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COMMON FOR
INTEGRATED PROFESSIONAL COMPETENCE
EXAMINATION
GROUP I
&
NOVEMBER, 2009
BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
(Set up by an Act of Parliament)
The suggested Answers published in this volume do not constitute the basis for evaluation of
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(viii) Explain contract costs as per Accounting Standard-7 related to ‘Construction Contracts’.
(ix) Omshanti Club has 500 members with annual fee of Rs.1,000 per member. At the end of
the accounting year, accountant noticed that 40 members have not paid annual fee and
70 members had paid fee in advance. Help the accountant to compute cash receipts of
annual fee for the year.
(x) The Companies Act, 1956 limits the payment of managerial remuneration. What is the
maximum managerial remuneration, which can be paid in case of a company consistently
earning profits and has more than one managerial person? (10 x 2 = 20 Marks)
Answer (i)
Rs.
Capital as on 31.3.2009 (Rs.2,00,000 – Rs.70,000) 1,30,000
Add: Drawings (Rs.5,000 × 12 months) 60,000
1,90,000
Less: Additional capital introduced as on 1.10.2008 (40,000)
1,50,000
Less: Capital on 01.04.2008 (70,000)
Profit for the year ended as on 31.3.2009 80,000
(ii) The probable reasons could be the change in the accounting policy viz.
(a) Change in method of recognition of sales revenue from cash basis to accrual basis or
vice versa; or
(b) Change in valuation of closing inventory by adopting different methods year to year
such as LIFO to FIFO to weighted average or vice versa.
(iii)
Rs.
Purchase price of Equity shares of YZ Ltd.(200 shares x Rs.105 per share) 21,000
Add: Brokerage, stamp duty and STT 200
Cost of investment 21,200
If the investment is a long term investment than it will be shown at cost. Therefore value
of investment will be Rs. 21,200. However, if the investment is a current investment,
then it will be shown at lower of cost (i.e. Rs.21,200) or net realizable value (i.e. Rs.200 x
110 = Rs.22,000). Therefore value of investment will be Rs. 21,200.
(iv) When the partnership deed is silent on the matter of interest on capitals and salary to
partners, then no partner is entitled to claim interest on capital and salary. Therefore,
claim of X and Z is not tenable. However, inclusion of specific provision regarding the
said issues in partnership deed can make them entitled for interest on capital and salary.
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PAPER – 1 : ACCOUNTING
(v) According to Section 3 (1) (iii), a private company means a company which has a
minimum paid-up capital of one lakh rupees or such higher paid-up capital as may be
prescribed, and by its articles:
(a) Restricts the rights of members to transfer its shares.
(b) Limits the number of its member to 50 excluding: (i) persons who are in employment
of the company; and (ii) persons who, having been formerly in the employment of
the company, were members of the company while in that employment and have
continued to be members after the employment ceased. For this purpose joint
holders of shares will be counted as single members.
(c) Prohibits any invitation to the public to subscribe to any shares in, or debentures of,
the company.
(d) Prohibits any invitation or acceptance of deposits from persons other than its
member, directors, and relatives.
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
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PAPER – 1 : ACCOUNTING
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
Answer
In the books of MN Ltd.
Journal Entries
(Rs. in lakhs)
Dr. Cr.
Business Purchase Account Dr. 9,300
To Liquidator of M Ltd. 8,400
To Liquidator of N Ltd. 900
(Being consideration payable to liquidators of the two companies
taken over)
Plant and Machinery Account (4,215+468) Dr. 4,683
Furniture and Fixtures Account (2,400+183) Dr. 2,583
Motor Vehicles Account Dr. 51
Stock Account (2,370+444) Dr. 2,814
Sundry Debtors Account (1,044+237) Dr. 1,281
Cash at Bank Account (1,542+240) Dr. 1,782
Preliminary Expenses Account Dr. 33
Discount on issue of Debentures Account Dr. 6
Profit and Loss Account (Refer W.N.) Dr. 120
To 8% Redeemable Debentures of N Ltd. Account 300
To Trade Creditors Account (2,421+369) 2,790
To Provisions Account (870+93) 963
To Business Purchase Account 9,300
(Being incorporation of all the assets and liabilities and the excess
of consideration over the share capital being adjusted against
reserves and surplus)
Liquidator of M Ltd. Account Dr. 8,400
Liquidator of N Ltd. Account Dr. 900
To Equity Share Capital Account (7,200+900) 8,100
To 11% Preference Share Capital Account 1,200
(Being allotment of fully paid shares in discharge of purchase
consideration)
Profit and Loss Account Dr. 6
To Bank Account 6
(Being payment of liquidation expenses of M Ltd. and N Ltd.)
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PAPER – 1 : ACCOUNTING
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
Amount to be adjusted:
Capital Reserve 600
General Reserve 2,100
Profit & Loss A/c 780 3,480
Debit balance of Profit & Loss Account 120
Question 3
E, F and G were partners sharing Profits and Losses in the ratio of 5:3:2 respectively. On 31st
March, 2009 Balance Sheet of the firm stood as follows:
Liabilities Rs. Assets Rs.
Capital A/cs Buildings 55,000
E 50,000 Furniture 25,000
F 40,000 Stock 42,000
G 28,000 1,18,000 Debtors 20,000
Creditors 33,500 Cash at Bank 11,200
Outstanding Expenses 1,700
1,53,200 1,53,200
On 31st
March, 2009, E decided to retire and F and G decided to continue as equal partners.
Other terms of retirement were as follows:
(i) Building be appreciated by 20%.
(ii) Furniture be depreciated by 10%.
(iii) A provision of 5% be created for bad debts on debtors.
(iv) Goodwill be valued at two years’ purchase of profit for the latest accounting year. The
firm’s Profit for the year ended 31st March, 2009 was Rs.25,000. No goodwill account is
to be raised in the books of accounts.
(v) Fresh capital be introduced by F and G to the extent of Rs.10,000 and Rs.35,000
respectively.
(vi) Out of sum payable to retiring partner E, a sum of Rs.45,000 be paid immediately and the
balance be transferred to his loan account bearing interest @ 12% per annum. The loan
is to be paid off by 31st March, 2011.
One month after E’s retirement, F and G agreed to admit E’s son H as a partner with one-forth
share in Profits/Losses. E agreed that the balance in his loan account be converted into H’s
Capital. E also agreed to forgo one month’s interest on his loan.
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PAPER – 1 : ACCOUNTING
It was also agreed that H will bring in, his share of goodwill through book adjustment, valued
at the price on the date of E’s retirement. No goodwill account is to be raised in the books.
You are requested to pass necessary Journal Entries to give effect to the above transactions
and prepare Partners’ Capital Accounts. (16 Marks)
Answer
Dr. Cr.
Rs. Rs.
1. Building Account Dr. 11,000
To Revaluation Account 11,000
(Being building appreciated)
2. Revaluation Account Dr. 3,500
To Furniture Account 2,500
To Provision for Doubtful Debts Account 1,000
(Being furniture depreciated by 10% and Provision for
doubtful debts created @ 5% on Debtors)
3. Revaluation Account Dr. 7,500
To E’s Capital Account 3,750
To F’s Capital Account 2,250
To G’s Capital Account 1,500
(Being profit on revaluation transferred to capital accounts
of partners)
4. F’s Capital Account Dr. 10,000
G’s Capital Account Dr. 15,000
To E’s Capital Account 25,000
(Being adjustment for E’s share of goodwill)
5. Bank Account Dr. 45,000
To F’s Capital Account 10,000
To G’s Capital Account 35,000
(Being fresh capital introduced by F and G)
6. E’s Capital Account Dr. 78,750
To Bank Account 45,000
To E’s Loan Account 33,750
(Being settlement of E’s capital on his retirement)
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
Working Notes:
1. Calculation of gaining ratio
Partners New ratio Old ratio Gain Sacrifice
E 5 5
10 10
F 1 3 1 3 2
– =
2 10 2 10 10
G 1 2 1 2 3
– =
2 10 2 10 10
Hence, ratio of gain between F and G = 2:3
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PAPER – 1 : ACCOUNTING
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
Answer
(a)
Calculation of amount of claim Rs. Rs.
Value of stock as on 8th July, 2009 (Refer W.N.) 16,00,000
Less: Value of stock remaining unaffected by fire 2,03,000
Agreed value of damaged goods 1,97,000 4,00,000
Loss of stock 12,00,000
Applying average clause:
Amount of policy
Amount of claim = × Loss of stock
Stock on the date of fire
Rs.10,00,000
= ×12,00,000
Rs.16,00,000
= Rs. 7,50,000
Working Note:
Memorandum Trading Account for the period from 1st April, 2009 to 8th July, 2009
Rs. Rs.
To Opening Stock 15,72,000 By Sales 52,60,000
To Purchases 37,10,000 By Closing Stock (Bal.Fig.) 16,00,000
To Gross Profit (30% of
sales) 15,78,000
68,60,000 68,60,000
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PAPER – 1 : ACCOUNTING
7,47,000
= 9th January, 2009 +
23,200
= 9th January 2009 + 32 days
i.e. 32 days from 9th January, 2009 = 10th February, 2009
Thus, average due date = 10th February, 2009
No. of days from 10th February, 2009 to 31st March, 2009 = 49 days.
Interest payable by Anil on Rs.23,200 for 49 days @ 12% per annum
49 12
= Rs.23,200 × × = Rs.373.74
365 100
Question 5
(a) The Income and Expenditure Account of City Sports Club for the year ended 31st March,
2009 was as follows:
Expenditure Amount Income Amount (Rs.)
(Rs.)
To Salaries 1,20,000 By Subscriptions 1,60,000
To Printing and Stationery 6,000 By Entrance Fees 10,000
To Rent 12,000 By Contribution for Annual 20,000
dinner
To Repairs 10,000 By Profit on Annual Sports 20,000
meet
To Sundry Expenses 8,000
To Annual Dinner Expenses 30,000
To Interest to Bank 6,000
To Depreciation on Sports 6,000
equipment
To Excess of Income over
Expenditure 12,000
2,10,000 2,10,000
The above account had been prepared after the following adjustments:
Rs.
Subscriptions outstanding on 31.03.2008 12,000
Subscriptions received in advance on 31.03.2008 9,000
Subscriptions received in advance on 31.03.2009 5,400
Subscriptions outstanding on 31.03.2009 15,000
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
Salaries outstanding at the beginning and at the end of the financial year were Rs.8,000
and Rs.10,000 respectively. Sundry expenses included prepaid insurance expenses of
Rs.1,200.
The Club owned a freehold ground valued Rs.2,00,000. The Club has sports equipment
on 01.04.2008 valued at Rs.52,000. At the end of the year, after depreciation, the sports
equipment amounted to Rs.54,000. The Club raised a loan of Rs.40,000 from a bank on
01.01.2008, which was unpaid till 31.03.2009. On 31.03.2009, cash in hand was
Rs.32,000.
Prepare Receipts and Payments account of the Club for the year ended 31st March, 2009
and Balance Sheet as on that date.
(b) Rama Udyog Limited was incorporated on August 1, 2008. It had acquired a running
business of Rama & Co. with effect from April 1, 2008. During the year 2008-09, the total
sales were Rs.36,00,000. The sales per month in the first half year were half of what
they were in the later half year. The net profit of the company, Rs.2,00,000 was worked
out after charging the following expenses:
(i) Depreciation Rs.1,08,000, (ii) Audit fees Rs.15,000, (iii) Directors’ fees Rs.50,000, (iv)
Preliminary expenses Rs.12,000, (v) Office expenses Rs.78,000, (vi) Selling expenses
Rs.72,000 and (vii) Interest to vendors upto August 31, 2008 Rs.5,000.
Please ascertain pre-incorporation and post-incorporation profit for the year ended 31st
March, 2009. (10 + 6 = 16 Marks)
Answer
(a) City Sports Club
Receipt and Payments Account for the year ended 31st March, 2009
Receipts Amount Payments Amount
(Rs.) (Rs.)
