2 RTP Compressed

Revisionary Test Paper_ June 2018
Final
Group III
Paper 13 : CORPORATE LAWS & COMPLIANCE
(SYLLABUS – 2016)
SECTION - A
Question 1:
Choose the correct answer from the given alternatives:
1. The _____________ shall recommend to the Board, the name of an individual auditor or of an
audit firm who may replace the incumbent auditor on expiry of the term of such incumbent.
(a) Audit Committee
(b) Managing Director
(c) Nomination Committee
(d) Whole time Director
2. Under Companies Act 2013, the Company may be wound up by ________________ and
Voluntary winding up
(a) Debt Recovery Tribunal
(b) National Company Law Tribunal
(c) Court
(d) Corporate creditor
3. Inspectors report under section 223 of Companies Act, 2013 shall be authenticated by
(a) the seal, if any, of the company whose affairs have been investigated
(b) a certificate of a public officer having the custody of the report
(c) Option (a) or (b)
(d) Option (a) and (b)
4. ‗Temporary loans‘ means loans repayable on

(a) demand or within six months
(b) demand or within three months
(c) within one year
(d) none of the above
5. The books containing the minutes of the proceedings of any general meeting of a
company shall be kept at
DOS, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Pg 1
(a) Head office

(b) Central Office
(c) Registered office
(d) Where the meeting was held
6. Sub section (2) of section 173 allows directors to attend Board meetings:
(a) in person
(b) through video conferencing
(c) other audio visual
(d) any of the above
7. ______________ means any director whose presence cannot count for the purpose of
forming a quorum at a meeting of the Board, at the time of the discussion or vote on any
matter.
(a) Interested Director
(b) Related party
(c) Nominee Director
(d) None of the above
8. The ___________________ shall satisfy itself on the need for omnibus approval for transactions
of repetitive nature and that such approval is in the interest of the company.
(a) Board of Directors
(b) Audit Committee
(c) Management Committee
(d) Any of the above
9. A company may make payment to a managing or whole-time director or manager, but not
to _______________, by way of compensation for loss of office, or as consideration for
retirement from office or in connection with such loss or retirement.
(a) Any other Director
(b) Independent Director
(c) Interested Director
(d) Employees
10. ______________ means a person to whom an operational debt is owed and includes any
person to whom such debt has been legally assigned or transferred.
(a) Operational Debtor
(b) Operational Creditor
(c) Debtor
(d) Creditor
11. Dispute includes a suit or arbitration proceedings relating to
(a) the existence of the amount of debt;

(b) the quality of goods or service; or
(c) the breach of a representation or warranty
(d) All of the above
12. Moratorium shall not apply to such transactions as may be notified by the Central
Government in consultation with
(a) any financial sector regulator
(b) Operational Debtor
(c) Operational Creditor
(d) Board of Directors
13. Which of the following are not a types of listing of securities

(a) Initial Listing
(b) Listing for Public Issue
(c) Listing for Sweat equity shares
(d) Listing for Merger and amalgamation
14. The Chairperson and other Members shall not, for a period of ______________ from the date
on which they cease to hold office, accept any employment in, or be connected with the
management or administration of, any enterprise which has been a party to a proceeding
before the Commission.
(a) three years
(b) two years
(c) one year
(d) six months
15. ________________ means a transaction which alters the assets or liabilities, including
contingent liabilities, outside India of persons resident in India or assets or liabilities in India.
(a) capital account transaction
(b) current account transaction
(c) balance of trade transaction
(d) none of the above
16. Remittance and Repatriation includes

(a) Remittance of sale proceeds/Remittance on winding up/Liquidation of Companies
(b) Repatriation of Dividend
(c) Repatriation of Interest
(d) All of the above
17. Suspicious transaction means a transaction whether or not made in cash which, to a person
acting in good faith and
(a) Gives rise to a reasonable ground of suspicion that it may involve the proceeds or crime
(b) Appears to be made in circumstances of unusual or unjustified complexity
(c) Appears to have no economic rationale or bonafide purpose
(d) Any of the above
18. Functions of Insurance Regulatory and Development Authority does not include
(a) Nomination by Policyholders
(b) Practical training for Insurance agents and other intermediaries
(c) Promoting insurance business
(d) Surrender value of Policyholders
19. Key themes relating to business and society emerge out of the Initiatives concerning
(a) obligations relating to Corporate Social Responsibility (CSR)
(b) recognition of stakeholders interests in corporate governance
(c) either (a) or (b)
(d) Both (a) and (b)
20. High Power Committee does not consist of which of the following members
(a) Cabinet Secretary
(b) Finance Secretary
(c) Vice-President, Government of India
(d) Chief Economic Adviser
SECTION - B
Study Note 1 – Companies Act, 2013
Question 2:
(a) A Ltd acquired B limited who in turn has C limited as his subsidiary and again D limited and E
limited are subsidiaries of C ltd. Can A limited acquire B limited and all its subsidiaries.
Would it have been possible if the companies have been Banking Companies? Comment.
Answer:
Provisions contained in the Companies (Restriction on number of layers) Rules, 2017 are as
under:
Restriction on number of layers for certain classes of holding companies:
a) On and from the date of commencement of these rules, no company shall have more than
2 layers of subsidiaries.
b) However, this restriction shall not affect a company from acquiring a company
incorporated outside India with subsidiaries beyond 2 layers as per the laws of such country.
c) For the purpose of computing the number of layers, one layer which consists of one or more
wholly owned subsidiary or subsidiaries shall not taken into account.
Rules vis-a-vis Sec. 186(1) - The provisions of this rule shall not be in derogation of the proviso to
sub-section (1) of section 186 of the Act.
Provisions for existing companies
Every company existing on the commencement of these rules, which has number of layers of
subsidiaries in excess of the layers specified in sub-rule (1) -
a) shall file, with the Registrar a return in Form CRL-1 disclosing the details specified therein,
within a period of 150 days from the date of publication of these rules in the Official Gazette
(viz. 20th September, 2017);
b) shall not, after the date of commencement of these rules, have any additional layer of
subsidiaries over and above the layers existing on such date; and
c) shall not, in case one or more layers are reduced by it subsequent to the commencement
of these rules, have the numbers of layers beyond the number of layers it has after such
reduction or maximum layers allowed under these Rules, whichever is more.
Punishment for contravention
If any company contravenes any provision of these rules the company and every officer of the
company who is in default shall be punishable with fine which may extend to ` 10,000 and
where the contravention is a continuing one, with a further fine which may extend to ` 1,000 for
every day after the first during which such contravention continues.
Non-applicability of the Rules
Nothing contained in these Rules shall apply to the following classes of companies:
a) A banking company as defined in clause (c) of section 5 of the Banking Regulation Act,
1949.
b) A non-banking financial company as defined in clause (f) of Section 45-1 of the Reserve
Bank of India Act, 1934 which is registered with the Reserve Bank of India and considered as
systematically important non-banking financial company by the Reserve Bank of India.
c) An insurance company being a company which carries on the business of insurance in

accordance with provisions of the Insurance Act, 1938 and the Insurance Regulatory
Development Authority Act, 1999.
d) A government company referred to in clause (45) of section 2 of the Act.
(b) Mr. Ayush is a director of several companies. He has approached the following companies
in which he is a director for financial help to start his own personal business:
(i) Rock on Ltd.
(ii) Super Glue Private Ltd.
(iii) Force Ltd.
The first named company has agreed to grant a loan of ` 50 lakhs. The second company
also offered another loan of ` 50 lakhs. The third company has agreed to provide guarantee
for the repayment of a loan sanctioned to Mr. Ayush by a private bank to the tune of ` 1
crore. Advise Mr. Ayush about the legal provisions that should be complied with under
Companies Act, 2013.
Answer:
As per section 185 of the Companies Act, 2013, no company shall directly or indirectly, advance
any loan to a director or give any guarantee in connection with a foan taken by a director.
Section 185 does not permit a company to advance any loan or give any guarantee even with
the approval of the Central Government. However, the prohibition under section 185 shall not
apply in the following cases:
Case I
Where loan is given to a managing or whole-time director as a part of the conditions of service
expended by the company to all its employees.
Case II
Where loan is given to a managing or whole-time director pursuant to any scheme approved
by the members by a special resolution.
Case III
Where a company, in the ordinary course of its business, provides loans or gives guarantees or
securities for the due repayment of any loan and in respect of such loans an interest is charged
at a rate not less than the bank rate declared by the Reserve Bank of India.
Case IV.
As per Notification No. G.S.R. 464(E) dated 5th June, 2015, the provisions of Section 185 shall not
apply to a private company –
(a) in whose share capital no other body corporate has invested any money;
(b) if the borrowings of such a company from banks or financial institutions or any body
corporate is less than twice of its paid up share capital or ` 50 crore, whichever is lower; and
(c) such a company has no default in repayment of such borrowings subsisting at the time of
making transactions under this section.
Thus, "Rock on Ltd. may grant a loan of ` 50 lakhs to Mr. Ayush in accordance with Case I or
Case II, as explained above, if Mr. Ayush is managing director or whole time director in such
company. If Mr. Ayush is not the managing director or whole time director of such company,
loan of ` 50 lakhs may be granted to him in accordance with Case III above.
"Super Glue Pvt. Ltd. may grant a loan of ` 50 lakhs to Mr. Ayush in accordance with Case I or
Case II, as explained above, if Mr. Ayush is managing director or whole time director in such
company. If Mr. Ayush is not the managing director or whole time director of such company,
loan of ` 50 lakhs may be granted to him in accordance with Case III above. If Super Glue Pvt.
Ltd. satisfies all the 3 conditions specified in Notification No. G.S.R. 464(E) dated 5th June, 2015
as explained in Case IV above, the provisions of section 185 shall not apply to it, and so it may
make loan of ` 50 lakhs to Mr. Ayush.
Also, Force Ltd. may provide guarantee for the repayment of loan sanctioned by a private bank
in accordance with Case III above.
Question 3:
(a) Radha Ltd. has passed a resolution in its general meeting regarding accepting deposits from
its members. Can this company accept deposits from its members under the Companies
Act, 2013? If yes, state the conditions to be fulfilled regarding this.
Answer:
(A) Provisions contained in the Companies Act:
(i) Conditions for acceptance of deposits from members [Sec 73(2)]
A company may accept deposits from its members -
- on such terms and conditions as may be agreed between the company and the members;
- subject to the fulfillment of the following conditions:
1. Resolution - A resolution is passed in GM
2. Rules - The Company shall comply with such Rules, as may be prescribed by CG.
3. Issue of circular to the members - The Company shall issue a circular to the
members inviting deposits from them. The circular shall include a Statement
containing -
(a) financial position of the company;
(b) credit rating obtained by the company;
(c) total number of depositors and amount due towards deposits in respect of any
previous deposits accepted by the company;
(d) such other particulars, in such form and manner, as may be prescribed.
4. Filing of circular - The circular, along with the Statement, shall be filed by the
company with the Registrar, at least 30 days prior to the issue of the circular to the
members.
5. 'Deposit repayment reserve account'
a) The company shall deposit in a Scheduled bank in a separate bank account a

sum equal to 15% of the amount of deposits maturing during the financial year
and next financial year.
b) Such account shall be called as the 'deposit repayment reserve account'.
c) The 'deposit repayment reserve account' shall not be utilised for any purpose,
except for the repayment of deposits.
6. Insurance - The Company shall obtain deposit insurance in such manner and upto
such extent as may be prescribed.
The companies may accept the deposits without deposit insurance contract till the
31st March, 2017 or till the availability of a deposit insurance product, whichever is
earlier.
7. Certification of 'no default - The company shall certify that it has not defaulted in
repayment of any deposit or interest thereon
8. Security w.r.t. deposits
a) The company may provide security for the due repayment of deposits and
interest payable thereon, and create a charge on its assets for this purpose.
b) If the company does not secure the deposits or secures them partially, then,
such deposits shall be termed as 'unsecured deposits' in every circular, form,
advertisement or document through which the deposits are invited or
accepted.
(ii) Repayment of deposits [Sec 73(3)] - The Company shall repay the deposits accepted
by it, and interest thereon, in accordance with the terms and conditions of such
deposits.
(iii) Failure to repay deposits or interest [Sec 73(4)] –
1. Application to the Tribunal - If a company fails to repay any deposit or interest

thereon in accordance with the terms and conditions of such deposit, the
depositor concerned may make an application to the Tribunal.
2. Orders of the Tribunal

(a) The Tribunal may also order the company to pay to the depositor –
(i) any sum due to him; and
(ii) any loss or damage incurred by him.
(b) The Tribunal may make such other orders as it may deem fit.
(B) Provisions contained in Rule 3 of the Companies (Acceptance of Deposits) Rules, 2014.
(i) Maximum amount of deposits and tenure of deposits:
a) The amount of deposits outstanding together with the amount of deposits proposed
to be accepted shall not exceed 35% of the aggregate of the paid-up share
capital, free reserves and securities premium account of the company. However, a
private company may accept from its members monies not exceeding 100% of
aggregate of the paid up share capital, free reserves and securities premium
account, and such company shall file the details of monies so accepted to the Ri in
such manner as may be specified.
b) No company shall accept or renew any deposit which is repayable on demand or

upon receiving notice or which is repayable within a period of less than 6 months or
more than 36 months from the date of acceptance of such deposit.
c) However, a company may, for the purpose of meeting any of its short-term
requirement of funds, accept such short term deposits which are repayable earlier
than 6 months from the date of acceptance of such deposit subject to the condition
that -
(i) such deposits shall not exceed 10% of the aggregate of the paid-up share
capital, reserves and securities premium account; and
(ii) such deposits are repayable not earlier than 3 months from the date of
acceptance of deposits.
(ii) No right of company to alter the terms:

The company shall not reserve to itself a right to alter, to the prejudice or disadvantage of
the depositor any of the terms and conditions of the deposit, deposit trust deed and deposit
insurance contract after circular is issued and deposits are accepted.
(C) Exemption to private companies [Notification No. GS.R. 464(E) dated 5th June, 2015]
Following conditions for acceptance of deposits from members shall not apply to a private
company which accepts from its members monies not exceeding the aggregate of the paid up
share capital and free reserves, provided such company shall file the details of monies so
accepted to the Registrar in such manner as may be specified:
(a) Issue of circular along with a Statement to the members inviting deposits from them.
(b) Filing of the circular along with the Statement, with the Registrar.
(c) Depositing money in 'deposit repayment reserve account'.
(d) Obtaining deposit insurance.
(e) Certifying that the company has not defaulted in repayment of any depositor interest
thereon.
(b) Sushant Company Ltd. Has the requirement of maintaining register of loans, guarantees,
securities and investments. Guide them, as to how to go about the same.
Answer:
The various provisions and legal requirements that has to be abided by in this regard are as
follows:
(A) The provisions contained in Sec 186 of The Companies Act, 2013
(i) Every company which makes a loan, investment, guarantee and security, shall
maintain a register.
(ii) The register shall contain such particulars as may be prescribed.
(iii) The register shall be maintained in such manner as may be prescribed.
(iv) The register shall be kept at the registered office of the company.
(v) The register shall be open to inspection at the registered office of the company.
(vi) The copies of the register may be obtained by any member on payment of the
prescribed fees.
(vii) Extracts may be taken from the register by any member on payment of the prescribed
fees.
(B) Provisions contained in Rule 12 of the Companies (Meetings of Board and its Powers) Rules,
2014
(i) The register shall be maintained in Form MBP-2.
(ii) The company shall enter in the register separately, the particulars of loans and
guarantees given, securities provided and acquisitions made.
(iii) The register shall be maintained with effect from the date of its incorporation.
(iv) The entries in the register shall be made chronologically in respect of each such
transaction within 7 days of making such loan or giving guarantee or providing security
or making acquisition.
(v) The register shall be kept at the registered office of the company.
(vi) The register shall be preserved permanently.
(vii) The register shall be kept in the custody of the company secretary of the company or
any other person authorised by the Board for this purpose.
(viii) The register may be maintained either manually or in electronic mode.
(ix) The entries in the register shall be authenticated by the company secretary of the
company or by any other person authorised by the Board for the purpose.
(x) The extracts from the register may be furnished to any member of the company on
payment of such fee as may be prescribed in the Articles of the company which shall
not exceed ` 10 per page.
Question 4:
(a) Mr. Bhagvath recently acquired 76% of the equity shares of M/s Renowned Company Ltd in
the hope of earning good dividend income. Unfortunately the existing Board of Directors
have been avoiding declaration o0f dividend due to alleged inadequacy of profits.
Unconvinced, Mr. Bhagvath seeks permission of the company to examine the Books of
Accounts, which is summarily rejected by the company. Examine and advise the provisions
relating to inspection of Books of Accounts and remedy available.
Answer:
The present problem relates to section 128, 206 and 212 of the Companies Act, 2013 read with
Regulation 89 of Table F contained in Schedule I.
(i) As per section 128 read with Rule 4, a director of the company is entitled to inspect the
books of account of the company. However, section 128 does not empower any member
(irrespective of the percentage of share capital held by him) to make inspection of the
books of account.
(ii) As per section 206, following persons are empowered to inspect the books of account:
(a) Registrar of Companies
(b) Such officer of the government as may be authorised by the Central Government in this
behalf.
(iii) As per section 212, the books of account of a company shall be open to inspection of the
officers of Serious Fraud Investigation Office (SFIO).
(iv) Regulation 89 of Table F reads as under:
(i) The Board shall from time to time determine whether and to what extent and at what
times and places and under what conditions or regulations, the accounts and books of
the company, or any of them, shall be open to the inspection of members not being
directors.
(ii) No member (not being a director) shad have any right of inspecting any account or
book or document of the company except as conferred by law or authorised by the
Board or by the company in general meeting.
In the given case, Mr. Bhagvath has not been authorised to inspect the books of account by the
Board or by the members in the general meeting, Thus, Mr. Bhagvath shall not have any right to
inspect the books of account even if he holds 76% of the equity shares of the company.
However, Mr. Bhagvath may, by using the majority voting power held by him and complying
with the provisions of the Companies Act, 2013, get himself appointed as a director of M/s
Renowned Company Ltd., and then, he shall be entitled (in the capacity of director) to make
the inspection of books of account.
(b) The Board of Directors of Shiba Sports Club (a not-for-profit company) desires to prepare the
books of accounts on cash basis. Can it be done without the approval of members or the
Central Government?
Answer:
The present problem relates to section 128 of the Companies Act, 2013. As per the section, the
books of accounts shall be prepared on accrual basis.
Section 128 does not provide any exemption permitting a company to p[reaper the books of
accounts on any basis other than accrual basis. Further, the requirement to prepare the books
of accounts on accrual basis is applicable on all companies, whether public or private, whether
having share capital or not, whether a company is a government company or non-profit
company.
Further, section 128 does not empower the members or the Central Government to permit a
company to prepare the books of accounts on any basis other than accrual basis.
Thus the books of Accounts of Shiba Sports Club cannot be prepared on cash basis. If the books
are prepared on cash basis, it would amount to contravention of Section 128.
Question 5:
(a) What are the provisions that are required by a company to abide by in respect of the
Unpaid Dividend Account?
Answer:
The provisions of the Companies Act, 2013 relating to the Unpaid Dividend Account, that a
company needs to abide by, are contained in section 124, as explained below:
1. Treatment of dividend declared but remaining unpaid
(a) Transfer to Unpaid Dividend Account - Where a dividend is declared by a company,

but it remains unpaid or unclaimed for 30 days from the date of its declaration, such
dividend shall be transferred by the company, within next 7 days, to a special account
in any scheduled bank. Such account shall be called as 'Unpaid Dividend Account'.
(b) Placing of a statement containing particulars of unpaid dividend on the website - The
company shall prepare a statement containing the names, the last known addresses
and the amount of unpaid dividend to be paid to each person. The company shall
place such statement on the website of the company, if any, and also on any other
website approved by the Central Government for this purpose. The statement shall be
prepared in such form and manner, and shall contain such other particulars as may be
prescribed. The statement shall be prepared and placed on the website(s) within 90
days of transfer of unpaid dividend to the Unpaid Dividend Account.
(c) Interest for delayed transfer - If the company fails to transfer the unpaid or unclaimed
dividend to the Unpaid Dividend Account, the company shall be liable to pay interest
@ 12% per annum.
The interest so paid by the company shall enure to the benefit of the members of the
company, in proportion to the amount remaining unpaid to them.
2. Application to the company for payment of dividend
Any person who claims to be entitled to any money transferred to the Unpaid Dividend
Account, may apply to the company for the payment of such money.
3. Treatment of dividend remaining unpaid in the Unpaid Dividend Account
(a) Transfer to „Investor Education and Protection Fund‟ - Any money transferred to the
Unpaid Dividend Account which remains unpaid for 7 years from the date of such
transfer shall be transferred by the company, along with interest accrued, if any, to the
'Investor Education and Protection Fund'.
(b) Statement to be sent by the company to the Authority - The company shall send a
statement containing the details of such transfer to the Authority which administers the
said Fund. The statement shall be in the prescribed form.
The statement containing the details of amount transferred to the Fund shall be in Form
DIV. 5 (Rule 4 of the Companies (Declaration and Payment of Dividend) Rules, 2014).
(c) Issue of receipt by the Authority - The Authority shall issue a receipt to the company
acknowledging the transfer of money in the Fund. The receipt shall be an evidence of
such transfer.
4. Transfer of shares in the name of the Fund

All such shares in respect of which dividend has not been paid or claimed for 7 consecutive
years shall be transferred by the company in the name of Investor Education and
Protection Fund. At the time of such transfer of shares, the company shall also file a
statement containing such details as may be prescribed.
Shares not to be transferred - In case any dividend is paid or claimed for any year during the
said period of 7 years, the shares shall not be transferred to the Fund.
5. Right to claim the transferred shares
Any person who claims such shares as have been transferred to the Fund, shall be entitled
to claim the transfer of shares fro the Fund. For this purpose, he shall be required to submit
such documents as may be prescribed. The procedure to claim shares shall be such as may
be prescribed.
6. Punishment for contravention
If a company fails to comply with any of the requirements of this section, then -
(a) the company shall be punishable with fine which shall not be less than ` 5 lakh but
which may extend to ` 25 lakh; and
(b) every officer of the company who is in default shall be punishable with fine which shall
not be less than ` 1 lakh but which may extend to ` 5 lakh.
(b) Sona Ltd redeemed its preference shares 5 years ago. Some of the shares are still unpaid. It
credited the unpaid amount into its „Investor Education Protection Fund‟. Was it a
contravention of the provisions of Companies Act, 2013?
Answer:
The credits that may be made into the ‗Investor Education Protection Fund‘ as per provisions of
Section 125 of Companies Act, 2013 are as under:
(i) Amount in the Investor Education and Protection Fund under section 205C of the
(ii) Amount in the Unpaid Dividend Account of the companies transferred to the Fund under
section 124, and interest accrued thereon
(iii) Application money received by the companies for allotment of any securities and due for
refund and remaining unpaid for a period of 7 years, and interest accrued thereon
(iv) Matured deposits remaining unpaid for a period of 7 years, and interest accrued thereon
(v) Matured debentures remaining unpaid for a period of 7 years, and interest accrued thereon
(vi) Redemption amount of preference shares remaining unpaid for a period of 7 years
(vii) Grants by the Central Government after due appropriation made by the Parliament
(viii) Donations given to the Fund by the Central Government, any State Government,
companies or any other institution
(ix) Interest or other income received out of the investments made from the Fund
(x) Sale proceeds of fractional shares arising out of issuance of bonus shares, merger and
amalgamation and remaining unpaid for a period of 7 years.
(xi) Amount in the General Revenue Account of the Central Government which had been
transferred to that account under section 205A(5) of the Companies Act, 1956, as it stood
immediately before the commencement of the Companies (Amendment) Act, 1999
(xii) Amount received under section 38(4)
(xiii) Such other amount as may be prescribed.
Since, only 5 years has passed and not 7 years, hence it is a contravention of the provisions.
Question 6:
Some changes in the particulars of a Director of an Indian Multi-national Company have taken
place. Now the director wants to have the details updated or have a new DIN. How should he go
about it?
Answer:
The details about DIN may be enumerated as under:
1. Definition of "Director Identification Number" (DIN) [Rule 2(d)]
(i) DIN means an identification number allotted by the Central Government to any individual,
intending to be appointed as director or to any existing director of a company, for the
purpose of his identification as a director of a company.
(ii) The DIN obtained by the individuals prior to the notification of these rules shall be the DIN for
the purpose of the Companies Act, 2013.
(iii) DIN includes the Designated Partnership Identification Number (DPIN) issued under section 7
of the Limited Liability Partnership Act, 2008 and rules made there under.
DIN is a unique Identification Number. For filing various forms with the Registrar, DIN is a pre-
requisite, i.e. the electronic system of the Ministry of Corporate Affairs does not allow filing of
various forms unless DIN of the signatory director is filled in the form.
2. Application for allotment of DIN (Rule 9)
(i) Every individual, who is to be appointed as director of a company shall make an

application electronically in Form DIR-3, to the Central Government for the allotment of DIN
along with such fees as provided in the Companies (Registration Offices and Fees) Rules,
2014.
(ii) The Central Government shall provide an electronic system to facilitate submission of
application for the allotment of DIN through the portal on the website of the Ministry of
Corporate Affairs.
(iii) The applicant shall download Form DIR-3 from the portal, fill in the required particulars
sought therein, verify and sign the form and after attaching copies of the following
documents, scan and file the entire set of documents electronically -
(1) photograph;
(2) proof of identity;
(3) proof of residence; and
(4) specimen signature duly verified.
(iv) Form DIR-3 shall be signed and submitted electronically by the applicant using his or her
own Digital Signature Certificate and shall be verified digitally by -
(1) a chartered accountant in practice or a company secretary in practice or a cost
accountant in practice; or
(2) a company secretary in full time employment of the company or by the managing
director or director of the company in which the applicant is to be appointed as
director.
(v) In case the name of a person does not have a last name, then his or her father's or
grandfather's surname shall be mentioned in the last name along with the declaration in
Form No. DIR-3A.
3. Allotment of DIN (Rule 10)
(a) On the submission of the Form DIR-3 on the portal and payment of the requisite amount of
fees through online mode, an application number shall be generated by the system
automatically.
(b) After generation of the application number, the Central Government shall process the
applications received for allotment of DIN, decide on the approval or rejection thereof and
communicate the same to the applicant along with the DIN allotted in case of approval by
way of a letter by post or electronically or in any other mode, within a period of 1 month
from the receipt of such application.
(c) If the Central Government, on examination, finds such application to be defective or

incomplete in any respect, it shall give intimation of such defect or incompleteness, by
placing it on the website and by email to the applicant who has filed such application,
directing the applicant to rectify such defects or incompleteness by resubmitting the
application within a period of 15 days of such placing on the website and email. In such a
case, the Central Government shall -
(i) reject the application and direct the applicant to file fresh application with complete
and correct information, where the defect has been rectified partially or the
information given is still found to be defective;
(ii) treat and label such application as invalid in the electronic record in case the defects
are not removed within the given time; and
(iii) inform the applicant either by way of letter by post or electronically or in any other
mode.
(d) In case of rejection or invalidation of application, the fee so paid with the application shall
neither be refunded nor adjusted with any other application.
(e) All DINs allotted to individual(s) by the Central Government before the commencement of
these rules shall be deemed to have been allotted to them under these rules.
(f) The DIN so allotted under these rules is valid for the life-time of the applicant and shall not
be allotted to any other person.
The powers and functions of the Central Government in respect of allotment of Director
Identification Number have been delegated to the Regional Director, Joint Director, Deputy
Director or Assistant Director posted in the office of Regional Director at Noida [Notification No.
S.O. 1354(E) dated 21st May, 2014].
4. Intimation of DIN by existing directors (Rule 10A)
(a) Every director, functioning as a director in one or more companies on or before the 30th
June, 2007 and who has not yet intimated his DIN to such company or companies shall,
within 1 month of the receipt of Director Identification Number from the Central
Government, intimate his Director Identification Number to the company or all companies
wherein he is a director as per Form DIR-3B.
(b) The intimation by the company of Director Identification Number of its directors under
section 157 of the Act shall be furnished in Form DIR-3C within 15 days of receipt of
intimation under section 156.
5. Cancellation or surrender or Deactivation of DIN (Rule H)
The Central Government or Regional Director (Northern Region), Noida or any officer authorised
by the Regional Director may, upon being satisfied on verification of particulars or documentary
proof attached with the application received alongwith fee from any person, cancel or
deactivate the DIN in the following cases:
(a) Where DIN is found to be duplicated in respect of the same person provided the data
related to both the DIN shall be merged with the validly retained number.
(b) Where DIN was obtained in a wrongful manner or by fraudulent means.

 Before cancellation or deactivation of DIN pursuant to clause (b), an opportunity of
being heard shall be given to the concerned individual.
 The term 'wrongful manner' means any case where DIN is obtained on the strength of
documents which are not legally valid or incomplete documents are furnished or on
suppression of material information or on the basis of wrong certification or by making
misleading or false information or by misrepresentation.
 The term 'fraudulent means' means obtaining DIN with an intent to deceive any other
person or any authority including the Central Government.
(c) In case of the death of the concerned individual.
(d) Where the concerned individual has been declared as a person of unsound mind by a
competent Court.
(e) Where the concerned individual has been adjudicated an insolvent.
(f) Where an application made in Form DIR-5 by the DIN holder to surrender his or her DIN
along with declaration that he has never been appointed as director in any company and
the said DIN has never been used for filing of any document with any authority. Before
deactivation of any DIN in such case, the Central Government shall verify e-records.
6. Intimation of changes in particulars specified in DIN application (Rule 12)
(a) Every individual who has been allotted a DIN shall, in the event of any change in his
particulars as stated in Form DIR-3, intimate such change(s) to the Central Government
within a period of 30 days of such change(s) in Form DIR-6 in the following manner, namely:
(i) The applicant shall download Form DIR-6 from the portal, fill in the relevant changes,
verify the Form and attach duly scanned copy of the proof of the changed particulars
and submit electronically.
(ii) The form shall be digitally signed by a chartered accountant in practice or a company
secretary in practice or a cost accountant in practice.
(iii) The applicant shall submit the Form DIR-6.
(b) The Central Government, upon being satisfied, after verification of such changed
particulars from the enclosed proofs, shall incorporate the said changes and inform the
applicant by way of a letter by post or electronically or in any other mode confirming the
effect of such change in the electronic database maintained by the Ministry.
(c) The DIN cell of the Ministry shall also intimate the change(s) in the particulars of the director
submitted to it in Form DIR-6 to the concerned Registrar(s) under whose jurisdiction the
registered office of the company or companies in which such individual is a director is
situated.
(d) The concerned individual shall also intimate the change(s) in his particulars to the company
or companies in which he is a director within 15 days of such change.
Director Identification Number (DIN) is individual specific, viz. for one individual; there shall be
one DIN even if he is a director in more than one company. Once issued, DIN remains valid for
lifetime unless it is cancelled, surrendered or deactivated
Question 7:
(a) Radha Limited is a widely held, listed company having two executive directors who are
technocrats. The company has suffered losses in the last four years. The company wants to
enhance the remuneration of the executive directors to ` 6 lakhs per month from existing
remuneration of ` 4 lakh. The audited balance sheet as on 31st March, 2016 reveals that the
paid up capital of the company is ` 15 crores, accumulated losses ` 11 crores and secured
long term borrowing ` 5 crores. Besides, the company has long term investments of ` 11
crores. The company‟s remuneration committee has recommended the proposal and the
company is regular in repayment of its debts. Analyse the proposition with reference to the
provisions of the Companies Act, 2013.
Answer:
As per section 197, where the proposed increase in remuneration is within the limits laid down in
Part II of Schedule V, the company is competent to increase the remuneration of the
managerial person without the approval of the Central Government.
As per Section II of Part II of Schedule V, the 'effective capital" shall be computed as follows:
Items to be added:
 paid-up share capital (excluding share application money or advances against shares)
 Securities premium account
 Reserves and surplus (excluding revaluation reserve)
 Long-term loans
 Deposits repayable after 1 year (excluding working capital loans, overdrafts, interest due on
loans unless funded, bank guarantee, etc., and other short-term arrangements)
Items to be deducted:
 Investments (except in the case of an investment company)
 Accumulated losses
 Preliminary expenses not written off
The effective capital shall be calculated as on the last day of the financial year preceding the
financial year in which the appointment of the managerial person is made.
Thus, the effective capital of Radha Limited shall be calculated as on 31.03.2016.

Accordingly, the effective capital of Venus Limited is
` 15 crore + ` 5 crore - ` 11 crore - ` 11 crore = ` 2 crore (negative).
As per Section II of (Part II of Schedule V, in the absence or inadequacy of profits, a company

having negative effective capital or effective capital of less than ` 5 crore may pay a maximum
of ` 60 lakh per financial year as the managerial remuneration to each managerial person.
However, the aforesaid limit of ` 60 lakh shall be doubled, if the resolution passed 6y the
shareholders is a special resolution.
Radha Limited proposes to increase the remuneration of its two executive directors from ` 4 lakh
per month to ` 6 lakh per month. At the rate of ` 6 lakh per month, the managerial remuneration
shall amount to ` 72 lakh per financial year for each managerial person. This payment of ` 72
lakh per financial year for each managerial person is possible only if the following conditions are
satisfied:
(a) Repayment of remuneration is approved by a resolution passed by the (Board and, in the
case of a company covered under sub-section (1) of section 178 also by the Nomination
and Remuneration Committee.
This condition has been satisfied as the given problem states that company's remuneration
committee has recommended the proposal to increase the remuneration.
(b) The company has not made any default in repayment of any of its debts (including public
deposits) or debentures or interest payable thereon for a continuous period of 30 days in the
preceding financial year before the date of appointment of such managerial person.
However, in case the company has made such a default, this condition shall be deemed to
be complied with if the company obtains prior approval from the secured creditors for the
proposed remuneration and the fact that such prior approval has been obtained, is
mentioned in the explanatory statement annexed to the notice convening the general
meeting.
This condition has been satisfied as the given problem states that the company is regular in
repayment of its debts.
(c) A special resolution has been passed at the general meeting of the company authorising
the payment of remuneration. Such special resolution shall remain valid for a period not
exceeding 3 years.
(d) A statement shall be given to the shareholders along with the notice calling the general
meeting. The statement shall contain the following information:
(i) General Information
(ii) Information about the appointee
(iii) Other information
(iv) Disclosures.
(b) What are the functions you need to undertake as a Company Secretary?
Answer:
The functions of a company secretary are contained in section 205 of the Companies Act, 2013,
as explained below:
Functions and duties of Company Secretary
The functions of the company secretary shall include the following:

(a) To report to the Board about compliance with the provisions of this Act, the rules made
there under and other laws applicable to the company.
(b) To ensure that the company complies with the applicable secretarial standards.
(c) To discharge such other duties as may be prescribed.
As per Rule 10 of the Companies (Appointment and Remuneration of Managerial Personnel)

Rules, 2014, the Company Secretary shall also discharge the following duties:
(1) To provide to the directors of the company, collectively and individually, such guidance
as they may require, with regard to their duties, responsibilities and powers.
(2) To facilitate the convening of meetings and attend Board, committee and general
meetings and maintain the minutes of these meetings.
(3) To obtain approvals from the Board, general meeting, the government and such other
authorities as required under the provisions of the Act.
(4) To represent before various regulators and other authorities under the Act in connection
with discharge of various duties under the Act.
(5) To assist the Board in the conduct of the affairs of the company.
(6) To assist and advise the Board in ensuring good corporate governance and in complying
with the corporate governance requirements and best practices.
(7) To discharge such other duties as have been specified under the Act or rules.
(8) To discharge such other duties as may be assigned by the Board from time to time.
Definition of 'secretarial standards'

For the purpose of section 205, the expression 'secretarial standards' means secretarial standards
issued by the Institute of Company Secretaries of India (constituted under section 3 of the
Company Secretaries Act, 1980) and approved by the Central Government,
Question 8:
What are the steps that may be taken by the Tribunal to prevent oppression and
mismanagement? What the powers that the Tribunal has in this regard.
Answer:
As per section 241, requisite number of members (as specified under section 244) may apply to
the Tribunal for claiming relief from oppression or mismanagement. After due inquiry, the Tribunal
may make such orders as are necessary to bring an end to the matters complained of. The
Tribunal has been vested with the powers of wide amplitude to grant relief from oppression and
mismanagement. These powers, and conditions to be fulfilled subject to which the Tribunal shall
exercise such powers, are explained as follows:
1. Conditions to be fulfilled for exercise of powers by the Tribunal
Upon receiving an application under section 241, the Tribunal may exercise the powers vested in
it, if it is of the opinion -
(a) that the company's affairs have been or are being conducted in a manner –
(i) prejudicial to public interest; or
(ii) prejudicial or oppressive to any member or members; or
(iii) prejudicial to the interests of the company; and
(b) that to wind up the company would unfairly prejudice such member or members, but that
otherwise the facts would justify the making of a winding-up order on the ground that it was
just and equitable that the company should be wound up.
2. Powers of the Tribunal (Nature of orders of Tribunal)
The Tribunal may, with a view to bringing to an end the matters complained of, make such order
as it thinks fit, including the following orders:
(a) The regulation of conduct of affairs of the company in future.
(b) The purchase of shares of any member of the company by any other member or by the
company.
(c) In the case of a purchase of its shares by the company, the consequent reduction of its
share capital.
For effecting the reduction of capital, compliance with the provisions of section 66 of
Companies Act, 2013 or sections 100 to 104 of the Companies Act, 1956 is not required.
(d) Restrictions on the transfer or allotment of shares of the company.
(e) The termination, setting aside or modification, of any agreement between the company
and the managing director, any other director or manager, upon such terms and conditions
as the Tribunal may deem fit.
(f) The termination, setting aside or modification, of any agreement between the company and
any other person.
No such agreement shall be terminated, set aside or modified except after due notice and after
obtaining the consent of the party concerned. A person whose agreement is terminated, set
aside or modified shall not be entitled to claim any damages or compensation.
(g) The setting aside of any transfer, delivery of goods, payment, execution or other act relating to
property made or done by or against the company within 3 months before the date of the
application made to the Tribunal, which would, if made or done by or against an individual,
be deemed in his insolvency to be a fraudulent preference.
(h) Removal of the managing director, manager or any of the directors of the company.
(i) Recovery of undue gains made by any managing director, manager or director during the
period of his appointment as such and the manner of utilisation of the recovery, including
transfer to Investor Education and Protection Fund or repayment to identifiable victims.
(j) The manner in which the managing director or manager of the company may be appointed
subsequent to an order removing the existing managing director or manager of the
company.
(k) Appointment of such number of persons as directors, who may be required to report to the
Tribunal on such matters as the Tribunal may direct.
(l) Imposition of costs as may be deemed fit by the Tribunal.
(m) Any other matter for which, in the opinion of the Tribunal, it is just and equitable that
provision should be made, i.e. in addition to the above powers, the Tribunal may make such
orders as it may think fit for giving relief in respect of the matters complained of.
Consequences of termination of certain agreements

Where any such agreement is terminated, set aside or is modified, the following consequences
shall follow:
(I) Vacation of office: Such managing director or director or manager shall vacate his office as
from the date of the order of the Tribunal. The Tribunal is not bound to follow the procedure
prescribed under section 169 for making such an order. As such, the Tribunal has unlimited
powers to remove the existing directors and manager.
(II) No compensation for loss of office: A director or manager whose agreement is terminated,
set aside or modified shall not be entitled to claim any damages or compensation for loss of
office.
(III) No similar appointment for 5 years in the company: No director or manager whose
agreement is so terminated or set aside, shall act as the director or manager of such
company for a period of 5 years except with the permission of the Tribunal. The Tribunal may
grant such permission only after giving an opportunity of being heard to the Central
Government.
(IV) Punishment for contravention. Any person who knowingly acts as a director or manager of a
company in contravention of the provisions of this section, and every other director of the
company who is knowingly a party to such contravention, shall be punishable with imprisonment
for a term which may extend to 6 months or with fine which may extend to ` 5 lakh, or with
both.
Powers of the Tribunal are illustrative only

It can be seen that powers enumerated under section 242 are illustrative only. The Tribunal may
make any other order to end the oppression or mismanagement. Thus, wide and ample powers
have been conferred on the Tribunal for regulating the conduct of the company's affairs and to
provide for any other matter which the Tribunal thinks just and equitable to provide for.
3. Filing of copy of order of the Tribunal
The company shall, within 30 days, file a certified copy of order of the Tribunal with the Registrar.
4. Power of the Tribunal to make an interim order
Pending the final order, the Tribunal may make an interim order for regulating the company's
affairs. The Tribunal may make the interim order only if an application is made to the Tribunal by
any party to the proceedings. The interim order may stipulate such terms and conditions as may
appear to the Tribunal to be just and equitable.
5. Power of the Tribunal to alter the memorandum or articles
(a) Alteration by the Tribunal to be effective: The Tribunal is empowered to make any
alteration in the memorandum or articles of a company, and such alteration shall have
the same effect as if such alteration were duly made by a resolution passed by the
company.
Where a particular regulation in the articles of the company was capable of being
misused to prevent the members from exercising their ordinary right to demand a poll,
the Tribunal ordered the amendment of such article
The Tribunal is empowered to reframe or insert a new article, which may be against the
company's memorandum or other articles and even against the Companies Act, 2013
provided that such an order is necessary to put an end to the matters complained of
(b) Further alterations to require permission of the Tribunal: Any further alteration by the
company would have to be consistent with the alterations made by the Tribunal and
can be effective only if the permission of the Tribunal is obtained. Thus, once the
Tribunal has altered an article contained in the articles of the company, the company
cannot make an alteration which is calculated to reduce the effect of the alteration
made by the Tribunal.
(c) Filing of copy of order of the Tribunal: The company shall file with the registrar a certified
copy of every order of the Tribunal, which has the effect of altering the company's
memorandum or articles, or which grants permission to the company to alter its
memorandum or articles in future. The certified copy shall be filed with the registrar
within 30 days of order of the Tribunal.
If a company, without obtaining the permission of the Tribunal, makes any alteration in the
memorandum or articles which is inconsistent with the alterations made by the Tribunal, the
punishment shall be as follows:
(a) The company shall be punishable with fine which shall not be less than ` 1 lakh but which
may extend to ` 25 lakh.
(b) Every officer of the company who is in default shall be punishable with imprisonment for a
term which may extend to 6 months or with fine which shall not be less than ` 25,000 but
which may extend to ` 1 lakh, or with both.
Question 9:
(a) The Board of directors of M/S. Lion Consultants Limited, registered in Nagpur, proposes to
hold the next Board meeting in the month of December, 2014. They seek your advise in
respect of the following matters:
(i) Can the Board meeting be held in Chennai, when all the directors of the company
reside at Nagpur?
(ii) Whether the Board meeting can be called on a national holiday and that too after
business hours as the majority of the directors of the company have gone to Chennai
on vacation.
(iii) It is necessary that the notice of the Board meeting should specify the nature of business
to be transacted?
Advise with reference to the relevant provisions of the Companies Act, 2013.
Answer:
There is no provision in the Companies Act, 2013 which requires that a (Board meeting shall be
held-
(a) only on a day that is not a national holiday;
(b) only at the registered office of the company or at any other place within the city, town or
village in which the registered office of the company is situated;
(c) only during business hours.
The answer to the given problem is as under:
(i) Section 96 requires that an annual general meeting shall be held only at the registered
office of the company or at any other place within the city, town or village in which the
registered office of the company is situated. However, there is no similar provision in respect
of holding of a Board meeting. As such, a Board meeting can be held anywhere in India or
even outside India.
(ii) As per section 174, if a Board meeting could not Be held for want of quorum, then, unless
the articles otherwise provide, the meeting shall automatically stand adjourned to the same
day, time and place in the next week or if that day is a national holiday, then to next
succeeding day, which is not a national holiday. It means that a Board meeting adjourned
for-want of quorum can be held only on a day which is not a national holiday. 'However,
there is nothing in the Act which prohibits the holding of an original Board meeting on a
national holiday. Similarly, the Act does not require that a Board meeting shall be held only
during Business hours.
In the instant case, the directors intend to hold a Board meeting on a national holiday and
after Business hours, which is permissible.
(iii) No form or contents of notice has Seen specified By the Act. Agenda of a Board meeting is
not required to Se sent along with the notice of a Board meeting unless there is some
express provision of the Act which requires a specific notice to move a resolution at a Board
meeting.
Therefore, the notice of Board meeting need not specify the nature of Business to be
transacted.
(b) The Balance Sheet of Fast Track Ltd. As at 31-03-2014 discloses the following position:
` (in crores)
Share Capital 100
Reserves & Surplus 300
Secured Loans 150
Unsecured Loans 100
Current Liabilities 70
Mr. Fast, the Managing Director of the company approaches the Best Bank for a secured
loan of ` 600 crores to finance the new projects to be taken up shortly. The Bank seeks your
advice whether it can grant the loan of ` 600 crores on the application of Mr. Fast. Advise
the Royal Bank having regard to the provisions of the Companies Act, 2013.
Answer:
The given problem relates to section 179 and 180 of the Companies Act, 2013.
As per section 179(3)(d) of the Companies Act, 2013, the powers relating to borrowing of money
shall be exercised by the (Board at a (Board meeting. However, as per First Proviso to Section
179(3), such power may be delegated by the (Board, subject to the following 3 conditions:
(a) The powers may be delegated to a committee of directors, managing director, manager, a
principal officer of the company or a principal officer of the branch office.
(b) The delegation of power is made by passing a resolution at a Board meeting only.
(c) The Board may delegate such powers subject to such conditions as it may deem fit.
As per section 180(l)(c) of the Companies Act, 2013, consent of the company by way of a
special resolution shall be required for borrowing of money if moneys already borrowed,
together with moneys to be borrowed will exceed the aggregate of paid up capital and free
reserves of the company. However, temporary loans obtained from the company's bankers in
the ordinary course of business shall not be considered as borrowings.
In the given case, the aggregate of paid up capital and free reserves comes to ` 400 crores (`
100 crores + ` 300 crores). The company has already borrowed ` 250 crores (` 150 crores + ` 100
crores). It has been assumed that secured loans of ` 150 crores and unsecured loans of ` 100
crores are not temporary loans. Current liabilities shall not be included in the amount already
borrowed.
The amount already borrowed (` 250 crores) and amount proposed to be borrowed (` 600
crores) would exceed the aggregate of paid up capital and free reserves (` 400 crores).
Therefore, the (Board is entitled to borrow ` 600 crores only after obtaining the consent of the
company by way of a special resolution.
Accordingly, our advice to the Royal Bank is as follows:
(a) The Bank should make sure that the (Board has obtained the consent of the company by
way of a special resolution. The special resolution must specify the maximum amount upto
which moneys may be borrowed by the (Board, and the amount so specified must be ` 850
crores or more [Section 180(1)(c) of the Companies Act, 2013].
(b) The (Bank should make sure that the power to borrow money has been delegated to the
Managing (Director by passing such resolution in (Board meeting only [First proviso to Section
179(3) of the Companies Act, 2013].
Question 10:
(a) A Board Meeting was held on 22.02.2018. at Chennai. After the meeting the Chairman asked
Mr. Sanjay to record the minutes and get the necessary documentation done. Mr. Sanjay is
completely unaware of the procedure. Help him with the provisions as, when are the
minutes of the meetings of the Board of directors required to be recorded and signed?
Answer:
The statutory requirements relating to preparation of minutes, as contained in section 118 of

Companies Act, 2013, are as follows:
(A) Provisions contained in the Act.
1. Scope of Section 118
Every company shall cause to be prepared, signed and kept minutes of-
(a) proceedings of every general meeting;

(b) proceedings of meeting of any class of shareholders;
(c) proceedings of meeting of any class of creditors;
(d) proceedings of meeting of board of directors;
(e) proceedings of meeting of any committee of the Board; and
(f) every resolution passed by postal ballot.
2. Manner of preparation and signing
(a) The minutes shall be prepared and signed in such manner as may be prescribed.
(b) All the appointments made at any meeting shall be included in the minutes.
(c) The minutes shall be maintained in the books kept for that purpose.
(d) The pages of the minutes book shall be consecutively numbered.
3. Time limits for preparation and signing
The minutes shall be prepared and signed within 30 days of-

(a) the conclusion of the meeting; or
(b) passing of the resolution by postal ballot.
4. Contents w.r.t. board meetings
In case of a board meeting or of committee meeting, the minutes shall also contain -
(a) the names of the directors present; and

(b) where any resolution is passed at the meeting, the names of the directors, dissenting from
the resolution and the names of the directors not concurring with the resolution.
5. Discretion of Chairman
(a) No matter shall be included in the minutes, if the chairman is of the opinion that it is –
(i) defamatory of any person; or

(ii) irrelevant or immaterial; or
(iii) detrimental to the interests of the company.
(b) The chairman shall exercise absolute discretion with regard to the inclusion or non-inclusion
of any matter in the minutes on any of the grounds specified above.
6. Minutes to be correct and fair
Minutes shall contain a fair and correct summary of the proceedings of the meeting.
7. Evidential value
Minutes kept as per Sec. 118 shall be evidence of the proceedings recorded therein.
8. Presumptions drawn from minutes
Where minutes are kept as per Sec. 118, then, until contrary is proved, it shall be presumed that –
(a) the meeting was duly called and held;

(b) all the proceedings at the meeting were duly taken place;
(c) all the resolutions passed by postal ballot were duly passed; and
(d) in particular, all the appointments of directors, key managerial personnel, auditors or
company secretary in practice were validly made.
9. Publication of reports of proceedings
No document purporting to be a report of the proceedings of any general meeting of a

company shall be circulated or advertised at the expense of the company, unless it includes the
matters required by this section (viz. Section 118) to be contained in the minutes of the
proceedings of such meeting.
10. Compliance with Secretarial Standards
Every company shall observe secretarial standards with respect to general meetings and Board
meetings-
(a) specified by the Institute of Company Secretaries of India; and

(b) approved as such by the Central Government.
If any default is made in complying with the provisions of this section, then -
(a) the company shall be liable to a penalty of ` 25,000; and
(b) every officer in default shall be liable to a penalty of ` 5,000.
12. Punishment for tampering
Any person found guilty of tampering with the minutes shall be punishable with -
(a) imprisonment upto 2 years; and
(b) Fine: Minimum: ` 25,000; Maximum: ` 1 lakh.
(B) Provisions contained in the Rules:
1. Distinct minute book for each type of meeting
A distinct minute book shall be maintained for each type of meeting namely:
(i) General meeting of the members (including the resolutions passed by postal ballot since
such resolutions are deemed to be passed in general meeting)
(ii) Meetings of the creditors
(iii) Meetings of the Board; and
(iv) Meetings of each of the committees of the Board.
2. Manner of maintenance of minutes
(i) The minutes of proceedings of each meeting shall be entered in the books maintained for
that purpose along with the date of such entry.
(ii) Every resolution passed by postal ballot shall be entered in the minutes book of general
meetings.
(iii) With respect to every resolution passed by postal ballot, the minutes shall contain -
(a) a brief report on the postal ballot conducted;
(b) the resolution proposed;
(c) the result of voting;
(d) summary of the scrutinizer's report
(e) date of entry in the minutes book.
3. Manner of signing of minutes

Each page of every minute book shall be initialled or signed, and the last page shall be dated
and signed, as follows:
Nature of minutes
Signing Authority
book
Minutes of Board ■ The chairman of the same meeting or the chairman of the next
meetings and meeting.
Committee meetings
Minutes of General ■ The chairman of the same meeting within 30 days of conclusion of
Meeting such meeting.
■ In the event of the death or inability of that chairman within that
period, by a director duly authorised by the Board for this purpose.
Resolutions passed ■ The chairman of the Board
by postal ballot ■ If there is no chairman of the Board or in the event of the death or
inability of the chairman of the Board, by a director duly authorized
by the Board for the purpose.
4. Preservation of minutes book
The minute books of general meetings, Board meetings and committee meetings shall be -
(i) kept at the registered office of the company, or at such other place as may be approved
by the Board;
(ii) preserved permanently;
(iii) kept in the custody of the company secretary or any director duly authorised by the Board.
Question 11:
(a) The annual general meeting of a company for the financial year 2014-2015 was held on 30th
September, 2015. Till 30th September, 2016, the company does not hold any annual general
meeting for the financial year 2015-2016. Ripu, Sona and Thimpu are the directors liable to
retire at the annual general meeting. Can they continue in office?
Answer:
At every annual general meeting, 1/3 rd (or nearest to 1/3rd) of rotational directors shall retire from
office [Section 152(6)]. As a general rule, the directors who are liable to retire at an annual
general meeting cannot continue in office after the last day on which the annual general
meeting should have Seen held. This is because the calling of annual general meeting is a duty
and responsibility of the directors. They cannot, by omitting to call the annual general meeting,
take advantage of their own default and by that means extend their tenure of office [B.K.
Kundra v Motion Pictures Association (1976) 46 Comp Cas 339]. Also, the rule of automatic
reappointment does not apply to a case where annual general meeting is not held.
The annual general meeting of a company must be held -

(a) within 6 months of close of the financial year; and
(b) not later than 15 months from the date of its previous annual general meeting.
The registrar has the power to grant extension of time for holding the annual general meeting by
a period not exceeding 3 months.
The answer to the given problem is as under:
(a) For the financial year 2015-2016, the annual general meeting must be held on or before 30th
September, 2016. If it is not so held, the directors, Ripu, Sona and Thimpu shall cease to hold
their offices on 30th September, 2016. Their continuance beyond this date shall be invalid.
(b) However, if the registrar grants extension of time for holding the annual general meeting, the
annual general meeting may be held upto 31.12.2016, and so the directors can continue in
office till that date. However, if the annual general meeting is not held upto 31.12.2016
(where extension is granted), the directors, Ripu, Sona and Thimpu shall cease to hold their
offices on 31.12.2016.
(b) Raja Limited is an unlisted public company having a paid up capital of twenty crore rupees
as on 31st March, 2015 and a turnover of one hundred fifty crore rupees during the year
ended 31st March, 2015. The total number of directors is thirteen.
Referring to the provisions of the companies act, 2013 answer the following:
(i) State the minimum number of independent directors that the company should appoint.
(ii) How many independent directors are to be appointed in case Raja Limited is a listed
company?
Answer:
The given problem relates to section 149(4) of the Companies Act, 2013 read with Rule 4 of the
Companies (Appointment and Qualification of Directors) Rules, 2014.
(i) As per Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014,
the following class(es) of companies shall have at least 2 directors as independent directors:
(a) Public Companies having paid up share capital of ` 10 crore or more.
(b) Public Companies having turnover of ` 100 crore or more.
(c) Public Companies which have, in aggregate, outstanding loans, debentures and
deposits, exceeding ` 50 crore.
However, the following classes of unlisted public companies shall not be required to have
any independent director:
(a) A joint venture
(b) A wholly owned subsidiary
(c) A dormant company as defined under section 455 of the Act.
Relevant date: The paid up share capital or turnover or outstanding loans, debentures and
deposits, as the case may be, as existing on the last date of latest audited financial
statements shall be taken into account.
In the given case, the paid up capital of Raja Limited is ` 20 crore, and turnover is ` 150
crore. Raja Limited fulfils two criteria out of the 3 criteria given under Rule 4. Accordingly,
Raja Limited is required to appoint a minimum of 2 independent directors.
(ii) In case Raja Limited is a listed company, it is required to appoint at least 1/3rd of its total
number of directors as independent directors.
Accordingly, out of 13 directors, at least 5 directors (1/3rd of 13 = 4.33; any fraction

contained in such 1/3rd shall be rounded off as one) shall be independent directors.
Question 12:
(a) A transferee company may prepare a scheme or contract by which an offer is made to the
shareholders of a transferor company to acquire their shares. In this regard state the powers
it has to acquire shares of shareholders dissenting from the scheme or contract approved by
majority.
Answer:
Section 235 of Companies Act, 2013 deals with such situations:
(1) The offer to acquire shares

A company (hereinafter referred to as 'the transferee company') may prepare a scheme or
contract by which an offer is made to the shareholders of another company (hereinafter
referred to as 'the transferor company') to acquire their shares.
Time limit during which the offer shall remain open

The offer shall remain open for a period of 4 months, i.e. any shareholder of the transferor
company may agree to transfer his shares to the transferee company within a period of 4
months from the date of the offer.
(2) Approval of the offer, and notice to acquire the shares of dissenting shareholders
(a) If the offer made by the transferee company is approved by the shareholders holding
not less than 9/10th in value of the shares, then, the transferee company may give
notice to any dissenting shareholder that it desires to acquire his shares.
Time limit for giving notice

Notice to any dissenting shareholder may be given by the transferee company at
anytime, but within 2 months of expiry of the period of 4 months during which the offer
was open.
As per Rule 26, such notice shall be in Form No. CAA. 14 and shall be sent at the last
intimated address of such shareholder.
(b) For this purpose, any shares already held by the transferee company or any of its
nominees or subsidiaries shall be excluded.
(c) Dissenting shareholder means -

(i) a shareholder who has not assented to the scheme or contract;
(ii) a shareholder who has failed or refused to transfer his shares to the transferee
company.
(3) Right of the dissenting shareholder(s) to make an application to the Tribunal
A dissenting shareholder to whom notice of acquisition is given by the transferee company,

may make an application to the Tribunal praying that acquisition of his shares should not be
permitted.
Time limit for making application

The application may be made to the Tribunal by any dissenting shareholder within 1 month
of receipt of notice of acquisition of shares by him.
(4) Acquisition of shares by the transferee company
The transferee company shall be entitled as well as bound to acquire the shares of the
dissenting shareholders on the same terms on which the shares of the approving
shareholders were transferred to the transferee company, in the following two cases:
(a) Where no application is made by any dissenting shareholder to the Tribunal within 1
month of receipt of notice of acquisition of shares.
(b) Where an application is made by any dissenting shareholder, but such application is
dismissed by the Tribunal.
The transferee company shall acquire the shares of the dissenting shareholder in the
following manner:
(a) The transferee company shall send to the transferor company -

(i) a copy of the notice of acquisition of shares earlier sent to the dissenting shareholders;
(ii) an instrument of transfer of shares (viz. Transfer deed)
(b) The instrument of transfer shall be executed -

(i) on behalf of the dissenting shareholder, by some person appointed by the transferor
company; and
(ii) on behalf of the transferee company, by a person authorised by the transferee
company.
(c) The transferee company shall pay to the transferor company the consideration payable by
it in respect of the shares of the dissenting shareholders acquired by it.
(d) The transferor company shall register the shares in the name of the transferee company.
(e) The transferor company shall, within 1 month of registration of shares in the name of the
transferee company, inform the dissenting shareholder of the fact of -
(i) registration of shares in the name of the transferee company; and
(ii) receipt of consideration paid by the transferee company to which the dissenting
shareholder is entitled to.
(f) The transferor company shall -

(i) deposit into a separate bank account the consideration paid by the transferee
company;
(ii) hold such consideration as a trustee for the dissenting shareholders; and
(iii) within 60 days, pay such consideration to the dissenting shareholders.
(5) No acquisition of shares by the transferee company
The transferee company shall not be entitled to acquire the shareholders of the dissenting
shareholders if the Tribunal allows the application of dissenting shareholders, i.e. where the
Tribunal makes an order that the transferee company shall not be allowed to acquire the
shares of the dissenting shareholders.
(b) State the powers of Tribunal to enforce compromise or arrangement under Section 231 of
Answer:
(1) Power to give directions

Where the Tribunal makes an order under section 230 sanctioning a compromise or an
arrangement in respect of a company, it –
(a) shall have the power to supervise the implementation of the compromise or
arrangement; and
(b) may, at the time of making such order or at any time thereafter, give such directions in
regard to any matter or make such modifications in the compromise or arrangement as
it may consider necessary for the proper implementation of the compromise or
arrangement.
(2) Power to order winding up

If the Tribunal is satisfied that the compromise or arrangement sanctioned under section 230
cannot be implemented satisfactorily with or without modifications, and the company is
unable to pay its debts as per the scheme, it may make an order for winding up the
company and such an order shall be deemed to be an order made under section 273.
(3) Applicability of section 231 to companies for which compromise or arrangement was
sanctioned before the commencement of the Companies Act, 2013
The provisions of this section shall, so far as may be, also apply to a company in respect of
which an order has been made before the commencement of this Act sanctioning a
compromise or an arrangement.
Jurisdiction in case of Government Companies
In case of Government companies, while applying the provisions of section 230, for the word
‗Tribunal‘, wherever it occurs, the words ‗Central Government‘ shall be substituted [Notification
No. G.S.R. 463(E) dated 5th June, 2015 as amended by Notification No. G.S.R. 582(E) dated 13 th
June, 2017].
Question 13:
(a) In a winding up certain debts shall be paid in priority to all other debts. Comment
Answer:
Section 327 as amended by section 255 read with Schedule XI of the Insolvency and Bankruptcy
Code, 2016 deals with preferential payments
(1) Certain debts termed „preferential payments'
In a winding up, following debts shall be paid in priority to all other debts:
(a) All revenues, taxes, cesses and rates due, within 12 months immediately before the relevant
date, to –
(i) the Central Government; or
(ii) any State Government; or
(iii) to a local authority.
(b) All wages or salaries or commissions due to any employee for a period not exceeding 4
months within 12 months immediately before the relevant date.
Such amount payable to any employee shall not exceed the amount as may be notified.
(c) All accrued holiday remuneration becoming payable to any employee, or in the case of his
death, to any other person claiming under him.
(d) All amounts due in respect of contributions payable under the Employees' State Insurance
Act, 1948 or any other law for the time being in force during the period of 12 months
immediately before the relevant date.
(e) All amounts due in respect of any compensation or liability for compensation under the
Workmen's Compensation Act, 1923 in respect of the death or disablement of any
employee of the company.
(f) All sums due to any employee from the provident fund, the pension fund, the gratuity fund
or any other fund for the welfare of the employees, maintained by the company.
(g) The expenses of any investigation held in pursuance of sections 213 and 216, in so far as they
are payable by the company.
(2) Situation where assets are insufficient
The debts payable under this section shall rank equally among themselves and be paid in
full, unless the assets are insufficient to meet them, in which case they shall abate in equal
proportions.
(3) Priority over debentures secured by a floating charge
The debts payable under this section shall have priority over the claims of holders of
debentures under any floating charge created by the company.
(4) Payments of debts forthwith

Subject to the retention of such sums as may be necessary for the costs and expenses of the
winding up, the debts under this section shall be discharged forthwith so far as the assets are
sufficient to meet them.
(5) Meaning of 'employee'
For the purposes of this section, the expression 'employee' does not include a 'workman'.
(6) Meaning of 'relevant date'
In the case of a company being wound up by the Tribunal, relevant date means the date
of appointment of a provisional liquidator or if no appointment of a provisional liquidator
was made, the date of the winding up order, unless, in either case, the company had
commenced to be wound up voluntarily before that date under the Insolvency and
Bankruptcy Code, 2016.
1. The provisions of section 327 shall apply subject to the provisions of section 326.
2. Section 327 shall not apply in the event of liquidation under the Insolvency and Bankruptcy
Code, 2016.
(b) What are the effects of floating charge on an undertaking?
Answer:
Section 332 of Companies Act, 2013 states that, if a floating charge on the undertaking or
property of the company was created within 12 months immediately preceding the
commencement of the winding up, then such a floating charge shall be invalid, except for -
(a) the amount of any cash paid to the company at the time of, or subsequent to the creation
of, and in consideration for, the charge; and
(b) interest on such amount at the rate of 5% per annum or such other rate as may be notified
by the Central Government in this behalf.
However, if it is proved that the company, immediately after the creation of the charge was
solvent, the floating charge shall not be invalid.
Study Note 2 – Insolvency & Bankruptcy Code, 2016
Question 14:
(a) Mr. Raghav is a financial creditor of Raghu Limited. He wants to initiate the corporate
insolvency resolution process under Insolvency and Bankruptcy Code, 2013. Guide his with
the process.
Answer:
Section 7 of Insolvency and Bankruptcy Code deals with initiation of corporate insolvency
resolution process by a financial creditor. The process can be explained as under:
(1) Filing of application before the Adjudicating Authority for initiating corporate insolvency
resolution process
A financial creditor either by itself or jointly with other financial creditors may file an
application for initiating corporate insolvency resolution process against a corporate debtor
before the Adjudicating Authority when a default has occurred.
For this purpose, a default includes a default in respect of a financial debt owed not only to
the applicant financial creditor but to any other financial creditor of the corporate debtor.
(2) Form and manner of making application
The application shall be in such form and manner and accompanied with such fee as may
be prescribed.
(3) Enclosures to application
Following documents and information shall be furnished along with the application:
(a) Record of the default recorded with the information utility or such other record or
evidence of default as may be specified.
(b) The name of the resolution professional proposed to act as an interim resolution
professional.
(c) Any other information as may be specified by the Board.
(4) Duty of Adjudicating Authority to ascertain the existence of a default
The Adjudicating Authority shall, within 14 days of the receipt of the application, ascertain
the existence of a default from the records of an information utility or on the basis of other
evidence furnished by the financial creditor.
(5) Admission of application by the Adjudicating Authority
The Adjudicating Authority may, by order, admit such application, if it is satisfied that -
(a) a default has occurred;
(b) the application for initiating corporate insolvency resolution process is complete; and
(c) no disciplinary proceedings are pending against the proposed resolution professional.
(6) Rejection of application by the Adjudicating Authority
The Adjudicating Authority may, by order, reject such application, if it is satisfied that -
(a) default has not occurred; or
(b) the application for initiating corporate insolvency resolution process is incomplete; or
(c) any disciplinary proceeding is pending against the proposed resolution professional.
Before rejecting the application, the Adjudicating Authority shall give a notice to the applicant
to rectify, within 7 days, the defect in his application.
(7) Commencement of corporate insolvency resolution process
The corporate insolvency resolution process shall commence from the date of admission of the
application by the Adjudicating Authority.
(b) Heritage India Limited filed a petition under Insolvency and Bankruptcy Code, 2016 with
National Company Law Tribunal (NCLT) against Tulip Limited and the petition was admitted.
After that, nature India Limited wanted to withdraw the petition based on a settlement arrived
between the parties. Whether it is permissible to withdraw the petition after it has been
admitted? Decide.
Also explain the rules relating to the admission and rejection of application by an
adjudicating authority under the Insolvency and Bankruptcy Code, 2016.
Answer:
The given problem relates to section 9 of the Insolvency and Bankruptcy Code, 2016 read with
Rule 44(2) of the National Company Law Tribunal Rules, 2016.
As per section 9, an application for initiation of corporate insolvency resolution process may be
made by an operational creditor against the corporate debtor. Such application is made to the
Adjudicating Authority, viz. the Tribunal (NCLT).
As per section 13, where an application made under section 9 is admitted, the Adjudicating
Authority shall make an order with respect to the following:
(a) Appoint an interim resolution professional in the manner as laid down in section 16.
(b) Cause a public announcement of the initiation of corporate insolvency resolution process
and call for the submission of claims.
(c) Declare a moratorium for the purposes referred to in section 14.
However, section 9 does not address a situation where in an application made to the
Adjudicating Authority is admitted, But afterwards, the operational creditor wishes to withdraw its
application. In other words, section 9 is silent as to whether an application, once admitted, can
be withdrawn or not. (But, this issue is dealt with under Rule 44(2) of the National Company Law
Tribunal Rules, 2016.
As per Rule 44(2), where at any stage prior to the hearing of the petition or application, the
applicant desires to withdraw his application, he shall make an application to that effect to the
Tribunal, and the Tribunal on hearing the applicant and if necessary, the other party in the
application, may permit such withdrawal upon imposing such costs as it may deem fit and
proper.
In Parker Hannifin India Private Limited v Powers International Private Limited, an application
made under section 9 was admitted By the Adjudicating Authority. As a consequence of
admission of application, public announcement was made inviting claims from the creditors and
moratorium was declared. Thereafter, operational creditor and corporate debtor thereafter duly
agreed for amicable settlement.
Thereafter, a settlement was arrived at between the parties, viz. (Parker 'Hannifin India (private
Limited and Prowess International Private Limited. Then, an application was made to the
Adjudicating Authority for withdrawal of application admitted earlier.
The Adjudicating Authority held that after the admission of the application under section 9, the
application acquires the character of a representative suit. By reason of public announcement,
other creditors become entitled to file their claims and participate in the corporate insolvency
resolution process. Therefore, the application cannot be dismissed on the Basis of a compromise
or settlement arrived at between the operational creditor and corporate debtor. Thus,
operational creditor and corporate debtor alone shall have no right to decide the withdrawal of
the application.
In the given case, Heritage India Limited‘s application against Tulip Limited has been admitted
By the Adjudicating Authority (viz. NCLT) under section 9. Afterwards, Heritage India Limited and
Tulip Limited entered into a settlement and wanted to withdraw the application. These facts are
similar to the facts in the case of Parker Hannifin India Private Limited v Prowess International
Private Limited. Accordingly, the application admitted under section 9 cannot be withdrawn.
Question 15:
(a) Discuss about the Powers and duties of Liquidator under Section 35 of Insolvency and
Bankruptcy Code, 2016.
Answer:
(1) Powers and duties of the liquidator - The liquidator shall have the following powers and duties
(a) To verify claims of all the creditors
(b) To take into his custody or control all the assets, property, effects and actionable claims
of the corporate debtor
(c) To evaluate the assets and property of the corporate debtor in the manner as may be
specified by the Board and prepare a report
(d) To take such measures to protect and preserve the assets and properties of the
corporate debtor as he considers necessary
(e) To carry on the business of the corporate debtor for its beneficial liquidation as he
considers necessary
(f) To sell the immovable and movable property and actionable claims of the corporate
debtor in liquidation by public auction or private contract, with power to transfer such
property to any person or body corporate, or to sell the same in parcels in such manner
as may be specified
(g) To draw, accept, make and endorse any negotiable instruments including bill of
exchange, hundi or promissory note in the name and on behalf of the corporate
debtor, with the same effect with respect to the liability as if such instruments were
drawn, accepted, made or endorsed by or on behalf of the corporate debtor in the
ordinary course of its business
(h) To take out, in his official name, letter of administration to any deceased contributory
and to do in his official name any other act necessary for obtaining payment of any
money due and payable from a contributory or his estate which cannot be ordinarily
done in the name of the corporate debtor, and in all such cases, the money due and
payable shall, for the purpose of enabling the liquidator to take out the letter of
administration or recover the money, be deemed to be due to the liquidator himself
(i) To obtain any professional assistance from any person or appoint any professional, in
discharge of his duties, obligations and responsibilities
(j) To invite and settle claims of creditors and claimants and distribute proceeds in
accordance with the provisions of this Code
(k) To institute or defend any suit, prosecution or other legal proceedings, civil or criminal, in
the name of on behalf of the corporate debtor
(l) To investigate the financial affairs of the corporate debtor to determine undervalued or
preferential transactions
(m) To take all such actions, steps, or to sign, execute and verify any paper, deed, receipt
document, application, petition, affidavit, bond or instrument and for such purpose to
use the common seal, if any, as may be necessary for liquidation, distribution of assets
and in discharge of his duties and obligations and functions as liquidator
(n) To apply to the Adjudicating Authority for such orders or directions as may be necessary
for the liquidation of the corporate debtor and to report the progress of the liquidation
process in a manner as may be specified by the Board
(o) To perform such other functions as may be specified by the Board.
The liquidator may exercise the above powers subject to the directions of the Adjudicating Authority.
(2) Power of the liquidator to consult the stakeholders
The liquidator shall have the power to consult any of the stakeholders entitled to a
distribution of proceeds under section 53. However, any such consultation shall not be
binding on the liquidator. The records of any such consultation shall be made available to
all other stakeholders not so consulted, in the manner specified by the Board.
(b) Can anybody be a resolution professional?
Answer:
Regulation 3 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for
Corporate Persons) Regulations, 2016 deals with the provisions relating to eligibility for resolution
professionals, as explained below:
(1) Eligibility for appointment as resolution professional
An insolvency professional shall be eligible to be appointed as a resolution professional for a

corporate insolvency resolution process of a corporate debtor if he, and all partners and
directors of the insolvency professional entity of which he is a partner or director, are
independent of the corporate debtor.
A person shall be considered independent of the corporate debtor, if he:
(a) is eligible to be appointed as an independent director on the Board of the corporate

debtor under section 149 of the Companies Act, 2013, where the corporate debtor is a
company;
(b) is not a related party of the corporate debtor; or
(c) is not an employee or proprietor or a partner -
(i) of a firm of auditors or company secretaries in practice or cost auditors of the
corporate debtor in the last 3 financial years; or
(ii) of a legal or a consulting firm, that has or had any transaction with the corporate
debtor amounting to ten per cent or more of the gross turnover of such firm in the
last 3 financial years.
(2) Disclosure by the resolution professional
A resolution professional shall make disclosures at the time of his appointment and
thereafter in accordance with the Code of Conduct.
Study Note 3 – SEBI Laws and Regulations
Question 16:
(a) Bright Ltd., an unlisted public company, eligible to make a public issue, desires to get its
securities listed on Mumbai Stock exchange, pursuant to a public issue to be made shortly.
The company seeks your advice in respect of the following:
(i) Whether the company can freely price its equity shares, and
(ii) Whether it can issue equity shares to those applicants in the firm allotment category at
a price different from the price at which equity shares are offered to the public.
Advise, keeping in view the SEBI Guidelines in this regard.
Answer:
Pricing by companies issuing securities are contained in Regulations 28 to 31 consisting of Part II of

Chapter III of Securities and Exchange Board of India (Issue of Capital and Disclosure
Requirements) Regulations, 2009. The relevant part of these Regulations is explained below:
Pricing
(1) An issuer may determine the price of specified securities in consultation with the lead
merchant banker or through the book building process.
(2) An issuer may determine the coupon rate and conversion price of convertible debt
instruments in consultation with the lead merchant banker or through the book building
process.
(3) The issuer shall undertake the book building process in a manner specified in Schedule XI.
Differential pricing
An issuer may offer specified securities at different prices, subject to the following:
(a) retail individual investors or retail individual shareholders or employees entitled for
reservation made under regulation 42 making an application for specified securities of
value not more than ` 2 lakhs, may be offered specified securities at a price lower than the
price at which net offer is made to other categories of applicants:
Provided that such difference shall not be more than 10% of the price at which specified
securities are offered to other categories of applicants;
(b) in case of a book built issue, the price of the specified securities offered to an anchor investor
shall not be lower than the price offered to other applicants;
(c) in case of a composite issue, the price of the specified securities offered in the public issue
may be different from the price offered in rights issue and justification for such price
difference shall be given in the offer document.
(d) In case the issuer opts for the alternate method of book building in terms of Part D of
Schedule XI, the issuer may offer specified securities to its employees at a price lower than
the floor price:
Provided that the difference between the floor price and the price at which specified
securities are offered to employees shall not be more than 10% of the floor price.
Price and price band
(1) The issuer may mention a price or price band in the draft prospectus (in case of a fixed
price issue) and floor price or price band in the red herring prospectus (in case of a book
built issue) and determine the price at a later date before registering the prospectus with the
Registrar of Companies:
Provided that the prospectus registered with the Registrar of Companies shall contain only
one price or the specific coupon rate, as the case may be.
(2) The issuer shall announce the floor price or price band at least 5 working days before the
opening of the bid (in case of an initial public offer) and at least 1 working day before the
opening of the bid (in case of a further public offer), in all the newspapers in which the pre
issue advertisement was released.
(3) The announcement referred to in sub-regulation (2) shall contain relevant financial ratios
computed for both upper and lower end of the price band and also a statement drawing
attention of the investors to the section titled "basis of issue price" in the prospectus.
(3A) The announcement referred to in sub-regulation (2) and the relevant financial ratios referred
to in sub-regulation (3) shall be disclosed on the websites of those stock exchanges where
the securities are proposed to be listed and shall also be pre-filled in the application forms
available on the websites of the stock exchanges.
(4) The cap on the price band shall be less than or equal to 120% of the floor price.
(5) The floor price or the final price shall not be less than the face value of the specified
securities.
Explanation: For the purposes of sub-regulation (4), the 'cap on the price band' includes
cap on the coupon rate in case of convertible debt instruments. 31. Face value of equity
shares.
Face Value of Equity Shares
(1) Subject to the provisions of the Companies Act, 1956, the Act and these regulations, an issuer
making an initial public offer may determine the face value of the equity shares in the
following manner:
(a) if the issue price per equity share is ` 500 or more, the issuer shall have the option to
determine the face value at less than ` 10 per equity share:
Provided that the face value shall not be less than Re. 1 per equity share;
(b) if the issue price per equity share is less than ` 500, the face value of the equity shares
shall be ` 10 per equity share:
Provided that nothing contained in this sub-regulation shall apply to initial public offer made
by any government company, statutory authority or corporation or any special purpose
vehicle set up by any of them, which is engaged in infrastructure sector.
(2) The disclosure about the face value of equity shares (including the statement about the issue
price being "X" times of the face value) shall be made in the advertisements, offer
documents and application forms in identical font size as that of issue price or price band.
Explanation: For the purposes of this regulation, the term "infrastructure sector" includes the
facilities or services as specified in Schedule X.
(b) A company “issuer” was in the process of making an offer to right issue of the specified
securities. All the process was completed and the arrangement was complete. Mr. Ritwik, a
director of the company was categorized as a „willful Defaulter‟ by a Bank in accordance
with the guidelines issued by the RBI. Advise the “Issuer” whether it can proceed to offer the
securities through the right issue. Will your answer differ, had it been a public issue?
Answer:
As per Regulation 4 of Securities and Exchange Board of India (Issue of Capital and Disclosure
Requirements) Regulations, 2009, no issuer shall make, -
(a) a public issue of equity securities, if the issuer or any of its promoters or directors is a wilful
defaulter; or
(b) a public issue of convertible debt instruments if,
(i) the issuer or any of its promoters or directors is a wilful defaulter; or
(ii) it is in default of payment of interest or repayment of principal amount in respect of debt

instruments issued by it to the public, if any, for a period of more than 6 months.
However, an issuer may make a rights issue of specified securities, even if the issuer or any of its
promoters or directors is a wilful defaulter provided the issuer shall make disclosures as specified in (Part
G of Schedule VIII, in the offer document and abridged letter of offer. (But, in such right issue, the
promoters or promoter group of the issuer shall not renounce their rights except to the extent of
renunciation within the promoter group.
In the given case, a director of the issuer, Mr. Ritwik, is a wilful defaulter. (Therefore, the issuer may
proceed to offer the securities by way of a right issue provided the issuer shall make disclosures as
specified in Part G of Schedule VIII, in the offer document and abridged letter of offer. However, the
issuer cannot make a public offer of securities.
Question 17:
(a) Complaints of unethical practices have been received against members of the governing
body of a recognized stock exchange. Examine whether the Government has any power to
take action against the governing body of the said exchange.
Answer:
On receipt of a complaint of unethical practices against the members of the governing body of
a recognised stocky exchange, the Central government is empowered to take the following
actions as per Securities Contracts (Regulations) Act, 1956.
1. Withdrawal of recognition (Section 5)

As per section 5, the Central (government may withdraw the recognition granted to a stock
exchange if considering the interest of the trade or the public interest, the Central
(government is of the opinion that the recognition granted to a stock exchange should be
withdrawn. The Central (government shall give an opportunity of being heard to the
governing body. The withdrawal of recognition shall be published in the Official gazette.
2. Supersession of the governing body (Section 11)

Section 11 empowers the Central (government to supersede the governing body of a
recognized stock exchange. It may also appoint any person or persons to exercise all the
powers and perform all the duties of the governing body. Where the Central (government
appoints more than one person, it may appoint one of such persons to be the chairman
and another to be the vice-chairman of the governing body. The Central (government shall
have these powers notwithstanding anything contained in any other law for the time being
in force. Jin order of supersession shall require the fulfilment of all the following conditions:
(a) The Central government shall serve on the governing body a written notice that it is
considering the supersession of the governing body.
(b) The Central Government shall specify the reasons in the notice given to the governing
Body.
(c) The Central Government shall give an opportunity of being heard to the governing
Body.
(d) The Central Government must form an opinion that the governing Body of the stock
exchange should be superseded.
(e) The Central Government shaft issue a notification in the Official Gazette that the
governing Body of the stock exchange has been superseded.
(b) The Securities and Exchange Board of India, for the purpose of corporatization and
demutualization of a recognized stock exchange issued an order that at least fifty one
percent of its equity share capital shall be held, within twelve months, by the public other
than share holders having trading rights. Decide whether the said order of the Securities and
exchange board of India is valid under the provisions of the Securities Contracts (Regulation)
Act, 1956 including the time limit of twelve months as stated in the order.
Answer:
The procedure for corporatisation and demutualisation is contained under section 4B of the Act.
This procedure is explained as under:
1. Requirement of Section 4B
Every recognised stock exchange shall submit a scheme for corporatisation and
demutualisation to SEBI for its approval within such time as may be specified by SEBI.
However, if a recognised stock exchange has already been corporatised and demutualised
before the appointed date, it shall not be required to submit a scheme for corporatisation
and demutualisation.
2. Approval of scheme by SEBI
(a) SEBI may approve the scheme of corporatisation and demutualisation. The approval
may be given with or without modification.
(b) Before granting approval, SEBI may make such enquiry as may be necessary in this
behalf. SEBI may obtain such further information from the recognised stock exchange
as it may require.
(c) SEBI shall grant the approval only if it is satisfied that it is in the interest of the trade and
also in the public interest to grant such approval.
3. Imposition of restrictions by SEBI
SEBI may, while approving the scheme, make an order restricting -
(a) the voting rights of the shareholders who are also the stock brokers;
(b) the right of shareholders or a stock broker of the recognised stock exchange to appoint the
representatives on the governing board of the recognised stock exchange;
(c) the maximum number of representatives of the stock brokers of the recognised stock
exchange to be appointed on the governing board of the recognised stock exchange,
which shall not exceed l/4th of the total strength of the governing board.
The restrictions so imposed by SEBI shall have full effect, notwithstanding anything to the contrary
contained in the Companies Act, 1956, or any other law for the time being in force.
4. Conditions of approval
(a) Every recognised stock exchange, in respect of which the scheme has been approved by
SEBI, shall ensure that at least 51 % of its equity share capital is held by the public other than
shareholders having trading rights.
(b) The recognised stock exchange shall comply with such provision within 12 months of the
publication of order of SEBI. However, SEBI may extend such period by another 12 months.
(c) The recognised stock exchange may comply with such provision either by fresh issue of
equity shares to the public or in any other manner as may be specified by the regulations
made by SEBI.
5. Publication of scheme
The scheme is required to be published only when it has been approved by SEBI. The
approved scheme shall be published by SEBI in the Official Gazette. The approved scheme
shall be published by the recognised stock exchange in such 2 daily newspapers circulating
in India, as may be specified by SEBI.
6. Effects of publication
(a) Upon publication of the scheme-

- the scheme shall become effective;
- the scheme shall be binding on all persons and authorities including all members,
creditors, depositors and employees of the recognised stock exchange and on all
persons having any contract, right, power, obligation or liability with, against, over,
to, or in connection with, the recognised stock exchange or its members.
(b) This provision shall apply notwithstanding anything to the contrary contained in this Act
or any other law for the time being in force or any agreement, award, judgment,
decree or other instrument for the time being in force.
7. Rejection of the scheme
(a) SEBI may reject the scheme submitted by the recognised stock exchange if it is satisfied
that it would not be in the interest of the trade and also in the public interest to approve
the scheme.
(b) The order of rejection shall be published in the Official Gazette.
(c) Before rejecting the scheme, SEBI shall give a reasonable opportunity of being heard to
all the persons concerned and the recognised stock exchange concerned.
Study Note 4 – Competition Act, 2002
Question 18:
(a) National Toys Limited and Local Toys Limited marketing their products in India proposes to be
amalgamated. The enterprise created as a result of the said amalgamation will have assets
of value of ` 300 crore and turnover of ` 1,000 crore. Examine whether the proposed
amalgamation attracts the provisions of the Competition Act, 2002?
Answer:
The given problem relates to section 5 of the Competition Act, 2002.
As per section 5, an amalgamation shall be a combination if the enterprise created as a result of

the amalgamation, shall have the assets of the value of more than ` 1,000 crores or turnover
more than ` 3,000 crores. As per Notification No. S.O. 675(E) dated 4th March, 2016, the value of
assets and turnover have been enhanced by 100%. Accordingly, as per section 5 read with
'Notification No. S.O. 675(E) dated 4th March, 2016, an amalgamation shall be a combination if
the enterprise created as a result of the amalgamation, shall have the assets of the value of
more than ` 2,000 crores or turnover more than ` 6,000 crores.
In the given case, the enterprise created as a result of the amalgamation wilt have assets of
value of ` 300 crore (i.e. less than ` 2,000 crores) and turnover of ` 1,000 crore (i.e. less than `
6,000 crores). Thus, as per the provisions of section S read with Notification No. S.O. 675(E) dated
4th March, 2016, the said amalgamation does not amount to 'combination', and so such
amalgamation shall come into effect without obtaining any approval of the Competition
Commission of India.
(b) What Factors are considered by the Commission in determining appreciable adverse effect
on competition, whether an enterprise enjoys dominant position and whether any enterprise
has abused its dominant position?
Answer:
The provisions relating to inquiry into anti-competitive agreements or abuse of dominant position
are explained in the following paragraphs:
1. Nature of inquiry under section 19
The Commission may make an inquiry to determine as to whether the provisions of Section 3
or Section 4 have been contravened.
2. When can commission make an inquiry
The Commission may make an inquiry -

(a) on its own motion; or
(b) on receipt of any information, in such manner and accompanied by such fees as may
be determined by Regulations, from any person, consumer or consumer association or
trade association; or
(c) if a reference is made to the Commission by CG or SG or a statutory authority.
3. Determining 'appreciable adverse effect on competition'
The Commission shall, while determining whether an agreement has an appreciable

adverse effect on competition under section 3, have due regard to all or any of the
following factors:
(a) creation of barriers to new entrants in the market;
(b) driving existing competitors out of the market;
(c) foreclosure of competition by hindering entry into the market;
(d) accrual of benefits to consumers;
(e) improvements in production or distribution of goods or provision of services; or
(f) promotion of technical, scientific and economic development by means of production
or distribution of goods or provision of services.
4. Determining whether an enterprise enjoys a dominant position or not
The Commission shall, while inquiring whether an enterprise enjoys a dominant position or
not under section 4, have due regard to all or any of the following factors:
(a) market share of the enterprise;
(b) size and resources of the enterprise;
(c) size and importance of the competitors;
(d) economic power of the enterprise including commercial advantages over competitors;
(e) vertical integration of the enterprises or sale or service network of such enterprises;
(f) dependence of consumers on the enterprise;
(g) monopoly or dominant position whether acquired as a result of any statute or by virtue
of being a Government company or a public sector undertaking or otherwise;
(h) entry barriers including barriers such as regulatory barriers, financial risk, high capital
cost of entry, marketing entry barriers, technical entry barriers, economies of scale, high
cost of substitutable goods or service for consumers;
(i) countervailing buying power;
(j) market structure and size of market;
(k) social obligations and social costs;
(l) relative advantage, by way of the contribution to the economic development, by the
enterprise enjoying a dominant position having or likely to have appreciable adverse
effect on competition;
(m) any other factor which the Commission may consider relevant for the inquiry.
5. Determining 'relevant market'
For determining whether a market constitutes a 'relevant market' for the purposes of this Act,
the Commission shall have due regard to the 'relevant geographic market' and 'relevant
product market'.
6. Determining 'relevant geographic market'

The Commission shall, while determining the 'relevant geographic market', have due regard
to all or any of the following factors:
(i) regulatory trade barriers;
(ii) local specification requirements;
(iii) national procurement policies;
(iv) adequate distribution facilities;
(v) transport costs;
(vi) language;
(vii) consumer preferences;
(viii) need for secure, regular supplies or rapid after-sales services.
7. Determining 'relevant product market'
The Commission shall, while determining the 'relevant product market', have due regard to
all or any of the following factors:
(a) physical characteristics or end-use of goods;
(b) price of goods or service;
(c) consumer preferences;
(d) exclusion of in-house production;
(e) existence of specialised producers;
(f) classification of industrial products.
Study Note 5 – Foreign Exchange Management Act, 1999
Question 19:
(a) What are the penalties provided under FEMA for contravention of provisions of the Act?
Answer:
The penalties provided in the different provisions of the Act are summarised as under:
1. Penalty for contravention

(a) The penalty may be levied in the following cases:
(i) Where any person contravenes any provisions of the Act, rule, regulation,
notification, direction or order issued under the Act.
(ii) Where any person contravenes any condition subject to which an authorisation is
issued by the Reserve Bank.
(b) Amount of penalty.

(i) Where the amount involved in contravention is quantifiable, the penalty may be
levied upto 3 times the sum involved in the contravention.
(ii) Where the amount involved in contravention is not quantifiable, penalty upto `
2,00,000 may be levied.
(iii) Where any contravention is a continuing one, further penalty not exceeding `
5,000 per day may be levied.
(c) Penalty payable upon adjudication. Penalty shall become payable only upon
adjudication under section 14.
2. Other consequences of contravention [Section 13(2)]

In addition to the levy of penalty, the Adjudicating Authority may issue the following
directions:
(a) Confiscation of currency etc.: While adjudicating any contravention, the Adjudicating
Authority may, if he thinks fit, direct that any currency, security or any other money or
property in respect of which the contravention has taken place shall be confiscated to
the Central Government.
Extended meaning of ‗property‘: For the purposes of section 13(2), 'property in respect
of which contravention has taken place', shall include-
(i) deposits in a bank, where the said property is converted into such deposits;
(ii) Indian currency, where the said property is converted into that currency; and
(iii) any other property which has resulted out of the conversion of that property.
(b) Issue of directions relating to foreign exchange holdings: The Adjudicating Authority
may further direct that the foreign exchange holdings of the person committing the
contravention shall be brought back into India or shall be retained outside India in
accordance with the directions made in this behalf.
3. Consequences of failure to pay penalty (Section 14)

Following points are worth noting in this regard:
(a) Imprisonment: If any person fails to make full payment of the penalty imposed on him
within 90 days from the date of service of notice on him, he shall be liable to civil
imprisonment.
(b) Term of imprisonment.
(i) Where the demand raised in the penalty order exceeds ` 1 crore, the imprisonment
may extend upto 3 years.
(ii) In any other case, the imprisonment may extend upto 6 months.
(c) Release of defaulter on payment.: The defaulter shall be released, where the amount
mentioned in the warrant has been paid to the officer in charge of the civil prison.
(1) Remedy consequent on order of Adjudicating Authority

Where penalty is imposed under section 13, the accused person may -
(a) seek compounding of the contravention; or
(b) prefer an appeal to -
(i) Special Director (Appeals), where the Adjudicating Authority passing the order is an
Assistant Director of enforcement or a Deputy Director of enforcement; or
(ii) Appellate Tribunal, where the order is passed by any officer of the Adjudicating
Authority other than Assistant Director of enforcement or Deputy Director of
enforcement.
(i) Liability of Legal representative or official assignee

Where a person dies or becomes insolvent, following consequences shall follow:
(a) Any right, obligation, liability, proceeding or appeal to which he was a party, shall not
abate by reason of his death or insolvency.
(b) Such rights and obligations shall devolve on the legal representative or the official
receiver or official assignee of such person. However, the legal representative of the
deceased shall be liable only to the extent of the inheritance or estate of the
deceased.
(ii) Penalty on an authorised person

An authorised person is levied penalty under section 11 and not under section 13.
(b) Ms. Deepika daughter of Mr. Royal (an exporter), is residing in Australia since long. She
wants to buy a flat in Australia. Since she is unmarried, she wants to make her father Mr.
Royal a joint holder in that flat, for which entire proceeds are to be paid by her.
(i) What are the provisions of FEMA governing such type of transactions?
(ii) can Mr. Royal join her daughter in acquiring such a flat in Australia?
(iii) Mr. Royal, wants to receive advice payments against his exports from a buyer outside
India.
What are the relevant provisions?
Answer:
(i) As per Regulation 5 of the Foreign 'Exchange Management (Acquisition and transfer of
immovable property outside India) Regulations, 2015, a person resident in India may acquire
immovable property outside India jointly with a relative who is a person resident outside India,
provided there is no outflow of funds from India.
As per Regulation 15 of the Foreign 'Exchange Management (Export of Goods and Services)
Regulations, 2015, where an exporter receives advance payment (with or without interest),
from a buyer/third party named in the export declaration made by the exporter, outside India,
the exporter shaft be under an obligation to ensure that -
(a) the shipment of goods is made within one year from the date of receipt of advance
payment;
(b) the rate of interest, if any, payable on the advance payment does not exceed the rate of
interest London Inter-Bank Offered Rate (LIBOR) + 100 basis points and
(c) the documents covering the shipment are routed through the authorised dealer through
whom the advance payment is received;
Provided that in the event of the exporter's inability to make the shipment, partly or fully, within
1 year from the date of receipt of advance payment, no remittance towards refund of
unutilized portion of advance payment or towards payment of interest, shad be made after
the expiry of the period of 1 year, without the prior approval of the Reserve Bank.
(ii) Mr. Royal can join her daughter in acquiring the flat in Australia in accordance with the
aforesaid Regulation 5 of the Foreign Exchange Management (Acquisition and transfer of
immovable property outside India) Regulations, 2015.
(iii) Mr. Royal can receive advance payments against his exports from a buyer outside India in
accordance with Regulation 15 of the Foreign Exchange Management (Export of Goods and
Services) Regulations, 2015.
Question 20:
(a) Mr. Aryan, an Indian National desires to obtain foreign exchange for the following purposes.
(i) Payment of US$ 10,000 as commission on exports under Rupee State Credit Route.
(ii) US$ 30,000 for a business trip to U.K.

