CA Inter MTP 2 M'19 PDF

Test Series: April, 2019
MOCK TEST PAPER – 2

INTERMEDIATE (NEW) : GROUP – I
PAPER – 1: ACCOUNTING
Question No. 1 is compulsory.
Answer any four questions from the remaining five questions.
Wherever necessary suitable assumptions may be made and disclosed by way of a note.
Working Notes should form part of the answer.
(Time allowed: Three hours) (Maximum marks: 100)
1. (a) Omega Ltd., has a normal wastage of 4% in the production process. During the year 2016-17, the
Company used 12,000 MT of raw material costing Rs. 150 per MT. At the end of the year 630 MT
of wastage was ascertained in stock. The accountant wants to know how this wastage is to be
treated in the books.
You are required to compute the amount of normal and abnormal loss and treatment thereof in line
with AS 2 “Valuation of inventories”.
(b) Ram Ltd. purchased machinery for Rs. 80 lakhs. (useful life 4 years and residual value Rs. 8 lakhs).
Government grant received is Rs. 32 lakhs. Show the Journal Entry to be passed at the time of
refund of grant and the value of the fixed assets in the third year and the amount of depreciation
for remaining two years, if the grant is credited to Deferred Grant A/c.
(c) While preparing its final accounts for the year ended 31 st March, 2019, a company made provision
for bad debts @ 5% of its total debtors. In the last week of February, 2019 a debtor for Rs. 20 lakhs
had suffered heavy loss due to an earthquake; the loss was not covered by any insurance policy.
In April, 2019 the debtor became a bankrupt. Can the company provide for the full loss arising out
of insolvency of the debtor in the final accounts for the year ended 31st March, 2019? Comment
with reference to relevant Accounting Standard.
(d) Kumar Ltd. had made a rights issue of shares in 2017. In the offer document to its members, it had
projected a surplus of Rs. 40 crores during the accounting year to end on 31 st March, 2017. The
draft results for the year, prepared on the hitherto followed accounting policies and presented for
perusal of the board of directors showed a deficit of Rs. 10 crores. The board in consultation with
the managing director, decided not to provide for “after sales expenses” during the warranty period.
Till the last year, provision at 2% of sales used to be made under the concept of “matching of costs
against revenue” and actual expenses used to be charged against the provision. The board n ow
decided to account for expenses as and when actually incurred. Sales during the year total to
Rs. 600 crores.
As chief accountant of the company, you are asked by the managing director to draft the notes on
accounts for inclusion in the annual report for 2016-2017. ( 4 parts x 5 Marks = 20 Marks)
2. (a) Gopal holds 2,000, 15% Debentures of Rs. 100 each in Ritu Industries Ltd. as on April 1, 2015 at
a cost of Rs. 2,10,000. Interest is payable on June, 30 and December, 31 each year. On May 1,
2015, 1,000 debentures are purchased cum-interest at Rs. 1,07,000. On November 1, 2015, 1,200
debentures are sold ex-interest at Rs. 1,14,600. On November 30, 2015, 800 debentures are
purchased ex-interest at Rs. 76,800. On December 31, 2015, 800 debentures are sold cum -interest
for Rs. 1,10,000. You are required to prepare the Investment Account showing value of holdings
on March 31, 2016 at cost, using FIFO Method.
1
© The Institute of Chartered Accountants of India

(b) Krishan bought 2 cars from ‘Fair Value Motors Pvt. Ltd. on 1.4.2015 on the following terms (for
both cars):
Down payment 6,00,000
1st Installment at the end of first year 4,20,000
2nd Installment at the end of 2nd year 4,90,000
3rd Installment at the end of 3 rd year 5,50,000
Interest is charged at 10% p.a.
Krishan provides depreciation @ 25% on the diminishing balances.
On 31.3.2018 Krishan failed to pay the 3 rd installment upon which ‘Fair Value Motors Pvt. Ltd.’
repossessed 1 car. Krishan agreed to leave one car with Fair Value Motors Pvt. Ltd. and adjusted
the value of the car against the amount due. The car taken over was valued on the basis of 40%
depreciation annually on written down basis. The balance amount remaining in the vendor’s
account after the above adjustment was paid by Krishan after 3 months with interest @ 20% p.a.
You are required to:
(i) Calculate the cash price of the cars and the interest paid with each installment.
(ii) Prepare Car Account in the books of Krishan assuming books are closed on March 31, every
year. Figures may be rounded off to the nearest rupee. (10 + 10 = 20 Marks)
3. (a) On 31st December, 2016 the following balances appeared in the books of Kolkata Branch of an
English firm having its HO office in New York:
Amount in Rs. Amount in
Rs.
Stock on 1st Jan., 2016 2,34,000
Purchases and Sales 15,62,500 23,43,750
Debtors and Creditors 7,65,000 5,10,000
Bills Receivable and Payable 2,04,000 1,78,500
Salaries and Wages 1,00,000 -
Rent, Rates and Taxes 1,06,250 -
Furniture 91,000 -
Bank A/c 5,68,650
New York Account - 5,99,150
36,31,400 36,31,400
Stock on 31st December, 2016 was Rs. 6,37,500.
Branch account in New York books showed a debit balance of $ 13,400 on 31st December, 2016
and Furniture appeared in the Head Office books at $ 1,750.
The rate of exchange on 31st December, 2015 was Rs. 52 and on 31st December, 2016 was Rs.
51. The average rate for the year was Rs. 50.
Prepare in the Head Office books the Profit and Loss a/c and the Balance Sheet of the Branch.

(b) The following is the Balance Sheet of Chirag as on 31 st March, 2015:
Liabilities Rs. Assets Rs.
Capital Account 48,000 Building 32,500
Loan 15,000 Furniture 5,000
Creditor 31,000 Motor car 9,000
Stock 20,000
Debtors 17,000
Cash in hand 2,000
Cash at bank 8,500
94,000 94,000
A riot occurred on the night of 31 st March, 2016 in which all books and records were lost. The
cashier had absconded with the available cash. He gives you the following information:
(a) His sales for the year ended 31 st March, 2016 were 20% higher than the previous year’s. He
always sells his goods at cost plus 25%; 20% of the total sales for the year ended
31st March, 2016 were for cash. There were no cash purchases
(b) On 1st April, 2015 the stock level was raised to Rs. 30,000 and stock was maintained at this
new level all throughout the year.
(c) Collection from debtors amounted to Rs. 1,40,000 of which Rs. 35,000 was received in cash,
Business expenses amounted to Rs. 20,000 of which Rs. 5,000 was outstanding on
31st March, 2016 and Rs. 6,000 was paid by cheques.
(d) Analysis of the Pass Book revealed the Payment to Creditors Rs. 1,37,500, Personal Drawing
Rs. 7,500, Cash deposited in Bank Rs. 71,500, and Cash withdrawn from Bank Rs. 12,000.
(e) Gross profit as per last year’s audited accounts was Rs. 30,000.
(f) Provide depreciation on Building and Furniture at 5% and Motor Car at 20%.
(g) The amount defalcated by the cashier may be treated as recoverable from him.
You are required to prepare the Trading and Profit and Loss Account for the year ended 31 st March,
2016 and Balance Sheet as on that date. (10 + 10= 20 Marks)
4. (a) X, Y and Z are in partnership sharing profits and losses in the ratio of 5:4:4. The Balance Sheet of
the firm as on 31st March, 2016 is as below:
X’s Capital 60,000 Factory Building 96,640
Y’s Capital 40,000 Plant and Machinery 65,100
Z’s Capital 50,000 Trade Receivable 21,600
Y’s Loan 18,000 Inventories 49,560
Trade Payable 66,000 Cash at Bank 1,100
2,34,000 2,34,000
On Balance Sheet date, all the three partners have decided to dissolve their partnership. Since the
realisation of assets was protracted, they decided to distribute amounts as and when feasible and
for this purpose they appoint Z who was to get as his remuneration 1% of the value of the assets
realised other than cash at bank and 10% of the amount distributed to the partners.
3

Assets were realised piecemeal as under:
Rs.
First instalment 74,600
Second instalment 69,301
Third instalment 40,000
Last instalment 28,000
Dissolution expenses were provided for estimated amount of Rs. 12,000
The creditors were settled finally for Rs. 63,600
You are required to prepare a statement showing distribution of cash amongst the partners by
"Highest Relative Capital Method".
(b) State the circumstances when LLP can be wound up by the Tribunal. (16 + 4 = 20 Marks)
5. (a) From the following particulars furnished by Megha Ltd., prepare the Balance Sheet as on 31 st March
20X1 as required by Part I, Schedule III of the Companies Act, 2013.
Particulars Debit Rs. Credit Rs.
Equity Share Capital (Face value of Rs. 100 each) 50,00,000
Call in Arrears 5,000
Land & Building 27,50,000
Plant & Machinery 26,25,000
Furniture 2,50,000
General Reserve 10,50,000
Loan from State Financial Corporation 7,50,000
Inventory:
Raw Materials 2,50,000
Finished Goods 10,00,000 12,50,000
Provision for Taxation 6,40,000
Trade receivables 10,00,000
Short term Advances 2,13,500
Profit & Loss Account 4,33,500
Cash in Hand 1,50,000
Cash at Bank 12,35,000
Unsecured Loan 6,05,000
Trade payables (for Goods and Expenses) 8,00,000
Loans & advances from related parties 2,00,000
The following additional information is also provided:
(i) 10,000 Equity shares were issued for consideration other than cash.
(ii) Trade receivables of Rs. 2,60,000 are due for more than 6 months.
(iii) The cost of the Assets were:
Building Rs. 30,00,000, Plant & Machinery Rs. 35,00,000 and Furniture Rs. 3,12,500

(iv) The balance of Rs. 7,50,000 in the Loan Account with State Finance Corporation is inclusive
of Rs. 37,500 for Interest Accrued but not Due. The loan is secured by hypothecation of Plant
& Machinery.
(v) Balance at Bank includes Rs. 10,000 with Omega Bank Ltd., which is not a Scheduled Bank.
(vi) Transfer Rs. 20,000 to general reserve is proposed by the Board of directors.
(b) Omega company offers new shares of Rs. 100 each at 25% premium to existing shareholders on
the basis one for five shares. The cum-right market price of a share is Rs. 200.
You are required to calculate the (i) Ex-right value of a share; (ii) Value of a right share?
(16 + 4 = 20 Marks)
6 Answer the following:
(a) The Business carried on by Kamal under the name "K" was taken over as a running business with
effect from 1st April, 2016 by Sanjana Ltd., which was incorporated on 1 st July, 2016. The same set
of books was continued since there was no change in the type of business and the following
particulars of profits for the year ended 31 st March, 2017 were available.
Rs. Rs.
Sales: Company period 40,000
Prior period 10,000 50,000
Selling Expenses 3,500
Preliminary Expenses written off 1,200
Salaries 3,600
Directors' Fees 1,200
Interest on Capital (Upto 30.6.2016) 700
Depreciation 2,800
Rent 4,800
Purchases 25,000
Carriage Inwards 1,019 43,819
Net Profit 6,181
The purchase price (including carriage inwards) for the post-incorporation period had increased by
10 percent as compared to pre-incorporation period. No stocks were carried either at the beginning
or at the end.
You are required to prepare a statement showing the amount of pre and post-incorporation period
profits stating the basis of allocation of expenses.
Or
Following items appear in the Trial Balance of Beta Ltd. as on 31st March, 2017:
Particulars Amount
3,000 Equity Shares of Rs. 100 each 3,00,000
Securities Premium 40,000
Capital Redemption Reserve 30,000
Profit and Loss Account (Cr. Balance) 50,000
5

The company decided to issue to equity shareholders bonus shares at the rate of 1 share for every
3 shares held. Company decided that there should be the minimum reduction in free reserves.
Pass necessary Journal Entries in the books of Beta Ltd.
(b) State under which head the following accounts should be classified in Balance Sheet, as per
Schedule III of the Companies Act, 2013:
(i) Share application money received in excess of issued share capital.
(ii) Share option outstanding account.
(iii) Unpaid matured debenture and interest accrued thereon.
(iv) Uncalled liability on shares and other partly paid investments.
(v) Calls unpaid.
(vi) Intangible Assets under development.
(vii) Money received against share warrant.
(viii) Cash equivalents.
(c) Mohan Ltd. purchased an asset on 1 st January 2013 for Rs. 5,00,000 and the asset had an
estimated useful life of 5 years and a residual value of nil. On 1 st January 2017, the directors
review the estimated life and decide that the asset will probably be useful for a further 4 years.
You are required to compute the amount of depreciation for each year, if company charges
depreciation on Straight Line basis.
(d) Explain in brief, the alternative measurement bases, for determining the value at which an element
can be recognized in the Balance Sheet or Statement of Profit and Loss.
(4 parts x 5 Marks = 20 Marks)

MOCK TEST PAPER - 2
INTERMEDIATE (New): GROUP – I
PAPER – 1: ACCOUNTING
SUGGESTED ANSWERS/HINTS
1. (a) As per para AS 2 ‘Valuation of Inventories’, abnormal amounts of wasted materials, labour and
other production costs are excluded from cost of inventories and such costs are recognized as
expenses in the period in which they are incurred. The normal loss will be included in determining
the cost of inventories (finished goods) at the year end.
Amount of Normal Loss and Abnormal Loss:
Material used 12,000 MT @ Rs. 150 = Rs. 18,00,000
Normal Loss (4% of 12,000 MT) 480 MT
Net quantity of material 11,520 MT
Abnormal Loss in quantity 150 MT (630 MT less 480 MT)
Abnormal Loss Rs. 23,437.50 [150 units @ Rs. 156.25
(Rs.18,00,000/11,520)]
Amount Rs. 23,437.50 will be charged to the Profit and Loss statement.
(b) In the books of Ram Ltd.
If the grant is credited to Deferred Grant Account:
As per AS 12 ‘Accounting for Government Grants,’ income from Deferred Grant Account is
allocated to Profit and Loss account usually over the periods and in the proportions in which
depreciation on related assets is charged.
Accordingly, in the first two years (Rs. 32 lakhs /4 years) = Rs. 8 lakhs x 2 years =
Rs. 16 lakhs will be credited to Profit and Loss Account and Rs. 16 lakhs will be the balance of
Deferred Grant Account after two years.
Therefore, on refund of grant, following entry will be passed:
Rs. Rs.
I Deferred Grant A/c Dr. 16 lakhs
Profit & Loss A/c Dr. 16 lakhs
To Bank A/c 32 lakhs
(Being Government grant refunded)
1. Value of Fixed Assets after two years but before refund of grant
Fixed assets initially recorded in the books = Rs. 80 lakhs
Depreciation for each year = (Rs. 80 lakhs – Rs.8 lakhs)/4 years = Rs. 18 lakhs per year
Book value of fixed assets after two years = Rs. 80 lakhs – (Rs. 18 lakhs x 2 years) = Rs. 44
lakhs

2. Value of Fixed Assets after refund of grant
On refund of grant the balance of deferred grant account will become nil. The fixed assets will
continue to be shown in the books at Rs. 44 lakhs.
3. Amount of depreciation for remaining two years
Depreciation will continue to be charged at Rs. 18 lakhs per annum for the remaining two
years.
(c) As per AS 4 ‘Contingencies and Events Occurring After the Balance Sheet Date’, adjustment to
assets and liabilities are required for events occurring after the balance sheet date that provide
additional information materially affecting the determination of the amounts relating to conditions
existing at the Balance Sheet date.
A debtor for Rs. 20,00,000 suffered heavy loss due to earthquake in the last week of February,
2019 which was not covered by insurance. This information with its implications was already known
to the company. The fact that he became bankrupt in April, 2019 (after the balance sheet date) is
only an additional information related to the condition existing on the balance sheet date.
Accordingly, full provision for bad debts amounting Rs. 20,00,000 should be made, to cover the
loss arising due to the insolvency of a debtor, in the final accounts for the year ended 31 st March
2019. Since the company has already made 5% provision of its total debtors, additional provision
amounting Rs. 19,00,000 shall be made (20,00,000 x 95%).
(d) As per AS 1, any change in the accounting policies which has a material effect in the current period
or which is reasonably expected to have a material effect in later periods should be disclosed. In
the case of a change in accounting policies which has a material effect in the current period, the
amount by which any item in the financial statements is affected by such change should also be
disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or in part,
the fact should be indicated. Accordingly, the notes on accounts should properly disclose the
change and its effect.
Notes on Accounts:
So far, the company has been providing 2% of sales for meeting “after sales expenses during the
warranty period. With the improved method of production, the probability of defects occurring in
the products has reduced considerably. Hence, the company has decided not to make provision
for such expenses but to account for the same as and when expenses are incurred. Due to this
change, the profit for the year is increased by Rs. 12 crores than would have been the case if the
old policy were to continue.
2. (a) Investment Account of Gopal
For the year ended 31.3.2016
(Script: 15% Debentures in Ritu Industries Ltd.)
(Interest payable on 30 th June and 31st December)
Date Particulars Nominal Interes Cost Date Particulars Nominal Interest Cost Rs.
Value Rs. t Rs. Rs. Value Rs. Rs.
1.04.15 To Balance 2,00,000 7,500 2,10,000 30.06.15 By Bank A/c - 22,500
A/c
1.05.15 To Bank A/c 1,00,000 5,000 1,02,000 1.11.15 By Bank A/c 1,20,000 6,000 1,14,600
30.11.15 To Bank A/c 80,000 5,000 76,800 1.11.15 By Profit & Loss - - 11,400
A/c

31.12.15 To Profit & 20,000 31.12.15 By Bank A/c 80,000 6,000 1,04,000
Loss A/c
31.03.16 To Profit & 37,250 31.12.15 By Bank A/c - 13,500 -
Loss A/c
(Bal. fig.) 31.12.15 By Bank A/c - 6,750 -
31.3.16 By Bal. c/d 1,80,000 - 1,78,800
3,80,000 54,750 4,08,800 3,80,000 54,750 4,08,800
Working Notes:
15 3
(i) Accrued Interest as on 1st April, 2015 = Rs. 2,00,000 x x  ` 7,500
100 12
15 4
(ii) Accrued Interest as on 1.5.2015 = Rs. 1,00,000 x x  ` 5,000
100 12
(iii) Cost of Investment for purchase on 1 st May = Rs. 1,07,000 – Rs. 5,000 = Rs. 1,02,000
15 6
(iv) Interest received as on 30.6.2015 = Rs. 3,00,000 x x ` 22,500
100 12
(v) Accrued Interest on debentures sold on 1.11.2015
15 4
= Rs. 1,20,000 x x ` 6,000
100 12
15 5
(vi) Accrued Interest = Rs. 80,000 x x  ` 5,000
100 12
15 6
(vii) Accrued Interest on sold debentures 31.12.2015 = Rs. 80,000 x x ` 6,000
100 12
(viii) Sale Price of Investment on 31 st Dec. = Rs. 1,10,000-Rs. 6,000 = Rs. 1,04,000
(ix) Loss on Sale of Debenture on 1.1.2015
Sale Price of debenture 1,14,600
Less: Cost Price of debenture
2,10,000
x ` 1,20,000 1,26,000
2,00,000
Loss on sale 11,400
15 6
(x) Accrued interest as on 31.12.2015 = Rs. 1,80,000 x x  ` 13,500
100 12
15 3
(xi) Accrued Interest = Rs. 1,80,000 x x  ` 6,750
100 12
(xii) Cost of investment as on 31 st March = Rs. 1,02,000 + Rs. 76,800 = Rs. 1,78,800
(xiii) Profit on debentures sold on 31 st December
= Rs. 1,04,000 –(Rs. 2,10,000x800/2,000) =Rs. 20,000

(b) Calculation of Interest and Cash Price
No. of Outstanding Amount Outstanding Interest Outstanding
installment balance at the end due at the balance at the balance at
s after the payment time of end before the the
of installment installme payment of beginning
nt installment
[1] [2] [3] [4] = 2 +3 [5] = 4 x [6] = 4-5
10/110
3rd - 5,50,000 5,50,000 50,000 5,00,000
2 nd 5,00,000 4,90,000 9,90,000 90,000 9,00,000
1st 9,00,000 4,20,000 13,20,000 1,20,000 12,00,000
Total cash price = Rs. 12,00,000+ 6,00,000 (down payment) = Rs. 18,00,000.
Cars Account in the books of Krishan
Date Particulars Rs. Date Particulars Rs.
1.4.2015 To Fair Value 31.3.2016 By Depreciation A/c 4,50,000
Motors A/c 18,00,000 By Balance c/d 13,50,000
18,00,000 18,00,000
1.4.2016 To Balance b/d 13,50,000 31.3.2017 By Depreciation A/c 3,37,500
By Balance c/d 10,12,500
13,50,000 13,50,000
1.4.2017 To Balance b/d 10,12,500 31.3.2018 By Depreciation A/c 2,53,125
By Fair Value Motors A/c
(Value of 1 Car taken over after
depreciation for 3 years @ 40%
p.a.) [9,00,000 - (3,60,000
+ 2,16,000 + 1,29,600)] 1,94,400
By Loss transferred to
Profit and Loss A/c on
surrender (Bal. fig.) 1,85,288
By Balance c/d
½ (10,12,500-2,53,125) 3,79,687
10,12,500 10,12,500
3. (a) In the books of English Firm (Head Office in New York)

Kolkata Branch Profit and Loss Account
for the year ended 31 st December, 2016
$ $
To Opening stock 4,500 By Sales 46,875
To Purchases 31,250 By Closing stock 12,500
To Gross profit c/d 23,625 (6,37,500 / 51)
59,375 59,375
To Salaries 2,000 By Gross profit b/d 23,625

To Rent, rates and taxes 2,125
To Exchange translation loss 2,000
To Net Profit c/d 17,500
23,625 23,625
Balance Sheet of Kolkata Branch
as on 31st December, 2016
Liabilities $ $ Assets $
Head Office A/c 13,400 Furniture 1,750
Add : Net profit 17,500 30,900 Closing Stock 12,500
Trade creditors 10,000 Trade Debtors 15,000
Bills Payable 3,500 Bills Receivable 4,000
Cash at bank 11,150
44,400 44,400
Working Note:
Require for calculation of Exchange Translation Loss
Kolkata Branch Trial Balance (converted in $)
as on 31st December, 2016
Dr. Cr. Conversion Dr. Cr.
Rs. Rs. rate ($) ($)
Stock on 1st Jan., 2016 2,34,000 52 4,500
Purchases & Sales 15,62,500 23,43,750 50 31,250 46,875
Debtors & creditors 7,65,000 5,10,000 51 15,000 10,000
Bills Receivable and Bills Payable 2,04,000 1,78,500 51 4,000 3,500
Salaries and wages 1,00,000 50 2,000
Rent, Rates and Taxes 1,06,250 50 2,125
Furniture 91,000 1,750
Bank A/c 5,68,650 51 11,150
New York Account 5,99,150 13,400
Exchange translation loss (bal.
fig.) 2,000
36,31,400 36,31,400 73,775 73,775
(b) Trading and Profit and Loss Account
For the year ending on 31 st March, 2016
Particulars Rs. Particulars Rs.
To Opening Stock 20,000 By Sales 1,80,000
To Purchases (bal.fig.); 1,54,000 By Closing Stock 30,000
To Gross Profit c/d (@20% on 2,10,000
sales) 36,000
2,10,000
To Sundry Business Expenses 20,000 By Gross Profit b/d 36,000
5

To Depreciation on Building 1,625
Furniture 250
Motor 1,800 3,675
To Net profit transferred to
Capital A/c 12,325
36,000 36,000
Balance Sheet as at 31 st March, 2016
Capital Account: Building 32,500
Opening Balance 48,000 Less: Depreciation (1,625) 30,875
Add: Net profit 12,325 Furniture 5,000
60,325 Less: Depreciation (250) 4,750
Less: Drawings (7,500) 52,825 Motor Car 9,000
Loan 15,000 Less: Depreciation (1,800) 7,200
Sundry Creditors 47,500 Stock in trade 30,000
Outstanding Expenses 5,000 Sundry Debtors 21,000
Cash at Bank 22,000
Sundry Advances
(Amount recoverable
from Cashier) 4,500
1,20,325 1,20,325
Working Notes:
(i) Total Debtors Account
To Balance b/d 17,000 By Bank (Rs. 1,40,000 – Rs. 35,000) 1,05,000
To Sales (80% of 1,44,000 By Cash A/c 35,000
Rs. 1,80,000)
By Balance c/d 21,000
1,61,000 1,61,000
(ii) Total Creditors Account
To Bank 1,37,500 By Balance b/d 31,000
To Balance c/d 47,500 By Purchases 1,54,000
1,85,000 1,85,000
(iii) Cash Book
Particulars Cash Rs. Bank Rs. Particulars Cash Rs. Bank Rs.
To Balance b/d 2,000 8,500 By Business Expenses 9,000 6,000
To Sales 36,000 - By Drawings - 7,500
To Sundry Debtors 35,000 1,05,000 By Sundry Creditors - 1,37,500

To Cash (Contra) - 71,500 By Bank (Contra) 71,500 -
To Bank (Contra) 12,000 By Cash (Contra) - 12,000
By Defalcation (Bal fig.) 4,500 -
By Balance c/d (Bal fig.)
22,000
85,000 1,85,000 85,000 1,85,000
(iv) Last year’s Total Sales = Gross Profit x 100/20 = Rs. 30,000 x 100/20 = Rs. 1,50,000
(v) Current year’s Total Sales = Rs. 1,50,000+ 20% of Rs. 1,50,000= Rs. 1,80,000
(vi) Current year’s Credit Sales = Rs. 1,80,000 x 80%= Rs. 1,44,000
(vii) Cost of Goods Sold = Sales – G.P. = Rs.1,80,000 – Rs. 36,000 = Rs. 1,44,000
(viii) Purchases = Cost of Goods Sold + Closing Stock – Opening Stock
= Rs. 1,44,000 + Rs. 30,000 – Rs. 20,000 = Rs. 1,54,000
4. (a) Statement showing distribution of cash amongst the partners
Trade Y’s Loan Capitals
Payable
X (Rs.) Y (Rs.) Z (Rs.)
Balance Due 66,000 18,000 60,000 40,000 50,000
Including 1st Instalment
amount with the firm 75,700
Rs. (1100 + 74,600)
Less: Dissolution
expenses provided for (12,000)
63,700
Less: Z’s remuneration of
1% on assets realized
(74,600 x 1%) (746)
62,954
Less: Payment made to
Trade Payables (62,954) (62,954)
Balance due Nil 3046
2nd instalment realised 69,301
(69,301 x 1%) (693)
68,608
Less: Payment made to
Trade Payables (646) (646)
Transferred to P& L A/c 2,400
67,962

Less: Payment for Y’s (18,000) (18,000)
loan A/c
Amount available for
distribution to partners 49,962 nil
10% of the amount (4,542)
distributed to partners
(49,962 x 10/110)
Balance to be distributed
to partners on the basis of 45,420
HRCM
Less: Paid to Z (W.N.) (2,000) (2,000)
43,420 48,000
Less: Paid to X and Z in (18,000) (10,000) - (8,000)
5:4 (W.N.)
Balance due 25,420 50,000 40,000 40,000
Less: Paid to X, Y & Z in
5:4:4 25,420 (9,778) (7,821) (7,821)
Nil
Amount of 3rd instalment 40,000 40,222 32,179 32,179
(40,000 x 1%) (400)
39,600
10% of the amount
(39,600 x 10/110) (3,600)
36,000
Less: Paid to X, Y, Z in
5:4:4 for (W.N.) (36,000) (13,846) (11,077) (11,077)
Nil 26,376 21,102 21,102
Amount of 4th and last 28,000
instalment
(28,000 x 1%) (280)
27,720
10% of the amount
(27,720 x 10/110) (2,520)
25,200

Less: Paid to X, Y and Z
in 5:4:4 (25,200) (9,692) (7,754) (7,754)
Nil
Loss suffered by partners 16,684 13,348 13,348
Working Note:
(i) Rs. 1100 added to the first instalment received on sale of assets represents the Cash in Bank
(ii) The amount due to Creditors at the end of the utilization of First Instalment is Rs. 3046.
However, since the creditors were settled for Rs. 63,600 only the balance Rs.646 were paid
and the balance Rs. 2400 was transferred to the Profit & Loss Account.
(iii) Highest Relative Capital Basis
X Y Z
Rs. Rs. Rs.
Balance of Capital Accounts (A) 60,000 40,000 50,000
Profit sharing ratio 5 4 4
Capital Profit sharing ratio 12,000 10,000 12,500
Capital in profit sharing
ratio taking Y’s Capital as base (B) 50,000 40,000 40,000
Excess of X’s Capital and Z’s Capital (A-B) =(C) 10,000 nil 10,000
Again repeating the process
Profit sharing ratio 5 4
Capital Profit sharing ratio 2,000 2,500
Capital in profit sharing
ratio taking X’s Capital as base (D) 10,000 8,000
Excess of Z’s Capital (C-D)=(E) nil 2,000
Therefore, firstly Rs.2,000 is to be paid to Z, then X and Z to be paid in proportion of 5:4 upto
Rs. 18,000 to bring the capital of all partners X, Y and Z in proportion to their profit sharing
ratio. Thereafter, balance available will be paid in the profit sharing ratio 5:4:4 to all partners
viz X, Y and Z.
(b) Under section 64 of the LLP Act, 2008, an LLP may be wound up by the Tribunal:
• If the LLP decides that it should be wound up by the Tribunal;
• If for a period of more than six months, the number of partners of the LLP is reduced below
two;
• If the LLP is unable to pay its debts;
• If the LLP has acted against the interests of the integrity and sovereignty of India, the security
of the state or public order;
• If the LLP has defaulted in the filing of the Statement of Account and Solvency with the
Registrar for five consecutive financial years;
• If the Tribunal is of the opinion that it is just and equitable that the LLP be wound up.

5. (a) Alpha Ltd.
Balance Sheet as on 31st March, 20X1
Particulars Notes Rs.
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 49,95,000
b Reserves and Surplus 2 11,82,907
2 Non-current liabilities
Long-term borrowings 3 13,17,500
3 Current liabilities
a Trade Payables 8,00,000
b Other current liabilities 4 3,38,093
c Short-term provisions 5 6,40,000
d Short-term borrowings 2,00,000
Total 94,73,500
Assets
1 Non-current assets
Property, Plant and Equipment
Tangible assets 6 56,25,000
2 Current assets
a Inventories 7 12,50,000
b Trade receivables 8 10,00,000
c Cash and bank balances 9 13,85,000
d Short-term loans and advances 2,13,500
Total 94,73,500
Notes to accounts
Rs.
1 Share Capital
Equity share capital
Issued & subscribed & called up
50,000 Equity Shares of Rs. 100 each
(of the above 10,000 shares have been issued for
consideration other than cash) 50,00,000
Less: Calls in arrears (5,000) 49,95,000
Total 49,95,000
2 Reserves and Surplus
10

Add: current year transfer 20,000 10,70,000
Profit & Loss balance
Profit for the year 4,33,500
Less: Appropriations:
Transfer to General reserve (20,000)
Dividend Payable (Refer W N) (2,49,750)
DDT on dividend (Refer W N) (50,843) 1,12,907
Total 11,82,907
3 Long-term borrowings
Secured Term Loan
State Financial Corporation Loan (7,50,000-37,500)
(Secured by hypothecation of Plant and Machinery) 7,12,500
Unsecured Loan 6,05,000
Total 13,17,500
4 Other current liabilities
Interest accrued but not due on loans (SFC) 37,500
Dividend (Refer W N) 2,49,750
DDT on dividend (Refer W N) 50,843 3,00,593
3,38,093
5 Short-term provisions
Provision for taxation 6,40,000
6 Tangible assets
Land and Building 30,00,000
(2,50,000) 27,50,000
Less: Depreciation (b.f.)
Plant & Machinery 35,00,000
(8,75,000) 26,25,000
Less: Depreciation (b.f.)
Furniture & Fittings 3,12,500
Less: Depreciation (62,500) (b.f.) 2,50,000
Total 56,25,000
7 Inventories
Raw Materials 2,50,000
Finished goods 10,00,000
Total 12,50,000
8 Trade receivables
Outstanding for a period exceeding six months 2,60,000
Other Amounts 7,40,000
11

Total 10,00,000
9 Cash and bank balances
Cash and cash equivalents
Cash at bank
with Scheduled Banks 12,25,000
with others (Omega Bank Ltd.) 10,000 12,35,000
Cash in hand 1,50,000
Other bank balances Nil
Total 13,85,000
Working Note:
Calculation of grossing-up of dividend
Particulars Rs.
Dividend distributed by Alpha Ltd. (5% of 49,95,000) 2,49,750
Add: Increase for the purpose of grossing up of dividend
 15 
 100 - 15 × 2,49,750 
  44,074
Gross dividend 2,93,824
Dividend distribution tax @ 17.304% 50,843
(b) Ex-right value of the shares
= (Cum-right value of the existing shares + Rights shares x Issue Price) / (Existing No. of shares +
No. of right shares) = (Rs. 200 X 5 Shares + Rs. 125 X 1 Share) / (5 + 1) Shares
= Rs. 1,125 / 6 shares = Rs. 187.50 per share.
Value of right = Cum-right value of the share – Ex-right value of the share
= Rs. 200 – Rs. 187.50 = Rs. 12.50 per share.
6. (a) Statement showing the calculation of profits/losses for pre incorporation and Post incorporation
period profits of Sanjana Ltd.
for the year ended 31 st March, 2017
Particulars Basis Pre Post
Rs. Rs.
Sales (given) 10,000 40,000
Less: Purchases 1:3.3 5,814 19,186
Carriage Inwards 1:3.3 237 782
Gross Profit (i) 3,949 20,032
Less: Selling Expenses 1:4 700 2,800
Preliminary Expenses 1,200
Salaries 1:3 900 2,700
Director Fees 1,200
12

Interest on capital 700
Depreciation 1:3 700 2,100
Rent 1:3 1,200 3,600
Total of Expenses(ii) 4,200 13,600
Capital Loss/Net Profit (i-ii) (251) 6,432
Working Notes:
1: Sales Ratio = 10,000 : 40,000 = 1 :4
2: Time Ratio = 3:9 = 1:3
3: Purchase Price Ratio
 Ratio is 3 : 9
But purchase price was 10% higher in the company period
 Ratio is 3 : 9 + 10% ie. 3:9.9 = 1:3.3.
Or
Capital Redemption Reserve A/c Dr. 30,000
Securities Premium A/c Dr. 40,000
General Reserve A/c Dr. 30,000
To Bonus to Shareholders 1,00,000
(Being issue of bonus shares by utilization of various
Reserves, as per resolution dated …….)
Bonus to Shareholders A/c Dr. 1,00,000
To Equity Share Capital 1,00,000
(Being capitalization of Profit)
(b) (i) Current Liabilities/ Other Current Liabilities
(ii) Shareholders' Fund / Reserve & Surplus
(iii) Current liabilities/Other Current Liabilities
(iv) Contingent Liabilities and Commitments
(v) Shareholders' Fund / Share Capital
(vi) Fixed Assets
(vii) Shareholders' Fund / Money received against share warrants
(viii) Current Assets
(c) The entity has charged depreciation using the straight-line method at Rs. 1,00,000 per annum i.e
(5,00,000/5 years). On 1 st January 2017, the asset's net book value is [5,00,000 – (1,00,000 x 4)]
Rs. 1,00,000. The remaining useful life is 4 years. The company should amend the annual provision
for depreciation to charge the unamortized cost over the revised remaining life of four years.
Consequently, it should charge depreciation for the next 4 years at Rs. 25,000 per annum i.e.
(1,00,000 / 4 years).
13

(d) The Framework for Recognition and Presentation of Financial statements recognises four
alternative measurement bases for the purpose of determining the value at which an element can
be recognized in the balance sheet or statement of profit and loss. These bases are: (i)Historical
Cost; (ii)Current cost (iii) Realisable (Settlement) Value and (iv) Present Value.
A brief explanation of each measurement basis is as follows:
1. Historical Cost: Historical cost means acquisition price. According to this, assets are
recorded at an amount of cash or cash equivalent paid or the fair value of the asset at the
time of acquisition. Liabilities are generally recorded at the amount of proceeds received in
exchange for the obligation.
2. Current Cost: Current cost gives an alternative measurement basis. Assets are carried out
at the amount of cash or cash equivalent that would have to be paid if the same or an
equivalent asset was acquired currently. Liabilities are carried at the undiscounted amount of
cash or cash equivalents that would be required to settle the obligation currently.
3. Realisable (Settlement) Value: As per realisable value, assets are carried at the amount of
cash or cash equivalents that could currently be obtained by selling the assets in an orderly
disposal. Liabilities are carried at their settlement values; i.e. the undiscounted amount of
cash or cash equivalents paid to satisfy the liabilities in the normal course of business.
4. Present Value: Under present value convention, assets are carried at present value of future
net cash flows generated by the concerned assets in the normal course of business. Liabilities
under this convention are carried at present value of future net cash flows that are expected
to be required to settle the liability in the normal course of business.
14