To Balance b/d (Bal. Fig.) 27,800 By Salaries:
for 2007-2008 8,000
To Subscription: for 2008-2009 1,10,000
for 2007-2008 12,000 By Printing and 6,000
Stationery
for 2008-2009 (W.N.3) 1,36,000 By Rent 12,000
for 2009-2010 5,400 By Repairs 10,000
To Entrance Fees 10,000 By Sundry Expenses 9,200
(8,000 + 1,200)
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PAPER – 1 : ACCOUNTING
∗
It is assumed that the profit on annual sports meet has been realized in cash.
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
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PAPER – 1 : ACCOUNTING
from 1st August, 2008 to 31st March, 2009) will be (2 × .50 + 6 × 1) = Rs.7. Thus
sales ratio is 2:7.
2. Time ratio
1st April, 2008 to 31st July, 2008 : 1st August, 2008 to 31st March, 2009
= 4 months : 8 months = 1:2
Thus, time ratio is 1:2.
3. Gross profit
Gross profit = Net profit + All expenses
= Rs.2,00,000 + Rs.( 1,08,000+15,000+50,000+12,000+78,000+72,000+5,000)
= Rs.2,00,000 +Rs.3,40,000 = Rs.5,40,000.
Question 6
Answer any four of the following:
(i) Market is full of ready-made accounting softwares. What factors will you consider to
choose one of them for your enterprise?
(ii) As per Accounting Standard-14, what are the conditions which must be satisfied for an
amalgamation in the nature of merger?
(iii) What do you mean by Customised Accounting Software?
(iv) Rose Ltd. had made an investment of Rs.500 lakhs in the equity shares of Nose Ltd. on
10.01.2009. The realisable value of such investment on 31.03.2009 became Rs.200
lakhs as Nose Ltd. lost a case of patent rights. Rose Ltd. follows financial year as
accounting year. How will you recognize this reduction in Financial statements for the
year 2008-09.
(v) A company provided Rs.10,00,000 for dividend payment. Is the Corporate Dividend Tax
payable in this case? If yes, please compute Corporate Dividend Tax assuming rate of
15% plus surcharge of 10% and disclose as it would appear in profit and loss account of
the company.
(vi) SAD Enterprises, a partnership firm, had purchased business of SWAD enterprises on
01.04.2008 and paid Rs.50,000 towards goodwill. On 01.04.2009, SAD enterprises
decided to admit W as partner and the goodwill was valued at Rs.1,00,000 for the
purpose.
Please explain with reasons, at what price goodwill can be shown in the books of
account. (4 × 4 = 16 Marks)
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
Answer
(i) While choosing the accounting software, the following points should be considered:
1. Fulfilment of business requirements: Some packages have few functionalities more
than the others. The purchaser may try to match his requirement with the available
solutions.
2. Completeness of reports: Some packages might provide extra reports or the reports
match the requirement more than the others.
3. Ease of use: Some packages could be very detailed and cumbersome compare to
the others.
4. Cost: The budgetary constraints could be an important deciding factor. A package
having more features cannot be opted because of the prohibitive costs.
5. Reputation of the vendor: Vendor support is essential for any software. A stable
vendor with reputation and good track records will always be preferred.
6. Regular updates: Law is changing frequently. A vendor who is prepared to give
updates will be preferred to a vendor unwilling to give updates.
(ii) According to AS 14 “Accounting for Amalgamations”, Amalgamation in the nature of
merger is an amalgamation which satisfies all the following conditions:
(i) All the assets and liabilities of the transferor company become, after amalgamation,
the assets and liabilities of the transferee company.
(ii) Shareholders holding not less than 90% of the face value of the equity shares of the
transferor company (other than the equity shares already held therein, immediately
before the amalgamation, by the transferee company or its subsidiaries or their
nominees) become equity shareholders of the transferee company by virtue of the
amalgamation.
(iii) The consideration for the amalgamation receivable by those equity shareholders of
the transferor company who agree to become equity shareholders of the transferee
company is discharged by the transferee company wholly by the issue of equity
shares in the transferee company, except that cash may be paid in respect of any
fractional shares.
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PAPER – 1 : ACCOUNTING
(iv) The business of the transferor company is intended to be carried on, after the
amalgamation, by the transferee company.
(v) No adjustment is intended to be made to the book values of the assets and liabilities
of the transferor company when they are incorporated in the financial statements of
the transferee company except to ensure uniformity of accounting policies.
(iii) A customised accounting software is one where the software is developed on the basis of
requirement specifications provided by the organisation. The choice of customised
accounting software could be because of the typical nature of the business or else the
functionality desired to be computerised is not available in any of the pre-packaged
accounting software. An organisation desiring to have an integrated software package
covering most of the functional area may have the financial module as part of the entire
customised system.
(iv) Recognition of reduction in value of investment would depend upon the nature of
investment and nature of decline as per Accounting Standard 13 “Accounting for
Investments”. As per provisions of the standard, if the investments were acquired for
long term and decline is temporary in nature, reduction in value will not be recognized
and investments would be carried at cost. If the decline is of permanent nature, it will be
charged to profit and loss account. If the investments are current investments, then the
reduction should be recognized and charged to Profit and Loss Account as the current
investments are carried at cost or fair value, whichever is less.
(v) Yes, Corporate Dividend Tax (CDT)∗ is payable by the company which has provided for
the payment of dividend. CDT is payable even if no income tax is payable. This is
payable by a domestic company on distribution of profits to its shareholders.
In the given case, Corporate Dividend Tax would be worked out to Rs.1,65,000 [i.e.
(Rs.10,00,000 x 15%) x 110%]. CDT should be accounted for in the same financial year
in which provision for dividend is recognized and made. CDT shall be disclosed in profit
and loss account below the line just after the provision for dividend. Such disclosure
would give a proper picture regarding payments involved with reference to dividends.
Disclosure of CDT in the profit and Loss Account will be as follows:
Dividend XXXX
Corporate Dividend Tax XXXX XXXX
∗
Corporate Dividend Tax is also known as ‘Dividend Distribution Tax’.
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
(vi) Para 16 of AS 10,’ Accounting for Fixed Assets’ states that goodwill can be recorded in
the books only when some consideration in money or money’s worth has been paid for it.
Therefore, only purchased goodwill should be recorded in the books. In the said case,
payment of Rs.50,000 was made towards purchase of goodwill, hence to this extent
goodwill can be recorded in the books. Additional goodwill of Rs.50,000 is self generated
goodwill, which should not be recorded. On admission, death or retirement of a partner,
goodwill adjustments can be carried out through capital accounts.
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PAPER – 2 : BUSINESS LAWS, ETHICS & COMMUNICATION
Answer all questions
PART – I
Question 1
(a) Mr. Singh, an old man, by a registered deed of gift, granted certain landed property to A,
his daughter. By the terms of the deed, it was stipulated that an annuity of Rs.2, 000
should be paid every year to B, who was the brother of Mr. Singh. On the same day A
made a promise to B and executed in his favour an agreement to give effect to the
stipulation. A failed to pay the stipulated sum. In an action against her by B, she
contended that since B had not furnished any consideration, he has no right of action.
Examining the provisions of Indian Contract Act, 1872, decide, whether the contention of
A is valid? (5 Marks)
(b) State with reasons whether the following statements are correct or incorrect.(2×1=2 Marks)
(i) If the pawnor makes a default in the payment of debt, or performance of duty, as
agreed, the pawnee has a right to sell the thing pledged for which no reasonable
notice of the sale is required.
(ii) An "agency coupled with interest" may be terminated, at the instance of the
principal at any time.
(c) Pick out the correct answer from the following and give reasons: (3×1=3 Marks)
(i) A contracts to save B against the consequences of any proceedings, which C may
take against B in respect of a certain sum of 500 rupees. This is a :
(1) Contract of guarantee
(2) Quasi contract
(3) Contract of indemnity
(4) Void contract.
(ii) A promises to paint a picture for B by a certain day, at a certain price. A dies before
the day. The contract:
(1) can be enforced by A's representative
(2) can be enforced by B
(3) can be enforced either by A's representative or by B
(4) cannot be enforced either by A's representative or by B
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
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PAPER – 2 : BUSINESS LAWS, ETHICS & COMMUNICATION
(c) (i) Answer: No. (3): ‘Contract of Indemnity’ : A Contract of indemnity is a Contract by
which one party promises to save or indemnify the other from loss caused to him by
the promisor himself or by the conduct of any other person (Section 124, Indian
Contract Act, 1872).
(ii) Answer: No. (4): ‘Cannot be enforced either by A’s representative or by B’ : To
paint a picture is a personal contract and may be performed only personally. A
personal contract can not be performed by anybody other than the promisee.
Hence, if A dies, the contract can not be enforced [ illustration (b) given in Section
37 of the Indian Contract Act, 1872].
(iii) Answer: No. 3: ‘Valid’ : 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 bill of exchange or cheque.
A minor may draw, indorse and deliver such instruments so as to bind all parties
except himself. Therefore the negotiable instrument drawn in favour of a minor is
valid. Section 26 of the Negotiable Instruments Act states that a minor cannot make
himself liable as drawer, acceptor or endorser but where the instrument is drawn or
endorsed by him, the holder can receive payment from any other party thereto.
Question 2
(a) Noble Meters Limited was incorporated with the equity share capital of Rs. 50 lakh. The
company received the certificate of incorporation on 20th May, 2009. The company
issued the prospectus inviting the public to subscribe for its equity shares. Meanwhile,
the company intended to commence its business. Whether Noble Meters Ltd. is entitled
to commence its business without obtaining the certificate to commencement of
Business?
Advise the company stating the conditions to be fulfilled for obtaining the certificate to
commencement of Business from the Registrar of Companies under Companies Act,
1956. (5 Marks)
(b) State whether the following statements are true or false and give reasons. (2 × 1 = 2 Marks)
(i) The Articles of Association of a Company can be altered by passing an ordinary
resolution in the meeting of the shareholders.
(ii) A transferee becomes a member of the company when the instrument of transfer is
submitted with the company.
(c) Pick out the correct answer from the following and give reasons: ( 3 × 1 =3 Marks)
(i) Contracts which are entered into, by agents or trustees on behalf of a prospective
company before it has come into existence are called:
(1) Provisional contracts
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
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PAPER – 2 : BUSINESS LAWS, ETHICS & COMMUNICATION
(d) A statutory declaration by the secretary or one of the directors that the aforesaid
requirements have been complied with, is filed with the Registrar of Companies.
If a public company commences business or borrows money without obtaining the
certificate, every officer in default shall be punishable with a fine of Rs. 5,000/-.
(b) (i) Incorrect: As per the provisions of Section 31 of the Companies Act, 1956, a
company may , by special resolution, alter its articles. Therefore ordinary resolution
will not suffice in this case. The power of alteration of the company is absolute
subject to two restrictions viz.
(a) The alteration must not be in contravention of the Companies Act, 1956.
(b) The power of alteration is subjects to the conditions contained in the
memorandum of association.
(ii) Incorrect: A transferee does not become a member of the company only by
submitting the instrument of transfer with the company. The company has to
approve and register the transfer of shares in the name of the transferee before it
becomes effective. Section 206A of the Companies Act, 1956 lays down that where
any instrument of transfer of shares has been delivered to the company for
registration and the transfer of shares has not been registered by the company, the
right to dividend, rights shares and bonus shares shall be kept in abeyance.
(c) (i) Answer: No.2: Pre-incorporation Contracts. Contracts made by promoters who act
as agents or trustees of the company before its incorporation, are called pre-
incorporation contracts. Such contracts can not bind the company because the
company has no legal status prior to its incorporation. [In Re English and Colonial
Produce Co. (1906) 2 Ch. 435].
(ii) Answer: No.4: Shelf prospectus. According to Section 60A any public financial
institution, public sector bank or scheduled bank, whose main object is financing,
shall file a shelf prospectus. Such prospectus issued by financial institutions or bank
is called shelf prospectus.
(iii) Answer: No.4:15 months as may be extended by Registrar of Companies to 18
months.
According to Section 166 of the Companies Act, 1956 and its proviso, the gap
between two Annual General Meetings must not be more than 15 months but the
Registrar of Companies may extend it for further three months in special cases.