(iii) Remittance of US$ 2,00,000 for payment as prize money to the winning team in a
Kabaddi Tournament to be held in Australia.
Advise him, if he can get the Foreign Exchange and under what conditions.
Answer:
Any person may sell or draw foreign exchange to or from an authorised person if such sale or
drawal is a current account transaction. However, the Central government may, in public
interest and in consultation with the RBI, impose such reasonable restrictions for current account
transactions as may Be prescribed (Section 5). The Central government has framed foreign
Exchange Management (Current Account Transactions) (Rules, 2000. The (Rules stipulate some
prohibitions and restrictions on drawal of foreign exchange for certain purposes. In the light of
provisions of these rules, the answer to the given problem is as follows:
(i) Rule 3 read with Schedule I of Foreign (Exchange Management (Current Account
Transactions) (Rules, 2000 prohibits payment of commission on exports under (Rupees State
Credit Route (except commission upto 10% of invoice value of exports of tea and tobacco).
Therefore, payment of US $ 10,000 as commission on exports under (Rupee State Credit
Route is prohibited unless such commission is paid for export of tea and tobacco, and the
commission does not exceed 10% of invoice value of exports.
(ii) As per Rule 5 read with Schedule III of (Foreign Exchange Management (Current Account
Transactions) Rules, 2000, individuals can draw foreign exchange upto US Dollar 2,50,000 for
travel for business (referred to as 'the Liberalised Remittance Scheme). (Drawal of foreign
exchange in excess of US (Dollar 2,50,000 shall require prior approval of the Reserve (Bank of
India. Therefore, Mr. E can obtain US Dollar 30,000 for Business tour to UK without any
approval of the Reserve (Bank of India.
(iii) As per Rule 4 read with Schedule II of Foreign Exchange Management (Current Account
Transactions) Rules, 2000, drawal of foreign exchange exceeding US$ 1,00,000 for the
purpose of remittance of prize money/sponsorship of sports activity abroad By a person
other than International/ National/ State level sports Bodies requires the prior approval of
the Central government. In the given case, the drawal of US $ 2,00,000 for payment as prize
money to the winning team in a Kabaddi Tournament to be held in Australia is organised
By Mr. Aryan, who is an Indian National (i.e., not any International, National or State level
Sports (Body) Therefore, Mr. Aryan can obtain US (Dollar 1,00,000 without any permission, But
for drawal of additional US (Dollar 1,00,000, prior approval of the Central (government is
required. However, prior approval of the Central government shall not Be required if drawal
of additional US (Dollar 1,00,000 is made out of funds held in Resident Foreign Currency
(RFC) Account.
(b) Mr. Sunny, an Indian National desires to obtain foreign exchange for the following purposes:
(i) Payment of commission on exports under Rupee State Credit Route.
(ii) Gift remittance exceeding US$ 10,000.
Advise him whether he can get foreign exchange and if so, under what condition?
Answer:
Any person may sell or draw foreign exchange to or from an authorised person if such sale or
drawal is a current account transaction. However, the Central Government may, in public
interest and in consultation with the RBI, impose such reasonable restrictions for current account
transactions as may be prescribed (Section 5). The Central Government has framed Foreign
'Exchange Management (Current Account Transactions) (Rules, 2000. The (Rules stipulate some
prohibitions and restrictions on drawal of foreign exchange for certain purposes. In the light of
provisions of these rules, the answer to the given problem is as follows:
(i) (Rule 3 read with Schedule I of Foreign 'Exchange Management (Current Account
Transactions) (Rules, 2000 prohibits payment of commission on exports under (Rupees State
Credit (Route (except commission upto 10% of invoke value of exports of tea and tobacco).
Therefore, payment of commission on exports under (Rupee State Credit (Route is
prohibited unless such commission is paid for export of tea and tobacco, and the
commission does not exceed10% of invoice value of exports.
(ii) As per (Rule 5 read with Schedule III of Foreign Exchange Management (Current Account
Transactions) Rules, 2000, individuals can draw foreign exchange upto US Dollar 2,50,000 for
gift or donation referred to as 'the Liberalised (Remittance Scheme). Drawal of foreign
exchange in excess of US Dollar 2,50,000 shall require prior approval of the Reserve Bank of
India. Therefore, Mr. Sunny can obtain more than US Dollar 10,000 for gift without any
approval of the Reserve Bank of India provided the total amount drawn by him during the
entire financial year does not exceed US Dollar 2,50,000.
Study Note 6 – Laws relating to Banking Sector
Question 21:
(a) State the provisions relating to maintenance of Cash Reserve by a Banking Company.
Answer:
Section 18 contains the provisions regarding the Cash Reserve to be maintained by a Banking
Company, as explained below:
1. Time limit and amount of cash reserve [Section 18(1)]

Every banking company shall maintain on a daily basis by way of cash reserve or by way of
balance in a current account with the Reserve Bank, a sum equivalent to such percent of
the total of its demand and time liabilities as on the last Friday of the second preceding
fortnight as the Reserve Bank may specify, by notification in the Official Gazette, from time to
time, having regard to the needs of securing the monetary stability in the country, and shall
submit to the Reserve Bank before the 20th day of every month a return showing the amount
so held on alternate Fridays during a month with particulars of its demand and time liabilities
on such Friday or if any such Friday is a public holiday under the Negotiable Instruments Act,
1881, at the close of business on the preceding working day.
2. Penal interest payable for failure to maintain cash reserve [Section 18(1A) (IB) and (1C)]
(a) If the balance held by a banking company at the close of business on any day is below
the minimum specified under section 18(1), such banking company shall, without
prejudice to the provisions of any other law for the time being in force, be liable to pay to
the Reserve Bank, in respect of that day, penal interest at a rate of 3% above the bank
rate on the amount by which such balance falls short of the specified minimum, and if
the shortfall continues further, the penal interest so charged shall be increased to a rate
of 5% above the bank rate in respect of each subsequent day during which the default
continues [Section 18(1A)].
(b) However, if the Reserve Bank is satisfied, on an application in writing by the defaulting
banking company, that such defaulting banking company had sufficient cause for its
failure to comply with the provisions of sub-section (1), it may not demand the payment of
the penal interest [Section 18(1B)].
(c) The Reserve Bank may, for such period and subject to such conditions as may be
specified, grant to any banking company such exemptions from the provisions of this
section as it may think fit [Section 18(1C)].
3. Meaning of certain terms [Explanation to Section 18(1)

(a) ‗Liabilities in India': Liabilities in India' shall not include –
(i) the paid-up capital or the reserves or any credit balance in the profit and loss
account of the banking company;
(ii) any advance taken from the Reserve Bank or from the Exim Bank or from the
Reconstruction Bank or from the National Housing Bank or from the National Bank or
from the Small Industries Bank by the banking company.
(b) ‗Fortnight‘: Fortnight means the period from Saturday to the second following Friday,
both days inclusive.
(b) The Board of directors of Supra Limited, a banking company incorporated in India, for the
accounting period ended 31.03.2013 transferred 15% of its net profit to its Reserve Fund.
Certain shareholder of the company object to the above act of the board on the ground
that it is violative of the provisions of the Banking Regulation Act, 1949. Decide whether the
contention of the shareholders is tenable under the Banking Regulation Act, 1949.
Answer:
As per section 17, every banking company shaft transfer to the reserve fund a sum equivalent to
not less than 20% of profit.
However, the Central Government may, on the recommendation of the Reserve Bank and
having regard to the adequacy of the paid-up capital and reserves of a Banking company in
relation to its deposit liabilities, declare by order in writing that the requirement of transfer of at
least 20% of profits to reserve fund shall not apply to a Banking company for such period as may
be specified in the order. But, no such order shall be made unless the amount in the reserve fund
together with the amount in the share premium account is not less than the paid-up capital of
the banking company.
The given problem is answered as under:
(i) The (Board of directors of the Banking company has transferred to reserves 15% of net
profits. The shareholders have objected to it.
The objection made by the shareholders is valid since the minimum amount to be
transferred to the reserve fund is 20% of profits.
However, the action of the Board shall be valid if the banking company has obtained in
writing, an order of the Central government, waiving compliance with the requirements of
transfer to the reserve fund.
(ii) In case the Board has transferred to the reserves 30% of net profits, such decision of the
Board is valid since the requirement of 20% of profits to be transferred to reserves is the
minimum requirement given under the Act. The Board is free to transfer to reserves anything
over and above 20% of net profits. Thus, the contention of the shareholders is not tenable in
the second case.
Question 22:
(a) Pest Control Limited defaulted in the repayment of term loan taken from a Bank against
security created as a first charge on some of its assets. The bank issued notice pursuant to
Section 13 of the SARFAESI Act, 2002 to the Company to discharge its liabilities within a
period of 60 days from the date of the notice. The company failed to discharge its liabilities
within the time limit specified. Explain the measures to be taken by the Bank to enforce its
security interest under the said Act.
Answer:
The provisions relating to enforcement of security interest are as follows:
1. No intervention of court or tribunal in enforcement of security interest [Section 13(1)]
A secured creditor may enforce any security interest created in his favour, without the
intervention of any Court or Tribunal.
2. Notice by secured creditor to borrower to discharge liabilities within 60 days [Section 13(2)]
(a) The secured creditor is empowered to issue a written notice to the borrower, if -
(i) the borrower makes any default in repayment of secured debt or any installment
thereof; and
(ii) the account of such borrower is classified by the secured creditor as non-
performing asset.
The requirement of classification of secured debt as non-performing asset shall not

apply to a borrower who has raised funds through issue of debt securities.
In case of default in repayment of debt securities, the debenture trustee shall be

entitled to enforce security interest in the same manner as provided under this section
with such modifications as may be necessary and in accordance with the terms and
conditions of security documents executed in favour of the debenture trustee.
(b) The notice shall state -

(i) the details of the amount payable by the borrower;
(ii) that the borrower is required to pay in full his liabilities to the secured creditor within
60 days from the date of notice; and
(iii) that, in case of default by the borrower, the secured creditor shall be entitled to
exercise all or any of the rights under sub-section (4) of section 13;
(iv) the details of the secured assets intended to be enforced by the secured creditor in
the event of non-payment of amount payable by the borrower.
After receipt of notice from the secured creditor, the borrower shall not transfer any of his
secured assets referred to in the notice, without prior written consent of the secured
creditor.
3. Secured creditor to consider the representation or objection of the borrower [Section 13(3A)]
(a) When a notice is served on the borrower by the secured creditor, the borrower is entitled to
make a representation or raise his objection.
(b) The secured creditor shall consider such representation or objection.
(c) If the secured creditor comes to the conclusion that such representation or objection is not
acceptable, he shall, within 15 days, communicate to the borrower the reasons for non-
acceptance of the representation or objection.
The reasons so communicated or the likely action of the secured creditor shall not entitle the
borrower to make an application to the Debts Recovery Tribunal.
4. Measures for secured creditor in case of default by the borrower [Section 13(4)]
In case the borrower fails to discharge his liability in full within 60 days from the date of notice,
the secured creditor may take recourse to one or more of the following measures to recover
his secured debt:
(a) Take possession of the secured assets of the borrower including the right to transfer by
way of lease, assignment or sale for realising the secured asset.
(b) Take over the management of the business of the borrower including the right to
transfer by way of lease, assignment or sale for realising the secured asset.
(c) Appoint any person (hereafter referred to as the manager), to manage the secured
assets the possession of which has been taken over by the secured creditor.
(d) Require at any time by notice in writing, any person who has acquired any of the
secured assets from the borrower and from whom any money is due or may become
due to the borrower, to pay the secured creditor, so much of the money as is
sufficient to pay the secured debt.
Any payment made by such person to the secured creditor shall give such person a valid
discharge as if he has made payment to the borrower.
5. Right of secured creditor to bid [Section 13(5A)]
Where the sale of an immovable property, for which a reserve price has been specified, has
been postponed for want of a bid of an amount not less than such reserve price, it shall be
lawful for any officer of the secured creditors to bid for the immovable property on behalf of
the secured creditor at any subsequent sale.
6. Purchase price to be adjusted towards claim of secured creditor [Section 13(5B)]
Where the secured creditor is declared to be the purchaser of the immovable property at any
subsequent sale, the amount of the purchase price shall be adjusted towards the amount of
the claim of secured creditor.
7. Applicability of Banking Regulation Act, 1949 [Section 13(5C)]
The provisions of section 9 of the Banking Regulation Act, 1949 shall, as far as may be, apply
to such immovable property acquired by secured creditor.
8. Effects of transfer of secured asset by the secured creditor [Section 13(6)]
Any transfer of secured asset by the secured creditor shall vest in the transferee all the rights
in the secured asset.
9. Recovery of costs by the secured creditor from the borrower [Section 13(7)]
(a) The secured creditor shall be entitled to determine the costs which have been properly
incurred by him.
(b) Such costs shall be recoverable by the secured creditor from the borrower.
(c) Any money which is received by the secured creditor shall be applied, firstly, in payment of
such costs and secondly, in discharge of the dues of the secured creditor, and if any amount
remains after such payments, such amount shall be paid to the borrower.
10. No sale of secured asset if all dues paid to secured creditor before the date fixed for sale
[Section 13(8)]
If the amount of dues of the secured creditor together with all costs, charges and expenses
incurred by him is tendered to the secured creditor at any time before the date of
publication of notice for public auction or inviting quotations or tender from public or
private treaty for transfer by way of lease, assignment or sale of the secured assets, -
(i) the secured assets shall not be transferred by way of lease, assignment or sale by the
secured creditor; and
(ii) in case, any step has been taken by the secured creditor for transfer by way of lease or
assignment or sale of the assets before tendering of such amount under this subsection,
no further step shall be taken by such secured creditor for transfer by way of lease or
assignment or sale of such secured assets.
11. Right of action in case of joint financing of a financial asset [Section 13(9)]
In the case of financing of a financial asset by more than one secured creditors or joint
financing of a financial asset by secured creditors, no secured creditor shall be entitled to
exercise any right conferred on him under section 13(4), unless exercise of such right is
agreed upon by the secured creditors representing not less than 60% in value of the amount
outstanding, and such action shall be binding on all the secured creditors.
The provisions contained in section 13(9) are subject to the provisions contained in the
Insolvency and Bankruptcy Code, 2016.
12. Distribution of amount realised in case of a company in liquidation [Proviso to Section 13(9)]
In the case of a company in liquidation, the amount realised from the sale of secured assets
shall be distributed in accordance with the provisions of section 529A of the Companies Act,
1956.
13. Recovery of unsatisfied dues of secured creditor [Section 13(10)]

Where dues of the secured creditor are not fully satisfied with the sale proceeds of the
secured assets, the secured creditor may file an application to the Debts Recovery Tribunal
or a competent court, for recovery of the balance amount from the borrower.
14. Right of action against the guarantors or pledged assets [Section 13(11)]
The secured creditor shall be entitled to proceed against the guarantors or sell the pledged
assets without first taking any of the measures specified in section 13(4).
15. Exercise of rights of secured creditor by authorized officers [Section 13(12)]
The rights of a secured creditor under this Act may be exercised by one or more of his officers
authorised in this behalf.
(b) Under Section 31 of the Securitisation And Reconstruction of Financial Assets and
Enforcement of Security interest Act, 2002, certain situations have been specified in which
the provisions of this Act are not applicable. You are required to mention such situations.
Answer:
The provisions of this Act shall not apply to -

(i) a lien on any goods, money or security given by or under the Indian Contract Act, 1872 or
the Sale of Goods Act, 1930 or any other law for the time being in force;
(b) a pledge of movables within the meaning of section 172 of the Indian Contract Act, 1872;
(c) creation of any security in any aircraft as defined in clause (1) of section 2 of the Aircraft
Act, 1934;
(d) creation of security interest in any vessel as defined in clause (55) of section 3 of the
Merchant Shipping Act, 1958;
(e) any rights of unpaid seller under section 47 of the Sale of Goods Act, 1930;
(vi) any properties not liable to attachment (excluding the properties specifically charged with
the debt recoverable under this Act) or sale under the first proviso to sub-section (1) of
section 60 of the Code of Civil Procedure, 1908;
(vii) any security interest for securing repayment of any financial asset not exceeding ` 1 Lakh;
(viii) any security interest created in agricultural land;
(ix) any case in which the amount due is less than 20% of the principal amount and interest
thereon.
Question 23:
(a) „Pashu Kalyan‟, a charitable organization, opened a current account with M/s Advance
Bank on 1st July, 2012. This account was closed on 30th June, 2016. Referring to the
obligations of banking companies under the Prevention of Money Laundering act, 2002,
specify the period upto which the said bank has to maintain records relating to the account
of „Pashu Kalyan‟.
Answer:
The obligations of reporting entities with respect to maintenance of accounts are explained
below:
1. Duties of reporting entities [Section 12(1)]
(a) Every reporting entity shall maintain a record of all transactions, including information
relating to transactions covered under clause (b), in such manner as to enable it to
reconstruct individual transactions.
These records shall be maintained for a period of 5 years from the date of transaction
between a client and the reporting entity.
(b) Every reporting entity shall furnish to the Director within such time as may be prescribed,
information relating to such transactions, whether attempted or executed, the nature
and value of which may be prescribed.
(c) Every reporting entity shall verify the identity of its clients in such manner and subject to
such conditions, as may be prescribed.
In practice, verification of identity of clients is termed as 'Know Your Customer' (KYC).
(d) Every reporting entity shall identify the beneficial owner, if any, of such of its clients, as
may be prescribed.
(e) Every reporting entity shall maintain record of documents evidencing identity of its
clients and beneficial owners as well as account files and business correspondence
relating to its clients.
These records shall be maintained for a period of 5 years after the business relationship between
a client and the reporting entity has ended or the account has been closed, whichever is
later.
2. Confidentiality of information [Section 12(2)]
Every information maintained, furnished or verified, save as otherwise provided under any
law for the time being in force, shall be kept confidential.
3. Exemption [Section 12(5)]
The Central Government may, by notification, exempt any reporting entity or class of
reporting entities from any obligation under this Chapter (viz. Chapter IV comprising of
sections 12, 12A, 13, 14 and 15).
The Central Government may, in consultation with the Reserve Bank of India, prescribe the
procedure and the manner of maintaining and furnishing information by a reporting entity
under section 12 (Section 15)
(b) Explain the provisions contained in section 56 of Prevention of Money Laundering Act, 2002
with respect to power of the Central Government to enter into agreements with foreign
countries.
Answer:
The provisions of section 56 are explained hereunder:
1. Agreement with other countries [Section 56(1)]

(a) The Central Government may enter into an agreement with the Government of any
country outside India for –
(i) enforcing the provisions of this Act;
(ii) exchange of information for the prevention of any offence under this Act or under
the corresponding law in force in that country or investigation of cases relating to
any offence under this Act.
(b) The Central Government may, by notification in the Official Gazette, make such
provisions as may be necessary for implementing such agreement.
2. Modifications or exceptions in application of Chapter IX [Section 56(2)]

The Central Government may, by notification in the Official Gazette, direct that the
application of this Chapter (viz. Chapter IX consisting of Sec. 55 to 61) in relation to a
contracting State with which reciprocal arrangements have been made, shall be subject to
such conditions, exceptions or qualifications as are specified in the said notification.
Study Note 7 – Laws relating to Insurance Sector
Question 24:
(a) The Insurance Regulatory and Development Authority has certain duties, powers and
functions. Enumerate them.
Answer:
The duties, powers and functions of the Authority, as contained in section 14, are as follows:
1. Duties of the Authority [Section 14(1)]

Subject to the provisions of this Act and any other law for the time being in force, the
Authority shall have the duty to regulate, promote and ensure orderly growth of the
insurance business and re-insurance business.
2. Powers and functions of the Authority [Section 14(2)]
Without prejudice to the generality of the provisions contained in sub-section (1), the powers
and functions of the Authority shall include:
(a) issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or
cancel such registration;
(b) protection of the interests of the policy-holders in matters concerning assigning of policy,
nomination by policy-holders, insurable interest, settlement of insurance claim, surrender
value of policy and other terms and conditions of contracts of insurance;
(c) specifying requisite qualifications, code of conduct and practical training for
intermediary or insurance intermediaries and agents;
(d) specifying the code of conduct for surveyors and loss assessors;
(e) promoting efficiency in the conduct of insurance business;
(f) promoting and regulating professional organisations connected with the insurance and
re-insurance business;
(g) levying fees and other charges for carrying out the purposes of this Act;
(h) calling for information from, undertaking inspection of, conducting inquiries and
investigations including audit of the insurers, intermediaries, insurance intermediaries
and other organisations connected with the insurance business;
(i) control and regulation of the rates, advantages, terms and conditions that may be
offered by insurers in respect of general insurance business not so controlled and
regulated by the Tariff Advisory Committee under section 64U of the Insurance Act,
1938 (4 of 1938);
(j) specifying the form and manner in which books of account shall be maintained and
statement of accounts shall be rendered by insurers and other insurance intermediaries;
(k) regulating investment of funds by insurance companies;
(l) regulating maintenance of margin of solvency;

(m) adjudication of disputes between insurers and intermediaries of insurance intermediaries;
(n) supervising the functioning of the Tariff Advisory Committee;
(o) specifying the percentage of premium income of the insurer to finance schemes for
promoting and regulating professional organisations referred to in clause (/);
(p) specifying the percentage of life insurance business and general insurance business to
be undertaken by the insurer in the rural or social sector; and
(q) exercising such other powers as may be prescribed.
(b) Is the Insurance Regulatory and Development Authority required to maintain the accounts in
respect of transactions carried out by it? Is audit of accounts compulsory?
Answer:
The provisions of section 17 may be explained as follows:
1. Maintenance of Accounts [Section 17(1)]

The Authority shall maintain proper accounts and other relevant records and prepare an
annual statement of accounts in such form as may be prescribed by the Central
Government in consultation with the Comptroller and Auditor-General of India.
2. Audit of Accounts by CAG [Section 17(2)]

The accounts of the Authority shall be audited by the Comptroller and Auditor-General of
India at such intervals as may be specified by him and any expenditure incurred in
connection with such audit shall be payable by the Authority to the Comptroller and
Auditor-General of India.
3. Rights of CAG [Section 17(3)]

The Comptroller and Auditor-General of India and any other person appointed by him in
connection with the audit of the accounts of the Authority shall have the same rights,
privileges and authority in connection with such audit as the Comptroller and Auditor-
General generally has in connection with the audit of the Government accounts and, in
particular, shall have the right to demand the production of books, accounts, connected
vouchers and other documents and papers and to inspect any of the offices of the
Authority.
4. Laying down of audited accounts before Parliament [Section 17(4)]

The accounts of the Authority as certified by the Comptroller and Auditor-General of India
or any other person appointed by him in this behalf together with the audit report thereon
shall be forwarded annually to the Central Government and that Government shall cause
the same to be laid before each House of Parliament.
Question 25:
(a) State the manner of investment of assets by an insurer.
Answer:
(1) Investment of certain sum by an insurer carrying on life insurance business [Section 27(1)]
Every insurer shall invest and at all times keep invested assets equivalent to not less than the
sum of -
(a) the amount of his liabilities to holders of life insurance policies in India on account of
matured claims, and
(b) the amount required to meet the liability on policies of life insurance maturing for
payment in India, less -
(i) the amount of premiums which have fallen due to the insurer on such policies but
have not been paid and the days of grace for payment of which have not
expired, and
(ii) any amount due to the insurer for loans granted on and within the surrender values
of policies of life insurance maturing for payment in India issued by him or by an
insurer whose business he has acquired and in respect of which he has assumed
liability in the following manner:
(a) 25% of the said sum in Government securities, a further sum equal to not less
than 25% of the said sum in Government securities or other approved
securities; and
(b) the balance in any of the approved investments, as may be specified by the
regulations subject to the limitations, conditions and restrictions specified
therein.
(2) Investment of certain sum by an insurer carrying on general insurance business [Section
27(2)]
In the case of an insurer carrying on general insurance business, 20% of the assets in
Government Securities, a further sum equal to not less than 10% of the assets in Government
Securities or other approved securities and the balance in any other investment in
accordance with the regulations of the Authority and subject to such limitations, conditions
and restrictions as may be specified by the Authority in this regard.
It is to be noted:
(1) As per Section 27A, no insurer carrying on life insurance business shall invest or keep invested
any part of his controlled fund and no insurer carrying on general insurance business shall
invest or keep invested any part of his assets otherwise than in any of the approved
investments as may be specified by the regulations subject to such limitations, conditions

and restrictions therein.
(2) As per Section 27B, all assets of an insurer carrying on general insurance business shall,
subject to such conditions, if any, as may be prescribed, be deemed to be assets invested
or kept invested in approved investments specified in section 27.
(3) As per Section 27C, an insurer may invest not more than 5% in aggregate of his controlled
fund or assets as referred to in sub-section (2) of section 27 in the companies belonging to
the promoters, subject to such conditions as may be specified by the regulations.
(b) State the prohibitions relating to prohibition on appointment of certain agents and multi level
marketing.
Answer:
1. Prohibition on appointment of certain agents [Section 42A(1)]

No insurer shall, on or after the commencement of the Insurance Laws (Amendment) Act,
2015, appoint any principal agent, chief agent, and special agent and transact any
insurance business in India through them.
2. Prohibition on multilevel marketing scheme [Section 42A(2)]

No person shall allow or offer to allow, either directly or indirectly, as an inducement to any
person to take out or renew or continue an insurance policy through multilevel marketing
scheme.
3. Complaint to police authorities by Authority [Section 42A(3)]

The Authority may, through an officer authorised in this behalf, make a complaint to the
appropriate police authorities against the entity or persons involved in the multilevel
marketing scheme.
4. Meaning of 'multilevel marketing scheme' [Explanation to Section 42A(3)]

For the purpose of this section 'multilevel marketing scheme' means any scheme or
programme or arrangement or plan (by whatever name called) for the purpose of soliciting
and procuring insurance business through persons not authorised for the said purpose with
or without consideration of whole or part of commission or remuneration earned through
such solicitation and procurement and includes enrolment of persons into a multilevel chain
for the said purpose either directly or indirectly.
Study Note 8 – Corporate Governance
Question 26:
(a) Discuss about the „Legal Framework of Corporate Governance‟.
Answer:
The companies in India have to comply with the provisions of the Companies Act, 2013 the SEBI
guidelines, the Kumara Mangalam Birla report on corporate governance, the Accounting
Standards issued by the ICAI and the listing agreements with the stock exchanges in which they
are listed. The Companies Act, 2013 is the relevant statute in India that governs the incorporation
and, functioning of the companies. The ordinary business activities like declaration of dividends,
appointment of directors, acceptance of the financial statements and appointment of auditors
requires the consent of 51% of the shareholders, whereas all other business activities (other than
routine business activities) requires the approval of 75% of the shareholders. If a company wants
to start a new business it requires the approval of 75% shareholders, which means that the board
of a widely held company should be able to persuade the shareholders about their strategy to
pass the special resolution. Whereas, the board of a closely held company will not find it difficult
to pass such a resolution, because the shareholders are usually the managers in such cases.
However the Kumara Mangalam Birla report (KMB report) required that in case of appointment/
reappointment of directors, shareholders should be provided a resume, information regarding
functional expertise and number of directorships held in other companies. KMB report
mentioned that the board shall consist of at least 50% of non-executive directors. And if the
chairman is an executive director then at least half of the board of directors shall be
independent and in other case at least one-third of the total directors shall be independent. The
KMB report has taken a more stringent view that the directors shall not be members of more
than 10 committees or chairman of more than 5 committees across all companies.
The remuneration payable to managerial personnel under the Act, if there is only one such
person, shall not exceed 5% of its net profit and in case of more than one managerial personnel
it shall not exceed 10% of its net profit except with prior permission of the Central Government. In
case of companies, which incurred a loss in the current financial year the limits on the salaries
and perquisites to be paid to the Managing personnel.
The minority shareholders are protected under the Act and the members holding at least 10% of
the share capital can make an application for relief to the concerned authorities in the cases of
oppression and mismanagement. The minority shareholders have a provision to appoint
representative director on the board. There is no special provision under the companies to
protect the creditors. If the company makes default then the creditors have to move the civil
court for realization of dues, which demands more time and money to be spent around the
courts.
The Securitization and Reconstruction of Financial Assets and Enforcement of Securities Act, 2002
[SARFAESI Act] was enacted to regulate securitization and reconstruction of financial assets and
enforcement of security interest and for matters connected therewith or incidental thereto. The
Institute of Chartered Accountants of India is the concerned authority to issue Accounting
Standards, which are mandatory in most of the cases. These Standards provide guidelines for
disclosures of financial information to ensure uniformity between companies.
The Securities and Exchange Board of India is the regulatory authority, which issues regulations,
rules and guidelines to companies to ensure protection of investors. The companies whose
shares are listed on the stock exchanges should comply with additional requirements as
mentioned in the listing agreement on a regular basis.
(b) Organization for Economic Cooperation and Development (OECD) developed a set of
principles of Corporate Governance which are internationally recognized to serve as good
benchmarks. Comment.
Answer:
The governance mechanism differs in each country and is shaped by its political, economic and
social history as also by its legal framework. With keen interest shown by organizations like World
Bank, Asian Development Bank etc.,
Organization for Economic Cooperation and Development (OECD) developed a set of

principles of Corporate Governance which are internationally recognized to serve as good
benchmarks.
They are discussed below:
(a) The Basis of an Effective Corporate Governance Framework

The corporate governance framework should promote transparent and efficient markets,
be consistent with the rule of law, and clearly articulate the division of responsibilities among
different supervisory, regulatory and enforcement authorities.
(b) Rights of Shareholders and Key Ownership Functions

The corporate governance framework should protect and facilitate the exercise of
shareholders‘ rights. Seven core principles in this category spell out the various rights of
shareholders and call for effective shareholder participation in key corporate governance
decisions.
(c) Equitable Treatment of Shareholders

The corporate governance framework should ensure the equitable treatment of all
shareholders, including minority and foreign shareholders. All shareholders should have the
opportunity to obtain effective redress for violation of their rights.
(d) Role of Stakeholders in Corporate Governance

The corporate governance framework should recognize the rights of stakeholders
established by law or through mutual agreements and should encourage active
cooperation between corporations and stakeholders in creating wealth, jobs and
sustainability of financially sound enterprises.
(e) Disclosure and Transparency

The corporate governance framework should ensure that timely and accurate disclosure is
made on all material matters with respect to the corporation, including the financial
situation, performance, ownership, and governance of the company.
(f) Responsibilities of the Board

The corporate governance framework should ensure the strategic guidance of the
company, the effective monitoring of management by the board and the board‘s
accountability to the company and the shareholders. The advisory group on CG attempted
to compare the status of corporate governance in India vis-a-vis the internationally
recognized best standards and suggested to improve corporate governance standards in
India.
Question 27:
(g) Can governance be extended to unlisted companies? Discuss.
Answer:
There is generally an incorrect perception that ‗unlisted‘ or ‗closely held‘ companies are small,
mostly family run and relatively insignificant part of the corporate sector when it comes to
policymaking and regulation relating to their governance. Undoubtedly, this group includes a
vast proportion of such small and medium size entities but it is also home to several very
substantial corporations which qualify as unlisted only by virtue of their ownership structures
notwithstanding their revenues, profits, employee population, customer and vendor base, and
sourcing of funds from banks and financial institutions. Illustratively, a Reserve Bank of India study
of finances of select private limited companies (covering 6.8% of the paid up capital of all
private limited companies at work) as of March 2012 indicated that the ratio of total borrowings
(including both long and short term funds)to equity was 74.1 to 25.9; in other words, three fourths
of the finances of these companies were borrowed from banks and financial institutions, and as
such there was nothing strictly private about these companies except their ownership that was
closely held. Many of these private limited companies would be joint ventures, wholly owned
subsidiaries, venture-capital or other investor assisted units, and so on. Several companies in
these groups may well be aspiring for listed status in the near future; ironically, the group would
also include companies that preferred to delist from stock exchanges for whatever reason. A
major thrust of the Act has been to extend several good governance practices to the unlisted
segment of corporate business. As of December 2012, there were 852,957 companies at work
comprising 806,666 private limited companies and 66,291 public limited companies; of these,
about 6500 (10%) public companies were listed on the two major Indian stock exchanges. Given
their predominant contribution to a nation‘s economy and employment potential, not to
mention their extensive use of borrowed funds to sustain their operation, adoption of good
corporate governance practices voluntarily or by legislation will likely help to improve their
performance and reputational perceptions. Recognising these imperatives, guidelines have
already been issued for such companies in Europe and the UK. Due allowance has also been
made to minimise the costs of governance by segregating smaller from the relatively larger
unlisted companies in these guidelines.
In India, while SEBI over the last decade and more has gradually strengthened regulatory
requirements in respect of listed companies, the vast unlisted segment has received virtually no
major policy interventions in this regard. The 2013 Act has taken the first steps to bridge this
enormous vacuum by extending several good governance practices to the unlisted companies
segment.
The Act and the rules framed there under reckon several criteria thresholds for extending
application of such governance practices to unlisted companies. Primarily, these are based on
paid-up capital and net worth, sales revenue, profits after tax, number of shareholders, deposit
holders and debt security holders, and the extent of bank and other borrowings. Threshold levels
of course will have to be such that they ensure additional costs of governance are
commensurate with desired levels of benefits to the companies themselves and their
stakeholders. There are daunting problems ahead: appropriate capacity building exercises
have to be undertaken, both in getting these companies‘ buy-in to the new measures (based
on their value-add to them rather than on threat of punishment for non-compliance) and in
enlarging the pool of independent directors, and other key management personnel to take up
the relevant responsibilities.
(h) Discuss about the advantages and disadvantages of the Family Businesses over Non-Family
Businesses.
Answer:
Family businesses identify a number of positive differences over non-family businesses. These
include commitment and passion towards the success of the business, being able to make quick
market focused decisions, having a deep industry knowledge, etc.
Some of the advantages that family businesses share over non-family enterprises include the
following:
(a) Commitment, Passion and Dedication: It is believed that owners tend to take better care of
their businesses as they have greater personal stakes involved. Family businesses are more
appreciative of their talent.
(b) Agile decision-making abilities: Not having responsibilities towards any shareholders gives
the Indian family businesses greater flexibility in terms of making decisions faster, improving
the speed with which they launch new initiatives, change operations, evaluate new
business opportunities, etc.
(c) Deep industry insight: Family businesses gain significant experience and expertise as they
typically work in one industry for longer durations. This gives them the added advantage of
understanding and appreciating the challenges faced in that industry much better than
any non-family businesses.
(d) Mutual trust: Family businesses thrive on mutual trust and believe in maintaining long-term
relationships by providing a conducive, supportive and trusting work environment.
Disadvantages of the Family Businesses over Non-Family Businesses are:
(a) Staff recruitment: External talent can be reluctant to join the family businesses as they would
not enjoy the same freedom that the other businesses offer.
(b) Raising funds for growth: Access to capital is required to grow and evolve. However, it is
difficult to raise the required funds for the family businesses than non-family businesses.
(c) Family conflicts: Conflict among the family members is the major setback for the family
businesses.
(d) Ownership vs Management: Separating the ownership from the management and reaching
a consensus on the roles of family members in the business are two important issues for the
family businesses to address.
Study Note 9 – Social, Environmental and Economic Responsibilities of Business
Question 28:
(a) Discuss the National Voluntary Guidelines on “Businesses should provide goods and services
that are safe and contribute to sustainability throughout their life cycle”.
Answer:
The principle emphasizes that in order to function effectively and profitably, businesses should
work to improve the quality of life of people.
The principle recognizes that all stages of the product life cycle, right from design to final
disposal of the goods and services after use, have an impact on society and the environment.
Responsible businesses, therefore, should engineer value in their goods and services by keeping
in mind these impacts.
Core Elements
(a) Businesses should assure safety and optimal resource use over the life cycle of the product
from design to disposal and ensure that everyone connected with itviz., designers,
producers, value chain members, customers and recyclers are aware of their responsibilities.
(b) Businesses should raise the consumers‘ awareness of their rights through education, product
labelling, appropriate and helpful marketing communication, full details of contents and
composition and promotion of safe usage and disposal of their products and services.
(c) In designing the product, businesses should ensure that the manufacturing processes and
technologies required to produce it are resource efficient and sustainable.
(d) Businesses should regularly review and improve upon the process of new technology
development, deployment and commercialization, incorporating social, ethical and
environmental considerations.
(e) Businesses should recognize and respect the rights of people who may be owners of
traditional knowledge and other forms of intellectual property.
(f) Businesses should recognize that over consumption results in unsustainable exploitation of
our planet's resources and should therefore promote sustainable consumption, including
recycling of resources.
(b) CSR has a global perspective. Comment
Answer:
While there may be no single universally accepted definition of CSR, each definition that
currently exists underpins the impact that businesses have on society at large and the societal
expectations of them. Although the roots of CSR lie in philanthropic activities (such as donations,
charity, relief work, etc.) of corporations, globally, the concept of CSR has evolved and now
encompasses all related concepts such as triple bottom line [Triple bottom line (or otherwise
noted as TBL or 3BL) is an accounting framework with three parts: social, environmental (or
ecological) and financial.], corporate citizenship, philanthropy, strategic philanthropy, shared
value, corporate sustainability and business responsibility. This is evident in some of the definitions
presented below:
The European Commission (EC) defines CSR as ―the responsibility of enterprises for their impacts
on society‖. To completely meet their social responsibility, enterprises ―should have in place a
process to integrate social, environmental, ethical human rights and consumer concerns into
their business operations and core strategy in close collaboration with their stakeholders‖ The
World Business Council for Sustainable Development (WBCSD) defines CSR as ―the continuing
commitment by business to contribute to economic development while improving the quality of
life of the workforce and their families as well as of the community and society at large.‖
According to the United Nations Industrial Development Organization (UNIDO), ―Corporate

social responsibility is a management concept whereby companies integrate social and
environmental concerns in their business operations and interactions with their stakeholders. CSR
is generally understood as being the way through which a company achieves a balance of
economic, environmental and social imperatives (Triple Bottom Line Approach), while at the
same time addressing the expectations of shareholders and stakeholders. In this sense it is
important to draw a distinction between CSR, which can be a strategic business management
concept and charity, sponsorships or philanthropy. Even though the latter can also make a
valuable contribution to poverty reduction, will directly enhance the reputation of a company
and strengthen its brand, the concept of CSR clearly goes beyond that.‖
From the above definitions, it is clear that:
(a) The CSR approach is holistic and integrated with the core business strategy for addressing
social and environmental impacts of businesses.
(b) CSR needs to address the wellbeing of all stakeholders and not just the company‘s
shareholders.
(c) Philanthropic activities are only a part of CSR, which otherwise constitutes a much larger set
of activities entailing strategic business benefits.
Question 29:
(a) State the benefits of CSR programme.
Answer:
As the business environment gets increasingly complex and stakeholders become vocal about
their expectations, good CSR practices can only bring in greater benefits, some of which are as
follows:
(a) Communities provide the licence to operate: Apart from internal drivers such as values and
ethos, some of the key stakeholders that influence corporate behaviour include
governments (through laws and regulations), investors and customers. In India, a fourth and
increasingly important stakeholder is the community and many companies have started
realising that the ‗licence to operate‘ is no longer given by governments alone, but
communities that are impacted by a company‘s business operations. Thus, a robust CSR
programme that meets the aspirations of these communities not only provides them with
the licence to operate, but also to maintain the licence, thereby precluding the ‗trust
deficit‘.
(b) Attracting and retaining employees: Several human resource studies have linked a
company‘s ability to attract, retain and motivate employees with their CSR commitments.
Interventions that encourage and enable employees to participate are shown to increase
employee morale and a sense of belonging to the company.
(c) Communities as suppliers: There are certain innovative CSR initiatives emerging, wherein
companies have invested in enhancing community livelihood by incorporating them into
their supply chain. This has benefitted communities and increased their income levels, while
providing these companies with an additional and secure supply chain.
(d) Enhancing corporate reputation: The traditional benefit of generating goodwill, creating a
positive image and branding benefits continue to exist for companies that operate
effective CSR programmes. This allows companies to position themselves as responsible
corporate citizens.
(b) What are the initiatives undertaken in India regarding E-governance?
Answer:
Recognising the increasing importance of electronics, the Government of India established the
Department of Electronics in 1970. The subsequent establishment of the National Informatics
Centre (NIC) in 1977 was the first major step towards e-Governance in India as it brought
‗information‘ and its communication in focus. In the early 1980s, use of computers was confined
to very few organizations. The advent of personal computers brought the storage, retrieval and
processing capacities of computers to Government offices. By the late 1980s, a large number of
government officers had computers but they were mostly used for ‗word processing‘. Gradually,
with the introduction of better softwares, computers were put to other uses like managing
databases and processing information. Advances in communications technology further
improved the versatility and reach of computers and many Government departments started
using ICT for a number of applications like tracking movement of papers and files, monitoring of
development programmes, processing of employees‘ pay rolls, generation of reports etc.
However, the main thrust for e-Governance was provided by the launching of National
Informatics Centre Network (NICNET) in 1987, the national satellite based computer network. This
was followed by the launch of the District Information System of the National Informatics Centre
(DISNIC) programme to computerize all district offices in the country for which free hardware
and software was offered to the State Governments. NICNET was extended via the State
capitals to all district headquarters by 1990.
In the ensuing years, with ongoing computerization, teleconnectivity and internet connectivity,
came a large number of e-Governance initiatives, both at the Union and State levels. A National
Task Force on Information Technology and Software Development was constituted in May 1998.
While recognising Information Technology as a frontier area of knowledge per se, it focused on
utilizing it as an enabling tool for assimilating and processing all other spheres of knowledge. It
recommended the launching of an ‗Operation Knowledge‘ aimed at universalizing computer
literacy and spreading the use of computers and IT in education. In 1999, the Union Ministry of
Information Technology was created. By 2000, a 12-point minimum agenda for e-Governance
was identified by Government of India for implementation in all the Union Government
Ministries/Departments. The agenda undertaken which is adapted from Minimum Agenda for e-
Governance in the Central Government has included the following action points:
(i) Each Ministry/Department must provide PCs with necessary software up to the Section
Officer level. In addition, Local Area Network (LAN) must also be set up.
(ii) It should be ensured that all staff, who have access to and need to use computer for their
office work are provided with adequate training. To facilitate this, inter alia,
Ministries/Departments should set-up their own or share other‘s Learning Centres for
decentralized training in computers as per the guidelines issued by the Ministry.
(iii) Each Ministry/Department should start using the Office Procedure Automation software
developed by NIC with a view to keeping a record of receipt of dak, issue of letters, as
well as movement of files in the department.
(iv) Pay roll accounting and other house-keeping software should be put to use in day-to-day
operations.
(v) Notices for internal meetings should be sent by e-mail. Similarly, submission of applications
for leave and for going on tour should also be done electronically. Ministries/Departments
should also set up online notice board to display orders, circulars etc., as and when issued.
(vi) Ministries/Departments should use the web-enabled Grievance Redressal Software

developed by the Department of Administrative Reforms and Public Grievances.
(vii) Each Ministry/Department should have its own website.
(viii) All Acts, Rules, Circulars must be converted into electronic form and along with other
published material of interest or relevance to the public, should be made available on the
internet and be accessible from the Information and Facilitation Counter.
(ix) The websites of Ministries/Departments/Organisations should specifically contain a section

in which various forms to be used by citizens/customers are available. The forms should be
available for being printed or for being completed on the computer itself and then printed
out for submission. Attempts should also be made to enable completion and submission of
forms online.
(x) The Hindi version of the content of the websites should as far as possible be developed
simultaneously.
(xi) Each Ministry/Department would also make efforts to develop packages so as to begin
electronic delivery of services to the public.
(xii) Each Ministry/Department should have an overall IT vision or strategy for a five year period,
within which it could dovetail specific action plans and targets (including the minimum
agenda) to be implemented within one year.
Short Notes
Question 30:
(c) Rectification of name of memorandum
Answer:
Central government to issue direction

According to Section 16 of the Companies Act, 2013, the Central Government is empowered to
give direction to the company to rectify its name (Where the name is identical with or too nearly
resembles the name by which a company in existence had been previously registered, or the
name is identical with or too nearly resembling to a registered trade mark) within a period of 3
months or 6 months, as the case may be, from the issue of such direction by passing an ordinary
resolution.
Notice of change to the registrar

Where a company changes its name or obtains a new name, it shall within a period of 15 days
from the date of such change, give notice of the change to the Registrar along with the order
of the Central Government, who shall carry out necessary changes in the certificate of
incorporation and the memorandum.
Default in compliance with the direction

If a company makes default in complying with any direction:
Liable person Penalty/punishment
Company Fine of 1,000 rupees for every day during which the default continues
Every Officer who is Fine varying from 5,000 rupees to 1 lakh rupees.
in default
(d) General restrictions or prohibitions for a Nidhi Company
Answer:
No Nidhi company shall:

(a) carry on the business of chit fund, hire purchase finance, leasing finance, insurance or
acquisition of securities issued by any body corporate.
(b) issue preference shares, debentures or any other debt instrument by any name or in any
form whatsoever.
(c) open any current account with its members.
(d) acquire another company by purchase of securities or control the composition of the Board
of Directors of any other company in any manner whatsoever or enter into any
arrangement for the change of its management, unless it has passed a special resolution in
its general meeting and also obtained the previous approval of the Regional Director
having jurisdiction over such Nidhi.
(e) carry on any business other than the business of borrowing or lending in its own name.
Provided that Nidhis which have adhered to all the provisions of these rules may provide
locker facilities on rent to its members subject to the rental income from such facilities not
exceeding twenty per cent of the gross income of the Nidhi at any point of time during a
financial year.
(f) accept deposits from or lend to any person, other than its members.
(g) pledge any of the assets lodged by its members as security.
(h) take deposits from or lend money to anybody corporate.
(i) enter into any partnership arrangement in its borrowing or lending activities.
(j) issue or cause to be issued any advertisement in any form for soliciting deposit.
(k) pay any brokerage or incentive for mobilising deposits from members or for deployment of
funds or for granting loans.
(e) Punishment for failure to distribute dividends
Answer:
Section 127 of Companies Act, 2013 states that
(a) Where a dividend has been declared by a company but has not been paid or the warrant
in respect thereof has not been posted within thirty days from the date of declaration to
any shareholder entitled to the payment of the dividend, every director of the company
shall, if he is knowingly a party to the default, be punishable with imprisonment which may
extend to two years.
(b) He shall also be liable for a fine which shall not be less than ` 1,000 rupees for every day
during which such default continues.
(c) The company shall also be liable to pay simple interest at the rate of 18% p.a. during the
period for which such default continues.
(d) However, the following are the exceptions under which no offence shall be deemed to
have been committed:
(1) where the dividend could not be paid by reason of the operation of any law.
(2) where a shareholder has given directions to the company regarding the payment of
the dividend and those directions cannot be complied with and the same has been
communicated to him.
(3) where there is a dispute regarding the right to receive the dividend.
(4) where the dividend has been lawfully adjusted by the company against any sum due
to it from the shareholder, or
(5) where, for any other reason, the failure to pay the dividend or to post the warrant within
the period under this section was not due to any default on the part of the company.
This section shall apply to the Nidhis company, subject to that where the dividend payable to a
member is one hundred rupees or less, it shall be sufficient compliance of the provisions of the
section, if the declaration of the dividend is announced in the local language in one local
newspaper of wide circulation and announcement of the said declaration is also displayed on
the notice board of the Nidhis for at least three months [Vide Notification no. 465(E) dated 5th
June 2015].
(d) Minutes of General Meeting or Board Meeting
Answer:
Section 118 of the Companies Act, 2013 imposes a statutory obligation on every company to
cause minutes of all proceedings of general meetings, board meetings and other meeting and
resolution passed by postal ballot.
However, vide Notification No.G.S.R.466(E ) dated 05th June, 2015, this Section shall not apply as
a whole to Section 8 companies except the minutes may be recorded within 30 days of the
conclusion of every meeting in case of companies where the articles of association provide for
confirmation of minutes by circulation.
According to the Section, every company shall cause minutes of the proceedings of every
general meeting of any class of shareholders or creditors, and every resolution passed by postal
ballot and every meeting of its Board of Directors or of every Committee of the Board, to be
prepared and signed in such manner as may be prescribed and kept within thirty days of the
conclusion of every such meeting concerned, or passing of resolution by postal ballot in books
kept for that purpose with their pages consecutively numbered [Section 118(1)]
The minutes of each meeting shall contain a fair and correct summary of the proceedings there
at. [Section 118(2)].
All appointments made at any of the meetings aforesaid shall be included in the minutes of the
meeting [Section 118(3)].
The Chairman shall exercise absolute discretion in regard to the inclusion or non-inclusion of any
matter in the minutes [Section 118(6)].
The minutes kept in accordance with the provisions of this Section shall be evidence of the
proceedings recorded therein [Section 118(7)].
As per Section 118(10), every company shall observe Secretarial Standards with respect to
general and board meetings specified by the Institute of Company Secretaries of India
constituted under Section 3 of the Company Secretaries Act, 1980 and approved as such by the
Central Government. Accordingly, upon receipt of approval of MCA, ICSI has notified two
Secretarial Standards viz. SS-1: Meetings of the Board of Directors and SS-2: General Meetings
vide Notification ICSI No.1(SS) of 2015 dated 23rd April, 2015.
(e) „Information Utilities‟ under Insolvency and Bankruptcy Code, 2016
Answer:
The Insolvency and Bankruptcy professionals are expected to function on basis of financial
information available electronically. Information Utility will collect, collate, authenticate and
disseminate financial information to be used in insolvency, liquidation and bankruptcy
proceedings.
"Information utility" means a person who is registered with the 'Insolvency and Bankruptcy Board
of India' (Board) as an information utility under Section 210 of Insolvency and Bankruptcy Code,
2016 - Section 3(21) of Insolvency and Bankruptcy Code, 2016. They will have to be registered
with Board - Section 209 of Insolvency and Bankruptcy Code, 2016.
The information utility shall provide services as may be specified by Board. It will also provide
core services to any person if such person complies with terms and conditions as may be
specified in regulations - Section 213 of Insolvency and Bankruptcy Code, 2016.
"Core services" means services rendered by an information utility for –

(a) accepting electronic submission of financial information in such form and manner as may
be specified
(b) safe and accurate recording of financial information
(c) authenticating and verifying the financial information submitted by a person; and
(d) providing access to information stored with the information utility to persons as may be
specified - Section 3(9) of Insolvency and Bankruptcy Code, 2016.
(f) „Related party‟ in relation to a Corporate Debtor
Answer:
According to Insolvency and Bankruptcy Code, 2016, Related party, in relation to a corporate
debtor, means—
(a) a director or partner or a relative of a director or partner of the corporate debtor
(b) a key managerial personnel or a relative of a key managerial personnel of the corporate
debtor;
(c) a limited liability partnership or a partnership firm in which a director, partner, or manager of
the corporate debtor or his relative is a partner;
(d) a private company in which a director, partner or manager of the corporate debtor is a
director and holds along with his relatives, more than two per cent, of its share capital;
(e) a public company in which a director, partner or manager of the corporate debtor is a
director and holds along with relatives, more than two per cent, of its paid-up share capital;
(f) anybody corporate whose board of directors, managing director or manager, in the
ordinary course of business, acts on the advice, directions or instructions of a director,
partner or manager of the corporate debtor;
(g) any limited liability partnership or a partnership firm whose partners or employees in the
ordinary course of business, acts on the advice, directions or instructions of a director,
partner or manager of the corporate debtor;
(h) any person on whose advice, directions or instructions, a director, partner or manager of the
corporate debtor is accustomed to act;
(i) a body corporate which is a holding, subsidiary or an associate company of the corporate
debtor, or a subsidiary of a holding company to which the corporate debtor is a subsidiary;
(j) any person who controls more than twenty per cent, of voting rights in the corporate debtor
on account of ownership or a voting agreement;
(k) any person in whom the corporate debtor controls more than twenty per cent, of voting
rights on account of ownership or a voting agreement;
(l) any person who can control the composition of the board of directors or corresponding
governing body of the corporate debtor;
(m) any person who is associated with the corporate debtor on account of—
(i) participation in policy making processes of the corporate debtor; or
(ii) having more than two directors in common between the corporate debtor and such
person; or
(iii) interchange of managerial personnel between the corporate debtor and such person;
[ Section 5(24)]
(g) Licensing of Banking Companies
Answer:
(a) According to Section 22 of Banking Regulation Act, 1949, no banking company can
commence or carry on banking business in India unless it holds a licence granted to it by
the Reserve Bank for the purpose. This section states the following requirements for granting
licence:
(1) Necessity of licensing and mode of applying for it.
(2) Conditions for granting of licenses.
(3) Cancellation of licenses and appeals from such orders.
(b) Before granting any license under this section, the Reserve Bank may require to be satisfied
by an inspection of the books of the company that the following conditions are satisfied:
(1) that the company is in a position to pay its present or future depositors in full as their
claims accrue.
(2) that the affairs of the company are not likely to be conducted in a manner detri-mental
to the interests of its present or future depositors.
(3) in the case of the carrying on of banking business by such company in India will be in
the public interest and that the government or laws of the country in which it is
incorporated does not discriminate in any way against banking companies registered
in India and that the company complies with all the provisions of this Act, applicable to
banking companies incorporated outside India. However, RRBs have been established
under a separate Act of Parliament, viz., RRBs Act 1976 and not under Banking
Regulation Act.
(c) The Reserve Bank may cancel a license granted to a banking company under this section:
(1) If the company ceases to carry on banking business in India, or
(2) If the company at any time fails to comply with any of the conditions imposed upon it,
or
(3) Any banking company aggrieved by the decision of the Reserve Bank cancelling a
licence under this section may, within thirty days from the date on which such decision
is communicated to it, appeal to the Central Government. The decision of the Central
Government shall be final.
Thus, every banking company which likes to start banking business in India must obtain licence
from RBI. While on this section, it would be relevant to take note of the guidelines announced by
the Reserve Bank of India during 2016 for licensing of new Banks. The salient features of the
guidelines are provided at annexure I to this chapter. It is stated that the licences from Reserve
Bank of India would now be available on tap, meaning that there is no specific period when the
applications could be made. During the year 2015, two licences were issued by the Reserve
Bank of India viz. for Bandhan Bank Limited and IDFC Bank Limited. It is expected that some of
the prominent Non Banking Finance Companies may apply for conversion as banks under this
provision. During the last year, the Reserve Bank also announced a few licences for payment
banks which are yet to be implemented.
(h) Procedure for investigation of combination
Answer:
Section 29 of Competition Act, 2002 states that -
Meaning of Combination: It is the acquisition of one or more companies by one or more people
or merger or amalgamation of enterprises shall be treated as ‗Combination‘ of such enterprises
and Persons in the following cases:
(a) acquisition by large enterprises;
(b) acquisition by group;
(c) acquisition of enterprise having similar goods/services;
(d) acquisition enterprise having similar goods/services by a group;
(e) merger of enterprises;
(f) merger in group company
Notice to parties: Where the Commission is of the prima-facie opinion that a combination is likely
to cause, or has caused an appreciable adverse effect on competition within the relevant
market in India, it shall issue a notice to show cause to the parties to combination calling upon
them to respond within thirty days of the receipt of the notice, as to why investigation in respect
of such combination should not be conducted. After receipt of the response of the parties to
the combination under sub- Section (1), the Commission may call for a report from the Director
General and such report shall be submitted by the Director General within such time as the
Commission may direct.
Directions to parties to publish details: The Commission, if it is prima facie of the opinion that the
combination has, or is likely to have, an appreciable adverse effect on competition, it shall,
within seven working days from the date of receipt of the response of the parties to the
combination, or the receipt of the report from the Director General whichever is later direct the
parties to the said combination to publish details of the combination within ten working days of
such direction, in such manner, as it thinks appropriate, for bringing the combination to the
knowledge or information of the public and persons affected or likely to be affected by such
combination (Sub-Section 2).
Invitation to affected party: The Commission may invite any person or member of the public,
affected or likely to be affected by the said combination, to file his written objections, if any,
before the Commission within fifteen working days from the date on which the details of the
combination were published.
Additional information: The Commission may, within fifteen working days from the expiry of the
period specified before, call for such additional or other information as it may deem fit from the
parties to the said combination. The additional or other information called for by the Commission
shall be furnished by the parties to the combination within fifteen days from the expiry of the
above specified period. After receipt of all information and within a period of forty-five working
days from the expiry of the period for additional information, the Commission shall proceed to
deal with the case of accordance within the provisions contained in Section 31.
(i) Procedure and Powers of the Securities Appellate Tribunal
Answer:
The powers and procedures of the Securities Appellate Tribunal have been given under Section
15U of SEBI Act, 1992. The Securities Appellate Tribunal shall not be bound by the procedure laid
down by the Code of Civil Procedure, 1908 (5 of 1908), but shall be guided by the principles of
natural justice and, subject to the other provisions of this Act and of any rules. The Securities
Appellate Tribunal shall have powers to regulate their own procedure including the places at
which they shall have their sittings. The Securities Appellate Tribunal shall have, for the purposes
of discharging their functions under this Act, the same powers as are vested in a civil court under
the Code of Civil Procedure, 1908 (5 of 1908), while trying a suit, in respect of the following
matters, namely:
(a) summoning and enforcing the attendance of any person and examining him on oath.
(b) requiring the discovery and production of documents.
(c) receiving evidence on affidavits.
(d) issuing commissions for the examination of witnesses or documents.
(e) reviewing its decisions.
(f) dismissing an application for default or deciding it ex parte.
(g) setting aside any order of dismissal of any application for default or any order passed by it
ex parte.
(h) any other matter which may be prescribed.
Every proceeding before the Securities Appellate Tribunal shall be deemed to be a judicial
proceeding within the meaning of Sections 193 and 228 and for the purposes of Section 196 of
the Indian Penal Code (45 of 1860) and the Securities Appellate Tribunal shall be deemed to be
a civil court for all the purposes of Section 195 and Chapter XXVI of the Code of Criminal
Procedure, 1973 (2 of 1974).
The appellant in the Securities Appellate Tribunal may either appear in person or authorise one
or more chartered accountants or company secretaries or cost accountants or legal
practitioners or any of its officers to present his or its case before the Securities Appellate Tribunal.
No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter
which an adjudicating officer appointed under this Act is empowered by or under this Act to
determine and no injunction shall be granted by an court or other authority in respect of any
action taken or to be taken in pursuance of any power conferred by or under this Act.
(j) OECD Principles of Corporate Governance
Answer:
In response to a call by its council, the OECD issued the OECD Principles of Corporate
Governance in 1999 after extensive consultations. These were later revised in 2004 following a
comprehensive survey of corporate governance practices in and outside the OECD area. Since
their launch, the principles have formed the basis for corporate governance initiatives in both
OECD and non-OECD countries alike. They represent the minimum standard that countries with
different traditions have agreed on, being applicable to countries with a civil and common law
tradition without being unduly prescriptive.
The principles have been devised with four fundamental concepts in mind: responsibility,
accountability, fairness and transparency and enabling diversity of rules and regulations. They
outline the following:
(1) the basis for an effective corporate governance framework.
(2) the rights of shareholders.
(3) equitable treatment of shareholders.
(4) the role of stakeholders in corporate governance.
(5) disclosure and transparency, and
(6) the responsibilities of the board.
The 2004 revisions covered four main areas:
(1) a new set of principles on the development of regulatory framework to underpin corporate
governance mechanisms for implementation and enforcements.
(2) additional principles to strengthen the exercise of informed ownership by shareholders that
call on institutional investors to disclose their corporate governance policies and to
strengthen the rights of shareholders when choosing Board members.
(3) strengthened principles to reinforce Board oversight and enhance Board members‘
independent judgment, and
(4) new and strengthened principles to contain conflicts of interest through enhanced
disclosure and transparency (for example, on related party transactions), thus making
auditors more accountable to shareholders and promoting auditors‘ independence.
Revisionary Test Paper_June2018
Final
Group III
Paper 14: Strategic Financial Management
(SYLLABUS – 2016)
PART-I – MCQ QUESTIONS
1. Multiple Choice Questions (MCQ)

(1 marks for correct choice, 1 mark for justification.)
(i) Which of the following securities is most liquid?

(A) Money Market instruments
(B) Capital Market instruments
(C) Gilt –edged securities
(D) Index futures
(ii) A Ltd. has an EPS of ₹ 3 last year and it paid out 60% of its earnings as dividends that year.
This growth rate in earnings and dividends in the long term is expected to be 6%. If the
required rate of return on equity for Ashrin Ltd. is 14%. Calculate the P/E ratio of A Ltd.
(A) 7.50
(B) 7.65
(C) 7.85
(D) 7.95
(iii) The current spot rate for the US$ is ₹ 50. The expected inflation rate is 6 per cent in India and
2.5 per cent in the US. What will be the expected spot rate of the US$ a year hence?
(A) ₹51.71
(B) ₹50.71
(C) ₹57.01
(d) ₹52.71
(iv) DEF Ltd. placed ₹52 Crores in overnight call with a foreign bank for a day in overnight call.
The call ruled at 5.65% p.a. What is the amount it would receive from the foreign bank the
next day?
(A) ₹52,00,70,493
(B) ₹52,00,80,493
(C) ₹52,00,80,593
(D) ₹52,00,80,693
(v) The rates available in the Kolkata market are:
₹/$ Spot 46.75/78
£/$ 0.5285/86
If an Indian Importer requires pounds, calculate the rate quoted to him.
(A) ₹88.51/£
(B) ₹85.51/£
(C) ₹86.51/£
(D) ₹87.51/£
DoS, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 1
(vi) While plotting a graph with risk on X –axis and expected return on Y –axis , a line drawn
with co-ordinates (0, rf ) and (β, rm ) is called:
(A) Security market Line
(B) Characteristic Line
(C) Capital Market Line
(D) CAPM Line
(vii) If the RBI intends to reduce the supply of money as part of anti inflation policy , it might
(A) Lower bank rate
(B) Increase Cash Reserve Ratio
(C) Decrease SLR
(D) Buy Government securities in open market.
(viii) A Ltd., an export customer who relied on the interbank rate of `/$ 46.50/10 requested his
banker to purchase a bill for USD 80,000. Calculate the rate to be quoted to A Ltd., if the
banker wants a margin of 0.08%.
(A) ₹45.45
(B) ₹44.44
(C) ₹46.46
(D) ₹47.47
(ix) estimate the difference between the required rate of return and the growth
rate.
(A) Retention ratio
(B) Leverage ratio
(C) Payout Ratio
(D) Dividend yield ratio.
(x) Two Firms P Ltd and M Ltd. are similar in all respects expect that M Ltd. uses ₹ 10,00,000 debt
in its capital structure. If the corporate tax rate for these firms is 40%. Calculate the value of
M Ltd. exceeds that of P Ltd.
(A) ₹4,00,000
(B) ₹4,40,000
(C) ₹4,04,000
(D) ₹4,00,400
Answer:
(i) (C) Gilt –edged securities. Of all securities given, gilt edged securities are considered as
most liquid because they are Government bonds and have active secondary market.
(ii) (D) 7.95

P/E Ratio=Payout Ratio/(r-gn)
=0.6(1.06)/(0.14-0.06)=0.636/0.08=7.95
(iii)(A) ₹51.71
(Expected spot rate a year from now)/ Current spot rate= (1+ Expected inflation on
home country)/ (1+ Expected Inflation in foreign country
or Expected spot rate of US$ a year hence = (₹ 50 * 1.06)/1.025 = ₹ 51.71
(iv) (B) ₹52, 00, 80, 493
Amount placed in call = ₹52 crores
Interest = 5.65% p.a.
Amount receivable next day = Principal + Interest for a day
= ₹52 Crores + 52 crores *( 1 /365)*(5.65 /100) = ₹52,00,80,493
(v) (A) ₹88.51/£

The rate to be quoted to the importer is the Ask rate
= (₹/$) Ask * ($/N)Ask = (₹/$) Ask * (1/(£/$)Bid = 46.78 x 1/0.5285 = ₹88.51/£
(vi) (A) Security market Line

Security market Line simply represents the average or normal trade-off between risk and
return for a group of securities where risk is measured typically in terms of the securities
betas.
(vii) (B) Increase Cash Reserve Ratio
If the RBI intends to reduce the supply of money as part of anti inflation policy, it might
increase bank rate, increase Cash Reserve Ratio, increase SLR, sell Government securities
in open market.
(viii) (C) ₹46.46

Profit margin of 0.08% is to be deducted from the bid rate.
That is 46.50 x 0.0008 = ₹ 0.04
Spot bid rate = 46.50 – 0.04 = ₹ 46.46
(ix) (D) Dividend yield ratio.

As per constant dividend discount model, P=D1/(k-g), so k-g=D1/P is dividend yield.
(x) (A) ₹4,00,000

When Corporate taxes are considered, the value of the firm that is levered would be
equal to the value of the unlevered firm increased by the tax shield associated with debt
i.e. Value of Levered Firm = Value of unlevered firm + Debt (Tax rate)
Therefore, Value of M Ltd. would exceed the value of P Ltd. by only Debt (Tax rate)
i.e., 0.4 × 10,00,000 = ₹ 4,00,000.
PART II: SUBJECTIVE QUESTIONS
2) ANKIT Ltd. a manufacturing company produces 25,000 litres of special lubricants in its plant.
The existing plant is not fully depreciated for tax purposes and has a book value of ₹3 lakhs
(it was bought for ₹6 lakh six years ago). The cost of the product is as under:
Particulars Cost/Litre (₹)

Variable costs 60.00
Fixed Overheads 15.00
75.00
It is expected that the old machine can be used for further period of 10 Years by carrying out
suitable repairs at a cost of ₹2 lakh annually.
A manufacturer of machinery is offering a new machine with the latest technology at ₹10
lakhs after trading off the old plant (machine) for ₹1 lakh. The projected cost of the product
will then be:
Particulars Cost/Litre (₹)
Variable costs 45.00
Fixed Overheads 20.00
65.00
The fixed overheads are allocations from other department plus the depreciation of plant
and machinery. The old machine can be sold for ₹2 lakh in the open market. The new
machine is expected to last for 10 years at the end of which, its salvage value will be ₹1
lakhs. Rate of corporate taxation is 50%. For tax purposes, the cost of the new machine and
that of the old one may be depreciated in 10 years. The minimum rate of return expected is
10%
It is also anticipated that in future the demand for the demand for the product will remain at
25,000 litres.
Advice whether the new machine can be purchased ignores capital gain taxes.
[Given: PVIFA (10%, 10 years) = 6.145, PVIF (10%, 10 years) = 0.386]
Answer:
ANKIT LTD
Comparative Analysis:
Old New Differential Cash Flow on
Machine Machine new machine (₹)
Saving/(Extra Cost)₹
Production Ltrs 25,000 25,000
Variable Cost per Ltr (₹) 60 45
Total Variable Cost (₹) 15,00,000 11,25,000 3,75,000
Annual Cost of Repair (₹) 2,00,000 ----- 2,00,000
Depreciation (₹) 30,000 1,00,000 (70,000)
(10.00 + 1.00 – 1.00) / 10
Total Saving 5,05,000
Less: Tax Saving (50%) (2,52,500)
Add: depreciation (not 70,000
being cast outflow)
3,22,500
Present Value of Cash flow if new machine is taken:
Cash PV Factor Present

Year
Flow (₹) (At 10%) Value (₹)
Outflow on new Machine (₹10

0 10,00,000 1.000 (10,00,000)
Lakhs)
1-10 Annual Saving (as above) 3,22,500 6.145 (Cum) 19,81,762
10 Salvage value of new machine 1,00,000 0.386 38,600
10,20,362
Recommendation: Since NPV is positive, the new plant is to be acquired.

Note: Fixed overhead are allocations from other department and therefore, not relevant for
the replacement decision.
3) A company is considering a proposal of installing drying equipment. The equipment would

involve a cash outlay of `6,00,000 and net working capital of `80,000. The expected life of the
project is 5 years without any salvage value. Assume that the company is allowed to charge
depreciation on straight line basis for income tax purpose. The estimated before-tax cash
inflows (`' 000) are given below:
Year-end 1 2 3 4 5
Before-tax cash inflows 240 275 210 180 160
The applicable income-tax rate of the company is 35%. If the company's cost of capital is
12%, calculate the equipment's discounted payback period, and net present value.
Answer:
Statement showing the calculation of present value of CFAT:
Particulars Year 1 Year 2 Year 3 Year 4 Year 5
A Cash flows before tax 240 275 210 180 160

B Less: Tax@35% (84) (96.25) (73.5) (63) (56)
C After tax cash flows 156

D Add: tax saving on depreciation 42
E Net cash flow after tax 198

F release of working capital -
G CFAT for last year - - - -
H PVF at 12% 0.8929 0.7972 0.7118 0.6355
I PV 176.79 175.98 127.06 101.04
J NPV = `709.10 – `680 = `29.10 thousands
Cumulative discounted cash flows
Discounted payback period
4) A firm has an investment proposal requiring an outlay of `1,92,000. The Investment proposal is
expected to have two years economic life with no salvage value. In year-end 1, there is a 0.4
probability that cash inflow after tax will be `1,20,000 and 0.6 probability that cash inflow after
tax will be `1,44,000. The probability assigned to cash in flows after tax for the 2nd year-end
are as follows:
The cash inflow year –end 1 `1,20,000 `1,44,000

The cash inflow year –end 2 Probability Probability
`57,600 0.2 96,000 0.4
`76,800 0.3 1,20,000 0.5
`1,05,600 0.5 1,44,000 0.10
The firm uses 8% discount rate for this type of investment.
(i) Construct a decision tree for the proposed Investment project and calculate the
expected Net Present Value.
(ii) What is the most likely NPV of the project and what is the corresponding probability?
What is the probability of the project having a negative NPV?
Answer:
(i) The decision tree diagram is presented in chart identifying various paths and outcomes and
computation of various paths/outcomes and NPV are presented in the following table.
Path No. Joint Probability

1 0.08
2 012
3 0.20
4 0.24
5 0.30
6 0.06
1.00
The Net Present value (NPV) of each path at 8% discount rate is given below:
Path Year 1 Cash flow Year 2 Cash flows Total ("ash in Cash NPV
Flow (PV) ` Outflow `
1 120000 × 0.9259 = 57600 × .8573 = 49380 160488 192000 -31512
111108
2 111108 76800 × .8573 = 65841 176949 192000 -15051
3 111108 105600 × .8573 = 90531 201639 192000 9639
4 144000 × 0.9259 = 96000 × .8573 = 82301 215631 192000 23631
133330
5 133330 120000 × .8573 = 102876 236206 192000 44206
6 133330 144000 × .8573 = 123451 256781 192000 64781
Statement Showing Expected Net Present value

Path NPV (`) Joint probability Expected NPV
1 -31512 0.08 -2521
2 -15051 0.12 -1806
3 9639 0.20 1928
4 23631 0.24 5671
5 44206 0.30 13262
6 64781 0.06 3887
20421
(ii) The most likely NPV = 44206; Probability = 0.3 or 30%

(iii) The Probability of NPV = paths (c) and (2) = 0.08 + 0.12 = 0.20 = 20%
5) A publishing house has bought out a new monthly magazine which sells at ` 25 per copy. The
cost of purchasing it by newsstand is ` 20 per copy. A newsstand estimates the sales pattern
of the magazine as under:
Demand copies Probability
0 < 200 0.18
200 < 400 0.32
400 < 600 0.25
600 < 800 0.15
800 < 1000 0.06
1000 <1200 0.04
The newsstand has contracted for 500 copies of the magazine per month from the publisher.
The unsold copies are returnable to the publisher who will take them back at cost less ` 2 per
copy for handling charges.
The newsstand manager wants to simulate the pattern of demand and profitability.
The following random number may be used for simulation of sales pattern of each month.
26 14 55 17 97 70
51 33 60 82 96 68
You are required to:

(i) Allocate random numbers to the demand pattern forecast by the newsstand.
(ii) Simulate twelve months sales and calculate the monthly and annual profit/loss.
(iii) Calculate the loss on lost sales.
Answer:
Profit per copy of magazine = ` 25 – 20 = 5. If unsold copy is returned, loss per copy = ` 2.
(i) Allocation of random numbers:
Demand Probability Cumulative Probability Random Nos. allocated
0 < 200 0.18 0.18 00 -17
200 < 400 0.32 0.50 18 – 49
400 < 600 0.25 0.75 50 – 74
600 < 800 0.15 0.90 75 – 89
800 < 1000 0.06 0.96 90 – 95
1000 <1200 0.04 1.00 96 - 99
(ii) Simulation of monthly pattern of demand and profitability:

Month Random Demand Sales Returned Profit on Loss on Net Lost
Number Copies Copies sales ₹ return ₹ Profit sale
(loss) ₹ Copies
1 26 300 300 200 1,500 400 1,100 --
2 14 100 100 400 500 800 (300) --
3 55 500 500 -- 2,500 -- 2,500 --
4 17 100 100 400 500 800 (300) --
5 97 1,100 500 -- 2,500 -- 2,500 600
6 70 500 500 -- 2,500 -- 2,500 --
7 51 500 500 -- 2,500 -- 2,500 --
8 33 300 300 200 1,500 400 1,100 --
9 60 500 500 -- 2,500 -- 2,500 --
10 82 700 500 -- 2,500 -- 2,500 200
11 96 1,100 500 -- 2,500 -- 2,500 600
12 68 500 500 -- 2,500 -- 2,500 --
24,000 2,400 21,600 1,400
(iii) Loss due to lost sales 1,400 copies × ` 5 = ` 7,000
6) A mutual Fund having 300 units has shown its NAV of ` 8.75 and `9.45 at the beginning and at
the end of the year respectively. The Mutual Fund has given two options:
(i) Pay `0.75 per unit as dividend and `0.60per unit as a capital gain, or
(ii) These distributions are to be reinvested at an average NAV of `8.65 per unit.
What difference it would make in terms of returns available and which Option is preferable?
Answer:
(i) Returns for the year:
(All changes on a Per -Unit Basis)
Change in Price: ₹ 9.45 – ₹ 8.75 = ₹ 0.70
Dividends received: ₹ 0.75
Capital gains distribution ₹ 0.60
Total reward ₹ 2.05
` 2.05
Holding period reward: = 23.43%
` 8.75
(ii) When all dividends and capital gains distributions are re-invested into additional units of
the fund @ (₹ 8.65/unit)
Dividend + Capital Gains per unit
= ₹ 0.75 + ₹ 0.60 = ₹ 1.35
Total received from 300 units = ₹ 1.35 × 300 = ₹ 405/-.
Additional Units Acquired
= ₹ 405/ ₹ 8.65 = 46.82 Units.
Total No. of Units = 300 units + 46.82 units
= 346.82 units.
Value of 346.82 units held at the end of the year
= 346.82 units × ₹ 9.45 = ₹ 3277.45
Price Paid for 300 Units at the beginning of the year
= 300 units × ₹ 8.75 = ₹ 2,625.00
Holding Period Reward
₹ (3277.45 – 2625.00) = ₹ 652.45
% of Holding Period Reward
` 652.45
= 24.85%
` 2625.00
Conclusion: Since the holding period reward is more in terms of percentage in option-two i.e.,
reinvestment of distributions at an average NAV of ₹8.65 per unit, this option is preferable.
7) The following information is available regarding three Mutual Funds:

Mutual Fund Average Return Standard Correlation
Deviation with market
A 24% 8% 0.30
B 16% 4% 0.70
C 12% 3% 0.50
If the risk free return is 6%, return on market portfolio is 15% with a standard deviation of 4%
ascertain:
(i) Total gain and the Net Gain under Fama’s Net Selectivity.
(ii) Systematic risk and Unsystematic Risk.
Answer:
(a) Working Note:

Risk Free return (RF) = 6%
Market Return (RM) = 15%
Market standard deviation (σ M) = 4%
Market Risk Premium (RM – RF) = 15 % - 6% = 9%
Particulars A B C
Average Return (RP) 24% 16% 12%
Standard Deviation σP (Total Risk) 8% 4% 3%
Correlation with market (PPM) 0.30 0.70 0.50
Portfolio Beta 0.30 × 8 ÷4 = 0.60 0 .7 0 ×4 ÷ 4 = 0.70 0.50 × 3 = 4 = .375
(BP) = Ppm × σP ÷ σm
Actual Risk Premium 24-6 = 18% 16-6 = 10% 12-6 = 6%
(RP - RF) (A)
Computation of Net gain
Desired Risk Premium [9% × 8% ÷ 4%] [9% × 4% ÷ 4%] [9% × 3% ÷ 4%]
[(RM – RF) × σP ÷ σm] (B) 18% 9% 6.75%
Fama's Net Selectivity 0 1% (0.75%)
(Net gain) =A - B
Computation of total gain
Desired Risk Premium
(RM – RF) × PPm × σp ÷ σm (C)
OR 18% × 0.30 9% × 0.7 = 6.3% 6.75% × 0.5
Risk Premium in (B) × P pm = 5.4% = 3.375%
Total Gain A - C (18% -5.4%) (10%-6.3%) (6% -3.375%) =
= 12.6% = 3.7% 2.625%
(ii) Systematic Risk (σP × BP) 8% × 0.6 = 4.8% 4% ×.70 = 2.8% 3% ×.375 = 1.125%
Unsystematic Risk 3.2% 1.2% 1.875%
(Total Risk- Systematic Risk)
8) Mr. G, on 01.07.2014, during the initial offer of some mutual fund invested in 20,000 units
having face value of ` 20 per unit.
On 31.03.2015, the dividend operated by the Mutual Fund was 10% and Mr. G found that his
annualised yield was 153.33%.
On 31.03.2016, 20% dividend was given.
On 31.03.2017, Mr. G redeemed all his balance of 22,600 units when his annualised yield was
73.52%.
What is the Net Asset Value (NAV) as on 31.03.2017?
Answer:
Yield for 9 months = 153.33 × 9/12 =115%.
Market value of investments as on 31.03.2015 = ` 4,00,000 + (`4,00,000 × 115%) =`8,60,000.
Therefore, NAV as on 31.03.2015 =(` 8,60,000 – `40,000)/ 20,000 = `41.
NAV would stand reduced to the extent of dividend payout, being ` 20,000 × `20 × 10%
=`40,000.
Since dividend was reinvested, additional units acquired = ` 40,000 /`41 = 975.61 units.
Therefore, units as on 31.03.2015 = 20,000+ 975.61 = 20,975.61 units.
Alternatively, units as on 31.03.2015 = ` 8,60,000 /`41 = 20,975.61 units.
Dividend as on 31.03.2016 = 20,975.61 × `20 × 0.2 = ` 83,902.44.
Let × be the NAV as on 31.03.2016, then no. of new units reinvested will be `83,902/ x.
Accordingly, 22,600 units shall consist of reinvested units and 20,976 units (as on 31.03.2015).
Thus by way of equation: 22,600 units = [` 83,902 / x ] + 20,976 units.
Therefore, NAV as on 31.03.2016 = x = ` 83,902 / 1,624 units = ` 51.66.
NAV as on 31.03.2017 =[` 4,00,000 (1 + 0.7352 x {33 / 12})]/ 22,600 units = `53.48.
9) An investor purchased 300 units of a mutual fund at `12.25 per unit on 31st December, 2016. As
on 31st December, 2017 he has received `1.25 as dividend and `1.00 as capital gains
distribution per unit,
Required:
(i) The return on investment if the NAV as on 31st December, 2017 is `13.00.
(ii) The return on investment as on 31st December, 2017, if all dividends and capital gains
distributions are reinvested into additional units of the fund at `12.50 per unit.
Answer: (i) Return for the year (all charges on a per year basis)
Particulars `/Unit
Changes in price [13.00 -12.25] 0.75
Dividend received 1.25
Capital gain distribution 1.00
Total return 3.00
Return on investment = [3.00 / 12.25] × 100 = 24.49 %

(ii) If all dividends and capital gains are reinvested into additional units at ` 12.50 per unit,
the position would be:
Total amount reinvested = ` 2.25 × 300 = `675
Additional units added = ` 675 / 12.50 = 54 units
Value of 354 units as on 31.12. 2013 = `4,602
Price paid for 300 units on 31.12. 2012 = 300 × ` 12.25 = `3,675
Return = [4,602 - 3,675] / 3,675 =927/3,675 = 25.22%
10) Equi – stable is a portfolio model wherein 20% of Fund value is invested in Fixed Income
Bearing Instruments. The balance of 80% is divided among old industry stock (iron and steel),
Automotive Industry stock, Information Technology stocks, Infrastructure Company stocks and
Financial Services Sector in the ratio of 4:2:6:3:5.
Three mutual funds X, Y and Z offer a fund scheme based on the Equi-stable portfolio model.
The actual return on Equi-Stable portfolios of each of the three funds for the past 3 years is as
follows:
1 2 3
Portfolio X 17.35% 18.70% 21.60%
Portfolio Y 17.20% 18.25% 22.15%
Portfolio Z 17.10% 18.60% 22.00%
Beta factor of the Equi-Stable portfolio is measured at 1.35. Return on market portfolio
indicates that `1,000 invested will fetch `153 in a year (including capital appreciation and
dividend yield). RBI bonds, guaranteed by the Central Government yields 4.50%.
Rate the fund managers of X, Y and Z.
Answer: Computation of expected rate of return under CAPM:
E (Rx) = RF + Beta × [ RM - RF ]; Risk free return = Rf = 4.50 %
Return on market portfolio = RM = 15.30 % [153 /1000]
Beta of Equi-stable = 1.35
So, Expected return of Equi-stable = 4.50 % + [1.35 × (15.30 % - 4.50 %] = 19.08 %
Computation of Alpha factor of 3 Funds
Year Mutual Funds X Mutual Funds Y Mutual Funds Z
Actual Actual Abnormal Actual Abnormal
Abnormal return
return return return return return
17.20 – 19.08 = 17.10- 19.08 =

1 17.35% 17.35 – 19.08 = (1.73) 17.20% 17.10%
(1.88) (1.98)
18.25-19.08 = 18.60 – 19.80

2 18.70% 18.70 – 19.08 = (0.38) 18.25% 18.60%
(0.83) = (0.48)
22.15-19.08 = 22.00 – 19.08

3 21.60% 21.60-19.08 = 2.52 22.15% 22.00%
3.07 = 2.92
Alpha factor:
Fund X = 0.41 / 3years = 0.137 %; Fund Y = 0.36 /3 years = 0.120 %; Fund Z = 0.46 / 3years =
0.153 %
Evaluation: Equitable scheme of mutual fund Z has the highest alpha 0.153 % return more
than the market expectations when compared to 0.137 % and 0.120 % of fund X and Y.
Therefore, fund manager of Mutual fund Z has performed better.
Ranking: Fund manager Z = 1; Fund manager X = 2 and Fund manager Y= 3.
11) A portfolio Manager has the following four stocks in his portfolio:
Security No. of shares Market price (`) P = Beta

per Share
VL 12,000 40 0.9
CL 6,000 20 1.0
SL 10,000 25 1.5
AL 2,000 225 1.2
Compute the following:

(i) Portfolio Beta (β)
(ii) If the Portfolio Manager seeks to reduce the Beta to 0.8, how much risk-free
investment should he bring in? Verify the result.
Answer:
(i)
Security No. of shares Market Value % of total Beta Weighted
price Per Amount (w) Beta
share
VL 12000 40 4,80,000 0.3692 0.9 0.3323
CL 6000 20 1,20,000 0.0923 1.0 0.0923
SL 10000 25 2,50,000 0.1923 1.5 0.2885
AL 2000 225 4,50,000 0.3462 1.2 0.4154
13,00,000 1.000 1.129
Hence Portfolio Beta =1.129
(ii) Required Beta = 0.8

It should become 0.8/1.129 = 70.86% of the present portfolio
If `13,00,000 is 70.86%
13,00,000 × 100
Total Portfolio should be = `18,34,603
70.86%
Additional investment in zero risk should be = 18,34,603 – 13,00,000 = 5,34,600
Revised Portfolio will be
Security No. of Market Value % of total Beta Weighted
shares price Per Amount (w) Beta
share
VL 12000 40 4,80,000 0.2616 0.9 0.2354
CL 6000 20 1,20,000 0.0654 1.0 0.0654
SL 10000 25 2,50,000 0.1363 1.5 0.2045
AL 2000 225 4,50,000 0.2453 1.2 0.2944
Risk Free Asset 53460 10 5,34,600 0.2914 0 0
18,34,600 1,000 0.80
12) Mr. QURESHI owns a portfolio with the following characteristics:

Security A Security B Risk-free Security
Factor 1 Sensitivity 0.80 1.50 0
Factor 2 Sensitivity 0.60 1.20 0
Expected Return 20% 25% 15%
It is assumed that security returns are generated by a two-factor model:

(i) If Mr. QURESHI has ` 1,00,000 to invest and sells short `50,000 of Security B and
purchases `1,50,000 of Security A, what is the sensitivity of Mr. QURESHI portfolio of the
two factors?
(ii) If Mr. QURESHI borrows `1,00,000 at the risk-free rate and invests the amount he
borrows along with the original amount of ` 1,00,000 in Security A and B in the same
proportion as described in part (i), what is the sensitivity of the portfolio to the two
factors?
(iii) What is the expected return premium of Factor 2?
Answer: Sale of Security B and investment in Security A
Portfolio Value Sensitivity Product Sensitivity Product

Security
(Weights) (Factor 1) (Factor 1) (Factor 2) (Factor 2)
A (Invested) 1,50,000 0.80 1,20,000 0.60 90,000
B (Sold) (50,000) 1.50 (75,000) 1.20 (60,000)
Total 1,00,000 45,000 30,000
Portfolio Sensitivity (Product ÷ Weights) for:

(i) Factor 1 = 45,000 ÷ 1,00,000 = 0.45
(ii) Factor 2 = 30,000 ÷ 1,00,000 = 0.30
Borrowing at Risk free Return, Investment in Security A and B

Portfolio Value Sensitivity Product Sensitivity Product
Security
(Weights) (Factor 1) (Factor 1) (Factor 2) (Factor 2)
A (Invested) 3,00,000 0.80 2,40,000 0.60 1,80,000
B (Invested) ( 1,00,000) 1.50 ( 1,50,000) 1.20 ( 1,20,000)
Risk free (sold) (1,00,000) 0.00 Nil 0.00 Nil
Total 1,00,000 90,000 60,000
Portfolio Sensitivity (Product ÷ Weights) for:

(i) Factor 1 = 90,000 ÷ 1,00,000 = 0.90
(ii) Factor 2 = 60,000 ÷ 1,00,000 = 0.60
[It is assumed that portfolio Sensitivity = Weighted Average Sensitivity of individual Security
comprising the portfolio]
Return Premium of Factor 2

Since the security returns are generated by a two factor model, it is assumed that the
model is linear equation of two variables.
Where,
Rs = RF + BF1 (X) + BF2 (Y)
Where, Rs = Return of the Security S
RF = Risk free Return
BF1 = Factor 1 Sensitivity
BF2 = Factor 2 Sensitivity
X = Return Premium for Factor 1
Y = Return Premium for Factor 2
Therefore,
RA = 20% = 15% + 0.8X + 0.6Y 0.8 X + 0.6 Y = 5
RB = 25% = 15% + 1.5 X + 1.2 Y 1.5 X + 1.2 Y = 10
Expected premium for Factor 2 is to be determined, which corresponds to value of Y.
Substituting value for X in the second equation, we get------
Y= 0.625 ÷ 0.075 = 8.3333;
Therefore, Expected Return Premium for factor 2 is 8.33%
ALTERNATIVE SOLUTION
(i) Mr. Qureshi's position in the two securities are + 1.50 9n Security A and (- ) 0.50 in Security
B. Hence, the portfolio sensitivities to the two factors are ---
Factor 1 = [1.50 × 0.80] + [(-) 0.50 × 1.50] = 1.2 + (- )0.75 = 0.45

Factor 2 = [1.50 × 0.60] + [[(- )0.50 × 1.20] = 0.90 + (- )0.60 = 0.30
(ii) Mr. Qureshi's current position—

Security A : `3,00,000 / ` 1,00,000 = 3
Security B : (-) ` 1,00,000 / ` 1,00,000 = (-) 1
Risk-Free Asset : (-) 1,00,000 / ` 1,00,000 = (-) 1
Factor 1 =[3.00 × 0.80] + [(-) 1×1.50] + [ (- ) 1 x 0] = 2.40 -1.50 = 0.90
Factor 2 =[3.00 × 0.60] + [(-)1 × 1.20] + [(-)1 × 0] = 1.80 - 1.20 = 0.60
(iii) The portfolio created in part (ii) is a pure Factor 2 portfolio.
Expected Return on the Portfolio in part (ii) is :
RP = [3 × 0.20] + [( - )1 x 0.25] + [( - ) × 0.15] = 0.60 - 0.25 - 0.15 = 0.20 or 20 %
Therefore, Expected Return Premium = 20 % - 15 % = 5 %
13) As an investment manager, you are given the following information:
Investment Initial Dividend Market Beta

Price (`) (`) Price (`)
Equity Shares of
A Ltd. 70 5 140 0.8

B Ltd. 80 5 150 0.7
C Ltd. 90 5 270 0.5
Govt. of India 1,000 160 1,010 0.95
bonds
Risk-free return may be taken at 16%.
Required:
(i)Expected rate of return of Portfolio using CAPM.
(ii)Average return of Portfolio
Answer: Calculation of expected rate of returns of Portfolios:
Investment Amount Market price Capital gain Dividend Total

(`) (`) (`) (`) (`)
Equity shares of
A 70 140 70 5 75
B 80 150 70 5 75
C 90 270 180 5 185
Govt. of India bonds 1,000 1,010 10 160 170
Total 1240 1570 330 175 505
Expected rate of return on portfolio = [505/1240] × 100 = 40.73 %.
CAPM Model
E[RP] = R F + B × [ R M - RF]
A Ltd = 16 + 0.8 [40.73 -16] = 35.78 %
B Ltd = 16 + 0.7 [40.73 - 16] = 33.31 %
C Ltd = 16 + 0.5 [40.73 - 16] = 28.37 %
G of I Bonds = 16 + 0.95 [40.73 - 16] = 39.49 %
(ii) Simple average return of portfolio = [35.78 + 33.31 + 28.37 + 39.49] / 4 = 136.95 / 4 = 34.24 %
Average of Beta = [0.80 + 0.70 + 0.50 + 0.95] /4 = 0.7375.
ALTERNATIVE APPROACH for Average return:
Weighted average return:

Securities Cost Proportion Expected return Weighted return %
A 70 0.056 35.78 2.004
B 80 0.065 33.31 2.132
C 90 0.073 28.37 2.043
G. Bonds 1,000 0.806 39.49 31.829
1,240 1.000 37.008
14) Given the following information—
BSE Index 50,000

Value of Portfolio 1,01,00,000
Risk Free Interest Rate 9% p.a.
Dividend Yield on Index 6% p.a.
Beta of Portfolio 2.0
We assume that a futures contract on the BSE index with 4 months maturity is used to hedge
the value of portfolio over next 3 months. One future contract is for delivery of times the
index. Based on the information, Calculate — (i) Price of future contract, (ii) The gain on short
futures position if index turns out to be 45,000 in 3 months.
Answer:
(i) Computation of Price of Futures Contract
Securities of R Ltd.
Spot Price [Sx] `50,000
Dividend Yield Expected [y] 6% or 0.06
Tenor / Time Period [t] in Years 4 Months or 0.3333 Year
Risk Free Interest Rate [r] 9% or 0.09
Price of Futures Contract [TFPX] = ` 50,000 × e(0.09 - 0.06)× 0.3333

TFPX = SX × e(r-y)×t = ` 50,000 × e0.03 × 0.3333
= ` 50,000 × e0.01 = ` 50,000 × 1.0101
= ` 50,505
Therefore, price of the Futures Contract is ` 50,505 or ` 50,500 (Approx)
(ii) Gain on Short Futures Position

(a) Computation of No. of Contracts to be entered into:
Particulars Value
Portfolio Value ` 101,00,000

4-Month’s Futures Price per Unit of BSE Index ` 50,500
No. of Units per BSE Index Futures Contract 50
Value per BSE Index Futures Contract [50 Units X `50,500 per Unit] ` 25,25,000
No. of Contract to be entered [Portfolio Value X Beta of Portfolio w.r.t Index ÷ 8 Contracts
Value per BSE Index Futures Contract] = [`101,00,000 X 2.0 ÷ `25,25,000]
(b) Computation of Gain on Short Futures Position

Particulars Value
Position SELL
Contracted Sale Price per Unit of BSE Index ` 50,500

Less: Index Position in 3-Months ` 45,000
Gain per Unit of BSE Index Future ` 5,500
No. of Units per Contract 50
Gain per Contract [`5,500 X 50 Units] ` 2,75,000
No. of Contract entered into 8
Total Gain [8 Contracts X `2,75,000 per Contract] 22,00,000
Total Gain on Short Futures Position in 3 Months is ` 22,00,000.
15) A share is currently priced at `600. It is known that at the end of one month, it will be either
`570 or `630. The risk-free interest rate is 8% per annum with continuous compounding. Find
the value of a 1-month European call option with a strike price of ` 592, with the help of a
Binomial Model.
Answer:
Computation of Option Delta [Binomial Model]:
FP1 FP2
Future spot price 630 570
Position on expiry date [compared to Exercise price] In the money Out of
exercise money lapse
Action on Expiry date
Value of Option on expiry
[Future spot price-Exercise price] [630 – 592] = 38 0
Option Delta = Change in value of option /Change in Future spot price

= [` 38-0] / [` 630 – `570]= 0.633
Computation of amount to be invested in Risk Free Rate:
= Present value of Lower band of Future spot price i. e, FP2
= Present value of `570 discounted at 8 % continuous compounding for a 1- month
period
= ` 570 × e(-)rt = `570 × e-0.08 × 1/12 = `570/ e0.007 = `570/ 1.00702 = `566.
Value of call = Option Delta × [Current stock price - Amount to be invested at Risk free rate]
= 0.633 × [` 600 – ` 566 ] = ` 21.522.
16) An Indian exporter has sold handicraft items to an American business house. The exporter
will be receiving US dollar 1 lakh in 90 days. Premium for a dollar put option with a strike
price of `58.00 and a 90 days settlement is ` 1. The exporter anticipates the spot rate after
days to be `56.50.
(i) Should the exporter hedge its account receivable in the option market?
(ii) If the exporter is anticipating a spot rate to be `57.50 or `58.50 after 90 days, how
would it effect the exporter's decision?
Answer:
Option Put
Strike price ` 58 per US $
Premium ` 1 per US $
Settlement (expiration) rate ` 56.50
Benefit from Put option = Max[(Strike rate - Expiration rate), 0] - Premium

= Max[(` 58 per US $ - ` 56.50 per US $), 0] – ` 1 per US $
= `( 1.50 – ` 1) per US $ = ` 0.50 per US $.
As there is benefit in owning the Put, so the Exporter should hedge using the Put Option.
Here, if the exporter remains un-hedged, it will receive
= [` 56.50 per US $ x US $ 1,00,000] = ` 56,50,000
But with hedging using Put Option, the exporter receives at the end of 90 days
= [(` 58 × US $ 1,00,000) - (` 1 × US $ 1,00,000)] = `57,00,000
For Settlement price of ` 57.50 per US $, BENEFIT FROM Put Option
= Max[(` 58 per US $ - ` 57.50 per US $), 0] – ` 1 per US $ = ( - ) `0.50 per US $.
For Settlement price of ` 58.50 per US S, BENEFIT FROM Put Option
= Max[(` 58 per US $ - ` 58.50 per US $), 0] – ` 1 per US $
= 0 – ` 1 per US $
= ( - ) `. 1 per US S
So, for anticipated price of ` 57.50 per US $ or ` 58.50 per US $), the exporter will not be
hedging through a Put Option as he does not have positive benefit.
17) The following information is available for Call option on the stock of MACON LTD:
Current market price `415
Strike price `400
Time to expiration (1 year = 360 days) 90 days
Standard deviation of return 22%
Risk-free rate of interest 5%
You are required to compute the value of call option, using Black- Scholes model.
[Given: N(d1) = N (0.5033) = 0.7019;
N(d2) = N (0.3933) = 0.6628;
Ln (1.0375) = 0.03681; and
E = 2.71828].
Answer: d1 = [Ln (S / x) + (r + 0.5 σ2]/σ√t

=[Ln (415 /400) + ( 0.05 + 0.5 × 0.222) × 0.25 ] / [ 0.22 ×√0.25]
= [Ln (1.0375) + 0.01855]/ 0.11 = [ Ln (0.03681) + 0.01855 ] / 0.11
= 0.05536 / 0.11= 0.5033
d2 =d1: - σ√t = 0.5033-[0.22 ×/o.25] =0.5033 - 0.1100 = 0.3933
So, N(d1) = N (0.5033) = 0.7019; AND N(d2) = N (0.3933) =0.6628
Hence, value of call option = S × N(d1)] - [ X x e-rt × N(d2)]
= [415 × 0.7019] - [400/(2.71828)0.05 x 0.25 × 0.6628]
= [291.2885] - [400/1.01258 × 0.6628 ] = [291.2885] - [261.8266] = 29.46
18) Company A has outstanding debt on which it currently pays fixed rate of interest at 9.5%. The
company intends to refinance the debt with a floating rate interest. The best floating rate it
can obtain is LIBOR + 2%. However, it does not want to pay more than LIBOR. Another
company B is looking for a loan at a fixed rate of interest to finance its exports. The best rate
it can obtain is 13.5%, but it cannot afford to pay more than 12%. However, one bank has
agreed to offer finance at a floating rate of LIBOR + 2%. Citibank is in the process of
arranging an interest rate swap between these two companies.
(i) With a schematic diagram, show how the swap deal can be structured,
(ii) What are the interest savings by each company?
How much would Citi bank receive?
Answer: First let us tabulate the details to find the quality spread differential:
Cost of Funds to Company A and B
Objective Fixed rate Floating rate
Company A Floating 9.50% p.a. Libor + 200bp
Company B Fixed 13.50% p.a. Libor + 200bp
Differential 400 bps 0bps
CITI BANK
9.5% 10%
Labo Labo
A B
9.5% To Libor + 200bps

Lenders To Lenders
The differential between the two markets = 400 bps - 0 = 400 bps. A total of 400 bps needs to
be shared between A, B and Citi bank. Since A cannot afford to pay more than Libor, it
needs 200 bps benefits out of the total 400 bps (Libor +2% - Libor). Similarly B cannot pay
more than 12% as against the existing available fixed rate funding of 13.5%, it requires 150
bps benefits out of 400 bps. The balance 50 bps would be shared / charged by the Citi bank.
The swap can therefore be structured as follows:
Firm Paid to Bank Received from Bank Paid to market Net Cost Savings
A Libor 9.5% 9.5% Libor (Libor+2%)-
(Libor)=200bps
B 10% Libor Libor +200bps 12% (13.5-12.0)= 150bps
Company A gets floating rate funds at Libor as against Libor + 2%, thereby getting an
advantage of 200 bps, Company B gets fixed rate funds at 12% as against 13.5%, thereby
getting an advantage of 150 bps and finally Citi bank gets 50 bps commission.
19) Company PQR and DEF have been offered the following rate per annum on a $ 200 million
five year loan:
Company Fixed Rate Floating Rate
PQR 12.0 LIBOR+0.1%
DEF 13.4 LIBOR + 0.6%
Company PQR requires a floating - rate loan; Company DEF requires a fixed rate loan.
Design a swap that will net a bank acting as intermediary at 0.5 percent per annum and be
equally attractive to both the companies.
Answer:
Particulars `
(a) Difference in Floating Rates [(LIBOR + 0.1%) - (LIBOR + 0.6%)] 0.5%
(b) Difference in Fixed Rates [13.4%- 12%] 1.4%
(c) Net Difference {[(a) - (b)] in Absolute Terms} 0.9%
(d) Amount paid for arrangement of Swap Option (0.5%)
(e) Net Gain [(c) - (d)] 0.4%
(f) Company PQR's share of Gain [0.4/% X 50%] 0.2%
(g) Company DEF's share of Gain [0.4% X 50%] 0.2%
PQR is the stronger Company (due to comparative interest advantage). PQR has an
advantage of 1.40% in Fixed Rate and 0.50% in Floating Rate. Therefore, PQR enjoys a higher
advantage in Fixed Rate loans. Therefore, PQR will opt for Fixed Rate Loans with its Bankers.
Correspondingly DEF Ltd will opt for Floating Rate Loans with its bankers.
Company PQR Company DEF

1. Company PQR will borrow at Fixed 1. Company DEF will borrow at Floating Rate.
Rate.
2. Pay interest to Bankers at Fixed 2. Pay interest to its Bankers at Floating Rate (i.e.
Rate (i.e. 12.0%) LIBOR + 0.6%)
3. Will collect from Company DEF 3. Will pay to Company PQR interest amount
interest amount differential i.e. differential i.e. Interest computed at Fixed Rate
Interest computed at Fixed Rate (12.0%) Less Interest Computed at Floating Rate of
(12.0%) Less Interest Computed at (LIBOR + 0.1%) = 11.9% - LIBOR
Floating Rate of (LIBOR + 0.1 %) =
11.9% -LIBOR
4. Receive share of Gain from 4. Pay to Company PQR its share of Gain = 0.2%
Company DEF (0.2%)
5. Effective Interest Rate: 2-3=12.0%- 5. Pay Commission Charges to the Financial
(11.90% - LIBOR) -0.2% = LIBOR - Institution for arranging Interest Rate Swaps i.e.
0.1% 0.5%
6. Effective Interest Rate: 2 + 3 + 4+5
= Floating Rate to Company DEF (LIBOR + 0.6%) +
Interest Differential paid to Company PQR (11.9% -
LIBOR) + Commission charges paid for arranging
Swaps + Share of gain paid to Company PQR
= LIBOR + 0.60 % + 11.9% - LIBOR + 0.5% +0.2%
= 13.2%
20) Hindus Ltd. has to make US $ 5 million payment in three months' time. The required amount
in dollars is available with Hindus Ltd. The management of the company decides to invest if
for three months and the following information is available in this context:
The US $ deposit rate is 7% per annum.
The Sterling-Pound deposit rate is 9% per annum.
The spot exchange rate is $ 1.42 / £.
The three month forward rate is $ 1.40 / £.
Answer the following questions:

(i) Where should the company invest for better returns?
(ii) Assuming that the interest rates and spot exchange rate remain as above, what
forward rate would yield an equilibrium situation?
(iii) Assuming that the US interest rate and the spot and forward rates remain as above,
where should the company invest if the Sterling-Pound deposit rate were 12% per
annum?
With the originally stated spot and forward rates and same dollar deposit rate, what is the
equilibrium Sterling-Pound deposit rate?
Ans: Here, spot = $1.42/ £ ; 3-m Forward = $1.40/£ ; rh = 7% ; rf = 9%.

a) For Interest Rate Parity to hold, (1 + rh) = (F/S) × (1 + rf)
Now LHS = 1.0175 ; RHS = (1+ rf) (F/S) = (1.0225) (1.40/1.42) = 1.0080
Since, LHS ≠ RHS, IRP is not holding exactly.
Since LHS > RHS, the Company needs to invest in $ for better return.
b) For equilibrium, the interest rate parity equation should match i.e. F/S
= (1+rh)÷(1 + rf)
i.e. F = S × [(1+ rh) ÷ (1 + rf) = 1.42 × (1.0175 / 1.0225) = 1.4130
Only if the forward rate F = 1.4130, we have an equity barium situation.
c) Now, if spot = $1.42/£; 3m Forward = $1.40/£ ; rh = 7%; rf = 12%; we again check
whether Interest Rate Party holds.
Now, LHS = 1.0175; RHS = (1+ rf) (F/S) = (1.0300) (1.40/1.42) = 1.0155
Since, LHS # RHS, IRP is not holding exactly.
Now since LHS > RHS, the Company needs to invest here also in dollars for better
returns.
d) For equilibrium, the interest rate party equation should match
i.e. F/S = (1+ rh) ÷ (1+ rf).
i.e. (1+ rf) = S/F × (1+ rh) = (1.42 /1.40) × 1.0175 = 1.0320
or rf = 3.20% (for 3 months)
Only if the annual pound rate is 12.80% (i.e. 3.20 × 4), we have a equilibrium situation.
21) A sugar mill in Maharashtra is expected to produce 100 MT of sugar in the month of February.
The current market price today (the month of December) is `22 per kg. February futures
contract in sugar due on 20th February is trading at `25 per kg. The sugar mill apprehends
that the price lesser than `25 per kg will prevail in February due to excessive supply then.
How can the sugar mill hedge its position against the anticipated decline in sugar price in
February?
Answer:
Sugar mill is long on the asset in February. Therefore, it needs to sell the futures contract
today. The no. of contracts that needs to be sold is dependent upon the exposure in the
physical assets and the value one needs to cover. Assuming each contract for sugar is for
10 M.T. the no. of contracts to be sold is 10.
No. of contracts to be sold = Quantity to be hedged / Quantity in each future contract =
100 M.T./10 M.T. = 10 Contracts.
Sugar mill would go short on futures in December. Prior to February, before the future
contract expires, sugar mill buys futures contract to nullify its position in the futures contract.
The asset, i.e. sugar is sold in the spot market. Prices realized by sugar mill in two different
scenarios of decline or rise in sugar prices, using the principle of convergence of price on
the due date of the contract, is worked out as follows:
When the price falls to ` 20 per k.g. in the futures contract
Sold futures in December +25

Bought futures contract in February -22
Gain in the futures contract +3
Price realized in the spot mar +22
Effective price realize `25 per k. g
Here, the loss of `3 (`25 - 22) in the spot market is made up by an equal gain in the futures
market.
When the price rises to `26 per k.g. in the futures market
Sold futures contract in December +25

Bought futures contract in February -26
Loss in futures contract -1
Price realized in the spot market +26
Effective price realized `25 per k. g)
Here, gain of `1 [`26 – 25] in the spot market is offset by the equal in the futures market.
22) JB ltd. an American Company will need £ 3,00,000 in 180 days. In this connection, the
following information is available:
Spot rate £1= $2.00
180 days forward rate of £ as of today = $ 1.96
Interest rates are as follows:
U.K US
180 days deposit rate % 4.50 5.00
180 days borrowing rate % 5.00 5.50
The Company has forecast the spot rates 180 days hence as follows:
Rate Probability
$ 1.91 25%
$ 1.95 60%
$ 2.05 15%
Compare the benefits of money market hedge Vs. No hedge and advise JB Ltd. on the
choice of the better strategy.
Answer: Money market hedge: Borrow $, convert to £, invest £, repay $ loan in 180 days
Amount in £ to be invested = 3,00,000/(1+i) = 3,00,000/1.045 = £ 2,87,081
Amount of $ needed to convert into £ = 2,87,081 × 2 = $ 5,74,162
Interest and principal on $ loan after 180 days
= $ 5,74,162 × (1 + 5.5 %) = $ 5,74,162 × 1.055 = $ 6,05,741
No hedge option:
Expected future spot rate Dollar needed Probability
(1) £ 3,00,000 × (1) =(2) (3) (2) × (3) =(4)
1.91 5,73,000 0.25 1,43,250
1.95 5,85,000 0.60 3,51,000
2.05 6,15,000 0.15 92,250
5,86,500
Probability distribution of outcomes for no hedge strategy appears to be more preferable

because less no. of dollars are needed under this option to arrange £3,00,000.
23) The following data relate to JB Ltd's share price:

Current Price: ` 3,000 per share
6 months' future price = ` 3,500 per share
It is possible to borrow money in the market for transactions in securities at 12% p.a.
Consider continuous compounding of interest.
Assume that no dividend was paid in the intervening period.
You are required to calculate the theoretical minimum price of a 6 months' forward
purchase and explain the possible arbitrage opportunity.
Answer: Theoretical Forward Price
Spot Price = `3000
Required Rate of return = 12%
Time period = 6m = 0.5 yr
Theoretical forward price = spot price × eЛrate × period = 3000 e 0.12 × 0.5 = 3000 e0.06
= `(3000 × 1.0618) = `3185.40
6 months future contract rate is `3,500.
Actual future price is higher and hence it is overvalued.
Action: Buy spot, sell future for arbitrage advantage.
Borrow ` 3,000 for a period of 6 months at 12% and buy the stock now at `3,000
Amount payable interest plus principal after 6m = `3185.4 (on continuous
compounding)
Sell in the Futures market at forward price at `3,500.
Gain in futures market = `500
Net gain = `(500 -185.4) =` 314.6
24) An Indian exporting firm, Rohit and Bros., would be covering itself against a likely
depreciation of pound sterling. The following data is given:
Receivables of Rohit and Bros £ 5, 00,000
Spot rate `56.00/£
Payment date 3 months
3 months interest rate India: 12% per annum
UK : 5% per annum
Compute arbitrage gain.
Ans: The only thing left is Rohit and Bros. to cover the risk in the money market. The following
steps are required to be taken:
Step1 Borrow pound sterling for 3 months. The borrowing has to be such that at the end of
three months, the amount becomes £ 5, 00,000. Say, the amount borrowed is £ x.
Therefore,
 3
x 1 + 0.05 × = 5, 00,000 or x = £ 4, 93,827
 12 
Step 2 Convert the borrowed sum into rupees at the spot rate.
This gives: £ 4, 93,827 × ` 56 = ` 27,654,312
Step3 The sum thus obtained is placed in the money market at 12 per cent to obtain at the
end of 3 months:
 3
S = ` 27,654,312 × 1 + 0.12 ×  = ` 28,483,941
 12 
Step4 The sum of £ 5, 00,000 received from the client at the end of 3 moths is used to refund
the loan taken earlier.
From the calculations it is clear that the money market operation has resulted into a net gain
of ` 483,941 (i.e. 28,483,941 – 5, 00,000 × 56).
If pound sterling has depreciated in the meantime, the gain would be even bigger.
25) Nihar, a foreign exchange dealer, is actively engaged in simultaneously buying and selling
same foreign currencies to make guaranteed profit.
The rates prevailing in the market are as follows:
Spot rate : `65.80/$
3 months forward rate : `66.40/$
3 months interest rates : ` : 7% p. a.
$ : 11% p. a.
Discuss the possibility of a net gain in arbitrage if Nihar’s borrowing potential is limited to `100
million.
Answer: 3 month forward rate of dollar is higher (at ` 66.40) than the spot rate (` 65.80). It implies
that the dollar is at premium.
Premium (%) = ` 66.40 −` 65.80 × 12 × 100 = 3.647 or 3.65% P.a

65.80 3
Interest rate differential = 11% – 7% = 4% p.a.
Since the interest rate differential (4%) and premium (3.65%) do not match, there are
arbitrage gain possibilities. An arbitrageur (Nihar) can take the following steps in this
regard:
(i) Nihar (arbitrageur) borrows, say ` 100 million at 7% for 3 months (as ` carries lower
interest rate)
(ii) He then converts ` 100 mollion in US $ at the spot rate of ` 65.80 in the spot market.
He gets an amount of US $ 1519757 (i.e. 100,000,000/65.80 = 1519756.839 or 1519757)
(iii) He invests US $ 1519757 in the US money market at 11% interest p.a. for 3 months and
3 × 11
he obtains interest of US $ 41793 ($ 1519757 × )
12 100
(iv) Total sum available with arbitrageur, 3 months from now is (US $1519757 + $41793) =
US $1561550.
(v) Since he would get US $1561550 after 3 months, he sells forward US $ 1561550 at the
rate of ` 66.40.
(vi) As a result of forward deal, at the end of 3 months from now, he would get
` 103686920, i.e. ($ 1561550 x 66.40)
(vii) He refunds ` 100 million borrowed, along with interest due on it. The refunded sum is
` 100,000000 + ` 1750,000 i.e. (` 100,000,000 × 3 × 7 ) ` 101750000.