MOCK TEST PAPER - 2
INTERMEDIATE (NEW): GROUP – I
PAPER – 2: CORPORATE AND OTHER LAWS
Division A is compulsory.
In Division B, Question No.1 is compulsory
Attempt any Three questions out of the remaining Four questions
Time Allowed – 3 Hours Maximum Marks – 100
DIVISION A
1. An aid that expresses the scope, object and purpose of the Act—
(a) Title of the Act
(b) Heading of the Chapter
(c) Preamble
(d) Definitional sections (1 Mark)
2. As per the Negotiable Instruments Act, 1881, when the day on which a promissory note or bill of
exchange is at maturity is a public holiday, the instrument shall be deemed to be due on the…….. .
(a) said public holiday
(b) 5 days succeeding public holiday
(c) next succeeding business day
(d) next preceding business day (1 Mark)
3. An internal aid that may be added to include something within the section or to exclude something from
it, is—
(a) Proviso
(b) Explanation
(c) Schedule
(d) Illustrations (1 Mark)
4. In how many days from the date of declaration of interim dividend, it shall be deposited in a separate
bank account
(a) 5 days
(b) 7 days
(c) 15 days
(d) 21 days (1 Mark)
5. After Declaration of dividend it should be paid within
(a) 14 days
(b) 21 days
(c) 30 days
1

(d) 45 days (1 Mark)
6. A company can re- open / recast its book of accounts on an application to Tribunal made by:
(a) Registrar
(b) Member
(c) Board of Directors
(d) Income –tax authorities (1 Mark)
7. Which of the following is a prohibited services to be rendered by the auditor of the Company
(a) design and implementation of any financial information system
(b) making report to the members of the company on the accounts examined by him
(c) compliance with the auditing standards
(d) Reporting of fraud against the company by officers or employees to the Central Government
(1 Mark)
8. For appointing an auditor other than the retiring auditor,
(a) Special notice is required.
(b) Ordinary notice is required.
(c) Neither ordinary nor special notice is required
(d) Approval of Central Government is required. (1 Mark)
9. ABC Ltd., a pharmaceutical company was having its manufacturing plant in Solan, Himachal Pradesh.
The address of its registered office as informed to the Registrar of Companies was of one of its Director’s
office, situated at Mumbai, Maharashtra. To comply with the provisions of the Companies Act, 2013 it
was keeping all its books of accounts, other relevant papers and financial statements at its registered
office. After sometime Directors of the company found it difficult to maintain such books etc.at the
registered office, so in a duly convened meeting of the Board of the Directors, it was decided that the
books of accounts and other relevant papers be kept at the office situated in Solan. Within which time
period the Registrar must be given notice about such decision of the board –
(a) Within 30 days from the date of taking such decision by the board.
(b) Within 15 days from the date it starts maintaining its books of accounts at the office situated at
Solan.
(c) Within 30 days from the date it starts maintaining its books of accounts at the office situated at
Solan.
(d) Within 7 days from the date of taking such decision by the board. (1 Mark)
10. Purvi Pvt. Ltd. is maintaining a register of charges along with all other necessary books and registers.
The entry for every creation, modification and satisfaction of charges is being done properly. The
company is also preserving every instrument related to such charges. From the following for how long
the instrument of charges shall be maintained/preserved by the company---
(a) for minimum 8 years from the date of creation of charge
(b) For minimum 10 years from the date of creation of charge
(c) For minimum 8 years from the date of satisfaction of charge
(d) permanently, without any time limit (1 Mark)
2

11. ABC Infrastructures Limited is a listed company quoted at National Stock Exchange. The company
closed its Register of Members in June and August, 2017 for 12 and 21 days respectively. The CFO of
company has informed the company secretary to consider closing of register in December for another
15 days for some strategic reasons. Referring to the provisions of Companies Act, 2013, examine the
validity of above action of the company.
(a) Valid, as the closure of register of members by company each time is not exceeding 30 days.
(b) Invalid, as company cannot go for closure of Register of members more than twice in a year.
(c) Invalid, as the period of closing register of members exceeding 30 days in a year.
(d) Invalid, as the period of closing the Register of members by the company is exceeding 45 days in
a year. (1 Mark)
12. The Annual General meeting of Tirupati Limited was scheduled for 28 th December, 2017. Mr. Ananat,
shareholder of Tirupati Limited has desired to inspect inspection of proxies lodged with the company.
The notice for inspection should be given at least ………. before the meeting:
(a) 24 hours
(b) 1 day
(c) 2 days
(d) 3 days (1 Mark)
13. Feel Rich Co. Ltd. Having its registered office at New Delhi, is a subsidiary of a German company named
Richman Company limited. The financial year of the parent/holding company ends on 31 st December
every year. The subsidiary company intends to follow a different financial year for consolidation of its
accounts with its parent company, situated outside India. For doing so it is required to take prior
permission of the competent authority. For the purpose from the following who will be this competent
authority---
(a) Registrar of Companies at New Delhi
(b) Tribunal
(c) Ministry of Corporate Affairs
(d) SEBI (1 Mark)
14. Validity period for the presentment of cheque in bank is—
(a) 3 months
(b) 6 months
(c) 1 year
(d) 2 years (1 Mark)
15. Food lovers Inc. was incorporated as a one person company (OPC) on 1 st September 2015 with paid up
share capital of Rs. 25 lacs. This OPC wants to convert itself into a private limited company during the
year ending on 31st March 2017. But the provisions of the Companies Act, 2013 prohibits an OPC from
doing so before the expiry of a specified period. From the following options in which situation this OPC
will mandatorily be converted into a private/public company even before expiry of such period —
(a) After the expiry of two years from the date of its incorporation
(b) Paid up share capital of the company is increased beyond fifty lakh rupees
(c) The average annual turnover during the relevant period exceeds one crore rupees

(d) If the application is filed with the ROC within 90 days of its incorporation as OPC, to be converted
into a Private Limited company. (2 Marks)
16. The paid up share capital of ABC Ltd. Is 5000000 shares of Rs. 200 each. 20% of its paid up share
capital is held by 4 of its promoters, who wants to off load their holding by making an offer of sale to the
public by issuing a prospectus. They want to authorise someone to take all actions and complete all
formalities related to such offer of sale. From the following who can be authorised by them to do so —
(a) Any person who has agreed to fulfil all the formalities related to such offer of sale
(b) Any one or more director of the company.
(c) Company itself whose shareholding they want to offload.
(d) Any competent officer of the company. (2 Marks)
17. The Authorised share capital clause of LMN & Co. ltd. consisted of Preference share capital and Equity
share capital both. With regard to equity share capital, the article of association of the company has
given authorisation to issue differential equity shares. Apart from authorisation by the Articles, from the
following strike out the condition, which is not mandatory to comply with—
(a) Such issue of shares must be authorised by an ordinary resolution passed at a general meeting of
the shareholders or by postal ballot, as the case may be
(b) The company must have consistent track record of distributable profit for the last five years.
(c) The company has no subsisting default in the payment of the declared dividend to its shareholders.
(d) The company has not defaulted in filing financial statements and annual returns for three financial
years immediately preceding the financial year in which it is decided to issue such shares
(2 Marks)
18. ABC Ltd., a listed company proposed a dividend @ 15% on equity shares for the financial year ended
on 31st March 2018. The Annual General Meeting (AGM) of the company was held on 15 th July 2018
and the proposed dividend was approved and declared in the same. Due to some technical issues,
dividend on 600 shares neither be paid within the time limit prescribed by the Act nor was transferred to
unpaid dividend account. In such a situation which regulatory authority can take action against the
company and its officers in default?
(a) Central Government
(b) SEBI
(c) Tribunal
(d) Investor Education and Protection Fund Authority (2 Marks)
19. Mr. A died at the age of 72 leaving behind some movable and immovable properties to be distributed
between his two sons C& D, as per his registered will. His Will clearly mentioned that all the immovable
property should go to C and all the movable property should go to D.Both the brothers divided the
property as per will except below mentioned properties, because they could not establish which property
should go to whom. Kindly help them by ticking the property/ies which should go to D (as per the
provisions of the general Clause Act, 1897):
(a) Standing crop in the fields
(b) Cut crop, ready to sell
(c) Tube well in the agriculture land

(d) Sandal wood tree (2 Marks)
20. Anand is a goldsmith, who makes gold jewellery as per customer’s requirement. Brijesh along with his
friend Ramesh, who was also a friend of Anand, approached Anand for making bangles for his wife.
Anand agreed to give delivery within 7 days from the day Brijesh gives him gold for making bangles.
Brijesh gave him bangles on 2 nd February 2018. The bangle making charges were Rs. 5000/-, which
Brijesh agreed to pay at the time of delivery of the bangles. Anand delivered the bangles on 6 th February
2018, but Brijesh said that he will pay the making charges after some time. Anand agreed to that. In
spite of repeated reminders Brijesh did not pay his making charges. In this situation from the following
what remedy is available to Brijesh—
(a) He can sue Ramesh for his making charges because Anand was accompanied by him
(b) He can sue Anand for his overdue making charges.
(c) He can visit Anand’s place and can take away anything, which is similar in value to the bangle
making charges.
(d) He can retain the goods, as he has the right of particular lien, he however does not have the right
to sue Anand or Ramesh (2 Marks)
21. A good friend of Mr. A, Mr. D is a property dealer in Delhi and works for many renowned registered
real estate developers. As Mr. D is doing very well in his work, Mr. A also wanted to work as a property
dealer or property agent. Mr. X, a real estate developer of Delhi, appointed Mr. D as his agent for selling
flats in his upcoming project, and asked him to name some other person to work for him, for his another
project. At this time he introduced Mr. A to Mr. X, saying that he is also in the same field for last 10
years, although Mr. A did not had any experience in this field. Going by his words, Mr. X instructed to
appoint Mr. A also for his other ventures. From the following, Mr. A will be treated as --
(a) Agent of Mr. X
(b) Sub-agent of Mr. D
(c) Substituted agent of Mr. X
(d) Sub- agent of Mr. X (2 Marks)
22. A draws a cheque in favour of M, a minor. M endorses the same in favour of X. The cheque is
dishonoured by the bank on grounds of inadequate funds. As per the provisions of Negotiable
Instruments Act, 1881:
(a) M is liable to X
(b) X can proceed against A
(c) No one is liable in this case
(d) M can proceed against A (2 Marks)
DIVISION B
1. (a) New a One Person company (OPC) was incorporated during the year 2015-16 with an authorised
capital of Rs. 45 lakhs (4.5 lakhs shares of Rs. 10 each). The capital was fully subscribed and paid
up. Turnover of the company during 2015-16 and 2016-17 was Rs. 2 crores and Rs. 2.5 crores
respectively. Promoter of the company seeks your advice in the following circumstances, whether
New (OPC) can convert into any other kind of company during 2017-18. Please, advise with
reference to relevant provisions of the Companies Act, 2013 in the below mentioned
circumstances:
(i) If promoter increases the paid up capital of the company by Rs. 10 lakhs during 2017-18

(ii) If turnover of the company during 2017-18 was Rs. 3 crores. (6 Marks)
(b) (i) YZ Ltd is a manufacturing company & has proposed a dividend @ 10% for the year 2017-18
out of the current year profits. The company has earned a profit of Rs. 910 crores during
2017-18. YZ Ltd. does not intend to transfer any amount to the general reserves of the
company out of current year profit. Is YZ Ltd. allowed to do so? Comment.
(ii) Karan was holding 5000 equity shares of Rs. 100 each of M/s. Future Ltd. A final call of
Rs. 10 per share was not paid by Karan. M/s. Future Ltd. declared dividend of 10%. Examine
with reference to relevant provisions of the Companies Act, 2013, the amount of dividend
Karan should receive. (6 Marks)
(c) Explaining the provisions of the Indian Contract Act, 1872, answer the following:
Mr. D was in urgent need of money amounting Rs. 5,00,000. He asked Mr. K for the money. Mr. K
lent the money on the sureties of A, B and N without any contract between them in case of default
in repayment of money by D to K. D makes default in payment. B refused to contribute, examine
whether B can escape liability? (4 Marks)
(d) Mr. S Venkatesh drew a cheque in favour of M who was sixteen years old. M settled his rental due
by endorsing the cheque in favour of Mrs. A the owner of the house in which he stayed. The cheque
was dishonoured when Mrs. A presented it for payment on grounds of inadequacy of funds. Advise
Mrs. A how she can proceed to collect her dues.
Give your answer in reference to the Provisions of Negotiable Instruments Ac t, 1881. (3 Marks)
2. (a) Miraj Limited held its Annual General Meeting on September 15, 2018. The meeting was presided
over by Mr. Venkat, the Chairman of the Company’s Board of Directors. On September 17, 2018,
Mr. Venkat, the Chairman, without signing the minutes of the meeting, left India to look after his
father who fell sick in London. Referring to the provisions of the Companies Act, 2013, examine
the manner in which the minutes of the above meeting are to be signed in the absence of
Mr. Venkat and by whom. (4 Marks)
(b) State any 6 amounts that can be credited to the Investor Education and Protection Fund. Give
your answer as per the provisions of the Companies Act, 2013. (6 Marks)
(c) Mr. Ahuja of Delhi engaged Mr. Singh as his agent to buy a house in West Extension area. Mr.
Singh bought a house for Rs. 20 lakhs in the name of a nominee and then purchased it himself for
Rs. 24 lakhs. He then sold the same house to Mr. Ahuja for Rs. 26 lakhs. Mr. Ahuja later comes to
know the mischief of Mr. Singh and tries to recover the excess am ount paid to Mr. Singh. Is he
entitled to recover any amount from Mr. Singh? If so, how much? Explain. (4 Marks)
(d) What are the circumstances under which a bill of exchange can be dishonoured by non-acceptance?
Give your answer as per the provisions of the Negotiable Instruments Act, 1881. (3 Marks)
3. (a) State in what way does the Companies Act, 2013 regulate and restrict the following in respect of a
company going for public issue of shares:
(i) Minimum Subscription, and
(ii) Application Money payable on shares being issued? (5 Marks)
(b) EF Limited appointed an individual firm, Naresh & Company, Chartered Accountants, as Auditors
of the company at the Annual General Meeting held on 30 th September, 2018. Mrs. Kamala, wife
of Mr. Naresh, invested in the equity shares face value of Rs. 1 lakh of EF Limited on 15 th October,
2018. But Naresh & Company continues to function as statutory auditors of the company. Advice
as per the provisions of the Companies Act, 2013.
(5 Marks)
6

(c) P draws a bill on Q for Rs. 10,000. Q accepts the bill. On maturity, the bill was dishonored by non-
payment. P files a suit against Q for payment of Rs. 10,000. Q proved that the bill was accepted
for value of Rs. 7,000 and as an accommodation to the plaintiff for the balance am ount i.e.
Rs. 3,000. Referring to the provisions of the Negotiable Instruments Act, 1881 decide whether P
would succeed in recovering the whole amount of the bill? (4 Marks)
(d) Explain the rule of ‘beneficial construction’ while interpreting the statutes quoting an example.
(3 Marks)
4. (a) XY Ltd. has its registered office at Mumbai in the State of Maharashtra. For better administrative
conveniences the company wants to shift its registered office from Mumbai to Nashik (within the
State of Maharashtra). What formalities the company has to comply with under the provisions of
the Companies Act, 2013 for shifting its registered office as stated above? Explain. (4 Marks)
(b) A General Meeting was scheduled to be held on 15 th April, 2018 at 3.00 P.M. As per the notice the
members who are unable to attend a meeting in person can appoint a proxy and the proxy forms
duly filled should be sent to the company so as to reach at least 48 hours before the meeting. Mr.
X, a member of the company appoints Mr. Y as his proxy and the proxy form dated 10-04-2018
was deposited by Mr. Y with the company at its registered Office on 11-04-2018. Similarly, another
member Mr. W also gives two separate proxies to two individuals named Mr. M and Mr. N. In the
case of Mr. M, the proxy dated 12-04-2018 was deposited with the company on the same day and
the proxy form in favour of Mr. N was deposited on 14-04-2018. All the proxies viz., Y, M and N
were present before the meeting.
According to the provisions of the Companies Act, 2013, who would be the persons allowed to
represent at proxies for members X and W respectively? (6 Marks)
(c) X owned a land with fifty tamarind trees. He sold his land and the timber (obtained after cutting the
fifty trees) to Y. X wants to know whether the sale of timber tantamounts to sale of immovable
property. Advise him with reference to provisions of "General Clauses Act, 1897”. (4 Marks)
(d) Explain how 'Dictionary Definitions' can be of great help in interpreting / constructing an Act when
the statute is ambiguous. (3 Marks)
5. (a) Examine the validity of the following statement referring to the provisions of the Companies Act,
2013 and/or Rules:
“The Articles of Association of X Ltd. contained a provision that upto 4% of issue price of’ the
shares may be paid as underwriting commission to the underwriters. The Board of Directors of X
Ltd. decided to pay 5% underwriting commission. (5 Marks)
(b) Define the term “charge” and also explain what is the punishment for default with respect to
registration of charge as per the provisions of the Companies Act, 2013. (5 Marks)
(c) Define contract of indemnity and contract of guarantee and state the conditions when guarantee is
considered invalid? (4 Marks)
(d) What is the meaning of service by post as per provisions of The General Clauses Act, 1897?
(4 Marks)

MOCK TEST PAPER - 2
PAPER – 2: CORPORATE AND OTHER LAWS
DIVISION A
1 2 3 4 5 6 7 8 9 10
(c) (c) (b) (a) (c) (d) (a) (a) (d) (c)
11 12 13 14 15 16 17 18 19 20
(d) (d) (b) (a) (b) (c) (b) (b) (b) (b)
21 22
(a) (b)
DIVISION B
1. (a) As per Rule 3 of the Companies (Incorporation) Rules, 2014, One Person Company (OPC) cannot
convert voluntarily into any kind of company unless two years have expired from the date of
incorporation, except where the paid up share capital is increased beyond fifty lakh rupees or its
average annual turnover during the relevant period exceeds two crore rupees.
Besides, Section 18 of the Companies Act, 2013 provides that a company of any class registered
under this Act may convert itself as a company of other class under this Act by alteration of
memorandum and articles of the company in accordance with the provisions of the Chapter II of
the Act.
According to the above provisions, following are the answers to the given circumstances:
(i) Where, if the promotors increases the paid up capital of the company by Rs. 10.00 lakh during
2017-2018 i.e., to Rs. 55 lakh (45+10= 55), ‘New’ (OPC) may convert itself voluntarily into
any other kind of company due to increase in the paid up share capital exceeding 50 lakh
rupees. This could be done by the ‘New’ by alteration of memorandum and articles of the
company in compliance with the Provisions of the Act.
(ii) Where if the turnover of the ‘New’ during 2017-18 was Rs. 3.00 crore, there will be no change
in the answer, as it meets up the requirement of minimum turnover i.e., Rs. 2 crore for
voluntarily conversion of ‘New’ (OPC) into any other kind of company.
(b) (i) Transfer to reserves (Section 123 of the Companies Act, 2013): A company may, before
the declaration of any dividend in any financial year, transfer such percentage of its profits for
that financial year as it may consider appropriate to the reserves of the company. Therefore,
the company may transfer such percentage of profit to reserves before declaration of dividend
as it may consider necessary. Such transfer is not mandatory and the percentage to be
transferred to reserves is at the discretion of the company.
As per the given facts, YZ Limited has earned a profit of Rs. 910 crores for the financial year
2017-18. It has proposed a dividend @ 10%. However, it does not intend to transfer any
amount to the reserves of the company out of current year profit.
1
As per the provisions stated above, the amount to be transferred to reserves out of profits for
a financial year is at the discretion of the YZ Ltd. acting vide its Board of Directors.
(ii) As per the proviso to section 127 of the Companies Act, 2013, no offence will be said to have
been committed by a director for adjusting the calls in arrears remaining unpaid or any other
sum due from a member from the dividend as is declared by a company.
Thus, as per the given facts, M/s Future Ltd. can adjust the sum of Rs. 50,000 unpaid call
money against the declared dividend of 10%, i.e. 5,00,000 x 10/100 = 50,000. Hence, Karan’s
unpaid call money (Rs. 50,000) can be adjusted fully from the entitled dividend amount of
Rs. 50,000/-.
(c) Co-sureties liable to contribute equally (Section 146 of the Indian Contract act, 1872): Equality
of burden is the basis of Co-suretyship. This is contained in section 146 which states that “when
two or more persons are co-sureties for the same debt, or duty, either jointly, or severally and
whether under the same or different contracts and whether with or without the knowledge of each
other, the co-sureties in the absence of any contract to the contrary, are liable, as between
themselves, to pay each an equal share of the whole debt, or of that part of it which remains unpaid
by the principal debtor”.
Accordingly, on the default of D in payment, B cannot escape from his liability. All the three sureties
A, B and N are liable to pay equally, in absence of any contract between them.
(d) Capacity to make, etc., promissory notes, etc. (Section 26 of the Negotiable Instruments Act,
1881): Every person capable of contracting, according to the law to which he is subject, may bind
himself and be bound by the making, drawing, acceptance, endorsement, delivery and negotiation
of a promissory note, bill of exchange or cheque.
However, a minor may draw, endorse, deliver and negotiate such instruments so as to bind all
parties except himself.
As per the facts given in the question, Mr. S Venkatesh draws a cheque in favour of M, a minor. M
endorses the same in favour of Mrs. A to settle his rental dues. The cheque was dishonoured when
it was presented by Mrs. A to the bank on the ground of inadequacy of funds. Here, in this case,
M being a minor may draw, endorse, deliver and negotiate the instrument so as to bind all parties
except himself. Therefore, M is not liable. Mrs. A can, thus, proceed against Mr. S Venkatesh to
collect her dues.
2. (a) Section 118 of the Companies Act, 2013 provides that every company shall prepare, sign and keep
minutes of proceedings of every general meeting, including the meeting called by the requisitionists
and all proceedings of meeting of any class of shareholders or creditors or Board of Directors or
committee of the Board and also resolution passed by postal ballot within thirty days of the
conclusion of every such meeting concerned. Minutes kept shall be evidence of the proce edings
recorded in a meeting.
By virtue of Rule 25 of the Companies (Management and Administration ) Rules 2014 read with
section 118 of the Companies Act, 2013 each page of every such book shall be initialled or signed
and the last page of the record of proceedings of each meeting or each report in such books shall
be dated and signed by, in the case of minutes of proceedings of a general meeting, by the
chairman of the same meeting within the aforesaid period of thirty days or in the event of the death
or inability of that chairman within that period, by a director duly authorized by the Board for the
purpose.
Therefore, the minutes of the meeting referred to in the case given above can be signed in the
absence of Mr Venkat, by any director who is authorized by the Board.
2
(b) Credit of amount to the Fund: There shall be credited to the Investor Education and Protection
Fund the following amounts—
(a) Amount given by the Central Government- the amount given by the Central Government
by way of grants after due appropriation made by Parliament by law in this behalf for being
utilised for the purposes of the Fund;
(b) Donations by the Central Government- donations given to the Fund by the Central
Government, State Governments, companies or any other institution for the purposes of the
Fund;
(c) Amount of Unpaid Dividend Account- the amount in the Unpaid Dividend Account (UDA)
of companies transferred to the Fund under section 124(5);
(d) Amount of the general revenue account of the Central Government- the amount in the
general revenue account of the Central Government which had been transferred to that
account under section 205A(5) of the Companies Act, 1956 as it stood immediately before
the commencement of the Companies (Amendment) Act, 1999 and remaining unpaid or
unclaimed on the commencement of this Act;
(e) Amount in IEPF- the amount lying in the Investor Education and Protection Fund under
section 205C of the Companies Act, 1956;
(f) Income from investments- the interest or other income received out of investments made
from the Fund;
(g) Amount received through disgorgement or disposal of securities- The amount received
under section 38(4) i.e. amount received through disgorgement or disposal of securities under
section 38(3) shall be credited to the IEPF provided under section 38(4);
(h) Application money- the application money received by companies for allotment of any
securities and due for refund;
(i) Matured deposits- matured deposits with companies other than banking companies;
(j) Matured debentures- matured debentures with companies;
(k) Interest- interest accrued on the amounts referred to in clauses (h) to (j);
(l) Amount received from sale proceeds- sale proceeds of fractional shares arising out of
issuance of bonus shares, merger and amalgamation for seven or more years;
(m) Redemption amount- redemption amount of preference shares remaining unpaid or
unclaimed for seven or more years; and
(n) Other amount- such other amount as prescribed in Rule 3 of the Investor Education and
Protection Fund Authority (Accounting, Audit, Transfer and Refund) Rules, 2016.
(c) The problem in this case, is based on the provisions of the Indian Contract Act, 1872 as contained
in Section 215 read with Section 216. The two sections provide that where an agent without the
knowledge of the principal, deals in the business of agency on his own account, the principal may:
(1) repudiate the transaction, if the case shows, either that the agent has dishonestly concealed
any material fact from him, or that the dealings of the agent have been disadvantageous to
him.
(2) claim from the agent any benefit, which may have resulted to him from the transaction.
Therefore, based on the above provisions, Mr. Ahuja is entitled to recover Rs. 6 lakhs from
Mr. Singh being the amount of profit earned by Mr. Singh out of the transaction.
3
(d) As per section 91 of the Negotiable Instruments Act, 1881, a bill may be dishonoured either by
non-acceptance or by non-payment.
Dishonour by non-acceptance may take place in any one of the following circumstances:
(i) When the drawee either does not accept the bill within forty-eight hours (exclusive of public
holidays) of presentment or refuse to accept it;
(ii) When one of several drawees, not being partners, makes default in acceptance;
(iii) When the drawee makes a qualified acceptance;
(iv) When presentment for acceptance is excused and the bill remains unaccepted; and
(v) When the drawee is incompetent to contract.
3. (a) The Companies Act, 2013 by virtue of provisions as contained in Section 39 (1) and (2) regulates
and restricts the minimum subscription and the application money payable in a public issue of
shares as under:
Minimum subscription [Section 39 (1)]
No Allotment shall be made of any securities of a company offered to the public for subscrip tion;
unless; -
(i) the amount stated in the prospectus as the minimum amount has been subscribed; and
(ii) the sums payable on application for such amount has been paid to and received by the
company-
Application money: Section 39 (2) provides that the amount payable on application on each
security shall not be less than 5% of the nominal amount of such security or such amount as SEBI
may prescribe by making any regulations in this behalf.
Further section 39 (3) provides that if the stated minimum amount is not received by the company
within 30 days of the date of issue of the prospectus or such time as prescribed by SEBI, the
company will be required to refund the application money received within such time and manner
as may be prescribed.
In case of any default under sub-section, the company and its officer who is in default shall be
liable to a penalty, for each default, of one thousand rupees for each day during which such default
continues or one lakh rupees, whichever is less.
Section 40 (3) provides that all moneys received on application from the public for subscription to
the securities shall be kept in a separate bank account maintained with a scheduled bank.
(b) Disqualification of auditor: According to section 141(3)(d)(i) of the Companies Act, 2013, a
person who, or his relative or partner holds any security of the company or its subsidiary or of its
holding or associate company a subsidiary of such holding company, which carries voting ri ghts,
such person cannot be appointed as auditor of the company. Provided that the relative of such
person may hold security or interest in the company of face value not exceeding 1 lakh rupees as
prescribed under the Companies (Audit and Auditors) Rules, 2014.
In the case Mr. Naresh, Chartered Accountants, did not hold any such security. But Mrs. Kamala,
his wife held equity shares of EF Limited of face value Rs. 1 lakh, which is within the specified limit.
Further Section 141(4) provides that if an auditor becomes subject, after his appointment, to any
of the disqualifications specified in sub-section 3 of section 141, he shall be deemed to have
vacated his office of auditor. Hence, Naresh & Company can continue to function as auditors of
4
the Company even after 15th October 2018 i.e. after the investment made by his wife in the equity
shares of EF Limited.
(c) As per Section 44 of the Negotiable Instruments Act, 1881, when the consideration for which a
person signed a promissory note, bill of exchange or cheque consisted of money, and was originally
absent in part or has subsequently failed in part, the sum which a holder standing in immediate
relation with such signer is entitled to receive from him is proportionally reduced.
Explanation—The drawer of a bill of exchange stands in immediate relation with the acceptor. The
maker of a promissory note, bill of exchange or cheque stands in immediate relation with the payee,
and the endorser with his endorsee. Other signers may by agreement stand in immediate relation
with a holder.
On the basis of above provision, P would succeed to recover Rs. 7,000 only from Q and not the
whole amount of the bill because it was accepted for value as to Rs. 7,000 only and an
accommodation to P for Rs. 3,000.
(d) Where the language used in a statute is capable of more than one interpretation, the most firmly
established rule for construction is the principle laid down in the Heydon’s case. This rule enables,
consideration of four matters in constituting an act :
(1) what was the law before making of the Act,
(2) what was the mischief or defect for which the law did not provide,
(3) what is the remedy that the Act has provided, and
(4) what is the reason for the remedy.
The rule then directs that the courts must adopt that construction which ‘shall suppress the mischief
and advance the remedy’. Therefore even in a case where the usual meaning of the language used
falls short of the whole object of the legislature, a more extended meaning may be attributed to the
words, provided they are fairly susceptible of it. If the object of any enactment is public safety, then
its working must be interpreted widely to give effect to that object. Thus in the case of Workmen’s
Compensation Act, 1923 the main object being provision of compensation to workmen, it was held
that the Act ought to be so construed, as far as possible, so as to give effect to its primary
provisions.
However, it has been emphasized by the Supreme Court that the rule in Heydon’s case is
applicable only when the words used are ambiguous and are reasonably capable of more than one
meaning [CIT v. Sodra Devi (1957) 32 ITR 615 (SC)].
4. (a) The Companies Act, 2013 under section 13 provides for the process of altering the Memorandum
of a company. Since the location or Registered Office clause in the Memorandum only names the
state in which its registered office is situated, a change in address from Mumbai to Nashik, does
not result in the alteration of the Memorandum and hence the provisions of section 13 (and its sub
sections) do not apply in this case.
However, under section 12 (5) of the Act which deals with the registered office of company, the
change in registered office from one town or city to another in the same state, must be approved
by a special resolution of the company. Further, presuming that the Registrar will remain the same
for the whole state of Maharashtra, there will be no need for the company to seek the confirmation
to such change from the Regional Director.
(b) A Proxy is an instrument in writing executed by a shareholder authorizing another person to attend
a meeting and to vote thereat on his behalf and in his absence. As per the provisions of Section
105 of the Companies Act, 2013, every shareholder who is entitled to attend and vote has a
5
statutory right to appoint another person as his proxy. It is not necessary that the proxy be a
member of the company. Further, any provision in the articles of association of the company
requiring instrument of proxy to be lodged with the company more than 48 hours before a meeting
shall have effect as if 48 hours had been specified therein. The members have a right to revoke
the proxy’s authority by voting himself before the proxy has voted but once the proxy has voted the
member cannot retract his authority.
Where two proxy instruments by the same shareholder are lodged of in such a manner that one is
lodged before and the other after the expiry of the date fixed for lodging proxies, the former will be
counted.
Thus, in case of member X, the proxy Y will be permitted to vote on his behalf as form for appointing
proxy was submitted within the permitted time.
However, in the case of Member W, the proxy M (and not Proxy N) will be permitted to vote as the
proxy authorizing N to vote was deposited in less than 48 hours before the meeting.
(c) “Immovable Property” [Section 3(26) of the General Clauses Act, 1897]: ‘Immovable Property’
shall include:
(i) Land
(ii) Benefits to arise out of land, and
(iii) Things attached to the earth, or
(iv) Permanently fastened to anything attached to the earth.
It is an inclusive definition. It contains four elements: land, benefits to arise out of land, things
attached to the earth and things permanently fastened to anything attached to the earth. Where, in
any enactment, the definition of immovable property is in the negative and not exhaustive, the
definition as given in the General Clauses Act will apply to the expression given in that enactment.
In the instant case, X sold Land along with timber (obtained after cutting trees) of fifty tamarind
trees of his land. According to the above definition, Land is immovable property; however, timber
cannot be immovable property since the same are not attached to the earth.
(d) Dictionary Definitions: First we refer the Act in question to find out if any particular word or
expression is defined in it. Where we find that a word is not defined in the Act itself, we may refer
to dictionaries to find out the general sense in which that word is commonly understood. However,
in selecting one out of the several meanings of a word, we must always take into consideration the
context in which it is used in the Act. It is the fundamental rule that the meanings of words and
expressions used in an Act must take their colour from the context in which they appear. Further,
judicial decisions laying down the meaning of words in construing statutes in ‘pari materia’ will have
greater weight than the meaning furnished by dictionaries. However, for technical terms, reference
may be made to technical dictionaries.
5. (a) Section 40 (6) of the Companies Act 2013, provides that a company may pay commission to any
person in connection with the subscription or procurement of subscription to its securities, whether
absolute or conditional, subject to the number of c onditions which are prescribed under
Companies (Prospectus and Allotment of Securities) Rules, 2014. Under the Companies
(Prospectus and Allotment of Securities) Rules, 2014 the rate of commission paid or agreed to be
paid shall not exceed, in case of shares, five percent (5%) of the price at which the shares are
issued or a rate authorised by the articles, whichever is less.
In the given problem, the articles of X Ltd. have prescribed 4% underwriting commission but the
directors decided to pay 5% underwriting commission.
6
Therefore, the decision of the Board of Directors to pay 5% commission to the underwriters is
invalid.
(b) The term charge has been defined in section 2 (16) of the Companies Act, 2013 as an interest or
lien created on the property or assets of a company or any of its undertakings or both as security
and includes a mortgage.
Every company is under an obligation to keep at its registered office a register of charges and enter
therein all charges specifically affecting property of the c ompany and all floating charges on the
undertaking or any property of the company.
Punishment for contravention – According to section 86 of the Companies Act, 2013, if a
company makes any default with respect to the registration of charges covered under chapter VI,
a penalty shall be levied, ranging from Rs. 1 lakh to 10 lakhs.
Every defaulting officer is punishable with imprisonment for a term not exceeding 6 months or fine
which shall not be less than 25,000 rupees, but not exceeding 1 lakh rupees or both.
(c) Section 124 of the Indian Contract Act, 1872 says that “A contract by which one party promises to
save the other from loss caused to him by the conduct of the promisor himself, or the conduct of
any person”, is called a “contract of indemnity”.
Section 126 of the Indian Contract Act says that “A contract to perform the promise made or
discharge liability incurred by a third person in case of his default.” is called as “contract of
guarantee”.
The conditions under which the guarantee is invalid or void are stated in section 142,143 and 144
of the Indian Contract Act are :
(i) Guarantee obtained by means of misrepresentation.
(ii) creditor obtained any guarantee by means of keeping silence as to material circumstances.
(iii) When contract of guarantee is entered into on the condition that the creditor shall not act upon
it until another person has joined in it as co-surety and that other party fails to join as such.
(d) “Meaning of Service by post” [Section 27 of the General Clauses Act, 1897]: Where any
legislation or regulation requires any document to be served by post, then unless a different
intention appears, the service shall be deemed to be effected by:
(i) properly addressing
(ii) pre-paying, and
(iii) posting by registered post.
A letter containing the document to have been effected at the time at which the letter would be
delivered in the ordinary course of post.
7
Test Series: April 2019
MOCK TEST PAPER –II
PAPER – 3: COST AND MANAGEMENT ACCOUNTING
Answers are to be given only in English except in the case of the candidates who have opted for Hindi medium. If
a candidate has not opted for Hindi medium his/ her answer in Hindi will not be valued.
Attempt any four questions from the remaining five questions.
Working notes should form part of the answer.
1. Answer the following:
(a) Yamuna Ltd. manufactures a product, currently utilising 80% capacity with a turnover of
Rs.8,00,000 at Rs.25 per unit. The cost data are as under:
Material cost Rs.7.50 per unit, Labour cost Rs.6.25 per unit
Semi-variable cost (Including variable cost of Rs.3.75) per unit Rs.1,80,000.
Fixed cost Rs. 90,000 upto 80% level of output, beyond this an additional
Rs. 20,000 will be incurred.
CALCULATE:
(i) Activity level at Break-Even-Point
(ii) Number of units to be sold to earn a net income of 8% of sales
(iii) Activity level needed to earn a profit of Rs. 95,000.
(b) Madhu Ltd. has calculated a predetermined overhead rate of Rs.22 per machine hour for its
Quality Check (QC) department. This rate has been calculated for the budgeted level of activity
and is considered as appropriate for absorbing overheads. The following overhead
expenditures at various activity levels had been estimated.
Total overheads Number of machine hours
Rs.3,38,875 14,500
Rs.3,47,625 15,500
Rs.3,56,375 16,500
(i) CALCULATE the variable overhead absorption rate per machine hour.
(ii) CALCULATE the estimated total fixed overheads.
(iii) CALCULATE the budgeted level of activity in machine hours.
(iv) CALCULATE the amount of under/over absorption of overheads if the actual machine
hours were 14,970 and actual overheads were Rs.3,22,000.
(v) ANALYSE the arguments for and against using departmental absorption rates as
opposed to a single or blanket factory wide rate.
(c) Anirban Ltd. wants to ascertain the profit lost during the year 20X8-X9 due to increased labour
turnover. For this purpose, they have given you the following information:

(1) Training period of the new recruits is 50,000 hours. During this period their productivity
is 60% of the experienced workers. Time required by an experienced worker is 10
hours per unit.
(2) 20% of the output during training period was defective. Cost of rectification of a
defective unit was Rs. 25.
(3) Potential productive hours lost due to delay in recruitment were 1,00,000 hours.
(4) Selling price per unit is Rs.180 and P/V ratio is 20%.
(5) Settlement cost of the workers leaving the organization was Rs.1,83,480.
(6) Recruitment cost was Rs.1,56,340
(7) Training cost was Rs.1,13,180.
You are required to CALCULATE the profit lost by the company due to increased labour
turnover during the year 20X8-X9.
(d) Nirmal Motors Ltd. manufactures pistons used in car engines. As per the study conducted by
the Auto Parts Manufacturers Association, there will be a demand of 80 million pistons in the
coming year. Arnav Motors Ltd. is expected to have a market share of 1.15% of the total
market demand of the pistons in the coming year. It is estimated that it costs Rs.150 as
inventory holding cost per piston per month and that the set-up cost per run of piston
manufacture is Rs. 3,50,000.
(i) DETERMINE the optimum run size for piston manufacturing?
(ii) Assuming that the company has a policy of manufacturing 40,000 pistons per run,
CALCULATE how much extra costs the company would be incurring as compared to
the optimum run suggested in (i) above? (4 × 5 = 20 Marks)
2. (a) BBC Ltd. manufactures Ordinary Portland Cement (OPC). The standard data for the raw
materials that are used to manufacture OPC are as follows:
Raw Material Composition (%) Rate per Metric Ton (Rs.)
Limestone 65 565
Silica 20 4,800
Alumina 5 32,100
Iron ore 5 1,800
Others 5 2,400
During the month of February 20X8, A Ltd. produced 500 MT OPC. Actual data related with
the consumption and costs are as follows:
Raw Material Quantity (MT) Total Cost (Rs.)
Limestone 340 1,90,400
Silica 105 5,09,250
Alumina 25 8,12,500
Iron ore 30 53,400
Others 23 51,750
You are required to COMPUTE the following variances related with the production of OPC for
the month of February 20X8:
(i) Material Price Variance
2

(ii) Material Mix Variance
(iii) Material Yield Variance
(iv) Material Cost Variance. (10 Marks)
(b) Cimech Constructions Limited has entered into a big contract at an agreed price of
Rs. 1,50,00,000 subject to an escalation clause for material and labour as spent out on the
contract and corresponding actual are as follows:
Standard Actual
Material: Quantity Rate per Ton Quantity Rate per Ton
(Tons) (Rs.) (Tons) (Rs.)
A 3,000 1,000 3,400 1,100
B 2,400 800 2,300 700
C 500 4,000 600 3,900
D 100 30,000 90 31,500
Hours Hourly Rate Hours Hourly Rate
Labour:
(Rs.) (Rs.)
L1 60,000 15 56,000 18
L2 40,000 30 38,000 35
(i) ANALYSE admissible escalation claim and DETERMINE the final contract price payable.
(ii) PREPARE the contract account, if the all expenses other than material and labour related
to the contract are Rs. 13,45,000. (10 Marks)
3. (a) The following data are available in respect of Process-I for January 20X9:
(1) Opening stock of work in process: 600 units at a total cost of Rs. 4,20,000.
(2) Degree of completion of opening work in process:
Material 100%
Labour 60%
Overheads 60%
(3) Input of materials at a total cost of Rs.55,20,000 for 9,200 units.
(4) Direct wages incurred Rs.18,60,000
(5) Production overhead Rs.8,63,000.
(6) Units scrapped 200 units. The stage of completion of these units was:
Materials 100%
Labour 80%
Overheads 80%
(7) Closing work in process; 700 units. The stage of completion of these units was:
Material 100%
Labour 70%
Overheads 70%

(8) 8,900 units were completed and transferred to the next process.
(9) Normal loss is 4% of the total input (opening stock plus units put in)
(10) Scrap value is Rs.60 per unit.
(i) COMPUTE equivalent production,
(ii) CALCULATE the cost per equivalent unit for each element.
(iii) CALCULATE the cost of abnormal loss (or gain), closing work in process and the units
transferred to the next process using the FIFO method. (10 Marks)
(b) ‘Humara - Apna’ bank offers three products, viz., deposits, Loans and Credit Cards. The bank
has selected 4 activities for a detailed budgeting exercise, following activity based costing
methods.
The bank wants to know the product wise total cost per unit for the selected activities, so that
prices may be fixed accordingly.
The following information is made available to formulate the budget:
Activity Present Cost Estimation for the budget period
(Rs.)
ATM Services:
(a) Machine Maintenance 4,00,000 All fixed, no change.
(b) Rents 2,00,000 Fully fixed, no change.
(c) Currency 1,00,000 Expected to double during budget period.
Replenishment Cost
7,00,000 (This activity is driven by no. of ATM
transactions)
Computer Processing 5,00,000 Half this amount is fixed and no change
is expected.
The variable portion is expected to
increase to three times the current level.
(This activity is driven by the number of
computer transactions)
Issuing Statements 18,00,000 Presently, 3 lakh statements are made. In
the budget period, 5 lakh statements are
expected.
For every increase of one lakh statement,
one lakh rupees is the budgeted
increase.
(This activity is driven by the number of
statements)
Computer Inquiries 2,00,000 Estimated to increase by 80% during the
budget period.
(This activity is driven by telephone
minutes)

The activity drivers and their budgeted quantifies are given below:
Activity Drivers Deposits Loans Credit
Cards
No. of ATM Transactions 1,50,000 --- 50,000

No. of Computer Processing 15,00,000 2,00,000 3,00,000
Transactions
No. of Statements to be issued 3,50,000 50,000 1,00,000
Telephone Minutes 3,60,000 1,80,000 1,80,000
The bank budgets a volume of 58,600 deposit accounts, 13,000 loan accounts, and 14,000
Credit Card Accounts.
Required
(i) CALCULATE the budgeted rate for each activity.
(ii) PREPARE the budgeted cost statement activity wise.
(iii) COMPUTE the budgeted product cost per acc ount for each product using (i) and (ii)
above. (10 Marks)
4. (a) Nakata Ltd a Vehicle manufacturer has prepared sales budget for the next few months, and
the following draft figures are available:
Month No. of vehicles
October 40,000
November 35,000
December 45,000
January 60,000
February 65,000
To manufacture a vehicle a standard cost of Rs.5,71,400 is incurred and sold through dealers
at a uniform selling price of Rs.8,57,100 to customers. Dealers are paid 15% commission on
selling price on sale of a vehicle.
Apart from other materials four units of Part - X are required to manufacture a vehicle. It is a
policy of the company to hold stocks of Part-X at the end of each month to cover 40% of next
month’s production. 48,000 units of Part-X are in stock as on 1st October.
There are 9,500 nos. of completed vehicles are in stock as on 1 st October and it is policy to have
stocks at the end of each month to cover 20% of the next month’s sales.
You are required to
(i) PREPARE Production budget (in nos.) for the month of October, November, December
and January.
(ii) PREPARE a Purchase budget for Part-X (in units) for the months of October, November
and December.
(iii) CALCULATE the budgeted gross profit for the quarter October to December.(10 Marks)
(b) R Limited showed a net loss of Rs.35,400 as per their cost accounts for the year ended 31st
March, 20X8. However, the financial accounts disclosed a net profit of Rs.67,800 for the same
period. The following information were revealed as a result of scrutiny of the figures of cost
accounts and financial accounts:
5

(Rs.) (Rs.)
(i) Administrative overhead under recovered 25,500
(ii) Factory overhead over recovered 1,35,000
(iii) Depreciation under charged in Cost Accounts 26,000
(iv) Dividend received 20,000
(v) Loss due to obsolescence charged in Financial Accounts 16,800
(vi) Income tax provided 43,600
(vii) Bank interest credited in Financial Accounts 13,600
(viii) Value of opening stock:
- In Cost Accounts 1,65,000
- In Financial Accounts 1,45,000
(ix) Value of closing stock:
- In Cost Accounts 1,25,500
- In Financial Accounts 1,32,000
(x) Goodwill written-off in Financial Accounts 25,000
(xi) Notional rent of own premises charged in Cost Accounts 60,000
(xii) Provision for doubtful debts in Financial Accounts 15,000
PREPARE a reconciliation statement by taking costing net loss as base. (10 Marks)
5. (a) XYZ LLP, contractors and civil engineers, are building a new wing to a school. The quoted
fixed price for the contract is Rs.30,00,000. Work commenced on 1 st January 20X8 and is
expected to be completed on schedule by 30 June 20X9.
Data relating to the contract at the year ended 31 st March 20X9 is as follows.
Amount (Rs.)
Plant sent to site at commencement of contract 2,40,000
Hire of plant and equipment 77,000
Materials sent to site 6,62,000
Materials returned from site 47,000
Direct wages paid 9,60,000
Wage related costs 1,32,000
Direct expenses incurred 34,000
Supervisory staff salaries - Direct 90,000
- Indirect 20,000
Regional office expenses apportioned to contract 50,000
Head office expenses apportioned to contract 30,000
Surveyor’s fees 27,000
Progress payments received from school 18,00,000
Additional information:
1. Plant is to be depreciated at the rate of 25 % per annum following straight line method,
with no residual value.
6

2. Unused materials on site at 31st March are estimated at Rs. 50,000.
3. Wages owed to direct workers total Rs. 40,000
4. No profit in respect of this contract was included in the year ended 31 st March 2016.
5. Budgeted profit on the contract is Rs. 8,00,000
6. Value of work certified by the surveyor is Rs. 24,00,000.
7. The surveyor has not certified the work costing Rs. 1,80,000
You are required to PREPARE the account for the school contract for the fifteen months ended
31st March 20X9, and CALCULAT E the notional profit to date. (10 Marks)
(b) A Ltd. produces a product ‘Exe’ using a raw material Dee. To produce one unit of Exe, 2 kg of
Dee is required. As per the sales forecast conducted by the company, it will able to sale 20,000
units of Exe in the coming year. The following is the information regarding the raw material
Dee:
(i) The Re-order quantity is 200 kg. less than the Economic Order Quantity (EOQ).
(ii) Maximum consumption per day is 20 kg. more than the average consumption per day.
(iii) There is an opening stock of 2,000 kg.
(iv) Time required to get the raw materials from the suppliers is 4 to 8 days.
(v) The purchase price is Rs.125 per kg.
There is an opening stock of 1,800 units of the finished product Exe.
The rate of interest charged by bank on Cash Credit facility is 13.76%.
To place an order company has to incur Rs. 720 on paper and documentation work.
From the above information COMPUTE the followings in relation to raw material Dee:
(a) Re-order Quantity
(b) Maximum Stock level
(c) Minimum Stock level
(d) Impact on the profitability of the company by not ordering the EOQ.
[Take 364 days for a year] (10 Marks)
6. (a) DISCUSS the accounting treatment of Idle time and overtime wages.
(b) EXPLAIN the difference between Cost Control and Cost Reduction
(c) STATE Direct Expenses with examples.
(d) EXPLAIN the difference between product cost and period cost. (4 × 5 =20 Marks)

PAPER – 3: COST MANAGEMENT ACCOUNTING
1. (a) Working notes:
1. (i) Number of units sold at 80% capacity
Turnover Rs. 8,00,000
= = = 32,000 units.
Selling price p.u. Rs. 25
(ii) Number of units sold at 100% capacity
Rs. 32,000 units
× 100 = 40,000 units
80
2. Component of fixed cost included in semi-variable cost of 32,000 units.
Fixed cost = {Total semi-variable cost – Total variable cost }
= Rs.1,80,000 – 32,000 units × Rs.3.75
= Rs.1,80,000 – Rs.1,20,000
= Rs.60,000
3. (i) Total fixed cost at 80% capacity
= Fixed cost + Component of fixed cost included in semi—variable cost
(Refer to working note 2)
= Rs.90,000 + Rs.60,000 = Rs.1,50,000
(ii) Total fixed cost beyond 80% capacity
= Total fixed cost at 80% capacity + Additional fixed cost to be incurred
= Rs.1,50,000 + Rs.20,000 = Rs.1,70,000
4. Variable cost and contribution per unit
Variable cost per unit = Material cost + Labour cost + Variable cost component in
semi variable cost = Rs.7.50 + Rs.6.25 + Rs.3.75 = Rs.17.50
Contribution per unit = Selling price per unit – Variable cost per unit
= Rs.25 – Rs.17.50 = Rs.7.50
5. Profit at 80% capacity level
= Sales revenue – Variable cost – Fixed cost
= Rs.8,00,000 – Rs.5,60,000 (32,000 units × Rs.17.50) – Rs.1,50,000
= Rs.90,000
(i) Activity level at Break–Even Point
Fixed cost Rs. 1, 50, 000
Break-even point (units) = = = 20,000 units
Contribution per unit Rs. 7.50
(Refer to working notes 3 & 4)

Break - Even point (units)
Activity level at BEP = × 100
No. of units at 100% capacity level
(Refer to working note 1(ii))
20,000 units
= × 100 = 50%
40,000 units
(ii) Number of units to be sold to earn a net income of 8% of sales
Let S be the number of units sold to earn a net income of 8% of sales.
Mathematically it means that : (Sales revenue of S units)
= Variable cost of S units + Fixed cost + Net income
8
Or, Rs.25S = Rs.17.5S + Rs.1,50,000 + × (Rs.25S)
100
Or, Rs.25S = Rs.17.5S + Rs.1,50,000 + Rs.2S
Or, S = (Rs.1,50,000/Rs.5.5) units
Or, S = 27,273 units.
(iii) Activity level needed to earn a profit of Rs. 95,000
The profit at 80% capacity level, is Rs. 90,000 which is less than the desired profit
of Rs. 95,000, therefore the needed activity level would be more than 80%. Thus
the fixed cost to be taken to determine the activity level needed should be
Rs.1,70,000 (Refer to Working Note 3 (ii))
Units to be sold to earn a profit of Rs.95,000
Fixed cost + Desired profit
=
Contribution per unit
Rs. 1,70,000 + Rs. 95,000
=
Rs. 7.5
= 35,333.33 units
Activity level needed to earn a profit of Rs.95,000
35,333.33 units
= × 100 = 88.33%
40,000 units
Difference inTotalOverheads
(b) (i) Variable overhead absorption rat 
Difference in levels in terms of machine hours
Rs.3,47,625 - Rs.3,38,875
= = Rs.8.75 per machine hour.
15,500hours -14,500hours
(ii) Calculation of Total fixed overheads:
(Rs.)
Total overheads at 14,500 hours 3,38,875
Less: Variable overheads (Rs. 8.75 × 14,500) (1,26,875)
Total fixed overheads 2,12,000

(iii) Calculation of Budgeted level of activity in machine hours:
Let budgeted level of acti vity = X
(Rs. 8.75 X + Rs.2,12,000)
T hen, = Rs. 22
X
8.75X + Rs.2,12,000 = 22X
13.25X = 2,12,000
X =16,000
T hus, budgeted level of activity = 16,000 machine hours.
(iv) Calculation of Under / Over absorption of overheads:
(Rs.)
Actual overheads 3,22,000
Absorbed overheads (14,970 hours × Rs. 22 per hour) 3,29,340
Over-absorption (3,29,340 – 3,22,000) 7,340
(v) Departmental absorption rates provide costs which are more precise than those provided
by the use of blanket absorption rates. Departmental absorption rates facilitate variance
analysis and cost control. The application of these rates make the task of stock and work-
in-process (WIP) valuation easier and more precise. However, the setting up and
monitoring of these rates can be time consuming and expensive.
50,000
(c) Output by experienced workers in 50,000 hours = = 5,000 units
10
 Output by new recruits = 60% of 5,000 = 3,000 units
Less of output = 5,000 – 3,000 = 2,000 units
Total loss of output = 10,000 + 2,000 = 12,000 units
Contribution per unit = 20% of 180 = Rs. 36
Total contribution cost = 36 × 12,000 = Rs. 4,32,000
Cost of repairing defective units = 3,000 × 0.2 × 25 = Rs. 15,000
Profit forgone due to labour turnover
(Rs.)
Loss of Contribution 4,32,000
Cost of repairing defective units 15,000
Recruitment cost 1,56,340
Training cost 1,13,180
Settlement cost of workers leaving 1,83,480
Profit forgone in 20X8-X9 9,00,000
2D S
(d) (i) Optimum run size or Economic Batch Quantity (EBQ) =
C
Where, D = Annual demand i.e. 1.15% of 8,00,00,000 = 9,20,000 units
S = Set-up cost per run = Rs. 3,50,000

C = Inventory holding cost per unit per annum
= Rs.150 × 12 months = Rs. 1,800
2×9,20,000units×Rs.3,50,000
EBQ = = 18,915 units
Rs. 1,800
(ii) Calculation of Total Cost of set-up and inventory holding
Batch size No. of set- Set-up Cost Inventory holding Total Cost
ups (Rs.) cost (Rs.) (Rs.)
3,60,00,000
23
80,50,000  40,000×Rs.1,800 
A 40,000 units  9,20,000    4,40,50,000
 40,000  (23×Rs.3,50, 000)  2 
 
49 1,71,50,000 1,70,23,500
B 18,915 units  9,20,000  (49×Rs.3,50, 000)  18,915  Rs.1,800  3,41,73,500
 18,915   
   2 
Extra Cost (A – B) 98,76,500
2. (a) (i) Material Price Variance = Actual Quantity (Std. Price – Actual Price)
 Rs.1,90,400 
Limestone = 340  Rs.565  
 340 
= 340 (Rs. 565 - Rs. 560) = 1,700 (F)
 Rs.5,09,250 
Silica = 105  Rs.4,800  
 105 
= 105 (Rs. 4,800 - Rs. 4,850) = 5,250 (A)
 Rs.8,12,500 
Alumina = 25  Rs.32,100  
 25 
= 25 (Rs. 32,100 - Rs. 32,500) = 10,000 (A)
 Rs.53,400 
Iron ore = 30  Rs.1,800  
 30 
= 30 (Rs. 1,800 - Rs. 1,780) = 600 (F)
 Rs.51,750 
Others = 23  Rs.2,400  
 23 
= 23 (Rs. 2,400 - Rs. 2,250) = 3,450 (F)
9,500 (A)
(ii) Material Mix Variance = Std. Price (Revised Std. Quantity – Actual Quantity)
Limestone = Rs. 565 (523 × 65% - 340)
= Rs. 565 (339.95 - 340) = 28.25 (A)
Silica = Rs. 4,800 (523 × 20% - 105)
= Rs. 4,800 (104.6 - 105) = 1,920 (A)
Alumina = Rs. 32,100 (523 × 5% - 25)
4

= Rs. 32,100 (26.15 - 25) = 36,915 (F)
Iron ore = Rs. 1,800 (523 × 5% - 30)
= Rs. 1,800 (26.15 - 30) = 6,930 (A)
Others = Rs. 2,400 (523 × 5% - 23)
= Rs. 2,400 (26.15 - 23) = 7,560 (F)
35,596.75 (F)
(iii) Material Yield Variance = Std. Price (Standard Quantity – Revised Std. Quantity)
Limestone = Rs. 565 (500 × 65% - 523 × 65%)
= Rs. 565 (325 - 339.95) = 8,446.75 (A)
Silica = Rs. 4,800 (500 × 20% - 523 × 20%)
= Rs. 4,800 (100 - 104.6) = 22,080 (A)
Alumina = Rs. 32,100 (500 × 5% - 523 × 5%)
= Rs. 32,100 (25 - 26.15) = 36,915 (A)
Iron ore = Rs. 1,800 (500 × 5% - 523 × 5%)
= Rs. 1,800 (25 - 26.15) = 2,070 (A)
Others = Rs. 2,400 (500 × 5% - 523 × 5%)
= Rs. 2,400 (25 - 26.15) = 2,760 (A)
72,271.75 (A)
(iv) Material Cost Variance = (Std. Quantity × Std. Price) – (Actual Quantity × Actual Price)
Limestone = Rs. 565 × (500 × 65%) - Rs. 1,90,400
= Rs. 1,83,625 - Rs. 1,90,400 = 6,775 (A)
Silica = Rs. 4,800 × (500 × 20%) - Rs. 5,09,250
= Rs. 4,80,000 – Rs. 5,09,250 = 29,250 (A)
Alumina = Rs. 32,100 (500 × 5%) – Rs. 8,12,500
= Rs. 8,02,500 – Rs. 8,12,500 = 10,000 (A)
Iron ore = Rs. 1,800 (500 × 5%) – Rs. 53,400
= Rs. 45,000 – Rs. 53,400 = 8,400 (A)
Others = Rs. 2,400 (500 × 5%) – Rs. 51,750
= Rs. 60,000 – Rs. 51,750 = 8,250 (F)
46,175 (A)
(b) In case of escalation clause in a contract, a contractor is paid for the any increase in price of
materials and rate of labours which are beyond the control of the contractor. Any increase in
the cost due to inefficiencies in usage of the materials and labours are not admissible. Thus
any increase in cost due to usage in excess of standard quantity or hours are not paid.
(i) Statement showing Additional claim due to Escalation clause.
Standard Std. Rate Actual Variation in Escalation claim
Qty / (Rs.) Rate (Rs.) Rate (Rs.) (Rs.)
Hours
(a) (b) (c) (d) = (c-b) (e) = (a × d)
Material:

A 3,000 1,000 1,100 +100 +3,00,000
B 2,400 800 700 -100 -2,40,000
C 500 4,000 3,900 -100 -50,000
D 100 30,000 31,500 +1,500 +1,50,000
Material escalation claim 1,60,000
Labour:
L1 60,000 15 18 +3 +1,80,000
L2 40,000 30 35 +5 +2,00,000
Labour escalation claim 3,80,000
Statement showing Final Contract Price
(Rs.) (Rs.)
Agreed contract price 1,50,00,000
Add: Agreed escalation claim:
Material Cost 1,60,000
Labour Cost 3,80,000 5,40,000
Final Contract Price 1,55,40,000
(ii) Contract Account
Dr Cr.
.
Particulars (Rs.) Particulars (Rs.)
To Material: By Contractee’s A/c 1,55,40,000
A – (3,400 × Rs. 1,100) 37,40,000
B – (2,300 × Rs. 700) 16,10,000
C – (600 × Rs. 3,900) 23,40,000
D – (90 × Rs. 31,500) 28,35,000 1,05,25,000
To Labour:
L1 – (56,000 × Rs.18) 10,08,000
L2 – (38,000 × Rs.35) 13,30,000 23,38,000
To Other expenses 13,45,000
To Estimated Profit 13,32,000
1,55,40,000 1,55,40,000
3. (a) (i) Statement of Equivalent Production (FIFO Method)

Input Output Equivalent Production
Materials Labour Production
Overhead
Details Units Details Units % Units % Units % Units
Opening 600 From opening 600 - - 40 240 40 240
Stock stock
- From fresh 8,300 100 8,300 100 8,300 100 8,300
materials
Closing W-I-P 700 100 700 70 490 70 490

Fresh inputs 9,200 Normal loss 392 - - - - - -

9,992 9,000 9,030 9,030
Less: Abnormal
Gain (192) 100 (192) 100 (192) 100 (192)
9,800 9,800 8,808 8,838 8,838
(ii) Statement of Cost per equivalent units

Elements Cost Equivalent units Cost per
(EU) EU
(Rs.) (Rs.) (Rs.)
Material Cost 55,20,000
Less: Scrap realisation 392 (2,3520) 54,96,480 8,808 624.03
units @ Rs. 60/- p.u.
Labour cost 18,60,000 8,838 210.45
Production OH Cost 8,63,000 8,838 97.65
Total Cost 82,19,480 932.13
(iii) Cost of Abnormal Gain – 192 Units
(Rs.) (Rs.)
Material cost of 192 units @ Rs. 624.03 p.u.

1,19,813.76
Labour cost of 192 units @ Rs. 210.45 p.u. 40,406.40
Production OH cost of 192 units @ Rs. 97.65 p.u. 18,748.80 1,78,968.96
Cost of closing WIP – 700 Units
Material cost of 700 equivalent units @ Rs. 624.03 4,36,821.00
p.u.
Labour cost of 490 equivalent units @ Rs. 210.45 p.u. 1,03,120.50
Production OH cost of 490 equivalent @ Rs. 97.65 47,848.50 5,87,790.00
p.u.
Cost of 8,900 units transferred to next process

(i) Cost of opening W-I-P Stock b/f – 600 units 4,20,000.00
(ii) Cost incurred on opening W-I-P stock
Material cost —
Labour cost 240 equivalent units @ Rs. 210.45 p.u. 50,508.00
Production OH cost 240 equivalent units @ Rs 97.65 p.u. 23,436.00
4,93,944.00
(iii) Cost of 8,300 completed units
8,300 units @ Rs. 932.13 p.u. 77,36,679.00
Total cost [(i) + (ii) + (iii))] 86,50,623.00

(b) Statement Showing “Budgeted Cost per unit of the Product”
Activity Activity Activity No. of Activity Deposits Loans Credit
Cost Driver Units of Rate Cards
(Budgete Activity (Rs.)
d) (Rs.) Driver
(Budget)
ATM 8,00,000 No. of ATM 2,00,000 4.00 6,00,000 --- 2,00,000
Services Transaction
Computer 10,00,000 No. of 20,00,000 0.50 7,50,000 1,00,000 1,50,000
Processing Computer
Transaction
Issuing 20,00,000 No. of 5,00,000 4.00 14,00,000 2,00,000 4,00,000
Statements Statements
Customer 3,60,000 Telephone 7,20,000 0.50 1,80,000 90,000 90,000
Inquiries Minutes
Budgeted 41,60,000 29,30,000 3,90,000 8,40,000
Cost
Units of Product (as estimated in the budget period) 58,600 13,000 14,000
Budgeted Cost per unit of the product 50 30 60
Working Note
Activity Budgeted Cost (Rs.) Remark
ATM Services:
(a) Machine Maintenance 4,00,000 − All fixed, no change.
(b) Rents 2,00,000 − Fully fixed, no change.
(c) Currency
Replenishment Cost 2,00,000 − Doubled during budget period.
Total 8,00,000
Computer Processing 2,50,000 − Rs.2,50,000 (half of
Rs.5,00,000) is fixed and no
7,50,000 change is expected.
− Rs.2,50,000 (variable portion)
Total 10,00,000 is expected to increase to
three times the current level.
Issuing Statements 18,00,000 − Existing.
2,00,000 − 2 lakh statements are
expected to be increased in
budgeted period. For every
increase of one lakh
Total statement, one lakh rupees is
20,00,000
the budgeted increase.
Computer Inquiries 3,60,000 − Estimated to increase by 80%
during the budget period.
(Rs.2,00,000 x 180% )
Total 3,60,000

4. (a) (i) Preparation of Production Budget (in units)
October November December January
Demand for the month (Nos.) 40,000 35,000 45,000 60,000
Add: 20% of next month’s demand 7,000 9,000 12,000 13,000
Less: Opening Stock (9,500) (7,000) (9,000) (12,000)
Vehicles to be produced 37,500 37,000 48,000 61,000
(ii) Preparation of Purchase budget for Part-X
October November December
Production for the month (Nos.) 37,500 37,000 48,000
Add: 40% of next month’s 14,800 19,200 24,400
production (40% of 37,000) (40% of 48,000) (40% of 61,000)
52,300 56,200 72,400
No. of units required for 2,09,200 2,24,800 2,89,600
production (52300 × 4 units) (56200 × 4 units) (72,400 × 4 units)
Less: Opening Stock (48,000) (59,200) (76,800)
(14800 × 4 units) (19200 × 4 units)
No. of units to be purchased 1,61,200 1,65,600 2,12,800
(iii) Budgeted Gross Profit for the Quarter October to December
October November December Total
Sales in nos. 40,000 35,000 45,000 1,20,000
Net Selling Price per unit* 7,28,535 7,28,535 7,28,535
Sales Revenue (Rs. in lakh) 2,91,414 2,54,987.25 3,27,840.75 8,74,242
Less: Cost of Sales (Rs. in lakh) 2,28,560 1,99,990.00 2,57,130.00 6,85,680
(Sales unit × Cost per unit)
Gross Profit (Rs. in lakh) 62,854 54,997.25 70,710.75 1,88,562
* Net Selling price unit = Rs. 8,57,100 – 15% commission on Rs. 8,57,100
= Rs.7,28,535.
(b) Statement of Reconciliation
Sl. Particulars Amount (Rs.) Amount (Rs.)
No.
Net loss as per Cost Accounts (35,400)
Additions
1. Factory O/H over recovered 1,35,000
2. Dividend Received 20,000
3. Bank Interest received 13,600
4. Difference in Value of Opening Stock 20,000
(1,65,000 – 1,45,000)
5. Difference in Value of Closing Stock 6,500

(1,32,000 – 1,25,500)
6. Notional Rent of own Premises 60,000 2,55,100
Deductions
1. Administration O/H under recovered 25,500
2. Depreciation under charged 26,000
3. Loss due to obsolescence 16,800
4. Income tax Provided 43,600
5. Goodwill written-off 25,000
6. Provision for doubtful debts 15,000 (1,51,900)
Net Profit as per Financial A/c. 67,800
5. (a) School Contract Account
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Plant 2,40,000 By Material returned 47,000
To Hire of plant 77,000 By Plant c/d 1,65,000
To Materials 6,62,000 By Materials c/d 50,000
To Direct wages 9,60,000 By WIP c/d:
Add: Accrued 40,000 10,00,000 Value of work certified 24,00,000
To Wages related costs 1,32,000 Cost of work not certified 1,80,000
To Direct expenses 34,000
To Supervisory staff:
Direct 90,000
Indirect 20,000 1,10,000
To Regional office expenses 50,000
To Head office expenses 30,000
To Surveyors’ fees 27,000
To Notional profit c/d 4,80,000
28,42,000 28,42,000
(b) Working Notes:
(i) Computation of Annual consumption & Annual Demand for raw material ‘Dee’:
Sales forecast of the product ‘Exe’ 20,000 units
Less: Opening stock of ‘Exe’ 1,800 units
Fresh units of ‘Exe’ to be produced 18,200 units
Raw material required to produce 18,200 units of ‘Exe’ 36,400 kg.
(18,200 units × 2 kg.)
Less: Opening Stock of ‘Dee’ 2,000 kg.
Annual demand for raw material ‘Dee’ 34,400 kg.
10

(ii) Computation of Economic Order Quantity (EOQ):
2  Annualdemandof 'Dee '  Orderingcos t
EOQ =
Carryingcos t per unit per annum
2×34,400kg.× Rs.720 2×34,400kg.× Rs.720

= = = 1,697 kg.
Rs.125×13.76% Rs.17.2
(iii) Re- Order level:
= (Maximum consumption per day × Maximum lead time)
 AnnualConsumptionof 'Dee '  
=   20kg.   8 days 
 364 days  
 36,400kg.  
=   20kg.   8 days  = 960 kg.
 364 days  
(iv) Minimum consumption per day of raw material ‘Dee’:
Average Consumption per day = 100 kg.
Hence, Maximum Consumption per day = 100 kg. + 20 kg. = 120 kg.
So, Minimum consumption per day will be
Min.consumption  Max.consumption
Average Consumption =
2
Min.consumption  120kg.
Or, 100 kg. =
2
Or, Min. consumption = 200 kg – 120 kg. = 80 kg.
(a) Re-order Quantity:
EOQ – 200 kg. = 1,697 kg. – 200 kg. = 1,497 kg.
(b) Maximum Stock level:
= Re-order level + Re-order Quantity – (Min. consumption per day × Min. lead time)
= 960 kg. + 1,497 kg. – (80 kg. × 4 days)
= 2,457 kg. – 320 kg. = 2,137 kg.
(c) Minimum Stock level:
= Re-order level – (Average consumption per day × Average lead time)
= 960 kg. – (100 kg. × 6 days) = 360 kg.
(d) Impact on the profitability of the company by not ordering the EOQ.
When purchasing the ROQ When purchasing the
EOQ
I Order quantity 1,497 kg. 1,697 kg.

II No. of orders a 34,400kg. 34,400kg.
 22.9or 23orders  20.27or 21orders
year 1,497kg. 1,697kg.
III Ordering Cost 23 orders × Rs. 720 = Rs.16,560 21 orders × Rs. 720 =
Rs.15,120
11

IV Average 1,497kg. 1,697kg.
 748.5kg.  848.5kg.
Inventory 2 2
V Carrying Cost 748.5 kg. × Rs. 17.2 = 848.5 kg. × Rs. 17.2 =
Rs.12,874.2 Rs.14,594.2
VI Total Cost Rs. 29,434.20 Rs. 29,714.20
Cost saved by not ordering EOQ = Rs. 29,714.20 - Rs. 29,434.20 = Rs.280.
6. (a) Accounting treatment of idle time wages & overtime wages in cost accounts: Normal idle
time is treated as a part of the cost of production. Thus, in the case of direct workers, an
allowance for normal idle time is built into the labour cost rates. In the case of indirect workers,
normal idle time is spread over all the products or jobs through the process of absorption of
factory overheads.
Under Cost Accounting, the overtime premium is treated as follows:
If overtime is resorted to at the desire of the customer, then the overtime premium may be
charged to the job directly.
If overtime is required to cope with general production program or for meeting urgent orders,
the overtime premium should be treated as overhead cost of particular department or cost
center which works overtime.
Overtime worked on account of abnormal conditions should be charged to costing Profit &
Loss Account.
If overtime is worked in a department due to the fault of another department the overtime
premium should be charged to the latter department.
(b)
Cost Control Cost Reduction
1. Cost control aims at maintaining 1. Cost reduction is concerned with
the costs in accordance with the reducing costs. It challenges all
established standards. standards and endeavours to better
them continuously
2. Cost control seeks to attain lowest 2. Cost reduction recognises no condition as
possible cost under existing permanent, since a change will result in
conditions. lower cost.
3. In case of cost control, emphasis 3. In case of cost reduction, it is on present
is on past and present and future.
4. Cost control is a preventive 4. Cost reduction is a corrective function.
function It operates even when an efficient cost
control system exists.
5. Cost control ends when targets 5. Cost reduction has no visible end.
are achieved.
(c) Expenses other than direct material cost and direct employee cost, which are incurred to
manufacture a product or for provision of service and can be directly traced in an economically
feasible manner to a cost object. The following costs are examples for direct expenses:
(a) Royalty paid/ payable for production or provision of service;
(b) Hire charges paid for hiring specific equipment;
(c) Cost for product/ service specific design or drawing;
(d) Cost of product/ service specific software;
12

(e) Other expenses which are directly related with the production of goods or provision of
service.
(d) Product costs are those costs that are identified with the goods purchased or produced for
resale. In a manufacturing organisation they are attached to the product and that are included
in the inventory valuation for finished goods, or for incomplete goods. Product cost is also
known as inventoriable cost. Under absorption costing method it includes direct material , direct
labour, direct expenses, directly attributable costs (variable and non-variable) and other
production (manufacturing) overheads. Under marginal costing method Product Costs
includes all variable production costs and the all fixed costs are deducted from the contribution.
Periods costs are the costs, which are not assigned to the products but are charged as
expense against revenue of the period in which they are incurred. General Administration,
marketing, sales and distributor overheads are recognized as period costs.
13

MOCK TEST PAPER - 2
INTERMEDIATE (NEW) COURSE
PAPER – 4: TAXATION
SECTION – A: INCOME TAX LAW (60 MARKS)
Working Notes should form part of the answer. Wherever necessary, suitable assumptions may be made by the
candidates and disclosed by way of a note. However, in answers to Question in Division A, working
notes are not required.
Your answers should be based on the provisions of Income-tax law as amended
by the Finance Act, 2018. The relevant assessment year is A.Y.2019-20.
Division A – Multiple Choice Questions
Write the most appropriate answer to each of the following multiple choice questions by choosing
one of the four options given. All questions are compulsory.
1. Under the provisions of the Income-tax Act, 1961, the term “Person” would not include:
(a) A body corporate incorporated in a country outside India
(b) A Limited Liability Partnership (LLP)
(c) Indian branch of a foreign company
(d) A local authority (1 Mark)
2. Which of the following incomes is not deemed to accrue or arise in India under section 9(1)(i) of the
Income-tax Act, 1961?
(a) Income from any business connection in India
(b) Income through or from any property in India
(c) Income arising from transfer of a capital asset situated in India
(d) Income relating to operations which are confined to purchase of goods in India for the purpose of
export (1 Mark)
3. A member of parliament is entitled to salary, constituency allowance and daily allowance when the
Parliament is in session. Which of the following statements are correct?
(a) His entire income is taxable under the head "Salaries".
(b) Only his salary component is taxable under the head "Salaries". Constituency allowance and daily
allowance are exempt.
(c) Only his salary component is taxable under the head "Income from other sources". Constituency
allowance and daily allowance are exempt.
(d) His salary component and constituency allowance is taxable under the head "Income from other
sources". Daily allowance is exempt. (1 Mark)

4. Ms. Sheetal and her brother jointly own a bungalow. They had taken a housing loan to purchase the
bungalow. The loan is sanctioned in the name of M s. Sheetal and her brother in the year 2015. Interest on
housing loan for the P.Y. 2018-19 amounted to Rs.4,50,000 which is paid by Ms. Sheetal (Rs.2,25,000) and
her brother (Rs.2,25,000). The bungalow is used by them for their residence. In this case, what will be the
amount of deduction available under section 24(b) to Ms. Sheetal and her brother?
(a) Rs.30,000 each
(b) Rs.2,00,000 each
(c) Rs.2,25,000 each
(d) Rs.4,50,000 each (1 Mark)
5. On 31.08.2018, Mr. Kashyap moved to Japan for employment. His family accompanied him, owing to long
term nature of employment. Mrs. Kashyap is also planning to start a fashion boutique in Japan soon, onc e
she gets settled. Both Mr. & Mrs. Kashyap are Indian citizens and have been working in India for more than
a decade now. Comment on their residential status for A.Y. 2019-20, assuming they did not visit India after
August 2018 -
(a) Mr. & Mrs. Kashyap will qualify to be non-resident
(b) Mr. Kashyap will qualify to be non-resident and Mrs. Kashyap will be resident but not ordinarily
resident
(c) Mr. Kashyap will qualify to be non-resident and Mrs. Kashyap will be resident and ordinarily resident
(d) Mr. & Mrs. Kashyap will qualify to be resident but not ordinarily resident (1 Mark)
6. XYZ a partnership firm was dissolved on 30-6-2018. A machine acquired on 1-5-2016 for Rs.2,50,000 was
distributed amongst the partners on dissolution for Rs.2,25,000. The value of machinery as per books of
account and Fair Market Value on 30-6-2018 was Rs.2,00,000 and Rs.3,50,000, respectively. What will be
the full value of consideration of this machine?
(a) Rs.2,25,000
(b) Rs.3,50,000
(c) Rs.2,50,000
(d) Rs.2,00,000 (1 Mark)
7. Mr. Kabir (a non-resident and aged 70 years) is a retired person, earning rental income of Rs.45,000 per
month from a property located in Mumbai. He is residing in Canada. Apart from rental income, he does not
have any other source of income. Is he liable to pay advance tax in India?
(a) Yes, he is liable to pay advance tax in India as he is a non-resident and his tax liability in India
exceeds Rs.10,000.
(b) No, he is not liable to pay advance tax in India as his tax liability in India is less than Rs.10,000.
(c) No, he is not liable to pay advance tax in India as he is a senior citizen and has no income chargeable
under the head “Profits and gains of business or profession”.
(d) Both (b) and (c) (2 Marks)

8. Mr. Vikram sold his old residential house in May, 2017 for Rs.25,00,000. Long- term capital gain arising on
transfer of old house amounted to Rs.8,70,000. In December, 2017 he purchased another residential house
worth Rs.4,50,000. The new house was however, sold in May, 2018 for Rs.14,00,000 (stamp duty value of
the new house was Rs.13,00,000). What will be amount of taxable capital gains in the hands of Mr. Vikram
for the A.Y. 2018-19 and 2019-20?
(a) Long term capital gain of Rs.4,20,000 in A.Y. 2018-19 and short-term capital gain of Rs.14,00,000 in
A.Y. 2019-20
(b) Long term capital gain of Rs.4,20,000 in A.Y. 2018-19 and long term capital gain of Rs.4,50,000 and
short-term capital gain of Rs.14,00,000 in A.Y. 2019-20
(c) Long term capital gain of Rs.4,20,000 in A.Y. 2018-19 and long term capital gain of Rs.4,50,000 and
short-term capital gain of Rs.9,50,000 in A.Y. 2019-20
(d) Long term capital gain of Rs.4,20,000 in A.Y. 2018-19 and long term capital gain of Rs.4,50,000 and
short-term capital gain of Rs.8,50,000 in A.Y. 2019-20 (2 Marks)
9. M/s ABC & Co., a firm carrying on business, furnishes the following particulars for the P.Y. 2018-19.
Particulars Rs.
Book profits (before setting of unabsorbed depreciation and brought forward business loss) 2,50,000
Unabsorbed depreciation of P.Y.2012-13 1,20,000
Brought forward business loss of P.Y.2017-18 2,00,000
Compute the amount of remuneration allowable under section 40(b) from the book profit.
(a) Rs. 2,25,000
(b) Rs.1,80,000
(c) Rs.1,50,000
(d) Rs.1,17,000 (2 Marks)
10. Mr. William, an Indian citizen and a Government employee, left India for the first time on 28.02.2018
on account of his transfer to High Commission in United Kingdom. During P.Y. 2018 -19, he visited
India only for a week on occasion of his brother marriage. During F.Y. 2018-19, his income
composition includes salary, foreign allowances, rent from property in Singapore and interest earned
from fixed deposits maintained with SBI. His taxable income for P.Y. 2018-19 will include:
(a) All of them, since Mr. William is a resident in India, hence his global income will be taxable
(b) Only interest earned from fixed deposits maintained in India
(c) No income shall be taxable since Mr. William is a non-resident in India for P.Y. 2018-19
(d) Salary and interest income of fixed deposits with SBI (2 Marks)
11. Provision of rent free accommodation and motor car owned by Alpha Ltd. to its employee Mr. Anurag,
where motor car is allowed to be used by Mr. Anurag both for official and personal purposes, is a -
(a) perquisite taxable in case of all employees
(b) perquisite taxable only in case of specified employees

(c) perquisite of rent free accommodation is taxable in case of all employees whereas perquisite of
motor car is taxable only in case of specified employees
(d) perquisite of rent free accommodation is taxable only in case of specified employees whereas
perquisite of motor car is taxable in case of all employees (2 Marks)
12. Mr. Arjun, a businessman, whose total income (after allowing deduction under chapter VI-A except
under section 80GG) for AY 2019-20 is Rs.5,50,000. He does not own any house property and is
staying in a rented accommodation in Patna for a monthly rent of Rs.8,000. Deduction allowance
under section 80GG for A.Y. 2019-20 is:
(a) Rs.41,000
(b) Rs.1,37,500
(c) Rs.60,000
(d) Rs.96,000 (2 Marks)
Division B – Descriptive Questions
Question No. 1 is compulsory
Attempt any two questions from the remaining three questions
1. Mr. Ashwin, a resident individual aged 61, furnishes the following information pertaining to the year
ended 31.3.2019:
(i) He is a working partner in ASC & Co. He has received the following amounts from the firm:
Interest on capital at 15% : Rs.3,00,000
Salary as working partner (at 1% of firm's sales) (allowed fully to the firm) : Rs.90,000
(ii) He is engaged in a business of manufacturing. The Profit and Loss account pertaining to this
proprietary business (summarised form) is as under:
To Salaries 1,20,000 By Gross profit 12,45,500
To Bonus 48,000 By Interest on Bank FD 49,500
To Car expenses 50,000 (Net of TDS)
To Machinery repairs 2,34,000 By Agricultural income 60,000
To Advance tax 70,000 By Pension from LIC
To Depreciation on: Jeevan Dhara 24,000
- Car 3,00,000
- Machinery 1,25,000
To Net profit 4,32,000
13,79,000 13,79,000
Details of assets:
Particulars Rs.
Opening WDV of assets are as under:
Car 3,00,000
4

Machinery (Used during the year for 179 days) 6,50,000
Additions to machinery:
Purchased on 15.9.2018 by cash in single payment 2,00,000
Purchased on 12.12.2018 by account payee cheque 3,00,000
Second hand machinery purchased on 30.4.2018 by bearer cheque in single 1,25,000
payment
(All assets added during the year were put to use immediately after purchase)
One-fifth of the car expenses are towards estimated personal use of the assessee.
Salary includes Rs. 15,000 paid by way of a single cash payment to manager.
(iii) In February, 2016, he had sold a house at Mumbai. Arrears of rent relating to this house
amounting to Rs.75,000 was received in March, 2019.
(iv) Details of his Savings and Investments are as under:
Particulars Rs.
Life insurance premium for policy in the name of his major son employed in a
multinational company, at a salary of Rs.10 lakhs p.a. (Sum assured
Rs.2,00,000) (Policy taken on 1.07.2013) 30,000
Contribution to PPF 70,000
Medical Insurance premium for his mother aged 79, who is not dependent on him 52,000
You are required to compute the total income and tax liability of Mr. Ashwin for the assessment year
2019-20. (14 Marks)
2. (a) Compute the total income of Mr. Rajesh, aged 45 years, an Indian citizen for A.Y. 2019-20. On
22.09.2018, he left India for the first time to work as an officer of a company in Canada. He earns
the following income during the previous year 2018-19:
Sr. Particulars (Rs.)
No.
1. Interest on Canada Development Bonds (only 50% of interest received in 40,000
India)
2. Dividend from Canadian company received in Canada 20,000
3. Short term capital gain on sale of shares of an Indian company received in 90,000
India
4. Interest on savings bank deposit in UCO Bank, Delhi 12,000
5. Income from Profession in Canada (set up in India), out of which 15,000
Rs.10,000 is received in India
6. Agricultural income from a land situated in Gujarat 45,000
7. Rent received in Canada in respect of house property at Canada 60,000
(7 Marks)

(b) Mr. Sailesh, a resident individual aged 54, furnishes his income & other details for the P.Y.
2018-19:
(i) Income of Rs.8,10,000 from wholesale cloth business, whose accounts are audited u/s
44AB.
(ii) Income from other sources Rs.2,70,000.
(iii) Tax deducted at source Rs.25,000.
(iv) Advance tax paid Rs.1,03,000 during the P.Y. 2018-19.
Return of income filed on 11-12-2019. Calculate the interest payable under section 234B of the
Income-tax Act, 1961. Assume that the return of income would be processed on the same day of
filing of return. What are the consequences for delay in furnishing return of income under the
Income-tax Act, 1961? Examine, making the required computations in this case. (5 Marks)
(c) Who are the persons authorized to verify return of income in the case of following persons:
(i) Local authority
(ii) Firm, having no managing partner (2 Marks)
3. (a) Mr. Ramesh and Mr. Suresh constructed their houses on a piece of land purchased by them at
Mumbai. The built up area of each house was 1,500 sq. ft. ground floor and an equal area in the
first floor. Ramesh started construction on 1-04-2017 and completed on 1-04-2018. Suresh
started the construction on 1-04-2017 and completed the construction on 30-06-2018. Ramesh
occupied the entire house on 01-04-2018. Suresh occupied the ground floor on 01-07-2018 and
let out the first floor for a rent of Rs.15,000 per month. However, the tenant vacated the house on
31-12-2018 and Suresh occupied the entire house during the period 01-01-2019 to 31-03-2019.
Following are the other information
(i) Fair rental value of each unit Rs.1,00,000 per annum

(ground floor /first floor)
(ii) Municipal value of each unit Rs.72,000 per annum
(ground floor / first floor)
(iii) Municipal taxes paid by Ramesh – Rs.8,000
Suresh – Rs.8,000
(iv) Repair and maintenance charges paid by Ramesh – Rs.28,000
Suresh – Rs.30,000
Ramesh has availed a housing loan of Rs.20 lakhs @ 12% p.a. on 01-04-2017. Suresh has
availed a housing loan of Rs.12 lakhs @ 10% p.a. on 01-07-2017. No repayment was made by
either of them till 31-03-2019. Compute income from house property for Ramesh and Suresh for
the previous year 2018-19 (A.Y. 2019-20). (7 Marks)
(b) Mr. Satish, General Manager of Akon Ltd., Delhi, furnishes the following particulars for the
financial year 2018-19:
(i) Salary Rs.46,000 per month
(ii) Value of medical facility in a hospital maintained by the company Rs.7,000
(iii) Rent free accommodation owned by the company

(iv) Housing loan of Rs.6,00,000 given on 01.04.2018 at the interest rate of 6% p.a. (No
repayment made during the year). The rate of interest charged by State Bank of India (SBI)
as on 01.04.2018 in respect of housing loan is 10%.
(v) Gifts in kind made by the company on the occasion of wedding anniversary of
Mr. Satish Rs.4,750.
(vi) A four seater dining table was provided to Mr. Satish at his residence. This was purchased
on 1.5.2015 for Rs.60,000 and sold to Mr. Satish on 1.8.2018 for Rs.30,000.
(vii) Personal purchases through credit card provided by the company amounting to Rs.10,000
was paid by the company. No part of the amount was recovered from Mr. Satish.
(viii) A Maruti Suzuki car which was purchased by the company on 16.7.2015 for Rs.2,50,000
was sold to the assessee on 14.7.2018 for Rs.80,000.
Other income received by the assessee during the previous year 2018-19:
Particulars Rs.
(a) Interest on Fixed Deposits with a company 5,000
(b) Income from specified mutual fund 3,000
(c) Interest on bank fixed deposits of a minor married daughter 3,000
(ix) Contribution to LIC towards premium under section 80CCC Rs.1,00,000
(x) Deposit in PPF Account made during the year 2018-19 Rs.40,000
Compute the taxable income of Mr. Satish for the Assessment year 2019-20. (7 Marks)
4. (a) Examine the applicability of tax deduction at source provisions, the rate and amount of tax
deduction in the following cases for the financial year 2018-19:
(i) On 1.6.2018, Mr. Gyaneshwar made three nine month fixed deposits of ` 1 lakh each
carrying interest@9% with Laxmi Nagar Branch, Mayur Vihar Branch and Rohini Branch of
ABC Bank, a bank which has adopted CBS. The fixed deposits mature on 28.2.2019.
(ii) Sky TV, a television channel, made payment of ` 70 lakhs to a production house ABC Ltd.
for production of programme for telecasting as per the specifications given by the channel.
The copyright of the programme is also transferred to Sky TV. (4 Marks)
(b) A proprietary business was started by Mrs. Kapoor in the year 2016. As on 1.4.2017 her capital in
business was Rs.3,00,000. Her husband gifted Rs.2,00,000 on 10.4.2017, which amount
Mrs. Kapoor invested in her business on the same date. Mrs. Kapoor earned profits from her
proprietary business for the Financial year 2017-18, Rs.1,50,000 and Financial year 2018-19
Rs.3,90,000. Compute the income, to be clubbed in the hands of Mrs. Kapoor’s husband for the
Assessment year 2019-20 with reasons. (3 Marks)
(c) Compute the total income of Mr. Pratap (aged 48), a resident Indian, from the following
information relating to the financial year ended 31.3.2019. Also, show the items eligible for carry
forward.
Particulars Rs.
Income from salaries 2,20,000
Loss from house property 2,50,000
Loss from toy business 1,30,000

Income from speculation business 40,000
Loss from specified business covered by section 35AD 20,000
Long-term capital gains from sale of urban land 2,50,000
Long-term capital loss from sale of listed shares in recognized stock exc hange (STT 1,10,000
paid at the time of acquisition and sale of shares)
Loss from card games 32,000
Income from betting (Gross) 45,000
Life Insurance Premium paid (10% of the capital sum assured) 50,000
(7 Marks)

SECTION B - INDIRECT TAXES (40 MARKS)
QUESTIONS
(i) Working Notes should form part of the answers. However, in answers to Question in Division A, working
notes are not required.
(ii) Wherever necessary, suitable assumptions may be made by the candidates, and disclosed by way of
note.
(iii) All questions should be answered on the basis of the position of GST law as amended up to 31 st October,
2018.
(iv) The GST rates for goods and services mentioned in various questions are hypothetical and may not
necessarily be the actual rates leviable on those goods and services. Further, GST compensation cess
should be ignored in all the questions, wherever applicable.
Division A - Multiple Choice Questions
Write the most appropriate answer to each of the following multiple choice questions by choosing
one of the four options given. All questions are compulsory.
Total Marks: 12 Marks
Question Nos. 1 and 2 carries 2 Marks each
1. A person having ____business verticals in a State ____obtain a separate registration for each business
vertical.
(a) Single, shall
(b) Multiple, shall
(c) Multiple, may
(d) Single, may (2 Marks)
2. Mr. Rahu is receiving legal services from a lawyer Mr. Ketu. The information regarding date of payment,
invoice etc. is as follows-
1. Invoice issued by Mr. Ketu on 15-Apr-20XX
2. Payment received by Mr. Ketu on 5-May-20XX
3. Date of payment entered in books of accounts of Rahu: 1-May-20XX
What is time of supply of goods?
(a) 1-May-20XX
(b) 5-May-20XX
(c) 14-Jun-20XX
(d) 15-Apr-20XX (2 Marks)
Question Nos. 3 to 10 are of 1 mark each.
3. Services by way of warehousing of _____is exempt from GST.
(i) processed tea
(ii) jaggery
(iii) processed coffee
(iv) rice
9

(a) (i) & (ii)
(b) (iii)
(c) (iv)
(d) all of the above (1 Mark)
4. Discount given after the supply is deducted from the value of taxable supply, if –
(a) such discount is given as per the agreement entered into at/or before the supply
(b) such discount is linked to the relevant invoices
(c) proportionate input tax credit is reversed by the recipient of supply
(d) all of the above (1 Mark)
5. Which of the following services are exempt from GST?
(a) Services by an artist by way of a performance in folk or classical art forms of painting/sculpture
making etc. with consideration therefor not exceeding Rs. 1.5 lakh.
(b) Services by an artist by way of a performance in modern art forms of music/ dance/ theatre with
consideration therefor not exceeding Rs. 1.5 lakh.
(c) Services by an artist by way of a performance in folk or classical art forms of music/ dance/theatre
with consideration therefor exceeding Rs. 1.5 lakh.
(d) Services by an artist by way of a performance in folk or classical art forms of music/ dance / theatre
with consideration therefor not exceeding Rs. 1.5 lakh. (1 Mark)
6. Which of the following services does not fall under reverse charge provisions as contained under section
9(3) of the CGST Act?
(a) Services supplied by arbitral tribunal to business entity
(b) Sponsorship provided to any partnership firm
(c) Sponsorship provided to any body corporate
(d) None of the above (1 Mark)
7. Registration certificate granted to casual taxable person or non-resident taxable person will be valid for:
(a) Period specified in the registration application
(b) 90 days from the effective date of registration
(c) Earlier of (a) or (b)
(d) Later of (a) or (b) (1 Mark)
8. Where the goods being sent or taken on approval for sale or return are removed before the supply takes
place, the invoice shall be issued:
(a) before/at the time of supply.
(b) 6 months from the date of removal.
(c) Earlier of (a) or (b).
(d) Later of (a) or (b). (1 Mark)
10

9. Which of the following statements is true under GST?
(a) Grand-parents are never considered as related persons to their grandson/granddaughter
(b) Grand-parents are always considered as related persons to their grandson/granddaughter
(c) Grand-parents are considered as related persons to their grandson/granddaughter only if they are
wholly dependent on their grandson/granddaughter
10. Invoice shall be prepared in (i) ___________ in case of taxable supply of goods and in
(ii)_____________ in case of taxable supply of services.
(a) (i) Triplicate, (ii) Duplicate
(b) (i) Duplicate, (ii) Triplicate
(c) (i) Duplicate, (ii) Duplicate
Division B - Descriptive Questions
Attempt any two questions out of remaining three questions.
1. Sungrow Pvt. Ltd. (a registered taxable person) having the gross receipt of Rs. 50 lakh in the previous
financial year provides the following information relating to their services for the month of July, 2018.
Sr. Particulars Amount
No. (Rs.)
(1) Running a boarding school 2,40,000
(2) Fees from prospective employer for campus interview 1,70,000
(3) Education services for obtaining the qualification recognised by law of 3,10,000
foreign country
(4) Renting of furnished flats for temporary stay to different persons 1,20,000
(Rent per day is less than Rs. 1,000 per flat)
(5) Conducting Modular Employable Skill Course, approved by National 1,40,000
Council of Vocational Training
(6) Conducting private tuitions amount 3,00,000
(7) Running martial arts academy for young children 55,000
(8) Conducting career counselling session 1,65,000
Compute the value of taxable supply and the amount of GST payable. The above receipts don't include
the GST amount. Rate of GST is 18%. (8 Marks)
2. (a) Laxmi Pvt. Ltd., a registered supplier, is engaged in the manufacture of taxable goods. The
company provides the following information pertaining to GST paid on the purchases made/input
services availed by it during the month of July, 2018:
11

Sr. Particulars GST paid
No
(1) Raw Material (to be received in September, 2018) 2,50,000
(2) Membership of a club availed for employees working in the factory 1,45,000
(3) Inputs to be received in 5 lots, out of which 3 lot was received during the
rd
80,000
month
(4) Trucks used for transport of raw material 40,000
(5) Capital goods (out of 3 items, invoice for 2 items is missing and GST paid on 1,50,000
that item is Rs. 80,000)
(6) Confectionery items for consumption of employees working in the factory. 75,000
These items were supplied free of cost to the employees in lieu of services
rendered by them to the manufacturer in the course of employment.
Determine the amount of tax credit available with Laxmi Pvt. Ltd. for the month of July, 2018 by
giving the necessary explanation for treatment of various items. All the conditions necessary for
availing the ITC have been fulfilled. (6 Marks)
(b) Mr. Guneet is running a consulting firm and also a readymade garment showroom in Kolkata
registered in same PAN. Turnover of the showroom is Rs. 70 lakh and receipt of consultancy firm
is Rs. 15 lakh in the preceding financial year. You are required to answer the following:
(1) Is Mr. Guneet eligible for composition scheme?
(2) Is it possible for Mr. Guneet to opt for composition scheme only for showroom? (4 Marks)
3. (a) The aggregate turnover of Priyank Services Ltd. exceeded Rs.20 lakh on 12 August. He applied
th
for registration on 3rd September and was granted the registration certificate on 6 th September.
You are required to advice Priyank Services Ltd. as to what is the effective date of registration in
its case. It has also sought your advice regarding period for issuance of Revised Tax Invoices.
(6 Marks)
(b) Determine the effective date of registration in following cases:
(i) The aggregate turnover of Grand Industries of Delhi has exceeded Rs. 20 lakh on
1st September. It submits the application for registration on 20 th September. Registration
certificate is granted to it on 25 th September.
(ii) Mangal Teleservices is an internet service provider in Lucknow. Its aggregate turnover
exceeds Rs. 20 lakh on 25th October. It submits the application for registration on
27th November. Registration certificate is granted to it on 5 t h December. (4 Marks)
4. (a) State whether the following supplies would be treated as supply of goods or supply of services as
per Schedule II of CGST Act:
(i) Renting of immovable property
(ii) Transfer of right in goods without transfer of title in goods.
(iii) Works contract services
(iv) Temporary transfer of permitting use or enjoyment of any intellectual property right
(v) Transfer of title in goods under an agreement which stipulates that property shall pass at a
future date. (5 Marks)
(b) State the persons who are not liable for registration as per provisions of Section 23 of Central
Goods and Service Tax Act, 2017. (5 Marks)
12

MOCK TEST PAPER - 2
INTERMEDIATE (NEW) COURSE
PAPER – 4: TAXATION
SECTION – A: INCOME TAX LAW
SOLUTIONS
Division A – Multiple Choice Questions
1. (c)
2. (d)
3. (c)
4. (b)
5. (c)
6. (b)
7. (b)
8. (a)
9. (b)
10. (d)
11. (c)
12. (a)
1. Computation of total income of Mr. Ashwin for the A.Y. 2019-20
Particulars Rs. Rs.
Income from house property
Arrears of rent received in respect of the Bangalore house
taxable under section 25A [Note 1] 75,000
Less: Deduction @ 30% 22,500 52,500
Profits and gains of business or profession
(a) Own business [Note 3] 6,32,500
(b) Income from partnership firm [Note 2]
Interest on capital 2,40,000
[As per section 28(v), chargeable in the hands of the
partner only to the extent allowable as deduction in
the firm’s hand i.e. @12%]
Salary of working partner (Since the same has been
fully allowed as deduction in the hands of the firm) 90,000 3,30,000
Income from other sources
(a) LIC Jeevan Dhara pension 24,000
(b) Interest from bank FD (gross) 55,000 79,000
Gross Total Income 10,94,000

Less: Deductions under Chapter VIA
Section 80C
Life insurance premium for policy in the name of major son
qualifies for deduction even though he is not dependent on
the assessee. However, the same has to be restricted to
10% of sum assured i.e. 10% of Rs.2,00,000. 20,000
Contribution to PPF 70,000 90,000
Section 80D
Mediclaim premium for mother, a senior citizen 52,000
(qualifies for deduction, even though the mother is not
dependent on the assessee, subject to a maximum of 50,000
Rs.50,000)
Section 80TTB
Interest on bank FD 55,000
(subject to a maximum of Rs.50,000) 50,000 1,90,000
Total Income 9,04,000
Computation of tax liability of Mr. Ashwin for the A.Y. 2019-20

Particulars Rs.
Tax on Agricultural income plus non-agricultural income i.e., Rs.9,64,000 1,02,800
Less: Tax on agricultural income plus basic exemption limit i.e., Rs.3,60,000 3,000
99,800
Add: Health and education cess @4% 3,992
Tax liability 1,03,792
Less: TDS 5,000
Less: Advance Tax 70,000
Tax Payable 28,792
Tax Payable (rounded off) 28,790
Notes:
(1) As per section 25A, any arrears of rent received will be chargeable to tax, after deducting a sum
equal to 30% of such arrears, as income from house property in the year of receipt, whether or
not the assessee is the owner of the house property.
(2) The income by way of interest on capital and salary of Mr. Ashwin from the firm, ASC & Co., in
which he is a working partner, to the extent allowed as deduction in the hands of the firm under
section 40(b), has to be included in the business income of the partner as per section 28(v).
Accordingly, Rs.3,30,000 [i.e., Rs.90,000 (salary) + Rs.2,40,000 (interest@12%)] should be
included in his business income.
(3) Computation of income from own business
Particulars Rs. Rs.
Net profit as per profit and loss account 4,32,000
Less: Items credited to profit and loss account not treated as
business income
Interest on bank FD (Net of TDS) 49,500
Agricultural income 60,000
Pension from LIC Jeevan Dhara 24,000 1,33,500
2

2,98,500
Add: Items debited to profit and loss account to be
disallowed/considered separately
Advance tax 70,000
Depreciation:
- Car 3,00,000
- Machinery 1,25,000
Car expenses disallowed for personal use (Rs.50,000 x 1/5) 10,000
Salary to manager disallowed under section 40A(3) since it
is paid in cash and the same exceeds Rs.10,000 15,000 5,20,000
8,18,500
Less: Depreciation (See Working Note below) 1,86,000
Income from business 6,32,500
Working Note:
Computation of depreciation allowable under the income-tax Act, 1961
Particulars Rs. Rs.

On Car:
Depreciation @15% on Rs.3,00,000 45,000
Less: 1/5th for personal use 9,000
Depreciation on Car allowable as deduction 36,000
On Machinery:
Opening WDV 6,50,000
Additions during the year (used for more than 180 days)
- New Machinery purchased on 15.9.18 2,00,000
- Second hand machinery purchased on 30.4.18 1,25,000
Additions during the year (used for less than 180 days) 3,00,000
Normal Depreciation
Depreciation @15% on Rs.6,50,000 97,500
[As per second proviso to section 43(1), the expenditure for
acquisition of asset, in respect of which payment to a person in a
day exceeds Rs.10,000 has to be ignored for computing actual cost,
if such payment is made otherwise than by way of A/c payee
cheque/ bank draft or ECS. Accordingly, depreciation on second
hand machinery purchased on 30.4.2018 and on new machinery
purchased on 15.9.2018 is not allowable since the payment is made
otherwise than by A/c payee cheque/A/c payee draft/ ECS to a
person in a day]
Depreciation @ 7.5% on Rs.3,00,000 22,500
Total normal depreciation on machinery (A) 1,20,000
Where an asset acquired during the year is put to use for less than
180 days, 50% of the rate of depreciation is allowable. This
restriction does not apply to assets acquired in an earlier year.
Additional depreciation (B)
New machinery
3

Used for less than 180 days = 10% of Rs.3,00,000 30,000
Total permissible depreciation on machinery (A) + (B) 1,50,000
Depreciation allowable under section 32 1,86,000
2. (a) Under section 6(1), an individual is said to be resident in India in any previous year if he satisfies
any one of the following conditions -
(i) He has been in India during the previous year for a total period of 182 days or more, or
(ii) He has been in India during the 4 years immediately preceding the previous year for a tota l
period of 365 days or more and has been in India for at least 60 days in the previous year.
In the case of Indian citizens leaving India for employment, the period of stay during the previous
year must be 182 days instead of 60 days given in (ii) above.
During the previous year 2018-19, Mr. Rajesh, an Indian citizen, was in India for 175 days only
(i.e., 30+31+30+31+31+22 days). Thereafter, he left India for employment purposes.
Since he does not satisfy the minimum criteria of 182 days, he is a non-resident for the A.Y.
2019-20.
Computation of total income of Mr. Rajesh for the A.Y. 2019-20
S. No. Particulars Non-Resident
(Rs.)
1. Interest on Canada Development Bond (See Note 1) 20,000
2. Dividend from Canadian Company received in Canada (See Note 2) -
3. Short term capital gain on sale of shares of an Indian company received 90,000
in India
4. Interest on savings bank deposit in UCO Bank, Delhi 12,000
5. Income from profession in Canada (set up in India) out of which 10,000
Rs.10,000 is received in India (See Note 1)
6. Agricultural income from a land in Gujarat (See Note 3) -
7. Income from house property at Canada (See Note 4) -
Gross Total income 1,32,000
Less: Deduction under Chapter VI-A
Section 80TTA (See Note 5) 10,000
Notes:
(1) As per section 5(2), in case of a non-resident, only the following incomes are chargeable to
tax in India:
(i) Income received or deemed to be received in India; and
(ii) Income accruing or arising or deemed to accrue or arise in India.
Therefore, only that part of interest income and income from profession which is received in
India would be taxable in his hands.
(2) Dividend received in Canada from a Canadian based company would not be taxable in the
hands of Mr. Rajesh since it has neither accrued nor arisen in India nor is it received in India.
(3) Agricultural income from a land situated in India is exempt under section 10(1) in the case of
both non-residents and residents.
(4) Rental income from property in Canada would not be taxable, since it is neither accrued or
4

arisen in India nor it is received in India.
(5) In case of an individual other than senior citizen, interest upto Rs.10,000 from savings
account with, inter alia, a bank is allowable as deduction under section 80TTA, irrespective
of the residential status.
(b) Computation of interest payable under section 234B by Mr. Sailesh
Particulars Rs.
Tax on total income of Rs.10,80,000 [Business income of Rs.8,10,000 + 1,36,500
Income from other sources of Rs.2,70,000]
Add: Health and education cess@4% 5,460
Tax on total income 1,41,960
Less: Tax deducted at source 25,000
Assessed Tax 1,16,960
90% of assessed tax 1,05,264
Advance tax paid 1,03,000
Interest under section 234B is leviable since advance tax of Rs.1,03,000 paid
is less than Rs.1,05,264, being 90% of assessed tax
Number of months from 1 st April, 2019 to 11th December, 2019, being the date 9
of processing of return
Interest under section 234B@1% per month or part of a month for 9 months 1,251
on Rs.13,900 [i.e., difference between assessed tax of Rs.1,16,960 and
advance tax of Rs.1,03,000 paid, being Rs.13,960 which is rounded off to
Rs.13,900 under Rule 119A of Income-tax Rules, 1962]
Consequences for delay in filing return of income on or before the due date
Interest under section 234A and fee under section 234F would be attracted for filing return of
income beyond the due date specified under section 139(1).
Interest under section 234A
Since Mr. Sailesh’s accounts are audited under section 44AB, the due date for filing of return for
A.Y. 2019-20, in his case, is 30.09.2019. Mr. Sailesh has filed his return on 11.12.2019 i.e.,
interest under section 234A will be payable for 3 months (from 1.10.2019 to 11.12.2019) @ 1%
per month or part of month on the amount of tax payable on the total income, as reduced by TDS
and advance tax paid i.e., Rs.13,960 rounded off to Rs.13,900 under Rule 119A of Income-tax
Rules, 1962
Interest u/s 234A = Rs.13,900 x 1% x 3 = Rs.417
Fee for late filing of return under section 234F
Since Mr. Sailesh has furnished his return of income after the due date but before 31.12.2019 and his
total income exceeds Rs.5 lakhs, a fee of Rs.5,000 will be payable by him.
(c) Return of income to be verified by whom
Person Return of income to be verified by
(i) Local authority The principal officer
(ii) Firm, having no managing partner Any partner of the firm, not being a minor
3. (a) Computation of income from house property of Mr. Ramesh for A.Y. 2019-20
Particulars Rs. Rs.
Annual value is nil (since house is self occupied) Nil

Less: Deduction under section 24(b)
Interest paid on borrowed capital Rs.20,00,000 @ 12% 2,40,000
Pre-construction interest Rs.2,40,000 / 5 48,000
2,88,000
As per second proviso to section 24(b), interest deduction restricted to 2,00,000
Loss under the head “Income from house property” of Mr. (2,00,000)
Ramesh
Computation of income from house property of Mr. Suresh for A.Y. 2019-20
Particulars Ground floor First floor
(Self occupied)
Gross annual value (See Note below) Nil 90,000
Less: Municipal taxes (for first floor) 4,000
Net annual value(A) Nil 86,000
Less: Deduction under section 24
(a) 30% of net annual value 25,800
(b) interest on borrowed capital
Current year interest
Rs.12,00,000 x 10% = Rs.1,20,000 60,000 60,000
Pre-construction interest
Rs.12,00,000 x 10% x 9/12 = Rs.90,000
Rs.90,000 allowed in 5 equal installments
Rs.90000 / 5 = Rs.18,000 per annum 9,000 9,000
Total deduction under section 24(b) 69,000 94,800
Income from house property (A)-(B) (69,000) (8,800)
Loss under the head “Income from house property” of Mr. (77,800)
Suresh (both ground floor and first floor)
Note: Computation of Gross Annual Value (GAV) of first floor of Suresh’s house
If a single unit of property (in this case the first floor of Suresh’s house) is let out for some
months and self-occupied for the other months, then the Expected Rent of the property shall be
taken into account for determining the annual value. The Expected Rent shall be compared with
the actual rent and whichever is higher shall be adopted as the annual value. In this case, the
actual rent shall be the rent for the period for which the property was let out during the previous
year.
The Expected Rent is the higher of fair rent and municipal value. This should be considered for 9
months since the construction of property was completed only on 30.6.2018.
Expected rent = Rs.75,000 being higher of -
Fair rent = 1,00,000 x 9 /12 = Rs.75,000
Municipal value = 72,000 x 9/12 = Rs.54,000
Actual rent = Rs.90,000 (Rs.15,000 p.m. for 6 months from July to December, 2018)
Gross Annual Value = Rs.90,000 (being higher of Expected Rent of Rs.75,000 and actual rent of
Rs.90,000)

(b) Computation of taxable income of Mr. Satish for the A.Y. 2019-20
Particulars Rs. Rs.
(a) Income from salaries (See Working Note below) 7,62,800
(b) Income from other sources
(i) Interest on fixed deposit with a company 5,000
(ii) Income from specified mutual fund exempt under section
10(35) Nil
(iii) Interest on Fixed Deposit received by minor daughter
(Rs.3,000 - Rs.1500) 1,500 6,500
Gross total income 7,69,300
Less: Deductions under Chapter VI-A
Section 80C – PPF 40,000
Section 80CCC 1,00,000 1,40,000
Working Note:
Computation of salary income of Mr. Satish for the A.Y. 2019-20
Particulars Rs.
Income under the head “salaries”
Salary [Rs.46,000 x 12] 5,52,000
Medical facility [in the hospital maintained by the company is exempt] _
Rent free accommodation
15% of salary is taxable (i.e. Rs.5,52,000 × 15% as per Rule 3(1)) 82,800
Use of dining table for 4 months
[Rs.60,000 x 10 /100 x 4 /12] 2,000
Valuation of perquisite of interest on loan
[Rule 3(7)(i)] – 10% is taxable which is to be reduced by actual rate of interest 24,000
charged i.e. [10% - 6% = 4%]
Gift given on the occasion of wedding anniversary Rs.4,750 is exempt, since its -
value is less than Rs.5,000
Perquisite on sale of dining table
Cost 60,000
Less: Depreciation on straight line method @ 10% for 3 years 18,000
Written Down Value 42,000
Less: Amount paid by the assessee 30,000 12,000
Purchase through credit card – not being a privilege but covered by 10,000
section 17(2)(iv)
Perquisite on sale of car
Original cost of car 2,50,000
Less: Depreciation from 16.7.2015 to 15.7.2016 @ 20% 50,000
2,00,000
Less: Depreciation from 16.7.2016 to 15.7.2017 @ 20% 40,000

Value as on 14.07.2018- being the date of sale to employee 1,60,000
Less: Amount received from the assessee on 14.07.2018 80,000 80,000
Income from Salaries 7,62,800
Note: Under Rule 3(7)(viii), while calculating the perquisite value of benefit to the employee arising
from the transfer of any movable asset, the normal wear and tear is to be calculated in respect of each
completed year during which the asset was put to use by the employer. In the given case the third
year of use of car is completed on 15.7.2018 whereas the car was sold to the employee on 14.7.2018.
The solution worked out above provides for wear and tear for only two years.
4. (a) (i) ABC Bank has to deduct tax at source@10% under section 194A, since the aggregate
interest on fixed deposit with the three branches of the bank is Rs.20,250 [1,00,000 × 3 ×
9% × 9/12], which exceeds the threshold limit of ` 10,000. Since ABC Bank has adopted
CBS, the aggregate interest credited/paid by all branches has to be considered. Since the
aggregate interest of Rs.20,250 exceeds the threshold limit of Rs.10,000, tax has to be
deducted@10% under section 194A.
Tax to be deducted = Rs.20,250 x 10% = Rs.2,025
. (ii) In this case, since the programme is produced by the production house ABC Ltd. as per the
specifications given by Sky TV, a television channel, and the copyright is also transferred to
the television channel, the same falls within the scope of definition of the term ‘work’ under
section 194C. Therefore, the payment of ` 70 lakhs made by Sky TV to the production
house ABC Ltd. would be subject to tax deduction at source under section 194C. Under
section 194C, tax is deductible at the time of credit or payment, whichever is earlier @ 2% if
the payment is made to a person other than an individual or HUF.
Therefore, tax to be deducted = Rs.70 lakhs x 2% = Rs.1,40,000
(b) Section 64(1) of the Income-tax Act, 1961 provides for the clubbing of income in the hands of the
individual, if the income earned is from the assets transferred directly or indirectly to the spouse
of the individual, otherwise than for adequate consideration. In this case Mrs. Kapoor received a
gift of Rs.2,00,000 from her husband which she invested in her business. The income to be
clubbed in the hands of Mrs. Kapoor’s husband for A.Y.2019-20 is computed as under:
Particulars Mrs. Kapoor’s Capital
Capital Contribution Total
Contribution Out of gift
from husband
Rs. Rs. Rs.
Capital as at 1.4.2017 3,00,000 -- 3,00,000
Investment on 10.04.2017 out of gift
received from her husband 2,00,000 2,00,000
3,00,000 2,00,000 5,00,000
Profit for F.Y. 2017-18 to be apportioned
on the basis of capital employed on the first
day of the previous year i.e., on 1.4.2017
1,50,000 1,50,000
Capital employed as at 1.4.2018 4,50,000 2,00,000 6,50,000
Profit for F.Y.2018-19 to be apport i oned
on the basis of c apital em ployed as at
1.4.2018 (i.e., 45 : 20) 2,70,000 1,20,000 3,90,000

Therefore, the income to be clubbed in the hands of Mrs. Kapoor’s husband for A.Y.2019 -20 is
Rs.1,20,000.
(c) Computation of total income of Mr. Pratap for the A.Y.2019-20
Particulars Rs. Rs.
Salaries
Income from salaries 2,20,000
Less: Loss from house property set-off against salary as per section 2,00,000 20,000
71(1) & 71(3A)
Profits and gains of business or profession
Income from speculation business 40,000
Less: Loss from toy business set off 40,000 Nil
Capital gains
Long-term capital gains from sale of urban land 2,50,000
Less: Long term capital loss on sale of listed shares on which STT is 1,10,000
paid can be set off as per section 74(1), since long-term capital gain
arising on sale of such shares is taxable under section 112A
Less: Loss from toy business set off 90,000 50,000
Income from other sources
Income from betting 45,000
Gross total income 1,15,000
Less: Deduction under section 80C(life insurance premium paid) 20,000
Total income 95,000
Losses to be carried forward:
Particulars Rs.
(1) Loss from House property (Rs.2,50,000 – Rs.2,00,000) 50,000
(2) Loss from toy business(Rs.1,30,000 - Rs.40,000 - Rs.90,000) Nil
(3) Loss from specified business covered by section 35AD 20,000
Notes:
(i) As per section 71(3A), loss from house property can be set-off against any other head of
income to the extent of Rs.2,00,000 only.
As per section 71B, balance loss not set-off can be carried forward to the next year for set-
off against income from house property of that year. It can be carried forward for a
maximum of eight assessment years i.e., upto A.Y. 2027-28, in this case.
(ii) Loss from specified business covered by section 35AD can be set-off only against profits
and gains of any other specified business. Therefore, such loss cannot be set off against
any other income. If loss cannot be so set-off, the same has to be carried forward to the
subsequent year for set-off against profits and gains of any specified business, if any, in that
year. As per section 73A(2), such loss can be carried forward indefinitely for set-off against
profits of any specified business.
(iii) Business loss cannot be set off against salary income. However, business loss of Rs.90,000
(Rs.1,30,000 – Rs.40,000 set-off against income from speculation business) can be set-off
against long-term capital gains from sale of urban land. Consequently, the taxable long-term
capital gains would be Rs.50,000.

(iv) Loss from card games can neither be set off against any other income, nor can it be carried
forward.
(v) For providing deduction under Chapter VI-A, gross total income has to be reduced by the
amount of long-term capital gains and casual income. Therefore, the deduction under
section 80C in respect of life insurance premium paid has to be restricted to Rs.20,000 [i.e.,
Gross Total Income of Rs.1,15,000 – Rs.50,000 (LTCG) – Rs.45,000 (Casual income)].
(vi) Income from betting is chargeable at a flat rate of 30% under section 115BB and no
expenditure or allowance can be allowed as deduction from such income, nor can any loss
be set-off against such income.
10

SECTION B - INDIRECT TAXES (40 MARKS)
Division A - Multiple Choice Questions Answer
1. (c)
2. (a)
3. (c)
4. (d)
5. (d)
6. (d)
7. (c)
8. (c)
9. (c)
10. (a)
Division B - Descriptive Answer
1. Computation of value of taxable supply and amount of GST payable
S.No. Particulars Rs.
(1) Running a boarding school Nil
[Services provided by an educational institution to its students, faculty and
staff are exempt.]
(2) Fees from prospective employer for campus interview 1,70,000
[Not exempt.]
(3) Education services for obtaining the qualification recognised by law of foreign 3,10,000
country
[An institution providing education services for obtaining qualification
recognized by a foreign country does not qualify as educational institution.
Thus, said services are not exempt.]
(4) Renting of furnished flats for temporary stay of different persons Nil
[Services by a hotel, inn, guest house, club or campsite, by whatever name
called, for residential or lodging purposes, having Value of Supply of a unit of
accommodation below Rs. 1,000 per day or equivalent are exempt]
(5) Conducting Modular Employable Skill Course Nil
[An institution providing Modular Employable Skill Course qualifies as
educational institution. Services provided by an educational institution to its
students, faculty and staff are exempt.]
(6) Conducting private tuitions 3,00,000
[Not exempt.]
(7) Running martial arts academy for young children [Not exempt under GST 55,000
laws]
(8) Conducting career counselling session [Not exempt under GST laws] 1,65,000
Value of taxable supply 10,00,000
GST payable @ 18% 1,80,000
11

2. (a) Computation of ITC available with Laxmi Pvt. Ltd. for the month of July, 2018
Particulars Rs.
Raw Material Nil
[ITC not available as raw material is not received in July, 2018]
Membership of a club availed for employees working in the factory Nil
[Blocked credit in terms of section 17(5) of the CGST Act, 2017]
Inputs to be received in 5 lots, out of which 3rd lot was received during the month Nil
[In case of goods received in lots, ITC can be taken only upon receipt of the last lot]
Trucks used for transport of raw material 40,000
[ITC of GST paid on motor vehicles is allowed only when used, inter alia, for
transportation of goods in terms of section 17(5) of the CGST Act, 2017]
Capital goods 70,000
[ITC of GST paid on items for which invoice is missing is not available. So, ITC of
Rs. 80,000 is not available]
Confectionery items for consumption of employees working in the factory Nil
[ITC on food or beverages is specifically disallowed unless the same is used for
making outward taxable supply of the same category or as an element of the
taxable composite or mixed supply-Section 17(5)(b)(i)]
Total ITC available 1,10,000
(b) A registered person, whose aggregate turnover in the preceding financial year did not exceed
Rs. 1 crore in a State/UT [Rs. 75 lakh in case of Special Category States except Jammu and
Kashmir and Uttarakhand], may opt for composition scheme.
However, he shall not be eligible to opt for composition scheme if, inter alia, he is engaged in the
supply of services other than restaurant services.
(1) In the given case, since Mr. Guneet is engaged in the supply of consultancy service, he is not
eligible to opt for composition scheme irrespective of its turnover in the preceding financial year.
(2) No, it is not possible for Mr. Guneet to opt for composition scheme only for showroom as all
the registrations under the same PAN have to opt for composition scheme and since the
supply of consultancy service is ineligible for composition scheme, supply of readymade
garments too becomes ineligible for composition scheme.
3. (a) As per section 25 read with CGST Rules, 2017, where an applicant submits application for
registration within 30 days from the date he becomes liable to registration, effective date of
registration is the date on which he becomes liable to registration. Since, Priyank Services Ltd.’s
turnover exceeded Rs. 20 lakh on 12th August, it became liable to registration on same day.
Further, it applied for registration within 30 days of so becoming liable to registration, the effective
date of registration is the date on which he becomes liable to registration, i.e. 12th August.
As per section 31 read with CGST Rules, 2017, every registered person who has been granted
registration with effect from a date earlier than the date of issuance of certificate of registration to him,
may issue Revised T ax Invoices. Revised Tax Invoices shall be issued within 1 month from the date of
issuance of certificate of registration. Revised Tax Invoices shall be issued within 1 month from the
date of issuance of registration in respect of taxable supplies effected during the period starting from
the effective date of registration till the date of issuance of certificate of registration.
Therefore, in the given case, Priyank Services Ltd. has to issue the Revised Tax Invoices in respect
of taxable supplies effected during the period starting from the effective date of registration
(12th August) till the date of issuance of certificate of registration (6 th September) within 1 month
from the date of issuance of certificate of registration, i.e. on or before 6 th October.
12

(b) (i) Every supplier becomes liable to registration if his turnover exceeds Rs. 20 lakh [in a State/UT
other than Special Category States except Jammu and Kashmir] in a financial year [Section
22 of CGST Act, 2017]. Since in the given case, the turnover of Grand Industries exceeded
Rs. 20 lakh on 1st September, it becomes liable to registration on said date.
Further, since the application for registration has been submitted within 30 days from such
date, the registration shall be effective from the date on which the person becomes liable to
registration [Section 25 read with rule 10 of the Chapter III - Registration of CGST Rules,
2017]. Therefore, the effective date of registration is 1st September.
(ii) Since in the given case, the turnover of Mangal Teleservices exceeds Rs. 20 lakh on
25th October, it becomes liable to registration on said date.
Further, since the application for registration has been submitted after 30 days from the date
such person becomes liable to registration, the registration shall be effective from the date of
grant of registration. Therefore, the effective date of registration is 5th December.
4. (a) (i) Renting of immovable property would be treated as supply of services in terms of Schedule -
II of CGST Act, 2017.
(ii) As per Schedule-II of CGST Act, 2017, transfer of right in goods without transfer of title in
goods would be treated as supply of services.
(iii) As per Schedule-II of CGST Act, 2017, works contract services would be treated as supply of
services.
(iv) As per Schedule-II of CGST Act, 2017, temporary transfer of permitting use or enjoyment of
any intellectual property right would be treated as supply of services.
(v) As per Schedule-II of CGST Act, 2017, transfer of title in goods under an agreement which
stipulates that property shall pass at a future date would be treated as supply of goods.
(b) As per provisions of Section 23 of CGST Act, 2017, the persons who are not liable for registration
are as under–
(a) Person engaged exclusively in supplying goods/services/both that are wholly exempt from tax.
(b) Person engaged exclusively in supplying goods/services/both that are not liable to tax.
(c) Agriculturist to the extent of supply of produce out of cultivation of land.
(d) Persons only engaged in making supplies of taxable goods or services or both liable to
reverse charge.
(e) Persons making inter-State supplies of taxable services up to an aggregate turnover of
Rs. 20 lakh (Rs. 10 lakh in case of special category States except Jammu and Kashmir).
(f) Casual Taxable Persons making taxable supplies of specified handicraft goods up to an
aggregate turnover of Rs. 20 lakh (Rs. 10 lakh in case of special category States except
Jammu and Kashmir) subject to specified conditions.
(g) Persons making inter-State supplies of specified handicraft goods up to an aggregate turnover
of Rs. 20 lakh (Rs. 10 lakh in case of special category States except Jammu and Kashmir)
subject to specified conditions.
(h) Job workers making inter-State supply of services to a registered person up to an aggregate
turnover of Rs. 20 lakh (Rs. 10 lakh in case of special category States except Jammu and
Kashmir) subject to specified conditions.
(i) Persons making supplies of services through an electronic commerce operator (other than
supplies specified under section 9(5) of the CGST Act) up to an aggregate turnover of Rs. 20
lakh (Rs. 10 lakh in case of special category States except Jammu and Kashmir).
[Note Any 5 points may be mentioned]
13

INTERMEDIATE (NEW) : GROUP – II
PAPER – 5: ADVANCED ACCOUNTING
Answer any four questions from the remaining five questions.
Wherever necessary suitable assumptions may be made and disclosed by way of a note.
Time Allowed: 3 Hours Maximum Marks: 100
1. (a) Ruby Ltd. sold goods through its agent. As per terms of sales, consideration is payable within one
month. In the event of delay in payment, interest is chargeable @ 10% p.a. from the agent. The
company has not realized interest from the agent in the past. For the year ended 31 st March, 2017
interest due from agent (because of delay in payment) amounts to Rs. 5 lakhs. The accountant of
Ruby Ltd. booked Rs. 5 lakhs as interest income in the year ended 31 st March, 2017.
Examine and discuss the contention of the accountant with reference to AS 9 “Revenue
Recognition”.
(b) EXOX Ltd. is in the process of finalising its accounts for the year ended 31 st March, 2017. The
company seeks your advice on the following:
(i) The Company’s sales tax assessment for assessment year 2014-15 has been completed on
14th February, 2017 with a demand of Rs. 2.76 crore. The company paid the entire due under
protest without prejudice to its right of appeal. The Company files its appeal before the
appellate authority wherein the grounds of appeal cover tax on additions made in the
assessment order for a sum of 2.10 crore.
(ii) The Company has entered into a wage agreement in May, 2017 whereby the labour union
has accepted a revision in wage from June, 2016. The agreement provided that the hike till
May, 2017 will not be paid to the employees but will be settled to them at the ti me of
retirement. The company agrees to deposit the arrears in Government Bonds by
September, 2017.
You required to examine and give suggestions in line with the relevant Accounting Standards.
(c) A Ltd. has got the license to manufacture particular medicines for 10 years at a license fee of
Rs. 200 lakhs. Given below is the pattern of expected production and expected operating cash
inflow:
Year Production in bottles (in lakhs) Net operating cash flow (Rs. in lakhs)
1 300 900
2 600 1,800
3 650 2,300
4 800 3,200
5 800 3,200
6 800 3,200
7 800 3,200
1

8 800 3,200
9 800 3,200
10 800 3,200
Net operating cash flow has increased for third year because of better inventory management and
handling method.
You are required to determine the amortization method in line with AS 26.
(d) ABC Ltd. took a machine on lease from XYZ Ltd., the fair value being Rs. 10,00,000. The economic
life of the machine as well as the lease term is 4 years. At the end of each year, ABC Ltd. pays
Rs. 3,50,000. The lessee has guaranteed a residual value of Rs. 50,000 on expiry of the lease to
the lessor. However, XYZ Ltd. estimates that the residential value of the machinery will be
Rs. 35,000 only. The implicit rate of return is 16% and PV factors at 16% for year 1, year 2, year 3
and year 4 are 0.8621, 0.7432, 0.6407 and 0.5523 respectively.
You are required to calculate the value of machinery to be considered by ABC Ltd. and the finance
charges for each year. (4 parts x 5 Marks = 20 Marks)
2. (a) Z Limited came up with an issue of 60,00,000 equity shares of Rs. 10 each at par. 15,00,000 shares
were issued to the promoters and the balance offered to the public was underwritten by three
underwriters D, E and F - equally with firm underwriting of 1,40,000 shares each, Subscriptions
totalled 38,91,000 shares including the marked forms which were:
D 12,75,000 shares
E 13,50,000 shares
F 10,50,000 shares
The underwriters had applied for the number of shares covered by firm underwriting. The amounts
payable on application and allotment were Rs. 2.50 and Rs. 2.00 respectively. The agreed
commission was 5%.
You are required to give journal entries for -
(a) The allotment of shares to the underwriters
(b) The commission due to each of them and
(c) The net cash paid and or received.
Note: Unmarked applications are to be credited to underwriters equally. Benefit of firm underwriting
is given to individual underwriter.
(b) SMM Ltd. has the following capital structure as on 31 st March, 2017: Rs. in crore
Particulars Situation Situation
(i) Equity share capital (shares of Rs. 10 each) 1,200 1,200
(ii) Reserves:
General Reserves 1,080 1,080
Securities Premium 400 400
Profit & Loss 200 200
Infrastructure Development Reserve (Statutory Reserve) 320 320
(iii) Loan Funds 3,200 6,000

The company has offered buy back price of Rs. 30 per equity share. You are required to calculate
maximum permissible number of equity shares that can be bought back in both situations and also
required to pass necessary Journal Entries. (10 + 10 = 20 Marks)
3. (a) The following were the summarized Balance Sheets of P Ltd. and V Ltd. as at 31-3-20X1:
Liabilities P Ltd. V Ltd.
(Rs. in lakhs) (Rs. in lakhs)
Equity Share Capital (Fully paid shares of Rs. 10 each) 15,000 6,000
Securities Premium 3,000 –
Foreign Project Reserve – 310
General Reserve 9,500 3,200
Profit and Loss Account 2,870 825
12% Debentures – 1,000
Trade payables 1,200 463
Provisions 1,830 702
33,400 12,500
Assets P Ltd. V Ltd.

Land and Buildings 6,000 –
Plant and Machinery 14,000 5,000
Furniture, Fixtures and Fittings 2,304 1,700
Inventory 7,862 4,041
Trade receivables 2,120 1,100
Cash at Bank 1,114 609
Cost of Issue of Debentures — 50
33,400 12,500
All the bills receivable held by V Ltd. were P Ltd.’s acceptances.
On 1st April 20X1, P Ltd. took over V Ltd in an amalgamation in the nature of merger. It was agreed
that in discharge of consideration for the business P Ltd. would allot three fully paid equity shares
of Rs. 10 each at par for every two shares held in V Ltd. It was also agreed that 12% debentures
in V Ltd. would be converted into 13% debentures in P Ltd. of the same amount and denomination.
Details of trade receivables and trade payables as under:
Assets P Ltd. V Ltd.
Trade payables
Bills Payable 120 -
Creditors 1,080 463
1,200 463

Trade receivables
Debtors 2,120 1,020
Bills Receivable — 80
2,120 1,100
Expenses of amalgamation amounting to Rs. 1 lakh were borne by P Ltd.
(i) Prepare journal entries in the books of P Ltd. and
(ii) Prepare P Ltd.’s Balance Sheet immediately after the merger considering that the cost of
issue of debentures shown in the balance sheet of the V Ltd. company is not transferred to
the P Ltd. company.
(b) XYZ Limited is being would up by the tribunal. All the assets of the company have been charged
to the company’s bankers to whom the company owes Rs. 5 crores. The company owes following
amounts to others:
Dues to workers – Rs. 1,25,00,000
Taxes Payable to Government – Rs. 30,00,000
Unsecured Creditors – Rs. 60,00,000
You are required to compute with the reference to the provision of the Companies Act, 2013 the
amount each kind of creditors is likely to get if the amount realized by the official liquidator from
the secured assets and available for distribution among creditors is only Rs. 4,00,00,000/-
(15 + 5 = 20 Marks)
4. (a) The following are the figures extracted from the books of TOP Bank Limited as on 31.3.2017.
Rs.
Interest and discount received 59,29,180
Interest paid on deposits 32,59,920
Issued and subscribed capital 16,00,000
Salaries and allowances 3,20,000
Directors fee and allowances 48,000
Rent and taxes paid 1,44,000
Postage and telegrams 96,460
Statutory reserve fund 12,80,000
Commission, exchange and brokerage 3,04,000
Rent received 1,04,000
Profit on sale of investments 3,20,000
Depreciation on bank’s properties 48,000
Statutory expenses 44,000
Preliminary expenses 40,000
Auditor’s fee 28,000

The following further information is given:
(i) A customer to whom a sum of Rs. 16 lakhs has been advanced has become insolvent and it
is expected only 40% can be recovered from his estate.
(ii) There were also other debts for which a provision of Rs. 2,10,000 was found necessary by
the auditors.
(iii) Rebate on bills discounted on 31.3.2016 was Rs. 19,000 and on 31.3.2017 was Rs. 25,000.
(iv) Preliminary expenses are to be fully written off during the year.
(v) Provide Rs. 9,00,000 for Income-tax.
(vi) Profit and Loss account opening balance was Nil as on 31.3.2016.
You are required to Prepare the Profit and Loss account of TOP Bank Limited for the year ended
31.3.2017.
(b) From the following particulars of M/s. Tsunami Marine Insurance Limited for the year ending
31st March, 2016, find out the
(i) Net Premium earned
(ii) Net Claims incurred
Direct Business Re- Insurance
(Rs.) lakhs (Rs.) lakhs
PREMIUM:
Received 4,400 376
Receivable -01.04.2015 220 18
Receivable -31.3.2016 189 16
Paid 305
Payable - 01.04.2015 14
Payable - 31.3.2016 9
CLAIMS:
Paid 3,450 277
Payable - 01.04.2015 45 8
Payable - 31.3.2016 48 6
Received 101
Receivable - 01.04.2015 20
Receivable - 31.3.2016 19
(16+ 4 = 20 Marks)
5. (a) Consider the following summarized balance sheets of subsidiary Neel Ltd.:
2015 2016 2015 2016
Rs. Rs. Rs. Rs.
Share-Capital Fixed Assets
Issued & subscribed Cost 1,60,000 1,60,000
2,500 equity shares Less: Accumulated
of Rs. 100 each 2,50,000 2,50,000 depreciation (24,000) (48,000)
Reserves & Surplus 1,36,000 1,12,000
5

Revenue reserves 1,43,000 3,57,000 Investments at cost
Current Liabilities & Current Assets: — 2,00,000
Provisions:
Trade Payables 2,45,000 2,47,000 Inventory 2,98,500 3,71,000
Bank overdraft — 85,000 Trade Receivables 2,97,000 4,45,500
Provision for taxation 1,55,000 2,15,000 Prepaid Expenses 36,000 24,000
Cash at Bank 25,500 1,500
7,93,000 11,54,000 7,93,000 11,54,000
Also consider the following information:
(i) Neel Ltd. is a subsidiary of Sky Ltd. Both the companies follow calendar year as the
accounting year.
(ii) Sky Ltd. values inventory on LIFO basis while Neel Ltd. used FIFO basis. To bring Neel Ltd.’s
values in line with those of Sky Ltd. its value of inventory is required to be reduced by Rs.
6,000 at the end of 2015 and Rs. 17,000 at the end of 2016.
(iii) Neel Ltd. deducts 1% from Trade Receivables as a general provision against doubtful debts.
(iv) Prepaid expenses in Neel Ltd. include advertising expenditure carried forward of
Rs. 30,000 in 2015 and Rs. 15,000 in 2016, being part of initial advertising expenditure of
Rs. 45,000 in 2015 which is being written off over three years. Similar amount of advertising
expenditure of Sky Ltd. has been fully written off in 2015.
You are required to restate the balance sheet of Neel Ltd. as on 31 st December, 2016 after
considering the above information, for the purpose of consolidation. Make the necessary
restatement which is necessary to make the accounting policies adopted by Sky Ltd. and Neel Ltd.
uniform.
(b) The summarized Balance Sheet of K Ltd. for the year ended on 31 st March, 2015, 2016 and 2017
are as follows:
(Rs. in thousands)
Liabilities 31.3.2015 31.3.2016 31.3.2017
1,60,000 equity shares of Rs. 10 each, fully paid 1,600 1,600 1,600
General reserve 1,200 1,400 1,600
Profit and Loss account 140 160 240
Trade Payables 600 800 1,000
3,540 3,960 4,440
Assets
Goodwill 1,000 800 600
Building and Machinery less, depreciation 1,400 1,600 1,600
Inventory 1,000 1,200 1,400
Trade Receivables 20 160 440
Bank balance 120 200 400
3,540 3,960 4,440

Additional information:
(a) Actual valuations were as under:
Building and machinery less, depreciation 1,800 2,000 2,200
Inventory 1,200 1,400 1,600
Net profit (including opening balance after
writing off depreciation, goodwill, tax
provision and transferred to general 420 620 820
reserve)
(b) Capital employed in the business at market value at the beginning of 2014-15 was
Rs. 36,60,000 which included the cost of goodwill. The normal annual return on average
capital employed in the line of business engaged by K Ltd. is 12½%.
(c) The balance in the general reserve on 1 st April, 2014 was Rs. 10 lakhs.
(d) The goodwill shown on 31.3.2015 was purchased on 1.4.2014 for Rs. 10 lakhs on which date
the balance in the Profit and Loss account was Rs. 1,20,000. Compute the average capital
employed in each year.
Goodwill is to be valued at 5 year’s purchase of Super profit (Simple average method). Also find
out the total value of the business as on 31.3.2017. (12 Marks + 8 Marks = 20 Marks)
6. (a) A consumer goods producer has changed the product line as follows:
Dish washing Bar Clothes washing Bar
(Per month) (Per month)
January 2016 - September 2016 2,00,000 2,00,000
October 2016 - December 2016 1,00,000 3,00,000
January 2017 - March 2017 Nil 4,00,000
The company has enforced a gradual enforcement of change in product line on the basis of an
overall plan. The Board of Directors has passed a resolution in March 2016 to this effect. The
company follows calendar year as its accounting year. You are required to advise whether it should
it be treated as discontinuing operation as per AS 24?
(b) Explain, in brief, the investment valuation norms for traded securities in case of mutual funds as
per SEBI(Mutual fund) Regulations.
(c) Balance Sheets of X Ltd.
As on 31st March 2014 and 31st March 2015
(Rs. In lakhs)
Liabilities 31.3.14 31.3.15 Assets 31.3.14 31.3.15
Share Capital 18,00 18,00 Fixed assets 24,00 26,00
General Reserve 6,00 6,00 Investments 1,00 2,00
Profit &Loss A/c 6,80 9,40 Inventory 6,00 5,50
12% Debentures 2,00 2,00 Trade 3,00 3,50
receivables
18% Term Loan 3,00 3,20 Cash and Bank 4,00 3,40

Cash Credit 1,20 80
Trade payables 70 60
Tax Provision 30 40
38,00 40,40 38,00 40,40
Non-trade investments were 75% of the total investments. Find capital employed as on 31.3.14
and as on 31.3.15 and average capital employed.
(d) XYZ Ltd. purchased 80% shares of ABC Ltd. on 1 st January, 2016 for Rs. 2,80,000. The issued
capital of ABC Ltd., on 1 st January, 2016 was Rs. 2,00,000 and the balance in the Profit & Loss
Account was Rs. 1,20,000.
During the year ended 31 st December, 2016, ABC Ltd. earned a profit of Rs. 40,000 and at year
end, declared and paid a dividend of Rs. 60,000.
Show by an entry how the dividend should be recorded in the books of XYZ Ltd.
What is the amount of minority interest as on 1 st January, 2016 and 31st December, 2016?
(4 Parts x 5 Marks = 20 Marks)

MOCK TEST PAPER - 2
INTERMEDIATE (NEW): GROUP – II
PAPER – 5: ADVANCED ACCOUNTING
1. (a) As per AS 9 “Revenue Recognition”, “where the ability to assess the ultimate collection with
reasonable certainty is lacking at the time of raising any claim, the revenue recognition is
postponed to the extent of uncertainty involved. In such cases, the revenue is recognized only
when it is reasonably certain that the ultimate collection will be made”. In this case, the company
never realized interest for the delayed payments made by the agent. Hence, based on the past
experience, the realization of interest for the delayed payments by the agent is very much
uncertain. The interest should be recognized only if the ultimate collection is certain. Therefore,
the interest income of Rs. 5 lakhs should not be recognized in the books for the year ended 31 st
March, 2017. Thus the contention of accountant is incorrect. However, if the agents have agreed
to pay the amount of interest and there is an element of certainty associated with these receipts,
the accountant is correct regarding booking of Rs. 5 lakhs as interest amount.
(b) (i) Since the company is not appealing against the addition of Rs. 0.66 crore the same should
be provided for in its accounts for the year ended on 31st March, 2017. The amount paid
under protest can be kept under the heading ‘Loans & Advances’ and disclosed along with
the contingent liability of Rs. 2.10 crore.
(ii) The arrears for the period from June, 2016 to March, 2017 are required to be provided for in
the accounts of the company for the year ended on 31st March, 2017.
(c) As per AS 26 ‘Intangibles Assets’, the amortization method used should reflect the pattern in which
economic benefits are consumed by the enterprise. If pattern cannot be determined reliably, then
straight-line method should be used.
In the instant case, the pattern of economic benefit in the form of net operating cash flow vis-à-vis
production is determined reliably. A Ltd. should amortize the license fee of Rs. 200 lakhs as under:
Year Net operating Cash in Ratio Amortize amount (Rs. in lakhs)
flow (Rs.)
1 900 0.03 6
2 1,800 0.06 12
3 2,300 0.08 16
4 3,200 0.12 24
5 3,200 0.12 24
6 3,200 0.12 24
7 3,200 0.12 24
8 3,200 0.12 24
9 3,200 0.12 24
10 3,200 0.11 (bal.) 22
27,400 1.00 200

(d) As per AS 19 “Leases”, the lessee should recognize the lease as an asset and a liability at the
inception of a finance lease. Such recognition should be at an amount equal to the fair value of the
leased asset at the inception of lease. However, if the fair value of the leased asset exceeds the
present value of minimum lease payment from the standpoint of the lessee, the amount recorded
as an asset and liability should be the present value of minimum lease payments from the
standpoint of the lessee.
Value of machinery
In the given case, fair value of the machinery is Rs. 10, 00,000 and the net present value of
minimum lease payments is Rs. 10, 07,020 (Refer working Note). As the present value of the
machine is more than the fair value of the machine, the machine and the corresponding liability will
be recorded at value of Rs.10,00,000.
Calculation of finance charges for each year
Year Finance Payment Reduction in Outstanding
charge outstanding liability liability
(Rs.) (Rs.) (Rs.) (Rs.)
1 year beginning
st - - - 10,00,000
End of 1st year 1,60,000 3,50,000 1,90,000 8,10,000
End of 2nd year 1,29,600 3,50,000 2,20,400 5,89,600
End of 3rd year 94,336 3,50,000 2,55,664 3,33,936
End of 4th year 53,430 3,50,000 2,96,570 37,366
Working Note:
Present value of minimum lease payments
Annual lease rental x PV factor
Rs. 3,50,000 x (0.8621 + 0.7432 + 0.6407+ 0.5523) Rs. 9,79 ,405
Present value of guaranteed residual value
Rs. 50,000 x (0.5523) Rs. 27,615
Rs. 10,07,020
2. (a) Z Ltd.
Journal Entries
Dr. Cr.
Rs. Rs.
Bank A/c Dr. 10,50,000
To Share Application A/c 10,50,000
(Application money received on firm applications for 140,000 shares
each @ Rs. 2.50 per share from D, E & F)
D Dr. 2,80,000
E Dr. 2,80,000
F Dr. 11,30,500
Share Application A/c Dr. 10,50,000
 The difference between this figure and guaranteed residual value (Rs. 50,000) is due to rounding off.
2

To Share Capital A/c 27,40,500
(Allotment of shares to underwriters - 1,40,000 to D; 1,40,000 to E
and 3,29,000 to F; application and allotment money credited to
share capital)
Underwriting Commission A/c Dr. 22,50,000
To D 7,50,000
To E 7,50,000
To F 7,50,000
(Amount of underwriting commission payable to D, E and F @ 5%
on the amount of shares underwritten.)
Bank A/c Dr. 3,80,500
To F 3,80,500
(Amount received from F on shares allotted less underwriting
commission)
D Dr. 4,70,000
E Dr. 4,70,000
To Bank A/c 9,40,000
(Amount paid to D & E in final settlement of underwriting commission
due less amount payable on shares allotted payable by them.)
Working Notes:
(1) Calculation of Liability of Underwriters
D E F
Gross Liability (No. of shares) 15,00,000 15,00,000 15,00,000
Less: Marked Applications (excluding
firm underwriting) (12,75,000) (13,50,000) (10,50,000)
2,25,000 1,50,000 4,50,000
Less: Unmarked Applications (equally) (72,000) (72,000) (72,000)
1,53,000 78,000 3,78,000
Less: Firm Underwriting (1,40,000) (1,40,000) (1,40,000)
13,000 (62,000) 2,38,000
Surplus of E distributed between D & F
equally (31,000) 62,000 (31,000)
(18,000) - 2,07,000
Surplus of D allocated to F totally 18,000 — (18,000)
Net Liability, excluding Firm Underwriting - - 1,89,000
Add: Firm underwriting 1,40,000 1,40,000 1,40,000
Total liability of underwriters 1,40,000 1,40,000 3,29,000
(2) Calculation of Amounts Payable by Underwriters
D E F
Liability (No. of shares) 1,40,000 1,40,000 3,29,000
Amount payable @ Rs. 4.50 per share 6,30,000 6,30,000 14,80,500
3

Less: Amount paid on Firm Applications of
1,40,000 each @ Rs. 2.50* (3,50,000) (3,50,000) (3,50,000)
Balance payable 2,80,000 2,80,000 11,30,500
Underwriting Commission Receivable 7,50,000 7,50,000 7,50,000
Amount Paid 4,70,000 4,70,000 —
Amount received by the Co. — — 3,80,500
* Underwriters had already paid the application money on these shares.
(b) Statement determining the maximum number of shares to be bought back
Number of shares (in crores)
Particulars When loan fund is
Rs. 3,200 crores Rs. 6,000
crores
Shares Outstanding Test (W.N.1) 30 30
Resources Test (W.N.2) 24 24
Debt Equity Ratio Test (W.N.3) 32 Nil
Maximum number of shares that can be 24 Nil
bought back [least of the above]
Journal Entries for the Buy Back
(applicable only when loan fund is Rs.3,200 crores)
Rs. in crores
Debit Credit
(a) Equity share buyback account Dr. 720
To Bank account 720
(Being payment for buy back of 24 crores equity shares
of Rs. 10 each @ Rs. 30 per share)
(b) Equity share capital account Dr. 240
Premium Payable on buyback account Dr. 480
To Equity share buyback account 720
(Being cancellation of shares bought back)
Securities Premium account Dr. 400
General Reserve / Profit & Loss A/c Dr. 80
To Premium Payable on buyback account 480
(Being Premium Payable on buyback account charged to
securities premium and general reserve/Profit & Loss
A/c)
(c) General Reserve / Profit & Loss A/c Dr. 240
To Capital redemption reserve account 240
(Being transfer of free reserves to capital redemption
reserve to the extent of nominal value of share capital
bought back out of redeemed through free reserves)
4

Working Notes:
1. Shares Outstanding Test
Particulars (Shares in crores)
Number of shares outstanding 120
25% of the shares outstanding 30
2. Resources Test
Particulars
Paid up capital (Rs. in crores) 1,200
Free reserves (Rs. in crores) (1,080 + 400 +200) 1,680
Shareholders’ funds (Rs. in crores) 2,880
25% of Shareholders fund (Rs. in crores) Rs. 720 crores
Buy back price per share Rs. 30
Number of shares that can be bought back 24 crores shares
3. Debt Equity Ratio Test: Loans cannot be in excess of twice the Equity Funds post Buy
Back
Particulars When loan fund is
Rs. 3,200 crores Rs. 6,000 crores
(a) Loan funds (Rs.) 3,200 6,000
(b) Minimum equity to be maintained after buy 1,600 3,000
back in the ratio of 2:1 (Rs.) (a/2)
(c) Present equity shareholders fund (Rs.) 2,880 2,880
(d) Future equity shareholders fund (Rs.) (see 2,560 (2,880-320) N.A.
W.N.4)
(e) Maximum permitted buy back of Equity (Rs.) 960 Nil
[(d) – (b)]
(f) Maximum number of shares that can be 32 crore shares
bought back @ Rs. 30 per share Nil
As per the provisions of the Companies Act,
2013, company Qualifies Does not Qualify
3. (a) Books of P Ltd.
Journal Entries
Dr. Cr.
(Rs. in Lacs) (Rs. in Lacs)
Business Purchase A/c Dr. 9,000
To Liquidator of V Ltd. 9,000
(Being business of V Ltd. taken over for consideration
settled as per agreement)
Plant and Machinery Dr. 5,000

Furniture & Fittings Dr. 1,700
Inventory Dr. 4,041
Debtors Dr. 1,020
Cash at Bank Dr. 609
Bills Receivable Dr. 80
To Foreign Project Reserve 310
To General Reserve (3,200 - 3,000) 200
To Profit and Loss A/c (825 – 50*) 775
To Liability for 12% Debentures 1,000
To Creditors 463
To Provisions 702
To Business Purchase 9,000
(Being assets & liabilities taken over from V Ltd.)
Liquidator of V Ltd. A/c Dr. 9,000
To Equity Share Capital A/c 9,000
(Purchase consideration discharged in the form of equity
shares)
Profit & loss A/c Dr. 1
To Bank A/c 1
(Liquidation expenses paid by P Ltd.)
Liability for 12% Debentures A/c Dr. 1,000
To 13% Debentures A/c 1,000
(12% debentures discharged by issue of 13% debentures)
Bills Payable A/c Dr. 80
To Bills Receivable A/c 80
(Cancellation of mutual owing on account of bills)
Balance Sheet of P Ltd. as at 1st April, 20X1 (after merger)

Particulars Notes Rs. (in lakhs)
Equity and Liabilities
1 Shareholders' funds
A Share capital 1 24,000
B Reserves and Surplus 2 16,654

2 Non-current liabilities
A Long-term borrowings 3 1,000
3 Current liabilities
A Trade Payables (1,543 + 40) 1,583
B Short-term provisions 2,532
Total 45,769
Assets
1 Non-current assets
A Fixed assets
Tangible assets 4 29,004
2 Current assets
A Inventories 11,903
B Trade receivables 3,140
C Cash and cash equivalents 1,722
Total 45,769
Notes to accounts
Rs.
1. Share Capital
Equity share capital
Authorised, issued, subscribed and paid up
24 crores equity shares of Rs. 10 each (Of the above shares, 9 crores shares
have been issued for consideration other than cash) 24,000
Total 24,000
2. Reserves and Surplus
General Reserve 9,700
Securities Premium 3,000
Foreign Project Reserve 310
Profit and Loss Account 3,644
Total 16,654
3. Long-term borrowings
Secured
13% Debentures 1,000
4. Tangible assets
Land & Buildings 6,000
Plant & Machinery 19,000
Furniture & Fittings 4,004
Total 29,004

Working Note:
Computation of purchase consideration
The purchase consideration was discharged in the form of three equity shares of P Ltd. for every
two equity shares held in V Ltd.
Purchase consideration = Rs. 6,000 lacs × 3 = Rs. 9,000 lacs.

2
* Cost of issue of debenture adjusted against P & L Account of V Ltd.
(b) Section 326 of the Companies Act, 2013 talks about the overriding preferential payments to be
made from the amount realized from the assets to be distributed to various kind of creditors.
According to the proviso given in the section 326 the security of every secured creditor should be
deemed to be subject to a paripassu change in favor of the workman to the extent of their portion.
Amount Realied X Workman′ s Dues
Workman′ s Share to Secured Asset =
Workman′ s Dues + Secured Loan
Workman′ s Share to Secured Asset
4,00,00,000 X 1,25,00,000
=
1,25,00,000 + 5,00,00,000
1
4,00,00,000 X
5
Workman′ s Share to Secured Assets = 80,00,000

Amount available to secured creditor is Rs. 400 Lakhs – 80 Lakhs = 320 Lakhs
Hence, no amount is available for payment of government dues and unsecured creditors.
4. (a) TOP Bank Limited
Profit and Loss Account for the year ended 31 st March, 2017
Schedule Year ended
31.03.2017
(Rs. in ‘000s)
I. Income:
Interest earned 13 5923.18
Other income 14 728.00
Total 6,651.18
II. Expenditure
Interest expended 15 3259.92
Operating expenses 16 768.46
Provisions and contingencies (960+210+900) 2,070.00
Total 6,098.38
IIII. Profits/Losses
Net profit for the year 552.80
Profit brought forward nil
552.80

IV. Appropriations
Transfer to statutory reserve (25%) 138.20
Balance carried over to balance sheet 414.60
552.80
Year ended
31.3. 2017
(Rs. in ‘000s)
Schedule 13 – Interest Earned
I. Interest/discount on advances/bills (Refer W.N.) 5923.18
5923.18
Schedule 14 – Other Income
I. Commission, exchange and brokerage 304
II. Profit on sale of investments 320
III. Rent received 104
728
Schedule 15 – Interest Expended
I. Interests paid on deposits 3259.92
Schedule 16 – Operating Expenses

I. Payment to and provisions for employees 320
II. Rent and taxes 144
III. Depreciation on bank’s properties 48
IV. Director’s fee, allowances and expenses 48
V. Auditors’ fee 28
VI. Law (statutory) charges 44
VII. Postage and telegrams 96.46
VIII. Preliminary expenses 40
768.46
Working Note:
(Rs. in
‘000s)
Interest/discount 5,929.18
Add: Rebate on bills discounted on 31.3. 2016 19.00
Less: Rebate on bills discounted on 31.3. 2017 ( 25.00)
5,923.18

(b) (i) Net Premium earned
Rs. In lakhs
Premium from direct business received 4,400
Add: Receivable as 31.03.16 189
Less: Receivable as on 01.04.2015 (220) 4,369
Add: Premium on re-insurance accepted 376
Add: Receivable as on 31.03.16 16
Less: Receivable as on 01.04.2015 (18) 374
4,743
Less: Premium on re-insurance ceded 305
Add: Payable as on 31.03.16 9
Less: Payable as on 01.04.15 (14) (300)
Net Premium earned 4,443
(ii) Net Claims incurred
Rs. In lakhs
Claims paid on direct business 3,450
Add: Reinsurance 277
Add: Reinsurance outstanding as 31.03.16 6
Less: Reinsurance outstanding as on 01.04.2015 (8) 275
Less: Claims Received from re-insurance 101
Add: Receivable as on 31.03.16 19
Less: Receivable as on 01.04.2015 (20) 100
3,625
Add: Outstanding direct claims at the end of the year 48
3,673
Less: Outstanding Claims at the beginning of the year (45)
Net Claims Incurred 3,628
5. (a) Adjusted revenue reserves of Neel Ltd.
Rs. Rs.
Revenue reserves as given 3,57,000
Add: Provision for doubtful debts [4,45,500 / 99 X 1] 4,500
3,61,500
Less: Reduction in value of Inventory 17,000
Advertising expenditure to be written off 15,000 (32,000)
Adjusted revenue reserve 3,29,500
10

Note: Since Neel Ltd. follows FIFO basis, it is assumed that opening inventory has been sold out
during the year 2015. Therefore, reduction in inventory would have been taken care of by sale
value. Hence no adjustment has been made for the same.
Restated Balance Sheet of Neel Ltd.
as at 31st December, 2016
Particulars Note No. (Rs.)
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 2,50,000
(b) Reserves and Surplus 1 3,29,500
(2) Current Liabilities
(a) Short term borrowings 2 85,000
(b) Trade Payables 2,47,000
(c) Short-term provision 3 2,15,000
Total 11,26,500
II. Assets
(1) Non-current assets
(a) Fixed assets
Tangible assets 4 1,12,000
(b) Non-current Investment 2,00,000
(2) Current assets
(a) Inventories 3,54,000
(b) Trade Receivables 4,50,000
(c) Cash & Cash Equivalents 1,500
(d) Other current assets 5 9,000
Total 11,26,500
Notes to Accounts
Rs.
1. Reserves and Surplus
Revenue Reserve (refer computation of adjusted revenue 3,29,500
reserves of Neel Ltd)
2. Short term borrowings
Bank overdraft 85,000
3. Short-term provision
Provision for taxation 2,15,000
4. Tangible Assets
Cost 1,60,000
Less: Depreciation to date (48,000) 1,12,000
11

5. Other current assets
Prepaid expenses (After adjusting advertising expenditure to be 9,000
written off each year)
(b)
Total value of business Rs.
Total net Asset as on 31.3.2017 42,40,000
Less: Goodwill as per Balance Sheet (6,00,000)
Add: Goodwill as calculated in Working Note 2 20,56,250
Value of Business 56,96,250
Working Notes:
1. Capital Employed at the end of each year
31.3.2015 31.3.2016 31.3.2017
Rs. Rs. Rs.
Goodwill 10,00,000 8,00,000 6,00,000
Building and Machinery (Revaluation) 18,00,000 20,00,000 22,00,000
Inventory (Revalued) 12,00,000 14,00,000 16,00,000
Trade Receivables 20,000 1,60,000 4,40,000
Bank Balance 1,20,000 2,00,000 4,00,000
Total Assets 41,40,000 45,60,000 52,40,000
Less: Trade Payables (6,00,000) (8,00,000) (10,00,000)
Closing Capital 35,40,000 37,60,000 42,40,000
Add: Opening Capital 36,60,000 35,40,000 37,60,000
Total 72,00,000 73,00,000 80,00,000
Average Capital 36,00,000 36,50,000 40,00,000
Since the goodwill has been purchased, it is taken as a part of Capital employed.
2. Valuation of Goodwill
(i) Future Maintainable Profit 31.3.2015 31.3.2016 31.3.2017
Net Profit as given 4,20,000 6,20,000 8,20,000
Less: Opening Balance (1,20,000) (1,40,000) (1,60,000)
Adjustment for Valuation of Opening - (2,00,000) (2,00,000)
Inventory
Add: Adjustment for Valuation of closing 2,00,000 2,00,000 2,00,000
inventory
Goodwill written off - 2,00,000 2,00,000
Transferred to General Reserve 2,00,000 2,00,000 2,00,000
Future Maintainable Profit 7,00,000 8,80,000 10,60,000
Less: 12.50% Normal Return (4,50,000) (4,56,250) (5,00,000)
(ii) Super Profit 2,50,000 4,23,750 5,60,000
(iii) Average Super Profit = Rs. (2,50,000+4,23,750+5,60,000) ÷3 = Rs. 4,11,250
(iv) Value of Goodwill at five years’ purchase= Rs. 4,11250 × 5 = Rs. 20,56,250.
12

6. (a) As per AS 24 ‘Discontinuing Operations’, a discontinuing operation is a component of an enterprise:
(i) that the enterprise, pursuant to a single plan, is:
(1) disposing of substantially in its entirety,
(2) disposing of piecemeal, or
(3) terminating through abandonment; and
(ii) that represents a separate major line of business or geographical area of operations; and
(iii) that can be distinguished operationally and for financial reporting purposes.
As per provisions of the standard, business enterprises frequently close facilities, abandon
products or even product lines, and change the size of their work force in response to market
forces. While those kinds of terminations generally are not, in themselves, discontinuing
operations, they can occur in connection with a discontinuing operation. Examples of activities that
do not necessarily satisfy criterion of discontinuing operation are gradual or evolutionary phasing
out of a product line or class of service, discontinuing, even if relatively abruptly, several products
within an ongoing line of business;
In the given case, the company has enforced a gradual enforcement of change in product line and
does not represent a separate major line of business and hence is not a discontinued operation.
If it were a discontinuing operation, the initial disclosure event is the occurrence of one of the
following, whichever occurs earlier:
(i) the enterprise has entered into a binding sale agreem ent for substantially all of the assets
attributable to the discontinuing operation; or
(ii) the enterprises board of directors or similar governing body has both approved a detailed, formal
plan for discontinuance and made an announcement of the plan.
(b) Eight Schedule of the SEBI (Mutual Fund) Regulations, 1996 states the Investment Valuation
Norms. NAV of a scheme is determined by dividing the net assets of the scheme by the number
of outstanding units on the valuation date.
Traded Securities:-
(i) The securities shall be valued at the last quoted closing price on the recognized stock
exchange.
(ii) When the securities are traded on more than one recognised stock exchange, the securities
shall be valued at the last quoted closing price on the stoc k exchange where the security is
principally traded. It would be left to the asset management company to select the appropriate
stock exchange, but the reasons for the selection should be recorded in writing. There should
however be no objection for all scrips being valued at the prices quoted on the stock exchange
where a majority in value of the investments is principally traded.
(iii) Once a stock exchange has been selected for valuation of a particular security, reasons for
change of the exchange shall be recorded in writing by the asset management company.
(iv) When on a particular valuation day, a security has not been traded on the selected stock
exchange, the value at which it is traded on another stock exchange may be used.
(v) When a security is not traded on any stock exchange on a particular valuation day, the value
at which it was traded on the selected stock exchange or any other stock exchange, as the
case may be, on the earliest previous day may be used provided such date is not more than
sixty days prior to the valuation date.
13

(c) Computation of capital employed
(Rs. in lakhs)
31.3.14 31.3.15
Total Assets as per
Balance Sheet 38,00 40,40
Less: Non-trade Investments (75) (1,50)

37,25 38,90
Less: Outside Liabilities:
12% Debentures 2,00 2,00
18% Term Loan 3,00 3,20
Cash Credit 1,20 80
Trade payables 70 60
Tax Provision 30 7,20 40 7,00
Capital employed 30,05 31,90
30,05 lakhs+31,90 lakhs
Average capital employed = = Rs. 3,097.5 lakhs.
2
(d) Total dividend paid = Rs. 60,000
Out of post-acquisition profit = Rs. 40,000
Out of pre-acquisition profit = Rs. 20,000
Hence, 2/3rd of dividend received by XYZ will be credited to P & L and 1/3rd will be credited to
Investment.
XYZ Ltd.’s share of dividend = Rs. 60,000 X 80% = Rs. 48,000
In the books of XYZ Ltd.
Rs. Rs.
Bank A/c Dr. 48,000
To Profit & Loss A/c 32,000
To Investments in ABC Ltd. 16,000
(Dividend received from ABC Ltd. 1/3 credited to investment A/c
being out of capital profits – as explained above)
Goodwill on Consolidation: Rs.
Cost of shares less dividend out of capital profits 2,64,000
Less: Face value of capital i.e. 80% of capital 1,60,000
Add: Share of capital profits [1,20,000-20,000 (dividend portion 80,000 2,40,000
out of pre-acquisition profits)] X 80 %
Goodwill 24,000
Minority interest on: 64,000
1st January, 2016: 20% of Rs. 3,20,000 [2,00,000 + 1,20,000]
31st December, 2016: 20% of Rs. 3,00,000 [2,00,000 + 1,20,000 60,000
+ 40,000 – 60,000]
14

INTERMEDIATE (NEW) GROUP – II
PAPER – 6: AUDITING AND ASSURANCE
Attempt any four questions from the Rest.
Division A- Multiple Choice Questions

Questions (1-20) carry 1 Mark each Total 30 Marks
Questions 21-25 carry 2 Marks each
1. If the auditor concludes that there is reasonable justification to change the engagement and if the audit
work performed complied with the SAs applicable to the changed engagement, the report issued would
be appropriate for the revised terms of engagement. In order to avoid confusion, the report would not
include reference to:
(a) the original engagement; or any procedures that may have been performed in the original
engagement.
(b) the original engagement;
(c) any procedures that may have been performed in the original engagement
(d) the original engagement and any procedures that may have been performed in the original
engagement.
2. Which of the following is correct :
(a) The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain
absolute assurance that the financial statements are free from material misstatement due to fraud
or error.
(b) The auditor is expected to and can reduce audit risk to zero and can therefore obtain absolute
assurance.
(c) The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain
reasonable assurance that the financial statements are free from material misstatement due to
fraud or error.
(d) The auditor is expected to and can reduce audit risk to zero and can therefore obtain reasonable
assurance that the financial statements are free from material misstatement due to fraud or error.
3. With reference to SA 300, the auditor shall document:
(a) The overall audit strategy
(b) The audit plan
(c) Any significant changes made during the audit engagement to the overall audit strategy or the audit
plan, and the reasons for such changes.
(d) All of the above
4. Determining a percentage to be applied to a chosen benchmark (in relation to materiality) involves the
exercise of ___________
(a) Independence

(b) Professional Judgement
(c) Professional skepticism
(a) The auditor shall assemble the audit documentation in an audit file and complete the administrative
process of assembling the final audit file on a timely basis after the date of the auditor’s report.
(b) The auditor shall assemble the audit documentation in an audit file and shall not comple te the
administrative process of assembling the final audit file.
(c) The auditor shall assemble the audit documentation in an audit file and complete the administrative
process of assembling the final audit file on a timely basis before the date of the auditor’s report.
(d) The auditor shall not assemble the audit documentation in an audit file..
6. Audit evidence includes
(a) information contained in the accounting records underlying the financial statements
(b) both information contained in the accounting records underlying the financial statements and other
information.
(c) other information.
(d) information contained in the accounting records underlying the financial statements or other
information.
7. Most of the auditor’s work in forming the auditor’s opinion consists of :
(a) obtaining audit evidence.
(b) evaluating audit evidence.
(c) obtaining or evaluating audit evidence.
(d) obtaining and evaluating audit evidence.
8. Audit risk is a function of the
(a) risks of material misstatement and detection risk.
(b) audit risk and detection risk.
(c) control risk and detection risk.
(d) inherent risk and detection risk.
9. Risk of material misstatement may be defined as the risk
(a) that the financial statements are materially misstated after audit.
(b) that the financial statements are materially misstated during audit.
(c) that the financial statements are materially misstated prior to audit.
10. ____________refers to a difference between the amount, classification, presentation, or disclosure of a
reported financial statement item and the amount, classification, presentation, or disclosure that is
required for the item to be in accordance with the applicable financial reporting framework.
(a) Misstatement
(b) Error
(c) Fraud

(d) Any of the above
11. The auditor has no obligation to perform any audit procedures regarding the financial statements after
the date of the auditor’s report. However, when, after the date of the auditor’s report but before the date
the financial statements are issued, a fact becomes known to the auditor that, had it been known to the
auditor at the date of the auditor’s report, may have caused the auditor to amend the auditor’s report,
the auditor shall:
(a) Discuss the matter with management and, where appropriate, those charged with governance.
(b) Determine whether the financial statements need amendment.
(c) Inquire how management intends to address the matter in the financial statements.
12. A request that the confirming party respond directly to the auditor only if the confirming party disagrees
with the information provided in the request is-
(a) Positive confirmation request
(b) Non-response
(c) Exception
(d) Negative confirmation request
13. The auditor shall design and perform audit procedures in order to identify litigation and claims involving
the entity which may give rise to a risk of material misstatement, including:
(a) Inquiry of management and, where applicable, others within the entity, including in-house legal
counsel.
(b) Reviewing minutes of meetings of those charged with governance and correspondence between
the entity and its external legal counsel.
(c) Reviewing legal expense accounts.
14. If the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening balances,
the auditor shall express :
(a) a disclaimer opinion
(b) a qualified opinion
(c) a qualified opinion or a disclaimer of opinion, as appropriate, in accordance with SA 705.
(d) unmodified opinion
15. If, as a result of a misstatement resulting from fraud, the auditor encounters exceptional circumstances
that bring into question his ability to continue performing the audit, he shall-
(a) Withdraw from the engagement immediately.
(b) Report to Audit team regarding withdrawal.
(c) Determine the professional and legal responsibilities applicable in the circumstances.
(d) Ask the management for his withdrawal.
16. It is a type of value-weighted selection in which sample size, selection and evaluation results in a
conclusion in monetary amounts :
(a) Haphazard sampling
(b) Monetary Unit Sampling

(c) Stratified Sampling
(d) Interval sampling
(a) A firm whereof all the partners practising anywhere are qualified for appointment may be appointed
by its firm name to be auditor of a company.
(b) A firm whereof majority of partners practising anywhere are qualified for appointment may be
appointed by its firm name to be auditor of a company.
(c) A firm whereof all the partners practising in India are qualified for appointment may be appointed
by its firm name to be auditor of a company.
(d) A firm whereof majority of partners practising in India are qualified for appointment may be
appointed by its firm name to be auditor of a company.
18. As per Section 139(6), the first auditor of a company, other than a Government company, shall be
appointed
(a) by the Board of Directors within 30 days from the date of registration of the company.
(b) by the audit committee within 30 days from the date of registration of the company.
(c) by the Managing Director within 30 days from the date of registration of the company.
(d) by the shareholders within 30 days from the date of registration of the company.
19. Where a company is required to constitute an Audit Committee under section 177,
(a) all appointments, including the filling of a casual vacancy of an auditor under this section shall be
made after taking into account the recommendations of such committee.
(b) all appointments, excluding the filling of a casual vacancy of an auditor under this section shall be
made after taking into account the recommendations of such committee.
(c) appointment of first auditors shall be made after taking into account the recommendations of such
committee.
(d) appointment of subsequent auditors shall be made after taking into account the recommendations
of such committee.
20. which of the following is incorrect :
(a) In terms of the general principles of law, any person having the lawful possession of somebody
else’s property, on which he has worked, may retain the property for non-payment of his dues on
account of the work done on the property.
(b) Under section 128 of the Act, books of account of a company must be kept at the registered office.
These provisions ordinarily make it impracticable for the auditor to have possession of the books
and documents.
(c) The company provides reasonable facility to auditor for inspection of the books of ac count by
directors and others authorised to inspect under the Act.
(d) working papers not being his own property, auditor can exercise lien on working papers.
(20 x 1 = 20 Marks)
Questions (21-25) carry 2 Marks each
21. You are at the planning stage for one of your firm’s client XYZ Bank for the year ended 31 March 2018.
The bank is a commercial bank that provides a number of products and services to the general public
and other segments of the economy in the area of South Mumbai. You are assigned the audit of one of
the branches of XYZ Bank. The audit engagement team was called to have a detailed discussion on the

following matters. Which one of the following should not be included in the discussion for the audit of
banks?
(a) Discuss on the error of last year in the application of accounting policies of the bank.
(b) Discuss on the method of fraud if any perpetrated by the bank employee within particular balances
and/or disclosures
(c) Discuss with the team the appointment and remuneration to be received on this bank audit.
(d) Discuss the effect of the results of the risk assessment procedures on other aspects to decide the
nature, timing and extent of further audit procedures.
(a) When reporting on prior period financial statements in connection with the current period’s audit, if
the auditor’s opinion on such prior period financial statements differs from the opinion the auditor
previously expressed, the auditor need not disclose the substantive reasons for the different
opinion.
(b) When reporting on prior period financial statements in connection with the current period’s audit, if
previously expressed, the auditor shall disclose the substantive reasons for the different opinion in
an Other Matter paragraph in accordance with SA 706.
(c) When reporting on prior period financial statements in connection with the current period’s audit, if
an emphasis of Matter paragraph in accordance with SA 706.
(d) When reporting on prior period financial statements in connection with the current period’s audit, if
an Other Matter paragraph or emphasis of matter paragraph in accordance with SA 706.
23. Which of the following is incorrect :
(a) Communicating key audit matters in the auditor’s report is not a substitute for disclosures in the
financial statements that the applicable financial reporting framework requires management to
make, or that are otherwise necessary to achieve fair presentation;
(b) Communicating key audit matters in the auditor’s report is not a substitute for the auditor
expressing a modified opinion when required by the circumstances of a specific audit engagement
in accordance with SA 705 (Revised);
(c) Communicating key audit matters in the auditor’s report is not a substitute for reporting in
accordance with SA 570 when a material uncertainty exists relating to events or conditions that
may cast significant doubt on an entity’s ability to continue as a going concern;
(d) Communicating key audit matters in the auditor’s report is a substitute for the auditor expressing
a modified opinion when required by the circumstances of a specific audit engagement in
accordance with SA 705 (Revised);
24. One of your junior audit team members is confused with the term ‘material misstatement’. You explain
him that a material misstatement is untrue information in a financial statement that could affect the
financial decisions of one who relies on the statement. Which of the following would constitute material
misstatement?
(1) An error of Rs.5,000 in relation to assets of Rs.20 lakhs.
(2) A payroll fraud of Rs.100 in a company where profit before tax is Rs.11,000.
(3) Non-disclosure of a material uncertainty.
5

(4) Financial statements have been prepared on a going concern basis when the company is in the
process of being liquidated.
(a) 1 and 2
(b) 3 and 4
(c) 2 and 3
(d) 1 and 4
25. Springfield Hospital located in the rural area of Lonawala region is a government hospital run by the
local doctors who are appointed by the government. The hospital was registered on 1 October 2018.
Which of the following is correct in respect of the appointment of the first auditor for Springfield Hospital?
(a) The Board of Directors of the hospital have appointed the first auditor on 5th November 2018.
(b) The Comptroller Auditor-General of India appointed the first auditor on 15 th December 2018.
(c) Since the Comptroller Auditor-General of India did not appoint the first auditor, the Board of Director
appointed the first auditor on 15 th December 2018.
(d) Since the Comptroller Auditor-General of India did not appoint the first auditor, the Board of Director
appointed the first auditor on 10 t h November 2018. (5 x 2 = 10 Marks)
Division B- Descriptive Questions

Attempt any four questions from the Rest.
Total 70 Marks
1. Examine with reasons (in short) whether the following statements are correct or incorrect : (Attempt any
7 out of 8)
(i) The objective of audit is to obtain absolute assurance about whether the financial statements as a
whole are free from material misstatement.
(ii) Engagement partner refers to the partner or other person in the firm who is responsible for the
audit engagement.
(iii) There is no need to put the nature of engagement to writing.
(iv) Few members of the Board of Directors oppose the appointment of Mr. N, an employee of the
company, as an Internal Auditor, stating that Mr. N is not a chartered accountant and further he is
an employee of the company.
(v) PQR & Co., Chartered Accountants, resigned from the audit of a Government Company and filed
the resignation with the company and the registrar within 30 days. Comment, whether PQR & Co.
has complied with the provisions of the Companies Act, 2013.
(vi) The statutory auditor of ABC Ltd. is of the opinion that communicating key audit matters in the
auditor's report constitutes a substitute for disclosure in the financial statements.
(vii) Sample size is not a valid criterion to distinguish between statistical and non-statistical approaches.
(viii) The risk of not detecting a material misstatement resulting from fraud is higher than the risk of not
detecting one resulting from error. (7 x 2 = 14 Marks)
2. Discuss the following:
(a) The auditor shall comply with relevant ethical requirements, including those pertaining to
independence, relating to financial statement audit engagements. (3 Marks)

(b) Familiarity threats are self-evident, and occur when auditors form relationships with the client where
they end up being too sympathetic to the client’s interests. Explain. (4 Marks)
(c) M & Co. was appointed as auditor of IGI Ltd. As an auditor what are the factors that would be
considered in the development of overall audit plan? (4 Marks)
(d) The Auditor is fully satisfied with the audit of an entity in respect of its systems and procedures and
wants to issue a report without any hesitation. What type of opinion can be given and give
reasoning. (3 Marks)
3. (a) State the matters to be included in the auditor's report as per CARO, 2016, regarding:
(i) Private Placement of Preferential Issues. (2 Marks)
(ii) Utilisation of IPO and further public offer. (2 Marks)
(b) Briefly discuss the limitations of Internal Control. (4 Marks)
(c) What are the provisions prescribed under Companies Act, 2013 in respect of ceiling on number of
audits in a company to be accepted by an auditor? (3 Marks)
(d) While planning the audit of S Ltd. you want to apply sampling techniques. What are the risk factors
you should keep in mind? (3 Marks)
4. (a) During the audit of PQR Ltd. you as an auditor requested officers of the company to have access
to secretarial records and correspondence which they refused to provide. Comment. (4 Marks)
(b) Substantive analytical procedures are generally more applicable to large volumes of transactions
that tend to be predictable over time. Explain. (4 Marks)
(c) Write the circumstances that indicate the possibility of fraud due to problematic or unusual
relationship between the auditor and management. (6 Marks)
5. (a) Discuss with reference to SA-230, factors affecting form, contents and extent of audit
documentation. (4 Marks)
(b) State six important advantages of audit of accounts of a Partnership firm. (4 Marks)
(c) State assertions that are implied in the extract of financial statement given below:
(Rs.)
Plant & Machinery (at Cost) 4,00,000
Less: Depreciation:
Up to Previous year 1,40,000
For the year 26,000 1,66,000
2,34,000
(i) Indicate assertions in respect of transactions and events for the period relating to Fixed
Assets.
(ii) State specific assertions relating to the above extract of financial statement. (6 Marks)
6. (a) In today’s digital age when companies rely on more and more on IT systems and networks to
operate business, the amount of data and information that exists in these systems is enormous.
Explain stating uses of Data analytics. (4 Marks)
(b) The auditor should examine the efficacy of various internal controls over advances in case of Banks
to determine the nature, timing and extent of his substantive procedures. Explain what is included
in the internal controls over advances. (4 Marks)
OR

(c) The auditor’s report shall include a section with a heading “Responsibilities of Management for the
Financial Statements.” SA 200 explains the premise, relating to the responsibilities of management
and, where appropriate, those charged with governance, on which an audit in accordance with SAs
is conducted. Explain (4 Marks)
(d) Explain with examples the audit procedure to establish the existence of intangible fixed assets as
at the period- end. (3 Marks)
(e) Verification of liabilities is as important as that of assets, considering if any liability is omitted (or
understated) or overstated, the Balance Sheet would not show a true and fair view of the state of
affairs of the entity. Explain stating also criteria for a liability to be classified as current liability.
(3 Marks)

MOCK TEST PAPER - 2
PAPER – 6: AUDITING AND ASSURANCE
SUGGESTED ANSWERS / HINTS
Division A - Multiple Choice Questions
1. (a)
2. (a)
3. (d)
4. (b)
5. (a)
6. (b)
7. (d)
8. (a)
9. (c)
10. (a)
11. (d)
12. (d)
13. (d)
14. (c)
15. (c)
16. (b)
17. (d)
18. (a)
19. (a)
20. (d)
21. (c)
22. (b)
23. (d)
24. (b)
25. (c)
Division B - Descriptive Answers
1. (i) Incorrect: The objective of audit is to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement. In auditing, reasonable assurance can
be given which is high level assurance but not absolute assurance. The auditor is not expected to,
and cannot, reduce audit risk to zero and cannot therefore obtain absolute assurance that the
financial statements are free from material misstatement due to fraud or error. This is because
there are inherent limitations of an audit.
1

(ii) Correct. Engagement partner refers to the partner or other person in the firm who is responsible
for the audit engagement and its performance, and for the auditor’s report that is issued on behalf
of the firm, and who, where required, has the appropriate authority from a professional, legal or
regulatory body.
(iii) Incorrect: It is important, both for the auditor and client, that each party should be clear about the
nature of the engagement. It must be reduced to writing and should exactly specify the scope of
the work.
(iv) Incorrect: As per section 138, the internal auditor shall either be a chartered accountant or a cost
accountant (whether engaged in practice or not), or such other professional as may be decided by
the Board to conduct internal audit of the functions and activities of the companies. The internal
auditor may or may not be an employee of the company.
(v) Incorrect: As per section 140(2) the auditor who has resigned from the company shall file within
a period of 30 days from the date of resignation, a statement in the prescribed Form with the
company and the Registrar, and in case of the companies referred to in section 139(5) i.e.
Government company, the auditor shall also file such statement with the Comptroller and Auditor -
General of India, indicating the reasons and other facts as may be relevant with regard to his
resignation. In this case, the PQR & Co., was also required to file prescribed Form with C & AG of
India but it did not file the same. Therefore, it did not comply with the provisions of the Companies
Act, 2013.
(vi) Incorrect: Communicating key audit matters in the auditor’s report is not a substitute for
disclosures in the financial statements that the applicable Financial reporting framework requires
management to make, or that are otherwise necessary to achieve fair presentation.
(vii) Correct: The decision whether to use a statistical or non-statistical sampling approach is a matter
for the auditor’s judgment; however, sample size is not a valid criterion to distinguish between
statistical and non-statistical approaches.
Whatever may be the approach non-statistical or statistical sampling, the sample must be representative.
This means that it must be closely similar to the whole population although not necessarily exactly the
same. The sample must be large enough to provide statistically meaningful results.
(viii) Correct: The risk of not detecting a material misstatement resulting from fraud is higher than the
risk of not detecting one resulting from error. This is because fraud may involve sophisticated and
carefully organized schemes designed to conceal it, such as forgery, deliberate failure to record
transactions, or intentional misrepresentations being made to the auditor. Such attempts at
concealment may be even more difficult to detect when accompanied by collusion
2. (a) Ethical Requirements Relating to an Audit of Financial Statements: The auditor shall comply with
relevant ethical requirements, including those pertaining to independence, relating to financial
statement audit engagements. Relevant ethical requirements ordinarily comprise the Code of
Ethics for Professional Accountants (IESBA Code) related to an audit of financial statements.
The Code establishes the following as the fundamental principles of professional ethics relevant to
the auditor when conducting an audit of financial statements :
(a) Integrity;
(b) Objectivity;
(c) Professional competence and due care;
(d) Confidentiality; and
(e) Professional behavior.
(b) Familiarity threats are self-evident, and occur when auditors form relationships with the client
where they end up being too sympathetic to the client’s interests. This can occur in many ways:
2

(i) close relative of the audit team working in a senior position in the client company,
(ii) former partner of the audit firm being a director or senior employee of the client,
(iii) long association between specific auditors and their specific client counterparts, and
(iv) acceptance of significant gifts or hospitality from the client company, its directors or
employees.
(c) Development of an Overall Plan: The auditor should consider the following matters in developing
his overall plan for the expected scope and conduct of the audit-
➢ The terms of his engagement and any statutory responsibilities.
➢ The nature and timing of reports or other communication.
➢ The applicable legal or statutory requirements.
➢ The accounting policies adopted by the client and changes in those policies.
➢ The effect of new accounting or auditing pronouncem ents on the audit.
➢ The identification of significant audit areas.
➢ The setting of materiality levels for audit purposes.
➢ Conditions requiring special attention, such as the possibility of material error or fraud or the
involvement of parties in whom directors or persons who are substantial owners of the entity
are interested and with whom transactions are likely.
➢ The degree of reliance he expects to be able to place on accounting system and internal
control.
➢ Possible rotation of emphasis on specific audit areas.
➢ The nature and extent of audit evidence to be obtained.
➢ The work of internal auditors and the extent of their involvement, if any, in the audit.
➢ The involvement of other auditors in the audit of subsidiaries or branches of the client.
➢ The involvement of experts.
➢ The allocation of work to be undertaken between joint auditors and the procedures for its
control and review.
Establishing and coordinating staffing requirements.
(d) Unqualified Opinion:
1. An unqualified opinion should be expressed when the auditor concludes that the financial
statements give a true and fair view in accordance with the financial reporting framework used
for the preparation and presentation of the financial statements.
2. An unqualified opinion indicates, implicitly, that any changes in the accounting principles or in the
method of their application, and the effects thereof, have been properly determined and disclosed
in the financial statements.
3. An unqualified opinion also indicates that:
(i) the financial statements have been prepared using the generally accepted accounting
principles, which have been consistently applied;
(ii) the financial statements comply with relevant statutory requirements and regulations;
and
(iii) there is adequate disclosure of all material matters relevant to the proper presentation
of the financial information, subject to statutory requirements, where applicable.
3

3. (a) (i) The auditor is required to report as per clause xiv of paragraph 3 of CARO 2016, whether
the company has made any preferential allotment or private placement of shares or fully or
partly convertible debentures during the year under review and if so, as to whether the
requirement of section 42 of the Companies Act, 2013 have been complied with and the
amount raised have been used for the purposes for which the funds were raised. If not, provide
the details in respect of the amount involved and nature of non-compliance;
(ii) It is duty of the auditor to report as per clause ix of paragraph 3 of CARO 2016, whether
moneys raised by way of initial public offer or further public offer (including debt instruments) and
term loans were applied for the purposes for which those are raised. If not, the details together
with delays or default and subsequent rectification, if any, as may be applicable, be reported.
(b) Limitations of Internal Control:
(i) Internal control can provide only reasonable assurance: Internal control, no matter how
effective, can provide an entity with only reasonable assurance about achieving the entity’s
financial reporting objectives. The likelihood of their achievement is affected by inherent
limitations of internal control.
(ii) Human judgment in decision-making: Realities that human judgment in decision-making
can be faulty and that breakdowns in internal control can occur because of human error.
(iii) Lack of understanding the purpose: Equally, the operation of a control may not be effective,
such as where information produced for the purposes of internal control (for example, an
exception report) is not effectively used because the individual responsible for reviewing the
information does not understand its purpose or fails to take appropriate action.
(iv) Collusion among People: Additionally, controls can be circumvented by the collusion of two
or more people or inappropriate management override of internal control. For example,
management may enter into side agreements with customers that alter the terms and
conditions of the entity’s standard sales contracts, which may result in improper revenue
recognition. Also, edit checks in a software program that are designed to identify and report
transactions that exceed specified credit limits may be overridden or disabled.
(v) Judgements by Management: Further, in designing and implementing controls,
management may make judgments on the nature and extent of the controls it chooses to
implement, and the nature and extent of the risks it chooses to assume.
(vi) Limitations in case of Small Entities: Smaller entities often have fewer employees due to
which segregation of duties is not practicable. However, in a small owner-managed entity, the
owner-manager may be able to exercise more effective oversight than in a larger entity. This
oversight may compensate for the generally more limited opportunities for segregation of
duties.
On the other hand, the owner-manager may be more able to override controls because the
system of internal control is less structured. This is taken into account by the auditor when
identifying the risks of material misstatement due to fraud.
(c) Ceiling on number of Audits:
1. Section 141(3)(g) of the Companies Act, 2013 prescribes that a person shall not be eligible
for appointment as an auditor of a company namely – a person who is in full time employment
elsewhere or a person or a partner of a firm holding appointment as its auditor, if such person
or partner is at the date of such appointment or reappointment holding appointment as auditor
of more than twenty companies other than one person companies, dormant com panies, small
companies and private companies having paid-up share capital less than Rs. 100 crore.
2. In the case of a firm of auditors, it has been further provided that ‘specified number of
companies’ shall be construed as the number of companies spec ified for every partner of the
4

firm who is not in full time employment elsewhere. This limit of 20 company audits is per
person. In the case of an audit firm having 3 partners, the overall ceiling will be 3 × 20 = 60
company audits.
3. Sometimes, a chartered accountant is a partner in a number of auditing firms. In such a case,
all the firms in which he is partner or proprietor will be together entitled to 20 company audits
on his account. Subject to the overall ceiling of company audits, how they alloca te the 20
audits between themselves is their affairs.
(d) Risk Factors while applying Sampling Techniques: As per SA 530 “Audit Sampling”, sampling
risk is the risk that the auditor’s conclusion based on a sample may be different from the conclusion
if the entire population were subjected to the same audit procedure. Sampling risk can lead to two
types of erroneous conclusions-
(i) In the case of a test of controls, that controls are more effective than they actually are, or in
the case of tests of details, that a material misstatement does not exists when in fact it does.
The auditor is primarily concerned with this type of erroneous conclusion because it affects
audit effectiveness and is more likely to lead to an inappropriate audit opinion.
(ii) In the case of test of controls, the controls are less effective than they actually are, or in the
case of tests of details, that a material misstatements exists when in fact it does not. This type
of erroneous conclusion affects audit efficiency as it would usually lead to additional work to
establish that initial conclusions were incorrect.
4. (a) Right of Access to secretarial records and correspondence:
1. Section 143(1) of the Companies Act, 2013 grants powers to the auditor that every auditor
has a right of access, at all times, to the books of account and vouchers of the company kept
at Registered or Head Office, branches and subsidiaries in the case of a Holding Company
for conducting the audit.
2. Further, he is also entitled to require from the officers of the company such information and
explanations which he considers necessary for the proper performance of his duties as
Auditor. Therefore, he has a statutory right to inspect the secretarial records and
correspondence.
3. In order to verify actions of the company and to vouch and verify some of the transactions of
the company, it is necessary for the auditor to refer to the decisions of the shareholders and/or
the directors of the company. It is, therefore, essential for the auditor to refer to the secretarial
records and correspondence which also includes Minute book. In the absence of the same,
the auditor may not be able to vouch/verify certain transactions of the company.
4. The refusal to provide access to secretarial records and correspondence shall constitute
limitation of scope as far as the auditor’s duties are concerned.
5. The auditor may examine whether by performing alternative procedures, the auditor can
substantiate the assertions or else he shall have to either qualify the report or give a disclaimer
of opinion.
(b) Substantive Analytical Procedure: Substantive analytical procedures are generally more
applicable to large volumes of transactions that tend to be predictable over time. The application
of planned analytical procedures is based on the expectation that relationships among data exist
and continue in the absence of known conditions to the contrary. However, the suitability of a
particular analytical procedure will depend upon the auditor’s assessment of how effective it will be
in detecting a misstatement that, individually or when aggregated with other misstatements, may
cause the financial statements to be materially misstated.
In some cases, even an unsophisticated predictive model may be effective as an analytical
procedure. For example, where an entity has a known number of employees at fixed rates of pay
5

throughout the period, it may be possible for the auditor to use this data to estimate the total payroll
costs for the period with a high degree of accuracy, thereby providing audit evidence for a
significant item in the financial statements and reducing the need to perform tests of details on the
payroll. The use of widely recognised trade ratios (such as profit margins for different types of retail
entities) can often be used effectively in substantive analytical procedures to provide evidence to
support the reasonableness of recorded amounts.
(c) Problematic or unusual relationships between the auditor and management, including:
1. Denial of access to records, facilities, certain employees, customers, vendors, or others from
whom audit evidence might be sought.
2. Undue time pressures imposed by management to resolve complex or contentious issues.
3. Complaints by management about the conduct of the audit or management intim idation of
engagement team members, particularly in connection with the auditor’s critical assessment
of audit evidence or in the resolution of potential disagreements with management.
4. Unusual delays by the entity in providing requested information.
5. Unwillingness to facilitate auditor access to key electronic files for testing through the use of
computer-assisted audit techniques.
6. Denial of access to key IT operations staff and facilities, including security, operations, and
systems development personnel.
7. An unwillingness to add or revise disclosures in the financial statements to make them more
complete and understandable.
8. An unwillingness to address identified deficiencies in internal control on a timely basis.
9. Unwillingness by management to permit the auditor to meet privately with those charged with
governance
10. Accounting Policy that appears to be variance with industry norms
11. Frequent changes in accounting estimates that do not appear to result from changed
circumstances
12. Tolerance of variations in the entity’s code of conduct
5. (a) Form, Content and Extent of Audit Documentation: Working papers should record the audit
plan, nature, timing and extent of auditing procedures performed, and the conclusions drawn from
the evidence obtained.
The form, content and extent of working papers depend on factors such as:
 The size and complexity of the entity.
 The nature of the audit procedures to be performed.
 The identified risks of material misstatement.
 The significance of the audit evidence obtained.
 The nature and extent of exceptions identified.
 The need to document a conclusion or the basis for a conclusion not readily determinable
from the documentation of the work performed or audit evidence obtained.
 The audit methodology and tools used.
(b) Advantages of Audit of Accounts of a Partnership: On broad considerations, the advantages
of audit of accounts of a partnership could be stated as follows:
(1) Audited accounts provide a convenient and reliable means of settling accounts between the
partners and, thereby, the possibility of occurrence of a dispute among them is mitigated. On
6

this consideration, it is usually provided in and accepted by the partners, shall be binding
upon them, unless some manifest error is brought to light within a specified period subsequent
to the accounts having been signed.
(2) On the retirement or death of a partner, audited ac counts, which have been accepted by the
partners, constitute a reliable evidence for computing the amounts due to the retiring partner
or to the representative of the deceased partner in respect of his share of capital, profits and
goodwill.
(3) The accounts of a partnership, which have been audited, are generally accepted by the
Income Tax Department as the basis for computing the assessable income of the partners.
(4) Audited statement of accounts are relied upon by the banks when advancing loans, as well
as by prospective purchasers of the business, as evidence of the profitability of the concern
and its financial position.
(5) Audited statements of account can be helpful in the negotiations to admit a person as a
partner, especially when they are available for a number of past years.
(6) An audit is an effective safeguard against any undue advantage being taken by a working
partner or partners especially in the case of those partners who are not actively associated
with the working of the firm.
(c) (i) Assertions about transactions and events for the period relating to fixed assets :
(1) Occurrence—transactions and events relating to fixed assets have been recorded, have
occurred and pertain to the entity.
(2) Completeness—all transactions and events relating to fixed assets that should have
been recorded have been recorded.
(3) Accuracy—amounts and other data relating to recorded transactions and events have
been recorded appropriately.
(4) Cut-off—transactions and events have been recorded in the correct accounting period.
(5) Classification—transactions and events have been recorded in the proper accounts.
(ii) The specific assertions are as follows:
(1) the firm owns the plant and machinery;
(2) the historical cost of plant and machinery is Rs. 4 lacs;
(3) the plant and machinery physically exists;
(4) the asset is being utilised in the business of the company productively;
(5) total charge of depreciation on this asset is Rs. 1,66,000 to date on which Rs. 26,000
relates to the year in respect of which the accounts are drawn up; and
(6) the amount of depreciation has been calculated on recognised basis and the calculation
is correct
6. (a) In today’s digital age when companies rely on more and more on IT systems and networks
to operate business, the amount of data and information that exists in these systems is enormous.
A famous businessman recently said, “Data is the new Oil”.
The combination of processes, tools and techniques that are used to tap vast amounts of electronic
data to obtain meaningful information is called data analytics. While it is true that companies can
benefit immensely from the use of data analytics in terms of increased profitability, better customer
service, gaining competitive advantage, more efficient operations, etc., even auditors can make
use of similar tools and techniques in the audit process and obtain good results. The tools and

techniques that auditors use in applying the principles of data analytics are known as Computer
Assisted Auditing Techniques or CAATs in short.
Data analytics can be used in testing of electronic records and data residing in IT systems using
spreadsheets and specialised audit tools viz., IDEA and ACL to perform the following,
• check completeness of data and population that is used in either test of controls or
substantive audit tests
• selection of audit samples – random sampling, systematic sampling
• re-computation of balances – reconstruction of trial balance from transaction data
• reperformance of mathematical calculations – depreciation, bank interest calculation.
• analysis of journal entries as required by SA 240
• fraud investigation
• evaluating impact of control deficiencies
(b) Evaluation of Internal Controls over Advances: The auditor should examine the efficacy of
various internal controls over advances to determine the nature, timing and extent of his
substantive procedures. In general, the internal controls over advances should include, inter alia,
the following:
 The bank should make an advance only after satisfying itself as to the credit worthiness of
the borrower and after obtaining sanction from the appropriate authorities of the bank.
 All the necessary documents (e.g., agreements, demand promissory notes, letters of
hypothecation, etc.) should be executed by the parties before advances are made.
 The compliance with the terms of sanction and end use of funds should be ensured.
 Sufficient margin as specified in the sanction letter should be kept against securities taken so
as to cover for any decline in the value thereof. The availability of sufficient margin needs to
be ensured at regular intervals.
 If the securities taken are in the nature of shares, debentures, etc., the ownership of the same
should be transferred in the name of the bank and the effective control of such securities be
retained as a part of documentation.
 All securities requiring registration should be registered in the name of the bank or otherwise
accompanied by documents sufficient to give title to the bank.
 In the case of goods in the possession of the bank, contents of the packages should be test
checked at the time of receipt. The godowns should be frequently inspected by responsible
officers of the branch concerned, in addition to the inspectors of the bank.
 Drawing Power Register should be updated every month to record the value of securities
hypothecated. These entries should be checked by an officer.
 The accounts should be kept within both the drawing power and the sanctioned limit.
 All the accounts which exceed the sanctioned limit or drawing power or are otherwise irregular
should be brought to the notice of the controlling authority regularly.
 The operation of each advance account should be reviewed at least once a year, and at more
frequent intervals in the case of large advances.
(c) Responsibilities for the Financial Statements: The auditor’s report shall include a section with
a heading “Responsibilities of Management for the Financial Statements.”
SA 200 explains the premise, relating to the responsibilities of management and, where
appropriate, those charged with governance, on which an audit in accordance with SAs is
conducted. Management and, where appropriate, those charged with governance accept
8

responsibility for the preparation of the financial statements. Management also accepts
responsibility for such internal control as it determines is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due to fraud or error. The
description of management’s responsibilities in the auditor’s report includes reference to both
responsibilities as it helps to explain to users the premise on which an audit is conducted.
This section of the auditor’s report shall describe management’s responsibility for:
(a) Preparing the financial statements in accordance with the applicable financial reporting
framework, and for such internal control as management determines is necessary to enable
the preparation of financial statements that are free from material misstatement, whether due to
fraud or error;[because of the possible effects of fraud on other aspects of the audit, materiality
does not apply to management’s acknowledgement regarding its responsibility for the design,
implementation, and maintenance of internal control (or for establishing and maintaining
effective internal control over financial reporting) to prevent and detect fraud.] and
(b) Assessing the entity’s ability to continue as a going concern and whether the use of the going
concern basis of accounting is appropriate as well as disclosing, if applicable, matters relating to
going concern. The explanation of management’s responsibility for this assessment shall include
a description of when the use of the going concern basis of accounting is appropriate.
(d) Since an Intangible Asset is an identifiable non-monetary asset, without physical substance,
for establishing the existence of such assets, the auditor should verify whether such intangible
asset is in active use in the production or supply of goods or services, for rental to others, or for
administrative purposes.
Example- for verifying the existence of software, the auditor should verify whether such software
is in active use by the entity and for the purpose, the auditor should verify the sale of related
services/ goods during the period under audit, in which such software has been used.
Example- For verifying the existence of design/ drawings, the auditor should verify the production
data to establish if such products for which the design/ drawings were purchased, are being
produced and sold by the entity.
In case any intangible asset is not in active use, deletion should have been recorded in the books
of account post approvals by the entity’s management and amortization charge should have ceased
to be charged beyond the date of deletion.
(e) Liabilities in addition to borrowings (discussed above), include trade payables and other
current liabilities, deferred payment credits and provisions. Verification of liabilities is as important
as that of assets, considering if any liability is omitted (or understated) or overstated, the Balance
Sheet would not show a true and fair view of the state of affairs of the entity.
Further, a liability is classified as current if it satisfies any of the following criteria:
▪ It is expected to be settled in the entity’s normal operating cycle
▪ It is held primarily for the purpose of being traded
▪ It is due to be settled within twelve months after the reporting period
▪ The entity does not have an unconditional right to defer settlement of the liability for at least
twelve months after the reporting period. Terms of a liability that could, at the option of the
counterparty, result in its settlement by the issue of equity instruments does not affect its
classification.

INTERMEDIATE (New): GROUP – II
PAPER – 7: ENTERPRISE INFORMATION SYSTEMS AND STRATEGIC MANAGEMENT
SECTION – A: ENTERPRISE INFORMATION SYSTEMS
Time Allowed – 1½ Hours Maximum Marks – 50 Marks
Multiple Choice Questions

Question Nos. 1 to 5 carries 2 Marks each.
1. Auditor of a company finds that management policy of cash expenses limit of Rs. 5,000/- is not being
adhered to. There are many violations of the same during the year. Auditor of the company sha ll report
on same under which clause of Companies Act, 2013?
(a) 134(4)
(b) 143(3)
(c) 134(3)
(d) 143(4)
2. Bills of Materials (BoM) is an important feature for any ERP software. The su b-system where a BoM is
located is _________.
(a) Manufacturing
(b) Financials
(c) Projects
(d) Human Resource Management
3. Database is a collection of Data. Various database models are used. The database models having using
a primary key is ___________.
(a) OODBMS
(b) RDBMS
(c) Network Database Model
(d) Hierarchical Database Model
4. Driverless cars are the future of personal transportation technology. Many companies have been testing
these cars on roads across the world. Few fatalities have been caused by these driverless cars. The
culprits are not yet booked. This reflects which risk of AI as a technology being used in driverless cars.
(a) The police investigations are poor.
(b) AI is not human.
(c) The law is not being able to meet the requirements of technology.
(d) No one is responsible.

5. A company has purchased a luxury yacht in Monte Carlo from sale of property worth Rs.100/- crores.
The sale was executed in cash and money was taken out of India through dubious means. This
transaction is a money laundering act by the company. Purchase of luxury yach t is best classified
as__________.
(a) Application
(b) Placement
(c) Integration
(d) Layering (5 x 2 = 10 Marks)
Question Nos. 6 to 10 carries 1 Marks each.
6. Entity-Relationship (ER) Diagram, Data Flow Diagram, Flowcharts all use graphical symbols. All
symbols given are used in all three except one.
(a)
(b)
(c)
(d)
7. Pick the ODD one out.
(a) Accounting Information System
(b) Input
(c) Output
(d) Process
8. Pick the odd one out.
(a) Amazon Alexa
(b) Boss Speakers
(c) Apple Siri
(d) Google Talk
9. An element that has contributed to e-commerce success is payment gateways. One that does not fall in
the definition is _________.
(a) SBI Buddy
(b) HDFC Zapp
(c) Paytm
(d) Cash On Delivery
10. In Core banking Systems, a ____ server is a computer that offers a computer network service to allow
clients to make indirect network connections to other network services.
(a) ATM
(b) Network
(c) Proxy
(d) Internet Banking (5 x 1 = 5 Marks)

Attempt any three questions out of remaining four questions.
1. (a) Explain the term “Data Warehouse”. (3 Marks)
(b) Define the term “Money Laundering”. (2 Marks)
2. (a) You are an IS Auditor undertaking a job of auditing the Information Systems of an ABC Bank. While
performing Audit checks, you intend to ensure the placement of Input validation controls placed in
the Information System by detecting errors in the transaction data before the data is processed.
Determine the three levels of Input Validation Controls. (6 Marks)
(b) Discuss any four benefits of Enterprise Risk Management (ERM). (4 Marks)
3. (a) Analyze the statement “The potential benefits of Business Intelligence (BI) programs include
accelerating and improving decision making; optimizing internal business processes; increasing
operational efficiency; driving new revenues; and gaining competitive advantages over business
rivals.” Determine its justification. (6 Marks)
(b) Discuss the application areas of Virtualization. (4 Marks)
4. (a) You attended an IT workshop as a CBS. You are required to provide a basic idea to the participants
about Current & Savings Accounts (CASA) and primarily discuss the risks and controls that might be
relevant in CASA process. Advise about the relevant risks and their counter controls. (6 Marks)
(b) Discuss the characteristics of the Hybrid Cloud. (4 Marks)
5. (a) Draw a flowchart to input 5 subject marks of a student. Calculate its total, percentage and also
print the grade. Condition for grade are as follows:
Percentage Grade
>=80 A
<80 & >=60 B
<60 & >=50 C
<50 FAIL (6 Marks)
(b) Discuss the factors that an IS Auditor need to determine while accessing the records in an access
log of an organization. (4 Marks)

SECTION – B: STRATEGIC MANAGEMENT
Time Allowed – 1½ Hours Maximum Marks – 50
Question 1 and 2 are compulsory.
Attempt any three questions out of remaining four questions.
1. (i) Strategy helps in:
a. Unravelling complexity
b. Reduce uncertainty
c. Relate the goals with the resources.
d. All of Above.
(ii) Which of the following statement is not true:
a. Strategic environment is complex
b. Strategic environment is turbulent.
c. High cost of strategy makes them useless for charitable organization.
d. Public sector units should implement business strategy
(iii) Which of the following is not part of external analysis:
a. Customer segments.
b. Organizational constraints.
c. Entry barriers.
d. Competitors.
(iv) A core competence is all except?
a. Valuable
b. Rare
c. Impossible to imitate
d. Non-substitutable
(v) Mission
a. is an internally-focused definition of the organization's societal goals
b. is a statement of a firms unique purpose and scope of operations
c. does not limit the firm by specifying the industry in which the firm intends to compete
d. is developed by a firm before the firm develops its strategic intent.
(vi) Objectives should be:
(i) Concrete and specific.
(ii) Related to time frame.
(iii) Standards for performance appraisal.
Which of the above statements are true:
a. (i) & (ii).
b. (ii) & (iii).
c. (i) & (iii).
d. (i), (ii) and (iii).
4

(vii) Acquision of a company producing readymade garments by a company manufacturing yarn is .
a. Horizontal integration
b. Horizontal Diversification
c. Forward integration
d. Backward integration
(viii) Which of the following can be used in retrenchment strategy?
a. Reducing assets.
b. Operational improvement.
c. Cutting cost.
d. All of the above.
(ix) Conglomerate diversification can also be explained as:
a. Merger
b. Combination strategy
c. Related diversification
d. Unrelated diversification
(x) Michael Porter Generic strategies to gain competitive advantage include all except:
a. Cost leadership
b. Differentiation
c. Focus
d. Revenue generation
(xi) Decisions with regards to marketing mix are related to:
a. Growth Strategy
b. Business level strategy
c. Functional strategy
d. Corporate decisions
(xii) The purpose of logistics management is
a. Provide customer satisfaction
b. Create automation
c. Procure better quality raw material
d. Manage inward and outward movement of goods
(xiii) Who is a transformational leader?
a. Someone who is involved in organizational change.
b. A leader, who provides new ways of carrying out management.
c. A leader who inspires the workers to new levels by offering them a vision of a better future.
d. A leader who tries to transform their staff by giving them rewards for what they do.

(xiv) Which of the following is not a phase in Kurt Lewin’s Model of Change?
a. Changing
b. Deep freezing
c. Refreezing
d. Unfreezing
(xv) The following are part of Richard Rumelt’s criteria for strategy audit, except:
a. Adaptation
b. Consistency
c. Consonance
d. Feasibility (15 x 1 = 15 Marks)
2. ‘Speed’ is a leading retail chain, on account of its ability to operate its business at low costs. The retail
chain aims to further strengthen its top position in the retail industry. The Chief executive of the retail
chain is of the view that to achieve the goals they should focus on lowering the costs of procurement of
products. Highlight and explain the core competence of the retail chain. (5 Marks)
3. (a) Enumerate the task to be performed as a strategic manager of a company. (5 Marks)
(b) A company manufactures computers that are of low in production cost, competitive price, and
quality to their competitor’s product. Profits and market share are declining day by day. Shree, a
senior executive realizes that drastic strategies have to be created for the survival of a company.
After SWOT analysis by assessing the strengths and weaknesses, they come up with the
conclusion that they cannot compete in the computers with the competitors. The management
directs Shree to act quick and develop a suitable strategic plan.
Discuss the strategy which can be opted by Shree. (5 Marks)
4. (a) A owner of medium size factory in Aligarh manufacturing hardware consisting handles, hinges,
tower bolts and so on has a staff of about 200 in his organisation. One of the leading brand of
Hardware seller in India is rebranding and selling the material from his factory. The owner believes
in close supervision and takes all major and minor decisions in the organisation.
Do you think the owner should take all decisions himself? What kind of decisions should be taken
by person at the level of owner of a medium size factory. (5 Marks)
(b) How Ansoff’s Product Market Growth Matrix is a useful tool for business organizations? (5 Marks)
5. (a) Gennex is a company that designs, manufactures and sells computer hardware and software.
Gennex is well known for its innovative products that has helped the company to have advantage
over its competitors. It also spends on research and development and concerned with innovative
softwares. Often the unique features of their product helps them to gain competitive advantage.
Gennex using the strategy is consistently gaining its position in the industry over its competitors.
Identify and explain the strategy which Gennex has opted to gain the competitive advantage.
(5 Marks)
(b) Rohit Bhargava is the Managing Director of Smooth and Simple Pvt Ltd. The company established
in 2011, with 35 employees grew very fast to become an organisation with 335 employees in the
year 2016. With the increase in size Rohit started facing difficulty in managing things. Many a times
he finds that personnel at the functional level are not in sync with the strategies of the top. He felt
that strategies need to be segregated into viable plans and policies that are compatible with each
other and communicated down the line.
Why does Rohit need to segregate the strategies into functional plans? Discuss. (5 Marks)
6

6. (a) Discuss the concept of Multi Divisional Structure
(b) HQ is a service company? Two years back the company hired a reputed management consultant
to formulate its strategy. The consultant recommended an aggressive expansion plan. Now in an
internal review meeting the company finds that many of the suggestions are not even fully
considered.
Which part of strategic management process is missing in HQ? (5 Marks)

MOCK TEST PAPER - 2
PAPER – 7: ENTERPRISE INFORMATION SYSTEMS AND STRATEGIC MANAGEMENT
SECTION – A: ENTERPRISE INFORMATION SYSTEMS
ANSWERS
MULTIPLE CHOICE QUESTIONS
1. (b) 143(3)
2. (a) Manufacturing
3. (b) RDBMS
4. (c) The law is not being able to meet the requirements of technology.
5. (c) Integration
6. (b)
7. (a) Accounting Information System
8. (b) Boss Speakers
9. (d) Cash on Delivery
10. (c) Proxy
DESCRIPTIVE QUESTIONS
1. (a) Data Warehouse: Usually this is a module that can be accessed by an organizations customers,
suppliers and employees. Data warehouse is a repository of an organization’s electronically stored data.
Data warehouses are designed to facilitate reporting and analysis. This classic definition of the data
warehouse focuses on data storage. However, the means to retrieve and analyze data, to extract,
transform and load data, and to manage the data dictionary are also considered essential components
of a data warehousing system. An expanded definition for data warehousing includes business
intelligence tools, tools to extract, transform, and load data into the repository, and tools to manage and
retrieve metadata. In contrast to data warehouses are operational systems which perform day-to-day
transaction processing. The process of transforming data into information and making it available to the
user in a timely enough manner to make a difference is known as data warehousing.
(b) Money Laundering is the process by which the proceeds of the crime and the true ownership of
those proceeds are concealed or made opaque so that the proceeds appear to come from a
legitimate source. The objective in money laundering is to conceal the existence, illegal source, or
illegal application of income to make it appear legitimate. Money laundering is commonly used by
criminals to make “dirty” money appear “clean” or the profits of criminal activities are made to
appear legitimate.
2. (a) Validation Controls: Input validation controls are intended to detect errors in the transaction data
before the data are processed. There are three levels of input validation controls:
• Field Interrogation: It involves programmed procedures that examine the characters of the
data in the field. The following are some common types of field interrogation. Various field
checks used to ensure data integrity have been described below:
o Limit Check: This is a basic test for data processing accuracy and may be applied to
both the input and output data. The field is checked by the program against predefined
limits to ensure that no input/output error has occurred or at least no input error
exceeding certain pre-established limits has occurred.
o Picture Checks: These checks against entry into processing of incorrect/invalid
characters.
1

o Valid Code Checks: Checks are made against predetermined transactions codes, tables
or order data to ensure that input data are valid. The predetermined codes or tables may
either be embedded in the programs or stored in (direct access) files.
o Check Digit: One method for detecting data coding errors is a check digit. A check digit is
a control digit (or digits) added to the code when it is originally assigned that allows the
integrity of the code to be established during subsequent processing. The check digit can
be located anywhere in the code, as a prefix, a suffix, or embedded someplace in the
middle.
o Arithmetic Checks: Simple Arithmetic is performed in different ways to validate the result
of other computations of the values of selected data fields.
o Cross Checks: may be employed to verify fields appearing in different files to see that the
result tally.
• Record Interrogation: These are discussed as follows:
o Reasonableness Check: Whether the value specified in a field is reasonable for that
particular field?
o Valid Sign: The contents of one field may determine which sign is valid for a numeric field.
o Sequence Check: If physical records follow a required order matching with logical records.
• File Interrogation: These are discussed as follows:
o Version Usage: Proper version of a file should be used for processing the data correctly.
In this regard, it should be ensured that only the most current file be processed.
o Internal and External Labeling: Labeling of storage media is important to ensure that the
proper files are loaded for process. Where there is a manual process for loading files,
external labeling is important to ensure that the correct file is being processed. Where
there is an automated tape loader system, internal labeling is more important.
o Data File Security: Unauthorized access to data file should be prevented, to ensure its
confidentiality, integrity and availability. These controls ensure that the correct file is used
for processing.
o Before and after Image and Logging: The application may provide for reporting of before
and after images of transactions. These images combined with the logging of events
enable re-constructing the data file back to its last state of integrity, after which the
application can ensure that the incremental transactions/events are rolled back or forward.
o File Updating and Maintenance Authorization: Sufficient controls should exist for file
updating and maintenance to ensure that stored data are protected. The access restrictions
may either be part of the application program or of the overall system access restrictions.
o Parity Check: When programs or data are transmitted, additional controls are needed.
Transmission errors are controlled primarily by detecting errors or correcting codes.
(b) ERM provides enhanced capability to do the following:
 Align risk appetite and strategy: Risk appetite is the degree of risk, on a broad-based level
that an enterprise (any type of entity) is willing to accept in pursuit of its goals. Management
considers the entity’s risk appetite first in evaluating strategic alternatives, then in setting
objectives aligned with the selected strategy and in developing mechanisms to manage the
related risks.  
 Link growth, risk and return: Entities accept risk as part of value creation and preservation,
and they expect return commensurate with the risk. ERM provides an enhanced ability to
identify and assess risks, and establish acceptable levels of risk relative to growth and return
objectives.

 Enhance risk response decisions: ERM provides the rigor to identify and select among
alternative risk responses – risk avoidance, reduction, sharing and acceptance. ERM provides
methodologies and techniques for making these decisions.
 Minimize operational surprises and losses: Entities have enhanced capability to identify
potential events, assess risk and establish responses, thereby reducing the occurrence of
surprises and related costs or losses.
 Identify and manage cross-enterprise risks: Every entity faces a myriad of risks affecting
different parts of the enterprise. Management needs to not only manage individual risks, but
also understand interrelated impacts.  
 Provide integrated responses to multiple risks: Business processes carry many inherent
risks, and ERM enables integrated solutions for managing the risks.  
 Seize opportunities: Management considers potential events, rather than just risks, and by
considering a full range of events, management gains an understanding of how certain events
represent opportunities.  
 Rationalize capital: More robust information on an entity’s total risk allows management to
more effectively assess overall capital needs and improve capital allocation.
3. (a) Business Intelligence (BI) is a technology-driven process for analysing data and presenting
actionable information to help corporate executives, business managers and other end users make
more informed business decisions.
• BI encompasses a wide variety of tools, that enable organizations to collect data from internal
systems and external sources, prepare it for analysis, develop and run queries against the
data, and create reports, dashboards and data visualizations to make the analytical results
available to corporate decision makers as well as operational workers.
• BI systems can also help companies identify market trends and spot business problems that
need to be addressed.
• Business Intelligence uses data from different sources and helps to finds answers to various
questions as shown on right hand side of above image.
• BI data can include historical information, as well as new data gathered from source systems
as it is generated, enabling BI analysis to support both strategic and tactical decision -making
processes.
• Initially, BI tools were primarily used by data analysts and other IT professionals who ran
analyses and produced reports with query results for business users. Increasingly, however,
business executives and workers are using BI software themselves, thanks partl y to the
development of self-service BI and data discovery tools.
• Business Intelligence combines a broad set of data analysis applications, including ad hoc
analysis and querying, enterprise reporting, Online Analytical Processing (OLAP), mobile BI,
real-time BI, operational BI, cloud and software as a service BI, open source BI, collaborative
BI and location intelligence.
• BI technology also includes data visualization software for designing charts and other info -
graphics, as well as tools for building BI dashboards and performance scorecards that display
visualized data on business metrics and key performance indicators in an easy -to-grasp way.
• BI applications can be bought separately from different vendors or as part of a unified BI
platform from a single vendor.
• BI programs can also incorporate forms of advanced analytics, such as data mining, predictive
analytics, text mining, statistical analysis and big data analytics. In many cases, though,
advanced analytics projects are conducted and managed by separate teams of data
scientists, statisticians, predictive modelers and other skilled analytics professionals, while BI
teams oversee more straightforward querying and analysis of business data.
3

• Business Intelligence data in terms of unstructured data, log files, sensor data and other types
of big data are stored in a data warehouse or smaller data marts that hold subsets of a
company’s information. Before it’s used in BI applications, raw data from different source
systems must be integrated, consolidated and cleansed using data integration and data
quality tools to ensure that users are analysing accurate and consistent information.
(b) Application Areas of Virtualization are as follows:
 Server Consolidation: Virtual machines are used to consolidate many physical servers into
fewer servers, which in turn host virtual machines. Each physical server is reflected as a
virtual machine “guest” residing on a virtual machine host system. This is also known as
“Physical-to-Virtual” or ‘P2V’ transformation.
 Disaster Recovery: Virtual machines can be used as “hot standby” environments for physical
production servers. This changes the classical “backup-and-restore” philosophy, by providing
backup images that can “boot” into live virtual machines, capable of taking over workload for
a production server experiencing an outage.
 Testing and Training: Virtualization can give root access to a virtual machine. This can be
very useful such as in kernel development and operating system courses.
 Portable Applications: Portable applications are needed when running an application from
a removable drive, without installing it on the system’s main disk drive. Virtualization can be
used to encapsulate the application with a redirection layer that stores temporary files,
windows registry entries and other state information in the application’s installation directory
and not within the system’s permanent file system.
 Portable Workspaces: Recent technologies have used virtualization to create portable
workspaces on devices like iPods and USB memory sticks.
4. (a) Risks and Controls around the CASA Process of Current and Savings Account (CASA) Process
are as follows:
Risk Key Controls
Credit Line setup is unauthorized The credit committee checks that the Financial Ratios,
the Net-worth, the Risk factors and its corresponding
and not in line with the banks policy.
mitigating factors, the Credit Line offered and the
Credit amount etc. is in line with Credit Risk Policy and
that the Client can be given the Credit Line.
Credit Line setup in CBS is Access rights to authorize the credit limit in case of
unauthorized and not in line with the account setup system should be restricted to
banks policy. authorized personnel.
Customer Master defined in CBS is Access rights to authorize the customer master in CBS
not in accordance with the Pre- should be restricted to authorized personnel.
Disbursement Certificate.
Inaccurate interest / charge being Interest on fund based facilities are automatically
calculated in CBS. calculated in the CBS as per the defined rules.
Unauthorized personnel approving Segregation of Duties to be maintained between the
the CASAS transaction in CBS. initiator and authorizer of the transaction for processing
transaction in CBS.
Inaccurate accounting entries Accounting entries are generated by CBS basis the
generated in CBS. facilities requested by the customer and basis defined
configurations for those facilities in CBS.
(b) The characteristics of Hybrid Cloud are as follows:
 Scalable: The hybrid cloud has the property of public cloud with a private cloud environment
and as the public cloud is scalable; the hybrid cloud with the help of its public counterpart is
also scalable.
4

 Partially Secure: The private cloud is considered as secured and public cloud has high risk of
security breach. The hybrid cloud thus cannot be fully termed as secure but as partially secure.
 Stringent SLAs: Overall the SLAs are more stringent than the private cloud and might be as
per the public cloud service providers.
 Complex Cloud Management: Cloud management is complex as it involves more than one
type of deployment models and the number of users is high.
5. (a) The required flowchart is as below:
Start
Input A,B,C,D,E
Sum = 0, Per = 0
Sum = A+B+C+D+E
Per = Sum/5
Yes
If Per ≥ 80?
Print Grade “A”
No
Yes
If Per ≥ 60? Print Grade “B”
No
If Per ≥ 50? Yes

Print Grade “C”
No
Print “Fail”
Stop
A,B,C,D,E: Denote the five subjects

Sum: Sum of marks of all the subjects
Per: Percentage

(b) The IS auditor needs to determine what events are recorded in access logs. The IS auditor needs
to understand the capabilities of the system being audited and determine if the right events are
being logged, or if logging is suppressed on events that should be logged.
 Centralized access logs: The IS auditor should determine if the organization’s access logs
are aggregated or if they are stored on individual systems.
 Access log protection: The auditor needs to determine if access logs can be altered,
destroyed, or attacked to cause the system to stop logging events. For especially high -value
and high-sensitivity environments, the IS auditor needs to determine if logs should be written
to digital media that is unalterable, such as optical WORM (write once read many) media.
 Access log review: The IS auditor needs to determine if there are policies, processes, or
procedures regarding access log review. The auditor should determine if access log reviews
take place, who performs them, how issues requiring attention are identified, and what actions
are taken when necessary.
 Access log retention: The IS auditor should determine how long access logs are retained
by the organization and if they are back up.

SECTION – B: STRATEGIC MANAGEMENT
1.
(i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x)
d c b c a d c d d d
(xi) (xii) (xiii) (xiv) (xv)
c d c c a
2. A core competence is a unique strength of an organization which may not be shared by others. Core
competencies are those capabilities that are critical to a business achieving competitive advantage. In
order to qualify as a core competence, the competency should differentiate the business from any other
similar businesses. A core competency for a firm is whatever it does is highly beneficial to the
organisation. ‘Speed’ is the leader on account of its ability to keep costs low. The cost advantage that
‘Value for Money’ has created for itself has allowed the retailer to price goods lower than competitors.
The core competency in this case is derived from the company’s ability to generate large sales volume,
allowing the company to remain profitable with low profit margin.
3. (a) The primary tasks of the strategic manager is conceptualizing, designing and executing company
strategies.
For this purpose, his tasks will include:
• Defining the mission and goals of the organization.
• Determining what businesses it should be in.
• Allocating resources among the different businesses.
• Formulating strategies.
• Implementing strategies.
• Providing leadership for the organization.
(b) Shree can opt for turnaround strategy which is a highly-targeted effort to return the company to
profitability and increase positive cash flows to a sufficient level. Organizations those have faced
a significant crisis that has negatively affected operations require turnaround strategy. Once
turnaround is successful the organization may turn to focus on growth.
Conditions for turnaround strategies
When firms are losing their grips over market, profits due to several internal and external factors,
and if they have to survive under the competitive environment they have to identify danger signals
as early as possible and undertake rectification steps immediately. These conditions may be, inter
alia cash flow problems, lower profit margins, high employee turnover and decline in market share,
capacity underutilization, low morale of employees, recessionary conditions, mismanagement, raw
material supply problems and so on.
Action plan for turnaround strategy
• Stage One – Assessment of current problems
• Stage Two – Analyze the situation and develop a strategic plan
• Stage Three – Implementing an emergency action plan
• Stage Four – Restructuring the business
• Stage Five – Returning to normal

4. (a) Decision making is a managerial process of selecting the best course of action out of several
alternative courses for the purpose of accomplishment of the organizational goals. Decisions may
be operational, i.e., which relate to general day-to-day operations. They may also be strategic in
nature.
A owner manager at the top level should concentrate on strategic decisions. These are higher level
decisions having organisation wide implications. The major dimensions of strategic decisions are
as follows:
 Strategic decisions require top-management involvement as they involve thinking in totality of
the organization.
 Strategic decisions involve significant commitment of organisational resources.
 Strategic decisions necessitate consideration of factors in the firm’s external environment.
 Strategic decisions are likely to have a significant impact on the long-term prosperity of the firm.
 Strategic decisions are future oriented.
 Strategic decisions usually have major multifunctional or multi-business consequences.
(b) The Ansoff’s product market growth matrix (proposed by Igor Ansoff) is a useful tool that helps
businesses decide their product and market growth strategy. With the use of this matrix a business
can get a fair idea about how its growth depends upon it markets in new or existing products in
both new and existing markets.
Companies should always be looking to the future. Businesses that use the Ansoff matrix can
determine the best strategy. The matrix can help them to decide how to do this by demonstrating
their options clearly, breaking them down into four strategies, viz., Market Penetration, Market
Development, Product Development, Diversification. Determining which of these is best for their
business will depend on a number of variables including available resources, infrastructure, market
position, location and budget.
5. (a) According to Porter, strategies allow organizations to gain competitive advantage from three
different bases: cost leadership, differentiation, and focus. Porter called these base generic
strategies.
Gennex has opted differentiation strategy. Its products are designed and produced to give the
customer value and quality. They are unique and serve specific customer needs that are not met
by other companies in the industry. Highly differentiated and unique hardware and software
enables Gennex to charge premium prices for its products hence making higher profits and
maintain its competitive position in the market.
Differentiation strategy is aimed at broad mass market and involves the creation of a product or
service that is perceived by the customers as unique. The uniqueness can be associated with
product design, brand image, features, technology, dealer network or customer service.
(b) Rohit Bhargava needs to break higher level strategies into functional strategies for implementation.
These functional strategies, in form of Marketing, Finance, Human Resource, Production,
Research and Development help in achieving the organisational objective. The reasons why
functional strategies are needed can be enumerated as follows:
• Functional strategies lay down clearly what is to be done at the functional level. They provide
a sense of direction to the functional staff.
• They are aimed at facilitating the implementation of corporate strategies and the business
strategies formulation at the business level.
• They act as basis for controlling activities in the different functional areas of business.

• They help in bringing harmony and coordination as they are formulated to achieve major
strategies.
Similar situations occurring in different functional areas are handled in a consistent manner by the
functional managers.
6. (a) Multidivisional (M-form) structure is composed of operating divisions where each division
represents a separate business to which the top corporate officer delegates responsibility for day -
to-day operations and business unit strategy to division managers. By such delegation, the
corporate office is responsible for formulating and implementing overall corporate strategy and
manages divisions through strategic and financial controls.
Multidivisional or M-form structure was developed in the 1920s, in response to coordination- and
control-related problems in large firms. Functional departments often had difficulty dealing with
distinct product lines and markets, especially in coordinating conflicting priorities among the
products.
Costs were not allocated to individual products, so it was not possible to assess an individual
product’s profit contribution. Loss of control meant that optimal allocation of firm resources between
products was difficult (if not impossible). Top managers became over-involved in solving short-run
problems (such as coordination, communications, conflict resolution) and neglected long -term
strategic issues. Multidivisional structure calls for:
 Creating separate divisions, each representing a distinct business
 Each division would house its functional hierarchy;
 Division managers would be given responsibility for managing day-to-day operations;
 A small corporate office that would determine the long-term strategic direction of the firm and
exercise overall financial control over the semi-autonomous divisions.
(b) Strategy implementation is missing in HQ. It is concerned with the managerial exercise of putting
a chosen strategy into action. It deals with the managerial exercise of supervising the ongoing
pursuit of strategy, making it work, improving the competence with which it is executed and showing
measurable progress in achieving the targeted results.
Strategic implementation is concerned with translating a strategic decision into action, which
presupposes that the decision itself (i.e., the strategic choice) was made with some thought being
given to feasibility and acceptability. The allocation of resources to new courses of action will need
to be undertaken, and there may be a need for adapting the organization’s structure to handle new
activities as well as training personnel and devising appropriate systems.
It is crucial to realize the difference between the formulation and implementation because they both
require very different skills. Also, a company will be successful only when the strategy formulation
is sound and implementation is excellent.

MOCK TEST PAPER – II
PAPER – 8: FINANCIAL MANAGEMENT& ECONOMICS FOR FINANCE
PAPER 8A : FINANICAL MANAGEMENT
Answers are to be given only in English except in the case of the candidates who have opted for Hindi medium.
If a candidate has not opted for Hindi medium his/ her answers in Hindi will not be valued .
Attempt any four questions from the remaining five questions.
Working notes should form part of the answer.
Time Allowed – 3 Hours (Total time for 8A and 8B) Maximum Marks – 60
1. Answer the following:

(a) The proportion and required return of debt and equity was recorded for a company with its
increased financial leverage as below:
Debt (%) Required return Equity Required Return (Ke) Weighted Average Cost of
(Kd ) (%) (%) (%) Capital (WACC) (K o )(%)
0 5 100 15 15
20 6 80 16 ?
40 7 60 18 ?
60 10 40 23 ?
80 15 20 35 ?
You are required to complete the table and IDENTIFY which capital structure is most beneficial for
this company. (Based on traditional theory, i.e., capital structure is relevant).
(b) Annova Ltd is considering raising of funds of about Rs.250 lakhs by any of two alternative methods,
viz., 14% institutional term loan and 13% non-convertible debentures. The term loan option would
attract no major incidental cost and can be ignored. The debentures would have to be issued at a
discount of 2.5% and would involve cost of issue of 2% on face value.
ADVISE the company as to the better option based on the effective cost of capital in each case.
Assume a tax rate of 50%.
(c) Probabilities for net cash flows for 3 years of a project of Ganesh Ltd are as follows:
Year 1 Year 2 Year 3
Cash Flow Probability Cash Flow Probability Cash Flow Probability
(Rs.) (Rs.) (Rs.)
2,000 0.1 2,000 0.2 2,000 0.3
4,000 0.2 4,000 0.3 4,000 0.4
6,000 0.3 6,000 0.4 6,000 0.2
8,000 0.4 8,000 0.1 8,000 0.1
CALCULATE the expected net cash flows and the present value of the expected cash flow, using
10 per cent discount rate. Initial Investment is Rs. 10,000

(d) With the help of the following information ANALYSE and complete the Balance Sheet of Anup Ltd.:
Equity share capital Rs. 1,00,000
The relevant ratios of the company are as follows:
Current debt to total debt 0.40
Total debt to Equity share capital 0.60
Fixed assets to Equity share capital 0.60
Total assets turnover 2 Times
Inventory turnover 8 Times
(4 × 5 = 20 Marks)
2. (a) The capital structure of Anshu Ltd. as at 31.3.2019 consisted of ordinary share capital of
Rs. 5,00,000 (face value Rs. 100 each) and 10% debentures of Rs. 5,00,000 (Rs. 100 each). In
the year ended with March 2019, sales decreased from 60,000 units to 50,000 units. During this
year and in the previous year, the selling price was Rs. 12 per unit; variable cost stood at Rs. 8 per
unit and fixed expenses were at Rs. 1,00,000 p.a. The income tax rate was 30%.
You are required to CALCULATE the following:
(i) The percentage of decrease in earnings per share.
(ii) The degree of operating leverage at 60,000 units and 50,000 units.
(iii) The degree of financial leverage at 60,000 units and 50,000 units. (6 Marks)
(b) EXPLAIN the limitations of Leasing? (4 Marks)
3. (a) Navya Ltd has annual credit sales of Rs. 45 lakhs. Credit terms are 30 days, but its management
of receivables has been poor and the average collection period is 50 days, Bad debt is 0.4 per cent
of sales. A factor has offered to take over the task of debt administration and credit checking, at
an annual fee of 1 per cent of credit sales. Navya Ltd. estimates that it would save Rs. 35,000 per
year in administration costs as a result. Due to the efficiency of the factor, the average collection
period would reduce to 30 days and bad debts would be zero. The factor would advance 80 per
cent of invoiced debts at an annual interest rate of 11 per cent. Navya Ltd. is currently financing
receivables from an overdraft costing 10 per cent per year.
If occurrence of credit sales is throughout the year, COMPUTE whether the factor’s services should
be accepted or rejected. Assume 365 days in a year. (6 Marks)
(b) EXPLAIN the principles of “Trading on equity”. (4 Marks)
4. (a) Prem Ltd has a maximum of Rs. 8,00,000 available to invest in new projects. Three possibilities
have emerged and the business finance manager has calculated Net present Value (NPVs) for
each of the projects as follows :
Investment Initial cash outlay NPV
Rs. Rs.
Alfa (α) 5,40,000 1,00,000
Beta(β) 6,00,000 1,50,000
Gama (γ) 2,60,000 58,000
DETERMINE which investment/combination of investments should the company invest in, if we
assume that the projects can be divided? (6 Marks)

(b) Invest Corporation Ltd. adjusts risk through discount rates by adding various risk premiums to the
risk free rate. Depending on the resultant rate, the proposed project is judged to be a low, medium
or high risk project.
Risk level Risk free rate Risk Premium
(%) (%)
Low 8 4
Medium 8 7
High 8 10
DEMONSTRATE the acceptability of the project on the basis of Risk Adjusted rate. (4 Marks)
5. The following information is supplied to you:
Rs.
Total Earnings 2,00,000
No. of equity shares (of Rs. 100 each) 20,000
Dividend paid 1,50,000
Price/ Earnings ratio 12.5
Applying Walter’s Model
(i) DETERMINE whether the company is following an optimal dividend policy.
(ii) IDENTIFY, what should be the P/E ratio at which the dividend policy will have no effect on the
value of the share.
(iii) Will your decision change, if the P/E ratio is 8 instead of 12.5? ANALYSE. (10 Marks)
6. (a) DESCRIBE Bridge Finance.
(b) STATE Virtual Banking? DISCUSS its advantages.
(c) EXPLAIN Concentration Banking (4 + 4 + 2 = 10 Marks)

PAPER – 8B: ECONOMICS FOR FINANCE
Time Allowed – 1:15 Hours Maximum Marks - 40

Answers are to be given only in English except in the case of the candidates who have opted for Hindi medium. If
a candidate has not opted for Hindi medium his/ her answers in Hindi will not be valued.
Question 7 is compulsory question.
Attempt any three from the remaining four questions
In case, any candidate answers extra questions(s)/sub-question(s)/sub-question(s) over and above the
required number, then only the requisite number of questions first answered will be the evaluated the rest
answer shall be ignored
7. (a) Suppose in an economy:
Consumption Function (C) = 100 + 0.9 Yd, where Yd = Y-T
Autonomous Investment (I) = Rs. 100 crores
Government Expenditure G = Rs. 120 crores
Taxes (T) = Rs.50 crores
Exports (X) = Rs.200 crores
Import Function (M) = 100 + 0.15Y
Where Y and Yd National Income and Personal Disposable Income respectively. All the figures are
in Rupees. Find the Equilibrium level of GDP? (3 Marks)
(b) Define permanent income and state its relationship to demand for real money balances?
(3 Marks)
(c) Explain why government imposes price ceilings? (2 Marks)
(d) What is meant by trade distortion? (2 Marks)
8. (a) (i) Explain how decline in interest rates influence economic activity by changing the incentives
for households and businesses to save or invest? (3 Marks)
(ii) Define Information Failure (3 Marks)
(b) (i) What is meant by nominal GDP-growth? (2 Marks)
(ii) Define optimal output from the point of view of social welfare? (2 Marks)
9. (a) (i) Explain the effects of monetary policy through balance sheet channel (3 Marks)
(ii) What is the major determinant of the economic functions of a government? (2 Marks)
(b) Calculate (a) GDPMP and (b) NNPFC from the following data: (5 Marks)
Particulars (Rs) In Crore
(i) Net indirect tax 208
(ii) Consumption of fixed capital 42
(iii) Net factor income from abroad -40
(iv) Rent 311
(v) Profits 892

(vi) Interest 81
(vii) Royalty 6
(viii) Wages and salary 489
(ix) Employer's contribution to Social Security Scheme 50
10. (a) (i) How do foreign direct investments enhance human capital in recipient countries? (3 Marks)
(ii) Distinguish between domestic subsidy and export subsidy? (2 Marks)
(b) (i) What do you understand by the term ‘final good”? (2 Marks)
(ii) Explain the different types of Externalities? How Externalities lead to welfare loss of markets?
(3 Marks)
11. (a) (i) What is the rationale for government intervention in allocation of resources? (3 Marks)
(ii) Distinguish between ‘non tariff measures’ and ‘non tariff barriers’ (3 Marks)
(b) (i) What do you understand by the term ‘cross rate’? (2 Marks)
(ii) What is the objective of policies requiring foreign entities to procure local contents? (2 Marks)
OR
What is meant by open market operations?

Test Series: April 2019
MOCK TEST PAPER – II
PAPER – 8: FINANCIAL MANAGEMENT& ECONOMICS FOR FINANCE
PAPER 8A : FINANICAL MANAGEMENT
1. (a) Computation of Weighted Average Cost of Capital (WACC) for each level of Debt-equity mix.
Debt Required Equity Required Kd × Proportion of debt + Weighted Average
(%) return (%) return (K e) Ke Proportion and equity Cost of Capital
(Kd )(%) (%) (WACC)(K o )(%)
0 5 100 15 0%(5%)+100%(15%) 15
20 6 80 16 20%(6%)+80%(16%) 14
40 7 60 18 40%(7%)+60%(18%) 13.6
60 10 40 23 60%(10%)+40%(23%) 15.2
80 15 20 35 80%(15%)+20%(35%) 19
The optimum mix is 40% debt and 60% equity, as this will lead to lowest WACC value i.e., 1 3.6%.
(b) Calculation of Effective Cost of Capital
Particulars Option 1 Option 2
14% institutional 13% Non-convertible
Term loan Debentures
(Rs. in Lakhs) (Rs. in lakhs)
(A) Effective capital to be raised Face value 250.00 250.00
Less: Discount Nil (6.25)
250.00 243.75
Less: Cost of issue Nil 5.00
Effective amount of capital 250.00 238.75
(B) Annual interest charges on face value of
Rs. 250 lakhs 35.0 32.50
Less: Tax benefit on interest @ 50% 17.5 16.25
17.5 16.25
(C) Effective cost of capital after tax B 16.25
x 100 x100
A 238.75
= 7.0% = 6.81% (approx)
So, the better option is raising of funds of Rs.250 lakhs by issue of 13% Non-convertible Debenture
(c)
Year 1 Year 2 Year 3
Cash Probability Expected Cash Probability Expected Cash Probability Expecte
Flow Value Flow Value Flow d Value
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
2,000 0.1 200 2,000 0.2 400 2,000 0.3 600
4,000 0.2 800 4,000 0.3 1200 4,000 0.4 1,600
6,000 0.3 1,800 6,000 0.4 2400 6,000 0.2 1,200

8,000 0.4 3,200 8,000 0.1 800 8,000 0.1 800
ENCF 6,000 4,800 4,200
The present value of the expected value of cash flow at 10 per cent discount rate has been
determined as follows:
ENCF1 ENCF2 ENCF3
Present Value of cash flow = + +
(1+ k)1 (1+ k)2 (1+ k)3
6,000 4,800 4,200
=  
(1.1)1 (1.1)2 (1.1)3
= (6,000 × 0.909) + (4,800 × 0.826) + (4,200 + 0.751)
= 12,573
Expected Net Present value = Present Value of cash flow - Initial Investment
= Rs. 12,573 – Rs.10,000 = Rs.2,573.
(d) MNOP Ltd.
Balance Sheet
Equity share capital 1,00,000 Fixed assets 60,000
Current debt 24,000 Cash (balancing figure) 60,000
Long term debt 36,000 Inventory 40,000
1,60,000 1,60,000
Working Notes
1. Total debt = 0.60 x Equity share capital = 0.60 Rs. 1,00,000 = Rs. 60,000
Further, Current debt to total debt = 0.40. So, current debt = 0.40 × Rs.60,000 = Rs.24,000,
Long term debt = Rs.60,000 - Rs.24,000= Rs. 36,000
2. Fixed assets = 0.60 × Equity share Capital = 0.60 × Rs. 1,00,000 = Rs. 60,000
3. Total assets to turnover = 2 Times : Inventory turnover = 8 Times
Hence, Inventory /Total assets = 2/8=1/4, Total assets = Rs. 1,60,000
Therefore Inventory = Rs. 1,60,000/4 = Rs. 40,000
2. (a)
Sales in units 60,000 50,000
Rs. Rs.
Sales Value 7,20,000 6,00,000
Variable Cost (4,80,000) (4,00,000)
Contribution 2,40,000 2,00,000
Fixed expenses 1,00,000 1,00,000
EBIT 1,40,000 1,00,000
Debenture Interest (50,000) (50,000)
EBT 90,000 50,000
Tax @ 30% (27,000) (15,000)

Profit after tax (PAT) 63,000 35,000
63,000 35,000
(i) Earning per share (EPS) = = Rs. 12.6 = Rs. 7
5,000 5,000
Decrease in EPS = 12.6 – 7 = 5.6
5.6
% decrease in EPS =  100 = 44.44%
12.6
Contribution 2,40,000 2,00,000
(ii) Operating leverage = =
EBIT 1,40,000 1,00,000
= 1.71 2
EBIT 1,40,000 1,00,000
(iii) Financial Leverage = =
EBT 90,000 50,000
= 1.56 2
(b) Limitations are:
1) The lease rentals become payable soon after the acquisition of assets and no moratorium
period is permissible as in case of term loans from financial institutions. The lease
arrangement may, therefore, not be suitable for setting up of the new projects as it would
entail cash outflows even before the project comes into operation.
2) The leased assets are purchased by the lessor who is the owner of equipment. The seller’s
warranties for satisfactory operation of the leased assets may sometimes not be available to
lessee.
3) Lessor generally obtains credit facilities from banks etc. to purchase the leased equipment
which are subject to hypothecation charge in favour of the bank. Default in payment by the
lessor may sometimes result in seizure of assets by banks causing loss to the lessee.
4) Lease financing has a very high cost of interest as compared to interest charged on term loans
by financial institutions/banks.
Despite all these disadvantages, the flexibility and simplicity offered by lease finance is bound to
make it popular. Lease operations will find increasing use in the near future.
3. (a)
Rs.
Present level of receivables is 45 lakh× 50/365 6,16,438
In case of factor, receivables would reduce to 45 lakhs× 30/365 3,69,863
The costs of the existing policy are as follows:

Cost of financing existing receivables: 6,16,438×10% 61,644
Cost of bad debts: 45 lakhs × 0.4% 18,000
Cost of current policy 79,644
The cost under the factor are as follows:
Cost of financing new receivable through factor:
(Rs. 3,69,863 × 0.8 × 0.11) + (Rs. 3,69,863 × 0.2 × 0.10) 39,945
= (32,548 + 7,397)
3

Factor’s annual fee: 45 Lakhs × 0.01 45,000
Administration costs saved: (35,000)
Net cost under factor: 49,945
From the above analysis it is clear that the factor’s services are cheaper than Existing policy by
Rs. 29,699 (Rs. 79,644 - Rs.49,945) per year. Hence, the services of the factor should be
accepted.
(b) The term trading on equity means debts are contracted and loans are raised mainly on the basis
of equity capital. Those who provide debt have a limited share in the firm’s earning and hence
want to be protected in terms of earnings and values represented by equity capital. Since fixed
charges do not vary with firm’s earnings before interest and tax, a magnified effect is produced on
earning per share. Whether the leverage is favourable, in the sense, increase in earnings per
share more proportionately to the increased earnings before interest and tax, depends on the
profitability of investment proposal. If the rate of returns on investment exceeds their explicit cost,
financial leverage is said to be positive.
4. (a) Since funds available are restricted, the normal Net Present Value (NPV) rule of accepting
investments decisions with the highest NPVs cannot be adopted straight way. Further, as the
projects are divisible, a Profitability Index (PI) can be utilized to provide the most beneficial
combination of investment for Rio Ltd.
Project PV Per Rs. Rank as per PI
Alfa (α) Rs. 6,40,000 / Rs. 5,40,000 = 1.185 III
Beta (β) Rs. 7,50,000 / Rs. 6,00,000 = 1.250 I
Gama (γ) Rs. 3,18,000 / Rs. 2,60,000 = 1.223 II
Therefore Rio Ltd should invest Rs. 6,00,000 into project β (Rank I) earnings Rs. 1,50,000 and
Rs.2,00,000 into project γ (Rank II) earning Rs.44,615 Rs. 2,00,000 / Rs. 2,60,000 × Rs. 58,000
So, total NPV will be Rs.1,94,615 Rs. 1,50,000 + Rs. 44,615 from Rs. 8,00,000 of investment.
(b) Calculation of Risk Adjusted rate

Risk level Risk free rate (%) Risk Premium (%) Risk adjusted rate (%)
Low 8 4 12
Medium 8 7 15
High 8 10 18
The cash flows of the project considered are as following:

Point in time (yearly intervals) 0 1 2
Cash flow (Rs. in crore) (100) 45 80
If the project is judged to be Low risk
Years 0 1 2
PV (Rs. in crore) (100) 45 80
 40.18  63.78
1  0.12 (1  0.12)2
NPV = 40.18 + 63.78 – 100 = 3.96: Accept

If the project is judged to be Medium risk
Years 0 1 2
PV (Rs. in crore) (100) 45 80
 39.13  60.49
1  0.15 (1  0.15)2
NPV = 39.13 + 60.49 – 100 = (0.38): Reject

If the project is judged to be High risk
Years 0 1 2
PV (Rs. in crore) (100) 45 80
 38.14  57.45
1  0.18 (1  0.18)2
NPV = 38.14 + 57.45 – 100 = (4.41): Reject

5. (i) The EPS of the firm is Rs. 10 (i.e., Rs. 2,00,000/ 20,000). The P/E Ratio is given at 12.5 and the
cost of capital, ke, may be taken at the inverse of P/E ratio. Therefore, k e is 8 (i.e., 1/12.5). The
firm is distributing total dividends of Rs. 1,50,000 among 20,000 shares, giving a dividend per share
of Rs. 7.50. the value of the share as per Walter’s model may be found as follows:
D (r / K e )(E  D) 7.50 (.10 / .08)(10  7.5)
P  =  = Rs. 132.81
Ke Ke .08 .08
The firm has a dividend payout of 75% (i.e., Rs. 1,50,000) out of total earnings of Rs. 2,00,000.
since, the rate of return of the firm, r, is 10% and it is more than the k e of 8%, therefore, by
distributing 75% of earnings, the firm is not following an optimal dividend policy. The optimal
dividend policy for the firm would be to pay zero dividend and in such a situation, the market price
would be
D (r / K e )(E  D) 0 (.10 / .08)(10 - 0)
P=  =  = Rs. 156.25
ke Ke .08 .08
So, theoretically the market price of the share can be increased by adopting a zero payout.
(ii) The P/E ratio at which the dividend policy will have no effect on the value of the share is such at
which the ke would be equal to the rate of return, r, of the firm. The K e would be 10% (=r) at the
P/E ratio of 10. Therefore, at the P/E ratio of 10, the dividend policy would have no effect on the
value of the share.
(iii) If the P/E is 8 instead of 12.5, then the Ke which is the inverse of P/E ratio, would be 12.5 and in
such a situation ke> r and the market price, as per Walter’s model would be
D (r / K e )(E  D) 7.50 (.1/ .125) (10  7.5)
P=  = + = Rs. 76
Ke Ke .125 .125
6. (a) Bridge finance refers, normally, to loans taken by the business, usually from commercial banks for
a short period, pending disbursement of term loans by financial institutions, normally it takes time
for the financial institution to finalise procedures of creation of security, tie-up participation with
other institutions etc. even though a positive appraisal of the project has been made. However,
once the loans are approved in principle, firms in order not to lose further time in starting their
projects arrange for bridge finance. Such temporary loan is normally repaid out of the proceeds of
the principal term loans. It is secured by hypothecation of moveable assets, personal guarantees
and demand promissory notes. Generally rate of interest on bridge finance is higher as compared
with that on term loans.

(b) Virtual Banking and its Advantages
Virtual banking refers to the provision of banking and related services through the use of
information technology without direct recourse to the bank by the customer.
The advantages of virtual banking services are as follows:
➢ Lower cost of handling a transaction.
➢ The increased speed of response to customer requirements.
➢ The lower cost of operating branch network along with reduced staff costs leads to cost
efficiency.
Virtual banking allows the possibility of improved and a range of services being made available to
the customer rapidly, accurately and at his convenience.
(c) Concentration Banking: In concentration banking the company establishes a number of strategic
collection centres in different regions instead of a single collection centre at the head office. This
system reduces the period between the time a customer mails in his remittances and the time when
they become spendable funds with the company. Payments received by the different collection
centers are deposited with their respective local banks which in turn transfer all surplus funds to
the concentration bank of head office

PAPER 8B : ECONOMICS FOR FINANCE
7. (a) National Income
Y = C+I+G+(X-M)
= (100+0.9Yd) +100+120+200-(100+0.15Y)
= 100+0.9(Y-T) +100+120+200-100-0.15Y
= 100+0.9(Y-50) +100+120+200-100-0.15Y
Y= 375+0.75Y
Y-0.75Y= 375
0.25Y= 375
100
Y= 375×  1500
25
(b) According to Milton Friedman, permanent income is a measure of wealth which is the present
discounted value of all expected future incomes. As distinguished from transitory income, it is the
normal income or the income that people expect to persist into the future. The nominal demand for
money is a function of total wealth, which is represented by permanent income divided by the
discount rate, defined as the average return on the five asset classes in the monetarist theory
world, namely: money, bonds, equity, physical capital and human capital.
(c) In order to protect the interest of consumer’s government fixes the maximum price of the
commodity. This maximum price is generally lower than the equilibrium price. This is calle d control
price or ceiling price. This price is fixed by the government because poor people cannot afford to
buy the commodity at equilibrium price. This situation arises when the production of a co mmodity
is less than its demand. In India government has a control price or ceiling price of the commodities
which it considers essential for the masses. For examples maximum prices of food grains and
essential items like some goods such as wheat, rice, sugar, kerosene oil etc. are during scarcity.
(d) Trade is distorted if quantities of commodities produced, bought, and sold and their prices are
higher or lower than levels that would usually exist in a competitive market. For example, barriers
to imports such as tariffs, domestic subsidies and quantitative restrictions can make agricultural
products more costly in a market of a country. The higher prices will result in higher production of
crop. Then export subsidies are needed to sell the surplus output in the world markets, where
prices are low. Thus, the subsidising countries can be producing and exporting considerably more
than what they normally would.
8. (a) (i) Lower interest rates increases disposable incomes and influence the spending decisions of
households and businesses by reducing the amount of interest they pay on debt. Reductions
in interest rates which they receive on deposits reduce the incentives for households to save
and may encourage them to borrow and spend now rather than later, in particular, on durable
goods, such as cars and household appliances, and housing. Lower interest rates are thus
associated with higher household consumption and housing investment. Similarly, with lower
interest rates the cost of borrowing declines, expected returns on investment projects
increase, and these encourage businesses to borrow and increase their spending on
investment (in capital assets like new equipment or buildings). Since households and
businesses substitute between spending now and in the future, overall, lower interest rates
should be associated with an increase in business investment.

(ii) Perfect information which implies that both buyers and sellers have complete information
about anything that may influence their decision making is an important element of an efficient
competitive market. Information failure occurs when lack of information can result in
consumers and producers making decisions that do not maximize welfare. Information failure
is widespread in numerous market exchanges due to complex nature of goods and services
that are transacted, inaccurate and incomplete data, and non-availability of correct
information.
(b) (i) Nominal GDP is calculated in terms of current prices. Nominal GDP growth refers to the
percentage change in nominal GDP over a specific period of time. Since the effect of inflation/
deflation is not removed, it does not present the true picture of growth of the economy.
(ii) Optimal output is the ideal quantity of output that ensures maximum level of social welfare.
This will occur at a level of output where social marginal cost (SMC) = social marginal benefit.
(SMB) At this level of output the society’s resources are utilised in the most efficient way.
9. (a) (i) A direct effect of monetary policy on the firm’s balance sheet comes through an increase in
interest rates leading to an increase in the payments that the firm must make to repay its
floating rate debts. Logically, as a firm’s cost of credit rises, the strength of its balance sheet
deteriorates. An indirect effect occurs when the same increase in interest rates works to
reduce the capitalized value of the firm’s long‐lived assets. Reduced net worth of businesses
and individuals make it tougher for them to qualify for loans at any interest rate, thus reducing
spending and price pressures. Hence, a policy‐induced increase in the short‐term interest
rate not only acts immediately to depress spending through the traditional interest rate
channel, it also acts, possibly with a time-lag, to raise each firm’s cost of capital through the
balance sheet channel. These together aggravate the decline in output and employment.
Conversely, a reduction in interest rates can increase the borrowing capacity of households
and businesses. This is because lower interest rates are associated with higher asset prices.
In turn, higher asset prices increase the equity (or collateral) of existing assets that a bank
can lend against. As a result, borrowers with existing assets may be able to borrow more,
which can lead to more spending.
(ii) The nature of the economic system determines the size and scope of the economic functions
of the government. In a centrally planned socialistic economy, the state owns all productive
resources and makes all important economic decisions. On the contrary, in a m arket
economy, all important economic decisions are made by individuals and firms who want to
maximise self interest and there is only limited role for the government. In a mixed economic
system, both markets and government contribute towards resource allocation decisions.
(b) NDPFC = Compensation of Employees + Operating Surplus + Mixed Income
= (viii) + (ix) + (iv) + (v) + (vi) + (vii) = 489 + 50+ 311 + 892 + 81 + 6 = 1829 Crores
GDPMP = NDPFC + Depreciation + Net Indirect Tax
= NDPFC + (ii) + (i) = 1829 + 42 + 208 = 2079 Crores
NNP Fc= NDPFC + Net Factor Income from Abroad
= NDPFC + (iii) = 2079+ (-40) = 2039 Crores
10. (a) (i) Since FDI involves setting up of production base (in terms of factories, power plants, etc.) it
generates direct employment in the recipient country. Subsequent FDI as well as domestic
investments propelled in the downstream and upstream projects that come up in multitude
of other services generate multiplier effects on employment and income. FDI not only creates
direct employment opportunities but also, through backward and forward linkages, it is able
to generate indirect employment opportunities as well.Foreign direct investments also
promote relatively higher wages for skilled jobs. However, jobs that require expertise and
entrepreneurial skills for creative decision making may generally be retained in the home
8

country and therefore the host country is left with routine management jobs that demand only
lower levels of skills and ability. This may result in ‘crowding in’ of people in jobs requiring low
skills, perpetuation of low labour standards and differential treatment.
FDIs are likely use labor-saving technology and capital-intensive methods in a labour-
abundant country and cause labour displacement. Such technology is inappropriate for a
labour-abundant country as it does not support generation of jobs which is a crucial
requirement to address poverty and unemployment which are the two fundamental areas of
concern for the less developed countries. Not only that foreign entities fail to support
employment generation, but they may also drive out domestic firms from the industry resulting
in serious problems of displacement of labour.
(b) (i) A final good is a good sold to final purchasers and is consumed by the end user in its present
state. It does not require any further processing and therefore will not undergo any further
transformation at the hands of producer. Once a final good has been sold, it passes out of
the active economic flow. The value of the final goods already includes the value of the
intermediate goods that have entered into their production as inputs.
(ii) Externalities, also referred to as 'spillover effects', 'neighbourhood effects' 'third-party effects'
or 'side-effects', occur when the actions of either consumers or producers result in costs or
benefits that do not reflect as part of the market price. Externalities cause market inefficiencies
because they hinder the ability of market prices to convey accurate information about how
much to produce and how much to buy. Since externalities are not reflected in market prices,
they can be a source of economic inefficiency. The four possible types of externalities are
negative externality initiated in production which imposes an external cost on others, positive
production externality, less commonly seen, initiated in production that confers external
benefits on others, negative consumption externalities initiated in consumption which produce
external costs on others, positive consumption externality initiated in consumption that
confers external benefits on others. Each of the above may be received by another in
consumption or in production.
11. (a) (i) The allocation responsibility of the governments involves suitable corrective action when
private markets fail to provide the right and desirable combination of goods and services to
ensure social welfare. In the absence of appropriate government intervention, market failures
may occur and the resources are likely to be misallocated by too much production of certain
goods or too little production of certain other goods. Thus, market failures provide the
rationale for government’s allocative function.
(ii) Non tariff measures are policy measures other than ordinary customs tariffs that can
potentially have an economic effect on international trade in goods, changing quantities
traded, or prices or both (UNCTAD, 2010). For example, the sound use of NTMs like sanitary
and phytosanitary measures and licensing could be legitimately used to ensure consumer
health and to protect plant and animal life and environment
NTMs are not the same as non-tariff barriers (NTBs). NTMs are sometimes used as means
to circumvent free-trade rules and favour domestic industries at the expense of foreign
competition. In this case they are called non-tariff barriers (NTBs). NTBs are a subset of NTMs
that have a 'protectionist or discriminatory intent' and implies a negative impact on trade.
NTMs only become NTBs when they are more trade restrictive than necessary. Some
examples of NTBs are compulsory standards, often not based on international norms or
genuine science; stringent technical regulations requiring alterations in production processes,
testing regimes which require complex procedures and product approvals requiring inspection
of individual premises
(b) (i) The rate between Y and Z which is derived from the given rates of another set of two pairs of
currency (say, X and Y, and, X and Z) is called cross rate.

(ii) Local content policies requiring the purchase or use by a foreign enterprise of domestic
products and employment of the local workforce seek to ensure that the maximum benefits
from production activities accrue to local economic actors. These are essentially aimed at
reducing the volume or value of imports or at restraining the employment of foreign labour.
OR
Open market operations are conducted by the RBI by way of sale or purchase of government
securities to adjust money supply conditions. The central bank sells government securities to
suck out liquidity from the system and buys back government securities to infuse liquidity into
the system. When the RBI feels that there is excess liquidity in the market, it resorts to sale
of securities thereby sucking out the rupee liquidity. Similarly, when the liquidity conditions
are tight, the RBI will buy securities from the market, thereby releasing liquidity into the
market. These operations are often conducted on a day-to-day basis in a manner that
balances inflation while helping the banks to continue lending.
10

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Test Series: April, 2019

MOCK TEST PAPER – 2

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

3. (a) In the books of English Firm (Head Office in New York)

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

No. of ATM Transactions 1,50,000 --- 50,000

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

(Refer to working notes 3 & 4)

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

3. (a) (i) Statement of Equivalent Production (FIFO Method)

Closing W-I-P 700 100 700 70 490 70 490

© The Institute of Chartered Accountants of India

(ii) Statement of Cost per equivalent units

Material cost of 192 units @ Rs. 624.03 p.u.

Cost of 8,900 units transferred to next process

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

2×34,400kg.× Rs.720 2×34,400kg.× Rs.720

I Order quantity 1,497 kg. 1,697 kg.

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India