Question 3
Standard Airways Limited was incorporated at Chennai in the year 2005, employing 125
workmen. Due to strike of workers, mismanagement in the company and accidental loss of the
assets the company suffered heavy losses continuously since its incorporation, resulting in a
large part of the capital and assets getting wiped out. Consequently, the company moved an
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
application to the Government of Tamilnadu requesting to exempt the company fully from the
application of the provisions of the Payment of Bonus Act, 1965.
Decide, whether the Government of Tamilnadu may grant exemption to the Company. State
the provisions of law in this regard as stated under the Payment of Bonus Act, 1965. (6 Marks)
Answer
An employer who is unable to comply with the provisions of the Payment of Bonus Act, due to
paucity of funds or for other reasons, can make an application to the appropriate Government
for exemption fully or partly from the provisions of the Payment of Bonus Act,1965 under
Section 36. If the appropriate Government having regard to the financial position and other
relevant circumstances of any establishment or class of establishments, is of the opinion that
it will not be in public interest to apply all or any of the provisions of the Act thereto, it may, by
notification in official Gazette, exempt for such period as may be specified therein and subject
to such conditions as it may think fit to impose, such establishment or class of establishments
from all or any of the provisions of the Act. Such relevant considerations for granting
exemptions are industrial peace, law and order situation, effect on production of consumer
goods, difficulties of management, etc.
Decision under Section 36 must be an objective one. If the employer establishes that losses
were being incurred continuously and entire capital and assets have been wiped out, the State
Government can not refuse to grant exemption under Section 36 [Nav Bharat Potteries vs.
State (1987) ILLN117 (Bombay)]. Employees should be heard before granting such
exemption.
The facts of the problem meet the criteria spelt out in Section 36 and hence, Standard Airways
may be allowed exemption.
Question 4
'N' is the holder of a bill of exchange made payable to the order of 'P'. The bill of exchange
contains the following endorsements in blank:
First endorsement ‘P’
Second endorsement 'Q'
Third endorsement 'R'
Fourth endorsement 'S'
'N' strikes out, without S's consent, the endorsements by 'Q' and 'R'. Decide with reasons
whether 'N' is entitled to recover anything from 'S' under the provisions of Negotiable
Instruments Act, 1881. (5 Marks)
Answer
According to Section 40 of the Negotiable Instruments Act,1881, where the holder of a
Negotiable Instrument without the consent of the endorser destroys or impairs the endorser’s
remedy against a prior party the endorser is discharged from liability to the holder to the same
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PAPER – 2 : BUSINESS LAWS, ETHICS & COMMUNICATION
extent as if the instrument had been paid at maturity. Therefore if the endorsements of ‘R’ and
‘Q’ are struck out without the consent of ‘S’, ‘N’ will not be entitled to recover anything from ‘S’,
the reason being that as between ‘R’ and ‘S’ ‘R’ is the principal debtor and ‘S’ is the surety. If
‘R’ is released by the holder under Section 39 of the Act, ‘S’ being surety will be discharged. In
this given problem, the rule may be stated thus that when the holder without the consent of the
endorser impairs the endorser’s remedy against a prior party, the endorser is discharged from
liability to the holder.
Question 5
Mr. X was an employee of Mutual Developers Limited. He retired from the company after
completing 30 years of continuous service. He applied to the company for the payment of
gratuity within the prescribed time. The company refused to pay the gratuity and contended
that due to stringent financial condition the company is unable to pay the gratuity. Mr. X
applied to the appropriate authority for the recovery of the amount of gratuity.
Examine the validity of the contention of the company and also state the provisions of law to
recover the gratuity under the Payment of Gratuity Act, 1972. (5 Marks)
Answer
(i) Gratuity shall be payable to an employee on the termination of his employment after he
has rendered continuous service for not less than five years on his superannuation or on
his retirement or resignation or on his death or disablement due to accident or disease
under Section 4(1) of the Payment of Gratuity Act,1972. Further, as soon as gratuity
becomes payable, the employer shall whether the application for the payment of gratuity
has been given or not by the employee, determine the amount of gratuity and give notice
in writing to the person to whom the gratuity is payable under intimation to the controlling
officer [Section 7(2)].
The employer shall arrange to pay the amount of gratuity within 30 days for the date of its
becoming due/payable to the person to whom it is payable [Section 7(3)], along with
simple interest if it is not paid within the period specified except where the delay in the
payment is due to the fault of the employee and the employer has obtained permission
thereon from the Controlling Authority[Section 7(3A)].
(ii) If the gratuity payable under the Act is not paid by the employer within the prescribed
time to the person entitled thereto, the Controlling Authority shall issue a certificate for
the amount to the Collector to recover the same along with compound interest at such
rate as prescribed by the Central Government from the date of expiry of the prescribed
time as land revenue arrears, to enable the person entitled to get the amount, after
receiving the application from the aggrieved person (Section 8).
Before issuing the certificate for such recovery the Controlling Authority shall give the
employer a reasonable opportunity of showing cause against the issue of such certificate.
The amount of interest payable under the Section shall not exceed the amount of gratuity
payable under this Act in no case (Section 8).
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
In the given case the facts are commensurate with provisions of law as stated above
under Sections 7 and 8 of the Payment of Gratuity Act, 1972. Therefore, Mr. X is entitled
to recover gratuity as he has completed the service of 30 years. The company cannot
take the plea of stringent financial conditions for not paying the gratuity to Mr. X. On the
refusal by the company, Mr. X can apply to the appropriate authority and the company
will be liable to pay the gratuity along with interest as decided by such authority.
Question 6
An Executive Committee is to be constituted to assist the Central Board under the provisions
of the Employees Provident Funds and Miscellaneous Provisions Act. 1952. State the
composition of such Executive Committee. (5 Marks)
Answer
The Central Government may by notification in the official gazette, constitute with effect from
such date as may be specified therein, an Executive Committee to assist the Central Board in
the performance of its functions under Section 5AA of the Employees’ Provident Funds and
Miscellaneous Provision Act, 1952.
The Executive committee shall consist of the following persons as members, namely:
(a) A Chairman appointed by Central Government from amongst the members of the Central
Board.
(b) Two members appointed by the Central Government from amongst the persons referred
to in clause (b) of Sub-section 1 of Section 5 A. (These two will actually be Central
Government officials as per the aforementioned clause).
(c) Three persons appointed by the Central Government from amongst the persons referred
to in clause (c) of Subsection (1) of Section 5A. (These three will actually be
representatives of the State Governments as per the aforementioned clause).
(d) Three persons representing the employers elected by the Central Board from amongst
the persons referred to in clause (d) of subsection (1) of Section 5A.
(e) Three persons representing the employees elected by the Central Board from amongst
the persons referred to in clause (e) of subsection (1) of Section 5A.
(f) The Central Provident Fund Commissioner, ex officio.
Question 7
The United Traders Association was constituted by two joint Hindu Families consisting of 21
major and 5 minor members. The Association was carrying on the business of trading as
retailers with the object for acquisition of gains. The Association was not registered as a
company under the Companies Act, 1956 or any other law.
State whether United Traders Association is having any legal status? Will there be any change
in the status of this Association if the members of the United Traders Association
subsequently were reduced to 15? (5 Marks)
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PAPER – 2 : BUSINESS LAWS, ETHICS & COMMUNICATION
Answer
Section 11 of the Companies Act, 1956 provides that no company, association or partnership
consisting of more than 10 persons for the purpose of carrying on the business of banking and
more than 20 persons for the purpose of carrying on any other business can be formed unless
it is registered under the Companies Act or is formed in pursuance of some other Indian Law.
Thus if such an association violates the provisions of Section 11 it is an “Illegal Association“
although none of the objects for which it may have been formed is illegal.
This Section does not apply to a joint Hindu family but where the business is being carried on
by two or more joint Hindu families the provisions of Section 11 shall be applicable. For
computing the number of members for this purpose, minor members of such families shall be
excluded.
Hence, the United Traders Association constituted by two joint Hindu Families is an Illegal
Association according to the provisions of Section 11 as stated above.
Further such Association of more than 20 persons, if unregistered is invalid at its inception
and cannot be validated by subsequent reduction in the number of members to below 20
(Madan Lal vs. Janki Prasad 4 All 319).
Question 8
Mr. 'Y', the transferee, acquired 250 equity shares of BRS Limited from Mr. 'X', the transferor.
But the signature of Mr. 'X', the transferor, on the transfer deed was forged. Mr. 'Y' after
getting the shares registered by the company in his name, sold 150 equity shares to Mr. 'Z' on
the basis of the share certificate issued by BRS Limited. Mr. ‘Y' and 'Z' were not aware of the
forgery. State the rights of Mr. 'X', 'Y' and 'Z' against the company with reference to the
aforesaid shares. (5 Marks)
Answer
According to Section 84(1) of the Companies Act, 1956, a share certificate once issued
amounts to a declaration by the company to all the world that the person in whose name the
certificate is made out and to whom it is given is a share holder in the company; in other words
the company is estopped from denying his title to the shares. However, a forged transfer is a
nullity. It does not give the transferee (Y) any title to the shares. If the company acts on a
forged transfer and removes the name of the real owner (X) from the Register of Members,
then the company is bound to restore the name of X as the holder of the shares and to pay
him any dividends which he ought to have received (Barton v. North Staffordshire Railway Co.
38 Ch D 456).
In the above case, ‘Z’ being the bona fide purchaser must be compensated by the company.
‘Z’ shall have therefore a right to claim the market price of those shares at that time. However
‘Z’ cannot insist on being placed on the register of members to which ‘X’ alone is eligible as he
cannot be said to have consented to the transfer. ‘Y’ shall of course be liable to the company
to indemnify the loss on account of payment to ‘Z’. A similar decision was given in Dixon v.
Kennaway.
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
Question 9
Modern Furnitures Limited was willing to purchase teakwood estate in Chhattisgarh State. Its
prospectus contained some important extracts from an expert report giving the number of
teakwood trees and other relevant information in the estate in Chhattisgarh State. The report
was found inaccurate. Mr. 'X' purchased the shares of Modern Furnitures Limited on the basis
of the above statement in the prospectus. Will Mr. 'X' have any remedy against the company?
When will an expert not be liable? State the provisions of the Companies Act, 1956 in this
respect. (5 Mark)
Answer
In the event of any mis-statement in a prospectus, the allottees have certain remedies against
the company as well as against those who were responsible for the issue of such a
prospectus. Thus, in the present case the allotee Mr. X shall have the right to claim
compensation from Modern Furnitures Ltd., for any loss that he might have sustained in terms
of the value of shares. But his claim against those responsible for issue of prospectus shall
not succeed since they made the statement on the basis of the report of an expert whom they
believed to be competent. Section 62(2) of the Companies Act, 1956 provides that in such
circumstances, one shall not incur liability. However, the expert can be proceeded against, for
the inaccurate report which he had made.
An expert shall not be liable if he proves:
(i) that having given his consent, he withdrew it in writing before delivery of the copy of
prospectus for registration or
(ii) that after delivery of prospectus for registration and before allotment he became aware of
the untrue statement and withdrew his consent in writing and gave reasonable public
notice of the withdrawal and his reasons therefor; or
(iii) that he was competent to make the statement and believed on reasonable grounds that it
was true.
Question 10
M. H. Company Limited served a notice of general meeting upon its shareholders. The notice
stated that the issue of sweat equity shares would be considered at such meeting. Mr. 'A', a
shareholder of the M. H. Company Limited complains that the issue of sweat equity shares
was not specified fully in the notice. Is the notice issued by M. H. Company Limited regarding
issue of sweat equity shares valid according to the provisions of the Companies Act, 1956?
