RTP For June 2019 CAP II-All Subjects

CHARTERED ACCOUNTANCY PROFESSIONAL
(CAP-II)
REVISION TEST PAPER

JUNE 2019
The Institute of Chartered Accountants of Nepal

CAP II Advance Accounting- June 2019
Paper 1:
Advance Accounting
The Institute of Chartered Accountants of Nepal 2

REVISION QUESTIONS
Business Combination
Question 1:
The following are the Balance Sheets of companies as at 32 nd Ashadh, 2075:
Liabilities DD Ltd. SS Ltd. Assets DD Ltd. SS Ltd.

Rs. Rs. Rs. Rs.
Equity share capital (Rs. 800,000 600,000 Goodwill 600,000 ―
100) Fixed Assets 500,000 800,000
General Reserve 400,000 300,000 Investments 200,000 400,000
Investment Allowance Current Assets 400,000 300,000
Reserve ― 400,000
Sundry Creditors 500,000 200,000 ________ ________
1,700,000 1,500,000 1,700,000 1,500,000
DD Ltd. took over SS Ltd. on the basis of the respective shares value, adjusting wherever
necessary, the book values of assets and liabilities on the basis of the following information:
(i) Investment Allowance Reserve amounting to Rs. 200,000 has to carry forward till FY 2076/077 for
utilization.
(ii) Investments of SS Ltd. included 1,000 shares in DD Ltd. acquired at cost of Rs. 150 per share. The
other investments of SS Ltd. have a market value of Rs. 192,500.
(iii) The market value of investments of DD Ltd. are to be taken at Rs. 100,000.
(iv) Goodwill of DD Ltd. and SS Ltd. are to be taken at Rs. 500,000 and Rs. 100,000 respectively.
(v) Fixed assets of DD Ltd. and SS Ltd. are valued at Rs. 600,000 and Rs. 850,000 respectively.
(vi) Current assets of DD Ltd. included Rs. 80,000 of stock in trade received from SS Ltd. at cost plus
25%.
The above scheme has been duly adopted. Pass necessary Journal Entries in the books of DD Ltd.
and prepare Balance Sheet of DD Ltd. after taking over the business of SS Ltd. Fractional share to
be settled in cash, rest in shares of DD Ltd. Calculation shall be made to the nearest multiple of a
rupee.
Question 2:
Following is the Balance Sheet of X Co. Ltd. as at 31 st March, 2019:
Balance Sheet as at 31st March, 2019
Liabilities Rs. Assets Rs.
Equity share capital (Rs. 100 each) 15,00,000 Land and building 10,00,000
11% Pref. share capital 5,00,000 Plant and machinery 7,00,000
General reserve 3,00,000 Furniture and fittings 2,00,000
Sundry creditors 2,00,000 Stock in trade 3,00,000
Sundry debtors 2,00,000
_ Cash in hand and at bank 1,00,000
25,00,000 25,00,000
Y Co. Ltd. agreed to take over X Co. Ltd. on the following terms:
(i) Each equity share in X Co. Ltd. for the purpose of absorption is to be valued at Rs . 80.
(ii) Equity shares will be issued by Y Co. Ltd. by valuing its each equity share of Rs. 100 each at Rs.
120 per share.
(iii) 11% Preference shareholders of X Co. Ltd. will be given 11% redeemable debentures of Y Co.
Ltd. at equivalent value.

(iv) All the Assets and Liabilities of X Co. Ltd. will be recorded at the same value in the books of Y
Co. Ltd.
(a) Calculate Purchase consideration.
(b) Pass Journal entries in the books of Y Co. Ltd. for absorbing X Co. Ltd.
Internal Reconstruction
Question 3:
The Balance Sheet of Hilltop Limited as on 32 nd Ashadh, 2075 was as follows:
Liabilities Amount Assets Amount
(Rs.) (Rs.)
5,00,000 Equity Shares of Rs. 10 each 50,00,000 Goodwill 10,00,000
fully paid Patent 5,00,000
9% 20,000 Preference shares of Rs. Land and Building 30,00,000
100 each fully paid 20,00,000 Plant and Machinery 10,00,000
10% First debentures 6,00,000 Furniture and Fixtures 2,00,000
10% Second debentures 10,00,000 Computers 3,00,000
Debentures interest outstanding 1,60,000 Trade Investment 5,00,000
Trade creditors 5,00,000 Debtors 5,00,000
Directors’ loan 1,00,000 Stock 10,00,000
Bank overdraft 1,00,000 Discount on issue of debentures 1,00,000
Outstanding liabilities 40,000
Provision for Tax 1,00,000 Profit and Loss Account(Loss) 15,00,000
96,00,000 96,00,000
Note: Preference dividend is in arrears for last three years.
A holds 10% first debentures for Rs. 4,00,000 and 10% second debentures for Rs. 6,00,000. He is
also creditors for Rs. 1,00,000. B holds 10% first debentures for Rs. 2,00,000 and 10% second
debentures for Rs. 4,00,000 and is also creditors for Rs. 50,000.
The following scheme of reconstruction has been agreed upon and duly approved by the court.
(i) All the equity shares be converted into fully paid equity shares of Rs. 5 each.
(ii) The preference shares be reduced to Rs. 50 each and the preference shareholders agree to
forego their arrears of preference dividends in consideration of which 9% preference shares
are to be converted into 10% preference shares.
(iii) Mr. ‘A’ is to cancel Rs. 6,00,000 of his total debt including interest on debentures and to pay
Rs. 1 lakh to the company and to receive new 12% debentures for the Balance amount.
(iv) Mr. ‘B’ is to cancel Rs. 3,00,000 of his total debt including interest on debentures and to
accept new 12% debentures for the balance amount.
(v) Trade creditors (other than A and B) agreed to forego 50% of their claim.
(vi) Directors to accept settlement of their loans as to 60% thereof by allotment of equity shares
and balance being waived.
(vii) There were capital commitments totalling Rs. 3,00,000. These contracts are to be cancelled
on payment of 5% of the contract price as a penalty.
(viii) The Directors refund Rs. 1,10,000 of the fees previously received by them.
(ix) Reconstruction expenses paid Rs. 10,000.
(x) The taxation liability of the company is settled at Rs. 80,000 and the same is paid
immediately.
(xi) The assets are revalued as under:

Rs.
Land and Building 28,00,000
Plant and Machinery 4,00,000
Stock 7,00,000
Debtors 3,00,000
Computers 1,80,000
Furniture and Fixtures 1,00,000
Trade Investment 4,00,000
Pass Journal entries for all the above mentioned transactions including amounts to be written off
of Goodwill, Patents, Loss in Profit & Loss Account and Discount on issue of debentures.
Cash Flow Statement

Question 4:
Following are the changes in the account balances taken from the balance sheet of Mahakali Ltd.
as the beginning and end of the year.
Particular Debit Credit

8% Debentures 150,000
Debenture Discount 3,000
Plant and Machinery at cost 180,000
Depreciation on Plant and Machinery 43,200
Trade Receivables 150,000
Inventory including work in progress 115,500
Trade payables 35,400
Net profit for the year 229,500
Dividend paid in respect of earlier years 90,000
Provision for Doubtful Debts 9,900
Trade Investments at cost 141,000
Bank 211,500
Total 679,500 679,500
You are informed that:

 During the year plant costing Rs. 54,000 against which depreciation provision of Rs. 40,500 was
lying was sold for Rs. 21,000.
 During the middle of the year, Rs. 150,000 debentures were issued for cash at a discount of Rs.
3,000.
 The net profit for the year was after crediting the profit on sale of plant and charging
debenture interest.
Prepare a cash flow statement which will explain why bank borrowing has increased by Rs.
211,500 during the year end, ignore taxation.
Insurance Claim
Question 5:
On 20th Magh, 2075 the godown and business premises of Khichadi Hall were affected by fire.
From the salvaged accounting records, the following information is available:

Rs.
st
Stock of goods @ 10% lower than cost as on 31 Ashadh, 2075 216,000
Purchases less return (01.04.2075 to 20.10.2075) 280,000
Sales less return (01.04.2075 to 20.10.2075) 620,000
Additional information:
i) Sales up to 20th Magh, 2075 include Rs. 80,000 for which goods had not been dispatched.
ii) Purchase up to 20th Magh, 2075 did not include Rs. 40,000 for which purchase invoice had not
been received from suppliers, though goods have been received in godown.
iii) Past records show the gross profit rate of 25%.
iv) The value of goods salvaged from fire is Rs. 31,000.
v) Khichadi Hall has insured their stock for Rs. 100,000.
Compute the amount of claim to be lodged to the insurance company.
Question 6:
A trader intends to take a loss of profit policy with indemnity period of 6 months however he
could not decide the policy amount. From the following details, suggest the insurance policy
amount.
Turnover in last financial year Rs. 450,000
Standing charges in last financial year Rs. 90,000
Net profit earned in last year was 10% of turnover and the same trend expected in subsequent year.
Increase in turnover expected 25%
To achieve additional sales, trader has to incur additional expenditure of Rs. 31,250.
Contract Accounting
Question 7:
Kamana Constructions undertake to construct a bridge for the government of Gandaki Pradesh.
The construction commenced during the financial year ending 32.3.2075 and is likely to be
completed by the next financial year. The contract is for a fixed price of Rs. 12 crores with an
escalation clause. The costs to complete the whole contract are estimated at Rs. 9.50 crores of
rupees. You are given the following information for the year ended 32.3.2075 .
Cost incurred upto 32.3.2075 Rs. 4 crores
Cost estimated to complete the contract Rs. 6 crores
Escalation in cost by 5% and accordingly the contract price is increased by 5%
You are required to ascertain the state of completion and state the revenue and profit to be
recognized for the year.
Hire Purchase Transactions

Question 8:
Sallaghari Corporation sells Computers on Hire-purchase basis at cost plus 25%. Terms of sales
are 5,000 as Down payment and 10 monthly installments of Rs. 2,500 for each Computer. From
the following particulars, prepare Hire-purchase Trading A/c for the year 2074-2075:

As on 1 st Shrawan, 2074, last installment on 20 Computers were outstanding as these were not
due upto the end of the previous year. During 2074-75, the firm sold 120 Computers. As on 32 nd
Ashadh, 2075 the position of installments outstanding were as under:
Installments due but not 4 Installments on 4 Computers and Last installment on 9
collected Computers
Installments not yet due 6 Installments on 50 Computers, 4 Installments on 20 and Last
Installment on 40 Computers
Two Computers on which 8 Installments were due and one Installment not yet due on 32.03.2075, had
to be repossessed. Repossessed stock is valued at 50% of cost. All other Installments have been
received.
Issue of Shares and Debentures

Question 9:
Pokhara Co. Ltd. issued 200,000 shares of Rs. 100 each at a premium of Rs. 20 per share payable
as follows:
on application Rs. 20
on allotment Rs. 50 (including premium)
on First/ call Rs. 30
on second and final call Rs. 20
Applications were received for 300,000 shares and pro-rata allotment was made to applicants of
240,000 shares. Amount excess received on application was employed on account of sum due on
allotment as part of share capital. Mr. Subash, to whom, 4,000 shares were allotted, failed to pay the
allotment money and on his subsequent failure to pay the first call, his shares were forfeited and Mr.
Dhiraj, the holder of 6,000 shares failed to pay to calls and his shares were forfeited after the second
call. Of the forfeited shares, 8,000 shares were reissued to Mr. Gopal at a discount of 10%, the whole
of Dhiraj's forfeited shares being reissued. Pass necessary journal entries in the books of Everest Co.
Ltd.
Underwriting of Shares and Debentures

Question 10:
Nepal Capital Ltd. came out with an issue of 450,000 equity shares of Rs. 100 each at a premium
of Rs. 20 per share. The promoters took 20% of the issue and the balance was offered to the
public. The issue was equally underwritten by A & Co; B & Co. and C & Co.
Each underwriter took firm underwriting of 10,000 shares each. Subscriptions for 310,000 equity
shares were received with marked forms for the underwriters as given below:
A & Co. 72,500 shares
B & Co. 84,000 shares
C & Co. 131,000 shares
Total 287,500 shares
The underwriters are eligible for a commission of 5% on face value of shares. The entire amount
towards shares subscription has to be paid along with application. You are required to:
(a) Prepare the statement showing the underwriters’ liability (number of shares)
(b) Compute the amounts payable or due to underwriters; and
(c) Pass necessary journal entries in the books of Nepal Capital Ltd. relating to underwriting.

Incomplete Records
Question 11:
A trader keeps his books of account under single entry system. On 31 st Ashadh, 2074 his statement of
affairs stood as follows :
Trade Creditors 5,80,000 Furniture, Fixtures and Fittings 1,00,000
Bills Payable 1,25,000 Stock 6,10,000
Outstanding Expenses 45,000 Trade Debtors 1,48,000
Capital Account 2,50,000 Bills Receivable 60,000
Unexpired Insurance 2,000
Cash in Hand and at Bank 80,000
10,00,000 10,00,000
The following was the summary of Cash–book for the year ended 32nd Ashadh, 2075:
Receipts Rs. Payments Rs.
Cash in Hand and at Bank on Payments to Trade Creditors 75,07,000
1st Shrawan, 2074 80,000 Payments for Bills payable 8,15,000
Cash Sales 73,80,000 Sundry Expenses paid 6,20,700
Receipts from Trade Debtors 15,10,000 Drawings 2,40,000
Receipts for Bills Receivable 3,40,000 Cash in Hand and at Bank
on 32nd Ashadh, 2075 1,27,300
93,10,000 93,10,000
Discount allowed to trade debtors and received from trade creditors amounted to Rs. 36,000 and Rs.
28,000 respectively. Bills endorsed amounted to Rs. 15,000. Annual Fire Insurance premium of Rs. 6,000
was paid every year on 1st August for the renewal of the policy. Furniture, fixtures and fittings were subject
to depreciation @ 15% per annum on diminishing balances method.
You are also informed about the following balances as on 32nd Ashadh, 2075 :
Rs.
Stock 6,50,000
Trade Debtors 1,52,000
Bills Receivable 75,000
Bills Payable 1,40,000
Outstanding Expenses 5,000
The trader maintains a steady gross profit ratio of 10% on sales.
Required: Prepare Trading and Profit and Loss Account for the year ended 32 nd Ashadh, 2075 and
Balance Sheet as at that date.
Ratio Analysis
Question 12:
From the following data, prepare the Financial Statements of the Everest Company Ltd. for the year
ended on 32 nd Ashadh:
Gross Profit Ratio 40% on Sales Net profit Ratio 10% on Sales
Debtors Turnover Ratio 2 Months Other Expenses (Administrative) Rs. 25 Lakhs
Creditors Turnover Ratio 1.5 Months Depreciation Rs. 25 Lakhs
Inventory Turnover Ratio 2 Months Debentures to Equity Share Capital 10%
Current Ratio 2.5 Months

Opening Stock was less than the Closing Stock by Rs. 4 Lakhs. The ratio of Cash Sales to Credit Sales was
16:9. Depreciation was charged on Fixed Assets at 20%. Other Expenses include the payment of Interest on
Debentures. No dividends were declared during the year. Ignore effect of taxation.
Profit or Loss Pre and Post Incorporation

Question 13:
The partnership of Bara Enterprises decided to convert the partnership into private limited company
named Churimai Company Pvt. Ltd. with effect from 1 st Baisakh 2071. The consideration was agreed
at Rs. 23,400,000 based on firm’s Balance Sheet as on 31 st Chaitra 2070. However, due to some
procedural difficulties, the company could be incorporated only on 1 st Shrawan 2071. Meanwhile, the
business was continued on behalf of the company and the consideration was settled on that day with
interest at 12% p.a. The same books of accounts were continued by the company, which closed its
accounts for the first time on 31 st Ashadh, 2072 and prepared the following summarized profit and
loss account:
Particulars Rs. Particulars Rs.
To Cost of goods sold 32,760,000 By sales 46,800,000
To Salaries 2,340,000
To Depreciation 360,000
To Advertisement 1,404,000
To Discount 2,340,000
To Managing Director’s Salary 180,000
To Miscellaneous Office Expenses 240,000
To Office/Showroom Rent 1,440,000
To Interest paid 1,902,000
To Net Profit 3,834,000
Total 46,800,000 Total 46,800,000
The company’s only borrowing was a loan of Rs. 10,000,000 at 12% p.a. to pay the purchase
consideration due to the firm and for working capital requirements. The company was able to double
the monthly average sales of the company from 1 st Shrawan 2071 but the salaries treble from that
date. It had to occupy additional space from 1 st Kartik 2071 for which rent was Rs. 60,000 per month.
Prepare a statement showing apportionment of costs and revenue between pre -incorporation and
post-incorporation periods.
Liquidator’s Final Statement

Question 14:
The following is the Balance Sheet of Himchuli Co. Limited as at 31 st Ashadh, 2073:
Share Capital: Fixed Assets:
2,000 Equity Shares of Rs. 100 Land & Buildings 400,000
each Rs. 75 per share paid up 150,000 Plant and Machineries 380,000
6,000 equity shares of Rs. 100 Current Assets:
each Rs. 60 per share paid up 360,000 Stock at Cost 110,000
2,000 10% Preference Share of Cash at Bank 60,000
Rs. 100 each fully paid up 200,000 Profit and Loss A/c 240,000
10% Debentures (having a floating Sundry Debtors 220,000

charge on all assets) 200,000

Interest accrued on Debentures
(also secured as above) 10,000
Sundry Creditors 490,000
1,410,000 1,410,000
On that date, the company went into Voluntary Liquidation. The dividends on preference shares were in
arrear for the last two years. Sundry Creditors include a loan of Rs. 90,000 on mortgage of Land and
Buildings. The assets realized were as under:-
Rs.
Land and Buildings 340,000
Plant & Machineries 360,000
Stock 120,000
Sundry Debtors 160,000
Interest accrued on loan on mortgage of buildings upto the date of payment amounted to Rs. 10,000.
The expenses of liquidation amounted to Rs. 4,600. The liquidator is entitled to a remuneration of 3%
on all the assets realized (except cash at bank) and 2% on the amounts distributed among equity
shareholders. Sundry creditor included preferential creditors Rs. 30,000. All payments were made on
31st Ashwin 2073. Prepare the liquidator’s final statement.
Accounting for Partnership

Question 15:
The Anil, Sunil and Rahim carried on a manufacturing business in partnership sharing profits and losses
in the ratio of 5:3:2. It was agreed that Sunil should retire from the partnership on 31 st Ashadh, 2074
and a private limited company, SR Ltd, was formed to take over the business and certain assets of the
partnership on that date.
The authorized capital of SR Ltd. was Rs. 700,000 divided into 10,000 12% preference shares of Rs. 20 each
and 25,000 ordinary shares of Rs. 20 each.
The firm's Balance Sheet as on 31st Ashadh, 2074 was as follows:
Capital & Liabilities Rs. Rs. Assets Rs. Rs.
Capital Accounts: Fixed assets less depreciation:
Anil 200,000 Machinery 160,000
Sunil 184,000 Motor cars 52,000
Rahim 96,000 480,000 Furniture 28,000 240,000
Current Accounts: Goodwill 40,000
Anil 90,000 Life assurance policy 70,000
Sunil (10,000) Current assets:
Rahim 40,000 120,000 Stock 180,000
Loan Account – Anil 120,000 Debtors 116,000
Creditors 70,000 Bank balance 144,000 440,000
790,000 790,000

Sunil owned the freehold premises occupied by the firm and he agreed to sell them to the company in
return for issue to him of 2,000 preference shares at par. The company agreed to discharge Anil's loan
by the issue to him of 6,000 preference shares at par.
The life assurance policy had been taken out on the life of Sunil and was surrendered for Rs. 84,000,
which was received by the partners on 1st Shrawan, 2074.
On his retirement Anil took over one of the cars at the book value of Rs. 14,000. The furniture in his
private office was his own property, for which the company paid him Rs. 5,000. He agreed further to take
over the partnership debtors at the balance sheet value less 5%, and to pay the creditors. SR Ltd. agreed
to purchase the remaining assets, including the bank balance for Rs. 520,000, the purchase consideration
being discharged by the payment of Rs. 80,000 in cash and the issue of 22,000 ordinary shares to Anil,
Sunil, and Rahim in the proportion in which they shared profits and losses.
Formation expenses of Rs. 11,000 were paid by the company. For the purpose of opening entries in the
company's book the assets taken over from partnership were valued: Machinery Rs. 140,000; Motor cars
Rs. 40,000; Furniture Rs. 20,000; and Stock Rs. 150,000.
Required: Prepare realization account, partners' combined capital and current account showing the
dissolution of the partnership and the opening balance sheet of SR Ltd. as on 1st Shrawan, 2074.
Accounting for Non-profit making Organization
Question 16:
Kathmandu Books Circle Society showed the following position on Ashadh 31, 2074.
Balance sheet as on Ashadh 31, 2073
Liabilities Amount(Rs.) Assets Amount(Rs.)
Capital fund 793,000 Electrical fittings 150,000
Expense payable 7,000 Furniture 50,000
Digital Book license 400,000
Investment in securities 150,000
Cash at bank 25,000
Cash in hand 25,000
800,000 800,000
Receipts and Payment Accounts for the year ended Ashadh 31, 2074 is given below:
Receipts Amount(Rs.) Payments Amount(Rs.)
To, Balance b/d By, Electrical charges 7,200
Cash at bank 25,000 By, Postage & stationary 5,000
Cash in hand 25,000 By, Telephone charges 5,000
By, Digital book License 60,000
To, Entrance fee 30,000 By, Outstanding expense paid 7,000
To, Membership subscription 200,000 By, Rent 88,000
By, Investment in securities
To, Sale proceeds of old paper 1,500 40,000
(Magh 01, 2073)
To, Hire of lecture hall 20,000 By, Salaries 66,000
To, Interest on securities 8,000 By, Balance c/d
Cash at bank 20,000
Cash in hand 11,300
309,500 309,500

You are required to prepare Income and Expenditure Account for the year ended Ashad 31, 2074 and
Balance sheet as on Ashad 31, 2074 after making following adjustments:
i) Membership subscription included Rs. 10,000 received in advance.
ii) Provide for Outstanding rent Rs. 4,000 and Salaries Rs. 3,000
iii) Digital book license to be amortized at 10% including additions, electrical fitting and furniture
are to be depreciated at 10%.
iv) 75% of entrance fees to be capitalized.
v) Interest on securities is to be calculated @ 5% p.a. including for purchase made during the year.
Accounting for Banks

Question 17:
Following information as at third quarter ending FY 2074/75 were drawn from the records of M/s
Mechi Bank Limited as under:
Loan outstanding for Amount Rs.
Upto 1 month 1,673,000
More than 1 month but not more than 3 months 100,000
More than 3 months but not more than 6 months 13,612
More than 6 months but not more than 12 months 782
More than 12 months 2,198
Total 1,789,592
The bank has not restructured or rescheduled any of its credit.
Following additional information relating to previous quarter ending were extracted from the records
of the bank:
Particulars Amount Rs.
Paid up Equity Share Capital 171,010
General Reserve 155,432
Retained Earnings 87,886
General Loan Loss Provision 16,983
Exchange Equalization Reserve 22,313
Un-audited current year profit 31,991
Deferred Revenue expenses 2,884
The bank is in the process of preparing the documents for quarterly reporting. The bank has also
provided a term loan of Rs.125,000 to a single party during the period under review. As a reporting and
compliance officer of the bank you are required to calculate movement in loan loss provision amount.
Accounting for Departments

Question 18:
Nepal Industry consisted of three departments- A, B and C. It prepares separate Departmental Profit
and Loss Accounts. The nature of their operation required frequent supply of articles/ services from
one department to another. It had been decided that A department will charge, for services supplied
to other departments, the cost thereof plus 10% thereon. Likewise B department will charge the
other departments cost plus 20% thereof in respect of supplies made to them. The C department’s
supplies to the other departments will be charged at the prevailing rates applicable to outsiders. The
accounts for the year ended on Ashadh 32, 2075 has been closed without taking into account the
interdepartmental transactions.
Following are the departmental transactions:

Rs.
i) Cost of A Department’s service extended to : B 8,400
C 4,500
ii) Cost of supplies made by B Department to: A 29,800
C 5,400
iii) Value of supplies made by C Department to:A 400

B 5,600
In addition, the following are the charges to be made for interchange of staffs from one department to
another for temporary period during the year:
B’s staff shifted to A Department 4,400
A’s staff shifted to B Department 1,100
Required: Show the net variation in the departmental Profit and Loss Accounts as a result of above
adjustments.
Nepal Accounting Standards (NAS)

Question 19:
a. The company deals in three products, A, B & C, which are neither similar nor interchangeable. At
the time of closing of its account for the year 2074/075, the Historical and Net Realizable Value of
the items of closing stock are determined as follows:
Items Historical Cost Net Realizable Value
( Rs. in Lakhs) ( Rs. in Lakhs)
A 40 28
B 32 32
C 16 24
Compute the value of closing stock as per provisions of NAS?

b. Explain ‘Recognition of Assets’ as per Framework for the Preparation and Presentation of Financial
Statements under NAS.
c. What are the conditions that have to be satisfied for recognition of revenue from sale of goods?
d. Kupandole Enterprises has been charging depreciation on an item of plant and machinery on straight
line basis. The machine as purchased on 1-4-2072 at Rs.325,000. It is expected to have a total useful
life of 5 years from the date of purchase and residual value of Rs. 25,000. Calculate the book value of
the machine as on 1-4-2074 and the total depreciation charged till 31-3-2074 under SLM. The
company wants to change the method of depreciation and charge depreciation @ 20% on WDV from
2074-75. Is it valid to change the method of depreciation? Explain the treatment required to be done
in the books of accounts in the context of Accounting Standards.
Ascertain the amount of depreciation to be charged for 2074-75 and the net book value of the
machine as on 32-3-2075 after giving effect of the above change.
e. Discuss on ‘Other comprehensive income’ as outlined in Nepal Accounting Standard.

Write Short Notes

Question 20:
(a). Leases
(b). Re-Insurance
(c). Contingent Assets
(d). Non Banking Assets
(e) Accounting Estimates
(f). Components of financial statements
(g). Watch List in Loan loss provisioning
(h). Government Accounting System in Nepal
(i). Outsourcing the Accounting function to third party
(j) Compilation of accounting information for agricultural farm

SUGGESTED ANSWERS HINT

Business Combination
Solution 1:
Journal Entries in the Books of DD Ltd.

Dr. Cr.
Amount Amount
Rs. Rs.
Business Purchase Account Dr. 1,242,500
To Liquidator of SS Ltd. 1,242,500
(For purchase consideration due)
Investments Account Dr. 192,500

Goodwill Account (Balancing figure) Dr. 100,000
Fixed Assets Account Dr. 850,000
Current Assets Account Dr. 300,000
To Sundry Creditors Account 200,000
To Business Purchase Account 1,242,500
(For assets and liabilities taken over at agreed value)
Liquidator of SS Ltd. Dr. 1,242,500

To Equity Share Capital Account (Rs. 100) 903,600
To Securities Premium Account (Rs. 37.50) 338,850
To Cash Account 50
(For purchase consideration discharged)
Goodwill Account Dr. 16,000
To Current Assets (Stock) Account 16,000
(For elimination of unrealized profit on unsold stock)
Amalgamation Adjustment Account Dr. 200,000
To Investment Allowance Reserve Account 200,000
(For incorporation of statutory reserve)
Balance Sheet of DD Ltd.

as on 32nd Ashadh 2075
Rs. Rs.
Equity Share Capital: Fixed Assets (500,000 + 850,000) 1,350,000
17,036 shares of Rs. 100 each (out of Goodwill
which 9036 shares are issued in favour (6,00,000 + 1,00,000 + 16,000) 716,000
of vendor for consideration other than 1,703,600 Investments (200,000 + 192,500) 392,500
cash)
General Reserve 400,000 Current Assets
Securities Premium 338,850 (7,00,000 – 50 – 16,000) 683,950
Investment Allowance Reserve 200,000 Amalgamation Adj. Account 200,000
Sundry Creditors 700,000
3,342,450 3,342,450

Working Notes:
1. Calculation of net asset value of shares
DD Ltd. SS Ltd.
Rs. Rs.
Goodwill 500,000 100,000
Fixed Assets 600,000 850,000
Investments 100,000 330,000*
Current Assets 400,000 300,000
1,600,000 1,580,000
Less: Sundry Creditors 500,000 200,000
Net assets 1,100,000 1,380,000
Number of shares 8,000 6,000
Value per equity share 137.50 230
Rs.
*Investments of SS Ltd. are calculated as follows:
137,500
Shares in DD Ltd. (1,000  137.50)
192,500
Market value of remaining investments (given)
330,000
2. Calculation of Purchase Consideration
Rs.
Net assets of SS Ltd. 380,000
Value of Shares of DD Ltd. 137.50
Number of shares to be issued in DD Ltd. to SS Ltd. (13,80,000  137.50) 10,036.36
Less: Shares already held by SS Ltd. 1,000
Additional shares to be issued 9,036.36
Total value of shares to be issued (9036  137.50) 1,242,450

Cash payment for fractional share (.36  137.50) 50
1,242,500
Solution 2:
Computation of Purchase Consideration
Rs.
Value of 15,000 equity shares @ Rs.80 per share = Rs.12,00,000
Shares to be issued by Y Co. Ltd. (Rs. 12,00,000/120 per share = 10,000 12,00,000
shares @ Rs.120 each)
11% Preference shareholders to be issued equivalent 11% Redeemable 5,00,000
Debentures by Y Co. Ltd.
Total Purchase Consideration 17,00,000

Journal Entries in the books of Y Co. Ltd.

Rs. Rs.
Business Purchase A/c Dr. 17,00,000
To Liquidator of X Co. Ltd. 17,00,000
(Being the amount payable to X Co. Ltd’s liquidator)
Land & Building A/c Dr. 10,00,000
Plant & Machinery A/c Dr. 7,00,000
Furniture & Fittings A/c Dr. 2,00,000
Stock in Trade A/c Dr. 3,00,000
Sundry Debtors A/c Dr. 2,00,000
Cash & Bank A/c Dr. 1,00,000
To Sundry Creditors 2,00,000
To Capital Reserve (Balancing figure) 6,00,000
To Business Purchase 17,00,000
(Being the value of assets and liabilities taken over from X Co. Ltd.)
Liquidators of X Co. Ltd. Account Dr. 17,00,000
To Equity Share Capital 10,00,000
To Securities Premium Account 2,00,000
To 11% Debentures 5,00,000
(Being purchase consideration discharged)
Internal Reconstruction
Solution 3:
Journal Entries in the Books of Hilltop Ltd.
Dr. Cr.
Rs. Rs.
(i) Equity Share Capital (Rs. 10 each) A/c Dr. 50,00,000
To Equity Share Capital (Rs. 5 each) A/c 25,00,000
To Reconstruction A/c 25,00,000
(Being conversion of 5,00,000 equity shares of Rs. 10 each
fully paid into same number of fully paid equity shares of Rs.
5 each as per scheme of reconstruction.)
(ii) 9% Preference Share Capital (Rs.100 each) A/c Dr. 20,00,000
To 10% Preference Share Capital (Rs.50 each) A/c 10,00,000

(Being conversion of 9% preference share of Rs. 100 each
into same number of 10% preference share of Rs. 50 each
and claims of preference dividends settled as per scheme of
reconstruction.)
(iii) 10% First Debentures A/c Dr. 4,00,000
10% Second Debentures A/c Dr. 6,00,000
Trade Creditors A/c Dr. 1,00,000
Interest on Debentures Outstanding A/c Dr. 1,00,000
Bank A/c Dr. 1,00,000

To 12% New Debentures A/c 7,00,000

(Being Rs. 6,00,000 due to A (including creditors) cancelled
and 12% new debentures allotted for balance amount as per
scheme of reconstruction.)
(iv) 10% First Debentures A/c Dr. 2,00,000
10% Second Debentures A/c Dr. 4,00,000
Trade Creditors A/c Dr. 50,000
Interest on Debentures Outstanding A/c Dr. 60,000
To 12% New Debentures A/c 4,10,000
(Being Rs. 3,00,000 due to B (including creditors) cancelled
and 12% new debentures allotted for balance amount as per
scheme of reconstruction.)
(v) Trade Creditors A/c Dr. 1,75,000
(Being remaining creditors sacrificed 50% of their claim.)
(vi) Directors' Loan A/c Dr. 1,00,000

To Equity Share Capital (Rs. 5) A/c 60,000
To Reconstruction A/c 40,000
(Being Directors' loan claim settled by issuing 12,000 equity
shares of Rs. 5 each as per scheme of reconstruction.)
(vii) Reconstruction A/c Dr. 15,000

To Bank A/c 15,000
(Being payment made for cancellation of capital
commitments.)
(viii) Bank A/c Dr. 1,10,000

(Being refund of fees by directors credited to reconstruction
A/c.)
(ix) Reconstruction A/c Dr. 10,000
To Bank A/c 10,000
(Being payment of reconstruction expenses.)
(x) Provision for Tax A/c Dr. 1,00,000
To Bank A/c 80,000
To Reconstruction A/c 20,000
(Being payment of tax for 80% of liability in full settlement.)

(xi) Reconstruction A/c Dr. 47,20,000

To Goodwill A/c 10,00,000
To Patent A/c 5,00,000
To Profit and Loss A/c 15,00,000
To Discount on issue of Debentures A/c 1,00,000
To Land and Building A/c 2,00,000
To Plant and Machinery A/c 6,00,000
To Furniture & Fixture A/c 1,00,000
To Computers A/c 1,20,000
To Trade Investment A/c 1,00,000
To Stock A/c 3,00,000
To Debtors A/c 2,00,000
(Being writing off of losses and reduction in the value of
assets as per scheme of reconstruction.)
Cash Flow Statement

Solution 4:
Cash Flow Statement
Particulars Amount Amount
Cash Flow from Operating Activities
Net Profit before Taxation (given) 229,500
Adjustment for Depreciation (WN 2) 83,700
Debenture Interest (150,000x8%x6/12) 6,000
Provision for Doubtful Debts 9,900
Profit/gain on sale of plant (WN 1) (7,500) 92,100
Operating profit before working capital changes 321,600
Increase in Inventory (115,500)
Increase in Trade Receivables (150,000)
Increase in Trade Payables 35,400 (230,100)
Net cash flow from Operating Activities (A) 91,500
Cash Flow from Investing Activities
Purchase of Plant & Machinery (WN 3) (234,000)
Purchase of Trade Investments (141,000)
Sale of machinery 21,000
Net cash flow from Investing Activities (B) (354,000)
Cash Flow from Financing Activities
Proceeds from issue of 8% Debentures (net) 147,000
Interest paid on 8% Debentures (6,000)
Dividends paid in respect of earlier years (90,000)
Net Cash flow from Financing Activities (C) 51,000
Net Increase/(Decrease) in Cash and Cash Equivalents (A+B+C) (211,500)
Working Notes:
1. Profit on sale of Plant = WDV at disposal – sale value
= (54,000-40,500) – 21,000
= 7,500

2. Depreciation for current year = 43,200 + 40,500 = 83,700
3. Cash flow towards assets purchase = Increase in Plant & machinery at cost + cost of plant sold
= 180,000 + 54,000 = 234,000
Insurance Claim
Solution 5:
Memorandum Trading Account

(01.04.2075 to 20.10.2075)
To Opening stock 240,000 By Sales Rs. (620,000 – 80,000) 540,000
To Purchases Rs. (280,000 + 40,000) 320,000 By Closing stock – Bal. fig. 155,000
To Gross profit – 25% of sales 135,000
695,000 695,000
Stock destroyed by fire:

Rs.
Stock on the date of fire 155,000
Less: Stock salvaged 31,000
Stock destroyed by fire 124,000
Loss of Stock
Insurance Claim   Amount of Policy
Value of Stock on the date of fire
Rs. 124,000
  Rs. 100,000  Rs. 80,000
Rs. 155,000
Working note:
Stock on 1st Shrawan, 2075 was valued at 10% lower than cost.
Hence, original cost of the stock as on 1st Shrawan, 2075 would be:
Rs. 216,000
  100  Rs. 240,000
90
Solution 6:
a. Turnover in last financial year 450,000

Add: 25% increase 112,500
Total turnover 562,500
b. Net profit = 10% of 562,500 = 56,250

c. Total Standing Expenses = 90,000+31,250=121,250
d. Gross profit = Net profit + Standing Charges = 56,250+121,250=177,500
Hence, insurance policy amount should be Rs. 177,500.

Contract Accounting:
Solution 7:
Particulars Rs. in crore

Cost of construction of bridge incurred upto 32.3.2075 4.00
Add: estimated future cost 6.00
Total estimated cost of construction 10.00
Contract price (12 crore x 1.05) 12.60 crore
State of completion
Percentage of completion till date to total estimated cost of construction
= (4/10) X 100 = 40%
Revenue and profit to be recognized for the year ended 32.3.2075

Proportion of total contract value recognized as revenue = contract price x % of completion
= Rs. 12.60 crore x 40% = 5.04 crore
Profit for the year ended 32.3.2075 = Rs. 5.04 crore less Rs. 4 crore = 1.04 crore.
Hire Purchase Transactions

Solution 8:
In the books of Sallaghari Corporation

Hire Purchase Trading Account
for the year ended 32nd Ashadh, 2075
Dr. Cr.
Amount Amount
Rs. Rs.
To Hire Purchase Stock 50,000 By Hire Purchase Sales 25,95,000
(20  Rs. 2,500) (W.N. 2)
To Goods sold on Hire 36,00,000 By Stock Reserve 10,000
Purchase (120Rs.30,000) (Rs. 50,000  20%)
To Bad Debts (W.N. 4) 8,000 By Goods sold on Hire Purchase 7,20,000
To Loss on Repossession 12,000 (Rs. 36,00,000  20%)
Less: Instalments not yet By Hire Purchase Stock 10,50,000
due 4,000 8,000 [(650+420+ 140)  Rs.
2,500]
To Stock Reserve 2,10,000
(Rs.10,50,000  20%)
To Profit and Loss Account 4,99,000
(Transfer of Profit) ________
43,75,000 43,75,000
Issue of Shares and Debentures

Solution 9:
Books of Pokhara Co. Ltd.
Journal Entries
Bank A/c Dr. 6,000,000
To Share Application A/c 6,000,000
(Being application amount received)

Share Application A/c Dr. 6,000,000

To Share Capital A/c 4,000,000
To Bank A/c 1,200,000
To Share Allotment A/c 800,000
(Being application money transferred to share capital,
refunded and excess transferred to allotment )
Share Allotment A/c Dr. 10,000,000
To Share Premium A/c 4,000,000
(Being allotment amount due)
Bank A/c Dr. 9,016,000
Calls in Arrear A/c Dr. 184,000
To Share Allotment A/c 9,200,000
(Being allotment money received except from Mr. Subash)
Share First Call A/c Dr. 6,000,000
(Being first call amount due)
Bank A/c Dr. 5,700,000
To Share First Call A/c 6,000,000
(Being first call money received except from Mr. Subash
and Mr. Dhiraj)
Share Capital A/c Dr. 320,000
Share Premium a/c Dr. 80,000
To Calls in Arrear A/c 304,000
To Share Forfeiture A/c 96,000
(Being forfeiture of shares of Mr. Subash)
Share Final Call A/c Dr. 3,920,000
(Being final call amount due)
Bank A/c Dr. 3,800,000
To Share Final Call A/c 3,920,000
(Being final call money received except from Mr. Dhiraj)
Share Capital A/c Dr. 600,000
To Calls in Arrear A/c 300,000
To Share Forfeiture A/c 300,000
(Being forfeiture of shares of Mr. Dhiraj)
Bank A/c Dr. 720,000
Share Forfeiture A/c Dr. 80,000
To Share Capital A/c 800,000
(Being re-issue of shares @ 90 to Mr. Gopal as fully paid up)
Share Forfeiture A/c Dr. 268,000
To Capital Reserve A/c 268,000
(Being forfeiture amount transferred to capital Reserve
A/c)
Working Note:
1. No. of Shares applied by Mr. Subash = (240,000/200,000) x 4,000 = 4,800
2. Amount paid my Mr. Subash at the time of application = 4,800 x 20 = 96,000

3. Forfeiture amount available for use = full of Mr. Dhiraj (300,000) + half of Mr. Subash (96,000/2) =
348,000
4. Amount Transferred to capital reserve = 348,000 – 80,000 = 266,000
Underwriting of Shares and Debentures

Solution 10:
(a) Statement showing the underwriters’ liability (No. of shares)
Particulars A & Co. B & Co. C & Co.
Gross Liability 120,000 120,000 120,000
Less: Firm underwriting 10,000 10,000 10,000
110,000 110,000 110,000
Less: Marked applications 72,500 84,000 131,000
37,500 26,000 (21,000)
Less: Unmarked applications distributed to A &
Co. and B & Co. in equal ratio (11,250) (11,250) Nil
26,250 14,750 (21,000)
Less: Surplus of C & Co. distributed to A & Co. and
B & Co. in equal ratio (10,500) (10,500) 21,000
Net liability (excluding firm underwriting) 15,750 4,250 Nil
Add: Firm underwriting 10,000 10,000 10,000
Total liability (No. of shares) 25,750 14,250 10,000
(b) Computation of amounts payable by underwriters

Liability towards shares to be subscribed @ 120 per 3,090,000 1,710,000 1,200,000
share
Less: Commission (5% on 1.2 lakhs shares @ 100 each)
600,000 600,000 600,000
Net amount to be paid by the underwriters 2,490,000 1,110,000 600,000
(c) In the Books of Nepal Capital Ltd.

Journal Entries
Particulars Dr. Cr.
Rs. Rs.
Underwriting commission A/c Dr. 1,800,000
To A & Co. A/c 600,000
To B & Co. A/c 600,000
To C & Co. A/c 600,000
(Being underwriting commission on the shares underwritten)
A & Co. A/c Dr. 3,090,000
B & Co. A/c Dr. 1,710,000
C & Co. A/c Dr. 1,200,000
To Equity share capital A/c 5,000,000
To Share premium A/c 1,000,000
(Being shares including firm underwritten shares allotted to
underwriters)

Bank A/c Dr. 4,200,000

To A & Co. A/c 2,490,000
To B & Co. A/c 1,110,000
To C & Co. A/c 600,000
(Being the amount received towards shares allotted to
underwriters less underwriting commission due to them)
Incomplete Records
Solution 11:
Trading and Profit and Loss Account
for the year ended 32nd Ashadh, 2075
Rs. Rs.
To Opening Stock 6,10,000 By Sales
To Purchases (W.N. 3) 84,10,000 Cash 73,80,000
To Gross profit c/d 9,30,000 Credit (W.N. 2) 19,20,000 93,00,000
(10% of 93,00,000) By Closing stock 6,50,000
99,50,000 99,50,000
To Sundry expenses (W.N. 6) 5,80,700 By Gross profit b/d 9,30,000
To Discount allowed 36,000 By Discount received 28,000
To Depreciation 15,000
(15% Rs. 1,00,000)
To Net Profit 3,26,300
9,58,000 9,58,000
Balance Sheet as at 32nd Ashadh, 2075

Rs. Rs.
Capital Furniture & Fittings 1,00,000
Opening balance 2,50,000 Less : Depreciation 15,000 85,000
Less : Drawing 2,40,000 Stock 6,50,000
10,000 Trade Debtors 1,52,000
Add : Net profit 3,26,300 3,36,300 Bills receivable 75,000
Bills payable 1,40,000 Unexpired insurance 2,000
Trade creditors 6,10,000 Cash in hand & at bank 1,27,300
Outstanding expenses 5,000
10,91,300 10,91,300
Working Notes :
1. Bills Receivable Account
Rs. Rs.
To Balance b/d 60,000 By Cash 3,40,000
To Trade debtors 3,70,000 By Trade creditors 15,000
(Bills endorsed)
By Balance c/d 75,000
4,30,000 4,30,000

2. Trade Debtors Account

Rs. Rs.
To Balance b/d 1,48,000 By Cash/Bank 15,10,000
To Credit sales 19,20,000 By Discount allowed 36,000
(Balancing figure) By Bills receivable 3,70,000
By Balance c/d 1,52,000
20,68,000 20,68,000
3. Memorandum Trading Account

Rs. Rs.
To Opening stock 6,10,000 By Sales 93,00,000
To Purchases (Balancing figure) 84,10,000 By Closing stock 6,50,000
To Gross Profit (10% on sales) 9,30,000
99,50,000 99,50,000
4. Bills Payable Account
Rs. Rs.
To Cash/Bank 8,15,000 By Balance b/d 1,25,000
To Balance c/d 1,40,000 By Creditors (balancing figure) 8,30,000
9,55,000 9,55,000
5. Trade Creditors Account
Rs. Rs.
To Cash/Bank 75,07,000 By Balance b/d 5,80,000
To Discount received 28,000 By Purchases (as calculated 84,10,000
To Bills receivable 15,000 in W.N. 3)
To Bills payable 8,30,000
To Balance c/d (balancing figure) 6,10,000
89,90,000 89,90,000
6. Computation of sundry expenses to be charged to Profit & Loss A/c
Rs.
Sundry expenses paid (as per cash book) 6,20,700
Add : Prepaid expenses as on 31–3–2074 2,000
6,22,700
Less : Outstanding expenses as on 31–3–2074 45,000
5,77,700
Add : Outstanding expenses as on 32–3–2075 5,000
5,82,700
Less : Prepaid expenses as on 32–3–2075 (Insurance paid till Kartik, 2075) 2,000
5,80,700
Ratio Analysis
Solution 12:
A. Application of Ratios for computing missing figures
1. Sales Since GP Ratio and NP Ratio are 40% and 10% of Sales respectively, Other
Expenses debited to P&L Account= 40% - 10% = 30% of Sales.

Since Other Expenses + Depreciation debited in P&L A/c = Rs. 25 Lakhs + Rs. 5
Lakhs = Rs. 30 Lakhs, Sales = 30÷ 30% = Rs. 100 Lakhs
2. Gross Profit = 40% of Sales = Rs. 40Lakhs
3. Net Profit = 10% of Sales = Rs. 10 Lakhs
4. Credit Sales Cash Sales to Credit Sales = 16:9.
Hence, Credit Sales = Total Sales × 9/25= 100x9/25 Rs. 36 Lakhs
5. Debtors = Credit Sales × 2 months / 12 months = Rs. 36×2/12= Rs. 6 Lakhs

6. Average Stock = COGS× 2 months ÷ 12 months = (Sales – GP) × 2/12= 60×2/12 = Rs. 10 Lakhs
7 Closing Stock Average Stock = (Opening Stock + Closing Stock) ÷ 2= 10 Lakhs.
Opening Stock = Closing Stock – 4 Lakhs.
On substituting,
(Closing Stock - 4 + Closing Stock) ÷ 2 = 10;
Hence, Closing Stock = Rs.12 Lakhs
Therefore Opening Stock = 12 – 4 = Rs. 8 Lakhs
8. Purchases COGS = Opening Stock + Purchase – Closing Stock .

Since COGS = Sales – GP = 100 – 40 = 60, Opening and Closing Stock are known, on
Substitution, Purchase will be the bal. figure = Rs. 64 Lakhs
9. Creditors = Credit Purchase ×1.5 months ÷12 months
= 64 × 1.5 / 12 = Rs. 8 Lakhs
10. Current Assets Current Ratio = 2.5; Current Assets(CA) ÷Current Liabilities( CL) = 2.5;
Hence, CA= 2.5 CL. Since CL= Creditors = Rs.8 Lakhs,
On substitution, CA = 2.5×8 Lakhs = Rs. 20 Lakhs
11. Fixed Assets = Depreciation ÷ Deprn. Rate = Rs.5 Lakhs ÷20%=Rs.25Lakhs

12. Net Block = Gross Block – Depreciation = Rs. 25 Lakhs – Rs. 5 Lakhs = Rs. 20 Lakhs
13. Cap. Employed = Fixed Assets + Net Working Capital =20+ (20-8) =Rs.32 Lakhs
14. Debentures Capital Employed= Debt. +Equity= Debentures+(Capital + R & S)= Rs. 32 Lakhs,
of which P&L = Rs. 10 Lakhs.
Hence, Debentures + Share Capital = Rs. 22 Lakhs.
Since Debentures to Share Capital = 10%, Debentures
= Rs. 22× 10/ 110 = Rs. 2 Lakhs
1. Trading and Profit and Loss Account for the year ended 32nd Ashadh
Particulars Rs. Lakhs Particulars Rs. Lakhs
To Opening Stock 8 By Sales 100
To Purchases 64 By Closing Stock 12
To Gross Profit c/d 40
Total 112 Total 112
2. Balance Sheet as on 32nd Ashadh

Liabilities Rs. Lakhs Assets Rs. Lakhs
Equity Share Capital 20 Fixed Assets 20
Profit and Loss Account 10 Current Assets
Debentures 2 Debtors 6
Creditors 8 Stock 12
Cash – bal. figure 2
Total 40 Total 40

Profit or Loss Pre and Post Incorporation

Solution 13:
Statement showing calculation of profits for pre and post incorporation periods
For the year ended 31.3.2072 (15 months)
Particulars Total Ratio Pre Post
Gross Profit 14,040,000 1:8 1,560,000 12,480,000
Less: Salaries 2,340,000 1:12 180,000 2,160,000
Depreciation 360,000 1:4 72,000 288,000
Advertisement 1,404,000 1:8 156,000 1,248,000
Discount 2,340,000 1:8 260,000 2,080,000
Managing Director’s Salary 180,000 Post - 180,000
Office/showroom rent 1,440,000 Actual 180,000 1,260,000
Miscellaneous office expenses 240,000 1:4 48,000 192,000
Interest paid 1,902,000 Actual 702,000 1,200,000
Goodwill (loss) 38,000 -
Net Profit - 3,872,000
Working note:
Particulars Pre Post
1. calculation of time ratio = 1:4 1st Baisakh to 31.3.2071 1.4.2071 to 31.3.2072
3 months 12 months
2. Calculation of sales ratio = 1:8 3x1 = 3 12 x 2 = 24
3. Calculation of staff salary ratio = 3x1 = 3 12 x 3 = 36
1:12
4. calculation of interest 234,00,000 x 12% for 3 100,00,000 x 12% for 1 year
months Rs. 1200,000
Rs. 702,000
5. Calculation of Rent
(i) additional rent 60,000x9 = 540,000
(ii) regular rent = (1440,000-540000) 900,0000X3/15 = 180,000 900,0000X12/15 = 720,000
= 900,000
Calculation of gross profit = sales – cost of goods sold = 468,00,000-327,60,000 = 140,40,000

Solution 14:
Receipts Rs. Rs. Payments Rs. Rs.
Cash at Bank 60,000 Liquidation expenses 4,600
Assets realised:
Sundry Debtors 160,000 Liquidator’s remuneration (W.N. 1) 30,400
Stock 120,000 Debenture holders:
Plant & Machinery 360,000 640,000 10% debentures 200,000
Surplus from Land & Interest accrued (W.N.2) 15,000 215,000
Buildings: Preferential creditors 30.000
Amount realised 340,000 Unsecured creditors 370,000
Less: Secured Preference shareholders:

Creditors 100,000 240,000 10% Preference Share

Capital 200,000
Arrear dividend 40,000 240,000
Equity Shareholders
(W.N. 3) :
Rs. 17.50 per share
on 2,000 shares 35,000
Rs. 2.50 per share
on 6,000 shares 15,000 50,000
940,000 940,000
Working Notes:
(1) Liquidator’s remuneration Rs.
3% on Assets realised (3% of Rs. 980,000) 29,400
2% of the amounts distributed among Equity Shareholders
(2/102 × Rs. 51,000) 1,000
30,400
(2) Interest accrued on 10% debentures
Interest accrued as on 31.3.2073 10,000
Interest accrued upto the date of payment
(upto 31st Ashwin, 2073) 5,000
15,000
(3) Amount payable to Equity Shareholders
Equity Share Capital 510,000
Less: Surplus available for Equity Shareholders 50,000
Loss to be borne by them 460,000
Loss per Equity share (Rs. 460,000/8,000) 57.50
Amount payable to Equity shareholders:
Each Equity share of Rs. 75 paid up 17.50
Each Equity share of Rs. 60 paid up 2.50
Accounting for Partnership

Solution 15:
Realization Account
Particulars Rs. Rs. Particulars Rs.
To Sundry assets at book value 790,000 By Creditors 70,000
To Anil's capital – creditors 70,000 By Cash – surrender of policy 84,000
To Partner's capital – profit: By Anil's capital – motor car 14,000
Anil (1/2) 29,100 By Anil's capital – debtors* 110,200
Sunil (3/10) 17,460 By SR Ltd – consideration 640,000
Rahim (1/5) 11,640 58,200
918,200 918,200
* Rs. 116,000 less 5%.

Anil's Capital & Current Account

To Realisation A/c – motor cars 14,000 By Balance b/d 290,000
To Realisation A/c – debtors 110,200 By Realisation A/c – creditors 70,000
To Shares in SR Ltd. 220,000 By Realisation A/c – profit 29,100
To Cash 44,900
389,100 389,100
Sunil's Capital & Current Account

To Shares in SR Ltd. 132,000 By Balance b/d 174,000
To Cash 59,460 By Realisation A/c – profit 17,460
191,460 191,460
Rahim's Capital & Current Account

To Shares in SR Ltd. 88,000 By Balance b/d 136,000
To Cash 59,640 By Realisation A/c – profit 11,640
147,640 147,640
SR Ltd.
Balance Sheet as on 1st Shrawan, 2074
Liabilities Rs. Assets Rs. Rs.
Share capital: Fixed assets:
Authorised: Goodwill 146,000
10,000 12% pref. shares of Rs. 20 each 200,000 Premises 40,000
25,000 ordinary shares of Rs. 20 each 500,000 Machinery 140,000
700,000
Issued and paid up: Motor cars 40,000
8,000 12% pref. shares of Rs. 20 each 160,000 Furniture 25,000 391,000
22,000 ordinary shares of Rs. 20 each 440,000 Current assets:
Stock 150,000
Bank balance 48,000 198,000
Preliminary expenses 11,000
600,000 600,000
Working notes:
(i) Purchase consideration:
Rs.
Cash 80,000
Ordinary shares (Rs. 520,000 – Rs. 80,000) 440,000

Preference shares – discharge of Anil's loan 120,000

Total 640,000
(ii) Computation of goodwill:
Rs. Rs.
Purchase consideration 640,000
Less: Assets taken over:
Machinery 140,000
Motor cars 40,000
Furniture 20,000
Stock 150,000
Bank balance 144,000 494,000
Goodwill 146,000
(iii) Bank balance:

Rs. Rs.
Bank balance taken over 144,000
Less: Purchase consideration discharged 80,000
Purchase of furniture from Anil 5,000
Formation expenses 11,000 96,000
Balance 48,000
(iv) Preference shares issued:
Rs.
For discharging Anil's loan (Rs. 20 × 6,000) 120,000
For purchasing premises owned by Anil (Rs. 20 × 2,000) 40,000
Total 160,000
(v) Furniture:
Rs.
Taken over from partnership 20,000
Separately purchased Anil's personal furniture 5,000
Total 25,000
Accounting for Non-profit making organization

Solution 16:
Kathmandu Books Circle Society

Income and expenditure account for the year ended Ashadh 31, 2074
Dr. Cr.
Expenditure Amount Incomes Amount
To, Electric charges 7,200 By, Entrance fees 7,500
To, Postage & stationary 5,000 25% of 30000
To, Telephone charges 5,000
To, Rent 88,000 By Membership subscription 200,000
Add: Outstanding 4,000 92,000 Less: Received in Advance (10,000) 190,000
To, Salaries 66,000
Add: Outstanding 3,000 69,000 By, Sale proceeds of paper 1,500
By, Hire of lecture hall 20,000
To, Amortization & By, Interest on securities
8,000
Depreciation (WN-1) (WN-2)
Electrical fittings 15,000 Add: Receivable 500 8,500

Furniture 5,000
By, Deficit -excess of
Books 46,000 66,000 16,700
expenditure over Income
244,200 244,200
Kathmandu Books Circle Society

Balance sheet as on Ashadh 31, 2074
Capital fund 793,000 Electrical fittings 150,000

Add: Entrance fees
22,500 Less: Depreciation (15,000) 135,000
capitalization
Less: Excess of expenses
(16,700) 798,800 Furniture 50,000
over income
Less: Depreciation (5,000) 45,000
Outstanding Expense Digital Books 460,000
Rent 4,000 Less: Amortization (46,000) 414,000
Salaries 3,000 7,000
Investment in Securities 190,000
Membership subscription in advance 10,000 Accrued interest 500 190,500
Cash at bank 20,000

- Cash in hand 11,300
815,800 815,800
Working Notes
1 Depreciation & Amortization 2 Interest on securities
Electrical fittings @10% 15,000 Interest @5% p.a. on 150,000 full year 7,500
Furniture @10% 5,000 Interest @5% p.a. on 40,000 half year 1,000
Digital Books @10% 46,000 Total 8,500
Total 66,000 Less: Received (8,000)
Receivable 500
Accounting for Banks

Solution 17:
As per the provision of the NRB Directives, a bank can provide credit up to 25% of its core capital to a single
party. This limit is called the single obligor limit (SOL). While calculating the SOL, core capital of previous
quarter shall be taken as base. In case any excess credit than SOL, additional 100% provision shall be made
for such excess credit amount.
Before calculating the provision amount, SOL of the bank shall be tested upon.
Computation of SOL and credit amount in excess of SOL

Particulars Amount
Core Capital
Paid up Equity Share Capital 171,010
General reserve 155,432
Retained earnings 87,886
Un-audited current year cumulative profit 31,991
Less: Deferred Revenue expenses (2,884)
Total Core capital 443,435

Single obligor limit ( 25% of the core capital) 110,859

Loan to single party 125,000
Loan in excess of SOL 14,141
Computation of loan loss provision amount as per NRB Directive
Computation of Loan Loss Provision amount

Categories Loan Amt Provision Provision
Rate Amount
Not due or <=3 months Pass 1,673,000 1% 16,730
>1 months <= 3 months Watch list 100,000 5% 5,000
>3 months <= 6 months Sub-standard 13,612 25% 3,403
>6 months <= 12 months Doubtful 782 50% 391
>12 months Loss 2,198 100% 2,198
Total 1,689,592 27,722
Additional provision for loan in excess of SOL 14,141
Total Provision amount 41,863
Mechi Bank Ltd

Movement in Provision Amount
For Third Quarter of Fiscal Year 2074/75
Amount in NPR
Particulars Amount
Opening Provision amount 16,983
Closing Provision amount 41,863
Movement in provision amount (addition during the quarter) 24,880
Accounting for Departments

Solution 18:
Departmental Profit & Loss (Adjustment) Account

Particulars A Rs. B Rs. C Rs. Particulars A Rs. B Rs. C Rs.
To Services from A 9,240 4,950 By Services from A to B 9,240
To Supplies from B 35,760 6,480 By Services from A to C 4,950
To Supplies from C 400 5,600 By Services from B to A 35,760
To Charge in respect of
staff 4,400 1,100 By Services from B to C 6,480
To Increase in Dept.
Profit 30,700 By Services from C to A 400
(or Decrease in Dept.
Loss) By Services from C to B 5,600
By Recovery in respect of
Staff 1,100 4,400
By Decrease in Dept.

Profit
(or Increase in Dept.
Loss) 25,270 5,430
40,560 46,640 11,430 40,560 46,640 11,430
Notes:
10% has been added to cost of A dept. services to find out transfer price for B and C. 20% has been added to
costs of supplies of B dept. to find out transfer price for A and C dept.
Working Note:
Statement showing transfer price
From Dept. To Dept. Cost/ Value (Rs.) Transfer Price (Rs.)
A B 8,400 9,260
A C 4,500 4,950
B A 29,800 35,760
B C 5,400 6,480
C A 400 400
C B 5,600 5,600
Nepal Accounting Standards (NAS)

Solution 19:
(a) As per NAS-2 Inventories, inventory should be valued at the lower of cost and net realizable
value. Inventories should be written down to net realizable value on an item-by-item basis in
the given case:
Items Historical Cost Net Realizable Value Valuation of Closing Stock
(Rs. in Lakhs) (Rs. in Lakhs) (Rs. in Lakhs)
A 40.00 28.00 28.00
B 32.00 32.00 32.00
C 16.00 24.00 16.00
88.00 84.00 76.00
Hence, closing stock will be valued at Rs. 76 lakhs
(b). An asset is recognized in the balance sheet when it is probable that the future economic benefits
will flow to the enterprise and the asset has a cost or value that can be measured reliably.
An asset is not recognized in the balance sheet when expenditure has been incurred for which it is
considered improbable that economic benefits will flow to the enterprise beyond the current
accounting period. Instead such a transaction results in the recognition of an expense in the
income statement. This treatment does not imply either that the intention of management in
incurring expenditure was other than to generate future economic benefits for the enterprise or
that management was misguided. The only implication is that the degree of certainty that
economic benefits will flow to the enterprise beyond the current accounting period is insufficient
to warrant the recognition of an asset.
c). As per NAS-12, Revenue from Sale of goods shall be recognized when all the following conditions
have been satisfied:
i. The entity has transferred to the buyer the significant risks and rewards of ownership of
goods;

ii. The entity retains neither continuing managerial involvement to the degree usually
associated with ownership nor effective control over the goods sold;
iii. The amount of revenue can be measured reliably;
iv. It is probable that the economic benefits associated with the transaction will flow to the
entity; and
v. The cost incurred or to be incurred in respect of the transaction can be measured reliably.
d). As per NAS-16 ‘ Property, Plant & Equipment’, the depreciation method applied to an asset shall
be reviewed at least at each financial year end and, if there has been a significant change in the
expected pattern of consumption of the future economic benefits embodied in the asset, the
method shall be changed to reflect the changed pattern. Such a change shall be accounted for as
a change in an accounting estimate in accordance with NAS 08.
As per NAS ‘Accounting Policies, Changes in Accounting Estimates & Errors’, changes in
accounting estimates shall be adjusted prospectively that means the effect of a change in an
accounting estimate shall be included in the determination of net profit or loss in:
(a) The period of the change, if the change affects the period only; or
(b) The period of the change and future periods, if the change affects both.
In the given case, the company can change the method of depreciation from year 2074-75 if the
conditions set aside in above paragraph have been fulfilled.
Depreciation for year 2074-75 and net book value of Machine as on 32.3.75 after Rs.
effect of the change
Book value of Machinery as on 01.04.2074 2,05,000
Current year depreciation as per new method (WDV) (205,000 X 20%) 41,000
Net Book value as on 32.03.2075 (205,000–41,000) 1,64,000
Working Note:
Book Value of Machinery and Depreciation under SLM as on 01-04-2074
Rs.
Cost of Machine purchased on 01.04.2072 3,25,000
Less: Residual Value 25,000
Depreciable amount 3,00,000
Useful life of Machine 5Years
Depreciation for 2 Years (Rs.3,00,000x2/5) 1,20,000
Book value as on01.04.2074 2,05,000
e). ‘Other Comprehensive Income’s per NAS

Other comprehensive income comprises items of income and expenses (including reclassification
adjustments) that are not recognized in profit and loss as required or permitted by other NFRSs.
The components of other comprehensive income include;
1. changes in revaluation surplus
2. re-measurements of defined benefit plans
3. gains and losses arising from translating the financial statements of a foreign operation

4. gains and losses from investments in equity instruments measured at fair value through other
comprehensive income in accordance NFRS related with financial instruments
5. the effective portion of gains and losses on hedging instruments in a cash flow hedge
6. for particular liabilities designed as at fair value through profit or loss, the amount of the
change in the fair value that is attributable to changes in the liability’s credit risk.
Solution 20:
(a). Leases
A lease is a contract calling for the lessee (user) to pay the lessor (owner) for use of the property.
A rental agreement is a lease in which the asset is tangible property. Leases for intangible
property can include use of a computer program (similar to a license, but with different
provisions), or use of a radio frequency (such as a contract with a cell-phone provider). It is a
written agreement under which a property owner allows a tenant to use the property for a
specified period of time and rent. The lease will either provide specific provisions regarding the
responsibilities and rights of the lessee and lessor, or there will be automatic provisions as a result
of local law. In general, by paying the negotiated fee to the lessor, the lessee (also called a tenant)
has possession and use (the rental) of the leased property to the exclusion of the lessor and all
others except with the invitation of the tenant.
(b). Re-insurance
In general insurance there are risks which, because of their magnitude or nature, one insurance
company cannot afford to cover, e.g., aviation insurance. Generally, in such cases, an insurance
company insures the whole risk itself and lays off the amount it has accepted to other insurance of
reinsurance companies, retaining only that much risk which it can absorb.
A reinsurance transaction may thus be defined as an agreement between a 'ceding company' and
a 're-insurer' whereby the former agrees to 'cede' and the later agrees to accept a certain specified
share of risk or liability upon terms as set out in the agreement.
(c). Contingent Assets

An entity shall not recognize a contingent asset.
1. Contingent assets usually arise from unplanned or other unexpected events that give
rise to the possibility of an inflow of economic benefits to the entity. An example is a
claim that an entity is pursuing through legal processes, where the outcome is uncertain.
2. Contingent assets are not recognized in financial statements since this may result in the
recognition of income that may never be realized. However, when the realization of
income is virtually certain, then the related asset is not a contingent asset and its
recognition is appropriate.
3. A contingent asset is disclosed, as required by paragraph 89, where an inflow of
economic benefits is probable.
4. Contingent assets are assessed continually to ensure that developments are appropriately
reflected in the financial statements. If it has become virtually certain that an inflow of
economic benefits will arise, the asset and the related income are recognized in the
financial statements of the period in which the change occurs. If an inflow of economic
benefits has become probable, an entity discloses the contingent asset.

(d). Non Banking Assets (NBA)

Bank can sale the property which has taken as collateral security, against loan and advances given
to the borrower in case of default, to recover outstanding principal and interest amount. If such
properties couldn’t be sold through auction then the bank can assume the properties in its own
name. Such assumed property is called ‘Non Banking Asset (NBA)’. Recognition of the NBA should
be done at lower of total outstanding amount (principal plus accrued interest thereon as on the
date of assume) and prevailing market value of the properties. The difference between the two
should be recorded as an expense in the year of assume. As per the requirement of the Unified
Directives of Nepal Rastra Bank (NRB), 100% provision should be provided to total value of NBA
from the year of assume. It means institution shouldn’t hold NBA.
(e) Accounting Estimates

As a result of the uncertainties in business activities, many financial statement items cannot be
measured with precision but can only be estimates. These are called accounting estimates.
Therefore, the management makes various estimates and assumptions of assets, liabilities,
incomes and expenses as on the date of preparation of financial statements. This process of
estimation involves judgments based on the latest information available.
Examples of estimation in some fields are:
i) Estimation of useful life of depreciable assets.

ii) Estimation of provision to be made for bad and doubtful debts.
(f). Components of financial statements

Following are components of financial statements comprises:
(a) a statement of financial position as at the end of the period;
(b) a statement of profit or loss and other comprehensive income for the period;
(c) a statement of changes in equity for the period;
(d) a statement of cash flows for the period;
(e) notes, comprising significant accounting policies and other explanatory information;
(g). Watch list in Loan loss provisioning
Nepal Rastra Bank (NRB) has formulated a new category of loan for provisioning purposes. As per
the NRB’s Rule, all loans are required to be classified into 5 different categories including Watch
List whereby 5% of the total loan is required to be kept as provisioning though the provision can
be reversed when the loan becomes performing later. Provision made for watch list loans is a
general loan loss provision. As per the circular issued by NRB, the loans having the following
characteristics are to be classified as Watch List loans:
1. If interest and principal repayments are overdue for more than a month.
2. Short term/Working Capital Loans that are not renewed on time and are renewed on
temporary basis.
3. Loan and advances to customers/ group of customers who have been categorized as non
performing by other banks and financial institutions.

4. Firms/Companies/Organizations having negative net worth or net loss though interest and
principal are served on regular basis.
5. Loan and advances having multiple banking exposure more than Rs. 1 billion and have not
entered into consortium agreement.
6. Specifically specified by NRB after due inspection.
(h). Government Accounting System in Nepal

Government Accounting System in Nepal is generally on Cash Basis. It has set chart of accounts
under which revenue and expenditure are accounted for. It follows double entry system;
however, do not follow the mercantile system of accounting. Government accounting system
broadly classifies expenditure into administrative and development expenses. Accounting system
followed by the government differentiates Capital expenditures and revenue expenditure in its
subsidiary records. Office of the Financial Comptroller General specifies the chart of accounts
under which all the government revenue and expenditure are to be accounted for.
(i). Outsourcing the Accounting function to third party

Recently a growing trend has developed for outsourcing the accounting function to a third party.
The consideration for doing this is to save cost and to utilize the expertise of the outsourced
party. The third party maintains the accounting software and the client data, does the processing
and hands over the report from time to time.
Benefits of outsourcing the accounting function to third party:
1. The organization that outsources its accounting function is able to save time to concentrate
on the core areas of business activity.
2. The organization is able to utilize the expertise of the third party in undertaking the
accounting work.
3. Storage and maintenance of the data is in the hand of professional people.
4. The organization is not bothered about people leaving the organization in key accounting
positions. The proposition is proving to be economically and more sensible as they do not
have train the people again. Hence the training cost is saved.
(j) Compilation of accounting information for agricultural farm
Agricultural activities are carried on mostly in an unorganized manner. Generally, the farmer does
not have office and also does not find time for day to day record keeping. The transactions and
events of such agricultural activities are also not supported by vouchers or other documents in
most of the cases. Therefore, it is essential to maintain a Diary to record happenings of the day.
This Diary becomes the source document for record keeping. The following registers are required
for compilation of the accounting information of agricultural activities:
i. Cash Book: to record cash transactions.
ii. Fixed Assets Register: to record details of fixed assets such as description of assets, cost
of purchases/construction/generation, disposal, depreciation and balance.
iii. Loan Register: to record borrowings from bank, cooperatives and other agencies trade
creditors along with interest paid or payable.
iv. Stock Register: to record details of input, output and by-product – receipts, utilization,
wastage and balance.
v. Debtors and Creditors Register: to record credit transactions classified by parties involved.

vi. Register for National Transactions: to record transactions between farm and farm
household.
vii. Cost Analysis Register: to record crop-wise input and output inclusive of apportionment of
common costs and finding out crop profit.

Paper 2:
Audit And Assurance

CAP II Audit and Assurance- June 2019
REVISION QUESTION
Question No 1:
Explain the process of filing complaints against member and members holding certificate of
practice.
Question No 2:
As an auditor, comment on the following situations/statements:
You are a partner in Ashok Kumar & Associates, Chartered Accountants. You are approached by Mr
Yogendra, the managing director of Nepal Brewery Ltd, who asks your firm to become auditors of his
company. In return for giving you this appointment Mr Yogeendra says that he will expect your firm
to waive 50 per cent of your normal fee for the first year's audit. The existing auditors, Mukul
Pandey & Associates, have not resigned but Mr Yogendra informs you that they will not be re-
appointed in the future.
What action should Ashok Kumar & Associates take in response to the request from Mr
Yogedra to reduce their first year's fee by 50 per cent?
Is Mukul Pandey & Associates within their rights in not resigning when they know Mr
Yogendra wishes to replace them? Give reasons for your answer.
Question No 3
BKS & Associates, a chartered accountant firm is yet to receive their professional fee from Ms Nepal
Liquor Ltd. In spite of the overdue of the fees for past 3 years, it has yet again appointed the same
firm to conduct the annual audit of the organization. In the light of the code of conduct or the
pronouncement from the ICAN, is it appropriate for the firm to continue the engagement. Explain.
Question No 4:
Mr. Nabin, the partner of the firm Prabin & Associates, says that since he has formally e-mailed the
audit opinion along with the financial statements to the company as accepted therefore he does not
require signing the audit report. Comment.
Question No 5:
Pink Pvt. Ltd., manufacturing noodles, has valued at the year end its closing stock of packed finished
goods for which firm sales contracts have been received, at realizable value inclusive of profit and
cash incentive. As at the year end, the ownership of the goods has not been transferred to the
buyers.
Question No 6:
Distinguish between Audit Reports and Certificates:
Question No 7:
The internal auditor of the company has been asked by the managing director of the company to
ensure that no qualifications are made by the statutory auditor in his report. What are the points
that need to be examined and reported to the managing director by the chief of internal audit in
respect of the following items:
I. Fixed assets:
II. Inventory; and
III. Loans granted or taken

Question No 8:
How do you vouch the
a. Substantive procedures for bank reconciliation
b. Receipt of Special backward area subsidy from Nepal Government
c. After sales service
d. Substantive procedures for work in progress (WIP)
e. Borrowing from Banks:
Question No 9:
Explain Audit evidence and the essential elements of good audit evidence
Question No 10:
There are a number of key procedures which auditors should perform if they wish to rely on internal
controls and reduce the level of substantive testing they perform. These include:
(i) Documentation of accounting systems and internal control;
(ii) Walk-through tests;
(iii) Audit sampling;
(iv) Testing internal controls;
(v) Dealing with deviations from the application of control activities.
Required: Briefly explain each of the procedures listed above.
Question No 11:
Discuss the objectives of information systems auditing
Question No 12
What is audit sampling and sampling risk? What are the methods of selecting samples?
Question No 13
Explain the Internal Audit and its objectives.
Question No 14
Write down the functions, duties and powers of audit committee under the Companies Act, 2063.
Question No 15:
What are the special audit points to be considered by the auditor during the audit of a
Hospital?
Question No 16
Mention the special steps involved in the audit of an Educational Institution.
Question No 17
Carry out discussion on the resolution of ethical conduct in the ICAN Code of Ethics?
Question No 18
What is the responsibility of an auditor when he relies on the work performed by another expert, for
forming and expressing his opinion on the financial statement? How should he evaluate the work of
an expert?

Question No 19
Write short note on following
a) Integrity and Objectivity
b) Tests of control
c) Substantive procedures
d) Contents of Working Papers
e) Materiality
f) Inherent risk
g) Internal Controls and their Inherent Limitations

SUGGESTED ANSWER HINT
Answer No 1:
The concerned person may lodge complaint to the Institute of Chartered Accountants of Nepal
against any member or member holding Certificate of Practice for not upholding the conduct
mentioned in this Act or the Regulations framed under this Act or for violation of this Act or
Regulations framed under this Act. The person can give application showing all the available
evidence and paying a fee of Rs. 100. However, no fee is required if the complainant is any
Government agencies or other entity where council has waived such fee. The Executive Director
shall, if he finds convincing information that proves any member or member holding Certificate of
Practice is not observing the conduct, submit the proposal along with the related facts to the Council
for further action against such member or member holding Certificate of Practice.
The council if finds the complaints convincing, the complaint is placed in the disciplinary committee
for further discoveries and recommendation.
Pursuant to section 14 of ICAN Act, a Disciplinary Committee, comprising of following members, shall
be constituted to recommend the Council to take necessary actions after investigation upon
complaints lodged against any action, contrary to the Chartered Accountants Act or Regulations or
code of conduct framed under this Act, rendered by any member, or the Institute receives any
information of such kind.
 A FCA member designated by council from amongst elected CA council members - Chairman
 Three persons nominated by the Council from amongst the Council members - Member
 Two persons nominated by the Council amongst the members - Member
 One person nominated by the Auditor General - Member
The chairman or members shall not be allowed to attend any meeting that hears complaint against
the Chairman or member of the Disciplinary Committee for their actions contrary to this Act or the
Regulations, Byelaws or code of conduct framed under this Act. The Procedures of the meeting of
the Disciplinary Committee and the term of office of the chairman and members of the committee
shall be as prescribed.
The Disciplinary committee shall have the authority, similar to a judicial court, in respect of
summoning concerned person and investigating evidences and witnesses.
The Disciplinary committee shall recommend to the Council, along with its opinion and finding, for
necessary action against a member, if found guilty, and the council may, considering such a
recommendation, impose any of the following punishment according to the degree of offence:
a. Reprimanding,
b. Removing from the membership for a period up to five years,
c. Prohibiting from carrying on the accounting profession for any particular period,
d. Cancellation of the Certificate of Practice (COP) or membership.
Any Council member against whom the Disciplinary Committee, after investing upon the complaint
of his action contrary to the Act or Regulations, Bye –laws or code of conduct framed under the Act,
has decided to recommend the Council to take necessary action, shall not be allowed to attend and
to vote at the Council meeting where the Council is hearing at such recommendation.

Before imposing any punishment, the Council shall provide reasonable opportunity to the concerned
members to submit their clarification. The concerned member may, if he is not satisfied with the
decision file an appeal in the Appellate Court.
Answer No 2:
The request by Mr Yogendra that half of the first year's audit fee should be waived is quite improper.
If this proposal were to be accepted it could be held that Ashok Kumar & Associates had sought to
procure work through the quoting of lower fees. This would be unethical and would result in
disciplinary proceedings being taken against the firm.
Mr Yogendra should be informed that the audit fee will be determined by reference to the work
involved in completion of a satisfactory audit, taking into account the nature of the audit tasks
involved and the resources required to carry out those tasks in an efficient manner. He should also
be told that if he is not prepared to accept an audit fee arrived at in this way and insists on there
being a reduction then regrettably the nomination to act as auditor will have to be declined.
Mukul Pandey & Associates has every right not to resign even though they may be aware that Mr
Yogendra wishes to replace them. The auditors of a company are appointed by, and report to, the
members of a company and the directors are not empowered to remove the auditors. If the reason
for the proposed change arises out of a dispute between management and the auditors then the
auditors have a right to put forward their views as seen above and to insist that any decision should
be made by the members, but only once they have been made aware of all pertinent facts
concerning the directors' wishes to have them removed from office.
Answer No 3:
A self-interest threat may be created if fees due from an audit client remain unpaid for a long time,
especially if a significant part is not paid before the issue of the audit report for the following year.
Generally the firm is expected to require payment of such fees before such audit report is issued. If
fees remain unpaid after the report has been issued, the existence and significance of any threat
shall be evaluated and safeguards applied when necessary to eliminate the threat or reduce it to an
acceptable level. An example of such a safeguard is having an additional professional accountant
who did not take part in the audit engagement, provide advice or review the work performed. The
firm shall determine whether the overdue fees might be regarded as being equivalent to a loan to
the client and whether, because of the significance of the overdue fees, it is appropriate for the firm
to be reappointed or continue the audit engagement.
Relative size of the fees mentioned hereinbefore, until ICAN makes specific guidelines shall not be
considered as self-interest or intimidation threats
Answer No 4:
Section 116 of the Company’s Act provides that an audit report prepared by the auditor appointed
by the company shall be signed and dated by the auditor. Further, where the company has
appointed any accounting institution to carry out the audit the member who has been authorized by
the decision of the partners of such institution shall sign and date the audit report.
Answer No 5:
Valuation of Inventories: NAS 2 requires that inventories should be valued as lower of cost and Net
realizable value (NRV). A departure from the general principle can be made if the NAS is not
applicable or having regard to the nature of industry. NAS 2 also states that
(a) work in progress arising under construction contracts, including directly related service contracts
(b) work in progress arising in the ordinary course of business of service providers;

(c) shares, debentures and other financial instruments held as stock-in-trade; and
(d) producers’ inventories of livestock, agricultural and forest products
are measured as NRV based on established practices.
In the given case the sale is assumed under a forward contract but the goods are not of a nature
covered by the above exceptions taking into account the facts the closing stock of finished goods
should have been valued at cost, as it is lower than the realizable value (as it includes profit).
Further, sale cash incentives should not be included for valuation purposes.
The policy adopted by the Pink Pvt. Ltd. for valuing its closing stock of inventory of finished goods on
selling price plus sale incentives is not correct. The statutory auditor should give a qualified report.
Answer No 6:
The term 'certificate', is a written confirmation of the accuracy of the facts stated therein and does
not involve any estimate or opinion. When an auditor certifies a financial statement, it implies that
the contents of that statement can be measured and that the auditor has vouchsafed the exactness
of the data. The term certificate is, therefore, used where the auditor verifies certain exact facts. An
auditor may thus, certify the circulation figures of a newspaper or the value of imports or exports of
a company. An auditor's certificate represents that he has verified certain precise figures and is in a
position to vouch safe their accuracy as per the examination of documents and books of account.
An auditor's report, on the other hand, is an expression of opinion. When we say that an auditor is
reporting, we imply that he is expressing an opinion on the financial statements.
The term ‘report’ implies that the auditor has examined relevant records in accordance with
generally accepted auditing standards and that he is expressing an opinion whether or not the
financial statements represent a true and fair view of the state of affairs and of the working results
of an enterprise. Since an auditor cannot guarantee that the figures in the balance sheet and profit
and loss account are absolutely precise, he cannot certify them. This is primarily because the
accounts itself are product of observance of several accounting policies, the selection of which may
vary from one professional to another and, thus, he can only have an overall view of the accounts
through normal audit procedures. Therefore, the term certificate cannot be used in connection with
these, statements.
Thus, when a reporting auditor issues a certificate, he is responsible for the factual accuracy of what
is stated therein. On the other hand, when a reporting auditor gives a report, he is responsible for
ensuring that the report is based factual data, that his opinion is in due accordance with facts, and
that it is arrived at by the application of due care and skill.
Answer No 7:
The points to be examined and reported by the internal auditor in respect of the following are:
I. Fixed Assets
 Whether the company is maintaining proper records showing full particulars, including
quantitative details and situation or fixed assets;
 Whether these fixed assets have been physically verified by the management at reasonable
intervals. Also is there any material discrepancies noticed in such verification. If so the same are
to properly dealt with in the books of account;
 If a substantial part of fixed assets have been disposed of during the year, whether it has
affected the business of the going concern.
II. Inventory
 Whether physical verification of inventory has been conducted at reasonable intervals by the
management.
 Whether the procedures of physical verification of inventory followed is reasonable and

adequate in relation to the size of the company and the nature of its business. If not what are
the inadequacies and what are the corrections needed.
 Whether the records of inventory are maintained properly and material discrepancies noticed
on physical verification have been properly dealt with in the books of accounts.
III. Loans granted or taken

 Whether the company has either granted or taken and loans secured or unsecured to/from
companies, firms or other parties covered in the register and if so the number of parties and
amounts involved in the transactions should be given.
 Whether the rate of interest and other terms and conditions of loans given or taken by the
company, secured or unsecured are prima facie prejudicial to the interests of the company.
 Whether the payment of the principal amount and interest are also regular.
 If overdue amount is more than one lakh, whether reasonable steps have been taken to recover
the dues or pay the amounts owed in respect of principal and interest.
Apart from the above, it should also be verified whether there is an adequate internal control
procedure commensurate with the size of the company and nature of its business, for the purchase
and sale etc. Also, if there is a continuing failure to correct major weakness in internal control, the
same have to be reported.
Answer No 8
a. Substantive procedures for bank reconciliation
 Obtain bank account reconciliation and cast to check the additions to ensure arithmetical
accuracy.
 Agree the balance per the bank reconciliation to an original year-end bank statement and to
the bank confirmation letter.
 Agree the reconciliation’s balance per the cash book to the year-end cash book.
 Trace all the outstanding lodgments to the pre year-end cash book, post year-end bank
statement and also to paying-in-book pre year end.
 Trace all unpresented cheques through to a pre year-end cash book and post year-end
statement. For any unusual amounts or significant delays, obtain explanations from
management.
 Examine any old unpresented cheques to assess if they need to be written back into the
purchase ledger as they are no longer valid to be presented.
b. Receipt of Special backward area subsidy from Nepal Government

 The claim for backward area subsidy submitted to the authorities should be studied.
 It should be ascertained whether the grant is of a capital nature for funding assets or of a
revenue nature. Mere computation formula of quantum of grant with reference to the cost of
project of itself will not make the grant a capital nature ipso facto.
 The accounting of the grant should be in accordance with NAS 20 “Accounting for Government
Grants & Disclosure of Government Assistance” of ICAN. The revenue grant can be taken to
income statement with appropriate disclosure.
 The capital grant may be adjusted against cost of assets or may be kept in the capital reserve to
be transferred to statement of profit or loss account each year in proportion to the depreciation
of that asset charged in statement of profit and loss account.
 The receipt of the grant should be checked with bank statement, remittance challan etc.
c. After sales service

 Nature of after sales services rendered by the enterprise.
 Maintenance of adequate records such as customer cards of after sales services provided to
each customer indicating the period and other details.