12 100
(viii) Net gain is ` 103686920 – 101750000 = ` 1936920
26) The following two way quotes appear in the Foreign Exchange Market
Spot Three Months' Forward
`/US $ ` 66/66.25 ` 67/67.50
(i) By what % has the Dollar currency changed? Indicate the nature of change. (Answer
with reference to the ask rate).
(ii) By what % has the Rupee changed? Indicate the nature of change. (Answer with
reference to the bid rate).
(iii) How many US Dollars should a firm sell to get ` 45 lakhs after three months?
(iv) How many rupees is the firm required to pay so as to obtain US $ 2,20,000 in the spot
market?
(v) Assume that the firm has US $ 90,000 in current account earning interest. Return on
rupee investment is 10% per annum. Should the firm encash the US $ now or 3
months later?
Answer:
(i) Ask rate:
Computation of annualized appreciation/depreciation
= (Forward rate-spot rate)/spot rate x100 x 12/3
= (67.50-66.25)/66.25 x 100 x 12/3
= 7.55%
Result is positive, so appreciation.
(ii) Bid rate:
Computation of annualized appreciation/depreciation
Spot =66 `/$ =0.01515 $/`
3 months forward= 67 `/$ =0.01493 $/`
Difference =0.00022
=.00022/.01493 x 100 x 12/3
= 5.89%
(iii) Action= Sell US $ in forward market relevant rate= Forward bid rate=`67.
US $ required= `4500000/`67=US $ 67164.
(iv)Action = Buy US $ in spot market relevant rate= Spot Ask rate= `66.25
Rupees required to obtain US $220000 =US $220000 x `66.25/US $= `14575000
(v) Evaluation of Investment in Rupee

Particulars Encash Now Encash after 3 months
Relevant rate Spot bid rate= `66 Forward bid rate= `67
` available for US $90000 `5940000 `6030000
Add: Interest for 3 months (if 5940000 x 10% x 3/12
Not applicable
converted now) =148500
Amount available after 3 months `6088500 `6030000
Conclusion: Encashing now yields higher return. So it is better to encash now.
27) P Ltd. exports electronic instruments to importers of USA, and Japan on 180 days credit terms.
You are given the following information of the company:
Cost and sales information

Particulars Japan USA
Variable cost per unit ` 600 ` 1560
Export sale price per unit Yen 1200 USD 30.50
Receipts from sale due in 180 days Yen 120,00,000 USD 3,05,000
Foreign Exchange Rate information

Particulars Yen/` USD/`
Spot Market 1.693 - 1.714 0.01610 - 0.01670
6-Months Forward 1.701 - 1.712 0.01652 - 0.01662
6-Months Spot 1.719 - 1.733 0.01658 - 0.01661
You are asked to advise P Ltd. whether it should hedge its foreign currency risk or not. Present
relevant figures in support of your advice.
Answer:
Japan USA
Particulars Bid Rate Ask rate Bid rate Ask Rate
Spot Market 1.714 1.693 0.0167 0.0161
0.583430572 0.590667454 59.88023952 62.11180124
6 months forward 1.712 1.701 0.01662 0.01652
0.58411215 0.587889477 60.16847172 60.53268765
6 months spot 1.733 1.719 0.01661 0.01658
0.577034045 0.581733566 60.20469597 60.31363088
Japan USA
Spot Forward Spot Forward
Variable Cost per unit(a) 600 600 1560 1560
Export Sale(b) 1200 1200 30.5 30.5
Relevant bid rate(c ) 0.577 0.584 60.205 60.168
Export sale per unit(d) 692.4 700.8 1836.2525 1835.124
Contribution per unit(e)=(d-a) 92.4 100.8 276.2525 275.124
Contribution ratio(f)=e/d 13.34488735 14.38356164 15.04436345 14.99212042
Hedging using forward
Advice Do not hedge
contract.
Advice: The Company should hedge its foreign currency risks/exposure in Japanese Yen
as it stands to gain a higher contribution to sales ratio and therefore higher profit margin.
However for sale to USA, company need not hedge its risk.
28) Lotus Finance Ltd. is engaged in leasing business. The company wants your advice to
structure the lease of a machine costing `30 lacs. The machine will have no salvage value.
The life of the machine and the lease period will be 5 years and it has to be fully
depreciated in 5 years on straight line basis. The average post-tax cost of funds to Lotus
Finance is 10%, but to cover the effects of inflation, they prefer to hike this rate by 2%.
Assume tax rate is 50% and that taxes are paid on the last day of the year.
Calculate the minimum annual lease rent to be charged if
(i) the lease rents are payable on the first day of each year.
(ii) the lease rents are payable on the last day of each year;
What is the type of the above lease? Give reasons for your classification
Answer: (i)
Annuity
End of Yr. 0 1 2 3 4 5
Factor
Inflows:
Lease rent x x x x x 4.0382
Defn Tax Shield
50%  30 − 0  3 3 3 3 3 3.6052
 5 
Outflows: (Taxes) 3.6052
(x/2) (x/2) (x/2) (x/2) (x/2)
Initial (30) 1
P/V factor 12% 1 0.893 0.797 0.712 0.636 0.567
Minimum lease rental if pd on the 1st day of the year.

– 30 x 1 – 3.605 × x + 3×3.6052 + X × 4.0382 = 0.
2
X (4.0382 – 1.8026) = 30 – 10.8156
= 19.1844
X = 19.1844 = 8.58132
2.2356
Lease rent = ` 8,58,132.
(ii) If lease rents are paid on the last day of the years
– 30 ×1 + 3.6052 × x + 3 × 3.6052 = 0.
2
3.6052 × x =19.1844
2
x = 19.1844 × 2 = 10.6426273
3.6052
∴ Lease rent = 10,64,263
(iii) The type of lease is a financial lease

Reason: (i) Lessor is only the financial, not interested in the asset.
(ii) Time of the lease is the same as the life of the assets.
(iii) Cost of the asset fully amortised during the base period.
29) A contract has been made between M & T Construction Company Ltd. and a foreign
embassy to build a block of ten flats to be used by the foreign embassy as guest houses. As
per the terms of the contract the foreign embassy would provide the plans and the land
costing ` 50 lakh to M & T Construction Company Ltd. The Company would build their flats at
their own cost and lease them to the foreign embassy for 15 years. As per the contract the
flats will be transferred to the foreign embassy after 15 years at a nominal value of ` 16 lakh.
The company estimates the cost of construction as follows:
Area per flat 1500 sq. feet
Construction cost ` 1200 per sq. feet
Registration and other costs 5% of cost of construction
The company will also incur ` 8 lakh each in years 14 and 15 towards repairs of flats. M & T
Construction Company Ltd. proposes to charge the lease rentals as follows:
Years Rentals
1-5 Normal
6-10 130% of the normal
11-15 150% of normal
The company's present tax rate averages at 35% which is likely to be the same in future. The
full construction and registration costs will be written off over 15 years at a uniform rate and
will be allowed for tax purposes.
Additional information: (a) Minimum desired rate of return 10% (b) Rentals and Repairs will
arise on the last day of the year and (c) construction, registration and other costs will be
incurred at the beginning of the project (t=0).
Calculate the normal lease rent per annum per flat.
Answer: Calculation of Present Value of cash outflow

₹ ₹
Cost of construction 1500 × 1200 × 10 1,80,00,000
Registration and other costs @ 5% 9,00,000
Cost of repairs 8,00,000
Less: Tax Savings (35%) 2,80,000
5,20,000
Present Value of Cost of Repairs for year 1,36,932
14=520000X0.26333
Present Value of Cost of Repairs for year 1,24,483 2,61,414
15=520000X0.23939
1,91,61,414
Rounded off 1,91,61,400
Present Value Factor PV (14 Years) =0.26333

Present Value Factor PV ( 15 Years)=0.23939
Let X be the normal lease rent per 10 flats per annum and present value of recurring cash
inflow for 15 years.
Particulars 1-5 years 6-10 Year 11-15 Years
Lease Rent (per X 1.3X 1.5X
annum
Depreciation 1260000 1260000 1260000
(18900000/15)
PBT X - 1260000 1.3X - 1260000 1.5X - 1260000
PAT 65% 0.65X – 819000 .78X – 819000 0.975X – 819000
CIAT = 0.65X + 441000 0.78X + 441000 0.975X + 441000
PAT+Depreciation
PVCF (as given in 3.7907 2.3538 1.4615
QP)
PV(g) = 2.464X + 1671699 1.836X + 1038026 1.425X+644522
Total 5.725X+3354247
P/V of terminal cash Inflows: Rs.

Nominal Value of flats after 15 years 1600000
Less: Tax on profit (35%*1600000) 560000
1040000
P/V=1040000*0.239 248560
At 10 %rate of return: P/V of cash inflows= P/V of
Cash outflows
5.725 X+3354247+248560=19161400
5.725 X=15558593
X=2717658.16
Lease rent per flat=Rs.2717658.16/10 =Rs.271765.82
30) Write Short Note on:

a)Reverse Book Building
b) Limitation of credit rating
c) Name the participants in commodity futures.
d) What are the benefits of future trading?
e) State the type of risk in following situations:
i) The risk of loss arising from sovereign state freezing foreign currency payments
ii) The risk that stock prices or stock indices values and/or their implied volatility may
change
iii) The risks arising from the people, systems and processes through which a company
operates
iv) Changes in currency exchange rates
f) Illustrate types of Liquidity Risk.
g) Write down the main activities of RBI.
h) How does commercial banks grant loans?
i) Foreign Currency Convertible Bonds (FCCBs)
j) Leading and lagging.
Answer:
a) Reverse Book Building is method of buy-back of securities. It is an efficient price discovery

mechanism adopted when the company aims to buy the shares from the public and
other shareholders. This is generally done when the company wishes to delist itself from the
trading exchanges. The reverse book building route is a difficult and costly process. Price
discovery is a problem in case of small companies as their shares are thinly traded, making
it difficult to delist through the reverse book building route. Unless the shares are delisted,
the small companies have to pay all listing charges.
b) Credit rating is a very important indicator for prudence but it suffers from certain limitations.
Some of the limitations are:
(i) Conflict of Interest – The rating agency collects fees from the entity it rates leading to a
conflict of interest. Since the rating market is very competitive, there is a distant possibility
of such conflict entering into the rating system.
(ii) Industry Specific rather than Company Specific –Downgrades are linked to industry rather
than company performance. Agencies give importance to macro aspects and not to
micro ones; overreact to existing conditions which come from optimistic / pessimistic
views arising out of up / down turns. At times, value judgments are not ruled out.
(iii)Rating Changes – Ratings given to instruments can change over a period of time. They
have to be kept under constant watch. Downgrading of an instrument may not be timely
enough to keep investors educated over such matters.
(iv) Corporate Governance Issues – Special attention is paid to:
• Rating agencies getting more of their revenues from a single service or group.
• Rating agencies enjoying a dominant market position. They may engage in
aggressive competitive practices by refusing to rate a collateralized / securitized
instrument or compel an issuer to pay for services rendered.
• Greater transparency in the rating process viz. in the disclosure of assumptions
leading to a specific public rating.
(v) Basis of Rating – Ratings are based on ‘point of time’ concept rather than on ‘period of
time’ concept and thus do not provide a dynamic assessment.
(vi) Cost Benefit Analysis – Since rating is mandatory, it becomes essential for entities to get
themselves rated without carrying out cost benefit analysis.
(c) Participants in Commodity Future

• Farmers/Producers
• Merchandisers / Traders
• Importers
• Exporters
• Consumers/ Industry
• Commodity Financers
• Agriculture credit providing agencies
• Corporate having price risk exposure in commodities.
(d) Benefits of Futures Trading
• Price discovery for commodity players
- A farmer can plan his crop by looking at prices prevailing in the futures market
• Hedging against price risk
- A farmers can sell in futures to ensure remunerative prices
- A processor/ manufacturing firm can buy in futures to hedge against volatile raw material
costs
- An exporter can commit to a price to his foreign clients
- A stockiest can hedge his carrying risk to ensure smooth prices of the seasonal
commodities round the year
• Easy availability of finance
- Based on hedged positions commodity market players (farmers, processors,
manufacturers, exporters) may get easy financing from the banks.
(e) i) The risk of loss arising from sovereign state freezing foreign currency payments-Country risk
under Credit risk
ii) The risk that stock prices or stock indices values and/or their implied volatility may change-
Equity risk under Market risk
iii) The risks arising from the people, systems and processes through which a company
operates-Operational risk
iv) Changes in currency exchange rates-Foreign Investment Risk
(f) Types of Liquidity Risk

Market liquidity - An asset cannot be sold due to lack of liquidity in the market – essentially a
sub-set of market risk. This can be accounted for by:
 Widening bid/offer spread
 Making explicit liquidity reserves
 Lengthening holding period for VaR calculations
Funding liquidity - Risk that liabilities:
 Cannot be met when they fall due
 Can only be met at an uneconomic price
 Can be name-specific or systemic
(g) The Reserve Bank is the umbrella network for numerous activities, all related to the nation’s
financial sector, encompassing and extending beyond the functions of a typical central
bank:
• Monetary Authority
• Issuer of Currency
• Banker and Debt Manager to Government
• Banker to Banks
• Regulator of the Banking System
• Manager of Foreign Exchange
• Maintaining Financial Stability
• Regulator and Supervisor of the Payment and Settlement Systems
• Developmental Role
(h) Banks grant loan in following ways:–
(i) Overdraft: - Banks grant overdraft facilities to current account holder to draw amount in
excess of balance held.
(ii) Cash credit: - Banks grant credit in cash to current account holder against hypothecation
of goods.
(iii) Discounting trade bills:- The banks facilitate trade and commerce by discounting bills of
exchange.
(iv) Term loan: - Banks grant term loan to traders and to agriculturists against some collateral
securities.
(v) Consumer credit:- Banks grant credit to households in a limited amount to buy durable
goods.
(vi) Money at call or short term advances:- Banks grant loan for a very short period not
exceeding 7 days to dealers / brokers in stock exchange against collateral securities.
(i) Foreign Currency Convertible Bonds (FCCBs):

They mean bonds issued in accordance with relevant scheme and subscribed by a non-
resident in foreign currency and convertible into depository receipts or ordinary shares of the
issuing company in any manner, either in whole or in part, on the basis of any equity-related
warrants attached to debt instruments. A company seeking to issue FCCBs should have
consistent track record of good performance for 3 years.
FCCBs are unsecured; carry a fixed rate of interest and an option for conversion into as fixed
number of equity shares of the issuer company. Interest on redemption price (if conversion
option is not exercised) is payable in Dollars. Interest rates are very low by Indian domestic
standards.
FCCB has been popular with issuers. Local debt markets can be restrictive with
comparatively short maturities and high interest rates. On the other hand, a straight equity
may cause a dilution in earnings, and certainly dilutions in control, which many shareholders,
especially major family shareholders, would find unacceptable. Foreign investors also prefer
FCCBs because of dollar-denominated servicing, the conversion option and the arbitrage
opportunities presented by conversion of FCCBs into equity at discount on prevailing market-
price in India. The major drawbacks are that the issuing company cannot plan capital
structure as it is not assured of conversion of FCCBs. In addition, FCCBs would result in creation
of external debt for the country, as there would be foreign exchange outflow from the
country, if conversion option is not exercised by the investors.
Some other regulations are: (i) Interest payment on bond, until the conversion option is
exercised, shall be subjected to TDS; (ii) Conversion of FCCBs into shares shall not give rise to
capital gain in India; and (iii) Transfer of FCCBs shall not give rise to capital gain in India.
(j) Leading and Lagging

It refers to the adjustment of the times of payments that are made in foreign currencies.
Leading is the payment of an obligation before due date while lagging is delaying the
payment of an obligation past due date. The purpose of these techniques is for the company
to take advantage of expected devaluation or revaluation of the appropriate currencies.
Lead and lag payments are particularly useful when forward contracts are not possible.
It is more attractive to use for the payments between associate companies within a group.
Leading and lagging are aggressive foreign exchange management tactics designed to
take the advantage of expected exchange rate changes. Buckley (1988) supports the
argument.
Revisionary Test Paper _ June 2018
Final
Group III
Paper 15: Strategic Cost Management - Decision Making
(SYLLABUS – 2016)
PART-I – Objective Question
1. (A) Choose the most appropriate answer to the following questions giving justification.
Each questions carries 2(two) marks.
(i) Which of the following is not a term normally used in value analysis?
A. Resale value
B. Use value
C. Esteem value
D. Cost value
(ii) Which of the following is not suitable for a JIT production system?
A. Batch production
B. Jobbing production
C. Process production
D. Service production
(iii) Which of the following is NOT a method of transfer pricing?

A. Cost plus transfer price
B. Internal price transfer price
C. Market-based transfer price
D. Two part transfer price
(iv) When is market skimming pricing appropriate?

A. If demand is very elastic
B. If the product is new and different
C. If there is little chance of achieving economies of scale
D. If demand is inelastic
E. If there is little competition and high barriers to entry
(v) Which of the following is a recognised method of arriving at the selling price for the
products of a business?
(a) Life cycle pricing
(b) Price skimming
(c) Penetration pricing
(d) Target costing
A. (a) and (b) only
B. (a), (b) and (c) only
c. (b) and (c) only
D. (a), (c) and (d) only
E. (a), (b), (c) and (d)
DOS, The Institute of Cost Accountants of India (Statutory body under an Act of Parliament) Page 1
(vi) A company has estimated the selling prices and variable costs of one of its products
as follows:
Selling price per unit Variable cost per unit
` Probability ` Probability
40 0.30 20 0.55
5o 0.45 30 0.25
60 0.25 40 0.20
The company will be able to supply 1,000 units of its product each week irrespective
of the selling price. Selling price and variable cost per unit are independent of each
other.
The probability that the weekly contribution will exceed `20,000 is ______________%
(round to the nearest whole %)
(A) 40% (B) 42% (C) 45% (D) 55%
(vii) The shadow price of skilled labour for CBV limited is currently `8 per hour. What does
this mean?
A. The cost of obtaining additional skilled labour resources is `8 per hour
B. There is a hidden cost of `8 for each hour of skilled labour actively worked
C. Contribution will be increased by `8 per hour for each extra hour of skilled labour
that can be obtained
D. Total costs will be reduced by `8 for each additional hour of skilled labour that can
be obtained
(viii) An organisation is considering the costs to be incurred in respect of a special order
opportumty.
The order would require 1,250 kgs of material D. This is a material that is readily
available and regularly used by the organisation on its normal products. There are 265
kgs of material D in stock which cost `795 last week. The current market price is `3.24
per kg.
Material D is normally used to make product X. Each unit of X requires 3 kgs of
material D, and if material D is casted at `3 per kg, each unit of X yields a contribution
of `15.
The relevant cost of material D to be included in the costing of the special order is
nearest to:
A `3,990
B `4,050
c `10,000
D `10,300
(ix) Aderholt uses activity based costing to allocate its overheads. The budgeted
cost/expected for the Supervisor cost pool was:
Budgeted units 5,000
Number of employees 75
Budgeted cost `7,500
The actual costs incurred were:
Actual units 5,500
Actual employees 77
Actual cost `8,085
What was the total variance for the setups?
A. `585 Adverse
B. `165 Favourable
C. `5550 Favourable
D. `385 Adverse
(x) P operates an activity based costing (ABC) system to attribute its overhead costs to
cost objects.
In its budget for the year ending 31August 2017, the company expected to place a
total of 2,895 purchase orders at a total cost of `110,010. This activity and its related
costs were budgeted to occur at a constant rate throughout the budget year,
which is divided into 13 four-week periods.
During the four-week period ended 30 June 2016, a total of 210 purchase orders
were placed at a cost of `7,650.
The over-recovery of these costs for the four-week period was:
A. `330
B. `350
c. `370
D. `390
(xi) A manufacturing company recorded the following costs in October for Product X:
`
Direct materials 20,000
Direct labour 6,300
Variable production overhead 4,700
Fixed production overhead 19,750
Variable selling costs 4,500
Fixed distribution costs 16,800
Total costs incurred for Product X 72,050
During October 4,000 units of Product X were produced but only 3,600 units were sold.
At the beginning of October there was no inventory.
The value of the inventory of Product X at the end of October using throughput
accounting was:
A `630
B `1,080
C ` 1,100
D ` 2,000
(xii) A company operates a standard absorption costing system. The budgeted
fixed production overheads for the company for the latest year were `330,000 and
budgeted output was 220,000 units. At the end of the company's financial year the
total of the fixed production overheads debited to the Fixed Production Overhead
Control Account was `260,000 and the actual output achieved was 200,000 units.
The under/over absorption of overheads was
A. `40,000 over absorbed
B. `40,000 under absorbed
C. `70,000 over absorbed
D. `70,000 under absorbed
(xiii) Company B uses a throughput accounting system. The details of product X per unit
are as follows:
Selling price `50
Material cost `16
Conversion costs `20
Time on bottleneck resource 8 minutes
The return per hour for product X is:
A. `105 B. `225 C. `255 D. `375
(xiv) A company has 2,000 units of an obsolete item which are carried in inventory at the
original purchase price of `30,000. If these items are reworked for `10,000, they can
be sold for `18,000. Alternatively, they can be sold as scrap for `3,000 in the market.
In a decision model used to analyze the reworking proposal, the opportunity cost
should be taken as:
(a) `8,000 (b) `12,000 (c) `3,000 (d) `10,000
(xv) The time taken to produce the first unit of a product is 4000 hrs, what will be the total
time taken to produce the 5th to 8th unit of the product, when a 90% learning curve
applies?
(a) 10,500 hours (b) 12,968 hours (c) 9,560 hours (d) 10,368 hours
Answer: 1
(i) A: The resale value is normally referred to as the ‘exchange value’
(ii) A: Batch production uses stocks to supply customers whilst other products are being
produced. Stocks are avoided in a JIT system. Jobbing production makes products
to customer order and is ideal for JIT.
(iii) B: The internal price is just another name for the TP. So it is not a method of transfer
pricing.
(iv) B: Here market skimming would be more appropriate. A high price could be changed
to the ‘opinion leaders’ who want to be seen to have the new product and are
prepared to pay a high price.
(v) B: At first inspection all four appear to be methods of arriving at selling price. However,
target costing is a method to arrive at the cost at which a product should be
produced for having worked backwards from the price already set for the product.
(vi) C: To generate a contribution greater than $20,000 it is necessary to earn a unit

contribution greater than `20. Consider each of the feasible combinations:
Selling price Variable cost Contribution Probability
50 20 30 0.45 × 0.55 = 0.2475
60 20 40 0.25 × 0.55 = 0.1375
60 30 30 0.25 × 0.25 = 0.0625
Answer = 0.4475
Answer = 44.75% = 45% to nearest full %
(vii) C: A shadow price for a scarce resource is its opportunity cost. It is the amount of
contribution that would be lost if one unit less of that resource were available. It is
similarly the amount of additional contribution that would be earned if one unit
more of that resource were available. (This is on the assumption that the scarce
resource is available at its normal variable cost.)
(viii) B: The material is in regular use by the organization and so would be replaced if it is
used on the special order. The material is readily available at a price of 3.24 per kg.
Therefore the relevant cost of the material is 1,250 kgs × 3.24 = 4,050
(ix) B: Standard quantity (SQ) = 75 employees/5,000 units × 5,500 units = 82.5 employees
Standard price (SP) = 7500/75 employees = 100
Standard cost (SQ × SP) = 82.5 × 100 = 8,250
Actual cost = 8,085
Total Variance = 8250-8085=165 F
(x) A: Cost driver rate= Budgeted cost of orders/Budgeted number of orders

= 1,10,000/2895 = 38 for each order
Cost recovered: 210 orders × 38 = 7,980
Actual costs incurred =7650
Over-recovery of costs for four-week period =7980 - 7650 = 330.
(xi) D: Using throughput accounting inventory is valued at material cost

Inventory value = 20,000/4,000 ×400 units = 2,000
(xii) A: OAR= 3,30,000/2,20,000 = 1.50 per units

Overhead absorbed(200000 units × 1.50)= 3,00,000
Actual Overhead= 2,60,000.
Over absorbed = 40,000
(xiii) C: Return per minute = (Selling price - material cost)/Time on bottleneck resource
=(50-16)/8 =4.25; Return per hour = 4.25 × 60 = 255
(xiv) (C) Original price is not relevant

Rework income `18,000
Deduct cost of rework 10,000
Net inflow `8,000 It is relevant
The other alternative relevant cash flow is from sale as scrap = `3,000 Hence, the
opportunity cost is `3,000.
(xv) D:
Units Average Time (hours) Total Time (hours)
1 4000 4000
2 3600 7200
4 3240 12960
8 2916 23328
Total time for 5th to 8 units = 23328 - 12960 = 10368 hrs.
Part II: Subjective Questions
SECTION – A
(Each question carries 16 marks)
COST MANAGEMENT
2. (a) Importance of Product Life Cycle Costing.

(b) DIC Ltd. supports the concept of terotechnology or life cycle costing for new
investment decisions covering its engineering activities. The final side of this
philosophy is now well established and its principles extended to all other areas of
decision-making.
The company is to replace a number of its machines and the Production Manager
is torn between the ‘X’ Machine, a more expensive machine with a life of 12 years
and the ‘Y’ machine with an estimated life of 6 years. If the ‘Y’ machines chosen it
are likely that it would be replaced at the end of 6 years by another ‘Y’ machine.
The pattern of maintenance and running costs differs between the two types of
machine and relevant data are shown below.
‘X’ ` ‘Y’ `
Purchase price 19000 13,000
Trade-in value 3000 3,000
Annual repair costs 2000 2,600
Overhaul costs (at year 8) 4000 (at year 4) 2,000
Estimated financing costs averaged
10% p.a. 10% p.a.
over machine life
You are required to:
(a) Recommend, with supporting figures. Which machine to purchase, stating any
assumptions made;
Answer: 2(a)
Product Life Cycle Costing is considered important due to the following reasons —
(a) Time based analysis: Life cycle costing involves tracing of costs and revenues of
each product over several calendar periods throughout their life cycle. Costs and
revenues can analysed by time periods. The total magnitude of costs for each
individual product can be reported and compared with product revenues
generated in various time periods.
(b) Overall Cost Analysis: Production costs are accounted and recognized by the
routine accounting system. However non-production costs like R&D; design;
marketing; distribution; customer service etc. are less visible on a product — by —
product basis. Product Life Cycle Costing focuses on recognizing both production
and non-production costs.
(c) Pre-production costs analysis: the development period of R&D and design is long
and costly. A high percentage of total product costs may be incurred before
commercial production begin. Hence; the company needs accurate information
on such costs for deciding whether to continue with the R&D or not.
(d) Effective Pricing Decisions: Pricing decisions; in order to be effective; should
include market considerations on one hand and cost considerations on the other.
Product Life cycle costing and target costing help analyze both these
considerations and arrive at optimal price decisions.
(e) Better Decision Making: Based on a more accurate and realistic assessment ot
revenues and costs, at least within a particular life cycle stage, better decisions
can be taken.
(f) Long Run Holistic view: Product Life cycle costing can promote long-term
rewarding in contrast to short-term profitability rewarding. It provides an overall
framework for considering total incremental costs over the entire life span of a
product, which in turn facilitates analysis of parts of the whole where cost
effectiveness might be improved.
(g) Life Cycle Budgeting: Life cycle Budgeting, i.e., Life cycle costing with target
costing principles, facilitates scope for cost reduction at the design stage itself.
Since costs are avoided before they are committed or locked in the Company is
benefited.
(h) Review: Life Cycle Costing provides scope for analysis of long term picture of
product line profitability, feedback on the effectiveness of life cycle planning and
cost data to clarify the economic impact of alternatives chosen in the design,
engineering phase etc.
Answer: 2 (b)
Machine X-Life 12 years
Year Cost Discount Factor Discounted Cost
` `
Purchase price 0 19,000 1.00 19,000
Overhead cost 8 4,000 0.47 1,880
Trade-in-value 12 (3,000) 0.32 (960)
Annual repair cost 1-12 2,000 6.81 13,620
33,540
Annualised equivalent `33,540/6.81 = `4,925
Machine Y-Life 6 years

Year Cost Discount Factor Discounted Cost
` `
Purchase price 0 13,000 1.00 13,000
Overhead cost 4 2,000 0.68 1,360
Trade-in-value 6 (3,000) 0.56 (1,680)
Annual repair cost 1-6 2,600 4.36 11,336
24,016
Annualised equivalent ` 24,016/4.36 = `5,508
Recommendation: Purchased ‘X’

Assumptions:
(i) Same performance, Capacity and speed.
(ii) No inflation.
(iii) 12-year estimates are as accurate as 6-year estimates.
(iv) Cash flow at the year end.
3. (a) Advantages of Target Costing?
(b) CELO Company has the capacity of production of 80,000 units and presently sells
20,000 units at `100 each. The demand is sensitive to Selling Price and it has been
observed that for every reduction of10 in Selling Price, the demand is doubled.
Required:
1. What should be the Target Cost at full capacity, if Profit Margin on Sale is 25%?
2. What should be the Cost Reduction Scheme if at present 40% of Cost is variable,
with same % of profit?
3. If Rate of Return desired is 15%, what will be the maximum investment at full
capacity?
Answer 3(a)
(i) Innovation: it reinforces top-to-bottom commitment to process and product
innovation, and is aimed at identifying issues to be resolved.
(ii) Competitive Advantage: it enables a Firm to achieve competitive advantage
over other Firms in the industry. The firm which achieves cost reduction targets
realistically stands to gain in the long run.
(iii) Market Driven Management: it helps to create a company’s competitive future
with market-driven management for designing and manufacturing products that
meet the price required for market success.
(iv) Real Cost Reduction: it uses management control systems to support and
reinforce manufacturing strategies, and to identify market opportunities that can
be converted into real savings to achieve the best value rather than simply the
lowest cost.
Answer 3(b)
1. Target Cost at Full Capacity
Selling Price per unit ` 100 ` 90 ` 80
Demand(units) 20,000 40,000 80,000=Full Capacity
Hence, Target Cost at Full Capacity = Sale Price less Profit Margin
= `80 less 25% thereon = ` 60 p.u.
2. Determination of Target Cost Reduction
(a) Since Present Price is `100 p.u. and Profit is 25% thereon, 45 × 80,000
Present Cost p.u. =75, of which 40% is variable. So, Fixed = `36 Lakhs
Cost is 60% of 75 = 45 p.u. So, Total Fixed Cost =
(b) Variable Cost at Full Capacity `24 Lakhs
= (40% of `75 p.u.) × 80,000 units =
(c) Estimated Cost at Full Capacity = Fixed Cost (constant `60 Lakhs
at all levels) +Variable Cost (a + b)
(d) Target Cost at Full Capacity = `60 p.u. for 80,000 units = `48 Lakhs
(e) Cost Reduction Target/Scheme ` 12 Lakhs
=Estimated Cost less Target Cost = (c - d)
3. Computation of Investment required

(a) Profit at full capacity = 25% of `80 = `20 p.u.× 80,000 units `16 Lakhs
(b) Since ROCE desired is 16%, Maximum Required Investment
= `16 Lakhs/ 16% `100 Lakhs
4. (i) State the problems associated with Throughput Accounting.
(ii) K Mnf.Ltd produces three products, X, Y and Z. The capacity of K Mnf. Ltd’s plant is
restricted by process alpha. Process alpha is expected to be operational for eight
hours per day and can produce 1,200 units of X per hour, 1,500 units of Y per hour, and
600 units of Z per hour.
Selling prices and material costs for each product are as follows.
Product Selling price Material cost Throughput contribution
` per unit ` per unit ` per unit
X 150 80 70
Y 120 40 80
Z 300 100 200
Conversion costs are ` 720,000 per day.
Required:
(a) Calculate the profit per day if daily output achieved is 6,000 units of X, 4,500 units
of Y and 1,200 units of Z.
(b) Calculate the TA ratio for each product.
(c) In the absence of demand restrictions for the three products, advise K Mnf. Ltd’s
management on the optimal production plan.
Answer: 4(i)
1. When throughput accounting is the driving force behind all production
scheduling, a customer that has already placed an order for a product, which
will result in a sub-optimal profit level for the manufacturing, may find that its order
is never filled.
2. The company’s ability to create the highest level of profitability is now dependent
on the production scheduling staff, who decides, what products are to be
manufactured and in what order.
3. Another issue is that all costs are totally variable in the long-run since the
management then, has the time to adjust them to long-range production
volumes.
(ii)
(a) Profit per day = throughput contribution – conversion cost
= [(`70 × 6,000) + (`80 × 4,500) + (`200 × 1,200)] – `7,20,000
= `3,00,000
(b) TA ratio = throughput contribution per factory hour / conversion cost per factory
hour
Conversion cost per factory hour = `720,000 / 8 = `90,000
Product Throughput contribution per Cost per factory hour TA ratio
factory hour
X `70 × 1,200 = `84,000 `90,000 0.93
Y `80 × 1,500 = `120,000 `90,000 1.33
Z `200 × 600 = `120,000 `90,000 1.33
(c) An attempt should be made to remove the restriction on output caused by

process alpha's capacity. This will probably result in another bottleneck emerging
elsewhere. The extra capacity required to remove the restriction could be
obtained by working overtime, making process improvements or product
specification changes. Until the volume of throughput can be increased, output
should be concentrated upon products Y and Z (greatest TA ratios), unless there
are good marketing reasons for continuing the current production mix.
Product X is losing money every time it is produced so, unless there are good
reasons why it is being produced, for example it has only just been introduced
and is expected to become more profitable, A Ltd should consider ceasing
production of X.
5. Short Notes
(i) Various steps and Advantages of cost control system.

(ii) The Variants of Backflush Accounting.
(iii) Characteristics and Principles of Re-engineering Process.
(iv) List the general principles relating to decision-making with Key Factor.
(v) Write short notes on Make or Buy Decisions.
Answer: 5
(i) Various steps and Advantages of cost control system.

Cost control involves the following steps and covers the various facets of the
management:
(a) Planning: First step in cost control is established plans/targets. The plan/target
may be in the form of budgets, standards, estimates and even past actual
may be expressed in physical as well as monetary terms. These serves as
yardsticks by which the planned objective can be assessed.
(b) Communication: the plan and the policy laid down by the management are
made known to all those responsible for carrying them out. Communication
is established in two directions; directives are issued by higher level of
management to the lower level for compliance and the lower level
executives report performances to the higher level.
(c) Motivation: the plan is given effect to and performances starts. The
performance is evaluated, costs are ascertained and information about
results achieved are collected and reported. The fact that costs are being
complied for measuring performances acts as a motivating force and makes
individuals endeavour to better their performances.
(d) Appraisal and reporting: the actual performance is compared with the
predetermined plan and variances, i.e. deviations from the plan are
analyzed as to their causes. The variances are reported to the proper level of
management.
(e) Decision making: the variances are reviewed and decisions taken. Corrective
actions and remedial measures or revision of the target, as required, are
taken.
The advantages of cost control are mainly as follows:
(a) Achieving the expected return on capital employed by maximising or
optimizing profit
(b) Increase in productivity of the available resources
(c) Reasonable price of the customers
(d) Continued employment and job opportunity for the workers
(e) Economic use of limited resources of production
(f) Increased credit worthiness
(g) Prosperity and economic stability of the industry
(ii) The Variants of Backflush Accounting.

There are a number of variants of the Back flush system, each differing as to the
‘trigger points’ at which costs are recognized within the cost accounts and thus
associated with products. All variants, however, have the following common features:
• The focus is on output – costs are first associated with output (measured as either
sales or completed production) and then allocated between stocks and costs of
goods sold by working back.
• Conversion costs (labour and overheads) are never attached to products until
they are complete (or even sold) – thus the traditional WIP account doesn’t exist.
Materials are recognized at different points according to the variant used, but
only to the extent of being either stock of raw materials or part of the cost of
stock of finished goods. Again, materials are not attached to WIP.
Two variants of the Backflush system are summarized below. Note that in each as
conversion costs (labour and overheads) are incurred they will be recorded in a
conversion cost (cc) account.
Variant 1
This has two trigger points (TP):
TP 1 - purchase of raw materials / components. A ‘raw and in process (RIP)’ account
will be debited with the actual cost of materials purchased, and creditors credited.
TP 2 - completion of good units. The finished goods (FG) account will be debited with
the standard cost of unit produced and the RIP and cc account will be credited with
the standard cost.
Under this variant, then, there will be two stock accounts:
• raw materials (which may, in fact, be incorporated into WIP)
• finished goods
Variant 2
This has only one trigger point – the completion of good units. The FG account is
debited with the standard cost of units produced, with corresponding credits to the
cc account and the creditors account.
Thus the cost records exclude:
• Raw materials purchased but not yet used for complete production
• The creditors for these materials (and any price variance) and there is only stock
account, carrying the standard cost of finished goods stock.
Other variants include those using the sale of complete goods units as a trigger point
for the attachment of conversion cost to unit -- thus there is no finished goods
account, just a raw materials stock account, carrying the materials cost of raw
materials, WIP and finished goods.
It should be seen that as stock of raw materials, WIP and finished goods are
decreased to minimal levels, as in a ‘pure’ JIT system, these variants will give the same
basic results.
(iii) Characteristics and Principles of Re-engineering Process

Characteristics of Re-engineering Process:
(i) several jobs are combined into one
(ii) often workers make decisions
(iii) the steps in the process are performed in a logical order
(iv) Work is performed, where it makes most sense
(v) Quality is built in.
(vi) manager provides a single point of contact
(vii) Centralized and decentralized operations are combined.
Seven Principles of BPR:

(a) Processes should be designed to achieve a desired outcome rather than
focusing on existing tasks.
(b) Personnel who use the output from a process should perform the process
(c) Information processing should be included in the work, which produces the
information
(d) Geographically disperesed resources should be treated; as if they are centralized
(e) Parallel activities should be linked rather than integrated
(f) Doers should be allowed to be self-managing
(g) Information should be captured once at source.
(iv) List the general principles relating to decision-making with Key Factor.
1. If Availability < Requirement, that Resource is called a Key Factor or Key Resource.
2. If Availability > Requirement, that Resource is called as an Idle Resource.
3. Key Resource and Idle Resource are mutually exclusive terms, i.e. they do not
refer to the same resource as such.
4. Key Resource should not be kept idle, and an Idle Resource will always have
spare capacity.
5. Key Resource has Opportunity Costs, while Idle Resources have no Opportunity
Costs.
6. A Key Resource, if kept idle, will erode/reduce Contribution.
7. For identifying Key Resource, Availability = Normal Resource Availability at
Normal Costs. Any additional resource availability at higher cost (e.g. additional
labour hours due to Overtime Work and Premium) will not be considered.
8. For identifying Key Resource, Requirement = Requirement at 100% capacity
Levels, i.e. Maximum Output.
9. In case of minimum production condition, minimum resource requirements should
be allocated independent of the Key factor Ranking priority. Additional Resource
requirements only should be allocated based on Key Factor Ranking.
10. In case of Multiple Products and Multiple Key Factors with difference in ranking
priority, Linear Programming (LPP) Techniques may be applied for Resource
Allocation decision.
11. Application of Key Factor Principles is subject to- (a) feasibility, and (b) Company
policy.
(v) Write short notes on Make or Buy Decisions.
In case of Make or Buy decisions, i.e. whether to produce a component / product
internally, or buy it from outside, Marginal Costing and Opportunity Costing
approaches are adopted in decision-making. The following are the relevant
considerations in Make or Buy decisions -
1. Quality of goods supplied by Supplier.
2. Reasonable certainty of the Supplier meeting the delivery dates, i.e.
Relating to Timeliness.
Suppliers 3. Availability of more than one Supplier to reduce the risk involved in
buying.
4. Lead Time involved in receiving the materials versus time involved in
own production.
5. Supplier Stability, i.e. whether the Supplier will support the Firm in the
long-run also.
Relating to 6. Availability of skilled labour, technical know-how and capability to
Labour make the product /component.
7. Labour relations - any adverse effect on labour relations if it is
decided to buy instead of making.
8. Cost of labour redundancies, if any.
9. Cost of Special Machineries to be installed in making the component.
10. Possible use of released capacity and facility as a result of buying
Relating to instead of making.
Capacity 11. Possibility of expanding the existing capacity or creating extra
capacity (e.g. Overtime Work, Second Shift)
12. Process of making - whether confidential or patented or a general
process.
13. Technical obsolescence associated with the component- whether
investment in machinery is risky or not.
14. Seasonal demand of Components, leading to costs of inventory
Other holding.
Factors 15. Price Stability and possibility of escalations in the Price of
Components purchased.
16. Possibility of adverse Foreign Exchange Rate Fluctuations in respect
of Imported Components.
17. Availability of transport and other infrastructure facilities for
procuring the component from outside.
18. Behavior of cost of make and cost of buy in the long run.
Cost Comparison
Cost of Make Cost of Buy
Variable Costs Direct Purchase Costs
+ Specific Fixed Cost (if any) + Purchase Related Costs like Buying Commission,
+ Opportunity Cost (in case of Transportation, etc.
full capacity operations) + Opportunity Cost if any (e.g. Purchase of different
quality Raw Material, leading to reduction in Selling
Price of Finished Product).
Decision will be as under-
• If Cost of Make < Cost of Buy, then MAKE.
• If Cost of Make = Cost of Buy, the Firm is indifferent. (Non-cost factors to be
considered)
• If Cost of Make > Cost of Buy, then BUY.
SECTION - B
STRATEGIC COST MANAGEMENT TOOLS AND TECHNIQUES
6 (a). VCPL Co. produces and sells 4 types of dolls for children. It also produces and sells a
set of dress kit for the dolls. The company has worked out the following estimates for
the next year -
Doll Estimated Standard Standard Estimated
Demand(Units) Material Cost Labour Cost Sales per unit
A 50,000 `20 `15 `60
B 40,000 `25 `15 `80
C 35,000 `32 `18 `100
D 30,000 `50 `20 `120
Dress Kit 2,00,000 `15 `5 `50
To encourage the sale of Dress Kits, a discount of 20% in its price is offered if it were to
be purchased along with the doll. It is expected that all the customers buying dolls will
also buy the Dress Kit.
The Company's Factory has effective capacity of 2,00,000 Labour Hours per annum on
a single shift basis and it produces all the products on that basis. The Labour Hour Rate
is `15. Overtime of Labour has to be paid at double the normal rate.
Variable Cost works out to 40% of Direct Labour Cost. Fixed Costs are `30 Lakhs per
annum.
There will be no inventory at the end of the year. Prepare a conservative estimate of
the year's profitability.
6 (b). Sri Company Ltd. manufactures and sells in a year 20,000 units of a particular
product to definite customers at a price of `100 per unit. The Firm has a capacity to
produce 25,000 units of the product per annum. To produce beyond 25,000 units per
annum, it will have to install a New Equipment at a cost of `15 Lakhs. The Equipment
will have a life span of 10 years and will have no residual value. There is an offer from
a Client to purchase 10,000 units of the product regularly at a price of `90 per unit.
The order, if accepted, will have to be over and above the existing level of
production of 20,000 units.
The Cost Structure of the Product (per unit basis) is Direct Materials - `30, Direct
Labour- `20, Variable Overhead - `10 and Profit - `20. The present total Fixed
Overheads is `4,00,000.
During the coming year, it has been estimated that the cost of Direct Material, as
compared to the current year will increase by 10%. Because of certain wage
agreement Direct Labour Cost will increase by 25%. Fixed OH will increase by 10%. If
the new order for 10,000 units is accepted, Fixed Overheads will increase further by `
60,000 due to increased administrative charges.
You are required to analyse whether the concern should accept the order or instead
of that try to secure order for the balance unused capacity, as available now,
through some Sales Promotion Expenses which will be `50,000 per annum. Ignore
financial charges for the new investment.
Answer: 6(a)
1. Computation of Labour Overtime premium

Particulars Doll A Doll B Doll C Doll D Dress Kit
(a) Direct Labour Cost per hour `15 `15 `18 `20 `5
(b) Labour Rate per hour (given) `15 `15 `15 `15 `15
(c) Hours required per unit (a ÷ b) 1 hour 1 hour 1.2 1.33 0.33
hours hours hours
(d) Sales Demand (units) 50,000 40,000 35,000 30,000 2,00,000
(e) Total Hours required (c x d) 50,000 40,000 42,000 40,000 66,667
Total Hours required for all the dolls and dress kits is 2,38,667 hours. Since only 2,00,000
hours are ava1lable, the balance of 38,667 hours will be from Overtime work.
Premium Amt. = 38,667 hrs × `15 = `5,80,000
2. computat1on of Discount offered

(a) Total Sale of all Dolls = 50,000 + 40,000 + 35,000 + 30,000 = 1,55,000 units
(b) Hence, Dress Kits sold separately (i.e. without discount) 45,000 units
= 2,00,000 - 1,55,000 =
(c) Total Discount offered = 1,55,000 Dress Kits × `50 × 20% = `15,50,000
This discount is subtracted from the Gross Continuation of Dress Kits, in the statement of
profitability.
3. Computation of Contribution and Profits (in `)

Particulars Doll A Doll B Doll C Doll D Dress Kit
(a) Selling Price p.u 60.00 80.00 100.00 120.00 50.00
(b) Variable Costs p.u
Materials 20.00 25.00 32.00 50.00 15.00
Labour 15.00 15.00 18.00 20.00 5.00
VOH(40% of Lab.) 6.00 6.00 7.20 8.00 2.00
Total Variable Costs 41.00 46.00 57.20 78.00 22.00
(c) Contribution p.u (a- b) 19.00 34.00 42.80 42.00 28.00
(d) Sales Demand (units) 50,000 40,000 35,000 30,000 2,00,000
(e) Total Contribution (c x d) 9,50,000 13,60,000 14,98,000 12,60,000 56,00,000
(f) Discount (15,50,000)
(g) Net Contribution (e - f) 9,50,000 13,60,000 14,98,000 12,60,000 40,50,000
Total Net Contribution from all Dolls and Dress Kits from above `91,18,000
Less: Fixed Costs (`30,00,000 + OT Premium `5,80,000) `35,80,000
Estimated Net Profit for the Sales Demand `55,38,000
Answer: 6(b)
1. Present and Revised Cost and Profit Structure

Particulars Present Revised
(a) Sale Price p.u. Given = `100
(b) Direct Material Cost p.u. Given = `30 `30 + 10% = `33
(c) Direct Labour Cost p.u. Given = `20 `20 + 25% = `25
(d) VOH p.u. Given = `10 No Change = `10
(e) Variable Cost pu (b + c +d) `60 ` 68
(f) Fixed OH (Total) Given =`4,00,000 ` 4,00,000 + 10% = `4,40,000
2. Options available to the company

Option Description
I Continue at present level of 20,000 units
II Incur Additional SOH and sell upto full capacity = 20,000 + 5,000 = 25,000
units
III Buy New Equipments, accept special offer of 10,000 units at ` 90 pu =
20,000+10,000 = 30,000 units
IV Accept both Options II and III, and sell 20,000 + 5,000 + 10,000 = 35,000 units
The profits from these options are analysed below.
3. Profit Ana1Iysis under different options

Particulars Option I Option II Option III Option IV
(a) Sale Quantity 20,000 units 25,000 units 30,000 units 35,000 units
(b) Sale Price pu `100 `100 20,000 units at `100 25,000 units at
& `100 &
10,000 units at `90 10,000 units at `90
(c) Sale Revenue `20,00,000 `25,00,000 `29,00,000 `34,00,000
(a × b)
(d) VC at `68 pu `13,60,000 `17,00,000 `20,40,000 `23,80,000
(WN 1)
(e) Contribution `6,40,000 `8,00,000 `8,60,000 `10,20,000
(c- d)
(f) Fixed Costs
Given (WN 1f) `4,40,000 `4,40,000 `4,40,000 `4,40,000
Additional SOH - `50,000 - `50,000
Additional AOH - - `60,000 `60,000
Department on - - `1,50,000 `1,50,000
New Equipment
Total Fixed Costs `4,40,000 `4,90,000 `6,50,000 `7,00,000
(g) Profit (e - f) `2,00,000 `3,10,000 `2,10,000 `3,20,000
(h) Rank I Priority (iv) (ii) (iii) (i)
Note: Depreciation on New Equipments = `15,00,000/10 years = `1,50,000.

Decision: Option IV is preferable, due to maximum profits. If it is not possible, the Firm
may choose Option II.
7. AUES manufactures two products P and Q. Both the products pass through the
Company's two Departments, A and B. the market demand for a month is 2,500 units
of P and 2,000 units of Q. The Company has a normal capacity of 600 hours in
Department A and 520 hours in Department B per month. Overtime is acceptable upto
50% of normal hours in each department. Details relating to the products and
departments are –
Product P Q Department A B
Direct Material Cost `10 p.u. `5 p.u. Direct Labour time required –
P (minutes per unit) 6 12
Q (minutes per unit) 18 12
Fixed OH per `18,000 `6,400 Direct Wage Rate per hour –
month Normal Time `10 `12
Overtime `15 `18
If the Company is not able to fulfill the demand for want of capacity, the balance
quantity of products can be sold by buying from a sub-contractor, who has agreed to
supply Product P at `18 and Product Q at `12 per unit.
1. Calculate the quantity of each product to be manufactured and / or to be sub-
contracted in a most economical way of fulfilling the market demand.
2. Present a statement showing the Total Costs involved in your solution above.
Answer: 7
1. Identification of Kev Factor

Particulars Department A Department B
(a) Normal Time Available Given 600 hours 520 hours
(b) Possible Overtime at 50% 50% of (a) 300 hours 260 hours
(c) Total Time Available (a+ b) 900 hours 780 hours
(d) Time Read for P Production P (2500 units) 2500 × 6/60 = 2500 × 12/60 =
250 hours 500 hours
(e) Time Read for Q Production Q (2000 units) 2000 × 18/60 = 2000 × 12/60 =
600 hours 400 hours
(f) Total Time required (d + e) 850 hours 900 hours
(g) Whether Key Factor (See Note) Yes Yes
Note: A Resource is considered as a Key Factor when its normal availability is less than
its requirement. For this purpose, only the Normal Time as per (a) is compared with Total
Requirement as per (f). Overtime is not considered here because - (a) Overtime is only a
possibility, not compulsory, and (b) Costs undergo an increase during overtime.
2. Computation of Contribution per unit of product: (Production during Normal Time)

Particulars Product P Product q
(a) Cost of Buying per unit ` 18.00 `12.00
(b) Variable Cost of Make:
Materials `10.00 `5.00
Labour - Department A `10 × 6/60 = `1.00 `10 x 18/60 = `3.00
Labour - Department B `12 × 12/60 = `2.40 `12 x 12/60 = `2.40
Total Costs of own make `13.40 `10.40
(c) Savings per unit, if made in ` 4.60 `1.60
Normal Time
Observation: Since there is a savings per unit if made during normal time, the company
should first prefer own production of both products and if limited by capacity, may sub-
contract (buy) the balance quantity.
3. Effect of overtime work on Contribution per unit of the Products
Particulars Product P Product Q
(a) Savings per unit, if made during Normal Time ` 4.60 ` 1.60
(b) Effect of Overtime premium: 50% of Normal Costs
Labour - Department A 5 × 6/60 = `0.50 `5 x 18/60 =`1.50
Labour - Department B 6 × 12/60=`1.20 `6×12/60 =`1.20
(c) Savings per unit, if made in Overtime `2.90 (`1.10)
Note: Since the Normal Time Labour Cost has already been considered in the
computation of Savings per unit, the Overtime Premium is the only incremental cost
and is hence relevant.
Observation based on effect of Overtime Work:
(i) Normal Time Work: Both products P and Q can be produced during normal time as
cost of make is less than cost of buy. There is a saving of `4.60 and `1.60 per unit,
on own production.
(ii) Overtime Work: The effect of overtime work differs for the products as under -
• Product P can be produced during Overtime Work, either in Department A or
Department Borin both. There will be a saving of `2.90 p.u., due to own production,
even if Overtime Work is involved in both Departments A and B.
• Product Q can be produced during Overtime Work, either in Department A only
(saving of `0.10) or in Department B only (saving of `0.40), but not in both. If
Overtime Work is required in both departments for Product Q, it is better to sub-
contract the same.
4. Computation of Ranking Priority (Savings per Labour Hour in Departments A and B)

Particulars Product P Product Q
(a) Savings per unit, if made during normal time `4.60 `1.60
(b) Hours required in Department A 6/60 hours 18/60 hours
(c) Savings per hour in Department A= (a ÷ b) `46 per hour `5.33 per hour
(d) Ranking for production in Department A I II
(e) Hours required in Department B 12/60 hours 12/60 hours
(f) Savings per hour in Department B = (a + e) `23 per hour `8.00 per hour
(g) (g)Ranking for production in Department B I II
Note: Since ranking priorities on the Key Factors are the same, the solution can be
obtained as given below. In case of different priorities on Multiple Key Factors, Linear
Programming Techniques may be used for resource allocation.
5. Key Factor AIIocation and Production Decision

Particulars Department A Department B
(a) Normal Time Available 600 hours 520 hours
(b) Possible Overtime at 50% 300 hours 260 hours
(c) Total Time Available (a+ b) 900 hours 780 hours
Time Allocation: Hours Utilised Hours Utilised
(see Table below)
Stage 1: Make - Normal Time P= 2500 2500 ×6/60 =250 2500 ×12/60 =
units hours 500 hours
Stage 2: Make - Normal Time Q= 100 100 × 18/60 = 30 (bal.fig.)=20hours
units hours
Stage 3: Make -Overtime in B Q= 1067 (bal. fig.) = 320 1067 × 12/60 =
units hours 213 hours
Stage 4: Sub-contract Q = 833 No further production possible since OT
units is involved in both Depts. A and B
which is not economical.
Stage Explanation
Product P has maximum preference for own production. Hence it will be
1 produced first. Time utilised therefore = 250 hours and 500 hours of Normal Time
in A and B. Balance time left will be 350 hours in Department A and 20
hours in Department B.
Least Normal Time available is 20 hours in Department B. This will be utilised in
2 production of Q, equivalent to 20 ÷ 12/60 hours = 100 units. This will utilise 100
units × 18/60 = 30 hours in Department A.
Balance Normal Time is 320 hours in Department A. This will be utilised in
production of Q, equal to 320 ÷ 18/60 hours = 1067 units. This will utilise 1067 ×
3 12/60 = 213 hours (in Overtime) in Dept B. Since this is within the permissible
overtime limit of 260 hours, this production is feasible. [Note: If available
overtime is less than 213 hours, production of Q will be restricted to that level.]
Now both Departments require overtime operation for Product Q. Since this is
4 costlier when compared to sub- contracting, the Firm should purchase the
balance requirements of Product Q.
6. Statement of Contract Costs

Particulars Decision Quantity Cost per unitTotal Cost
Product P Make in Normal Time 2,500 units (WN 2b) `13.40 `33,500.00
Product Q Make in Normal Time 100 units (WN 2b) `10.40 `1,040.00
Product Q Make - Overtime in B 1,067 units (Note) `11.60 `12,377.20
Product Q Sub-Contract 833 units (WN 2a) `12.00 `9,996.00
Fixed Costs Given= `18,000 + `6,400 `24,400.00
`81,313.20
Note: Cost of making Q by working Overtime in Department B = Normal Time Cost + OT
Premium of Product Q in Department B = `10.40 + `1.20 (WN 3b) = `11.60 per unit.
8 (a). You are the Management Accountant of a medium-sized company. You have
been asked to provide budgetary information and advice to the Board of Directors for
a meeting where they will decide the pricing of an important product for the next
period.
The following information is available from the records:
Previous Current
period period
`'000 `'000
Sales: [1,00,000 units at `13 each) 1,300 (l,06,000 units at `13 each) 1,378.0
Costs 1,000 1,077.4
Profit 300 300.6
You find that between the previous and current periods there was 4% general cost
inflation and it is forecast that costs will rise a further 6% in the next period. As a
matter of policy, the firm did not increase the selling price in the current period
although competitors raised their prices by 4% to allow for the increased costs. A
survey by economic consultants was commissioned and has found that the demand
for the product is elastic with an estimated price elasticity of demand for 1.5. This
means that volume would fall by 1-(1/2) times the rate of real price increase.
Various options are to be considered by the Board and you are required:
(a) to show the budgeted positions if the firm maintains `13 selling price for the next
period (when it is expected that competitors will increase their prices by 6%);
(b) to show the budgeted position in the firm also raise its price by 6%;
8 (b).ABC Limited manufactures product Min addition to other products by using the same
machines in Departments A and B. The cost data are as under:
Direct Material P : 4 kg @ `6 per kg used in Dept. A;
Q : 8 kg @ ` 2.50 per kg added in Dept B
Direct Labour: 2 hours @ ` 4 per hour in Dept. A;
3 hours @ 3 per hour in Dept. B
Overheads:
Basis of overheads recovery Dept. A per rupee of Dept. B per direct
direct material P (`) labour hour (`)
Recovery rates at 80% of practical
capacity
Variable 0.80 2.00
Fixed 2.20 3.00
Depreciation component of fixed
overhead rate 0.80 0.10
Other relevant data:
Net plant and equipment value 70,00,000 1,20,000
Total deprecation per month 80,000 1,000
The working capital requirement of Product M based on a target volume of output of
1,000 units per month is estimated at `1,24,000 per month is estimated at `24,000 per
annum.
Required:
(A) Indicate the bottom line selling price of Product M assuming that:
(i) Price is adequate to ensure contribution equivalent to 30% on investment
made.
(ii) The product is a new product about to be introduced in market.
(B) Calculate the selling price in a situation where Product is well established in the
market so as to yield return of 18% on investment.
Answer: 8 (a)
Price elasticity of demand (% in quantity demand ÷ % increase in price) = 1.5
When the prices fall by 4%, demand increased by 4% × 1.5 = 6%
When the prices fall by 6%, demand increased by 6% × 1.5 = 9%
Determination of fixed and variable costs:

Adjust current period cost of previous period cost =1077.4 ÷ (1+ 4% of 1 or 1.04)=1036
Using high and low method to determine fixed/variable cost split:

Period Units ('000) Cost (` in thousands)
Current 106 1,036
Previous l 00 1,000
6 36
Variable cost per unit = `36 ÷ 6 = ` 6.00
Fixed cost per unit = ` 1 ,000 - (100 × 6) = ` 400
Variable cost per unit next period: = ` 6 × (1 + 4% of 1) × (1 + 6% of 1)= `6.6144
Fixed cost for next period:= ` 4,00,000 × (1+ 4% of 1) × (1 + 6% of 1) = ` 4,40,960
Budgeted Position. Selling Price ` 13.00

Sales: 1,06, 000 units × (1+ 9% of 1) × `13 = `15,02,020
Variable cost : 1,06,000 × (l + 9% of 1) × ` 6.6144 = 7,64,228
Contribution 7,37,792
Fixed cost 4,40,960
Profit 2,96,832
(b) Budgeted Position. Selling `13.00 + 6%

Sales: 1.06,000 units × (1 + 6%) ×` 13 = `14,60,680
Variable cost: 1,06,000 units × ` 6.6144 = 7,01,126
Contribution 7,59,554
Fixed cost 4,40,960
Profit 3,18,594
Answer 8 (b):
(A) It is given in the question that contribution equivalent to 30% on investment is

adequate. Therefore, for arriving at the bottom line price of product M, it is
necessary to work out the cost of production and capital employed (consisting of
net fixed assets and working capital).
Statement showing cost of production of product M
Direct material - Dept. A (P - 4 × ` 6) ` 24.00 44
- Dept. B (Q- 8 × ` 2.5) 20.00
Direct labour - Dept. A (2 × ` 4) 8 17
- Dept. B (3 × ` 3) 9
Variable overheads: - Dept. A (` 24 ` 0.8) 19.20
- Dept. B (3 hrs × 2) 6.00 25.20
Total variable costs 86.20
Fixed overheads - Dept. A (`24 × 2.20) 52.80
- Dept. B (3 hrs ` 3) 9.00 61.80
Total cost of production 148.00
Statement showing capital employed

Dept. A Dept. B
Depreciation per unit of M ` 24 x 0.8 = 19.20 3 hrs. x 0.1 = 0.30
Net Fixed Assets ` 70, 00,000 ` 1,20,000
Depreciation p.a. 9,60,000 12,000
NFA for 12, 000 units p.a. 16,80,000* 36,000@
Total N.F.A.
(`16,80,000 + ` 36,000) = `17,16,000
Working Capital 1,24,000
Total capital employed 18,40,000
(A) (i) Bottom line price (contribution 30% on investment)= `18,40,000 x 0.3 = `5,52,000
Contribution per unit = `5,52,000 ÷ ` 12,000 = `46
Bottom line price as per (a)= `86.20 + 46.00 = `132.20
Bottom line price as per
(ii) i.e., for new product (variable cost only) = 86.20.
(B) Selling price of the well established product = Total cost + 18% on investment
= `148 + 18% of (18,40,000 + 12,000) = `175.60.
*(`70 lakhs ÷ ` 9.60 lakhs) × 19.20 x 12,000
@(`1.20 lakhs ÷ 0.12 lakhs) × 0.30 × 12,000
9. (a) What do you mean by Dual-Rate Transfer Pricing System?

(b) A Company is organized on decentralized lines, with each manufacturing division
operating as a separate profit centre. Each Division Manager has full authority to
decide on sale of division's output to outsiders or to other divisions. Division A
manufactures a single standardized product. Some output is sold externally and
remaining is transferred to Division X where n is a sub-assembly in the manufacture
of that Division's product. The unit cost of Division A and Division X is as follows:
Particulars Division A Division X
Transfer from Division A to X - ` 42.00
Direct Material `6.00 ` 35.00
Direct Labour `3.00 `4.50
Direct Expenses `3.00 -
Variable Manufacturing Overheads `3.00 `18.00
Fixed Manufacturing Overheads `6.00 `18.00
Variable Selling & Packing Expenses `3.00 `2.50
Total `24.00 `120.00
Division A sold 40,000 units annually at the Standard Price of `45 in the external
market. In addition to the external sales 10,000 units are transferred annually to
Division X at an internal price of `42 per unit. Variable Selling and Packing
Expenses are not incurred by the Supplying Division for the internal transfer of the
product. Division X incorporates the transferred goods into a more advanced
product. The Manager of Division X disagrees with the basis used to set the Transfer
Price. He argues that Transfer Price should be made at Variable Cost, since he
claims that his Division is taking output that Division A should be unable to sell at a
price of `45.
He also submitted a report of the relationship between Selling Price and demand, to
support of his disagreement.
The report of customer demand at various Selling Prices for Division A and for
Division X is as follows –
Division A Selling Price per unit `30 `45 `60
Demand 60,000 units 40,000 units 20,000 units
Division X Selling Price per unit `120 ``135 `150
Demand 15,000 units 10,000 units 5,000 units
The Company has sufficient capacity to meet demand at various Selling Prices.
Internal transfer demanded units will be decided by X Division.
Required:
1. To calculate Divisional Overall Profitability, if Division A transfers demanded
units to X at a price of `42.
2. To calculate Divisional and Overall Profitability, if Division A transfers
demanded units to X at Variable Cost.
3. In place of Internal Transfers, Division A can sell 10,000 units of its product in a
new external market without affecting existing market, at a price of `32 per unit
and X Division can purchase these units at the rate of `31 in the open market.
Calculate Company's Profit by following the above strategies.
Answer 9(a):
1. Dual-Rate Transfer Pricing uses two separate Transfer Prices to price each
inter-divisional transaction, as under
Dual Rate Transfer Pricing Method
Debit Cost in Recipient Division Credit Income in Transferring Division
Cost = Relevant Costs, Income = Market Price, or Full Cost
i.e. Variable Cost + Opportunity plus mark-up
Cost, if any (whether or not Intermediate Product
is marketable)
Under this method, Company Profits = Total of Divisional Profits Less Inter-
Divisional Mark-up,
2. Advantages:
(a) Incentive to Transferring Division: The Transferring Division Manager is
motivated to transfer the Intermediate Product internally, since each
unit transferred generates a profit (due to mark-up).
(b) No Unjust Enrichment: If the Transfer Price is set at the Transferring
Division's Marginal Cost for the Intermediate Product, that division will
not have any contribution from internal transfers. All the total
contribution from inter-divisional trading will be assigned to the
Recipient Division. Such unjust enrichment is avoided through the use
of mark-up.
(c) Optimal Decisions: Since Relevant Cost is used as the second Transfer
Price, (for debiting Cost in Recipient Division) the Transfer Pricing
system automatically promotes goal congruence by leading to
optimal decisions.
3. Disadvantages:
(a) Confusing: Use of different Transfer Prices causes confusion, particularly
when more than two divisions are involved. (b) Artificial: Dual Transfer
Prices are considered to be artificial.
(c) No incentive: Fixed Price with mark-up protects Transferring Divisions
from competition. It gives them little incentive to improve their
productivity.
(d) Misleading: Dual Transfer Prices can result in misleading information and
create a false impression of divisional profits. There is a possibility of
double-counting of profits. At the extreme, all divisions may report
profits, when the Company as a whole is losing money.
Answer 9 (b)
1. Computation of Variable Costs per unit in different cases
Particulars Dir Matl Dir Lab Dir Exps Var POH Var SOH Total VC
(a) Divn A (for `6.00 `3.00 `3.00 `3.00 `3. 0 `18.00
Ext Sale)
(b) Divn A `6.00 `3.00 `3.00 `3.00 - `15.00
(for Int Tfr)
(c) Divn X `35.00 `4.50 - `18.00 `2.50 `60.00
(Own VC)
Note: Fixed Costs of - (i) Divn A= (50,000 units × `6) = `3,00,000,

(ii) Divn X = (10,000 units × `18)= `1,80,000.
2 . Determination of Internal Transfer quantity,i.e. Demand by X division

When TP = `42 When TP = VC = `15 p.u
Qty SP Own TP Cn Total Cn Qty SP Own TP Cn Total Cn
p.u VC p.u p.u p.u VC p.u p.u
5,000 `150 `60 `42 `48 `2,40,000 5,000 `150 `60 `15 `75 `3,75,000
10,000 `135 `60 `42 `33 `3,30,000 10,000 `135 `60 `15 `60 `6,00,000
(maximum)
15,000 `120 `60 `42 `18 `2,70,000 15,000 `120 `60 `15 `45
`6,75,000
(maximum)
So, Demanded Internal Transfer Qty So, Demanded Internal Transfer Qty
=10,000 units = 15,000 units
3. Profit Statement at various Transfer Prices and Output levels

Transfer from A to X at TP = ` 42 p.u Transfer from A to X at TP = VC `15
Particulars Division A Division X Division A Divn X
Sale Transfer Sale Sale Transfer Sale
(a) Qtty (units) 40,000 10,000 10,000 40,000 15,000 15,000
(b) Sale Price p.u. `45 `42 `135 `45 `15 `120
(c) VC p.u.: Own `18 `15 `60 `18 `15 `60
Transfer in - - `42 - - `15
Total VC pu `18 `15 `102 `18 `15 `75
(d) Contribution pu `27 ` 27 `33 `27 - `45
(e) Total `10,80,000 `2,70,000 `3,30,000 `10,80,000 - `6,75,000
Contribution
`13,50,000 `3,30,000 `10,80,00 `6,75,000
(ax d)
(f) Fixed Cost (`3,00,000) (`1,80,000) (`3,00,000) (`1,80,000)
(WN1)
(g) Profit (e - f) `10,50,000 `1,50,000 `7,80,000 `4,95,000
(h) Company Profit (10,50,000 + 1,50,000)= `12,00,000 (7,80,000 + 4,95,000) =`12,75,000
Note: Both Departments have enough capacity to meet Internal & external demands.
4. Profit Statement when Division X procures its materials from external market
Particulars Division A Division X
(a) Sale Quantity (units) Given 40,000units New 10,000 units 10,000 units
(b) Selling Price p.u `45 `32 `135
(c) Variable Cost p.u `18 `18 (60 + 31) = `91
(d) Contribution p.u `27 `14 ` 44
(e) Total Contribution `10,80,000 `1,40,000
(a x d) `4,40,000
`12,20,000
(f) Fixed Cost (WN 1) `3,00,000 `1,80,000
(g) Profit `9,20,000 `2,60,000
(h) Company Profit (9,20,000 + 2,60,000) = `11,80,000
10 (i). Explain how CVP based Sensitivity Analysis, can help Managers with uncertainty.
10 (ii). MN Agarwal owns a Glft-5hop, a Restaurant and a Lodge in Shillong. Typically, he

operates these only during the season period of 4 months in a year. For the past
season the occupancy rate in the Lodge was 90% and level of activity in case of Gift-
Shop and Restaurant at 80%. The relevant data for the past season were as under-
(Amounts in `)
Gift-Shop Restaurant Lodge
Amount % Amount % Amount %
1. Receipts/ Sales 48,000 100 64,000 100 1,80,000 100
2. Expenditure:
Cost of Sales 26,400 55 35,200 55 - -
Supplies 2,400 5 6,400 10 14,400 8
Insurance & Taxes 1,920 4 6,400 10 36,000 20
Depreciation 2,880 6 8,000 12(1/2) 39,600 22
Salaries 4,800 10 4,800 7(1/2) 25,200 14
Electricity Charges 960 2 3,200 5 13,500 7(1/2)
Total 39,360 82 64,000 100 1,28,700 71(1/2)
3. Profit 8,640 18 - - 51,300 28(1/2)
Additional information:
(a) Cost of Sales and Supplies vary directly with the occupancy rate In case of Lodge
and level of activity In case of Gift Shop and Restaurant.
(b) Insurances and Taxes and Depreciation are for the entire period of twelve months.
(c) Salaries paid are for the season period except a Chowkidar for the Lodge who is
paid for the full year at `400 per month.
(d) Electricity Charges include Fixed Charges of `640, `1,920 and `9,900 for Gift-5hop,
Restaurant and Lodge respectively.
The balance amount varies directly with occupancy rate in case of Lodge and
level of activity in case of Gift-Shop and Restaurant. Fixed Electric Charges are for
the season except in case of Lodge where `6,900 is for the season and `3,000 for
the entire period of twelve months.
Agarwal is interested in increasing his Net Income. The following options are under his
consideration -
(a) To continue the operations during the season period only by inserting
advertisement in newspapers thereby occupancy rate to reach 100% in case of
Lodge and 90% level of activity in respect of Gift-Shop and Restaurant. The costs of
advertisement are estimated at `12,000).
(b) To continue operations throughout the entire period of twelve months comprising
season period of four months and off season period of eight months. The
occupancy rate is expected at 90% and 40% during season period and off-season
period respectively in case of the Lodge. The room rents are bound to be reduced
to 50% of the original rates during off season period. The level of activity of Gift-
Shop and Restaurant is expected at 80% and 30% during season and off season
period respectively but 5% discount on the original rates will have to be offered
during off-season period.
Which option is profitable? As a Cost Accountant would you like to suggest him
any other alternative based upon the above figures, which can be adopted to
earn more net profit? (Use Incremental Revenue and Cost Approach.)
Answer: 10(i)
CVP based Sensitivity Analysis help Managers to cope with uncertainty.
1. Sensitivity Analysis refers to analysis of the change in one factor on the other
related factors. For example, what will be the effect of a 10% increase in Selling
Price, on Sales Volume and Profits?
2. Sensitivity Analysis focusses on how a result will be changed if the original
estimates of the underlying assumptions change.
3. CVP-based Sensitivity analysis will help top Management to get answers to
questions like - What will be the Total Profit if the Sales Mix is changed to include
more of Product L and less of Product M? or What will be the Profit if Fixed Costs
increase by 30% and Variable Costs decline by 5%?, etc.
4. CVP-based Sensitivity analysis can be performed in a Spreadsheet package, i.e.
computerized CVP Models. Computers will quickly show changes both
graphically and numerically based on data keyed in.
5. Managers can study various combinations of changes in Selling Prices, Fixed
Costs, Variable Costs and Product Mix, and can react quickly without waiting for
formal MIS Reports from the Financial Officer.
6. Therefore, use of CVP-based Sensitivity analysis, helps Managers to cope up with
uncertainty.
Answer: 10(ii)
1. Additional Revenues and Costs under Option 1: Operate during Season only (`)
Particulars Gift Shop Restaurant Lodge Total
1. Additional Given = 48,000 at Given = 64,000 at Given = 1,80,000 at
Revenue 80%. 80%. 90%.
So, for extra 10% So, for extra 10% So, for extra 10% = 34,000
= 48,000 x (10/80) =64,000 x (10/80)= = 180,000 x (10/90)
-
= 6,000 8,000 =20,000
2. Addnl Costs
(a) Cost of Sales 6,000 × 55% 8,000x55% =4,400 Nil 7,700
=3,300
(b) Supplies 6,000 × 5% = 300 8,000 x 10% = 800 20,000 X 8% = 1,600 2,700
(c) Electricity (960- 640) × (10/ (3,200- 1,920)× (13,500- 9,900) x
Charges 80) =40 (10/80) = 160 (10/90)= 400 600
(d)Advertisement 12,000
Sub-Total 23,000
3. Addnl Profit 11,000
2. Additional Revenues and Costs under Option 2: Operate during all 12 months
(amounts in `)
Particulars Gift Shop Restaurant Lodge Total
1. Additional 48,000 × 2 × 64,000 × 2 × 1,80,000 x 2 ×
Revenue (30%/80%)× 95% (30%/80%)× 95% (40%/90%) × 50% = 1,59,800
= 34,200 = 45,600 80,000
2. Addnl Cost
(a) Cost of Sales 36,000× 55%=19,800 48,000×55%=26,400 Nil 46,200
(b) Supplies 36,000×5% =1,800 48,000x10%= 4,800 1,60,000x8%=12,800 19,400
(c) Salaries 4,800 × 2 = 9,600 4,800 x 2 = 9,600 (25200-4800)x2= 40,800 60,000
(d)Eiectricity
-Fixed 640 x 2 = 1,280 1,920 × 2 = 3,840 6,900x2 = 13,800 18,920
(e)Eiectricity
-Variable (960-640)x2x (3,200 -1,920)x 2 x (13500- 9900) × 2 × 4,400
(30%/80%)=240 (30%/80%) = 960 (40%/90%) = 3,200
Sub-Total 1,48,920
3. Addnl Profit 10,880
3. Decision: Both options are desirable since there is an Additional Net Income. Option 1
is slightly better than Option 2 by `120. However, it is suggested that the Firm should
adopt a combination of both options in which case, the Total Additional Profit will be
`11,000 + `10,880 = `21,880.
11(a). HRO Cycles Ltd has 2 divisions, A and B which manufacture bicycle. Division A
produces the bicycle frame and Division B assembles rest of the bicycle on the frame.
There is a market for both the sub-assembly and the final product. Each division has
been treated as a profit center. The Transfer Price for the sub-assembly has been set at
the long run average market price. The following data are available to each division -
Estimated Selling Price for Final Product `3,000 p.u.
Long-run Average Market Price for sub-assembly `2,000 p.u.
Incremental Costs of completion sub-assembly in Division B `1,500 p.u.
Incremental Costs in Division A `1,200 p.u.
Required:
1. If Division A's maximum capacity is 1,000 units per month and sales to the
intermediate market are now 800 units. Should 200 units be transferred to Division B
at the long run average price basis?
2. What would be the Transfer Price, if the Manager of Division B should be kept
motivated?
3. If outside market increases to 1,000 units, should Division A continue to transfer 200
units to Division B or sell entire production to outside market?
11(b). MNC Company assembles bicycles. This year's expected production is 10,000 units.
MNC makes the Chains for Its bicycles. Its Accountant reports the following costs for
making 10,000 Bicycle Chains-
Particulars Costs Total for
per unit 10,000 units
Direct Materials `4.00 `40,000
Direct Manufacturing Labour `2.00 `20,000
Power and Utilities (variable) `1.50 `15,000
Inspection, Set-Up and Materials Handling `2,000
Machine Rent `3,000
Allocated Fixed Costs of Plant Administration, Insurance,etc. `30,000
Total Costs `1,10,000
MNC received an offer from an outside vendor for the supply of any number of chains
at `8.20 per Chain. The following additional information is available on MNC's
operations -
• Inspection, Set-up and Materials Handling Costs vary with the number of batches in
which the Chains are produced. MNC currently produces the Chains in batches of
1000 units. It estimates that 10 batches are required for meeting the expected
production requirements.
• MNC rents the machine used to make the Chains. If it chooses to outsource the
Chains, machine rent can be avoided.
Required:
1. Should MNC accept the Vendor's offer for 10,000 units? What is the net gain/ (loss)?
What is the maximum price payable to the Vendor?
2. Suppose the Chains were purchased outside, the facilities where the Chains are
currently made will be used to upgrade the bicycles by adding Mud Flaps and
Reflectors. As a result, the Selling Price of the Bicycles can be increased marginally by
`20. The Variable Costs of the upgrade would be 18 and additional Tooling Costs of
`16,000 would be incurred. Should MNC make or buy the Chains, at the anticipated
production level of 10,000 units? What is the maximum price payable to the Vendor in
this situation?
3. MNC's Sales Manager is concerned that the estimate of 10,000 units may be high and
believes that only 6,200 units can be sold. Production will be cut back, freeing up work
facilities and space. This space can be used to add the Mud Flaps and Reflectors
whether MNC outsources the Chains or makes them in-house. At this lower output,
MNC will produce the chains in 8 batches of 775 units each. Should MNC purchase the
Chains from the Outside Vendor?
Answer:11(a)
1. When External Sales = 800 units
(a) Since External Sales of Sub-Assembly by Division A is only 800 units, there is a spare
capacity of 200 units, which does not involve any Opportunity Costs.
(b) Cost of Final Product from Company angle = Variable Costs of A + Variable Costs
of B = `1,200 + `1,500 = `2,700 p.u. Since Final Selling Price (3,000) is above cost
`2,700), there is a Net Contribution of `300 p.u. of the Final product.
Hence, 200 units may be transferred by Division A.
2. Range of Transfer Prices will be as under -
(a) Minimum TP (from Divn A viewpoint) = Variable Costs only = `1,200.
(b) Maximum TP (from Divn B viewpoint) = Least of- (i) Market Price of Sub-Assembly
[or] (ii) Ability to pay = `2,000 [or] (`3,000 - `1,500) = `1,500.
(c) A Transfer Price in the range of `1,200 to `1,500 will be agreeable to both
Managers.
(d) To keep the Manager of Division B motivated, the profit earned `300 per unit may
be shared equally between the two Divisions. Hence, the appropriate Transfer
Price for motivating Division B may be Variable Cost of Division A + 50% Share of
Profit to be given to Division A = `1,200 + `150 = `1,350.
3. When External Sales = 1,000 units
(a) If External Sales by Division A increases to 1,000 units, Internal Transfer would
involve Opportunity Costs. Hence Relevant Cost of Internal Transfer = Variable
Costs `1,200 + Opportunity Costs `800 (being Contribution foregone on External
Sales) = `2,000.
(b) Cost of Final Product from Company angle = Relevant Costs of A + Relevant Costs
of B = `2,000 + `1,500 = `3,500 p.u. Since Final Selling Price (`3,000) is below
Relevant Cost (`3,500), there is a Net Loss of `500 p.u. of the Final Product. Hence,
Internal Transfers are not worthwhile. Division A has to sell the entire output of
1,000 units to the outside market only.
Answer 11(b):
1. Computation of Relevant Costs of own production
Particulars Nature and Computation `
Direct Materials Variable and Relevant = `4 x 10,000 units 40,000

Direct Manufacturing labour Variable and Relevant = 2 × 10,000 units 20,000
Power and Utilities Variable and Relevant = 1.50 × 10,000 units 15,000
Inspection, Set up etc. Batch Related Production Costs= Specific 2,000
and Relevant (given)
Machine Rent Specifically incurred =relevant 3,000
Fixed Costs Allocated and Irrelevant Nil
Total Relevant Costs for own production 80,000
,
Average Relevant Cost per unit for own production = (`80,000/10,000)= `8 per unit
Since Cost of Buying `8.20 p.u. is higher than Average Relevant Cost `8, own
production is preferable. Hence, the Company should not accept the Vendor's
offer.
Maximum Price Payable = Relevant Cost = `8.00 per unit.
2. Effect of Alternative use of facilities:
Additional Benefit from upgradation = 10,000 units x (`20 - 18) = `20,000
Less: Fixed Costs incurred specifically = `16,000
Net Additional Benefit = `4,000
Since this benefit will be foregone due to own production of Chains, the relevant
cost of own production will then be 80,000 (as per WN 1) + `4,000 (Opportunity
Cost)= `84,000.
Average Relevant Cost per unit for own production=`84,000/10,000 units= `8.40 per
,
unit
Since Cost of Buying `8.20 p.u. is less than Average Relevant Cost `8.40, buying the
chains is preferable now.
Maximum Price Payable = Relevant Cost = `8.40 per unit.
3. Computation of Relevant Costs of Own Production, with Revision in Production Estimates

Particulars Nature and Computation `
Direct Materials Variable and Relevant = `4 x 6,200 units 24,800
Direct Manufacturing labour Variable and Relevant = `2 x 6,200 units 12,400
Power and Utilities Variable and Relevant = `1.50 × 6,200 units 9,300
Inspection, Set up etc. Batch Related Costs = (2,000 + 10 batches)× 8 1,600
batches
Machine Rent Specifically incurred = relevant 3,000
Fixed Costs Allocated and Irrelevant Nil
Total Relevant Costs for own production `51,100
• Average Cost per unit for own ,production = (`51,100/6,200 units)= `8.24 per unit
• Since Cost of Buying `8.20 p.u. is less than Average Relevant Cost `8.24, buying the
chains is preferable.
• Maximum Price Payable = Relevant Cost = `8.24 per unit
12(a). A Company following Standard Marginal Costing system has the following Interim
Trading Statement for the quarter ending 30’th June, which reveals a loss off `17,000,
detailed below-
Income:
Sales 4,99,200
Closing Stock (at Prime Cost) 18,000 5,17,200
Costs:
Direct Material 1,68,000
Direct Labour 1,05,000
Variable Overhead 42,000 3,15,000
Fixed Overhead 1,20,000
Fixed Administration OH 40,000
Variable Distribution OH 19,200
Fixed Selling OH 40,000 2,19,200
Total Costs 5,34,200
Loss 17000
Additional Information is as follows:
1. Sales for the quarter were 1,200 units. Production was 1,400 units, of which 100
units were scrapped after complete manufacture. The factory capacity is
estimated at 2,000 units.
2. Because of low production, Labour Efficiency during the quarter is estimated to be
20% below normal level. You are required to analyse the above and report to the
Management, giving the reasons for the loss.
12(b). The standard cost sheet of XYZ Ltd. based on the normaI output of 30,000 units for a
quarter is as under-
Direct Materials 4 kg at `2 per kg `8
Direct Wages 6 hours at `4 per hour `24
Overheads 50% of Direct Wages `12
Standard Profit `6
Selling Price `50
The Budgeted Fixed OH is `1,44,000 per quarter and it is included in the Overhead
Costs given above.
On the basis of the budgeted activity of 36,000 units, the Company estimated its Q-2
profit as under-
`
Direct Materials 2,88,000
Direct Wages 8,64,000
Overheads 4,32,000
Total Costs 15,84,000
Profit (balancing figure) 2,16,000
Sales 18,00,000
"The cost records revealed the following actual data for the second quarter of the year
- Production was 25,000 units. Direct Materials consumed 96,000 kg at `2.25 per kg.
Direct Wages paid 1,60,000 hours at `4.10 per hour, out of which 6,000 hours being idle
time were not recorded on production. Overheads were `3,32,000 out of which `
1,50,000 were fixed. 25,000 units were sold at an Average Price of `51.50 per unit.
Required -
1. Prepare a statement of Actual Profit/Loss for Q-2.
2. Analyse the variances and present an Operating Statement reconciling the
Budgeted Profit with Actual Profit.
Answer:12(a)
1. Analysis of the Profit and Loss Account to compute Standards
Particulars Total(`) Standards Per Unit

Sales 4,99,200 `4,99,200/ 1,200 units = `416
Less: Cost of Production:
Materials 1,68,000 1,68,000 /1,400 units =`120
Labour Cost (at 20% below normal level) 1,05,000 (1,05,000 × 80%)/1,400 units = 60
VOH(at 20% below normal efficiency) 42,000 (42,000 × 80%)/1,400 units = 24
Less: Closing Stock (120 + 60) ×100 units (18,000) (see Note)
Gross Contribution 2,02,200 `212
Less: Variable Distribution OH 19,200 19,200 / 1,200 units =`16
Net Contribution 1,83,000 `196

Less: Fixed Costs(1,20,000 +40,000+40,000) 2,00,000
Loss (17,000)
Note: Production 1,400 units - Sales 1,200 units - Scrapped 100 units = 100 units
2. Assumptions /Working Notes in analyzing Variances

(a) Sales Variances: Budgeted Capacity = 2,000 units is taken as Budgeted Sales
Quantity. Also, it is assumed that
Budgeted Sale Price = Actual Sale Price = `416 per unit.
• Sales Price Variance = Nil.
• Sales Volume Variance (Effect on Contribution)
= (2,000 units- 1,200 units) × 196 = `1,56,800A
(b) Material Cost Variances: In the absence of information, Material Cost Variances =
Nil.
(c) Labour Cost Variances:
• Labour Rate Variance = Nil.
• Labour Efficiency Variance = 1,05,000 × 20% Efficiency Loss = `21,000A
(d) Variable OH Cost Variances:
• VOH Expenditure Variance = Nil.
• VOH Efficiency Variance = 42,000 x 20% Efficiency Loss = `8,400A.
(e) FOH Cost Variances: In the absence of information, FOH Cost Variances = Nil.
(f) Effect of Abnormal Loss: Variable Cost of Output scrapped after complete
manufacture = (120 + 60 + 24) = 204 × 100 units = `20,400A.
(g) Stock Valuation Effect: Since Marginal Costing System in use, the inventories are to
be carried at total variable cost. However, since the Company has valued its
inventories on Prime Cost basis, i.e. excluding VOH, to that extent, profits will be
under--stated. Hence, effect of VOH not included in Stock Valuation = 24 × 100
units = `2,400A.
3. Explanation of factors causing Loss during the period
Particulars ` `
Budgeted Contribution for 2,000 units at `196 3,92,000
Less: Budgeted Fixed Costs (1,20,000 + 40,000 + 40,000) 2,00,000
Budgeted Profit 1,92,000
Less: Effect of Variances
Sales Volume Variance 1,56,800A
Labour Efficiency Variance 21,000A
VOH Efficiency Variance 8400A
Abnormal/Loss I Scrap 20,400A
Stock Valuation Difference 2,400A (2,09,000)
Loss for the period (17,000)
Alternative treatment: In the above calculations, Labour Efficiency has been taken to
have an impact on VOH, i.e. time related OH also. If such impact is not considered in
VOH, Standard Contribution; per unit will be `196 (instead of `190). All calculations will
stand modified accordingly.
[[
Answer: 12(b)
1.Statement of Actual Profit for Q - 2
Particulars Computation ` `
Sales 25,000 units at 51.50 per unit 12,87,500

Less: Materials 96,000 kg at `2.25 per kg 2,16,000
Labour
1,60,000 hours at `4.10 per hour 6,56,000
Variable OH
{3,32,000 - 1,50,000) 1,82,000
Fixed OH 12,04,000
Given 1,50,000
Actual profit 83,500
2. Sales Variances (Total Approach)

Col.(1):BQ × BP Col.(2):AQ × BP Col.(3):AQ × AP
36,000 uts × 50 25,000 uts × 50 25,000 uts × 51.50
= `18,00,000 = `12,50,000 = `12,87,500
Sales Volume Variance + Sales Price Variance
=18,00,000 - 12,50,000 = 12,50,000 - 12,87,500
= 5,50,000A = 37,500F
Total Sales Variance
= 18,00,000 – 12,87,500 =`5,12,500A
3. Materials Variances (Total Approach)