Explain in detail. (5 Marks )
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PAPER – 2 : BUSINESS LAWS, ETHICS & COMMUNICATION
Answer
Section 173 of the Companies Act, 1956 requires a company to annex an explanatory
statement to every notice for a meeting of the company at which some special business is to
be transacted. This explanatory statement is to bring to the notice of members all material
facts relating to each item of special business. Section 173 further specifies that all business
in case of any meeting other than (i) consideration and approval of the annual accounts of the
company (ii) declaration of dividend (iii) appointment of directors in place of those retiring and
(iv) appointment of auditors including the fixing of their remuneration is regarded as special
business. Therefore, the complaint of Mr. A, the shareholder is valid, since the details on the
item regarding issue of sweat equity shares to be considered is lacking. The information about
the issue of sweat equity shares is a material fact. The notice given by M. H. Ltd. of the
General Meeting of the shareholders is not a valid notice under Section 173 of the Companies
Act, 1956.
PART – II
Question 11
(a) Explain the importance of ethical behaviour at the workplace. (5 Marks)
(b) Explain the meaning of the ''Iron Law of Responsibility". State the resulting benefits
which may be acquired by achieving the long-term objectives through the business
activities. (5 Marks)
Answer
(a) An organisation, whether a business or government agency is first and foremost a human
society. If an employer does not take steps to create a work environment where the
employees have a clear, common understanding of what is right and wrong and feel free
to discuss and ask questions about ethical issues and report violations, significant
problems could arise, including:
• increased risk of employees making unethical decisions;
• increased tendency of employees to report violations to out side regulatory authorities
(whistle blowing) because they lack an adequate internal forum;
• inability to recruit and retain top executives;
• diminished reputation in the industry and the community; and
• significant legal exposure and loss of competitive advantage in the market place.
(b) The Iron Law of Responsibility: The institution of business exists only because it
performs invaluable services for society. Society gives business its license to exist and
this can be amended or revoked at any time if it fails to live up to society’s expectations.
Therefore, if a business intends to retain its existing social role and power, it must
respond to society’s needs constructively. This is known as the “Iron Law of
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
Responsibility”. In the long-term those who do not use power in a manner that society
considers responsible, will tend to lose it.
Businesses have been delegated economic power and have access to productive
resources of a community. They are obliged to use these resources for the common good
of society so that more wealth for its betterment may be generated. Technical and
creative resources are also helpful to it. A business organisation sensitive to community
needs would in its own self interest like to have a better community within which the
business may be conducted. This way, the resulting benefits would be:
(a) Decrease in crime
(b) Easier labour recruitment
(c) Reduced employee absenteeism.
(d) Easier access to international capital, better conditions for loans on international
money markets.
(e) Dependable and preferred as supplier, exporter, importer and retailer of responsibly
manufactured components and products.
This way a better society would produce a better environment in which the business
may gain long term profit maximisation.
Question 12
Explain the pragmatic reasons for maintaining ethical behaviour in marketing through
marketing executives. (5 Marks)
Answer
Pragmatic reasons for maintaining ethical behaviour: Marketing executives should practice
ethical bahaviour because it is morally correct. To maintain ethical behaviour in marketing, the
following positive reasons may be useful to the marketing executives:
1. To reverse declining public confidence in marketing: Sometime misleading package
labels, false claim in advertisement, phony list prices, infringement of trademarks pervert
the market trends and such behaviour damages the marketers’ reputation. To reverse
this situation, business leaders must demonstrate convincingly that they are aware of
their ethical responsibility and will fulfill it. Companies must set high ethical standards
and enforce them. Moreover, it is in management’s interest to be concerned with the well
being of consumers, since they are the lifeblood of a business.
2. To avoid increase in government regulation: Business apathy, resistance, or token
responses to unethical behaviour increase the probability of more governmental
regulation. The governmental limitations may also result from management’s failure to
live up to its ethical responsibilities. Moreover, once the government control is
introduced, it is rarely removed.
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PAPER – 2 : BUSINESS LAWS, ETHICS & COMMUNICATION
3. To retain power granted by society: Marketing executives wield a great deal of social
power as they influence markets and speak out on economic issues. However, there is a
responsibility tied to that power. If marketers do not use their power in a socially
acceptable manner, that power will be lost in the long run.
4. To protect the image of the organisation: Buyers often form an impression of an
entire organisation based on their contact with one person. That person represents the
marketing function. Some times a single sales clerk may pervert the market opinion in
relation to that company which he represents.
Therefore, the ethical behaviour in marketing may be strengthened only through the
behaviour of the marketing executives.
Question 13
State with reasons whether the following statements are correct or incorrect.
(a) Fairness and honesty are the pillars of success in business. (2 ½ Marks)
(b) There is no difference between ethics and morals. (2 ½ Marks)
Answer
(a) Correct: The success of the business depends very much on fairness and honesty in the
business. Fairness and honesty are at the heart of the business ethics and relate to the
general values of decision makers. At a minimum, business professionals and persons
are expected to follows all applicable laws and regulation. Even then, they are expected
not to harm customers, employees, clients or competitors knowingly through deception,
misrepresentation, coercion or discrimination.
One aspect of fairness and honesty is related to disclosure of potential harm caused by
product use. For example, Mitsubishi Motors, a Japanese automaker, faced criminal charges
and negative publicity after executives admitted that the company had systematically covered
up customer complaints about tens of thousands of defective automobiles over a 20 year
period in order to avoid expensive and embarrassing product recalls.
Another aspect of fairness relates to competition. Although numerous laws have been
passed to foster competition and make monopolistic practices illegal, companies
sometimes gain control over markets by using questionable practices that harm
competition.
Rivals of Microsoft, for example, accused the software giant of using unfair and
monopolistic practices to maintain market dominance with its Internet Explore browser.
These aforesaid examples show that fairness and honesty pay in the long run; they
secure the stability of the business and overall reputation in the business world.
Therefore we may say that fairness and honesty are the pillars of success in the
business.
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
(b) Incorrect: There is a fine distinction between ethics and morals which may be
enumerated as follows:
(1) The word ‘Moral’ is defined as relating to principles of right and wrong. The root
word for moral is Latin word ‘mos’ meaning custom while the root word for ethics is
the Greek word ‘ethos’ meaning character. Custom and character however provide
two different standards for defining what is wrong and what is right. Character is a
personal attribute while custom is defined by a group over time and people have
character while societies have custom.
(2) Morals are accepted from an authority i.e. culture, religion etc. while ethics are
accepted because they follow from personally accepted principles.
(3) Morals work on a smaller scale than ethics, more reliably but by addressing human
needs for belonging and emulation, while ethics has much wider scope.
PART – III
Question 14
(a) What are the merits and demerits of grape-vine form of Communication. (5 Marks)
(b) TKR Limited wants to hold its statutory meeting on 20th December, 2009 to discuss the
matters relating to formation of the company and incidental matters thereto.
Draft a notice along with notes in brief for calling statutory meeting of the company. (5 Marks)
Answer
(a) Merits of the Grapevine phenomenon:
(a) Speedy transmission: It transmits information very speedily. A run or spreads like
wild fire.
(b) Feedback value: The managers or top bosses of an organisation get the feedback
regarding their policies, decisions memos etc. Feedback reaches then much faster.
(c) Support to other channels: It is a supplementary or parallel channel of
communication
(d) Psychological satisfaction: It gives immense psychological satisfaction to the
workers and strengthens their solidartiy,
(e) It is less credible: It cannot always be taken seriously.
(f) It does not always carry the complete information
(g) If often distorts the picture or often misinforms.
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PAPER – 2 : BUSINESS LAWS, ETHICS & COMMUNICATION
35
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
3. Shri Y Director
4. Shri Z Director
5. Shri T Director
6. Shri R Director
7. Shri Alok representative of Alok & Co. Chartered Accountant
8. Shri S. Secretary of the Company
55 Shareholders attended the meeting in person and 6 shareholders in proxy.
1. Notice: The notice of convening the meeting was read by the Secretary of the
company.
2. Director’s Report and Accounts: With the consent of the members present the
Director’s Report and Accounts having already been circulated to the members
were taken as read.
3. Auditor’s Report: The Auditor’s Report was read.
4. Adoption of Director’s Report, etc: The Chairman the invited queries from the
members present on Director’s Report, Accounts and audit and Auditor’s Report but
there was no query. Thereafter the chairman proposed the following resolution
which was recommended by some of the members namely.
“Resolved that the Director’s Report audited Balance Sheet as on 31th March, 2008
and profit and loss account for the year ended 31st March 2008 and auditor’s report
thereon be and the same are hereby received considered and adopted.”
Carried unanimously.
5. Dividend: Proposed by Shri Devrishi M.D seconded by Shri X Y Directors
“Resolved that the dividend as recommended by the Board of Directors for the year
ended 31st March, 2008 at the rate of Rs.5/- per share on the equity share capital of
the company subject to deduction of tax at source be and is hereby declared for
payment for those shareholders whose name appeared on the Register of Members
as on …..2008.
Carried unanimously.
6. Directors:
Proposed by……………
Seconded by………….
“Resolved that Shri Y who retires by rotation and is eligible for reappointment to and
is hereby reappointed a director of the company.”
Carried unanimously
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PAPER – 2 : BUSINESS LAWS, ETHICS & COMMUNICATION
7. Auditors:
Proposed by ……X Director of the Company.
Seconded by………A,B shareholders of the Company
“Resolved that M/s Alok & Company Chartered Accountants be and are hereby
appointed Auditors of the company to hold office from the conclusion of this meeting
until the conclusion of the next Annual General Meeting at a remuneration of
Rs.50,000/-“
Carried unanimously
The meeting ended with the vote of thanks to the chair.
Dated 20th sept., 200 Sd.
Chairman
Question 16
A partnership firm was constituted by A, B and C. A, the partner of the firm, expressed his
desire to retire from the partnership firm by Mutual consent.
Draft a "Partnership Retirement Deed". (5 Marks)
Answer
Partnership Retirement Deed.
1. This retirement deed partnership executed on the…… between Mr. X aged about 45
years S/o….Y residing at Kanpur here in after called the first party.
2. Mr. A aged about 40 years S/o B residing at Kanpur herein after called the second party,
and
3. Mr. R aged about 51 year S/o S residing at Kanpur herein after called the third party.
Witnesseth as follows,
Whereas the aforesaid parties were carrying on business in partnership under an instrument of
partnership the last of which is dated ….and where as the first party having expressed a desire
to retire from the partnership by mutual consent the terms of retirement are hereby agreed to
as follows:
1. Mr. X, will retire from the partnership effective from close of business on…..
2. The firm is free to continue the business with all its assets and liabilities and use the
same firm name with the remaining partners.
3. The accounts of the retiring partner is settled in accordance with the looks of accounts
or in full and final settlement of his account…… party has been given the following
assets i.e. Rs….
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
4. The retiring partner X is hereby authorises the continuing partners A and R to collect all
debts of the firm or realize or sell any asset of the firm including any immovable
property.
5. In consideration of moneys received the X party hereby releases all his rights little and
interest in the balance of assets of the firm including the goodwill.
6. The continuing partners A and R release X party of all debts and obligations including
taxes due from the firm as on the date of this deed to third parties.
7. The parties hereby agree to execute such other document S that may be necessary to
give effect to this partnership retirement agreement.
Witness
1……………………………………….. Signature of the first party
2……………………………………………Signature of the second party
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PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT
AH
.75 =
24000 Hours
AH = 18000 Hours
Actual Output in term of S tan dard Hours
Efficiency Ratio = × 100
Actual Working Hours
5000 units × 4 hours per unit
= × 100
18000 Hours
20000 Hours
= × 100 = 111.11%
18000 Hours
Actual Output in term of S tan dard Hours
Activity Ratio = × 100
Budgeted Output in term of S tan dard Hours
20000 Units
= × 100
6000 Units × 4 hour per unit
20000 Units
= × 100 = 83.33%
24000 Units
(iii) Financial expenses which are not included in cost accounting are as follows:
• Interest on debentures and deposit
• Gratuity
• Pension
• Bonus of Employee,
• Income Tax,
• Preliminary Expenses
• Discount on issue of Share
• Underwriting Commissions.
(iv) Main advantages of cost plus contracts are:
• Contractor is protected from risk of fluctuation in market price of material, labour
and services.
• Contractee can insure a fair price of the market.
• It is useful specially when the work to be done is not definitely fixed at the time of
making the estimate.
• Contractee can ensure himself about the cost of the contract’, as he is empowered
to examine the books and documents of the contractor to ascertain the veracity of
the cost of the cotract.
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PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT
41
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
Actual fixed overhead was Rs.48,000 less than the budgeted fixed overhead. Budgeted
variable overhead was Rs.20,000 less than the actual variable overhead. The company used
an expected actual activity level of 72,000 direct labour hours to compute the predetermine
overhead rates.
Required :
(i) Compute the unit cost and total income under:
(a) Absorption costing
(b) Marginal costing
(ii) Under or over absorption of overhead.
(iii) Reconcile the difference between the total income under absorption and marginal
costing. (15 Marks)
Answer
(i) Computation of Unit Cost & Total Income
Unit Cost Absorption Costing Marginal Costing
(Rs.) (Rs.)
Direct Material 16.00 16.00
Direct Labour 54.00 54.00
Variable Overhead 12.00 12.00
Fixed Overhead 18.00 -
Unit Cost 100.00 82.00
Income Statements
Absorption Costing
Sales 36,12,000
(21500 × Rs.168)
Less: Cost of goods sold (21500 × 100) 21,50,000
Less: Over Absorption 28,000 21,22,000
14,90,000
Less: Selling & Distribution Expenses 11,90,000
Profit 3,00,000
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PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT
Marginal Costing
Sales 36,12,000
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
45
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
Process II Account
Particulars Units Amount Particulars Units Amount
Rs. Rs.
To Opening - Nil By Normal Loss 840 3,780
WIP
“ Input 42,000 5,04,000 “ Abnormal Loss 460 8,295
“ Direct - 61,530 “ Finished Goods 39,500 7,98,877
Material
“ Labour - 88,820
“ Overhead - 1,76,400 “ Closing WIP 1,200 19,798
42,000 8,30,750 42,000 8,30,750
Abnormal Loss Account
Particulars Units Amount Particulars Units Amount
Rs. Rs.
To Process II 460 8,295 By Cash 460 4,140
(Sold@Rs.9)
. . “ Costing P & L - 4,155
460 8,295 460 8,295
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PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT
47
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
(ii) Explain briefly, what do you understand by Operating Costing. How are composite units
computed?
(iii) The following information relating to a type of Raw material is available:
Annual demand 2000 units
Unit price Rs.20.00
Ordering cost per order Rs.20.00
Storage cost 2% p.a.
Interest rate 8% p.a.
Lead time Half-month
Calculate economic order quantity and total annual inventory cost of the raw material.
(iv) List the eight functional budgets prepared by a business. (3×3=9 Marks)
Answer
(i) Increase in Hourly Rate of Wages (Rowan Plan) is (Rs.60 – Rs.50) = Rs.10
This is Equal to
Time Saved
× Hourly rate
S tan dard Time
Time Saved
Or 10 = × 50
S tan dard Time
Time Saved
Or × 50 = 10
90
900
Time Saved = = 18 Hours
50
Time Taken = (90 – 18) = 72 Hours
Effective Hourly Rate under Halsey System
Time Saved = 18 Hours
Bonus @ 40% = 18 × 40% × 50 = Rs.360
Total Wages = (50 × 72 + 360) = 3,960
Effective Hourly Rate
= 3,960 ÷ 72 Hours
= Rs.55
(ii) Operating Costing: It is method of ascertaining costs of providing or operating a service.
This method of costing is applied by those undertakings which provide services rather
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PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT
2 × 2,000 × 20 80,000
= = = 200 Units
2+8 2
Rs.20 ×
100
Total Annual Inventory Cost
Cost of 2,000 Units @ Rs.20 (2,000 × 20) = Rs.40,000
2000
No. of Order = Rs.10
200
Ordering Cost 10 × 20 = Rs.200
200 10
Carrying cost of Average Inventory × 20 × = Rs.200
2 100
= Rs.40,400
(iv) The various commonly used Functional budgets are:
• Sales Budget
• Production Budget
• Plant Utilisation Budget
• Direct Material Usage Budget
• Direct Material Purchase Budget
• Direct Labour (Personnel) Budget
• Factory Overhead Budget
• Production Cost Budget
Note: In addition to above, there are many more functional budgets which the student
can write alternatively.
49
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
Question 5
Answer any five of the following:
(i) Explain briefly the limitations of Financial ratios.
(ii) What do you understand by Business Risk and Financial Risk?
(iii) Differentiate between Factoring and Bills discounting.
(iv) Differentiate between Financial Management and Financial Accounting.
(v) Y Ltd. retains Rs. 7,50,000 out of its current earnings. The expected rate of return to the
shareholders, if they had invested the funds elsewhere is 10%. The brokerage is 3% and
the shareholders come in 30% tax bracket. Calculate the cost of retained earnings.
(vi) From the information given below calculate the amount of Fixed assets and Proprietor’s
fund.
Ratio of fixed assets to proprietors fund = 0.75
Net Working Capital = Rs. 6,00,000 (5 × 2 =10 Marks)
Answer
(i) Limitations of Financial Ratios
The limitations of financial ratios are listed below:
(a) Diversified product lines: Many businesses operate a large number of divisions in
quite different industries. In such cases, ratios calculated on the basis of aggregate
data cannot be used for inter-firm comparisons.
(b) Financial data are badly distorted by inflation: Historical cost values may be
substantially different from true values. Such distortions of financial data are also
carried in the financial ratios.
(c) Seasonal factors may also influence financial data.
(d) To give a good shape to the popularly used financial ratios (like current ratio, debt-
equity ratios, etc.): The business may make some year-end adjustments. Such
window dressing can change the character of financial ratios which would be
different had there been no such change.
(e) Differences in accounting policies and accounting period: It can make the
accounting data of two firms non-comparable as also the accounting ratios.
(f) There is no standard set of ratios against which a firm’s ratios can be compared:
Sometimes a firm’s ratios are compared with the industry average. But if a firm
desires to be above the average, then industry average becomes a low standard.
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PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT
On the other hand, for a below average firm, industry averages become too high a
standard to achieve.
(g) It is very difficult to generalise whether a particular ratio is good or bad: For example, a
low current ratio may be said ‘bad’ from the point of view of low liquidity, but a high current
ratio may not be ‘good’ as this may result from inefficient working capital management.
(h) Financial ratios are inter-related, not independent: Viewed in isolation one ratio may highlight
efficiency. But when considered as a set of ratios they may speak differently. Such
interdependence among the ratios can be taken care of through multivariate analysis.
(Note : Students to write any four limitations)
(ii) Business Risk and Financial Risk
Business Risk: It is an unavoidable risk because of the environment in which the firm has to
operate and the business risk is represented by the variability of earnings before interest and
tax (EBIT). The variability in turn is influenced by revenues and expenses. Revenues and
expenses are affected by demand of firm’s products, variations in prices and proportion of
fixed cost in total cost.
Financial Risk: It is the risk borne by a shareholder when a firm uses debt in addition to
equity financing in its capital structure. Generally, a firm should neither be exposed to high
degree of business risk and low degree of financial risk or vice-versa, so that shareholders do
not bear a higher risk.
(iii) Differentiation between Factoring and Bills Discounting
The differences between Factoring and Bills discounting are:
(a) Factoring is called as “Invoice Factoring’ whereas Bills discounting is known as ‘Invoice
discounting.”
(b) In Factoring, the parties are known as the client, factor and debtor whereas in Bills
discounting, they are known as drawer, drawee and payee.
(c) Factoring is a sort of management of book debts whereas bills discounting is a sort of
borrowing from commercial banks.
(d) For factoring there is no specific Act, whereas in the case of bills discounting, the
Negotiable Instruments Act is applicable.
(iv) Differentiation between Financial Management and Financial Accounting
Though financial management and financial accounting are closely related, still they differ in
the treatment of funds and also with regards to decision - making.
Treatment of Funds: In accounting, the measurement of funds is based on the accrual
principle. The accrual based accounting data do not reflect fully the financial conditions of the
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
organisation. An organisation which has earned profit (sales less expenses) may said to be
profitable in the accounting sense but it may not be able to meet its current obligations due to
shortage of liquidity as a result of say, uncollectible receivables. Whereas, the treatment of
funds, in financial management is based on cash flows. The revenues are recognised only
when cash is actually received (i.e. cash inflow) and expenses are recognised on actual
payment (i.e. cash outflow). Thus, cash flow based returns help financial managers to avoid
insolvency and achieve desired financial goals.
Decision-making: The chief focus of an accountant is to collect data and present the data
while the financial manager’s primary responsibility relates to financial planning, controlling
and decision-making. Thus, in a way it can be stated that financial management begins where
financial accounting ends.
(v) Computation of Cost of Retained Earnings (Kr)
Kr = k (1-TP) (1-B)
Kr = 0.10 (1- 0.30) (1- 0.03)
= 0.10 (0.70) × (0.97)
= 0.0679 or 6.79%
Cost of Retained Earnings = 6.79%
(vi) Calculation of Fixed Assets and Proprietor’s Fund
Since Ratio of Fixed Assets to Proprietor’s Fund = 0.75
Therefore, Fixed Assets = 0.75 Proprietor’s Fund
Net Working Capital = 0.25 Proprietor’s Fund
6,00,000 = 0.25 Proprietor’s Fund
Rs. 6,00,000
Therefore, Proprietor’s Fund =
0.25
= Rs. 24,00,000
Proprietor’s Fund = Rs. 24,00,000
Since, Fixed Assets = 0.75 Proprietor’s Fund
Therefore, Fixed Assets = 0.75 × 24,00,000
= Rs.18,00,000
Fixed Assets = Rs. 18,00,000
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PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT
Question 6
The Balance Sheets of a Company as on 31st March, 2008 and 2009 are given below:
Liabilities 31.3.08 31.3.09 Assets 31.3.08 31.3.09
Rs. Rs. Rs. Rs.
Equity share capital 14,40,000 19,20,000 Fixed assets 38,40,000 45,60,000
Capital reserve - 48,000 Less: depreciation 11,04,000 13,92,000
General reserve 8,16,000 9,60,000 27,36,000 31,68,000
Profit & Loss A/c 2,88,000 3,60,000 Investment 4,80,000 3,84,000
9% debentures 9,60,000 6,72,000 Sundry debtors 12,00,000 14,00,000
Sundry creditors 5,50,000 5,90,000 Stock 1,40,000 1,84,000
Bills payables 26,000 34,000 Cash in hand 4,000 -
Proposed dividend 1,44,000 1,72,800 Preliminary 96,000 48,000
Expenses
Provision for tax 4,32,000 4,08,000
Unpaid dividend - 19,200
46,56,000 51,84,000 46,56,000 51,84,000
Additional information:
During the year ended 31st March, 2009 the company:
(i) Sold a machine for Rs.1,20,000; the cost of machine was Rs. 2,40,000 and depreciation
provided on it was Rs. 84,000.
(ii) Provided Rs. 4,20,000 as depreciation on fixed assets.
(iii) Sold some investment and profit credited to capital reserve.
(iv) Redeemed 30% of the debentures @ 105.
(v) Decided to write off fixed assets costing Rs. 60,000 on which depreciation amounting to Rs.
48,000 has been provided.
You are required to prepare Cash Flow Statement as per AS 3. (15 Marks)
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
Answer
Cash Flow Statement for the year ending 31st March, 2009
(A) Cash Flows from Operating Activities
Rs.