 Manner of distinction should be made between the customers being serviced under warranty
period and those under the annual maintenance contract.
 Type of a form describing date wise the services rendered or parts replaced on each visit by
service engineers.
 Manner of collecting service charges on annual basis or on periodic visits from customers who
are not covered by annual maintenance contract by service engineers and issue provisional
receipts to customers in the case of changeable parts.
 Existence of any system of reconciliation of stores and spare parts issued with the cash received.
d. Substantive procedures for work in progress (WIP)

 Prior to attending the inventory count, discuss with management how the percentage
completions are attributed to the WIP
 During the count, observe the procedures carried out in assessing the level of WIP and
consider the reasonableness of the assumptions used.
 Agree for a sample that the percentage completions assessed during the count are in
accordance with the policies communicated prior to the count.
 Discuss with management the basis of the standard costs applied to the percentage
completion of WIP, and how often these are reviewed and updated.
 Review the level of variances between standard and actual costs and discuss with
management how these are treated.
 Obtain a breakdown of the standard costs and agree a sample of these costs to actual
invoices or payroll records to assess their reasonableness.
 Cast the schedule of total WIP and agree to the trial balance and financial statements.
 Agree sample of WIP assessed during the count to the WIP schedule, agree percentage
completion is correct and recalculate the inventory valuation
e. Borrowing from Banks:

 Borrowing from banks may be either in the form of overdraft limits or term loans. In each case,
the borrowings should be verified as follows:
 Primarily, the authority under which a loan has been raised should be verified. An unauthorized
loan cannot be treated as a liability of the concern. In the case of a company, only the Board of
Directors is authorized to raise
 a loan or borrow from a bank.
 The copy of the loan agreement should be referred to find out the rate of interest, the terms of
repayment and the conditions as to security agreed to by the client.
 Reconcile the balances in the overdraft or loan account with that shown in the pass book(s) and
confirm the last mentioned balance by obtaining a certificate from the bank showing the balance
in the accounts as at the end of the year.
 Obtain a certificate from the bank showing particulars of securities deposited with the bank as
security for the loans or of the charge created on an asset or assets of the concern and confirm
that the same has been correctly disclosed and duly registered with Registrar of Companies and
recorded in the Register of charges.
 Ascertain the purpose for which loan has been raised and the manner in which it has been
utilised and that this has not prejudicially affected the entity.
 If any guarantee has been provided for the repayment of the loan the particulars thereof should
be ascertained for the purpose of disclosure in the balance sheet.
Answer No 9:
The auditor has to obtain sufficient and appropriate evidence to substantiate his opinion on the
financial statements. The audit evidence provides grounds for believing that a particular thing is true
or not by providing support for a fact or a point in question. The evidences collected by the auditor

must support the contents of the auditor’s report. Essentials of good audit evidence
 Sufficient: The audit evidence are said to be sufficient when they are in adequate quantity. The
audit evidence enables the auditor to form an opinion on the financial information. Sufficient
evidence can be obtained by test checking instead of 100% checking.
 Reliable: Evidences obtained by auditor are persuasive rather than conclusive in nature
therefore evidence cannot be 100% reliable. The reliability of audit evidence is depends upon:
(i) Source: whether the evidence obtained within the organisation i.e. internal and obtained
from outside i.e. external (confirmation by third party)
(ii) Nature: whether the evidence is verbal (explanation from clients staff), visual (physical
verification of stock) or documentary (bills attached to vouchers)
2. Relevant: The obtained audit evidence must be relevant to the matter being checked. For e.g.
the balance stock in hand to be checked then the relevant evidence shall the physical
verification.
The following rules of thumb have proven helpful in judging the appropriateness of evidence:
a. documentary evidence is usually better than testimonial evidence;
b. audit evidence is more reliable when the auditor obtains consistent evidence from difference
sources or of a different nature.
c. original documents are better than photocopies;
d. evidence from credible third parties may be better than evidence generated within the audited
organization;
e. the quality of information generated by the audited organization is directly related to the
strength of the organization’s internal controls (the auditors should have a good understanding
of internal controls as they relate to the objectives of the audit); and
f. evidence generated through the auditor’s direct observation, inspection and computation is
usually better than evidence obtained indirectly.
Important factors to be considers while obtaining audit evidence:

– the quality of the evidence (its relevance, reliability and validity);
– the level of materiality (Rupees terms) or the significance of the observation or conclusion (in
general, the higher the level of significance or materiality, the higher the standard that evidence
will have to meet);
– whether an audit level of assurance (high) or a review level of assurance(moderate) is required
(for example, a higher level of assurance is required for evidence to support observations than
is required to support contextual information included in the report);
– the risk involved in making an incorrect observation or reaching an invalid conclusion (as an
example, if any risk of legal action against the auditee results from reporting an observation, the
standard of evidence demanded will be high); and
– the cost of obtaining additional evidence relative to likely benefits in terms of supporting
observations and conclusions (as in most things, diminishing returns apply in gathering audit
evidence at some point, incurring the cost of obtaining more evidence will not be justified by
changes in the persuasiveness of the total body of evidence).
Answer No 10
(i) Documentation of accounting systems and internal control: Auditors are required to obtain an
understanding of the business they are to audit. As part of that process they record the accounting
and internal control systems to enable them to plan the audit and develop an effective audit
approach. This allows the auditor to determine the adequacy of the system for producing the
financial statements and to perform an initial risk assessment. There are a number of different
techniques which may be used to record the system. These include narrative notes, flowcharts and
questionnaires. The extent of the work will depend on the nature of the organization and the

practical circumstances. For example in a smaller company where a substantive rather than controls
based approach is to be taken, a detailed record of internal control would not be necessary. For a
new client with a large and complex system a much more detailed review would be required.
(ii) Walk-through tests: Walk through tests are performed by the auditors to confirm that whether their
recording and understanding of the system is correct. They are often performed as the recording of
the system takes place or in conjunction with the tests of controls. The process involves the tracing
of a sample of transactions from the start of the operating cycle to the end and vice versa. For
example a sales transaction could be traced from the initial order through to the entry in the
nominal ledger accounts.
(iii) Audit sampling: Audit sampling involves the application of audit procedures to a selection of
transactions within a population (i.e. rather than applying the procedures to 100%). The auditor then
obtains and evaluates the evidence in order to form a conclusion about the population as a whole.
Sampling is normally adopted for practical reasons as in most cases it would be too time consuming
to audit the whole population. A number of different techniques can be used in order to select the
sample including random, systematic or haphazard selection. When designing the size and the
structure of the audit sample the auditor will need to consider sampling risk – the risk that the
sample is not representative of the population as a whole, meaning that results cannot be
extrapolated.
(iv) Testing internal controls: Tests of controls are used to confirm the auditor's assessment of the
operation of the control system. They are tests to obtain audit evidence which confirm that controls
have been carried out correctly and consistently. For example a control activity over the payment of
supplier invoices could be that all invoices are authorized by the purchases manager's signature. The
auditor would test this control by looking for evidence of this on a sample of paid purchase invoices.
As this is a test of controls rather than a substantive procedure the size of the balance on the invoice
is irrelevant and any exceptions potentially show a failure in the system. The results of this work will
then determine the extent to which further substantive procedures are required. If controls have
proved to be effective less additional work is required. If controls are not in place or are not effective
more additional evidence will be required.
(v) Deviations: If deviations from the application of control activities are found the auditor will need to
determine whether this is an isolated incident or evidence of a more comprehensive breakdown in
procedures. This will normally be confirmed by extending the sample size and testing more
transactions. If the problem is an anomalous error arising from an isolated incident, no further
formal action is required (although the auditor may wish to mention it to manage informally). If the
breakdown is more comprehensive the auditor needs to consider the impact this will have on this
particular aspect of the audit and the audit approach as a whole. An unexpectedly high deviation
rate, which is in excess of the tolerable rate of deviation set by the auditor, will mean the auditor will
need to re-assess audit risk. If a compensating control cannot be identified and tested satisfactorily,
a substantive approach will need to be adopted.
Answer No 11:
Information systems auditing or systems audit is the process of collecting and evaluating evidence to
determine whether a computer system safeguards assets, maintains data integrity, allows
organizational goals to be achieved effectively, and uses resources efficiently. Some of the objectives
of information systems auditing are discussed as under:
i. Asset Safeguarding Objectives: The information system assets of an organization include
hardware, software, facilities, people (knowledge), data files, system documentation, and
supplies. Like all assets, they must be protected by a system of internal control. Hardware can

be damaged maliciously. Proprietary software and the contents of data files can be stolen or
destroyed. Supplies of negotiable forms can be used for unauthorized purposes. These assets
are often concentrated in one or a small number of locations, such as a single disk. As a result,
asset safeguarding becomes an especially important objective for many organizations to
achieve.
ii. Data Integrity Objectives: Data integrity is a fundamental concept in information systems
auditing. It is a state implying data has certain attributes: completeness, soundness, purity, and
veracity. If data integrity is not maintained, an organization no longer has a true representation
of itself or of events. Moreover, if the competitive advantage. Nonetheless, maintaining data
integrity can be achieved only at a cost. The benefits obtained should exceed the costs of the
control procedures needed.
iii. System Effectiveness Objectives: An effective information system accomplishes its objectives.
Evaluating effectiveness implies knowledge of user needs. To evaluate whether a system report
information in a way that facilitates decision making by its users, auditors must know the
characteristics of users and the decision-making environment. Effectiveness auditing often
occurs after a system has been running for some time. Management requests a post audit to
determine whether the system is achieving its stated objectives. The evaluation provides input
to the decision on whether to scrap the system, continue running it, or modify it is some way.
Effectiveness auditing also can be carried out during the design stages of a system. Users often
have difficulty identifying or agreeing on their needs. Moreover, substantial communication
problems often occur between system designers and users. If a system is complex and costly to
implement, the design is likely to fulfill user needs.
iv. System Efficiency Objectives: An efficient information system uses minimum resources to
achieve its required objectives. Information systems consume various resources: machine time,
peripherals, system software, and labour. These resources are scare, and different application
system usually competes for their use. The question of whether an information system is
efficient often has no clear cut answer. The efficiency of any particular system cannot be
considered isolation from other systems. Problems of sub optimization occur if one system is
“optimized” at the expense of other system. For example, minimizing an application system’s
execution time might require dedication of some hardware resource (e.g., a printer) to that
system. The system might not use the hardware fully, however, while it undertakes its work.
The slack resource will not be available to other application system if it is dedicated to one
system. System efficiency becomes especially important when a computer no longer has excess
capacity. The performance of individual application system degrades (e.g., slower response
times occur), and users can becomes increasingly frustrated Management must then decide
whether efficiency can be improved or extra resources must be purchased. Because extra
hardware and software is a cost issue, management needs to know whether available capacity
has been exhausted because individual application systems are inefficiency or because existing
allocations of computer resources are causing bottlenecks. Because auditors are perceived to
be independent, management might ask them to assist with or even perform this evaluation.
Answer No 12
Audit sampling is the application of audit procedures to less than 100% of items within a population
of audit relevance such that all sampling units have a chance of selection. This will enable the auditor
to obtain and evaluate audit evidence about some characteristic of the items selected in order to
provide the auditor with a reasonable basis on which to draw conclusions about the entire
population. Audit sampling can be applied using either statistical or non-statistical approaches.

The population is the entire set of data from which a sample is selected and about which the auditor
wishes to draw conclusions.
Auditors are unlikely to test 100% of items when carrying out tests of controls, but 100% testing may
be appropriate for certain substantive procedures. For example, if the population is made up of a
small number of high value items, there is a high risk of material misstatement and other means do
not provide sufficient appropriate audit evidence, then 100% examination may be appropriate.
Audit sampling can be done using either statistical sampling or non-statistical sampling methods.
Statistical sampling is an approach to sampling that involves random selection of the sample items,
and the use of probability theory to evaluate sample results, including measurement of sampling
risk. Non-statistical sampling is a sampling approach that does not have these characteristics.
The auditor may alternatively select certain items from a population because of specific
characteristics they possess. The results of items selected in this way cannot be projected onto the
whole population but may be used in conjunction with other audit evidence concerning the rest of
the population.
 High value or key items. The auditor may select high value items or items that are suspicious,
unusual or prone to error.
 All items over a certain amount. Selecting items this way may mean a large proportion of the
population can be verified by testing a few items.
 Items to obtain information about the client's business, the nature of transactions, or the client's
accounting and control systems.
 Items to test procedures, to see whether particular procedures are being performed.
Sampling risk arises from the possibility that the auditor's conclusion, based on a sample of a certain
size, may be different from the conclusion that would be reached if the entire population were
subjected to the same audit procedure.
Non-sampling risk arises from factors that cause the auditor to reach an erroneous conclusion for
any reason not related to the size of the sample. For example, the use of inappropriate audits
procedures, or misinterpretation of audit evidence and failure to recognize a misstatement or
deviation.
Sampling unit is the individual items constituting a population. It may be a physical item (e.g. credit
entries on bank statements, sales invoices, receivables’ balances) or a monetary unit. Stratification is
the process of dividing a population into sub-populations, each of which is a group of sampling units
which have similar characteristics, often monetary value.
The auditor must consider the purpose of the audit procedure when designing an audit sample. The
auditor must also consider the characteristics of the population. When considering the
characteristics of the population, the auditor might determine that stratification or value-weighted
selection is appropriate. The auditor must design a sample size sufficient to reduce sampling risk to
an acceptably low level.
Sampling risk can lead to two types of erroneous conclusions: for tests of controls, that they are
more effective that they actually are or for tests of details, that a material misstatement does not
exist when it actually does; and for tests of controls, that controls are less effective than they
actually are or for tests of details, that a material misstatement exists when it actually does not. The
lower the risk the auditor is willing to accept, the greater the sample size will need to be. Sample size
can be determined using a statistically-based formula or through the use of judgment.

The standard also requires the auditor to select items for the sample in such a way that each
sampling unit in the population has a chance of selection. When statistical sampling is used, each
sampling unit has a known probability of being selected. When non-statistical sampling is used,
judgment is applied. However, it is important that the auditor selects a representative sample, free
from bias, by choosing sample items that have characteristics typical of the population. The main
methods of selecting samples are random selection, systematic selection and haphazard selection.
We discuss these and other methods below.
• Random selection ensures that all items in the population have an equal chance of selection, e.g.
by use of random number tables or random number generators.
• Systematic selection involves selecting items using a constant interval between selections, the
first interval having a random start. While using a systematic selection, auditors must ensure
that the population is not structured in such a manner that the sampling interval corresponds
with a particular pattern in the population.
• Haphazard selection may be an alternative to random selection provided auditors are satisfied
that the sample is representative of the entire population. This method requires care to guard
against making a selection which is biased, for example towards items which are easily located,
as they may not be representative. It should not be used if auditors are carrying out statistical
sampling.
• Block selection may be used to check whether certain items have particular characteristics. For
example an auditor may use a sample of 50 consecutive cheques to test whether cheques are
signed by authorized signatories rather than picking 50 single cheques throughout the year.
Block sampling may however produce samples that are not representative of the population as a
whole, particularly if errors only occurred during a certain part of the period, and hence the
errors found cannot be projected onto the rest of the population.
• Monetary unit sampling is a type of value-weighted selection in which sample size, selection and
evaluation results in a conclusion in monetary amounts.
Answer No 13:
Internal audit is the independent appraisal activity within an organization for the review of
accounting, financial and other business practices as protective and constructive arms of
management. It is a type of control which measure and evaluate the effectiveness of other type of
controls. According to Professor Walter B. Meigs, Internal Auditing means, “Internal auditing consist
of a continuous, critical review of financial and operating activities by a staff of auditors functioning
as full time salaried employees.” In big organization, an internal audit is carried out by the team of
professionals in the organization. The organization gets the internal audit done with a view to
evaluate the effectiveness of internal control, the soundness of financial system, effectiveness of
business processes etc. This provides management an assurance about the control process in the
organization and it aids in early detection of inefficiencies/fraud etc. it helps the statutory auditors
too in getting the statutory audit done effectively. As per company audit report order, 2003,
statutory auditor also requires to comment whether the company is having sound internal audit
system or not.
i. Proper Control: The purpose of internal Audit is to keep proper control over business activities.
When there is proper control there is maximum efficiency. The internal control can determine
the degree of control over work.
ii. Accounting System: The purpose of internal audit is to evaluate the accounting system. It is
concerned with checking proper authority for transactions like purchase, retirement and
disposal of fixed assets. The voucher can be compared with entries in order to determine that
figures and facts.
iii. Help Management: The purpose of internal audit is to help the management. Internal auditor

can point out the weaknesses. The internal audit can be used as a tool to correct the situation.
The management functions can be performed properly.
iv. Working Review: The purpose of internal audit is to review the working of business. The working
of current year can be reviewed in detail. There is a need to locate the weak points. The
corrective measures can be taken for proper working.
v. Asset Protection: The purpose of internal audit is to protect the assets. The proper records of
assets must be there. Internal auditor can examine the valuation, verification and possession.
The purchase and sale of assets must be made under proper authority.
vi. Internal Check: The purpose of internal audit is to evaluate the internal check system. There is
division of duties among the employees. When all staff member are working properly it means
there is effective internal check system. The work of an auditor is reduced. He can apply test
checks to complete audit duty.
vii. Fair Statements: The purpose of internal audit is to detect the error in the accounting records.
The work of internal audit can help the management to see that accounting record is in order.
viii. Check Error: The purpose of internal audit is to detect the errors in the accounting records. If the
work of internal auditor goes side by side therefore there are minimum chances of errors. The
accounting staff can rectify mistake to prepare accounts at the end of year in order to help the
external auditor.
ix. Detect Fraud: The purpose of internal audit is to detect frauds in the books of accounting. When
the work of accounting staff is over the internal audit is started. Accounting staff remains alert
because there is no time gap between recording and checking. Thus detection of fraud is
possible with it.
x. Determine Liability: The purpose of internal audit is to determine liabilities of employees. The
duties are divided among the staff. It is easy to note the negligence on the part of employees.
The internal audit can pin point the person responsible for carelessness.
xi. Help in Independent Audit: The purpose of internal audit is to help an independent audit. The
external auditor can rely on internal auditor and there is no need of cent percent checking. In
this way there is saving of time and money due to internal audit.
xii. Performance Appraisal: The purpose of internal audit is to check the performance appraisal. The
management must achieve the targets fixed in budgets and plans. The internal audit is a tool to
evaluate the working of each management function.
xiii. Provide Suggestions: The purpose of internal audit is to provide suggestions for improvement of
business activities. The internal audit staff can suggest the ways and means to remove the
difficulties. Anyhow the internal auditor cannot compel the management to implement
suggestions.
xiv. New Ideas: The purpose of internal audit is to seek new ideas relating to procedures, marketing,
financing and other business matters. The internal audit staff can provide new ideas about
various business matters. The viable ideas can be put in to practice for the benefit of business.
xv. Use of Resources: The purpose of internal audit is to determine the proper use of resources. The
misuse of resources can increase the cost of doing the business. The proper use of resources
means there is efficiency on the part of management.
xvi. Accounting Policies: The purpose of internal audit is to examine the accounting policies. The
understanding of accounting system and procedure is helpful to device the effective audit plans
& procedures. The internal auditor may find any weakness in the internal control. He can
comment on the accounting policies.
xvii. Special Investigation: The purpose of internal audit may be to conduct special investigation
about any business matter. Internal audit can be used as a tool to note the effectiveness of
management function.

Answer No 14
Section 165 of the Companies Act, 2063 has prescribed the functions, duties and powers of audit
committee: The functions, duties and powers of the audit committee formed pursuant to subsection
(1) of Section 164 shall be as follows:
a. To review the accounts and financial statements of the company and ascertain the truth of
the facts mentioned in such statements;
b. To review the internal financial control system and the risk management system of the
company;
c. To supervise and review the internal auditing activity or the company;
d. To recommend the names of potential auditors for the appointment of the auditor of the
company, fix the remuneration and terms and conditions of appointment of the auditor and
present the same in the general meeting for the ratification thereof;
e. To review and supervise as to whether the auditor of the company has observed such
conduct, standards and directives determined by the competent body pursuant to the
prevailing law as required to be observed in the course of doing auditing work;
f. Based on the conduct, standard and directives determined by the competent body pursuant
to the prevailing law, to formulate the polices required to be observed by the company in
respect of the appointment and selection of the auditor;
g. To prepare the accounts related policy of the company and enforce, or cause to be enforced,
the same;
h. Where any regulatory body has provided for the long term audit report to be set out in the
audit report of the company, to comply with the terms required preparing such report;
i. To perform such other terms as prescribed by the board of directors in respect of the
accounts, financial management and audit of the company.
Answer No 15
The audit points to be considered by the auditor during the audit of a Hospital are stated
below:-
(i) Vouch the Register of patients with copies of bills issued to them. Verify bills for a
selected period with the patients’ attendance record to see that the bills have been
correctly prepared. Also see that bills have been issued to all patients from whom an
amount was recoverable according to the rules of the hospital.
(ii) Check cash collections as entered in the Cash Book with the receipts, counterfoils and
other evidence for example, copies of patients bills, counterfoils of dividend and other
interest warrants, copies of rent bills, etc.
(iii) See by reference to the property and Investment Register that all income that should
have been received by way of rent on properties, dividends, and interest on securities
settled on the hospital, has been collected.
(iv) Ascertain that legacies and donations received for a specific purpose have been
applied in the manner agreed upon.
(v) Trace all collections of subscription and donations from the Cash Book to the respective
Registers. Reconcile the total subscriptions due (as shown by the Subscription Register
and the amount collected and that still outstanding).
(vi) Vouch all purchases and expenses and verify that the capital expenditure was incurred
only with the prior sanction of the Trustees or the Managing Committee and that
appointments and increments to staff have been duly authorized.
(vii) Verify that grants, if any, received from Government or local authority has been duly
accounted for. Also, that refund in respect of taxes deducted at source has been

claimed.
(viii) Compare the totals of various items of expenditure and income with the amount
budgeted for them and report to the Trustees or the Managing Committee significant
variations which have taken place.
(ix) Examine the internal check as regards the receipt and issue of stores; medicines, linen,
apparatus, clothing, instruments, etc. so as to ensure that purchases have been
properly recorded in the Stock Register and that issues have been made only against
proper authorization.
(x) See that depreciation has been written off against all the assets at the appropriate
rates.
(xi) Inspect the bonds, share scripts, title deeds of properties and compare their
particulars with those entered in the property and Investment Registers.
(xii) Obtain inventories, especially of stocks and stores as at the end of the year and check
a percentage of the items physically; also compare their total values with respective
ledger balances.
Answer No 16
The special steps involved in the audit of an educational institution are the following:
 Examine the Trust Deed or Regulations in the case of school or college and note all the
provisions affecting accounts. In the case of a university, refer to the Act of Legislature and
the Regulations framed thereunder.
 Read through the minutes of the meetings of the Managing Committee or Governing Body,
noting resolutions affecting accounts to see that these have been duly complied with,
specially the decisions as regards the operation of bank accounts and sanctioning of
expenditure.
 Check names entered in the Students’ Fee Register for each month or term, with the
respective class registers, showing names of students on rolls and test amount of fees
charged; and verify that there operates a system of internal check which ensures that
demands against the students are properly raised.
 Check fees received by comparing counterfoils of receipts granted with entries in the cash
book and tracing the collections in the Fee Register to confirm that the revenue from this
source has been duly accounted for.
 Total up the various columns of the Fees Register for each month or term to ascertain that
fees paid in advance have been carried forward and the arrears that are irrecoverable have
been written off under the sanction of an appropriate authority.
 Check admission fees with admission slips signed by the head of the institution and confirm
that the amount had been credited to a Capital Fund, unless the Managing Committee has
taken a decision to the contrary.
 See that free studentship and concessions have been granted by a person authorised to do
so, having regard to the prescribed Rules.
 Confirm that fines for late payment or absence, etc., have either been collected or remitted
under proper authority.
 Confirm that hostel dues were recovered before students’ accounts were closed and their
deposits of caution money refunded.

 Verify rental income from landed property with the rent rolls, etc.
 Vouch income from endowments and legacies, as well as interest and dividends from
investment; also inspect the securities in respect of investments held.
 Verify any Government or local authority grant with the relevant papers of grant. If any
expense has been disallowed for purposes of grant, ascertain the reasons and compliance
thereof.
 Report any old heavy arrears on account of fees, dormitory rents, etc. to the Managing
Committee.
 Confirm that caution money and other deposits paid by students on admission have been
shown as liability in the balance sheet and not transferred to revenue.
 See that the investments representing endowment funds for prizes are kept separate and any
income in excess of the prizes has been accumulated and invested along with the corpus.
 Verify that the Provident Fund money of the staff has been invested in appropriate securities.
 Vouch donations, if any, with the list published with the annual report. If some donations
were meant for any specific purpose, see that the money was utilised for the purpose.
 Vouch all capital expenditure in the usual way and verify the same with the sanction for the
Committee as contained in the minute book.
 Vouch in the usual manner all establishment expenses and enquire into any unduly heavy
expenditure under any head.
 See that increase in the salaries of the staff have been sanctioned and minuted by the
Committee.
 Ascertain that the system ordering inspection on receipt and issue of provisions, foodstuffs,
clothing and other equipment is efficient and all bills are duly authorised and passed before
payment.
 Verify the inventories of furniture, stationery, clothing, provision and all equipment, etc.
These should be checked by reference to Stock Register and values applied t o various items
should be test checked.
 Confirm that the refund of taxes deducted from the income from investment (interest on
securities, etc.) has been claimed and recovered since the institutions are generally exempted
from the payment of income-tax.
 Verify the annual statements of accounts and while doing so see that separate statements of
account have been prepared as regards Poor Boys Fund, Games Fund, Hostel and Provident
Fund of Staff, etc.
Answer No 17
Ethical Conflict Resolution has been discussed under paragraph 100.17 to 100.22 of the ICAN-Code
of Ethics. According to the said paragraph:
100.17 A professional accountant may be required to resolve a conflict in complying with the
fundamental principles.

100.18 When initiating either a formal or informal conflict resolution process, the following
factors, either individually or together with other factors, may be relevant to the
resolution process:
(a) Relevant facts;
(b) Ethical issues involved;
(c) Fundamental principles related to the matter in question;
(d) Established internal procedures; and
(e) Alternative courses of action.
Having considered the relevant factors, a professional accountant shall determine the
appropriate course of action, weighing the consequences of each possible course of
action. If the matter remains unresolved, the professional accountant may wish to consult
with other appropriate persons within the firm or employing organization for help in
obtaining resolution.
100.19 Where a matter involves a conflict with, or within, an organization, a professional

accountant shall determine whether to consult with those charged with governance of the
organization, such as the board of directors or the audit committee.
100.20 It may be in the best interests of the professional accountant to document the substance
of the issue, the details of any discussions held, and the decisions made concerning that
issue.
100.21 If a significant conflict cannot be resolved, a professional accountant may consider

obtaining professional advice from the relevant professional body or from legal advisors.
The professional accountant generally can obtain guidance on ethical issues without
breaching the fundamental principle of confidentiality if the matter is discussed with the
relevant professional body on an anonymous basis or with a legal advisor under the
protection of legal privilege. Instances in which the professional accountant may consider
obtaining legal advice vary. For example, a professional accountant may have encountered
a fraud, the reporting of which could breach the professional accountant’s responsibility to
respect confidentiality. The professional accountant may consider obtaining legal advice in
that instance to determine whether there is a requirement to report.
100.22 If, after exhausting all relevant possibilities, the ethical conflict remains unresolved, a
professional accountant shall, where possible, refuse to remain associated with the matter
creating the conflict. The professional accountant shall determine whether, in the
circumstances, it is appropriate to withdraw from the engagement team or specific
assignment, or to resign altogether from the engagement, the firm or the employing
organization.
Answer No 18
Responsibility of the Auditor:
The auditor’s education and experience enable him to be knowledgeable about business matters in
general but he is not expected to have the expertise of a person trained for or qualified to engage in
the practice of another profession or occupation such as an actuary or engineer.
When the auditor uses work performed by experts he continues to be responsible for forming and
expressing his opinion on the financial information.

Evaluating the work of an expert:

The auditor should obtain reasonable assurance that work performed by expert is adequate. He
should satisfy himself as to the expert’s skill and competence.
The auditor should seek reasonable assurance that the expert’s work constitutes appropriate audit
evidence in support of the financial information, by considering:
i. The source data used.
ii. The assumptions and methods used and if appropriate, their consistency with the prior period;
&
iii. The results of the expert’s work in the light of the auditor’s overall knowledge of the business
and of the results of his audit procedures.
The auditor should consider whether the expert has used source data which are appropriate in the
circumstances. The procedures to be applied by the auditor should include:
i. Making inquiries of the expert to determine how he has satisfied himself that the source data
are sufficient, relevant and reliable; &
ii. Conducting audit procedures on the data provided by the client to the expert to obtain
reasonable assurance that the data are appropriate.
The appropriateness and reasonableness of assumptions and methods used and their applications
are the responsibility of the expert. The auditor does not have the same expertise and therefore,
cannot always challenge the expert’s assumptions and methods. However, the auditor should obtain
an understanding of those assumptions and methods to determine that they are reasonable based
on the auditor’s knowledge of the client’s business and on the result of his audit procedures.
Normally, completion of the above procedures will provide the auditor with reasonable assurance
that he has obtained appropriate audit evidence in support of the financial information. If the work
of an expert does not support the related representations in the financial information, the auditor
should attempt to resolve the inconsistency by discussions with the client and experts. Applying
additional procedures, including possibly engaging another expert, may also assist the auditor in
resolving the inconsistency.
If, after performing these procedures, the auditor concludes that the work of the expert is
inconsistent with the information in the financial statements, or that the work of the expert does not
constitute sufficient appropriate audit evidence, he should express a qualified opinion, a disclaimer
of opinion or an adverse opinion, as appropriate.
Answer No 19
a) Integrity and Objectivity
Integrity implies not merely honesty but fair dealing and truthfulness. The principle of objectivity
imposes the obligation on all professional accountants to be fair, intellectually honest and free of
conflicts of interest. Professional accountants serve in many different capacities and should
demonstrate their objectivity in varying circumstances. Professional accountants in public practice
undertake reporting assignments, and render tax and other management advisory services. Other
professional accountants prepare financial statements as a subordinate of others, perform internal
auditing services, and serve in financial management capacities in the private sector, the public
sector or education or non-government organization. They also educate and train those who aspire
to admission into the profession. Regardless of service or capacity, professional accountants should
protect the integrity of their professional services, and maintain objectivity in their judgment. In
selecting the situations and practices to be specifically dealt within ethics requirements relating to
objectivity, adequate consideration should be given to the following factors:
- Professional accountants are exposed to situations which involve the possibility of pressures
being exerted on them. These pressures may impair their objectivity.

- It is impracticable to define and prescribe all such situations where these possible pressures
exist. Reasonableness should prevail in establishing standards for identifying relationships that
are likely to, or appear to, impair a professional accountant’s objectivity.
- Relationships should be avoided which allow prejudice, bias or influences of others to override
objectivity. Professional accountants have an obligation to ensure that personnel engaged on
professional services adhere to the principle of objectivity.
- Professional accountants should neither accept nor offer gifts or entertainment which might
reasonably be believed to have a significant and improper influence on their professional
judgment or those with whom they deal. Professional accountants should avoid circumstances
which would bring their professional standing into disrepute.
- Professional accountants should not act in contrary to the interest of ICAN in the delivery of
education and training.
b) Tests of control
Internal control is a means whereby an entity’s board or entity’s senior management obtains a
reasonable assurance that the entity’s set objectives are achieved. These constitute all management
mechanisms such as approved authorization process, policies and procedures that should be
followed in fulfilling organizational objectives, in order to give assurance that the procedures are
followed in conducting the business of the entity.
Auditors usually select a sample of transactions passing through the procedures and test whether
they were appropriately conducted in accordance with the laid down guidelines. In conducting tests
of control for the purpose of obtaining audit evidence, the auditor should consider the sufficiency
and appropriateness of the audit evidence obtained to support the assessed level of control risk.
Audit evidence may be obtained from the accounting and internal control systems in the following
areas of design and operations:
(a) Design: The accounting and internal control systems are capable of preventing or detecting
material mis-statements during the period covered by the audit.
(b) Operation: The systems exist and have operated effectively throughout the relevant period
covered by the audit. The tests described above are referred to as `compliance testing’; which is test
of controls that provide audit evidence to ensure that they are working as designed. This is different
from substantive tests, which are designed to provide audit evidence that transactions reported in
the financial statements are accurate, complete and valid.
c) Substantive procedures
In conducting substantive tests for the purpose of obtaining audit evidence, auditors should consider
the extent to which the evidence obtained from substantive procedures together with any
information obtained from tests of controls support the relevant financial statements.
As a basis for the preparation of financial statements, the directors make certain assertions. The
assertions constitute representations of the directors that are embodied in the financial statements.
The directors, by approving the financial statements, are making representations about the
information therein by the directors in approving financial statements:
a) Existence:
An asset or a liability exists at a given date.
b) Rights and Obligations:
An asset or a liability pertains to the entity at a given date.
c) Occurrence:
A transaction or event took place which pertains to the entity during the particular period.
d) Completeness:
There are no unrecorded assets, liabilities, transactions or events, or undisclosed items.

e) Valuation:
An asset or liability is recorded at an appropriate carrying value.
f) Measurement:
A transaction or event is recorded at the proper amount and revenue or expense is allocated to the
proper period.
g) Presentation and Disclosure:
An item is disclosed, classified and described in accordance with the applicable reporting framework
(for example, relevant legislation and applicable accounting standards).
The auditor should obtain evidence to support each financial statement assertion. The audit
evidence presented in support of one assertion (for example, existence of stock) does not
compensate for failure to obtain audit evidence regarding another (for example, its valuation). Tests
may, however, provide audit evidence for more than one assertion (for example, testing subsequent
receipts from the entity’s debtors may provide some audit evidence regarding both their existence
and valuation).
In planning an assignment, the auditor prepares programs comprising detailed audit procedures and
objectives. The objectives cover the financial statement assertions made by the directors. The
auditor seeks to ensure that both the objectives and the audit programs enable him to satisfy
himself that the planned work will result in the appropriate evidence being obtained. In conducting
substantive tests, the auditor should consider the nature, timing and extent of substantive
procedures. These may depend, amongst other factors, on the following matters:
(a) The auditor’s assessment of the control environment and accounting systems generally;
(b) The inherent and control risks relating to each assertion;
(c) Evidence obtained from audit work performed during the preparation of the financial statements;
and
(d) Where tests of control provide satisfactory evidence as to the effectiveness of accounting and
internal control systems, the extent to which relevant substantive procedures may be reduced, but
not entirely eliminated.
d) Contents of Working Papers

The contents of working papers will generally include the following: (a) Information concerning the
legal and organizational structure of the entity;
(b) Extracts or copies of important legal documents, agreements and minutes;
(c) Information concerning the industry, economic and legislative environment within which the
entity operates;
(d) Evidence of the planning process including audit programs and any changes thereto;
(e) Evidence of the auditor’s understanding of the accounting and internal control systems;
(f) Evidence of inherent and control risk assessments and any revisions thereof;
(g) Evidence of the auditor’s consideration of the work of internal auditing and conclusions reached;
(h) Analysis of transactions and balances;
(i) Analyses of significant ratios and trends;
(j) A record of the nature, timing and extent of audit procedures performed and the results of such
procedures;
(k) Evidence that the work performed by assistants was supervised and reviewed;
(l) An indication as to who performed the audit procedures and when they were performed;
m) Details of procedures applied regarding components whose financial statements are audited by
another auditor;
(n) Copies of communications with other auditors, experts and other third parties;

(o) Copies of letters or notes concerning audit matters communicated to or discussed with the
entity, including the terms of the engagement and material weaknesses in internal control;
(p) Letters of representation received from the entity;
(q) Conclusions reached by the audit concerning significant aspects of the audit, including how
exceptions and unusual matters, if any, disclosed by the auditor’s procedures were resolved or
treated; and
(r) Copies of the financial statements and auditor’s report.
(s) Checklists for compliance with statutory disclosure requirements and accounting standards; and
(t) Management letter
e) Materiality
The information is considered to be material to the financial statements if the misstatement or
omission of such information may reasonably be expected to ‘influence the economic decisions of
users’ of those financial statements, including their assessments of management’s stewardship.
Auditors must consider the effect of possible misstatement of relatively small amounts in that a
relatively small error in a month end procedure may be an indication of possible material
misstatement when the cumulative effect on the financial statements is considered at the end of the
financial period.
A misstatement or the aggregate of all misstatements in financial statements is material if,
considering the surrounding circumstances:
(a) It is probable that, the decision of a person who is relying on the financial statements; and
(b) Who has a reasonable knowledge of business and economic activities (the user), would be
changed or influenced by such misstatement or the aggregate of all misstatements.
Steps in establishing materiality

The steps to be followed in establishing materiality of an audit item are:
(a) Set a threshold at the planning stage about materiality;
(b) Record misstatements identified in the course of the audit; and
(c) Document the likely misstatements and compare with materiality.
When immaterial information is given in the financial statements, the result may distort the
understandability of the other information provided. In such circumstances, the auditors need to
consider the exclusion of such immaterial information. However, the requirements of legislation,
accounting standards and auditing standards must be considered in determining the nature of
information to be given in the financial statements.
The auditor must exercise judgment in determining whether information is material. An item may be
material considering its size and nature. The principal factors which may affect materiality are as
follows:
(a) The size of the item when taken in the context of the financial statements as a whole and of the
other information readily available in the market place to investors and users that would affect their
evaluation of the financial statements;
(b) Consideration may be given to the nature of the item in relation to:
(i) the basis of transaction or other event giving rise to it;
(ii) the significance of the event or transaction;
(iii) the legality, sensitivity, normality and potential consequences of the item; and
(iv) the disclosure requirement of such item.
The auditor should determine materiality by a combination of these factors, rather than any one in
particular. When there are two or more similar items, the auditor should consider the aggregate.
In planning the conduct of an audit, auditors seek to provide reasonable assurance that the financial
statements are free of material mis-statement and give a true and fair view. Auditors exercise

professional judgment in determining what is material. Both the amount (quantity) and the nature
(quality) of mis-statements are considered in determining materiality. There exists a difficulty in
ascribing general mathematical definition to ‘materiality’, in that it has both qualitative and
quantitative aspects.
Auditors must consider the possibility of misstatements of relatively small amounts that,
cumulatively, could have a material effect on the financial statements. For example, a relatively
small error in a month-end procedure could be an indication of a potential material misstatement, if
that error is repeated each month during the financial year that is being audited.
Auditors should also pay attention to the nature of mis-statements relating to qualitative aspects of
a matter. Examples of qualitative mis-statements would be the inadequate or inaccurate description
of an accounting policy when it is likely that a user of the financial statements could be misled by the
description.
In planning and conduct of an audit, auditors must consider:

(a) Materiality and its relationship with audit risk; and
(b) Materiality when determining the nature, timing and extent of audit procedures.
At the planning stage, the assessment of materiality based on the latest available reliable financial
information, assists in the determination of an efficient and effective audit approach. The
preliminary materiality assessment helps auditors decide such questions as what items to examine,
and whether to use sampling techniques. This enables auditors to select audit procedures that, in
combination, reduce audit risk to an acceptably low level.
In practice, the assessment of materiality at the audit planning stage, may differ from that at the
time of evaluating the results of audit procedures. This may be caused by a change in circumstances,
or a change necessitated by the outcome of the audit. For example, if the actual results of
operations and financial position are different from those they expected when the audit was
planned.
Auditors must consider the implications of factors which result in the revision of their preliminary
materiality assessment on their audit approach. In this circumstance, auditors may modify the
nature, timing and extent of planned audit procedures. For example, if, after planning for specific
audit procedures, auditors determine that the acceptable materiality level falls short of the initial
materiality level, the risk of failing to detect a material mis-statement necessarily increases. The risk
may be compensated for by the auditors carrying out more audit work.
f) Inherent risk
In developing the audit approach and the detailed procedures, auditors should assess inherent risk
in relation to financial statement assertions, about material account balances and classes of
transactions, taking account of factors relevant both to the entity as a whole and to the specific
assertions”.
In the absence of information to assess the inherent risk for a specific account balance, or class of
transactions, the auditors should assume that the inherent risk is high. However, when an
assessment results in the inherent risk not to be high, the auditors must document the reasons and
are able to reduce the work which would otherwise have been carried out’
To assess inherent risk:

(a) Auditors use their professional judgment to evaluate numerous factors having regard to their
experience of the entity from previous audits;
(b) Any controls established by management to compensate for a high level of inherent risk; and

(c) Their knowledge of any significant changes which have taken place.
Examples of the factors are:

At the entity level
(a) The integrity of directors and management;
(b) Management experience and knowledge and changes in management during the period;
(c) Unusual pressures on directors or management, such as tight reporting deadlines, market
expectations or other circumstances that might predispose them to misstate the financial
statements;
(d) The nature of the entity’s business;
(e) Factors affecting the industry in which the entity operates.
At the account balance and class of transaction level:

(a) Financial statement accounts likely to be susceptible to misstatements;
(b) The complexity of underlying transactions and other events which might require the use of the
work of an expert;
(c) The degree of judgment involved in determining account balances;
(d) Susceptibility of assets to loss or misappropriation, for example, assets which are highly desirable
and movable such as cash;
(e) The quality of the accounting systems;
(f) The completion of unusual and complex transactions, particularly at or near period end; and
(g) Transactions not subjected to ordinary processing
g) Internal Controls and their Inherent Limitations

Internal controls established by the directors relating to the accounting system are concerned with
achieving objectives such as:
a. Transactions are executed in accordance with proper, general or specific authorization;
b. All transactions and other events are promptly recorded at the correct amount, in the
appropriate accounts and in the proper accounting period, so as to permit preparation of
financial statements in accordance with the applicable reporting framework (e.g. relevant
legislation and applicable accounting standards);
c. Access to assets is permitted only in accordance with proper authorization; and
d. Recorded assets are compared with the existing assets at reasonable intervals and appropriate
action is taken with regard to any differences.
An internal control system can only provide the directors with reasonable confidence that their
objectives are reached because of inherent limitations such as:
a. The usual requirement that the cost of an internal control is not disproportionate to the
potential loss which may result from its absence;
b. Most systematic internal controls tend to be directed at routine transactions rather than non-
routine transactions;
c. The potential for human error due to carelessness, distraction, mistakes of judgment and the
misunderstanding of instruction;
d. The possibility of circumvention of internal controls through collusion with parties outside or
inside the entity;
e. The possibility that a person responsible for exercising an internal control could abuse that
responsibility, for example by overriding an internal control; and
f. The possibility that procedures may become inadequate due to changes in conditions or that
compliance with procedures may deteriorate over time.
These factors indicate why auditors cannot obtain all their evidence from tests of the system of
internal control.

CAP II Corporate And Other Laws-June 2019
Paper 3:
Corporate And Other Laws

REVISION QUESTIONS
Companies Act, 2063 (Including Amendments)

Question No. 1:
A telecommunication company wants to incorporate in Nepal having paid up share capital of Rs. 100
million by registering as a private limited company. Give your opinion whether incorporation of
telecommunication as private limited company is allowed by Companies Act, 2063 (Including
Amendments) or not?
Question No. 2:
XYZ public company wants to issue right shares of the Company and wants the following advices
from you:
i.Due to the financial crisis of some shareholders, they will not able to subscribe shares, so want to
provide loan to its shareholders to subscribe right shares.
ii.How notice of right issue shall be given?
iii.What time limit must be provided to shareholders to subscribe the shares?
iv.Does the shareholder have right to renounce the share offered by company?
v.What do you mean by pre-emptive right of shareholder?
Question No. 3:
Managing Director of Ram Laxman Company Private Limited enters into an agreement with
Hanuman Company Private Limited exceeding the objectives mentioned in the Memorandum of
Association. As a result, Ram Laxman Company Private Limited has sustained losses of Rs. 105,000.
Give your opinion based on Companies Act, 2063 (Including Amendments).
i.Does the agreement entered by the Managing Director is valid one?
ii.Company shall be liable for the agreement or not?
iii.Can Ram Laxman Company Private Limited rectify such agreement? What need to be done?
iv.If Ram Laxman Company Private Limited rectifies the agreement, what is the liability of Managing
Director of Company?
v.What is the situation, if the Managing Director has done the agreement on good faith of the
Company?
Question No. 4:
A company wants to incorporate as per Companies Act, 2063 (Including Amendments). Suggests on
the following provisions:
i.Objectives clause of Memorandum of Association mentions that company has incorporated to earn
the profit.
ii.Liability clause of Memorandum of Association mentions that unlimited liability of the member.
iii.Whether the Board of Directors can approve the dividend or not?
iv.What type of resolution is required to distribute cash dividend and bonus shares?
v.Can Annual General Meeting pass higher rate of divided as proposed by the Board of Directors?
Question No. 5:
A to Z soap limited, a public Company was established on 2069.07.01 with the paid capital of Rs. 5
million. Comment:

Question No. 6:
Ram construction Pvt. Ltd. wants to open partnership firm with Hari and Shyam. Comment:
Question No. 7:
A Company was in the process of incorporation. Promoters of the company signed an agreement for
the purchase of certain furniture for the company and payment was to be made to the suppliers of
furniture by the company after incorporation. The company was incorporated and the furniture was
used by it. Shortly after incorporation, the company went into liquidation and the debt could not he
paid by the company for the recovery of money. Examine whether promoters can he held liable or
company be liable for payment under the following situation:
i. In case of a Public Limited Company?
ii. In case of a Private Limited Company?
Question No. 8:
ABC Private Limited Company is a private company having five members only. All the members of
the company were going by car to Dharan in relation to some business. An accident took place and
all of them died. Answer with reasons, under the Companies Act, 2063 (Including Amendments)
whether existence of the company has also come to the end?
Question No. 9:
Can a company issue shares with differential rights? What can do if the rights of different
shareholders have been affected?
Question No. 10:

Give your opinion on the followings questions regarding share certificate:
a. What do you mean by Share Certificate?
b. Within what time limit share certificate need to distribute?
c. Who shall sign in the share certificate?
d. What need to be done by shareholder in case of share certificate is lost/destroyed and
damaged?
e. To whom share certificate need to be distributed in case of joint shareholders?
Securities Act, 2063

Question No. 11:
Securities Board is a formation of group of people just like board of directors of a company only and
it do not represent a body corporate itself. Check the validity of above statement based on Securities
Act, 2063.
Question No. 12:

A group of investors are unknown about the process of establishment of the stock exchange and
want to have following advices from you:
i. Where is the place of incorporation of stock exchange and place of getting license?
ii. They want to establish stock exchange having paid up share capital of Rs. 20 million.
iii. They want to establish stock exchange as a private company.
iv. Does the stock exchange need to renew its license?
v. What is the limit of securities transactions charges?

Question No. 13
Securities Act, 2063 has made provision for Compensation Fund to be established by a Stock
Exchange and should made rule for the operation of such Compensation Fund. Enumerate the
provisions that should be included in such Rule.
Bank and Financial Institutions Act, 2073

Question No. 14:
What transactions are restricted to be carried out by licensed financial institutions as per Bank &
Financial Institutions Act, 2073?
Question No. 15:

A bank established want to know the provision of buy back of shares based on Bank and Financial
Institutions Act, 2063. Mention the provisions of the Act on the following issues:
i. Can bank and financial institutions buy back of shares?
ii. Up to which limit shares need to buy back?
iii. What are the sources of buy back of shares?
iv. What are the manners of buy back of shares?
v. What is the time limit for buy back of shares?
Question No. 16:

City Development Bank has provided hypothecation loan to one of its client. Check the validity
whether such function of Development Bank is allowed by Bank and Financial Institutions Act, 2073?
Question No. 17:

Mountain Bank Limited has recently formed its Board of Directors. State the validity of the formation
of Board of Directors:
a) The total number of Board of Directors is 11.
b) Chairperson of the Board of Directors chosen from General Meeting of the Bank.
c) A securities dealer has also appointed as one of the Board of Directors.
d) Board of Directors have fixed their tenure for 5 years.
e) Board of Directors decided to hold meeting at least 6 times in a year.
Nepal Rastra Bank Act, 2058

Question No. 18:
A Deputy Governor of Nepal Rastra Bank is retiring in Jestha 2074. Your opinion is sought on the
following issues with regard to new appointment:
i. What is the service tenure of deputy governor?
ii. How many candidates should be recommended?
iii. Who are the recommending and appointing authorities?
iv. Can a Chartered Accountant with MA in economics and having 15 years of experience in
executive level in commercial bank appointed as deputy governor?
v. After appointment as deputy governor of NRB, is deputy governor is employee of NRB?
Question No. 19:

Nepal Rastra Bank issues the fiscal policy on behalf of Government of Nepal. Check the validity of
above statement based on Nepal Rastra Bank Act, 2073?