Col.(1):SQ × SP Col.(2):AQ × SP Col.(3):AQ × AP
(25,000 × 4) × 2 96,000 kg x 2 96,000 kg × 2.25
= `2,00,000 = `1,92,000 = `2,16,000
Usage Variance + Price Variance
=2,00,000- 1,92,000 =1,92,000 - 2,16,000
= `8,000 F = `24,000 A
Total Material Cost Variance
= 2,00,000 – 2,16,000 = `16,000
Note: Since there is a difference between Normal capacity and Budgeted Capacity,
and absorption is based on the Normal Output, Reconciliation is done only under
Absorption Costing. NP Ratio = Profit = `6/`50 =12%
Under Absorption Costing Approach, Effect on Profit due to Sales Volume = Net Profit
foregone = SW × Budgeted NP Ratio = 5,50,000 A × 12% = `66,000 A.
4. Labour Variances
Col.(1): SH × SR Col.(2): Net AH × SR Col.(3): Total AH × SR Col.(4): AH × AR
(25,000 uts x 6 hrs) (1,60,000- 6,000) hrs × 1,60,000 hrs x 4 1,60,000 hrs x 4.10
x 4 = 6,00,000 4 =6,16,000 = 6,40,000 = 6,56,000
Labour Net Efficiency Labour Idle Time Labour Rate Variance
Variance Variance
= 6,00,000- 6,16,000 + = 6,16,000- 6,40,000 + =6,40,000 – 6,56,000
= `16,000A = `24,000A = `16,000A
Total Labour Cost Variance = 6,00,000 – 6,56,000 = `56,000A
5. Analysis of VOH and FOH

Total OH = `12 × 30,000 units = 3,60,000. This is analysed for the following computations-
Particulars Fixed OH Variable OH
(a) Amount of OH (given) 1,44,000 3,60,000- 1,44,000 = 2,16,000
(b) Budgeted Output (Normal 30,000 units 30,000 units
capacity)
(c) OH Rate per unit (a ÷ b) `4.80 per unit `7.20 per unit
(d) Budgeted Hours 30,000 units x 6 = 1,80,000 hours 30,000 units x 6 = 1,80,000 hrs
(e) OH Rate per hour (a ÷ d) 0.80 per hour 1.20 per hour
6. VOH Variances
Col.(1): SH x SR Col.(2):Net AH x SR Col.(3):Total AH x SR Co1.(4): AVOH
(25,000 uts x6 hrs) x (1,60,000 - 6,00) hrs x 1,60,000 hrs x 1.20 (Given)
1.20 1.20 = `1,92,000 `1,82,000
= `1,80,000 = `1,84,800
VOH Net Efficiency Variance + VOH Idle Time Variance+ VOH Expenditure Variance
=1,80,000-1,84,000 =1,84,800-1,92,000 =1,92,000 – 1,82,000
= `4,800A = `7,200A = `10,000F
Total VOH Cost Variance = 1,80,000 -1,82,000 = `2,000A
7. FOH Variances
Col. (1): AO x Col. (2): Net AH x Col. (3):Total AH Col. (4): BFOH Col.(5):
SR SR x SR AFOH
25,000 uts x (1,60,000 - 600) hrs 1,60,000 hrs x (given) (given)
4.80 x 0.80 0.80
= `1,20,000 = `1,23,200 =`1,28,000 `1,44,000 `1,50,000
Net Efficiency Variance +Idle Time Variance + Capacity Variance +Expenditure Variance
=1,20,000 - =1,23,200 - 1,28,000 =1,28,000 - 1,44,000 = 1,44,000 - 1,50,000
1,23,200
= ` 3,200 A =`4,800 A = `16,000 A = `6,000 A
Volume Variance = 1,20,000 - 1,44,000 = 24,000 A + Expenditu Variance b/fd
as above = 6,000 A
Total FOH Cost Variance = 1,20,000 - 1,50,000= `30,000 A
8. Operating Statement / Reconciliation Statement (in `):

Particulars Method 2: Absorption Costing
Approach
Budgeted Profit 36,000 units ×6 = 2,16,000
Effect of Sales Variances
+/- Sales Volume Variance Effect on Profit 5,50,000 A × NP Ratio 12%= (66,000)
Sales Price Varianc 37,500
Effect of Cost Variances
+/- Material Variances Usage 8,000
Price (24,000)
Labour Variances Net Efficiency (16,000)
Idle Time (24,000)
Rate (16,000)
VOH Variances Net Efficiency (4,800)
Idle Time (7,200)
Expenditure 10,000
FOH Variances Net Efficiency (3,200)
Idle Time (4,800)
Capacity (16,000)
Expenditure (6,000)
Actual Profit 83,500
Note: Budgeted Profit ± Sales Volume Variance impact on Profit, i.e. `2,16,000 - `66,000
Adv. = `1,50,000, is called Standard Profit on Actual Sales, i.e. 25,000 units at `6 per unit.
13. ABG & Co. provides you with following data:
Total overhead ` 30,10,500

Total Machine hrs. 2,23,000
Production :
Product L 10,000 units
Product M 3,000 units
Product N 2,10,000 units
Direct cost per unit (`) Selling price per unit (`)
Product L 20 `50
Product M 20 45
Product N 9 45
Mr Krishnan is the Cost Accountant of this firm and he says that profit of this company
is `38,74,500. The overhead has been distributed at the rate of `13.50 per machine
hour and each unit produced in the company is presumed to have used one
machine hour. Mr Krishnan has reported that all the units are profit-making.
Mr. Srinivasan is Director Finance of ABG & Co. He is a dynamic personality and is
eager to find out ways to improve profit. He wants to implement Activity based
Costing. With this objective in mind he has given a project to Mr Gupta to introduce
ABC system. Mr. Gupta has held numerous interviews and surveys. He has gathered
the following information:
(i) The overhead is caused by following activities.
(a) Set-up ...... 1,37,600 set-ups to be charged at the `13,76,000

rate of `10 per set-up.
(b) Machining ...... 51,800 machine hours to be charged @ `7,77,000
`15 per machine hours
(c) Engineering 24, 750 engineering hrs. to be charged@ `20 `4,95,000
per hour
(d) Organisation costs cannot be linked with products `3,62,500
`30,10,500
(ii) Based on the basis of factory records Mr. Gupta has established that activities
have been assigned to different products as follows:
Set-up Machining Engineering
(hrs.) (hrs.) (hrs.)
Product L 8,000 6,000 1 , 500
Product M 3,600 3,800 2,250
Product N 1,26,000 42,000 21,000
1,37,600 51,800 24,750
Mr Gupta has recently left the or anisation and Mr Srinivasan, who was keeping an
overall watch over the project is very hopeful olthe validity of the data. He expects
you to answer following questions:
(i) What are the profits made by different products, when conventional costing
method of overhead distribution is used and overall profit is ` 38,74,500 ?
(ii) (a) What will be the profit of different products, if ABC costing is used presuming
that work done by Mr Gupta is quite reliable ?
(b) Can we discontinue any product, if discontinuing a loss-making product does
not harm the organisation otherwise? What will be increase in profit, if loss-making
product is discontinued?
(c) Reasons for difference in results shown by connectional costing and Activity-
based Costing System.
Answer: 13
Product-wise profit position using conventional costing
(i.e.,overhead rate per machine hour)
Product L Product M Product N
(10,000 units) (3,000 units) (2,10,000 units) Total
Per Total Per Unit Total Per Unit Total
Unit
Product
Revenue 50.00 5,00,000 45.00 1,35,000 40.00 84,00,000 90,35,000
Product Costs:
Direct 20.00 2,00,000 20.00 60,000 9.00 18,90,000
Overhead@
`13.50 per unit 13.50 1,35,000 13.50 40,500 13.50 28,35,000 51,60,500
Total 33.50 3,35,000 33.50 1,00,500 22.50 47,25,000
1,65,000 34,500 36,75,000 38,74,500
(ii)(a) Product-wise profit position using Activity-based Costing System
Product L Product M Product N Total
(10,000 units) [3,000 units) (2,1 0,000 units)
Per Total Per Total Per Total
unit unit unit
Product Revenue 50 5,00,000 45 1,35,000 40 84,00,000 90,35,000
Product Cost : Direct 20 2,00,000 20 60,000 9 18,90,000
Overhead charge
for different activities
Set-up(Refer to note) 8 80,000 12 36,000 6 12,60,000
Machining (Refer to note 2) 9 90,000 19 57,000 3 6,30,000
Engineering: (Refer to note 3 30,000 15 45,000 2 4,20, 000

3)
Total 40 4,00,000 66 1,98,000 20 42,00,000 47,98,000

Product line
income/loss 1,00,000 (63,000) 42,37,000
Organisational
Costs 3,62,500
38,74,500
(b) From the table given above it is apparent that product M can be
discontinued, because it is a loss-making product. The suggestion is based on
the presumption that there will not be adverse consequences of this decision
otherwise. The total profit will increase by `60,000, if product M is
discontinued.
(c) Reasons for difference
The overhead distribution was not based on activity consumption in
conventional costing. Due to this reason product N’s position was poorly
shown. Product M was shown as making profit whereas it in making loss of
`60,000. Even position of product L was not properly shown. It is making a
profit of `1,00,000, whereas in conventional costing, it was shown making a
profit of `1,65,000. Illogical overhead distribution was the main reason for
distorted results.
Working Notes
1. Set- Up Product L 8,000 x `10 ₹ 80,000
Product M 3,600 x 10 36,000
Product N 1,26,000 x 10 12,60,000
13,76,000
2. Machining Product L 6,000 x `15 `90,000
Product M 3,800 x 15 57,000
Product N 42,000 x 15 6,30,000
7,77,000
3. Engineering Product L 1,500 x `20 `30,000
Product M 2,250 x 20 45,000
Product N 21,000 x 20 4,20,000
4,95,000
14 (i) As a Cost Accountant, you decide to experiment by applying the principles of ABC to
the four products currently made and sold by your company. Details of the four
products and relevant information are given below for one period:
Product A B C D
Output in units 120 100 80 120
Costs per units:
Direct material (`) 40 50 30 60
Direct labour (`) 28 21 14 21
Machine hours (per unit) 4 3 2 3
The four products are similar and are usually produced in production runs of 20 units
and sold in batches of 10 units.
The production overhead is currently absorbed by using a machine hour rate, and the
total of the production overhead for the period has been analysed as follows :
Machine department costs(rent, business, rates, depreciation and supervision) `10,430
Set-up costs `5,250
Stores receiving `3,600
Inspection/Quality control `2,100
Materials handling and dispatch `4,620
You have ascertained that the 'cost drivers' to be used are as listed below for the
overhead costs shown:
Cost Cost Driver
Set-up costs Number of production runs
Stores receiving Requisitions raised
Inspection/Quality control Number of production runs
Materials handling and dispatch Orders executed
The number of requisitions raised on the stores, was 20 for each product and the
number of orders executed as 42, each order being for a batch of 10 of a product.
You are required:
(a) to calculate the total costs for each product if all overhead costs are absorbed on
a machine hour basis.
(b) to calculate the total costs for each product, using activity - based costing.
(c) to calculate and list the unit product costs from your figures in (a) and (b) above,
to show the difference and to comment briefly on any conclusions which may be
drawn which could have pricing and profit implications.
14(ii). AXE Ltd wants to implement a JIT Programme, with the impact on the three types of
Stocks as given below. Find out the Cost Savings to the Company, due to
implementation of JIT with the foIIowing Information-
Particulars Present Situation, i.e. before JIT After JIT
Sales Value ` 12,00,00,000 Same as present
Percentage of Costs Materials 40%, Materials 44%,
to Sales Value Conversion 30% Conversion 32%
Stockholding Raw Materials:1 month Raw Materials: 25% less than
WIP: 0.5 month present
Finished Goods: 0.5 month WIP: 50% less than present
Finished Goods: 40% less
than present
Percentage of Materials 90%, Materials 90%,
Completion of WIP Conversion 75% Conversion 75%
Stock-related Costs
are as under -
Raw Materials
Fixed `2,00,000 15% less than present
Variable `0.09 per Rupee of Stock held `0.05 per Rupee of Stock held
WIP Fixed `3,00,000 20% less than present
Variable ` 0.04 per Rupee of Stock held `0.02 per Rupee of Stock held
Finished Goods
Fixed `2,50,000 40% less than present
Variable `0.02 per Rupee of Stock held `0.01 per Rupee of Stock held
Financial Charges due to Impact of stockholding on working capital requirement =18%
per annum on the value of stocks held.
Answer: 14 (i)
(a) Statement showing total cost of different products, assuming absorption of
overhead on a machine hour basis:
Product Product Product Product
A B C D
Direct material 40 50 30 60
Direct labour 28 21 14 21
Overhead* 80 60 40 60
Cost of production per unit 148 131 84 141
Output in units 120 100 80 120
Total cost (`) 17,760 13,100 6,720 16,920
*Rate per machine hr.=26,000/1300hrs= `20;

Machine hours=480+300+160+360 = 1,300
(b)
Cost ` Drivers No. Cost/unit of Driver
Set-ups 5,250 Prod. Runs 21* `250
Stores/receiving 3,600 Requisitions 80@ 45
Inspection/quality 2,100 Prod. Runs 21 100
Handling/dispatch 4,620 Orders 42 110
* Production runs= (120 + 20) + (100 + 20) + (80 + 20) + (120 + 20)
@ Requisitions = 20 for each product or 80 in total.
It may be pointed out that machine department cost of `10,430 will continue
to be absorbed on a machine hour basis as before. The relevant absorption
rate will be `10,430 ÷ 1,300 = `8.02 per machine hour.
Total Cost (`)
A B C D
Direct material 4,800 5,000 2,400 7,200
Direct labour 3,360 2, 100 1,120 2,520
Set-ups 1,500 1,250 1,000 1,500
Stores/receiving 900 900 900 900
Inspection/ quality 600 500 400 600
Handling/ dispatch 1,320 1,100 880 1,320
Machine deptt. costs 3,851 2,407 1,284 2,888
16,331 13,257 7,984 16,928
Cost per unit 136.09 132.57 99.80 141.07
(c) Cost per unit (a) 148.00 131.00 84.00 141.00
Cost per unit (b) 136.09 132.57 99.80 141.07
Difference (11.91) 1.57 15.80 0.07
The total overheads which are spread over the four products have been
apportioned on different bases, causing the product cost to differ
substantially in respect of products A and C. A change from traditional
machine hour rate to an activity-based system may have effect on:
(i) Pricing and profits to the extent that pricing is based on a ‘cost-plus'
approach
(ii) Reported profits to the extent that stock levels fluctuate between reporting
periods.
Answer 14(ii):
Particulars Before JIT Programme After JIT Programme

Computation ` Computation `
1. Sales Value 12,00,00,000 Given 12,00,00,000
2. Raw 12,00,00,000x40% (12,00,00,000× 44% RM

Material RM Cost 40,00,000 Cost x1/12 33,00,000
Stock x 1/12 Stockholding) less 25%
Stockholding
3. RM Related
Costs
Fixed Given 2,00,000 `2,00,000 less 15% 1,70,000
Variable `40,00,000 × `0.09 3,60,000 `33,00,000 × 0.05 1,65,000
Interest `40,00,000 ×18% 7,20,000 `33,00,000 x 18% 5,94,000
Sub-Total 12,80,000 9,29,000

Cost Saved = `3,51,000
4. WIP Stock 12,00,00,000× 12,00,00,000x63.6%
(Note) 58.5% WIP 29,25,000 WIP Cost × 0.5/12 15,90,000
Cost x 0.5/12 Stockholding × 50%
Stockholding
5.WIP Related
Costs
Fixed Given 3,00,000 3,00,000 less 20% 2,40,000
Variable `29,25,000 × 0.04 1,17,000 15,90,000 × `0.02 31,800
Interest 29,25,000 ×18% 5,26,000 22,80,000 × 18% 2,86,000
Sub-Total 9,43,000 5,58,000

Cost Saved = `3,85,000
6.Finished 12,00,00,000x70% 12,00,00,000 × 76% FG 22,80,000
Goods Stock FG Cost × 0.5/12 35,00,000 Cost × 0.5/12 Stock
Stockholding holding × 60%
7.FG Related
Costs
Fixed Given 2,50,000 `2,50,000 less 40% 1,50,000
Variable `35,00,000 x 0.02 70,000 `22,80,000 x 0.01 22,800
Interest 35,00,000 x18% 6,30,000 `22,80,000 x 18% 4,10,400
9,50,000 5,83,200
Cost Saved = 3,66,800
Note: WIP Cost is computed as under -
Before: (Materials 90% Complete × 40%)+(Conversion 75% Complete x 30%)
= 36% + 22.5% = 58.5% on Sales.
After: (Materials 90% Complete × 44%) +(Conversion 75% Complete x 32%)
= 39.6% + 24% = 63.6% on Sales.
Total Cost Savings = `3,51,000 + `3,85,500 + `3,66,800= `11,03,300
15(a).A Company manufactures a single product, which requires two

components. The Company purchases one of the components from two
Suppliers: A Ltd and B Ltd.
The price quoted by A Ltd is `180 per hundred units of the component and it is
found that on an average 3% of the total receipt from this Supplier is
defective. The corresponding quotation from B Ltd is `174 per hundred units,
but the defective would go up to 5%. If the defectives are not detected, they
are utilized in production causing a damage of `180 per 100 units of the
component.
The Company Intends to introduce a system of inspection for the components
on receipt. The Inspection cost is estimated at `24 per 100 units of the
component. Such an inspection will be able to detect only 90% of the
defective components received. No payment will be made for components
found to be defective In Inspection.
Required:
1. Advise whether Inspection at the point of receipt is justified?
2. Which of the Suppliers should be asked to supply? Assume total
requirement is 10,000 units of the component.
15 (b) Describe some business situation where Pareto Analysis can be applied.
Answer: 15(a)
1. Computation of Cost per 100 units of good components without Inspection

Particulars A Ltd B Ltd
(a) Purchase Price `180 × 10,000/100= `18,000 `174 x 10,000/100=17,400
(b) Production Damage (18,000 × 3%) =540 (17,400 × 5%) = 870
(c) Total Costs (a + b) `18,540 `18,270
(d) Number of good (10,000- 300) = 9,700 units 10,000 – 500) = 9,500 units
components
(e) Cost per 100 good `18,540/9,700 units × 100 `18,270/9,500 units × 100
components (c ÷ d) =191.13 =192.31
2. Computation of Cost per 100 units of good components with Inspection
Particulars A Ltd B Ltd
(a) Total Units Required 10,000 units 10,000 units
(b) Defective Units 3% of 10,000 = 300 units 5% of 10,000 = 500 units
(c) Defectives not 30 units 50 units
detected (10%)
(d) Defectives Detected 270 units 450 units
(e) Components paid for 9,730 units 9,550 units
(a-d)
(f) Purchase Price (9,730 × 180) ÷100 (9,550 × 174) ÷ 100
=`17,514 =16,617
(g) Inspection Cost (10,000 × 24) ÷100 = (10,000 × 24) ÷ 100 =2,400
`2,400
(h) Production Damage (30 x 180) ÷100 = `54 (50 × 174) ÷ 100 =87
(i) Total Costs (f + g + h) `19,968 `19,104
(j) Cost per 100 good (`19,968/9,700units) (`19,104/9,500 units)
components ×100=`205.86 ×100 =`201.09
Conclusion:
• Inspection at the point of receipt is not advantageous, due to additional
cost per 100 good components, i.e. (`205.86 - `191.13) = `14.73 in case of
A Ltd, and (`201.09- `192.31) = `8.78 in case of B Ltd.
• Purchase from A Ltd is cheaper, as there is cost saving of `1.18 per 100
good components.
Answer: 15(b)
Pareto analysis may be applicable in the presentation of Performance indicators data

through selection of representative process characteristics that truly determine or
directly or indirectly influence or conform the desired quality or performance result or
outcome. The Pareto Analysis is generally applicable to the following business
situations:
(i) Pricing of a product:
• In the case of a firm dealing with multi products, it would not be possible for it to
analyse cost-profit- price -volume relationships for all of them. In practice, in case
of such firm approximately 20% of products may account for about 80% of total
sales revenue. Pareto Analysis is used for analysing the firm estimated sales
revenues from various products and it might indicate that approximately 80% of
its total sales revenue is earned from about 20% of its products.
• Such analysis helps the top management to delegate the pricing decision for
approximately 80% of its products to the lower levels of management, thus
freeing themselves to concentrate on the pricing decisions for products
approximately 20% which are essential for the company’s survival.
• Thus, a firm can adopt more sophisticated pricing methods for small proportion of
products that jointly accounts for approximately 80% of total sales revenue. For
the remaining 80% of the products which account for 20% of total sales revenue
the firm may use cost based pricing method.
(ii) Customer Profitability analysis:
• Instead of analysing products, customers can be analysed for their relative
profitability to the organisation.
• Again it is often found that approximately 20% of customers generate 80% of the
profit. There will always be some customers who are less profitable than others,
just as some products are less profitable than others.
• Such an analysis is useful tool for evaluation of the portfolio of customer profile
and decision making such as whether to continue serving a same customer
group, what is the extent of promotion expenses to be incurred.
(iii) ABC analysis- Stock Control: Another application of Pareto analysis is in stock
control where it may be found that only a few of the goods in stock make up
most of the value. In practice approximately 20% of the total quantity of stock
may account for about 80% of its value. The outcome of such analysis is that by
concentrating on small proportion of stock items that jointly accounts for 80% of
the total value, a firm may well be able to control most of monetary investment in
stocks.
(iv) Application in Activity Based Costing: in activity Based costing it is often said that
20% of an organisation cost drivers are responsible for 80% of the total cost. By
analysing, monitoring and controlling those cost drivers that cause most cost, a
better control and understanding of overheads will be obtained.
(v) Quality Control:
• Pareto analysis seeks to discover from an analysis of defect report or customer
complaints which “vital few” causes are responsible for most of the reported
problems.
• Often, 80% of reported problems can usually be traced to 20% of the various
underlying causes. By concentrating once efforts on rectifying the vital 20%,
one can have the greatest immediate impact on product quality.
• The Pareto Analysis indicates how frequently each type of failure (defect)
occurs. The purpose of the analysis is to direct management attention to the
area where the best returns can be achieved by solving most of quality
problems, perhaps just with a single action.
16. Short Notes on:

(a) Advantages of Uniform costing
(b) Traditional vs. Activity Based Costing
(c) Reasons for the Implementation of ERP by Companies
(d) Types of Benchmarking
(e) Six Sigma process in Quality Control
Answer:
(a) Advantages of Uniform costing:
Main advantages of a Uniform Costing System are summarised below:
(i) It provides comparative information to the members of the organisation /
association which may by them to reduce or eliminate the evil effects of
competition and unnecessary expenses arising from competition.
(ii) It enables the industry to submit the statutory bodies reliable and accurate
data which might be required to regulate pricing policy or for other purposes.
(iii) It enables the member concerns to compare their own cost data with that of
the others detect the weakness and to take corrective steps for improvement in
efficiency.
(iv) The benefits of research and development can be passed on the smaller
members of the association lead to economy of the industry as a whole.
(v) It provides all valuable features of sound cost accounting such as valued and
efficiency of the workers, machines, methods, etc., current reports of
comparing major cost items with the predetermined standards, etc.
(vi) It serves as a prerequisite to Cost Audit and inter firm comparison.
(vii) Uniform Costing is a useful tool for management control. Performance of
individual units can be measured against norms set for the industry as a whole.
(viii) It avoids cut-throat completion by ensuring that competition among member
units proceeds on healthy lines.
(ix) The process of pricing policy becomes easier when Uniform Costing is adopted.
(x) By showing the one best way of doing things, Uniform Costing creates cost
consciousness and provides the best system of cost control and cost
presentation in the entire industry.
(xi) Uniform costing simplifies the work of wage boards set up to fix minimum wages
and fair wages for an industry.
(b) Traditional vs. Activity Based Costing
Activity-Based costing (ABC) is a system that focuses on activities as the fundamental
cost objects and uses the cost of these activities for computing the costs of products.
There are several reasons why managers are preferring ABC to traditional system.
(i) In the traditional system cost analysis is done by product. In ABC managers focus
attention on activities rather than products because activities in various
departments may be combined and costs of similar activities ascertained, e.g.
quality control, handling of materials, repairs to machines etc. If detailed costs
are kept by activities, the total company costs for each activity can be obtained,
analysed, planned and controlled.
(ii) Managers manage activities and not products. Changes in activities lead to
changes in costs. Therefore, if the activities are managed well, costs will fall and
resulting products will be more competitive.
(iii) Allocating overhead cost to production based on a single cost driver (allocation
base, such as unit basis, percentage of material, percentage of prime cost,
labour hour rate, machine hour rate etc.) can result in an unrealistic product cost
because the traditional system fails to capture cause-and-effect relationships. To
manage activities better and to make wiser economic decisions, managers need
to identify the relationships of causes (activities) and effects (costs) in a more
detailed and accurate manner.
(iv) ABC highlights problem areas that deserve management’s attention and more
detailed analysis. Many actions are possible, on pricing, on process technology,
on product design, on operational movements and on product mix.
Traditional costing can lead to undercosting or overcosting of products or
services. Over or under costing of products distorts cost information. A poor
quality of cost information causes management to make poor decisions for
pricing, product emphasis, make or buy etc. ABC differs from the traditional
system only in respect of allocations of overheads or indirect costs. Direct costs
are identified with, or assigned to, the cost object, in the same manner as is done
in case of traditional costing system. Overhead costs are linked to the cost
objects based on activities. This is shown in the following figure:
(c) Reasons for the Implemention of ERP by Companies

(i) Improve a company’s business performance: ERP automates the tasks involved in
performing a business process – such as order fulfillment which involves taking an
order from a customer, shipping it and billing for it. With ERP, when a customer
service representative takes an order from a customer, he or she has all the
information necessary to complete the order (the customer’s credit rating and
order history, the company’s inventory levels and the shipping dock’s trucking
schedule). Everyone else in the company sees the same computer screen and has
access to the single database that holds the customer’s new order. When one
departments finishes with the order it automatically routed via the ERP system to
the next department. To find out where the order is at any point, one need only to
log into the ERP system and track it down. With luck, the order process moves like a
bolt of lightning through the organisation, and customers get their orders faster
and with fewer errors than before. ERP can apply that same magic to the other
major business processes, such as employee benefits or financial reporting.
(ii) Standardize manufacturing processes: manufacturing companies --- especially
those with an appetite for mergers and acquisitions --- often find that multiple
business units across the company make the same widget using different methods
and computer systems, standardizing those processes and using a single,
integrated computer system can save time, increase productivity & reduce
headcount.
(iii) Integrate financial data: as the CEO tries to understand the company’s overall
performance, he or she may find many different versions of the truth. Finance has
its own set of revenue numbers, sales has another version, and the different
business units may each have their own versions of how much they contributed to
revenues. ERP creates a single version of the truth that cannot be questioned
because everyone is using the same system.
(iv) To standardise HR information : Especially in companies with multiple business units,
HR may not have a unified, simple method for tracking employee time and
communicating with them about benefits and services. ERP can fix that.
(v) Reduction in cycle time: cycle time is the time between receipt of the order and
delivery of the product. ERP systems are helpful in both make-to -order and make-
to-stock situations. In both cases, cycle time can be reduced by the ERP systems,
but the reduction will be more in the case of make-to-order systems. ERP
packages go a long way in reducing the cycle times due to automation achieved
in material procurement, production planning and the efficiency achieved
through the plant maintenance and production systems of the ERP packages.
(vi) Improved Resource Utilization: as manufacturing processes become more
sophisticated and as the philosophies of elimination of waste and constraint
management achieve broader acceptance, manufacturer place increased
emphasis upon planning and controlling capacity. The capacity planning feature
of ERP systems offer both rough-cut and detailed capacity planning. The system
loads each resource with production requirements from master Production
scheduling, materials requirements Planning and shop floor Control. The ERP
systems have simulation capabilities that help the capacity and resource planners
to simulate the various capacity and resource utilization scenarios and choose the
best option. The ERP systems help the organisation in drastically improving the
capacity and resource utilization.
(vii) Better Customer Satisfaction: Customer satisfaction means meeting or exceeding
customer’s requirements for a product or service. The customer could get
technical support by either accessing the company’s technical support
knowledge base (help desk) or by calling the technical support. Since all the
details of the product and the customer are available to the person at the
technical support department, the company will be able to better support the
customer. All this is possible because of use of latest developments in information
technology by the ERP systems.
(viii) Improved Supplier Performance: the quality of the raw materials or components
and the capability of the vendor to deliver them ontime are of critical importance
for the success of any organisation. For this reason, an organisation chooses its
suppliers or vendors very carefully and monitor their activities very closely. To
realise these benefits, corporations rely heavily on supplier management and
control systems to help, plan, manage and control the complex processes
associated with global supplier partnerships.
(d) Types of Benchmarking: The different types of Benchmarking are:
(i) Product Benchmarking (Reverse Engineering): is an age old practice of product
oriented reverse engineering. Every organization buys its rival’s products and tears
down to find out how the features and performances etc., compare with its
products. This could be the starting point for improvement.
(ii) Competitive Benchmarking: this has moved beyond product-oriented
comparisons to include comparisons of process with those of competitors. In this
type, the process studied may include marketing, finance, HR, R&D etc.,
(iii) Process Benchmarking: is the activity of measuring discrete performance and
functionality against organization through performance in excellent analoguous
business process e.g. for supply chain management – the best practice would be
that of Mumbai dubbawallas.
(iv) Internal Benchmarking: is an application of process benchmarking, within an
organization by comparing the performance of similar business units or business
process.
(v) Strategic Benchmarking: differs from operational benchmarking in its scope. It
helps to develop a vision of the changed organizations. it will develop core
competencies that will help sustained competitive advantage.
(vi) Global Benchmarking: is an extension of Strategic Benchmarking to include
benchmarking partners on a global scale. E.g. Ford Co. of USA benchmarked its
A/c payable functions with that of Mazada in Japan and found to its
astonishment that the entire function was managed by 5 persons as against 500
in Ford.
(e) Six Sigma process in Quality Control
Six Sigma is a set of practices originally developed by Motorola to systematically

improve processes by eliminating defects. A defect is defined as non-conformity of a
product or service to its specifications.
While the particulars of the methodology were originally formulated by Bill Smith at
Motorola in 1986, Six Sigma was heavily inspired by six preceding decades of quality
improvement methodologies such as quality control, TQM, and Zero Defects. Like its
predecessors, Six Sigma asserts the following:
(a) Continuous efforts to reduce variation in process outputs is key to business success
(b) Manufacturing and business processes can be measured, analyzed, improved
and controlled
(c) Succeeding at achieving sustained quality improvement requires commitment
from the entire organization, particularly from top-level management.
The term “Six Sigma” refers to the ability of highly capable processes to produce
output within specification. In particular, processes that operate with six sigma quality
produce at defect levels below 3.4 defects per (one) million opportunities (DPMO). Six
Sigma’s implicit goal is to improve all processes to that level of quality or better.
SECTION - C
STRATEGIC COST MANAGEMENT - APPLICATION OF STATISTICAL TECHNIQUES IN
BUSINESS DECISIONS
17. An electronics firm which has developed a new type of Fire-Alarm System has been
asked to quote for a prospective contract.
The customer requires separate price quotations for each of the following possible
orders -
Order First Second Third
Number of Fire-Alarm Systems 100 60 40
The Firm estimates the folioing cost per Amount for the first order-
Direct Materials 500
Direct Labour: Department A (Highly automatic) 20 hours at 10 per hour
Department B (Skilled Labour) 40 hours at 15 per hour
Variable Overheads 20% of Direct Labour
Fixed Overheads absorbed: Department A 8 per hour
Department B 5 per hour
Determine a price per unit for each of the orders, assuming the Firm uses a mark-up of
25% on total costs and allows for as 80% Learning Curve. Extract from 80% Learning
Curve table -
X 1.0 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.0
Y% 100.0 91.7 89.5 87.6 86.1 84.4 83.0 81.0 80.0
X represents the cumulative total volume produced to date expressed as a multiple of

the initial order.
Y is the Learning Curve Factor, for a given X value, expressed as a percentage of the
cost of the initial order.
Answer:
1. Computation of Selling Price per unit of First Order (100 units)
Particulars Computation `
Direct Materials 100 units × 500 per unit 50,000
Direct Labour:
Department A 100 units × 20 hours × 10 per hour 20,000
Department B 100 units × 40 hours × 15 per hour 60,000
Variable OH 20% of (20,000 + 60,000) 16,000
Fixed OH:
Department A 100 units × 20 hours × 8 per hour 16,000
100 units × 40 hours × 5 per hour 20,000
Total Cost 1,82,000
Add: Profit at 25% of cost 1,82,000 × 25% 45,500
Sale Value 2,27,500
Sale Price per unit 2,27,500 + 100 units 2,275
Note: Department A is highly automatic C and there is no Learning Effect in respect of
machine/ mechanical operations. Hence, Learning Effect is applicable for Department
B only, where Skilled Labour is involved.
2. Computation of Selling Price per unit of Second Order (60 units) (See Note below for
Learning Effect)
Direct Materials 60 units × 500 per unit 30,000.00
Direct Labour: Department A 60 units x 20 hours × 10 per hour 12,000.00
Department B 1,510.40 hours × 15 per hour 22,656.00
Variable OH 20% of (12,000 + 22,656) 6,931.20
Fixed OH: Department A 60 units × 20 hours × 8 per hour 9,600.00
Department B 1,510.40 hours × 5 per hour 7,552.00
Total Cost 88,739.20
Add: Profit at 25% of cost 88,739.20 × 25% 22,184.80
Sale Value 1,10,924.00
Sales Price Per Unit 1,10,924.00 + 60 units 1,848.73
Learning Effect: Since Second Order is for 60 units the relevant "X" factor 1s 1.6
(cumulative quantity = 160 un1ts) and "Y" factor is 86.1%. Hence, the additional time
taken for the Second Order is determined as under -
Total Time for First and Second Order = (40 hours p.u × 86.1%) × 160 units = 5,510.40 hours.
Less: Total Time for First Order only = (40 hours p.u × 100 units) = 4,000.00 hours.
Additional Time for Second Order = 1,510.40 hours.
3. Computation of Selling Price per unit of Second Order (40 units) (See Note below for
Learning Effect)
Direct Materials 40 units × 500 per unit 20,000.00

Direct Labour:
Department A 40 units × 20 hours × 10 per hour 8,000.00
Department B 889.60 hours × 15 per hour 13,344.00
Variable OH 20% of (8,000 + 13,344) 4,268.80
Fixed OH: Department A 40 units × 20 hours × 8 per hour 6,400.00
Department B 889.60 hours × 5 per hour 4,448.00
Total Cost 56,480.80
Add: Profit at 25% of cost 56,480.80 × 25% 14,120.20
Sale Value 70,601.00
Sales Price Per Unit 70,601.00 + 40 units 1,765.03
Leam1ng Effect: Since Th1rd Order is for 40 units, the relevant "X" factor is 2.0 (Cumulative
quantity = 200 un1ts) and "Y" factor is 80%. Hence, the additional time taken for the Third
Order is determined as under -
Cumulative time upto Third Order = (40 hours p. u × 80%) × 200 units = 6,400.00
hours.
Less: Cumulative time upto Second Order = (as calculated earlier) = 5.510.40
hours.
Additional Time for Third Order = 889.60 hours
18. A leading Firm of Cost Accountants is attempting to determine a best investment
portfolio and is considering six alternative investment proposals. The following table
indicates point estimates for the price per share, the annual growth rates in the price
per share, the amount of dividend per share and a measure of the risk associated with
each investment.
Portfolio Data
Particulars Shares under consideration
A B c D E F
Current Price per Share (`) 80 100 160 120 150 200
Projected Annual Growth 0.08 0.07 0.10 0.12 0.09 0.15
Projected Annual Dividend per Share (`) 4.00 4.50 7.50 5.50 5.75 0.00
Projected Risk In Return 0.05 0.03 0.10 0.20 0.06 0.08
The total amount available for investment is `25 Lakhs and the following conditions are
to be satisfied.
• The maximum rupee amount to be invested in alternative F is `2,50,000
• Not more than `5,00,000 should be invested in alternatives A and B combined.
• Total Weighted Risk should not be greater than 0.10 where-
(Amount Invested in Alternative i) × (Risk of Alternative i)
• Total Weighted Risk =
Total Amount investedin all alternatives
• For the sake of diversity, at least 100 shares of each stock should be purchased.
• At least 10% of the total investment should be in alternatives A and B combined.
• Dividends for the year should be at least ` 10,000
Rupees Return per Share is defined as the Price per Share one year hence less Current
Price per Share plus Dividend per Share. If the objective is o maximize Total Rupee
Return, formulate (but do not solve) the LPP for determining the optimum number of
share& to be purchased In each of the Shares under consideration. Assume that the
time horizon for the Investment is one year. ·
Answer:
Let A, B, C, D,E and F be the number of shares to be purchased in each of the
above investment proposals. Given Return Per Share = Price Per Share one year
hence Less Current Price Per Share Plus Dividend Per Share
Hence, Return per Share = (Current Price per Share × Projected Annual Growth Rate) +
Dividends per Share.
Particulars
Number of shares purchase Shares under consideration
A B C D E F
a. Current price per share (`) 80 100 160 120 150 200
b. Projected Annual growth
Rate (given) 0.08 0.07 0.10 0.12 0.09 0.15
c. Increase in price per share =
a × b (in `) 6.40 7.00 16.00 14.40 13.50 30.00
d. Projected Annual Dividend
per share (in `) 4.00 4.50 7.50 5.50 5.75 0.00
e. Rupee return per share = c +
d (in `) 10.40 11.50 23.50 19.90 19.25 30.00
Maximise Z = 10.40 A + 11.50 B + 23.50 C + 19.90 D + 19.25 E + 30.00 F......(objective
Function)
Subject to the following constraints
80A + 100B + 160C + 120D + 150E + 200F ≤ 25,00,000 ……… (Funds Availability)
200F ≤ 2,50,000 ……….. (Investment F Condition)
80A + 100B ≤ 5,00,000 ………….((investment A & B Condition)
[(5% × 80A) + (3% ×100B) + (10% ×160C) + (20% ×120D) + (6% ×150E) + (8% × 200F)]
≤ 10%
80A +100B +160C +120D +150E + 200F
On simplification, we have – 4A – 7B + 12D – 6E – 4F ≤ 0 …….(Weighted risk Condition)
A, B, C, D, E, F ≥ 10,000 ………………………………….(Dividend condition)
(80a + 100B) ≥ (80A + 100B + 160C + 120D + 150E + 200F) × 10%
Simplifying, we have, 72A + 90B – 16C – 12D – 115E – 20F ≥ 0 ………..(Minimum
Investment in A & B)
4A + 4.50B + 7.50C + 5.50D + 5.75E ≥ 10,000 ……………..(Dividend Condition).
Note: Non- negativity Assumption is not necessary in the given case, since the Diversity
condition is applicable.
19. The owner of Excel Sports wishes to determine how many advertisements to place in
the selected three monthly magazines A B and C. His objective is to advertise in such
a way that total exposure to principal buyers of expensive sports goods is maximized.
Percentages of readers for each magazine are known. Exposure in any particular
magazine is the number of advertisements placed multiplied by the number of
principal buyers. The following data may be used:
Magazine
A B C
Readers 1 lakh 0.6 lakh 0.4 lakh
Principal Buyers 20% 15% 8%
Cost per Advertisement (`) 8.000 6.000 5.000
The budgeted amount is at most ` 1 lakh for the advertisements. The owner has already
decided that magazine A should have not more than 15 advertisements and that B and
C each have at least 8 advertisements. Formulate on LP model for the problem.
Answer:
Step 1. The key decision to be made is to determine how many advertisements to
place in the selected three monthly magazines A. B. and C so that total
exposure to principal buyers of expensive sports goods is maximised
Step 2. Decision variables
Let x1 = number of insertions in magazine A,
x2 = number of insertions In magazine B, and
x3 = number of insertions in magazine C,
Step 3. Feasible alternatives are sets of values of x1, X2, x3 .
where x 1 , x2 , x3 each ≥ 0
Formulation of LP Model
The objective is to maximise (total exposure)
Maximise Z = (20% of 1,00,000)x1 + (15% of 60,000)x2 + (8% of 4,000)x3
= 20,000x1 + 9,000x2 + 3,200x3
Subject to constraints
8,000x1 + 6,000x2 + 5,000x3 ≤ 1,00,000 (Budgeted amount)
x1 ≤ 15, x2 ≥ 8 and x3 ≥8 (Advertisement)
x1 ≥ 0, x2 ≥ 0 and x3 ≥0 (Insertions assumed to be non-negative
20. To stimulate interest and provide an atmosphere for intellectual discussion, a

finance faculty in a management school decides to hold special seminars to four
contemporary topics-leasing, portfolio management, private mutual funds, swaps and
options. Such seminars should be held once in a week in the afternoons. However,
scheduling these seminars (one for each topic, and not more than one seminar
per afternoon) has to be done carefully so that the number of students unable to
attend is kept to a minimum. A careful study indicates that the number of students
who cannot attend a particular seminar on a specific day is as follows:
Leasing Portfolio Private Swaps and
management mutual funds Options
Monday 50 40 60 20
Tuesday 40 30 40 30
Wednesday 60 20 30 20
Thursday 30 30 20 30
Friday 10 20 10 30
Find an optimum schedule of the seminars. Also find out the total number of
students who will be missing at least one seminar.
Answer:
This is an unbalanced minimisation assignment problem. We first of all balance it by
adding a dummy topic.
Leasing Portfolio Private Swaps and Dummy
Management Mutual funds options
Monday 50 40 60 20 0
Tuesday 40 30 40 30 0
Wednesday 60 20 30 20 0
Thursday 30 30 20 30 0
Friday 10 20 10 30 0
Subtracting the minimum element of each column from all elements of that column,
we get the following matrix.

Monday 40 20 50 0 0
Tuesday 30 10 30 10 0
Wednesday 50 0 20 0 0
Thursday 20 10 10 10 0
Friday 0 0 0 10 0
The minimum number of lines to cover all zeros is 4, which is less than the order of
the matrix (i.e., 5), the above matrix will not give the optimal solution. Subtract the
minimum uncovered element (i.e., 10) from all uncovered elements and add it to
the elements lying on the intersection, we get the following matrix:
Monday 30 20 40 0 0
Tuesday 20 10 20 10 0
Wednesday 40 0 10 0 0
Thursday 10 10 0 10 0
Friday 0 10 0 20 10
Since the minimum number of lines to cover all zeros is 5, which is equal to
order of the matrix, the above matrix will give the optimum solution which is
given below:
Leasing portfolio Private Swaps and management mutual funds options Dummy
Monday 30 20 40 0
0
Tuesday 20 10 20 10 0
Wednesday 40 10 0
0 0
Thursday 10 10 10 0
0
Friday 10 0 20 10
0
The optimal schedule is:

Day Contemporary topics No. of students missing
Monday Swaps and Options 20
Tuesday No Seminar 0
Wednesday Portfolio 20
Thursday Private mutual funds 20
Friday Leasing 10
Total 70
Thus number of students, who will be missing at least one seminar is 70.
21. The management of ABC company is considering the question of marketing a new
product. The fixed cost required in the project is ` 4,000. Three factors are uncertain,
viz., the selling price, variable cost and the annual sales volume. The product has a
life of only one year. The management has the data on these three factors as
under:
Selling price Probability Variable Probability Sales Probability

(`) cost volume
(`) (units)
3 0.2 1 0.3 2,000 0.3

4 0.5 2 0.6 3,000 0.3
5 0.3 3 0.1 5,000 0.4
Consider the following sequence of thirty random numbers:

81, 32, 60, 04, 46, 31, 67, 25, 24, 10, 40, 02, 39, 68, 08,
59, 66, 90, 12, 64, 79, 31, 86, 68, 82, 89, 25, 11, 98, 16
Using the sequence (first 3 random numbers for the first trial, etc.), simulate the
average profit for the above project on the basis of 10 trials.
Answer:
First, we assign random numbers to the three uncertain factors.
Selling Price (`) Probability Cum. Probability Random Numbers
3 0.2 0.2 00 - 19
4 0.5 0.7 20- 69
5 0.3 1.0 70- 99
Variable Cost (`)
1 0.3 0.3 00- 29
2 0.6 0.9 30- 89
3 0.1 1.0 90- 99
Sales Volume (units)
2,000 0.3 0.3 00- 29
3, 000 0.3 0.6 30- 59
5, 000 0. 4 1.0 60- 99
Simulation sheet for finding average profit is developed as under:

S. No. RN Selling RN Variable RN Sales
Price Cost Volume
(`) (`) ('000 units)
1 81 5 32 2 60 5
2 04 3 46 2 31 3
3 67 4 25 1 24 2
4 10 3 40 2 02 2
5 39 4 68 2 08 2
6 59 4 66 2 90 5
7 12 3 64 2 79 5
8 31 4 86 2 68 5
9 82 5 89 2 25 2
10 11 3 98 3 16 2
Simulated profit in 10 trials would be as follows:
S. No Simulated profit Total Simulated profit
1 (5 – 2) × 5,000 – 4,000 11,000
2 (3 – 2) × 3,000 – 4,000 -1,000
3 (4 – 1) × 2,000 – 4,000 2,000
4 (3 – 2) × 2,000 – 4,000 -2,000
5 (4 – 2) × 2,000 – 4,000 0
6 (4 – 2) × 5,000 – 4,000 6,000
7 (3 – 2) × 5,000 – 4,000 1,000
8 (4 – 2) × 5,000 – 4,000 6,000
9 (5 – 2) × 2,000 – 4,000 2,000
10 (3 – 3) × 2,000 – 4,000 -4,000
21,000
Average Profit = `21,000 + 10 = `2,100.
22. An Investment Company wants to study the investment projects based on market
demand, profit and the investment required. Which are independent of each other.
Following probability distribution are estimated for each of the three factors.
Annual Demand 25,000 30,000 35,000 40,000 45,000 50,000 55,000
(units)
Probability 0.05 0.10 0.20 0.30 0.20 0.10 0.05
Profit pu (`) 3 5 7 9 10
Probability 0.10 0.20 0.40 0.20 0.10
Investment (`) 27,50,000 30,00,000 35,00,000

Probability 0.25 0.50 0.25
Using Simulation Process, repeat the trial10 times and compute the investment on each
trial taking these factors into trial. What is the most likely return? Use the following
Random Numbers. (30, 12,16), (59, 09, 69), (63, 94, 26), (27, 08, 74), (64, 60, 61), (28, 28,
72), (31, 23, 57), (54, 85, 20), (64, 68,18), (32, 31, 87). In the bracket above, the first
Random Number is for Annual Demand, the second one is for Profit and the last one is
for the Investment required.
Answer:
1. Random Number Allocation Tables
Table 1: Random Numbers for Demand

Demand Prob. Cum Prob. Random Nos.
25,000 units 0.05 0.05 00 – 04
30,000 units 0.10 0.15 05 – 14
35,000 units 0.20 0.35 15 – 34
40,000 units 0.30 0.65 35 – 64
45,000 units 0.20 0.85 65 – 84
50,000 units 0.10 0.95 85 – 94
55, 000 units 0.05 1.00 95 - 99
Table 2: Random Numbers for Profit
Profit Prob. Cum Prob Random Nos.
`3 0.10 0.10 00 – 09
`5 0.20 0.30 10 – 29
`7 0.40 0.70 30 – 69
`9 0.20 0.90 70 – 89
`10 0.10 1.00 90 - 99
Table 3: Random Numbers for Investment
Investment Prob. Cum Prob Random Nos.
`27,50,000 0.25 0.25 00 – 24
`30,00,000 0.50 0.75 25 – 74
`35,00,000 0.25 1.00 75 - 99
2. Simulation table
Trial R. No. Demand R. No. Profit R. No. Investment Return = ROI=(R

(Demand) Qtty (units) (Profit) p.u. ( `) (Invt) (`) Qty x Pft (`) lnvt) × 100
1 30 35,000 12 5 16 27,50,000 1,75,000 6.36%
2 59 40,000 09 3 69 30,00,000 1,20,000 4.00%
3 63 40,000 94 10 26 30,00,000 4,00,000 13.33%
4 27 35,000 08 3 74 30,00,000 1,05,000 3.50%
5 64 40,000 60 7 61 30,00,000 2,80,000 9.33%
6 28 35,000 28 5 72 30,00,000 1,75,000 5.83%
7 31 35,000 23 5 57 30,00,000 1,75,000 5.83%
8 54 40,000 85 9 20 27,50,000 3,60,000 13.09%
9 64 40,000 68 7 18 27,50,000 2,80,000 10.18%
10 32 35,000 31 7 87 35,00,000 2,45,000 7.00%
Total 78.45%
Result: Most Likely Average Retum = 78.45% ÷ 10 trials = 7.85% (approximately).

Also, Highest ROI = 13.33% relating to Trial 3, Investment = `30 Lakhs and
Demand = 40,000 units.
23. A Network is given below-

• Name the Paths and give their total duration.
• Give three different ways of reducing the above project duration by four weeks.
Activity Duration Activity Duration
1–2 2 weeks 4–7 3 weeks
Answer:
Path 1-2-5-8-9 1-3-5-8-9 1-3-4-6-7-8-9 1-3-4-7-8-9

Path No. I II III IV
Duration 2+5+3+5 = 15 weeks 3+0+3+5 = 11 3+2+1+2+2+5 = 3+2+3+2+5 =
weeks 15 weeks 15 weeks
The different ways of reducing the Project Duration by four weeks are –
1. Reduce duration of Activity 8- 9 by 4 weeks (presently 5 weeks), since this is a
common activity on all Paths.
2. Reduce duration of Activity 1- 3 (Common for Paths II, III and IV), and any one of
Activities 1 - 2 and 2- 5 (on Path I) such that total time reduction is 4 weeks.
3. Reduce duration of Activity 3-4 or 7- 8 (Common for Paths III & IV), and Activity 5-8
(Common for Paths I & II).
24. Short Notes on:
(a) Uses of Learning curve

(b) Vogel’s Approximation Method (VAM)
(c) Application & Advantages of Simulation
Answer:
(a) Uses of Learning curve
Learning curve is now being widely issued in business. Some of the uses are as
follows:
(i) Where applicable the learning curve suggest great opportunities for cost
reduction to be achieved by improving learning.
(ii) The learning curve concept suggests a basis for correct staffing in
continuously expanding production. The curve shows that the work force
need not be increased at the same rate as the prospective output. This also
helps in proper production planning through proper scheduling of work;
providing manpower at the right moment permitting more accurate forecast
of delivery dates.
Learning curve concept provides a means of evaluating the effectiveness of
training programs. What level of cumulative cost reduction do they
accomplish?
(iii) How does the learning curve for this group or shop compare with others?
Whether any of the employees who lack the aptitude to meet normal
learning curve should be eliminated.
(iv) Learning curve is frequently used in conjunction with establishing bid price for
contracts. Usually, the bid price is based on the cumulative average unit cost
for all the units to be produced for a given contract. If production is not
interrupted. Additional units beyond this quantity should be costed at the
increment costs incurred, and not at the previous cumulative average. If the
contract agreement so provides, a contract may be cancelled and
production stopped before the expected efficiency is reached. This would
mean that the company having quoted on the basis of cumulative average
unit cost is at a disadvantage because it can not reap the benefit of
leaning. The contractor must provide for these contingencies so that it will be
reimbursed for such loss.
(v) The use of learning curve, where applicable, is important in the working
capital required. If the requirement is based on average cumulative unit
cost, the revenues from the first few units may not cover the actual
expenditures. For instance, if the price was based on the average
cumulative unit cost of 328 hours the first unit when produced and sold will
cause a deficit of 4.72 hours (8.00 – 3.28). Provision should therefore, be
made to cover the deficit of working capital in the initial stages of
production.
(vi) As employees become more efficient, the rate of production increases and
so more materials are needed, the work-in-progress inventory turns over
faster, and finished goods inventory grows at an accelerated rate. A
knowledge of the learning curve assists in planning the inventories of
materials. Work-in-progress, and finished goods.
(vii) Learning curve techniques are useful in exercising control, Variable norms
can be established for each situation, and a comparison between these
norms and actual expenses can be made. Specific or average incremental
unit cost should be used for this purpose.
(viii) The learning curve may be used for make-or- buy decisions especially if the
outside manufacturer has reached the maximum on the learning curve. Help
to calculate the sensitive rates in wage bargaining.
(b) Vogel’s Approximation Method (VAM):
This method is preferred over the other two methods because the initial basic
feasible solution obtained is either optimum or very close to the optimum
solution. Therefore, the amount of time required to arrive at the optimum solution
is greatly reduced. Various steps of this method are summarized as under:
Step 1: Compute a penalty for each row and column in the transportation table.
The penalty for a given row and column is merely the difference
between the smallest cost and the next smallest cost in that particular
row or column.
Step 2: Identify the row or column with the largest penalty. In this identified row
or column, choose the cell which has the smallest cost and allocate the
maximum possible quantity to the lowest cost cell in that row or column
so as to exhaust either the supply at a particular source or satisfy
demand at a warehouse. If a tie occurs in the penalties, select that
row/column which has minimum cost. If there is a tie in the minimum cost
also, select that row/column which will have maximum possible
assignments. It will considerably reduce computational work.
Step 3: Reduce the row supply or the column demand by the amount
assigned to the cell.
Step 4: If the row supply is now zero, eliminate the row, if the column demand is
now zero, eliminate the column, if both the row supply and the column
demand are zero, eliminate both the row and column.
Step5: Recompute the row and column difference for the reduced
transportation table, omitting rows or columns crossed out in the
preceding step.
Step 6: Repeat the above procedure until the entire supply at factories are
exhausted to satisfy demand at different warehouses.
(d) Application & Advantages of Simulation

Application of Simulation
(i) Scheduling aircraft,
(ii) Job-ship scheduling and personnel scheduling,
(iii) Manpower-hiring decisions,
(iv) Traffic light-timing,
(v) Transport-scheduling,
(vi) Evaluating alternative investment opportunities, and
(vii) Design of parking lots, harbor, and communication systems etc.
Advantages of Simulation
(a) Enables to experiment and study complex interactions of a system (e.g.
company operations, economic policies).
(b) Possible to study the effects of organizational environment informational
changes in the operations of a system (e.g. number of stocking points,
industrial policies).
(c) Better insight and understanding of a complex system to indication for
improvement. (d) Assists in teaching and training (management games).
(e) New situations policies can be protested.
(f) Probabilistic features can be easily incorporated.
(g) A process can be studies in extended or compressed time.
(h) Risks involved in experimenting with real problems can be eliminated.
Final
Group III
Paper 16 : DIRECT TAX LAWS AND
INTERNATIONAL TAXATION
(SYLLABUS – 2016)
Objectives
1. (a) Multiple Choice Questions (with reasons)
1. TDS on income from Investment in securitization fund is covered under section

A. 196B
B. 196D
C. 194LC
D. 194LBC
2. AMT is levied at the rate of ______ of adjusted total income in case of non corporate
assessee.
A. 200
B. 139
C. 226
D. 225
3. Stay of proceedings is covered under section
A. Section 192
B. Section 192A
C. Section 193
D. None of the above
4. MAT credit can be carry forward for how long.
A. 5 years
B. 10 years
C. 15 years
D. 20 years
5. The ___________ of a company has to intimate the tax authority before he parts
with any of the assets of the company or the properties in his hands and has to set
aside the amount if any intimated to him by the tax authorities.
A. Company Secretary
B. Cost Accountants
C. Liquidator.
D. Chartered Accountants
6. Which one is the duty of the Tax payer?
A. Tax Planning
B. Tax Evasion
DOS, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 1
C. Tax Avoidance
D. Tax Management
7. Section _________ deals with the rectification mistakes which are apparent from the
record in any order passed by the assessing officer.
A. 156
B. 154
C. 144
D. 158
8. ICDS-II stands for _______.
A. Accounting policies
B. Construction Contract
C. Revenue recognition
D. Valuation of inventories
9. MAT stands for _______.
A. Management Aptitude Test
B. Minimum Alternate Tax
C. Minimum adjusted Tax
D. None of the above
10. Form ___ is required to file an appeal to the commissioner of Income Tax.
A. 34
B. 35AC
C. 26AS
D. 35
Answer:
Sl/No. Answer Reason

1. D TDS on income from Investment in securitization fund is covered
under section 194LBC.
2. C AMT is levied at the rate of 18.5% of adjusted total income in case

of non corporate assessee.
3. D Stay of proceedings is covered under section 225.
4. C The amount of tax credit shall be carried forward and set off but
such carry forward shall not be allowed beyond the 15th
assessment year immediately succeeding the assessment year in
which tax credit becomes allowable.
5. C As per section 178(3), the liquidator of a company has to intimate
the tax authority before he parts with any of the assets of the
company or the properties in his hands and has to set aside the
amount if any intimated to him by the tax authorities
6. D Tax management is the duty of the Tax payer.
7. B Any mistake which is apparent from the record in an order passed
by the Assessing Officer can be rectified u/s 154.
8. D ICDS-II stands for Valuation of Inventories.
9. B MAT stands for Minimum Alternate Tax.
10. D An appeal to the Commissioner of Income-tax (Appeals)shall be
filed in Form No. 35.
Assessment of income and Computation of tax liability of various Entities
Question No.: 2
Mr P, an employee with M/s PKJ ltd. provides the following information relating to his income for
financial year 2017-18.
i. He received salary ` 25,000 per month including conveyance allowance @ ` 2,500

per month for official purpose.
ii. He deposited ` 2,500 per month in his account under a pension scheme notified by
the Central Government.
iii. He paid a sum of ` 60,000 during the year as interest on loan taken in April, 2015 from
bank for higher studies of his daughter.
iv. He paid health insurance premium for himself and his family members ` 8,500 in cash
and ` 9,000 by credit card.
v. He invested ` 40,000 in notified bonds under section 80C issued by NABARD in July,
2017.
vi. Equity shares having fair market price of ` 1,00,000 were allotted to him by the
company at a concessional price of ` 20,000 on 30.05.2017, which were sold by him
for `1,80,000 on 28.02.2018.
Compute the total income of Mr P for the Assessment Year 2018-19 and give reasons for
treatment of each of the items.
Answer:
Computation of Total Income of Mr P for the Assessment Year 2018-19
` `
Income under head salary
Gross Salary 3,00,000
Add: Equity shares given at concessional rate 80,000
3,80,000
Less: Conveyance allowance exempt under section 10(14) 30,000 3,50,000
as spent for official purpose
Income under head capital gain
Sale consideration of equity shares sold on 28.02.2018 1,80,000
Less: Fair Market Price of shares on 30.05.2017 1,00,000
Short term capital gain 80,000
Gross Total Income 4,30,000
Less: Deduction
Under section 80C-Bond issued by NABARD 40,000
Under section 80CCD
For deposit in pension scheme notified by the Central
Government
[Restricted to 10% of salary i.e 10% of ` 2,70,000] 27,000
Additional amount of investment u/s 80CCD 3,000
Under section 80D-Payment of health insurance premium by 9,000
credit card under section 80E
For payment of interest on loan taken from bank for higher 60,000 1,39,000
studies of daughter
Total Income 2,91,000
Notes: Payment of ` 8,500 made in cash will not qualify for deduction under section 80D
Question No.: 3
Pankaj, a non-resident Indian, has the following sources of income in India during the previous
year 2017-18:
` `
Income from house property located in India (computed) 2,70,000
Dividend from Indian Companies 75,000
Interest on debentures of Indian company 1,00,000
(Subscribed in convertible foreign exchange)
Less: Interest on loan taken for purchase of debentures 20,000 80,000

Long-term capital gains on sale of debentures subscribed in
US $:
Cost in 2002-03 4,00,000
Sale in 2017-18 6,00,000
2,00,000
Less: Commission to brokers 6,000 1,94,000
Cost Inflation Index: FY 2002-03-105; F.Y.2017-18-272.
Compute the tax payable by Pankaj for the Assessment year 2018-19, if he opts for the previous
of chapter XII-A of the Income Tax, Act 1961.
Answer:
Computation of total income of Mr. Pankaj for the A.Y. 2017-18 as per provisions of Chapter XII-A
` `
Income from house property located in India (computed) 2,70,000
Capital Gains on sale of debentures
Sale consideration 6,00,000
Less: Commission to brokers 6,000

Net sale consideration 5,94,000
Cost of acquisition 4,00,000
Long term capital gain 1,94,000
Dividend income received from Indian companies Nil
[exempt under section 10(34)]
Interest on debentures of Indian company 1,00,000

(deduction of expenses not allowed)
Total Income
5,14,000
Computation of tax liability of Mr. Pankaj for the A.Y. 2018-19 as per provisions of Chapter Xll-A
` `
Tax on long term capital gain (` 1,94,000 x 10%) 19,400
[Indexation not allowed]
Tax on interest on debentures being investment income 20,000

(` 1,00,000 x 20%)
Tax on balance income of ` 2,70,000 1,000 40,400
Add: Education cess & SHEC @ 3% 1,212
Total tax liability (rounded off) 41,610
Question No.: 4
The net profit of PKJ Ltd. as per Profit & Loss Account for the previous year 2017-18 is ` 100 lakhs after
debiting/crediting the following items:
(i) Provision for income-tax: `15 lakhs
(ii) Provision for deferred tax: ` 8 lakhs
(iii) Proposed Dividend: ` 20 lakhs
(iv) Depreciation debited to Profit & Loss Account is `12 lakhs. This includes depreciations asset
to the tune of ` 2 lakhs.
(v) Profit from unit established in Special Economic Zone: ` 30 lakhs
(vi) Provision for permanent diminution in value of investments: ` 2 lakhs
Brought forward losses and unabsorbed depreciation as per books of the company are as
follows:
Previous year Brought forward loss (` in lakhs)

Unabsorbed depreciation
(` in lakhs)
2014-15 2 5
2015-16 - 3
2016-17 10 2
Compute book profit of the company under section 115JB for Assessment Year 2018-19.
Answer:
Computation of book profit of PKJ Ltd under section 115JB for Assessment Year 2018-19
(` in Lakh)
` `
Net profit as per profit and loss account 100
Add: Provision for income tax 15
Provision for deferred tax 8
Proposed dividend 20
Depreciation 12
Provision for diminution in value of investment 2 57
Less: Depreciation (excluding depreciation on revaluation 10

of assets)
Aggregate of brought forward loss or unabsorbed 10 20
depreciation, as per books of past years whichever is less
137
Book Profit
Question No.: 5
X Ltd., a domestic company in which public arc substantially interested, is engaged in the
manufacture and sale of cement. Its audited accounts for the year ended 31.3.2018 show a
profit of ` 35,00,000 .Examination of the accounts reveals that the above profit was arrived at
after taking into account the following items of income and expenditure-
` `
Dividend received from M Ltd, a domestic company registered in in
April. 1980 and engaged exclusively in the manufacture of paints.
The assessee company has declared dividend of ` 30,000 50,000
Expenditure incurred in connection with issue of additional share 20,000

capital in the year
Interest of ` 3,50,000 debited to the profit and loss account is made

up as under:
a. Interest payable to debenture holder 30,000
b. Interest payable to XYZ ltd 40,000
c. Interest on fixed deposit received from the member of the 60,000
public
2,20,000 3,50,000
d. Interest to bank in respect of overdraft
Penal interest paid to State Government for delay in payment of 12,000

cess
Expenditure on maintenance of guest house 35,000
Legal charges include payment made to lawyer for conducting the 8,000
income-tax proceedings before the AO
Depreciation debited to Profit & Loss Account (Depreciation 8,95,000
allowable under the Income tax Act ` 7,45,000)
Payment made to consultants for furnishing a feasibility report 15,000
regarding the setting up of a new unit in another State.
Expenditure incurred on stamp duty etc. in connection with issue of 14,000
debentures in the year.
Donation to Prime Minister's National Relief Fund 25,000
Compute the taxable income of the company for the assessment year 2018-19 giving reasons
briefly for the various adjustments you may wish to make to the profit shown in the audited
accounts.
Answer:
` `
Profit as per statement of Profit and loss account 35,00,000
Add:
Expenses on issue of shares 20,000
Depreciation in excess of allowable under Income Tax 1,50,000
Expenses of feasibility report 15,000
Donations 25,000 2,10,000
37,10,000
Less:
Dividend 50,000
Income from Business (GTI) 36,60,000
Income from other sources (Dividend Exempt
36,60,000
Less: Deduction
Under Section 80G-PM NRF 100% 25,000
Total Income 36,35,000
Question No.: 6.a
Bharat Charitable Trust created on 1. 1.2010 applied for registration of trust under section 12A of
the Income-tax Act before the Commissioner of Income-tax on 1.7.2017 and requested for
condonation of delay;
(i) Explain with reasons the period for which the trust is eligible to get exemption
under section 11 and 12 of the Income-tax Act.
(ii) Can the exemption under sections 11 and 12 for assessment year 2018-19 be
denied if the trust is holding investments in equity shares of a public sector
company since 1.4.2014.
(iii) The Trust has also applied for granting exemption under section 80G of the
Income-tax Act. But the approval for the same has been rejected by the
Commissioner of Income-tax under section 80G (vi) the Income-tax Act on 30.9.2017.
The Trust seeks your advice on whether it can file an appeal against the said
rejection before the higher authorities.
Answer:
(i) As per the amendment made by the Finance Act, 2007, the power to condone delay in
filing the application for registration has been removed. The assessee is now required to
apply for registration before the end of the previous year relevant to the assessment year
from which is sought exemption. Hence. Bharat Charitable Trust shall be eligible to get
exemption under section 11 and 12 with effect from the financial year 2017-18 only.
(ii) The exemption under section 11 and 12 for A. Y. 2018-19 cannot be denied to the trust for
holding investment in equity shares of a public sector company as section 13(1)(d)(iii) denies
exemption to a trust holding any shares in company, other than, inter alia, shares in a public
sector company. Therefore, a trust cannot be denied exemption for holding shares in a
public sector company.
(iii) As per section 253 an appeal can be filed before the Appellate Tribunal against an order
passed by the Commissioner under section 80G(5)(vi) rejecting the application of such trusts,
for the purpose of recognition under section 80G.
Question No.: 6.b.
The following trusts claim that anonymous donations received by them during the financial year
2017-18 are not liable to tax under section 115BBC:
(i) A charitable trust referred to in section 11 which applied the entire amount of anonymous
donations for purposes of the trust during the relevant financial year.
(ii) A trust established wholly for religious purposes which applied 75% of the amount of
anonymous donations for the purposes of the objects of the trust during the relevant
financial year.
Examine the validity of the claim made by the trusts.
Answer:
(i) As per section 115BBC, anonymous donation received by a trust or institution shall be
taxable @30% even if such amount is applied by the trust for its charitable purpose during
the year. However, anonymous donation to the extent of 5% of total donations received
or ` 1,00,000 whichever is more shall not be anonymous donation.
(ii) Section 115BBC is not applicable in case of a anonymous donation received by a trust or
institution established wholly for religious purposes. However, to claim full exemption it
should apply 85% of the amount received as donation. In this case, 85% of the amount
actually applied and 15% of the amount accumulated shall be exempt in the hands of the
religious trust.
Question No.: 7
Pankaj Co-Operative Housing Society is a registered Co-operative Housing Society. It is formed

with the objective of maintaining the property owned by it. It effects repairs and maintenance of
the property of the Members and confers the usual rights and privileges to its Members. During
the year ended March, 2018, Mr. X transferred his Membership to Mr. Y, for which the Society
received Transfer Fees of ` 5.50 Lakhs each from Mr. X and Mr. Y. Mr. Y was not a Member of the
Society at the time of transfer .ln course of assessment of the Society u/s 143(3) the Assessing
Officer charged Transfer Fees to tax under the head “Profit and Gains of Business or Profession". Is
the action of the Assessing Officer correct?
Answer:
A co-operative society is a mutual society and, on mutual principles, would not be earning any
income in the eye of law. Transfer fee received by a co-operative housing society is not
assessable since housing society is a mutual concern and the persons became members of the
society before they were entitled to get the flat transferred in their names or were liable to pay
the transfer fees. There is an element of mutuality in respect of the transfer fees and therefore
the same are not taxable. CIT v Apsara Co-op Housing Society LTD.(1993) 204 ITR 662 (Cal).
Transfer fee received by a co-operative housing society whether from outgoing or from
incoming member is not liable to tax on ground of principle of mutuality where predominant
activity of such co-operative society is maintenance of property of society. [SIND Co-op Housing
Society v ITO Pune (2009) 182 Taxman 346 (Bom)].
Therefore the action of the Assessing Officer is not correct as the receipt is not taxable on the
principle of mutuality.
Tax Management, Return and Assessment Procedure

Question No.: 8
Discuss the provision of section 139(4C) in respect of return of income of scientific research
association.
Answer:
Every -
 Research Association referred to in sec. 10(21);
 News agency referred to in sec. 10(22B);
 Association or institution referred to in sec. 10(23A) or sec. 10(23B);
 Specified Employee Welfare Fund referred to in sec. 10(23AAA);
 Any university or other educational institution referred to in sec. 10(23C)(iiiad) or (iiiab);
 Any hospital or other medical institution referred to in sec. 10(23C)(iiiae) or (iiiac);
 Fund or institution referred to in sec. 10(23C)(iv);
 Trust or institution referred to in sec. 10(23C)(v);
 Any university or other educational institution referred to in sec. 10(23C)(vi);
 Any hospital or other medical institution referred to in sec. 10(23C)(via);
 Mutual Fund referred to in sec. 10(23D);
 Securitisation trust referred to in sec. 10(23DA);
 Investor Protection Fund referred to in sec. 10(23EC) or sec. 10(23ED);
 Core Settlement Guarantee Fund referred to in sec. 10(23EE);
 Venture Capital Company or Venture Capital Fund referred to in sec. 10(23FB);
 Trade union or an association of such union referred to in sec. 10(24);
 Body or authority or Board or Trust or Commission referred to in sec. 10(46) or 10(29A);
 Infrastructure debt fund referred to in sec. 10(47),
must file a return, if the total income without giving effect to the provisions of sec. 10, exceeds
the maximum amount which is not chargeable to income-tax.
Penalty: Where an assessee fails to file return of income under this section, within the time limit, it
shall be liable to pay a penalty of ` 100 per day during which such failure continues [Sec.
272A(2)].
Question No.: 9.
State with reasons whether return of Income is to be filed in the following cases for the
Assessment year 2018-19.
i. Mr Pankaj, an employee of ICAI, draw a salary of ` 4,80,000 and has income from
fixed deposit with bank of ` 10,000.
ii. A registered association eligible for exemption under section 10(23B), has income
from house property of ` 2,70,000.
iii. PKJ, a partnership firm has a loss of ` 10,000 during the previous year 2017-18.
iv. Mr P, an individual, aged 80 years, has gross total income of ` 6,50,000 and he is
eligible for deduction of ` 1,60,000 under chapter VIA.
Answer:
i. Mr Pankaj has to file return of income as Notification No. 29/2012, dated 11-2-2012 is
not valid for return of assessment year 2018-19.
ii. According to section 139(4C), every institution referred to, in section 10(23B) is required
to furnish the return of income if its total income without giving effect to the provisions
of section 10 exceeds the maximum amount not chargeable to tax.
In the above case, the registered association has income from hose property of `
2,70,000 before exemption under section 10, which exceeds the basic exemption limit
of ` 2,50,000. Therefore, it is under an obligation to furnish its return of income for the AY
2018-19.
iii. According to section 139(1), it is mandatory for a firm to furnish its return of income or
loss on or before the specified due date. Therefore, M/s PKJ has to furnish its return of
loss for the Assessment year 2018-19 on or before the due date.
iv. In this case, the gross total income of Mr P aged 80 years before deduction under
section 80C is ` 6,50,000, which exceeds the basic exemption limit of ` 5,50,000.
Therefore Mr P has to furnish return of income for the A.Y 2018-19.
Question No.: 10.
The regular assessment of PKJ Ltd. for the Assessment Year 2014-15 was completed under
Section 143(3) on 13.3.2016. There was an audit objection by the Revenue Audit team that interest
on loan should be disallowed partly as there was diversion of borrowed fund to sister concern
without charge of interest.
Based on the above facts:
(i) State, with reasons, whether the Assessing Officer can issue notice under section 148 on
the basis of audit objection of the Revenue Audit team.
(ii) If the action stated in (i) above is not permitted, what is the option open to the Revenue
Department to deal with the said audit objection?
Answer:
(i) Section 147 states that, inter alia, if the Assessing Officer has reason to believe that any
income chargeable to tax has escaped assessment for any assessment year, he may, assess or
reassess such income and also any other income chargeable to tax which has escaped
assessment and which comes to his notice subsequently in the course of the proceedings under
this Section.
The basic requirements are as follows:
(1) The Assessing Officer should have reason to believe that income chargeable to tax
has escaped assessment. The belief should be that of the Assessing Officer and not
the audit party.
(2) It is further well established that audit party cannot express opinion on legal issues or
issues involving provisions of law [Indian & Eastern Newspaper Society v CIT (1979)
119 ITR 996 (SC)]. Such opinion cannot be the basis upon which the Assessing Officer
can initiate reassessment proceedings.
(3) The Income-tax Act, 1961 does not confer jurisdiction on change of opinion on the
interpretation of a particular provision earlier adopted by the assessing authority. It is
assumed that this issue had already been considered earlier during the course of
scrutiny assessment and the Assessing Officer had come to a conclusion that no
disallowance of interest paid by the assessee is required, even though loans had
been given to sister concern without any interest. Therefore, the same issue cannot
be the basis of reassessment, merely because the revenue audit team takes a
different view.
Therefore, the Assessing Officer cannot issue notice under section 148 on the basis of audit
objection of the Revenue Audit team.
(ii) The option open to the Revenue is initiation of proceedings under section 263, by the
jurisdictional Commissioner. He has the power to call for and examine the records, if he is of the
opinion that the order passed by the Assessing Officer under section 143(3) is erroneous in so far
as it is prejudicial to the interests of the Revenue.
However, where the Assessing Officer has considered the issue in the original assessment and
come to a conclusion that no disallowance of interest is called for, the Commissioner cannot
initiate revisionary proceedings, merely because he holds a different view. Only where the view
taken by the Assessing Officer is unsustainable in law, the Commissioner will be justified in
initiating the revisionary proceedings under section 263. In CIT v Sohana Woollen Mills (2008) 296
ITR 238, it has been held that mere audit objection and merely because a different view can be
taken, are not enough to say that the order of the Assessing Officer is erroneous or prejudicial to
the interest of revenue.
Note : As per Explanation 2 inserted in Section 263 by the Finance Act, 2015 w.e.f 1-6-2015. If the
order passed by the AO is deemed to be erroneous due to the reasons specified in the said
Explanation, the commissioner can initiate proceedings u/s 263 in such cases.
Question No.: 11.
A firm furnished its return of income on 30th June, 2018 showing income of ₹1,00,000. The return
shows other particulars as follows -
Advance tax ` 20,000
TDS ` 1,000
The AO passed the assessment order enhancing income by ` 5,000 on 29-3-2019. Compute
interest u/s 234B.
Answer:
Computation of interest u/s 234B

Particulars Amount
Assessed Income 1,05,000
Tax liability before surcharge [`1,05,000 * 30%] 31,500
Add: Education cess & SHEC @ 3% 945
Tax and cess payable 32,445
Less: Tax deducted at source 1,000
Assessed tax 31,445
90% of above 28,300
Advance tax paid 20,000
Since advance tax paid by the firm is less than 90% of assessed tax, sec. 234B is
applicable
Shortfall (Assessed tax less Advance tax paid) 11,445
Rounded off 11,400
Period of default [From April 2018 to March 2019] 12 months
Interest u/s 234B (1% x `11,400 x 12) 1,368
Question No.: 12.
Pankaj Ltd paid a sum of ` 15 lakhs as salary to Mr A for which no tax was deducted at source by
the company. Mr A filed his return of income and paid the tax due by way of self assessment.
The Assessing Officer issued notice to Mr A demanding interest under section 234B as no
advance tax was paid by him. Your opinion is sought on the following aspects-
i. Is the action of AO is valid?

ii. If not, is there any other means available to AO to recover the section?
Answer:
The Finance Act, 2012 has amended Section 209 retrospectively, with effect from 1.04.2012, to
provide that in case the payer has filed to deduct tax at sources, then the amount of tax so
deductible shall not be reduced from the income tax liability if the resident payee for
determining his liability to pay advance tax. Therefore the resident payee would be liable to pay
advance tax if the tax deductible was not deducted at source, in which case the interest under
section 234B for default in payment of advance tax would also be attracted.
Further interest @ 1% per month or part of the month would be leviable under section 201(1A) on
the payer from the month in which tax was deductible till the date of furnishing of return of
income by the resident payee.
Question No.: 13
The business premises of Ram Bharose Ltd. and the residence of two of its directors at Delhi were
searched under section 132 of the Act by the DDI, Delhi. The search was concluded on 9-8-2017
and following were also seized besides other papers and records:
(i) Papers found in drawer of an accountant relating to Shri Krishna Ltd., Mumbai indicating
details of various business transactions. However, Ram Bharose Ltd. is not having any
direct or indirect connection of any nature with these transactions and Shri Krishna Ltd.,
Mumbai and its directors.
(ii) Jewellery worth ` 5,00,000 from the bedroom of one of the director, which was claimed
by him to be of his married daughter.
(iii) Papers recording certain transactions of income and expenses having direct nexus with
the business of the company for the period from 16-4-2013 to date of search. It was
admitted by the director that the transactions recorded in such papers have not been
incorporated in the books.
You are required to answer on the basis of the aforesaid and the provisions of Act, following
questions:
(a) What action the DDI shall be taking in respect of the seized papers relating to Shri Krishna
Ltd., Mumbai?
(b) Whether the contention raised by the director as to jewellery found from his bedroom will be
acceptable?
(c ) What presumption shall be drawn in respect of the papers which indicate transactions not
recorded in the books?
(d) Proceedings for how many years shall now be taken up and within which time limit the
assessment thereof be completed by the Assessing Officer?
(e) Can the company move an application for settlement of case as per chapter XIX-A of the
Act?
Answer:
(a) Since, DDI, Delhi is not having any jurisdiction over Shri Krishna Ltd., Mumbai, the paper
seized relating to Shri Krishna Ltd. shall be handed over by him to the Assessing Officer
having jurisdiction over such person, within a period of 60 days from the date on which the
last of the authorizations for search was executed and the Assessing Officer to whom such
papers were handed over will take necessary action under section 132.
(b) The contention raised by the Director will not be acceptable because as per the provisions
as per section 132(4A), where any books of account, other documents, money, bullion,
jewellery or other valuables are found in the possession or control of any person in the
course of search, then, in respect therefore, it may be presumed that the same belong or
belongs to that person. Hence, the contention of Director is correct.
(c) As per section 132(4A), if any documents are found during the course of search, it is
presumed that the contents of such papers are true and it is in the handwriting of the same
person. (a) As per provision of section 153 A, the Assessing Officer will issue notices to the
company to furnish the return of income in respect of each assessment year falling within six
assessment years immediately preceding the assessment year relevant to the previous year in
which the search is conducted. Therefore, notices for A.Y. 2012-2013 to 2017-18 shall be issued
by the Assessing Officer.
(d) Further, the assessment for six assessment years shall be completed within a period of 2 years
from the end of the financial year in which the last of the authorization for search was executed.
Therefore, the assessment for the six assessment years shall be required to be completed by the
Assessing Officer by 31.12.2019 as the search was concluded on9-8-2017.
(e) The application to Settlement Commission can be made as per section 245A only if
additional income tax payable on the income disclosed in the application exceeds `
50,00,000.
Question No.: 14
Discuss the provision related to Provisional attachment to protect revenue in certain cases
(section 281B).
Answer:
 Where, during the pendency of any proceeding for the assessment or reassessment, the
Assessing Officer is of the opinion that for the purpose of protecting the interests of the
revenue it is necessary so to do, he may, with the previous approval of the Chief
Commissioner, Commissioner, Director General or Director, by order in writing, attach
provisionally any property belonging to the assessee in the manner provided in the
Second Schedule.
 Every such provisional attachment shall cease to have effect after the expiry of a period
of 6 months from the date of such order.
 However, Principal Chief Commissioner or Chief Commissioner, Principal Commissioner or
Commissioner, Principal Director General or Director General or Principal Director or
Director may, for reasons to be recorded in writing, extend the aforesaid period by such
further period or periods as he thinks fit, so, however, that the total period of extension
shall not in any case exceed 2 years or 60 days after the date of order of assessment or
reassessment, whichever is later.
 Where the assessee furnishes a guarantee from a scheduled bank for an amount not less
than the fair market value of the property provisionally attached, the Assessing Officer
shall, by an order in writing, revoke such attachment. However, where the Assessing
Officer is satisfied that a guarantee from a scheduled bank for an amount lower than the
fair market value of the property is sufficient to protect the interests of the revenue, he
may accept such guarantee and revoke the attachment.
 The Assessing Officer may, for the purposes of determining the value of the property
provisionally attached, make a reference to the Valuation Officer referred to in sec.
142A, who shall estimate the fair market value of the property in the manner provided
under that section and submit a report of the estimate to the Assessing Officer within a
period of 30 days from the date of receipt of such reference.
 An order revoking the provisional attachment shall be made:
 within 45 days from the date of receipt of the guarantee, where a
reference to the Valuation Officer has been made; or
 within 15 days from the date of receipt of guarantee in any other case.
 Where a notice of demand specifying a sum payable is served upon the assessee and
the assessee fails to pay that sum within the time specified in the notice of demand, the
Assessing Officer may invoke the guarantee furnished, wholly or in part, to recover the
amount.
 The Assessing Officer shall, in the interests of the revenue, invoke the bank guarantee, if
the assessee fails to renew the guarantee, or fails to furnish a new guarantee from a
scheduled bank for an equal amount, 15 days before the expiry of the guarantee.
 The amount realised by invoking the guarantee shall be adjusted against the existing
demand which is payable by the assessee and the balance amount, if any, shall be
deposited in the Personal Deposit Account of the Principal Commissioner or
Commissioner in the branch of the Reserve Bank of India or the State Bank of India or of
its subsidiaries or any bank as may be appointed by the Reserve Bank of India as its
agent at the place where the office of the Principal Commissioner or Commissioner is
situate.
 Where the Assessing Officer is satisfied that the guarantee is not required anymore to
protect the interests of the revenue, he shall release that guarantee forthwith.
Grievance Redressal
Question No.: 15.a.
Assessment of Pankaj Ltd. was completed u/s 143(3) with an addition of `15 lakhs to the returned
income. The assessee-company preferred appeal before the Commissioner (Appeals) which is
pending now.
In the backdrop, answer the following:
 Can the assessee-company seek revision u/s 264 in respect of matters other than those
preferred in appeal?
 Can the Commissioner make a revision u/s 263 both in respect of matters covered in
appeal and other matter?
Answer:
 As per section 264(4)(d), the Principal Commissioner or Commissioner shall not revise any
order under this clause where the order has been made the subject of an appeal to the
Commissioner (Appeals) i.e. where a led to CIT (Appeal) on any issue relating to such
order. Hence in this case, the Commissioner cannot revise an order which is pending
before the Commissioner (Appeal) even if the revision pertains to a matter, other than
the matter(s) covered in the appeal.
 As per clause (c) of Explanation to section 263, where an order passed by the Assessing
Officer has been subject matter of any appeal, it cannot be revised by the
Commissioner. However, in respect of such matters which have not been considered
and decided in appeal, the Commissioner has powers under section-263 for revision.
The Supreme Court in the case of Jaykumar B. Patil held that CIT has jurisdiction and power to
initiate proceedings under section 263 in respect of issues which are not touched by the
Commissioner of Income Tax (Appeals) in his appellate order.
Question No.: 15.b.
Discuss the correctness or otherwise of the following statements with reference to the provision of
the Income Tax Act, 1961:
1. An appeal before Income-tax Appellate Tribunal cannot be decided in the event of

difference of opinion between the Judicial Member and the Accountant Member on a
particular ground.
2. A high court does not have an inherent power to review an earlier order passed by it on
merits.
Answer:
1. The statement given is not correct. As per the provisions of Section 255, in the event of
difference between the members of the Bench of the Income-tax Appellate Tribunal, the
matter shall be decided on the basis of the opinion of the majority of the members. In case
the members are equally divided, they shall state the points of difference and the case
shall be referred by the President of the Tribunal for hearing on such points by one or more
of the other members of the Tribunal. Such point or points shall be decided according to
the opinion of majority of the members of the Tribunal who heard the case, including those
who had first heard it.
2. The statement given is correct. As per the decision given by the High Court in the case of
Deepak Kumar Garg v CIT (2010) 327 ITR 448, the power to review the order passed is not
an inherent power but need to be virtue of section 260A(7), the power of re-admission or
restoration of the appeal is always enjoyed by the High Court. However, such power
cannot be treated to be a power to review its earlier order on merits as it is not expressly
provided for in the law.
Question No.: 16.
Discuss the procedure for application for advance Ruling as per section 245-Q.
Answer:
An applicant desirous of obtaining an advance ruling may make an application stating the
question on which the advance ruling is sought in quadruplicate in:
(a) in Form No. 34C in respect of a non-resident applicant;
(b) in Form No. 34D in respect of a resident applicant seeking advance ruling in relation to a
transaction undertaken or proposed to be undertaken by him with a non-resident;
(c) in Form No. 34DA in respect of a resident applicant referred to in sec. 245N(b)(iia) falling
within any such class or category of person as notified by the Central Government; and
(d) in Form No. 34E in respect of a notified resident referred to in sec. 245N(b)(iii)
(e) in Form No. 34EA in respect of a applicant referred to in sec. 245N(b)(iiia)
and shall be verified in the manner indicated therein.
The application shall be accompanied by a fee of

a. ` 10,000 or
b. such fees as may be prescribed.
– whichever is higher
An applicant may withdraw an application within 30 days from the date of the application.
An application shall be presented by the applicant in person or by an authorised
representative to the Secretary or any other officer notified in writing by the Secretary or sent
by registered post addressed to the Secretary along with a fee (in the form of a Demand
Draft drawn in favour of "Authority for Advance Rulings" payable at New Delhi).
An application sent by registered post shall be deemed to have been made on the date on
which it is received in the office of the Authority.
If the applicant is not hitherto assessed in India, he shall indicate in Annexure I to the
application:
(a) his head office in any other country,
(b) the place where his office and residence is located or is likely to be located in India, and
(c) the name and address of his representative in India, if any, authorised to receive notices
and papers and act on his behalf.
The Secretary may send the application back to the applicant if it is defective in any manner
for removing the defects within such time as he may allow. Such application shall be
deemed to have been made on the date when it is represented after correction.
Question No.: 17
X &Co Ltd. had made an application to the Settlement Commission. The issue in the said
application related to cash credits in the books of account. The Commission passed an order
making addition to the income on the basis of difference in gross profit rate adopted, which was
neither an issue in the application nor in the report of the Commissioner of the Income Tax.
Discuss the validity of the order of the Settlement Commission.
Answer:
The issue under consideration is whether the Settlement Commission can pass an order making
addition to the income on the basis of difference in gross profit rate adopted, which was neither
an issue in the fin the report of the Commissioner of Income-tax.
Section 245D(5) provides that the Settlement Commission, after examination of records and the
report of the after examining such further evidence as may be placed before it or obtained by
it, may, in accordance with the provision of the Act, pass such order as it thinks fit.
Further Section 245D(5) provides that the materials brought on record before the Settlement
Commission shall be considered by the Members of the concerned Bench before passing any
order under section 245D(4).
Consideration means independent examination of the evidence and material brought on

record before the settlement commission by the members and application of mind thereto with a
view to independently assess the material and evidence, whether adduced by the applicant or
by the Commissioner, and come to a conclusion by themselves.
This view has been upheld in case of Supreme Agro Foods P Ltd. v Income-tax Settlement
Commission 2013 353 ITR 385 (P & H).
The settlement Commission, therefore, has to consider the material brought on record before it
and consideration means independent examination of the evidence and material on record.
In this case, since the material was available before the Settlement Commission and such
material has been federation for returning a finding which is relevant for determining the
undisclosed income of the applicant, the addition made on the basis of difference in gross profit
rate adopted is justified.
Therefore, the order of the Settlement Commission is valid.
Penalties and Prosecutions

Question No.: 18.a.
Compute penalty leviable u/s 270A in case of X Ltd from the following details:
Particulars Total Income Tax on Total Income Book Profit Tax on Book Profit
Return of income 80,00,000 24,72,000 2,00,00,000 40,77,770
Assessed income 1,20,00,000 39,67,560 2,10,00,000 42,81,659
b. Discuss the Power of Principal Commissioner or Commissioner to Grant Immunity from Penalty
under Sec. 273AA.
Answer:
a. Computation of penalty
Particulars Amount
Under-reported income
Total income computed by the Assessing Officer A 1,20,00,000
Total income as per return of income B 80,00,000
Book profit computed by the Assessing Officer C 2,10,00,000
Book profit as per return of income D 2,00,00,000
Under-reported income [(A – B) + (C – D)] 50,00,000
Tax on under-reported income
Tax on A P 39,67,560
Tax on B Q 24,72,000
Tax on C R 42,81,659
Tax on D S 40,77,770
Tax on Under-reported income [(P – Q) + (R – S)] T 16,99,449
Penalty u/s 270A
- Minimum (being 50% of T) 8,49,725
- Maximum (being 200% of T) 33,98,898
b.
1. A person may make an application to the Principal Commissioner or Commissioner for
granting immunity from penalty, if —
(a) he has made an application for settlement u/s 245C and the proceedings for settlement
have abated u/s 245HA; and
(b) the penalty proceedings have been initiated under this Act.
2. The application to the Principal Commissioner or Commissioner shall not be made after the
imposition of penalty after abatement.
3. The Principal Commissioner or Commissioner may, subject to such conditions as he may think
fit to impose, grant to the person immunity from the imposition of any penalty under this Act,
if he is satisfied that the person has, after the abatement, co-operated with the income-tax
authority in the proceedings before him and has made a full and true disclosure of his
income and the manner in which such income has been derived.
4. The order, either accepting or rejecting the application in full or in part, shall be passed
within a period of 12 months from the end of the month in which the application is received
by the Principal Commissioner or the Commissioner. Further, no order rejecting the
application, either in full or in part, shall be passed unless the assessee has been given an
opportunity of being heard.
5. The immunity granted to a person shall stand withdrawn, if such person fails to comply with
any condition subject to which the immunity was granted and thereupon the provisions of
this Act shall apply as if such immunity had not been granted.
6. The immunity granted to a person may, at any time, be withdrawn by the Principal
Commissioner or Commissioner, if he is satisfied that such person had, in the course of any
proceedings, after abatement, concealed any particulars material to the assessment from
the income-tax authority or had given false evidence, and thereupon such person shall
become liable to the imposition of any penalty under this Act to which such person would
have been liable, had not such immunity been granted.
Business Restructuring
Question No.: 19
Pankaj Ltd has two industrial undertakings. Unit 1 is engaged in the production of television sets
and Unit 2 is engaged in the production of refrigerators. The Company has, as part of its
restructuring program, decided to sell Unit 2 as a going concern, by way of Slump Sale for ` 300
Lakhs to a New Company called Amit Ltd, in which it holds 85% Equity Shares. The following are
extracted from the Balance Sheet of Pankaj Ltd. as on 31st March, 2018:
Particulars ` (in Lakhs)

Unit-1 Unit-2
Fixed Assets 112 158
Debtors 88 68
Inventories 85 22
Liabilities 33 65
` (in Lakhs)
Paid-up Share Capital 231
General Reserve 160
Share Premium 39
Revaluation Reserve 105
The Company had set up Unit 2 on 1.4.2013. The written down value of the block of Fixed Assets
for tax purpose as on 31st March, 2018 is ` 130 lakhs out of which ` 75 Lakhs are attributable to
Unit 2.
(i) Determine what would be the tax liability of Pankaj Ltd, on account of this Slump Sale.
(ii) How can the restructuring plan of Pankaj Ltd, be modified, without changing the amount of
consideration, in order to make it more tax efficient?
Solution:
(i) Computation of Tax Liability of Pankaj Ltd on Slump Sale
Long-Term Capital Gain on sale of Unit 2:

` Lakhs
Sale Consideration 300.00
Less: Cost of acquisition (Net Worth of the unit transferred) (See note) 100.00
Long Term Capital Gain (as the unit was held for more than 36 200.00
b months)
Tax on LTCG at 20% u/s 112 40.00
Add:
below)Surcharge at 7% (Since the Total Income exceeds ` 1 Crore) 2.80
Tax and Surcharge Payable 42.80
Education and SHEC @ 3% 1.284
Total Tax Liability 44.084
Computation of Net worth of Unit 2 (Refrigeration unit)
Particulars ` Lakhs
Depreciable Assets at WDV 75.00
Debtors at Book Value 68.00
Inventories at Book Value 22.00
Total Assets 165.00
Less: Liabilities 65.00
Net worth of Unit 2 100.00
Note:
ii. Modification in the Restructuring Plan: The Company can plan for demerger of the company.
Unit 2 may be transferred to Amit Ltd. In this case the shareholders of Pankaj Ltd will get shares of
Amit Ltd. in proportion to their shareholding in Pankaj Ltd. There will be no capital gain tax liability
as the transaction will not be regarded as a transfer. Alternatively, Pankaj ltd may acquire the
balance 15% shares of Amit ltd whereby it becomes the holding company and Amit ltd
becomes its 100% subsidiary company. After this, if the unit is transferred to Beta ltd. it will not be
regarded as transfer but it shall have to satisfy the conditions laid down otherwise the exemption
shall be withdrawn.
Different aspects of Tax Planning
Question No.: 20
State with reason whether the following acts can be considered as;
a. Tax Planning
b. Tax Management
c. Tax Evasion
i. A partnership firm obtaining declaration from lender in Form 15G/15H and forwarding
the same to Income Tax Authorities
ii. A company installed an AC costing ` 75,000 at the residence of a director as per
terms of his appointment but treats it as fitted in quality control section in the factory.
This is with the objective to treat it as plant for the purpose of computing depreciation.
iii. An individual tax payer making tax saver deposit ` 1,30,000 in a nationalized bank.
iv. A company remitted provident fund contribution of both its own contribution and
employee contribution on monthly basis before due date.
v. Pankaj Ltd issues a credit note for ` 90,000 as brokerage payable to Mr Amit who is
son of the managing director of the company. The purpose is to increase the total
income of Mr Amit from ` 5,00,000 to ` 5,90,000 and reduce the income of Pankaj Ltd
correspondingly.
Answer:
i. An Act of Tax Management: Partnership firm who is obtaining declaration from lender in
Form 15G/15H and forwarding the same to Income Tax authorities is an act of
compliance of statutory obligation under the Income Tax Act, 1961.
ii. An Act of Tax Evasion: Furniture is eligible for depreciation @ 10% whereas, a plant is
eligible for depreciation @ 15%. Therefore an AC fitted at the residence of a director
as per terms of his appointment would be furniture eligible for depreciation @ 10%
and 15% allowable for plant. Further, furniture at the residence of the director shall be
treated as perquisite and the value of the same has to be included while computing
his income under the head salary for the purpose of deduction of tax at source. Thus,
the default will amount to an act of tax evasion.
iii. An Act of Tax Planning: Tax saver deposit of ` 1,30,000 made by an individual in a
nationalized bank for claiming deduction under section 80C is an act of Tax Planning
under the provision of Income Tax.
iv. An Act of Tax Management: Remittance of provident fund contribution of both its own
and its employees on monthly basis before due date is a compliance of statutory
obligation and hence an act of tax management.
v. An Act of Tax Evasion: Booking a fictitious expense for reducing the total income is a
clear act of tax evasion as it reduces the tax liability of the assessee which is taxable
at the flat rate of 30%. Whereas, the son of the managing director attracts the tax
liability of 10%.
Income Tax Authorities

Question No.: 21
Discuss the power of Central Board of Direct Taxes (CBDT).
Answer:
1. Instructions to subordinate authorities [Sec. 119(1)]

The Board may, from time to time, issue such orders, instructions and directions to other
income-tax authorities as it may deem fit for the proper administration of this Act. Such
authorities and all other persons employed in the execution of this Act shall observe and
follow such orders, instructions and directions of the Board
Exception
No such orders, instructions or directions shall be issued—
 So as to require any income-tax authority to make a particular assessment or to dispose
of a particular case in a particular manner; or
 So as to interfere with the discretion of the Commissioner (Appeals) in the exercise of his
appellate functions.
However, the Board can issue administrative instructions.
2. Issue General or Special order to subordinates [Sec. 119(2)(a)]

The Board may issue from time to time general or special orders to its subordinate subject to
following features:
(a) If it considers it necessary or expedient to do so, for the purpose of proper and efficient
management of the work of assessment and collection of revenue.
(b) Such order may be issued whether by way of relaxation of any of the provisions of sec.
115P, 115S, 139, 143, 144, 147, 148, 154, 155, 158BFA, 201(1A), 210, 211, 234A, 234B, 234C,
234E, 270A, 271, 271C, 271CA and 273 or otherwise.
(c) Such orders may be in respect of any class of incomes or class of cases
(d) Such order must not be prejudicial to the assessee.
(e) Such order acts as guidelines, principles or procedures to be followed by other income-tax
authorities in the work relating to assessment or collection of revenue or the initiation of
proceedings for the imposition of penalties;
(f) Any such order may, if the Board is of the opinion that it is necessary in the public interest
so to do, be published and circulated in the prescribed manner for general information.
3. Admit application or claim after expiry of time limit [Sec. 119(2)(b)]

(a) The Board may, by general or special order, admit an application or claim for any
exemption, deduction, refund or any other relief under this Act after the expiry of the
period specified under this Act for making such application or claim.
(b) Such order can be issued by the Board, if it considers it desirable or expedient to do so,
for avoiding genuine hardship in any case or class of cases.
(c) Such order can be issued to any income-tax authority except Commissioner (Appeals).
4. Relaxation in requirement of the provisions of Chapter IV or Chapter VIA [Sec. 119(2)(c)]

 The Board may, by general or special order, relax any requirement contained in any of
the provisions of Chapter IV (Sec.14 to 59) or Chapter VIA (Sec.80A to 80U), where the
assessee has failed to comply with any requirement specified in such provision for
claiming deduction there under.
 Reasons for issuing such order are to be specified therein;
 The Board can issue such order if it considers it desirable or expedient to do so for
avoiding genuine hardship in any case or class of cases;
 Such order can be issued subject to the following conditions:
a) the default in complying with such requirement was due to circumstances beyond
the control of the assessee; and
b) the assessee has complied with such requirement before the completion of
assessment in relation to the previous year in which such deduction is claimed.
Note: The Central Government shall cause every order issued under this clause to be laid
before each House of Parliament.
5. Control over income-tax authorities [Sec. 118]

The Board may, by notification in the Official Gazette, direct that any income-tax authority
or authorities specified in the notification shall be subordinate to such other income-tax
authority or authorities as may be specified in such notification.
Note
An order, circular, instruction or direction issued u/s 119 cannot override the provisions of the
Act.
Ecommerce Transactions and Liability in special cases
Question No.: 22 Discuss the manner of computation of income under tonnage tax scheme [Sec.
115VE].
Answer:
 A tonnage tax company (means a qualifying company in relation to which tonnage tax
option is in force) engaged in the business of operating qualifying ships shall compute the
profits from such business under the tonnage tax scheme.
 The business of operating qualifying ships giving rise to income [referred to in sec. 115V-I(1)]
shall be considered as a separate business (hereafter referred to as the tonnage tax
business) distinct from all other activities or business carried on by the company.
 The profits shall be computed separately from the profits and gains from any other business.
 The tonnage tax scheme shall apply only if an option to that effect is made in accordance
with the provisions of section 115VP.
 Where a company engaged in the business of operating qualifying ships is not covered
under the tonnage tax scheme or, has not made an option to that effect, as the case may
be, the profits and gains of such company from such business shall be computed in
accordance with the other provisions of this Act.
Tonnage income [Sec. 115VF]

The tonnage income shall be computed in accordance with sec. 115VG and the income so
computed shall be deemed to be the profits chargeable under the head "Profits and gains of
business or profession" and the relevant shipping income referred to in sec. 115V-I(1) shall not be
chargeable to tax.
Computation of tonnage income [Sec. 115VG]

The tonnage income of a tonnage tax company for a previous year shall be the aggregate of
the tonnage income of each qualifying ship computed in accordance with the following
provisions:
 The tonnage income of each qualifying ship shall be the daily tonnage income of each such
ship multiplied by:
(a) the number of days in the previous year; or
(b) the number of days in part of the previous year in case the ship is operated by the
company as a qualifying ship for only part of the previous year.
Daily tonnage income of a qualifying ship shall be:
Qualifying ship having net tonnage Amount of daily tonnage income
Upto 1,000 ` 70 for each 100 tons
Exceeding 1,000 but not more than ` 700 plus ` 53 for each 100 tons exceeding 1,000
10,000 tons
Exceeding 10,000 but not more than ` 5,470 plus ` 42 for each 100 tons exceeding 10,000
25,000 tons
Exceeding 25,000 ` 11,770 plus ` 29 for each 100 tons exceeding 25,000
tons
 The tonnage shall be rounded off to the nearest multiple of 100 tons and for this purpose
 any tonnage consisting of kilograms shall be ignored and thereafter;
 if such tonnage is not a multiple of 100, then,
 if the last figure in that amount is 50 tons or more, the tonnage shall be
increased to the next higher tonnage which is a multiple of 100; or
 if the last figure is less than 50 tons the tonnage shall be reduced to the next
lower tonnage which is a multiple of 100.
 No deduction or set off shall be allowed in computing the tonnage income under this
Chapter.
Income Computation and Disclosure Standards (ICDS)
Question No.: 23 Discuss ICDS II on “Valuation on Inventories”.
Answer:
Scope
This Standard shall be applied for valuation of inventories, except
i. Work-in-progress arising under ‗construction contract‘
ii. Work-in-progress which is dealt with by other Standard
iii. Shares, debentures and other financial instruments held as stock-in-trade
iv. Producers‘ inventories of livestock, agriculture and forest products, mineral oils, ores and
gases to the extent that they are measured at net realisable value
v. Machinery spares, which can be used only in connection with a tangible fixed asset and
1
their use is expected to be irregular
Measurement
Inventories shall be valued at cost, or net realisable value, whichever is lower.
 Net realisable value is the estimated selling price in the ordinary course of business less the
estimated costs of completion and the estimated costs necessary to make the sale.
 In case of dissolution of a partnership firm or association of person or body of individuals,
notwithstanding whether business is discontinued or not, the inventory on the date of
dissolution shall be valued at the net realisable value. The provision is contrary to law
settled by the Apex court in the case of Sakti Trading Co.
Cost of Inventories
Cost of inventories shall comprise of all costs of purchase, costs of services, costs of
conversion and other costs incurred in bringing the inventories to their present location and
condition.
 The costs of purchase shall consist of purchase price including duties and taxes, freight
inwards and other expenditure directly attributable to the acquisition. Trade discounts,
rebates and other similar items shall be deducted in determining the costs of purchase
 The costs of services shall consist of labour and other costs of personnel directly engaged
in providing the service including supervisory personnel and attributable overheads.
 The costs of conversion of inventories shall include costs directly related to the units of
production and a systematic allocation of fixed and variable production overheads that
are incurred in converting materials into finished goods.
 Other costs shall be included in the cost of inventories only to the extent that they are
incurred in bringing the inventories to their present location and condition.
 Interest and other borrowing costs shall not be included in the costs of inventories, unless
they meet the criteria for recognition of interest as a component of the cost as specified
in the Income Computation and Disclosure Standard on borrowing costs.
 In determining the cost of inventories, the following costs shall be excluded
a. Abnormal amounts of wasted materials, labour, or other production costs;
b. Storage costs, unless those costs are necessary in the production process prior to a
further production stage;
c. Administrative overheads that do not contribute to bringing the inventories to their
present location and condition;
d. Selling costs.
Cost Formulae
The standard recognizes 3 cost formulae viz. (i) Specific Identification Method; (ii) First-in-First-
Out Method (FIFO); (iii) Weighted Average Method
Change of Method of Valuation of Inventory
The method of valuation of inventories once adopted by a person in any previous year shall
not be changed without reasonable cause
Disclosure
Following shall be disclosed:
a. the accounting policies adopted in measuring inventories including the cost formulae
used; and
b. the total carrying amount of inventories and its classification appropriate to a person.
Question No.: 24 Discuss ICDS IV on “Revenue Recognition”.