Profit and Loss A/c
(3,60,000 – 2,88,000) 72,000
Adjustments:
Increase in General Reserve 1,44,000
Depreciation 4,20,000
Provision for Tax 4,08,000
Loss on Sale of Machine 36,000
Premium on Redemption of 14,400
Debentures
Proposed Dividend 1,72,800
Preliminary Expenses written off 48,000
Fixed Assets written off 12,000
Interest on Debentures* 60,480 13,15,680
Funds from Operations 13,87,680
Increase in Sundry Creditors 40,000
Increase in Bills Payable 8,000
48,000
Increase in Sundry Debtors (2,00,000)
Increase in Stock (44,000) (1,96,000)
Cash before Tax 11,91,680
Less: Tax paid 4,32,000
Cash flows from Operating Activities 7,59,680
(B) Cash Flows from Investing Activities
Purchase of Fixed Assets (10,20,000)
Sale of Investment 1,44,000
Sale of Fixed Assets 1,20,000 (7,56,000)
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PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
(b) A hospital is considering to purchase a diagnostic machine costing Rs. 80,000. The projected
life of the machine is 8 years and has an expected salvage value of Rs. 6,000 at the end of 8
years. The annual operating cost of the machine is Rs. 7,500. It is expected to generate
revenues of Rs. 40,000 per year for eight years. Presently, the hospital is outsourcing the
diagnostic work and is earning commission income of Rs.12,000 per annum; net of taxes.
Required:
Whether it would be profitable for the hospital to purchase the machine? Give your
recommendation under:
(i) Net Present Value method
(ii) Profitability Index method.
PV factors at 10% are given below:
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467
(8 + 8 = 16 Marks)
Answer
(a) Income Statements of Company A and Company B
Company A Company B
Rs. Rs.
Sales 91,000 1,05,000
Less: Variable cost 56,000 63,000
Contribution 35,000 42,000
Less: Fixed Cost 20,000 31,500
Earnings before interest and tax (EBIT) 15,000 10,500
Less: Interest 12,000 9,000
Earnings before tax (EBT) 3,000 1,500
Less: Tax @ 30% 900 450
Earnings after tax (EAT) 2,100 1,050
Working Notes:
Company A
EBIT
(i) Financial Leverage =
EBIT − Interest
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PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT
EBIT
5=
EBIT − 12,000
5 (EBIT – 12,000) = EBIT
4 EBIT = 60,000
EBIT = Rs.15,000
(ii) Contribution = EBIT + Fixed Cost
= 15,000 + 20,000
= Rs. 35,000
(iii) Sales = Contribution + Variable cost
= 35,000 + 56,000
= Rs. 91,000
Company B
(i) Contribution = 40% of Sales (as Variable Cost is 60% of Sales)
= 40% of 1,05,000
= Rs. 42,000
Contribution
(ii) Financial Leverage =
EBIT
42,000
4=
EBIT
42,000
EBIT = = Rs.10,500
4
(iii) Fixed Cost = Contribution – EBIT
= 42,000 – 10,500 = Rs. 31,500
(b) Advise to the Hospital Management
Determination of Cash inflows
Sales Revenue 40,000
Less: Operating Cost 7,500
32,500
Less: Depreciation (80,000 – 6,000)/8 9,250
Net Income 23,250
Tax @ 30% 6,975
Earnings after Tax (EAT) 16,275
Add: Depreciation 9,250
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
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PAPER – 3 : COST ACCOUNTING AND FINANCIAL MANAGEMENT
Assuming the corporate tax of 30%, calculate the value of these firms according to MM
Hypothesis. (3 ×3 = 9 Marks)
Answer
(i) Two Basic Functions of Financial Management
Procurement of Funds: Funds can be obtained from different sources having different
characteristics in terms of risk, cost and control. The funds raised from the issue of equity
shares are the best from the risk point of view since repayment is required only at the time of
liquidation. However, it is also the most costly source of finance due to dividend expectations
of shareholders. On the other hand, debentures are cheaper than equity shares due to their
tax advantage. However, they are usually riskier than equity shares. There are thus risk, cost
and control considerations which a finance manager must consider while procuring funds.
The cost of funds should be at the minimum level for that a proper balancing of risk and
control factors must be carried out.
Effective Utilization of Funds: The Finance Manager has to ensure that funds are not kept
idle or there is no improper use of funds. The funds are to be invested in a manner such that
they generate returns higher than the cost of capital to the firm. Besides this, decisions to
invest in fixed assets are to be taken only after sound analysis using capital budgeting
techniques. Similarly, adequate working capital should be maintained so as to avoid the risk
of insolvency.
(ii) (a) Ploughing Back of Profits: Long term funds may also be provided by accumulating the
profits of the company and by ploughing them back into business. Such funds belong to
the ordinary shareholders and increase the net worth of the company. A public limited
company must plough back a reasonable amount of its profits each year keeping in view
the legal requirements in this regard and its own expansion plans. Such funds also
entail almost no risk. Further, control of present owners is also not diluted by retaining
profits.
(b) Desirability Factor: In certain cases we have to compare a number of proposals each
involving different amount of cash inflows. One of the methods of comparing such
proposals is to work out, what is known as the ‘Desirability Factor’ or ‘Profitability Index’.
In general terms, a project is acceptable if the Profitability Index is greater than 1.
Mathematically,
Sum of Discounted Cash inflows
Desirability Factor =
Initial Cash Outlay or Total Discounted Cash outflows
calculated by calculating the cost of specific source of fund and multiplying the cost of
each source by its proportion in capital structure. Thus, weighted average cost of capital
is the weighted average after tax costs of the individual components of firm’s capital
structure. That is, the after tax cost of each debt and equity is calculated separately and
added together to a single overall cost of capital.
(iv) Calculation of Value of Firms P and Q according to MM Hypothesis
Market Value of Firm P (Unlevered)
EBIT (1 - t )
Vu =
Ke
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PAPER – 4 : TAXATION
Answer all questions.
Question 1
From the following details, compute the total income of Siddhant of Delhi and tax payable for
the A.Y.2009-10:
Rs.
Salary including dearness allowance 3,35,000
Bonus 11,000
Salary of servant provided by the employer 12,000
Rent paid by Siddhant for his accommodation 49,600
Bills paid by the employer for gas, electricity and water provided free of cost at 11,000
the above flat
Siddhant was provided with company’s car (self-driven) also for personal use and it is not possible
to determine expenditure on personal use and all expenses were borne by the employer.
Siddhant purchased a flat in a co-operative housing society for Rs.4,75,000 in April, 1990,
which was financed by a loan from Life Insurance Corporation of India of Rs.1,60,000 @ 15%
interest, his own savings of Rs.85,000 and a deposit from a nationalized bank for Rs.2,50,000
to whom this flat was given on lease for ten years. The rent payable was Rs.3,500 per month.
The following particulars are relevant:
(a) Municipal taxes paid Rs.4,300 (per annum)
(b) Society charges for passage lights, watchman’s salary Rs.1,900 (per annum)
(c) Insurance Rs.860
(d) He earned Rs.2,700 in share speculation business and lost Rs.4,200 in cotton
speculation business.
(e) In the year 2003-04, he had gifted Rs.30,000 to his wife and Rs.20,000 to his son who
was aged 11. The gifted amounts were advanced to Mr. Rajesh, who was paying interest
@ 19% per annum.
(f) Siddhant received a gift of Rs.25,000 each from four friends.
The Suggested Answers for of Paper – 4: Taxation are based on the provisions of law as
amended by the Finance Act, 2008 and notifications and circulars issued upto 30-04-2009.
The relevant assessment year for income-tax is A.Y. 2009-10.
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER,2009
(g) He contributed Rs.5,600 to Public Provident Fund and Rs.4,000 to Unit Linked Insurance
Plan.
(h) He received national award for humanitarian work from the Central Government in the
form of a land whose fair market value is Rs.5,00,000 as on 31st March, 2009. (16 Marks)
Answer
Computation of total income and tax liability of Siddhant for the A.Y. 2009-10
Particulars Rs. Rs.
Salary Income
Salary including dearness allowance 3,35,000
Bonus 11,000
Value of perquisites:
(i) Salary of servant 12,000
(ii) Car (The company is liable to pay FBT on the same; therefore, it Nil
is not a perquisite in the hands of the employee)
(iii) Free gas, electricity and water 11,000 __23,000
3,69,000
Income from house property
Gross Annual Value (GAV) (Rent receivable is taken as GAV in the 42,000
absence of other information) (3,500 × 12)
Less: Municipal taxes paid [See Note 2(i)] _4,300
Net Annual Value (NAV) 37,700
Less: Deductions under section 24
(i) 30% of NAV 11,310
(ii) Interest on loan from LIC @15% of 1,60,000 24,000 35,310 2,390
[See Note 2(ii)]
Income from speculative business
Income from share speculation business 2,700
Less: Loss from cotton speculation business 4,200
Net Loss 1,500
Net loss from speculative business has to be carried forward as it
cannot be set off against any other head of income.
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PAPER – 4 : TAXATION
(ii) Interest income earned from advancing money gifted to wife has 5,700
to be clubbed with the income of the assessee as per section
64(1)
(iii) Gift received from four friends (taxable under section 56(2)(vi) as the
aggregate amount received during the year exceeds Rs.50,000) 1,00,000
1,08,000
Gross Total Income 4,79,390
Particulars Rs.
Tax on total income 48,958
Add: Education cess@2% 979
Add: Secondary and higher education cess@1% 490
50,427
Tax liability (rounded off) 50,430
Notes:
(1) National Award for humanitarian work given by the Central Government is exempt under
section 10(17A) of the Income-tax Act, 1961.
(2) The following assumptions have been made while computing income under the head
“Income from house property” -
(i) It is the owner, namely, Mr.Siddhanth, who has paid the municipal taxes;
(ii) The entire loan of Rs.1,60,000 is outstanding as on 31.3.2009; and
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER,2009
(iii) Society charges of Rs.1,900 p.a. is not included in the rent of Rs.3,500 p.m.
payable by the tenant. Such charges have either been paid directly by Mr. Siddhant
or recovered separately from the tenant.
(3) It has been assumed that Siddhant’s own flat in a co-operative housing society, which he
has rented out to a nationalised bank, is also in Delhi. Therefore, he is not eligible for
deduction under section 80GG in respect of rent paid by him for his accommodation in
Delhi, since one of the conditions to be satisfied for claiming deduction under section
80GG is that the assessee should not own any residential accommodation in the same
place.
Question 2
Answer any two of the following
(a) From the following particulars of Pankaj for the previous year ended 31st March, 2009,
compute the income chargeable under the head “Income from other sources”:
Rs.
(i) Directors fee from a company 10,000
(ii) Interest on bank deposits 3,000
(iii) Income from undisclosed source 12,000
(iv) Winnings from lotteries (Net) 33,500
(v) Royalty on a book written by him 9,000
(vi) Lectures in seminars 5,000
(vii) Interest on loan given to a relative 7,000
(viii) Interest on debentures of a company (listed in a recognised stock 3,588
exchange) net of taxes
(ix) Interest on Post Office Savings Bank Account 500
(x) Interest on Government Securities 2,200
(xi) Interest on Monthly Income Scheme of Post Office 33,000
He paid Rs.1,000 for typing the manuscript of book written by him.
(b) Mr. Raman is a co-owner of a house property alongwith his brother.
Rs.
Municipal value of the property 1,60,000
Fair rent 1,50,000
Standard rent under the Rent Control Act 1,70,000
Rent received 15,000 p.m.
The loan for the construction of this property is jointly taken and the interest charged by
the bank is Rs.25,000, out of which Rs.21,000 has been paid. Interest on the unpaid
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PAPER – 4 : TAXATION
interest is Rs.450. To repay this loan, Raman and his brother have taken a fresh loan
and interest charged on this loan is Rs.5,000.
The municipal taxes of Rs.5,100 have been paid by the tenant.
Compute the income from this property chargeable in the hands of Mr. Raman for the
A.Y. 2009-10.
(c) Compute the net taxable capital gains of Smt. Megha on the basis of the following
information -
A house was purchased on 1.5.1997 for Rs.4,50,000 and was used as a residence by the
owner. The owner had contracted to sell this property in June, 2007 for Rs.10 lacs and
had received an advance of Rs.70,000 towards sale. The intending purchaser did not
proceed with the transaction and the advance was forfeited by the owner. The property
was sold in April, 2008 for Rs.15,00,000. The owner, from out of sale proceeds, invested
Rs.4 lacs in a new residential house in January, 2009. (2 × 6 = 12 Marks)
Answer
(a) Computation of income of Pankaj chargeable under the head “Income from other
sources” for the A.Y. 2009-10
Particulars Rs. Rs.
1. Directors’ fees 10,000
2. Interest on bank deposit 3,000
3. Income from undisclosed source 12,000
4. Royalty on books written (See Note below) 9,000
Less: expenses 1,000 8,000
5. Lectures in seminars 5,000
6. Interest on loan given to a relative 7,000
7. Interest on listed debentures
Net Received 3,588
Add: T.D.S. @ 10.3%
3588 × 10.3
412 4,000
100 − 10.3
8. Interest on Post Office Savings Bank [exempt under -
section 10(15)]
9. Interest on Government securities 2,200
10. Interest on Post Office Monthly Income Scheme 33,000
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER,2009
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PAPER – 4 : TAXATION
Working Note:
Indexed cost of acquisition
Purchase price 4,50,000
Less: Amount forfeited (See Note 2 below) __70,000
Cost of acquisition 3,80,000
Notes:
(1) Exemption under section 54 is available if a new residential house is purchased
within two years from the date of transfer of existing residential house, which is a
long-term capital asset. Since the cost of new residential house is less than the
long-term capital gains, capital gains to the extent of cost of new house, i.e., Rs.4
lakh, is exempt under section 54.
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER,2009
(2) As per section 51, any advance received and retained by the assessee, as a result
of earlier negotiations for sale of the asset, shall be deducted from the purchase
price for computing the cost of acquisition of the asset.
Question 3
Mr. Rajat submits the following information for the financial year ending 31st March, 2009. He
desires that you should:
(a) Compute the total income and
(b) Ascertain the amount of losses that can be carried forward.
(i) He has two houses : Rs.
(a) House No. I – Income after all statutory deductions 72,000
(b) House No. II – Current year loss (30,000)
(ii) He has three proprietary businesses :
(a) Textile Business :
(i) Discontinued from 31st October, 2008 - Current year loss 40,000
(ii) Brought forward business loss of A.Y.2005-06 95,000
(b) Chemical Business :
(i) Discontinued from 1st March, 2007 - hence no profit/loss Nil
(ii) Bad debts allowed in earlier years recovered during this year 35,000
(iii) Brought forward business loss of A.Y. 2007-08 50,000
(c) Leather Business : Profit for the current year 1,00,000
(d) Share of profit in a firm in which he is partner since 2002 16,550
(iii) (a) Short-term capital gain 60,000
(b) Long-term capital loss 35,000
(iv) Contribution to LIC towards premium 10,000
(10 Marks)
Answer
Computation of total income of Mr. Rajat for the A.Y. 2009-10
Particulars Rs. Rs.
1. Income from house property
House No.1 72,000
House No.2 (-) 30,000 42,000
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PAPER – 4 : TAXATION
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER,2009
(1) Any person including the principal officer of a company who is required to
deduct any sum in accordance with the provisions of Act, and
(2) An employer paying tax on non-monetary perquisites under section 192(1A).
(ii) No penalty shall be charged from such person unless the Assessing Officer is
satisfied that such person has failed to deduct and pay the tax without good and
sufficient reasons.
(iii) Such person shall also be liable to pay simple interest@1% for every month or part
of a month on the amount of such tax from the date on which such tax was
deductible to the date on which such tax is actually paid and such interest should be
paid before furnishing the quarterly statements.
(iv) Where the tax has not been paid after it is deducted, the amount of the tax together
with the amount of simple interest, shall be a charge upon all the assets of the
person or the company, as the case may be.
(b) Reference to Valuation Officer
With a view to ascertaining the fair market value of a capital asset, the Assessing Officer
may refer valuation of the capital asset to the Valuation Officer, in the following cases:
(1) Where the value of the asset, as claimed by the assessee, is in accordance with the
estimate made by the registered valuer but the Assessing Officer is of the opinion
that the value so claimed is less than its fair market value;
(2) Where the Assessing Officer is of the opinion that the fair market value of the asset
exceeds the value of the asset as claimed by the assessee by more than 15% of the
value of the asset as so claimed or by more than Rs.25,000.
(3) Where the Assessing Officer is of opinion that, having regard to the nature of the
asset and relevant circumstances, it is necessary to make a reference to the
Valuation Officer.
(c) Reverse Mortgage Scheme and its tax implications
(i) The Reverse Mortgage scheme is for the benefit of senior citizens, who own a
residential house property. In order to supplement their existing income, they can
mortgage their house property with a scheduled bank or housing finance company,
in return for a lump-sum amount or for a regular monthly/quarterly/annual income.
The senior citizens can continue to live in the house and receive regular income,
without the botheration of having to pay back the loan.
(ii) The borrower can use the loan amount for renovation and extension of residential
property, family’s medical and emergency expenditure etc., amongst others.
However, he cannot use the amount for speculative or trading purposes.
(iii) Clause (xvi) of section 47 clarifies that any transfer of a capital asset in a
transaction of reverse mortgage under a scheme made and notified by the Central
Government would not amount to a transfer for the purpose of capital gains.
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PAPER – 4 : TAXATION
(iv) Clause (43) of section 10 provides that any amount received by an individual as a
loan, either in lump sum or in installments, in a transaction of reverse mortgage
would be exempt from income-tax.
(d) Carry forward and set off of losses in cases of change in constitution of firm or on
succession [Section 78]
(i) Where there is a change in the constitution of firm, so much of the loss
proportionate to the share of a retired or deceased partner remaining unabsorbed,
shall not be allowed to be carried forward by the firm.
(ii) Where any person carrying on any business or profession has been succeeded in
such capacity by another person otherwise than by inheritance, such other person
shall not be allowed to carry forward and set off against his income, any loss
incurred by the predecessor.
(iii) Where there is a succession by inheritance, the legal heirs (assessable as BOI) are
entitled to set off the business loss of the predecessor. Such carry forward and set off
is possible even if the legal heirs constitute themselves as partnership firm. In such a
case, the firm can carry forward and set off the business loss of the predecessor.
Question 5
Answer the following:
(a) Should service tax be paid even, if it is not collected from the client or service receiver?
(b) Mr. Raju is a multiple service provider and files only a single return. State with reasons
whether he can do so?
(c) Explain the term “Vocational Training Institute” under the provisions of service tax.
(d) State with reason in brief whether the following statement is true or false with reference
to the provisions of service tax:
Mr. Salim, an architect has received the fees of Rs.4,48,500 after the deduction of
income-tax of Rs.51,500. Service tax will be payable on Rs.4,48,500. (2 x 4 = 8 Marks)
Answer
(a) Section 68 of the Finance Act, 1994 casts the liability to pay service tax upon the service
provider or upon the person liable to pay service tax as per Rule 2(1)(d) of the Service
Tax Rules, 1994. This liability is not contingent upon the service provider realizing or
charging the service tax at the prevailing rate. The statutory liability does not get
extinguished if the service provider fails to realize or charge the service tax from the
service receiver.
(b) Yes, Mr. Raju can file a single return though he is a multiple service provider. He has to
furnish the details in each of the columns of the Form No.ST-3 separately for each of the
taxable services rendered by him. Thus, instead of showing a lump sum figure for all the
services together, service-wise details should be provided in the return.
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER,2009
(c) Notification No. 24/2004 ST dated 10.09.2004 defines a vocational training institute to
mean a commercial training or coaching centre which provides vocational coaching or
training that impart skills to enable the trainee to seek employment or undertake self-
employment, directly after such training or coaching.
(d) False. As the charge of the service tax is on the services provided, the gross receipts
are to be considered for tax calculation. Hence, service tax will be payable on the gross
fee of Rs.5 lakh.
Question 6
(a) Rosy Tours Co. has arranged three package tours during F.Y. 2008 - 09. The particulars
of the services and charges are as under:
(i) Tour 1: April, 2008 - Charges received Rs.3.5 Lacs.
The package includes transportation, accommodation, food, tourist guide and entry
fees for monuments.
(ii) Tour 2: October, 2008 - Charges received Rs.6.5 Lacs.
The package includes transportation and accommodation for stay.
(iii) Tour 3: December, 2008 - Charges received Rs.4 Lacs.
The charges are solely for arranging accommodation for stay. However, the bills
issued to the clients do not mention it clearly that the charges are solely for
arranging the accommodation for stay.
All the charges are excluding service tax. The rate of service tax is 12% + education
cess. Compute the value of taxable service and service tax payable thereon. (8 Marks)
(b) Answer the following:
(i) Whether export service provided by a service provider is excluded for the purpose
of payment of service tax?
(ii) List the documents to be submitted alongwith the first service tax return.
(iii) What is the due date for payment in case of e-payment of service tax?
(3 x 3 = 9 Marks)
Answer
(a) Computation of total value of taxable services provided by Rosy Tours Co. for F.Y. 2008-
09:-
Particulars Value of Abatement Taxable value Value of
services in % age taxable
services
Rs. % Rs.
Tour 1 – April, 2008 3,50,000 75 (Note 1) 25 87,500
72
PAPER – 4 : TAXATION
73
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER,2009
74
PAPER – 4 : TAXATION
(c) The income variant of VAT allows deduction of purchases of raw material and
components as well as depreciation of capital goods. This method provides incentive to
classify purchases as current expenditure to claim set off. In practice, however, there
are many difficulties connected with the specification of any method of measuring
depreciation, which basically depends on the life of an asset as well as on the rate of
inflation.
(d) False. Since VAT is not applicable on sale of lottery tickets, the question of rate does not
arise.
Question 8
(a) Mr. X, a manufacturer sells goods to Mr. B, a distributor for Rs.2,000 (excluding VAT).
Mr. B sells goods to Mr. K, a wholesale dealer for Rs.2,400. The wholesale dealer sells
the goods to a retailer for Rs.3,000, who ultimately sells to the consumers for Rs.4,000.
Compute the tax liability, input credit availed and tax payable by the manufacturer,
distributor, wholesale dealer and retailer under invoice method assuming VAT rate @
12.5%. (8 Marks)
(b) Answer the following:
(i) What are the different stages of VAT? Can it be said that entire burden falls on the
final consumer?
(ii) Discuss filing of return under VAT.
(iii) List six purchases which are not eligible for input tax credit. (3 x 3 = 9 Marks)
Answer 8
(a) Computation of tax liability, input tax credit availed and tax payable under invoice method
Stage Particulars VAT Less VAT Tax payable to
Liability Credit Government
1. X, the manufacturer, sells to 250 - 250
B, the distributor, for
Rs.2,000. Therefore his tax
liability will be Rs.250
(Rs.2,000 @ 12.5%). He will
not have any VAT credit.
2. B, the distributor, sells goods 300 250 50
to K, the wholesale dealer,
for Rs.2,400. B’s tax liability
will be Rs.300 (Rs.2,400 @
12.5%). He will get set off of
tax paid at earlier stage of
Rs.250. Thus, tax payable
by him will be Rs.50.
75
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION : NOVEMBER,2009
76
PAPER – 4 : TAXATION
(iii) The following purchases are not eligible for input tax credit:
(a) purchases from unregistered dealers;
(b) purchases from registered dealers who opt for composition scheme under the
provisions of the Act;
(c) purchase of goods as may be notified by the State Government;
(d) purchase of goods where the purchase invoice is not available with the
claimant or there is evidence that the same has not been issued by the
registered selling dealer from whom the goods are purported to have been
purchased;
(e) purchase of goods where invoice does not show the amount of tax separately;
(f) purchase of goods which are being utilized in the manufacture of exempted
goods;
(g) purchase of goods used for personal use or consumption or provided free of
charge as gifts;
(h) goods imported from other States;
(i) goods imported from outside the territory of India;
(j) goods in stock which have suffered tax under an earlier Act but under VAT Act
they are covered under exempted items.
Out of the above, any six purchases may be mentioned in the answer.
77
SUMMARY OF EXAMINERS’ COMMENTS ON THE PERFORMANCE OF CANDIDATES
PAPER – 1 : ACCOUNTING
General Comments
The performance of the candidates has not been satisfactory. The answers of the candidates
showed lack of knowledge and understanding of the subject, particularly the Accounting Standards.
The candidates are advised to read and understand the Study Material thoroughly and analytically.
Adequate practice of solving practical problems is essential to acquire command over the
fundamentals of the subject. The solutions to practical problems must be given in suitable formats
along with sufficient working notes. It is suggested that the question paper should be gone through
carefully before writing the answers.
Specific Comments:
Question1 In parts (ii), (iii), (v), (viii), (x), candidates could not answer the question in accordance
with the relevant provisions of the Accounting Standards.
Question 2 Most of the candidates failed to give the required journal entries in the books of MN
Ltd. In very few cases, the balance sheet of MN Ltd. (post merger) was prepared correctly by the
candidates.
Question 3 Few candidates could not pass the necessary journal entries. Consequently, they
could not prepare partners; capital accounts in the correct manner.
Question 4 In part (b) of the question, some candidates calculated the amount the amount of
interest directly, without using the average due date method.
Question 5.(a) Some candidates erred in calculation of subscription received, purchase of sports
equipment, opening balance of capital fund. They could not give the correct receipts and payments
account and balance sheet of the club.
(b) Many candidates committed mistakes in allocation of expenses between pre and post
incorporation periods and consequently, in computation of pre incorporation and post incorporation
profits.
Question 6 Many candidates could not score good marks in this question as the answers were
not concise and to the point. In parts (iv) and (vi), they could not apply the relevant provisions of
the Accounting Standards. They were not aware of the disclosure requirements in the profit and
loss statement of a company in respect of corporate dividend tax which was required in part (v) of
the question.
SUMMARY OF EXAMINERS’ COMMENTS
General Comments
The performance of the examinees, in general, was average. The following improvements are
required:
1. Examinees to provide case-laws and specific provisions in their answers.
2. Examinees to hone their English language skills such that their answers have clarity
and precision.
3. Examinees to make use of the various Bare Acts.
4. Examinees must grasp the questions correctly and not get confused as mentioned in
Specific Comment No. 3 below.
5. Examinees to answer to the point, without unnecessary extrapolations.
6. Examinees to focus on certain legislations such as the Negotiable Instruments Act,
1881, and the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952.
7. In the Communications part, performance of the students was satisfactory.
Nevertheless, the students should improve their writing and presentation skills.
Further, the students are advised to delve deep into the areas of drafting
notices/circulars/minutes/ legal deeds and documents etc.
Specific Comments
Question 1. The performance of the examinees was average in 1(a) while 1(b) and 1(c) were
answered satisfactorily. Some examinees had come to the erroneous conclusion that there was no
consideration involved in question 1(a) and that hence there was no contract in the given problem.
Question 2. Examinees’ performance was quite satisfactory compared to question No.1, though
both the questions are similarly patterned.
Question 3. The performance of the examinees was found to be mixed, with some answering
well, while others having failed to mention the relevant legal provision, while still others were
referring erroneously to the Central Government rather than the Tamilnadu Government.
Question 4. Many examinees had not mentioned the relevant provisions (Sections 39 & 40 of the
Negotiable Instruments Act).
Question 5. The performance of the examinees was highly satisfactory.
Question 6. Many examinees had not attempted this question. Even those who had attempted it
fared poorly.
Question 7. This question was not answered well. Many examinees could not explain why the
entity in question was an ‘illegal association’.
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
Question 8. Examinees’ performance was average. The various rights of the three parties were
not clearly enunciated by most examinees.
Question 9. Performance of the examinees was satisfactory.
Question 10. An overall average performance with regard to this question. Many examinees could
not pin-point that the non-attachment of the explanatory note vitiates the notice.
Question 11. Performance was average and the answers were vague, in many cases.
Question 12. The performance was generally good, though the pragmatic reasons were found
mixed up with certain general reasons that the candidates had adduced on their own.
Question 13. Performance was satisfactory.
Question14.(a) Performance of the students was quite satisfactory. The question was asked to
test the students’ knowledge about the merits and demerits of informal form of communication.
(b) Most of the students attempted this question in a very poor manner. The students failed to
discriminate the difference between Notice and Agenda. The students must develop a logical
understanding to tackle such a practical question.
Question 15. Overall performance of the students was not satisfactory. The format of the Annual
General Meeting was not followed by most of the students. The students are advised to practice
the specimen of Minutes of Annual General Meeting.
Question16. Performance of the students was middling. They could not get the essence of the
question and drafted the Partnership Deed rather than the Partnership Retirement Deed.
General Comments
The overall performance of the candidates was below average. The quality of most of the answers
reflected lack of candidates’ knowledge and understanding of the subject. It is also observed that
the candidates neglect the theoretical aspects of the subject; they should go through the study
material carefully. A thorough practice and lots of reading of the subject is required to maintain the
level of knowledge expected from the students of IPCC level.
Specific Comments
Question1.(i) This theory question related to ‘Basic Concepts’ was attempted by majority of the
candidates. Most of the students were not able to understand the ‘imputed cost’ as ‘input cost’.
Many of them were not able to answer it appropriately.
(ii) This practical question related to labour (Variance analysis of labour) was attempted by the
majority of the candidates. Maximum of the students were not able to answer it correctly. They
failed to depict the relationship of activity ratio, efficiency ratio and capacity ratio correctly.
80
SUMMARY OF EXAMINERS’ COMMENTS
(iii) This theory question part related to ‘Non Integrated Accounts’ was not satisfactorily answered
by the majority of the students. Many of the examinees had treated ‘financial expenses’ as financial
items’.
(iv) This theory question was related to ‘Contract Costing’ was correctly answered by only few of
the students. The advantages of cost plus contracts were stated correctly by the students.
(v) This practical question part related to ‘Marginal Costing’ was not satisfactorily answered by
many of the students. Many of them failed to calculate BEP correctly.
(vi) This theory question related to ‘Non – Integrated Accounts’ was not well answered by most of
the candidates. Many of them failed to mention a situation where reconciliation statement of cost
and financial account are not required.
Question2. This numerical question related to ‘Marginal Costing and Absorption Costing’ was
attempted by less number of the examinees. The students were confused with the preparation of
the respective statements. The candidates could not solve this question correctly.
Question3.(a) This numerical problem related to ‘Process Costing’ is covered under ‘Method of
Costing (II)’ was attempted by a large number of students. Most of the examinees had failed to
take into account of the material introduced at the inception and hence could not prepare the
statement of equivalent production account, statement of cost and process account correctly.
(b) This practical question related to ‘Standard Costing’ was satisfactorily answered by majority
of the students. Variance related to material and labour was correctly calculated by most of the
candidates.
Question4.(i) This numerical question related to ‘Labour’ was wrongly answered by maximum
number of candidates. Most of the students were able to calculate ‘time saved’ but they were not
able to accurately calculate the effective hourly rate of wages.
(ii) This theory question part related to ‘Operating Costing’ is covered under ‘Method of Costing
(I)’ was not answered satisfactorily by maximum number of candidates. They were not able to
show that how composite units are computed.
(iii) This numerical question related to ‘Material’ is attempted by the maximum number of students
satisfactorily. EOQ was calculated by majority of them.
(iv) This theory question related to ‘Budgets & Budgetary Control’ was very well answered by the
majority number of students. They were even not able to list out the list of functional budgets
correctly.
Question 5.(i) Short note on Limitations of Financial Ratios was answered correctly by most of the
candidates.
(ii) Concept of Business Risk and Financial Risk was answered well by majority of the
candidates.
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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
(iii) Differentiation between Factoring and Bills Discounting was well written by most of the
candidates. However, few candidates differentiated between factoring and discounting instead.
(iv) A large percentage of the candidates discussed the differentiation between Financial
Management and Financial Accounting well.
(v) Very few candidates could compute the Cost of Retained Earnings on correct lines.
(vi) Majority of the candidates were able to calculate the amount of Fixed Assets and Proprietor’s
Fund correctly.
Question 6 Majority of the candidates prepared the Cash Flow Statement on correct lines but
failed to present it in the proper format. However, a few candidates could not work out cash flow
from operating activities correctly. Further, the candidates have not presented their answers
supported by proper working notes in preparation of cash flow statement.
Question 7.(a) Though a large percentage of the candidates prepared correctly the Income
Statement, however, few of the candidates did not support their answers by proper working notes.
(b) This part of the question was not well answered by majority of the candidates. Most of them
failed to take into consideration the loss of commission. Few of the candidates even added the
commission to the income instead of treating it as an opportunity lost.
Question 8.(i) Majority of the candidates answered well the two basic functions of Financial
Management. However, a few of them discussed the objectives of Financial Management instead.
(ii) A large percentage of the candidates attempted this part of the question on short notes on
Ploughing back of profits and Desirability factor. However, only a handful could discuss logically
and in short. Few of the candidates have written ploughing back of profits as profit on sale of old
assets.
(iii) A large percentage of candidates explained well the concept of Weighted Average Cost of
Capital.
(iv) While most of the candidates attempted the problem, only a few of them could calculate the
value of the firms according to MM Hypothesis correctly.
PAPER − 4 : TAXATION
General Comments
Many candidates have exhibited lack of knowledge of the provisions of the Income-tax Act and
Service Tax and VAT. They were also not aware of the recent amendments in the Income-tax Act.
Further, most of the candidates have not given proper working notes for practical problems. The
presentation of answers is also poor in most cases.
82
SUMMARY OF EXAMINERS’ COMMENTS
Specific Comments
Question 1.(i) Many candidates have wrongly considered the purchase price of flat, i.e.,
Rs.4,75,000, as the annual value of house property.
(ii) Most of the candidates have not provided for exemption of Rs.1,500 under section 10(32) in
respect of income of minor child, clubbed in the hands of Siddhant;
(iii) Some candidates have wrongly taxed national award for humanitarian work from the Central
Government under the head “Capital gains” or “Income from other sources”. Some others have
totally ignored the same without giving any reason.
Question 2.(a)(i) Many candidates have not grossed up winnings from lotteries and interest
on debentures while calculating income under the head “Income from other sources”;
(ii) Most of the candidates have wrongly treated interest on Government securities and
interest on Post Office Monthly Income Scheme as exempt income.
(b) (i) Most of the candidates have allowed interest under section 24 on payment basis
instead of due basis;
(ii) Municipal taxes paid by the tenant was wrongly allowed as deduction from gross annual
value in most of the cases.
(c) Many candidates have not deducted the advance of Rs.70,000, received and retained on
an earlier negotiation for sale of property, to arrive at the cost of acquisition.
Question 3.(i) Some candidates have wrongly treated share of profit from firm as taxable income
and set off business losses against the same;
(ii) Some candidates have wrongly set off brought forward business loss against income from
house property of the current year;
(iii) Many candidates have wrongly set-off long-term capital loss against short-term capital gain.
Question 4.(a) Most of candidates were not aware of the provisions of section 201 relating to
consequences of failure to deduct and pay the tax and hence, they could not answer the question
correctly.
(b) Some candidates have wrongly written about the provisions of section 50C dealing with
adoption of value assessed by stamp valuation authority.
(d) Most of the candidates were not aware of the provisions of section 78 and have wrongly
written about the order of set-off under each head of income. Some candidates have answered
that loss can be carried forward without any restriction even in case of change in constitution /
succession in business.
Question 5.(d) Few candidates wrongly took the net amount (net of TDS) as the taxable receipt.
Some candidates further deducted the amount of TDS from Rs.4,48,500 while others wrongly
concluded that once TDS is deducted no service tax is liable to be paid.
83
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
Question 6.(a) Majority of the candidates were ignorant about the percentage of abatements
available to various tours.
(b)(i) Many candidates were not aware of the provisions relating to export of services.
(b)(iii) Many candidates did not mention the due date for the month of March. Some of them
wrongly considered HUF along with individual and firm for the purpose of determining the due
dates.
Question 7.(d) Instead of mentioning that VAT is not applicable on lottery tickets, many
candidates wrongly considered lottery ticket as exempt item under VAT.
Question 8.(b)(i) Many candidates wrongly concluded that the final burden of VAT does not
lie on the consumer.
(b)(ii) Most of the candidates provided general answers to this question instead of mentioning the
procedure of filing of returns under VAT.
84
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