Insurance Act, 2049

Question No. 20:
Majority of the members of the insurance board wants to remove the chairperson from his office.
Mention the provision based on Insurance Act, 2049.
Question No. 21:

Mention the objectives and formation of Insurance Tariff Advisory.
Question No. 22:

Based on market practice, a life insurance company has issued insurance policy on credit. Give your
opinion, whether such functions of life insurance company is valid one or not?
Question No. 23:

Mention order of priority in settlement of liabilities in case of liquidation of insurer.
Social Welfare Act, 2049

Question No. 24:
What are the funds of the Social Welfare Council?
Question No. 25:

What are the requirements to obtain approval for any foreign non-governmental organization if
willing to work in Nepal?
Nepal Chartered Accountants Act, 2053

Question No. 26:
What are the special provisions guiding for Partnership as per Nepal Chartered Accountants Rules
2061?
Question No. 27:

Describe punishment as per Nepal Chartered Accountants Act, 2053 to Alok, Manoj and Dhiraj for
the following:
i. Alok who without holding the certificate of practice proved to have signed a document in
capacity of the member holding certificate of practice.
ii. Manoj as being a member of The Institute of Chartered Accountants of Nepal, committed an
act contrary to the provisions of the Act which was other than the provision of Section 41.
iii. Dhiraj who first time used the seal of the Institute in contravention to Section 6 of the Act.
Question No. 28:

Mention duties, responsibilities and powers of the Disciplinary Committee.
Question No. 29:

Membership of the ICAN has been applied by an Indian citizen who has passed chartered
accountancy examination conducted by The Institute of Chartered Accountants of India (ICAI) having
20 years of age. Check the validity of application for membership based on Nepal Chartered
Accountants Act, 2053.

Question No. 30:

Mention the provisions related to Executive Director/Secretary of ICAN based on Nepal Chartered
Accountants Act, 2053.
Question No. 31:

Define Certificate of Practice (COP) under Nepal Chartered Accountants Act, 2053.
Negotiable Instruments Act, 2034

Question No. 32:
What are the assumptions of Negotiable Instruments Act, 2034?
Question No. 33:

Define Holder due in course and Payment in due course.
Question No. 34:

Write about the Notice of Dishonor in case of non-acceptance and non-payment.
Question No. 35:

Write short notes on Noting and Protesting.
Muliki Dewani (Sanhita) Ain, 2074

Question No. 36:
Mention place for performing contract.
Question No. 37:

What do you mean by Privity of Contract.
Bonus Act, 2030

Question No. 38:
What are the types of bonus? Can bonus pay in kind? Out of forty Branches of City Bank Limited, five
branches are in losses. Can bonus shall be received by five branches staff or not. Can deduction of
bonus possible? How much penalties be imposed as per Bonus Act, 2030.
Question No. 39:

Mention the circumstances in which employee shall restrict to obtain Bonus.
Question No. 40:

Write down the disputes settlement mechanism as per Bonus Act, 2030.
Industrial Enterprises Act, 2073

Question No. 41:
Mention the Classification of Industries.
Question No. 42:

Classify Industry based on their nature.

Question No. 43:

Mention Corporate Social Responsibility (CSR) as per Industrial Enterprises Act, 2073.
Labour Act, 2074

Question No. 44:
Mention the types of leaves as per Labour Act, 2074.
Question No. 45:

What are the provisions prescribed by the Labour Act, 2074 regarding working hours and over time
work?
Question No. 46:

What are the deductions allowed from the remuneration to be obtained by the worker or
employees as per Labour Act, 2074?
Miscellaneous
Question No. 47:
Write down main functions of WTO.

Suggested Answers Hint

Answer No 1:
As per Section 12 of Companies Act, 2063 (Including Amendments), telecommunication service
providers need to incorporate as public limited companies if they have paid up share capital of more
than Rs. 50 Million. Similarly, time limit of additional 2 years from the date of applicability of this this
amended section has been provided to existing telecommunication service provider for conversion
into public limited companies.
Hence, incorporation of telecommunication as a private limited company is not possible as per the
amendment made by Companies Act.
Answer No. 2:
Following are the provisions relating to right issue of shares:
i. As per Section 62 of Companies Act, 2063 (Including Amendments), no company shall
provide any loan or financial assistance of any kind to any person for purchasing its own
shares or the shares of its holding company or getting entitlement too such shares in any
manner. So that, to subscribe right shares, company shall not provide loan to its
shareholders.
ii. As per Section 56 (7) of the Companies Act, 2063 (Including Amendments) a public company
shall publish a notice on the issue of right shares, in a daily newspaper of national circulation
for at least three consecutive times prior to fifteen days of the issue of such shares.
iii. As per Section 56 (11) of the Companies Act, 2063 (Including Amendments) a time limit of at
least thirty five days shall be given to the existing shareholders to subscribe the shares.
iv. Yes. If such shareholders fail either to subscribe the shares or to sell or transfer the right to
subscribe shares to anyone else within the time limit or, such shares may be sold in any
other manner as decided by the board of directors of the company. It means shareholder
have right to renounce the right shares of the Company.
v. Pre-emptive right means the existing shareholders shall have the first right to subscribe the
shares issued by the Company.
Answer No. 3:
As per the provisions of the Companies Act, 2063 (Including Amendments) following are the
opinion:
i. As per Section 103 of Companies Act 2063, (Including Amendments) No transaction done by a
company with another person shall be void or invalid merely on the ground that such
transaction is beyond jurisdiction based on any matter contained in the memorandum of
association of the company. Thus, transactions entered by the Managing Director shall be valid
one.
ii. If the general meeting of the company passes special resolution to ratify the transactions,
company shall become liable for the agreement entered.
iii. Yes. Company can rectify the agreement entered beyond the jurisdiction of memorandum of
Association. Any act or transaction done by a director beyond the authority conferred to
him/her may be rectified by the company by adopting a special resolution in its general
meeting.
iv. No director, officer or other person of the company shall be deemed to have been released
from any liability under Companies Act, 2063 (Including Amendments) for any act done or
action taken by him/her beyond jurisdiction merely on the ground that any act or transaction
has been rectified by a special resolution.
v. As per Section 104(2) of the Companies Act, 2063 (Including Amendments) where any person
does any transaction with a company in good faith, such transaction shall be binding for the

company; and nothing contained in memorandum of association, articles of association of the

company or in any resolution adopted by the general meeting or in any agreement concluded
between the company and its shareholder shall be deemed to have made any limitation in or
restriction on the authority of the director or the authorized person to do such transaction.
Answer No. 4:
As per Companies Act, 2063 (Including Amendments) following are the provisions for the related
questions:
i. As per Section 3 of Companies Act, 2063 (Including Amendments) every company's one of the
objectives is to earn profit and other objectives of the Company shall be as prescribed by
Memorandum of Association. Hence, not for profit distribution company can also establish
with having profit earning objectives; however, a company not distributing profits shall not
distribute dividends among its members or pay, directly or indirectly, any amount to a
member or his/her close relative. So that provision of objective clause is valid one.
ii. As per Section 8 of the Companies Act 2063 (Including Amendments) the liability of the
shareholders shall be limited up to the extent of shares subscribed or shares undertaken to
subscribe. So the Liability clause must be changed as limited liability of its members.
iii. Dividend can be only approved by General Meetings of the Company. Board of Directors has
only authority to propose the rate of dividend.
iv. Ordinary resolution is required to pass cash dividend and special resolution is required to pass
bonus shares.
v. As per Section 77(6) of Companies Act 2063 (Including Amendments) on the rate of dividends
to be distributed to the shareholders, general meeting shall not pass higher rate of dividend as
proposed by the board of directors.
Answer No. 5:
As per Section 11(1) of the Companies Act, 2063 (Including Amendments) to establish a public
limited company requires the paid up capital of rupees 10 million; however, sub section (2) of the
section envisaged that if any public limited company was established earlier before the Act came
into effect i.e. 2063.07.24, then the capital shall be increased to 10 million up 2065.06.22.
Accordingly, A to Z soap limited was established as on 2069.07.01 with rupees 5 million paid up
capital is not valid as per the requirement of Section 11(1) of the Companies Act, 2063 (Including
Amendments).
Answer No. 6:
Section 10 is the clause that should be abide by the companies registered under companies act in
addition to those set forth in memorandum of association and articles of association. Section 10 (e)
of Companies Act, 2063 (Including Amendments) states that a company shall not open a partnership
or private firm. Hence, Ram construction Pvt. Ltd. cannot open a partnership firm with Hari and
shyam.
Answer No. 7:
Section 17 (1) of Companies Act, 2063 (Including Amendments) states that a contract made prior to
the incorporation of a company shall be a proposed contract only and such contract shall not be
binding on the Company. Section 17(2) of Companies Act, 2063 (Including Amendments) states that
if prior to the incorporation of a company, any person carries on any transaction or borrows moneys
on behalf of the company, such person shall be personally liable for any contract related with the
transaction so carried on.
Further a company cannot ratify a contract entered into by the promoters on its behalf before its
incorporation. Therefore it cannot ratify a contract entered into by the promoters on its behalf
before its incorporation. Therefore, it cannot by adoption or ratification obtain the benefit of the

contract purported to have been made on its behalf before it came into existence as ratification by
the company when formed is legally impossible. The doctrine of ratification applies only of an agent
contracts for a principal who is in existence and who is competent to contract at the time of contract
by the agent. The company can if it desires, enter into a new contract, after its incorporation with
the other party. The contract may be on the same basis and terms as given in the pre-incorporation
contract made by the promoters.
Based on above:
In case of public company: If Memorandum of Association of the company mentions that company
shall bear the expenses held on pre-incorporation. It shall be the responsibility of the company.
Similarly, if company adopts pre-incorporation contract through its acceptance, conduct and
behavior, company shall be liable. In other case, persons who sign on behalf of the proposed
company shall have to take personal responsibility. In this case, company has accepted the contract
through the use of the furniture purchased by the proposed company.
In case of private company: Pre incorporation contract shall be dealt by the provisions as mentioned
in Memorandum of Association, Articles of Association and Consensus Agreement.
Answer No. 8:
Company's life does not depend upon the death, insolvency or retirement of any or all shareholders
or directors. Provision for transferability or transmission of the share helps to preserve the perpetual
existence of a company. Law creates company and law alone can dissolve it. Shareholders may come
and go but the company can go on forever. Death of all the shareholders of the company does not
affect the continuity of the company. As per Section 7 of the Companies Act, 2063 company
incorporated shall be an autonomous and body corporate with perpetual succession. In such case,
ABC Private Limited does not cease to exist. By way of transmission of shares, shares are transmitted
to their legal representatives. The company ceases to exist only on the winding up of the company.
Therefore, even with the death of all shareholders of ABC Private Limited does not cease to exist.
Answer No. 9:
Company may, by making provisions to that effect in its memorandum of association and articles of
association, issue various classes of shares with different rights attached thereto. Except as
otherwise provided in the articles of association of company, approval of the shareholders of any
particular class shall be required to make any alteration in the rights of those shareholders of that
class. Provided, however, that no alteration may be made in the rights of the shareholders of any
particular class in a manner to adversely affect the rights of the shareholders of any other class.
If the shareholders representing at least ten percent share of any particular class who are not
satisfied with a decision to make alteration in the rights attached to the shares of that class file a
petition in the court to have the decision to make such alteration void, the decision made to make
alteration in the rights of the shareholders of such class shall not be enforced unless and until
otherwise decided or ordered by the court.
Petition shall be made within thirty days after the decision made to make alteration in the rights
attached to the shares of any particular class; and any decision shall not be enforced pending the
expiration of that time limit.
If it appears that alteration in the rights conferred to the shareholders of the class concerned is
prejudicial to the rights of the petitioner shareholders, the court may quash the decision made on
the alteration in the rights of the shareholders of that class.
The board of directors shall submit a proposed resolution on the alteration in the rights of the
shareholders of any particular class to the general meeting of the shareholders of the concerned
class; and such resolution has to be adopted as a special resolution by the general meeting.

Answer No. 10:

Section 33 of Companies Act, 2063 (Including Amendments) has provision of the Share Certificate.
Based on the above provision following shall be the answers:
a) A share certificate issued by a company, signed by its competent officer and under the seal of the
company, if any, to be used by it, specifying the number of shares held by any shareholder shall be
prima facie evidence of his/her title to such shares.
b) A share certificate in the prescribed format shall be issued to every shareholder in respect of each
share subscribed by him/her, within two months after the allotment of shares.
c) The share certificate shall bear the signature of any two out of a director or chief executive of the
company or the company secretary, in the case of a public company, and the signature of the person
as mentioned in the articles of association or consensus agreement, in the case of a private
company, and also bear the seal of the company, if any.
d) If a share certificate is lost or destroyed because of a divine act or otherwise, the shareholder shall
give information thereof to the registered office the company immediately when he/she knows that
the share certificate has been so lost or destroyed because of the divine act or otherwise.
e) While issuing a share certificate in respect of any shares held jointly by two or more persons, the
share certificate may be issued to any one of them, by mentioning their names in the certificate.
Provided, however, that the names of all shareholders shall be mentioned in the shareholder
register.
Answer No. 11:

Securities Board is established as per Section 3 of the Securities Act, 2063. Securities Board
established to regulate and manage the activities of the securities markets and persons involved in
securities business by regulating the issue, purchase, sale and exchange of securities in order to
develop capital market and protect the interests of investors in securities.
Similarly, as per Section 4 of Securities Act, 2063 Securities Board to be an autonomous and body
corporate having perpetual succession additional following features:
(1) The Securities Board shall have a separate seal of its own for all of its acts and proceedings.
(2) The Securities Board may, like an individual, acquire, use, purchase, sell, or otherwise deal with,
any movable or immovable property.
(3) The Securities Board may, like an individual, sue by its own name and be also sued in the same
name.
Hence, the Securities Board has separate legal existence as provided by Securities Act, 2063.
Securities Board is an artificial person. The statement stating Securities Board is a formation of group
of people just like board of directors of a company only and it do not represent a body corporate
itself is invalid.
Answer No. 12:

As per Securities Act, 2063 following are the provisions relating to establishment of stock exchange:
i. Place of incorporation of stock exchange is Office of Company Registrar; however, before
incorporation of stock exchange prior approval of Securities Board of Nepal is needed. Similarly,
place of getting license is Securities Board of Nepal.
ii. As per Section 41 of Securities Act, 2063, minimum paid up share capital to establish a stock
exchange is Rs. 50 Million. Thus Stock exchange cannot establish having paid up share capital of
Rs. 20 Million.
iii. As per Section 12 of the Companies Act, 2063 Stock exchange must be incorporated as public
limited company. Similarly, Section 58(3) of Securities Act also requires to have registered as
public company to run stock exchange in Nepal. Incorporation of stock exchange as private
limited company is not permitted by the Act.

iv. As per Section 42, the license issued to carry on a stock exchange shall remain valid only until
the last day of the fiscal year of its issue. Renewal shall have to be made not later than three
months after the expiry of each fiscal year.
v. As per Section 50, securities transactions charges shall not exceed 0.03 percent of the total
turnover of securities transactions.
Answer No. 13:

Section 53 of the Securities Act, 2063 has made provision for Compensation Fund to be established
by a Stock Exchange to protect investor against possible loss or damage.
As per the section 54 of the Securities Act, 2063 made provisions shall be made in the Rules in
relation to the operation of the compensation fund as follows:
(a) Provisions relating to the deposit of money to the fund,
(b) Maximum amount to be paid as compensation from the fund,
(c) Provisions relating to the accounts and audit of the fund,
(d) Conditions for making claim to obtain amount from the compensation fund and
procedures from making such a claim,
(e) Conditions where any claim cannot be made on the compensation fund,
(f) Procedures for taking action and making decision on payment of money as claimed from
the compensation fund,
(g) Maximum limit of amount payable as compensation to one person,
(h) Other necessary matters in relation to the examination of compensation claims,
(i) Provisions to be made in the event of the revocation of the license of a stock exchange.
Answer No. 14:

Section 50 of the Bank & Financial Institutions Act, 2073 prescribes the provision of the act
prohibited to be done by Banks& Financial Institutions. According to it Bank & Financial Institutions
are not allowed to carry out, or cause to be carried out the following activities:
 Purchasing or selling goods for commercial purpose or constructing building or purchasing
any immovable property except when it is required for its own use;
 Advancing credit against the security of its own share.
 Supplying credit or facility to any directors, person who have subscribed one percent or
more of its share, chief executive or any family members of such persons, managing agents
or any firms, companies or institutions which are entitled or nominate or appoint directors;
or any firm companies or institutions in which the institution has a financial interest.
 Supplying credit or facility in an amount exceeding such percentage of capital fund as may
be prescribed by the Rastra Bank to a single customer, company and companies or
partnership firm of single group.
 Supplying any type of credit to any person, firm, company or institution against guarantee
given by the promoters, directors, or chief executive.
 Making investment in the securities of Bank or financial institutions of Classes A, B and C
classified by the Rastra Bank.
 Making investment of an amount exceeding the limit prescribed by the Rastra Bank in the
share capital of any other institutions.
 Indulging with other licensed institutions to mutually create any type of monopoly or any
other type of controlled practice in the financial transactions.

 Doing any kind of act which is capable of creating any artificial obstruction in the
competitive environment of the financial sector, with the intention of deriving undue
advantage.
 Doing such other acts prohibited from being done by a bank or financial institutions as may
be prescribed by the Rastra Bank.
Answer No. 15:

As per the Section 12 of Bank and Financial Institutions Act, 2073, following are the relevant
provisions for the buyback of shares:
i. No bank or financial institution shall purchase its own shares (buy-back) or lend moneys
against security of its own shares; however, by fulfilling certain requirement can make buy
back of shares.
ii. Buyback of shares shall not exceed more than twenty percent of the total paid up capital
and general reserve fund of the bank or financial institution.
iii. Buyback of shares must be completed from the free reserves of the bank or financial
institutions.
iv. Buyback must be made on the following manners:
(a) Purchasing from stock exchange;
(b) Purchasing from the existing shareholders on a proportionate basis.
v. Buyback of shares must be completed within six months after the date of receipt of approval
from Nepal Rastra Bank or twelve months of the adoption of a special resolution at the
general meeting, whichever is later.
Answer No. 16:

As per Section 47(2) of Bank and Financial Institutions Act, 2073, functions to be carried out by
Development Banks, providing of hypothecation loan has not been included in the lists of loans.
Hence, City Development Bank shall not allow for providing hypothecation loan.
Answer No. 17:

a) As per Bank and Financial Institutions Act, 2073, The Board of Directors shall consist of not less
than five and not more than nine. Hence, the formation is invalid.
b) Annual General Meeting only elects Board of Directors; however, a director chosen by the
directors from among themselves by a majority decision shall be the chairperson of the Board of
Directors. Hence, the formation is invalid.
c) As per the disqualification sections of the Board of Directors, a securities dealer cannot become
the Board of Directors. Hence appointment of securities dealer is invalid as per the Bank and
Financial Institutions Act, 2073.
d) The tenure of office of a director of a bank or financial institution shall be as provided in its
Articles of Association, but not exceeding four years. Here Board of Directors fixed their tenure for 5
years, which is also invalid.
e) This is also invalid because meetings of the Board shall be held at least 12 times in a year.
Answer No. 18:

Nepal Rastra Bank Act 2058, states following provisions of the deputy governor:
i. Tenure of deputy governor shall be of five years.
ii. Candidates for deputy governor shall be recommended double the number of vacant position.
iii. Governor recommends the deputy governor and Government of Nepal, Council of Ministers,
appoints deputy governor.

iv. No. Deputy Governor must be recommended from first class officer of the Nepal Rastra Bank
only.
v. No. After appointment of deputy governor, person shall be retired from the service of Nepal
Rastra Bank.
Answer No. 19:

To formulate necessary monetary and foreign exchange policies in order to maintain the stability of
price and balance of payment for sustainable development of economy is one of the major
objectives of Nepal Rastra Bank out of other objectives; however, formulation of fiscal policy is the
major function of Ministry of Finance, Council of Ministers, Government of Nepal. Government of
Nepal announces its fiscal policy through announcement of the Budget in every fiscal year. Hence, it
is not the objective and function of Nepal Rastra Bank to formulate fiscal policy.
Answer No. 20:

As per Insurance Act 2049, Insurance Board shall be established to systematize, regularize, develop
and regulate the Insurance Business in Nepal. Insurance Board shall be autonomous and body
corporate having perpetual succession. Chairperson of the Insurance Board shall be as designated or
nominated by Government of Nepal. The Chairperson shall be the Chief Administrative Officer of the
Insurance Board and shall have the power and duty to execute the decisions of the Insurance Board
and supervise and control the functions and activities of the Insurance Board. The tenure of office of
the Chairperson shall be four years and he may be re-appointed or designated.
The majority decision of the Insurance Board shall not remove the chairperson as the chairperson of
the Insurance Board is appointed by the Government of Nepal. Thus Government of Nepal can only
remove the chairperson of the Insurance Board. Hence, majority decision of the members of
Insurance Board shall not be valid in case of removal of Chairperson.
Answer No. 21:

Objectives of Insurance Tariff Advisory:
 To provide necessary advice and recommendation to the Insurance Board relating to the
determination of the tariff of the Insurance Business.
Formation: There shall be following members of Insurance Tariff Advisory Committee:
Chairperson, Insurance Board –Chairperson
Three persons from among the Chief of Insurers as nominated by the Nepal Government –Member
Secretary, Insurance Board –Member-Secretary
Answer No. 22:

Section 27 of Insurance Act, 2049 states that Insurance Premium to be paid before holding the risk.
No Insurer shall hold the insurance risk of any category of Insurance Business until it receives the
premium of the insurance to be obtained by it. It shall be deemed that the insurer has undertaken
the insurance business only after receiving the insurance premium by it for holding the risk.
Provided that, if any practical difficulty arises due to any reason for paying the amount in a lump
sum, Section 27 shall not be deemed to be prohibited to issue an insurance policy on the guarantee
of a bank or the Nepal Government relating to the payment of the outstanding amount within a
specified period.
It is not allowed to hold insurance risk based on market practice. The function carried out by a life
insurance company by following the market practice is invalid as per the Section 27 of Insurance Act,
2049.

Answer No. 23:

As per Section 41B of Insurance Act, 2049; if any Insurer is dissolved due to the cancellation of its
registration, the liabilities shall be settled in the following order of priority
(a) The expenses incurred for the dissolution,
(b) The amount to be paid against the insurance claims to the Insured pursuant to Section 16,
(c) The remuneration and other outstanding amounts to be obtained by the employees of the
Insurer,
(d) Loan amounts,
(e) The amount to be paid to the Board,
(f) The amount to be paid to the Government of Nepal.
Answer No. 24:

As per Section 17 of the Social Welfare Act, following are the provisions relating to fund of Social
Welfare Council:
(1) The Social Welfare Council shall have own separate fund and the fund shall contain the following
money:
(a) Money received from Government of Nepal.
(b) Money received from foreign Governments, international organizations or foreign
organizations, through Government of Nepal.
(c) Money received from the movable or immovable property of the Social Welfare Council.
(d) Money received from any individual, institutions or countries in the form of donation,
assistance, grants and presents.
(e) Money received from any other sources.
(2) All money of the Council shall be deposited by opening an account in the name of the Council in
Nepal Rastra Bank or any Commercial Bank.
(3) All expenditure of the Social Welfare Council shall be borne from the fund pursuant to Sub-
section (1).
(4) The operation of the account of the Social Welfare Council shall be as prescribed.
Answer No. 25:

(1) As per Section 12 of the Social Welfare Act, 2049 any foreign non-government organization if
willing to work within the Nepal, before starting the work shall submit an application to the
Social Welfare Council for permission/to obtain approval.
(2) If the Social Welfare Council considers that any necessary information or documentation
contained in the application referred as above is not complete, the Social Welfare Council
may demand or obtain additional description of the concerned organization or person. In
cases, where the descriptions so demanded, It shall be the duty of the organization or person
to provide the same accordingly.
(3) Upon receipt of the application and description pursuant to above, the Committee shall,
within three months, provide such organization or person with an approval to carry out acts.
(4) Any International Social Organization having obtained approval under above shall, prior to
commence work within Nepal, wants to conclude an agreement as prescribed by the
Committee
If the Committee considers that any agreement concluded pursuant to above has been violated, the
concerned party shall be provided with an opportunity to furnish explanation. If the explanation be
not satisfactory, the Social Welfare Council may cancel such an agreement.

Answer No. 26:

Nepal Chartered Accountants Rules 2061 has provided following special provisions guiding the
Partnership arrangements between the members:
 Every partner of the firm must hold COP.
 One firm can have a maximum 20 partners.
 A member having COP cannot own more than one proprietorship firm nor can be a partner
in more than one accounting firm at a time. Partnership of foreign accounting firm is not
counted for this purpose.
 Remaining partner must inform ICAN if there is any change in the composition of the
partner, within 35 days of such change.
 The member can use the word partner if he is one of the partners of the firm.
Answer No. 27:

Following are the relevant provisions of the Nepal Chartered Accountants Act, 2053:
i) Alok who without holding the certificate of practice proved to have signed a document in
capacity of the member holding certificate of practice.
Punishment to Alok
If a person, who has not obtained a certificate of practice and is proved to have signed any
document in capacity of the member holding certificate of practice, shall be liable to punishment
with a penalty up to two thousand rupees or imprisonment for a period of up to three months or
both. Alok is to be punished accordingly.
ii) Manoj as being a member of The Institute of Chartered Accountants of Nepal committed an act
contrary to the provisions of the Act which was other than the provision of Section 41 of Nepal
Chartered Accountants Act, 2053.
Punishment to Manoj
A member, who commits any act contrary to the provisions of Nepal Chartered Accountants Act,
2053 other than the provisions of Section 41, shall be suspended for a maximum period of five
years and shall be liable of punishment with a maximum penalty of two thousands rupees or
imprisonment for a maximum period of three months or both. Manoj is to be punished
accordingly.
iii) Dhiraj who first time used the seal of the Institute in contravention to Section 6 of the Nepal
Chartered Accountants Act, 2053.
Punishment to Dhiraj
If a person, who in contravention of Section 6 of Nepal Chartered Accountants Act, 2053 uses the
name or seal of the ICAN or exercises any type of authority bestowed to the ICAN, shall be
punished with a penalty of one thousand rupees maximum on first conviction, and on any
subsequent conviction thereafter, a maximum penalty of five thousand rupees or imprisonment
for a maximum period of six months or both. Hence Dhiraj might be punished for penalty of one
thousand rupees maximum as this is the use of seal for the first time.
Answer No. 28:

Under Rule 68 of Nepal Chartered Accountants, Regulation, 2061 duties, responsibilities and powers
of the disciplinary committee in addition to those provided by the Section 14 of the Nepal Chartered
Accountants Act, 2053 shall be as followings:
 To investigate the complaint filed by a member under sub-article (1) of article 35 of Nepal
Chartered Accountants Act, 2053 or forwarded by the council,
 To receive the service of the legal advisor or a related expert,

 To recommend for action/ penalty with findings if the complaint is found based on facts and
subject to penalty according to sub-article (5) of article 14 of the Nepal Chartered Accountants
Act, 2053,
 To report the council to close the complaint if after investigation not found based on facts or to
recommend action against the complainer if found filed with malafide intention.
 To perform other duties fixed or delegated to do.
Answer No. 29:

Section 18 of Nepal Chartered Accountants Act, 2053 states that the following person shall not be
deemed to be qualified to be enrolled as a member of the ICAN:
(a) One who has not the qualification of chartered accountant and registered auditor;
(b) One who has not attained the age of Twenty One years;
(c) One who has become insolvent being unable to repay loan to creditors;
(d) One who has been convicted by the court of a criminal offence involving moral turpitude;
(e) One who is of unsound mind.
Based on above an Indian Citizen can become the member of ICAN; however, a person having below
21 years of age shall not eligible to become a member of the ICAN. Hence, an Indian citizen having
20 years of age shall not eligible to become the member of the ICAN and membership shall not be
granted by the Council of ICAN.
Answer No. 30:

Section 38 of Nepal Chartered Accountants Act, 2053 states that Council shall appoint any person
who has experience in accountancy to the post of executive director in order to carry out
administrative activities of ICAN. The term of office of the executive director shall be four years, and
the council may, if it so wishes, re-appoint him or her. The Council may designate any officer
employee of ICAN to perform the functions of the executive director during the absence of the
latter.
Similarly, Section 39 of Nepal Chartered Accountants Act, 2053 states the functions, duties and
powers of executive director as follows:
(a) To be responsible to the Council and act as the chief of the ICAN;
(b) To perform the day-to-day administrative business of the ICAN;
(c) To prepare the annual budget of the Institute and submit it to the Council of ICAN;
(d) To maintain, or cause to be maintained, the accounts of the ICAN;
(e) To take custody of, and update, or cause to be updated, the register of members and
members having obtained the professional certificate.
Similarly, executive director shall act under supervision and control of the Council of ICAN.
Answer No. 31:

Section 2(j) of Nepal Chartered Accountants Act, 2053 defines the Certificate of Practice (COP)
"Certificate of Practice (COP)" means the certificate issued pursuant to section 28, to render
accounting profession.
(1)Member willing to carry out audit profession shall make an application, in a prescribed
format, for Certificate of Practice, along with the prescribed fees, to the Institute.
(2)The Council, prescribed that the applying member as per sub-section (1), has fulfilled all
conditions prescribed by the Council, shall provide a Certificate of Practice, in a prescribed
format, to such member.

(3)The Council shall ensure that the members observe or shall cause to observe conditions
prescribed for members holding Certificate of Practice may prescribe Code of Conduct for
such member.
Answer No. 32:

Section 103 of the Negotiable Instruments Act, 2034 specifies the following presumptions of
negotiable instruments:
(a) That every Negotiable Instrument was made or drawn for consideration and that every such
instrument, when it has been accepted, indorsed negotiated or transferred, was, accepted,
indorsed, negotiated or transferred for consideration in accordance with the prevailing law,
(b) That every Negotiable Instrument bearing a date was made or drawn on such date,
(c) That every transfer of a Negotiable Instrument was made before its Maturity,
(d) That every accepted bill of exchange was accepted within a reasonable time after its date and
before its Maturity,
(e) That the endorsements appearing upon a Negotiable Instrument were made in the order in
which they appear thereon,
(f) That the Holder of a Negotiable Instrument is a Holder in due Course.
Answer No. 33:

Holder in Due Course:
In the case of an instrument payable to bearer "holder in due course" means any person who, for
consideration became its possessor before the amount mentioned in it became payable.
In the case of an instrument payable to order, "holder in due course" means any person who
became the payee or endorsee of instrument before the amount mentioned in it became payable. In
both the case, he must receive the instrument without having sufficient cause to believe that any
defect existed in the title of the person from whom he derived his title. Thus a person who claims to
be "holder in Due Course" is required to prove that:
 On paying valuable consideration, he became either possessor of the instrument if payable to
bearer or endorsees thereof , if payable to order,
 He had come into the possession of the instrument before the amount due there under became
actually payable and
 He had come to possess the instrument without having sufficient cause to believe that any
defect existed in the title of transferor from whom he derived his title.
Payment in Due Course:

Payment in due course means payment in accordance with the apparent tenor of the instruments in
good faith and without negligence to any person in possession thereof under circumstances which
do not afford a reasonable ground for believing that he is not entitled to receive payment of the
amount therein mentioned. In order that such payment may operate as a discharge of a negotiable
instrument, it must fulfill the following conditions:
That the payment should be in accordance with the apparent tenor of the instrument. The
connotation of the expression "Apparent Tenor" is "in accordance with what appears on the face of
the instrument to be the intention of the parties. Consequently, it is imperative that the payment
should be made at or after maturity. A payment before maturity is not a payment in accordance with
apparent tenor of the instrument; and such it is not a payment in due course. Further, such payment
should be made in money only, because the instrument expressed to be payable in money. A
different form of payment may however be adopted but only with the consent of the holder of the
instrument.

That the person to whom payment is made should be in possession of the instrument. Therefore,
payment must be made to the "holder" or a person authorized to receive payment on his behalf.
Suppose, the instrument is payable to a particular person or order and is not endorsed by him.
Payment to any person in actual possession of the instrument in such case, will not amount to the
payment in due course. However, in the event of the instrument being payable to bearer or
endorsed in blank the payment to a person who possesses the instrument is, in the absence of
suspicious circumstances, payment in due course. Any party to a bill, but not any stranger, may pay
it; and on payment, acquire the rights of the holder against all parties prior to him. But a stranger
may pay protest for honour of some party to the bill or note.
That the payment should be made in good faith, without negligence, and under circumstances which
do not afford a reasonable ground for believing that the person to whom it is made is not entitled to
receive the amount. If suspicious circumstances are there, the person making the payment is to at
once put on an enquiry. If he does not make the enquiry, the payment would not be in due course.
Answer No. 34:

Dishonor by Non Acceptance:
A bill may be dishonored either by non-acceptance or by non-payment. A dishonor by non
acceptance may take place in any one of the following circumstances:
a) When the drawee either does not accept the bill within 48 hours of presentment or refuse to
accept it;
b) When one of several drawees, not being partners, makes default in acceptance;
c) When drawee gives a qualified acceptance;
d) When presentment for acceptance is excused and the bill remains unaccepted; and
e) When the drawee is incompetent to contract.
Note that presentment is not necessary where the drawee after diligent, search cannot be
discovered, or where the drawee is incompetent to contract or here the drawee is fictitious person.
When a bill has been dishonored by non acceptance, it gives the holder an immediate right to have
recourse against the drawer or the endorser. Since a dishonor by non acceptance constitutes a
material ground entitling the holder to take action against the drawer, he need not wait till the
maturity of the bill for it to be dishonored on presentment for payment.
Dishonor by Non Payment:
An instrument is dishonored by non-payment when the party primarily liable e.g.; the acceptor of a
bills of exchange, maker of a promissory note or the drawee of a cheque, make default in payment.
An instrument is also dishonored for non-payment when presentment for payment excused and the
instrument, when overdue, remains unpaid.
Answer No. 35:

Noting:
Noting is a convenient mode of authenticating the fact that a bill or note has been dishonored.
When a note or a bill has been dishonored by non-acceptance or non-payment, the holder causes
such dishonor to be noted by a Notary Public. Noting is a minute recorded by a notary public in the
dishonored instrument. When an instrument, say a bill of exchange, is to be noted for dishonor, it is
taken to Notary Public who presents it once again for acceptance or payment, as the case may be;
and if the drawee or acceptor still refuses to accept or pay the bill, it is noted, i.e., a minute is
prepared containing date of dishonor, reason for such dishonor, etc; which is attached to the
instrument; and the facts are noted on the instrument.

Protesting:
When an instrument is dishonored, the holder may cause the fact not only to be noted, but also to
be certified by a Notary Public that the bill has been dishonored. Such a certificate is referred to as a
protesting.
Neither noting nor protesting is compulsory in the case of inland bills; however, every foreign bill of
exchange must be protested for dishonor when such a protest is required by the law of the country
where the bill was drawn. The advantage of both noting and protesting is that it constitutes prima
facie evidence in the court that instrument has been dishonored. Any bill or document which has
been noted can be protested any time thereafter for taking legal action against the parties.
Answer No. 36:

 In case any specific place has been specified in the contract for performing the work, the
work shall be performed at the same place.
 In case any party has to hand over or deliver goods to the other party under the contract
and the place where those goods are to be hands over or delivered has not been specified in
the contract, the contract shall be deemed to have been concludes with a provision to and
over or deliver the goods at the place where those goods are stored.
 In case the specific place where the work mentioned in the contract has to be performed,
has not been specified in the contract, and whereas that work can be performed only in as
specific place or in case the work needs to be performed in any specific place due to the
general practice and custom or the nature of the work, the contract shall be deemed to have
been concluded with a provision to perform at work at place.
 In case the place for performing the work prescribed in the contract shall inform the other
party to specify a reasonable place for performing the work and the other party shall specify
a reasonable place to perform the work.
Answer No. 37:

The doctrine of privity of contract means that a person cannot acquire rights or be subject to
liabilities arising under a contract to which he is not a party. It is a relationship between the parties
to a contract, allowing them to sue each other but preventing a third party from doing so. It is an
elementary principle of English law- known as the doctrine of 'Privity of Contract' that contractual
rights and duties only affect the parties to a contract, and this principle is the distinguishing feature
between the law of contract and the law of property. True proprietary rights are 'binding on the
world' in the lawyer's traditional phrase. Contractual rights, on the other hand, are only binding on,
and enforceable by, the immediate parties to the contract. Nowadays, there has been a constant
tendency for contractual rights to be extended in their scope so as to affect more and more persons
who cannot be regarded as parties to the transaction.
The requirement of privity has been relaxed under modern laws and doctrines of implied warranty
and strict liability, which allow a third-party beneficiary or other foreseeable user to sue the seller of
a defective product. Hence, the Doctrine of Privity of Contract exists with exceptions. It means in the
following cases the Doctrine of Privity of Contract does not apply:
(a) In the case of assignment of a contractual right to a third party (beneficiary),
(b) In case of a contract of trust created in favor of a beneficiary,
(c) In case of a right created under a contract of life insurance policy,
(d) In case of negotiable instrument held by a holder in due course.

Answer No. 38:

There is only a kind of bonus i.e. Cash Bonus. Section 9 states that Bonus shall have to be paid in
cash only. So bonus cannot be paid in kind.
Similarly, as per Section 3 of Bonus Act, 2030 states that branches or sub branches to be regarded as
part of establishment for the purpose of calculating bonus.
Section 12 of Bonus Act, 2030 states that any employee who has not worked for all the working days
of the fiscal year shall receive as bonus only the amount left after deducting the amount due from
the total amount of bonus payable to him, and he shall be paid bonus for the remaining period only.
As per Section 20 of Bonus Act, 2030, Department of Labor may fine up to Rs. 5,000 to any person
for violation of Bonus Act and Rules.
Answer No. 39:

As per Section 8 of Bonus Act, 2030; an employee shall not be entitled to obtain bonus under this
Act, if he/she is punished or dismissed from service for committing any act as follows: Provided that,
this Section shall not be deemed to be prejudiced to obtain in the case of the bonus for a period
before committing such a punishable act.
 Theft of the property of the enterprise or any damage to such property.
 Illegal strike or abetment to other for such strike,
 Riots or breaching of discipline.
Answer No. 40:

As per Section 16 of the Bonus Act, 2030; following are the disputes settlement mechanism:
Labour Office through Mutual Negotiations:
If any dispute arises between employee and management with respect to the bonus to be payable,
the Labour Office shall resolve such dispute by negotiations having invited both the parties.
Labour office through collection of Evidence:
If the dispute could not be resolved by negotiations as per above, the Labour Office shall ask to
concerned enterprise and employees to produce necessary documents and statements of accounts
and shall give a decision on the basis of such documents and statements.
Appeal to Labour Court:
The party who is dissatisfied with the decision of Labour Office, may appeal to the Labour Court,
within thirty five days of receipt of such notice.
Labour Court's Decision:
Decision made by the Labour Court shall be final one.
Answer No. 41:

As per Section 15 (1) of Industrial Enterprises Act, 2073; following are the classifications of
industries:
1. Micro Industry:
 Maximum of 9 employees including the investor
 Annual turnover of maximum of NPR. 5 million
 Owner himself involved in the industry.
 Maximum application of 20 KV energy
 Maximum fixed asset of NPR. 500,000
2. Cottage Industry:
 Based on traditional skill and technology
 Based on local technologies, arts and traditions.
 Maximum application of 10 KV electricity by plant and machinery.

 Industries as stated in the Annex 2 of the Act.

3. Small Industry:
 Apart from micro and cottage industry, maximum fixed asset of NPR. 100 million
4. Medium Industry:
 Fixed Capital between NPR. 100 to 250 million.
5. Large Industry:
 Fixed Capital of more than NPR. 250 million.
Answer No. 42:

As per Section 15 (2) of Industrial Enterprises Act, 2073; following are the classifications of industries
based on their nature:
1. Energy based Industry

Industry generating energy from water resources, wind, solar, coal, natural oil and fuel or gas,
biomass and similar types of energy producing industry; energy transmission; energy distribution.
2. Manufacturing industry
Industry based on utilizing or processing of raw materials, auxiliary raw materials, semi-processed
materials.
3. Agro and Forest based industry
Industry based on agriculture or forest products such as integrated sericulture and silk production,
horticulture and fruit processing, animal husbandry including bird, dairy industry, poultry farming,
fishery, tea/coffee gardening and processing, herbal processing, vegetable seed farming, vegetable
farming or processing, tissue culture, green house, bee-keeping, honey production, rubber farming,
floriculture and production, cold storage and agro market, lease hold forests, agro forestry, etc.
4. Minerals based industry
Industry based on minerals excavation or processing thereof, except that of metal.
5. Construction based industry
Road, bridge, tunnel; ropeway, railway, tram, trolley-bus, cable car, monorail and sliding-car; airway
and airport; conference center; waste management; water supply and distribution; irrigation; sport
complex and stadium; parking place and parking house; export processing zone; cargo complex;
sewage treatment plant; special economic zone; telephone tower, optical fiber network, satellite
and satellite transmission center; house and housing complex; film city, film studio; business
complex.
6. Tourism based industry
Tourist house, motel, hotel, resort and restaurant; travel agency, tour operator, healing center,
casino, massage and spa; adventure tourism; golf course, polo, pony trekking, hiking; village tourism,
home-stay and ecological tourism; cultural, religious, conference and sports tourism; entertainment
part; conservation; mountain flight.
7. Information, transmission and communication based industry
Information technology based industry like technology park, IT park, biotech park, software
development, computer and related services, data processing, cyber café, digital mapping, BPO, data
mining, cloud computing. Communication based industry like internet, telecommunication, teleport
services, satellite establishment and operation, satellite transmission center, VSAT, broad band,
optical network, satellite network, transmission based industry like FM radio, digital radio service,
digital television, satellite television, cable television, IPTV and online services, Digital cable TV,
network, Direct-to-home satellite services, MMDS Network, recording studio, printing media,
entertainment services, etc.
8. Service based industry

Workshop, printing press, consultancy services, ginning and bailing business, cinematography,
construction business, public transportation business, photography, hospital, nursing home,

educational and training institution, library and museum services, laboratory, air services, sports
services, non-agro cold storage, house wiring and electrical fitting and maintenance, waste
management services, cargo and courier services, advertising services, packaging and refilling
services, foreign employment services.
Answer No. 43:

As per Section 48 of Industrial Enterprises Act, 2073; following are the provisions related to
Corporate Social Responsibility (CSR):
The CSR Requirement is applicable to:
(i) Medium industries (fixed capital exceeding NPR. 100 million but less than NPR. 250 million);
(ii) Large industries (fixed capital exceeding NPR. 250 Million); and
(iii) Cottage industries and small industries having annual turnover more than NPR. 150 Million.
It is mandatory to allocate at least 1% of the annual profit to be utilized towards corporate social
responsibility. The fund created for CSR is to be utilized on the basis of annual plans and programs.
The progress report of the utilization of the fund collected for CSR is required to be submitted to the
relevant government authorities registered within three months from expiry of the financial year.
Answer No. 44:

Chapter 9 of Labour Act, 2074 states the various provisions regarding leave. Following are the
summary lists of such leaves:
a) Weekly Holiday (Section 40): Once in every week.
b) Public Holiday (Section 41): 13 days including May day in case of male worker and employee and 14
days including women day in case of female worker and employee.
c) Compensatory Leave (Section 42): If has to work continuously based on nature of work without
taking leave on weekly and public holiday. Such leave has to be taken within 21 days from the date
of working on weekly or public holiday.
d) Home Leave (Section 43): Worker and employee shall get home leave with remuneration
considering 1 day home leave for 20 working days.
e)Sick Leave (Section 44): Worker and employee shall get 12 days sick leave with remuneration.
f) Maternity Leave (Section 45): Pregnant women shall get Maternity leave with pay of 14 weeks
before or after delivery. Similarly, father shall also get 15 days of leave with pay.
g) Bereavement Leave (Section 48): Any worker or employee shall avail bereavement leave of 13 days
as required by the religion/culture in case he/she has to observe obscurity during the death of
his/her close relative.
Answer No. 45:

Section 28, 29 and 30 of the Labor Act, 2074 prescribed provision of working hours, and overtime
work of the labor.
As per the provision of employees or workers are allowed to work as follows:
i. Employer cannot engage any labor more than 8 hour a day and 48 hours a week.
ii. Labor should be allowed recess of half an hour after 5 hours of continuous work.
iii. If the nature of work is of continuous and cannot be stop, arrangement of recess should be made
in rotation basis.
iv. Recess period will be calculated in working hour.

v. Labor shall not be forced to work over time. However if non completion of work affect Life,
security or health of any person or employer might incur heavy loss, labor could be engage for
overtime work.
vi. Overtime work as above shall not be more than 4 hours a day and 24 hours a week.
In case of women workers, they can be engaged only from 6 a.m. to 6.p.m. If they are to be engaged
beyond 6 p.m. i.e. at night time, it required to take their consent by arranging necessary safety
measures and transportation facilities. In case of minor workers it is prohibited to engage them from
6 p.m. to 6 a.m. and is allowed to work 6 hours a day and 36 hours a week.
Answer No. 46:

As per Section 38 of Labour Act, 2074, the remuneration of workers or employees shall not be
deducted except under the following circumstances:
(a) In case it is required to deduct against absence,
(b) In case it is required to deduct against loss or damage of cash or kind of the Enterprise caused
intentionally or negligently;
(c) In case it is required to deduct in respect of contribution to provident fund or contribution
amount in respect of insurance or such other contribution amount in respect of social security,
(d) In case it is required to deduct any amount as per the order of judicial or quasi-judicial body,
(e) In case it is required deduct in respect of providing prescribed facilities;
(f) In case it is required to deduct in respect of advance or over payment of remuneration;
(g) In case it is required to deduct in respect of income tax or any other tax levied under prevailing
laws.
(h) In case it is required to deduct any amount from remuneration as per collective agreement,
(i) In case it is required to deduct trade union membership fee.
The limit of amount to be deducted, the method of deduction, the period of deduction and other
related matters shall be as prescribed.
Answer No. 47
The major functions of WTO are discussed as below:
Administering WTO agreements:
The WTO agreements cover goods, services and intellectual property. They include individual
countries' commitments to lower customs tariffs and other trade barriers and to open and keep
open services markets. It has different mechanism like General Council which works on behalf of
ministerial conference. It meets to Dispute Settlement Body and Trade Policy Review Body to
oversee procedures for settling disputes and to analyze members' trade policies. There are Goods
Council, Services Council and TRIPS Council with various committees to works on related sectors. The
ministerial conference can take decisions on all matters under any of the multilateral trade
agreements.
Forum for trade negotiation:

It provides forum for trade negotiation. For this purpose, its different mechanism activate to works
for their responsible sectors. Issues on trade related aspects could be submitted through
committees and councils for negotiations.
Handling trade disputes:

It has dispute settlement mechanism like Dispute Settlement panels and Dispute Settlement Body
(General Council in another guise). It is under the General Council and finally ministerial conference.
The Dispute Settlement Body has the sole authority to establish “panels” of experts to consider the
case, and to accept or reject the panels’ findings or the results of an appeal. It monitors the

implementation of the rulings and recommendations, and has the power to authorize retaliation
when a country does not comply with a ruling.
Monitoring national trade policies:

It monitors national trade policies through General Council Meetings as Trade Policy Review Body.
Finally, the general council submits the report before conference.
Technical assistance and training for developing countries:

It provides technical assistance and training as it think fit. It has technical assistance missions
that works in this field.
Cooperation with other international organizations:

It cooperates with and assists to IMF and IBRD for establishing coherence in universal economic
policy determination. The WTO maintains extensive institutional relations with many of its sister
organizations, participates as observer in their work and has established several partnerships to help
improve the trading opportunities and capacities of developing and least-developed countries.
Examples of such partnerships are the Enhanced Integrated Framework (EIF), the Standards and
Trade Development Facility (STDF) and the Aid for Trade Initiative. WTO cooperation with other
international organizations continues to evolve and is more than ever a function of the need for
increased global coordination and better governance.

CAP II Financial Management-June 2019
Paper 4:
Financial Management
Revision Questions
Capital Budgeting
Question No.1
Helmet Ltd. is considering two projects, Ka and Kha, to undertake. The projects are mutually exclusive
and the company can choose any one of these two. There is a controversy at the top management level
of Helmet regarding the capital budgeting technique to be employed as the basis for selection of the
investment projects. The finance manager is of the view that the project with higher Net Present
Value (NPV) should be chosen whereas the Chief Executive Officer strongly feels that the one with
higher Internal Rate of Return (IRR) should be undertaken especially when the mutually exclusive
projects have the same initial outlay and length of life.
The company anticipates a cost of capital of 10% and the net after tax cash flow of the projects (in
"000" rupees) are as given below:
Year Projects
Ka Kha
0 (800) (800)
1 140 872
2 320 40
3 360 40
4 300 16
5 80 12
You are required to:

a) Calculate the NPV and IRR of each project;
b) Recommend, with reasons, which project should be undertaken (if either);
c) Explain the inconsistency in ranking of the two projects in the light of the remarks of the directors;
and
d) Identify the cost of capital at which your recommendation made in part (b) would be reversed.
Following discount factors may be adopted:
Discount Factor Year

0 1 2 3 4 5
At 10% 1.0000 0.9091 0.8264 0.7513 0.6830 0.6209
At 15% 1.0000 0.8696 0.7561 0.6575 0.5718 0.4972
At 20% 1.0000 0.8333 0.6944 0.5787 0.4823 0.4019
Question No.2
Following are the data on a capital project being evaluated by the Senior Management of Calculator
Ltd.
1 Annual Cost Saving Rs. 40,000
2 Useful Life 4 years
3 Internal Rate of Return 15%
4 Profitability Index 1.064
5 Net Present Value ?
6 Cost of Capital ?
7 Cost of Project ?
8 Payback ?
9 Salvage Value Nil

Required:
Find the missing value considering the following table of discount factor only.
Discount 15% 14% 13% 12%

Factor
1 Year 0.869 0.877 0.885 0.893
2 Year 0.756 0.769 0.783 0.797
3 Year 0.658 0.675 0.693 0.712
4 Year 0.572 0.592 0.613 0.636
2.855 2.913 2.974 3.038
Cash Flow statement

Question No.3
Following is the cash flow abstract of Tube light Ltd. For the year ended 32nd Ashad, 2075:
Inflows Amount Outflows Amount
Opening balance: Purchase of Fixed Assets 561,798
Cash 10,000 Payment to creditors 11,111
Bank 1,000 Payment of 73,556

140,000 remuneration (Salaries &
Dividend Received Wages)
300,000
Long Term Borrowings Taxation 17,865
20,000
Interest Received Dividends 156,799
200,000
Sale of Machinery Debentures Redeemed 50,000
391,000
Collection from Debtors Repayments of Long term 179,000
Borrowings
Interest paid 1,200

Closing balance:
Cash 2,200
Bank 8,471
1,062,000 1,062,000
Required:
Prepare Cash Flow Statement for the year ended 31st March, 2019 in accordance with NAS 7.
Ratio Analysis
Question No.4
Using the following information, complete the Balance Sheet given below
Total Debt to Net worth: - 1:2
Total Assets Turnover: - 2
Gross Profit on Sales : - 30%
Average Collection period (assume 360 days in a year): 40 days

Inventory Turnover Ratio based on cost of goods sold and yearend inventory: 3
Acid Test Ratio = 0.75
Equity Share Capital 4,00,000 Plant & Machinery & Other ?
Fixed Assets
Reserve & Surplus 6,00,000 Current Assets:
Current Liabilities ? Inventory ?
Debtors ?
Cash ?
Total Total
Bond Valuation
Question No.5
The Mt. Everest limited is contemplating a debenture issue on the following terms:
Face value = Rs. 100 per debenture
Term of maturity= 7 years
Coupon rate of Interest:
Years 1-2=8% p.a.
3-4=12% p.a.
5-7=15% p.a.
The Current market rate of interest on similar debenture is 15% p.a. The company proposes to price
the issue so as to yield a (compounded) return of 16% p.a. to the investor. Determine the issue price.
Assume the redemption on debenture at a premium of 5% (Note: The present value interest factors at
16% p.a. for years 1 to 7 are .862, .743, .641, .552, .476, .410, and .354 respectively).
Equity Valuation
Question No.6
Mouse Ltd. has the following capital structure:
11,000 Equity shares of Rs. 100 each Rs. 1,100,000
5% Preference shares Rs. 900,000
8% Debentures Rs. 300,000
The current market price of the share of Mouse Ltd. is Rs. 111. The company is expected to declare a
dividend of Rs. 11 at the end of the current year, with an expected growth rate of 7%. The applicable
tax rate is 35%.
Required:
i) Find out the cost of equity capital and the WACC.
ii) Assuming that the company can raise Rs. 800,000 15% Debentures, find out the new
cost of equity and WACC if dividend rate is decreased from 11% to 9%, growth rate
is increased from 7% to 11%, and market price of the share is increased to Rs.110.
Working Capital Management & Financial Forecasting

Question No.7
A company is considering its Working Capital Investment and Financing Policies for the next year.
Estimated fixed assets and current liabilities for the next year are Rs. 2.60 Crores and Rs. 2.34 Crores
respectively. Estimated sales and EBIT depend on current assets investment, particularly inventories
and book-debts. The following alternative working capital policies are under consideration:
(Rs. in Crores)
Working capital policy Investment in Estimated EBIT
current assets sales

Conservative 4.50 12.30 1.23

Moderate 3.90 11.50 1.15
Aggressive 2.60 10.00 1.00
After evaluating the working capital policies, the Finance Director of the company has advised the
adoption of the moderate working capital policy. Further, the company is examining the following
alternatives for use of long-term and short-term borrowings for financing its assets:
(Rs. in Crores)
Financing Policy Short-term debt Long-term debt
Conservative 0.54 1.12
Moderate 1.00 0.66
Aggressive 1.50 0.16
Interest rate-average 12% 16%
The company will use Rs. 2.50 Crores of the equity funds. The corporate tax rate is 25%.
Required:
i) Calculate net working capital position, under each working capital policy.
ii) Calculate net working capital position, rate of return on shareholder's equity, and
current ratio under consideration of different financing policies and finance director's
advice.
Receivable management
Question No.8
In order to increase sales from their present annual level of Rs. 2, 40,000, Godavari Foods Pri vate
Limited is considering a more liberal credit policy. Currently, the company has an average collection
period of 30 days. However, it is believed that as collection Period is lengthened, sales will increase by
following amounts-
Credit Policy Increase in Average Collection Period Increase in Sales
A 15 Days Rs. 10,000
B 30 Days Rs. 15,000
C 45 Days Rs. 17000
D 60 Days Rs. 18,000
The Variable Costs of the Company‘s product is 60% of Sales Price.
If the Company has pre-tax opportunity cost of 20%, which credit policy should be pursued? (Assume a
360-Day year).
Cash Management
Question No.9
Baby Limited is planning to change its credit policy which is expected to increase the average collection
period from one month to two months. The relaxation of credit terms is expected to produce an
increase in sales volume by 25%. Following are other relevant data:
Sales price per unit Rs.10
Profit per unit Rs.1.5
Current Sales Revenue per annum Rs. 2,400,000
Required rate of return on investment 20%
Assume that the 25% increase in sales would result additional stock of Rs. 100,000 and
additional creditors of Rs. 20,000.
Required:
Advise the company whether the credit terms should be revised in following circumstances:

i) If all the customers take longer credit terms of 2 months.

ii) If current customers do not opt for revised credit terms and only new customers opt the
revised credit terms.
Cash Conversion Cycle

Question No.10
Following data related to Karnali Sugar Ltd. is made available to you.
Particulars Year 1 (Rs.) Year 2 (Rs.))
Stocks:
Raw Materials 300,000 405,000
Work – in – Process 210,000 270,000
Finished Goods 315,000 360,000
Purchase of Raw Materials 1,440,000 2,025,000
Cost of Goods Sold 2,100,000 2,700,000
Sales 2,400,000 3,000,000
Debtors 480,000 750,000
Creditors 240,000 270,000
You are required to compute the duration of the operating cycle for each of the two years and
comment on the increase/decrease. (Assume 360 days per year for the purpose of computations.)
Dividend Distribution Policy

Question No.11
The following information pertains to a company:
Net profit (Rs. in '000') 60,000
12% preference shares capital (Rs. in '000') 20,000
Number of equity shares outstanding (in '000') 60
Return on investment 20%
Equity capitalization rate 16%
i) Compute the dividend payout ratio so as to keep the share price at Rs. 412.50 by using Walter model,
and
ii) Ascertain (giving reasons) the optimum payout ratio if return on investment is 16% and equity
capitalization rate is 18%.
Question No.12
The beta co-efficient of security X is 1.6. The risk free rate of return is 12% and the required rate of
return is 18% on the market portfolio. If the dividend expected during the coming year is Rs. 25 and the
growth rate of dividend and earnings is 8%, at what price should the security X can be sold based on
the capital asset pricing model.
Capital Structure
Question No.13
The capital structure of Matrix Ltd. is extracted below:
(Rs. in Millions)
Equity capital: 100 thousand shares of Rs.100 each 10.0
Reserve and surplus 12.0
12% preference shares: 55,000 shares of Rs. 100 each fully paid up 5.5
14% debentures of Rs. 1,000 each; 3,000 numbers 3.0

Long-term loan from financial institution at 12% per annum 2.0

32.5
The company is also availing a bank overdraft of Rs. 2 million carrying interest at 15% per annum. The
company is now drawing up its profit plan for the next year. It wants to pay dividend to equity
shareholders at 15% and keep the total dividend payout (equity as well as preference shareholders) at
60%.
Assuming that the tax rate applicable to the company is 25%., what level of earnings (EBIT) should the
company try to achieve to meet its plan?
Leverage
Question No.14
The following details of RSTZ Ltd. for the year ended on Ashadh end, 2075 are given below:
Operating leverage : 1.4
Combined leverage : 2.8
Fixed cost (excluding interest) : Rs. 204 thousand
Sales : Rs. 3,000 thousand
12% Debentures of Rs. 100 each : Rs. 2,125 thousand
Equity shares capital of Rs. 100 each : Rs. 1,700 thousand
Income-tax rate : 30 per cent
Required:
Calculate the P/V ratio and Earnings per share (EPS).
Cost of Capital
Question No. 15
Rathi Ltd. is a growing supplier of office materials. Analysts project the following free cash flow during
the next 3 years of operation of the company, after which the free cash flow is expected to grow at a
constant rate of 7%.
Year 1 2 3
Free cash flow (Rs. In millions) (20) 30 40
The company's weighted average cost of capital is 13%.
Required:
i) What is the terminal value of free cash flows after 3rd year?
ii) What is the value of the company today?
iii) If the company has Rs. 100 million in debt and 10 million ordinary shares outstanding, what is
the price per share?
Question No.16
Videocon Limited has following book value capital structure;
Particulars Amount (in Lakhs)
Equity Capital (in shares of Rs. 100 each, fully paid - up at par) 1,200
9% Preference Share Capital (in shares of Rs. 100 each, fully paid- up at par) 1000
Retained Earnings 600
11% Debenture (of Rs. 100 each) 900
13% Term Loan 360

Preference share, redeemable after 8 years, is currently selling at Rs. 90 per share. Debentures,
redeemable after 3 years, are selling at Rs. 75 per debenture. The next expected dividend per share on
equity shares is Rs. 24 and the dividend per share is expected to grow at the rate of 5%. The market
price per share is Rs. 350. The income tax rate for the company is 40%.
Required:
a) Calculate the weighted average cost of capital using market value proportion and
b) Determine the weighted marginal cost of capital for the company, if it raises Rs 400 lakhs
next year, given the following information:
i) The amount will be raised by equity and debt in equal proportions.
ii) The company expects to retain Rs. 120 lakhs earnings next year.
iii) The additional issue of equity shares will result in the net price per share being fixed at
Rs. 275
Time value of Money

Question No.17
A 12-payment annuity of Rs. 5,000 will begin 8 years hence, i.e. the first payment occurs at the end of 8
years. What is the present value of this annuity, if the discount rate is 14 per cent?
Risk & Return Theory

Question No.18
The data for the three securities A, B and C are as follows:
Securities Likely Return Standard Deviation
A 16% 0.21
B 16% 0.20
C 21% 0.25
Does anyone security dominates another? Which type of investor prefers security C?
Question No. 19
Describe the term “beta co-efficient” as used in the portfolio theory. Explain what does the value of
beta of 1, less than 1 and more than 1 signify.
Overview of Nepalese Capital Market

Question No.20
XYZ Limited issued 1 for 10 right shares on Bhadra 15, 2075 at an exercise price of Rs. 100 per share.
Market value of its shares immediately prior to the rights issue was Rs. 350 per share. XYZ Limited had
10 lakh shares before the issuance of rights shares. All rights were exercised by shareholders.
Calculate Theoretical Ex-right price.
Question No.21
Distinguish between:
a) Risk aversion Vs. Risk diversification
b) Floatation cost and Transaction Costs
c) Proxy fight and Takeover
d) Retention policy and Pay Out policy
e) Euro convertible bonds Vs. Euro convertible zero bonds

Question No.22
Write Short Notes on:
a) Financial distress
b) Tax consideration influencing the dividend policy of the firm
c) NEPSE Index
d) Debt Securitization
e) Inflation Premium


Answer No.1
(a) Computation of NPV and IRR:
Project A:
Year Discount Factors Cash Flow NPV at

10% 15% 20% 10% 15% 20%
0 1.0000 1.0000 1.0000 -800 -800.00 -800.00 -800.00
1 0.9091 0.8696 0.8333 140 27.27 121.74 116.66
2 0.8264 0.7561 0.6944 320 264.45 241.95 222.21
3 0.7513 0.6575 0.5787 360 270.47 236.70 208.33
4 0.6830 0.5718 0.4823 300 204.90 171.54 144.69
5 0.6209 0.4972 0.4010 80 49.67 39.78 32.15
Total 116.76 11.71 -75.96
Project B:
Year Discount Factors Cash Flow NPV at

10% 15% 20% 10% 15% 20%
0 1.0000 1.0000 1.0000 -800 -800.00 -800.00 -800.00
1 0.9091 0.8696 0.8333 872 792.74 758.29 726.63
2 0.8264 0.7561 0.6944 40 33.06 30.24 27.76
3 0.7513 0.6575 0.5787 40 30.05 26.30 23.15
4 0.6830 0.5718 0.4823 16 10.93 9.15 7.72
5 0.6209 0.4972 0.4010 12 7.45 5.97 4.82
Total 74.23 29.95 -9.82
From the above table, at 10% discount rate:
Formula: IRR= Lr + [Co-PVLr] X Hr -Lr

[PVLr – PVHr]
NPV of Project A = Rs. 116,760
NPV of Project B = Rs. 74,230
Using interpolation method, IRR of individual projects is computed as follows:
Project A = 15% + [11.71/ 11.71 – (-75.96)] X 5%
= 15% + [11.71/ (11.71+ 75.96)] X 5%
= 15% + (11.71/ 87.67) X 5% = 15% + 0.67% = 15.67%
Project B = 15% + [(29.95/(29.95 + 9.82) X 5%]

= 15% + [(29.95/(39.77 + 9.82) X 5%]
= 15% + 29.95/ 39.77 X 5% = 15% + 3.77 % = 18.77%
Note: Using the rate of 10% and 20% rate for discounting, IRR derived for project A and B will be
16.06% and 18.83% respectively.
(b) Recommendation on the Selection of Project:
Under NPV technique, project A has higher NPV (Rs. 116,760) as compared to project B which has a
NPV of Rs. 74,230. On the contrary, IRR of project B (18.77%) is much higher than that of Project A
which has an IRR of 15.67%.
The projects are mutually exclusive and conflicting rankings have occurred. In this situation, NPV
method will indicate the correct rankings due to certain limitation of IRR method as explained under

point (c). It is therefore recommended that project A should be selected for implementation since it
yields the higher NPV at a discount rate of 10%.
(c) Reasons for Inconsistency in the ranking of two Projects:

Such an inconsistency in the rankings generally occurs when the cash inflow in the project with lower
NPV is heavily loaded in the earlier years. That is exactly what has happened in the case of Project B in
the present case. Exactly, 88% of the cash inflow occurred in the first year in this project whose NPV is
lower as computed under point (a) above.
The superiority of NPV technique over the IRR method in such instances can be explained in terms of
the following factors:
(i) Percentage Returns: IRR expresses the results in percentage rather than in absolute or monetary
terms. Comparison of percentage can be misleading. For instance, an investment of Rs. 500,000 that
generates a return of 15 per cent is better than an investment of Rs. 200,000 which yields a return of
30 per cent. If the two projects are mutually exclusive, the first investment will yield Rs. 75,000 but
the second will only contribute Rs. 60,000 towards the profit pool of the firm. Therefore, if the
objective is to maximize the shareholders wealth, NPV is the correct measure.
(ii) Reinvestment assumptions: When NPV method is adopted, the implicit assumption is that the cash
flows generated from an investment will be reinvested at the cost of capital. However, the IRR method
assumes that all the proceeds from a project can be reinvested to earn a return equal to the IRR of the
original project. The underlying assumption of NPV method is therefore more realistic as compared to
the assumption made in IRR method.
(d) Cost of Capital at which the Recommendation would be Reversed:

The cost of capital at which Project A would be preferred to Project B can be ascertained by calculating
the IRR on incremental investment, A – B.
Particulars Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Total
(Rs. In '000)
Project A: Cash -800 140 320 360 300 80
Flow
Project B: Cash -800 872 40 40 16 12
Flow
Project (A-B) 0 -732 280 320 284 68
Discount Factor 1.0000 0.9091 0.8264 0.7513 0.683 0.6209
10%
NPV @ 10% 0 -665.46 231.39 240.42 193.97 42.22 42.54
Discount Factor 1.0000 0.8696 0.7561 0.6575 0.5718 0.4972
15%
NPV @ 15% 0 - 636.55 211.71 210.40 162.39 33.81 -18.54
Using interpolation method, IRR on incremental investment

= [10% + 42.54/(42.54 + 18.24) X 5%]
= 10% + 42.54/ 60.78 X 5%
= 10% + 3.5% = 13.5%
Thus, the IRR on incremental investment (A – B) is 13.5 per cent. This implies that the decision
recommended in (b) above would be reversed if the cost of capital were in excess of 13.5 per cent
assuming that of the projects has a positive NPV.

Answer No.2
(i) Calculation of Cost of Project
Let cost of project be x
Cost of Project at IRR 15% is equal to PV of Cash Inflow (Annual Cost Saving)
X =Rs.40, 000×2.855
=Rs.1, 14,200
(ii) Calculation of Pay Back period

Pay Back Period = Cost of Project/ Annual Cash Inflow
=Rs.1,14,200/Rs.40,000
=2.855 years
(iii)Calculation of PV of Cash Inflow

Profitability Index =PV of Cash Inflow/PV of Cash Outflow
PV of Cash Inflow = 1.064 ×Rs.1, 14,200
=1, 21,509
(iv)Calculation of Net Present Value

NPV = PV of Cash Inflow-PV of Cash Outflow
=Rs.1, 21,509-Rs.1, 14,200
=Rs.7, 309
(v) Calculation of Cost of Capital

PV of Cash Inflow = Annual Cash Inflow×PVF for 4 years at Cost of Capital
PVF for 4 years = Rs.1,21,509/Rs.40,000
=3.0378
Cost of capital = 12%
Answer No.3
Cash Flow Statement
For the year ended 32.03.2075
Cash flow from operating activities Amount Amount

Cash received from customers 391,000
Cash paid to suppliers (11,111)
Payment of remuneration (Salaries & Wages) (73,556)
Cash generated from operations 306,333
Income Tax paid (17,865)
Net cash from operating activities 288,468
Cash flow from investing activities
Payment for Purchase of fixed assets (561,798)
Proceeds from sale of Machinery 200,000
Dividend Received 140,000
Interest Received 20,000
Net cash used in investment activities (201,798)
Cash flow from financing activities
Proceeds from long term borrowings 300,000
Dividend paid (156,799)
Debenture redeemed (50,000)
Repayment of long term borrowings (179,000)

Interest paid (1,200)

Net cash from financing activities (86,999)
Net Decrease in cash and cash equivalents (329)
Cash and cash equivalents at the beginning of the year 11,000
Cash and cash equivalents at the end of the year 10,671
Answer No.4
Balance Sheet
Equity Share Capital 4,00,000 Plant & Machinery & Other 425,000
Fixed Assets
Reserve & Surplus 6,00,000 Current Assets:
Current Liabilities 5,00,000 Inventory 700,000
Debtors 333,333
Cash 41,667
Total 15,00,000 Total 15,00,000
Working Notes:
1) Net Worth= Equity Share Capital + Reserve and surplus= Rs.400, 000+600,000=Rs.10, 00,000
2) Total Debt =1/2 So, Total Debt =1/2 Hence, Total Debt = 10, 00,000 =Rs. 5, 00,000
Net worth Rs.10, 00,000 2
3) Total of Balance Sheet (on Liabilities side) = Rs.15, 00,000 (after updating working Note 2), so total
Assets= Rs.15, 00,000
4) Total Assets T/O= Turnover =Turnover =2

Total Assets Rs. 15, 00,000
So, Turnover (i.e. sales) =Rs.15, 00,000×2=Rs.30, 00,000
5) Cost of Goods Sold= Sales less Gross Profit= Rs.30, 00,000- 30% = Rs.21, 00,000
6) Debtors=Sales ×40/360 =Rs.30, 00,000× 40/360 = Rs. 3, 33,333
7) COGS = Rs. 21, 00,000 = 3 times
Closing Inventory Closing Inventory
So, Closing Inventory = Rs. 21,00,000 =Rs. 7,00,000

3
8) Acid Test Ratio = Quick Assets =Debtors +Cash = Rs. 3, 33,333+ Cash =0.75
Quick Liabilities Current Liabilities Rs. 5, 00,000
So Cash=Rs.41, 667
Note: Quick Liabilities= Current Liabilities in this question, since there is no Bank Overdraft in Balance
Sheet format.
Answer No.5
The interest payments over the life of the debentures and their present values are given in the
following table:
Year Interest (Rs.) PVF@16% Present Value (Rs.)
1 8 .862 6.896
2 8 .743 5.944
3 12 .641 7.692
4 12 .552 6.624

5 15 .476 7.14
6 15 .410 6.15
7 15 .354 .531
Total 45.756
The present value of the redemption amount of Rs. 105 (Rs.100+Rs.5)@16% p.a. is Rs. 105*.354=Rs.
37.17
Therefore, the present value of the debenture is Rs. 45.76+Rs. 37.17=Rs. 82.93. The company should
issue the debenture at this value in order to yield a return of 16% to the investors.
Answer No.6
i) Computation of cost of equity capital
Cost of equity capital (Ke) = (D1/P0) +g
= (11/111) + 0.07
= 16.90%
Computation of Weighted Average Cost of Capital (WACC)
Source Amount W Cost of Capital(after tax) (1)X(2)
(1) (2)
Equity Capital 1,100,000 0.48 0.169 0.08112
5% Pref. Capital 900,000 0.39 0.05 0.0195
8% Debenture 300,000 0.13 0.052 0.00676
2,300,000 1.0 0.10738
WACC = 10.738%
ii) Computation of Cost of Capital and WACC under the new situation
Cost of Equity capital, (New) (ke) = (D1/P0) +g
= (9/110) +0.11
= 19.18%
Computation of Weighted Average Cost of Capital (New)
Source Amount W Cost of Capital(after tax) (1)X(2)
(1) (2)
Equity Capital 1,100,000 0.36 0.1918 0.069
5% Pref. Capital 900,000 0.29 0.05 0.0145
8% Debenture 300,000 0.09 0.052 0.0046
15% Debenture 800,000 0.26 0.0975 0.0253
3,100,000 1.0 0.1134
WACC = 11.34%
Answer No.7
i) Net Working Capital position (Rs. Crores)
Particulars Working Capital Policy
Conservative Moderate Aggressive
Current assets 4.50 3.90 2.60
Less: Current liabilities 2.34 2.34 2.34
Net working Capital position 2.16 1.56 0.26

ii) Calculation of Net working capital position, return on shareholder’s equity and current ratio
under different financing policy and finance director's advices:
(Rs.Crores)
Particulars Financing Policy
Conservative Moderate Aggressive

Fixed assets 2.60 2.60 2.60
Current assets 3.90 3.90 3.90
Total assets 6.50 6.50 6.50
Current liabilities 2.34 2.34 2.34
Short-term debt 0.54 1.00 1.50
Long-term debt 1.12 0.66 0.16
Equity capital 2.50 2.50 2.50
Total liabilities 6.50 6.50 6.50
Budgeted sales 11.50 11.50 11.50
EBIT 1.15 1.15 1.15
Less: Interest on short-term debt @ 12% 0.06 0.12 0.18
Interest on long-term debt @ 16% 0.18 0.11 0.03
EBT 0.91 0.92 0.94
Less: Tax @ 25% 0.23 0.23 0.24
EAT 0.68 0.69 0.70
(a) Net working Capital position 1.02 0.56 0.06
(Current assets-current liabilities)
(b) Rate of Return on shareholders' Equity Capital 27.2% 27.6 28%
(EAT/Equity Share Capital) × 100
(c) Current ratio (Current assets/current liabilities) 1.35 1.17 1.02
Answer No.8
Evaluation of alternative credit policies
Particulars Present Policy A Policy B Policy C Policy D
A) Sales (given) Rs. Rs. Rs. Rs. Rs.
2,40,000 2,50,000 2,55,000 2,57,000 2,58,000
B) Variable Cost at 60% of sales Rs.1,44,000 Rs.1,50,000 Rs.1,53,000 Rs.1,54,200 Rs.1,54,800
C) Contribution (A-B) Rs. Rs. Rs. Rs. Rs.
96,000 1,00,000 1,02,000 1,02,800 1,03,200
D) Cost of Debtors p.a. = Rs.1,44,000 Rs.1,50,000 Rs.1,53,000 Rs.1,54,200 Rs.1,54,800
Variable Cost of Sales
E) Collection Period (in days) 30 days 45 days 60 days 75 days 90 days
F) Average Debtors Rs. 12,000 Rs. 18,750 Rs. 25,500 Rs. 32,125 Rs. 38,700
G) Interest on Average Debtors Rs 2,400 Rs 3,750 Rs 5,100 Rs 6,425 Rs 7,740

[20% on (F)]
H) Net Benefit [C-G] Rs. 93,600 Rs. 96,250 Rs. 96,900 Rs. 96,375 Rs. 95,460
Conclusion:
The company should select Policy B, i.e. 60 Days Credit, since maximum Net Benefit is obtained under
that policy.

Answer No.9
The revision of credit terms is justifiable if the rate of return on the additional investment in working
capital exceeds 20%.
Extra profit from the revision

Profit Margin (1.5/10) = 15%
Increase in sales revenue = 2,400,000x25% = Rs. 600,000
Increase in profit = 600,000x15% = Rs. 90,000
Total sales revenue after revision = (2,400,000+600,000) = Rs. 3,000,000
Now, we need to calculate return on extra investment in working capital so as to assess whether the
revision of credit terms is justifiable. This is generally done by taking the figure of debtors on the basis
of cost of sales and sometimes on the basis of sales. Computations have been done below by following
both the basis.
(i) If all Debtors take two months’ Credit:

Cost of Sales Basis (Rs.) Sales Basis (Rs.)
Average Debtors after the Sales Increase
(2/12X Rs. 3,000,000 X 85%) 425,000
(2/12X Rs. 3,000,000) 500,000
Current Average Debtors
(1/12 X Rs 2,400,000 X 85% 170,000
(1/12 X Rs 2,400,000) 200,000
Increase in Debtors 255,000 300,000
Increase in Stocks 100,000 100,000
355,000 400,000
Increase in Creditors (20,000) (20,000)
Net Increase in Working Capital Investment 335,000 380,000
Return on Extra Investment (Cost of Sales Basis) = 90,000/335,000 = 26.87%

Return on Extra Investment (Sales Basis) = 90,000/380,000 = 23.7%
(ii) If only the New Debtors take Two Months’ Credit:

Cost of Sales Basis (Rs.) Sales Basis (Rs.)
Increase in Debtors
(2/12X Rs. 600,000 X 85%) 85,000
(2/12X Rs. 600,000) 100,000
Increase in Stocks 100,000 100,000
Increase in Creditors (20,000) (20,000)
Net Increase in Working Capital Investment) 165,000 180,000
Return on Extra Investment (Cost of Sales Basis) = 90,000/165,000 = 54.55%

Return on Extra Investment (Sales Basis) = 90,000/180,000 = 50%
Recommendation:
In both the cases (i) and (ii), the new credit policy appears to be worthwhile under both the basis.
Furthermore, the most of the product can also support extra sales. If the firm has high fixed costs but
low variable costs, the extra production and sales could provide a substantial contribution at little extra
cost.

Answer No.10
Determination of Operating Cycle:
Particulars Year 1 Year 2
(i) Raw Materials Holding Period:
360 days X Stock of Raw Materials 360 X Rs. 300,000 =75 360 X Rs. 405,000 =72
Cost of Raw Materials Consumed* Rs. 1,440,000 Rs. 2,025,000
(*Assumed to be equivalent to Purchases)
(ii) Less: Creditors Payment Period:

360 X Rs. 240,000 =(60) 360 X Rs. 270,000 =(48)
360 days X Creditors Rs. 1,440,000 Rs. 2,025,000
Purchases
(iii) Work – in – Process Holding Period:

360 X Rs. 210,000 =36 360 X Rs. 270,000 =36
360 days X Stock of WIP Rs. 2,100,000 Rs. 2,700,000
Cost of Goods Manufactured
(iv) Finished Goods Holding Period:

360 days X Stock of Finished Goods 360 X Rs. 315,000 =54 360 X Rs. 36,000 =48
Cost of Goods Sold Rs. 2,100,000 Rs. 2,700,000
(v) Debtors Collection Period

360 days X Debtors 360 X Rs. 480,000 =72 360 X Rs. 750,000 =90
Credit Sales** Rs. 2,400,000 Rs. 3,000,000
(** Assumed to be equal to total sales
Duration of Operating Cycle 177 198
Comment on the Increase/Decrease:

The duration of the operating cycle has increased by 21 days in Year 2 as compared to Year 1. It will
necessitate more working capital in Year 2. This increase has been primarily caused by an increase in
debtors‘ collection period and decrease in creditors‘ payment period as shown below;
____________________________________________________________________________
Increase in Debtors‘ Collection Period: 18 days
Decrease in Creditors‘ Payment Period: 12 days
Less: Decrease in Raw Material Holding Period: (3) days
Less: Decrease in Finished Goods Holding Period: (6) days
Net Increase in Operating Cycle: 21 Days
Answer No.11
Calculation of Earnings per Share (EPS) (Rs. in ‘000’)
Net Profit 60,000
Less: Preference Dividend (20,000 X 12 / 100) 2,400
Net Profit after Preference Dividend 57,600
Earnings per Share in Rs. [Rs 57,600,000/60,000] 960

(i) Calculation of Dividend Payout Ratio:

Let dividend payout ratio be 'x'. The formula for share price under Walter model is:
P = D + r / Ke (E – D), where
Ke
P = Market price per share (Rs. 412.50 Given)
E = Earnings per share (Rs. 960 derived above)
D = Dividend per share (Rs. 960 x Given)
r = return on investment (0.20 given)
Ke = Cost of equity (0.16 Given)
Substituting the values, we get:
412.50 = 960 x + 0.20/0.16 (960 – 960 x)
0.16
Or, 412.50 = 60 x + 1.25 (60 – 60 x)
0.16
Or, 412.50 = 60 x + 75 - 75 x
0.16
Or, 66 = 1,200 – 240x
Or, x = 4.725, or 472.5%
Thus, the required dividend payout ratio is 472.5%.
(ii) Optimum Payout Ratio when Return on Investment (16%) is less than Equity Capitalization Rate
(18%)
According to Walter model, when return on investment is less than the cost of capital, the value of the
share is highest when dividend payout is maximum. It is evident that when r/Ke is less than 1, higher
dividend will maximize the value per share. Therefore, the dividend payout should be 100% in this case.
Answer No.12
Expected rate of return is calculated as follows by applying CAPM formula:
E (Ri) = Rf + Bi (Rm – Rf)
= 12% + 1.6 (18% - 12%) = 12% + 9.6% = 21.6%.
Price of security X is calculated with the use of dividend growth model formula as follows:
Re = D1 / P0 + g, where
D1 = Expected dividend during the coming year
Re = Expected rate of return on security X
g = Growth rate of dividend
P0 = Price of security X
Substituting the values, we get:
0.216 = 25/ P0 + 0.08,
Or, 0.216 = 2.50 + 0.08 P0
P0
Or, 0.216 P0 = 25 + 0.08 P0
Or, 0.216 P0 – 0.08 P0 = 25,
Or, 0.136 P0 = 25
Or, P0 = 25 / 0.136 = Rs. 183.82.
The price at which the security X should be sold as per CAPM is Rs. 183.82.
Answer No.13
Let 'x' be the EBIT to meet the company's commitments.
Interest Payable Yearly (Rs. in Millions)
On debentures @ 14% on Rs. 3 million 0.42

On long term loan of Rs. 2 million @ 12% 0.24

On bank overdraft of Rs. 2 million @ 15% 0.30
0.96
Profit before tax (PBT) = EBIT – 0.96 = x – 0.96
Tax at 25% = (x – 0.96) / 4
Profit after tax (PAT) = 3 (x – 0.96) / 4
Total dividend payable (Rs. in Millions)

On preference capital of Rs. 5.5 million @ 12% 0.66
On equity capital of Rs. 10 million 1.50
2.16
Total dividend payout is limited to 60% of PAT and is also equal to Rs. 2.16.
Therefore, 3 (x – 0.0.96) /4 x 60 / 100 = 2.16
Or 3(X-0.96)/4=216/60
Or X-0.96=3.6x4/3
Or, x – 0.96 = 4.80
Or, x = 4.80 + 0.96 = 5.76
Hence, earnings before interest and tax should be Rs. 5.76 million.
Answer No.14
(i) Calculation of P/V Ratio:
P/ V Ratio = Contribution / Sales X 100
Operating Leverage = C / (C – F) X 100
1.4 =C / C -204,000
1.4 (C – 204,000) = C
1.4 C – 285,600 = C
0.4 C = 285,600
Therefore, C = 285,000/0.4 = Rs. 714,000
P/V ratio = 714,000 /3,000,000 X 100 = 23.8%
(ii) Calculation of EPS:

EBT = Contribution – Fixed Cost – Interest = 714,000 – 204,000 – 255,000 = Rs. 255,000
(Interest =Rs. 2,125,000 × 12% =Rs. 255,000
EAT = EBT – Tax = 255,000 – 76,500 = Rs. 178,500
(Tax = Rs. 255,000 × 30% = Rs. 76,500)
EPS = EAT / No. of Equity Shares = 178,500/17,000 = Rs. 10.50.
Answer No.15
i) Terminal Value of Free Cash Flows after 3rd year:
= Free Cash Flow of 3rd year (1+g)
(WACC-g)
= 40(1+0.07)
0.13-0.07
= Rs. 713.33 Million

ii) Calculation of Value of the Firm Today
Year FCF/Terminal Value PVIF @ 13% PV (Rs. in millions)
(Rs. in millions)
1 (20) 0.8850 (17.70)
2 30 0.7831 23.493

3 40 0.6931 27.724
3 713.33 0.6931 494.41
Value of the Firm Today 527.927
iii) Calculation of Price Per Share

Value of Common Equity = Value of Firm Today - Value of Debt
= 527.927 Million - 100 Million
Price Per Share = Value of Equity
No. of Equity Share
10 Million
= Rs. 42.7927
Answer No. 16
Working Notes:
1. Cost of Equity Capital (Ke) and Cost of Retained Earnings(Kr)
Ke = D1/P0+g = 24/350 + 0.05 = 0.07 + 0.05 = 0.12 or 12%
2. Cost of Preference Share Capital (Kp)

Kp = D+ [RV – Net Procceds]/N = 9+ [100 – 90]/8 =9+1.25 =0.1079 or 10.79%
[RV + Net Proceeds] /2 [100+90]/2 95
3. Cost of Debentures (Kd)

Kd = Interest [100% - Tax rate] + [RV – Net Proceeds]/N
[RV + Net Proceeds]/2
= 11 [100% – 40%] + [100 – 75]/3

[100 + 75]/2
= 6.6 + 8.333
87.5
= 0.171 or 17.1%
4. Cost of Term Loan (Kt)

Kt = Interest (1- t) = 13X 60% = 7.8%
5. Cost of Fresh Equity Shares (ke)

Ke = D1/P0 +g = 24/275 + 0.05 = 0.0872 + 0.05 = 0.1372 or 13.72%
a) Calculation of Weighted average cost of capital (WACC) using market value proportion:
Source of Finance Market Value Weight Cost of Weighted cost
(Rs. in Lakhs) Capital of capital%
Equity Capital 4,200 0.684 0.12 0.08208
(12 Lakh shares X Rs. 350

9% Preference Capital 900 0.147 0.1079 0.01586

(10 lakh shares X Rs. 90
11% Debenture 675 0.110 0.171 0.01881
(9 lakh debentures X Rs. 75
13% term Loan 360 0.059 0.078 0.00460
Total 6,135 1 WACC 0.12135
Therefore, WACC = 12.135%
Note: Retained earnings are not considered for calculating WACC since it does not have any
market value separately. The market value of equity shares reflects the value of retained
earnings as well.
b) Calculation of Weighted average cost of capital (WACC) Videocon Limited when it raises
Rs 400 lakhs next year:
Source of Finance Amount Weight Cost of Weighted cost
(Rs. in Lakhs) Capital of capital%
Retained Earnings 120 0.3 0.12 0.036
Equity Shares 80 0.2 0.1372 0.02744
Debt 200 0.5 0.171 0.0855
Total 400 1 WACC 0.1489
Therefore, WACC of raising Rs. 400 lakh next year = 14.89%.
Answer No.17
Annuity amount (Rs.) = 5,000
No. of payment = 12
Discounting Rate = 14%
PVIFA at 14% for years 8-19 = 2.2621
Therefore,
PV = Rs.5, 000 x 2.2621
= Rs.11, 310.5 (Approx.)
Answer No.18
 In case of security A and B return is equal but security B has comparatively lower standard
deviation i.e. it has lower risk, hence security B dominates security A.
 Investors who prefer high return will prefer security C irrespective of having risk i.e. high
standard deviation. He belongs to risk taking group.
Answer No.19
Under capital asset pricing model (CAPM), the risk of an individual security can be estimated. The
market related risk, which is also called ‘systematic risk’ is unavoidable even by diversification of the
portfolio. The systematic risk of an individual security is measured in terms of its sensitivity to market
movements which is referred to as security’s beta.
Beta coefficient is a measure of the volatility of stock price in relation to movement in stock index of
the market. Thus, beta is the index of systematic risk. The beta factor of the market as a whole is 1.0. A
beta of 1.0 of individual security indicates the average level of risk as compared to the market.

Mathematically, the beta coefficient of a security is the security’s covariance with the market portfolio
divided by the variance of the market portfolio. Symbolically,
βi = Cov im. = σi σm Cor im, where
Varm σm2
βi = Beta of an individual security
Cov im = Covariance of returns of individual security with the market portfolio
Varm = Variance of returns of market portfolio (σm2)
Cor im = Correlation coefficient between the returns of individual security and the market
portfolio
σi = Standard deviation of returns of individual security
σm = Standard deviation of returns of market portfolio
The degree of volatility can be expressed as follows:
 If beta is 1, then it has the same level of risk profile as the market as a whole.
 If the beta is less than 1, it is not as sensitive to systematic or market risk as the
average investment.
 If beta is more than 1, it is more sensitive to the market risk than the average
investment.
Answer No.20
Calculation of theoretical ex-right price:
Particulars Amount in Lakh
Market value before right issue (Rs. 350X10 lakh shares) 3,500
Cash raised from right issue (10 lakh shares/10X Rs 100) 100
Total Number of shares post right issue (10 + 1 lakh shares) 11
Theoretical Ex – right price {(3,500 + 100)/11} 327.27 per share
Answer No.21
a) Risk aversion is the reluctance of a person to accept a bargain with an uncertain payoff
rather than another bargain with more certain, but possibly lower, expected payoff. For
example, a risk-averse investor might choose to put his or her money into a bank account
with a low but guaranteed interest rate, rather than into a stock that may have high
returns, but also has a chance of becoming worthless. An investor is said to be risk averse if
he prefers less risk to more risk, all else being equal.
Risk Diversification refers to minimization of risk which an investor may choose by

investing in various types of securities. An investor may not want to concentrate his
investment in a single risky security, as a result of which he may choose to invest in various
other securities to minimize his level of risk and harmonize his returns.
b) Floatation cost refers to the cost involved in raising capital from the market, for instance,
underwriting, commission, brokerage and other expenses. The presence of floatation costs
affects the balancing nature of internal (retained earnings) and external (dividend
payments) financing. The introduction of floatation costs implies that the net proceeds
from the sale of new shares would be less than the face value of the shares, depending
upon their size.
Transaction costs refer to costs associated with the sale of securities by the shareholder
investors. In the Modigliani Miller Hypothesis, it is assumed that if dividends are not paid

(or earnings are retained), the investors desirous of current income to meet consumption
need can sell a part of their holdings without incurring any cost, like brokerage and so on.
This is obviously an unrealistic assumption. Since the sale of securities involves cost, to get
current income equivalent to the dividend, if paid, the investors would have to sell
securities in excess of income that they will receive.
c) Management always solicits stockholders' proxies and usually gets them. However if
earnings are poor and stockholders are dissatisfied, an outside group might solicit the
proxies in an effort to overthrow management and take control of the business. This is
known as proxy fight.
Takeover is an action whereby a person or group succeeds in ousting a firm's management

and taking control of the company. In recent years there are cases, where attempts have
been made by one corporation to take over another by purchasing a majority of the
outstanding stock.
d) The firms resort to different dividend policies according to the situations. The firms
deciding to retain the internal accruals and deciding not to pay dividends are called
retention policy.
Whereas the firms deciding to pay the dividends are called pay out policy. The Higher
retention policy will lead to lower pay out policy and vice-versa.
e) Euro convertible bond is a Euro bond, a debt instrument which gives the bond holders an
option to convert them into a pre-determined number of equity shares of the company.
Usually the price of the equity shares at the time of conversion will have a call option
(where the issuer company has the option of calling/buying the bonds for redemption prior
to the maturity date) or a put option (which gives the holder the option to put/sell his
bonds to the issuer company at a predetermined date & price).
Euro convertible zero bonds are structured as convertible bond. No interest is payable on
the bonds. But conversion of bonds takes place on maturity at a predetermined price.
Usually there is a five years maturity period and they are treated as deferred equity issue.
Answer No.22
a) Financial distress is a term used to indicate a condition when promises to creditors of a

company are broken or honored with difficulty.
 Sometimes financial distress can lead to bankruptcy.
 Financial distress is usually associated with some costs to the company; these are
known as costs of financial distress.
 This is a situation where a firm’s operating cash flows are not sufficient to satisfy
current obligations and the firm is forced to take corrective action.
 Financial distress may lead a firm to default on a contract, and it may involve financial
restructuring between the firm, its creditors, and its equity investors.
b) The firm's dividend policy is directed by the provisions of income-tax law. If a firm has a
large number of owners, in high tax bracket, its dividend policy may be to have higher
retention. As against this if the majority of shareholders are in lower tax bracket requiring
regular income the firm may resort to higher dividend payout, because they need current

income and the greater certainty associated with receiving the dividend now, instead of
the less certain prospect of capital gains later.
c) The Nepal Stock Exchange is a value weighted index of all shares listed at the Nepal Stock
Exchange and calculated on a daily basis (for the days market remain open) at the closing
price. The calculation of the NEPSE index is based on the concept of the market
capitalization which is the sum of the market capitalization of all the company listed in the
Nepal Stock Exchange. If the ratio of current period market capitalization to the base
period market capitalization is multiplied by the multiplier 100, we get NEPSE index. This
method of index calculation is called value weighted method.
Total Market Capitalization of all the Companies Listed

NEPSE Index= -------------------------------------------------------------------------------* 100
Total Base Year’s Market Capitalization
However in reality, the number of the listed companies keeps on changing, and the
number of the outstanding shares also keeps on changing as the company issues right
shares or bonus shares or common shares at the time of capital needs. The actual practice
to adjust the base period is as follows:
Adjusted Base Period = (New Market Capitalization including new listing/New Market
Capitalizations excluding new listing)* Base Year's Market Capitalization.
d) Debt securitization is a method of recycling of funds. It is especially beneficial to financial

intermediary to support the lending volumes. Assets generating steady cash flows are
packaged together and against this assets pool, market securities can be issued, e.g.
housing finance, auto loans and credit cards receivables. The process of securitization is
generally without recourse i.e. investors bear the credit risk and issuer is under an
obligation to pay to investors only if the cash flows are received by him from the collateral.
The benefits to the originator are that assets are shifted off the balance sheet, thus the
originator recourse to off-balance sheet funding.
e) Inflation Premium is the premium for expected inflation that investors add to the real risk
free rate of return. Inflation has a major impact on interest rates because it erodes the
purchasing power and lowers the real rate of return on investment. Investors are well
aware of all this, so when they lend money, they build in an inflation premium equal to the
average inflation rate expected over the life of the security. Therefore, if the real risk free
rate is 4 percent and if inflation is expected to be 5% (and hence inflation premium=5%)
during the next year, then the quoted rate of interest would be 9%.

CAP II Cost And Management Accounting -June 2019
Paper 5:
Cost And Management Accounting

REVISION QUESTIONS
Costs concepts and costing methods
Question No. 1
a. Discuss the essential features of a good cost accounting system.
b. Discuss the accounting treatment of defectives in Cost Accounts.
c. Discuss cost classification based on variability and controllability.
d. Discuss briefly the relevant costs with examples.
Material Control
Question No. 2
a) Primex Limited produces product 'P'. It uses annually 60,000 units of a material 'Rex' costing Rs.
10 per unit. Other relevant information are:
Cost of placing an order : Rs. 800 per order
Carrying Cost : 15% per annum of average inventory
Re- order period : 10 days
Safety stock : 600 Units
The company operates 300 days in a year.
You are required to calculate:
a) Economic Order Quantity for material 'Rex'
b) Re- Order Level
c) Maximum Stock Level
d) Average Stock Level
b) KL Limited produces product 'M' which has a quarterly demand of 8,000 units. The product
requires 3 kg. quantity of material 'X' for every finished unit of product. The other information
are follows:
Cost of material 'X': Rs. 20 per kg

Cost of placing an order : Rs. 1,000 per order
Carrying Cost: 15% per annum of average inventory
You are required:
i. Calculate the Economic Order Quantity for material 'X'.
ii. Should the company accept an offer of 2 percent discount by the supplier, if he wants to
supply the annual requirement of material 'X' in 4 equal quarterly installments?
Labour Control
Question No. 3
Calculate the earnings of A and B from the following particulars for a month and allocate the labour
cost to each job X, Y and Z:
A B
i) Basic Wages Rs. 100 Rs.160
ii) Dearness Allowance 50% 50%
iii) Contribution to provident Fund(on basic wages) 8% 8%
iv) Contribution to Employees' State Insurance(on basic wages) 2% 2%
v) Overtime 10 hours
The normal working hours for the month are 200. Overtime is paid at double the total of normal
wages and dearness allowance. Employer's contribution to state Insurance and Provident Fund

are at equal rate with employees' contributions. The two workers were employed on jobs X,Y
and Z in the following proportions:
Jobs
X Y Z
Worker A 40% 30% 30%
Worker B 50% 20% 30%
Overtime was done on job Y.
Overhead
Question No. 4
a) In a factory, a machine is considered to work for 208 hours in a month. It includes maintenance
time of 8 hours and set up time of 20 hours. The expense data relating to the machine are as
under:
Cost of machine is Rs. 5,00,000 . Life 10 years. Estimated scrap value at the end of life is Rs.20,000.
Particulars Rs.
- Repairs and maintenance per annum 60,480
- Consumable store per annum 47,520
- Rent of building per annum (The machine under reference occupies 1/6 of the area) 72,000
- Supervisor's salary per month( Common to three machines) 6,000
- Wages of operator per month per machine 2,500
- General lighting charges per month allocated to the machine 1,000
- Power 25 units per hour at Rs. 2 per unit
Power is required for productive purpose only. Set up time though productive, does not require
power. The Supervisor and Operator are permanent. Repairs and maintenance and consumable
stores vary with the running of the machine.
Required
Calculate a two-tier machine hour rate for (a) Set up time, and (b) Running time
b) A manufacturing unit has purchased and installed a new machine of Rs. 12,70,000 to its fleet of
7 existing machines. The new machine has a estimated life of 12 years and is expected to realise
Rs. 70,000 as scrap at the end of its working life. Other relevant data are as follows:
i) Budgeted working hours are 2,592 based on 8 hours per day for 324 days. This includes 300
hours for plant maintenance and 92 hours for setting up of plant.
ii) Estimated cost of maintenance of the machine is Rs. 25.000 p.a.
iii) The machine requires a special chemical solution, which is replaced at the end of each (6
days in a week) at a cost of Rs. 400 each time
iv) Four operators control operation of 8 machines and the average wages per person amounts
to Rs. 420 per week plus 15% fringe benefits.
v) Electrify used by the machine during the production is 16 units per hour at a cost of Rs. 3
per unit. No electricity is consumed during unproductive maintenance and setting up time.
vi) Departmental and general works overhead allocated to the operation during last year was
Rs. 50,000. During the current year it is estimated to increase by 10% of this amount.
Calculate machine hour rate, if (a) Setting up time is unproductive; (b) Setting up time is productive.

Costs Accounts System, Cost Control (Integrated and Non-integrated Accounting System)
Question No. 5
You are given the following information of the cost department of a manufacturing company:
Particulars (Rs.)
Stores:
Opening Balance 12,60,000
Purchases 67,20,000
Transfer from work-in-progress 33,60,000
Issue to work-in-progress 67,20,000
Issue to repairs and maintenance 8,40,000
Shortage found in stock taking 2,52,000
Work-in-progress:
Opening Balance 25,20,000
Direct wages applied 25,20,000
Overhead applied 90,08,000
Closing Balance 15,20,000
Finished products: Entire output is sold at a profit of 12% on actual cost from work-in-progress.
Other information:
(Rs.)
Wages incurred 29,40,000
Overhead incurred 95,50,000
Income from Investment 4,00,000
Loss on sale of fixed assets 8,40,000
Shortage in stock taking is treated as normal loss.
You are require to prepare:
(i) Stores control account;
(i) Work-in-progress control account;
(ii) Costing Profit and Loss account;
(iii) Profit and Loss account and
(v) Reconciliation statement
Methods of Costing
Question No. 6
a) JK Ltd. produces a product "AZE ", which passes through two processes, VIZ., process I and
process II. The output of each process is treated as the raw material of the next process to
which it is transferred and output of the second process is transferred to finished stock. The
following data related to December, 2018:
Particulars Process I Process II

25,000 units introduced at cost of Rs. 2,00,000 -
Material Consumed Rs.1,92,000 Rs. 96,020
Direct Labour Rs. 2,24, 000 Rs. 1,28,000

Manufacturing Expenses Rs. 1,40,000 Rs.60,000

Normal wastage of input 10% 10%
Scrap Value of normal wastage ( Per Unit) Rs.9.90 Rs.8.60
Output in Units 22,000 20,000
Required:
(i) Prepare Process I and Process II account
(ii) Prepare Abnormal Gain / Loss account as the case may be for each process.
b) A mini-bus having a capacity of 32 passengers operates between two places- 'A' and 'B'. The
distance between the place 'A' and place 'B' is 30 km. The bus makes 10 round trips in a day
for 25 days in a month. On an average, the occupancy ratio is 70% and is expected
throughout the year.
The details of other expenses are as under:
Amount Rs.
Insurance 15,600 Per annum
Garage Rent 2,400 Per annum
Road Tax 5,000 Per annum
Repairs 4,800 Per annum
Salary of operating staff 7,200 Per annum
Tires and Tubes 3,600 Per annum
Diesel :( One liter is consumed for every 5 km) 13 Per Liter
Oil and Sundries 22 Per 100 km run
Depreciation 68,000 Per annum
Passenger Tax @ 22% on total taking is to be levied and bus operator requires a profit of
25% on total taking.
Prepare operating cost statement on the annual basis and find out the cost per passenger
kilometer and one way fare per passenger.
c) The Sunshine Oil Company purchases crude vegetables oil. It does refining of the same. The
refining process results in four products at the split off point: M, N, O and P.
Product O is fully Processed at the split off point. Product M, N and P can be individually
further refined into 'Super M', ' Super N' and 'Super P'. In the most recent month (March,
2019), the output at split off point was:
Product M 3,00,000 gallons
Product N 1,00,000 gallons
Product O 50,000 gallons
Product P 50,000 gallons
The joint cost of purchasing the crude Vegetables oil and processing it were Rs. 40,00,000.
Sunshine had no beginning or ending inventories. Sales of Product O in March, 2019 were Rs
20,00,000. Total output of products M, N, and P was further refined and them sold. Data
related to March, 2019 are as follows:
Further Processing Costs to Sales
Make Super Products
Super M' Rs. 80,00,000 Rs. 1,20,00,000
Super N' Rs. 32,00,000 Rs. 40,00,000
Super P' Rs. 36,00,000 Rs. 48,00,000

Sunshine had the option of selling products M, N and P at the split off point. This alternative
would have yielded the following sales for the March, 2019 production:
Product M Rs. 20,00,000
Product N Rs. 12,00,000
Product P Rs. 28,00,000
You are required to answer:
i) How the joint Cost of Rs. 40,00,000 would be allocated between each product under
each of the following methods (a) Sales value at split off; (b) physical output
(gallons); and (c) estimated net realizable value?
ii) Could Sunshine have increased its March, 2019 operating profit by making different
decisions about the further refining of product M, N or P ? Show the effect of any
change you recommend on operating profits.
d) PQR Construction Ltd. commenced a contract on Shrawan 1, 2074. The total contract was for
Rs.27,12,500. It was decided to estimate the total profit and to take to the credit of Costing
P & L A/c the proportion of estimated profit on cash basis which work completed bear to the
total contract. Actual expenditure in 2074-75 and estimated expenditure in 2075-76 are
given below:
2074-75 2075-76
Actual (Rs.) Estimated (Rs.)
Material issued 4,56,000 8,14,000
Labour : Paid 3,05,000 3,80,000
: Outstanding at end 24,000 37,500
Plant purchased 2,25,000 -
Expenses : Paid 1,00,000 1,75,000
: Outstanding at the end - 25,000
: Prepaid at the end 22,500 -
Plant returned to stores (a historical 75,000 1,50,000

stores) (on Chaitra, 31 2075)
Material at site 30,000 75,000
Work-in progress certified 12,75,000 Full
Work-in-progress uncertified 40,000 ----
Cash received 10,00,000 Full
The plant is subject to annual depreciation @ 20% of WDV cost. The contract is likely to
be completed on Chaitra 31, 2075.
Required:
(i) Prepare the Contract A/c for the year 2074-75.
(ii) Estimate the profit on the contract for the year 2074-75 on prudent basis which has
to be credited to Costing P & L A/c.

Cost Concepts for Decision Making

Question No. 7
a) The P/V Ratio of Delta Ltd. is 50% and margin of safety is 40% . The company sold 500 units
for Rs. 5,00,000. You are required to calculate:
I. Break -even point, and

II. Sales in units to earn a profit of 10% on sales
b) MFN limited Started its operation in 2012 with the total production capacity of 2,00,000
units. The following data for two years is made available to you:
2012 2013
Sales Units 80,000 1,20,000
Total Cost Rs. 34,40,000 45,60,000
There has been no change in the cost structure and selling price and it is expected to
continue in 2014 as well. Selling price is Rs. 40 per unit.
You are required to calculate:
(i) Break- Even Point ( In Units)
(ii) Profit at 75% of the total capacity in 2014
Costing for planning and Control –Budgets

Question No.8
a) AK Limited produces and sells a single product. Sales budget for calendar year 2018 by a
quarter is as under:
Quarters I II III IV
No. of units to be sold 18,000 22,000 25,000 27,000
The year is expected to open with an inventory of 6,000 units of finished products and close
with inventory of 8,000 units. Production is customarily scheduled to provide for 70% of the
current quarter's sales demand plus 30% of the following quarter demand. The budgeted
selling price per unit is Rs. 40. The Standard cost details for one unit of the product are as
follows:
Variable Cost Rs. 34.50 per unit.
Fixed overheads 2 hours 30 minutes @ Rs. 2 per hour based on a budgeted production
volume of 1,10,000 direct labour hours for the year. Fixed overheads are evenly distributed
throughout the year.
(I) Prepare Quarterly Production Budget for the year.
(II) In which Quarter of the year, company expected to achieve break- even point.
b) Pentax Limited has prepared its expense budget for 20,000 units in its factory for the year
2013 as detailed below:
Particulars Rs. (Per Unit)
Direct Materials 50
Direct Labour 20
Variable Overhead 15
Direct Expenses 6
Selling Expenses ( 20% Fixed) 15

Factory Expenses ( 100% Fixed) 7

Administration Expenses ( 100% Fixed) 4
Distribution Expenses ( 85% Variable ) 12
Total 129
Prepare an expenses budget for the production of 15,000 units and 18,000 units.
Standard Costing
Question No. 9
J.K. Ltd. Manufactures NXE by mixing three raw materials. For every batch of 100 kg. of NXE 125 kg.
Of raw materials are used. In April, 2019, 60 batches were prepared to produce an output of 5,600
kg. of NXE. The Standard and actual particulars for April, 2019, are as follows:
Raw Materials Standard Actual Quantity of Raw
Materials Purchased
Mix Price per kg. Mix Price per Kg.
(%) (Rs.) (%) (Rs.) (Kg.)
A 50 20 60 21 5,000
B 30 10 20 8 2,000
C 20 5 20 6 1,200
Calculate all variances.
Uniform Costing and Inter-firm comparison

Question No. 10
a. Describe the application and pre-requisites of Uniform Costing.
b. Discuss the Difference between inter firm and intra firm comparison?
Cost control and cost reduction

Question No. 11
What are the Characteristics and Tools of Cost Reduction?


Answer 1 (a)
The essential features, which a good Cost Accounting System should possess, are as follows:
a) Informative and Simple: Cost Accounting System should be tailor-made, practical,
simple and capable of meeting the requirements of a business concern. The system of
costing should not sacrifice the utility by introducing meticulous and unnecessary
details.
b) Accuracy: The data to be used by the Cost Accounting System should be accurate;
otherwise it may distort the output of the system and a wrong decision may be taken.
c) Support from Management and subordinates: Necessary cooperation and
participation of executives from various departments of the concern is essential for
developing a good system of Cost Accounting.
d) Cost-Benefit: The Cost of installing and operating the system should justify the results.
e) Procedure: A carefully phased programme should be prepared by using network
analysis for the introduction of the system.
f) Trust: Management should have faith in the Costing System and should also provide a
helping hand for its development and success.
Answer 1 (b)
Accounting treatment of defectives in cost accounts:
Defectives refer to those units or portions of production, which do not meet the prescribed
specifications. Such units can be reworked or re-conditioned by the use of additional material,
labour and /or processing and brought to the point of either standard or sub-standard units.
The possible way of treating defectives in Cost Accounts are as below:
1. When defectives are normal and it is not beneficial to identity them job-wise,
then the following methods may be used.
(a) Charged to good products: The cost of rectification of normal defectives is
charged to good units. This method is used when defectives rectified are
normal.
(b) Charged to general overheads. If the department responsible for defectives
cannot be identified, the rework costs are charged to general overheads.
(c) Charged to departmental overheads: If the department responsible for
defectives can be correctly identified, the rectification costs should be
charged to that department.
2. When normal defectives are easily identifiable with specific job the rework
costs are debited to the identified job.
3. When defectives are abnormal and are due to causes within the control
of the organization, the rework cost should be charged to the Costing Profit and
Loss Account.

Answer 1 (c)
Cost classification based on variability

(a) Fixed Costs – These are the costs which are incurred for a period, and which, within certain
output and turnover limits, tend to be unaffected by fluctuations in the levels of activity
(output or turnover). They do not tend to increase or decrease with the changes in output. For
example, rent, insurance of factory building etc., remain the same for different levels of
production.
(b) Variable Costs – These costs tend to vary with the volume of activity. Any increase in the
activity results in an increase in the variable cost and vice-versa. For example, cost of direct
labour, etc.
(c) Semi-variable Costs – These costs contain both fixed and variable components and are thus
partly affected by fluctuations in the level of activity. Examples of semi variable costs are
telephone bills, gas and electricity etc.
Cost classification based on controllability

(a) Controllable Costs - Cost that can be controlled, typically by a cost, profit or investment centre
manager is called controllable cost. Controllable costs incurred in a particular responsibility
centre can be influenced by the action of the executive heading that responsibility centre. For
example, direct costs comprising direct labour, direct material, direct expenses and some of the
overheads are generally controllable by the shop level management.
(b) Uncontrollable Costs - Costs which cannot be influenced by the action of a specified member
of an undertaking are known as uncontrollable costs. For example, expenditure incurred by,
say, the tool room is controllable by the foreman in-charge of that section but the share of the
tool-room expenditure which is apportioned to a machine shop is not to be controlled by the
machine shop foreman.
Answer 1 (d)
Relevant costs may be understood as expected future costs which are essential but differ
for alternative course or action. Relevant costs are affected by the decision being taken by
the management. A cost is relevant when it satisfies two conditions i.e. it should occur in
future and it should differ among the alternative courses of action. For example, while
considering a proposal for plant replacement by discarding the existing plant, the original
cost and the present depreciated book value of the old plant are irrelevant as they have no
impact on the decision for replacement just going to be taken place. However the expected
sales value of the discarded plant is relevant, as it just goes to reduce the amount of
investment to be made in the new plant and so it has an influence on the decision.
Moreover, outcome of the investment is also taken into consideration for decision making.
Answer 2 (a)
1) Economic Order Quantity (EOQ)
== √ (2 Annual requirement of 'Rex' ×Ordering cost per order)
Annual carrying cost per unit per annum
=
Rs. 10 ×15%

=
Rs. 1.5 = 8,000 units
2) Re- order Level = Safety Stock + (Normal daily Usage × Re- order period )
= 600+( )
= 600+2,000
= 2,600 units
3) Maximum Stock Level = EOQ (Re- order Quantity ) + Safety Stock

= 8,000 units + 600 units
= 8,600 units
4) Average Stock Level = Minimum Stock Level +
= 600 +
= 4,600 units
OR
Average Stock Level = Maximum Stock level + Minimum Stock level
2
=8,600 units + 600 units

2
= 4,600 units
Minimum Stock Level= Re-order level-(Normal Daily Usage× Re -order period)
=2,600-(
=2,600-2000 = 600 units

Minimum Stock Level = Safety Stock level = 600 units
Answer 2 (b)
Annual demand of material 'X'
= 8,000 units (per quarter) × 4 (No. of Quarter in a year) × 3 kg (for every finished product)
= 96,000 kg.
i. Calculation of Economic Order Quantity for material 'X'.

EOQ =√(2 Annual demand ×Ordering cost)
Carrying cost per unit per annum
=√(2×96,000kg× Rs. 1,000) = 8,000 kg.

RS 20×15%

ii Evaluation the Cost under different options of 'order quantity'.

Particulars When EOQ is Ordered When discount of 2% is
accepted and supply is in 4
equal installments
Order size 8,000 kg. 24,000 kg
96,000kg
4
No. of orders 12 4
96,000kg 96,000kg
8,000 kg 24,000 kg
Purchase Cost per kg. Rs. 20 Rs. 19.60
{Rs 20-(Rs 20×2%)}
Total purchase Cost (A) Rs. 19,20,000 Rs. 18,81,600
(96,000 kg ×Rs 20) (96,000 kg× Rs 19.6)
Ordering Cost (B) Rs. 12,000 Rs. 4,000
(12 order × Rs 1,000) (4 order × Rs 1,000)
Carrying Cost (C) Rs. 12,000 Rs. 35,280
(8,000 kg ×15%× Rs. 20) (24,000 kg ×15%× Rs. 19.6)

2 2
Total Cost (A+B+C) Rs 19,44,000 Rs 19,20,880
Advice - The total Cost is lower if Company accept an offer of 2 percent discount by the
suppler, when supply of the annual requirement of material 'X' is made in 4 equal
installments.
Answer 3
Statement showing Earnings of Workers A and B

Workers A (Rs.) B (Rs.)
Basic Wages 100.00 160.00
Dearness Allowance (50% of Basic Wages) 50.00 80.00
Overtime Wages (Refer to Working Note 1) 15.00 -.......
Gross Wages earned 165.0 240.00
Less: Provident Fund(8%× Rs. 100);(8%× Rs. 160) (8.00) (12.80)
-ESI(2%× Rs. 100);(2%× Rs. 160) (2.00) (3.20)
Net Wages Paid 155.00 224.00
Statement of Labour Cost

Workers A (Rs.) B (Rs.)
Gross Wages(excluding overtime) 150.00 240.00
Employer's contribution to P.F. and E.S.I. 10.00 16.00
160.00 256.00
Ordinary wages labour Rate per hour 0.80 1.28
(Rs. 160/200 hours);( Rs. 256/200 hours)

Statement Showing Allocation of Wages to Jobs

Total Jobs
Wages X Y Z
Worker A
Ordinary Wages (4:3:3) 160.00 64.00 48.00 48.00
Overtime 15.00 .. 15.00 ..
Worker B
Ordinary Wages(5:2:3) 256.00 128.00 51.20 76.80
431.00 192.00 114.20 124.80
Working Notes
1. Normal Wages are considered as basic wages

Overtime =2×(Basic wage+D.A)×10 hours
200 hours
= 2×
=1.50×10 hours =Rs. 15
Answer 4 (a)
Working Notes:
1. (i) Effective hours for standing charges (208 hours-8 hours) = 200 hours
(ii) Effective hours for variable costs ( 208 hours-28 hours) =180 hours
2. Standing Charges per hour

Cost per month (Rs.) Cost per hour (Rs.)
(Cost per month
÷200 hours)
2,000 10.00
Supervisor's salary{
1,000 5.00
Rent of building { ×
General lighting 1,000 5.00
Total Standing Charges 4,000 20.00
3. Machine running expenses per hour

Cost per month (Rs.) Cost per hour (Rs.)
Depreciation 4,000 20.00
{ ×
Wages 2,500 12.50

Repairs and Maintenance 5,040 28.00
Consumable stores 3,960 22.00

}
Power (25 units × Rs. 2×180 hours) 9,000 50.00

Total Machine Expenses 24,500 132.50
Computation of Two-tier machine hour rate
Set up time rate per Running time rate

machine hour(Rs.) per machine hour
(Rs.)
Standing Charges 20.00 20.00
Machine expenses:
Depreciation 20.00 20.00
Repair and maintenance - 28.00
Consumable store - 22.00
Power - 50.00
Machine hour rate of overheads 40.00 140.00
Wages 12.50 12.50
Comprehensive machine hour rate 52.50 152.50
Answer 4 (b)
Working Note:
1. Effective machine hour when set-up time is unproductive:
=Budgeted working hours-(Maintenance time + Setting -up time)
= [2,592-(300+92)] hours =2,200 hours
2. Effective machine hour when set-up time is productive:
=Budgeted working hours-Maintenance time
=( 2,592-300) hours =2,292 hours.
3. Operators' wages per annum
Basic wages (4 operators ×RS 420 ×54 weeks) = Rs. 90,720
Add: Fringe benefit (15% of RS 90,720) = Rs. 13,608
Rs. 1,04,328

4 Depreciation per annum
= Rs. 1,00,000
5. Cost of special chemical solution
324 days ÷ 6 days ×RS 400 = Rs. 21,600
Computation of Machine hour Rate

Amount Amount per Amount per
P.a.( Rs.) hour (Rs.) hour(Rs.)
(when set-up (when set-up
time is time is
unproductive) productive)
Standing charges 90,720
Operators wages
5.93
{ ×
5.69
{ ×
Departmental and general overhead

(50,000×110%) 55,000
3.13
{ ×
3.00
{ ×
(A) 1,45,720 9.06 8.69

Machine Expenses
Depreciation 1,00,000
45.45 43.63
{
Electricity (16 units× RS 3) 48.00 48.00

Special chemical solution 21,600
9.82 9.42
Maintenance 25,000
11.36 10.91
{
(B) 114.63 111.96

Machine Hour Rate (A+B) 123.69 120.65

Answer 5
Stores Leger Control Account

Dr. Cr.
(Rs.) (Rs.)
To Balance b/d 12,60,000 By Work-in-progress control 67,20,000
To General ledger 67,20,000 A/c
By Overhead control A/c 8,40,000
adjustment A/C
To Work-in progress 33,60,000 By Overhead control A/c 2,52,000
Control A/c (Shortage)
By Balance c/d 35,28,000
1,13,40,000 1,13,40,000
W.I.P Control A/c

Dr. Cr.
(Rs.) (Rs.)
To Balance b/d 25,20,000 By Stores ledger control 33,60,000
A/c
To Stores ledger control A/c 67,20,000 By Costing P&L A/c (Cost of 1,58,88,000
To Direct wages Control A/c 25,20,000 Sales) (Balancing figure)
To Overhead control A/c 90,08,000 By Balance c/d 15,20,000

2,07,68,000 2,07,68,000
Costing Profit and Loss A/c

Dr. Cr.
(Rs.) (Rs.)
To W.I.P Control A/c 1,58,88,000 By General
To General ledger Adj. A/c 19,06,560 Ledger Adj. A/c
(Profit) Cost of sales 1,58,88,000
Add 12%Profit 1,77,94,560
19,06,560
1,77,94,560 1,77,94,560
Financial Profit and Loss A/c

Dr. Cr.
(Rs.) (Rs.) (Rs.) (Rs.)
To Opening stock : 12,60,000 By Sales 1,77,94,560
Stores
W.I.P 25,20,000 37,80,000 By Income from 4,00,000
investment

To Purchases 67,20,000 By Closing

stock:
To Wages 29,40,000 Stores 35,28,000
W.I.P 15,20,000 50,48,000
To Overhead 95,50,000 By loss 5,87,440
To Loss on sale of fixed
assets 8,40,000
2,38,30,000 2,38,30,000
Reconciliation Statement
Dr. Cr.
(Rs.) (Rs.)
Profit as per Cost Accounts 19,06,560
Add: Income from investments 4,00,000
23,06,560
Less : Loss on sale of fixed assets 8,40,000
Under absorption of overheads (Refer to Working Note) 20,54,000 28,94,000
Loss as per Financial Accounts 5,87,440
Working Notes:
Overhead Control Account
Dr. Cr.
(Rs.) (Rs.)
To General Ledger Adj. A/c 9550000 By W.I.P control A/c 90,08,000
To Stores Ledger Control A/c 252000 By Balance c/d 20,54,000
(under absorption
To Stores ledger control A/c 8,40,000 of overheads)
To Wages control A/c Indirect wages Rs.
29,40,000- `25,20,000) 4,20,000
1,10,62,000 1,10,62,000
Answer 6(a)
Process- I Account
Particulars Units Amount Particulars Units Amount Rs.
Rs.
To Input 25,000 2,00,000 By Normal Wastage 2,500 24,750
(2,500×Rs.9.90)
To Material 1,92,000 By Abnormal loss a/c 500 16,250
( 500units ×Rs.32.50)
To Direct Labour 2,24,000 By Process- II 22,000 7,15,000
( 22,000 units ×Rs.32.50)
To Manufacturing 1,40,000
Exp.
Total 25,000 7,56,000 Total 25,000 7,56,000

Rs. 7, 56,000- Rs 24,750

Cost per unit = = Rs.32.50 Per unit
25,000 units -2,500 units
Process- II Account
Particulars Units Amount Rs. Particulars Units Amount
Rs.
To Input 22,000 7,15,000 By Normal Wastage 2,200 18,920
(2,200×Rs.8.60)
To Material 96,020 By Finished Stock 20,000 9,90,000
( 20,000units ×Rs.49.50)
To Direct Labour 1,28,000
To Manufacturing 60,000
Exp.
To Abnormal Gain 200
A/c (200 units × 9,900
Rs.49.50)
Total 22,200 10,08,920 Total 22,200 10,08,920
Rs. 9, 99,020 – Rs. 18,920

Cost per unit = = Rs 49.50 per Unit
22,000 units – 2,200 units
Abnormal Loss Account

Particulars Units Amount Particulars Units Amount Rs.
Rs.
To Process-I A/c 500 16,250 By Cash ( Sales) 500 4,950
( 500 units ×Rs.9.90)
By Costing Profit and Loss A/C 11,300
Total 500 16,250 Total 500 16,250
Abnormal Gain Account

Particulars Units Amount Rs. Particulars Units Amount Rs.
To, Normal Wastage 200 1,720 By, Process II A/C 200 9,900
( 200 units ×8.60)
To, Costing profit and Loss 8,180
Total 200 9,900 Total 200 9,900
Answer 6(b)
Operating Cost Statement
Particulars Cost Per annum Rs. Total Cost Rs.
A. Fixed Charges:
Insurance 15,600

Garage rent ( Rs. 2,400×4 Quarters) 9,600

Road Tax 5,000
Salary of operating Staff ( Rs. 7,200 ×12 Months) 86,400
Depreciation 68,000
Total (A) 1,84,600
B. Variable Charges:
Repairs ( Rs. 4,800 × 4 Quarters) 19,200
Tires and Tubes ( Rs. 3,600×4 Quarters) 14,400
Diesel {(1,80,000 Km ÷ 5 km)× Rs.13 } 4,68,000
Oil and Sundries {(1,80,000 Km ÷ 100 km) Rs.22 } 39,600
Total (B) 5,41,200
Total Operating Cost ( A+B) 7,25,800
Add: Passenger Tax ( Refer to WN- 1) 3,01,275
Add: Profit ( Refer to WN-1 3,42,359
Total takings 13,69,434
Calculation of cost per passenger kilometer and one way fare per passenger
Total Operating Cost

Cost per Passenger – Km. =
Total Passenger - Km.
Rs. 7, 25,800
Cost per Passenger – Km. =
40, 32,000 Passenger – Km
Total Takings
One Way fare per passenger = × 30 Km.
Total Passenger - Km.
Rs. 13, 69,434

= × 30 Km.
40, 32,000 Passenger - Km.
= Rs. 10.20
Working Notes:
1. Let Total taking be X then Passenger tax and Profit will be as follows:
X = Rs. 7, 25,800 + 0.22 + 0.25X
X-0.47X = Rs. 7, 25,800
Rs. 7, 25,800
X=
0.53
= Rs. 13, 69,434
Passenger Tax = Rs. 13, 69,434 × 0.22 = Rs. 3, 01,275
Profit = Rs. 13, 69,434 ×0.25 = 3, 42,359
2. Total kilometers to be run during the year
= 30 km. × 2 sides ×10 tips × 25 days ×12 months = 1, 80,000 Kilometers
3. Total Passenger Kilometers
= 1, 80,000 km. × 32 passengers ×70% = 40, 32,000-Km.

Answer 6 (c)
i) Allocation of joint Cost by the following methods:
a) Sales Value at split-off Method

Products Sales Value of the point of split off(Rs.) Joint cost allocation (Rs.)
M 20,00,000 10,00,000
[
N 12,00,000 6,00,000
O 20,00,000 10,00,000
[
P 28,00,000 14,00,000
Total 80,00,000 40,00,000
b) Physical output (gallon) Method

Products Physical output ( in gallon) Joint cost allocation (Rs.)
M 3,00,000 24,00,000
N 1,00,000 8,00,000
O 50,000 4,00,000
P 50,000 4,00,000
Total 5,00,000 40,00,000
c) Estimated Net Realizable Value Method

Sales Sales Further Net Joint cost allocated
Product revenue after revenue at processing realizable
further the point of costs value
processing split off
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
(a) (b) (c) (d) (e)=[(b)-
(d)] or (c)
Super M' 1,20,00,000 -- 80,00,000 40,00,000 20,00,000
Super N' 40,00,000 -- 32,00,000 8,00,000 4,00,000

O' --- 20,00,000 -- 20,00,000 10,00,000
Super P' 48,00,000 -- 36,00,000 12,00,000 6,00,000
Total 1,48,00,000 80,00,000 40,00,000
(ii) Decision about the further refining of Product M, N or P

Products M (Rs.) N (Rs.) P (Rs.)
Sales revenue after further processing ;(A) 1,20,00,000 40,00,000 48,00,000
Sales revenue at the point of split off: (B) 20,00,000 12,00,000 28,00,000
Incremental sales revenue: (C)=[(A)-(B)] 1,00,00,000 28,00,000 20,00,000
Further processing cost: (D) 80,00,000 32,00,000 36,00,000
Profit (Loss) arising due to further processing : 20,00,000 (4,00,000) (16,00,000)
[(C)-(D)]
It is apparent from above that further processing of products N and P results in the decrease of the
operating profit by Rs. 20,00,000 . Hence M/s. Sunshine Oil Company should not resort to further
processing of its N and P products. This decision of adoption would increase the operating profits of
the company for the company for the month of March, 2019 by Rs. 20,00,000.
Answer 6 (d)
PQR Construction Ltd.
Contract A/c
(Shrawan 1, 2074 to Ashadh 31, 2075)
Particulars Amount (Rs.) Particulars Amount (Rs.)
To Materials Issued 4,56,000 By Plant returned to 60,000
Stores
(Working Note 1)
To Labour 3,05,000 By Materials at Site 30,000
Add: Outstanding 24,000 3,29,000 By W.I.P.
To Plant Purchased 2,25,000 Certified 12,75,000
To Expenses 1,00,000 Uncertified 40,000 13,15,000
Less: Prepaid 22,500 77,500 By Plant at Site

(Working Note 2) 1,20,000
To Notional Profit c/d 4,37,500
15,25,000 15,25,000
To Costing Profit & Loss A/c By Notional Profit b/d

(Refer to Working Note 5) 53,763 4,37,500
To Work-in-Progress A/c
(Profit-in-reserve) 3,83,737
4,37,500 4,37,500

PQR Construction Ltd.

Contract A/c
(Shrawan 1, 2074 to Chaitra 31, 2075)
(For Computing estimated profit)
Particulars Amount (Rs.) Particulars Amount (Rs.)
To Materials Issued 12,70,000 By Material at Site 75,000
(` 4,56,000+ Rs. 8,14,000)
To Labour Cost 7,22,500 By Plant returned To 60,000
(Rs. 3,05,000 + Rs. 24,000 Rs. + Stores on 31.3.2073.
3,56,000* + Rs. 37,500)
To Plant purchased 2,25,000 By Plant returned to 1,02,000
Stores on 31.12.2075
(Working Note 3)
To Expenses 3,00,000 By Contractee A/c 27,12,500
(Rs. 77,500 + Rs. 1,97,500 + Rs.
25,000)
To Estimated profit 4,32,000
29,49,500 29,49,500
* Labour paid in 2075-76: Rs. 3,80,000 – Rs. 24,000 = Rs. 3,56,000
Working Notes
(Rs.)
1. Value of the Plant returned to Stores on 31.03.2075
Historical Cost of the Plant returned 75,000
Less: Depreciation @ 20% of WDV for one year (15,000)
60,000
2. Value of Plant at Site 31.03.2075
Historical Cost of Plant at Site (Rs. 2,25,000 – Rs. 75,000) 1,50,000
Less: Depreciation @ 20% on WDV for one year (30,000)
1,20,000
3. Value of Plant returned to Stores on 31.12.2075
Value of Plant (WDV) on 31.3.2075 1,20,000
Less: Depreciation @ 20% of WDV for a period of 9 months (18,000)
1,02,000
4. Expenses Paid for the year 2074-75
Total expenses paid Less: 1,00,000
Pre-paid at the end (22,500)
77,500
5. Profit to be credited to Costing Profit & Loss A/c on Ashadh 31,2073 for
the Contract likely to be completed on Chaitra 31,2075.
Work Certified Cash received
Notional Profit × ˟
Total Contract Price Work Certified
12,75,000 ˟ 10,00,000 53,763
= 4,32,000 ×
27,12,500 27,12,500

Answer 7 (a)
I. P/V Ratio 50%

Margin of Safety 40%
Sales 500 Units for Rs. 5,00,000
Selling price per unit Rs. 1,000
Calculation of Break Even Point (BEP)
Margin of Safety Ratio = Sales-BEP ×100

Sales
40 = 5,00,000-BEP ×100
5,00,000
BEP (in Sales) = Rs. 3,00,000
BEP( in Units) = Rs. 3,00,000÷ RS 1,000 = 300 units
II. Sales in units to earn a profit of 10% on sales

Sales = Fixed Cost + Desired Profit
P/V Ratio
Let the Sales be x

Profit = 10% of x i.e. o.1 x
Thus,
x = [
Or, x = Rs. 3,75,000
To find out sales in units amount of sales Rs. 3,75,000 is to be divided by Selling Price per unit.
Thus,
Sales (in units) = Rs. 3,75,000 =375 units
Rs. 1,000
Working Notes
1. Selling Price = Rs. 5,00,000 ÷ Rs. 500 = Rs. 1,000 per unit
2. Variable cost per unit = Selling Price -(Selling Price × P/V Ratio)
= Rs. 1,000-( Rs. 1,000×50%) = Rs. 500
3. Profit at present level of Sales

Margin of Safety =
Margin of Safety =40% of RS 5,00,000 =RS 2,00,000
Rs. 2,00,000 =
Profit = Rs. 1,00,000
4. Fixed Cost =( Sales ×P/V Ratio)-Profit
= (Rs. 5,00,000 × 50%) - Rs. 1,00,000= Rs. 1,50,000
Answer 7(b)
2012 2013 Difference

Sales Units 80,000 1,20,000 40,000
Sales Value @ Rs.40 32,00,000 48,00,000 16,00,000
Total Cost Rs. 34,40,000 45,60,000 11,20,000
Change in Total Cost

Variable Cost per Unit =
Change in sales volume
Rs. 11, 20,000

Variable Cost Per Unit = = Rs. 28 Per Unit
40,000 units
Total Fixed Cost (Rs.) = Rs. 45, 60,000 – (1, 20,000 units × Rs.28) = Rs 12, 00,000
Fixed Cost
(i) Break- Even Point ( In Units ) =
Contribution per Unit
Rs. 12, 00,000

= = 1, 00,000 Units
(Rs.40- Rs.28)
(ii) Profit at 75% Capacity in 2014.
= (2, 00,000 Units × 75%) × Contribution Per unit – Fixed Cost

= 1, 50,000 units × Rs. 12 – Rs.12, 00,000 = Rs. 6,00,000
Answer 8 (a)
(I) Production Budget for the year 2018 by Quarters
S.N. Particulars I II III IV Total
Sales demand ( Units) 18,000 22,000 25,000 27,000 92,000
I. Opening Stock 6,000 7,200 8,100 8,700 30,000
II. 70% of Current Quarter's 12,600 15,400 17,500 18,900 64,400

Demand
III. 30 % of following Quarter's 6,600 7,500 8,100 7,400* 29,600
Demand
IV. Total Production ( I and II) 19,200 22,900 25,500 26,300 94,000
V. Closing Stock ( I + IV- Sales) 7,200 8,100 8,700 8,000 32,000
*Balancing Figure
(II) Break Even Point = Fixed Cost + PV Ratio

= (Rs.2, 20,000 ÷13.75%) = Rs. 16, 00,000 or 40,000 Units
PV Ratio = (Rs 40- Rs.34.50=Rs.5.50) ÷40×100 = 13.75 %

Or, Break Even Point = Fixed cost÷ Contribution
= Rs.2, 20,000÷ Rs. 5.50
= 40,000 Units
Total Sales in the Quarter II is 40,000 equal to BEP means BEP achieved in II quarter.
Answer 8 (b)
Expense Budget of M/S Pentax Ltd
Particulars 20,000 Units Rs. 15,000 Units Rs. 18,000 Units Rs.
Direct Materials 10,00,000 7,50,000 9,00,000
( 20,000×50) ( 15,000×50) ( 18,000× 50)
Direct Labour 4,00,000 3,00,000 3,60,000
(20,000×20) (15,000×20) (18,000×20)
Variable Overhead 3,00,000 2,25,000 2,70,000
(20,000×15) (15,000×15) ( 18,000×15)
Direct Expenses 1,20,000 90,000 1,08,000
(20,000×6) (15,000×6) (18,000×6)
Selling Expenses ( Variable)* 2,40,000 1,80,000 2,16,000
( 20,000×12) ( 15,000×12) (18,000×12)
Selling Expenses ( Fixed) 60,000 60,000 60,000
*3×20,000
Factory Expenses( 1,40,000 1,40,000 1,40,000
Fixed)(7×20,000)
Administration Expenses ( 80,000 80,000 80,000
Fixed) ( 4×20,000)
Distribution Expenses ( 2,04,000 1,53,000 1,83,600
Variable)** ( 10.20×20,000) (10.20×15,000) (10.20×18,000)
36,000 36,000 36,000
Distribution Expenses ( Fixed)**
( 1.80×20,000)
25,80,000 20,14,000 23,53,600
*Selling Expenses: Fixed Cost Per Unit = Rs.15×20% = Rs.3

 Fixed Cost = Rs. 3×20,000 Units = Rs.60,000
 Variable Cost Per Unit = Rs.15- Rs.3 = Rs.12
**Distribution Expense: Fixed Cost Per Unit = Rs.12×15% = Rs. 1.80
 Fixed Cost = Rs.1.80 × 20,000 Units = Rs.36,000
 Variable Cost Per Unit = Rs. 12- Rs.1.80 = Rs.10.20

Answer 9
Actual Material used = 125kg. × 60 = 7,500 kg.