Answer:
Scope
The Standard deals with the bases for recognition of revenue arising in the course of the ordinary
activities of a person from:
a) the sale of goods;
b) the rendering of services;
c) the use by others of the person‘s resources yielding interest, royalties or dividends.
 Revenue is the gross inflow of cash, receivables or other consideration arising in the
course of the ordinary activities of a person from the sale of goods, from the rendering of
services, or from the use by others of the person‘s resources yielding interest, royalties or
dividends. In an agency relationship, the revenue is the amount of commission and not
the gross inflow of cash, receivables or other consideration.
 The Standard does not deal with the aspects of revenue recognition which are dealt
with by other ICDS.
Sale of Goods
Revenue from sales transactions should be recognized when the following conditions are fulfilled
-
a) The seller of goods has transferred to the buyer the property in the goods for a price or all
significant risks and rewards of ownership have been transferred to the buyer;
b) The seller retains no effective control of the goods transferred to a degree usually
associated with ownership;
c) There is reasonable certainty of its ultimate collection.
Rendering of Services
 Revenue from service transactions shall be recognised by the percentage completion
method.
 Under this method, revenue from service transactions is matched with the service
transaction costs incurred in reaching the stage of completion, resulting in the
determination of revenue, expenses and profit which can be attributed to the proportion
of work completed.
 However, when services are provided by an indeterminate number of acts over a
specific period of time, revenue may be recognised on a straight line basis over the
specific period.
 Revenue from service contracts with duration of not more than 90 days may be
recognised when the rendering of services under that contract is completed or
substantially completed.
Interest
 Interest shall accrue on the time basis determined by the amount outstanding and the
rate applicable.
 Interest on refund of any tax, duty or cess shall be deemed to be the income of the
previous year in which such interest is received.
 Discount or premium on debt securities held is treated as though it were accruing over
the period to maturity.
Royalty
Royalties shall accrue in accordance with the terms of the relevant agreement and shall be
recognised on that basis unless, having regard to the substance of the transaction, it is more
appropriate to recognise revenue on some other systematic and rational basis.
Dividend
Dividends are recognised in accordance with the provisions of the Act
Disclosure
Following disclosures shall be made in respect of revenue recognition:
a) in a transaction involving sale of goods, total amount not recognised as revenue during
the previous year due to lack of reasonably certainty of its ultimate collection along with
nature of uncertainty;
b) the amount of revenue from service transactions recognised as revenue during the
previous year;
c) the method used to determine the stage of completion of service transactions in progress;
and
d) for service transactions in progress at the end of previous year:
i. amount of costs incurred and recognised profits (less recognised losses) upto end of
previous year;
ii. the amount of advances received; and
iii. the amount of retentions.
Black Money Act, 2015
Question No.: 25
a. Computation of total undisclosed foreign income and asset [Sec. 5].
b. Define the following’s as per the provisions under Black Money Act, 2015;
i. Tax Authorities;
ii. Change of incumbent.
Answer:
a. In computing the total undisclosed foreign income and asset of any previous year of an
assessee:
 No deduction in respect of any expenditure or allowance or set off of any loss shall
be allowed to the assessee, whether or not it is allowable in accordance with the
provisions of the Income-tax Act.
 Any income,—
a) which has been assessed to tax for any assessment year under the Income-tax Act
prior to the assessment year to which this Act applies; or
b) which is assessable or has been assessed to tax for any assessment year under this
Act,
shall be reduced from the value of the undisclosed asset located outside India, if, the
assessee furnishes evidence to the satisfaction of the Assessing Officer that the asset has
been acquired from the income which has been assessed or is assessable, as the case
may be, to tax.
The amount of deduction in case of an immovable property shall be the amount which bears to
the value of the asset as on the first day of the financial year in which it comes to the notice of
the Assessing Officer, the same proportion as the assessable or assessed foreign income bears to
the total cost of the asset.
b.
Tax authorities [Sec. 6]

 The income-tax authorities shall be the tax authorities for the purposes of this Act.
 Every such authority shall exercise the powers and perform the functions of a tax
authority under this Act in respect of any person within his jurisdiction.
 The jurisdiction of a tax authority under this Act shall be the same as he has under the
Income-tax Act
 The tax authority having jurisdiction in relation to an assessee who has no income
assessable to income-tax under the Income-tax Act shall be the tax authority having
jurisdiction in respect of the area in which the assessee resides or carries on its business or
has its principal place of business.
Change of incumbent [Sec. 7]

The tax authority who succeeds another authority as a result of change in jurisdiction or for any
other reason, shall continue the proceedings from the stage at which it was left by his
predecessor. The assessee in such a case may be given an opportunity of being heard, if he so
requests in writing, before passing any order in his case.
International Taxation
Question No.: 26
a. Write short notes on “Resident of Contracting State”.
b. Mr Pankaj, an individual resident and citizen of India earned remuneration in foreign from
a University in foreign country during her stay in that country in the previous year 2017-18.
There is no Double taxation avoidance agreement with that country. The remuneration
was `4,00,000 and ` 30,000 was deducted at source by the university. Income from other
sources of Mr Pankaj in India, was ` 2,67,000.
Compute the relief available to her under Section 91 assuming that Mr Pankaj brings `
3,00,000 in India in convertible foreign exchange by 30.09.2018.
Answer:
a.
Residence as defined in double taxation treaties is different from residence as defined for
domestic tax purposes. Tax treaties generally follow the OECD Model Convention.
For the purposes of this Convention, the term "resident of a Contracting State" means any person
who, under the laws of that State, is liable to tax therein by reason of his domicile, residence,
place of management or any other criterion of a similar nature, and also includes that State and
any political subdivision or local authority thereof. This term, however, does not include any
person who is liable to tax in that State in respect only of income from sources in that State or
capital situated therein.
Where by reason of the provisions of aforesaid paragraph an individual is a resident of both
Contracting States, then his status shall be determined as follows:
a. he shall be deemed to be a resident only of the State in which he has a permanent home
available to him; if he has a permanent home available to him in both States, he shall be
deemed to be a resident only of the State with which his personal and economic relations
are closer (centre of vital interests);
b. if the State in which he has his centre of vital interests cannot be determined, or if he has not
a permanent home available to him in either State, he shall be deemed to be a resident only
of the State in which he has an habitual abode;
c. if he has an habitual abode in both States or in neither of them, he shall be deemed to be a
resident only of the State of which he is a national;
d. if he is a national of both States or of neither of them, the competent authorities of the
Contracting States shall settle the question by mutual agreement.
Where by reason of the aforesaid provisions, a person other than an individual is a resident of
both Contracting States, then it shall be deemed to be a resident only of the State in which its
place of effective management is situated.
b.
Computation of Taxable income of Mr Pankaj for the A.Y 2018-19

Particulars Amount (`) Amount (`)
Income from Salary 4,00,000
Less: Deduction Nil 4,00,000
Income from other sources 2,67,000
Gross Total Income 6,67,000
Less: Deduction under chapter VIA Nil
6,67,000
Tax on 6,67,000 45,900
Add: Education cess and SHEC @3% 1,377
Total Tax 47,277
Less: Relief under section 91 30,000
Balance tax payable 17,280
1. Average rate of tax i.e Tax on Total Income /Total Income x 100
=47222/667000 x 100=7.089%
2. Average rate of tax of foreign tax
30000/400000 x 100=7.5%
Hence relief available shall be @7.089% or 7.5% of foreign c=income whichever is less
` 4,00,000 x 7.5%= `30,000
Question No.: 27
a. State the meaning of International transaction.
b. Brain Inc. London has 35% equity in Salem Ltd. The company Salem Ltd. is engaged in
development of software and maintenance of customers across the globe, which
includes Brain Inc.
During the year 2017-18, Salem Ltd. spent 2000 man hours for developing and maintaining a
software for Brain Inc. and billed at ` 1,000 per hour. The cost incurred for executing
maintenance work to Brain Inc. for Salem Ltd. amount to `15,00,000. Similar such work was
done for unrelated party Try Ltd. in which the profit was at 50%. Brain Inc. gives technical
support to Salem Ltd. which can be valued at 8% of gross profit. There is no such functional
relationship with try Ltd. Salem Ltd. gives credit period of 90 days the cost of which is 3% of
the normal billing rate which is not given to other parties.
Compute ALP under cost plus method in the hands of Salem Ltd. and the impact of the same
on the total income.
Answer:
a. International transaction:
International transaction means a transaction between two or more associated enterprises,

either or both of whom are non-residents, in the nature of
(i) purchase, sale or lease of tangible or intangible property, or
(ii) provision of services, or
(iii) lending or borrowing money, or
(iv) any other transaction having a bearing on the profits, income, losses or assets of such
enterprises; &
shall include a mutual agreement or arrangement between two or more associated
enterprises
a. for the allocation or apportionment of, or
b. any contribution to, any cost or expense incurred or to be incurred in connection with a
benefit, service or facility provided or to be provided to any one or more of such
enterprises [Sec. 92B(1)]
A transaction entered into by an enterprise with a person other than an associated enterprise
shall, be deemed to be an international transaction entered into between two associated
enterprises,
a) if there exists a prior agreement in relation to the relevant transaction between such
other person and the associated enterprise; or
b) the terms of the relevant transaction are determined in substance between such
other person and the associated enterprise
where the enterprise or the associated enterprise or both of them are non-residents irrespective
of whether such other person is a non-resident or not [Sec. 92B(2)]
E.g. X Ltd., an Indian company, and Y Inc., a foreign company, are associated enterprise. Z Plc.,
a foreign company, (not an associated enterprise of X Ltd.) and Y Inc. enters into an agreement
for determining the terms of transactions between X Ltd. and Z Plc. The transaction as may be
entered between X Ltd. and Z Plc., which is governed by such an agreement existing between Y
Inc. and Z Plc. shall be deemed to be a transaction between two associated enterprises.
Taxpoint
Non-resident means a person who is not a 'resident' including a person who is not ordinarily
resident [Sec. 2(30)]
Transaction includes an arrangement, understanding or action in concert,—
(A) whether or not such arrangement, understanding or action is formal or in writing; or
(B) whether or not such arrangement, understanding or action is intended to be
enforceable by legal proceeding. [Sec. 92F(v)]
For a transaction to be an international transaction, it should satisfy the following two conditions
cumulatively:
b) It must be a transaction between two associated enterprises; and
c) At least one of the two enterprises must be a non-resident.
b.
(A) Computation of Arms Length Gross Profit Mark-up

Particulars %
Normal Gross Profit Mark up 50.00
Less: Adjustment for differences
Technical support from Brain Inc [ 8% of Normal GP = 8% of 50%] (4.00)
46.00
Add: Cost of Credit to Brain Inc 3% of Normal Bill [3% ×GP 50%] 1.50
Arm‘s Length Gross Profit mark-up 47.50
(B) Computation of Increase in Total Income of Brain Inc
Particulars Amount
Cost of services 15,00,000
Arm‘s length Billed Value [Cost / [ (100 – Arm‘s Length mark up)] [ ` 15,00,000 / (100% 28,57,143
- 47.50%)]
Less: Billed amount [ 2,000 hours x ` 1,000 per hour] 20,00,000
Therefore, Increase in Total Income 8,57,143
Case Study Analysis
Question No.: 28
a. Credit of TDS won’t be denied to a contractor even if entire work has been sub-contracted to
others. Critically comment with case law.
b. Delay in issuing a notice u/s 143(2) would be fatal to the re-assessment proceedings. Critically
comment with case law.
Answer:
a. IVRCL-KBL (JV) -va.- ACIT (2016) (Andhra Pradesh)
The assessee was a joint-venture executing civil contract works. It was awarded contracts by the
Irrigation Department of the State Government. The assessee gave said contracts subsequently
on sub-contract basis to one of its constituents without any margin. The assessee filed its return
claiming refund of tax deducted at source from bills paid by the State Government. The
assessing authority contended that as no real work was carried on by the assessee, no income
had accrued to it and therefore , credit for TDS was not allowable in the hands of the assessee in
terms of Rule 37BA (2)(i) of the income tax rules,1962.
The High Court ruled in favour of the assessee by contending that there are two distinct and
independent contracts. There is no privity of contract between the government and the
constituent of the assessee i.e. sub-contractor. The rights and obligations under the first contract
are only that of the Government and the assessee; and those, in the second contract, are only
that of the assessee and the sub-contractor. The contractual obligation, to execute the work for
the Government, is that of the assessee joint venture alone, and not that of the constituent
member of the JV i.e. the sub-contractor. It is evident, therefore, that the contractual receipts
under the first contract is only that of the assessee; and the income, arising out of the said
contract, is assessable only in their hands, and not in the hands of the sub-contractor. The High
Court set aside the order passed by the AO and directed to determine the quantum of credit for
TDS which the assessee is entitled to and refund the amount so computed to assessee in
accordance with law.
b.
Indus Towers Limited -vs.- DCIT (2017) (Delhi)

The Petitioner is the successor to India Cellular Towers Infrastructure Ltd. (‗ICTIL‘). ICTIL and India
Cellular Limited (‗ICL‘) filed a scheme of arrangement (‗demerger scheme‘) under Sec. 391 to
394 of the Companies Act, 1956 on 17th/24th April, 2009 for transfer of the passive infrastructure
(PI) assets owned by ICL to ICTIL with effect from 1st January, 2009. On 3rd and 31st August 2009,
the High Court of Delhi and High Court of Gujarat, respectively, approved the demerger
scheme. ICTIL filed a return of income for the AY 2009-10 on 26th September, 2009. On 29th
September, 2009, the demerger scheme became effective upon its submission to the Registrar
of Companies. As a result, the PI assets owned by ICL stood transferred to ICTIL with effect from
1st January, 2009.
On February 22, 2013, the AO issued a notice u/s. 148 of the Act to ICTIL for re-opening the
assessment for AY 2009-10, which already stood concluded, requiring ICTIL to file its return of
income within 30 days of the receipt of the notice. The re-opening was ordered because of the
receipt of capital assets by ICTIL on ‗nil‘ consideration from ICL and the demerger approved by
the High Court was not compliant with the Act. ICTIL requested that the revised return filed by it
on March 31, 2010 u/s. 139(5) of the Act should be considered as the return filed in response to
the notice was rejected by the Assessing Officer.
Aggrieved, the assessee preferred an appeal before the Delhi High Court.
It was assessee‘s contention that belief of Assessing Officer was a mere change of opinion and
the proceedings have been initiated on the basis of no material and, therefore, assumption of
jurisdiction was plainly unsustainable in law. It was further contended that in terms of the proviso
to Sec. 153(1), time limit for completion of AY 2009- 10 was December 31, 2011. In addition, the
proviso to Sec. 143(2) requires that notice for assessment should be issued within six months from
the end of the financial year in which the return was furnished by an assessee.
The High Court held that law on this point was fairly well settled in the decisions in ACIT -vs.- Hotel
Blue Moon [2010] 321 ITR 362 (SC) reiterated in CIT -vs.- Madhya Bharat Energy Corporation
[2011] 337 ITR 389 (Del) and Pr. CIT -vs.- Jai Shiv Shankar Traders (P.) Ltd. [2016] 383 ITR 448 (Del)].
In the last mentioned judgment, the division bench had held that the delay in issuing a notice
under Sec. 143(2) would be fatal to the reassessment proceedings.
The High Court quashed the impugned notice dated 22nd February, 2013 issued to the Petitioner
u/s. 148 as well as the consequential order dated 20th January, 2014 disposing of its objections
as well as the reassessment proceedings pursuant thereto.
Short Notes
Question No.: 29 Write short notes on the followings;

a. Scope of total undisclosed foreign income and asset [Sec. 4]
b. Penalty for under-reporting and misreporting of income [Sec. 270A]
c. ICDS-IX on “Borrowing Cost”
d. Application for Advance Ruling [Sec. 245-Q]
Answer.
a. Scope of total undisclosed foreign income and asset [Sec. 4]:
 The total undisclosed foreign income and asset of any previous year of an assessee shall
be:
 the income from a source located outside India, which has not been disclosed in the
return of income furnished u/s 139 of the Income-tax Act;
 the income, from a source located outside India, in respect of which a return is required
to be furnished u/s 139 of the Income-tax Act but no return of income has been furnished
u/s 139 of the Income-tax Act; and
 the value of an undisclosed asset located outside India.
 Any variation made in the income from a source outside India in the assessment or
reassessment of the total income of any previous year, of the assessee under the
Income-tax Act in accordance with the provisions of section 29 to section 43C (Profits
and gains of business or profession) or section 57 to section 59 (Income from other
sources) or section 92C (Transfer pricing) of the said Act, shall not be included in the total
undisclosed foreign income.
 To avoid double taxation, the income included in the total undisclosed foreign income
and asset under this Act shall not form part of the total income under the Income-tax
Act.
b. Penalty for under-reporting and misreporting of income [Sec. 270A]

The
- Assessing Officer; or
- Commissioner (Appeals); or
- Principal Commissioner or Commissioner
may, during the course of any proceedings under this Act, direct that any person who has
under-reported his income shall be liable to pay a penalty in addition to tax, if any, on the
under-reported income.
Taxpoint
 Penalty proceedings must be initiated before completion of the assessment or appeal
order or revision order, as the case may be.
 Penalty order is different from assessment order. Aggrieved with the penalty order passed
by the Assessing Officer, the assessee is required to file separate appeal to the
Commissioner (Appeals) or separate revision petition u/s 264 or separate rectification
petition u/s 154. Further, appeal can be filed with the Tribunal against the penalty order
passed by the Commissioner (Appeals) or Principal Commissioner or Commissioner.
 Tribunal cannot impose penalty
 Penalty shall be imposed by the respective income-tax authority on addition made by
them. E.g., on addition being made by the Assessing Officer, Commissioner (Appeals)
cannot levy penalty. Even the Assessing Officer fails to levy penalty on such addition,
Commissioner (Appeals) cannot levy penalty on such addition made by the Assessing
Officer. In CIT -vs.- Shadiram Balmukund, the Apex court has held that the Assessing
officer can levy penalty on the additions made by him and not on the additions made
by Commissioner (Appeals). Similarly, Commissioner (Appeals) can levy penalty on the
additions made by him and not on the additions made by the Assessing Officer.
c. ICDS-IX on “Borrowing Cost”
Scope
The Standard deals with treatment of borrowing costs. However, the Standard does not deal
with the actual or imputed cost of owners‘ equity and preference share capital.
Borrowing costs are interest and other costs incurred by a person in connection with the
borrowing of funds and include:
a) commitment charges on borrowings;
b) amortised amount of discounts or premiums relating to borrowings;
c) amortised amount of ancillary costs incurred in connection with the arrangement
of borrowings;
d) finance charges in respect of assets acquired under finance leases or under
other similar arrangements.
Recognition
Borrowing costs that are directly attributable to the acquisition, construction or production of a
qualifying asset shall be capitalised as part of the cost of that asset.
Qualifying asset means:

a. land, building, machinery, plant or furniture, being tangible assets;
b. know-how, patents, copyrights, trademarks, licences, franchises or any other business or
commercial rights of similar nature, being intangible assets;
c. inventories that require a period of 12 months or more to bring them to a saleable
condition.
Borrowing Costs Eligible for Capitalisation
Specific Borrowing: The extent to which funds are borrowed specifically for the purposes of
acquisition, construction or production of a qualifying asset, the amount of borrowing costs to
be capitalised on that asset shall be the actual borrowing costs incurred during the period on
the funds so borrowed.
Other than specific borrowing: The amount of borrowing costs to be capitalised shall be
computed in accordance with this formula: A x B / C
A Borrowing costs incurred during the previous year except on specific borrowings
B i. the average of costs of qualifying asset as appearing in the balance sheet of a person
on the first day and the last day of the previous year
ii. in case the qualifying asset does not appear in the balance sheet of a person on the
first day, half of the cost of qualifying asset; or
iii. in case the qualifying asset does not appear in the balance sheet of a person on the
last day of the previous year, the average of the costs of qualifying asset as appearing
in the balance sheet of a person on the first day of the previous year and on the date
of put to use or completion, as the case may be,
excluding the extent to which the qualifying assets are directly funded out of specific
borrowings
C the average of the amount of total assets as appearing in the balance sheet of a person
on the first day and the last day of the previous year, other than assets to the extent they
are directly funded out of specific borrowings
Commencement of Capitalisation
The capitalisation of borrowing costs shall commence
 In case of specific borrowing : from the date on which funds were borrowed
 In case of other borrowing : from the date on which funds were utilised
Cessation of Capitalisation
Capitalisation of borrowing costs shall cease:
 In case of asset other than inventory When such asset is first put to use
 In case of inventory When substantially all the activities necessary to
prepare such inventory for its intended sale are
complete.
Disclosure
The following disclosure shall be made in respect of borrowing costs, namely:—
a) the accounting policy adopted for borrowing costs; and
b) the amount of borrowing costs capitalised during the previous year.
d. Application for Advance Ruling [Sec. 245-Q]
 An applicant desirous of obtaining an advance ruling may make an application stating

the question on which the advance ruling is sought in quadruplicate in:
 in Form No. 34C in respect of a non-resident applicant;
 in Form No. 34D in respect of a resident applicant seeking advance ruling in relation to a
transaction undertaken or proposed to be undertaken by him with a non-resident;
 in Form No. 34DA in respect of a resident applicant referred to in sec. 245N(b)(iia) falling
within any such class or category of person as notified by the Central Government; and
 in Form No. 34E in respect of a notified resident referred to in sec. 245N(b)(iii)
 in Form No. 34EA in respect of a applicant referred to in sec. 245N(b)(iiia)
 and shall be verified in the manner indicated therein.
 The application shall be accompanied by a fee of

 ` 10,000 or
 such fees as may be prescribed.
– whichever is higher
 An applicant may withdraw an application within 30 days from the date of the
application.
 An application shall be presented by the applicant in person or by an authorised
representative to the Secretary or any other officer notified in writing by the Secretary or
sent by registered post addressed to the Secretary along with a fee (in the form of a
Demand Draft drawn in favour of "Authority for Advance Rulings" payable at New Delhi).
 An application sent by registered post shall be deemed to have been made on the date
on which it is received in the office of the Authority.
 If the applicant is not hitherto assessed in India, he shall indicate in Annexure I to the
application:
 his head office in any other country,
 the place where his office and residence is located or is likely to be located in
India, and
 the name and address of his representative in India, if any, authorised to receive
notices and papers and act on his behalf.
 The Secretary may send the application back to the applicant if it is defective in any
manner for removing the defects within such time as he may allow. Such application
shall be deemed to have been made on the date when it is represented after
correction.
Question No.: 30. Write short notes on the followings
a. Permanent Establishment
b. Power of Authorised officer while carrying search.
c. ICDS-I on “Accounting Policies”
d. Income Tax Authorities
Answer:
a. Permanent Establishment:
One of the important terms that occur in all the Double Taxation Avoidance Agreements is the
term 'Permanent Establishment' (PE) which has not been defined in the Income Tax Act.
However as per the Double Taxation Avoidance Agreements, PE includes, a wide variety of
arrangements i.e. a place of management, a branch, an office, a factory, a workshop or a
warehouse, a mine, a quarry, an oilfield etc. Imposition of tax on a foreign enterprise is done
only if it has a PE in the contracting state. Tax is computed by treating the PE as a distinct and
independent enterprise.
Generally, in Indian context, the term permanent establishment‖ means a fixed place of
business through which the business of an enterprise is wholly or partly carried on. The term
―permanent establishment‖ shall also include:
a. a place of management;
b. a branch;
c. an office;
d. a factory;
e. a workshop;
f. a mine, an oil or gas well, a quarry or any other place of extraction of natural resources;
g. a warehouse in relation to a person providing storage facilities for others;
h. a farm, plantation or other place where agricultural, pastoral, forestry or plantation activities
are carried on;
i. premises used as a sales outlet or for receiving or soliciting orders;
j. an installation or structure, or plant or equipment, used for the exploration for or exploitation
of natural resources;
k. a building site or construction, installation or assembly project, or supervisory activities in
connection with such a site or project, where that site or project exists or those activities are
carried on (whether separately or together with other sites, projects or activities) for more
than specified months (generally 6 months).
Exclusion
An enterprise shall not be deemed to have a permanent establishment merely by reason of :
a. the use of facilities solely for the purpose of storage or display of goods or merchandise
belonging to the enterprise ;
b. the maintenance of a stock of goods or merchandise belonging to the enterprise solely for
the purpose of storage or display ;
c. the maintenance of a stock of goods or merchandise belonging to the enterprise solely for
the purpose of processing by another enterprise;
d. the maintenance of a fixed place of business solely for the purpose of purchasing goods or
merchandise, or of collecting information, for the enterprise; or
e. the maintenance of a fixed place of business solely for the purpose of advertising, for the
supply of information, for scientific research, or for similar activities which have a preparatory
or auxiliary character, for the enterprise.
An enterprise of one of the Contracting States shall not be deemed to have a permanent
establishment in the other Contracting State merely because it carries on business in that other
State through a broker, a general commission agent or any other agent of an independent
status, where that person is acting in the ordinary course of the person‘s business as such a
broker or agent. However, when the activities of such a broker or agent are carried on wholly or
principally on behalf of that enterprise itself or on behalf of that enterprise and other enterprises
controlling, or controlled by or subject to the same common control as, that enterprise, the
person will not be considered a broker or agent of an independent status within the meaning of
this paragraph.
b Power of Authorised officer while carrying search.
While conducting search, authorized officer has following powers -

a. Enter and search any building, etc.: Enter and search any building, place, vessel, vehicle or
aircraft where he has reason to suspect that such books of account, other documents,
money, bullion, jewellery or other valuable article or thing are kept.
b. Break open the lock of any door, etc.: Break open the lock of any door, box, locker, safe,
almirah or other receptacle, where the keys thereof are not available.
c. Search person: Search any person who -
 has got out of; or
 is about to get into; or
 is in,
the building, place, vessel, vehicle or aircraft if the authorised officer has reason to suspect
that such person has secreted about his person any books of account, other documents,
money, bullion, jewellery or other valuable article or thing.
d. Require any person to facilitate the authorised officer: Require any person who is found to be
in possession or control of any books of account or other documents maintained in the form
of electronic record, to afford the authorised officer the necessary facility to inspect such
books of account or other documents.
e. Seizure: Seize any such books of account, other documents, money, bullion, jewellery or
other valuable article or thing found as a result of such search.
f. Place marks of identification: Place marks of identification on any books of account or other
documents or make extracts or copies therefrom.
g. Make inventory: Make a note or an inventory of any such money, bullion, jewellery or other
valuable article or thing.
h. Examine on oath: Examine on oath any person who is found to be in possession or control of
any books of account, documents, money, bullion, jewellery or other valuable article or
thing. Any statement made by such person during such examination may thereafter be used
as evidence in any proceeding.
The examination of any person may be not merely in respect of any books of account, other
documents or assets found as a result of the search, but also in respect of all matters relevant
for the purposes of any investigation connected with any proceeding under Act.
c. ICDS-I on “Accounting Policies”
Accounting Policies
Accounting policies adopted by a person shall be such so as to represent a true and fair view of
the state of affairs and income of the business, profession or vocation.
Taxpoint: accounting policies should be such that discloses ‘true and fair view‘ and not ―‘true
and correct‘.
The treatment and presentation of transactions and events shall be governed by their substance
and not merely by the legal form.
Marked to market loss or an expected loss shall not be recognised unless the recognition of such
loss is in accordance with the provisions of any other Income Computation and Disclosure
Standard.
Fundamental Accounting Assumptions

The fundamental accounting assumptions i.e., Going Concern, Consistency and Accrual are
assumed as followed. No specific disclosure is required, if these assumptions are followed,
however, if such assumption are not followed, the fact shall be disclosed.
Taxpoint: ICDS does not recognize materiality as an accounting policy
Change in Accounting Policies

An accounting policy shall not be changed without reasonable cause.
Taxpoint: The word ‗reasonable cause‘ is not defined in the ICDS
Disclosure of Accounting Policies

 All significant accounting policies adopted by a person shall be disclosed.
 Any change in an accounting policy which has a material effect shall be disclosed (with
quantum of the effect, if ascertainable). Where such amount is not ascertainable, the
fact shall be indicated.
 Disclosure of accounting policies or of changes therein cannot remedy a wrong or
inappropriate treatment of the item.
d. Income Tax Authorities
a) The Central Board of Direct Taxes (CBDT) constituted under the Central Boards of Revenue
Act, 1963
b) Principal Directors General of Income-tax or Principal Chief Commissioners of Income-tax
c) Directors-General of Income-tax or Chief Commissioners of Income-tax
d) Principal Directors of Income-tax or Principal Commissioners of Income-tax
e) Directors of Income-tax or Commissioners of Income-tax or Commissioners of Income-tax
(Appeals)
f) Additional Directors of Income-tax or Additional Commissioners of Income-tax or Additional
Commissioners of Income-tax (Appeals)
g) Joint Directors of Income-tax or Joint Commissioners of Income-tax
h) Deputy Directors of Income-tax or Deputy Commissioners of Income-tax or Deputy
Commissioners of Income-tax (Appeals)
i) Assistant Directors of Income-tax or Assistant Commissioners of Income-tax
j) Income-tax Officers
k) Tax Recovery Officers
l) Inspectors of Income-tax
Taxpoint
 As per sec. 2(7A), Assessing Officer means the Assistant Commissioner or Deputy
Commissioner or Assistant Director or Deputy Director or the Income-tax Officer who is
vested with the relevant jurisdiction by virtue of directions or orders, and the Additional
Commissioner or Additional Director or Joint Commissioner or Joint Director who is
directed to exercise or perform all or any of the powers and functions conferred on, or
assigned to, an Assessing Officer under this Act.
 As per sec. 2(9A), Assistant Commissioner means a person appointed to be an Assistant
Commissioner of Income-tax or a Deputy Commissioner of Income-tax u/s 117(1)
 As per sec. 2(15A), Chief Commissioner means a person appointed to be a Chief
Commissioner of Income-tax or a Principal Chief Commissioner of Income-tax u/s 117(1)
 As per sec. 2(16), Commissioner means a person appointed to be a Commissioner of
Income-tax or a Director of Income-tax or a Principal Commissioner of Income-tax or a
Principal Director of Income-tax u/s 117(1)
 As per sec. 2(21), Director General or Director means a person appointed to be a
Director General of Income-tax or a Principal Director General of Income-tax or, as the
case may be, a Director of Income-tax or a Principal Director of Income-tax, u/s 117(1),
and includes a person appointed to be an Additional Director of Income-tax or a Joint
Director of Income-tax or an Assistant Director or Deputy Director of Income-tax
 As per sec. 2(28C), Joint Commissioner means a person appointed to be a Joint
Commissioner of Income-tax or an Additional Commissioner of Income-tax u/s 117(1).
 As per sec. 2(28D), Joint Director means a person appointed to be a Joint Director of
Income-tax or an Additional Director of Income-tax u/s 117(1)
Revisionary Test Paper_June 2018
Final
Group IV
Paper 17 : CORPORATE FINANCIAL REPORTING
(SYLLABUS – 2016)
Objectives
1. Multiple Choice Questions:

(i) Dido Ltd. deals in three products ,  and  , which are neither similar nor interchangeable.
At the time of closing of its account for the year 2015-16 the historical cost and net realizable
value of the items of closing stock are determined as below:
Items Historical Cost Net realizable value

(` in Lakhs) (` in Lakhs)
 65 56
 40 46
 28 23
What will be the value of closing stock?

A. `119 Lakhs
B. `125 Lakhs
C. `133 Lakhs
D. None of these
Answer:
A — `119 Lakhs.
Computation of value of closing stock
Lower of Historical Cost and Net Realisable Value will be considered `
 56
 40
 23
Value of Closing Stock 119
(ii) M. Chandra Ltd. has provided the following information:

Depreciation as per accounting records ` 12,00,000, Depreciation as per income tax records
` 30,00,000. Unamortized preliminary expenses as per income tax records ` 1,80,000, Tax rate
40%. There is adequate evidence of future profit sufficiency. As per AS 22 Deferred Tax Asset/
Liability to be recognized will be
A. ` 7,20,000 (DTA)
B. ` 6,48,000 (DTL)
C. ` 72,000 (Net DTL)
D. None of these
Answer:
B — `6,48,000(Net DTL).
Deferred tax liability = 40% (30,00,000 – 12,00,000) = `7,20,000

Deferred tax asset = 40% of 1,80,000 = `72,000
Net Deferred tax liability = `6,48,000
(iii) V Ltd. acquired 2,000 equity shares of D Ltd. on April, 01,2016 for a price of ` 3,00,000. D Ltd.
made a net profit of ` 80,000 during the year 2016-17. The Share Capital of D Ltd. is ` 2,50,000
consisting of shares of ` 100 each. If the share of V Ltd. in the pre-acquisition profit of D Ltd. is
` 56,000, the amount of Goodwill/Capital Reserve to be shown in the Consolidated Balance
Sheet as on March 31, 2013 is —
A. ` 4,000 (Goodwill)
B. ` 4,000 (Capital Reserve)
C. ` 44,000 (Goodwill)
D. ` 56,000 (Goodwill)
Answer:
C — ` 44,000 (Goodwill).
Cost of investments ` 3,00,000

Less: Share of capital profit ` 56,000
2,44,000
Face value of shares `2,00,000
Cost of control-Goodwill `44,000
(iv) PRAKASH LTD. declares the following information:

Exchange Rate (`/US$)
Purchased goods on 12.3.2016 of US $ 1,00,000 60.60
Exchange rate as on 31.3.2016 61.00
Date of actual payment is 12.4.2016 61.50
What will be the gain/loss to be booked in the financial year 2013-14?
A. ` 90,000 (loss)
B. ` 40,000 (loss)
C. ` 50,000 (loss)
D. ` 1,30,000 (loss)
Answer:
C — `50,000 (loss).
As per AS-11, exchange difference on settlement of monitory items should be transferred to

Profit & Loss A/c. Here loss to be debited to Profit & Loss A/C as: ` (1, 00,000 x 61.50) - (1, 00,000
x 61.00) = `50,000.
(v) During 2016, Avishkar Ltd. incurred costs to develop and produce a routine, low-risk computer
software product, as follows:
Completion of detailed program design `23,000
Cost incurred for coding and testing to establish technological feasibility `20,000
Other coding costs after establishing technological feasibility `39,000
Other testing costs after establishing technological feasibility `31,000
What amount should be capitalized as software cost?
A. `43,000
B. `70,000
C. `23,000
D. `14,000
Answer:
B — `70,000.
Costs incurred after establishing technological feasibility should be capitalized i.e.

(`39,000+`31,000)=`70,000 is to capilised and costs incurred before establishing technological
feasibility is to be expensed as and when it is incurred.
(vi) Miss Dumpty purchased 2,000 shares in M Ltd. at ` 600 per share in 2014. There was a rights issue
in 2016 at one share for every two held at price of `150 per share. If Miss Dumpty subscribed to
the rights, what would be carrying cost of 3,000 shares as per AS-13.
A. ` 12,00,000
B. ` 13,50,000
C. ` 14,00,000
D. Data insufficient
Answer:
B — ` 13,50,000.
Cost of original holding (Purchase) (1,000 x 600) = `12,00,000

Amount paid for Rights (500 x 150) = `1,50,000
Total carrying cost of 1500 shares: `13,50,000
(vii) ANKITA LTD. has three segments with their assets inclusive of Deferred Tax Assets as shown
below:
Segment Total Assets (` in lakh) Deferred Tax Assets (` in lakh)
M 20 10
N 60 8
P 120 6
Reportable segments as per AS-17 are
A. M, N and P
B. M and N only
C. M and P only
D. P and N only
Answer:
D — P and N are reportable segments.

According to AS-17 "Segment Reporting", segment Assets do not include income tax assets.
Therefore, the revised total assets are ` 176 lakh [200 lakh - (10+8+6)]
Segment M holds total assets of ` 10 lakh (20-10)
Segment N holds total assets of ` 52 lakh (60-8)
Segment P holds total assets of ` 114 lakh (120-6)
Thus P and N hold more than 10% of total assets and hence P and N are reportable segments.
(viii) On January 2, 2016 E Ltd. bought a trademark from M Ltd. for ` 20,00,000. E Ltd. retained an
independent consultant, who estimated the trademark's remaining life to be 20 years. Its
unamortised cost on accounting records was `17,60,000. E Ltd. decided to amortize the
trademark over the maximum period allowed. In E Ltd. December 31, 2016 balance sheet,
what amount should be reported as expenses to be amortised this regard?
A. ` 17,60,000
B. ` 88,000
C. ` 1,00,000
D. ` 2,00,000.
Answer:
D — `2,00,000.
As per AS-26 intangible assets should be measured initially at cost therefore, E Ltd. should
amortize the trademark at its cost of ` 20,00,000. The unamortised cost on the seller's books
(`17,60,000) is irrelevant to the buyer. Although the trademark has a remaining useful life of 20
years, intangible assets are generally amortized over a maximum period of 10 years per AS-26.
Therefore, the 2016 amortization expense and accumulated amortization is 2,00,000 (` 20,00,000
÷ 10 years).
(ix) A&B Ltd. obtained a Loan from a bank for ` 240 lakhs on 30.04.2014. It was utilized for :
Construction of a shed ` 120 lakhs, Purchase of a machinery ` 80 lakhs, Working Capital ` 40
lakhs, Construction of shed was completed in March 2016. The machinery was installed on the
same date. Delivery truck was not received. Total interest charged by the bank for the year
ended 31.03.2016 was ` 36 lakhs. As per AS 16, Interest to be debited to Profit & Loss Account will
be :
A. ` 36 lakhs
B. ` 18 lakhs
C. ` 9 lakhs
D. None of these
Answer:
B — `18 lakhs
Qualifying Asset as per AS-16 = ` 120 lakhs (construction of a shed)

Borrowing cost to be capitalized = 36 × 120/240 = ` 18 lakhs
Interest to be debited to Profit or Loss Account = ` (36 – 18) lakhs = ` 18 lakhs
(x) Super Profit of ABC Ltd. (Computed) : `18,00,000

Normal rate of return : 12%
Present value of annuity of `1 for 4 years @ 12% : 3.0374
Vathe of goodwill is —
A. `54,67,320
B. `2,16,000
C. `18,00,000
D. `5,92,612
Answer:
A — `54,67,320
Value of goodwill = Super profit × P.V of Annuity of ` 1for 4 years @ 12% = ` 18,00,000 × 3.0374
= ` 54,67,320.
(xi) MR Ltd. acquire 40% of TS Ltd.‘s shares on April 2, 2015, the price paid was `1,40,000. TS Ltd.‘s
Shareholder equity shares are as follows:
`
Equity Shares (Paid up) 50,000
Share premium 1,50,000
Retained Earning 50,000
2,50,000
Further TS Ltd. reported a net income of ` 30,000 and paid dividends of `10,000. MR Ltd. has
subsidiary on 31-03-2016. Calculate the amount at which the investment in TS Ltd. should be
shown in the consolidated Balance Sheet of MR Ltd. as on 31.03.2016.
A. `1,08,000
B. `40,000
C. `1,48,000
D. `1,40,000
Answer:
C — `1,48,000
As per AS – 23 when the investor company prepares the consolidated Balance Sheet, the
investment in associate i.e., TS Ltd. shall be carried by equity method and goodwill and capital
reserve to be identified and disclosed.
Extract of Consolidated Balance Sheet of MR Ltd. as on 31.03.2016
`
Investment in TS Ltd.
Associates 1,08,000
Goodwill (Identified) 40,000 1,58,000
Value of the investment as per equity method `1,40,000 + 40% (`30,000) – 40%
(`10,000)=`1,48,000
Goodwill Identified = (`1,40,000 – 40% of `2,50,000) = `40,000.
(xii) At the time of absorption of B Ltd. by A Ltd., trade receivable of both companies shown in
their Balance Sheets were ` 35 Lakhs and ` 18 Lakhs. On that date trade payable of B Ltd.
includes payable to A Ltd. ` 4.5 Lakhs. After absorption, the amount of trade receivables will
be shown in the A Ltd.'s Balance Sheet as
A. `35 Lakhs
B. ` 53 Lakhs
C. ` 48.50 Lakhs
D. ` 44 Lakhs
Answer:
C — ` 48.50 Lakhs
` 35 Lakhs + ` 18 Lakhs – ` 4.50 Lakhs = ` 48.50 Lakhs.
(xiii) Ind AS 7 is related to (no explanation is required) —

A. Inventories
B. Statement of Cash Flow
C. Construction Contract
D. Property, Plant and Equipment
Answer:
B — Statement of Cash Flow
(xiv) NUPUR LTD. has equity share capital of ` 30 lakhs consisting of fully paid equity shares of ` 10
each. Net profit for the year 2013-14 was ` 45 lakhs. It has also issued 27,000, 10%
convertible Debentures of ` 50 each. Each Debenture is convertible into 5 equity shares. The
applicable tax rate is 30%. Compute the diluted earnings.
A. ` 46,35,000
B. ` 44,59,500
C. ` 45,94,500
D. ` 45,00,000
Answer:
C — `45,94,500.
Interest on debenture @ 10% for the year = 27,000 × 50 ×10%

= `1,35,000
Tax on interest `40,500.
Diluted earnings = `(45,00,000 + 1,35,000 – 40,500) = ` 45,94,500.
(xv) Wealth Ltd. aquired 1,50,000 shares of Health Ltd. on August 1, 2016. The Equity Capital of
Health Ltd. is ` 20 lakh of ` 10 per share. The machinery of Health Ltd. is revalued upwards
by ` 4,00,000. The minority group interest shown in the Consolidated Balance Sheet as at
March 31, 2017 was
A. ` 6,00,000
B. ` 4,00,000
C. ` 1,00,000
D. None of A, B and C
Answer: A — ` 6,00,000
No. of shares of Health Ltd. = ` 20,00,000/10 = 2,00,000
Minority interest = 200000 - 150000 = 50,000 = 25%
Profit on revaluation of Machinery = ` 4,00,000
Share of Minority Group of Silver Ltd. = 25% of ` 4,00,000 `1,00,000
Equity Share Capital : (50000 × 10) ` 5,00,000
Total minority interest ` 6,00,000
Study Note 1 – Accounting Standards
2. (a) Ind AS 1 Presentation of Financial Statement
Current Assets:
An entity shall classify an asset as current when:
(a) it expects to realise the asset, or intends to sell or consume it, in its normal operating cycle;
(b) it holds the asset primarily for the purpose of trading;
(c) it expects to realise the asset within twelve months after the reporting period; or
(d) the asset is cash or a cash equivalent unless the asset is restricted from being exchanged or
used to settle a liability for at least twelve months after the reporting period.
An entity shall classify all other assets as non-current.
This Standard uses the term ‗non-current‘ to include tangible, intangible and financial assets of a
long-term nature. It does not prohibit the use of alternative descriptions as long as the meaning
is clear.
The operating cycle of an entity is the time between the acquisition of assets for processing and
their realisation in cash or cash equivalents. When the entity‘s normal operating cycle is not
clearly identifiable, it is assumed to be twelve months. Current assets include assets that are sold,
consumed or realised as part of the normal operating cycle even when they are not expected
to be realised within twelve months after the reporting period. Current assets also include assets
held primarily for the purpose of trading and the current portion of noncurrent financial assets.
Question 1:
An entity has placed certain deposits with varies parties. How the following should be classified
in Current and Non-current Items?
(a) Electricity Deposit;
(b) Indirect Taxes deposit paid under dispute.
Answer:
(a) Electricity When the connection is not required, at all points of time Electricity Deposit
Deposit is recoverable on demand. Practically, electricity Connection is required as
long as the entity exists. It means from the commercial perspective an
entity does not expect to realize the Assets within 12 months from the end
of reporting period. Hence, Electricity Deposit should be classified as a
Non-Current Asset.
(b) Indirect In this type of cases classification depend on
Taxes (a) The fact of case, and
deposit (b) The expectation of the entity to realize the same within 12 months.
paid under If the Entity expects these to be realized within 12 months, it should classify
dispute these items as Current, otherwise these should be classified as Non-Current.
(b) Ind AS 2 Inventories
 when joint products are produced or when there is a main product and a by-product
and the costs of conversion of each product are not separately identifiable — they are
allocated between the products on a rational and consistent basis.
 The allocation may be based, for example, on the relative sales value of each product
either at the stage in the production process when the products become separately
identifiable, or at the completion of production.
 In case of by-products which are by their nature immaterial , then they are often
measured at net realisable value and this value is deducted from the cost of the main
product.
Question 2:
ZooZoo Ltd. Produces four joint products A,B, C and D from a joint process. It incurred `8,56,800.
Allocate the Joint Costs with the following information:
Particulars A B C D
Quantity Produced (in‘000s) 10,000 kgs 12,000 kgs 14,000 kgs 16,000 kgs
Sales Price per kg `13 `17 `19 `22
Stock Quantity at the end of year 1,625 kgs 400 kgs Nil 1,550 kgs
Also determine the value of Closing Stock in respect of the above products.
Answer:
As per Ind AS – 2, costs of Joint Products should be apportioned on a rational and consistent
basis. The Sales Value at Split Off Point may be used for apportionment in the given case.
Particulars A B C D
1. Production Quantity 10,000 kg 12,000 kg 14,000 kg 16,000 kg
2. Sale price per kg `13 `17 `19 `22
3. Total Sale Vale (1×2) `1,30,000 `2,04,000 `2,66,000 `3,52,000
4. Joint Costs apportioned (based on `1,17,000 `1,83,600 `2,39,400 `3,16,800
Sale Value) (bases on 3)
5. Average Joint Costs per kg (4÷1) `11.70 `15.30 `17.10 `19.80
6. Closing Stock Quantity (given) 1,625 kg 400 kg Nil 1,550 kg
7. Value of Closing Stock (5×6) `12,675 `4,080 Nil `20,460
Note: It is presumed that the NRV of the products as at the Balance Sheet date, are higher than
the respective costs.
(c) Ind AS 7 Statement of Cash Flows
Cash comprises cash on hand and demand deposits.

Cash equivalents are short-term, highly liquid investments that are readily convertible to
known amounts of cash and which are subject to an insignificant risk of changes in value.
Cash flows are inflows and outflows of cash and cash equivalents.
Operating activities are the principal revenue-producing activities of the entity and other
activities that are not investing or financing activities.
Investing activities are the acquisition and disposal of long-term assets and other investments
not included in cash equivalents.
Financing activities are activities that result in changes in the size and composition of the
contributed equity and borrowings of the entity.
Question 3:
An entity has Opening Bank Balance in Foreign Currency aggregating to USD 200 (equivalent to
`14,000). The Entity also reported a Profit before Tax which included `200 on account of
Exchange Gain on the Bank Balance in Foreign Currency. What would be the closing Cash and
Cash Equivalents as per the Balance Sheet (assuming no other transaction)?
Answer:
Particulars ` `
A. Cash Flows from Operating Activities
Net Profit before taxation 200
Adjustments for: Unrealised Exchange Gain (200) NIL
B. Cash Flows from Investing Activities NIL
C. Cash Flows from Financing Activities NIL
D. Net increase/(Decrease) in Cash & Cash Equivalents NIL
(A+B+C)
E. Cash & Cash Equivalents at the beginning of the 14,000
period
F. Cash & Cash Equivalents at the end of the period 14,000
(D+E)
Particulars `
Cash and Cash Equivalents as per Statement of Cash Flows 14,000
Add: Unrealised Gain on Cash and Cash Equivalents 200
Cash and Cash Equivalents as per the Balance Sheet 14,200
(d) Ind AS 10 Events after the Reporting Period
An entity shall not adjust the amounts recognised in its financial statements to reflect non-
adjusting events after the reporting period.
An example of a non-adjusting event after the reporting period is a decline in fair value of
investments between the end of the reporting period and the date when the financial
statements are approved for issue. The decline in fair value does not normally relate to the
condition of the investments at the end of the reporting period, but reflects circumstances
that have arisen subsequently. Therefore, an entity does not adjust the amounts recognised in
its financial statements for the investments. Similarly, the entity does not update the amounts
disclosed for the investments as at the end of the reporting period, although it may need to
give additional disclosure.
Question 4:
As at 31st March, Cost of Investments is `1,50,000. (Market Value `1,80,000) Its value declines
to `80,000 on 25th April. How should the entity consider the above in its Financial Statements?
Answer:
Decline in fair value of investments does not normally relate to the condition of the
Investments at the end of the reporting period, but reflects circumstances that have arisen
subsequently.
So, an entity does not –

(a) Adjust the amounts recognized in its Financial Statements for the Investments, or
(b) Update the amounts disclosed for the investments as at the end of the reporting period.
The entity may need to give Additional Disclosure.
3. (a) Amrita Ltd. sold goods for `180 lakhs to Malika Ltd. During financial year ended 31.03.2016.
The Managing Director of Amrita Ltd. Own 100% of Malika Ltd. The sales were made to
Malika Ltd. at normal selling prices followed by Amrita Ltd. The Chief Accountant of Amrita
Ltd. contends that these sales need not require a different treatment from the other sales
made by the company and hence no disclosure is necessary as per accounting standard.
Is the Chief Accountant correct?
Answer:
No, the Chief Accountant is not correct. As per AS – 18 ― Related Party Disclosure‖, the
name of related party relationship, the nature of transaction has to be disclosed irrespective
of the fact that the sale were made at normal selling price or arms – length price.
In this case, Amrita Ltd. Sold goods for `180 lakhs to Malika Ltd. During the year ended
31.03.2016 as the transaction falls under related party transaction, the disclosure is necessary
as per AS-18, in spite of the fact that the sales were made at normal selling price.
(b) Raw material was purchased at `150 per kg. Price of raw material is on the decline. The
finished goods in which the raw material is incorporated are expected to be sold at below
cost. 10,000 kgs. of raw material is in stock at the year end. Replacement cost is `120 per kg.
How will you value the inventory?
Answer:
As per AS 2 on valuation of inventories, material and other supplies held for use in the
production of inventories are not written down below cost if the finished products in which
they will be incorporated are expected to be sold at or above cost. However, when there
has been a decline in the price of materials and it is estimated that the cost of the finished
product will exceed net realizable value, the materials are written down to net realizable
value. In such case, the replacement cost of the material may be the best available
measure of their net realizable value.
(c) At the end of the financial year ending on 31st December, 2016, a company finds that there
are twenty law suits outstanding which have not been settled till the date of approval of
accounts by the Board of Directors. The possible outcome as estimated by the Board is as
follows:
Probability Loss (`)
In respect of five cases (Win) 100% 

Next ten cases (Win) 60% 
Lose (Low damages) 30% 1,20,000
Lose (High damages) 10% 2,00,000
Remaining five cases
Win 50% 
Lose (Low damages) 30% 1,00,000
Lose (High damages) 20% 2,10,000
Outcome of each case is to be taken as a separate entity. Ascertain the amount of

contingent loss and the accounting treatment in respect thereof.
Answer:
According to AS 29 ‗Provisions, Contingent Liabilities and Contingent Assets‘, contingent
liability should be disclosed in the financial statements if following conditions are
satisfied:
(i) There is a present obligation arising out of past events but not recognized as
provision.
(ii) It is not probable that an outflow of resources embodying economic benefits will be
required to settle the obligation.
(iii) The possibility of an outflow of resources embodying economic benefits is also
remote.
(iv) The amount of the obligation cannot be measured with sufficient reliability to be
recognized as provision.
In this case, the probability of winning of first five cases is 100% and hence, q uestion of
providing for contingent loss does not arise. The probability of winning of next ten cases
is 60% and for remaining five cases is 50%. As per AS 29, we make a provision if the loss is
probable. As the loss does not appear to be probable and the possibility of an outflow
of resources embodying economic benefits is not remote rather there is reasonable
possibility of loss, therefore disclosure by way of note should be made. For the purpose
of the disclosure of contingent liability by way of note, amount may be calculated as
under:
Expected loss in next ten cases = 30% of ` 1,20,000 + 10% of ` 2,00,000
= ` 36,000 + ` 20,000 = ` 56,000
Expected loss in remaining five cases = 30% of ` 1,00,000 + 20% of ` 2,10,000
= ` 30,000 + ` 42,000 =` 72,000
To disclose contingent liability on the basis of maximum loss will be highly unrealistic.
Therefore, the better approach will be to disclose the overall expected loss of ` 9,20,000
(` 56,000  10 + ` 72,000  5) as contingent liability.
4. (a) Venus Ltd. has an asset, which is carried in the Balance Sheet on 31.3.2015 at ` 1,000 lakhs.
As at that date the value in use is ` 800 lakhs and the net selling price is ` 750 lakhs.
From the above data:
(i) Calculate impairment loss.
(ii) Give journal entries for adjustment of impairment loss.
(iii) Show, how impairment loss will be shown in the Balance Sheet.
Answer:
(i) Impairment loss is the amount by which the carrying amount of an asset exceeds its
recoverable amount.
Thus, Impairment loss = Carrying amount – Recoverable amount*

= `1000 lakhs – ` 800 lakhs = ` 200 lakhs
*Recoverable amount is higher of asset‘s net selling price ` 750 lakhs and its value in use
`800 lakhs.
∴ Recoverable amount = ` 800 lakhs
Journals
(ii) Particulars Debit Credit

Amount Amount
(` in lakhs) (` in lakhs)
(a) Impairment loss A/c Dr. 200
To Asset A/c 200
(Being the entry for accounting impairment loss)
(b) Profit and loss A/c Dr. 200
To Impairment loss A/c 200
(Being the entry to transfer impairment loss to profit
and loss account)
(iii)
Balance Sheet of Venus Ltd. as on 31.3.2014 ` in lakhs

Asset less depreciation 1000
Less: Impairment loss 200
800
(b) A company entered into an agreement to sell its immovable property included in the
Balance Sheet at `10 lakhs to another company for `40 lakhs. The agreement to sell was
concluded on 31.01.2016 and the sale deed was registered on 30.04.2016. How this will be
treated in Balance Sheet as on 31.03.2016.
Answer:
As per AS 4 Assets and liabilities should be adjusted for events occurring after the balance
sheet date which provide additional evidence to assist the estimation of amounts relating to
conditions existing at the balance sheet date. In the present case sale of immovable
property was concluded before approval by the Board. This is clearly an event occurring
after the balance sheet date. Agreement to sell was entered into before the balance sheet
date. Registration of the sale deed simply provides additional information relating to the
conditions existing at the balance sheet date. So adjustments to assets are necessary and
Asset will be derecognized in the Balance Sheet as on 31.03.2016.
5. (a) State how you will deal with the following matter in the accounts of MCQ Ltd. for the year
ended 31st March 2016 with reference to Accounting Standard:
― The company finds that the stock sheets of 31.03.2015 did not include two pages
containing details of inventory worth `21.75 lakhs‖.
Answer:
As per AS 5 an item of expenses or income arises in current period as a result of omission or

commission in the preparation of financial statements of one or more prior period is prior
period item.
In this case stock sheet of 31.03.2015 did not include two pages containing details of
inventory worth `21.75 lakhs which is the omission and this omission was detected in current
period i.e. 31.03.2016. Therefore, it is a prior period item,
Entry to be passed is as under:
Opening inventory A/c Dr. `21.75

To, Prior Period Income A/c `21.75
(b) Aveer Ltd. wants to re-classify its Investment in accordance with AS-13.Decide on the
treatment to be given in each of the following cases:
(i) A portion of Current Investments purchased for `40 lakhs to be reclassified as long-term
Investments, as the company has decided to retain them. The market value as on the
date of Balance Sheet was `50 lakhs.
(ii) Another portion of Current Investments purchased for `30 lakhs has to be reclassified as
Long-term Investments. The market value of these investments as on the date of Balance
Sheet was `13 lakhs.
(iii) Certain Long-term Investments no longer considered for holding purposes have to be re-
classified as Current Investments. The original cost of theses was `36 lakhs but they had
been written down to `24 lakhs to recognize permanent decline as per AS 13.
Answer:
As per AS 13 ‗Accounting for Investments‘ where investments are reclassified from current
to long term, transfers are made at the lower of cost and fair value at the date of
transfer.
In the first case, the market value of the investment is `50 lakhs, which is higher than its
cost `40 lakhs. Therefore, the transfer to long term investments should be carried at cost
`40 lakhs.
In the second case, the market value of the investment is `13 lakhs, which is lower than its
cost `30 lakhs. Therefore, the transfer to long term investments should be carried in the
books at the market value `13 lakhs. The loss of `17 lakhs should be charged to profit and
loss account.
Where long-term investments are re-classified as current investments, transfers are made
at the lower of cost and carrying amount at the date of transfer.
In the third case, the book value of the investments is `24 lakhs, which is lower than its
cost `36 lakhs. Here, the transfer should be at carrying amount and hence this re-
classified current investment should be carried at `24 lakhs.
6. (a) Mitra Ltd. imported a machine on 04.01.2009 for Euros 12,000, on deferred payment basis,
payment in six equal annual instilments at every financial year end, commencing from
31.03.2009 onwards. Use AS – 11 provisions and determine the exchange differences
carrying amounts of the liability as the end of each financial year, if the following exchange
rates are given. One Euro equals Indian Rupees on —
04.01.2009 31.03.2009 31.03.2010 31.03.2011 31.03.2012 31.03.2013 31.03.2014

`50.4872 `45.5208 `41.8463 `41.0175 `42.6400 `51.4400 `53.1000
Answer:
A. Computation of Carrying Amounts of Liability
Financial Year ending EURO Amount due Closing Rate Carrying Amount in
`
31st March 2009 10,000 45.5208 4,52,208
31st March 2010 8,000 41.8463 3,34,770
31st March 2011 6,000 41.0175 2.46,105
31st March 2012 4,000 42.6400 1,70,560
31st March 2013 2,000 51.4400 1,02,880
31st March 2014 Nil 53.1000 Nil
B. Computation of Exchange Differences
Financial Year ending Due to settlement Due to Reporting

31st March 2009 2,000 × (50.4872 – 45.5208) = 9,933 Gain 10,000 × (50.4872 - 45.5208) = 49,664 Gain
31st March 2010 2,000 × (45.5208 – 41.8463) = 7,349 Gain 8,000 × (45.5208 – 41.8463) = 29,396 Gain
31st March 2011 2,000 × (41.8463 – 41.0175) = 1,658 Gain 6,000 × (41.8463 – 41.0175) = 4,973 Gain
31st March 2012 2,000 × (41.0175 – 42.6400) = 3,245 Loss 4,000 × (41.0175 – 42.6400) = 6,490 Loss
31st March 2013 2,000 × (42.6400 – 51.4400) = 17,600 Loss 2,000 × (42.6400 – 51.4400) = 17,600 Loss
31st March 2014 2,000 × (51.4400 – 53.1000) = 3,320 Loss Nil
(b) XYZ Ltd. purchased goods on credit from ABC Ltd. for `250 Crores for export. The export
order was cancelled. XYZ Ltd. decided to sell the same goods in the local market with a
price discount. ABC Ltd. was requested to offer a price discount of 15 %. The directors of
ABC Ltd. want to adjust the sales figure to the extent of the discount requested by XYZ Ltd.
Comment.
Answer:
As per AS 9 trade discounts and volume rebates are not encompassed within the definition
of revenue. Trade discounts and volume rebates given should be deducted in determining
the revenue.
However, the price discount of 15 % in the instant case, is not the discount given during the
ordinary course of the trade. Hence, it cannot be treated in the nature of discount eligible
for deduction from sales price, the better alternative is to treat the amount as bad debt,
therefore the contentions of directors of XYZ Ltd. are not correct.
7. Prasad Ltd. had the following borrowing during a year in respect of capital expansion.
Plant Cost of Asset Remarks

Plant A 100 Lakhs No specific Borrowings
Plant B 125 Lakhs Bank loan of ` 65 Lakhs at 10%
Plant C 175 Lakhs 9% Debenture of ` 125 Lakhs were issued
In addition to the specific borrowings stated above, the Company had obtained term loans
from two banks (i) ` 100 lakhs at 10% from Corporation Bank and (ii) ` 110 lakhs at 11.5% from
State Bank of India, to meet its capital expansion requirements. Determine the borrowing
costs to be capitalized in each of the above plants, as per AS-16.
Answer :
A. Computation of Actual Borrowing Costs incurred during the year:
Source Loan Amount Interest Rate Interest Amount

` in Lakhs ` in Lakhs
Bank Loan 65.00 10% 6.50
9% Debentures 125.00 9% 11.25
Term Loan from Corporation Bank 100.00 10% 10.00
Term Loan from State Bank of 110.00 11.5% 12.65
India
Total 400.00 40.40
Specific Borrowing included in 190.00 17.75
above
B. Weighted Average Capitalization Rate for General Borrowings:
TotalInterest- Intereston Specific Borrow ing 40.40  17.75

= = = 22.65  210  10.79%
TotalBorrow ing- Specific Borrow ing 400  190
C. Capitalization of Borrowing Costs under AS-16 will be as under:
Plant Borrowing Loan Interest Interest Cost of Asset

Amount rate amount
` in lakhs ` in lakhs
` in Lakhs ` in Lakhs
A General 100 10.79% 10.79 110.79
B Specific 65 10.00% 6.50 71.50
General 60 10.79% 6.47 66.47 137.97
C Specific 125 9.00% 11.25 136.25
General 50 10.79% 5.39 55.39 191.64
Total 400 40.40 440.40
Note: Amount of borrowing costs capitalized should not exceed the actual interest cost.
8. (a) Assume a `2,50,000 contract that requires 3 years to complete and incurs a total cost of
`2,02,500. The following data pertain to the construction period:
Year I Year II Year III
Cumulative costs incurred to date 75,000 1,80,000 2,02,500
Estimated cost yet to be incurred at year 1,50,000 20,000 -
end
Progressive billing made during the year 50,000 1,85,000 15,000
Collection of billings 37,500 1,50,000 62,500
The firm seeks your advice and assistance in the presentation of accounts keeping in view
the requirements of AS – 7.
Answer :
Particulars Year I Year II Year III

Initial amount of Revenue agreed in 2,50,000 2,50,000 2,50,000
contract
Variation - - -
Total Contract Revenue (A) 2,50,000 2,50,000 2,50,000
Contract Cost Incurred 75,000 1,80,000 2,02,500
Contract cost yet to be incurred to 1,50,000 20,000 -
complete
Total Estimated Contract Cost (B) 2,25,000 2,00,000 2,02,500
Estimated Profit (A-B) 25,000 50,000 47,500
`75,000 `1,80,000 ` 2,02,500

Stage of Completion  100 ;  100 ;  100
` 2,25,000 ` 2,00,000 ` 2,02,500
=33⅓% =90% =100%
Revenue, Expense and Profit recognized in Profit and Loss Statement

Year I Upto the Recognised Recognised
reporting in Prior Year in Current
date Year
Revenue (2,50,000 × 33⅓%) 83,333 - 83,333

Cost incurred 75,000 - 75,000
Profits 8,333 - 8,333
Year II
Revenue (2,50,000 × 90%) 2,25,000 83,333 1,41,667
Cost incurred 1,80,000 75,000 1,05,000
Profits 45,000 8,333 36,667
Year III
Contract Revenue Earned 2,50,000 2,25,000 25,000
Cost incurred 2,02,500 1,80,000 22,500

47,500 45,000 2,500
Contract Disclosure (AS-7)

Year I Year II Year III
1. Contract revenue recognised 83,333 2,25,000 2,50,000
2. Contract expenses recognised 75,000 1,80,000 2,02,500
3. Recognised Profit (Loss) 8,333 45,000 47,500
4. Contract cost incurred 75,000 1,80,000 2,02,500
5. Contract cost that relates to future NIL NIL NIL
activity recognised as an asset
6. Progress Billing 50,000 2,35,000 2,50,000
7. Unbilled contract revenue 33,333 NIL NIL
8. Advances 37,500 1,50,000 62,500
9. Contract cost incurred and 83,333 2,25,000 2,50,000
recognised Profit (Less recognised
Loss)
10. Gross amount due from customer 33,333 NIL NIL
11. Gross amount due to customer NIL 10,000 NIL
12. Retention 12,500 47,500 NIL
(b) Best Ltd. has initiated a lease for three years in respect of an equipment costing ` 1,50,000
with expected useful life of 4 years. The asset would revert to Best Limited under the lease
agreement. The other information available in respect of lease agreement is:
(i) The unguaranteed residual value of the equipment after the expiry of the lease term is
estimated at `20,000.
(ii) The implicit rate of interest is 10%.
(iii) The annual payments have been determined in such a way that the present value of
the lease payment plus the residual value is equal to the cost of asset.
Ascertain in the hands of Best Ltd.
(i) The annual lease payment.

(ii) The unearned finance income.
(iii) The segregation of finance income, and also,
(iv) Show how necessary items will appear in its profit and loss account and balance sheet
for the various years.
Answer:
(i) Calculation of Annual Lease Payment
`
Cost of the equipment 1,50,000
Unguaranteed Residual Value 20,000
PV of residual value for 3 years @ 10% (` 20,000 x 0.751) 15,020
Fair value to be recovered from Lease Payment
(`1,50,000 – `15,020) 1,34,980
PV Factor for 3 years @ 10% 2.487
Annual Lease Payment (` 1,34,980/ PV Factor for 3 years @ 10% i.e. 2.487)
54,275
(ii) Unearned Financial Income

Total lease payments [` 54,275 x 3] 1,62,825
Add: Residual value 20,000
Gross Investments 1,82,825
Less: Present value of Investments (` 1,34,980 + ` 15,020) 1,50,000
Unearned Financial Income 32,825
(iii) Segregation of Finance Income

Year Lease Rentals Finance Charges @ Repayment Outstanding
10% on outstanding Amount
amount of the year
` ` ` `
0 - - - 1,50,000
I 54,275 15,000 39,275 1,10,725
II 54,275 11,073 43,202 67,523
III 74,275 6,752 67,523 --
1,82,825 32,825 1,50,000
(iv) Profit and Loss Account (Extracts) Credit side `

I Year By Finance Income 15,000
II year By Finance Income 11,073
III year By Finance Income 6,752
Balance Sheet (Extracts)

Assets side ` `
I year Lease Receivable 1,50,000
Less: Amount Received 39,275 1,10,725
II year Lease Receivable 1,10,725
Less: Received 43,202 67,523
III year :Lease Amount Receivable 67,523
Less: Amount received 47,523
Residual value 20,000 NIL
Study Note 2 – Accounting of Business Combinations and Restructuring
9. The following are the Balance Sheets of Andrew Ltd. and Barry Ltd., as at 31.12.2017:
Andrew Ltd.
Liabilities Assets
Share Capital Fixed assets 3,400
3,00,000 Equity shares of `10 each 3,000 Stock (pledged with secured 18,400
Loan creditors)
10,000 Preference shares of 1,000 Other Current assets 3,600
`10 each Profit and Loss account 16,600
General reserve 400
Secured loans (secured against 16,000
Pledge of stocks)
Unsecured loans 8,600
Current liabilities 13,000 ______
42,000 42,000
Barry Ltd.
Liabilities Assets
Share Capital Fixed assets 6,800
10,00,000 Equity shares of `10 each 1,0000 Current assets 9,600
General reserve 2,800
Secured loans 8,000
Current liabilities 4,600 _______
16,400 16,400
Both the companies go into liquidation and Charlie Ltd., is formed to take over their
businesses. The following information is given:
(a) All Current assets of two companies, except pledged stock are taken over by Charlie Ltd.
The realizable value of all Current assets are 80% of book values in case of Andrew Ltd.
and 70% for Barry Ltd. Fixed assets are taken over at book value.
(b) The break up of Current liabilities is as follows:
Andrew Ltd. Barry Ltd.
` `
Statutory liabilities (including ` 22 lakhs in case of
Andrew Ltd. in case of a claim not having been
Admitted shown as contingent liability) 72,00,000 10,00,000
Liabilities to employees 30,00,000 18,00,000
The balance of Current liability is miscellaneous creditors.
(c) Secured loans include `16,00,000 accrued interest in case of Barry Ltd.
(d) 2,00,000 equity shares of `10 each are allotted by Charlie Ltd. at par against cash
payment of entire face value to the shareholders of Andrew Ltd. and Barry Ltd. in the ratio
of shares held by them in Andrew Ltd. and Barry Ltd.
(e) Preference shareholders are issued Equity shares worth `2,00,000 in lieu of present
holdings.
(f) Secured loan creditors agree to continue the balance amount of their loans to Charlie
Ltd. after adjusting value of pledged security in case of Andrew Ltd. and after waiving
50% of interest due in the case of Barry Ltd.
(g) Unsecured loans are taken over by Charlie Ltd. at 25% of Loan amounts.
(h) Employees are issued fully paid Equity shares in Charlie Ltd. in full settlement of their dues.
(i) Statutory liabilities are taken over by Charlie Ltd. at full values and miscellaneous
creditors are taken over at 80% of book value.
Show the opening Balance Sheet of Charlie Ltd. Working should be part of the answer.
Answer:
Balance sheet of Charlie Ltd. as at 31st December, 2017
Liabilities ` Assets `
Share Capital Goodwill (W.N.4) 9,470
Authorised Other Fixed Assets (3,400+6,800) 10,200
Shares of `10 each Current Assets (2,880+6,720) 9,600
Issued, subscribed & Paid up: Cash at Bank 2,000
7,00,000 equity shares of `10 7,000
Each, fully paid up (W.N.5)
(of the above 5,00,000 shares
Have been issued for
consideration of than cash)
Secured loans (1,280+7,200) 8,480
Unsecured Loans (25% of 8,600) 2,150
Current Liabilities
(7,200 + 1,000 +4,000 + 1,440) 13,640 _______
31,270 31,270
Working Notes:
1. Value of miscellaneous creditors taken over by Charlie Ltd.
(in ` ‗000s)
` `
Given in balance sheet 13,000 4,600
Less : Statutory liabilities 5,000 1,000
Liabilities to employees 3,000 1,800
Miscellaneous creditors 5,000 1,800
80% thereof 4,000 1,440
2. Value of total liabilities taken over by Charlie Ltd.
` ` ` `
Current liabilities
Statutory liabilities 7,200 1,000
Liabilities to employees 3,000 1,800
Miscellaneous creditors (W.N.1) 4,000 14,200 1,440 4,240
Secured loans
Given in Balance sheet 16,000 8,000
Interest waived - 800 7,200
Value Stock 14,720
(80% of ` 184 lakhs) 1,280
Unsecured Loans
(25% of `86 lakhs) 2,150 -
17,630 11,440
3. Assets taken over by Charlie Ltd.
` `
Fixed Assets (Assumed on book value basis) 3,400 6,800
Current Assets 80% and 70% respectively of book value 2,880 6,720
6,280 13,520
4. Goodwill / Capital Reserve on amalgamation
Liabilities taken over (W.N. 2) 17,630 11,440
Equity shares to be issued to Preference Shareholders 200 -
A 17,830 11,440
Less: total assets taken over (W.N.3) B 6,280 13,520
A-B 11,550 (2,080)
Goodwill Capital Reserve
Not Goodwill 9,470

5. Equity shares issued by Charlie Ltd.
Number
(i) For Cash 200000
For consideration other than cash
(ii) In Discharge of Liabilities to Employees 4,80,000
(iii) To Preference shareholders 20,000 5,00,000
7,00,000
Value of shares ` 10 × 7,00,000 = ` 70 Lakhs
10. The Balance Sheet of X Ltd. before reconstruction is:
Building at cost
12,000 7% Preference Less: Depreciation 4,00,000
shares of ` 50 each 6,00,000 Plant at cost
7,500 Equity shares of ` 100 Less: Depreciation 2,68,000
each 7,50,000 Trade Marks and Goodwill
at Cost 3,18,000
(Note : Preference dividend is Stock 4,00,000
in arrear for five years) Debtors 3,28,000
Loan 5,73,000 Preliminary expenses 11,000
Sundry creditors 2,07,000 Profit and Loss A/c 4,40,000
Other liabilities 35,000
Total 21,65,000 Total 21,65,000
Note: Loan is assumed to be of less than 12 months, hence treated as short term borrowings
(ignoring interest)
The Company is now earning profits short of working capital and a scheme of reconstruction has
been approved by both classes of shareholders. A summary of the scheme is as follows:
a. The Equity Shareholders have agreed that their ` 100 shares should be reduced to ` 5 by
cancellation of ` 95 per share. They have also agreed to subscribe in each for the six new
Equity Shares of ` 5 each for two Equity Share held.
b. The Preference Shareholders have agreed to cancel the arrears of dividends and to accept
for each `50 share, 4 new 5 per cent Preference Shares of `10 each, plus 3 new Equity
Shares of ` 5 each, all credited as fully paid.
c. Lenders to the Company of ` 1,50,000 have agreed to convert their loan into share and for
this purpose they will be allotted 12,000 new preference shares of `10 each and 6,000 new
equity share of ` 5 each.
d. The Directors have agreed to subscribe in cash for 20,000, new Equity Shares of ` 5 each in
addition to any shares to be subscribed by them under (a) above.
e. Of the cash received by the issue of new shares, ` 2,00,000 is to be used to reduce the loan
due by the Company.
f. The equity Share capital cancelled is to be applied:
i. to write off the preliminary expenses;
ii. to write off the debit balance in the Profit and Loss A/c ; and
iii. to write off ` 35,000 from the value of Plant.
Any balance remaining is to be used to write down the value of Trade Marks and Goodwill.
Show by journal entries how the financial books are affected by the scheme and prepare the
balance sheet of company after reconstruction. The nominal capital as reduced is to be
increased to the old figures of ` 6,50,000 for Preference capital and ` 7,50,000 for Equity capital.
Though in the question the balance sheet is not prepared as per Schedule III the answer should
be as per Schedule III.
Solution :
Particulars Debit Credit

1. Reduction of Equity capital
Equity Share capital A/c (Face Value ` 100) Dr.7,50,000
To Equity Share capital (Face value ` 5) A/c 37,500
To Reconstruction A/c 7,12,500
2. Right issue : (7,500 × 3 = 22,500 Shares)
(a) Bank A/c Dr.1,12,500
To Equity Share Application A/c 1,12,500
(b) Equity Share Application A/c Dr.1,12,500
To Equity Share Capital A/c 1,12,500
3. Cancellation of arrears of preference dividend
NO ENTRY (as it was not provided in the Books of Accounts)
Note :
(a) On cancellation, it ceases to be a contingent
liability and hence no further disclosure
(b) Preference shareholders have to forego
voting rights presently enjoyed at par with
equity share holders
4. Conversion of preference shares
7% Preference Share Capital A/c Dr.6,00,000
Reconstruction A/c (balancing figure) Dr.60,000
To 5% Preference Share Capital (12,000×4×10) 4,80,000
To Equity Share Capital (12,000 × 3 × 5) 1,80,000
5. Conversion of Loan
Loan A/c Dr.1,50,000
To 5% Preference Share Capital A/c 1,20,000
To Equity Share Capital A/c 30,000
6. Subscription by directors:
(a) Bank A/c Dr.1,00,000
To Equity Share Application A/c 1,00,000
(b) Equity Share Application A/c Dr.1,00,000
To Equity Share Capital A/c 1,00,000
7. Repayment of loan
Loan A/c Dr.2,00,000
To Bank 2,00,000
8. Utilisation of reconstruction surplus
Reconstruction A/c Dr.6,52,500
To Preliminary Expenses A/c 11,000
To Profit and Loss A/c 4,40,000
To Plant A/c 35,000
To Trademark and Goodwill A/c 1,66,500
Reconstruction Account
Dr. Cr.
Particulars Amount ParticularsAmount

To Preference shareholders 60,000 By Equity Share capital (FV ` 50) 7,12,500
To Preliminary expenses 11,000
To Profit and Loss A/c 4,40,000
To Plant A/c 35,000
To Trademark and Goodwill 1,66,500
7,12,500 7,12,500
Bank Account
Dr. Cr.
Particulars Amount ParticularsAmount

To Equity share application A/c 1,12,500 By Loan A/c 2,00,000
To Equity share application A/c 1,00,000 By Balance c/d 12, 500
2,12,500 2,12,500
Name of the Company: X Ltd.
Balance Sheet as at 31st March, (after reconstruction)
Ref Particulars Note Current Year Previous Year

No. No.
(`) (`)
I. Equity and Liabilities
1 Shareholders‘ funds
(a) Share capital 1 10,60,000
(b) Reserves and surplus 2 -
(c) Money received against share warrants
2 Share application money pending allotment
3 Non-current liabilities
(a) Long-term borrowings
(b) Deferred tax liabilities (Net)
(c) Other Long term liabilities
(d) Long-term provisions
4 Current Liabilities
(a) Short-term borrowings 3 2,23,000
(b) Trade payables 4 2,07,000
(c) Other current liabilities 5 35,000
(d) Short-term provisions
Total 15,25,000
II. Assets
1 Non-current assets
(a) Fixed assets
(i) Tangible assets 6 6,33,000
(ii) Intangible assets 7 1,51,500
(iii) Capital work-in-progress
(iv) Intangible assets under development
(b) Non-current investments
(c) Deferred tax assets (Net)
(d) Long-term loans and advances
(e) Other non-current assets
2 Current assets
(a) Current investments
(b) inventories 8 4,00,000
(c) trade receivables 9 3,28,000
(d) Cash and cash equivalents 10 12,500
(e) Short-term loans and advances
(f) Other current assets
Total 15,25,000
(`)
Note 1. Share Capital Current Year Previous Year
Authorised Share Capital
60,000 5% Preference Shares of ` 10 each 6,00,000
1,50,000 Equity shares of ` 5 each 7,50,000
13,50,000
Issued, subscribed and paid-up
92,000 Equity shares of ` 5 each 4,60,000

60,000 5% Preference Shares of ` 10 each 6,00,000
Total 10,60,000
FOR EQUITY SHARE :- Current Year Previous Year
Nos. Amount (`) Nos. Amount (`)
Opening Balance 7500 37,500.00 NIL NIL
Add: Fresh Issue (Incld Bonus shares , 84,500.00 422,500.00 NIL NIL
Right shares, split shares, shares issued
other than cash)
92000 460,000.00 NIL NIL
Less: Buy Back of shares - - -
92000 460,000.00 NIL NIL
FOR 5% PREFERENCE SHARE :- Current Year Previous Year
Nos. Amount (`) Nos. Amount (`)
Opening Balance 60000 600,000.00 NIL NIL
Add: Fresh Issue (Incld Bonus shares , - - NIL NIL

Right shares, split shares, shares issued
other than cash)
60000 600,000.00 NIL NIL
Less: Buy Back of shares - - - -
60000 600,000.00 NIL NIL
Note 2. Reserves and Surplus Current Year Previous Year
Profit and Loss A/c (4,40,000)
Less: Written off 4,40,000
Total 0.00
Note 3. Short term borrowings Current Year Previous Year
Loan 5,73,000
Less: Reduced 3,50,000
Total 2,23,000
Note 4. Trade Payables Current Year Previous Year
Sundry Creditors 2,07,000
Total 2,07,000
Note 5. Other Current Liabilities Current Year Previous Year
Other Liabilities 35,000
Total 35,000
Note 6. Tangible Assets Current Year Previous Year
Building at cost Less Depreciation 4,00,000
Plant at Cost
Less Depreciation
(2,68,000-35,000) 2,33,000
Net Block 6,33,000
Note 7. Intangible assets Current Year Previous Year
Trade Mark at Goodwill at cost 3,18,000
Less: Reduction 1,66,500
Total 1,51,500
8. Inventories Current Year Previous Year
Inventories 4,00,000
Total 4,00,000
9. Trade receivables Current Year Previous Year
Debtors 3,28,000
Total 3,28,000
10. Cash & Cash Equivalents Current Year Previous Year
Bank 12,500
Total 12500
Note: Loan is assumed to be of less than 12 months. Hence, treated as short term borrowings
(ignoring
Current Year Previous Year
Preliminary Expenses 11,000
Less: Reduced 11,000
Total NIL
11. A Ltd. and M Ltd. decide to amalgamate and to form a new company AM Ltd. The following
are their balance sheets as at 31.3.2016:
A Ltd. M Ltd.
(`) (`)
Equity and Liabilities
(1)Shareholders‘ funds
(a)Share Capital (` 100) each 10,00,000 6,00,000
(b) Reserves and Surplus
General Reserve 1,00,000 50,000
Investment Allowance Reserve 40,000 30,000
Non-Current Liabilities
12% Debentures (`100 each) 3,00,000 1,00,000
Current Liabilities
Trade payables 60,000 20,000
Total 15,00,000 8,00,000
Assets
Non-current Assets
Fixed Assets 7,50,000 2,00,000
Non-current investments
1,500 Shares in M 3,50,000 —
4,000 Shares in A — 5,00,000
Current Assets 4,00,000 1,00,000
Total 15,00,000 8,00,000
Calculate the amount of purchase consideration for A Ltd. and M Ltd. and draw up the
balance sheet of AM Ltd. after considering the following:
(i) Assume amalgamation is in the nature of purchase.

(ii) Fixed assets of A Ltd. are to be reduced by ` 50,000 and that of M Ltd. are to be taken at
` 3,00,000.
(iii) 12% debentureholders of A Ltd. and M Ltd. are discharged by AM Ltd. by issuing such
number of its 15% debentures of ` 100 each so as to maintain the same amount of
interest.
(iv) Shares of AM Ltd. are of ` 100 each.
Also show, how the investment allowance reserve will be treated in the Financial Statement
assuming the Reserve will be maintained for 3 years.
Answer:
Calculation of Purchase consideration
Value of Net Assets of A Ltd. and M Ltd. as on 31st March, 2014
A Ltd. M Ltd.
(`) (`)
Assets taken over:

Fixed Assets 7,00,000 3,00,000
Current Assets 4,00,000 11,00,000 1,00,000 4,00,000
Less: Liabilities taken over:
Debentures (WN) 2,40,000 80,000
Trade payables 60,000 (3,00,000) 20,000 (1,00,000)
8,00,000 3,00,000
Value of Shares of A Ltd. and M Ltd.
A Ltd. holds 1,500 shares in M Ltd. i.e. 1/4th of the shares of M Ltd.
The value of shares of A Ltd. is ` 8,00,000 plus 1/4 of the value of the shares of M Ltd.
M Ltd. holds 4,000 shares in A Ltd. i.e. 2/5th of the shares of A Ltd.
Similarly, the value of shares of M Ltd. is ` 3,00,000 plus 2/5 of the value of shares of A Ltd.
Let 'a' denote the value of shares of A Ltd. and 'm' denote the value of shares of M Ltd. then
a = 8,00,000 + 1/4 m; and
m = 3,00,000 + 2/5 a.
Substituting the value of m,
a = 8,00,000 + 1/4 (3,00,000 + 2/5 a)
a =8,00,000 + 75,000 + 1/10 a
9/10 a =8,75,000
a = 9,72,222
m = 3,00,000 + 2/5 (9,72,222)
m = 6,88,889
Amount of Purchase Consideration
A Ltd. M Ltd.
` `
Total value of shares (as determined above) 9,72,222 6,88,889
Less: Internal investments:
2/5 for shares held by M Ltd. (3,88,889) ----
1/4 for shares held by A Ltd. ---- (1,72,222)
Amount due to outsiders 5,83,333 5,16,667
Purchase Consideration will be satisfied by AM Ltd. as follows:
A Ltd. M Ltd.
` `
In shares (of ` 100 each) 5,83,300 5,16,600
In cash 33 67
Net Amount of Goodwill/Capital Reserve
` `
Total Purchase Consideration
A Ltd. 5,83,333
M Ltd. 5,16,667 11,00,000
Less: Net Assets taken over
A Ltd. 8,00,000
M Ltd. 3,00,000 (11,00,000)
Nil
(Alternatively, the calculations may be made separately for both the companies)
Balance Sheet of AM Ltd.

as at 31st March, 2016
Particulars Note No. Amount (`)
(1)Shareholder's Funds
(a) Share Capital 1 10,99,900
(b) Reserves and Surplus 2 70,000
(2) Non-Current Liabilities
Long-term borrowings 3 3,20,000
(3) Current Liabilities
Trade payables 80,000
Total 15,69,900
II. Assets
(1) Non-current assets
(a) Fixed assets 4 10,00,000
(b) Other non-current assets 5 70,000
(2) Current assets 4,99,900
Total 15,69,900
Notes to Accounts
(`) (`)
1. Share Capital
10,999 shares of ` 100 each 10,99,900
(All the above shares are allotted as fully paid-up for
consideration other than cash)
2. Reserves and surplus
Investment Allowance Reserve 70,000
3. Long Term Borrowings 3,20,000
15% Debentures (W.N.)
4. Other non-current assets 70,000
Amalgamation Adjustment Account
5. Current assets [4,00,000 + 1,00,000] 5,00,000
Less. Purchase consideration paid in cash ` (33+67) (100) 4,99,900
Working Note:
Calculation of Debentures to be issued

A Ltd. M Ltd.
12% Debentures 3,00,000 1,00,000
Interest on Debentures @ 12 % (a) 36,000 12,000
AM Ltd. Debentures rate of interest (b) 15% 15%
2,40,000 80,000
Debenture Value to earn above calculated interest (a / b)
12. Techno Ltd. has 2 divisions Laptops and Mobiles.

Division Laptops has been making constant profits while division Mobiles has been invariably
suffering losses.
On 31st March 2016 the division-wise draft Balance Sheet was: (` in crores)
Laptops Mobiles Total
Fixed assets cost 250 500 750
Depreciation (225) (400) (625)
Net Assets (A) 25 100 125
Current assets: 200 500 700
Less: Current liabilities (25) (400) (425)
(B) 175 100 275
Total (A+B) 200 200 400
Financed by:
Loan funds - 300 300
Capital: Equity `10 each 25 - 25
Surplus 175 (100) 75
200 200 400
Division Mobiles along with its assets and liabilities was sold for `50 crores to Turnaround Ltd. a
new company, who allotted 1 crore equity shares of `10 each at a premium of `40 per share to
the members of Techno Ltd. in full settlement of the consideration, in proportion to their
shareholding in the company.
Assuming that there are no other transactions, you are asked to:
(i) Pass journal entries in the books of Techno Ltd.
(ii) Prepare the Balance Sheet of Techno Ltd. after the entries in (i).
(iii) Prepare the Balance Sheet of Turnaround Ltd.
Though in the question the balance sheet is not prepared as per Revised Schedule VI the answer
should be as per Revised Schedule VI.
Answer:
Journal of Techno Ltd. (` in crores)
Dr. Cr.
` `
(1) Turnaround Ltd. Dr. 50
Loan Funds Dr. 300
Current Liabilities Dr. 400
Provision for Depreciation Dr. 400
To Fixed Assets 500
To Current Assets 500
To Capital Reserve 150
(Being division Mobiles along with its assets and liabilities sold to
Turnaround Ltd. for ` 40 crores)
Capital Reserve Dr. 50
(2) To Turnaround Ltd. 50
(Being allotment of 1 crore equity shares of `10 each at a premium
of `40 per share to the members of Techno Ltd. in full settlement of
the consideration)
Notes:
Techno Ltd,
Balance Sheet after reconstruction
Note
No.
I. Equity and liabilities
(1) Shareholders' funds
(a) Share Capital 25
(b) Reserves and surplus 1 175 200
(2) Current Liabilities 25
Total 225
II. Assets
(a) Fixed assets
25
(2)Current assets
200
Total 225
Notes to Accounts
1. (` in crores)
Reserves and Surplus 75
Add: Capital Reserve on reconstruction 100
175
Note to Accounts: Consequent on transfer of Division Mobiles to newly incorporated company
Turnaround Ltd., the members of the company have been allotted 1 crore equity shares of `10
each at a premium of `15 per share of Turnaround Ltd., in full settlement of the consideration in
proportion to their shareholding in the company.
Balance Sheet of Turnaround Ltd.

Note No.
1. Equity and liabilities
(1) Shareholders' funds
(a) Share Capital 1 10
(b) Reserves and surplus:
Securities Premium 40 50
(2) Non-current liabilities
Long term borrowings 300
(3) Current liabilities 400
Total 750
Assets
II. (1) Non-current assets
Fixed assets 100
(i) Tangible assets
(ii) Intangible assets 2 150
250
(2) Current assets 500
Total 750
Notes to Accounts
(` in crores)
1. Share Capital:
Issued and Paid-up capital
1 crore Equity shares of ` 10 each fully paid up 10
(All the above shares have been issued for consideration other than cash, to
the members of Techno Ltd. on take over of Division Mobiles from Techno
Ltd.)
2. Intangibles Assets:
Goodwill (WN 1) 150
Working Note
1. Calculation of Goodwill/Capital Reserve for Turnaround Ltd.
Assets taken over

Non Current Assets 100
Current Assets 500
Total Assets(A) 600
Loan Funds 300

Current Liabilities 400
700
Total Liabilities (B) (100)
Net Assets C= (A-B) 50
Purchase Consideration (given) D 150
Goodwill (D-C)
13. The summarized Balance sheets of Aman Ltd. and its subsidiary Ayan Ltd. as at 31.3.2015
were as follows :
Liabilities Aman Ltd. Ayan Assets Aman Ltd. Ayan Ltd.

Ltd.
Share capital 50,00,000 10,00,000 Fixed assets 60,00,000 18,00,000
(Share of `10
each)
General reserves 50,00,000 20,00,000 Investment in Ayan Ltd. 6,00,000 ---
(60,000 shares)
Profit and Loss 20,00,000 15,00,000 Sundry debtors 35,00,000 5,00,000
account
Secured loan 20,00,000 2,50,000 Inventories 30,00,000 25,00,000
Current liabilities 30,00,000 2,50,000 Cash and bank 39,00,000 2,00,000
1,70,00,000 50,00,000 1,70,00,000 50,00,000
Aman Ltd. holds 60% of the paid-up capital of Ayan Ltd. and the balance is held by a foreign
company.
A memorandum of understanding has been entered into with the foreign company by Aman Ltd.
to the following effect:
(i) The shares held by the foreign company will be sold to Aman Ltd. at a price per share to be
calculated by capitalizing the yield at 15%. Yield, for this purpose, would mean 50% of the
average of pre-tax profits for the last 3 years, which were `12 lakhs, 18 lakhs and 24 lakhs
respectively. (Average tax rate was 40%).
(ii) The actual cost of shares to the foreign company was `4,40,000 only. Gains accruing to the
foreign company are taxable at 20%. The tax payable will be deducted from the sale proceeds
and paid to government by Aman Ltd. 50% of the consideration (after payment of tax) will be
remitted to the foreign company by Aman Ltd. and also any cash for fractional shares allotted.
(iii) For the balance of consideration, Aman Ltd. would issue its shares at their intrinsic value. It
was also decided that Aman Ltd. would absorb Ayan Ltd. Simultaneously by writing down the
Fixed assets of Ayan Ltd. by 10%. The Balance Sheet figures included a sum of `1,00,000 due by
Ayan Ltd. to Aman Ltd. and stock of Aman Ltd. included stock of `1,50,000 purchased from Ayan
Ltd., who sold them at cost plus 20%. The entire arrangement was approved and put through by
all concern effective from 1.4.2015.
You are required to indicate how the above arrangements will be recorded in the books of
Aman Ltd. and also prepare a Balance Sheet after absorption of Ayan Ltd. Workings should form
part of your answer.
Answer:
Name of the Company: Aman Ltd.
Balance Sheet as at 1.04.2015
Ref No. Note No. As at 1st As at 1st

Particulars
April, 2015 April,2014
` `
1 Shareholders‘ funds
(a) (a) Share capital 1 53,34,660
(b) (b) Reserves and surplus 2 89,64,320
(c) (c) Money received against share

warrants
2 Share application money pending

allotment
(a) (a) Long-term borrowings 3 22,50,000
(b) (b) Deferred tax liabilities (Net)
(c) (c) Other Long term liabilities
(d) (d) Long-term provisions
(a) (a) Short-term borrowings
(b) (b) Trade payables
(c) (c) Other current liabilities 4 31,50,000
(d) (d) Short-term provisions
Total 1,96,98,980
II. Assets
(a) Fixed assets
(e) Tangible assets 5 76,20,000
8. Intangible assets
9. Capital work-in-progress
10. Intangible assets under

development
(c) Deferred tax assets (Net)
2 Current assets
(a) (a) Current investments
(b) (b) Inventories 6 54,75,000
(c) (c) Trade receivables 7 39,00,000
(d) (d) Cash and cash equivalents 8 27,03,980
(e) (e) Short-term loans and advances
(f) (f) Other current assets
Total 1,96,98,980
(`)
As at 1st As at 1st
Note 1. Share Capital
April, 2015 April,2014
Authorised, Issued, Subscribed and paid up:- 53,34,660

5,33,466 Equity Shares of ` 10 (of which 33,466 shares of ` 10
each issued for consideration other than cash)
Total 53,34,660
RECONCILATION OF SHARE CAPITAL

FOR EQUITY SHARE :- As at 1st April, 2015 As at 1st April, 2014
Nos Amount (`) Nos Amount
(`)
Opening Balance as on 01.04.14 5,00,000 50,00,000 NIL NIL
Add: Fresh Issue (Include Bonus shares, NIL NIL

Right shares, split shares, shares issued 33,466 3,34,660
other than cash)
5,33,466 53,34,660 NIL NIL
Less: Buy Back of shares - - - -
5,33,466 53,34,660 NIL NIL
As at 1st As at 1st
Note 2. Reserves and Surplus
April, 2015 April, 2014
General Reserve 50,00,000
Capital Reserve 13,20,000
Profit and Loss A/c (20,00,000 - 25,000) 19,75,000
Securities Premium (33,466 × 20) 6,69,320
Total 89,64,320
Note 3. Long-term borrowings As at 1st As at 1st

Secured Loans (20,00,000 +2,50,000) 22,50,000
22,50,000
As at 1st As at 1st
Note 4. Other Current Liabilities
Current Liabilities (32,50,000 – Mutual Debt. 1,00,000) 31,50,000
Total 31,50,000
As at 1st As at 1st
Note 5. Tangible assets
Fixed Assets (78,00,000 – 1,80,000) 76,20,000
Total 76,20,000
As at 1st As at 1st
Note 6. Inventories
Inventories (30,00,000 + 25,00,000 – Unrealised Profit 25,000) 54,75,000
Total 54,75,000
As at 1st As at 1st
Note 7. Trade receivables
Sundry Debtors ( 40,00,000 – Mutual debts 1,00,000) 39,00,000
Total 39,00,000
As at 1st As at 1st
Note 8. Cash and cash equivalent
Cash at Bank 27,03,980
Total 27,03,980
Working Notes:
12  18  24
i. Average of Pre Tax Profit = =`18 Lakhs
3
50
Yield = 18 × =`9 lakhs
100
ii. Price per share of Ayan Ltd:-
9 lakhs
Capitaised value of yield of Ayan Ltd. =  100  60 Lakhs.
15
No. of shares = 1,00,000
60 lakhs
Price per share = `60 per share
1 lakhs
iii. Purchase consideration for 40% of share capital of Ayan Ltd.
40
= 1,00,000 x 60 x = `24,00,000
100
iv. Calculation of intrinsic value of shares of Aman Ltd.
Total Assets excluding Investments in Ayan Ltd. 1,64,00,000

Value of Investment 60,000 ×60 36,00,000
2,00,00,000
Less: Outside Liabilities:
Secured Loan 20,00,000
Current Liabilities 30,00,000 50,00,000
Net Assets 1,50,00,000
Intrinsic value per share
Net asset `1,50,00,000

 =` 30per share
No of shares 5,00,000
v. Discharge of purchase consideration by Aman Ltd.

Equity share Cash Total
capital ` `
`
20 ---- 3,92,000 3,92,000
Payment of tax (24  4.40)  
100
Issue of shares to foreign company
50% of (24  3.92)  10.04lakhs 
 
 No. of shares issued by Aman Ltd. 10,04,000 
 30 
 33,466.666 shares 
 
Value of shares capital  33,466  30 10,03980 ---- 10,03,980

Cash payment
---- 10,04,000 10,04,000
50% of (24  3.92)  10.04Lakhs
Cash for fractional shares ---- 20 20
 0.6666  30
Total 10,03,980 13,96,020 24,00,000
vi. Calculation for Goodwill/Capital Reserve to Aman Ltd.

`
Total of Assets as per Balance Sheet of Ayan Ltd. 50,00,000
Less: 10% Reduction in the value of Fixed Assets 1,80,000
10
( 18,00,000)
100
48,20,000
Less: Secured Loan `2,50,000
Current Liabilities `2,50,000 5,00,000
Net Assets 43,20,000
Less: Purchase consideration (outside shareholders) 24,00,000
19,20,000
Less: Investment in Ayan Ltd. as per Balance Sheet of Aman Ltd. 6,00,000
13,20,000
vii. Cash and Bank Balance of Aman Ltd. after acquisition of shares
`
Opening Balance (Aman Ltd.) 39,00,000
Cash and Bank Balance of Ayan Ltd. 2,00,000
41,00,000
Less: Remittance to the foreign company 10,04,020
30,95,980
Less: T.D.S. paid to Government 3,92,000 3,92,000
27,03,980
20
viii. Unrealised profit included in stock of Aman Ltd. 1,50,000  `25,000
120
14. A Limited and B Limited were amalgamated on and from 31st March, 2012. A new company
D Limited was formed to takeover the business of the existing companies. The summarised
Balance Sheet of A Limited and B Limited (before menger) as on 31st March, 2012 are given
below :
(` in Lakhs)
Liabilities A Ltd. B Ltd. Assets A Ltd. B Ltd.
Share capital : Fixed assets 1,200 1,000

Equity Shares of ` 1,000 800 Current assets,
100 each Loans and Advances 880 565
15% Preference Share 400 300
Capital of ` 100 each
Reserve and Surplus :

Revaluation Reserve 100 80
General Reserve 200 150
P & L Account 80 60
Secured Loan :
12% Debentures of
` 100 each 96 80
Current Liabilities
and Provisions 204 95
2,080 1,565 2,080 1,565
Other Information :
1. 12% Debenture holders of A Ltd. and B Ltd. are discharged by D Limited by issuing adequate
number of 16% Debentures of ` 100 each to ensure that they continue to receive the same
amount of interest.
2. Preference shareholders of A Ltd. and B Ltd. have received same number of 15% Preference
share of ` 100 each of D Limited.
3. D Ltd. has issued 1.5 equity shares for each equity share of A Ltd. and 1 equity share each
equity share of B Ltd. The face value of shares issued by D Ltd. is ` 100 each.
Required :
(i) Calculate the Purchase Consideration

(ii) Give the journal entries in the books of D Ltd.
Answer:
WN # 1 : Calculation of purchase consideration :
Purchase consideration A Ltd. B Ltd.
i. No. of equity shares 10,00,000 8,00,000

Exchange Ratio 1:1.5 1:1
No. of equity shares to be issued 15,00,000 8,00,000
Equity Shares capital ` 1,500 Lakhs ` 800 Lakhs
ii. No. of preference shares 4,00,000 3,00,000
Exchange Ratio 1:1 1:1
No. of preference share to be issued 4,00,000 3,00,000
Preference Share Capital ` 400 Lakhs ` 300 Lakhs
Journal Entries in the books of D Ltd.
• Nature of Amalgamation - Merger
• Method of Accounting - Pooling of Interest
Particulars A Ltd. B Ltd.

Debit Credit Debit Credit
` ` ` `
a. For Business Purchase

Business Purchase A/c Dr. 1,900 1,100
To Liquidator of Selling Co. A/c 1,900 1,100
b. Incorporation of Assets and Liabilities
taken over :
Fixed Assets A/c Dr. 1,200 1,000
Current Assets A/c Dr. 880 565
Profit and Loss A/c Dr. 220
To Current Liabilities A/c 204 95
To 12% Debentures A/c 96 80
To Revaluation Reserve A/c 100 80
To General Reserve A/c WN # 2 — 150
To Profit and Loss A/c — 60
To Business Purchase A/c 1,900 1,100
c. Discharge of Purchase Consideration

Liquidator of Selling Co. A/c Dr. 1,900 1,100
To Equity Share Capital A/c 1,500 800
To Preference Share Capital A/c 400 300
d. Discharge of Debentures :
12% Debentures A/c Dr. 96 80
To 16% Debentures A/c 72 60
To Profit & Loss A/c (WN # 3) 24 20
WN # 2 : Reserves to be adjusted on the Amalgamation :

(in Lakhs)

` `
(i) Purchase consideration payable 1,900 1,100

(ii) Total paid up Share capital
(a) Equity Share capital 1,000
(b) Preference Share capital 400 1,400 1,100
(iii) Excess purchase consideration 500 Nil
(iv) Adjustment against reserves of transferee company :
(a) General reserve (200)
(b) Profit & Loss A/c Balance (80)
(c) Profit & Loss A/c debit balance (220)
(v) Reserves of transferor company to be incorporated
(a) Revaluation Reserve 100 80
(b) General Reserve — 150
(c) Profit & Loss A/c — 60
WN # 3 : Settlement of Debentures :
(in Lakhs)

` `
(i) Value of 12% Debentures 96 80

(ii) Interest Payable 11.52 9.6
(iii) 16% Debentures to be issued 72 60
11.52 9.6
×100 ×100
16 16
(iv) Amount to be credited to Profit & Loss A/c (i)-(iii) 24 20
Study Note 3 – Group Financial Statements
15. On 31st March, 2015 BA Ltd. became the holding company of CA Ltd. and DA Ltd. by
acquiring 1,800 lakhs fully paid shares in CA Ltd. for ` 27,000 lakhs and 960 lakhs fully paid
shares in DA Ltd. for ` 8,640 lakhs. On that date, CA Ltd. showed a balance of ` 10,200 lakhs in
General Reserve and a credit balance of ` 3,600 lakhs in Profit and Loss Account. On the same
date, DA Ltd. showed a debit balance of ` 1,440 lakhs in Profit and Loss Account. While its
Preliminary Expenses Account showed a balance of ` 120 lakhs.
After one year, on 31st March, 2016 the Balance Sheets of three companies stood as follows:
(` in lakhs)
Liabilities BA Ltd. CA Ltd. DA Ltd.
Fully paid equity shares of ` 10 each 1,08,000 30,000 12,000
General Reserve 1,32,000 12,600 -
Profit and Loss Account 36,000 4,800 3,000
30 lakh fully paid 9.5%
Debentures of ` 100 each - - 6,000
Loan from CA Ltd. - - 300
Bills Payable - - 600
Sundry Creditors 56,400 10,800 3,720
3,32,400 58,200 25,620
Assets
Machinery 1,56,000 30,000 8,400
Furniture and Fixtures 24,000 6,000 2,400
Investments:
1,800 lakhs shares in CA Ltd. 27,000 - -
960 lakhs shares in DA Ltd. 8,640 - -
12 lakhs debentures in DA Ltd. 1,176 - -
Stocks 66,000 12,000 6,000
Sundry Debtors 36,000 5,400 5,160
Cash and Bank balances 12,804 4,200 3,600
Loan to DA Ltd. - 360 -
Bills Receivable 780 240 -
Preliminary Expenses - - 60
3,32,400 58,200 25,620
The following points relating to the above mentioned Balance Sheets are to be noted:
(i) All the bills payable appearing in DA Ltd.‘s Balance Sheet were accepted in favour of CA
Ltd. out of which bills amounting to ` 300 lakhs were endorsed by CA Ltd. in favour of BA Ltd.
and bills amounting to ` 180 lakhs had been discounted by CA Ltd. with its bank.
(ii) On 29th March, 2016 DA Ltd. remitted ` 60 lakhs by means of a cheque to CA Ltd. to return
part of the loan; CA Ltd. received the cheque only after 31st March, 2016.
(iii) Stocks with CA Ltd. includes goods purchased from BA Ltd. for ` 800 lakhs. BA Ltd. invoiced
the goods at cost plus 25%.
(iv) In August, 2015 CA Ltd. declared and distributed dividend @ 10% for the year ended 31st
March, 2015. BA Ltd. credited the dividend received to its Profit and Loss Account.
You are required to prepare a Consolidated Balance Sheet of BA Ltd. and its subsidiaries CA Ltd.
and DA Ltd. as at 31st March, 2016.
Answer:
Consolidated Balance Sheet of BA Ltd. and its subsidiaries CA Ltd. and DA Ltd. as at 31st March,
2016
` In Lakhs
Ref Particulars Note As at 31st As at 31st
No. No. March,2016 March,2015
1 EQUITY AND LIABILITIES
(a) Share capital 1 1,08,000
(b) Reserves and surplus 2 1,73,600
(c) Money received against share warrants
2 Minority Interest (W.N.2) 21,948
3 Share application money pending allotment
(a) Long-term borrowings 3 4,800
(b)Deferred tax liabilities (Net)
(c ) Other Long term liabilities
(d) Long-term provisions
(a) Short-term borrowings
(b) Trade payables 4 71,100
(c )Other current liabilities
(d) Short-term provisions
Total (1+2+3+4+5) 3,79,448
II ASSETS
(a) Fixed assets
(i) Tangible assets 5 2,26,800
(ii) Intangible assets 6 984
(iii) Capital work-in-progress
(iv) Intangible assets under development
( c)Deferred tax assets (Net)
2 Current assets
(a)Current investments
(b) inventories 7 83,840
(c ) trade receivables 8 47,160
(d) Cash and cash equivalents 9 20,664
(e)Short-term loans and advances
(f) Other current assets
Total (1+2) 3,79,448
` In lakhs
Note 1. Share Capital As at 31st As at 31st
March,2016 March,2015
Authorized, Issued, Subscribed and fully paid-up Share capital:-
5400 Lakhs Equity share of `10 each 1,08,000
1,08,000
RECONCILIATION OF SHARE CAPITAL

FOR EQUITY SHARE As at 31st As at 31st
Nos. Amount Nos. Amount

(`) (`)
Opening Balance as on 01.04.11 10,800 1,08,000
Add: Fresh Issue (Including Bonus shares, right shares,

split shares, share issued other than cash)
10,800 1,08,000
Less: Buy Back of share
Total 10,800 1,08,000
Note 2. Reserve & Surplus As at 31st As at 31st

General Reserve (WN.4) 1,33,440
Profit & Loss A/c (WN.4) 40,160
Total 1,73,600
Note 3. Long- term borrowings As at 31st As at 31st

9.5% Debentures 4,800
Total 4,800
Note 4. Trade Payables As at 31st As at 31st

Sundry Creditors (56,400+10,800+3,720) 70,920
Bills Payable 180
Total 71,100
Note 5. Tangible Assets As at 31st As at 31st

Machinery 1,94,400
Furniture & Fixture 32,400
Total 2,26,800
Note 6.Intangible assets As at 31st As at 31st

Goodwill (WN.3) 984
Total 984
Note 7. Inventories As at 31st As at 31st

Stock 84,000
Less: unrealized profit 160
Total 83,840
Note 8.Trade Receivables As at 31st As at 31st

Debtors (more than six months considered good) – 46,560

(36,000+5,400+5,160)
Bills receivables 1,020
Less: mutual debts(WN.5) 420
Total 47,160
Note 9. Cash and cash equivalents As at 31st As at 31st

Cash and bank 20,604
Cash-in-transit 60
Total 20,664
Working Notes:
(i) Calculation of pre and post acquisition profits of subsidiaries:
(` in lakhs)
Pre-acquisition Post-acquisition
capital profit
General Profit/Loss
Reserve A/c
CA Ltd.
General Reserve (Cr.) 10,200 2,400
Profit and Loss A/c (Cr.) 3,600
(-) Dividend 3,000 600 4,200
10,800 2,400 4,200
Holding (60%) 6,480 1,440 2,520
Subsidiary (40%) 4,320 960 1,680
(` in lakhs)
Pre-acquisition Post-acquisition
Capital profit
Preliminary Profit / Loss
expenses A/c
DA Ltd.
Profit and Loss A/c (Cr.) (1,440) 4,440
Preliminary expenses (Dr.) (120) 60
(1,560) 60 4,440
Holding (80%) (1,248) 48 3,552
Subsidiary (20%) (312) 12 888
(ii) Minority Interest (` in lakhs)

CA Ltd.
Share capital 12,000
Capital profit 4,320
General Reserve 960
Profit/Loss 1,680 6,960 18,960
DA Ltd.
Share capital 2,400
Capital profit (312)
Revenue profit (Cr.) 888
Add: Preliminary expenses written off 12 900 588 2,988
21,948
(iii) Cost of Control (` in lakhs)

CA Ltd.
Investment 27,000
Less: Dividend received and wrongly credited to Profit and 1,800 25,200
Loss
Less: Paid-up share capital (60%) 18,000
Capital profit 6,480 24,480 720
Dee Ltd.
Investment in Shares 8,640
in debentures 1,176 9,816
Less: Paid-up share capital (80%) 9,600
Nominal value of debentures 1,200
Capital profit (1,248) 9,552 264
Goodwill 984
(iv) Consolidated General Reserve and Profit and Loss Account (` in Lakhs)
General Reserve Profit and Loss A/c
` `
BA Ltd. 1,32,000 36,000
Less: Wrong dividend credited - 1,800
1,32,000 34,200
CA Ltd. 1,440 2,520
DA Ltd. (3,552 + 48) - 3,600
1,33,440 40,320
Less: Unrealised profit on stock - 160
1,33,440 40,160
(v) Mutual owing regarding bills = ` (600 – 180) lakhs = ` 420 lakhs.
(vi) Unrealised profit
25
 800x Lakhs
125
= ` 160 lakhs
(vii) Amount of dividend wrongly credited to Profit and Loss A/c
= 60% of ` 3,000 lakhs = `1,800 lakhs.
16. As on 30th June, 2016 the draft balance sheets of the companies showed the following
position:
Amar Ltd. Akbar Ltd. Antony Ltd.

` ` `
Fixed assets 1,35,000 60,000 70,000
Investments at Cost 1,60,000 1,50,000 10,000
2,95,000 2,10,000 80,000
Current assets:
Stock 55,240 36,840 61,760
Debtors 1,10,070 69,120 93,880
Balances at Bank 1,31,290 16,540 52,610
2,96,600 1,22,500 2,08,250
Less: Current Liabilities
Creditors 1,12,060 73,130 78,190
Taxation 30,000 -- 22,000
Proposed dividend 1,00,000 60,000 40,000
2,42,060 1,33,130 1,40,190
Net current assets / (liabilities) 54,540 (10,630) 68,060
3,49,540 1,99,370 1,48,060
Financed by:
Issued ordinary shares of ` 10 each 2,00,000 1,50,000 80,000
Capital Reserve 50,000 -- 23,000
Revenue Reserve 99,540 49,370 45,060
3,49,540 1,99,370 1,48,060
You also obtain the following information:

(i) Akbar Ltd. acquired 6,800 shares in Antony Ltd. at ` 22 per share in 2013 when the balance on
capital reserve was ` 15,000 and on revenue reserve ` 30,500 consolidated.
(ii) Amar Ltd. purchased 8,000 shares in Akbar Ltd. in 2012 when the balance on the revenue
reserve was ` 40,000 . Amar Ltd. purchased a further 4,000 shares in Akbar Ltd. in 2014 when the
balance on the revenue reserve was `45,000. Amar Ltd. held no other investments on 30 th
June,2016.
(iii) Proposed dividends from subsidiary companies are included in the figure for debtors in the
accounts of the parent companies.
Prepare the Consolidated Balance Sheet of Amar Ltd. and its subsidiaries in vertical form as on
30th June,2016 , together with the consolidation schedules.
Answer:
Amar Ltd.
Consolidated Balance Sheet as on 30th June,2016
` ` `
Goodwill 49,592
Fixed assets `(1,35,000+60,000+70,000) 2,65,000
Investment at cost [W.N 5] 10,400 3,24,992
Current Assets:
Stock 1,53,840
Debtors [W.N 4] 1,91,070
Balance at Bank 2,00,440 5,45,350
Current liabilities:
Creditors 2,63,380
Taxation 52,000
Proposed Dividends:
Holding Company 1,00,000
Minority Shareholders 18,000 4,33,380 1,11,970
4,36,962
Financed by:
Issued ordinary shares of ` 10 each 2,00,000
Capital Reserve (50,000+ 5,440) 55,440
Revenue reserve (99,540+ 16,064) 1,15,604 3,71,044
Minority interest 65,918
4,36,962
Working Notes:
Analysis of Profit
W.N 1
Antony Ltd. Capital Profit Capital Revenue

` Reserve Reserve
` `
Capital Reserve in 2013 15,000 -- --
Increase in Capital Reserve -- 8,000 --
Revenue Reserve in 2013 30,500 -- --
Increase in Revenue Reserve -- -- 14,560
45,500 8,000 14,560
Minority Interest 15% 6,825 1,200 2,184
Share of Akbar Ltd. 38,675 6,800 12,376
W.N 2
Akbar Ltd. Capital Profit Capital Revenue

` Reserve Reserve
` `
Revenue Reserve in 2013 40,000 -- --
Increase in Reserve in 2013 -- -- 9,370
Share in Antony Ltd. 6,800 12,376
40,000 6,800 21,746
Minority interest (20%) 8,000 1,360 4,349
32,000 5,440 17,397
Less: [5,000 X 4/15] for second acquisition
treated as capital 1,333 1,333
33,333 16,064
W.N 3
Cost of Control/ Goodwill ` `

Cost of Investment in Antony 1,49,600
Cost of Investment in Akbar 1,60,000 3,09,600
Paid up value of shares: In Antony 68,000
In Akbar 1,20,000
Capital Profits: In Antony 38,675
(25,925+12,750)
In Akbar 33,333 2,60,008
Goodwill 49,592
W.N 4 Minority Interest
(20%) (15%)
Akbar Ltd. Antony Ltd.
` `
Capital 30,000 12,000
Revenue Reserve 1,360 1,200
Capital Profit 4,349 2,184
8,000 6,825
43,709 22,209
W.N 5 Investment
` `
Akbar Ltd. 1,50,000
Less: Cost of Antony Ltd. 1,49,600
400
Antony Ltd. 10,000
10,400
W.N 6 Debtors
Amar Ltd. `1,10,070

Less: Dividend from Akbar Ltd. ` 48,000 `62,070
Akbar Ltd. `69,120
Less: Dividend From Antony Ltd. `34,000 `35,120
Antony Ltd. ` 93,880 ` 1,91,070
17. The draft Balance Sheet of three companies W,H,O, as at 31.03.2016 is as under:
(` in thousand)
Assets W H O
Fixed assets 697 648 349
Investments
1,60,000 shares in H 562 - -
80,000 shares in O 184 - -
Cash at bank 101 95 80
Trade receivables 386 321 251
Inventory 495 389 287
2,425 1,453 967
Liabilities
Share Capital (Nominal value `1 per share) 600 200 200
Reserves 1,050 850 478
Trade payables 375 253 189
Debentures 400 150 100
2,425 1,453 967
You are given the following information:
(a) W purchased the shares in H on 31.10.2011 when the balance in reserves was `500
thousands.
(b) The shares in O were purchased on 11.05.2011 when the balance in reserves was `242
thousands.
(c) The following dividend have been declared but not accounted for before the accounting
year end:
W - `65 thousands
H - `30 thousands
O - `15 thousands
(d) Included in inventory figure of O is inventory valued at `20 thousands which had been
purchased from W at cost plus 25%.
(e) Goodwill in respect of the acquisition of H has been fully written off.
(f) On 31.03.2016 H made bonus issue of one share for every share held. This had not been
accounted in the Balance Sheet as on 31.03.2016.
(g) Included in trade payables of W is `18 thousands to O, which is included in trade
receivables of O.
Prepare Consolidated Balance Sheet of W as at 31.03.2016.
Answer:
Consolidated Balance Sheet of W and its subsidiary H

As on 31st March,2016
(As per Schedule III of the Companies Act,2013)
Particulars Note No. Amount (`)
1. Shareholders‘ Funds
(a) Share Capital 600.00
(b) Reserves & Surplus (W.N. 4) 1,355.80
2. Minority‘s interest (W.N.3) 204.00
3. Non-Current Liabilities
(a) Debentures 1 550.00
4. Current Liabilities
(a) Trade Payables 2 628.00
(b) Proposed Divided (W.N.6) 71.00
3,408.80
II. Assets
1. Non-Current Assets
(a) Tangible Fixed Assets 3 1,345.00
(b) Investments in Associates 4 270.80
2. Current Assets
(a) Trade Receivables 5 707.00
(b) Inventories 6 884.00
(c) Cash and Cash Equivalents 7 196.00
(d) Dividend Receivable from O 6.00
3,408.80
Notes to Accounts:

1. Debentures `(400 +150) 550.00
2. Trade Payables (3750+253) 628.00
3. Fixed Assets (697+648) 1,345.00
4. Investment in Associate (W.N.5) 184.00
(Including Goodwill 7.20)
Add: Accumulated Reserves 86.80 270.80
5. Trade Receivables (386+321) 707.00
6. Inventories (495+389) 884.00
7. Cash and Cash Equivalents 196.00
- Cash at Bank (101+95)
Working Notes:
1. Analysis of Profits of H
Particulars Pre-acquisition Post acquisition

Profits Profits
Reserves on the date of acquisition 500 350
Less: Bonus issue 200 -
300 350
Less: Dividend declared on 31.03.2014 - 30
300 320
Minority interest (20%) 60 64
W‘s Share (80%) 240 258
2. Cost of Control/Goodwill

Amount paid for investment 562
Less: Paid up value of shares including bonus (80% of 320
`400)
Shares in pre-acquisition profit of H 240 560
Goodwill 2
3. Minority Interest
Particulars Amount (`)
Paid up value of share including bonus issue (400 × 20%) 80
Share in pre-acquisition profit of H 60
Share in post acquisition profit of H 84
204
4. Consolidated Reserves
Balance as per W‘s Balance Sheet 1,050.00
Add: Share in post acquisition profits of H 256.00
Dividend from H 24.00
Share of Profit from Associate O 86.80
Add: Dividend from O 6.00 92.80
1,422.800
Less: Dividend payable 65.00
Goodwill written off 2.00 67.00
1,355.80
5. Investment in Associate O as on 31.03.2016 (As per AS 23)

Particulars Amount (`) Amount(`)
Amount paid for investment 184.00
Less: Paid up value of shares 80.00
Share in pre-acquisition reserves (40% of 242) 96.8 176.80
Goodwill (Identified at the time of purchase) 7.20
Initial Cost 184.00
Add: Increase in equity reserves [40% of (478-15-242)] 88.40
Less: unrealized profit (1.60) 86.80
Investment in Associate O as on 31.03.2016 270.80
Share of Profit from Associate O (270.80-184+6) 92.80
6. Proposed Dividend
W 65
Minority Interest (30-24) 6
71
18. Following are the balances in the Balance Sheet of Blue Ltd. and Green Ltd.
i. As on 31.03.2016 Equity Share Capital (`10): Blue Ltd. `80,000; Green Ltd. `1,00,000.
ii. As on 31.03.2016 shares of Green Ltd. held by Blue Ltd. is `99,000.
iii. Profit and Loss A/c balances as on 31.03.2016 of Blue Ltd. is `22,000 and Green Ltd. is
`30,000.
iv. Net Profit during 2015-16 included in above were: Blue Ltd. `18,000; Green Ltd. `9,000.
v. Both the companies have proposed a dividend of 10% which is yet to be recorded.
vi. On 01.04.2015, Blue Ltd. was formed and on the same day it acquired 4,000 shares of
Green Ltd. at `55,000.
vii. On 31.07.2015, 10% dividend was received from Green Ltd. and also bonus shares at 1:4
was received. The dividend was credited to P&L A/c.
viii. On 31.08.2015 Blue Ltd. purchased another 3,000 shares of Green Ltd. at `44,000.
Analyse the profit .
Answer:
Company Status Date of Acquisition
Holding Co.– Blue Ltd. Lot 1 4,000 Shares = 01.04.15

Subsidiary Co.– Green Ltd. Bonus 1,000 Shares 31.07.15
Lot 2 3,000 Shares = 31.08.15
Period No. of Shares Status

Before 01.04.15 All shares acquired i.e. 80% Pre-acquisition
01.04.15 to 31.08.15 Shares acquired on 31.08.15 i.e. 30% Pre-acquisition
01.04.15 to 31.08.15 Shares acquired before 31.08.15 i.e. 40% Post acquisition
After 31.08.15 All shares acquired i.e. 80% Post acquisition
Holding Status:
Holding Company = 80%
Minority Interest = 20%
Date of Consolidation = 31.03.2016
Analysis of Profit & Loss Account of Green Ltd.
P&L balance on 31.03.2016 ` 30,000
Less: Proposed Dividend for
FY 2015-16 (` 1,00,000×10)(Note 1) (`10,000)
Correct Profit ` 20,000
Balance as on 01.04.2015
Balance as on 31.03.2016 `30,000
Less: Net Profit during 2015-16 (`9,000)
Less: 2015-16 Dividend (`1,000)
Capital Profit `20,000
Profit from 01.04.15 to 31.03.16

Profit during 2015-16 `9,000
Less: Dividend for 2015-16 (`9,000)
Revenue Profit NIL
Note :
1. Dividend declared and paid by Green Ltd. is `10,000 (`1,00,000 × 10%).
Dividend for 2015-16

Dividend for 2015-16 `10,000
Out of Profit as at 01.04.2015 `1,000 Out of Profit for FY 15-16 `9,000
01.04.15 to 31.08.15 (5 Months) `3,750

01.09.15 to 31.03.16 (7 Months) `5,250
Consolidation of Balances
Particulars Total Minority Pre- Acquisition Post
` Interest ` Acquisition
`
Green Ltd. (Holding 80%, Minority P&L A/c
20%) `
Equity Capital 1,00,000 20,000 80,000
Profit and Loss A/c 20,000 4,000 16,000
Proposed Dividend 10,000 2,000 1,925 6,075
(Note 1) (Note 2)
Minority Interest 26,000
Total [Cr.] 97,925
Cost of Investment [Dr.] (99,000)
Parent‘s Balance 10,000
For consolidated Balance Sheet 1,075 16,075
Goodwill
Note:
1. Pre-acquisition : [80 % × `1,000 = `800] + [30% × `3,750] = `1,925.
2. Post acquisition: [50% × 3,750 = `1,875] + [80% × `5,250] = `6,075.
19. The summarised Balance Sheet of Apple Ltd., Orange Ltd. and Banana Ltd. as on 31st
March, 2016 are given below: (` in, 000)
Liabilities Apple Orange Banana Assets Apple Orange Banana
Ltd. Ltd. Ltd. Ltd. Ltd. Ltd.
Share Capital: Equity 300 200 120 Fixed Assets 140 240 206
Shares of ` 10 each
fully paid up
Reserves 100 80 60 Investment (at cost):

Shares in Orange Ltd. 180
Shares in Banana Ltd. 80 100
Profit & Loss A/c 120 100 80 Stock-in-trade 80 60 40
Sundry Creditors 60 70 50 Sundry Debtors 40 50 60
Apple Ltd. — 20 16 Due from:
Orange Ltd. 24
Banana Ltd. 16
Cash in Hand 20 20 20
Total 580 470 326 Total 580 470 326
(i) Apple Ltd., held 16,000 shares of Orange Ltd. and 3,600 shares of Banana Ltd.
(ii) Orange Ltd. held 7,200 shares of Banana Ltd.
(iii) All investments were made on 1st July, 2015
(iv) The following were the balances on 1st July, 2015:
Orange Ltd. Banana Ltd.

Reserves 50,000 30,000
Profit & Loss A/c 40,000 50,000
(v) Orange Ltd. invoiced goods to Apple Ltd. for ` 8,000 at a cost plus 25% in December,
2015. The closing stock of Apple Ltd. includes such goods valued at ` 10,000.
(vi) Apple Ltd. proposed dividend at 15%.
Prepare the consolidated Balance Sheet as on 31st March, 2016.
Answer:
Consolidated Balance Sheet of Apple Ltd. and

its Subsidiaries Orange Ltd. and Banana Ltd.
as on 31st March 2016
Particulars Note No `
I. EQUITY AND LIABILITIES
(1) Shareholder's Funds
(a) Share Capital 3,00,000
(b) Reserves and Surplus 1 3,44,200
(2) Share application money pending allotment
(3)Minority Interest 2 1,08,800
(4) Non-current liabilities
(5)Current Liabilities
(a)Trade Payables 3 1,80,000
(b)Other current liabilities 4 45,000
Total 9,78,000
II. ASSETS
(a) Fixed assets 5 5,86,000
(2) Current assets
(a) Inventories 6 1,78,000
(b) Trade receivables 7 1,50,000
(c) Cash and cash equivalents 8 64,000
Total 9,78,000
[Relevant Notes]
1. Reserve and Surplus ` `

Capital Reserve (WN – 3) 52,000
Other Reserves (WN – 6) 1,47,400
Profit and Loss A/c (WN – 5) 1,44,800 3,44,200
2 Minority interest
Orange Ltd. 82,800
Banana Ltd. 26,000 1,08,800
3. Trade Payables
Apple Ltd. 60,000
Orange Ltd. 70,000
Banana Ltd. 50,000 1,80,000
4 Other current Liabilities
Proposed Dividend 45,000
5 Fixed Assets
Apple Ltd. 1,40,000
Orange Ltd. 2,40,000
Banana Ltd. 2,06,000 5,86,000
6 Inventories
Apple Ltd 80,000
Less: Unrealised profit 2,000 78,000
Orange Ltd 60,000
Banana Ltd 40,000 1,78,000
7 Trade Receivables
Apple Ltd. 40,000
Orange Ltd. 50,000
Banana Ltd. 60,000 1,50,000
8 Cash and cash equivalents
Cash in hand
Apple Ltd. 20,000
Orange Ltd. 20,000
Banana Ltd. 20,000 60,000
Cash in Transit 4,000 64,000
Working Notes:
Shareholding Pattern:
Number of % of holding
shares
In Orange Ltd.
Apple Ltd. 16,000 80%
Minority Interest 4,000 20%
In Banana Ltd.
Apple Ltd. 3,600 30%
Orange Ltd. 7,200 60%
Minority Interest 1,200 10%
1. Analysis of profit of Banana Ltd.

Pre-acquisition Post acquisition
Capital Reserve Revenue Reserve Revenue Profit
Reserve as on 1.7.2015 30,000 - -
Profit and Loss A/c on 01.07.2015 50,000 - -
Increase in Reserves - 30,000 -
Increase in Profit - - 30,000
80,000 30,000 30,000
Less: Minority Interest (10%) 8,000 3,000 3,000
72,000 27,000 27,000
Share of Apple Ltd 24,000 9,000 9,000
Share of Orange Ltd 48,000 18,000 18,000
2. Analysis of profit of Orange Ltd.

Pre-acquisition Post acquisition
Capital Reserve Revenue Reserve Revenue Profit
Reserve as on 1.7.2015 50,000 - -
Profit and Loss A/c on 1.7.2015 40,000 - -
Increase in Reserves - 30,000 -
Increase in Profit - - 60,000
90,000 30,000 60,000
Share in profit of Banana Ltd. (post - 18,000 18,000
acquisition)
90,000 48,000 78,000
Less: Minority Interest (20%) 18,000 9,600 15,600
Share of Apple Ltd. 72,000 38,400 62,400
3. Cost of control
` `
Investment in Orange Ltd 1,80,000
Investment in Banana Ltd
By Orange Ltd 1,00,000
By Apple Ltd 80,000 1,80,000
3,60,000
Less: Paid value of shares
In Orange Ltd. 1,60,000
In Banana Ltd. 1,08,000 2,68,000
Capital Profit of Apple Ltd
In Orange Ltd 72,000
In Banana Ltd. 24,000 96,000
Capital Profit of Orange Ltd in Banana Banana Ltd. 48,000 4,12,000
Ltd
Capital Reserve 52,000
4. Minority Interest
Orange Ltd Banana Ltd
(`) (`)
Share Capital 40,000 12,000

Capital Profit 18,000 8,000
Revenue Reserve 9,600 3,000
Revenue Profit 15,600 3,000

83,200 26,000
Less: Unrealised profit on stock 20% of (` 10,000 x 25/125) 400 -
82,800 26,000
5. Profit and Loss A/c - Apple Ltd.

`
Balance as per separate Balance Sheet 1,20,000
Less: Proposed dividend 45,000
75,000
Add: Share of Orange Ltd 62,400
Share of Banana Ltd 9,000
1,46,400
Less: Unrealised profit on Stock (10,000 x 25/125 x 80%) 1,600
1,44,800
6. Other Reserve-Apple Ltd.

`
Balance as per separate Balance Sheet 1,00,000
Share of Orange Ltd. 38,400
Share of Banana Ltd. 9,000
1,47,400
7. Cash in transit
`
Due to Apple Ltd. from Orange Ltd. 24,000
Less: Due by Orange Ltd. 20,000
4,000
20. Mathi Ltd acquired 8,000 Shares of `100 each in Nidhi Ltd on 30.09.2014. The summarized
Balance Sheets of the two Companies as on 31.03.2015 were as follows –
(`‘000)
EQUITY AND LIABILITIES Mathi Nidhi
(1) Shareholders‘ Funds:
(a)Share Capital (` 100) 3,000 1,000
(b)Reserves & Surplus
-Capital Reserve --- 550
-General Reserve 300 50
-Profit & Loss A/c 382 180
(2)Non-Current Liabilities:
-Long Term Borrowings
(Loan from Nidhi Ltd) 21 ---
(3)Current Liabilities:
Trade Payables
-Sundry Creditors 179 70
-Bills Payable --- 17
(incl. ` 5,000 to Mathi Ltd)
Total 3,882 1,867
ASSETS
(1) Non-Current Assets:
(a)Fixed Assets 1,500 1,447
(b)Non-Current Investments
-Investments in Nidhi Ltd 1,700 ---
(2)Current Assets:
(a)Inventories 400 200
(b)Trade Receivables
-Debtors 250 180
-Bills Receivable 12 ---
(incl. ` 5,000 to Nidhi Ltd)
(c)Cash & Cash Equivalents 20 20
(d)Short Term Loans & Adv.
-Loan to Mathi Ltd --- 20
Total 3,882 1867
Contingent Liability (Mathi Ltd.): Bills discounted of ` 6,000.
(i) Nidhi Ltd made a Bonus issue on 31.03.2015 of one share for every two shares held, reducing
the Capital Reserve equivalently, but the accounting effect to this has not been given in the
above Balance Sheet.
(ii) Interest receivable for the year (`1,000) in respect of the loan due by Mathi Ltd. to Nidhi Ltd
had not been credited in the accounts of Nidhi Ltd.
(iii) The credit balance in Profit & Loss Account of Nidhi Ltd. on 01.04.2014 was `21,000.
(iv) The Directors decided on the date of the acquisition that the Fixed Assets of Nidhi Ltd were
overvalued and should be written down by `50,000. Consequential adjustments on
depreciation are to be ignored.
Prepare the Consolidated Balance Sheet as at 31.03.2015, showing your workings.
Answer:
A. Basic Information
Company Status Dates Holding Status
Holding Company = Mathi Ltd Acquisition: 30.09.2014 Holding Company = 80%
Subsidiary = Nidhi Ltd Consolidation: 31.03.2015 Minority Interest = 20%
B. Analysis of Reserves and Surplus of Nidhi Ltd.
(a) Capital Reserve

Balance as on date of Consolidation ` 5,50,000 Remarks
Less: Bonus Issue (`10,00,000 x ½) ` 5,00,000 The entire balance is considered
Corrected Balance ` 50,000 as Capital Profit
(b) Revaluation of Assets: Loss (`50,000) = Capital Profit
(c) General Reserve

Balance as per B/s `50,000
As on 01.04.14 (Date of previous B/s) 01.04.09 to 31.03.15 (upto Consolidation)

`50,000. ` NIL (balancing figure)
Assumed that entire balance is available Revenue Reserve

on this date Capital Profit
(d) Profit and Loss Account
Balance as on date of Consolidation ` 1,80,000

Add: Interest on Loan to Mathi (Given) ` 1,000
Corrected Balance ` 1,81,000
Balance on 01.04.14 Profit for 2014 – 15 (Balancing Figure) ` 1,60,000

(Date of previous B/s)
` 21,000
Upto date of acquisition 01.04.14 to Acquisition to Consolidation 30.09.2014
30.09.14 `1,60,000 x 6/12 to 31.03.2013 `1,60,000 x 6/12
Capital Profit ` 80,000 Revenue Profit ` 80,000
Total Capital Profits: 21,000 + 80,000 = ` 1,01,000, Total Revenue Profits: ` 80,000.
C. Consolidation of Balances
Particulars Total Minority Pre- Post Acquisition

Nidhi Ltd (Holding 80%, Minority 20%) Interest Acquisition Gen. Res. P&L A/c
Equity Capital [` 10,00,000 + Bonus 15,00,000 3,00,000 12,00,000
Shares ` 5,00,000]
General Reserves 50,000 10,000 40,000
Profit and Loss A/c 1,81,000 36,200 80,800 64,000
Capital Reserve 50,000 10,000 40,000
Loss on Revaluation of Assets (50,000) (10,000) (40,000)
Minority Interest 3,46,200
Total [Cr] 13,20,800 64,000
Cost of Investment [Dr.] (17,00,000)
Parent‘s Balances 3,00,000 3,82,000
For Consolidated Balance Sheet 3,46,200 (3,79,200) 3,00,000 4,46,000
(Goodwill)
D. Consolidated Balance Sheet of Mathi Ltd and its Subsidiary Nidhi Ltd as at 31.03.15
Particulars Note This Year Prev. Yr.
I EQUITY AND LIABILITIES
(1) Shareholders‘ Funds:
(a) Share Capital 1 30,00,000
(b) Reserves & Surplus 2 7,46,000
(2) Minority Interest 3,46,200
(3) Current Liabilities: Trade Payables 3 2,61,000
Total 43,53,200
II ASSETS
(1) Non-current Assets
Fixed Assets: (i) Tangible Assets 28,97,000
(15,50,000+14,47,000-Revaln 50,000)
(ii) Intangible Assets – Goodwill on Consolidation 3,79,200
(2) Current Assets
(a) Inventories = 4,00,000 + 2,00,000 6,00,000
(b) Trade Receivables 4 4,37,000
(c) Cash & Cash Equivalents = 20,000 + 20,000 40,000
Total 43,53,200
Contingent Liability for Bills Discounted ` 6,000.
Notes to the Balance Sheet

Note 1: Share Capital
Particulars This Year Prev. Yr.
Authorized: ……………Equity Shares of ` 100 each
Issued, Subscribed & Paid Up: 30,000 Equity Shares of ` 100 each. 30,00,000
Note 2: Reserves and Surplus

(a) Other Reserves - General Reserve 3,00,000
(b) Surplus (Balance in P&L A/c) 4,46,000
Total 7,46,000
Note 3: Trade Payables

(a) Sundry Creditors 2,49,000
(b) Bills Payable 12,000
Total 2,61,000
Note 4: Trade Receivables

(a) Sundry Debtors (2,50,000 + 1,80,000) 4,30,000
(b) Bills Receivable (12,000 – 5,000 Mutual Owings) 7,000
Total 4,37,000
Note: Fixed Assets have been revalued for the purpose of consolidation, and the depreciation
on the Revaluation Loss has been ignored as it is specifically stated in the question.
Study Note 4 – Recent Trends in Financial Reporting
21. (a) List the benefits of Triple Bottom Line Reporting.
Answer:
The benefits emerging from triple bottom line reporting are discussed hereunder:
• Enhancement of reputation and brand: Corporate reputation is a function of the way in

which a company is perceived by its stakeholders. Effective communication with
stakeholders on one or more of the environmental, social, and economic dimensions can
play an important role in managing stakeholder perceptions and, in doing so, protect and
enhance corporate reputation.
• Securing a social license to operate: A ‗license to operate‘ is not a piece of paper, but
informal community and stakeholder support for an organisation‘s operations. Business is
increasingly recognising the link between ongoing business success and its ‗license to
operate‘, especially in the resources sector. Communication with stakeholders is often
critical to securing and maintaining a ‗license to operate‘. Communities and stakeholders
generally, are likely to be more supportive of companies that communicate openly and
honestly about their management and performance in relation to environmental, social
and economic factors.
• Attraction and retention of high caliber employees: Existing and prospective employees
have expectations about corporate environmental, social and economic behaviour, and
include such factors in their decisions regarding working for an organisation. The publication
of TBL-related information can play a role in positioning an employer as an ‗employer of
choice‘ which can enhance employee loyalty, reduce staff turnover and increase a
company‘s ability to attract high quality employees.
• Improved access to investor market: A growing number of investors are including
environmental and social factors within their decision-making processes. The growth in
socially responsible investment and shareholder activism is evidence of this. Responding to
investor requirements through the publication of TBL-related information is a way of ensuring
that the company is aligning its communication with this stakeholder group, and therefore
enhancing its attractiveness to this segment of the investment market.
• Establish position as a preferred supplier: Obtaining a differentiated position in the market
place is one way to establish the status of preferred supplier. Effectively communicating with
stakeholder groups on environmental, social and economic issues is central to obtaining a
differentiated position in the market place.
• Reduced risk profile: There is an expanding body of evidence to suggest that performance
in respect of economic, social and environmental factors has the capacity to affect the
views of market participants about a company‘s exposure to, and management of risk. TBL
reporting enables a company to demonstrate its commitment to effectively managing such
factors and to communicate its performance in these areas. A communication policy that
addresses these issues can play an important role in the company‘s overall risk
management strategy.
• Identification of potential cost savings: TBL reporting often involves the collection, collation
and analysis of data on resource and materials usage, and the assessment of business
processes. For example, this can enable a company to better identify opportunities for cost
savings through more efficient use of resources and materials.
• Increased scope for innovation: The development of innovative products and services can
be facilitated through the alignment of R&D activity with the expectations of stakeholders.
The process of publishing TBL reporting provides a medium by which companies can
engage with stakeholders and understand their priorities and concerns.
• Aligning stakeholder needs with management focus: External reporting of information
focuses management attention on not only the integrity of the data but also the continuous
improvement of the indicator being reported.
• Creation of sound basis for stakeholder dialogue: Publication of TBL reporting provides a
powerful platform for engaging in dialogue with stakeholders. Understanding stakeholder
requirements and alignment of business performance with such requirements is
fundamental to business success. TBL reporting demonstrates to stakeholders the company‘s
commitment to managing all of its impacts, and, in doing so, establishes a sound basis for
stakeholder dialogue to take place.
In addition to the benefits obtained through superior relationships with key stakeholder
groups, the decision to be publicly accountable for environmental and social performance
is often recognised as a powerful driver of internal behavioural change. The availability of
relevant information on economic, environmental and social performance that previously
may not have been collected and evaluated in a readily understood manner may enable
executives to identify and focus attention on specific aspects of corporate performance
where improvement is required.
(b) Discuss the prerequisites of implementation of TBL Reporting.
Answer:
TBL reporting would be of little relevance to the reporting company or its stakeholders if it is not
aligned to the company‘s overall business strategy. A decision to move to full TBL reporting
should not be taken lightly. It must have senior management endorsement and commitment, as
it may have major resource implications, and a halfhearted approach is likely to be worse than
not adopting it all.
Strategy for implementation
Critical issues for consideration in the development and implementation of TBL reporting include:
• clear definition of the role of TBL reporting in driving strategic business objectives;
• establishment of the resource and cost requirements;
• awareness of associated legal implications; and
• understanding the risks involved in publishing TBL information.
Key Challenges for Implementation
The key challenges for implementation of TBL reporting framework are:

• Awareness of relevant issues associated with TBL reporting;
• Understanding stakeholder requirements;
• Aligning TBL reporting with objectives and risks; and
• Determining and measuring performance indicators.
Study Note 5 – Valuation, Accounting and

Reporting of Financial Instruments and others
22. (a) Find out the average capital employed of Magical Ltd. From its Balance Sheet (Draft) as
at 31st March,2016:
Liabilities ` in Lakhs Assets ` in Lakhs

Share Capital: Fixed Assets:
Equity Shares of `10 each 50.00 Land and buildings 25.00
9% Pref. Shares fully paid up 10.00 Plant and machinery 80.25
Reserve and Surplus: Furniture and Fixture 5.50
General reserve 12.00 Vehicles 5.00
Profit and Loss 20.00 Investments 10.00
Secured loans Current Assets:
16% Debentures 5.00 Stock 6.75
16% Term loan 18.00 Sundry debtors 4.90
Cash credit 13.30 Cash and Bank 10.40
Current Liabilities and Preliminary Expenses 0.50
Provisions:
Sundry creditors 2.70
Provision for taxation 6.40 Proposed Dividend on Equity 10.00
Shares
Preference Shares 0.90
148.30 148.30
Non-trade investments were 20% of the total investments.

Balance as on 01.04.2015 to the following accounts were:
Profit and loss Account `8.70 lakhs
General reserve `6.50 lakhs.
Answer:
Calculation of Average Capital Employed
Particulars Amount
`
Fixed Assets:
Land & Building 25.00
Plant & Machinery 80.25
Vehicles 5.50
Investments (80% of `10) 5.00
Current Assets 8.00
Debtors 4.90
Stock 6.75
Cash & Bank 10.40
145.80
Less: Secured Loans
16% Debentures 5.50
16% Term Loan 18.00
Cash Credit 13.30
Current Liabilities & Provisions
Sundry Creditors 2.70
Provision for tax 6.40 (45.40)
Closing Capital Employed 100.40
Less: ½ of Rectified Profit [1/2 of 27.70] 13.85
Average Capital Employed 86.55
Calculation of rectified profit
Increase in general Reserve (12 – 6.50) 5.50
Increase in Profit and Loss (20 – 8.70) 11.30
Add: Proposed Dividend 10.90
Rectified Profit 27.70
(b) The Balance Sheet of Jupiter Ltd. as on 31st March, 2016 is as under:
(` in Lakhs)
Equity Shares `10 each 3,000 Goodwill 744
Reserves (including provision for Premises and Land at cost 400
taxation of `300 lakhs) 1,000 Plant and Machinery 3,000
5% Debentures 2,000 Motor Vehicles 40
Secured Loans 200 (purchased on 1.10.15)
Sundry Creditors 300 Raw materials at cost 920
Profit & Loss A/c Work-in-progress at cost 130
Balance from previous B/S `32 Finished Goods at cost 180
Profit for the year Book Debts 400
(After taxation) `1100 1,132 Investment (meant for
replacement of Plant
and Machinery) 1,600
Cash at Bank and Cash
in hand 192
Discount on Debentures 10
Underwriting Commission 16
7,632 7,632
The resale value of Premises and Land is `1,200 lakhs and that of Plant and Machinery is `2,400
lakhs. Depreciation @ 20% is applicable to Motor Vehicles. Applicable depreciation on Premises
and Land is 2%, and that on Plant and Machinery is 10%. Market value of the Investments is
`1,500 lakhs. 10% of book debts is bad. In a similar company the market value of equity shares
of the same denomination is `25 per share and in such company dividend is consistently paid
during last 5 years @ 20%. Contrary to this, Jupiter Ltd. is having a marked upward or downward
trend in the case of dividend payment.
Past 5 years‘ profits of the company were as under:

2010-11 `67 lakhs
2011-12 (-) `1,305 lakhs
(loss)
2012-13 `469 lakhs
2013-14 `546 lakhs
2014-15 `405 lakhs
The unusual negative profitability of the company during 2011-12 was due to the lock out in the
major manufacturing unit of the company which happened in the beginning of the second
quarter of the year 2010-11 and continued till the last quarter of 2010-11.Value the Goodwill of
the Company on the basis of 4 years‘ purchase of the Super Profit. (Necessary assumption for
adjustment of the Company‘s inconsistency in regard to the dividend payment, may be made
by the examinee).
Answer:
Calculation of capital employed

Present value of assets: ` (in lakhs) ` (in lakhs)
Premises and land 1,200
Plant and machinery 2,400
Motor vehicles (book value less depreciation for ½ year) 36
Raw materials 920
Work-in-progress 130
Finished goods 180
Book debts (400 x 90%) 360
Investments 1,500
Cash at bank and in hand 192
6,918
Less: Liabilities:
Provision for taxation 300
5% Debentures 2,000
Secured loans 200
Sundry creditors 300 2,800
Total capital employed on 31.3.16 4,118
2. Profit available for shareholders for the year 2015-16 ` (in Lakhs)
Profit for the year as per Balance Sheet 1,100

Less: Depreciation to be considered
Premises and land 24*
Plant & machinery 240*
Motor vehicles 4 268
832
Less: Bad debts 40
Profit for the year 15 -16 792
3. Average capital employed ` (in Lakhs)
Total capital employed 4,118
Less: ½ of profit for the current year [Refer point 2] 396
Average capital employed 3,722
* Depreciation on premises and land and plant and machinery have been provided on the
basis of assumption that the same has not been provided for earlier
4. Average profit to determine Future Maintainable Profits ` (in lakhs)

Profit for the year 2015 -16 792
Profit for the year 2014-15 405
2212 / 4 553
5. Calculation of General Expectation:

Jupiter Ltd. pays `2 as dividend (20%) for each share of `10.
Market value of equity shares of the same denomination is `25 which fetches dividend of 20%.
Therefore, share of `10 (Face value of shares of Jupiter Ltd.) is expected to fetch (20/25)x10 = 8%
return.
Since Jupiter Ltd. is not having a stable record in payment of dividend, in its case the
expectation may be assumed to be slightly higher, say 10%
6. Calculation of super profit ` (in Lakhs)

Future maintainable profit [See point 4] 553.00
Normal profit (10% of average capital employed as computed in point 372.20
3)
Super Profit 180.80
7. Valuation of Goodwill ` (in Lakhs)

Goodwill at 4 years‘ purchase of Super Profit 723.20
Notes:
(1) It is evident from the Balance Sheet that depreciation was not charged to Profit & Loss
Account.
(2) It is assumed that provision for taxation already made is sufficient.
(3) While considering past profits for determining average profit, the years 2010-11 and 2011-12
have been left out, as during these years normal business was hampered.
23. (a) From the following information, calculate the value of a share if you want to
(i) Buy a small lot of Shares;
(ii) Buy a controlling interest in the Company
Year Profit (` ) Capital Employed Dividend %
(`)
2013 27,50,000 1,71,87,500 12
2014 80,00,000 4,00,00,000 15
2015 1,10,00,000 5,00,00,000 18
2016 1,25,00,000 5,00,00,000 20
The market Expectation is 12%.
Answer:
(i) Buy a small lot of Shares

If the purpose of valuation is to provide data base to aid decision of buying a small (non-
controlling) position of the equity of a company, dividend yield method is most appropriate.
Dividend rate is rising continuously, weighted average will be more appropriate for calculation
of average dividend.
Year Rate of Dividend Weight Product

2013 12 1 12
2014 15 2 30
2015 18 3 54
2016 20 4 80
10 176
176
Average Dividend = = 17.6%
10
Value of share on the basis of dividend for buying a small lot of shares will be
Average dividend rate 17.6
 100   100 `146.67 per share
M arketex pectation rate 12
(ii) Buy a controlling interest in the Company

If the purpose of valuation is to provide data base to aid a decision of buying controlling interest
in the company, total profit will be relevant to determine the value of shares as the shareholders
have capacity to influence the decision of distribution of profit. As the profit is rising, weighted
average will be more appropriate for calculation of average profit/ yield.
Year Yield % Weight Product

(Profit/ capital employed) X 100
2013 16 1 16
2014 20 2 40
2015 22 3 66
2016 25 4 100
10 222
222
Average yield = = 22.2%
10
If controlling interest in the company is being taken over, then the value per share will be
Average yield rate 22.2
=  100   100 `185 per share
M arketex pectation rate 12
(b) Mr.Dey buys a stock option of PQR Co. Ltd. in July, 2015 with a strike price on 30.07.2015 of
` 250 to be expired on 30.08.2015. The premium is ` 20 per unit and the market lot is 100. The
margin to be paid is ` 120 per unit.
Show the accounting treatment in the books of Buyer when:
(i) the option is settled by delivery of the asset, and
(ii) the option is settled in cash and the index price is ` 260 per unit.
Answer:
Date Particulars Debit Credit

` `
At the time of inception
2014. Stock option premium A/c Dr. 2,000
July To Bank A/c 2,000
(Being premium paid to buy a stock option)
Deposit for margin money A/c Dr. 12,000
To Bank A/c 12,000
(Being margin money paid on stock option)
At the time of settlement
August (i) Option is settled by delivery of the asset
Shares of PQR Ltd. A/c Dr. 25,000
To Deposit for margin money A/c 12,000
To Bank A/c 13,000
(Being option exercised and shares acquired, ` 12,000 margin
money adjusted and the balance amount was paid)
Profit and loss A/c Dr. 2,000
To Stock option premium A/c 2,000
(Being the premium transferred to profit and loss account on
exercise of option)
(ii) Option is settled in cash
Profit and loss A/c Dr. 2,000
To Stock option premium A/c 2,000
(Being the premium transferred to profit and loss account)
Bank A/c (` 100 ×10) Dr. 1,000
To Profit and loss A/c 1,000
(Being profit on exercise of option)
Bank A/c Dr. 12,000
To Deposit for margin money A/c 12,000
(Being margin on equity stock option received back on exercise
of option)
Study Note 6 – Share Based Payment
24. (a) Nice Ltd. grants 180 share options to each of its 690 employees. Each grant contains
condition on the employees working for Nice Ltd. over the next 4 years. On November,2016 Nice
Ltd. has estimated that the fair value of option is `15. It has also estimated that 30% of employees
will leave during four periods and forfeit their rights to the share option. If the above expectations
are correct, what amount of expenses to be recognized during vesting period?
Answer:
Expense to be recognize during 4 years‘ vesting period
Year Calculation Expense for the Cumulative
period ` expenses `
1 690 employees × 180 options × 70% × `15 × ¼ 3,26,025 3,26,025
2 [690 employees × 180 options × 70% × `15 × 2/4 3,26,025 6,52,050
years] - `3,26,025
years] - `6,52,050
years] - `9,78,075
(b) Softy Ltd. announced a Stock Appreciation Right (SAR) on 01.04.2013 for each of its
employees. The scheme gives the employees the right to claim cash payment equivalent to an
excess of market price of company shares on exercise date over the exercise price of `125 per
share in respect of 100 shares, subject to a condition of continuous employment of 3 years. The
SAR is exercisable after 31.03.2016 but before 30.06.2016.
The fair value of SAR was `21 in 2013-14, `23 2014-15 and `24 in 2015-16. In 2013-14 the
company estimated that 2% of its employees shall leave the company annually. This was revised
to 3% in 2014-15. Actually 15 employees left the company in 2013-14, 10 left in 2014-15 and 8 left
in 2015-16. The SAR therefore actually vested in 492 employees on 30.06.2016; when SAR was
exercised the intrinsic value was `25 per share.
Show the provision for SAR account by fair value method. Is this provision a liability or equity?
Answer:
Provision for SARs Account in the books of Softy Ltd.

Dr. Cr.
Date Particulars Amount ` Date Particulars Amount
`
Year
2013-14 To Balance c/d 3,45,891 2013-14 By Employees‘ 3,45,891
Compensation A/c
3,45,891 3,45,891
2014-15 To Balance c/d 7,35,785 2014-15 By Balance b/d 3,45,891
By Employees‘ 3,89,894
Compensation A/c
7,35,785 7,35,785
2015-16 To Balance c/d 11,80,800 2015-16 By Balance b/d 7,35,785
By Employees‘
Compensation A/c 4,45,015
11,80,800 11,80,800
To Bank A/c 12,30,000 By Balance b/d 11,80,800
By Employees‘ 49,200
Compensation A/c
12,30,000 12,30,000
Note: The Provision for Stock Appreciation Right (SARs) is a liability. Therefore SARs are settled
through cash payment equivalent to an excess of market price of company‘s shares over the
exercise price on exercise date.
Working Notes:
Year 2013-14
Number of employees to whom SARs were announced (492+15+10+8) = 525 employees

Number of SARs expected to vest = (525 × 0.98 × 0.98 × 0.98) × 100 = 49,413 SARs expected to lies
years 2013-14 and 2014-15. It can also be worked out by rounding off the number of employees.
Fair value of SARs = 49,413 SARs × 21 = 10,37,673
Vesting period = 3 years
Value of SARs recognized as expense in year 2013-14 = 10,37,673/3 years = 3,45,891.
Year 2014-15
Number of SARs expected to vest

= [(525-15)×0.97×0.97]×100= 47,986 SARs
Fair value of SARs = 47,986 SARs × `23 = `11,03,678
Vesting period = 3 years
Number of years expired = 2 years
Cumulative value of SARs to be recognized as expense
= `11,03,678/3 × 2 = `7,35,785
Value of SARs recognized as expense in year 2014-15
= `7,35,785 - `3,45,891 = `3,89,894
Year 2015-16
Fair value of SARs = `24

SARs actually vested = 492 employees × 100 = 49,200 SARs
Fair value = 49,200 SARs × `24 = `11,80,800
Cumulative value of SARs to be recognized = `11,80,800
Value of SARs to be recognized as an expense in = `11,80,800 - `7,35,785
= `4,45,015
Year 2016-17
Cash payment of SARs = 49,200 SARs × `25 = `12,30,000

Value of SARs to be recognized as an expense in 2016-17
= `12,30,000 - `11,80,800 = `49,200
Study Note 7 – Reporting through XBRL (Extended Business Reporting Language)
25. (a) Discuss the meaning of XBRL.
Answer:
XBRL is a language for the electronic communication of business and financial data which is
revolutionising the business reporting around the world. The term XBRL includes four terminologies
– Extensible, Business, Reporting and Language. These terms are briefly discussed hereunder:
(a) Extensible: This term implies that the user can extend the application of a particular
business data beyond its original intended purpose. The major advantage in it is that the
extended use can be determined even by the users and not just the ones who merely
prepare the business data. This is achieved by adding tags which are both human and
machine readable – describing what the data is.
(b) Business: This platform is relevant to any type of business transaction. It is to be noted that
XBRL focus is on describing the financial statements for all kinds of entities.
(c) Reporting: The intention behind promoting the use of XBRL is to have all companies report
their financial statements in a consolidated manner using the specified formats.
(d) Language: XBRL is based on ‗eXtensible Markup Language‘ (XML). It is one of a family of
―XML‖ languages which is becoming a standard means of communicating information
between businesses and on the internet. It prescribes the manner in which the data can
be ―marked-up‖ or ―tagged‖ to make it more meaningful to human readers as well as to
computers-based system.
(b) Discuss the features of XBRL.
Answer:
Features of XBRL:
1. Clear Definitions XBRL allows the creation of reusable, authoritative definitions, called
taxonomies, which capture the meaning contained in all of the reporting terms used in a
business report, as well as the relationships between all of the terms. Taxonomies are
developed by regulators, accounting standards setters, government agencies and other
groups that need to clearly define information that needs to be reported upon. XBRL
doesn‘t limit what kind of information is defined: it‘s a language that can be used and
extended as needed.
2. Testable Business Rules XBRL allows the creation of business rules that constrain what can be
reported. Business rules can be logical or mathematical, or both. These business rules can be
used to:
 Prevent poor quality information being sent to a regulator or third party, by being run
by the preparer while the report is in draft stage.
 Prevent poor quality information being accepted by a regulator or third party, by
being run at the point that the information is being received. Business reports that fail
critical rules can be sent back to the preparer for review and resubmission.
 Identifying or highlighting questionable information, allowing prompt follow up,
correction or explanation.
 Creation of ratios, aggregations and other kinds of value-added information, based
on the fundamental data provided.
3. Multi-lingual Support XBRL allows concept definitions to be prepared in as many languages
as necessary. Translations of definitions can also be added by third parties. This means that
it‘s possible to display a range of reports in a different language to the one that they were
prepared in, without any additional work. The XBRL community makes extensive use of this
capability as it can automatically open up reports to different communities.
4. Strong Software Support XBRL is supported by a very wide range of software from vendors
large and small, allowing a very wide range of stakeholders to work with the standard
Study Note 8 – Government Accounting
26. Discuss the general principles of Government Accounting.
Answer:
The general principles of government accounting are highlighted hereunder:
1. Classification of expenditures: The Government Expenditures are classified under Sectors,

major heads, minor heads, sub-heads and detailed heads of account. The method of
budgeting and accounting under the service heads is not designed to bring out the relation
in which Government stands to its material assets in use, or its liabilities due to be discharged
at more or less distant dates.
2. Based on budget: government accounting is based on the annual budget of the
government. In its budget for a year, Government is interested to forecast with the greatest
possible accuracy what is expected to be received or paid during the year, and whether
the former together with the balance of the past year is sufficient to cover the later.
Similarly, in the compiled accounts for that year, it is concerned to see to what extent the
forecast has been justified by the facts, and whether it has a surplus or deficit balance as a
result of the year‘s transactions. On the basis of the budget and the accounts, Government
determines:
(a) whether it will be justified in curtailing or expanding its activities; and
(b) whether it can and should increase or decrease taxation accordingly.
3. End products of government accounting: In the field of Government accounting, the end
products are the monthly accounts and the annual accounts. The monthly accounts serve
the needs of the day-to-day administration, while the annual accounts present a fair and
correct view of the financial stewardship of the Government during the year.
4. Period of Accounts: The annual accounts of the central, state and union territory
government shall record transactions, which take place during financial year running from
1st April to 31st March.
5. Cash basis of accounting: With the exception of such book adjustments as may be
authorized by these rules on the advice of the Comptroller and Auditor General of India
(C&AG),the transactions in government accounts shall represents the actual cash receipt
and disbursement during a financial year.
6. Form of Accounts: The accounts of Government are kept in three parts namely,
Consolidated Fund, Contingency Fund and Public Account.
27. (a) List the roles of Public Accounts Committee.
Answer:
Role of Public Accounts Committee (P.A.C)
1. Role regarding examination of the C&AG report: The chief function of P.A.C. is to examine
the audit report of Comptroller and Auditor General (C&AG) after it is laid in the Parliament.
C&AG assist the Committee during the course of investigation.
2. Role regarding unauthorized expenditures or excess expenditures: In examining the report
of the Comptroller and Auditor General of India (C&AG), the committee has to satisfy itself
that:
 the expenditures made by the government, were authorized by the Parliament; and
 the expenditures under any head has not crossed the limits of parliamentary
authorization.
It is to be noted that, every expenditure made by the government must be sanctioned by
the Parliament. Thus, it is the role of the committee to bring to the notice of the Parliament
instances of unauthorized expenditures or expenditures beyond sanctioned limits.
3. Role regarding spending of money by ministries: The committee not only ensures that
ministries spend money in accordance with parliamentary grants, it also brings to the notice
of the Parliament instances of extravagance, loss, in fructuous expenditure and lack of
financial integrity in public services. However, the committee cannot question the polices of
the government. It only concerns itself with the execution of policy on its financial aspects.
4. Scrutinizing the audit reports of public corporations: A new dimension has been added to
the function of the P.A.C. by entrusting it with the responsibility of scrutinizing the audit report
of public corporations.
5. Scrutinising the working process of ministries and public corporations: In examining the
accounts and audits of the ministries and public corporations, the Committee gets the
opportunity to scrutinize the process of their working. It points out the weakness and
shortcomings of the administration of ministries and public corporations Criticisms of the
P.A.C. draw national attention. This keeps the ministries and public corporations sensitive to
the criticisms of the P.A.C. Thus, it is wrong to suppose that the P.A.C. is only an instrument of
financial control, it is as well an instrument of administrative control.
(b) Write a note on Responsibilities of GASAB
Answer:
GASAB, inter alia, has the following responsibilities:
1. To formulate and improve standard of Government accounting and financial reporting in

order to enhance accountability mechanisms.
2. To formulate and propose standards that improve the usefulness of financial reports based
on the needs of the users.
3. To keep the standards current and reflect change in the Governmental environment.
4. To provide guidance on implementation of standards.
5. To consider significant areas of accounting and financial reporting that can be improved
through the standard setting process.
6. To improve the common understanding of the nature and purpose of information
contained in the financial reports
28. Write a note on ‗ Disclosure Requirement as per IGAS 1‘
Answer:
Disclosure requirements as per IGAS 1
The Financial Statements of the Union Government, the State Governments and the Union
Territory Governments (with legislature) shall disclose the following:
• maximum amount for which Guarantees have been given during the year, additions and
deletions (other than invoked during the year) as well as Guarantees outstanding at the
beginning and end of the year;
• amount of Guarantees invoked and discharged or not discharged during the year;
• details of Guarantee commission or fee and its realisation; and
• other material details.
The Financial Statements of the Union Government, the State Governments and the
Governments of Union Territories (with legislature) shall disclose in the notes the following details
concerning class or sector of Guarantees:
• limit, if any, fixed within which the Government may give Guarantee;
• whether Guarantee Redemption or Reserve Fund exists and its details including disclosure
of balance available in the Fund at the beginning of the year, any payments made and
balance at the end of the year;
• details of subsisting external foreign currency guarantees in terms of Indian rupees on the
date of Financial Statements;
• details concerning Automatic Debit Mechanism and Structured Payment Arrangement, if
any;
• whether the budget documents of the Government contain details of Guarantees:
• details of the tracking unit or designated authority for Guarantees in the Government; and
• other material details.
29. (a) Discuss the objectives and scope of IGAS 2.
Answer:
Objective: The objectives of this Standard are:
• to prescribe the principles for accounting and classification of Grants-in-aid in the Financial
Statements of Government both as a grantor as well as a grantee.
• to prescribe practical solutions to remove any difficulties experienced in adherence to the
appropriate principles of accounting and classification of Grants-in-aid by way of
appropriate disclosures in the Financial Statements of Government.
Scope:
This Standard applies to the Union Government and the State Governments in accounting
and classification of Grants-in-aid received or given by them. The Financial Statements should
not be described as complying with this Standard unless they comply with all the
requirements contained therein. This Standard encompasses cases of Pass-Through Grants
such as Grants-in-aid given by the Union Government to State Governments and by the State
Governments to the Local Bodies discharging functions of local government under the
Constitution.
(b) Write a note on IGFRS 2: Property, Plant and Equipment
Answer:
IGFRS 2: Property, Plant and Equipment This standard has prescribed the accounting treatment
for property, plant and equipment (PPE) so that users of financial statements can obtain
information regarding an entity‘s investment in its property, plant and equipment and any
changes in such investment. The principal issues in accounting for property, plant and
equipment are the timing of recognition of the assets, the determination of their carrying
amounts and the depreciation charges and impairment losses to be recognised in relation to
them. In addition, this standard aims at categorising assets according to their nature and also
aims to provide for depreciation of assets, taking into account their usage over the life of the
assets. The Accounting Standard is essentially an adaptation to Indian requirements of
International Public Sector Accounting Standard (EPSAS 17) issued by IFAC on Property, Plant
and Equipment. It also envisaged to provide guidance to pilot studies and the eventual
development of a common reporting framework under accrual basis for the Union and the
States. The IGFRS are subject to revision by GASAB based on experiences with pilot studies.
Short Note
30. Write Short note on the following:
(a) Scope of Ind AS 2 Inventories
Answer:
Ind AS 2 Inventories is applicable to all inventories except:
i. Financial Instruments
ii. Biological Assets related to agricultural activity and agricultural produce at the point of
harvest ; and
iii. Work-in-progress arising under construction contracts including directly related service
contracts
Ind AS 2 does not apply to the measurement of inventories held by:
(a) producers of agricultural and forest products, agricultural produce after harvest, and
minerals and mineral products, to the extent that they are measured at net realisable
value in accordance with well-established practices in those industries. When such
inventories are measured at net realisable value, changes in that value are recognised in
profit or loss in the period of the change.
(b) commodity broker-traders who measure their inventories at fair value less costs to sell.
When such inventories are measured at fair value less costs to sell, changes in fair value
less costs to sell are recognised in profit or loss in the period of the change.
(b) Users of Financial Statements and their Information Needs
Answer:
Users of Financial Statements and their Information Needs:
1. Investors Information need of the group primarily relates to decision making of

buy, hold or sale of the entity‘s share. Also dividend paying ability of
the entity is a matter of interest.
2. Employees Need to know about the stability and continued profitability of the
employer which would ensure payment of remuneration, employee
opportunities and retirement benefits.
3. Lenders Interested in debt servicing ability
4. Suppliers and Interested in information about the entity‘s ability in the short run to
other trade pay their dues. Of course, they are interested in long run viability of
creditors the entity, if it is the major customer.
5. Customers Seek information about the continuation of the entity in particular if
the entity is the major supplier.
6. Government They have manifold interests like taxation, contribution of the entity in
and their the employment generation and economic activities of the nation
agencies and also the infrastructural facilities to be provided to serve the need
of the entity commensurate with its contribution to the society.
7. Public Mostly interested in employment generation and societal
contribution.
(c) Myths regarding XBRL
Answer:
Myths regarding XBRL
(a) XBRL is not a set of Accounting Standards: It needs to be clearly understood that XBRL
does not represent a set of accounting standards, which remain the prerogative of the
regulatory standards bodies. XBRL is merely a platform on which reporting standards
content will reside and be represented.
(b) XBRL is not a chart of accounts: It is not a detailed universal chart of accounts.
Formulation of a company‘s chart of accounts is an exercise conducted by its
management with regard to its specific business intricacies. XBRL can facilitate the
implementation of such structures through its ability to transport data between
disparate software applications that might be used within an organizations operational
structures.
(c) XBRL is not a GAAP translator: It does not provide a mechanism for facilitating a
drilldown of existing GAAP information into lower levels of information that would be
necessary for translating financial statements from one GAAP to another. The business-
reporting document contains the same GAAP information, be it in an XBRL format or an
MS word or PDF format.
(d) XBRL is not a proprietary technology: XBRL is freely licensed and available to the public.
(e) XBRL is not a Transaction Protocol: XBRL deals with business reporting information, not
with data capture at the transaction level. It is designated to address issues related to
generation and usage of information contained within business reports and begin at
the accounting classification level.
(d) Objectives of Government Accounting
Answer:
Objectives of Government Accounting
The objectives of government accounting are the financial administration of the activities of the
government to promote maximisation of welfare in the form of various services. The specific
objectives can be stated as under:
1. To record financial transactions of revenues and expenditure relating to the government

organizations.
2. To provide reliable financial data and information about the operation of public fund.
3. To record the expenditures as per the appropriate Act, Rules, and legal provisions as set by
the government.
4. To avoid the excess expenditures beyond the limit of the budget approved by the
government.
5. To help in the preparation of various financial statements and reports.
6. To facilitate the auditing by the concerned government department.
7. To prevent misappropriation of government properties by maintaining the systematic
records of cash and store items.
8. To facilitate for estimating the annual budget by providing historical financial data of
government and expenditures.
(e) Cash and Cash Equivalent
Answer:
Cash and Cash Equivalent
Cash means cash in hand and balance of foreign currency. Cash equivalent implies bank
balance and other risk-free short term investments, and advances which are readily
encashable. Cash equivalent means short term highly liquid investments that are readily
convertible into known amounts of cash and which are subject to an insignificant risk of
changes in value. An investment of short maturity, say three months or less from the date of
acquisition is generally considered as cash equivalent. Equity investments are not considered
as cash equivalent because of high market risk. Investments in call money market, money
market mutual funds, repo transactions, badla transactions, etc., are usually classified as cash
equivalents.
(f) Financial Reporting vis-À-vis Triple Bottom Line Reporting
Answer:
Financial Reporting vis-À-vis Triple Bottom Line Reporting
Origin: The origination of financial reporting precedes that of Triple bottom line reporting, the
latter being just a few decades old.
Nature: It is mandatory for corporates to prepare and present their financial reports; while
preparation of full TBL reports including social and environmental dimension is voluntary in
nature.
Scope: Triple bottom line reporting is broader in scope than financial reporting, as the former
includes the reporting of social and environmental performances in addition to the financial
performance of an organisation.
Contents: The information contained within a TBL report is of a different nature to that
included in a financial report. Thus, TBL reporting enables environmental and social risks that
have the capacity to materially affect long-term financial performance to be identified and,
therefore, taken into consideration when preparing financial reports.
(g) Purpose of Share Valuation
Answer:
The shares of a company are required to valued for various purposes. Some of the most
important purposes include the following:
1. For selling shares of a shareholder to a purchaser (which are not quoted in the stock
exchange)
2. For acquiring a block of shares which may or may not give the holder thereof a
controlling interest in the company.
3. To shares by employees of the company where the retention of such shares is limited to
the period of their employment.
4. To formulate schemes of merger and acquisition.
5. To acquire interest of dissenting shareholders under a scheme of reconstruction.
6. For granting loans on the basis of security of shares
7. To compensate shareholders on the acquisition of their shares by the government
under a scheme of nationalization.
8. For conversion of securities, say preference shares into equity shares.
9. To advance a loan on the security of shares.
10. To resolve a deadlock in the management of a company on the basis of the controlling
block of shares given to either of the parties.
(h) Super Profit Method of Goodwill Valuation
Answer:
Super Profit Method of Goodwill Valuation:
 As per this method, the value of goodwill depends on the extra (i.e. super) profit earning
capacity of an entity.
 Such ‗Super Profit‘ refers to the excess profit earned by the entity over the normal profit
that should be earned by a similar firm in the industry.
 Mathematically, Super Profit = Average Future Maintainable Profit – Normal Profit i.e. Super
Profit = Average Future Maintainable Profit – (Average Capital Employed × Normal rate of
return)
 Finally, the value of goodwill is determined by multiplying the Super Profit, so calculated,
by certain ‗Number of Years‘ Purchase‘.
 ∴ Value of Goodwill = Super Profit × No. of Years‘ Purchase
(i) Types of Share Based Payment Plans
Answer:
Types of Share Based Payment Plans
Share-based payment plans generally take three forms i.e. Employee Stock Option Plans
(ESOP), Employee Stock Purchase Plans (ESPP) and Stock Appreciation Rights (SAR). These are
being defined as follows:
• Employee Stock Option Plan (ESOP): It is a contract that gives the employees of an
enterprise the right, but not obligation, for a specified period to purchase or subscribe to
the specified number shares of the enterprise at a fixed or determinable price, called the
exercise price.
• Employee Stock Purchase Plan (ESPP): Under Employees‘ Stock Purchase Plans (ESPP),
employees are given an option to subscribe to shares of employer in a public issue or
otherwise. The exercise price is set at a specified rate of discount on the issue price/
market price on the date of exercise.
• Stock Appreciation Rights (SAR): These are the rights that entitle the employees to
receive cash or shares for an amount equivalent to the excess of market price on
exercise date over a stated price.
(j) Finance Lease
Answer:
Finance Lease
– It is a lease, which transfers substantially all the risks and rewards incidental to ownership of
an asset to the Lessee by the Lessor but not the legal ownership.
In following situations, the lease transactions are called Finance Lease.
 The lessee will get the ownership of leased asset at the end of the lease term.
 The lessee has an option to buy the leased asset at the end of term at price, which is
lower than its expected fair value at the date on which option will be exercised.
 The lease term covers the major part of the life of asset.
 At the beginning of lease term, present value of minimum lease rental covers
substantially the initial fair value of the leased asset.
 The asset given on lease to lessee is of specialized nature and can only be used by
the lessee without major modification.
Revisionary Test Paper_Jun 2018
Final
Group IV
Paper 18: Indirect Tax Laws & Practice
(SYLLABUS – 2016)
1. Choose the correct answer with justification/ workings wherever applicable:

(i) Which of the following central taxes has been subsumed in the ambit of GST?
(a) Central Excise duty;
(b) Service Tax;
(c) CVD on import;
(d) All of the above.
(ii) GST is payable on the services provided by the employee to the employer in the
course of employment on:
(a) Regular basis;
(b) Contract basis as employed by the company;
(c) Contract basis as employed by a contractor;
(d) None of the above.
(iii) If a person, opting for composition scheme is liable to be registered on 1st Oct. 2017
and he has applied for registration on 17th Nov. 2017 and registration granted on 20th
Nov. 2017, then the effective date of registration will be:
(a) 20th Nov. 2017;
(b) 1st Oct. 2017;
(c) 17th Nov. 2017;
(d) 1st April, 2018.
(iv) In case of transport of goods by rail within India, which of the following item is an
exempted supply?
(a) Transport of postal mails and postal bags;
(b) Transport of defence and military equipments;
(c) Transportation of household effects;
(d) Transport of alcoholic beverages.
(v) Mr. C of Chennai supplied goods to M/s Smart Jet Airlines of Chennai flying between
Delhi-Mumbai. The goods are loaded in the aircraft in Delhi. The place of supply of
goods will be:
(a) Chennai
(b) Delhi
(c) Mumbai
(vi) Which of the following is/ are duty exemption scheme(s) under FTP?
(A) Advance Authorisation Scheme

(B) Duty Free Import Authorisation Scheme
(C) Merchandise Export from India Scheme
(D) Service Export from India Scheme
(a) Only (A)

(b) Both (A) & (B)
(c) Both (C) & (D)
(d) All (A), (B), (C) & (D)
(vii) The place which is used for unloading of imported goods and loading of exported
goods, is called:
(a) Inland Container Depot
(b) Land customs station
(c) Customs station
(d) Customs area
(viii) The type of bill of entry which is used for ex-bond clearance for home consumption
from the warehousing, is
(a) Form I (white)
(b) Form II (yellow)
(c) Form III (green)
(ix) Which of the following good/ goods is/ are covered under GST Compensation Cess?
(a) Pan Masala
(b) Tobacco and tobacco products
(c) Motor vehicles
(x) The due date to file GSTR-6 (Return for Input Service Distributor) is:
(a) 10th of the next month
(b) 13th of the next month
(c) 18th of the next month
(d) 20th of the next month.
Answer:
(i) (d)
In the GST regime, all the above taxes, such as — Central Excise duty, Service Tax, CVD on
import, Spl. CVD on import, Central Cesses etc. have been subsumed in the ambit of GST.
(ii) (c)
Supply includes the services provided by the employee to the employer in the course of
employment on Contract basis as employed by a contractor. So, GST is payable.
(iii) (a)
If a person, opting for composition scheme is liable to be registered on 1st Oct. 2017 and he has
applied for registration on 17th Nov. 2017 and registration granted on 20th Nov. 2017, then the
effective date of registration will be 20th Nov. 2017 (i.e. the date of grant of registration),
provided no discrepancies found.
(iv) (b)
In case of services by way of transportation of goods by rail or a vessel from one place in India to
another, the goods like defence or military equipments, agricultural produce, milk, salt and food
grain including flours, pulses and rice, organic manure etc. are exempted from GST.
(v) (b)
Where the goods are supplied on board a conveyance including a vessel, an aircraft, a train or a motor
vehicle, place of supply of goods will be the location at which such goods are taken on board. So, the
place of supply will be Delhi.
(vi) (b)
Both Advance Authorisation Scheme and Duty Free Import Authorisation Scheme are duty
exemption schemes. The last two schemes are reward schemes under FTP.
(vii) (a)
After the imported goods are unloaded at the port, the containers are carried to Inland
Container Depots for storage purpose. From these depots goods can be cleared for Domestic
Tariff Area or cleared for export. Inland Container Depots are used for unloading of imported
goods and loading of exported goods.
(viii) (c)
The bill of entry of Form III (green) is used for ex-bond clearance for home consumption from the
warehousing.
(ix) (d)
Pan masala, tobacco and tobacco products, cigarettes, aerated waters, motor vehicles etc.
goods are covered under GST Compensation Cess.
(x) (b)
The GSTR-6 (Return for Input Service Distributor) is to be filed on a monthly basis and the due
date is 13th of the next month.
2.(a) Mr. M of Madurai supplied goods/services for ` 24,000 to Mr. S of Salem. Mr. M purchased
goods/services for ` 23,600 (inclusive of CGST 9% and SGST 9%) from Mr. C of Chennai. Find
the following:
(1) Total price charged by Mr. M for supply of goods/services and
(2) Who is liable to pay GST?
(3) Net liability of GST.
(b) Mr. Raj being an owner of shop is a registered person under GST. He has decided to close
the business. At the time of deregistration he has closing stock of ` 15,00,000. Mr. Raj‟s final
GST return shows his supplies made during the last taxable period plus stock in hand of `
15,00,000 during the deregistration. Find the amount of supply. Is it supply of goods or
services?
Answer:
(a)
Particulars Value in (`)
Value charged for supply of goods/services 24,000
Add: CGST 9% 2,160
Add: SGST 9% 2,160
(1) Total price charged by Mr. M from Mr. S for local supply of 28,320
goods/services.
(2) Mr. M is liable to pay GST.
Particulars CGST (`) SGST (`)

Output tax 2,160 2,160
Less: Input Tax Credit (ITC) (1,800) (1,800)
(3) Net tax liability of Mr. M 360 360
(b) Amount to supply = ` 15,00,000

It is treated as supply of goods.
Note:
(1) Mr. Raj has to pay GST on ` 15 lacs.
(2) However, Mr. Raj is not required to pay to GST on closing stock of ` 15 lacs, provided
Input Tax Credit is not availed on such stock.
3.(a) M/s X Pvt. Ltd., is a manufacturer having two units namely Unit – A in Andhra Pradesh and
another Unit – B in Tamil Nadu. Total turnover of two units in last Financial Year was ` 95
lakhs (` 10 lakhs of Unit – A + ` 85 lakhs of Unit – B).
Total turnover of two units in the second quarter of this financial year was ` 15 lakhs (` 5
lakhs of Unit – A + ` 10 lakhs of Unit – B). Applicable rate of CGST is 9% and SGST is 9%. Find
the Net liability of X Pvt. Ltd.
Note: M/s X Pvt. Ltd., is not availing input tax credit.
(b) Mr. Param (register person under GST) being a dealer furnished the following business
transactions took place during the Oct 2017. Find the GST liability.
1. Sale of plastic bangles for ` 20,000.
2. Supply of mobile phones for ` 3,20,120
3. Sale of printed books and newspapers for ` 1,25,500
4. Sale of Dates for ` 13,500
5. Sale of Salt for ` 9,180
6. Sale of Organic manure worth ` 2,00,000
7. Sale of Chemical Fertilizers ` 5,75,000 (out of which 30% subsidy received from
Government of India).
Note: Taxable supply attracts GST @5% (CGST 2.5% and SGST 2.5%).
Answer:
(a) Since, the company is not availing the benefit of input tax credit the said company can pay
GST under composition levy under sec. 10(1) of the CGST Act, 2017.
Applicable rate of CGST is 1% and SGST is 1%.
Unit Location Turnover in Turnover in 2nd Total tax (@2%)

the previous Quarter of the
financial year financial year
1% CGST 1% SGST
A Andhra ` 10 lakhs ` 5 lakhs ` 5,000 ` 5,000
Pradesh
B Tamil Nadu ` 85 lakhs ` 10 lakhs ` 10,000 ` 10,000
(b) Statement showing tax liability of Mr. Param

S. No. Particulars Taxability CGST 2.5% (`) SGST 2.5% (`)
(1) Plastic bangles Exempted Nil Nil
(2) Mobile phone 3,20,120 8,003 8,003
(3) Books Exempted Nil Nil
(4) Dates Exempted Nil Nil
(5) Salt Exempted Nil Nil
(6) Organic manure Exempted Nil Nil
(7) Chemical Fertilizers (70% of ` 4,02,500 10,063 10,063
5,75,000)
Total 18,066 18,066
4.(a) Find the taxability for the following independent cases:

1. Packing of pulses in retail packs for ` 42,000.
2. Packing of tomato ketchup for ` 54,000
3. Commission on sale of rice for ` 10,125.
4. Storage of rice flour in the warehouse for ` 12,000.
(b) Mr. Navab, a performing artist, provides the following information relating to August, 2017.
Receipts from: `
Performing classical dance 98,000
Performing in television serial 2,80,000
Services as brand ambassador 12,00,000
Coaching in recreational activities relating to arts 2,10,000
Activities in sculpture making 3,10,000
Performing western dance 90,000
Determine the value of taxable supply of services and GST payable by Mr. Navab for
August, 2017. GST @ 18%.
Answer:
(a) Taxability:
(1) taxable supply of services.
(b)
Receipts from Value in ` Remarks
Classical dance Nil Exempt as receipt is less than
or equal to ` 1,50,000
Performing in television serial 2,80,000
Brand ambassador 12,00,000
Coaching in recreational activities in Nil
relation to arts
sculpture making 3,10,000
Western dance 90,000
Value of taxable supply of service 18,80,000
GST 18% 3,38,400
5.(a) Indian Institute of Management, Ahmedabad provided the following services in the month
of July 2017:
1. Post Graduate Diploma in Management services provided to those candidates who
selected through Common Admission Test (CAT) for ` 25 lakhs.
2. Services provided by way of Executive Development Programme ` 55 lakhs.
Find the GST liability if rate of GST is 18%.
(b) Tirumal Tirupati Devasthanams, Tirupati registered under section 12AA of the Income Tax
Act, 1961 was running guest houses for pilgrims. Renting of precincts of a religious place
meant for general public, by charging more than ` 1,000 per day. Department Claims that
the assessee was liable to pay GST. But the assessee contented that since, they were
running guest houses without any profit motive hence they were not liable to pay GST.
Decide the case whether the contention of the assessee is right or Department claim is
justifiable.
Answer:
(a) 1. Post Graduate Diploma in Management where admission to such programme is through
Common Admission Test (CAT) is exempted supply of service and exempted from GST.
2. Executive Development Programme is taxable supply. GST is ` 9.9 lakhs (` 55 lakhs x 18%).
(b) Renting of precincts of a religious place meant for general public, owned or managed by an
entity registered as a charitable or religious trust under section 12AA of the Income-tax Act,
1961 is exempt from GST.
However, w.e.f 1-7-2017, this exemption shall not be applicable to
1. Renting of rooms where charges are ` 1000/- or more per day,

2. Renting of premises, community halls, kalyanmandapam or open area, etc where
charges are ` 10,000/- or more per day, and
3. Renting of shops or other spaces for business or commerce where charges are ` 10,000/-
or more per month.
Thus, the law gives a limited exemption to renting of only religious precincts or a religious
place meant for general public by the entity registered under Section 12AA of the Income
Tax Act or Sec 10(23C)(v) or Sec 10(23BBA) of the Income Tax Act, 1961.
In the given case, it is not exempt from GST. Therefore, department claim is justifiable.
6.(a) With reference to the provisions of GST law (w.e.f. 1-7-2017), briefly explain as to who is the
person responsible to pay GST in the following:
i) Legal services are provided by Senior Advocates to business entities.
ii) Representation services are provided by Senior Advocates to any business entity.
iii) Were Contracts for representation service provided by the Senior Advocates to any
business entity has been entered into through another advocate or firm of advocates.
(b) Mr. A, a registered person received goods from Mr. B, an unregistered dealer. Mr. B issues
invoice on 1st July 2017.
Find the time of supply of goods in following independent cases:
(i) Mr. A received goods on 15th July 2017, payment of which is not made yet.
(ii) Mr. A received goods on 3rd August 2017 & made payment for the same on 4th
August 2017.
(iii) Mr. A made payment on 8th July and received goods on the same date.
(iv) Mr. A received goods on 10th July 2017 & made payment for the same on 9th July
2017.
Answer:
(a)
Service Service recipient Nature of Taxability Person
provider service responsible to
pay GST
(i) & (ii) Senior Business Entity Representation Taxable Recipient of
Advocate (whose turnover services supply of service, which is
exceeds ` 20 service the business
Lakhs in previous entity, who is
year) litigant, applicant
or petitioner.
(iii) Recipient of service that is the business entity, who is the litigant, applicant or petitioner,
is liable to pay GST.
Note: Previous year turnover more than ` 20 lakhs (in case of special category States is ` 10
lakhs).
(b)
(i) Time of supply of goods = 15-07-2017
Earliest of the following:
Receipt of Goods = 15-07-2017
Date of Payment = not paid
Date immediately following 30 days from the date of invoice = 31-07-2017
(ii) Time of supply of goods = 31-07-2017

Date of Payment = 04-08-2017
(iii) Time of supply of goods = 08-07-2017

(iv) Time of supply of goods = 09-07-2017

Date immediately following 30 days from the date of invoice = 31-07-2017.
7.(a) X Pvt. Ltd. engaged in providing taxable services by way of training and coaching activities
in relation of information Accounting and Auditing. Since 1st July 2017, it has the following
details in respect of that activity for the month of September, 2017:
Date of issuance Date on which payment Amount in `
invoice received
16.09.2017 03.10.2017 2,50,000
20.10.2017 06.10.2017 25,000
02.10.2017 30.09.2017 1,25,000
The date of change in effective rate of tax in this case is 01-10-2017 from 12% to 18%. These
services are rendered in August 2017. Find the Time of Supply of service, effective rate of
tax and due date of payment of tax.
(b) What do you mean by location of the supplier of service as per IGST Act?
Answer:
(a)
Services Date of Date on Amount Time of supply Effective Due date of
rendered issuance which in ` of service Rate of payment
invoice payment tax
received
Aug 2017 16.09.2017 03.10.2017 2,50,000 16.09.2017 12% 20.10.2017
Aug 2017 20.10.2017 06.10.2017 25,000 06.10.2017 18% 20.01.2018
Aug 2017 02.10.2017 30.09.2017 1,25,000 30.09.2017 12% 20.10.2017
(b) Location of the Supplier of service: As per sec. 2(15) of IGST Act, the definition of location of
supplier of service divided into 4 sub clauses:
Supplier of service Location of the supplier of service
(a) Supply is made from a place of business Location of such place of business
where registration is obtained.
(b) Supply is made from a fixed establishment Location of such fixed establishment
(c) Supply is made from more than one The location of establishment most directly
establishment concerned with the provision of the supply
(d) Services received at other than above. The location of the usual place of residence
of the supplier.
8.(a) X Ltd. being a registered person located in Hyderabad hires Mr. Y who is located in
Chennai for appraisal performance of senior employees of their company. Mr. Y visits
Hyderabad to evaluate the performance of the senior employees.
(1) Find the Place of supply of service.
(2) What would be the place of supply of service if some of the selected employees and
relevant papers are sent to Chennai for evaluation where X Ltd. is un-registered
person?
(b) ABC Fabricators has its factory located in Gujarat. It has temporarily imported certain
goods from its customer located in China and re-exported them to China after carrying out
the necessary repairs without putting them to any use in Gujarat.
Examine what would be the place of provision of service in the given case with reference
to the Place of Supply of Services.
Will your answer be different if the repaired goods are re-exported after being put to use in
Gujarat for some time?
Answer:
(a) (1) POS = Hyderabad (i.e. Location of recipient of Service, since, provided to a registered
person)
Mr. Y is liable to pay IGST.
(2) POS = Chennai (i.e. Location where the services are actually performed, since, provided
to un-registered person)
Mr. Y is liable to pay CGST and SGST.
(b) In the given case, since goods have been temporarily imported by ABC Fabricators and
have been re-exported after the repairs without being put to any use in Gujarat (taxable
territory), place of provision of repair services carried out by ABC Fabricators will be
determined by sec. 13(2) of IGST Act, 2017. Consequently, the place of supply of service will
be the location of service receiver, viz. China (non-taxable territory).
However, if repaired goods are re-exported after being put to use, the place of provision of
service will be determined according to sec. 13(3)(a) of IGST Act, 2017, if the use to which
such goods are put to is not required for such repair.
Therefore in such a case, the place of supply of service will be the location where the service
is actually performed, which in the given case is Gujarat.
However, if the use is of such nature, which is necessary for carrying out the repairs, the
place of supply of service will again be determined as per sec. 13(2) of IGST Act, 2017.
9.(a) Bharat Gas sells cooking gas cylinders. Subsidy directly transferred to the account of the
customer. Selling price per cylinder is ` 800. Customers received subsidy of ` 200 directly
from Government to his bank account. Net outflow of the buyer is ` 600. Find the value of
supply of goods (per cylinder) in the hands of Bharat Gas.
(b) Asha Ltd. supplies raw material to a job worker Kareena Ltd. After completing the job-work,
the finished products of 5,000 packets are returned to Asha Ltd. putting the retail sale price
as ` 20 on each packet. The product in the packet is covered under MRP provisions.
Determine the transaction value in the hands of Kareena Ltd. under GST law from the
following details:
Particulars Value in `
Cost of raw material supplied 30,000
Job worker's charges including profit 10,000
Transportation charges for sending the raw material to the job 3,000
worker
Transportation charges for returning the finished packets to Asha 4,500
Ltd.
Asha Ltd. paid certain technology transfer fees to „Kareena Ltd‟, 22,500
so that „Kareena Ltd‟ can use the said technology in the given
job-work operation. This technology owned by Asha Ltd. for
subsequent use as well.
Note: Kareena Ltd offered discount ` 2,000, provided full payment is made at the time of
raising invoice and the same is mentioned in the invoice. Asha Ltd. made full payment at
the time of issue of invoice.
Answer:
(a) Since, the amount of subsidy is directly credited to the account holder and not received by
the Bharat Gas making the supply, therefore, such subsidy will not be considered as part of
transaction value as it is not received by the Bharat Gas in making the supply.
Hence, transaction value is ` 800 per cylinder.
(b) Statement showing transaction value of Kareena Ltd.