Actual cost of actual material used ( AQ × AR)
A. 60% 4,500kg. × Rs. 21 = Rs. 94,500
B. 20% 1,500 kg × Rs. 8 = Rs. 12,000
C. 20% 1,500 kg × Rs. 6 = Rs. 9,000
7,500 1,15,500
Standard cost of actual material used ( AQ × SR )

A. 4,500kg. × Rs. 20 = Rs. 90,000
B. 1,500 kg × Rs. 10 = Rs. 15,000
C. 1,500 kg × Rs. 5 = Rs. 7,500
7,500 1, 12,500
Standard Cost of material, If it had been used in standard proportion

(Standard Proportion × Standard Rate)
A. 50% 3,750kg. × Rs. 20 = Rs. 75,000
B. 30% 2,250 kg × Rs. 10 = Rs. 22,500
C. 20% 1,500 kg × Rs. 5 = Rs. 7,500
7,500 1, 05,000
Standard cost of production (SQ for actual Production × SR)

Standard cost of output for 100 kg.
A. 62.50 kg. × Rs. 20 = Rs. 1,250
B. 37.50 kg × Rs. 10 = Rs. 375
C. 25.00 kg × Rs. 5 = Rs. 125
125 1,750
Standard cost for output of 5,600 kg.

1,750
= kg × 5,600 kg = Rs. 98,000
100
Material price Variance = Standard cost of actual material used – Actual cost of actual material used
= Rs. 1, 12,500- 1,15,500
= Rs. 3,000(A)
Material usage Variance = Standard cost of production – Standard cost of actual material used
= Rs. 98,000- Rs.1, 12,500 (A)
= Rs.14, 500 (A)
Note: Material Price Variance can be calculated at the time of purchase as well. In that case, material
Variance will be as follows:
Actual Cost of material used
A. 5000kg. × Rs. 21 = Rs. 1, 05,000
B. 2,000 kg × Rs. 8 = Rs. 16,000
C. 1,200 kg × Rs. 6 = Rs. 7,200
1, 28,200

Standard cost of Material used

A. 5000kg. × Rs. 20 = Rs. 1,00,000
B. 2,000 kg × Rs. 10 = Rs. 20,000
C. 1,200 kg × Rs. 5 = Rs. 6,000
1, 26,000
Material price variance (If calculated at the time of purchase)

= Standard cost of actual material used – Actual cost of actual material used
= Rs. 1, 26,000 – Rs. 1, 28,200
= Rs. 2,200 (A)
Answer 10 (a)
Application of Uniform Costing (Scope):
Uniform costing may be applied in two different situations.
(a) Common Control and Management:

Uniform costing may be applied when number of units or firm producing similar goods and services
are under a common control or controlled by the same group of management.
(b) Trade Associations:

Uniform costing may be adopted by firms or units which are related to a trade association. Different
firm may form an association through which they may adopt common costing method and practice.
Requisites of Uniform Costing:

Uniform costing can be adopted if certain pre-conditions exists. The success of a uniform costing
system depends primarily on the cooperation extended by different units or firm towards the
working of the system. Every unit should agree to supply required accounting and costing
information without reservation to a central body formed by them for implementation of the
uniform costing scheme. This body has to correlate, analyse and consolidate the information
received from the different units.
Following are pre-requisites of uniform costing:

(a) Firms or units adopting uniform costing must be ready to provide and share accounting and
costing information freely.
(b) They should adopt a common system of costing regarding classification, distribution and
absorption of costs. They must agree on a common technique of costing e.g., absorption costing,
standard costing or marginal costing.
Answer 10 (b)
Inter firm comparison:
It means comparing the two or more than two similar types of business units.
The objective here is to find to suitable position with regard to competition, also in order to increase
profit as well as the product.
It's actually a tool for the management of a firm in order to compare the performance as well as the
result.

Intra firm comparison:

It is actually about the comparing of two more than two department of the same firm or the
business unit.
The main objective here is to improve the efficiency and analysis the performance of departments.
Answer 11
Cost reduction is a challenge to the standards. The aim of cost reduction is to see whether there is
any possibility in bringing about a saving in the cost incurred — materials, labour, overheads etc.
“Cost reduction is to be understood as the achievement of real and permanent reduction in the unit
cost of goods manufactured or services without impairing their suitability for the use intended.” —
Institute of Cost & Management Accountants, U.K.
Thus, cost reduction aims at the elimination of wasteful elements in methods of doing things but not
at the cost of quality.
Characteristics of Cost Reduction:

The characteristics of cost reduction include:
(i) The cost is a permanent one. The reduction should be through improvements in methods of
production from research. It would be short lived if it comes through reduction in the prices of
inputs, such as material, labour etc.
(ii) The reduction in cost is real one in the course of manufacture or service rendered. Real cost
reduction comes through greater productivity.
Tools and Techniques of Cost Reduction:

The various techniques and tools used for achieving cost reduction are practically the same which
have been suggested for cost control. Some of these are:
1. Simplification and variety reduction.
2. Budgetary control.
3. Standard costing.
4. Overheads control.
5. Planning & control of finance.
6. Automation.
7. Market research.
8. Operations research.
9. Value analysis.
10. Standardizations of products and tools & equipments.
11. Improvement in design.
12. Simplification and variety reduction.
13. Labour control.
14. Materials control.

Paper 6:
Business Communication And Marketing

PART A: Business Communication
CAP II Business Communication -June 2019
REVISION QUESTIONS
Question No. 1
Read the following case carefully, and answer the questions given below: (5*4=20)
Xyan Xing, a newly designated field superior for a Chinese construction company has started working
at a road improvement project in the mid-hilly region in Nepal. Mr. Xing is sent to the Nepal site
seeing his expertise and experience in the related job. However, he has failed to exhibit the expected
results in the new context of workplace. Many bitter but unique instances are now recorded in the
personal journal of Mr. Xing. Some of them include the following:
a) In the commencing week, Mr. Xing found that the worker were talking and making
unnecessary gossips while they were working. They were frequently using their cell
phones while they were on duty. Grown in a different culture, Mr. Xing could not tolerate
all these activities of the workers. Ultimately, he decided to take action against them. As
a first attempt to discourage unwanted behaviors of the workers, he charged certain
amount from each individual’s regular wage. This became counter-productive: nearly
50% workers left the site, and there was scarcity of workers in his site for almost 6 weeks.
b) Mr. Xing had another problem, too. The workers took two breaks during the whole duty
hour: one at 10:00 am for morning meal and at 2:30 pm for afternoon meal. Mr. Xing
allowed only one break for them, i.e. at 12:00 for lunch. The workers, who never took
early morning’s meal (i.e. breakfast), had a problem: they had to depend on food that
they took only one time a day. They became too much unco-operative to Mr. Xing.
c) Noise was another trouble for Mr. Xing. He had no wireless communication device to
announce messages to the mass workers. So his commands were not heard properly by
them, and when he felt his commands were not being properly followed, he was hopeless
about the situation of the new workplace.
d) One word ‘boys’ became troublesome for him. He used the English word ‘boys’ to
address the Nepali speaking workers. They took the meaning of the word quite
negatively.
Mid-semester assessment of the construction site had very poor indicators. Mr. Xing decided to
resign from the post due to such unexpected results which would otherwise raise a very serious
moral question to him.
Questions:
a) As Mr. Xing how do you self-reflect and assess your own performance in the Nepal site?
b) How did workplace diversity influence the effective functioning in the new workplace of Mr.
Xing?
c) What types of communication barriers did Mr. Xing have to bear? How would they be
overcome? Discuss.
d) If you were Mr. Xing, what precautions would you take to ensure success in the new
workplace?
Question No. 2.
Elaborate the concepts of encoding and decoding as the basic processes of communication. How do
you assess the relationship between these two processes? 10
Question No. 3.
What are the problems that can be caused by workplace diversity? And, how can they be overcome
within an organization? (5+5=10)

Question No. 4.
Answer these questions. (5*2=10)

(a) What is business ethics? Discuss in brief economic, legal and philosophical perspectives of
business ethics.
(b) What are the common techniques of conflict management? Discuss them in brief.
Question No. 5.
(a) How are data collected and analyzed in a report? Discuss in brief.
(b) Write an e-mail to an employer responding to an online announcement for the vacancy of the
post that you deserve. Attach your CV too.
Question No. 6.
Write short notes on: (2 points each)
a) Graphics in business communication
b) Overcoming group problems
c) Roles of individuals in a group
d) Writing to an international audience
Question No. 7
Discuss the importance of ethics in business communication, and differentiate between ethical
dilemmas and ethical lapses. 10
Question No. 8
Read the following case carefully, and answer the questions given below: (5*4=20)
Mr. Samraj Kunwar has recently completed MBA degree from a recognized university in the USA. He
has been searching for a suitable job in his native city Kathmandu with a goal of localizing the global
knowledge and experience in the current context of Nepal. Mr. Kunwar has attempted to identify
and prepare himself for the appropriate job in Nepal. Recently he has noticed an online
announcement for the vacancy of a suitable post for him in one of the leading banking institutions of
Nepal. According to the announcement, the company is looking for the candidate who has rich
international exposure and experience in the banking sector. The major responsibility of the selected
candidate would be concerned with maintaining the appropriate transactions and relationships with
the international bankers. Mr. Kunwar realizes that he meets all the qualifications and requirements
stated in the vacancy announcement, but he knows he does not have sufficient experience in the
practical field. He has only superficial experience of international banking systems since he had done
his MBA internship in a bank in New York.
Questions:
a) What would Mr. Kunwar do for the identification of the appropriate employment for him?
And, what does he need to do prepare himself to appropriately address the vacancy
announcement that he has seen online?
b) Write an e-mail that Mr. Kunwar would send to the employer he has encountered online.
c) Mr. Kunwar realizes that he does not possess sufficient experience for the job that he is
going to apply. Write in a paragraph how he would persuade the employer?

d) Suppose Mr. Kunwar sent the e-mail with an application and a resume to the employer,
and the employer also responded him through an e-mail with some positive remarks on
his resume and statements. But, it has been more than one month that the employer has
called neither for interview nor for any other types of tests. Now, as Mr. Kunwar, write a
follow up letter to the employer.
Question No. 9.
What are the basic features of analytical report? What are its major components?10
Question No. 10
a) Suppose you are preparing a report on shareholders’ attitudes of one of the banks in
Kathmandu. Prepare a set of questionnaire for the survey as one of the tools of data
collection.
b) How is information organized in this report? Illustrate.

CAP-II Business Communication-June 2019

Answer No. 1:
a. I was extremely new in the working culture and tendency of Nepal. I now reflect that I mistakenly took
all the activities of innocent Nepali workers as a part of their dishonesty. Actually I should not have banned
talking and joking during the work time. But it was good to ban mobile phones at the workplace. I am still
strict at this position since mobile phones often harm the concentration of workers at their work. Another
important thing is that I should not have interrupted the eating patterns of the workers. I realized that these
patterns were guided by the culture of the people. I tried to apply my success story of one country into
totally different context of another country. I regret about the address term that I used to the workers.
‘Boys’ should have been ‘Bros’ or ‘Brothers’. I have nothing to say about the noisy environment and
misunderstanding of mine with the workers.
b. People who grew up in the same ethnic and cultural background are most likely to share the similar
patterns of social behavior in their workplace too. In multinational companies people from different
backgrounds might have different ways of perception, understanding and behaving. Such diversity may
invite many problems including conflicts and misunderstandings. This is called ‘workplace diversity’. It refers
to the diverse situation of the workers in an organization derived from their socio-cultural and national
identities, backgrounds, and behaviors. When people and products move across the borders, the workplace
can be diverse enough because of norms, age, gender, values, education, conventions, etc. of the workers.
In the above case, the supervisor and the workers have different cultures, nationalities and understanding
patterns. So the task results have been affected due to the lack of proper management of the diversity. Even
a renowned expert has failed to gain expected results of the assigned task. He has got to arrive at the point
of resignation from his job.
c. The barriers to communication and some of the measures to overcome them are precisely presented
in the table below:
Types of barriers Measures to overcome
Frame of reference By trying to understand the workers’ perspective to work
Noise/ physical barriers By managing proper technology to work in the noisy workplace and by
controlling the noise if possible
Semantic barrier By using the words and language forms sensibly
Cultural diversity By trying to adopt the new cultural trends such as eating patterns,
gossiping ways, etc.
d. If I were in the position of Mr. Xing, I would be cautious about the following issues:
 Holding meeting with the project managers, ex-officers, supervisors, etc. and getting ideas about the
working culture and workers’ uniqueness of the new workplace;
 Getting interactions with them on as well as off duty time;
 Learning the local contexts in terms of physical, social, behavioral and other perspectives;
 Learning some basic communication skills and vocabulary such as greeting exponents, thanking styles,
addressing terms, politeness cues, etc.
 Planning about potential barriers/ obstacles; and so on.
Hint No. 2:
 Concerned with how the sender frames the intended sense and how the receiver perceives the sense
framed by the sender.
 Business communication involves a number of linguistic and non-linguistic elements such as words,
phrases, discourse markers, graphic tools, paralanguage features, instruments and so on which are used
by the participants to give a specific meaning.
 It is human mind that is essentially important in making the meaning of what we have used as linguistic or
non-linguistic device for communication. The process is known as encoding.
 With the help of linguistic, socio-cultural and experiential knowledge, a speaker encodes the meaning of
his or her speech.
 Encoding is a sender’s mental process of presenting ideas or information in oral or written form, using
sounds, letters, words, figures or symbols.
 Decoding is the receiver’s mental process or act of assigning the meaning to the words and symbols used
by the speakers or writers.
 While encoding is concerned with production, decoding is concerned with perception of discourse
meaning in context.
 When the message encoded by the sender is decoded properly by the receiver, the process of
communication is successful. Encoded messages are decoded in the effective communication.
Hint No. 3:
Major problems
 Various interpretations of the same event and information
 High possibilities of conflicts and misunderstandings
 Lack of cooperation and working morale
 Social, racial and cultural disputes
 Low level of work productivity
Strategies to overcome
 Conduct a diversity audit
 Conduct regularly meetings, discussions, and workshops
 Train workers on multicultural communication, sensitivity, and efficiency
 Encourage social responsibilities
 Encourage informal conversations
 Organize refreshment packages such as tours, visits, different movies & documentaries, and so on
Hint No. 4 (a):

 Ethics refers to the principles, rules, norms or code of conducts to govern people. It is essential in every
sector of life, profession and activity.
 In the sector of business, ethics plays a vital role for effective conduct of organization and transaction.
Business ethics means obeying rules and respecting customer values.
 Transparence and truth are also important aspects of business ethics. It may incorporate social values,
cultural norms, morality and legal regularity too. It usually has three perspectives: economic, legal and
philosophical.
 Economic perspective refers to the tendency of avoiding financial abuses, unfair business
competencies, and unethical dealings. It encourages fair business, accurate pricing, regular tax
payment, and so on.
 Legal perspective refers to abiding in state rules, following regulatory norms and conducting according
to the established law and regulations.

 Philosophical perspective refers to the tendency of respecting others’ cultural values, honor of self -
esteem, mutual co-operation, etc. it encourages truth, honesty, and loyalty in business.
Hint No. 4 (b):

 Conflicts are regarded as common assets of business organizations. They need to be managed
successfully to avoid bad results of them.
 It is an agreed point that organizational conflicts can be settled with some careful strategies. Some of
the conventional techniques of conflict management are discussed in brief below:
 Mediation: In this process, disputes are facilitated by third party intervention. The third party mediates
between the conflicting parties. The mediator is granted with an institutional status for conflict
resolution, and is approved by both parties of conflict.
 Negotiation: Negotiation is one of the very useful and effective processes of conflict resolution. It helps
people to eliminate the basis for conflicts through bilateral discussions, dialogues and compromise. It is
based on win-win theory, and is operated by bilateral discussions and talks.
 Arbitration: It is a legal attempt to manage conflict. The disputes are legally analyzed. The illegal and
unethical points are pointed out and concerned ones are asked to improve. Some forceful impositions
are also used.
 Reconciliation: It is an institutional practice to bring the conflicting groups together into a consensus; it is
an approach of integration. It tries to show interdependence and coexistence of the conflicting powers.
Hint No 5 (a):
 Data refer to systematic information about a transaction, an event, or situation
 Collected through official records, documents, etc.; secondary sources
 Also through observation, questionnaire, field study, interview, etc.; primary sources
 Analysis with statistical tools, tables, diagrams, descriptions, etc.
 Also with comparison, compare, discussions, etc.
Hint No 5 (b):
From: anjali2005@gmail.com
To:srishashopping@yahoo.com
Sub: Application for the post of account officer
Dear sirs,
I came to learn through www.jobinnepal.com that you have a vacancy of the post of account officer.
Since I am equipped with eligible qualification and experience for the post, I would like to apply for the
same. I have attached my functional CV along with this application.
I am looking forward to hearing from you soon.
Regards,
Ananda Koirala

Answer No. 6:
a) Graphics in business communication
Graphics, one of the highly effective non-verbal tools commonly used in business communication refer
to different designs, drawings or pictures that we keep in our power point slides, advertisements,
business texts, brochures, instructions, manuals, etc. The usefulness of graphics in business
communication can never be underestimated since graphic representation of information becomes not
only clear and precise but also impressive and persuasive. It is commonly believed that a picture is worth
thousand words. Line graphs, histograms, bar charts, pie charts, figures, etc. are the common examples
of graphics.
b) Overcoming group problems

Working in groups may invite a number of problems though it is believed that team work contributes to
attaining the organizational goals and missions. The group problems are to be settled so that the
expected outcomes can be ensured. Some of the important strategies for overcoming the group
problems are:
 Working with group spirit and identity;
 Discouraging personal skepticism, lobbying, influences and thoughts;
 Training on group autonomy and group dynamism;
 Generating the sense of cooperation, endurance and collaboration…
c) Roles of individuals in a group

 Observing group principles, rules and guidelines
 Avoiding stereotyped perceptions and thoughts
 Avoiding biased and skeptic attitudes
 Active and creative contribution to the group mission
 Keeping group interests above individual interests
 Having proper communication, and sharing the ideas and innovations
 Being loyal, courteous and faithful, and so on.
d) Writing to an international audience

 Using international code,
 Using polite and formal language,
 Following proper format in written communication,
 Maintaining cross-cultural sensitivity.

Answer No. 7:
 Ethics in business communication generally refers to the set of principles guided for good conduct of
business dealings. They govern a business person or a group so that trust can be derived from
communication as well as from transaction.
 Ethical people are perceived by consumers and others as trust worthy, fair and impartial, respecting
the rights of others and showing concern about the impact of their actions on the society. They usually
obey the communicative maxims of cooperative and politeness principles.
 Ethical communication can obviously lead the business activities towards success and perfection.
Ethical communication includes all relevant information that excludes false traps and tricks. The

massage is true in every sense, and is not deceptive in any way. In contrast, unethical communication
can include falsehoods and misleading information. Ethical communication is a major key for the
success of a business transaction.
 Ethical behavior is a companywide concern, of course, but every company has responsibilities to its
each stakeholder. In some situations, what is right for a group or a person can be wrong for another.
There can be many alternative solutions for a particular issue, but they cannot be equally favorable for
all people. In such situations, ethical people may not be able to tell the truth or to take absolutely
right decisions. They're forced to think about a better choice among many different valid alternatives.
This is known as ethical dilemma.
 On the other hand, the term 'an ethical lapse' refers to a clearly unethical or illegal choice, When a
person (e.g. an official) or a group knows that something is wrong, and yet does it anyway, it is known
as ethical lapses.
Answer No. 8:
a) During the job search process immediately after the completion of the academic courses of
university, the fresh candidates are required to adopt a number of useful strategies and
considerations. Most primarily, they need to identify the appropriate job for them individually. In the
given case of Mr. Kunwar too, for the identification of job, he would attempt to find some matches
between his educational and personal strengths and the nature of the prospective job. He needs to
judge his own specific qualities, distinct personal competencies, qualifications, communication skills,
etc.
When Mr. Kunwar identifies the appropriate job (e.g. an officer in the commercial bank), he needs to
adopt some accurately effective strategies for the preparation for that job. In the given case, Mr. Kunwar
has seen an online announcement for the vacancy of a post that he thinks suitable for him. In this context,
he needs to prepare a persuasive resume and submit to the employer along with a short persuasive
application. He is required to prepare other application documents such as reference letters, academic
certificates, character certificates, recommendation letters, experience letters, internship certificate, and
so on. More importantly, Mr. Kunwar needs to acquire effective interview skills for all phases- before
interview, during interview and after interview.
b)
From: discover.samraj@gmail.com
To: himalayan_bank.org.com
subject: Application for the post of IR officer
Date: October 12, 2018
Dear sirs,
I came to learn from your website that your bank, a leading banking institution in Nepal has been
searching for a dynamic resource person as an international relationship officer. It's a big matter
of pleasure for me that I have completed my MBA degree from a reputed US university with
specialization in the international banking. I had done exactly same nature of job during my
internship program as you have required now. I did my internship at Global Bank in New York for a
year under close supervision of my university professors and bank administrators. I'm fully
convinced that I can be the fittest candidate for your requirement.

I will submit my complete application and resume when you receive and positively respond to this
e-mail.
Regards,
Samraj Kunwar
c) In the given case, Mr. Kunwar does not possess any professional experience in the related field. In this
context, he would persuade the employer from his other strong features and competencies related
with academic qualifications, international degree, seminar papers presented in the US, assignments
completed in the university, mini research and project works carried out by him, and so on. He woul d
emphasize the detail of the job that he performed during the internship period. His basic motive
would be to match between what he has and what the employer requires him to have.
d)
New Baneshor, Kathmandu
December 2, 2018
Ananda Dev Mishra
Administrative Director
Himalayan Bank Limited
Kathmandu, Nepal
Subject: Follow-up letter
Dear Mr. Mishra,
I had submitted you a letter of application and a copy of my resume through an e-mail responding
to your online advertisement for the post of IR Officer. I appreciate your way of responding the
email with detail information and feedbacks. I received a couple of emails from you in which you
had shown a favor with my qualifications and skills. I submitted the additional documents that you
had asked for. However, I have not received any response from you now for more than a month.
Would you please inform me how the process of recruitment is getting on?
Sincerely yours,
Samraj Kunwar
Hint No. 9:
 An analytical repot is usually a research report. It is also called investigative report.
 It is prepared on the basis of the information obtained from respondents of the related field.
 It requires basically the research tools such as questionnaires, interview, focused group discussion,
observation report, tests, discourse analysis, etc.

 Scientific analysis and possible interpretations of the data are made in this type of report.
 The basic components of an analytical report are: introduction, background, statement of problem,
objectives, methodology, analysis and interpretation, findings, and recommendations.
Answer No. 10(a):

Tick the best option. (SA: strongly agree, A: agree, NA: not agree)
Attitudes SA A NA
1. I prefer risks and challenges in business; they help to grow
the company.
2. Risks are useful to motivate me to work and concentrate
on duty.
3. I don’t like to be tied up by business commitments and
relationships. It’s good to keep on what is with us
conventionally.
4. I’m ready to allow the BoD to invest excessively on new
technology and globalization of market.
5. I don’t care whether one failure in business loses
everything. So, our bank must invest as required on the
innovative activities.
6. I’d like to follow the same pattern of business since it has to
bear less or no risk.
7. …
Hint No. 10(b):

 The information can be organized systematically by categorizing it into different issue based themes.
 Then the information is tabulated to ensure more systematic data for the report.
 The data can be organized and analysed using tables, graphs, statistical tools such as percentage,
mean, standard deviation, etc.
 The irrelevant ideas/options are avoided from analysis.
 Analysis should be based on the objectives of the research/report.

CAP-II Income Tax And VAT-June 2019
Paper 7:
Income Tax And VAT

CAP II Income Tax And VAT -June 2019
REVISION QUESTIONS
Income Tax
Question No. 1:
Surya Shoe Pvt. Ltd. is engaged in production and sale of high quality foot wares, one of brand ‘SuperFoot’ is
very famous among the consumers of India and next brand ‘AmagingFoot’ is famous among the Nepalese
consumers. Calculate the tax liability of the company for Income Year (2075.76 with latest provisions of
Income Act as amended by Budget for FY 2075.76) based upon following information:
Particulars Amount (Rs.)

Income
Domestic Sales of 'AmazingFoot' brand 12,500,000.00
Export Sales of 'SuperFoot' brand 16,500,000.00
Sales of scrap items in Domestic market 550,000.00
Disposal Proceeds of Old Machinery (book value 575,000) 1,215,000.00
Dividend Income (Net of Tax) 235,000.00
Total of Income 31,000,000.00
Cost of Materials Consumed 9,580,000.00
Manufacturing Expenses 2,025,000.00
Cost of Packing Materials 925,000.00
Electricity 275,000.00
Employee Cost 5,660,000.00
Selling & Other Administrative Expenses 1,525,000.00
Interest & Bank Charges 775,000.00
Bad Debt for the year 225,000.00
Repair of Machine 220,000.00
Repair of Building 190,000.00
Repair of Transportation Fleet 195,000.00
Depreciation 775,000.00
Net Profit before tax & bonus 8,630,000.00
Bonus Provision 863,000.00
Net Profit Before tax 7,767,000.00
Additional Information:
a) The Assets details is as follows
Asset Opening WDV of Asset

Building 1,550,000.00
Machine 4,550,000.00
Transport Fleet 2,550,000.00
b) Selling and administrative expenses includes Rs. 110,000 given to Prime Minister Disaster Relief Fund
and Rs. 70,000 to an NGO
c) Out of total bonus provision Rs. 500,000 is distributed to the employees and remaining decided not to
distribute.

d) Employee cost also includes Rs. 500,000 provision of gratuity as per Labor Act 2048 (not contributed
to Social Security Fund till the balance sheet date as required by Labor Act 2074)
e) Further, Rs. 75,000 of employee cost is personal expenses of Director.
f) The electricity bill includes Rs. 25,000 additional fine imposed by Nepal Electricity Authority for delay
payment of bill and Rs. 50,000 related to previous year.
g) Selling & Administrative Expenses Rs. 120,000 have no appropriate supporting (bill) justifying the
expense.
h) The company employs 155 workers out of which 54 are Indian and remaining are Nepali.
Question No. 2:
Fashionable World Pvt. Ltd. is exporting high end Pashmina to European countries, but being in initial years of
business kept its financial records as per Cash Received and Cash Paid (cash basis). The record of company
shows the following for FY 2074.75.
Particulars Payments Receipts
Loan 2,500,000.00 4,200,000.00
Raw Materials 6,000,000.00
Wages for Labour 500,000.00
Variable Production Overhead 250,000.00
Factory Rent 1,200,000.00
Production Incharge Salary 250,000.00
Insurance of Factory 117,000.00
Administrative Salary 650,000.00
Office Expenses 400,000.00
Plant & Machinery 4,200,000.00
Generator 800,000.00
Sale of Old Computer 10,000.00
Export of Pashmina 12,000,000.00
Advance Income Tax 200,000.00
Total 17,067,000.00 16,210,000.00
Calculate the tax payable by the company with relevant provisions of Income Tax Act regarding the method of
accounting to be followed for tax assessment.

Loan 2,500,000.00
Inventory (1,000 Pashmina Sawls) 2,400,000.00
Plant & Machinery 800,000.00
Computers 170,000.00
Cars 1,600,000.00
The company has borrowed the loan for the purchase of Plant & Machinery on 1st Magh, 2074 from a
commercial bank. The opening loan was paid on 30th Kartik, 2074. The agreed rate of interest was 12 % for this
loan including opening.
Normal production capacity of the company is 5000 units per year, but actual production was 4500 units
during the income year. The company has 1,500 units in stocks as per FIFO method at the end of the year.

The company has purchased a generator on 15 Chaitra 2074.

Payment of office expense includes advance amounting of Rs. 200,000 to Platinum Services Pvt. Ltd. No need
to consider the VAT amount on above transactions.
Question No. 3:
Sheraton Recreation Ltd is listed in Nepal Stock Exchange and obtained 5 Star Hotel status from Department of
Tourism. The details of the income and expenditure of the company for FY 2074.75 is given below, you are
required to calculate the tax liability of the company.
Sales Revenue 122,500,000.00
Total 122,500,000.00
Cost of Food 22,500,000.00
Cost of Beverage 17,500,000.00
Cost of Room consumables 14,500,000.00
Employee Cost 22,200,000.00
Selling & Administrative Expenses 11,850,000.00
Repair and improvement of Bed/furnishing set of room 3,560,000.00
Total 92,110,000.00
Net Profit 30,390,000.00
The details of fixed assets are as below:

Particulars Opening
Building 17,500,000.00
Bed/Furnishing Set 12,250,000.00
Vehicle for carriage of baggage of tourist 2,545,000.00
Vehicle for city/jungle/site tour 2,790,000.00
FY 2071.72 was the first year of operation of business, started operation from 2072.01.01. Till that date the
building was under construction, and loan utilized was Rs. 120,00,000 with agreed interest rate of 10% p.a.
During that year, the whole interest was capitalized under building. The company was in loss for 3 consecutive
years and due to boom in tourism sector have earned significant profit during the year.
Loss of Business Amount (Rs.)
2071.72 2,025,500.00
2072.73 2,145,000.00
2073.74 1,875,000.00
Management is claiming the renovation of bed/furnishing should be allowed for deduction in whole. Out of
sales, 30% is to the foreigners as FIT (Free Independent Travel) and remaining as Group Plan to foreigners. The
management is claiming that all the sales is made to foreigners, the export of service facility on tax rebate
should be considered. Give your opinion and suggest the tax to be paid by company, during the year, if any.
Question No. 4:
Mrs. Evana Manandhar has revealed her income, calculate the applicable tax for income year, showing all the
workings and explanations.
Pay scheme Rs. 215,000 basic salary per month
The employer has contributed 10% of her salary per month to Provident Fund

She is provided one month salary as festival allowance, and further as per performance appraisal was provided
an IPhone costing Rs. 110,000.
Per month Rs. 21,000 house rent allowance.
Entertainment allowance Rs. 2,500 per month and medical allowance 1.5% of her salary per month.
For the cook in her residence, the employer is paying Rs. 9,000 per month.
She is member of Management Committee and attended 10 meetings during the year and received Rs. 3,000
per meeting.
One time meal and two time tea/coffee is provided by the employer to all employees, and cost apportioned to
her for the year is Rs. 25,000.
Being one of key member of senior management, she arranged meeting with dinner to key customers and cost
of one of such meeting is paid by her Rs. 50,000 and later the employer reimbursed the cost to her.
Leave accumulated on account of her as per actuarial valuation is Rs. 120,000 and on account of gratuity is Rs.
755,000. Out of which Rs. 25,000 on account of leave is paid to her during the year.
Payment for school fees of son and daughter of Mrs. Evana directly to school by the employer Rs. 120,000.
She paid life insurance premium Rs. 21,000 for her endowment policy out of which 50% is reimbursed by the
employer and Rs. 11,000 for joint life policy of her children.
She had done surgery for her treatment, and received Rs. 500,000 from insurance company, for which the
premium paid was Rs. 150,000 only.
She is provided Mahindra Car costing Rs. 54 lacs for her official use.
She has donated Rs. 75,000 to Sahara Nepal, which is tax exempted entity.
Suggest her either to opt as couple (if no any additional income of her husband) or as single while paying the
tax as per Income Tax Act, 2058.
Question No. 5
Narayani Regmi was working as Teacher with reputed School till 2075 Poush end. She joined an INGO from 1st
Magh 2075.
Salary & benefits received from the School

Basic Salary Rs. 50,000 per month
Dashain Allowance Rs. 50,000
House Rent Allowance Rs. 5,000 per month
Remote Area Allowance Rs. 10,000 per month
Leave Encashment Rs. 25,000
Salary & benefits received from the INGO
Basic Salary Rs. 100,000 per month
Advance Salary Rs. 1 month salary
House Rent Allowance Rs. 25,000 per month
Telephone Allowance Rs. 5,000 per month
Travelling and Daily Allowance (TADA) Rs. 10,000 per day
School tuition fees of children Rs. 5,000 per month paid by INGO
Other Additional Information
Total amount of additional deposit into approved retirement fund is Rs. 120,000.
She has donated Rs. 103,000 to a tax exempted organization. Premium paid for life insurance policy is Rs.
31,000 and for health insurance is Rs. 18,500.
She went total of 12 days outstation during the 6 month period for official work and received the TADA as
agreed.

The withholding tax deducted and deposited by the School was Rs. 21,000, so calculate the tax to be deducted
by the INGO for the income year. Also suggest does she need to income tax return as per Income Tax Act
2058?
Question No. 6
The details various earnings of Mr. Ramesh Shrestha of Kathmandu for FY 2075.76 is given below, you are
required to assist him regarding the applicability of tax (additional) if any for the income year.
Interest Income from Commercial Bank (Net) 75,000.00
Interest Income from Hydro Solution Pvt Ltd (Net) for providing the unsecured loan 178,500.00
Music System Rental Income from Indreni Entertainment Pvt Ltd (Gross) 750,000.00
Received from Ward Welfare Society as Best Social Worker without deducting TDS
50,000.00
(Gross)
Cash Dividend Received from XYZ Bank Ltd (Gross) 100,000.00
Gift related to investment (Gross) 180,000.00
Income from Natural Resources (Gross) 55,000.00
Net Benefit from Life Insurance (Gross) 145,000.00
Total Income 1,533,500.00
Further, he has incurred the following expenses:

Repair Expenses of Music System 10,000.00
Interest Expenses for the borrowed fund provided to Hydro Solution 22,000.00
Allowable Depreciation of Music System 12,500.00
Life Insurance Premium paid 24,500.00
Expenses related to natural resources 3,500.00
Contribution to approved retirement fund 78,500.00
Total Expenses 151,000.00
Question No. 7
The financial information of Secured General Insurance Co. Ltd. for FY 2074.75 is given below:
Net Premium Received 400,000.00
Agent Commission 15,000.00
Allowable Deprecation 60,000.00
Carried Forward loss for F/Y 2073/74 100,000.00
Claim paid during the year 100,000.00
Claim received from Reinsurance 50,000.00
Closing claim outstanding 30,000.00
Commission on Insurance Ceded 20,000.00
Commission on Reinsurance accepted 10,000.00
Interest Income in fixed deposit(Gross) 50,000.00
Management Expenses 100,000.00
Miscellaneous Income 25,000.00
Opening claim out standing 23,000.00
Opening unexpired Risk reserve 150,000.00

The management expense includes Rs. 15,000 telephone expenses of previous year. Calculate the tax liability
of the company for the income year.
Question No. 8:
Following Information is available from the Financial Statement of SmartTech Bank Nepal Ltd.
Amount (in Rs.)
Particulars FY 2072/73 FY 2073/74 FY 2074/75
Loan Outstanding at the end 9,085,600.00 9,850,690.00 10,258,600.00
Non Banking Assets upto previous year 98,570.00 91,700.00 67,070.00
Non Banking Assets Recovered during the year 25,460.00 50,230.00 22,400.00
Bad accepted as Non Banking Assets During the Year 18,590.00 25,600.00 14,500.00
Loan Written Off upto previous Year 356,900.00 231,500.00 140,900.00
Written Off Loan recovered during the year 125,400.00 90,600.00 125,000.00
Loan Loss Provision upto previous year 181,712.00 254,212.00 400,062.00
Loan loss provision expenses in Income Statement 72,500.00 145,850.00 115,400.00
Net Income as per Income Statement 2,025,000.00 2,150,000.00 2,290,000.00
Complete the table for required data for calculation of allowable expenses of Loan Loss Provision (LLP)
Expenses as per Section 59 of Income Tax Act. LLP expenses claimed upto previous year for income tax
purpose is same as per the financial statement. The CFO of the bank has considered the written off loan
recovered as taxable income thus the taxable income given in question is including the written off loan
recovered and deducting the LLP expenses as deductible expenses, also calculate the tax as per income tax act
after considering the impact of both.
Question No. 9
Mrs. Sharma is a Chartered Accountant and worked with Public Finance Strengthning Project of DFID and has
received Rs. 2,250,000 upto Chaitra of 2075. She got married and transferred herself to UK and worked with
KPMG as PFM Strategy Consultant and received Rs. 1,250,000 from Baisakh to Ashad 2076. The tax deducted
on UK by KPMG is Rs. 335,000 on her (converted into equivalent Nepalese currency). Calculate the tax liability
in Nepal for IY 2075.76 (with latest rates). The retirement contribution in Nepal is 270,000 and donated Rs.
125,000 to an tax exempt organization.
Question No. 10
What do you mean by Final Withholding Payments and what are the payments treated as final withholdings as
per Income Tax Act, 2058?
Question No. 11
Define the following as per Income Tax Act 2058.
a) Payment
b) Trading Stock
c) Depreciable Assets
d) Non Business Chargeable Assets
e) Business Assets
f) Trustee
g) Royalty
h) Permanent Establishment
i) Investment Insurance

Question No. 12
Answer in brief
a) State the decisions under which a revision petition can be filled before the Inland Revenue Department
under the Income Tax Act, 2058.
b) List out the payments not included in the income from employment under the Income Tax Act, 2058.
c) What are the possible methods of taking foreign tax credit to avoid double taxation of resident person?
Question No. 13
Write short note of the followings with reference to Income Tax Act, 2058. (5×2=10)
a) Tax
b) Debt Claim
c) Exempt Organization
d) Underlying Ownership
e) Company
f) Lease
g) Investment
h) Interest
i) Receiver
j) Natural Person
Value Added Tax

Question No. 14
The financial detail of Nepal World Travel and Tours Pvt. Ltd. for FY 2074.75 is given below, which is leading
travel/tourism service provider in Nepal. Calculate the net VAT payable for the year. The amounts given are
excluding VAT, if applicable.
Travel Package to Kailash/Tibet (Outbound) Sales 102,560,000.00
Travel Package to Nepal (Inbound) Sales 125,600,000.00
Sales of Air Ticket 27,560,000.00
Sales of Vehicle Services (Vehicle hiring services to tourists in Nepal) 12,590,000.00
Total of Income 268,310,000.00
Purchase cost of Outbound Sales
Hotel (Accommodation and Food Cost) paid to Chinese hotels 29,500,000.00
Travel Insurance paid to Nepali General Insurers 1,456,000.00
Guide Charges 14,560,000.00
Porter Cost 15,060,000.00
Medicine Cost (purchased in Nepal) 1,500,000.00
Purchase cost of Inbound Sales
Hotel (Accommodation and Food Cost) paid to Nepali hotels 32,545,000.00
Travel Insurance paid to Nepali General Insurers 925,600.00
Guide Charges 16,590,000.00
Porter Cost 15,590,000.00
Medicine Cost (purchased in Nepal) 1,485,000.00
Entrance Fee to National Park 6,085,000.00
Other Expenses/Payments

Purchase of Tourist Class (Green Plate) Vehicle 8,560,000.00

Purchase cost of air ticket 10,980,000.00
Office Internet Expenses 550,000.00
Travel Management Software purchased from Thailand (paid equivalent Nrs) 10,055,600.00
Office Employee Salary 44,560,000.00
Question No. 15
Advanced Ayurvedic Company Pvt. Ltd. is renowned producer of ayurvedic products located at Sarlahi. Most
of its products are exported to European countires and USA. The main line of products are ayurvedic
medicines, and ayurvedic cosmetics. The details of transaction of FY 2074.75 is given below, calculate the VAT
payable by the company for the year as per provisions of VAT Act and Rule.
Sales of Ayurvedic Medicines 12,050,000.00
Sales of Ayurvedic Cosmetics 14,560,000.00
Export of Ayurvedic Medicines 22,590,000.00
Export of Ayurvedic Cosmetics 18,690,000.00
Total 67,890,000.00
Purchase of ayurvedic herbs (jadibuti) from local collectors in village in various district 6,090,000.00
Purchase of ayurvedic herbs (jadibuti) from Community Forest in various district 7,580,000.00
Import of grinding machine 4,560,000.00
Purchase of Truck (used for carriage of raw materials as well as finished goods) 1,860,000.00
Purchase of Furniture and Computer for Office 750,000.00
Electricity cost 450,000.00
Total 21,290,000.00
Question No. 16
What is market Value as per Value Added Tax, 2052? Mention the relevant provision applicable to market
Value as per Value Added Tax, 2052?
Question No. 17
What are the records to be maintained by a registered person dealing in used or second hand materials? How
the tax is assessed in such case? Answer with reference to the Value Added Tax Rules, 2053.
Question No. 18
State with reasons whether the following statements are true or false with reference to Value Added Tax
Act/Rules.
i) 'No VAT' and 'Zero VAT' have the same meaning as VAT in both the cases is zero.
ii) In the case where there is provision of a contract for paying partly the value of goods or services in more
than one day on an installment basis, the time of supply shall be the date of payment.
iii) Roy & Co. is a VAT registered firm engaged in the business of importing passengers' car and selling them in
local market. The firm is claiming full input tax credit on purchase of such cars.
iv) If a taxpayer fails to submit tax return as per section 18, the penalty imposed is Rs. 10,000 per month.
v) A separate record for purchase and sale shall be maintained for the used goods which have purchase price
more than Rs. 20,000.

Question No. 19
What shall be the fine and penalty chargeable under the following situations as per VAT Act, 2052?
i) Late payment of VAT amount.
ii) Tax plate not kept/misplaced.
Question No. 20
a) Can an unregistered person collect VAT?
b) Enumerate the transactions that are VAT attracted.
c) State the provisions on input tax credit on VAT paid on the lost goods
Question No. 21
Write short notes on the following

a) Temporary registration for VAT
b) Transfer of business

SUGGESTED ANSWERS HINTS

Solution to Q. No. 1
I. Determination of Tax Rates
As per Section 11 of Income Tax Act, 2058 the tax rate applicable for the company for two separate
category of business is determined as follows:
- The company employs 101 Nepali workers during the whole year and is Special Industry, so 90% of
applicable tax rate
- The company has export sales, so 25% rebate for export sales
Further as per the same section, only one benefit can be chooses out of available options, so the tax rate
is
Exemption Effective rate for Export Effective rate for Domestic Sales
Concessional rate for Special 80% of 25% = 20% 80% of 25%=20%
Industry
Concessional rate for Export 20%- 25% of 20% = 15% 20% - 0% = 20%
Concessional rate for employing 20%*90%=18% 20%*90%=18%
101 Nepali workers
Most Beneficial Option 15% 18%
II.Determination of Tax Liability
Ratio of Export & Domestic Sales Export Domestic Total

Sales 16,500,000.00 13,050,000.00 29,550,000.00
Sales Ratio 55.84% 44.16% 100%
For calculating the export and domestic sales, the scrap sold in domestic market is also considered as
domestic sales.
Amount (Rs.)
Particulars Export Income (Rs.) Domestic Income (Rs.) Total (Rs.)
Sales (Disposal of Trading Stock) 16,500,000.00 12,500,000.00 29,000,000.00
Sales of Scrap - 550,000.00 550,000.00
Dividend Income - - -
Disposal of Machinery - - -
Total of Income 16,500,000.00 13,050,000.00 29,550,000.00
Cost of Disposal of Trading Stock
Interest Cost (u/s 14) 432,741.12 342,258.88 775,000.00
Cost of Disposal of Trading Stock (u/s 15) 7,122,081.22 5,632,918.78 12,755,000.00
Repair (u/s 16) 290,606.60 229,843.40 520,450.00
Depreciation (u/s 19) 714,906.94 565,426.40 1,280,333.33
Others (u/s 13) 3,863,959.39 3,056,040.61 6,920,000.00
Total deduction 12,424,295.26 9,826,488.07 22,250,783.33
Taxable income 4,075,704.74 3,223,511.93 7,299,216.67
Tax rate 15% 18%
Tax Liability 611,355.71 580,232.15 1,191,587.86

Cost of Disposal of Trading Stock Export Domestic Total

Cost of Materials Consumed 5,349,238.58 4,230,761.42 9,580,000.00
Manufacturing Expenses 1,130,710.66 894,289.34 2,025,000.00
Cost of Packing Materials 516,497.46 408,502.54 925,000.00
Electricity 125,634.52 99,365.48 225,000.00
Total 7,122,081.22 5,632,918.78 12,755,000.00
The fine paid for electricity is allowed but the previous year related electricity is not allowed for deduction.
Others Expenses Export Domestic Total

Employee Cost 2,839,340.10 2,245,659.90 5,085,000.00
Selling & Other Administrative Expenses 745,431.47 589,568.53 1,335,000.00
Bad Debt for the year - - -
Bonus Provision 279,187.82 220,812.18 500,000.00
Total 3,863,959.39 3,056,040.61 6,920,000.00
The donation to Prime Minister Disaster Relief Fund (PMDF) is allowed for deduction, but the donation to NGO
is not allowed. The donation to PMDF need not be checked for Section 12 limit, so claimed as same heading in
the Income Statement (i.e. Selling & Admin Expenses). The expenses without appropriate supporting (bill)
under selling and administrative expenses are not allowed for deduction.
Rs. 500,000 provision for gratuity (i.e. no cash contribution from the company) and Rs. 75,000 personal
expenses of director under Employee expenses is not allowed for deduction.
The bad debt is not allowed for deduction.
The bonus provision to the extent distributed is allowed for deduction, the remaining (as per latest IRD
circular) need to be added as income in later income year as income while calculating the assessable income.
Pool Opening WDV of Asset Less : Disposal Proceeds Depreciation Base Value
A 1,550,000.00 - 1,550,000.00
D 7,100,000.00 1,215,000.00 5,885,000.00
Dep rate (%) Depreciation Actual Repair 7% of DBV Allowed repair (Minimum of Actual or 7%)
6.67 103,333.33 190,000.00 108,500.00 108,500.00
20.00 1,177,000.00 415,000.00 411,950.00 411,950.00
1,280,333.33 605,000.00 520,450.00 520,450.00
The company being the special industry, the depreciation rates are inflated by 1/3rd of normal depreciation
rate.
The disposal proceeds of depreciable assets is deducted while arriving at the Depreciable Base Value (DBV).
The fleet of transport is Pool D Asset.
Dividend income is final withholding income, so need not to be included under the income.
All the allowed expenses are segregated in the ratio of sales.

Solution to Q. NO. 2
The company being entity should keep and assess its tax liability as per Accrual basis of accounting.
Export Sales 12,000,000.00
Total Income 12,000,000.00
Deductible Expenditure
Interest (section 14) 352,000.00
Cost of Goods Sold (Section 15) 7,944,666.67
Depreciation (Section 19) 1,306,714.67
General Deduction (Section 13) 850,000.00
Total Deduction 10,453,381.33
Taxable Income 1,546,618.67
Tax Rate 15%
Tax Liability 231,992.80
Interest Expenses Amount (Rs.)
Opening Balance of Loan 2,500,000.00
Interest Rate 12%
Loan Paid on 30 Kartik, So Interest for 4 months 100,000.00
Loan Borrowed 4,200,000.00
Loan Utilized for 6 months, so interest 252,000.00
Total Interest 352,000.00
Cost of Goods Sold Amount (Rs.)
Opening Inventory 2,400,000.00
Direct Expenses 8,317,000.00
Raw Material Purchase 6,000,000.00
Wages 500,000.00
Variable Overhead 250,000.00
Factory Rent 1,200,000.00
Production In-charge Salary 250,000.00
Insurance 117,000.00
Less : Closing Inventory 2,772,333.33
Total Cost of 4500 units 8,317,000.00
Cost of 1500 closing units 2,772,333.33
COGS u/s 15 7,944,666.67
Particulars/ Pool B C D Total

Opening WDV 170,000.00 1,600,000.00 800,000.00 2,570,000.00
Addition (Machine & Generator
purchased on Chaitra, so 2/3 - - 3,333,333.33 3,333,333.33
capitalised)
Less : Disposal Proceeds 10,000.00 10,000.00
Depreciation Base Value 160,000.00 1,600,000.00 4,133,333.33 5,893,333.33
Depreciation Rate (1/3rd inflated for
33.33 26.67 20.00
export industry)
Depreciation 53,328.00 426,720.00 826,666.67 1,306,714.67

General Deduction Amount (Rs.)

Staff Salary 650,000.00
Other Expenses (200,000 advance is
200,000.00
not expense)
Total 850,000.00
Solution to Q.N. 3
The export facility is provided to the business which has either exported the service/ or goods that are
consumed/used/benefit derived on foreign countries. Eg. If shoe is exported from Nepal to India, the shoe is
used in India. If software is exported from Nepal to UK, the software is used in UK. But in case of hotel the
service seekers although being 100% foreigners, the service they received is in Nepal and thus no export
facility tax rebate is provided.
The renovation of bed and furnishing should be dealt as per cap of section 16, as the renovation/improvement
has increased the life/enhanced the output of the same asset, so whole amount cannot deducted without
meeting the conditions of section 16.
In FY 2071.72, the interest on building construction is capitalized for whole 12 months, i.e 120,00,000*10%=12
lacs. But the hotel started its operation on 2072.01.01, so interest for 3 months should have been claimed as
interest u/s 14 i.e. Rs. 3 lacs. Due to this error the loss for FY 2071.72 should be excess claimed by Rs. 3 lacs.
(The impact of overcapitalization on interest on building can also be adjusted for opening WDV of building for 2
years and impact of excess claim of depreciation for 3 years need to be examined in real scenario, but for CAP II
level the same complexity is not expected, so solution is done for adjustment of loss amount only. Further, in
Income Tax Act 2058 there is no provision of Amendment of Self Assessment, but as per Auditors point of view,
previous errors need to be appropriately addressed, so solution is made considering the easiest mode of
correcting the previous year error. Further, the in real scenario the loss once not claimed on self assessment is
not allowed by IRD on later year to claim, but for simplicity and CAP II level here the loss is claimed).
Sales Revenue 122,500,000.00
Total 122,500,000.00
Cost of Sales 54,500,000.00
Cost of Food 22,500,000.00
Cost of Beverage 17,500,000.00
Cost of Room consumables 14,500,000.00
Repair 1,035,650.00
Depreciation 3,652,250.00
General Deduction (Employee & Selling & Administrative Expenses) 34,050,000.00
Total Deduction 93,237,900.00
Previous Year Loss 6,345,500.00
2071.72 (The loss is increased by 3 lacs for the interest expenses) 2,325,500.00
2072.73 2,145,000.00
2073.74 1,875,000.00
Taxable Income for FY 2074.75 22,916,600.00
Tax Rate (15% Rebate for Listed Tourism Industry) 21.25%
Tax Liability 4,869,777.50

Pool A C D
Opening (The Bed/Furnishing for Hotel Industry are
17,500,000.00 2,790,000.00 14,795,000.00
Core Assets, and thus need to classified as Pool D)
Depreciation Rate 0.05 0.20 0.15
Depreciation 875,000.00 558,000.00 2,219,250.00
7% Cap for Repair 1,225,000.00 195,300.00 1,035,650.00
Actual Repair - - 3,560,000.00
Allowed Repair - - 1,035,650.00
Total Amount
Particulars
(Rs.)
Salary (215,000*12 months) 2,580,000.00
Festival Allowance (1*215,000) 215,000.00
Provident Fund Contribution by employer (2,508,000*10%) 258,000.00
Gift From Employer 110,000.00
House Rent Allowance (21,000*12) 252,000.00
Entertainment Allowance (2500*12) 30,000.00
Medical Allowance (2580000*1.5%) 38,700.00
Cook Facility at residence (9000*12) 108,000.00
Meeting Allowance (Meeting allowance is final withholding income, so need not to be
-
included in assessable income calculation)
Cost of Meal at Office (the meal is provided to all employees in equal terms, so need not
-
be included as income)
Reimbursement of Dinner Cost (the cost paid is for normal business transaction of
employer and reimbursement of such cost paid by employee is not part of income of -
employee)
Leave facility paid (only the part that is paid to employee is to included as income) 25,000.00
Gratuity cost (The gratuity is not paid by the employer so need not be included as
-
income)
Payment for School fees of children 120,000.00
Life insurance premium paid by employer (21000*50%) 10,500.00
Medical Insurance compensation from insurer (The compensation received is not part of
-
assessable income)
Quantification of Vehicle Facility (0.5% of 2580000) 12,900.00
Assessable income 3,760,100.00
Reduction
Donation (Min of below three conditions) 75,000.00
5% of AI (5% of 3760100) 188,005.00
Rs. 100,000 100,000.00
Rs. 75,000 actual payment 75,000.00
Life Policy (Minimum of below two conditions) 21,500.00
Rs. 25,000 25,000.00
Actual paid for her and her child (21000/2 + 11000) 21,500.00
Retirement Fund (Minimum of below three conditions) 300,000.00
Rs. 300,000 300,000.00

1/3rd of AI (Rs. 3760100/3) 1,253,366.67

Actual payment (Rs. 2580000*20%) 516,000.00
Taxable income 3,363,600.00
Assuming She claims as Couple
1% for 400,000 4,000.00
10% for Next 100,000 10,000.00
20% for Next 200,000 40,000.00
30% for Next 2,663,600 799,080.00
20% Surcharge for more than 20 lacs (1,363,600*30%*20%) 81,816.00
Total Tax 934,896.00
Assuming She claims as Single
1% for 350,000 3,500.00
10% for Next 100,000 10,000.00
20% for Next 200,000 40,000.00
30% for Next 2,713,600 814,080.00
20% Surcharge for more than 20 lacs (1,363,600*30%*20%) 81,816.00
Less : 10% rebate for female 94,939.60
Net Tax 854,456.40
It is beneficial to opt as single for her.

Salary (50000*6 + 100000*6) 900,000.00
Dashain Allowance (50,000*1, only received from School) 50,000.00
House Rent Allowance (5000*6 + 25,000*6) 180,000.00
Remote Area Allowance (10000*6) 60,000.00
Leave Encashment 25,000.00
Advance Salary (Employment income is calculated as per Cash Basis of Accounting) 100,000.00
Telephone Allowance (5000*6) 30,000.00
Travelling & Daily Allowance (TADA, not included as income ) -
School Tuition fees of children (5000*6) 30,000.00
Assessable Income 1,375,000.00
Reduction
Donation (5% of AI or 100,000 or actual Rs. 103,000 taken the lowest) 68,750.00
Retirement Fund (1/3rd of AI or 300,000 or actual Rs. 120,000 taken the lowest) 120,000.00
Life Insurance premium (25,000 or actual Rs. 31,000 taken the lowest) 25,000.00
Health Insurance Premium (Rs. 20,000 or actual Rs. 18,500 taken the lowest) 18,500.00
1% for 350,000 3,500.00
10% for 100,000 10,000.00
20% for 200,000 40,000.00
30% for 492,750 147,825.00

Total Tax Liability 201,325.00

Tax Deducted by School (previous employer) 21,000.00
Tax to be deducted by INGO (Current employer) 180,325.00
She has more than one employer during the year, so need to file the income tax return.
Particulars Amount (Rs.) Remarks
Interest Income from Commercial Bank - Final Withholding Income
Interest Income from Hydro Solution Pvt
The net amount is after 15% withholding tax,
Ltd (Net) for providing the unsecured 210,000.00
so income is grossed up
loan
Music System Rental Income from
750,000.00 Taxable Income
Indreni Entertainment Pvt Ltd (Gross)
The windfall income without TDS is not part
Received from Ward Welfare Society as
of assessable income, there is joint liability
Best Social Worker without deducting -
of TDS towards payer and payee in case of
TDS
windfall income
Cash Dividend Received from XYZ Bank
- Final Withholding Income
Ltd
Gift related to investment 180,000.00 Taxable Income
Income from Natural Resources 55,000.00 Taxable Income
Net Benefit from Life Insurance - Final Withholding Income
Total Assessable Income 1,195,000.00
Deductions
Repair Expenses of Music System 10,000.00 Allowable
Interest Expenses for the borrowed fund provided to Hydro Solution 22,000.00 Allowable
Allowable Depreciation of Music System 12,500.00 Allowable
Expenses related to natural resources 3,500.00 Allowable
Total Deduction 48,000.00
Reduction
Life Insurance Premium 24,500.00
Approved Retirement Fund Contribution 78,500.00
Tax Calculation
1% for 400,000 4,000.00
10% for 100,000 10,000.00
20% for 200,000 40,000.00
30% for next 344,000 103,200.00
Less : Tax deducted
On Interest Income from Hydro Solution (15% of 210,000) 31,500.00
Net Tax Payable 125,700.00


Net Premium received 400,000.00
Commission on reinsurance ceded 20,000.00
Opening unexpired risk reserve 150,000.00
Opening claim outstanding 23,000.00
Interest Income 50,000.00
Miscellaneous Income 25,000.00
Claim received from reinsurance 50,000.00
Total 718,000.00
Deduction
Agent Commission 15,000.00
Management Expenses (prior period Rs. 15,000 disallowed) 85,000.00
Claim paid during the year 100,000.00
Closing claim outstanding (115% of outstanding claim) 34,500.00
Closing unexpired risk reserve (50% of net premium received, 50% of 400,000) 200,000.00
Depreciation 60,000.00
Carry forward loss (section 20) 100,000.00
Total Deduction 594,500.00
Taxable Income 123,500.00
Tax Rate 30%
Tax 37,050.00
As per section 59(Ka) of Income Tax Act, the allowable limit for LLP during any income year is 5% of the Gross
Loan (Loan Outstanding + Non Banking Assets at the end of fiscal year + Loan Written Off but not recovered till
the end of fiscal year) for the particular year less claimed LLP upto previous year or the LLP expenses of the
Bank whichever is lower. The detailed calculation is as follows:
Amount (Rs.)
Particulars FY 2072/73 FY 2073/74 FY 2074/75

Loan Outstanding at the end (a) 9,085,600.00 9,850,690.00 10,258,600.00
Non Banking Assets upto previous year (b) 98,570.00 91,700.00 67,070.00
Non Banking Assets Recovered during the year (c.) 25,460.00 50,230.00 22,400.00
Bad accepted as Non Banking Assets During the
18,590.00 25,600.00 14,500.00
Year (d)
Closing NBA the end of Fiscal Year (e=b + d - c) 91,700.00 67,070.00 59,170.00
Loan Written Off upto previous Year (f) 356,900.00 231,500.00 140,900.00
Written Off Loan recovered during the year (g) 125,400.00 90,600.00 125,000.00
Closing Loan Written Off but not revered till the
231,500.00 140,900.00 15,900.00
end of Fiscal Year (h=f-g)
Total Loan Limit (i=a+e+h) 9,408,800.00 10,058,660.00 10,333,670.00
Loan Loss Provision upto previous year (j) 181,712.00 254,212.00 400,062.00
Loan loss provision expenses in Income Statement 72,500.00 145,850.00 115,400.00

(k)
Total LLP Expenses as per Income statement (l = j +
254,212.00 400,062.00 515,462.00
k)
5% of Loan Limit (m= 5% of i) 470,440.00 502,933.00 516,683.50
Allowed (n=m-l) 216,228.00 102,871.00 1,221.50
Allowable LLP expenses (Minimum of n or k) 72,500.00 102,871.00 1,221.50
Disallowed part of LLP expenses to be added on
- 42,979.00 114,178.50
calculating income
Net Income as per income statement 2,025,000.00 2,150,000.00 2,290,000.00
LLP expenses disallowed - 42,979.00 114,178.50
Written off loan recovered during the year to be
(125,400.00) (90,600.00) (125,000.00)
deducted
Taxable Income 1,899,600.00 2,102,379.00 2,279,178.50
Tax Rate 30% 30% 30%
Tax Amount (Rs.) 569,880.00 630,713.70 683,753.55
The written off loan recovered during the year is not to be included as income while calculating the tax,
because on write off the expenses is not allowed (in the year of written off) so from the net income this needs
to be deducted. The CFO has allowed all the LLP expenses as deductible expenses, so the disallowed part
needs to be added as income. The tax rate for banking industry is 30%.
Employment Income In Nepal 2,250,000.00
Employment income in UK 1,250,000.00
Less: Retirement Fund Reduction (1/3rd of AI, 300,000 or actual 270,000, taking the
270,000.00
minimum of actual)
Less: Donation (5% of AI, 100,000 or actual Rs. 125,000) 100,000.00
Tax Calculation
1% First 400,000 4,000.00
10% Next 100,000 10,000.00
20% Next 200,000 40,000.00
30% Remaining 2,430,000 729,000.00
20% surcharge on 30% of 1,130,000 67,800.00
Total Tax before foreign tax credit 850,800.00
Foreign Tax Credit = tax before foreign tax credit/taxable income =850800/3130000 27.18%
Foreign Tax Credit (foreign income * foreign tax credit%) = 1250000*27.18% or actual tax
335,000.00
Rs. 335,000 paid in UK, take the lowest
Net Tax Payable income in Nepal 515,800.00
Solution to Q. No 10
As per Section 2(Ga) of Income Tax Act, 2058, final withholding payment is defined as the payments specified
under Section 92 such as dividend, rent, gains, interest and payment to a non-resident person, which is to be
made after withholding final tax.

Final withholding payments are the payments made after deducting tax at source at specified rate prescribed
under Income Tax Act, 2058. The tax, thus, deducted shall be the final tax. The person receiving the final
withholding payments does not have to include this amount in his other taxable income.
According to Section 92 of Income Tax Act, 2058, following payments are treated as final withholding
payments:
 Dividend paid by a resident company.

 Rent for lease of land or building and associated fittings and fixtures, having a source in Nepal, and
that is received by an individual other than the individual carrying on business.
 Payment made by resident person for gains from investment insurance.
 Payments made as gain from unapproved Retirement Fund.
 Interest payment, as specified under Section 88(3), made by bank, financial institution or any entity
issuing bond or company listed as per the prevailing law.
 Payments made to non-resident persons that are subject to withholding tax under section 87, 88, or
89.
 Retirement payments made by Nepal Government or from the Approved or Unapproved Retirement
Fund including all types of retirement payments (except regular pension payment).
 Meeting fee, payments made for occasional teaching.
 Payment against windfall gain.
Solution to Q. No 11
a) Section 2(ha) of Income Tax Act, 2058 defines the term "Payment" as follows;
Payment means;
 The transfer of money, an asset, or a liability by a person to another person;
 The creation of an asset by one person that on creation it is owned by another person or the
taking of an obligation of liability owned by another person;
 Service provided by one person to another person; and
 The use, or making available for use, of an asset owned by one person to another person.
b) As per section 2 (ka yng) of Income Tax Act, 2058, "Trading Stock" means the assets owned by a
person and for sale in the ordinary course of business, work-in-progress on such assets and
inventories of materials that are to be included into such assets. Provided that the term shall not
include an asset in foreign currency.
c) As per section 2 (ka ra) of Income Tax Act, 2058, "Depreciable Asset" means an asset which is used for
generation of income from any business or investment and whose value declines due to wear and
tear, obsolescence, or the passing of time. Provided, the term shall not include trading stock.
d) As per Section (2) (da) of Income Tax Act 2058, non-business chargeable assets means securities or an
interest in an entity as well as land and buildings held by a natural person but excludes the following
assets.
(i) business assets, depreciable assets, of trading stock;

(ii) a private residence of an individual that has been:
 owned continuously for ten years or more; and
 lived in by the individual continuously or intermittently for a total of ten years or more;
private resident means Building or area covered by building or one rupani land whichever is less.

(iii) interest belonging to a beneficiary in a retirement fund;

(iv) land and private building of an individual that is disposed off for less than rupees one million; or non-
business assets of an individual that is disposed off by way of any type of transfer, other than sales and
purchase, made within three generations.
e) As per section 2(ka ta) of Income Tax Act, 2058, "Business Asset" means an asset used in
business. Provided, the term shall not include trading stock or a depreciable asset in business.
f) As per sec 2(u) of Income tax Act, 2058, A "Trustee" means an individual or Goothi or corporate body
holding assets in a fiduciary capacity, whether held alone or jointly with other individuals or
corporate bodies, and includes the following persons-
(i) any executor or administrator of a deceased individual's estate;
(ii) any liquidator, receiver, or trustee;
(iii) any person having, either in a private or official capacity, the
possession, direction, control, or management of the assets of an incapacitated person;
(iv) any person who manages assets under a private foundation or other similar arrangement; and
(v) any person in a similar position to a person mentioned in subparagraphs (i), (ii), (iii) and (iv).
g) As per sec 2(ak) of Income tax Act, 2058, "Royalty" means any payment made under a lease of an
intangible asset and includes any payment made for the following purpose:-
(i) the use of, or the right to use, a copyright, patent, design, model, plan, secret formula or process, or
trademark;
(ii) the supply of know-how;
(iii) the use of, or right to use, a cinematography film, video tape, sound recording, or any other like
medium and the supply of information concerning industrial, commercial, or scientific experience;
(iv) the supply of assistance ancillary to a matter referred to in paragraphs (i), (ii) or (iii); or
(v) a total or partial forbearance with respect to a matter referred to in paragraphs (i), (ii), (iii) or (iv).
provided that, the term does not mean any payment from natural resources.
h) As per sec 2(bb) of Income tax Act, 2058, "Permanent establishment" means a place where a person
wholly or partly carries on a business, and includes the following places:-
(i) a place where a person wholly or partly carries on a business through an agent, other than a general
agent of independent status acting in the ordinary course of business as such;
(ii) a place where a person has, is using, or is installing substantial equipment or substantial machinery;
(iii) one or more places within a country where a person furnishes (whether through employees or
otherwise) related services (including technical, professional, or consultancy services) for a period or
periods aggregating more than 90 days within any 12 month period; or
(iv) a place where a person is engaged in a construction, assembly, or installation
project for 90 days or more, including a place where a person is conducting supervisory activities in
relation to such a project.
i) As per sec 2(am) of Income tax Act, 2058, "Investment insurance" means insurance of any of the
following classes:
(i) insurance where the event covered is the death of an individual who is the insured or an associate of
the insured;
(ii) insurance where the event covered is an individual who is the insured or an associate of the
insured sustaining personal injury or becoming incapacitated in a particular manner;
(iii) insurance where the insurance agreement is expressed to be in effect for at least five years or

without limit of time and is not terminable by the insurer before the expiry of five years except in special
circumstances specified in the contract;
(iv) insurance under which an amount or series of amounts is to become payable to the insured in the
future; and
(v) reinsurance of insurance referred to under subparagraphs (i), (ii),or (iv); and
(vi) reinsurance of reinsurance referred to under subparagraph (v).
a)In case a taxpayer is not satisfied with any decision of IRO, it has to file an application, as its first step,
to IRD for an administrative review. According to Sec 114, an application against the following
decisions should be moved to IRD for an administrative review:
i. Advance ruling issued under Sec. 76 by IRD;
ii. Decision or order to withholding agent under Section 90(8)
iii. Reassessment of estimation of advance payment by a taxpayer made by a Tax Officer under
Section 95(7);
iv. Decision by a Tax Officer to require a taxpayer to file return of tax under Section 96(5) or 97;
v. Decision by a Tax Officer with regard to an extension of time for filling returns under Sec.98;
vi. Jeopardy assessment under Section 100, an amended assessment under Section 101, an
assessment of expenses incurred on auction sales under Section 105(5), or fees and interest
imposed under Sections 122;
vii. Notification by the IRO of an amount to be set aside by a receiver under Section 108(2);
viii. Order by a tax office to a debtor of the taxpayer to pay the amount due to the tax office instead
of to the taxpayer under Section 109(1);
ix. Order by a Tax Officer to a person to pay tax on behalf of a non-resident person under Section
110(1);
x. Decision of IRO on an application by a taxpayer for a refund of a tax under Section 113(5); and
xi. Decision of IRD on an application by a taxpayer for extension of time within which to file an
objection under Section 115(3).
b) Following are the payments, which are not included while computing income from employment:
i. Any amount received by an employee for which exemption is given under Section 10 of the Act
and any amount received which is subject to final withholding of tax.
ii. Work-time meals or refreshments provided by the employer in equal terms for all the employees
at working place or uniform applicable to working place only.
iii. Any reimbursement of expenses incurred by the employee:
_ That serves the purpose of the business of the employer; or
_ That would otherwise be deductible in calculating the individual’s income from the business or
investment.
_ Reimbursement of outstation cost-travelling or daily allowance
iv. Any prescribed small amounts, which are too small and thus unreasonable or administratively
impracticable to make accounting for them. The amount prescribed by the rule is Rs. 500 at a time.
The expenses prescribed by the rule include tea expenses, stationery expenses, prizes, gifts,
emergency medical facility, or other such payments as specified by IRD.
c) The following methods of foreign tax credit is prescribed as per Section 71 of the Income Tax Act, 2058
to avoid double taxation of a resident person:
a) Credit Method: Income from foreign country is taxable to the person in his country of residence and
permitted to set off of tax paid in foreign country (generally to the extent of effective tax rate of
country of residence)

b) Expense Method: Tax paid in foreign country is eligible to claim as expenses while computing
taxable income in his country of resident.
a)Tax
As per sec 2 (Dha), "Tax" means income tax imposed under the Income Tax Act and includes
following payments:-
i. Expenses incurred in the process of creating charge and performing auction of the property of tax
Debtors by the department as mentioned in section 104 (8) (a);
ii. Amount payable by a withholding agent Withholding agent or withholdee under section 90, or
amount payable by an installment payer under section 94, and on assessment under sections 99,
100,and 101; and amount payable by person who required to deposit tax under section 95 ka
iii. Amount payable to the Department in respect of a tax liability of a third party under section
107(2), 108(3) or (4), 109(1), and 110(1);
iv. Amount payable by way of interest and fees under Chapter 22; and
v. Amount payable by way of fines in order of the department as per section 129.
b) Debt Claim
As per Sec 2(Tha) of Income Tax Act, Debt claim means a right of one person to receive a payment from
another person and includes a right to repayment of an amount paid by one person to another person
as well as deposits in banks and other financial institutions, accounts receivable, notes, bills of exchange,
bonds, and rights under annuities, finance leases and installment sales.
c) Exempt Organization
As per sec 2(Dhna), "Exempt organization" means the following entities:

i. Following entities registered with the Inland Revenue Department as an exempt organization:
a. a social, religious, educational, or a charitable organization of a public character established without
having a profit motive,
b. an amateur sporting association formed for the purpose of promoting social or sporting facilities not
involving the acquisition of gain,
ii. a political party registered with the Election Commission,
iii. a village Municipality, municipality or district coordination committee,
Provided that, in cases where any person has derived any benefit from the property of that organization
and the monies obtained from that organization except in making payment for the property or the
service provided by any person to that organization or in discharging functions in consonance with the
objective of the organization entitled to exemption, tax exemption shall not be granted.
d) Underlying Ownership
As per Sec 2 (Ra) of Income Tax Act, "Underlying ownership" means following ownership:-
i. in relation to an entity, an ownership created on basis of an interest held in the entity directly or
indirectly through one or more interposed entities by an individual or by an entity in which no individual
has an interest; or
ii. in relation to an asset owned by an entity, an ownership of the asset that is determined on basis of
proportion to the ownership held by the persons having underlying ownership of the entity.

e) Company
As per section 2(m), "Company" means any company incorporated under the companies' law in force,
and for the purpose of tax the following institutions shall also be treated as if they were companies:
(1) Any corporate body established under the law in force,

(2) Any unincorporated union, board, association or society or sole proprietorship whether incorporated
or not and any group of persons or trust except a partnership,
(3) Any partnership firm consisting of Twenty or more partners whether registered or not under the law
in force, any retirement fund, cooperative institution, unit trust, joint venture,
(4) Any foreign company;
(5) Any other foreign institution as specified by the Director General.
f) Lease
As per section 2(ab), "Lease" means the provisional right of any person to enjoy or use any property
except movable property belonging to another person, and this term also includes a license, rent
agreement, trenches, royalty agreement or right of a lessee/ tenant.
g) Investment
As per section 2(al),"Investment" means the act of holding one or more properties or investing such
properties, except with the followings:
(1) Holding any property used by the owner thereof in personal use, or
(2) Employment or occupation.
Provided that holding non-business taxable property shall be deemed as investment.
h) Interest
As per section 2(as), "Interest" means the following payment or profit:
(1) Payment under debt liability except the principal,
(2) Profit made from concession, exemption, premium under loan liability, alteration payment or from
similar payment, and
(3) The amounts referred to in Section 32 receivable as an interest out of the payment to be made by a
person who acquires any property under annuities or installment sale or of the payment made to any
person for the use of any property under a financial lease.
i) Receiver:
As per Section 108 of Income Tax Act, 2058 ―Receiver‖ means any of the following persons:
(1) a liquidator;
(2) a receiver appointed out of court or by a court in respect of an asset or entity;
(3) a mortgagee in possession;
(4) an executor, administrator, or direct heir of a deceased individual's estate; or
(5) any person conducting the affairs of an incapacitated individual.
j) Natural Person:
Natural person as defined by section 2 (wa) as follows:
a. A single natural person;
b. A proprietorship firm 100% owned by a single natural person;
c. A couple opted being as a single taxation unit under section 50;
d. A natural person being widow or widower with dependent opted being as a single taxation
unit under section 50.

Calculation of output tax
Particulars Total Sales Taxable Non Taxable Tax
Travel Package to
Kailash/Tibet (Outbound)
Sales 102,560,000.00 102,560,000.00 -
Travel Package to Nepal
(Inbound) Sales 125,600,000.00 125,600,000.00 16,328,000.00
Sales of Air Ticket 27,560,000.00 27,560,000.00 -

Sales of Vehicle Services
(Vehicle hiring services to
tourists in Nepal) 12,590,000.00 12,590,000.00 1,636,700.00
Total 268,310,000.00 138,190,000.00 130,120,000.00 17,964,700.00

Taxable Sales
Taxable Sales Ratio *100/Total Sales 51.50%
Notes
- The outbound sales is export of service, so non taxable
- Sales of travel and tour package within Nepal is taxable (i.e VAT Attractive)
- Sales of vehicle hiring service by the registered tour/travel operator through the tourist class vehicles
(Green Plate) is VAT attractive
- The taxable sales ratio is percentage of taxable sales to total sales
Particulars Total Amount Taxable Non Taxable Tax Allowed Tax
Purchase cost of Outbound Sales - -

Hotel (Accommodation and
Food Cost) paid to Chinese
hotels 29,500,000.00 - 29,500,000.00 -
Travel Insurance paid to Nepali
General Insurers 1,456,000.00 1,456,000.00 189,280.00 -
Guide Charges 14,560,000.00 14,560,000.00 -
Porter Cost 15,060,000.00 15,060,000.00 -

Medicine Cost (purchased in
Nepal) 1,500,000.00 1,500,000.00 -
Purchase cost of Inbound Sales -

Hotel (Accommodation and
Food Cost) paid to Nepali hotels 32,545,000.00 32,545,000.00 4,230,850.00 4,230,850.00
Travel Insurance paid to Nepali
General Insurers 925,600.00 925,600.00 120,328.00 120,328.00
Guide Charges 16,590,000.00 16,590,000.00 -
Porter Cost 15,590,000.00 15,590,000.00 -

Medicine Cost (purchased in
Nepal) 1,485,000.00 1,485,000.00 -

Entrance Fee to National Park 6,085,000.00 6,085,000.00 791,050.00 791,050.00
Other Expenses/Payments -
Purchase of Tourist Class (Green
Plate) Vehicle 8,560,000.00 8,560,000.00 1,112,800.00 1,112,800.00
Purchase cost of air ticket 10,980,000.00 10,980,000.00 -
Office Internet Expenses 550,000.00 550,000.00 71,500.00 71,500.00

Travel Management Software
purchased from Thailand (paid
equivalent Nrs) 10,055,600.00 10,055,600.00 1,307,228.00 1,307,228.00
Office Employee Salary 44,560,000.00 44,560,000.00 -
Total 210,002,200.00 60,177,200.00 149,825,000.00 7,823,036.00 7,633,756.00

Allowed Input Tax (Input Tax *
taxable Sales ratio)
(7633756*51.5%)
3,931,678.81
Net VAT Payable (Total output
tax - total allowed input tax)
14,033,021.19
Notes:
- Hotel cost paid to Chinese hotels for Kailsah/Tibet tour package is non-taxable in Nepal
- The Insurance premium is taxable in Nepal, but the sales being non-taxable, the input VAT is not
allowed for credit
- The input tax paid on purchase of tourist class vehicle (green plate) is fully allowed, as directly used for
taxable sales.
- The software purchased from Thailand, is tax attractive through reverse charging (to declare and pay
the VAT amount by the purchaser)
Particulars Amount Non Taxable Taxable Tax

Sales of Ayurvedic Medicines 12,050,000.00 12,050,000.00
Sales of Ayurvedic Cosmetics 14,560,000.00 14,560,000.00 1,892,800.00

Export of Ayurvedic Medicines 22,590,000.00 22,590,000.00
Export of Ayurvedic Cosmetics
* 18,690,000.00 18,690,000.00 -
Total 67,890,000.00 34,640,000.00 33,250,000.00 1,892,800.00

Purchase of ayurvedic herbs
(jadibuti) from local collectors
in village in various district 6,090,000.00 6,090,000.00
Purchase of ayurvedic herbs
(jadibuti) from Community
Forest in various district 7,580,000.00 7,580,000.00
Import of grinding machine 4,560,000.00 4,560,000.00 592,800.00

Purchase of Truck (used for

carriage of raw materials as
well as finished goods) 1,860,000.00 1,860,000.00 241,800.00
Purchase of Furniture and
Computer for Office 750,000.00 750,000.00 97,500.00
Electricity cost 450,000.00 450,000.00
Total 21,290,000.00 14,120,000.00 7,170,000.00 932,100.00
Allowed Input Tax = total input tax * taxable sales ratio = 932100*82.25% 456,507.95
Net VAT Payable = Total Output Tax - Allowed Input Tax 1,436,292.05
Workings
Taxable Sales Ratio Taxable Sales*100/Total Sales 48.98%
* the rate of tax on export of taxable goods is 0%
As per section 2(k) of Value Added Tax Act 2052, "Market Value" means the price as determined pursuant to
Section 13;
As per section 13 of Value Added Tax Act 2052, market value related provisions are:
(1) The market value of goods or services shall be determined as the consideration in money which the
supply of these goods or services would generally be agreed on if the transaction were made under similar
circumstances at that date in Nepal taking into consideration the characteristics, quality, quantity,
materials, and any other relevant factor, being a supply freely offered and made between persons who are
unrelated.
(2) For the purpose of this section the method for the determination of market value shall be as
prescribed.
(3) Where the market value of goods or services could not be determined under subsection (1) and (2), it
shall be determined in accordance with a process determined by the Director General.
In addition to this section, Section 22 of Value Added Rules 2053 mention that, for determining the
market value under Section 13 of the Act, the tax officer shall determine the market value by studying the
transactions and value of other vendors registered in regard to the transaction of the same nature. In
cases where the market value of any goods or services cannot be determined as set forth in sub-section
(3) of Section 13 of the Act, the Director General shall determine the value on the basis also of the
information received in that regard by him from the registered persons of the same nature.
As per rule 33 of Value Added Tax Rules, 2053, following are the provisions regarding records to be
maintained, for a registered person dealing in used or second hand goods.
1) A registered person who is dealing in used or secondhand goods has to maintain purchase register and
sales register containing the following particulars:
Relating to purchases:
i. Date of purchase
ii. Particulars giving full information of the goods
iii. Buying price excluding tax

iv. Rate of tax

v. Amount of tax
vi. Total amount paid
Relating to Sales:
i. Date of sale
ii. Selling price excluding tax
iii. Difference between the buying price and selling price
iv. Rate of tax
v. Amount of tax
vi. Total amount received.
(2) In case the buying price of every item of used goods exceeds Rs. 10,000, separate records of buying or
selling shall be maintained.
(3) In case a registered person is found not to have satisfactorily maintained the records as prescribed
above, tax officer may impose VAT on the total selling price of the goods sold by such taxpayer, and the
tax officer may issue a written order requiring him to pay such tax along with the next tax return.
(4) In case of used or second hand goods, tax shall be assessed on the amount which is difference between
the selling price and buying price. Buying price means price including taxes.
i)
The statement is false. 'No VAT' and 'Zero VAT' have different meaning.
Transactions of those goods and services which are included in schedule 1 of the VAT Act, 2052 are exempted
from tax. This is called no VAT items. Where a supply of a goods or services is exempt from VAT, the input tax
credit is not allowable. Out of the goods or services, which are subject to VAT and are transacted as per
schedule 2 of the Act, the rate of VAT shall be charged by zero percentage. Where a supply of a goods or
services is at zero rate, the input tax credit is allowable.
ii.
The statement is false.
As per section 6(3)(kha) of Value Added Tax Act, 2052, in the case where there is provision of a contract for
paying partly the value of goods or services in more than one day on an installment basis, the time of supply
shall be
- at the time of the payment or
- the day on which the payment is to be made according to the terms of contract whichever occurs earlier.
iii.
The statement is true.
As per rule 41(3) of Value Added Tax Rules, 2053, for a registered person, who carries on a business of those
goods mentioned in sub- rule (1) and (2) of Rule 41 as the principal business, there shall be no restriction for
the tax credit in accordance with the procedures mentioned in these rules.
Hence, Roy & Co. is allowed to claim full input tax credit on purchase of cars as their principal business is to
import passengers car and sell into local market.
iv.
As per section 29(1)(ja) of Value Added Tax Act, if a taxpayer fails to submit tax return as per section 18, 0.05%
per day of tax payable or Rs. 1,000 per tax period whichever is higher.

v.
As per Rule 33(3) of Value Added Tax Rules, 2053, where the purchase price of each item of used goods
exceeds Rs. 10,000, separate records of purchase or sale shall have to be maintained.
i) Late payment of VAT amount.

Additional fee
On late payment of VAT amount to Inland Revenue, additional fee of 10% annually shall be imposed on
payable VAT amount (Section 19 (2)).
Interest
On late payment of VAT amount to Inland Revenue, 15% annual interest shall be imposed in such outstanding
amount. (Section 26).
ii. Tax plate not kept/misplaced.

As per section 29(1) if tax plate is not kept, penalty @ 2000 per week shall be charged and if it is not kept at
prescribed place, penalty @ 1000 shall be imposed.
a)
As per Section 15 of VAT Act, normally a person who is not registered shall not issue an invoice or other
document showing the collection of tax and shall not collect tax. But Sub-section 3 of Section mentions that
tax should be recovered on sale of taxable goods or services by local body, international organization or
mission situated in Nepal, Government of Nepal or public corporations dealing in VAT exempt goods.
b)
According to Section 5 (1) of VAT Act, except otherwise provided for in this Act, VAT shall be imposed on the
following transactions:
(Ka) Goods or services supplied into the State of Nepal,
(Kha) Goods or services imported into the State of Nepal,
(Ga) Goods or services exported outside the State of Nepal,
Sub-section 3 stipulates that notwithstanding Subsection (1), no tax shall be levied on the transactions of
goods or services set forth in Schedule 1.
c)
In case the loss of assets by fire, theft, accident, accidental damages, terror or riot compels a person to write
off the goods/(assets) or sale it at lower selling rate, the person shall made an application in writing to
respective Inland Revenue Office along with evidence within 30 days of happening of such incidence.
The tax office shall investigate the matter and finalize the quantum of tax credit to be allowed to claim.
On the basis of such investigation, the tax office may allow the tax payer to claim input tax credit of vat paid
on such assets/ (goods).
In case the assets are insured the tax officer may allow the tax payer to claim input tax credit on such goods to
the extent of compensation paid by the insurance company.
a) Temporary Registration for VAT Section 10A of Value Added Tax Act, 2052 provides for temporary
registration of VAT. Any unregistered person desiring to engage in any short-term taxable transactions of
goods or services at fair, show, demonstration, display, exhibitions etc. has to apply for a temporary VAT

registration. In the application, tax officer may demand deposit of the tax as appropriate. Existing registered
person can transfer goods for transaction to the place of exhibition or fair. Within seven days of completion of
the fair, show, demonstration, display, exhibition etc., temporary registered person has to submit VAT return
of the transactions made in such fair, show or exhibition and clear the required taxes collected thereon.
b) Transfer of Business Section 5(A). In case of transfer of business under either of the following two
conditions, Value Added Tax will not be applicable on the transfer of ownership of a business: - When a
registered person sells its business to any other registered person; or - A business is transferred to any
inheritor on the death of an owner. In case a registered person transfers the whole of its business to any other
registered person, the transferor is not required to charge tax on the transfer, if Form of Schedule 4 has
agreed and submitted with the Tax Officer. In this case, VAT liability due or further rose of the transferor, or
VAT credit in the hand of transferor has to be shifted to the transferee.

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CHARTERED ACCOUNTANCY PROFESSIONAL

REVISION TEST PAPER

The Institute of Chartered Accountants of Nepal

The Institute of Chartered Accountants of Nepal 2

Liabilities DD Ltd. SS Ltd. Assets DD Ltd. SS Ltd.

The Institute of Chartered Accountants of Nepal 3

The Institute of Chartered Accountants of Nepal 4

Cash Flow Statement

Particular Debit Credit

You are informed that:

The Institute of Chartered Accountants of Nepal 5

Hire Purchase Transactions

The Institute of Chartered Accountants of Nepal 6

Issue of Shares and Debentures

Underwriting of Shares and Debentures

The Institute of Chartered Accountants of Nepal 7

The Institute of Chartered Accountants of Nepal 8

Profit or Loss Pre and Post Incorporation

Liquidator’s Final Statement

The Institute of Chartered Accountants of Nepal 9

charge on all assets) 200,000

Accounting for Partnership

The Institute of Chartered Accountants of Nepal 10

Accounting for Non-profit making Organization

The Institute of Chartered Accountants of Nepal 11

Accounting for Banks

Accounting for Departments

The Institute of Chartered Accountants of Nepal 12

iii) Value of supplies made by C Department to:A 400

Nepal Accounting Standards (NAS)

Compute the value of closing stock as per provisions of NAS?

e. Discuss on ‘Other comprehensive income’ as outlined in Nepal Accounting Standard.

The Institute of Chartered Accountants of Nepal 13

Write Short Notes

The Institute of Chartered Accountants of Nepal 14

SUGGESTED ANSWERS HINT

Journal Entries in the Books of DD Ltd.

Investments Account Dr. 192,500

Liquidator of SS Ltd. Dr. 1,242,500

Balance Sheet of DD Ltd.

The Institute of Chartered Accountants of Nepal 15

2. Calculation of Purchase Consideration

Total value of shares to be issued (9036  137.50) 1,242,450

The Institute of Chartered Accountants of Nepal 16

Journal Entries in the books of Y Co. Ltd.

To Reconstruction A/c 10,00,000

The Institute of Chartered Accountants of Nepal 17

To 12% New Debentures A/c 7,00,000

(vi) Directors' Loan A/c Dr. 1,00,000

(vii) Reconstruction A/c Dr. 15,000

(viii) Bank A/c Dr. 1,10,000

The Institute of Chartered Accountants of Nepal 18

(xi) Reconstruction A/c Dr. 47,20,000

Cash Flow Statement

The Institute of Chartered Accountants of Nepal 19

2. Depreciation for current year = 43,200 + 40,500 = 83,700

Memorandum Trading Account

Stock destroyed by fire:

a. Turnover in last financial year 450,000

b. Net profit = 10% of 562,500 = 56,250

The Institute of Chartered Accountants of Nepal 20

Particulars Rs. in crore

Revenue and profit to be recognized for the year ended 32.3.2075