Particulars Value in `
Cost of raw material supplied Exempted
supply
Job worker's charges including profit 10,000

Transportation charges for sending the raw material to the job worker Exempted
supply
Transportation charges for returning the finished packets to Asha Ltd. 4,500
[Sec. 15(2)(b) of the CGST Act, 2017]
Technology fee [Sec. 15(2)(b) of the CGST Act, 2017] 22,500
Sub-total 37,000
Less: Discount [Sec. 15(3) of CGST Act, 2017] (2,000)
Transaction value (i.e. sole consideration) 35,000
Note: It is very clear that principal to job worker and job worker to principal cannot be
treated as supply as per section 143 of the CGST Act, 2017.
10.(a) M/s X Ltd. is a manufacturer of textile products. Company received order from
Government to supply goods to defense (exempted supply). The turnover of other
taxable goods and exempted goods are ` 4 crores and ` 1 crore respectively. Common
inputs on which GST paid is ` 20,000.
Calculate the eligible ITC on common inputs?
(b) Mr. X being a contractor undertaken construction work of an individual residential unit
otherwise than as part of a residential complex.
You are required to answer:
(1) Whether Mr. X is liable to pay GST where he undertaken pure labour contract.
(2) Whether Mr. X is liable to pay GST where he undertaken both labour and material
contract.
(3) Mr. X gives contract to a sub-contractor. Can the sub-contractor also get exemption
if it is pure labour contract?
Answer:
(a) Common inputs credit = ` 20,000
Total turnover = ` 5 crores
Credit attributable to exempted supplies = ` 4,000
(` 20,000 × ` 1 crore/` 5 crore)
Eligible Input Tax Credit is ` 16,000 (i.e. ` 20,000 – ` 4,000)
(b) As per Notification No. 12/2017 Central tax (rate) ―Services by way of pure labour contracts
of construction, erection, commissioning, or installation of original works pertaining to a single
residential unit otherwise than as a part of a residential complex.‖ are exempt from GST.
(1) Since, Mr. X undertaken services by way of pure labour contracts of construction of
single residential unit, it is exempt from GST.
(2) If in case Mr. X providing service with both labour and material i.e. termed as works
contract under GST. He will be charged 12% GST.
(3) Yes. Services provided by a sub-contractor to a contractor are also exempt as he is
providing labour for the construction of residential house.
11.(a) State the advantages of voluntary registration under GST.

(b) M/s Moon Pvt. Ltd. incorporated in Chennai on 1st July 2017 has the following details for
the year 2017-18:
S. No. Particulars Value (` in lacs)
I Inter-state exempted supply of goods 4.0
II Intra-state supplies of services 5.0
III Non-taxable supplies 2.0
IV Exempted supplies of services 7.60
Whether M/s Moon Pvt. Ltd. is required to register compulsorily under GST Law? Advise.
Whether your answer will be different if S.No. (I) above stated that inter-state taxable
supply of goods for ` 4 lacs.
Answer:
(a) Advantages of voluntary registration are as follows:
(i) Legally recognized as supplier of goods or services; This helps in attracting more
customers.
(ii) Provide input tax credit to customers. As they can issue taxable invoices, they can
collect GST. Their customers can take input credit on their purchases.
(iii) They will be more competitive than other small business as buying from them will ensure
input credit.
(iv) Voluntarily registered persons can take input credit on their own purchases and input
services like legal fees, consultation fees etc.
(v) They can make inter-state sales without many restrictions.
(b) Aggregate turnover is as follows:

S. No. Particulars Value (` in lacs)
I Inter-State exempted supply of goods 4.0
II Intra-State supplies of services 5.0
III Non-taxable supplies 2.0
IV Exempted supplies of services 7.60
Aggregate turnover 18.60
Advise: Since, aggregate turnover of Moon Pvt. Ltd. does not exceeds ` 20 lakhs, registration
is not compulsory in the financial year 2017-18.
Yes. Our answer will be different in the case of M/s Moon Pvt. Ltd. made inter-state taxable
supply of goods. As per Sec. 24 of the CGST Act, 2017, person making any inter-state taxable
supply of goods is required to register under GST Law irrespective of his aggregate turnover.
Therefore, M/s Moon Pvt. Ltd. is required to register under GST Law.
12.(a) What is revocation of cancellation of registration under GST?

(b) M/s X Ltd. being a registered person supplying taxable goods in the following manner:
Particulars `
Intra-State supply of goods 18,00,000
Inter-State supply of goods 13,00,000
Intra-State purchases 13,00,000
Inter-State purchases 1,50,000
ITC at the beginning of the relevant tax period:
CGST 1,30,000
SGST 1,30,000
IGST 1,70,000
(i) Rate of CGST, SGST and IGST to be 9%, 9% and 18% respectively.
(ii) Inward and outward supplies are exclusive of taxes.
(iii) All the conditions necessary for availing the input tax credit have been fulfilled.
Compute the net GST payable by M/s X Ltd during the tax period. Make suitable
assumptions.
Answer:
(a) Revocation of cancellation of registration under GST:
As per section 30(1) of the CGST Act, 2017, subject to such conditions as may be prescribed,
any registered person, whose registration is cancelled by the proper officer on his own
motion, may apply to such officer for revocation of cancellation of the registration in the
prescribed manner within 30 days from the date of service of the cancellation order.
As per section 30(2) of the CGST Act, 2017, the proper officer may, in such manner and
within such period as may be prescribed, by order, either revoke cancellation of the
registration or reject the application. The application for revocation of cancellation of
registration shall not be rejected unless the applicant has been given an opportunity of
being heard.
(b) Statement showing input tax credit (i.e. Electronic Credit Ledger):
Particulars CGST (`) SGST (`) IGST (`)
Opening balance 1,30,000 1,30,000 1,70,000
Add: ITC for the tax period 1,17,000 1,17,000 27,000
Total credit 2,47,000 2,47,000 1,97,000
Statement showing Net GST payable by M/s X Ltd. for the tax period:
Particulars CGST (`) SGST (`) IGST (`)
Output tax 1,62,000 1,62,000 2,34,000

Less: ITC allowed -2,47,000 -2,47,000 -1,97,000
Sub-total -85,000 -85,000 37,000
Less: CGST credit adjusted against IGST 37,000 Nil -37,000
Net GST liability Nil Nil Nil
Excess ITC c/f 48,000 85,000 Nil
13.(a) What is Bill of Supply? Write down the contents of Bill of Supply.
(b) Write a short note on:
(i) Provisional assessment &
(ii) Best judgement assessment.
Answer:
(a) A bill of supply is similar to a GST invoice except that bill of supply does not contain any tax
amount as the seller cannot charge GST to the buyer.
A bill of supply is issued in cases where tax cannot be charged:
 Registered person is selling exempted goods/services,
 Registered person has opted for composition scheme
Contents of Bill of supply:

A bill of supply shall be issued by the supplier containing the following details:
(1) Name, address and GSTIN of the supplier
(2) A consecutive serial number, in one or multiple series, containing alphabets or numerals
or special characters like hyphen or dash and slash symbolised as ―-‖ and
―/‖respectively, and any combination there of, unique for a financial year
(3) Date of its issue
(4) Name, address and GSTIN or UIN, if registered, of the recipient
(5) HSN Code of goods or Accounting Code for Services
(6) Description of goods or services or both
(7) Value of supply of goods or services or both taking into account discount or abatement,
if any
(8) Signature or digital signature of the supplier or his authorized representative.
(b) (i) Provisional assessment (Section 60 of the CGST Act, 2017):

As per section 60(1) of the CGST Act, 2017 where the taxable person is unable to
determine the value of goods or services or both or determine the rate of tax applicable
thereto, he may request the proper officer in writing giving reasons for payment of tax on
a provisional basis.
The proper officer (i.e. The Assistant Commissioner/ Deputy Commissioner of Central Tax)
shall pass an order, within a period not later than 90 days from the date of receipt of such
request, allowing payment of tax on provisional basis at such rate or on such value as
may be specified by him.
The Asst. Commissioner/Dy. Commissioner of Central Tax provisionally determines the

amount of tax payable by the supplier and is subject to final determination.
On provisional assessment, the supplier can pay tax on provisional basis but only after he
executes a bond with security, binding them for payment of the difference between the
amount of tax as may be finally assessed and the amount of tax provisionally assessed.
(ii) Best judgment assessment:

As per Section 62 of the CGST Act, 2017 (i.e. assessment of non-filers of return) provides for
best judgment assessment where a registered person fails to furnish the return even after
the service of a notice and pass order taking into account all the relevant material which
is available or which he has gathered within a period of five years from the due date of
filing annual return. Similar provision exists for unregistered persons under Section 63 of the
CGST Act, 2017.
14.(a) M/s X Ltd. being a dealer in new car sold a Petrol Car on which applicable GST rate is 28%
and GST Cess rate is 1%. Transaction value is ` 5,00,000/. Find the GST liability.
(b) Define „adjudicating authority‟ with respect to section 2(4) of the CGST Act.
Answer:
(a) `
Transaction value = 5,00,000
CGST 14% = 70,000 (i.e. ` 5,00,000 x 14%)
SGST 14% = 70,000 (i.e. ` 5,00,000 x 14%)
Cess 1% = 5,000 (i.e. ` 5,00,000 x 1%)
Invoice price of the car = 6,45,000
(b) As per Section 2(4) of the CGST Act, 2017 ―adjudicating authority‖ means any authority,
appointed or authorised to pass any order or decision under this Act, but does not include —
 the Central Board of Excise and Customs,

 the Revisional Authority,
 the Authority for Advance Ruling,
 the Appellate Authority for Advance Ruling,
 the Appellate Authority and
 the Appellate Tribunal;
15.(a) Discuss whether person aggrieved should approach both the authorities of Central and
State for exercising the right of appeal?
(b) X Ltd., a unit in SEZ, received services from various service providers in relation to
authorized operations in SEZ during the month July, 2017. The following details are
furnished for the month July, 2017:
(i) Value of Taxable services used exclusively for authorised operations within SEZ: `
5,00,000 (exemption from GST availed).
(ii) Value of Taxable Services used by SEZ units and DTA units: ` 8,00,000. GST paid @18%.
(iii) Value of Taxable Service used wholly for DTA units: ` 3,00,000. GST paid @18%.
(iv) Export Turnover of SEZ Unit: ` 1,00,00,000
(v) Turnover of DTA Unit: ` 60,00,000.
Compute the Input Tax Credit and amount of refund if any?
Note: All input services used by SEZ for its authorized operations only.
Answer:
(a) As per CBEC clarification the answer to this question is ‗no‘.
The Act makes provisions for cross empowerment between CGST and SGST/ UTGST officers so
as to ensure that if a proper officer of one Act (say CGST) passes an order with respect to a
transaction, he will also act as the proper officer of SGST for the same transaction and issue
the order with respect to the CGST as well as the SGST/ UTGST component of the same
transaction. TheAct also provides that where a proper officer under one Act (say CGST) has
passed an order, any appeal/ review/ revision/ rectification against the said order will lie only
with the proper officers of that Act only (CGST Act).
So also if any order is passed by the proper officer of SGST, any appeal/ review/ revision/
rectification will lie with the proper officer of SGST only.
(b) Statement showing Input Tax Credit & Refund of X Ltd. (a unit of SEZ)
S. No. Particulars Value of ITC (`) Refund Remarks
input Amount (`)
services (`)
1 Input services 5,00,000 Nil Since, no tax Input services

paid on used exclusively
inputs, no for authorized
refund is operations
allowed
2 DTA as well as Zero 8,00,000 54,000 90,000 (` 8,00,000 x 18%)

rated supply x 100L/160L
3 Input services only 3,00,000 54,000 Nil

for DTA
Total 1,08,000 90,000
16.(a) Under what circumstances it may be beneficial to claim refund of un-utilized credit when
exports of goods or services are made without payment of tax?
(b) State the matters on which advance ruling can be sought as per CGST Act.
Answer:
(a) If assessee has negligible balance of tax in Capital Goods Input Tax Credit Account, and
more credit in inputs and input services it is advisable to claim refund of un-utilized credit
when exports of goods or services are made without payment of tax [Section 54(3) of the
CGST Act, 2017].
(b) The questions / matters, on which the advance ruling is sought under this Act, shall be in
respect of,–
 classification of any goods or services or both;

 applicability of a notification issued under the provisions of this Act;
 determination of time and value of supply of goods or services or both;
 admissibility of input tax credit of tax paid or deemed to have been paid;
 determination of the liability to pay tax on any goods or services or both;
 whether applicant is required to be registered;
 whether any particular thing done by the applicant with respect to any goods or
services or both amounts to or results in a supply of goods or services or both, within
the meaning of that term.
Advance ruling can be sought only on the above mentioned aspects.
17.(a) What is Deemed Credit u/s 140(3) of the CGST Act?

(b) Mr. X is a taxable person under GST (who is a wholesaler), is having a stock worth of `
5,00,000/- as on 01-07-2017. Such person has supplied goods for ` 5,60,000/- and on
which he has paid CGST @9% and SGST @9%.
How much Input Tax Credit (ITC) is allowed under sec. 140(3) of CGST Act in the following
independent cases:
1. If he is in possession of duty paid document for the stock (namely BED is ` 62,500 and
VAT ` 28,125).
2. If he is not in possession of duty paid document for the stock, but has invoice
evidencing purchase of good.
Answer:
(a) Deemed Credit u/s 140(3) of the CGST Act:
• Registered person holding stock as on 1-7-2017 along with VAT and Entry tax paid
document on such stock of goods (which suffered tax at first pint of sale in the state and
subsequent sale of which are not subject to tax) shall be allowed to avail the input tax
credit on such goods held in stock. Thus, in case of credit of VAT and Entry tax, is allowed
as ITC equal to the VAT and Entry tax which attracted tax at the first point only.
• If such registered person is not in possession of any document evidencing payment of

VAT, then such credit shall be allowed @40% of the State tax applicable on such goods
and shall be credited after the State tax payable on such supply has been paid.
• The scheme shall be available for six tax periods from the 1-7-2017.
• This benefit is available only when the supplier passes on the benefit of such credit by
way of reduced prices to the recipient.
• The stock of goods on which such credit is availed is to be so stored that it can be easily
identified by the registered person.
Amended provision:
For items with rate of 18% or above under GST —
 For Intrastate supplies: Firstly supply of such goods shall be made against 100% payment
of tax under GST. Then the 60% of the amount of CGST paid on such supply shall be
credited to the electronic credit ledger of the registered person. So this credit is available
on Sales.
 For Interstate supplies: Firstly supply of such goods shall be made against 100% payment
of tax under IGST. Then the 30% of the amount of IGST paid on such supply shall be
on Sales.
For items with rate below 18% under GST

 For Intrastate supplies: Firstly supply of such goods shall be made against 100% payment
of tax under GST. Then the 40% of the amount of CGST paid on such supply shall be
on Sales.
 For Interstate supplies: Firstly supply of such goods shall be made against 100% payment
of tax under IGST. Then the 20% of the amount of IGST paid on such supply shall be
on Sales.
(b)
1. ITC allowed is equal to BED is ` 62,500 as CGST credit and VAT of ` 28,125 as SGST credit.
2. In accordance with the provisions of Transition Rules, he can claim credit to the extent of
60% of CGST paid, i.e., ` 30,240/- (` 50,400 @60%) as CGST credit.
In accordance with the provisions of Transition Rules, he can claim credit to the extent of
60% of SGST paid, i.e., ` 30,240/- (` 50,400 @60%) as SGST credit.
18.(a) What do you mean by Anti-profiteering? Explain with help of examples.

(b) Describe the duties & powers of Anti-profiteering Committee as per CGST Act.
Answer:
(a) Anti Profiteering (Section 171 of the CGST Act) —
As per section 171(1),

 Any reduction in rate of tax on any supply of goods or services
Or,
 the benefit of input tax credit
shall be passed on to the recipient by way of commensurate reduction in prices.
Detailed analysis of above two provisions is as follows-
(1) Any reduction in rate of tax on any supply of goods or services -
For Example, under the Service Tax regime, Tour operator services are charged at
abated rate of 9% whereas in Goods & Services Tax Act, 2017 rate of tax fixed is 5% which
resulted in reduction of tax from 9% to 5%. The tax rate reduction benefit to the extent of
4% is to be passed on to recipient.
Particulars Service tax (S.T.) GST regime Remarks

regime
Taxable value 100 100
S.T. / GST rate (%) 9% 5%
S.T./ GST (`) 9 5
Total Invoice value 109 105 Reduction of ` 4 is
benefit to be passed on
to recipient
(2) The benefit of input tax credit -
Any additional benefit by way of Input tax credit is arising to the supplier due to
implementation of GST the same benefit to be passed on to recipient by way of
reduction in prices which is explained as follows-
X Ltd. being an Interior designing service provider while providing output service has
availed Input services and a material ‗M‘ for which tax paid is as under:
Particulars Service tax regime GST regime

Tax paid towards service tax on Input services 15 15
availed (`)
Tax paid towards VAT for Material ‗M‘ (`) 5 5
Output tax liability of X Ltd. is ` 25 before deducting Input tax credit available.
In the given case benefit of input tax credit accruing to X Ltd. due to implementation of
GST is as follows-
Particulars Service tax GST regime Remarks

regime (`) (`)
Output tax liability 25 25
Input allowed- Service provider cannot
Towards Input services 15 15 avail VAT paid as Input tax
Towards Material ‗M‘ NIL 5 credit in Service tax regime
Total Input Tax credit 15 20
eligible for set off
Net tax payable 10 5

Input tax benefit due to - 5 Benefit of ` 5 to be passed
GST to recipient by way
reduction in prices
(b) The Anti-profiteering Committee shall exercise such powers and discharge such functions as
may be prescribed.
The Authority can determine the methodology and procedure for determination as to
whether the reduction in the rate of tax on the supply of goods or services or the benefit of
input tax credit has been passed on by the registered person to the recipient by way of
commensurate reduction in prices.
The Authority would have the following duties:
(i) to determine whether any reduction in the rate of tax on any supply of goods or services
or the benefit of input tax credit has been passed on to the recipient by way of
commensurate reduction in prices;
(ii) to identify the registered person who has not passed on the benefit of reduction in the
rate of tax on supply of goods or services or the benefit of input tax credit to the
recipient by way of commensurate reduction in prices;
(iii) to order,
 reduction in prices;
 return to the recipient, an amount equivalent to the amount not passed on by
way of commensurate reduction in prices along with interest at the rate of
eighteen per cent. from the date of collection of the higher amount till the date
of the return of such amount or recovery of the amount not returned, as the
case may be, in case the eligible person does not claim return of the amount or
is not identifiable, and depositing the same in the Consumer Welfare Fund;
 imposition of penalty; and
 Cancellation of registration.
19.(a) Rama Telecoms were engaged in the business of providing telecommunication services in
various States in India. For their business Rama Telecoms imported Optic Fibre Cables
(OFC) and classified them under Heading 85.44 of the Customs Tariff. However, the
Department claimed that the goods should be classified under Heading 90.01. The
Commissioner of Customs (Appeals), when the matter was brought before him, held that
the impugned goods were classifiable under Heading 85.44 of the Customs Tariff. The
Department has filed an appeal before CESTAT against the said order which has yet not
been decided.
Meanwhile, the customs authorities (DRI officers) have seized the consignment of OFC
imported and cleared by Rama Telecom on payment of duty assessed under Heading
85.44 and forced Rama Telecoms to pay the differential duty between Headings 85.44 and
90.01 by threat and coercion.
Examine the validity of the action of the customs authorities, with the help of a decided
case law, if any.
(b) Importer BOPP Ltd. imported two consignments of ethyl alcohol which were allowed to be
cleared for home consumption on execution of a bond undertaking to produce license
within a month. Since, appellant failed to fulfill the obligation, proceedings were initiated
which culminated in confiscation of the goods under Section 111(d) of the Customs Act,
1962 and imposition of penalty on the importer under section 112(a) of the Customs Act,
1962. Examine the correctness of the decision in terms of statutory provisions.
Answer:
(a) The action of the Director of Revenue (D.R.I) officers of the Customs is not valid. Optic Fibre
Cables correctly classified by the importer as per the order of the Commissioner of Customs
(Appeals) and paid the duty accordingly. Therefore, the action of the Director of Revenue
Intelligence (D.R.I. officers) in the Customs Department in seizing the goods and collecting
money from the petitioners was wholly unjustified. Moreover, in the absence of any
reassessment order passed determining the duty liability, there would be no question of
recovering differential duty. [Vodafone Essar South Ltd. v UOI 2009 (237) ELT 35 (Bom.)]
(b) The given case is similar to the case of Hira Lal Hari Bhagwati v CBI (2003) 155 ELT 433 (SC).
The Supreme Court of India had held that no penalty can be imposed if the goods are
imported with bona fide belief that they are entitled to exemption, later on they could not
fulfill conditions of exemption but paid the duty. Further it was held that for establishing
offence of cheating, complainant (i.e. importer) is required to show dishonest intention at
the time of making promise or presentation. Thereby there is no penalty under section 112(a)
of the Customs Act, 1962.
With regard to confiscation of the goods under Section 111(d) of the Customs Act, 1962, the
Apex Court namely the Supreme Court of India in the case of Sachinanda Banerji v Sitaram
Agarwala 110 ELT 292 (SC), held that goods imported against restrictions under section 11 of
the Customs Act, 1962 (Section 11 deals with power to prohibit importation or exportation of
goods) are liable to confiscation whenever they are found even if this is long after import is
over and even if they are in possession of third persons who had nothing to do with actual
import.
Thereby, Department‘s action to confiscate the goods under section 111(d) of the Customs
Act, 1962 is valid.
20.(a) Can delay in filing appeal to CESTAT for the reason that the person dealing with the case
went on a foreign trip and on his return his mother expired, be condoned? Discuss.
(b) Is judicial review of the order of the Settlement Commission by the High Court or Supreme
Court under writ petition/special leave petition, permissible? Examine with help of case
law.
Answer:
(a) The High Court observed that there did not appear to be any deliberate latches or neglect
on the part of the authorised representative to file the appeal. It held that the reasons for
delay in filing appeal to CESTAT, that the person dealing with the case went on a foreign trip
and on his return his mother expired, could not be considered as unreasonable for
condonation of delay.
Therefore, delay can be condoned. [Habib Agro Industries v. CCEx. 2013 (291) E.L.T. 321
(Kar.)]
(b) The High Court noted that although the decision of Settlement Commission is final, finality
clause would not exclude the jurisdiction of the High Court under Article 226 of the
Constitution (writ petition to a High Court) or that of the Supreme Court under Articles 32 or
136 of the Constitution (writ petition or special leave petition to Supreme Court).
The Court would ordinarily interfere if the Settlement Commission has acted without
jurisdiction vested in it or its decision is wholly arbitrary or perverse or mala fide or is against
the principles of natural justice or when such decision is ultra vires the Act or the same is
based on irrelevant considerations.
The Court, however, pronounced that the scope of court‘s inquiry against the decision of the
Settlement Commission is very narrow, i.e. judicial review is concerned with the decision-
making process and not with the decision of the Settlement Commission. [Saurashtra
Cement Ltd. v. CCus. 2013 (292) E.L.T. 486 (Guj.)]
21.(a) Write down the differences between tax planning and tax management.
(b) RST Ltd. imported drawings and designs in paper form through professional courier and
post parcels.
However, the Assistant Commissioner of Customs valued these drawings and designs and
levied duty on them.
RST Ltd. Contended that customs duty cannot be levied on drawings and designs as they
do not fall in the definition of goods under the Customs Act, 1962.
Do you feel the stand taken by the RST Ltd. is tenable in law? Support your answer with a
decided case law, if any.
Answer:
(a)
Tax Planning Tax Management
Tax planning primarily aims at adopting an Tax Management is dealing with compliance
arrangement so as to bring lesser of statutory provisions, prospective planning
incidence of tax. etc. so as to ease the financial constraints
that would arise when discharging the
commitments through payment of tax, keep
close watch and monitor statutory
Tax Planning Tax Management

requirements etc
Tax planning may not be essential for every Tax management is essential for every tax
assessee. paying person otherwise he may become
liable for penalty. For example, improper
import of goods attract penalty.
Tax planning essentially looks at future Tax management relates to past, present and
benefits arising out of present actions. future.
For Example:
(i) appeals, revisions, rectification of
mistakes deal with the past.
(ii) maintenance of records, self

assessment, filing of returns and other
documents are present activities.
Tax planning is focusing on saving taxes by Tax management is focusing on compliance
choosing best among the alternatives. with legal formalities: e.g. filing of return,
payment of tax, documentation, records,
maintenance of accounts etc.
(b) The Apex Court observed that though technical advice or information technology are
intangible assets, but the moment they are put on a media, whether paper or cassettes or
diskettes or any other thing, they become movable and are thus, goods.
Therefore, the Supreme Court held that drawings, designs, manuals and technical material
are goods liable to customs duty.
Therefore, the stand taken by the RST Ltd. is not correct in law. [Associated Cement
Companies Ltd. v CC 2001 (128) ELT 21 (SC)]
22.(a) An importer imported some goods for subsequent sale in India at $ 10,000 on Assessable
value basis. Relevant exchange rate and rate of duty are as follows:
Particulars Date Exchange rate Rate of Basic
declared by the Customs Duty
CBE&C
Date of submission of bill 25th February 2018 ` 58/USD 10%
of entry
Date of entry inwards 5th March 2018 ` 58.75/USD 12%
granted to the vessel
Calculate Assessable value and Customs Duty in Indian rupees?
(b) State the conditions which are to be satisfied for transhipment of goods without payment
of duty.
Answer:
(a) Relevant rate of duty for the imported goods is 12% (i.e. Date of submission of bill of entry or
Date of entry inwards granted to the vessel whichever is later)
Exchange Rate is ` 58 per USD (i.e. the rate of CBE&C as on the date of submission of Bill of
Entry by the importer)
Assessable value = ` 5,80,000 (i.e. USD 10,000 x ` 58)
Basic Customs Duty = ` 69,600 (i.e. ` 5,80,000 x 12%)
2% Education cess = ` 1,392 (i.e. ` 69,600 x 2%)
1% SAH education cess = ` 696(i.e. ` 69,600 x 1%)
Total Customs Duty = ` 71,688.
(b) Transhipment of goods without payment of import duty is permissible only if the following
conditions satisfy:
 Transhipment of goods with foreign destination
 The goods find place as Transhipment Goods in the Import of General Manifest (IGM) or
Import Report in case of goods imported in a vehicle
 Bill of Transhipment or Declaration of Transhipment filed.
 Goods must be transhipped to another vessel to place outside India.
23.(a) An importer filed a bill of entry after 60 days of filing Import General Manifest. The Deputy
Commissioner of Customs imposed a penalty of ` 10,000 by endorsement on the bill of
entry. Since, importer wants to clear the goods he paid the penalty. Can penalty be
imposed for late filing of the bill of entry? Examine the issue in the light of relevant statutory
provisions.
(b) X Transport company imported Rolls Royce car for the purpose of providing output
services by way of transportation of passengers. Following are the cost & other details-
Particulars Amount (INR)

Cost of vehicle (Assessable 300,00,000
value)
Custom duty 10%
IGST 28%
Compensation cess 20%
X Transport company is eligible to take Input tax credit and have output IGST liability of
INR 120 Lakhs. Calculate the tax liability towards custom duty & GST liability.
Answer:
(a) W.e.f. 31-3-2017, Section 46 of the Finance Act, 2017 has been amended as follows:
Submission of Bill of entry:
The importer shall presented the bill of entry under section 46(1) of the Customs Act, 1962
before the end of the next day following the day (excluding holidays) on which the aircraft
or vessel or vehicle carrying the goods arrives at a customs station at which such goods are
to be cleared for home consumption or for warehousing.
Provided that a bill of entry may be presented within 30 days of the expected arrival of the
aircraft or vessel or vehicle by which the goods have been shipped for importation into India.
Provided further that where the bill of entry is not presented within the time so specified and
the proper officer is satisfied that there was no sufficient cause for such delay, the importer
shall pay such charges for the late presentation of the bill of entry as may be prescribed.
In the given case penalty of ` 10,000 is valid. Hence, as per the provisions of the Customs
Act, 1962, penalty can be imposed for late filing of the bill of entry.
(b)
Particulars Calculation Amount(`)
Cost of Vehicle-(A) 300,00,000
Custom duty-(B) 10% 30,00,000
Cess-(C) 3% on (B) 90,000
Total custom duty payable- (D) (B+C) 30,90,000
Total Cost after Custom duty-(E) (A+D) 330,90,000
IGST-(F) 28% on (E) 92,65,200
Compensation cess-(G) 20% on (E) 66,18,000
Total cost-(H) (E+F+G) 489,73,200
 Input tax credit available to set off against output IGST is ` 92,65,200
 Compensation cess paid cannot be set off against output tax liability of IGST
 Total tax payable by X Ltd. after adjusting IGST ITC is ` 27,34,800 (` 120,00,000 - `
92,65,200).
24.(a) What is Identical Goods in customs? State the application of transaction value of identical
goods in valuation of imported goods.
(b) Care Energy Ltd. imported a lift from England at an invoice price of ` 20,00,000. The
assessee had supplied raw material worth ` 5,00,000 to the supplier for the manufacture of
said lift. Due to safety reasons, the lift was not taken to the jetty in the port but was
unloaded at the outer anchorage. The charges incurred for such unloading amounted to `
25,000 and the cost incurred on transport of the lift from outer anchorage to the jetty were
` 50,000. The importer was also required to pay ship demurrage charges ` 10,000. The lift
was imported at an actual cost of transport ` 45,000 and insurance charges ` 20,000.
Compute its assessable value.
Answer:
(a) Identical goods means the goods must be same in all respects, including physical quantity.
This method is applicable only when following conditions are satisfied:
 Identical goods can be compared with the other goods of the same country from which
import takes place.

 These goods must be valued at a price which is produced by the same manufacturer.
 If price is not available then the price of other manufacturers of the same country is to be
taken into account.
 If more than one value of identical goods is available, lowest of such value should be
taken.
(b) Value goods = ` 20,00,000

Add: Raw material supplied = ` 5,00,000
FOB = ` 25,00,000
Charges for bringing the goods from
Outer anchorage to jetty is known as
Barging/ lighterage or barge charges =` 50,000
Ship demurrage on chartered vessels (i.e.
Demurrage is payable when ship was not
unloaded within specified time) =` 10,000
Freight charges (Transport charges) =` 45,000
Insurance charges = ` 20,000
------------------
Cost, Insurance and Freight (CIF) = ` 26,25,000
Add: 1% landing charges on CIF = ` 26,250
------------------
Assessable Value = ` 26,51,250
===========
Note: actual amount of unloading charges or stevedoring charges are not addable into the
assessable value.
25.(a) An importer imported some goods on 1st January, 2018 and the goods were cleared from
Mumbai port for warehousing on 8th January, 2018 by submitting Bill of Entry, exchange
rate was ` 50 per US $. FOB value US $ 10,000. The rate of duty on 8th January, 2018 was
20%. The goods were warehoused at Pune and were cleared from Pune warehouse on
31st May, 2018, when rate of basic customs duty was 12% and exchange rate was ` 68.75
per 1US $. IGST @12% is applicable.
You are required to find:
(i) The total Customs duty payable.
(ii) The interest if any payable.
(b) Deemed Export under Customs.
Answer:
(a)
USD
FOB 10,000
ADD: 20% Freight on FOB 2,000
ADD: 1.125% Insurance on FOB 112.5
CIF 12,112.50
ADD: 1% on CIF 121.125
Assessable Value 12,233.625
`
Assessable Value in ` 6,11,681 (i.e. ` 12,233.625 x ` 50)
Add: BCD 12% 73,402 (i.e. ` 6,11,681 x 12%)
Add: 2% Ed. Cess 1,468 (i.e. ` 73,402 x 2%)
Add: 1% SAH Ed. Cess 734 (i.e. ` 73,402 x 1%)
Transaction value
subject to GST 6,87,285
Add: IGST 82,474 (i.e. 6,87,285 x 12%)
Value of import 7,69,759
Value of Customs duties 1,58,078
Interest:
(i.e. 1,58,078 x 15% x 54/365) 3,508
Working Note:
From 8th January 2018 to 31st May 2018 = 144 – 90 = 54 days.
(b) The term Deemed Exports an export without actual export, it means goods and services are
sold and provide respectively within India and payment also received in the Indian Rupees.
As per the Foreign Trade Policy, the following few transactions can be considered as
deemed exports:
 Sale of goods to units situated in Export Oriented Units, Software Technology Park, and
Electronic Hardware Technology Park etc.
 Sale of capital goods to fertilizer plants
 Sale of goods to United Nations Agencies
 Sale of goods to projects financed by bilateral Agencies, etc.
26.(a) Section 76 of the Customs Act, 1962 contains the provisions in respect of prohibition and
regulation of drawback. State the circumstances where no drawback will be allowed.
(b) Write a short note Postal Articles in Customs.
Answer:
(a) Section 76 of the Customs Act, 1962 contains the provisions in respect of prohibition and
regulation of drawback and no drawback shall be allowed in the following circumstances:
1. In respect of any goods, the market price of which is less than the amount of
drawback due thereon,
2. If the Central Government is of the opinion that goods of any specified description in
respect of which drawback is claimed under this Chapter are likely to be smuggled
back into India.
3. CENVAT credit claim is on inputs and input services then no duty drawback is
allowed. However, if the goods have already suffered the customs duty then duty
drawback is allowed to the extent of customs duties.
4. Duty drawback is not allowed if the exporter has already availed the Duty
Entitlement Pass Book (DEPB) or other export incentives.
5. If the sale proceeds not received within the time period allowed by Reserve Bank of
India.
6. Export to Nepal and Bhutan and the export proceeds are not received in hard
currency (it means USD, GBP or Pounds).
7. Drawback in respect of iron and steel, cement and rice is not allowed. [w.e.f. 29-5-
2008]
8. Duty drawback is more than 1/3rd of market value of exported goods, then amount
of duty drawback is restricted to 1/3rd of market value.
9. No amount or rate of drawback is to be determined except where the amount of
drawback exceeds or equal to ` 500/- or it is 1% or more of the FOB value of export.
10. Where the amount of drawback in respect of any goods is less than ` 50.
(b) Postal Articles: As per sections 82 to 84 of the Customs Act, 1962, goods can be cleared by
post. Any label or declaration accompanying the goods showing the description, quantity
and value thereof, shall be treated as "an entry for import" under the Customs Act.
The rate of duty and tariff value applicable to goods imported by post shall be the rate and
valuation in force on the date on which the postal authorities present to the proper officer a
list containing the particulars of such goods for the purpose of assessment of duty.
The procedure for clearance:

(i) Post parcels are allowed to pass from port/airport to Foreign Parcel Department of
Government Post Offices without payment of customs duty.
(ii) The Postmaster hands over to Principal Appraiser of Customs the memo showing
 Total number of parcels from each country of origin,
 Parcel bills or senders' declaration,
 Customs declaration and dispatch notes, and
 Other information that may be required.
(iii) The mail bags are opened and scrutinized by Postmaster under supervision of Principal
Postal Appraiser of Customs.
(iv) Packets suspected of containing dutiable goods are separated and presented to
Customs Appraiser with letter mail bill and assessment memos.
(v) The Customs Appraiser marks the parcels which are required to be detained if —
 necessary particulars are not available, or
 mis-declaration or undervaluation is suspected, or
 goods are prohibited for import.
Appraiser has the power to examine any parcel. After inspection, the parcels are sealed with
a distinctive seal. Any mis-declaration or undervaluation is noted or goods are prohibited
goods for imports these be detained and the same intimated to Commissioner of Customs.
If everything is in order after verification, goods will be handed over to Post Master, who will
hand over the same to the addressee on receipt of customs duty.
27.(a) State the situations where provisional assessment can be granted by Customs Officer.
(b) A person makes an unauthorized import of goods liable to confiscation. After
adjudication, Assistant Commissioner provides an option to the importer to pay fine in lieu
of confiscation. It is proposed to impose a fine (in lieu of confiscation) equal to 50% of
margin of profit. From the following particulars calculate the amount of fine that can be
imposed: Assessable value – ` 50,000, Total duty payable – ` 20,000, Market value – `
1,00,000. Also calculate the total payment to be made by the importer to clear the
consignment.
Answer:
(a) Provisional Assessment will be allowed by the Customs Officer, if he, satisfied with the request
of the importer or exporter. Provisional assessment can be granted in the following three
situations:
 An importer or exporter is unable to produce any document or furnish any information
necessary for the assessment of duty.
 Any imported goods or export goods need to conduct any chemical or other test for the
purpose of assessment of duty thereon.
 Where the importer or the exporter has produced all the necessary documents and
furnished full information for the assessment of duty but the proper officer deems it
necessary to make further enquiry for assessing the duty.
(b) In the given case Assistant Commissioner intends to impose redemption fine equal to 50% of
margin of profit.
Total cost to importer = ` 50,000 + ` 20,000 = ` 70,000.
Margin of profit:
Market value – Total cost to importer = ` 1,00,000 – ` 70,000 = ` 30,000.
Hence, redemption fine will be ` 15,000 (@ 50% of ` 30,000). In addition, duty of ` 20,000 is
payable. Thus, importer will have to pay totally ` 35,000 to clear the goods from customs.
28.(a) State the features of Foreign Trade Policy (FTP).

(b) What is Advance Authorisation in FTP?
Answer:
(a) Features of Foreign Trade Policy (FTP):
1. Export-Import is free unless specifically regulated by the provisions of the FTP.
2. Export and Import goods are broadly categorized as
I. Free (i.e. general goods freely import or export without any authorization).
II. Restricted (i.e. goods allowed to import or export only with authorization).
III. Prohibited (i.e. goods are not allowed to import or export)
3. There are restrictions on exports and imports for various strategic, health, and other
reasons.
4. Exports are promoted through various promotional schemes.
5. There should be no taxes on exports.

6. Capital goods can be imported at NIL duty for the purpose of exports under the scheme
of Export Promotion Capital Goods (EPCG) Scheme.
7. EOU‘S and SEZ units are exempted from payment of taxes.
8. Deemed exports concept introduced.
9. Duty credit scrip‘s schemes are designed to promote exports of some specified goods to
specified markets and to promote export of specified services.
(b) Advance Authorization:
(i) Exporters having past export performance (in at least preceding two financial years)
shall be entitled for Advance Authorization for Annual Requirement.
(ii) Materials imported under Advance Authorization will ‗Actual User Condition‘. These
imported goods will not be transferable even after completion of export obligation.
However, holder of Advance Authorization will have an option to dispose of product
manufactured out of duty free inputs once export obligation is completed.
(iii) Advance Authorization is issued for inputs in relation to the resultant product on the
basis of SION (Standard Input Output Norms). If SION for a particular item is not fixed,
Regional Authority (RA) based on self-declaration by applicant, except certain
specified products, can issue Advance Authorization.
(iv) It is necessary to establish that inputs actually used in manufacture of the export
product should only be imported under Advance Authorization and inputs actually
imported must be used in the export product, for redeeming the Authorization.
29.(a) During F.Y. 2017-18 S Pvt. Ltd. has made Exports of “Safety Valves” coming under Chapter
Heading 8481.
Country of Export – USA & UK.
Realised FOB value of exports in free foreign exchange: ` 50 Crore
FOB value of exports as given in the Shipping Bills in free foreign exchange (Covered in `):
` 55 Crore. As per Appendix 3B of Foreign Trade Policy 2015-20, reward for Export of Safety
Valves to USA & UK is 3%.
Find the Duty Credit Scrip or MEIS reward available to S Ltd.
(b) List out the benefits available to status holders under FTP 2015-20.
Answer:
(a) Realised FOB value of exports = ` 50 crore or
FOB value of exports = ` 55 crore (as given in the Shipping Bills)
Whichever is less.
Therefore MEIS Reward available to S Pvt. Ltd. for F.Y. 2017-18 would be ` 1.5 Crores
(i.e. ` 50 Crore x 3%).
(b) Benefits available to status holders:

a. Authorisation and Customs Clearances for both imports and exports may be granted
on self- declaration basis;
b. Fixation of Input Output Norms (SION) on priority by the Norms Committee i.e. within 60
days.
c. Exemption from compulsory negotiation of documents through banks. The remittance

receipts, however, would continue to be received through banking channels by way
of e-BRC by DGFT.
d. Exemption from furnishing of Bank Guarantee in Schemes under FTP.
e. Two Star Export Houses and above are permitted to establish export warehouses.
f. Three Star and above Export House shall be entitled to get benefit of Accredited
Clients Programme (ACP) as per the guidelines of CBEC.
g. Status holders shall be entitled to export freely exportable items on free of cost basis for
export promotion subject to an annual limit of `10 lakhs or 2% of average annual export
realization during preceding 3 licensing years, whichever is higher.
h. Manufacturer exporters who are also Status Holders shall be eligible to self-certify their
goods as originating from India.
30.(a) State the eligible as well as ineligible capital goods for import under EPCG Scheme.
(b) Write a short note on Special Economic Zone (SEZ).
Answer:
(a) Eligible capital goods for import under EPCG Scheme:
1. Capital Goods including capital goods in CKD/SKD condition

2. Computer software systems
3. Spares, moulds, dies, jigs, fixtures, tools & refractories for initial lining and spare
refractories.
4. Capital goods for Project Imports notified by CBEC.
Ineligible capital goods for import under EPCG Scheme:
1. Second hand capital goods

2. Power Generator Sets
(b) Special Economic Zone (SEZ): The provisions relating to SEZ are contained in Special
Economic Zone Act, 2005 and SEZ Rules, 2006.
 SEZs are like a separate island within territory of India.
 SEZs are projected as duty free area for the purpose of trade, operation, duty and tariffs.
 Goods and services coming to SEZ units from domestic tariff area are treated as exports
from India and goods and services rendered from SEZ to the DTA are treated as import
into India.
Any proposal for setting up of SEZ unit in the Private/ Joint/ State Sector is routed through the
concerned State government who in turn forwards the same to the Department of
Commerce with its recommendations for consideration.
The following incentives offered to the units in SEZ:
1. Duty free import/ domestic procurement of goods for development, operation and
maintenance of SEZ units.
2. Single window clearance for Central and State level approvals.
3. Exemption from State sales tax and other levies as extended by the respective State
Governments.
4. "In order to give a boost to exports from SEZs, government has now decided to extend
benefits of both the reward schemes (MEIS and SEIS) to units located in SEZs.
5. SEZs have been exempted from payment of IGST on imports. Supplies to SEZs by DTA
units also exempted from IGST (i.e. zero rated supply).
Final
Group IV
Paper 19 : COST AND MANAGEMENT AUDIT
(SYLLABUS – 2016)
Objectives
1. Multiple Choice Questions:
(1) Choose the correct option among four alternative answers. (1 mark for correct choice, 1 mark
for justification.)
(i) Rule 4 of the Companies (Cost Records and Audit) Rules, 2014 deals with:
(A) Application of Cost Records
(B) Application of Cost Audit
(C)Appointment of Cost Auditor
(D) Cost Audit Report.
(ii) Abnormal Loss due to flood or earthquake is charged to:

(A) Administrative Overhead Cost
(B)Material Cost
(C)Costing Profit and Loss Account
(D) Selling and Distribution Cost
(iii) XBRL is a language based on :

(A)XBL family of languages.
(B)XRL family of languages.
(C)XML family of languages .
(D) XGL family of languages.
(iv) Costing Taxonomy is best defined as a:

(A)Dictionary
(B)Made easy.
(C)Tax Ready Reckoner
(D)Referencer.
(v) Part B of the Annexure to Cost Audit Report deals:

(A)Service Sector
(B) Manufacturing Sector
(C)Both manufacturing and service sector
(D) None of the above.
(vi) The forex component of imported material is converted at the rate on :

(A) Date of Payment
(B) Date of Transaction
(C)Either of A or B
(D) None of A and B
(vii)KPI can be:

(A) Quantitative
(B) Qualitative
(C)Actionable
(D)All of the above.
(viii)CAS 14 deals with:

(A)Repair and Maintenance Cost.
(B)Pollution Control Cost
(C)Direct Expenses
(D)Packing material cost.
(ix)Operating Expense does not include:

(A)Rent
(B)Equipment
(C)Interest
(D)Payroll
(x) Outward transportation cost shall form part of :

(A) Cost of material
(B) Cost of Sale
(C) Packing material
(D)Administration Overhead
Ans:
(i) (B) Application of Cost Audit. Rule 4 of the Companies (Cost Records and Audit) Rules, 2014
prescribes the turnover based threshold limits for applicability of Cost Audit.
(ii) (C)Costing Profit and Loss Account. Rule 5(1) prescribes that any abnormal cost/loss should
not be part of Material, Administrative or Selling and Distribution overheads or any other item
of cost.
(iii) (C)XML family of languages . XBRL belongs to Extensible Markup Language family. It has
been defined specifically to meet requirements of business and financial information.
(iv) (A)Dictionary. Costing Taxonomy is a dictionary of all cost elements required in cost audit
report and compliance report.
(v) (B) Manufacturing Sector. This is as per Companies(Cost Records and Audit) Rules, 2014.
(vi) (B) Date of Transaction. This is as per CAS 6.
(vii) (D)All of the above. Key Performance Indicators are simply the variables, independent or
inter-dependent, in respect of which goals can be set and performance can be measured
to assess whether it is in furtherance of the enterprise objectives. These may be quantitative,

qualitative, actionable, or trends.
(viii) (B)Pollution Control Cost. This standard deals with the principles and methods of
classification, measurement and assignment of pollution control costs, for determination of
Cost of product or service, and the presentation and disclosure in cost statements
(ix) (C)Interest. Operating expenses typically exclude interest expense, nonrecurring items
(such as accounting adjustments, legal judgments, or one-time transactions), and other
income statement items not directly related to a company's core business operations.
(x) (B) Cost of Sale. This is as per CAS 5
Subjective
2 (a) (i) A paper manufacturing company having turnover of ` 90 crore, in the year 2017-18 was
incorporated in 2016-17 and commenced its production from March, 2017. From which financial
year, the Cost Audit will be applicable?
(ii) Whether maintenance of Cost Accounting Records and Cost Audit thereof, subject to threshold
limits prescribed, is applicable to products which are for 100% captive consumption?
(b) Mr. K was appointed as Cost Auditor of MNC Ltd. for the Financial Year 2017-18. State
(i) How long the Cost Auditor can continue to hold office for the financial year?
(ii) In what format the Cost Auditor shall submit his/her Report?
(iii) What was the formality to be observed by the Board of Directors if the cost Auditor did
resign on 31.01.2018?
Ans: 2(a)(i)
Rule 3 of the Companies (Cost Records and Audit) Rules, 2014, states that every company,
engaged in the production of goods or providing services specified in the Rules, shall maintain
Cost Records if the overall turnover from all its product and services is Rs. thirty five crore or more
during the immediately preceding financial year.
Applicability for Cost audit [Rule 4]

(1) Every company specified in item (A) of Rule 3 [Regulated Sector] shall get its cost records
audited in accordance with these rules if the overall annual turnover of the company from all its
products and services during the immediately preceding financial year is rupees fifty crore or
more and the aggregate turnover of the individual product or products or service or services for
which cost records are required to be maintained under rule 3 is rupees twenty five crore or more.
(2) Every company specified in item (B) of Rule 3 [Non –regulated Sector] shall get its cost records
audited in accordance with these rules if the overall annual turnover of the company from all its
products and services during the immediately preceding financial year is rupees one hundred
crore or more and the aggregate turnover of the individual product or products or service or
services for which cost records are required to be maintained under rule 3 is rupees thirty five crore
or more.
In the present case, the Paper Industry falls under the Non-Regulated Sector and is required to
maintain cost records from the Financial Year 2018-19 but is not required to get its cost records
audited from the same year since it did not cross the threshold limit in the preceding financial year
2017-18.
2(a)(ii)
The Companies (Cost Records and Audit) Rules, 2014, has specified different products and
services for which maintenance of cost accounting records and Cost Audit thereof, subject to
threshold limits prescribed, are mandatory.
In case a product is manufactured and 100% captively consumed for production of some other
product which is also covered under the Rules and is subject to Cost Audit, then the cost of such
captively consumed product would form part of the final product which is also under cost Audit
and as such a separate Cost Audit Report for the captively consumed product will not be
necessary;
If the product, however is partly for captive consumption and is partly sold, or if the product is
100% captively consumed for production of some other product which is not covered under the
Rules, then Cost Audit would be applicable for such captively consumed product.
2(b) (i) Rule 6(3) of the Companies (Cost Records and Audit) Rules, 2014, states that every Cost
Auditor appointed by the Company shall continue in such capacity till the expiry of one hundred
eighty days from the closure of the financial year or till he/she submits the Cost Audit Report for
the financial year for which he /she has been appointed.
(ii) According to Rule 6(4) of the Companies(Cost Records and Audit ) Rules, 2014 every cost
auditor, who conducts an audit of the cost records of a company, shall submit the cost audit
report along with his or its reservations or qualifications or observations or suggestions, if any, in
form CRA-3.
(iii) As per Rule 6(3) of the Companies (Cost Records and Audit) Rules, 2014, any casual vacancy
in the office of the Cost Auditor, by resignation or otherwise, shall be filled by the Board of
Directors within 30 days of occurrence of such vacancy. The procedure followed for such
appointment shall be the same as that of fresh appointment. The company shall inform the
Central Government in Form CRA 2 within 30 days of such appointment of Cost Auditor.
3(a) SHARATHI LTD. a tyre and tube manufacturing company is having turnover of `75 crores from
all its activities. The company has filed its prospectus with SEBI for a public issue of equity shares
and it hopes to complete the public offering by September, 2018 end.
Whether cost audit will become applicable to the company? If yes, then from which financial year
will cost audit become applicable?
(b)(i) Whether Value addition and distribution of earnings [Part D, Para 3] is to be computed based
on Cost record data or audited financial data?
(ii) Whether Financial position and ratio analysis [Part D, Para 4] is to be computed based on Cost
record data or audited financial data?
Ans:
3(a) According to Rule 4(2) of the Companies(Cost Records and Audit) Rules , 2014, every
company specified in item (B) of rule 3 shall get its cost records audited in accordance with these
rules if the overall annual turnover of the company from all its products and services during the
immediately preceding financial year is rupees one hundred crore or more and the aggregate
turnover of the individual product or products or service or services for which cost records are
required to be maintained under rule 3 is rupees thirty five crore or more.
Conclusion:
(i) In this case the company does not fall under the criteria mention under Rule 4 (2) of the
Companies (Cost Records and Audit) Rules, 2014 . Hence it is not required to undertake cost audit.
(ii)The company is in the process of listing on a stock exchange in India which will nowhere affect
the applicability of the Companies (Cost Records and Audit) Rules, 2014. Hence, the company is
not required to gets its cost records audited.
3(b)(i) Value Addition statement is to be computed based on audited financial accounts.

(ii) Financial Position and Ratio Analysis is to be computed based on audited financial accounts.
This reporting Para has been aligned with the nomenclature of schedule iii of the Companies Act,
2013
4) Explain whether the following amounts to professional misconduct by a Cost Accountant:

(a) A , a practicing CMA, B is a practicing Advocate representing matters in courts of law. A and
B agree to help each other in matters involving their professional expertise. Accordingly A
recommends B in all tax litigations in courts of law. B consults A on all matters relating to costing
and related matters, which come to him for arguing in various courts of law. They agree to ‗share‘
the remuneration.
(b) Q, a CMA , certifies a financial forecast of his client which was forwarded to the client‘s bank
based on which the bank sanctioned a loan to the client.
Ans:
(a) A CMA in practice shall be deemed to be guilty of professional misconduct if he either directly
or indirectly shares commission or brokerage in the fees or profits of his professional business to any
other than member of the Institute or accepts any part of the profits of the professional work of a
lawyer, broker, etc. who is not a member of the Institute. Thus, as per Clauses 2 and 3 of Part I of
the First Schedule to the Cost and Works Accountants Act, 1959 a member in practice can neither
share fees or profits with a person who is not a member of the Institute nor he is permitted to
receive and share the fees of other such as lawyers, engineers, etc.
A and B therefore cannot "share" any remuneration. They may, however, remunerate each other
for "professional" services rendered on any reasonable basis separately which would be on time
basis at rates depending on the extent of expertise. It is, however, important that care should be
taken by the member not to extend his service beyond the normal sphere of professional practice
and any reports or recommendations should clearly delimit the responsibilities assumed and
services rendered.
(b) Under Clause (3) of Part I of Second Schedule to the Cost and Works Accountants Act, 1959,
a CMA in practice is deemed to be guilty of professional misconduct if he permits his name or
the name of his firm to be used in connection with an estimate of cost or earnings contingent
upon future transactions in a manner which may lead to the belief that he vouches for the
accuracy of the forecast. Accuracy does not refer to arithmetical accuracy. All forecasts
are estimates based on certain assumptions duly evaluated on a consideration of various
relevant factors and cannot be ascertained with accuracy. But, first of all, he should clearly
indicate in his report the sources of information, the basis of forecasts and also the major
assumptions made in arriving at the forecasts and, secondly, he should not vouch for the
accuracy of the forecasts. In the instant case, CMA. Q is deemed to be guilty as it appears
that he has certified the financial forecast without taking adequate safeguards.
5) Which of the following acts amount to professional misconduct on the part of a practicing Cost
and Management Accountant?
(a) A firm of Cost Accountants undertake the Cost Audit of a Company. The audit work is
conducted by one of the partners and two assistants. The report is however signed by another
partner.
(b) Mr. X, a CMA was invited by the Chamber of Commerce to present a paper in a symposium
on the issues facing Indian Jute Industry. During the course of his presentation he shared
some of the vital information of his client‘s business under the impression that it will help the
Nation to compete with other countries at international level.
Ans:
(a) Since the certificate is signed by a Cost Accountant in practice who is also a partner of the
firm, the act of signing report doesnot amount to professional misconduct.
(b) Clause (1) of Part I of the Second Schedule to the Cost and Works Accountants Act, 1959
deals with the professional misconduct relating to the disclosure of information by a CMA in
practice relating to the business of his clients to any person other than his client without the
consent of his client or otherwise than as required by any law for the time being in force
would amount to breach of confidence. The Code of Ethics further clarifies that such a duty
continues even after completion of the assignment. The CMA may, however, disclose the
information in case it is required as a part of performance of his professional duties. In the
given case, Mr. X has disclosed vital information of his client‟s business without the consent of
the client under the impression that it will help the nation to compete with other countries at
International level. Thus it is a professional misconduct covered by clause(1) of Part I of
Second Schedule to the Cost and Works Accountants Act, 1959.
6(a) Trial Balance as on 31.3.2017 (relevant extracts only)
Particulars ` Particulars `
Materials consumed 2500000 Special Subsidy received 275000
from Government towards
Employee salary
Salaries 1500000 Recoverable amount from 35000

Employee out of perquisites
extended
Employee training cost 200000

Perquisites to Employees 450000
Contribution to Gratuity Fund 400000
Lease rent for accommodation 300000
provided to employees
Festival bonus 50000
Unamortised amount of 90000
Employee cost related to a
discontinued operation
Compute Employee Cost as per CAS 7
(b) How would you treat the following costs under Generally Accepted Cost Accounting Principles ?
i) Material acquired in exchange for other materials.

ii) Employee share options.
iii) Moisture losses in material in transit or storage.
iv) Annual Maintenance Contracts(AMC).
Ans:
6(a) Computation of Employee Cost

Particulars `
Salaries 1500000
Add Net Cost of Perquisites to Employees 415000
= Cost of Perquisites (-) amount recoverable from employee =

4,50,000 (-) 35,000
Add Lease rent paid for accommodation provided to employee 300000
Add Festival Bonus 50000
Add Contribution to Gratuity Fund 400000
Less Special subsidy received from Government towards employee (275000)

salary
Employee Cost 2390000
Note:
i) i)Recoverable amount from employee is excluded from the cost of perquisites.
ii) ii)Employee training cost is not an employee cost. It is to be treated as an Overhead, hence,
not included.
iii) iii)Special subsidy received is to be excluded, as it reduces the cost of the employer.
iv) iv)Unamortized amount of employee cost related to a discontinued operation is not an

includible item of cost.
6(b) i) Where a material is acquired in exchange for other materials or services supplied, the cost
of material acquired is taken as the cost of material supplied or services provided plus other
applicable cost such as freight.
For e. g in Paper Industry, bagasse from the Sugar Mills is obtained mills by supplying coal to the
sugar mills, in the cost statement , the cost of coal supplied is considered as the cost of bagasse
procured.
ii) Cost of employee share options is treated as part of employee cost provided the same is not a
notional cost and involves an actual cash outlay.
iii) Since most technical calculations are based on dry weight , it is advisable to account for
materials which absorb moisture on a dry weight basis grossing up the rate. Dry weight can be air
dry or bone dry. In case of wood used in paper industry, given that wood contains moisture, the
rate for wood is accounted on the basis of Air Dry Weight which may be obtained after deducting
standard or average moisture contents of such wood. Alternatively it can be accounted on bone
dry weight after deducting the entire moisture on actual basis.
iv) It is usual to have Annual Maintenance Contracts(AMC) for specialised equipments particularly
electronic equipments subject to sudden failures. These take the form of only servicing or
servicing with parts(comprehensive). The AMCs specify the number of routine servicing calls that
will be made in a year. Where a single machine is covered by AMC, costs get allocated to that
machine. But where a fleet of machines are covered by single AMC, allocation of costs to cost
centres can be made on basis of number of machines in each cost centre. Where the machines
in various cost centres require different levels of service or vary in cost, a suitable allocation base
has to be evolved based on such differences.
7(a) Purchase of Materials ` 3,00,000 (inclusive of Trade Discount ` 3,000); Fee on Board ` 12,000;
Import Duty paid ` 15,000; Freight inward ` 20,000; Insurance paid for import by sea ` 10,000;
Rebates allowed ` 4,000; Cash discount ` 3,000; CENVAT Credit refundable ` 7,000; Subsidy
received from the Government for importation of these materials ` 20,000. Compute the landed
cost of material (i.e. value of receipt of material).
(b)Answer the following with reference to CAS 24.

i)What do you understand by Net sales realization?
ii)What is reporting period?
iii)What is revenue from operations?
iv) What is the guideline for assignment of revenue?
Ans:
7(a) Computation of Material Cost Sheet

Purchase price of Material 3,00,000
Add: Fee on Board 12,000

Add: Import Duties of purchasing the material 15,000
Add: Freight Inward during the procurement of material 20,000
Add: Insurance paid 10,000
Total 3,57,000
Less: Trade Discount 3,000

Less: Rebates 4,000
Less: CENVAT Credit refundable 7,000
Less: Subsidy received from the Government for importation of 20,000
materials
Value of Receipt of Material 3,23,000
Note:
(i) Cash discount is not allowed, as it is a financial item.
(ii) Subsidy received, rebates and CENVAT Credit refundable are to be deducted for the
purpose of computing the material cost.
(b)(i) Net Sales Realization: is the revenue from operations net of discounts and indirect taxes.
(ii) Reporting Period: is the period for which the cost statements are prepared.
(iii) Revenue from operations: is the income arising in the course of the ordinary activities of an
entity from the sale of goods or rendering of services.
(iv) Revenue for each type of product or service shall be assigned directly to that product or
service to the extent it is economically feasible. economic feasibility implies that it is practically
feasible to assign the revenue to a particular product or service with reasonable cost and efforts.
Reasonable cost and efforts are matters of judgment.
8 (a) How would you compute cost of utilities as per CAS 8 in following circumstances?
i) Utilities generated for the purpose of inter unit transfers.
ii) Utilities generated for the inter company transfers .
(b) How would you treat the following as per CAS 9 related to Packing Material Cost?
i) Primary and Secondary packing material cost.
ii) Finance cost directly attributable to packing material.
Ans:
8(a)(i) Cost of utilities generated for the purpose of inter unit transfers shall comprise of direct
material cost, direct employee cost, direct expenses , factory overheads and the distribution cost
incurred for such transfers.
(ii) Cost of Utilities generated for the inter company transfers shall comprise direct material
cost, direct employee cost, direct expenses, factory overheads, distribution cost and share of
administrative overheads.
8(b) (i) Cost of primary packing materials shall form part of the cost of production.
Cost of secondary packing materials shall form part of distribution overheads
(ii) Finance costs directly incurred in connection with the acquisition of Packing Material shall
not form part of Packing Material Cost.
9 Answer the following questions with respect to Cost Auditing standard 102.
(i) What is the objective of the standard?
(ii)What do you understand by audit documentation?
(iii) What is ‗Firm‘?
(iv)How long Cost Audit documentation be retained?
Ans:
(i) The objective of Cost Auditing standard 102 is to guide the members to prepare
documentation that provides:
(a) A sufficient and appropriate record of the basis for the Cost Auditor‟s Report; and
(b) Evidence that the audit was planned and performed in accordance with Cost
Auditing Standards and applicable legal & regulatory requirements.
(ii) Audit Documentation means the records, in physical or electronic form, including working
papers prepared by and for, or obtained and retained by the Cost auditor, in connection
with the performance of the audit.
(iii) Firm means a sole practitioner, partnership including LLP (Limited Liability Partnership or any
other entity of professional cost accountants as may be permitted by law and constituted
under The Cost and Works Accountants Act & Regulations.
(iv) The cost audit documentation should be retained for at least ten years from the date of the
cost audit Report.
10) Answer the following questions with respect to Cost Auditing standard 104.
(i) What is the objective of the standard?
(ii) What is overall audit strategy?
(iii)What point to be evaluated regarding IT environment of an entity?
(iv)What is the effective date of the standard?
Ans:
(i) The objective of this standard is to enable the cost auditor to have knowledge of the client‟s
business which is sufficient to identify and understand the events, transactions and practices
that, in the cost auditor‟s judgment may have a significant effect on the examination of cost
statements or on the preparation of the cost audit report.
(ii) Overall Audit Strategy sets the scope, timing and direction of the audit, and guides the
development of the detailed audit plan.
(iii) The cost auditor should assess the following with regard to IT environment and controls.
(i) Reliance on systems or programs that are inaccurately processing data, processing
inaccurate data, or both.
(ii) Unauthorized access to data that may result in destruction of data or improper changes to
data, including the recording of unauthorized or non-existent transactions, or inaccurate
recording of transactions. Particular risks may arise where multiple users access a common
database
(iii) The possibility of it personnel gaining access to privileges beyond those necessary to
perform their assigned duties thereby breaking down segregation of duties.
(iv) Unauthorized changes to data in master files.
(v) Unauthorized changes to systems or programs.
(vi) Failure to make necessary changes to systems or programs.
(vii) Inappropriate manual interventions.
(viii) Potential loss of data or inability to access data as required.
(iv) This standard is effective for audits on or after September 11, 2015.
11 ) The Cost Accountant of TRINCUS TEXTILES MILLS LTD. has arrived at a Profit of ` 20,10,500 based
on Cost Accounting Records for the year ended March 31, 2017. Profit as per Financial Accounts is
`22,14,100.
As a Cost Auditor, you find the following differences between the Financial Accounts and Cost
Accounts:
(1) Profit on Sale of Fixed Assets 2,05,000
(2) Loss on Sale of Investments 33,600
(3) Voluntary Retirement Compensation included in Salary & Wages in 50,25,000

F/A
(4) Donation Paid 75,000
(5) Insurance Claim relating to previous year received during the year 5,08,700
(6) Profit from Retail trading activity 32,02,430
(7) Interest Income from Inter-Corporate Deposits 6,15,000
(8) Decrease in value of Closing WIP and Finished goods inventory
as per Financial Accounts 3,82,06,430
as per Cost Accounts 3,90,12,500
You are required to prepare a Reconciliation Statement between the two Accounts for the year
ended March 31, 2017.
Ans:
RECONCILIATION OF PROFIT BETWEEN COST AND FINANCIAL ACCOUNTS FOR
THE YEAR ENDED MARCH 31. 2017
` `
Profit as per Financial Accounts: 22,14,100
Add: Loss on sale of investments 33,600
Add: Voluntary Retirement compensation included in salary 50,25,000
and wages in F/A - Not included in cost A/c 75,000 51,33,600
Add: Donation paid 73,47,700
Less: Profit on Sale of Fixed Assets-Not considered in cost A/c 2,05,000
Less: Receipts of insurance claim related to previous year 5,08,700
Less: Profit from Retail trading activity 32,02,430
Less: Interest income from inter-corporate deposit-not considered in 6,15,000
cost accounts
Less: Difference in valuation of stock:
Decrease in inventories as per cost accounts 3,90,12,500
Decrease in inventories as per financial accounts 3,82,06,430 8,06,070 53,37,200
Profit as per Cost Accounts 20,10,500
12) In the Financial Accounts of CHEMICALS & FERTILIZERS LTD. for the year ended March 31,2017
the profit was `898,07,500. The profit as per Cost Accounting records for the same period was less.
The following details are extracted from the accounting schedules and Cost Accounting records
of the company.
Financial Accounts ` 000 Cost Accounts `000
Opening : Semi Finished Goods 31700 35210
: Finished Goods 83220 78590
Closing : Semi Finished Goods 35260 39420
: Finished Goods 89320 80450
Urea & Transport subsidy 348
Expenses on CSR 56
Profit on sale of Fixed Assets 150
Chemical used internally 382 365
Favourable Exch. Rate variation 294
Post-retirement Medical grant 584

Purchase Tax Refund 453
Litigation Recovery-Prior year 125
You are required to prepare a Reconciliation Statement and arrive at the Profit as per Cost
Records for the year ended March 31, 2017.
Ans: CHEMICALS & FERTILIZERS LTD.
Reconciliation of Financial Profit and Costing Profit for the year ended
March 31, 2017
Amount in ` thousand
Profit or loss as per Financial Accounts 89807.50

A. Less: Incomes not considered in Cost Accounts:
i. Profit on sale of Fixed Assets 150
ii. Urea & Transport Subsidy 348
iii. Litigation Recovery-Prior year 125
iv. Favorable Exch. Rate Variation 294
v. Purchase tax Refund 453
vi. Own consumption (chemicals) valuation difference (382-365) 17 (1387.00)
B. Add: Expenses not considered in Cost Accounts
i. Expenses on CSR 56
ii. Post-retirement medical grant 584 640.00
C. Less:
Difference in Valuation of stock between Financial Accounts and
Cost Accounts (9660-6070) (workings)
(3590.00)
Profit as per Cost Accounts 85470.50
Workings: Current Year(2016-17) (Amount in ` thousand)
Financial Cost Accounts

Accounts
Opening Semi finished 31700 35210
Finished 83220 78590
Total 114920 113800
Closing semi finished 35260 39420
Finished 89320 80450
Total 124580 119870
Variation in inventory 9660 6070
Increase in Difference of stock valuation towards financial accounts = `3590
13)What points should you consider as an Management Auditor performing CSR Audit?
Ans: The concept of CSR rests on the ideology of give and take. Companies take resources in the
form of raw materials, human resources etc. from the society. By performing the task of CSR
activities, the companies are giving something back to the society. India`s new Companies Act
2013 has introduced several new provisions which change the face of Indian corporate business.
One of such new provisions is Corporate Social Responsibility (CSR).
A CSR audit program can cover all or any of the following risks: -
• Effectiveness of the operating framework for CSR implementation

• Effectiveness of implementation of specific, large CSR projects
• Adequacy of internal control and review mechanisms
• Reliability of measures of performance
• Management of risks associated with external factors like regulatory compliance,
management of potential adverse NGO attention, etc.
A CSR Audit should cover the following points:
• Human Rights: Fundamental Human Rights, Freedom of association and Collective

bargaining, Nondiscrimination, Forced labor, Child labor
• Business behavior: Relations with clients, suppliers and sub-contractors, Prevention of
corruption and anticompetitive practices
• Human Resources: Labor relations, Working conditions including steps taken for preventing
accidents and health hazards, health and safety measures including compensation in case
of any accidents, career development and training, Remuneration system that motivates the
employees.
• Corporate Governance: Board of Directors, Audit and internal controls, Treatment of
shareholders, Executive remuneration
• Environment: Incorporation of environmental considerations into the manufacturing and
distribution of products, and into their use and disposal, effect on pollution, pollution control
measures undertaken,
• Community Involvement: Impacts on local communities, contribution to social and economic
development, General interest causes, creation of socials infrastructure like roads, schools,
hospitals.
14 ) Write short note on - Probable format of environmental statement .
Ans: The following are the main aspects which may be covered in the probable format of
Environmental Statement :
i. Name and address of the owner/occupier of the industry, operation or process.

ii. Date of last environmental audit report submitted.
iii. Consumption of water and other raw materials during current and previous year.
iv. Pollution generated in air and water alongwith the output and the types of pollutants and the
deviation from standards.
v. Generation of hazardous waste in current year and previous year from processes.
vi. Quantity of solid waste generated during current year and previous year and from recycling
or reutilisation of waste, etc.
vii. Disposal practice for different type of waste.

viii. Practice in operation for conservation of natural resources.
ix. Additional investment proposal for environmental protection including abatement of
pollution.
15) What do you understand by ‗energy audit‘? Briefly state the functions of energy auditor.
Ans: Energy Audit is the key to a systematic approach for decision-making in the area of energy
management. It attempts to balance the total energy inputs with its use, and serves to identify all
the energy streams in a facility. It quantifies energy usage according to its discrete functions.
Industrial energy audit is an effective tool in defining and pursuing comprehensive energy
management programme.
As per the Energy Conservation Act, 2001, Energy Audit is defined as "the verification,
monitoring and analysis of use of energy including submission of technical report containing
recommendations for improving energy efficiency with cost benefit analysis and an action plan to
reduce energy consumption".
In that context, energy management involves the basis approaches reducing avoidable losses,
improving the effectiveness of energy use, and increasing energy use efficiency. The function of
an energy auditor could be compared with that of a financial auditor. The energy auditor is
normally expected to give recommendations on efficiency improvements leading to monetary
benefits and also advise on energy management issues. Generally, energy auditor for the industry
is an external party. The following are some of the key functions of the energy auditor:
(i) Quantification of energy costs and quantities

(ii) To correlate trends of production or activity to energy cost.
(iii) To devise energy database formats to depict to correct picture – By product, department or
consumer.
While performing the aforesaid key functions, the energy auditor is required to carry out the
following activities:
(i) To analyse the historical energy consumption and cost data.
(ii) To conduct preliminary energy audit with the objectives to identify:
(a) major energy consuming equipment and process;
(b) obvious inefficiencies and energy wastes; and
(c) priority areas for further detailed investigation.
(iii) To conduct detailed technical and economic analysis of energy efficiency measures
involving large efficiency measures involving large capital investment or long payback
periods.
16) What do you understand by ―Corporate Services Audit‖? Describe the areas of Corporate
Services Audit, the scrutiny thereof and the evaluation criteria used in such audit.
Ans: The term “Corporate Services” is a generic term, which implies service oriented obligations of
a corporate body to different interested „Public‟ such as consumers, shareholders, community,
fellow-businessmen, government etc. It includes the social responsiveness of a business enterprise.
Corporate Services Audit is the audit of social behavior of the company to assess the extent to
which the company had met the expectations of the customers , employees, shareholders,
suppliers and the community.
The scope of the Corporate Services Audit extends to the critical examination of the different
aspects of services and the extent to which the corporate body has rendered satisfactory
services. It also includes the evaluation of the degrees of responsiveness and awareness on the
part of such enterprise. The performance of the management towards customers , employees,
shareholders, suppliers , the community and government is studied separately and properly
evaluated by management auditor.
The areas of Corporate Services Audit and the scrutiny and evaluation criteria can be
categorized as follows:
Consumers: Quality of goods in right quantity, right price, right place and right time.
Employees : Pay, Safety, Welfare and Industrial Relations etc.
Shareholders: Safety of investment, satisfactory return and capital appreciation.
Community: Social cost and social benefit, public relation
Fellow- businessmen: Business ethics and fair trade dealings.
State: Compliance with various legislations, fair trade practices, payment of taxes etc.
The concept of Corporate Services Audit is that its appraisal system should consider the level of
contribution a business entity makes to society and its environment towards raising the quality of
life through better product quality and services rather than profit maximization. The Corporate
Services Audit thus attempt to distinguish between the end and means of business and provides a
new dimension to the concept of audit approach. In Corporate Services Audit , the auditor
checks the company‟s response to different social needs.
17) Give an ―Audit programme‘ as an Internal Auditor of Wage Audit.

Ans:
Audit programme as an internal Auditor of Wage Audit:
(I) Information about Auditee and audit work:
(i) Name of the Auditee .

(ii) Address/Location.
(iii) Period to be covered.
(iv) Estimated time(days) required.
(v) Audit Team members consists of Partner/Qualified/Semi-qualified etc.
(vi) Queries of the Auditor to be settled by the representative of the concern.
(vii) Report to be submitted to the representative of the company.
(II) Study of various records:
(i) Wage related policy manuals.

(ii) Grade Structure.
(iii) Incentive Rules.
(iv) Overtime Rule.
(v) Bonus Scheme.
(vi) Various Statutory deduction schemes as for example ESI, PF, EPF etc.
(III) Verification of:
(i) Payroll package is properly updated with employee‟s details and it is properly functioning.
(ii) Take out the list of employees for the purpose of verification that no entry is Bogus i.e Ghost
Worker.
(iii) Ensure that all wage payments are made through banks.
(iv) Where payment is made in cash, whether it is done in presence of responsible officer.
(v) Cross verify wage with some employees , so that there will be assurance with system.
(vi) Checking of Daily Attendance Sheet, Absenteeism Statement, Manpower Planning and
Deployment.
(vii) Checking of Employee Signature at the time of payment in case of cash payment and
Attendance Register.
(viii) Checking of Appointment/Retirement records of Employees.
18) It is said that ‗Cost Audit ‗is ‗Efficiency Audit‘. Explain the statement. What is the evidence from
the Cost Audit Report that Cost Audit is ‗Efficiency Audit‘?
Ans:
‟Efficiency Audit‟ is systematic appraisal of management methods and is intended to assess the
actual performance levels relative to applicable benchmarks or standards. The main purpose of
Efficiency Audit is to ensure –
i)that every rupee invested in capital or in other fields give optimum returns, and
ii)the balancing investment between different functions and aspects designed to give optimum
results. „Cost Audit‟ may appropriately be called „Efficiency Audit „ as outlined above.
The following points may be considered in favour of the argument:
i) The Cost Auditor has to provide details of Capacity Available and Utilised as part of Annexure to
Cost Audit Report, Form CRA 3 (pursuant to Rule 6(4) of the Companies(Cost Records and
Audit)Rules, 2014.) Para 1 of Part B(Manufacturing Sector) /Part C(Service Sector) deals with
capacity utilization giving details of licensed capacity ,installed capacity, actual production etc.
to counter the problem of underutilization of capacity. Thus cost audit can help in improving
efficiency by reducing the idle capacity.
ii)Information revealed by the Annexure to Cost Audit Report under Para 2B , Part B/Part C which
provide details of Utilities consumed can be highly useful in energy conservation and help firms to
improve their efficiency in utilization of energy resources.
iii) Para 2A , Part B/Part C requires comparison of per unit actual consumption of major inputs with
the Previous Year. Such comparison is a very important control ratio and helps in analyzing the
production efficiency by bringing to focus the areas where wastage of raw materials occur.
iv)Efficiency of industrial units is affected by abnormal / non-recurring costs. An analytical study of

information given under Para 2, PART D which deals with profit reconciliation can provide useful
information to management to improve its working.
v)Para 4, Part D reveals information on Financial Position and Ratio Analysis. This information will
guide management in setting up of a sound system for Utilisation of various resources and help in
improving the resource utilization.
vi)Information given under Para 3 helps to analyse the efficiency of distribution of Earnings to
various stake holders.
vii)Para 1 Part B/Part C provides information on „Export Sale.‟ Similarly Para 2 A , Part B/Part C
provides details of imported materials consumed This helps Govt. not only to promote exports but
also to protect Indian Industry from unlawful dumping by foreign units.
viii) Similarly other paras like para 4 part D on financial position , para 5, Part D on Related Party
Transaction, para 3, Part D on value addition , para 2, Part D on profit reconciliation , Para 6, Part
D on reconciliation of Indirect Taxes, Cost Auditor‟s observations- will go a long way for cost
reduction, increasing productivity , efficiency of the firm etc.
ix) On basis of the above points , it can be established that cost audit is well designed to bring to
light the efficiency aspect of performance of a company and is thus appropriately called
„Efficiency audit‟.
19 (i) What are the mandatory requirements for appointment of Internal Auditor in a listed
company?
(ii) Who are the persons eligible for appointment as Internal Auditor?
Ans:
(i) (i)Rule 13 of the Companies (Accounts) Rules, 2014, makes it mandatory to appoint an Internal
Auditor for every listed company.
The Board of Directors of every listed company shall appoint an Audit Committee [Rule 6 of the
Companies (Meetings of Board and its Powers) Rules]. It is the responsibility of the Audit
Committee of a listed company to review the adequacy of the internal audit functions and
review the Internal Audit Reports (Clause 49 of the Listing Agreement).
(ii) In terms of Section 138 of the Companies Act, 2013, read with Rule 13 of the Companies
(Accounts) Rules, 2014,
(a) every listed company;
(b) every unlisted public company having (i) paid up share wealth of fifty crore rupees or more
during the preceding financial year; or (ii) turnover of two hundred crore rupees or more
during the preceding financial year; or (iii) outstanding loans or borrowings from banks or
public financial institutions exceeding one hundred crore rupees or more at any point of
time during the preceding financial year; or (iv) outstanding deposits of twenty five crore
rupees or more at any point in time during the preceding financial year; and
(c) every private company having (i) turnover of two hundred crore rupees or more during the
preceding financial year; or (ii) outstanding loans or borrowing from banks or public
financial institutions exceeding one hundred crore rupees
shall appoint (i) an individual or (ii) a firm of Internal Auditors as the Internal Auditor of the
company. Such person or firm shall either be a Chartered Accountant or a Cost Accountant, or
such other professional as may be decided by the Board to conduct the internal audit of the
functions and activities of the company.
20) SAFA organised a three-day International Conference of Accountants in Mumbai. You are
asked to conduct internal audit the accounts of the conference. Draft the internal audit
programme for audit of receipt of participation fees from delegates to the conference.
Ans:
Audit of Receipts of Participation Fees
The organization of three-day International Conference of Accountants in Bangalore by SAFA is a

one-time event. Normally, in view of mega-size of the event, a special cell is made in the
organization to handle the entire event. Since few people would be handling the event, the
internal controls may not be that strong and, thus, more emphasis is required to be given on
substantive procedure. Audit of receipt of participation fees should be under the following areas:
(I) Internal Control System
(i) Examine the organization structure of special cell created for the International
Conference, if any, and division of responsibilities amongst persons and control/custody
over receipt books.
(ii) Verify the internal control system for restricting the participation of unregistered
delegates.
(II) Rate of Participation Fees
(i) Verify with reference to resolution passed by the Organizing Committee/SAFA.

(ii) Also verify the rate from the literature/registration form circulated for promotion of
conference.
(III) Receipts of Participation Fees
(i) Verify counter foil of the receipts issued for individual registration.
(ii) Ensure that receipts are issued for all the registration received in cash.
(iii) Trace the receipts in Bank Statement or Cash Book – as the case may be.
(iv) Verify Bank Reconciliation Statement and list out dishonoured cheques.
(v) Verify subsequent recovery in respect of dishonoured cheques.
(IV) Overall Checking
(i) Verify the total receipts of participation fees shown in the financial statements with
reference to total number of receipts issued to participants.
(ii) Cross check the total number of delegates with reference to the following:
(a) Kits distributed to participants.
(b) Bill of caterer for providing meals during conference.
(c) Capacity of the Hall.
(d) Participation Certificate if any issued.
(V) Foreign Delegates: In case of foreign delegates – if registration fees are higher – ensure that
they are registered at higher fees.
(VI) Special Issues :
(i) Take out list of absentees and in case of nil absentees, probe the issue further.
(ii) If certain participants are exempted from payment of fees – obtain the list along with
proper authorization in this regard.
21) The following figures are extracted from the Books of VENNELA LTD., a Multi products Company
mainly producing Cement and Ready-mix Concrete for the years ended March 31, 2017 and
2016.
Year ended 31st March 2017 2016

Particulars (Amount in ` Millions)
Gross Sales including Excise Duty : 7,720 6,180
Excise Duty 600 480
Other Income 450 300
Export Incentives 80 60
Increase in Value of Stock of Finished Goods 30 15
Raw materials consumed 2,640 2,160
Direct wages, salaries, bonus, gratuity etc. 660 528
Power & Fuel 360 288
Stores and spares 240 210
Other manufacturing overheads 645 555
Administrative Overheads :
Audit fees 54 45
Salaries & commission to directors 72 60
Other overheads 390 330
Selling and distribution overheads :
Salaries & Wages 54 45
Packing and forwarding 30 24
Other overheads 375 300
Total depreciation 180 180
Interest Charges :
On working capital loans from Bank 90 75
On fixed loans from IDBI 135 105
On Debentures 45 45
Tax paid including provisions 474 300
Dividend paid 630 345
Dividend Distribution Tax 110 60
You are required to calculate the following parameters as stipulated PART-D, PARA-3 of the
Annexure to Cost Audit Report under the Companies (Cost Records and Audit) Rules, 2014 for
the year ended March 31, 2017 and March 31, 2016:
(i) Value addition

(ii) Earning available for Distribution
(iii) Distribution of Earning to the different claimants
Ans:
Annexure to Cost Audit Report:-

Part D-3: Value Addition And Distribution Of Earnings (For Vennela Ltd. as a whole)
(Amount In ` Millions)
SI. Particulars Current Previous

No. Year 2016-17 Year 2015-16
Value Addition:
1. Gross Sales including Excise Duty 7720 6180
2. Less: Excise Duty etc. 600 480
3. Net Sales 7120 5700
4. Add: Export incentives 80 60
5. Add:/ (Less) Adjustment In Finished Stocks 30 15

7,230 5,775
Less: Cost of bought out input:
(a) Cost of Raw materials consumed 2,640 2,160
(b) Consumption of stores and spares 240 210
(c) Power & Fuel 360 288
(d) Other overheads 1,584 1,329
- -
Total cost bought out inputs 4,824 3,987
7. VALUE ADDED: 2,406 1,788
8. Add: Other income 450 300
9. Add: Extra ordinary income --- -----
10. Earnings available for distribution 2,856 2,088
Distribution of earnings to:
(1) Employees as salaries and wages, bonus, gratuity etc. 714 573
Directors- Salaries and commission 72 60

(2) Shareholders as dividend 630 345
(3) Company as retained funds (including depreciation) 676 600
(4) Government as taxes
Dividend Distribution Taxes 110 60
Income taxes paid (including provisions) 474 300
584 360
(5) (1) Providers of Capital/Fund as interest on
Debentures:
Interest on debentures: 45 45
Interest on Fixed loans from IDBI 135 105
180 150
Total distribution of earnings 2,856 2,088
Working Notes :
Amount in ` Amount in `
Particulars Millions Millions
16-17 15-16
Other Overheads:
Other manufacturing OH 645 555
Audit fees 54 45
Other admn OH 390 330
Packing & forwarding 30 24
Other selling & distribution OH 375 300
Int. on Wk. cap. 90 75
Total 1584 1329
Amount in ` Amount in `
Particulars Millions Millions
Salaries
Direct wages & salaries 660 528

Salaries & Wages for selling &
distribution 54 45
714 573
Amount in Amount in `
Particulars `Millions Millions
Earnings available for distribution 2856 2088
Less, earning distributed to various
stakeholders 2180 1488
Retained earnings including
depreciation. 676 600
22) ABUNA ELECTRONICS LTD. is engaged in the manufacture of LED TV sets having its factories at
Patna and Gujarat. The company manufactures picture tube at Patna which is consumed to
produce LED TV sets at Gujarat factory. The following information pertaining to captively
consumed picture tubes are extracted from the records of the company for the Half year ended
March 31, 2017.
(Amount in `Thousand)
Direct material inclusive of excise duty ` 94 thousand 1,044
Direct wages and salaries 357
Direct expenses 80
Indirect materials 70
Factory overheads 320
Administrative overheads (20% relating to production activities) 640
Quality control cost 100
Research and development cost 125
Selling and distribution expenses 225
Sale of scrap realised 130
Profit margin 15%
You are required to determine:
(i) The cost of production for purpose of captive consumption in terms of Rule-8 of the
Central Excise Valuation (Determination of price of Excisable Goods) Rules and as per
CAS-4, and
(ii) Also Assessable Value for the purpose of paying excise duty on Captive Consumption
Ans: ABUNA ELECTRONIC LTD.

Computation of Cost of Production(As per CAS 4)
Amount in ` thousand
Direct materials (exclusive of excise duty (1044-94) 950
Direct wages and salaries 357
Direct expenses 80
Factory overheads (320+70) 390
Quality control cost 100
Research and development cost 125
Administrative overheads (to the extent relates to Production activities) 128
Less: sale of scrap realised (130)
Cost of production 2000
Add: 10% as per rule 8 of CEV (DPEG) Rules (10% of 2000) 200
Assessable Value as per rule 8 of the CEV (DPEG) Rules 2200
23) ASHIRBAD CEMENT LTD. has a captive power generation plant for its cement factory. The
following information is available with regard to the power generation for the year ended March
31, 2017:
Coal consumption 2400 tonnes @ `600 per tonne
Oil 3000 liters @ `50-50 per litre
Water 24000 gallons at `60 per gallon
Stores and other consumables ` 55,000
Salaries of power generating plant:
2 supervisors each at `10,600 p.m., 5 skilled workers each at `6,100 p.m., 3 helpers each at ` 4,200
p.m.
Salaries to boiler house attendant, 8 workers, each at `4,200 p.m.
Cost of power generating plant— `15,00,000 having life of plant 15 years with ` 60,000 residual
value.
Cost of Boiler plant— `6,00,000 having life of plant 10 years with no residual value.
Miscellaneous income received by sale of ash— ` 50,000.
Repair and maintenance— Power generating plant ` 1,50,000, Boiler house ` 1,26,000.
Share of Administrative Overhead— ` 1,35,000.
Power generated during the year: 3024250 KWH.
Note: No power generated is used by the power generated plant itself.
You are required to prepare the Cost Sheet to calculate cost per kWh of electricity generated as
per the Companies (Cost Records and Audit) Rules 2014 for the year ended March 31, 2017.
Ans: ASHIRBAD CEMENT LTD

STATEMENT SHOWING COST OF POWER GENERATED BY POWER GENERATED PLANT FOR YEAR
ENDED MARCH 31, 2017
Power generated 3024250 kwh
Particulars Total Cost Per Kwh

Amount (`) (`)
Coal consumption (2400 × 600) 1440000
Less: Sale of Ash 50000 1390000 0.46
Oil 3000 litres at ` 50.50 per ltr. 151500 0.05
Water 24000 gallans at `60/- per gallan 1440000 0.48
Stores and other consumables 55000 0.02
Salaries of generating plant
Supervisor (2 ×10600 ×12) 254400
Skilled Worker (5 × 6100 ×12) 366000
Helpers (3 x 4200 ×12) 151200 771600 0.26
Salaries To Boiler House Attendant (8× 4200 ×12) 403200 0.13
Repairs and maintenance
Generating plant 150000
Boiler house 126000 276000 0.09
Depreciation
Generating Plant (1500000 - 60000)/15 Yrs. 96000
Boiler House (600000/10 Yrs.) 60000 156000 0.05
Share of administrative overhead 135000 0.04
Total cost of power generated 4778300 1.58
So, Cost per KWH of Electricity generated = `1.58
24) PHIMPEX LTD. in the business of Real Estate and Consumer Goods shows the following financial
position for the year ending March31, 2017:
(Amount in ` crore)
Year ended 31st March

2017 2016
Liabilities
Share Capital 33 33
Securities Premium Account 931 928
General Reserve 57 44
Capital Redemption Reserve 42 40
Profit & Loss Account 595 390
Long Term Borrowings 1013 670
Deferred Tax Liability 25 39
Short Term Borrowing 782 676
Trade Payable 715 747
Miscl. Provisions 77 73
Total: 4270 3640
Assets:
Fixed Assets (Tangible) 647 614
Capital WIP 667 383
Non-Current Investments 2378 2048

Long Term Loans 53 66
Inventories 167 232
Trade Receivables 104 94
Cash and Bank Balance 107 69
Other Current Assets 25 30
Advance for Equipment 122 104
Total: 4270 3640
Profit before tax for the year 2016-17 was `326 crores (Previous year `397 Crores)
You are required to compute the following figures/ratios as stipulated in PART-D, PART-4 to
Annexure of cost Audit Report under the Companies (Cost Records and Audit) Rules, 2014 for the
year ended 31st March, 2017:
i. Capital Employed
ii. Net Worth
iii. Debt Equity Ratio
iv. PBT to Capital Employed
v. PBT to NET Worth
vi. Current Assets to Current Liabilities
Ans: PHIMPEX LTD.
(Amount in ` crore)
Year ended March 31 2016 2017 2017
(i) Capital Employed:
Fixed assets (Tangible) 614 647
Non-current investments 2048 2378
2662 3025
Particulars Previous Current
Year2016 Year2017
Current Assets: (A)
Inventories 232 167
Trade Receivables 94 104
Cash and Bank Balance 69 107
Other Current Assets 30 25
(A)
425 403
Current Liabilities:
Short term borrowings
Trade payables
Misc. Provision 676 782
(B) 747 715
73 77 (1071) (1171)
1591 1854
1496 1574
Working Capital (A-B)
CAPITAL EMPLOYED
Average capital employed for the year ended

March 31,2017 (1591+1854)÷2 1722.5
(ii) Net Worth: (For the year ended Mar31,2017

Share capital 33
Securities premium a/c 931
General reserve 57
Capital redemption reserve 42
Profit and loss account 595 1658
(iii) Debt (For the year ended March 31,2017)
Long Term Borrowings 1013
Deferred Tax Liabilities 25 1038
Debt Equity Ratio: (1038/1658) = 62.60% (1038÷1658) 62.6:100
= 62.6:100 or 0.63:1 =62.60% Or 0.63:1
Profit before tax (PBT) for the year ended 326
March 31, 2016
(iv) PBT to Capital Employed: (326÷1722.5)×100 18.93%
(v) PBT to Net Worth (326÷1658)×100 19.66%
(vi) Current Assets to Current Liabilities: for 2017 0.256
(CA/CL) = (403/1574) Or 0.26:1
25) PRANTIKA LTD., a manufacturing company provides the following extracts from its records
for the year ended March 31, 2017.
The Company's specifications—Capacity for the machines per hour 1800 units
No of shifts (each shift of 8 hours) per day 3 shifts
Paid holidays in a year (365 days):
(i) Sunday 52 days
(ii) Other holidays 13 days
Annual maintenance is done within these 13 holidays. ---
Preventive Weekly Maintenance for the Machines is carried on 1 hour
during Sundays. Normal idle capacity due to Lunch time, shift changes etc.
per shift.
Production based on sales expectancy in past 5 years (units in Lakh): 90.80
104.90
78.46
93.56
91.30
Actual Production for the year ended March 31, 2015 (units in Lakh): 97.80
You are required to calculate:
(1) Installed Capacity
(2) Actual Capacity
(3) Normal Capacity
(4) Idle Capacity
(5) Abnormal Idle Capacity—Keeping in view of the relevant Cost Accounting Standard
(CAS-2).
Ans:
1 Installed Capacity 365×8×3×1800=157.68 lakh units

2 Actual Capacity [(97.80)÷157.68] × 100 = 62.02%
Utilization
3 Normal Capacity (104.90 + 93.56 + 91.30)/3 = 96.59 lakh unit
4 Idle Capacity (157.68 – 97.80) = 59.88 lakh units
(59.88)÷157.68 = 0.3798 = 0.3798 i.e. 37.98%
5 Abnormal idle (113.40 – 97.80) = 15.60 lakh units i.e., or (15.60/113.40) =
capacity 13.76%
26) In a manufacturing shop, product P requires 2 man hours and Product Q requires 6 manhours.
In a month of 26 working days of 8 hours a day 2000 unit of P and 1000 unit of Q were produced.
The Company employs 60 workers in the shop and the budgeted man-hours are 1,08,000 for the
year. You are required to workout capacity ratio, activity ratio and efficiency ratio.
Ans:
Budgeted hours for the year = 108000 Hrs for the year
= 9000 for the month
Maximum possible hours = 26x8x60 workers = 12480 Hrs
Actual hours worked = Maximum possible hours worked = 12480 Hrs.
Standard hours produced

Product P = 2000 x 2 = 4,000 Hrs.
Product Q = 1000 x 6 = 6,000 Hrs.
10,000 Hrs.
(i) Capacity ratio

Standard capacity usage ratio = Budgeted/maximum possible hours x 100
= 9000/12480 x 100 = 72.12%
Actual capacity usage ratio = Actual hour worked/maximum possible hours
= 12480/12480 x 100 = 100.00%
(ii) Activity Ratio = Actual production in terms of Standards Hrs/Budgeted Hrs.

= 10000/9000x100 = 111.11%
(iii) Efficiency Ratio = Actual production in Standard Hour / Actual hours worked
= 10000/12480 x 100 = 80.13%
27) The following is a summary of the Profit and Loss Account of M/s. Straw Berry Company
Limited for the year ended 31.03.2017
` in lakh
Sales 13,540
Cost of Sales:
Raw Materials, Stores and Spares
5,600
Excise Duty
830
Salaries and Wages
1,400
Power and Fuel
470
Repairs and Maintenance: Major
Breakdown Repairs Other
regular maintenance 35
Carriage Outwards 94
Insurance General 320
34
Insurance-Transit 22
Advertisement and Sales Promotion 720
Rent, Rates and Taxes Printing, 97
Stationery etc. Travelling and 437
Conveyance 776
Other Administrative expenses 426
Depreciation 391
Interest 1,494
Profit 13,146
394
There was a major breakdown of machinery resulting in loss of production for 42 days, in June
and July, 2016 and a labour strike for 97 days from 14.2.2017 to 21.5.2017. The Company
produced a single product (Steel-Billet) and the production during the year was 942000 kgs.
You are required to compute the amount of abnormal cost on account of the breakdown and
strike and the impact on cost per unit of output. Where do these figures find a place in the Cost
Audit Report?
Ans:
Period Costs incurred when there is no production are deemed as abnormal and the costs
apportioned for such periods are excluded from cost of production of the product.
Particulars ` in lakh
Salaries & Wages General 1,400
Insurance Rent, rates & 34
taxes 97
Other administrative expenses 426
Depreciation 391
Interest 1,494
Total Fixed Cost 3,842
Total period of production stoppage:

Due to machinery breakdown 42 days
Due to strike 14.02.2014 to 31.03.2014 46 days
88 days
Fixed Costs apportioned to the period of production stoppage

= ` 3842 lakhs x 88 / 365 ` 926.29 lakhs
Major breakdown repair ` 35.00 lakhs
Total abnormal cost ` 961.29 lakhs
This work out to approximately 9.85%of the total cost of production and should be excluded
from the respective elements of cost in the cost sheets and should be stated in Reconciliation
Statement of Para 2,PART D of the Annexure to the Cost Audit Report.
The abnormal cost included in Cost of Production is `9,61,29,000/9,42,000 = `102.05 per Kg.
Working Notes:
Cost of Production
` in lakhs
Raw Materials, Stores and Spares 5,600
Salaries & Wages 1,400
Power & Fuel 470
Repairs and Maintenance 129
Insurance General Rent, 34
Rates & Taxes Printing, 97
Stationery 437
Travelling & Conveyance Other 776
Admn. Exp. Depreciation 426
391
Cost of Production 9,760
Abnormal cost=961.29*100/9760=9.85%
Note:
(i) Excise Duty is not forming part of Cost of Material.

(ii)Carriage outward and insurance in transit are considered not forming part of cost of
production.
(iii) Advertisement and Sales Promotion and Interest are not forming part of Cost of Production.
28) The following information pertains to REACON CEMENT LTD., a manufacturing cement
company for the year that ended as follows:
The year ended March 31. 2016-17 2015-2016
Rated Capacity per Hr (in MT) 80 80
Break down (Hrs) 2,177 1,01
Planned Maintenance (Hrs) 247 5422
Power restrictions (Hrs) 1,237 1,48
Shortfall (there are no orders) (Hrs) 792 1677
Want of wagons (Hrs) 495 635
Total stoppage (Hrs) 4,948 4,23
Total running (Hrs) 3,888 0
4,58
Total available Hours 8,836 2
8,81
Production during the year (in MT) 2,48,844 2
3,29,92
Hourly Rate of Production (in MT) 64 8 72
Capacity Utilization (%) 62.21 82.48
Annual Installed Capacity (in MT) 4,00,000 4,00,000
Based on information stated above, you as a Cost Auditor are required to offer your
comments on
(i) The performance of the company
(ii) Your suggestion for improvement.
Ans:
(i) Performance of the Company:
(a) Rated capacity = 80 MT/Hr : Rated capacity achieved in 2012-13=(72/80)x100 =90% Rated
capacity achieved in 2013-14= (64 /80)x100 = 80%
The capacity achievement as % of rated capacity has declined from 90% to 80% in 2013-14.
Further the Capacity Utilization has gone down to 62.21% in 2013-13 from 82.48% of previous
year; a reduction of 20.27%
(b)From the data available the following observations are noted:-
1. Breakdown hours have gone up from 1,015 hours to 2,177 hrs, an increase by 114.48%
2. Planned Maintenance hrs has reduced from 422 hrs to 247 hrs i.e. by 41.47%
3. Shortfall hrs due to lack of orders has increased from 677 hrs to 792 hrs i.e. by 16.99%
4. The total stoppage hrs. has increased from 4,230 hrs to 4,948 hrs i.e. by 16.97%
5. The total running hrs has come down from 4,582 hrs to 3,888 hrs i.e. by 15.15%
6. The production has come down from 3,29,928 Mt to 2,48,844 Mt i.e. by 24.58%
From the above findings, it can be pointed out that the under utilization of capacity to the
extent of little over 20% can be attributed mainly to:-
 Increased total stoppage hours of 4,948 of 2013-14 as against that of 4,230 hrs in 2012-13
and
 The net increase of 718 hrs (4,948-4,230) is again due to increase of break down by 1,162
hrs ( 2,177-1,015) in the year 2013-14
(ii) Suggestion:
Therefore, the Company should look into the aspect of proper maintenance, securing
sufficient orders to avoid lost time. Better utilization of capacity can be alsobe achieved by
improving availability of wagons. The company may also carry out a cost-benefit analysis to
have captive source of power.
29) ALLIED LTD. has the following Balance Sheet as on March 31, 2017 and March 31,2016
(Amount in ` Lakh)
Year ended March 31 2017 2016
SOURCES OF FUNDS:
Shareholders' Fund 2,972 1,886
Loan Funds 4,644 4,060
7,616 5,946
APPLICATIONS OF FUNDS:
Fixed Assets 4,279 3,600
Cash and Bank 707 684
Debtors 1,914 1,522
Stock 3,560 3,008
Other Current Assets 2,000 1,805
Less: Current Liabilities (4,844) (4,673)
7,616 5,946
The Income statement of ALLIED LTD. for the year that ended is as follows:
(Amount in ` Lakh)
Year ended March 31 2017 2016
Sales 26,718 16,778
Less: Cost of Goods Sold 25,152 15,173
Gross Profit 1,566 1,605
Less: Selling, General & Administrative expenses 1,242 782
Earnings before Interest & Tax (EBIT) 324 823
Less: Interest Expenses 256 246
Profit before Tax (PBT) 68 577
Less: Tax 28 230
Profit After Tax 41 347
Required:
(i) Calculate for the year 2016-17:

(a) Inventory Turnover Ratio
(b) Return on Net Worth
(c) ROI
(d) ROE
(e) Profitability Ratios
(ii) Give brief comments on the financial position of company
Ans:
(i)Various Ratios for the year 2016 – 2017
(a) Inventory Turnover Ratio= Cost of Goods sold/Average inventory=25152/3284=7.66
(b)Return on Net Worth=Profit after Tax/Net Worth=40/2972*100=1.35%

(c) ROI=Net profit before interest but after tax/Average Capital employed=296/6781*100=4.37%
Net profit before interest but after tax=256+40=296
Average capital employed=(7616+5946)/2=6781
(d)ROE= PAT available to Equity Share holders/Average shareholders‟ Funds=40/2429=1.65%
Average shareholders‟ Funds=(2972+1886)/2=2429
(e) Profitability Ratios:

Gross Profit Ratio = (1,566/26,718)  100 = 5.86%
Operating Profit Ratio = (68+256) =(324 /2,6718)  100 =1.21%
Net Profit Ratio=(40 /2,6718)  100 = 0.15%.
(ii) Comment:
There is a substantial decline in Profitability in the current Year from ` 823 Lakhs of previous year to
` 324 Lakhs. This is mainly due to huge increase in the operating expenses. There has been
substantial increase in the Interest charges also. During the year 2016-17 both fixed financial
expenses and operating expenses have increased. During current year both operating and
financial leverages have been adversely affected. It can be seen that the company is suffering
from a liquidity crisis during the year.
30) Short Questions:
(a) How would you assign administrative overheads as per CAS 11?
(b) Explain how installed capacity is calculated as per CAS 2 by a manufacturing concern?
(c) A Company engaged in manufacturing of chemicals is consistently recording higher sales

turnover, but the net profits is showing a declining trend since the last 5 years. As a Management
Auditor appointed to find out the reasons for the same, mention the points you would investigate.
(any 4 points)
(d) Management Audit and Operational Audit are complementary and supplementary to one
another". Discuss in brief.
(e) What is the Role of Management with regard to Internal Control?
(f) What points should be considered in audit programme of Local Bodies?
(g) Trial Balance extract of M/s Rashid Ltd. as on 31.03.2017 is given below:
Particulars Amount Particulars Amount
(`) (`)
Materials Consumed 32,00,000 Special subsidy 2,80,000
received from Govt.
Salaries 18,00,000 towards employees
Salary
Employees training cost Perquisites 1,80,000 Recoverable amount
30,000
to employees Contribution to 4,50,000 from employees out of
Gratuity Fund Festival Bonus 4,10,000 perquisites extended
Lease rental for accommodation 65,000
Unamortised amount of employee cost 3,00,000
related to a discontinued operation 80,000
Compute employees cost.
(h) The following figures are extracted from the statement prepared by the Cost Accountant and
the Trial Balance of ABC Ltd., which is a single product company calculate Value Added:
` in lacs
31.03.2017
Gross sales inclusive of Excise Duty 2,040
Excise Duty 295
Raw Materials consumed 1,140
Direct Wages 35
Power and Fuel 30
Stores and 6
Spares 16
Depreciation charged to production cost centres
Factory overheads: 5
Salaries and wages 2
Depreciation 1
Rates and Taxes 6
Other overheads
Administrative overheads: 10
2
Salaries and Wages 162
Rates and Taxes
Other overheads
7
Selling and distribution
6
overheads: Salaries and Wages
1
Packing and Forwarding
124
Depreciation
85
Other overheads
12
Interest
840
Bonus and Gratuity
324
Gross Current Assets
Current Liabilities and Provisions
(i) Purchase of material $ 50,000 [Forward contract rate $ = 54.40 but $ = 54.60 on the date of
importation]; Import Duty paid ` 5,65,000; Freight inward ` 1,62,000; Insurance paid for import by
road ` 48,000; Cash discount ` 33,000; CENVAT Credit refundable ` 37,000; Payment made to the
foreign vendor after a month, on that date the rate of exchange was $ = 55.20. Compute the
landed cost of material.
(j) A factory operates a standard cost system, where 2,000 kgs of raw materials @ `12 per kg were
used for a product, resulting in price variance of `6,000(F) and usage variance of `3,000(A).
Then what will be the standard material cost of actual production?
Ans:
(a) Assignment of administrative overheads to the cost objects shall be based on either of the
following two principles:
(i) Cause and effect – Cause is the process or operation or activity and effect in the
incurrence of cost.
(ii) Benefits received – Overheads are to be apportioned to various cost objects in
proportion to the Benefits received by them.
The cost of shared services should be assigned to user activities on the basis of actual usage.
Where the resources by way of infrastructure are shared the cost should be assigned on a
readiness to serve basis. General management cost should be assigned on rational basis.
(b) Installed capacity Installed capacity is usually determined based on:
i) Technical specifications of facility.
ii) Technical evaluation.
iii) Capacities of individual or interrelated production or operation Centres.
iv) Operational constraints or capacity of critical machines or equipment.
v) Number of shifts or machine hours or man hours.
In case technical specifications of facility are not available, the estimates by technical experts on
capacity under ideal conditions shall be considered for determination of installed capacity. In
case the installed capacity is assessed as per direction of the government or regulator it shall be in
accordance with the said directives.
(c) As per the facts that there has been consistently high turnover but declining net profits is an
anomalous situation. It may be attributed to one or more following reasons requiring further
investigation:
i) Unfavorable Sales mix

ii) Negative Impact of Financial Leverage - Higher Debt and Interest would result in lower profit.
iii) Other items included in Sales - Where the amount of Excise Duty goes up considerably the
total sales may show an increase which is not represented by a real increase in
quantity/value.
iv) High Administrative and Selling Expenses - A reduction in profit could also be due to increase
in administrative overheads and sales overheads at a rate higher than he rate of increase in
sales.
(d) Management Audit is wider in scope compared to Operational Audit.
Management Audit is concerned with quality of managing whereas Operational Audit centres
on the quality of operation. Operational Audit is an audit for the management and
Management Audit is an audit of the management also.
The basic difference between the two audits is not in method, but in the level of appraisal. In
management audit, the auditor is to make his tests to the level of top management, its
formulation of objectives, plans and policies and its decision making. It is not that he just verifies
the operations of control and procedures and fulfillment of plans in conformity with the
prescribed policies.
The auditor is to reach the root i.e., the functions of top management which lay down objectives
and policies, provide means and procedures of implementation and control and which
actually engage in direction and control on a continuous basis. In addition to what would
normally be covered in an operational audit, management audit would also encompass the
relevance and effectiveness of the aims, duties and decisions of management at various levels,
plans, policies and decisions of the top management. Every aspect of the functions of Board of
Directors should be in conformity with the objects set out in the constituting document. Similarly,
the managing director, if any, should act not only in accordance with the mandate he has
received but he should ensure that the decisions he takes are in conformity with the objects of
the company and the policies formulated by the Board. The effectiveness of management
under the control of managing director and the various members of the Board including those in
charge of finance, production, sales etc., should be subject to review of the management
auditor.
Therefore, it can be said that the two audits are complementary and supplementary to one
another.
(e) The responsibility of Management with regard to internal Control can be summarized as under-
1. Creation of system: Management is responsible for maintaining an adequate accounting
system incorporating various internal Controls to the extent appropriate to the size and
nature of the Business. The Management is vested with the responsibility of carrying on
the business, safeguarding its assets and recording the transactions in the books of
account and other records.
2. Review of system: The system installed, should be reviewed by the Management

to ascertain, whether-
(a) The prescribed Management policies are being properly interpreted by the
employees and are faithfully implemented,
(b) The prescribed procedures need a revision due to changed circumstances or
whether they have become obsolete or cumbersome, and
(c) Effective corrective measures are taken promptly when the system appears to
breakdown
3. Internal Audit: it is desirable that the Management also installs an internal audit System as
an independent function to check, amongst other things, the actual operation of the
Internal Control System and report any deviations or non-compliances.
(f) The audit programme for local bodies include the following:
• All sanctions are accorded by competent authority
• Expenditure incurred are according to provisions and as per regulations framed by competent
authority • Different schemes, programmes, and projects are running economically and the
purpose such programme is achieved.
(g) Computation of Employee Cost

Salaries 18,00,000
Add: Perquisite to employees 4,50,000
Less: Recoverable from Employees 30,000
4,20,000
Add: Lease rent Provided to Employees 3,00,000
Add: Festival Bonus 65,000
Add: Contribution to Gratuity Fund 4,10,000
29,95,000
Less: Subsidy received from Government towards Employees Cost 2,80,000
27,15,000
(h)
Net sales 1,745
Less : (i) Cost of Bought Out Materials & Service (Raw 1,146
Materials and Stores & Spares)
(ii) Power & Fuel, other bought out services 30
(iii) Over heads (excluding Salaries & Wages, Rates & 298
Taxes and depreciation)
(Y) =(i)+(ii)+(iii) 1,474

Value Addition : (X) - (Y) = 271
(i) Computation of Landed Cost of Material
Particulars `
Purchase price of material [50,000 × 54.60] 2730000
Add: Import Duties of purchasing the material 565000
Add: Freight Inward during the procurement of material 162000
Add: Insurance of the material (In case of import of material by 48000

road/Sea)
Total 3505000
Less: CENVAT Credit refundable 37000
Value of Receipt of Material 3468000
(j) Total material cost variance = Material price variance +Material usage variance
= 6,000(F) + 3,000(A)
= 3,000(F)
Actual material cost = 2,000x12

= ` 24,000
Hence, the standard material cost of actual production = 24,000 + 3,000(F) = ` 27,000
Final
Group IV
Paper 20: STRATEGIC PERFORMANCE MANAGEMENT &
BUSINESS VALUATION
(SYLLABUS – 2016)
Section A: Strategic Performance Management
1. Multiple choice questions with justification wherever necessary:

(i) The financial performance analysis which is undertaken by the outsiders of the
business, namely investors, credit agencies, government agencies, and other
creditors who have no access to the internal records of the company, is called:
(a) Internal analysis;
(b) External analysis;
(c) Horizontal Analysis;
(d) Vertical Analysis.
(ii) Which of the following is a cause for corporate distress?

(a) Fraud by Management;
(b) Working Capital Problems;
(c) Mismanagement;
(iii) Six Sigma has two key methodologies. These are:

(a) DMAIC and DMADV;
(b) DMADC and DMADV;
(c) DMAIC and DMADC;
(d) DMAII and DMADV.
(iv) Who has prompted the phrases, ―Zero Defects‖?

(a) Walter A. Shewhart;
(b) Philip Crosby;
(c) Peter Drucker;
(d) F. W. Taylor.
(v) One of the exceptions of Law of Demand is described by Sir Robert Giffen. He said
that even though the price, for necessary goods rise, the demand for them will not
decrease. These goods are called:
(a) Prestigious goods;
(b) Speculative goods;
(c) Giffen goods;
(vi) If the proportionate change in the price is more than the proportionate change in the
demand, it is called:
(a) Relatively inelastic demand;
(b) Relatively elastic demand;
(c) Perfectly Inelastic demand;
(d) Perfectly Elastic Demand.
(vii) A French economist Cournot analyzed a special case of competitive business

behaviour with only two firms in an Industry. It is called:
(a) Oligopoly
(b) Monopoly
(c) Duopoly
(viii) The risk which is primarily influenced by the level of financial gearing, interest cover,
operating leverage, and cash flow adequacy, is called:
(a) Financial risk;
(b) Business risk;
(c) External risk;
(d) Exchange risk.
(ix) Which of the following are not the element/ parameter of NCAER model of corporate
distress prediction?
(a) Net worth position
(b) Outstanding liability position
(c) Net working capital position
(d) Cash profit position.
(x) The type of benchmarking, which is concerned with the development of core
competencies that will help sustained competitive advantage, is called:
(a) Global Benchmarking
(b) Strategic Benchmarking
(c) Internal Benchmarking
(d) Competitive Benchmarking.
Answer:
(i) (b).
The financial performance analysis which is undertaken by the outsiders of the business, namely
investors, credit agencies, government agencies, and other creditors, who have no access to
the internal records of the company, is called External analysis.
(ii) (d).
The causes for corporate distress can be — Technological Causes, Working Capital Problems,
Economic Distress, Mismanagement, Fraud by Management etc.
(iii) (a).
DMAIC (Define, Measure, Analyze, Improve, Control) is used to improve an existing business
process and DMADV (Define, Measure, Analyze, Design, Verify) is used to create new product or
process designs for predictable, defect-free performance.
(iv) (b).
Philip Crosby prompted the phrases, ―Zero Defects‖. It does not mean mistakes never happen,
rather than there is no allowable number of errors built into a product or process and that it is to
be got right first time.
(v) (c).
According to the Law of demand, when the price rises, demand decreases and vice-versa. But,
according to Sir Robert Giffen, even though the price for necessary goods rise, the demand for
them will not decrease. These goods are called Giffen goods.
(vi) (a).
If the proportionate change in the price is more than the proportionate change in the demand, it is called
relatively inelastic demand. The demand is less elastic. This is one type of price elasticity of demand.
(vii) (c).
A special case of competitive business behaviour with only two firms in an industry is called
duopoly. It is assumed that each member in this two – firm industry produces a homogeneous product,
treats the rivals output as given and maximizes profit.
(viii) (a).
Financial risk is primarily influenced by the level of financial gearing, interest cover, operating
leverage, and cash flow adequacy. The financial risk depends on the capital structure and
method of financing adopted by the company.
(ix) (b).
The NCAER Study on Corporate Distress Prediction prescribed three elements/ parameters for
predicting the stages of corporate sickness, such as: (i) Cash profit position (a profitability
measure) (ii) Net working capital position (a liquidity measure) and (iii) Net worth position (a
solvency measure).
(x) (b).
Strategic Benchmarking helps to develop a vision of the changed organizations. It will develop
core competencies that will help sustained competitive advantage.
2.(a) What is Performance Management? Write down the components of Performance

Management.
(b) ―Financial performance analysis can be classified into different categories on the basis of
material used and modes operandi‖. — Explain.
Answer:
(a) Performance Management:
Performance management is a continuous process of identifying, measuring and
developing performance in organizations by linking each individual‘s performance and
objectives to the organization‘s overall mission and goals.
Performance management is ongoing. It involves a never-ending process of setting goals

and objectives, observing performance, and giving and receiving ongoing coaching and
feedback. Performance management requires managers to ensure that employees‘
activities and outputs are congruent with the organisation‘s goals and, consequently, help
the organization to gain a competitive business advantage. Performance Management
therefore creates a direct link between employee performance and organizational goals,
and makes the employees‘ contribution to the organization explicit.
Performance management is a comprehensive, continuous and flexible approach to the

management of organisations, teams and individuals which involves the maximum amount
of dialogue between those concerned. Performance management focuses mainly on the
achievement of results.
Components of Performance Management:
1. Performance Planning: Performance planning is the first crucial component of any

performance management process which forms the basis of performance appraisals.
Performance planning is jointly done by the appraiser and the reviewer in the beginning
of a performance session. During this period, the employees decide upon the targets
and the key performance areas which can be performed over a year within the
performance budget, which is finalized after a mutual agreement between the reporting
officer and the employee.
2. Performance Appraisal and Reviewing: The appraisals are normally performed twice in a
year in an organization in the form of mid reviews and annual reviews which is held at the
end of the financial year. In this process, the appraise first offers the self filled up ratings in
the self appraisal form and also describes his/her achievements over a period of time in
quantifiable terms. After the self appraisal, the final ratings are provided by the appraiser
for the quantifiable and measurable achievements of the employee being appraised.
The entire process of review seeks an active participation of both the employee and the
appraiser for analyzing the causes of loopholes in the performance and how it can be
overcome.
3. Feedback on the Performance followed by personal counseling and performance

facilitation: Feedback and counseling is given a lot of importance in the performance
management process. This is the stage in which the employee acquires awareness from
the appraiser about the areas of improvements and also information on whether the
employee is contributing the expected levels of performance or not. The employee
receives an open and a very transparent feedback and along with this the training and
development needs of the employee is also identified. The appraiser adopts all the
possible steps to ensure that the employee meets the expected outcomes for an
organization through effective personal counseling and guidance, mentoring and
representing the employee in training programs which develop the competencies and
improve the overall productivity.
4. Rewarding good performance: This is a very vital component as it will determine the work
motivation of an employee. During this stage, an employee is publicly recognized for
good performance and is rewarded. This stage is very sensitive for an employee as this
may have a direct influence on the self esteem and achievement orientation. Any
contributions duly recognized by an organization helps an employee in coping up with
the failures successfully and satisfies the need for affection.
5. Performance Improvement Plans: In this stage, fresh set of goals are established for an
employee and new deadline is provided for accomplishing those objectives. The
employee is clearly communicated about the areas in which the employee is expected
to improve and a stipulated deadline is also assigned within which the employee must
show this improvement. This plan is jointly developed by the appraise and the appraiser
and is mutually approved.
6. Potential Appraisal: Potential appraisal forms a basis for both lateral and vertical
movement of employees. By implementing competency mapping and various
assessment techniques, potential appraisal is performed. Potential appraisal provides
crucial inputs for succession planning and job rotation.
(b) Financial performance analysis can be classified into different categories on the basis of
material used and modes operandi as under:
A. Material used: On the basis of material used financial performance can be analyzed in
following two ways:
1. External analysis: This analysis is undertaken by the outsiders of the business namely
investors, credit agencies, government agencies, and other creditors who have no
access to the internal records of the company. They mainly use published financial
statements for the analysis and as it serves limited purposes.
2. Internal analysis: This analysis is undertaken by the persons namely executives and
employees of the organization or by the officers appointed by government or court
who have access to the books of account and other information related to the
business.
B. Modus operandi: On the basis of modus operandi financial performance can be analyze
in the following two ways:
1. Horizontal Analysis: In this type of analysis financial statements for a number of years
are reviewed and analyzed. The current year‘s figures are compared with the
standard or base year and changes are shown usually in the form of percentage. This
analysis helps the management to have an insight into levels and areas of strength
and weaknesses. This analysis is also called Dynamic Analysis as it based on data
from various years.
2. Vertical Analysis: In this type of Analysis study is made of quantitative relationship of
the various items of financial statements a particular date. This analysis is useful in
comparing the performance of several companies in the same group, or divisions or
departments in the same company. This analysis is not much helpful in proper analysis
of firm‘s financial position because it depends on the data for one period. This
analysis is also called Static Analysis as it based on data from one date or for one
accounting period.
3.(a) ―Supply Chain Management encompasses the planning and management of all activities
involved in sourcing, procurement, conversion and logistics management activities.‖ —
Define Supply Chain Management in this context and also state the components of Supply
Chain Management.
(b) What are the factors to be considered when analyzing customer profitability?
Answer:
(a) Supply Chain Management:
Supply Chain Management encompasses the planning and management of all activities
involved in sourcing, procurement, conversion and logistics management activities.
Importantly, it also includes coordination and collaboration with channel partners, which
can be suppliers, intermediaries, third party service providers, and customers. In essence,
Supply chain Management integrates supply and demand management within and across
companies.
The Supply Chain Management Program integrates topics from manufacturing operations,
purchasing, transportation, and physical distribution into a unified program.
In a typical supply chain, raw materials are procured and items are produced at one or
more factories, shipped to warehouses for intermediate storage, and then shipped to
retailers or customers. Consequently, to reduce cost and improve service levels, effective
supply chain strategies must take into account the interactions at the various levels in the
supply chain. The supply chain , which is also referred to as the Logistic Network, consists of
suppliers, manufacturing centers, warehouses, distribution centers, and retail outlets, as well
as raw material, work –in- process inventory, and finished product that flow between the
facilities.
Thus, we can define the Supply Chain Management as follows:

Supply chain management is a set of approaches utilized to efficiently integrate suppliers,
manufactures, warehouses and stores, so that merchandise is produce and distributed at the
right quantities, to the right locations, and at the right time, in order to minimize system wide
costs while satisfying service level requirements.
Component of Supply Chain Management:

There are five basic components of Supply Chain Management, as follows:
1. Plan: This is the strategic portion of SCM. You need a strategy for managing all the
resources that go toward the meeting customer demand for your product and services.
2. Source: Choose the suppliers that will deliver the goods and services you need to create
your product. Develop a set of pricing, delivery and payment processes with suppliers
and create metrics for monitoring and improving the relationships.
3. Make: This is the manufacturing step. Schedule the activities necessary for production,
testing, packaging and preparation for delivery.
4. Deliver: This is the part that many insiders refer to as logistics. Coordinate the receipt of
orders from customers, develop a network of warehouses, pick carriers to get products to
customers and set up an invoicing system to receive payments.
5. Return: The problem part of the supply chain. Create a network for receiving defective
and excess products back from customers and supporting customers who have
problems with delivered products.
(b) Customer profitability analysis has become an important new management accounting tool.
Customers utilize company resources differently; thus customer costs vary from one customer
to another. The following issues/ factors should be considered when analyzing customer
profitability:
 How to develop reliable customer revenue and customer cost information;
 How to recognize future downstream costs of customers;
 How to incorporate a multi-period horizon in the analysis; and
 How to recognize different drivers of customer costs.
This requires a broader examination of the costs associated with customer service. For
example, post- sale customer service costs must be included in any analysis of customer
costs. Some customers require substantially more post-sale service than others. In addition,
future environmental liabilities related to the sales of current products are additional
downstream costs that must be included. With management‘s increased focus on
customers, this analysis can provide forward- looking information about individual customers
and customer segments and more broadly examine both the revenues and Costs related to
customer transactions. Revenues can vary among customers due to variations in volume
levels, and differences in price structures, products and services.
Costs can also vary depending on how customers use the company‘s resources such as
marketing, distribution, and customer service. Unless a complete analysis of the benefits and
costs of customer relationships is undertaken, companies will unknowingly continue to service
unprofitable customers. Only after a thorough analysis of the costs and benefits, a firm can
decide which customers to service and strategically price its products and services.
4.(a) What is Operative Customer Relationship Management?

(b) State the objectives for using Customer Relationship Management applications.
Answer:
(a) Operative Customer Relationship Management:
Operative CRM mainly supports the actual contact with customers conducted by front
office workers and general automation of business processes including sales of products,
services and marketing. All communication with the customer is tracked and stored in the
database and if necessary it is effectively provided to users (workers). The advantage of this
approach being the possibility to communicate with various employees using various
channels but creating the feeling that customer is being taken care of by just one person. It
can also minimize the time that the worker has to spend typing the information and
administrating (the data is shared). This allows the company to increase the efficiency of
their employees work and they are then able to serve more customers.
(b) Objectives for using Customer Relationship Management applications:

I. To support the customer services
II. To increase the effectiveness of direct sales force.
III. To support of business to business activities.
IV. To support of business to consumer activities.
V. To manage the call center.
VI. To operate the In- bound call centre.
VII. To operate the Out - bound call centre.
5.(a) Discuss the potential impact of Computers and MIS on different levels of management.
(b) Write about the four perspectives of Balanced Score Card (BSC).
Answer:
(a) The potential impact of computers on top-level management may be quite significant. An
important factor which may account for this change is the fast development in the area of
computer science. It is believed that in future computers would be able to provide
simulation models to assist top management in planning their work activities. For example,
with the help of a computer it may be possible in future to develop a financial model by
using simulation technique, which will facilitate the executives to test the impact of ideas
and strategies formulated on future profitability and in determining the needs of funds and
physical resources.
Futurists believe that top management will realize the significance of techniques like
Simulation, Sensitivity Analysis and Management Science. The application of these
techniques to business problems with the help of computers would generate accurate,
reliable, timely and comprehensive information to top management. Such information
would be quite useful for the purpose of managerial planning and decision-making.
Computerized MIS will also influence in the development, evaluation and implementation of
a solution to a problem under decision making process.
Potential Impact of Computers and MIS on middle management level will also be significant.
It will bring a marked change in the process of their decision-making. At this level, most of the
decisions will be programmed and thus will be made by the computer, thereby drastically
reducing the requirement of middle level managers. For example, in the case of inventory
control system, computers will carry records of all items in respect of their purchase, issue and
balance. The re-order level, re-order quantity etc., for each item of material will also be
stored in computer after its predetermination. Under such a system, as soon as the
consumption level of a particular item of material will touch reorder level, computer will
inform for its purchase immediately.
The impact of Computers and MIS today at supervisory management level is maximum. At
this level, managers are responsible for routine, day-to-day decisions and activities of the
organization which do not require much judgment and discretion. In a way, Supervisory
manager‘s job is directed more towards control functions, which are highly receptive to
computerization. Potential impact of computers and MIS on supervisory level will completely
revolutionize the working at this level Most of the controls in future will be operated with the
help of computers. Even the need of supervisory managers for controlling the operations will
be substantially reduced. Most of the operations/activities now performed manually will be
either fully or partially automated.
(b) Four perspectives of Balanced Score Card (BSC):

The objectives and measures view organizational performance from four perspectives - (A)
Financial, (B) Customers, (C) Internal Business Process, and (D) Learning and Growth.
(A) Financial: The financial perspective serves as the focus for the objectives and measures
for the objectives and measures in the other scorecard perspectives. This perspective is
concerned for profit of the enterprises. Under this perspective the focus will be on
financial measures like operating profit, ROI, residual income, economic value added
concept, revenue growth, cost reduction, asset utilization etc. These financial measures
will provide feedback on whether improved operational performance is being translated
into improved financial performance.
(B) Customer: This perspective captures the ability of the organization to provide quality
goods and services, the effectiveness of their delivery, and overall customer service and
satisfaction. Needs and desires of customers have to be attended properly because
customer pay for the organization‘s cost and provided for its profits. This perspective
typically includes several core or genetic measures that relate to customer loyalty and
the result of the strategy in the targeted segment. They include market share, customer
retention, new customer acquisition, customer satisfaction and customer profitability.
(C) Internal Business Processes: This perspective focuses on the internal business results that
lead to financial success and satisfied customer. To meet organizational objectives and
customers‘ expectations, organizations must identify the key business processes at which
they must excel. Key processes are monitored to ensure that outcomes will be
satisfactory. The principal internal business processes include the following:
(1) Innovation processes for exploring the needs of the customers.
(2) Operation processes with a view to providing efficient, consistent and timely delivery
of product/ service.
(3) Post service sales processes.
(D) Learning and Growth: This perspective looks at the ability of employees, the quality of
information systems, and the effects of organizational alignment in supporting
accomplishment of organizational goals. Processes will only succeed if adequately skilled
and motivated employees, supplied with accurate and timely information, are driving
them. In order to meet changing requirements and customer expectations, employees
may be asked to take on dramatically new responsibilities, and may require skills,
capabilities, technologies, and organizational designs that were not available before.
The learning and growth perspective identifies the infrastructure that the business must
build to create long-term growth and improvement. There will be focus on factors like
employee capability, employee productivity, employee satisfaction, employee
retention.
6.(a) What are the difficulties in implementation of benchmarking?

(b) List the objectives of MIS (Management Information System) in different levels of
management.
Answer:
(a) Difficulties in implementation of benchmarking:
1. Time consuming: Benchmarking is time consuming and at times difficult. It has significant
requirement of staff time and Company resources. Companies may waste time in
benchmarking non-critical functions.
2. Lack of management Support: Benchmarking implementation requires the direct
involvement of all managers. The drive to be best in the industry or world cannot be
delegated.
3. Resistance from employees: It is likely that their maybe resistance from employees.
4. Paper Goals: Companies can become pre-occupied with the measures. The goal
becomes not to improve process, but to match the best practices at any cost.
5. Copy-paste attitude: The key element in benchmarking is the adaptation of a best
practice to tailor it to a company‘s needs and culture. Without that step, a company
merely adopts another company‘s process. This approach condemns benchmarking to
fail leading to a failure of bench marking goals.
(b) Objectives of MIS (Management Information System):
• To provide the managers at all levels with timely and accurate information for control of
business activities
• To highlight the critical factors in the operation of the business for appropriate decision
making
• To develop a systematic and regular process of communication within the organization
on performance in different functional areas
• To use the tools and techniques available under the system for programmed decision
making
• To provide best services to customers
• To gain competitive advantage
• To provide information support for business planning for future.
7.(a) State the objectives and benefits of Materials Requirement Planning or MRP I.
(b) Write short note on:
(i) MOLAP
(ii) ROLAP.
Answer:
(a) Objectives of Materials Requirement Planning or MRP I: The basic objectives of Materials
Requirement Planning are as follows:
1. It determines the quality and timing of finished goods demanded.
2. It determines time phased requirements of the demand for materials, components and
sub-assemblies over a specified planning time horizon.
3. It computes the inventories, work-in-progress batch sizes and manufacturing and
packing lead times.
4. It controls inventory by ordering components and materials in relation to orders received
rather than ordering them from stock level point of view.
Benefits of Materials Requirement Planning or MRP I: The benefits of a successful Materials

Requirement Planning system include:
 Significantly decreased inventory levels and corresponding decreases in inventory
carrying costs.
 Fewer stock shortage, which cause production interruptions and time-consuming
schedule juggling by managers.
 Increased effectiveness of production supervisors and less production chaos.
 Better customer service - an increased ability to meet delivery schedules and to set
delivery dates earlier and more reliably.
 Greater responsiveness to change. MRP gives manufacturing a better feel for the effects
of economic swings and changes in woodcut demand can be translated into schedule
changes quickly.
 Closer coordination of the marketing, engineering, and finance activities with the
manufacturing activities.
(b) MOLAP (Multidimensional On-Line Analytical Processing):

MOLAP is a ―multi-dimensional online analytical processing‖.‘MOLAP‘ is the ‗classic‘ form of
OLAP and is sometimes referred to as just OLAP. MOLAP stores this data in an optimized multi-
dimensional array storage, rather than in a relational database. Therefore it requires the pre-
computation and storage of information in the cube - the operation known as processing.
MOLAP tools generally utilize a pre- calculated data set referred to as a data cube. The
data cube contains all the possible answers to a given range of questions. MOLAP tools
have a very fast response time and the ability to quickly write back data into the data set.
ROLAP (Relational On-Line Analytical Processing): ROLAP works directly with relational
databases. The base data and the dimension tables are stored as relational tables and new
tables are created to hold the aggregated information. Depends on a specialized schema
design, this methodology relies on manipulating the data stored in the relational database
to give the appearance of traditional OLAP‘s slicing and dicing functionality. In essence,
each action of slicing and dicing is equivalent to adding a ―WHERE‖ clause in the SQL
statement. ROLAP tools do not use pre-calculated data cubes but instead pose the query to
the standard relational database and its tables in order to bring back the data required to
answer the question. ROLAP tools feature the ability to ask any question because the
methodology does not limit to the contents of a cube. ROLAP also has the ability to drill
down to the lowest level of detail in the database.
8.(a) ―Benefits from ERP is of two kinds, tangible and intangible.‖ — Discuss all these benefits of
ERP (Enterprise Resource Planning).
(b) What are the reasons for failure of ERP system in an organisation?
Answer:
(a) Benefits from ERP are of two kinds, tangible and intangible. Tangible benefits are those
benefits which can be quantified in monetary terms and intangible benefits cannot be
quantified in monetary terms but they do have a very positive and significant business
impact.
Tangible Benefits:
1. Lowering the cost of products and services purchased
2. Significant paper and postage cost reductions
3. Improve the productivity of process and personnel
4. Inventory reduction
5. Lead time reduction
6. Reduced stock obsolescence
7. Faster product/service lookup and ordering saving time and money
8. Automated ordering and payment, lowering payment processing and paper costs
Intangible Benefits:
1. Can reach more vendors, producing more competitive bids
2. Accurate and faster access to data for timely decisions
3. Saves enormous time and effort in data entry
4. More controls thereby lowering the risk of misutilization of resources
5. Facilitates strategic planning
6. Uniform reporting according to global standards

7. Improved customer response
8. Increases organizational transparency and responsibility.
(b) An organization cannot reap desired benefits from ERP system under the following
circumstances:
- Lack of effective project management
- Inability to resolve issues and make decisions in timely manner
- Resources not available when needed
- Perceived or real lack of executive support
- Software fails to meet business needs
- Under estimated levels of Change Management
- Improper communication
- Insufficient end user training
- Failure in gap analysis
- Failure to identify future business needs
- Technological obsolescence
- Failure to make available user-friendly checklist/guidelines.
9.(a) Write down the benefits arising out of Total Productivity Management (TPM).
(b) What do you mean by Total Quality Management (TQM)? State the three core concepts of it.
Answer:
(a) With the adoption of TPM at the enterprise level, your organisation would benefit from the
following aspect:
• A set of new management goals will be developed by the Management, using the skills
and training provided during the implementation of the TPM
• Team bonding and better accountability
• Improved quality and total cost competitiveness
• Productivity and quality team training for problem solving
• Earlier detection of factors critical to maintaining equipment ―uptime‖
• Measure impact of defects, sub-optimal performance, and downtime using OEE (Overall
Equipment Effectiveness)
• Motivated people function better all the time.
(b) Total Quality Management (TQM) is an active approach encompassing a company-wide

operating philosophy and system for continuous improvement of quality. It demands
cooperation from everyone in the company, from the top management down to workers.
The principles of TQM are as follows:

i) Customer Focus
ii) Managerial Leadership

iii) Belief in continuous improvement.
The current thinking of TQM is moving from Quality of product and service to Quality of
people to embrace also Quality of environment.
TQM seeks to increase customer satisfaction by finding the factors that limit current
performance. The TQM approach highlights the need for a customer-oriented approach to
management reporting, eliminating some or more of traditional reporting practices.
The emphasis of TQM is to design and build quality in the product, rather than allow
defectives and then inspect and rectify them. The focus is on the causes rather than the
symptoms of poor quality.
The three core concepts of TQM are -

A) Quality Control (QC): It is concerned with the past and deals with data obtained from
previous production, which allow action to be taken to stop the production of defective
units.
B) Quality Assurance (QA): It deals with the present and focuses to create and operate
appropriate systems to prevent defects from occurring.
C) Quality Management (QM): It concerned with the future and manages people in a
process of continuous improvement to the products and services offered by the firm.
10.(a) What is cross elasticity of demand?

(b) Write down the factors involved in Demand Forecasting.
(c) ―Market for a commodity may be local, regional, national or international.‖ — State the
elements of markets.
Answer:
(a) Cross elasticity of demand: The rate of change in the demand for one commodity due to
the change in the price of its substitutes and complementary goods is called cross elasticity
of demand.
Percentage change in the Demand for commodity X

Cross Elasticity of Demand =
Percentage cha nge in the Price of Y
If the percentage change in the demand for commodity X is more than the percentage
change in the price of Y, then the cross elasticity of demand is greater than one (E d>1). If the
percentage change in the demand for commodity X is less then percentage change in the
price of commodity Y, then the cross elasticity of demand is less than one (E d<1). If the
percentage change in the demand for commodity X is equal to percentage change in the
price of commodity Y, then the cross elasticity of demand is equal to one (Ed=1).
(b) Factors involved in Demand Forecasting:
1. Time factor: Forecasting may be done for short-term or long-term. Short-term forecasting
is generally taken for one year while long-term forecasting covering a period of more
than 1 year.
2. Level factor: Demand forecasting may be undertaken at three different levels.

a. Macro level: It is concerned with business conditions over the whole economy.
b. Industry level: Prepared by different industries.
c. Firm-level: Firm-level forecasting is the most important from managerial view point.
3. General or specific purpose factor: The firm may find either general or specific
forecasting or both useful according to its requirement.
4. Product: Forecasting varies type of product i.e., new product or existing product or well
established product.
5. Nature of the product: Goods can be classified into:

(i) consumer goods and (ii) producer goods.
Demand for a product will be mainly dependent on nature of the product. Forecasting
methods for producer goods and consumer goods will be different accordingly.
6. Competition: While making forecasting, market situation and the product position in
particular market should be analyzed.
7. Consumer Behaviour: What people think about the future, their own personal prospects
and about products and brands are vital factors for firm and industry.
(c) Elements of Markets:

1. Sellers and buyer agree to transact at a particular price of a product.
2. Nature of the commodity is known to both parties
3. Price of the product is determined under conditions of the market
4. Competition is depend on the increase in the buyers and seller
5. If there is increase in number buyers, price will increase and it is treated as Seller‘s
market
6. If there is increase in number sellers, price will decrease, it is treated as buyer‘s market
7. Free communication between the buyers and sellers.
8. Size of the market is not restricted; it may certain city, a region a country or even the
entire world.
9. Product is homogenous in case of perfect competition, and the product may be
differentiated in case of other markets.
11.(a) List out the features of perfect competition market and monopoly market.
(b) How price is determined in an oligopoly market?
Answer:
(a) Features of perfect competition market:
1. There must be large number of Buyers and sellers.
2. In perfect competition, the goods produced by different firms are homogenious or
identical.
3. In perfect competition there is free entry and exit of the firms into the industry.
4. The buyers and the sellers must have the knowledge with regard to the prices of various
commodities at different supply and demand forces.
5. The factors must be mobilized from those places where they are getting less
remuneration to those places where they will get maximum remuneration.
6. All commodities are identical in perfect competition. So the prices of the commodities
are also uniform.
7. In order to maintain the uniform price level in perfect competition we should not
include the transport cost in the price level.
8. There is a difference between firm and industry under perfect competition. Firm is a
production unit and where as industry is a group of firms.
Features of monopoly market:

1. Single producer: Under monopoly there is only one producer or seller. He controls the
entire supply of the commodities. Monopoly may be an individual or a partnership or a
joint stock company or a state. There is no competition in monopoly market.
2. No close substitutes: there are ―no close substitutes‖ in monopoly market. There are no
other firms produce the similar and nearer commodities for the product of monopoly.
3. No difference between Firm and Industry: Under Monopoly market there is ―no
difference between firm and industry‖. There is only one firm and other firms should not
produce the similar products which are produced by the monopoly firm. Therefore the
firm and industry both are same under monopoly market.
4. No free entry: The monopoly firm can get abnormal profits in the short run as well as in
the long run because of strong restrictions on the entry of new firms. If the new firms
have freedom to enter the market then the abnormal profits will disappear but in
monopoly there is no free entry and therefore the Monopoly firm may get abnormal
profits in long run also.
5. Monopolist controls only price (or) output: Under monopoly the producer has
controlling power on only price or output. He has no controlling power on both price
and output simultaneously.
6. Revenue curve falls down from left to right: In monopoly market the revenue curves are
falling down from left to right. If the monopolist wants to sell more he must reduce the
price level and if he wants to fix more prices he must reduce the output.
(b) Price can be determined in three ways under oligopoly:

1. Independent pricing: If there is a product differentiation under oligopoly each firm can
act as a monopoly and fixes the price independently. Therefore the firm may
determine its price in that way where it gets maximum profits. If there is no product
differentiation, it is difficult to know the price determination in accurate manner the
firm may compete each other and finally they may fix the common reasonable price
which cannot be changed. But this policy independent pricing cannot with stand in
the market.
2. Pricing Under collusion: Most of the firms have the opinion that independent price
determination leads to uncertainly. To avoid this defect there is a tendency among the
oligopoly firm to act collectively by collusion. In this method these firms may make
‗cartle‘ arrangement. The centralized cartle determines the output produce by
different firms and the price is also determined which is the most acceptable by all
firms. The firms may agree to share the market even though they are producing
homogeneous products.
3. Price leadership: If the other firms follow the price which is determined by one firm in
oligopoly then we can say that there is a dominant firm or the firm with low costs or well
established old firm may take this leadership and fixes the price.
12.(a) The total revenue from sale of ‗x‘ units is given by the equation R = 100x – 2x², calculate
the point price elasticity of demand, when marginal revenue is 20.
(b) The total cost (C) and the total revenue (R) of a firm are given C (x) = x3 + 60x² + 8x; R(x) =
3x3 - 3x² + 656x, x being output determine, the output for which the firm gets maximum
profit. Also obtain the maximum profit.
Answer:
(a)
R = 100x - 2x 2
Price (P) = 100 - 2x
dR
MR = = 100 - 4x
dx
p 100
= -2
x x
dp dx 1
=-2 = =
dx dp 2
1  100 
Ep = × - 2
2  x 
50
= -1
x
50
= -1
20
5
= -1
2
5-2 3
= =
2 2
MR = 20, x is .....
100 - 4x = 20
4x = 80
x = 20
(b)
C = x 3 + 60x 2 + 8x
R = 3x 3 - 3x 2 + 656x
Profit = 3x 3 - 3x 2 + 656x - x 3 - 60x 2 - 8x
= 2x 3 - 63x 2 + 648x = (p)
Derivative w.r.to x
dp
= 6x 2 -126x + 648 = 0
dx
x 2 - 21x +108 = 0
x 2 - 9x -12x +108 = 0
x(x - 9)-12(x - 9) = 0
(x -12)(x - 9) = 0
x = 12 or 9
d2p
= 2x - 21
dx 2
at x = 9
d2p
= 18 - 21= -3 < 0
dx 2
 P is maximum at x = 9
at x = 12
d2p
= 24 - 21= 3 > 0
dx 2
 P is minimum at x = 12
P = 2x 3 - 63x 2 + 648x
at x = 9
Profit P = 2(9)3 - 63(9)2 + 648(9)
= 1458 - 5103 + 5832 = 2187
13.(a) What is risk mapping? State the benefits of it.

(b) State the needs for implementation of Enterprise Risk Management (ERM).
Answer:
(a) Risk mapping: Risk mapping is the first step in operational risk measurement, since it requires
identifying all potential risks to which the bank is exposed and then pointing out those on
which attention and monitoring should be focused given their current or potential future
relevance for the bank. while the risk mapping process is sometimes identified with the usual
classification of operational risks in a simple frequency/ severity matrix, what is really needed
to map banks‘ internal processes in order to understand what could go wrong, where, and
why, to set the basis for assessing potential frequency and the severity of potential
operational events, and to define a set of indicators that can anticipate problems based on
the evolution of the external and internal environments. Careful risk mapping is an important
as a first step for operational risk measurement as it is for the audit process, when potential
pitfalls have to be identified in advance and properly eliminated or at least monitored. risk
mapping should start from process mapping and from identifying critical risks in each process
phase, linked either to key people, to systems, to interdependencies with external players, or
to any other resource involved in the process. Subsequently, potential effects of errors,
failures or improper behavior should be analyzed. This may also lead to identifying priorities in
terms of control actions.
Risk mapping is the process of identifying, quantifying and prioritizing the risks that may
interfere with the achievement of your organizational objectives. Its aim is to arrive at a clear
set of action plans that improve risk management controls, in areas where these are
necessary and help the management of the organization‘s direct resources.
Benefits of Risk Mapping:

• Promotes awareness of significant risks through priority ranking, facilitating the efficient
planning of resources.
• Enables the delivery of solutions and services across the entire risk management value
chain.
• Serves as a powerful aid to strategic business planning.
• Aids the development of an action plan for the effective management of significant
risks.
• Assigns clear responsibilities to individuals for the management of particular risk areas.
• Provides an opportunity to leverage risk management as a competitive advantage.
• Facilitates the development of a strategic approach to insurance programme design.
• Supports the design of the client‘s risk financing and insurance programmes, through the
development of effective/optimal retention levels and scope of coverage etc.
(b) Need for Implementation of ERM:

ERM needs to be implemented for the following reasons:
1. Reduce unacceptable performance variability.
2. Align and integrate varying views of risk management.
3. Build confidence of investment community and stakeholders.
4. Enhance corporate governance.
5. Successfully respond to a changing business environment.
6. Align strategy and corporate culture.
Traditional risk management approaches are focused on protecting the tangible assets
reported on a company‘s Balance Sheet and the related contractual rights and obligations.
The emphasis of ERM, however, is on enhancing business strategy. The scope and
application of ERM is much broader than protecting physical and financial assets. With an
ERM approach, the scope of risk management is enterprise-wide and the application of risk
management is targeted to enhancing as well as protecting the unique combination of
tangible and intangible assets comprising the organization‘s business model.
14.(a) There are various causes for corporate distress. Write down those causes to analyse
corporate distress.
(b) Write a short note on risk pooling in the context of risk management.
Answer:
(a) Causes for Corporate Distress Analysis:
1. Technological Causes:
Traditional methods of doing work have been turned upside down by the development
of new technology. If within an industry, there is failure to exploit information technology
and new production technology, the firms can face serious problems and ultimately fail.
By using new technology, cost of production can be reduced and if an organization
continues to use the old technology and its competitors start using the new technology;
this can be detrimental to that organization. Due to high cost of production, it will have
to sell its products at higher prices than its competitors and this will consequently reduced
its sales and the organization can serious problems.
2. Working Capital Problems:

Organizations also face liquidity problems when they are in financial distress. Poor
liquidity becomes apparent through the changes in the working capital of the
organization as they have insufficient funds to manage their daily expenses.
Businesses, which rely only on one large customer or a few major customers, can face
severe problems and this can be detrimental to the businesses. Losing such a customer
can cause big problems and have negative impact on the cash flows of the businesses.
Besides, if such a customer becomes bankrupt, the situation can even become worst, as
the firms will not be able to recover these debts.
3. Economic Distress:
A turndown in an economy can lead to corporate failures across a number of businesses.
The level of activity will be reduced, thus affecting negatively the performance of firms in
several industries. This cannot be avoided by businesses.
4. Mismanagement:
Inadequate internal management control or lack of managerial skills and experience is
the cause of the majority of company failures. Some managers may lack strategic
capability that is to recognize strengths, weaknesses, opportunities and threats of a given
business environment. These managers tend to take poor decisions, which may have
bad consequences afterwards.
Furthermore, managers of different department may not have the ability to work closely
together. There are dispersed department objectives, each department will work for their
own benefits not towards the goal of the company. This will bring failure in the company.
5. Over-expansion and Diversification:

Research has shown that dominant CEO is driven by the ultimate need to succeed for
their own personal benefits. They neglect the objective set for the company and work for
their self-interest. They want to achieve rapid growth of the company to increase their
status and pay level. They may do so by acquisition and expansion.
The situation of over expansion may arise to the point that little focus is given to the core
business and this can be harmful as the business may become fragment and unfocused.
In addition, the companies may not understand the new business field.
6. Fraud by Management:
Management fraud is another factor responsible for corporate collapse. Ambitious

managers may be influenced by personal greed. They manipulate financial statements
and accounting reports. Managers are only interested in their pay checks and would
make large increase in executive pay despite the fact that the company is facing poor
financial situation. Dishonest managers will attempt to tamper and falsify business records
in order to fool shareholders about the true financial situation of the company. These
fraudulent acts or misconduct could indicate a serious lack of control. These frauds can
lead to serious consequences: loss of revenue, damage to credibility of the company,
increased in operating expenses and decrease in operational efficiency.
7. Poorly Structured board:

Board of Directors is handpicked by CEO to be docile and they are encouraged by
executive pay and generous benefits. These directors often lack the necessary
competence and may not control business matters properly. These directors are often
intimated by dominant CEO and do not have any say in decision making.
8. Financial Distress:
Firms that become financially distressed are found to be under- performing relative to the
other companies in their industry. Corporate failure is a process rooted in the
management defects, resulting in poor decisions, leading to financial deterioration and
finally corporate collapse. Financial distresses include the following reasons also low and
declining profitability, investment Appraisal, Research and Development and technical
insolvency amongst others.
(b) Risk Pooling: One of the forms of risk management mostly practiced by insurance companies
is Risk Pool. Under this system, insurance companies come together to form a pool, which
can provide protection to insurance companies against catastrophic risks such as floods,
earthquakes etc. The term is also used to describe the pooling of similar risks that underlies
the concept of insurance. While risk pooling is necessary for insurance to work, not all risks
can be effectively pooled. In particular, it is difficult to pool dissimilar risks in a voluntary
insurance market, unless there is a subsidy available to encourage participation.
Risk pooling is an important concept in supply chain management. Risk pooling suggests that
demand variability is reduced if one aggregates demand across locations because as
demand is aggregated across different locations, it becomes more likely that high demand
from one customer will be offset by low demand from another. This reduction in variability
allows a decrease in safety stock and therefore reduces average inventory.
The three critical points to risk pooling are:

(1) Centralized inventory saves safety stock and average inventory in the system.
(2) When demands from markets are negatively correlated, the higher the coefficient of
variation, the greater the benefit obtained from centralized systems i.e., the greater the
benefit from risk pooling.
(3) The benefits from risk pooling depend directly on the relative market behaviour. If we
compare two markets and when demand from both markets is more or less than the
average demand, we say that the demands from the market are positively correlated.
Thus the benefits derived from risk pooling decreases as the correlation between
demands from the two markets becomes more positive.
The basis for the concept of risk pooling is to share or reduce risks that no single member
could absorb on their own. Hence, risk pooling reduces a person or fim‘s exposure to
financial loss by spreading the risk among many members or companies. Actuarial concepts
used in risk pooling include:
1. Statistical variation.
2. The law of averages.
3. The law of large numbers.
4. The laws of probability.
15.(a) Using Altman‘s Multiple Discriminant Function, calculate Z-score of S & Co. Ltd., where the
five accounting ratios are as follows and comment about its financial position:
Working Capital to Total Assets=0.250
Retained Earnings to Total Assets = 50%
EBIT to Total Assets = 19%
Book Value of Equity to Book Value of Total Debt= 1.65
Sales to Total Assets = 3 times
(b) Balance Sheet (extract) of Q Ltd. as on 31 March 2017.

Liabilities ` in Crores Assets ` in Crores
Equity Shares 20.80 Fixed Assets 105.60
Long-term Liabilities Current 104.00 Current Assets 57.60
Liabilities 78.40 Profit & Loss A/c 40.00
203.20 203.20
Additional Information:
(i) Depreciation written off ` 8 crores.
(ii) Preliminary Expenses written off ` 1.60 crores.
(iii) Net Loss ` 25.60 crores.
Ascertain the stage of sickness.
Answer:
(a) As the Book Value of Equity to Book Value of Total Debt is given in the problem in place of
Market Value of Equity to Book Value of Total Debt, the value of Z-score is to be computed
as per Altman‘s 1983 Model of Corporate Distress Prediction instead of Altman‘s 1968 Model
of Corporate Distress Prediction.
As per Altman‘s Model (1983) of Corporate Distress Prediction,
Z=0.717X1 + 0.847X2 + 3.107X3 + 0.420X4 + 0.998X5
Here, the five variables are as follows:
X1 = Working Capital to Total Assets = 0.250
X2 = Retained Earnings to Total Assets = 0.50
X3 = EBIT to Total Assets = 0.19
X4 = Book Value of Equity Shares to Book Value of Total Debt = 1.65
X5 = Sales to Total Assets = 3 times
Hence, Z-score = (0.717 x 0.25) + (0.847 x 0.50) + (3.107 x 0.19) + (0.420 x 1.65) + (0.998 x 3)
= 0.17925 + 0.4235 + 0.59033 + 0.693 + 2.994 = 4.88
Note: As the calculated value of Z-score is much higher than 2.9, it can be strongly predicted
that the company is a non-bankrupt company (i.e., non-failed company).
(b) The NCAER Study on Corporate Distress Prediction prescribed the following three parameters
for predicting the stage of Corporate Sickness:
(i) Cash profit position (a profitability measure)
(ii) Net working capital position (a liquidity measure)
(iii) Net worth position (a solvency measure)
In the given case, we need to judge the above-mentioned parameters to ascertain the
stage of sickness of the company.
(i) Cash profit = Net profit + (Non-cash expenses/losses debited to Profit & Loss A/c) –
(Non-cash incomes/Gains credited to Profit & Loss A/c)
Here, Cash Profit = Net Profit + Depreciation Written Off + Preliminary Expenses Written
Off
= ` [(25.60) + 8+ 1.60] = (` 16 crores)
(ii) Net Working Capital = Current Assets – Current Liabilities
= ` [57.60 - 78.40] = (` 20.80 crores)
(iii) Net Worth = Share Capital + Reserves & Surplus - Miscellaneous Expenditure - Profit &
Loss A/c (Dr.)
Here, Net Worth = Equity Share Capital - Profit & Loss A/c (Dr.)
= ` [20.80 - 40.00] = (` 19.20 crores)
Prediction about Corporate Sickness: As per NCAER Research Study, out of mentioned three
parameters, if any one parameter becomes negative in case of a firm, it can be predicted
that the firm has a tendency towards sickness. In the given company, all the three
parameters [as calculated under (i), (ii) and (iii)] show negative value. Therefore, it can
strongly be predicted that the company is a sick company and its stage of sickness is ‗fully
sick‘. Immediate necessary drastic revival measures are essentially required for the survival of
the company.
Section B: Business Valuation
16. Multiple choice questions with justification wherever necessary:

(i) The annual coupon bond with duration of 9 years, coupon of 14% and YTM of 15% will
have a modified duration of
(A) 6.9 years
(B) 8.18 years
(C) 7.83 years
(D) 9.78 years
(ii) A major advantage of Price/Sales ratio is that

(A) It can be used to value firms with negative earnings.
(B) It can be used to value firms with negative net worth.
(C) Both (A) and (B) above.
(D) It can be used effectively in cyclical industries.
(iii) Under _________ method, increasing shareholders wealth is given maximum

importance.
(A) Economic Value Added
(B) Constant growth FCFE model
(C) Dynamic true growth model
(D) Variable growth FCFE model
(iv) A company with PAT of `40 lacs, tax rate 50%, RONW of 100%, Reserves of `30 lac and
a par value of `5 will have pre-tax EPS of
(A) `4.00
(B) `80.00
(C) `40.00
(D) Insufficient information
(v) P/E rises when:

(A) Growth rises, discount rate falls, reinvestment rate is flat.
(B) Growth falls, discount rate falls, reinvestment rate rises.
(C) Growth exceeds, discount rate and reinvestment rate falls short of growth.
(D) Discount rate falls and reinvestment rate rises.
(vi) An investment is risk free when actual returns are always ………………..the expected
returns.
(A) equal to
(B) less than
(C) more than
(D) depends upon circumstances
(vii) In valuing a firm, the…………………….tax rate should be applied to earnings of every

period.
(A) marginal
(B) effective
(C) average
(D) maximum
(viii) In the context of an acquisition of a firm, which one of the following concepts of value
is least relevant?
(A) Market Value
(B) Opportunity Cost
(C) Synergy Value
(D) Value Gap
(ix) Shareholders of target companies are typically paid in

(A) Government bonds held by the target company
(B) Government bonds held by the acquiring company
(C) Cash and / or shares of the acquiring company
(D) None of the above
(x) Assume that in a Stock Market, the CAPM is working. A company has presently beta of
0.84 and its going to finance its new project through debt. This would increase its Debt /
Equity Ratio to 1.56 from the existing 1.26. Due to increased Debt / Equity Ratio, the
Company‘s beta would:
(A) Increase
(B) Decrease
(C) Remain unchanged
(D) Nothing can be concluded.
Answer:
(i) (C) 7.83 years
Modified duration = {9 / (1 + 0.15)}
(ii) (C) Both (A) and (B) above.
Price/Sales ratio is the multiplication of P/E ratio to profit margin. It can be used to
value firms with negative earnings and negative net worth
(iii) (A) Economic Value Added.
The theory of Economic Valued Added has traditionally suggested that every
company‘s primary goal is to maximize the wealth of shareholders
(iv) (C) `40.00.
PBT = 80 lac, i.e. 40/5, RONW = PAT/NW = 40/NW = 100%, So NW = 40lac, Value of
equity shares = 40-30 = 10 lac, No. of Shares = 10/5 = 2 lac, so Pre tax EPS = 80/2 =
40Lac
(v) (D) Discount rate falls and reinvestment rate rises.
The P/E ratio (price-to-earnings ratio) of a stock also called its ―P/E‖, or simply
―multiple‖ is a measure of the price paid for a share relative to the annual
Earnings per share. Price of stock will rise if discount rate falls and reinvestment
rate increases which in turn will increase the P/E ratio.
(vi) (A) equal to.
(vii) (A) marginal.
(viii) (B) Opportunity Cost
(ix) (C) Cash and / or shares of the acquiring company
(x) (C) Remain unchanged, because as per CAPM the company specific risk has no
impact on the systematic risk.
17.(a) What are the misconceptions about valuation?

(b) How do you relate coupon rate, required yield and price?
Answer:
(a) There are a number of misconceptions about valuation.
(1) A valuation is an objective search for true value.
(2) Since valuation models are quantitative, valuation is better.
(3) A well researched and well done valuation is timeless
(4) A Good valuation provides a precise estimate of value.
(5) To make money on valuation, you have to assume that markets are inefficient.
(6) The product of valuation (i.e., value) matters and not the valuation.
(7) How much a business is worth depends on what the valuation is used for.
(b) As the expected yield changes in the market place, prices of bonds change to reflect the
new required yield. When the required yield on a bond rises above its coupon rate, the bond
sells at Discount. When the required yield on a bond falls below its coupon rate, the bond
sells at a premium. We can summarize the relationship between coupon rate, required yield
and prices as follows:
Coupon rate < Required yield = Price < par value (Discount bond)
Coupon rate = Required yield = Price = Par value (At par bond)
Coupon rate > required yield = Price > par value (Premium bond)
18.(a) Distinguish between price and value.

(b) What do you mean by LIFO Reserve?
Answer:
(a) The price may be understood as ‗the amount of money or other consideration asked for or
given in exchange for something else‘. The price is therefore, an outcome of a transaction
whereas the value may not necessarily require the arrival of a transaction. The value exists
even if some assets become unable to generate cash flows today but can generate in
future on the happening of some events.
―Experts are of the opinion that valuation must be differentiated from price. While the fair
value of an asset is based on the assessment of intrinsic value accruing from fundamentals
on a stand-alone basis, varying return expectation and underlying strategic aspects for
different bidders could influence the price. A purchase and sale would be possible only
when two parties while forming different views as to the value of an asset, are eventually
able to reach agreement on the same price. It would be better appreciated by recognition
of the fact that Government can only realize what a buyer is willing to pay for the PSU, as the
purchase price ultimately agreed reflects its value to the buyer.
Another notable point is that valuation is a subjective figure arrived at by the bidder by
leveraging his strengths what the potential of the company. Depending on the level of
business synergy with the target company, perception of specific value realization and
varying assessment regarding productivity, capex, etc., this figure may vary from bidder to
bidder‖.
The oil reserve of an indentified basin owned by a hydrocarbon exploration company may
not have any value when the oil price is say `70 per barrel and the extraction cost of that oil
is `110. However, when the price reaches to `130 and is expected to prevail around this
figure, it may have significant value.
Another example reaffirms that price and value is not same. A lawyer is having some
question regarding a professional assignment having remuneration of `2,50,000. He browses
through some pages of a book at a bookshop and buys it for `40,000. He has an idea in his
mind that the book is essential for earning professional services fees of `2,50,000 and
expected contribution from the book would be around `80,000. At this stage the value /
Worth of that book is `80,000. However, after reading the book he feels that the book is not
useful for his assignment. If the same book cannot be returned to the shop, its disposal value
would be negligible.
(b) Companies that use LIFO for determining their balance sheet valuation of inventory
nevertheless keep their detailed inventory records on a FIFO or average cost basis. The
inventory amounts on these other bases usually will be higher than the LIFO valuation shown
on the balance sheet. At the end of each accounting period, the difference between the
LIFO valuation and the FIFO or average cost valuation is determined. This difference is
sometimes called the LIFO reserve. The terminology is unfortunate because ―reserve‖
suggests something set aside or saved for some special future purpose. The LIFO reserve is
nothing more than the mathematical difference between two inventory amounts, one
based on LIFO and the other one based on a different method of valuing inventory. LIFO
companies disclose their LIFO reserve in the notes for their financial statement.
19.(a) Discuss the steps involved in valuing a firm under Discounted Cash Flow Method.
(b) Why discounted cash flow method is not appropriate for valuation of real estate.
Answer:
(a) Steps in valuing firm under Discounted Cash Flow Method:
(I) Computation of Free Cash Flows for the forecast period. Free cash flow is the post tax
cash flow generate from operations of the company after providing for investments in
fixed capital and net working capital required for operations of the firm. Thus it is the
cash flow available for distribution to shareholders (by way of dividend and buyback of
shares) and lenders (by way of interest payment and debt repayment). Symbolically,
free cash flow = Net income (+) Depreciation (+ / -) Non Cash items (-) changes in
Working Capital (-) Capital expenditure (+) (New debt issues – repayment of debt) (-)
preference dividends.
(II) Determination of Discount Rate for estimating present value. In general, the cost of
capital is appropriate discount rate.
(III) Computation of Present Value of cash flows. The free cash flows are discounted using
appropriate discount rate
(IV) Estimation of Terminal Value, i.e., present value of cash flows occurring after the
forecast period.
(V) Value of firm = It is aggregate of the present value of free cash flows and the terminal
value.
(b) Discounted Cash Flow (DFC) Method of valuation is not appropriate for valuation of real
estate due to following reasons:
(1) Difficult to estimate discount rates for most real estate investments.
(2) Estimating cash flows for the time horizon is tedious and difficult to do, as is the
estimation of the terminal value.
(3) DCF does not reflect market conditions – that the market is strong or weak at the time
of valuation.
The third argument can be rejected at two levels. On one level, cash flows should reflect
the market conditions, since they will be higher (higher rents and lower vacancy rates) and
grow faster in strong market conditions. On the other hand, any additional value being
assigned by the market beyond the cash flow levels can be considered to be
‗overvaluation‘ and should not be built into the appraised value in the first place.
20.(a) What are different methods valuing self generated brands.

(b) ‗Jaggi & Lau suggested that a proper valuation of human resource is not possible unless
the contribution of individuals as a group is taken into consideration.‘ Comment.
(a) Important methods in valuation of self generated brands are discussed below:
(I) Historical cost method: Here Brand value is the sum total of Brand Development cost +
Brand Marketing and Distribution cost + Brand Promotion cost including advertising and
other cost.
(II) Replacement Price Model: It is the opportunity cost of investment made for replacement
of brand, Brand Value = Replacement Brand Cost.
(III) Market Price Model: Here Brand value is net realizable value on sale in the market.
(IV) Current Cost Model: According to this approach the current corporate brands are
valued at the current value to the group which is reviewed annually and not subject to
amortization.
(V) Potential Earning Model: The potential earning model is based on the estimated
potential earning that would be generated by a brand and their capitalization by using
appropriate discount rate. The volume of revenues raised by a brand in the market
determines its value.
Total market value of brand = Net brand revenue / capitalization rate

Net – Brand revenue = (Brand units x Unit brand price) – (Brand units x Unit brand cost) –
(Marketing cost + R & D cost + tax costs.
(b) Jaggi and Lau suggested a model for valuation of human resources. According to them,
proper valuation of human resources is not possible unless the contributions of individuals as
a group are taken into consideration. They referred group to homogeneous employees
whether working in the same department or division of the organization or not. They believed
that an individual‘s expected service tenure in an organization is difficult to predict, but on a
group basis, it is relatively easy to estimate the percentage of people in a group likely to
leave the organization in future. Accordingly, they developed a model which attempts to
calculate the present value of all existing employees in each rant. Such present value is
measured with the help of the following steps:
(I) Ascertain the number of employees in each rank.
(II) Estimate the probability that an employee will be in his rank within the organization or
terminated / promoted in the next period. This probability will be estimated for the
specified time-period.
(III) Ascertain the economic value of an employee in a specified rank during each time
period.
(IV) The present value of existing employees in each rank is obtained by multiplying the
above three factors and applying an appropriate discount rate.
Merit:
Jaggi and Lau model approached the valuation of human resources on the basis of
grouping of employees. Under this method, calculations get simplified and the chances of
errors get reduced.
Demerit:
This model ignores individual skills of the employees. The varied skills of the employees are not
recognized in the valuation process under Jaggi and Lau model.
The performance of a group may be seriously affected in the event of exit of a single
individual.
21.(a) A PSU is proposing to sell a 8 years bond of `1,000 at 10% coupon rate per annum. The
bond amount will be amortized equally over its life. If an investor has a minimum required
rate of return of 8%, what the bond‘s present value? If this bond sells at `1100, should an
investor buy this bond?
(b) Consider a bond selling at its par value of `1,000, with 6 years to maturity and a 7%
coupon rate (with annual interest payment), what is bond‘s duration? If the YTM of this
bond increases to 10%, how it affects the bond‘s duration? And why? Why should the
duration of a coupon carrying bond always be less than the time to its maturity?
Answer:
(a) Discount rate is given as 8%
Year Cash Flow Principal Cash Outflow PV factor 8% PV of Cash
Amortized Flows
1 100.00 125 225.00 0.926 208.350
2 87.50 125 212.50 0.857 182.113
3 75.00 125 200.00 0.794 158.800
4 62.50 125 187.50 0.735 137.813
5 50.00 125 175.00 0.681 119.175
6 37.50 125 162.50 0.630 102.375
7 25.00 125 150.00 0.583 87.450
8 12.50 125 137.50 0.540 74.250
Total 450 1000 1450 1070.326
The Bond‘s present value is `1070.33. Since the market value of bond is higher than the
intrinsic value the investor should not buy this bond.
(b) We are given the price of the bond as `1000.

We also know that duration is given by:
n
tC nM
 (1 i) 1 
(1 i)n
D t1
P
Where
n = number of cash flows = 6
t = time to maturity = 6
C = Coupons - ` 70
i = required yield =7%
M = maturity (par) value = 1000
P = bond price = `1000
D = Required
1 70 2  70 3  70 4  70 5  70 6  70 6  100
     
1.07 (1.07)2 (1.07)3 (1.07)4 (1.07)5 (1.07)6 (1.07)6
D  5.098 years
1000
If the YTM increases to 10%, then the coupons would be re-invested at higher rates, thereby
decreasing the time required for getting the initial investment. Hence, duration, which is
nothing but, weighted discounted payback period, decreases. We can re-calculate to verify
the same:
1 70 2  70 3  70 4  70 5  70 6  70 6  1000
     
1.1 (1.1)2 (1.1)3 (1.1)4 (1.1)5 (1.1)6 (1.1)6
D  5.025 years
1000
1000 The term duration is a measurement of how long in years it takes for the price of a bond
to be repaid by its internal cash flows. In a zero coupon bond we do not receive any
intermediate cash flows and the entire money is available only on maturity, and hence
duration of a Zero-Coupon Bond is equal to maturity period. On the same lines since coupon
bonds, pays coupons (intermediate interest), we get our price much earlier to maturity
period. Moreover, we receive the re-investment income too. Therefore, duration of a
coupon bond will always be less than its maturity period.
22.(a) Shares of A ltd. is currently quoted at `40/-. Dividend expected offer 1 year is `8, which is
expected to grow by 8% p.a. Their standard deviation of the return from the security is 4%.
Co-relation Coefficient is 0.6 and the market standard deviation is 3%.
Determine expected return from Government securities is return from market portfolio is
22%
(b) X Ltd. earns `8 per share. Market role of return is 12% and risk free return is 8%. Beta of
shares is 1.50. Suggest whether an investor should buy the shares at current price of `40/-.
Answer:
𝑅𝑠.8
(a) Cost of Equity (dividend growth model) = + 0.08 = 0.28
𝑅𝑠.40
Security Beta = B1
Co-relation Co-efficient = P1m = 0.06
Standard deviation of security return = 61
Standard deviation of market return = 6m
6p 4
Bp = P1m x 0.6 x = 0.80
3
6m
Using CAPM model:
RI = Rf + 0.8 (0.22 – Rf) = Ke
0.28 = Rf + 0.8 (0.22 – Rf)
Rf = 0.10
Or 10%
(b) Desired rate of return = 8% + 1.5 (12% - 8%) = 14%

8
Actual rate of return = = 20%
40
8
Equilibrium price = = `57.14
0.14
Actual price = `40
Suggestion
The investor should buy the share at `40/-.
23.(a) The Balance Sheet of T Ltd. discloses the following financial position as at 31-3-2017
Liabilities Amount Assets Amount

Paid-up-Capital: Good will at Cost 30,000
30,000 shares of `10 each 3,00,000 Land and Building at 1,75,000
fully paid cost less Depreciation
Capital Reserve 60,000 Plant and Machinery 90,000
at cost less
Sundry Creditors 71,000 Depreciation Stock at 1,15,000
cost
Provision for Taxation 55,000 Book Debts 98,000
Profit and Loss A/c 26,000 Less: Provision Doubtful 30,000 95,000
debts
Cash at Bank 7,000
Total 5,12,000 Total 5,12,000
You are asked to compute the value per share of T Ltd. for which purpose the following
information is supplied:
(a) Adequate provision has been made in the accounts for income-tax and depreciation.
(b) Rate of income-tax may be taken at 50%
(c) The average rate of dividend declared by the company for the past five years was 15
per cent.
(d) The reasonable return on capital invested in such class of business done by the
company is 12 per cent.
(b) The following information is available of a concern; calculate E.V.A.:

Debt capital 12% `2,000 crores
Equity capital `500 crores
Reserve and Surplus `7,500 crores
Capital employed `10,000 crores
Risk-free rate 9%
Beta factor 1.05
Market rate of return 19%
Equity (market) risk premium 10%
Operating profit after tax `2,100 crores
Tax rate 30%
Answer:
(a) Intrinsic Value Method (No. of years of purchase Method)
Step 1: Actual Capital Employed
Assets side approach
Land and Building 1,75,000
Plant and Machinery 90,000
Stock 1,15,000
Book debts 95,000
Cash at bank 7,000
4,82,000
Less: Sundry Creditors 71,000
Provision for taxation 55,000
3,56,000
Liability side approach

Paid up Capital 3,00,000
Capital Reserve 60,000
Profit and Loss Account 26,000

Goodwill (30,000)
3,56,000
Step 2: Actual Profit /Future Maintainable Profit

Actual Profit after tax = 55,000
Step 3: Expected Profit

Expected Profit = Capital employed x Normal rate of return
= 3,56,000 x 12% = 42,720
Step 4: Super Profit

Future Maintainable Profit 55,000
Less: Expected Profit 42,720
Super Profit 12,280
Step 5: Goodwill
Goodwill = Super Profit x No. of Years‘ Purchase
No. of Years Purchase = 100 / Normal Rate of return
= 100 / 12 = 8.33
Goodwill = 12,280 x 8.33 = 1,02,292
Step 6: Value of Business (Equity)

Capital Employed 3,56,000
Add: Goodwill 1,02,292
Capital employed for shares 4,58,292
Step 7: Value per share

𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐵𝑢𝑠𝑖𝑛𝑒𝑠𝑠
Value per share = [ ]
𝑁𝑜 .𝑜𝑓 𝑆ℎ𝑎𝑟𝑒𝑠
= 4,58,292 / 30,000 = 15.28
Intrinsic Value Method (Yield method)

Step 1: Actual Capital employed
Actual Capital Employed = 3,56,000
(Step 1 in No. of years purchase method)
Step 2: Actual Profit/Future Maintainable Profit

Actual Profit after tax = 55,000
Step 3: Expected Capital employed

Expected capital employed = Actual Profit/Return on capital employed
= 55,000/12% = 4,58,333
Step 4: Goodwill
Goodwill = Expected Capital employed – Actual Capital Employed
= 4,58,333 – 3,56,000 = 1,02,333
Step 5: Value of Business (Equity)

Capital Employed 3,56,000
Add: Goodwill 1,02,333
Capital Employed for shares 4,58,333
Step 6: Value per Share

𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐵𝑢𝑠𝑖𝑛𝑒𝑠𝑠
Value per share = [ ] = 4,58,333/30,000 = 15.28
𝑁𝑜 .𝑜𝑓 𝑆ℎ𝑎𝑟𝑒𝑠
(b) E.V.A. = NOPAT – COCE

NOPAT = Net Operating Profit after Tax
COCE = Cost of Capital Employed
COCE = Weighted Average Cost of Capital x Average Capital Employed
= WACC x Capital Employed
Debt Capital `2,000 crores
Equity capital 500 + 7,500 = `8,000 crores
Capital employed = 2,000 + 8,000 = `10,000 crores
2,000
Debt to capital employed = =0.20
10,000
8,000
Equity to capital employed = =0.80
10,000
Debt cost before tax 12%
Less: Tax (30% of 12%) 3.6%
Debt cost after Tax 8.4%
According to capital Asset Pricing Model (CAPM)
Cost of Equity Capital = Risk Free Rate + Beta x Equity Risk Premium
Or
= 9 + 1.05 x ((19-9)
= 9 + 1.05 x 10 = 19.5%
WACC = Equity to CE  Cost of Equity capital +Debt to CE  Cost of Debt
= 0.8  19.5% + 0.20  8.40%
= 15.60% + 1.68% = 17.28%
COCE = WACC  Capital employed
= 17.28%  10,000 crores =1728 crores
E.V.A. = NOPAT – COCE
= `2,100 – `1,728 = `372 crores
24.(a) Calculate the Economic Value added from the following data:
(` crores)
Year : 2016
Average debts 50
Average equity 2766
Cost of debt. Post tax% 7.72
Weighted average cost of capital (%) 16.70
Profit after tax before exceptional items 16.54
Interest after taxes 5
(b) Discuss how effectively shareholder value analysis indicates the creation of economic
value for shareholders.
Answer:
(a) EVA Calculation:
1. Average debts 50
2. Average Equity 2766
3. Average capital (1 + 2) 2816
4. Cost of debt, post tax % 7.72
5. Cost of Equity % 16.70

6. Weighted Avg. cost of Capital % 16.54
7. COCF (3) x (6) 166
8. Profit after tax before exceptional items 1541
9. Add. Int. after taxes 5
10. Net operating profits after taxes 1546
11. COCE 466
12. EVA (10 – 11) 1080
(b) Shareholder value analysis focuses on the creation of economic value for shareholders, as
measured by the share price performance and the flow of dividends. Under shareholder
value analysis key decisions with implications for cash flow and risk are specified.
These will be decisions that impact upon value drivers, factors that have the greatest impact
on shareholder value, such as sales growth rate, profit margin, working capital investment
and the required rate of return under the model.
Corporate value: PV of free cash flows + Current value of marketable securities and other
non-operating investments.
And Share holder value = Corporate value – debt.
25.(a) Distinguish between equity value and enterprise value of a company.

(b) Explain the steps in Valuation of Brand.
Answer:
(a) While both equity value and enterprise value serve the purpose of putting a value on the
company, they are calculated differently and give a slightly different picture of the
company‘s price tag.
The equity value / market cap is defined simply as the total value of all outstanding stock for
the company. Since the ownership of a public company lies in its outstanding shares, the
theoretical price to buy the entire company would be the price of a single share of stock
multiplied by the number of shares currently outstanding.
The enterprise value jumps off the back of the equity value and calculates what the
company is worth net of the amount of cash and debt that the company has on its balance
sheet. This is important to look at since, if anyone were to actually buy an entire company,
they inherit both the cash and the debt of the company.
Valuation of Equity / Equity Value = Common Shares Outstanding × Share Price
Enterprise Value = Equity Value – Cash + Debt + Minority Interest + Preferred Stock
(b) Steps in Valuation of Brand:
(i) Market segmentation: Brands influence customer choice, but the influence varies
depending on the market in which brand operates. For valuation we need to split
brand‘s market into non-overlapping and homogeneous groups of consumers
according to applicable criteria such as product or service, distribution channels,

consumption patterns, purchase sophistication, geography existing and new customers
and so on. The brand is valued in each segment and the sum of the segments
constitutes the total value of the brand.
(ii) Financial analysis: Identify and forecast revenue and earnings from intangibles
generated by the brand for each of the distinct segments determined in step – 1.
Intangibles earnings are defined as brand revenue less operating costs, applicable
taxes and a charge for the capital employed. The concept is similar to the economic
profit.
(iii) Demand analysis: Assess the role that the brand plays in driving demand for products
and services in the markets in which it operated and determine what proportion of
intangible earning is attributable to the brand measured by an indicator referred to as
the ‗role of branding index‘. The role of branding index represents the percentage of
intangible earnings that are generated by the brand. Brand earnings are calculated by
multiplying the role of branding index by intangible earnings.
(iv) Competitive benchmarking: Determine the competitive strengths and weakness of the
brand to derive the specific brand discount rate that reflects the risk profile of its
expected future earnings. This comprises extensive competitive benchmarking and a
structured evaluation of the brand‘s market, stability, leadership position, growth trend,
support geographic footprint and legal protect ability.
(v) Brand value measurement: Brand value is the net present value (NPV) of the forecast
brand earnings, discounted by the brand discount rate. The NPV calculation comprises
both the forecast period and the period beyond, reflecting the ability of brands to
continue generating future earnings.
This computation is useful for brand value modeling in a wide range of situations, viz.,
 Predicting the effect of marketing and investment strategies;

 Calculating the return on brand investment;
 Calculating the return on brand investment;
 Focus it as an icon of quality and customer loyalty;
 Assessing opportunities in new or unexpected markets; and
 Tracking brand value management and its consequential effect on business value and
overall corporate image.
26. J Co. Ltd. is studying the possible acquisition of K Co. Ltd., by way of merger. The following
data are available in respect of the companies:
Particulars J Co. Ltd. K Co. Ltd.

Earnings after tax (`) 80,00,000 24,00,000
No. of equity shares 16,00,000 4,00,000
Market value per share (`) 200 160
(i) If the merger goes through by exchange of equity and the exchange ratio is based on
the current market price. What is the new earning per share for J co. Ltd?
(ii) K Co. Ltd. wants to be sure that the earnings available to its shareholders will not be
diminished by the merger. What should be the exchange ratio in that case?
Answer:
(i) Calculation of new EPS of J Co. Ltd.
No. of equity shares to be issued by J Co. Ltd. to K Co. Ltd.
= 4,00,000 shares  `1.6/`2.0 = 3,20,000 shares
Total No. of shares in J Co. Ltd. after acquisition of K Co. Ltd.
= 16,00,000 + 3,20,000 = 19,20,000
Total earnings after tax [after acquisition]
= 80,00,000 + 24,00,000 = 1,04,00,000
` 1,04,00,000
EPS = = `5.42
19,20,000 equity shares
(ii) Calculation of exchange ratio which would not diminish the EPS of K Co. Ltd. after its merger
with J Co. Ltd.
Current EPS:
`80,00,000
J Co. Ltd. = = `5
`24,00,000
K Co. Ltd. = = `6
Exchange ratio = 6/5 = 1.20
No. of new shares to be issued by J Co. Ltd. to K Co. Ltd.
= 4,00,000 1.20 = 4,80,000 shares
Total number of shares of J Co. Ltd. after acquisition
= 16,00,000 + 4,80,000 = 20,80,000 shares
`1,04,00,000
EPS [after merger] = = `5
20,80,000 shares
Total earnings in J Co. Ltd. available to new shareholders of K Co. Ltd.
= 4,80,000 `5 = `24,00,000
Recommendation: The exchange ratio (6 for 5) based on market shares is beneficial to

shareholders of ‗K‘ Co. Ltd.
27.(a) From the following data calculate the cost of merger :

(i) when the merger is financed by cash ii)when the merger is financed by stock
Particulars Firm A Firm B
Market price per share (`) 60 15
Number of shares 1,00,000 50,000
Market value of firm (`) 60,00,000 750000
Firm A intends to pay `10,00,000 cash for B if B‘s market price reflects only its value as a
separate entity.
(b) (i) Why do M & A take place?

(ii) Why do they fail?
Answer:
(a)
(i) Cost of merger when the merger is financed by cash:

Cost of merger = (Cash-MVB) + (MVB-PBB)
Where, MVB = Market value of share.
PBB = Intrinsic value of Firm B
= (10,00,000 – 750000) + (750000-750000)
= `250000 + 0
= `250000.
If cost of merger becomes negative, shareholders of firm A gain higher by acquiring firm
B in terms of its market value.
(ii) Cost of merger when the merger is financed by stock:
Cost of merger =  PVB- PVB
Where,  PVB = Value in firm A that firm B‘s shareholders get.
No. of shares equivalent to `10,00,000 = 10,00,000/60

= 16,667
Apparent cost of merger:
16667 shares @ `60 = `1000000
Less: Value of firm B = `750000
Apparent cost of merger = `250000
PVAB = PVA + PVB
= `(6000000 + 750000)
= `6750000.
Proportion that Firms B‘s shareholders get in Firm A‘s capital structure will be:
 = 16667 / (100000 + 16667)
= 16667 / 116667
= 0.143
True cost of merger = (6750000 x 0.143 – 750000)
= 965250 – 750000
= `215250
As apparent cost is more than true cost, merger is beneficial to Firm B.
(b)
(i) Mergers and Acquisitions take place to take advantage of the following:
A Synergy in operating economies - It is considered that total value from
combination is greater than the sum of values the component companies
independently. The reason is benefits derived from –
 Economies of scale through sharing of central services such as
procurement, accounting, financial control, resources management,
top level management and control.
 Economies of Vertical Integration by moving both forward (towards
the customer) and backward (towards supplies of raw materials and
inputs).
 Companies having complementary resources.
 Investible surplus funds leading to looking for investment opportunities
 Eliminating inefficiencies by making use of unexploited opportunities
to cut cost and improve revenues.
B Taxation advantages-Mergers take place to have benefits of tax laws and a
profit earning company may merge with loss making one that will shield the
income from taxation.
(ii) Mergers fail mainly due to the following reasons:

(A) Lack of integration synergies.
(B) Key employees leaving the merged organization.
(C) Lack of common goals.
(D) Corporate culture dashes.
(E) Paying too much premium.
(F) Poor level of communication both internally and externally.
(G) Lack of sufficient due diligence by the acquiring company.
28.(a) What do you mean by Takeover by Reverse Bid?

(b) The summarized Balance Sheet of K Ltd as on 31st March is given below –
Equity and Liabilities ` Assets ` `

Equity Share Capital (2,00,000 20,00,000 Fixed Assets 19,00,000
@ 10 each)
13% Preference Share Capital 1,00,000 Investments 1,00,000
Retained Earnings 4,00,000 Current Assets -
12% Debentures 3,00,000 Inventories 5,00,000
Current Liabilities 2,00,000 Debtors 4,00,000
Bank 10,00,000 1,00,000
30,00,000 30,00,000
Negotiations for takeover of K Ltd result in its acquisition by A Ltd. The Purchase
Consideration consists of –
A. `3,30,000 13% Debentures of A Ltd for redeeming the 12% Debentures of K Ltd.
B. 1,00,000 12% Convertible Preference Shares in A Ltd for the payment of the
Preference Share Capital of K Ltd
C. 1,50,000 Equity Shares of A Ltd to be issued as its Current Market Price of `15.
D. A Ltd would meet Dissolution Expenses of `30,000.
E. The break up figures of eventual disposition by A Ltd, of un-required Assets and

Liabilities or K Ltd, are: Investments `1,25,000; Debtors `3,50,000; Inventories
R.4,25,000; and Payment of Current Liabilities `19,00,000.
The Project is expected to generate yearly Operating CFAT of `7,00,000 for 6 yea` It is
estimated that Fixed Assets of R Ltd, would fetch `3,00,000 at the end of 6th year.
The Firms Cost of Capital is 15%.
As a Financial Consultant, comment on the financial prudence of merger decision of A
Ltd.
Answer:
(a) Reserve Merger happens when, in order to avail benefit of carry forward of losses which are
available according to tax law only to the Company which had incurred them, the profit
making company (Target Company, or Big Company) is merged with Companies having
Accumulated Losses (Acquirer, or Small Company).
Salient Features:
1. In a ‗Reverse Takeover‘, ―Takeover by Reverse Bid‖ or ―Reverse Merger‖, a smaller

Company gains control of a larger one.
2. The entire undertaking of the healthy and prosperous Company (Big Company) is
merged and vested in the Sick Company (Small Company) which is non-viable and
whose Net Worth has eroded.
3. Reverse Takeover is also applicable to the purchase of a Listed Company by an Unlisted
Company with control passing to the Shareholders and Management of the Unlisted
Company. This is known as a ‗Back Door Listing‘.
4. A Reverse Takeover may take place by way of a Pure Equity Acquisition, also called a
Share Swap.
To be a ―Reverse Merger‖, the following conditions should be satisfied -
A. Assets of the Transferor company are greater than the Transferee Company,
B. Equity Capital to be issued by the Transferee Company pursuant to the acquisition
exceeds its Original Issued Capital, and
C. There is a change of control in the Transferee Company, through the introduction of a
minority holder or group of holders.
(b)
1. Computation of Cost of Acquisition of K Ltd.
Particulars `
12% Convertible Preference Shares [for payment of Pref. Capital] 1,00,000
Equity Share Capital (1,50,000 Shares  `15 per share) 22,50,000
Purchase Consideration 23,50,000
Add: Liabilities = Debentures 3,30,000 + Dissolution Expenses 30,000 + 5,50,000
Current Liabilities 1,90,000
Total Outflow 29,00,000
Less: Sale Proceeds of Assets = Investments 1,25,000 + Debtors 3,50,000 + (9,00,000)
Stock 4,25,000
Less: Bank Balance (Assumed that Bank Balance is also taken over) (1,00,000)
Net Outflow on Acquisition 19,00,000
2. Computation of Net Present Value of the Acquisition
Particulars Year Cash Flow PVF @15% Disc. Cash

Flow
Annual Cash Inflow 1–6 7,00,000 3.784 26,48,800
Terminal Inflow on sale of fixed assets 6 3,00,000 0.432 1,29,600
Present Value of Total Inflows 27,78,400
Less: Initial Investment on Acquisition 0 19,00,000 1.000 (19,00,000)
Net Present Value of Investment in K 8,78,400
Ltd
Observation: Acquisition of K Ltd yields a Net Present Value of `8.78 Lakhs on an Investment
of `19 Lakhs. Therefore, decision to acquire K Ltd is financially prudent.
29.(a) The chief executive of a Company thinks that shareholders always look for the earnings
per share. Therefore, he considers maximization of the earning per share (EPS) as his
Company‘s objective. His company‘s current net profit are `80 lakhs and EPS is `4. The
current market price is `42. He wants to buy another firm which has current income of
`15.75 lakhs, EPS of `10.50 and the market price per share of `85. What is the maximum
exchange ratio which the chief executive should offer so that he could keep EPS at the
current level? If the chief executive borrows funds at 15 per cent rate of interest and buys
out the other Company by paying cash, how much should he offer to maintain his EPS?
Assume a tax rate of 52%.
(b) A financial analyst has been asked to appraise N LTD. an IT company in terms of the future
cash generating capacity. He has projected the following after – tax cash flows:
Year 1 2 3 4 5
Cash Flows (` In 352 96 128 172 234
Lakhs)
It is further estimated that beyond 5th year, cash flows will perpetuate at a constant growth
rate of 7% per annum, mainly on account of inflation. The perpetuate cash flows is
estimated to `2,052 lakhs at the end of the 5th year.
Additionally the following informations are available:
(1) The cost of capital is 20%

(2) The company has outstanding debt of ` 724 lakhs and cash /bank balance of ` 542
lakhs.
(3) The number of outstanding shares of the company is 30.30 lakhs.
Requirements:
(I) What is the value of N LTD. in terms of expected future cash flows?
(II) Calculate the value of shareholders.

(III) The company has received a takeover bid of `402 per share. Is this good offer?
Answer:
(a)
(Amount in `)
Current data Acquiring company Target company
Net profit 80,00,000 15,75,000
EPS 4 10.50
Market price of share 42 85
Number of equity shares 20,00,000 1,50,000
Calculation of Share Exchange Ratio
𝐶𝑜𝑚𝑏𝑖𝑛𝑒𝑑 𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡
=4
𝑁𝑜 .𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠
80,00,000+15,75,000
=4
20,00,000+𝑥
95,75,000 =80,00,000 + 4x
4x =95,75,000 / 4 = 3,93,750 shares
X = 15,75,000 / 4 = 3,93,750 shares
Share exchange ratio = 3,93,750 shares / 1,50,000 = 2.625
The acquiring company can offer its 2.625 shares against the target company‘s 1 share.
If funds borrowed @15% interest and buys out the target company by paying cash, and
maintain the same level of EPS as before.
80,00,000+15,75,000−0.15 𝐷𝑒𝑏𝑡 (1−0.52)
= `4
20,00,000 𝑠ℎ𝑎𝑟𝑒𝑠
95,75,000 – 0.072 Debt = 80,00,000
0.072 Debt = 95,75,000 – 80,00,000
Debt = 15,75,000 / 0.072 = `2,18,75,000
CFO can offer `2,18,75,000 to acquire the target company.
Amount payable to each share in target company:

= `2,18,75,000 / 1,50,000 = `145.83 per share.
(b)
[Given: (PVIF at 20% for year 1 to 5): 0.833, 0.694, 0.579, 0.482, 0.402.]
(I) Present value of Cash flows for the year 1 to year 5:

352 0.833 + 96  0.694 + 128  0.579 + 172  0.482  234  0.402 = 610.92 Lakh.
Present value of Perpetual Cash flows:
[2052 (1 + 0.07)  0.402 = 16889.54  0.402 [(0.20 – 0.07)] = `6789.60 Lakh
VALUE OF THE COMPANY:
`(610.92 + 6789.60) = `7400.52 Lakhs
(II) SHARE HOLDERS VALUE:

`7400.52 + 542 (Cash / Bank Balance) – 724 (Outstanding debt) = `7218.52 Lakh.
The number of outstanding share of the company is 30.30 lakh.
(III) VALUE PER SHARE:
7218.52 / 30.30 = 238.23
This is much lower than the takeover bid value (`402) thus the Bid value is good offer from the
point of view of the company.
30.(a) R Ltd. is considering a takeover of S Ltd. The particulars of 2 companies are given below:
Particulars R Ltd. S Ltd.

Earnings After Tax (`) 20,00,000 10,00,000
Equity shares (No.) 10,00,000 10,00,000
EPS (`) 2 1
P/E ratio (times) 10 5
Required:
(I) What is the market value of each company before merger?

(II) Assuming that the management of R estimates that the shareholders of S will accept
an offer of one share of R for four share of S. If there are no synergic effects, what is
the market value of the post-merger R? What is the new price for share? Are the
shareholders of R better or worse off than they were before the merger?
(III) Due to synergic effects, the management of R estimates that the earnings will
increase by 20%.
What is the new post-merger EPS and price per share? Will the shareholders be better off
or worse off than before the merger?
(b) Write a short note on impact of Merger on Value of Shares.
Answer:
(a)
(I) Market value of companies before merger

Particulars R S
EPS (`) 2 1
P/E ratio 10 5
Market price per share (`) (EPS  P/E ratio) 20 5
Equity shares (No.) 10,00,000 10,00,000
Total market value (MPS  No. of EQ. shared) 2,00,000 50,00,000
(II) Post merger effect on R
Particulars `
Post merger earnings ` (20,00,000 + 10,00,000) 30,00,000
Equity shares 910,00,000 + 10,00,000  1/4) 12,50,000
EPS: 2.4
P/E ratio 10.00
Market price per share (`) 9EPS  P/E ratio) i.e., 10  2.4 24
Total Market Value (MPS  No. of Eq. shares) i.e., (12,500  24) 3,00,00,000
Gains from Merger

Particulars `
Post Merger Market Value of the firm 30,00,000
Less : Pre-Merger Market value
R 2,00,00,000
S 50,00,000 `2,50,00,000
`50,00,000
Apportionment of Gains between shareholders

Particulars R S
Post merger market value
10,00,000  24 2,40,00,000 5
2,50,000  24 60,00,000
Less: Pre merged market value 2,00,00,000 50,00,000
40,00,000 10,00,000
Thus the shareholders of both the Co. have gained from merger
(III) Post Merger Earnings
Increase in earnings by 20%

New earnings: `30,00,000  120% = 36,00,000
No. of equity share = 12,50,000
EPS = `36,00,000  12,50,000 = `2.88
P/E ratio = 10
Market price per share = `2.88  10 = `28.80
 Hence, shareholders will be better off than before the merger situation.
(b) Shareholder Value Analysis (SVA) focuses on the creation of economic value for
shareholders, as measured by share price performance and flow of funds.
Shareholder Value is used to link management strategy and decision to the creating of
value for shareholders.
Value Drivers: Factors or value Drivers which influence the shareholder‘s value are identified.
Example: Growth in sales, profit Margin, Capital Investments Decisions, etc.
Management Responsibilities: Management should pay attention to Value drivers, while

taking investment and finance decisions.
Benefits:
1. SVA helps the management to concentrate on activities which create value to the
shareholders rather than on short –term profitability.
2. SVA and EVA together helps to strengthen the competitive position of the Firm, by
focusing on wealth creation.
3. They provide an objective and consistent framework of evaluation and decision –
making across all function, departments and units of the Company.

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Revisionary Test Paper_ June 2018

Choose the correct answer from the given alternatives:

4. ‗Temporary loans‘ means loans repayable on

(a) Head office

11. Dispute includes a suit or arbitration proceedings relating to

(a) the existence of the amount of debt;

13. Which of the following are not a types of listing of securities

16. Remittance and Repatriation includes

Restriction on number of layers for certain classes of holding companies:

Provisions for existing companies

Punishment for contravention

Non-applicability of the Rules

c) An insurance company being a company which carries on the business of insurance in

d) A government company referred to in clause (45) of section 2 of the Act.

(A) Provisions contained in the Companies Act:

(i) Conditions for acceptance of deposits from members [Sec 73(2)]

A company may accept deposits from its members -

1. Resolution - A resolution is passed in GM

5. 'Deposit repayment reserve account'

a) The company shall deposit in a Scheduled bank in a separate bank account a

b) Such account shall be called as the 'deposit repayment reserve account'.

8. Security w.r.t. deposits

(iii) Failure to repay deposits or interest [Sec 73(4)] –

1. Application to the Tribunal - If a company fails to repay any deposit or interest

2. Orders of the Tribunal

(i) Maximum amount of deposits and tenure of deposits:

b) No company shall accept or renew any deposit which is repayable on demand or

(ii) No right of company to alter the terms:

1. Treatment of dividend declared but remaining unpaid

(a) Transfer to Unpaid Dividend Account - Where a dividend is declared by a company,

2. Application to the company for payment of dividend

3. Treatment of dividend remaining unpaid in the Unpaid Dividend Account

4. Transfer of shares in the name of the Fund

5. Right to claim the transferred shares

6. Punishment for contravention

The details about DIN may be enumerated as under:

1. Definition of "Director Identification Number" (DIN) [Rule 2(d)]

2. Application for allotment of DIN (Rule 9)

(i) Every individual, who is to be appointed as director of a company shall make an

3. Allotment of DIN (Rule 10)

(c) If the Central Government, on examination, finds such application to be defective or

be allotted to any other person.

4. Intimation of DIN by existing directors (Rule 10A)

5. Cancellation or surrender or Deactivation of DIN (Rule H)

(b) Where DIN was obtained in a wrongful manner or by fraudulent means.

(c) In case of the death of the concerned individual.

(e) Where the concerned individual has been adjudicated an insolvent.

6. Intimation of changes in particulars specified in DIN application (Rule 12)

Thus, the effective capital of Radha Limited shall be calculated as on 31.03.2016.

As per Section II of (Part II of Schedule V, in the absence or inadequacy of profits, a company

Functions and duties of Company Secretary

The functions of the company secretary shall include the following:

(c) To discharge such other duties as may be prescribed.

As per Rule 10 of the Companies (Appointment and Remuneration of Managerial Personnel)

Definition of 'secretarial standards'

1. Conditions to be fulfilled for exercise of powers by the Tribunal

2. Powers of the Tribunal (Nature of orders of Tribunal)

Consequences of termination of certain agreements

Powers of the Tribunal are illustrative only

3. Filing of copy of order of the Tribunal

4. Power of the Tribunal to make an interim order

5. Power of the Tribunal to alter the memorandum or articles

6. Punishment for contravention

The answer to the given problem is as under: