CAP II Group II June 2022

CHARTERED ACCOUNTANCY PROFESSIONAL II (CAP-II)
Revision Test Paper

Group - II
June 2022
Education Division
The Institute of Chartered Accountants of Nepal
The Revision Test Papers are prepared by the Institute with a view to
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RTP CAP II June 2022 © The Institute of Chartered Accountants of Nepal
Contents
PAPER 4: Financial Management……………………………03
PAPER 5: Cost and Management Accounting……………......36
PAPER 6: Business Communication……………………….…55
PAPER 7: Income Tax and VAT……………..……………….68
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PAPER 4: FINANCIAL MANAGEMENT
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REVISION QUESTIONS:
CHAPTER: Introduction and Fundamental Concept of Financial Management:
Question No 1:
Write short notes on the Inter relationship between investment, financing and dividend decisions.
CHAPTER: Time Value of Money:
Question No 2:
Mr. Lama requires Rs 80 lakhs as on 1st January, 2026 to start business. He has some surplus money
today, i.e. on 31st December, 2015. If he invests available money now and Rs 5 lakh at the end of
1st year, 9 lakh at the end of 2nd year, Rs 4 lakh at the end of 3rd year and Rs 3 lakh each at the end
of each year into a fund.
Required:
(i) Determine the amount that needs to be deposited now so that it will be sufficient to start
business if the fund pays 8% interest?
(ii) If Mr. Lama decides to invest a lump sum in the fund after one year and let it compound
annually, how much will the lump sum be? Assuming the rate of interest is 8%
Question No 3:
XYZ Bank pays 8 percent interest, compounded quarterly, on its money market account. The
managers of ABC Bank want its money market account to be equal to XYZ Bank’s effective annual
rate, but interest is to be compounded on monthly basis. What nominal, or quoted, or Annual
Percentage Rate must ABC Bank provide?
CHAPTER: Strategic Finance and Policy:
Question No 4:
From the following information, compute weighted average cost of capital (WACC) of Delta Ltd.
Debt to total funds 2:5

Preference capital to equity capital 1:1
Preference dividend rate 15%
Interest on debenture Rs. 20,000 for half year
Earnings before interest and tax (EBIT) Rs. 3 lakhs
at 30% of capital employed
Cost of equity capital 24%
Tax rate 35%
Question No 5:
A company earns a profit of Rs 27,00,000 p.a. after meeting its interest liability of Rs 900,000 on
15% debentures. The number of equity shares of Rs 100 each is 100,000. In addition, the company
has Rs 20 lakhs of 13% Cumulative preference share capital in its capital structure. Income tax rate
is 40%.
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Calculate the Return on equity for the company and indicate its segments due to presence of
Preference Share Capital and Borrowing (debentures).
The Chief Finance Officer of the company believes that in place of preference share capital, if the
company uses borrowings, return on equity can be maximized. Do you agree? Justify.
Question No 6:
The following particulars relating to Nirvana Ltd for the year ended 31st March, 2021 is given
below:
Output 100,000 units at normal capacity
Selling price per unit Rs 40
Variable cost per unit Rs 20
Fixed Cost Rs 10,00,000
The capital structure of the company as on 31st March, 2021 is as follows:
Particulars Rs
Equity Share Capital (100,000 shares @ 10 each) 10,00,000
Reserves and Surplus 5,00,000
7% Debentures 10,00,000
Current Liabilities 5,00,000
Total 30,00,000
Nirvana Ltd has decided to undertake an expansion project to use the market potential that will
involve Rs 10 lakhs. The company expects an increase in output by 50%. Fixed cost will be
increased by Rs 500,000 and variable cost per unit will be decreased by 10%. The additional output
can be sold at the existing selling price without any adverse impact on the market.
The following alternative schemes for financing the proposed expansion programme are planned:
(i) Entirely by equity shares of Rs 10 each at par.
(ii) Rs 5 lakh by issue of equity shares of Rs 10 each and the balance by issue of 6% debentures
of Rs 100 each at par.
(iii) Entirely by 6% debentures of Rs 100 each at par
Find out which of the above-mentioned alternatives would you recommend for Nirvana Ltd with
reference to the risk and return involved, assuming a corporate tax rate is 40%
CHAPTER: Analysis of Financial Statements:
Question No 7:
Jyoti Ltd. has at the beginning of a period 1, 00,000 Equity Shares of Rs. 10 each and 12% long-
term debt of Rs. 8, 00,000. The finance department of the company has generated the following
forecast financial statistics for the period:
Return on Total Assets (ROTA) (PBIT / Total Assets) 20%
Debt Ratio (External Liabilities / Equity) 0.80
Effective Interest Rate (EIR) (Interest Expense/ Total Liabilities) 8%
Current Assets to Fixed Assets 0.5:1
Tax Rate 40%
The Assets, Liabilities and Equity figures used to compute the above financial statistics are based
on forecast period-end balances. The company has no plan to change its equity share capital and
long-term debt.
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You are required to prepare the forecast balance sheet as at the end of the forecast period with as
many details as possible; and Forecast Earnings per Share (EPS).
Show necessary workings.
CHAPTER: Capital Investment Decision:
Question No 8:
Yes Enterprises, an existing company, is considering the introduction of a new product. The new
product envisages the purchase of new machinery costing Rs 40, 00,000 including freight and
installation charges. Investment allowance rate on purchase of equipment is 20% which can be
claimed as deduction at the end of year one. The useful life the equipment is five year, with an
estimated salvage value of Rs 15, 75,000 at the end of that time. The machine will be depreciated
for tax purposes by using straight line method at a rate of 10%.
Additions to current assets will require Rs 500,000 at the commencement of the proposal and will
be increased in subsequent years on the basis of operating revenue. At the start of each subsequent
years, Investment in working capital will need to be 10% of operating revenue for that year.
The production capacity of new machine is 12 lakh units and capacity utilization during the 5-year
life of the project is expected to be as indicated below:
Year 1 2 3 4-5
Capacity Utilization (%) 25 50 75 100
The average price per unit of the product is expected to be Rs. 20 netting a contribution of 40
percent. The annual fixed cost, excluding depreciation, are estimated to be Rs. 40 lakh from the
third year onwards; for the first and second year it would be Rs. 20 lakh and Rs. 30 lakh
respectively. In addition to this, Yes enterprises shall require a factory which will be taken at rent at
Rs 50,000 per month and will increase by 10% in each of the two years.
It may be assumed that all cash flows are received or paid at the end of the each year and that
income taxes are paid one year in arrears at an annual rate of 30% for both revenue and capital
gains/losses. Yes enterprises has a target debt to value ratio of 20%. The company in the past has
raised debt at 11% and it can raise fresh debt at 10%
Yes enterprises plans to follow dividend discount model to estimate the cost of equity capital. The
company plans to pay a dividend of Rs 2 per share in the next year. The current market price of
company's equity share is Rs 20 per equity share. The dividend per equity share of the company is
expected to grow at 3% per annum. Evaluate the proposal.
Question No-9:
The Elixir Construction Ltd has recently got a contract for construction of National Highway near
Pokhara. The Elixir would require vehicles to be used by its engineers for inspection of the sites.
One option before the Elixir is to hire the inspection vehicles from Continental Tours and Travels
Ltd. Hiring charges would be Rs 9000 per day for 80 Kilometers for 8 hours a day and Rs 70 per
Km beyond 80 Kms. The overtime rate for drivers would be Rs 250 per hour beyond 8 hours. It is
estimated that, on an average the inspection vehicles would be required for 10 hours per day and
100 kms per day. The hiring charges, including extra charges and overtime, would be increased by
10% every year.
The chief engineer Mr. Biki Sharma has submitted an alternative proposal to the CEO, Bikram
Pandey to buy a Tata Safari costing Rs 70 lakh, Tata would buy back its vehicles after 5 years for
Rs 20 lakh. The associated operating costs are estimated as follows.
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1) Drivers Salary, Rs 80,000 per month, Annual increments 3%

2) Drivers Overtime beyond 8 hours, Rs 300 per hour
3) Insurance of the vehicles, 1% of the depreciated value each year
4) Annual Maintenance costs, year 3-5, Rs 150,000
5) Fuel charges: year 1-2, Rs 30/km, year 3, Rs 35/km, and year 4-5, Rs 40/km
6) Annual Depreciation: SLM
Required:
The CEO seeks the opinion of the CFO, Mr. Neeraj Aryal, on the two alternative proposals for the
required inspection vehicle. What advice should Neeraj give? Why? Assume 35% tax and 10%
required rate of return for Elixir.
Question No-10:
An iron ore company is considering investing in a new processing facility. The company extracts
ore from an open pit mine. During a year, 1, 00,000 tons of ore is extracted. If the output from the
extraction process is sold immediately upon removal of dirt, rocks and other impurities, a price of
Rs 1,000 per ton of ore can be obtained. The company has estimated that its extraction costs amount
to 70 per cent of the net realizable value of the ore.
As an alternative to selling all the ore at Rs 1,000 per ton, it is possible to process further 25 per
cent of the output. The additional cash cost of further processing would be Rs 100 per ton. The
proposed ore would yield 80 per cent final output, and can be sold at Rs 1,600 per ton.
For additional processing, the company would have to install equipment costing Rs.1001akh. The
equipment is subject to 25 per cent depreciation per annum on reducing balance (WDV)
basis/method. It is expected to have useful life of 5 years. Additional working capital requirement is
estimated at Rs. 10 lakh. The company's cut-off rate for such investments is 15 per cent. Corporate
tax rate is 35 per cent.
Assuming there is no other plant and machinery subject to 25 per cent depreciation, should the
company install the equipment if-
a) The expected salvage is Rs 10 lakh and
b) There would be no salvage value at the end of year 5.
Assuming there are other plants and machinery subject to 25 per cent depreciation (i.e. in the same
block of assets). What course of action should the company choose?
CHAPTER: Working Capital Management and Financial Forecasting
Question No-11:
The following figures and ratios are related to a company.
Sales for the year (all credit) Rs 90,00,000

Gross profit ratio 35 percent
Fixed Assets turnover (based on cost of goods sold) 1.5 times
Stock turnover (based on cost of goods sold) 6 times
Liquid Ratio 1.5:1
Current Ratio 2.5:1
Receivables (debtors) collection period 1 months
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Reserves and surplus to share capital 1:1.5

Capital Gearing Ratio 0.7875
Fixed Assets to Net worth 1.3:1
You are required to prepare:

1) Balance Sheet of the company on the basis of above details
2) The statement showing working capital requirement, if the company wants to make a
provision for contingencies @ 15% of net working capital.
Question No 12:
Progressive Ltd. has current sales of Rs. 1.50 million per year. Cost of sales is 75 percent of sales
and bad debts are one percent of sales. Cost of sales comprises 80 percent variable costs and 20
percent fixed costs, while the company’s required rate of return is 12 percent.
Progressive Ltd. currently allows customers 30 days credit, but is considering increasing this to 60
days in order to increase sales. It has been estimated that this change in policy will increase sales by
15 percent and bad debts will increase from one percent to four percent. It is expected that the
policy change will not result in an increase in fixed costs, and creditors and stock will be
unchanged.
Required:
Advise whether Progressive Ltd. should introduce the proposed policy.
Question No-13:
Sports Ltd. is launching a new project for the manufacture of a unique component. At full capacity
of 24,000 units, the cost will be as follows:
Cost per unit (Rs)

Material 80
Labour and variable expenses 40
Fixed manufacturing and administration expenses 20
Depreciation 10
Total Cost 150
The selling price per unit is expected at Rs 200 and the selling expenses per unit will be Rs 10 (80%
of which is variable)
In the first two years, production and sales are expected to be as follows:
Year Production Sales
1 15,000 unit's 14,000 units
2 20,000 units' 18,000 units
To assess working capital requirement, the following additional information is given:

(a) Stock of raw material – 3 months average consumption
(b) Work in progress - Nil
(c) Debtors – 1 month average sales
(d) Creditors for supply of materials – 2 months average purchases of the year
(e) Creditors for expenses – 1 month's average of all expenses during the year
(f) Cash balance – Rs 20,000
(g) Stock of finished goods is taken at average cost
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You are required to prepare for the two years:

1. A projected statement of profit and loss
2. A projected statement of working capital requirements
CHAPTER: Dividend Distribution Policy
Question No 14:
Following are the details regarding three companies- X Ltd., Y Ltd. and Z Ltd
X Ltd. Y Ltd. Z Ltd.

Internal Rate of return (%) 5 15 20
Cost of equity capital (%) 15 15 15
Earnings per share (Rs) 10 10 10
Determine the optimum dividend payout ratio and the price of the share of each of those companies
applying Walter’s formula when dividend payment ratio (DIP) ratio is-
a) 0%
b) 50% and
c) 100%.
Question No 15:
A ltd. has made a profit of Rs. 1, 00, 000. Its gear ratio is 0.4. It is to be maintained. Its costs of
capital are: debt 10 percent, equity 23 percent, retained earnings 20 percent. Four projects are under
consideration:
Investment Return on Investment
A Rs 1, 12, 000 19%
B Rs 56, 000 18%
C Rs 1, 00, 000 16%
D Rs 2, 00, 000 14%
What amount should be paid as dividend if Corporate Dividend tax rate is 15%?
CHAPTER: Valuation of Securities:
Question No 16:
Bonds of a Cement Company, which carries AA rating, with five years to maturity and 16% coupon
rate, payable half-yearly, is being traded at Rs. 1,040. You as an investment Manager, want to
ascertain the intrinsic value and take a decision accordingly.
Your Asset Management Company has laid down the guideline that for AA Rated Instruments,
discount rate to be applied is 364-Day T Bill Rate+4% spread (T-Bill Rate is 10%)
Required:
(i) Calculate Intrinsic Value of the Bond.
(ii) Advice whether to buy or not bond
(iii) Calculate Yield to maturity of the Bond.
Question No 17:
A Ltd wants to acquire B Ltd and has offered its one share for every two shares of B Ltd. Following
information is provided to you:
Particulars A Ltd B Ltd
Profit After Tax Rs 18,00,000 Rs 3,60,000
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Number of equity shares 600,000 180,000

Earnings Per share Rs 3 Rs 2
PE Ratio 10 times -
Market Price per share Rs 30 -
Required:
a) Number of equity shares to be issued by A Ltd for acquisition of B Ltd
b) What is the EPS of A Ltd after the acquisition?
c) What is the expected market price per share of A ltd after the acquisition, assuming PE ratio
after acquisition remains unchanged?
d) Market Value of A ltd after Acquisition
CHAPTER: Risk and Return:
Question No-18:
The shares of Fulbari Ltd. are quoted at Rs 60 now. You expect that the company will pay a
dividend of Rs 3 per share, one year from now. The expected price one year from now is Rs 78.50.
a) What is the expected dividend yield, rate of price change and holding period return (HPR)?
b) If the beta of the share is 1.5, yield on Government securities is 6 percent and the market
risk premium is 10 percent, what is the required rate of return?
c) What is the intrinsic value of the share? How does it compare with the current market price?
CHAPTER: Overview of Capital Markets:
Question No-19:
A Mutual Fund having 300 units has showing its NAV of Rs. 8.75 and Rs. 9.45 at the beginning
and at the end of the year respectively. The Mutual Fund has given two options:
(i) Pay Rs. 0.75 per unit as dividend and Rs. 0.60 per unit as a capital gain, or
(ii) These distributions are to be reinvested at an average NAV of Rs. 8.65 per unit.
What difference it would make in terms of return available and which option is preferable?
CHAPTER: Short Notes from Overall Syllabous:
Question No-20:
Discuss the composition of Return on Equity (ROE) using the DuPont model.
Question No-21:
Write short Notes on:
a) Functions of stock exchange
b) ‘Aging Schedule’ in the context of monitoring of receivables
c) Virtual Banking
d) EBIT-EPS indifference point
e) Junk bonds
f) Venture Capital Financing
g) Different kinds of float with reference to management of cash
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Question No-22:
Distinguish Between:
a) Capital market and Money market
b) Bonus shares and Share splits.
c) Leveraged Buyout and Management Buyout
d) Return on equity and Return on capital employed
e) Treasury bills and Certificate of deposits
f) Permanent working capital and Variable working capital
g) Factoring and Bills discounting
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Suggested Answers /Hints:

CHAPTER: Introduction and Fundamental Concept of Financial Management:
Question No 1:
Answer:
The finance functions are divided into three major decisions, viz., investment, financing and
dividend decisions. It is correct to say that these decisions are inter-related because the underlying
objective of these three decisions is the same, i.e. maximization of shareholders’ wealth. Since
investment, financing and dividend decisions are all interrelated, one has to consider the joint
impact of these decisions on the market price of the company’s shares and these decisions should
also be solved jointly. The decision to invest in a new project needs the finance for the investment.
The financing decision, in turn, is influenced by and influences dividend decision because retained
earnings used in internal financing deprive shareholders of their dividends. An efficient financial
management can ensure optimal joint decisions. This is possible by evaluating each decision in
relation to its effect on the shareholders’ wealth.
The above three decisions are briefly examined below in the light of their interrelationship and to
see how they can help in maximizing the shareholders’ wealth i.e. market price of the company’s
shares.
Investment decision:
The investment of long term funds is made after a careful assessment of the various projects
through capital budgeting and uncertainty analysis. However, only that investment proposal is to be
accepted which is expected to yield at least so much return as is adequate to meet its cost of
financing. This have an influence on the profitability of the company and ultimately on its wealth.
Financing decision:
Funds can be raised from various sources. Each source of funds involves different issues. The
finance manager has to maintain a proper balance between long-term and short-term funds. With
the total volume of long-term funds, he has to ensure a proper mix of loan funds and owner’s funds.
The optimum financing mix will increase return to equity shareholders and thus maximize their
wealth.
Dividend decision:
The finance manager is also concerned with the decision to pay or declare dividend. He assists the
top management in deciding as to what portion of the profit should be paid to the shareholders by
way of dividends and what portion should be retained in the business. An optimal dividend pay-out
ratio maximizes shareholders ‘wealth.
The above discussion makes it clear that investment, financing and dividend decisions are
interrelated and are to be taken jointly keeping in view their joint effect on the shareholders’ wealth.
CHAPTER: Time Value of Money:
Question No 2:
Answer:
(i) Amount required to be deposited now:
Time (year) Cash Flow (Rs) FVIF @ 8% Future Value (Rs)
1 500,000 (1.08)9 999,502
2 900,000 (1.08)8 16,65,837
3 400,000 (1.08)7 685,530
4 to 10 300,000 FVIFA 8%, 7 years 26,76,840
(8.9228)
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Future Value of amount deposited from year 1 to 10 6027709

Amount shortfall as on 10th year 3322511q1 19,72,291
Present Value Factor (PVIF 8%,10 year) 0.4632
Amount Required to be deposited now 913,565
(ii) If the lump sum amount is deposited after one year then future value of single cash flow for
9 years will be Rs 80, 00,000. Hence Present value (at the end of year 1) = Future value X
Present Value Factor = 80, 00,000 x PVIF 8%, 9 years = 80, 00,000 x .5002 = Rs 40,01,600
Question No 3:
Answer:
m 4
Effective rate of interest = -1= -1 = 0.0824 = 8.24%
ABC Bank Ltd should have effective interest rate of 8.24% but interest should be compounded
monthly.
m
Or, 0.0824 = -1
12
Or, 0.0824 = -1
Or, (1.0824)1/12 =
Or, =
Or, r = 0.0066 x 12 = 7.94%.
Hence, ABC Bank should have nominal rate of 7.94%
CHAPTER: Strategic Finance and Policy:
Question No 4:
Answer:
1) EBIT at 30% of capital employed = Rs. 3 lakhs.
Hence, Capital employed = 3/0.3 = 10 lakhs
2) Debt to total funds = 2:5
Hence, Debt =2/5 of 1,000,000 = 400,000
3) Shareholders’ Funds = balance 3/5 of 1000000 = 600,000
4) Preference to equity capital = 1:1.
Total of both 600,000
Hence, Preference capital = equity capital = 300,000 each.
5) Interest on Debt = 20,000 x 2 = 40,000.
Hence Interest rate = 40,000 on 400,000 = 10%
6) Cost of Debt after tax = Interest Rate (1- Tax rate) = 10% x (1-35%) = 6.5%
7) Computation of WACC:
Sources Amount (Rs) Weight (%) Specific Cost (%) WACC (%)
Debt 400,000 40% 6.5% 2.6
Preference Share 300,000 30% 15% 4.5
Equity Shares 300,000 30% 24% 7.2
Total 10,00,000 14.3
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Question No-5
Answer:
1) EBIT = Profit After Interest + Interest
= 27 Lakh + 9 Lakh = Rs 36 lakhs
2) Capital Structure:
Equity share Capital (100,000 x 100) Rs 100,00,000

Loan amount (900,000/0.15) Rs 60,00,000
Preference Share Capital Rs 20,00,000
Total Capital Employed Rs 180,00,000
3) Return on Investment (ROI) = EBIT/Capital Employed

= 36 lakhs/180 lakhs = 20%
4) Post Tax ROI = Pre-tax ROI x (1- Tax) = 20% x 0.6 = 12%
5) Post Tax Cost of Debt = Coupon Rate× [1-Tax Rate] = 15%× [1-0.40] = 9%
6) Computation of Return on Equity (ROE):
Particulars Amount (Rs )

Operating Profit (EBIT) 36,00,000
Less: interest on loan 900,000
EBT 27,00,000
Less: Tax @ 40% 10,80,000
EAT 16,20,000
Less: Preference Dividend 260,000
Earning for Equity Holders 13,60,000
Return on Equity ( EAE/Equity Fund) 13.6%
Segment Decomposition of ROE may be analyzed as below:
ROE = Post Tax ROI + [Post Tax ROI- Cost of Preference Share] × [Preference Share/Equity]
+ [Post Tax ROI- Post Tax Cost of Debt] × [Debt/Equity]
= 12% + [12%-13%] × [20/100] + [12%-9%] × [60/100]
=12% - 0.20% + 1.8%% =13.60%
The negative 0.2% and Positive 1.8% is the segment of ROE caused by presence of Preference
Share Capital and Debenture in the Capital Structure. The negative 0.2% segment of ROE due to
presence of preference share capital reduces the equity shareholders return to that extent. Hence, use
of preference share capital is not recommended as it has unfavorable financial leverage.
Impact on ROE if Loan is used in place of Preference shares:
Supposing loan is available @ 15%, total loan will be Rs 80 lakhs, equity is 100 lakhs and
Preference share is Nil. Hence total capital employed will be 180 lakhs. The ROE, in such a case,
will be 14.40% as computed below.
Since, the ROE is increased to 14.40% from 13.60%, use of loan in place of preference share capital
is beneficial to equity share holders.
Computation of ROE:
Particulars Amount (Rs )
Operating Profit (EBIT) (as earlier) 36,00,000
Less: interest on loan (80 lakh x 15%) 12,00,000
EBT 24,00,000
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Less: Tax @ 40% 9,60,000

EAT 14,40,000
Less: Preference Dividend Nil
Earning for Equity Holders 14,40,000
Return on Equity ( EAE/Equity Fund) 14.40%
Question No. 6
Answer:
Statement showing profitability of alternative schemes for financing: (Rs in ‘00000’)
Particulars Existing Alternative Schemes

(i) (ii) (iii)
Equity share capital (existing) 10 10 10 10
New issues - 10 5 -
10 20 15 10
7% Debentures 10 10 10 10
6% Debentures - - 5 10
20 30 30 30
Debenture Interest (7%) 0.7 0.7 0.7 0.7
Debenture Interest (6%) - - 0.3 0.6
0.7 0.7 1 1.3
Output (units in lakhs) 1 1.5 1.5 1.5

Contribution per unit (Rs) 20 22 22 22
Contribution (Rs in Lakhs) 20 33 33 33
Less: Fixed cost 10 15 15 15
EBIT 10 18 18 18
Less: Interest (as above) 0.7 0.7 1 1.3
EBT 9.3 17.30 17 16.70
Less: Tax @ 40% 3.72 6.92 6.8 6.68
EAT 5.58 10.38 10.20 10.02
Operating Leverage 2 1.83 1.83 1.83
(Contribution/EBIT)
Financial Leverage 1.08 1.04 1.06 1.08
(EBIT/EBT)
Combined Leverage 2.15 1.91 1.94 1.98
(Contribution/EBT)
EPS (EAT/No of Share) (Rs) 5.58 5.19 6.80 10.02
Risk Lowest Lower than Highest
option 3
Return Lowest Lower than Highest
option 3
From the above figures, we can see that operating leverage is same in all alternatives though
financial leverage differs. Alternative (iii) uses the maximum amount of debt and result into the
highest degree of financial leverage, followed by alternative (ii). Accordingly, risk of the company
will be maximum in these options. Corresponding to this scheme, however, maximum EPS (i.e. Rs
10.02 per share) will be also in option (iii).
So, if Nirvana Ltd is ready to take a high degree of risk, then alternative (iii) is strongly
recommended. In case of opting for less risk, alternative (ii) is the next best option with a reduced
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EPS of Rs 6.80 per share. In case of alternative (i), EPS is even lower than the existing option,
hence not recommended.
CHAPTER: Analysis of Financial Statements:
Question No. 7
Answer:
Working notes:
1 Computation of current liabilities:
12% Long term debt Rs 800,000
Interest Amount Rs 96,000
Effective interest rate = Interest/total liability 0.08
Total Liability = 96000/0.08 Rs 12,00,000
Less: Long term Loan Rs 800,000
Current Liabilities Rs 400,000
2 Computation of amount of equity and reserves:
Debt Equity Ratio( External Liabilities/Equity) 0.8
Equity = 12,00,000/0.8 Rs 15,00,000
Less: Equity Share Capital Rs 10,00,000
Reserve and Surplus Rs 500,000
3 Total of Liabilities side of Balance Sheet Rs 27,00,000
= Equity + External Liabilities = 15,00,000 + 12,00,000
4 Computation of Fixed Assets and Current Assets:
Current Assets/Fixed Assets 0.5:1
Or, Total Assets = Fixed Assets + Current Assets 1.5
Hence, Current Assets = (27,00,000/1.5) x 0.5 Rs 900,000
Fixed Assets = (27,00,000/1.5) x 1 Rs 18,00,000
Balance Sheet
Liabilities Rs Assets Rs
Capital 10,00,000 Fixed Assets 18,00,000
Reserve and Surplus 500,000 Current Assets 9,00,000
Long Term Loan 8,00,000
Current Liabilities 400,000
Total 27,00,000 Total 27,00,000
Computation of EPS:
Particulars Amount (Rs)
Return on Total Assets 20%
Earnings Before Interest and Tax 27,00,000 x 20% 540,000
Less: Interest on Loan 96,000
Earnings Before Tax 444,000
Less: Tax@40% 177,600
Earnings After Tax 266,400
Divide: No of Equity Shares 100,000
Earnings Per Share (EPS) Rs 2.664
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CHAPTER: Capital Investment Decision:
Question No. 8:
Answer:
Step-1: Initial Cash Outflow of the Project:
Purchase Cost of Machine 40,00,000
Additional Working Capital required 5,00,000
Total Initial Cash Outflow Rs 45,00,000
Step-2: Computation of Annual Cash Flow after Tax (CFAT):

“Amount in Lakhs”
Particulars Y-1 Y-2 Y-3 Y-4 Y-5 Y-6
No of Units 3 6 9 12 12 -
Sales 60 120 180 240 240 -
Less: Variable 36 72 108 144 144 -
costs
Less: Fixed costs 20 30 40 40 40 -
Less: Factory Rent 6 6 6.6 6.6 7.26 -
Less: Investment 8 - - - - -
Allowance
Earnings Before (10) 12 25.4 49.4 48.74 -
Dep. and Tax
(EBDT)
Less: Depreciation 4 4 4 4 4 -
Earnings Before (14) 8 21.4 45.4 44.74 -
Tax
Less: Tax @ 30% - 4.2 (2.4) (6.42) (13.62) (13.422)
Earnings After (14) 12.2 19 38.98 31.12 (13.422)
Tax
Add: 4 4 4 4 4 -
Depreciation:
CFAT (10) 16.2 23 42.98 35.12 (13.422)
Salvage Value - - - - 15.75 -
Tax saving on loss - - - - - 1.275
Working Capital (7) (6) (6) - 24 -
Final CFAT (17) 10.2 17 42.98 74.87 (12.147)
Step-3: Computation of NPV:

Year Cash Flow (Rs) PV Factor @ 11.8% Present Value (Rs)
0 (4500,000) 1 (45,00,000)
1 (1700,000) 0.8945 (15,20,650)
2 10,20,000 0.8000 8,16,000
3 17,00,000 0.7156 12,16,520
4 42,98,000 0.6401 27,51,150
5 74,87,000 0.5725 42,86,308
6 (12,14,700) 0.5121 (6,22,048)
Net Present Value (NPV) Rs 24,27,280
Decision: Accept the project as its NPV is positive by Rs 24, 27,280
17 | P a g e
Working Notes:
1) Contribution ratio is 40%. Hence variable cost ratio is 60%
2) Depreciation is on SLM @10%. Salvage value is not required to be deducted while
calculating depreciation.
3) Tax Saving on loss on sale of Assets:
Selvage Value 15,75,000
Less: Book Value (40 -20) 20,00,000
Loss on sale 4,25,000
Tax Saving on loss @ 30% (Tax saving on loss is available only 1,27,500
in 6th year)
4) Adjustment of Working Capital:

Year Sales Working Cash outflow Release of working
Capital @ 10% capital (inflow)
0 - 5 5 -
1 60 12 7 -
2 120 18 6 -
3 180 24 6 -
4 240 24 - -
5 240 - 24
5) Computation of Cost of Capital (Discount Rate):

a) Cost of Debt (Kd) = Interest Rate (1-Tax) = 10% x 0.7 = 7%
b) Cost of Equity (Ke) = (D1/P0) + g = (2/20) + 3% = 13%
c) Overall cost of Capital (WACC) = Ke x We + Kd x Wd
= 13% x 0.80 + 7% x 0.2 = 11.80%
Question No. 9:
Answer:
a) Calculation of NPV (Purchase Vs Hire)

Year 1 2 3 4 5
Hire Charges (WN-1) 39, 24,000 43, 16,400 47, 48,040 52, 22,844 57, 45,128
Buying Charges (WN-2) 3326,000 3344,800 3694,464 3895,018 3916,489
Saving before Taxes 598,000 971,600 1053,576 1327,826 1828,639
Taxes @35% 209,300 340,060 368,752 464739 640,024
Saving after taxes 388,700 631,540 684,824 863,087 1188,615
Add: Depreciation 1000,000 1000,000 1000,000 1000,000 1000,000
Salvage Value - - - - 2000,000
Final Cash inflows 1388,700 1631,540 1684,824 1863,087 4188,615
PVIF@10% 0.9091 0.8264 0.7513 0.6830 0.6209
Present Values 1262,467 1348,305 1265,808 1272,488 2600,711
Total PVs 7749,779
Cash outflows 7000,000
NPV 749,779
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Advice:
Since the NPV of buying Tata Safari is more than the hiring of inspection vehicle, it is advised to
purchase Tata Safari.
Workings:
1) Annual Hire charges:
Year-1:
Daily charges = 9000
Extra charges = 1400 (70 x 20)
OT for Drivers =500 (250 x 2)
Total = 10,900
Annual Hire charges (Total) = 10,900 x 360 = 39, 24,000
Year-2: 39, 24,000 x 1.1 = 43, 16,400
Year-3: 43, 16,400 x 1.1 = 47, 48,040
Year-4: 47, 48,040 x 1.1 = 52, 22,844
Year-5: 52, 22,844 x 1.1 = 57, 45,128
2) Annual Operating costs (Purchase Option):

Year 1 2 3 4 5
Drivers Salary 960,000 988,800 1018,464 1049,018 1080,489
Over Time Payment 216,000 216,000 216,000 216,000 216,000
Insurance 70,000 60,000 50,000 40,000 30,000
Maintenance costs - - 150,000 150,000 150,000
Fuel 1080,000 1080,000 1260,000 1440,000 1440,000
Depreciation 1000,000 1000,000 1000,000 1000,000 1000,000
Total 3326,000 3344,800 3694,464 3895,018 3916,489
3) Assumption: Year = 360 days
Question No. 10:

Answer:
Financial Evaluation Whether to Install Equipment for Further Processing of Iron Ore:
PART –I: (If there is no other asset in a block):
1) Cash Outflows:
Cost of equipment Rs 1,00,00,000
+ Additional working capital Rs 10,00,000
Rs 1,10,00,000
2) Annual Cash inflows (CFAT):

Particulars Year-1 Year-2 Year-3 Year-4 Year-5
Incremental revenue [(Rs 7,000,000 7,000,000 7,000,000 7,000,000 7,000,000
1,600 x 20,000) - Rs
1,000 x 25,000)]
Less incremental costs: 2,500,000 2,500,000 2,500,000 2,500,000 2,500,000
Processing costs (Rs 100
x 25,000 tons)
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Depreciation (working 2,500,000 1,875,000 1,406,250 1,054,688 0

note 1)
Earnings before taxes 2,000,000 2,625,000 3,093,750 3,445,312 4,500,000
Less: taxes (0.35) 700,000 918,750 1,082,813 1,205,859 1,575,000
Earnings after taxes 1,300,000 1,706,250 2,010,937 2,239,453 2,925,000
(EAT)
Add: depreciation 2,500,000 1,875,000 1,406,250 1,054,688 0
CFAT 3,800,000 3,581,250 3,417,187 3,294,141 2,925,000
3) Determination of NPV (If Salvage Value = Rs 10 Lakh):

Year CFAT PV Factor @ Total PV
15%
1 3,800,000 0.870 33,06,000
2 3,581,250 0.756 27,07,425
3 3,417,187 0.658 22,48,509
4 3,294,141 0.572 18,84,249
5 2,925,000 0.497 14,53,725
Salvage value 10,00,000 0.497 4,97,000
Tax benefit on short term 7,57,422 0.497 3,76,439
capital loss
Recovery of working capital 10,00,000 0.497 4,97,000
1,29,70,347
Less cash outflows 1,10,00,000
Net present value (NPV) 19,70,347
Recommendation:
The Company is advised to install the equipment as it promises a positive NPV
4) Determination of NPV (If Salvage Value = Zero):

PV of operating CFAT (1 - 5 years) Rs 11,599,908
Add: PV of tax benefit on short term capital loss (Rs 5,50,389
31,64,062 x 0.35 = Rs 11,07,4,22 x 0.497, PV factor)
Add PV of recovery of working capital 4,97,000
Total Present Value 1,26,47,297
NPV 16,47,297
Decision:
Since the NPV is still positive, the company is advised to install the equipment.
Working notes:
1) Depreciation schedule:
Year Depreciation base of equipment Depreciation @ 25% on WDV
1 Rs 100,00,00 25,00,000
2 75,00,000 18,75,000
3 56,25,000 14,06,250
4 42,18,750 10,54,688
31,64,062 NIL
20 | P a g e
2) Tax Saving on short term capital loss:

0.35 X (Rs 31, 64,062 – Rs 10, 00,000) = Rs 7, 57,422
PART –II: (If there are other plants and machinery subject to 25 per cent depreciation):
a) Cash outflows would remain unchanged.

b) The annual depreciation will also remain the same for the first 4 years: In year 5, the
depreciation = Rs 21,64,062 (opening WDV of equipment, Rs 31,64,062 - Rs 10,00,000,
salvage value) x 0.25 = Rs 5,41,016.
c) The CFAT (operating) for years, 1-4 will not change. In year 5, it will be shown as below:
Particulars CFAT (year-5)
Incremental revenue Rs 70,00,000
Less: incremental costs:
Processing costs 25,00,000
Depreciation 5,41,016
Earnings before taxes 39,58,984
Less taxes (0.35) 13,85,644
EAT 25,73,340
CFAT 31,14,356
d) Determination of NPV (If Salvage Value = Rs 10 Lakh):

Year CFAT PV Factor @ 15% Total PV
1 3,800,000 0.870 33,06,000
2 3,581,250 0.756 27,07,425
3 3,417,187 0.658 22,48,509
4 3,294,141 0.572 18,84,249
5 31,14,356 0.497 15,47,835
Salvage value 10,00,000 0.497 4,97,000
Recovery of working capital 10,00,000 0.497 4,97,000
1,26,88,018
Less: cash outflows 1,10,00,000
Net present value (NPV) 16,88,018
Recommendation:
e) The company is advised to install the equipment as it promises a positive
NPVDetermination of NPV (If Salvage Value = Zero):
(i) For the first 4 years, depreciation amount will remain unchanged. In the fifth-year,
depreciation = Rs 31, 64,062 (Rs 31, 64,062, opening WDV less zero salvage value)
x 0.25 = Rs 7, 91,015.
(ii) Operating CFAT for years 1 - 4 will remain unchanged. The CFAT for 5th year
would be Rs 32,01,855 as shown below:
Incremental revenues Rs 70,00,000
Less: incremental total costs (Rs 25,00,000+Rs 7,91,015) 32,91,015
EBT 37,08,985
Less: taxes (0.35) 12,98,145
EAT 24,10,840
Add depreciation 7,91,015
CFAT 32,01,855
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(iii) Computation of NPV

PV of operating CFAT (1 - 4 years) 1,01,46,183
Add: PV of operating CFAT (5th year) (Rs 32,01,855 x 15,91,322
0.497)
Add PV of recovery of working capital 4,97,000
Total PV 1,22,34,505
NPV 12,34,505
Recommendation:
The decision does not change, as NPV is positive.
CHAPTER: Working Capital Management and Financial Forecasting
Question No-11:
Answer:
1) Balance Sheet of the company:
Equity and Liabilities Rs Assets Rs
Share Capital 18,00,000 Fixed Assets 39,00,000
Reserve and Surplus 12,00,000 Current Assets:
Long Term borrowings 23,62,500 Inventories 9,75,000
Current Liabilities 9,75,000 Trade Receivables 7,50,000
Cash and Cash 7,12,500
equivalents
63,37,500 63,37,500
2) Statement showing working capital requirement:

Current Assets:
Inventories (Stocks) 9,75,000
Receivables (Debtors) 7,50,000
Cash in hand and at bank 7,12,500
Total Current Assets 24,37,500
Current Liabilities:
Total Current Liabilities 9,75,000
Net working Capital 14,62,500
Add: Provision for contingencies 2,19,375
Working Capital Requirement 16,81,875
Working Notes:
1) Cost of Goods Sold
= Sales – Gross profit (35% of sales)
= 90, 00,000 – 31, 50,000
= Rs 58, 50,000
2) Closing Stock
= Cost of Goods Sold/Stock Turnover
= 58, 50,000/6 = 9, 75,000
3) Fixed Assets
= Cost of Goods Sold/Fixed Asset Turnover
22 | P a g e
= 58, 50,000/1.5 = 39, 00,000

4) Current Assets and Current Liabilities:
Current Ratio is 2.5, hence, Current Assets (CA) = 2.5 Current Liabilities (CL)
Liquid Ratio = 1.5
Or, (CA- Inventories)/ CL = 1.5
Or, 2.5CL – 9, 75,000 = 1.5 CL
Hence, Current Liabilities = Rs 9, 75,000, and
Current Assets = 9, 75,000 x 2.5 = Rs 24, 37,500
5) Liquid Assets (Receivables and Cash) = Current Assets – Inventories
= 24, 37,500 – 9, 75,000 = Rs 14, 62,500
6) Receivables (Debtors) = Credit Sales per Month x Debtors Collection Period (month)
= (90, 00,000/12) x 1 = Rs 7, 50,000
7) Cash = Liquid Assets – Receivables (Debtors)
= 14, 62,500 - 7, 50,000 = Rs 7, 12,500
8) Fixed Assets to Net worth = 1.3:1
Hence, Net Worth = Fixed Assets /1.3 = 39, 00,000/1.3 = Rs 30, 00,000
9) Reserve and surplus to share capital = 1/1.5
Hence, Share Capital = 1.5 Reserve and Surplus
Again, Net worth = Reserve and Surplus + Share Capital
Or, Net Worth = Reserve and Surplus + 1.5 Reserve and Surplus
Or, 30, 00,000 = 2.5 Reserve and Surplus
Hence, Reserve and Surplus = Rs 12, 00,000, and
Share Capital = 12, 00,000 x 1.5 = Rs 18, 00,000
10) Long Term Debts:
Capital Gearing Ratio = Long Term Debts/ Equity Shareholders Fund
Or, 0.7875 = Long term Debts/30, 00,000
Hence, Long Term Debts = 30, 00,000 x 0.7875 = Rs 23, 62,500
Question No-12:
Answer:
Statement Showing Evaluation of Credit Policy:
Particulars Amount (Rs) Amount (Rs)
Proposed investment in debtors =
(1725000 x 60% + 1500000 x 15%) x 60/365 207,123.88
Less: Current investment in debtors = 92,466.00
(1,500,000 x 75%) x 30/365
Increase in investment in debtors 114,657.88
Increase in contribution = 15% x 1,500,000 x 40% 90,000.00
New level of bad debts = 1,725,000 x 4% 69,000.00
Current level of bad debts = 1,500,000 x 1% 15,000.00
Increase in bad debts (54,000.00)
Additional financing (opportunity) costs (13,758.87)
= 114,657.88 x 12%
Savings by introducing change in policy 22,241.12
Decision: The financing policy is financially acceptable, although the savings are
not significant.
23 | P a g e
Question No. 13:

Answer:
1) A projected statement of profit and loss:
Particulars Year 1 (Rs) Year 2 (Rs)
Opening stock of RM 0 300,000
Add: Purchase 1500,000 1700,000
Less: Closing Stock of RM 300,000 400,000
RM Consumption 1200,000 1600,000
Add: Wages incurred 600,000 800,000
Add: Fixed Mfr. and Adm. Expenses 480,000 480,000
Add: Depreciation 240,000 240,000
Factory Cost 2520,000 3120,000
Add: Opening Stock of FG 0 168,000
Less: Closing Stock of FG 168,000 469,714
COGS 2352,000 2818,286
Add: Variable selling expenses 112,000 144,000
Add: Fixed selling expenses 48,000 48,000
Cost of Sales 2512,000 3010,286
Add: Profit 288,000 589,714
Sales 2800,000 3600,000
2) Statement showing estimation of working capital requirement (Total Approach):

Particulars Year 1 Year 2
Current Assets:
RM stock 300,000 400,000
FG stock 168,000 469,714
Debtors 233,333 300,000
Cash 20,000 20,000
Total CA 721,333 1189,714
Current Liabilities
Creditors (RM) 250,000 283,333
Creditors for expenses 103,333 122,667
Total CL 353,333 406,000
Working Capital 368,000 783,714
Note:
1) Fixed expenses and depreciation is based on full capacity
2) Administrative expenses are also included in stock valuation as per the information of
question.
3) Finished goods are valued on average cost basis.
4) Variable selling expenses are incurred for the units sold only.
CHAPTER: Dividend Distribution Policy
Question No-14:
Answer:
Determination of optimum dividend payout Ratio:
Company X Ltd. Y Ltd. Z Ltd.
24 | P a g e
Internal Rate of return (%) 5 15 20

Cost of equity capital (%) 15 15 15
Type of Firm Decline Stable Growth
Optimum D/P Ratio 100% 0 -100% 0%
Reason r <Ke r = Ke r > Ke
D/P Ratio 0% 50% 100%
Computation of price per share of X Ltd under given D/P Ratio

Formula: 0 + (10-0)x5%/15% 5 + (10-5)x5%/15% 10 + (10-10) x5%/15%
D + [(E-D) x r/Ke]
P= 15% 15% 15%
Ke = Rs 22.22 = Rs 44.44 = Rs 66.67
Computation of price per share of Y Ltd under given D/P Ratio
Formula 0 + (10-0) x15%/15% 5 + (10-5)x15%/15% 10 + (10-10) x15%/15%

D + [(E-D) x r/Ke]
P= 15% 15% 15%
Ke = Rs 66.67 = Rs 66.67 = Rs 66.67
Computation of price per share of Z Ltd under given D/P Ratio
Formula 0 + (10-0) x20%/15% 5 + (10-5)x20%/15% 10 + (10-10) x20%/15%

D + [(E-D) x r/Ke]
P= 15% 15% 15%
Ke = Rs 88.89 = Rs 77.78 = Rs 66.67
Question No-15:
Answer:
Total investment that can be made without raising fresh equity
1, 00, 000 (1.40) = 1, 40, 000
Cost of capital if the investment is up to Rs. 1, 40, 000
Source of finance Cost (X) W XW
Debt 10 40, 000 4, 00, 000
Retained Earnings 20 1, 00, 000 20, 00, 000
ΣW = 1, 40, 000 ΣXW = 24, 00, 000
Cost of capital = 24, 00, 000/1, 40, 000 = 17.14%
Project A may be taken up as its return is more than 17.14%
Investment in A: 80,000 retained earnings + 32, 000 Debt.
Deciding about B
Cost of capital for B:
Source of finance Cost (X) W XW
Debt 10 16, 000 1, 60, 000
Retained Earnings 20 20, 000 4, 00, 000
Equity 23 20,000 4, 60, 000
ΣW = 56, 000 ΣXW = 10, 20, 000
Cost of capital = 10, 20, 000/56, 000 = 18.21%

As the return from project B is less than its cost of capital, it may not be accepted.
25 | P a g e
Projects C and D may not be taken up as their returns are less than 18.21% and the cost of their
funding will be higher than 18.21% because of increase in the amount raised as fresh equity.
Dividend:
Net profit 1, 00, 000
Investment in A 80, 000
Balance 20, 000
This amount may be distributed as dividend subject on CDT
Dividend = 20, 000 * 100/115 17, 391
CDT 2, 609
CHAPTER: Valuation of Securities:
Question No-16:
Answer:
1) Computation of Intrinsic Value of Bond:
Intrinsic Value of Bond = PV of interest cash flow + PV of Maturity Value
= Rs 562 + Rs 508
= Rs 1070
Working Notes:
(i) PV of Interest Cash Flow:
Particulars Value
Face Value Rs 1000
Annual Coupon Rate 16%
Half yearly Coupon Rate (16%/2) 8%
Maturity Period (annual) 5 years
Maturity Period (half yearly) (5years x 2) 10 Periods
Half yearly Interest Amount (1000 x 16% x ½) Rs 80
No of interest payments for next 5 years 10
Discount Rate (T-Bill Rate + 4%) 14%
Discount Rate half yearly 7%
Annuity Factor for 10 periods @ 7% 7.024
PV of Interest Cash Flows Rs 562
(ii) PV of Maturity Value

Particulars Value
Maturity Value = Face Value Rs 1000
PV Factor at 7% at the end of 10 Periods 0.508
Present Value of Maturity Proceeds Rs 508
Note: Since interest is payable half-yearly, present value at the end of 5th Year is to be computed
based on the half yearly interest rate of 8% and the number of periods as 10
2) Action on Bond:
Particulars Value
Value of Bond (Expected Price = Intrinsic Value) Rs 1070
Actual Market Price per Bond Rs 1040
Inference Under priced
26 | P a g e
Action Buy
3) Computation of Yield to Maturity (YTM):

Particulars Rate Value
Intrinsic Value 7% (half yearly) Rs 1070
Face Value 8% (half yearly) Rs 1000
Market Value ? Rs 1040
Intrinsic Value – Market Value

YTM = lower Rate + X (HR-LR)
Intrinsic Value – Face Value
Rs 1070 – Rs 1040
Or, YTM = 7% + x (8% - 7%)
Rs 1070 – Rs 1000
OR YTM = 7% + 30/70 = 7.43%
Annual YTM = 7.43% x 2 = 14.86%
Question No-17:
Answer:
1) Number of shares to be issues by A ltd for acquisition of B Ltd
= 180,000/2 = 90,000 shares.
2) Profit After Tax of A ltd after Acquisition
= 18, 00,000 + 360,000 = Rs 21, 60,000
3) Total no of shares of A ltd after Acquisition
= 600,000 + 90,000 = 690,000
4) EPS after of A Ltd after acquisition
= 2160, 000/690,000 = Rs 3.13
5) PE Ratio of A ltd after acquisition = 10 times
6) MPS of A Ltd after acquisition = 3.13 x 10 = Rs 31.30 per share
7) Market Value of A ltd after acquisition
= Total number of shares x MPS = 690,000 x 3.13 = Rs 21, 59,700
CHAPTER: Risk and Return:
Question No-18:
Answer:
1) Computation of Dividend Yield on share:
Dividend yield:
= Expected Dividend/Current Market Price
= Rs 3/Rs 60
= 5%
2) Computation of Capital appreciation rate:
Capital Appreciation:
= (Year-end price – Year beginning Price)/ Year beginning Price
= (78.5 – 60)/60
= 30.83%
3) Holding Period Return (HPR):
= Dividend Yield + Capital Appreciation
= 5% + 30.83%
27 | P a g e
= 35.83%
4) Computation of required return (CAPM)
= Risk-free Rate + β x risk premium
= 6% + 1.5 x 10%
= 21%
5) Computation of Intrinsic Value:
= (Expected Divided + Expected Price)/ (1 + Required return)
= (3 + 78.5)/1.21
= Rs 67.36
6) Decision: Since the market price is lower than the intrinsic value, it is underpriced share and
hence should be purchased.
CHAPTER: Overview of Capital Markets:
Question No.19:
Answer:
Option 1:
Annual rate of return if dividend and capital gain is received:
Increase in NAV (Rs. 9.45 – Rs. 8.75) 0.70
Dividend Received 0.75
Capital Gain 0.60
Total Return 2.05
Annual rate of return = 2.05/8.75 = 23.43%
Option 2:
Annual rate of return if dividend and capital gain is reinvested:
Total Dividend & Capital Gain received =
(Dividend per unit + capital gain per unit) * No. of units = (0.75 + 0.60) * 300 = Rs 405
Total additional units acquired = Rs. 405 / Rs. 8.65 = 46.82 units
Total number of units = 300 + 46.82 = 346.82 units
Value of 346.82 units held at the end of the year = 346.82*9.45 = Rs. 3,277.50
Value of 300 units paid at the beginning = 300 * Rs. 8.75 = Rs. 2,625
Increase in Investment = Rs. 3,277.50 – 2,625.00 = Rs. 652.50
Annual rate of return = 652.5/2625 = 24.86%
Recommendation: The effective return is more if dividend and capital gains are
reinvested. Hence, it is recommended to reinvest the distributions at Rs. 8.65 per unit.
CHAPTER: Short Notes :
Question No.20:
Answer:
There are three components in the calculation of return on equity using the traditional Du Pont
Model viz. The net Profit Ratio, Total Assets Turnover ratio and the Total Assets to Net worth
28 | P a g e
Ratio (Equity Multiplier). By examining each input individually, the sources of a company’s return
on equity can be discovered and compared to its competitors.
ROE = Net Profit Ratio X Assets Turnover Ratio X Equity Multiplier
Net Profit Ratio

= EAT ÷ Net Sales
Return on Total Assets
= EAT ÷ Total Sales
X
Total Assets Turnover

Return on Equity
X Ratio
(ROE) = PAT ÷
= Net Sales ÷ Total
NW
Assets
Total Assets to Net worth

Ratio = Total Assets ÷ Net
Worth
Question No-21:
Answer:
a) Functions of Stock Exchange:
h) Liquidity and marketability of securities- Investors can sell their securities whenever they
require liquidity.
ii) Fair price determination- the exchange assures that no investor will have an excessive
advantage over other market participants.
iii) Source for long term funds- the stock exchange provides companies with the facility to raise
capital for expansion through selling shares to the investing public
iv) Helps in capital formation- Accumulation of saving and its utilization into productive use
creates helps in capital formation.
v) Creating investment opportunity of small investor- provides a market for the trading of
securities to individuals seeking to invest their saving or excess funds through the purchase
of securities.
vi) Transparency- Investor makes informed and intelligent decision about the particular stock
based on information. Listed companies must disclose information in timely, complete and
accurate manner to the exchange and the public in a regular manner.
b) ‘Aging Schedule’ in the context of monitoring of receivables:

An important means to get an insight into collection pattern of debtors is the preparation of their
‘Ageing Schedule’. Receivables are classified according to their age from the date of invoicing
e.g. 0 – 30 days, 31 – 60 days, 61 – 90 days, 91 – 120 days and more.
The ageing schedule can be compared with earlier month’s figures or the corresponding month
of the earlier year. This classification helps the firm in its collection efforts and enables
29 | P a g e
management to have a close control over the quality of individual accounts. The ageing
schedule can be compared with other firms also.
c) Virtual Banking:
Virtual banking refers to the provision of banking and related services through the use of
information technology without direct recourse to the bank by the customer.
The advantages of virtual banking services are as follows:
a. Lower cost of handling a transaction.

b. The increased speed of response to customer requirements.
c. The lower cost of operating branch network along with reduced staff costs leads to cost
efficiency.
d. Virtual banking allows the possibility of improved and a range of services being made
available to the customer rapidly, accurately and at his convenience.
d) EBIT-EPS Indifference Point:

i) It is that level of EBIT at which EPS under different capital structure will be equal.
ii) It is also called EPS equivalency point where the firm will be indifferent between two modes
of financing.
iii) It is Computed by solving the equation for EBIT
Alternative 1: With Debt Alternative 2: Without Debt

(EBIT – Interest) (1 – Tax Rate) EBIT (1 – Tax Rate)
No of equity shares No of equity shares
iv) When both the alternatives in the above chart is equal at a certain level of EBIT (to be
computed by solving the above equation), the company is said to be indifferent between the
two alternatives.
v) If the EBIT is more than the indifference level, alternative with debt should be selected to
avail the benefits of financial leverage i.e., debt financing from the point of view of equity
shareholders. However, if the expected EBIT is less than the indifference level, the firm
should raise the funds by issuing equity share capital only and avoid the debt financing.
vi) Interpretation of the Indifference Point:
Situation Option Reason

EBIT below Select that alternative which EPS is expected to decrease as
indifference point has lower debt. a result of debt financing
EBIT equal to Any alternative can be Both the alternative will have
indifference point chosen equal EPS
EBIT above Select that alternative which Benefits of financial leverage
indifference point has higher debt is available to maximize EPS
vii) Graphical Presentation of Indifference Level
Alternative 1: with Debt
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EPS(Rs)
Alternative 2: without Debt
Indifference Point
EBIT (Rs)
Indifference EBIT
e) Junk bonds:
Junk bonds are corporate bonds with low ratings from major credit rating agencies. High rated
bonds are called 'investment grade bonds'; low rated bonds are called 'speculative grade bonds'
or less formally called as 'junk bonds'.
A bond may receive a low rating for a number of reasons. If the financial condition or business
outlook of the company is poor, bonds are rated speculative grade. Bonds are also rated in the
speculative grade if the issuing company already has large amount of debt outstanding. Some
bonds are rated in such a grade because they are subordinated to other debt i.e. their legal claim
on the firm's assets in the event of default stands behind the other claim, so called senior debt.
Junk bonds are traded in a dealer market rather than being traded in stock exchanges.
Institutional investors hold the largest share of junk bonds. Firms with low credit ratings tend to
pay 3 to 5 percent more than the investment grade corporate debt to compensate for greater risk
they pose.
Junk bonds are high yield security, because of this reason junk bonds are widely used as a
source of finance in takeovers and leveraged buy-outs. Junk bonds lie between conventional
investments as equities and investment grade bonds. Junk bonds are riskier than investment
grade bonds but less risky than equity.
(f) Venture Capital Financing:

Venture capital financing refers to financing of new high risky venture promoted by qualified
entrepreneurs lacking experience and funds to give shape to their ideas. Under it venture
capitalist makes investment to purchase equity or debt securities from inexperienced
entrepreneurs undertaking highly risky ventures with a potential of success. The venture
capitalist finance ventures that are in national priority areas such as energy conservation, quality
up-gradation, etc. Some common methods of venture capital financing are:
(i) Equity financing:

The venture capital undertakings usually require funds for a longer period but, may not be able
to provide returns to investors during the initial stages. Thus, the venture capital finance is
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generally provided by way of equity share capital. The equity contribution of venture capital
firm does not exceed 49 % of the total equity capital of venture capital undertakings so that the
effective control and ownership remains with the entrepreneur.
(ii) Conditional loan:

It is repayable in the form of a royalty after the venture is able to generate sales. No
interest is paid on such loans. Venture capital financers charge royalty ranging between 2 and
15%, actual rate depends on other factors of the venture as gestation period, cash flow patterns,
riskiness and other factors of the enterprise. Some venture capital financers give a choice to
the enterprise of paying a high rate of interest, which can be well below 20%, instead of
royalty on sales once it becomes commercially sounds.
(iii)Income note:
It is a hybrid security combining features of both conventional and conditional loan. The
entrepreneur has to pay interest and royalty on sales but, at substantially low rates.
(iv) Participating debentures:

Such security carries charges in 3 phases -in the startup phase no interest is charged, next stage -
a low rate of interest is charged up to a particular level of operation and after that, a high rate of
interest is required to be paid.
(g) Different kinds of float with reference to management of cash:
Different Kinds of Float with Reference to Management of Cash: The term float is used to refer
to the periods that affect cash as it moves through the different stages of the collection process.
Four kinds of float can be identified:
(i) Billing Float:

An invoice is the formal document that a seller prepares and sends to the purchaser as the
payment request for goods sold or services provided. The time between the sale and the
mailing of the invoice is the billing float.
(ii) Mail Float:

This is the time when a cheque is being processed by post office, messenger service or other
means of delivery.
(iii) Cheque processing float:

This is the time required for the seller to sort, record and deposit the cheque after it has been
received by the company.
(iv) Bank processing float:

This is the time from the deposit of the cheque to the crediting of funds in the seller’s
account.
Question No-22:
Answer:
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a) Capital market and Money market

The capital market deals in financial assets. Financial assets comprises of shares, debentures,
mutual funds etc. The capital market is also known as stock market. Stock market and money
market are two basic components of the financial system. Capital market deals with long- and
medium-term instruments of financing while money market deals with short term instrument.
Some of the point of difference between capital market and money market are as follows:
Money Market Capital Market

There is no classification between There is a classification between primary market
primary market and secondary market. and secondary market.
It deals for funds of short-term It deals with the funds of long-term requirement.
requirement.
Money market instruments include inter- Capital market instruments are shares and debt
bank call money, notice money, short- instruments.
term deposits, commercial paper, and
Treasury bills.
Money market participants are Banks, Capital Market participants include retail investors,
Financial Institutions, Government, NRB institutional investors like mutual fund, financial
institutions, corporate and banks.
b) Bonus shares and Share splits.

Bonus shares Share splits
Bonus share is a distribution of shares in Stock split is a method to increase number of
lieu of or in addition to the cash dividend outstanding shares through a proportional
to the existing shareholders. It is also reduction in the par value of shares.
called stock dividend.
It increases the equity share capital and It increases the number of outstanding shares but
number of outstanding shares of the does not affect the retained earnings of .the
company. However, the face value of the company. However, the face value (par value) of
shares is unaffected by issuing bonus the shares is affected by share split.
share.
It reduces the reserves and surplus It does not reduce the reserves and surplus
(retained earnings) of .the company but (retained earnings) of .the company nor changes
does not change the net worth of the the net worth of the company.
company i.e. wealth of shareholders.
It represents a recapitalization of the It does not represent a recapitalization of the
owner's equity. owner's equity.
EPS and MPS will fall proportionately to EPS will increase proportionately to the share
the bonus share issue. split.
The main objective is to conserve the The main objective is to ensure that the share
cash for future profitable investment trading are maintained within the trading range.
opportunities.
c) Leveraged Buyout and Management Buyout:

Leveraged buy-out (LBO) is primarily a debt financed purchase of all the stock or assets of a
company, subsidiary, or division by an investor group. LBO thus represents an ownership
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transfer financed primarily with debt capital. The debt in LBO is secured by the assets of the
firm involved.
LBOs are mostly capital-intensive businesses. Sometimes, LBO involves an entire company.
However, most LBOs involve purchase of a division or some sub-unit of a company.
Desirable LBO candidates must possess certain common characteristics. The firm in question
should enjoy a host of opportunities without having a need to make investment in capital
expenditure in foreseeable future. It could be that the firm has recently made heavy investment
in capital expenditures and, as a result, the plant is quite modern. On the contrary, the
companies with the requirements of high research and development costs such as drug and
pharmaceutical companies, are not good candidates for LBOs.
Management buyout (MBO) is a leveraged buyout in which pre-buyout management ends up
taking up with a substantial equity in a particular division of the firm subjected to MBO. The
MBO takes place after the company decides that the division no longer fits in its long-term
objectives.
There are some features which distinguishes LBO from MBO. While LBO is a cash purchase,
MBO is an equity purchase. The business unit in question becomes a privately held company
following an MBO.
d) Return on equity and Return on capital employed:

Return on equity (ROE) measures the rate of return on the ownership interest
(shareholders' equity) of the common stock owners. It measures a firm's efficiency at generating
profits from every unit of shareholders' equity (also known as net assets or assets minus
liabilities). ROE shows how well a company uses investment funds to generate earnings growth.
ROEs between 15% and 20% are generally considered good. Return on equity reveals how
much profit a company earned in comparison to the total amount of shareholder equity found on
the balance sheet. It's what the shareholders "own". Shareholder equity is a creation of
accounting that represents the assets created by the retained earnings of the business and the
paid-in capital of the owners.
Return on capital employed (ROCE) is an accounting ratio used in finance, valuation, and
accounting. Return on capital employed (ROCE) is a measure of the returns that a business
is achieving from the capital employed, usually expressed in percentage terms. Capital
employed equals a company's Equity plus Non-current liabilities (or Total Assets – Current
Liabilities), in other words all the long-term funds used by the company. ROCE indicates the
efficiency and profitability of a company's capital investments. ROCE should always be higher
than the rate at which the company borrows otherwise any increase in borrowing will reduce
shareholders' earnings, and vice versa; a good ROCE is one that is greater than the rate at which
the company borrows.
e) Treasury bills and Certificate of deposits:

Treasury bills:
Treasury bills are sold by the government on a discount basis. As a result, the investor does not
get actual payment of interest on the Treasury bills. The return to the investor is in the form of
difference between the purchase price and face (or par) value of the bill. These bills are issued
without the investor’s name upon them, i.e. in the bearer form. This feature of the treasury bills
makes them easily transferable from one investor to another. The secondary market also exists
for these bills making them highly liquid. It is also considered risk-free since it has the backing
and guarantee of the government.
Certificate of deposits:
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Certificate of deposits (CDs) are marketable receipts for funds that have been deposited in a
bank/financial institution for a specified period of time. The funds thus deposited earn a fixed
rate of interest. The denomination and the maturities is agreed upon as per the needs and wishes
of the investor. Since the CDs are not sold at discount, the investor receives the amount
deposited plus the interest earned thereon. A secondary market also exists for the CDs. These
may be issued in the registered or bearer form. The second types of CDs are most common and
popular due to their easy transferability and liquidity.
f) Permanent working capital and Variable working capital:

Permanent working capital is the minimum amount of gross working capital which is always
maintained in spite of the increase or decrease in the sales during the year. It comprises of the
minimum cash balance, minimum inventory level etc. If a firm does not face a seasonal cycle
then it will have only a permanent working capital requirement.
Variable working capital is the amount of gross working capital that exceeds the amount of
permanent working capital at any time during the year. It is also important for the finance
manager to decide sources for financing seasonal current assets. The variable working capital is
the result of the periodic fluctuations of the gross working capital. For example, wheat mill may
have higher inventories at the time of harvesting wheat. It causes the increase in gross working
capital.
g) Factoring and Bills discounting:

The factoring and bills discounting are both means available for short term finance;
nevertheless, they are different to each other in terms of:
Responsibility:
In factoring it is the factor that usually assumes the responsibility of collecting the bills while in
bills discounting the drawer assumes the responsibility of collecting the bills and pays the
proceeds. Factoring is more associated with the management of book debts while bill
discounting is related to borrowing from commercial bank.
Risk of Credit:
Bills discounting is always of recourse type i.e., drawer assumes the credit risk and not the
drawee bank, while factoring can be either with or without recourse. In case of recourse, the
factor does not assume credit risk and the company that owns receivables assumes the credit
risk.
Facility of finance:
In bills discounting, there is only a provision of finance, while in factoring, the factor provides
other facilities like sales ledger maintenance, collection etc. in addition to the finance facility.
Negotiability:
The discounted bills may be re-discounted several times before they mature for payment where
as it is not possible to negotiate in case of factoring.
Accounting:
Transactions in the factoring are off balance sheet items as the amount of receivables and bank
credit are not presented in the balance sheet, whereas bills discounting are presented in the
"Loans and Advances" head of the balance sheet.
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PAPER 5: COST AND MANAGEMENT ACCOUNTING
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Revision Questions
Costs Concepts and Costing Methods
Question No. 1 a) Discuss the steps to be followed to exercise control over cost.
b) Distinguish between: Imputed Costs and Common Costs
Material Control
Question No. 2
Explain the advantages that would accrue in using the LIFO method of pricing for the valuation of
raw material stock.
Question No. 3
Bimal Cables require copper for it’s factory. The probability distributions of the daily usage rate
and the lead time for procurement are given below. (these distributions are independent)
Daily usage rate in Lead time in
Tonnes Probability Days Probability
2 0.2 25 0.2
3 0.6 35 0.5
4 0.2 45 0.3
The stock out cost is estimated at Rs. 8,000 per ton and the carrying cost in Rs. 2,000 per ton per
year.
Required:
a) What is the optimum level of safety stock?
b) What is the probability of stock out?
Labour Control
Question No.4
The Delta Corporation has filed the following income statement for the year ending 31st March,
2021.
Sales Rs. 24,00,000
Less : Variable costs
Material Rs 6,01,000
Direct labour 5,1 9,000
Variable factory overheads 3,20,000
Variable selling and distribution O.H. 1,90,000 16,30,000
Contribution 7,70,000
Less : Fixed overheads 5,30,000
Net income before tax 2,40,000
Capital employed 12,00,000
The actual number of hours for direct labour worked in the year under review was 2,06,000. As a
consequence of delays in filling vacancies of employees who quit, 6,000 potential direct hours were
not worked and included in the actual hours worked were 4,000 hours of trainees, half of which
time was unproductive. -The costs incurred in consequence of re-employment were as follows:
(a) Separation costs Rs. 25,630; (b) selection costs Rs. 32,080 (c) recruitment costs Rs. 23,140 and
(d) training costs Rs. 31,160.
Calculate the profits lost or forgone on account of labour turnover (round off to the nearest rupee)
and the potential return on capital and sales and turnover ratio.
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Overhead Control
Question No. 5
Explain Single and Multiple Overhead Rates.
Costs Accounts System, Cost Control (Integrated and Non-integrated Accounting System)
Question No. 6
Pass the journal entries for the following transactions in a double entry cost accounting
system:
Particulars Rs.
a) Issue of material : Direct 5,50,000
Indirect 1,50,000
b) Allocation of wages and salaries : Direct 2,00,000
Indirect 40,000
c) Overheads absorbed in jobs : Factory 1,50,000
Administration 50,000
Selling 30,000
d) Under/over absorbed overheads : Factory (Over) 20,000
Admn (Under) 10,000
Question No. 7
Write down the advantages of Cost Ledger. Prepare a short note on Control Account.
Cost Concepts for Decision Making
Question No. 8
Cola Cola, a zero sugar cold drink manufacturing UK based company, is planning to establish a
subsidiary company in Nepal to produce coconut flavoured juice. Based on the estimated annual
sales of 60,000 bottles of the juice, cost studies produced the following estimates for the Nepalese
subsidiary:
Total Annual Costs (Rs.) Percent of Total Annual
Cost which is variable
Material 2,70,000 100%
Labour 1,97,000 80%
Factory Overheads 1,20,000 60%
Administration Expenses 52,000 35%
The Nepalese production will be sold by manufacturer’s representatives who will receive a
commission of 9% of the sale price. No portion of the UK based office expenses is to be allocated
to the Nepalese subsidiary. You are required to-
(i) COMPUTE the sale price per bottle to enable the management to realize an
estimated 20% profit on sale proceeds in Nepal.
(ii) CALCULATE the break-even point in rupees value sales and also in number of
bottles for the Nepalese subsidiary on the assumption that the sale price is Rs. 14 per
bottle.
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Question No. 9
Following data is available from the costing department of Aarya Ltd. which manufactures
and markets a single product:
Material Rs. 32 per unit
Fixed Cost (Rs.) Rs. 10,00,000
Conversion Cost (Variable) Rs. 24 per unit
Present Sales (units) 90,000
Dealer’s Margin (10% of Sales) Rs. 8 per unit
Capacity Utilization 60 %
Selling Price Rs. 80 per unit
There is acute competition in the market, thus extra efforts are necessary to enhance the sales.
For this, following suggestions have been proposed:
(i) Reducing selling price by 5 per cent.
(ii) Increasing dealer's margin by 20 per cent over the existing rate.
Which of these two suggestions would you recommend, if the company desires to maintain the
present profit? GIVE REASONS.
Costing for planning and Control –Budgets

Question No 10
CALCULATE from the following figures:
(i) Efficiency ratio,
(ii) Activity, Ratio and
(iii) Capacity Ratio:
Budgeted Production 88,000 units
Standard Hours per unit 10
Actual Production 75,000 units
Actual Working Hours 6,00,000
Standard Costing
Question no. 11
Following data is extracted from the books of XYZ Ltd. for the month of January, 2020:
(i) Estimation
Particulars Quantity (kg.) Price (Rs.) Amount (Rs.)
Material-A 800 ? -
Material-B 600 30.00 18,000
-
Normal loss was expected to be 10% of total input materials.
(ii) Actuals- 1480 kg of output produced.
Particulars Quantity (kg.) Price (Rs.) Amount
(Rs.)
Material-A 900 ? -
Material-B - 32.50 18,000
59,825
(iii) Other Information-

Material Cost Variance = Rs. 3,625 (F)
Material Price Variance = Rs. 175 (F)
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You are required to CALCULATE:

(i) Standard Price of Material-A;
(ii) Actual Quantity of Material-B;
(iii) Actual Price of Material-A;
(iv) Revised standard quantity of Material-A and Material-B;
(v) Material Mix Variance;
Method of Costing
Question No 12
Discuss the four different methods of costing along with their applicability to concerned industry?
Question No 13
State how Economic Batch Quantity is determined?
Question No. 14
Herman Confectioners (HC) owns a bakery which is used to make bakery items like pastries, cakes
and muffins. HC use to bake at least 50 units of any item at a time. A customer has given an order
for 600 cakes. To process a batch of 50 cakes, the following cost would be incurred:
Direct materials - Rs. 5,000
Direct wages - Rs. 500
Oven set-up cost Rs. 750
HC absorbs production overheads at a rate of 20% of direct wages cost. 10% is added to the total
production cost of each batch to allow for selling, distribution and administration overheads.
HC requires a profit margin of 25% of sales value.
Required:
(i) DETERMINE the price to be charged for 600 cakes.
(ii) CALCULATE cost and selling price per cake.
(iii) DETERMINE what would be selling price per unit If the order is for 605 cakes.
Contract Costing
Question No 15
From the following particulars of M/S. Maa Shakti private limited prepare contract A/C. for the period 1st
April 2015 to 31st March 2016.
Following are the information as on 31st March 2016 : (Figures in Rs.)

Material Purchased 5,00,000
Salary to Foreman 90,000
Direct wages 2,40,000
Direct expenses 2,70,000
Apportioned expenses 4,00,000
Plant value at the beginning of the period 4,50,000
Depreciation for the period @ 10%
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Additional information
Contract Value: 22, 00,000
Work completed: 2/3 of contract value
Work certified: 50% of contract value
Cash received: 10, 00,000
Material on site as on 31st March 2016: 90,000
The plant has been used for the contract for a period of 150 days and one supervisor devote 1/4th of
his time for this contract who has taken a salary of Rs. 10,000 pm during the period of the contract.
You may assume 360 days as one year.
Operating Costing
Question No 16
The following information is available from an intensive care unit.
Rent (including repairs) Rs. 10,000 p.m.
The unit cost consists of 25 beds and 5 more beds can be accommodate when the occasion
demands. The permanent staff attached to the unit is as follows:
2 supervisors each at a salary of Rs.2000 per month. 4 nurse each at a salary of Rs.1500 per month.
2 ward boys each at a salary of Rs. 1000 per month.
Though the unit was open for the patients all the 365 days in a year, scrutiny of accounts of 2021
revealed that only 150 days in a year the unit had the full capacity of 25 patients per day and for
another 80 days it had on an average 20 beds only occupied per day. But there were occasions when
the beds were full, extra beds were hired from outside at a charge of Rs. 10 per bed per day. The
total hire charges for the whole year were Rs. 8,000. The unit engaged expert doctor from outside to
attend on the patients and the fees were paid on the basis of number of patients attended at time
spent by them on an average worked out to Rs. 20,000 per month in 2021.
The other expenses for the year were as under.

Repairs and maintenance Rs. 8,000
Food supplied to patients Rs. 1,00,000
Janitor and other services for patients Rs.25,000
Laundry charges for bed linens Rs. 40,000
Medicines supplied Rs. 70,000
Cost of oxygen, x ray etc other than directly born Rs. 90,000
for treatment of patients (Fixed)
General administration charges allocated to the unit Rs. 1,00,000
If the unit recovered an overall amount of Rs. 200 per day on an average from each patient what is
the profit made by the unit in 2021.
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Suggested Answers/Hint:
Costs Concepts and Costing Methods
Question No. 1 a)
Answer:
To exercise control over cost, following steps are followed:
(i) Determination of pre-determined standard or results: Standard cost or performance targets
for a cost object or a cost centre is set before initiation of production or service activity.
These are desired cost or result that need to be achieved.
(ii) Measurement of actual performance: Actual cost or result of the cost object or cost centre is
measured. Performance should be measured in the same manner in which the targets are set
i.e. if the targets are set up operation-wise, and then the actual costs should also be collected
and measured operation-wise to have a common basis for comparison.
(iii) Comparison of actual performance with set standard or target: The actual performance so
measured is compared against the set standard and desired target. Any deviation (variance)
between the two is noted and reported to the appropriate person or authority.
(iv) Analysis of variance and action: The variance in results so noted are further analysed to
know the reasons for variance and appropriate action is taken to ensure compliance in
future. If necessary, the standards are further amended to take developments into account.
Question No. 1 b)
Answer:
Imputed costs are the costs that are not incurred but are useful while taking decision pertaining to a
particular situation. These costs are known as imputed or notional costs and they do not appear in
financial records. These costs are notional in nature and do not involve any cash outlay. It is the
value of a benefit where no actual cost is incurred. Interest on internally generated funds, rental
value of company owned property and salaries of owners of a single proprietorship or partnership
are some examples of imputed costs. When alternate capital investment projects are being evaluated
it is necessary to consider the imputed interest on capital before a decision is arrived as to which is
the most profitable project.
Common costs are costs, which are incurred for more than one product, job, territory or any other
specific costing object. It is the cost of services employed in the creation of two or more outputs
which is not allocated to those outputs on a clearly justified basis. They are not easily related with
individual products and hence are generally apportioned. Common costs are not only common to
products, but they may be common to process, functions, responsibilities, customs, sales territories,
periods of time and similar costing units. In general, management decisions influence the
occurrence of common costs e.g., rent of the factory in a common cost to all departments located in
a factory.
Material Control
Question No. 2
Answer:
The advantages that would accrue in using the LIFO method of pricing for the valuation of raw
material stock are as follows:
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• The cost of materials issued will be either nearer to and or will reflect the current market
price. Thus, the cost of goods produced will be related to the trend of the market price of
materials. Such a trend in price of materials enables the matching of cost of production with
current sales revenues.
• The use of the method during the period of rising prices does not reflect undue high profit in
the income statement as it was under the first-in-first-out or average method. In fact, the
profit shown here is relatively lower because the cost of production takes into account the
rising trend of material prices.
• In the case of falling prices profit tends to rise due to lower material cost, yet the finished
products appear to be more competitive and are at market price.
• Over a period, the use of LIFO helps to iron out the fluctuations in profits.
• In the period of inflation LIFO will tend to show the correct profit and thus avoid paying
undue taxes to some extent.
Question no 3.
Answer:
a) The normal usage is:
Average daily usage X Average lead time in days
(2 X 0.2+3 X 0.6+4 X 0.2) (25 X 0.2+35 X 0.5+45 X 0.3) = 108 tonnes
The possible level of usage which are higher then 108 tonnes are underlined in the third column of
the following table. The safety stock required to meet these levels of usage is shown in the last
column of the following table.
The possible levels of usage are shown below:
Daily Lead time in Possible level Safety stock
usage rate days of usage
25 50
2 35 70
45 90
25 75
3 35 105 27
45 135
25 100
4 35 140 32
45 180 72
Cost associated with various level of safety stock

Expected
Safety Stock out Carrying
Stock out Probability Stock out Total cost
stock cost cost
cost
5 40,000 0.1 4000
27 54000
45 360,000 0.06 21600
25600 54000 79,600
32 40 320000 0.06 19,200 64,000 83,200
72 - - - - 144,000 144,000
Since total cost is lowest at the level of 27 tonnes hence it is the optimum safety stock.
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The probability of stock out when safety stock is 27 is 16% (i.e. when daily usage is 4 ton and lead
time will be 35 days and 45 days).
Labour Control
Question No.4
Answer:
Cost of labour turnover can be broadly grouped under two categories
1. Preventive cost,
2. Replacement cost,
This particular question deals with the replacement cost only. Profit lost on account of labour
turnover may be due to:
a. Saving in cost provided there was no labour turnover,
b. Loss in contribution due to under- utilisation of capacity.
(a) Saving in cost, if no replacement cost is incurred:
Separation costs Rs. 25,630
Selection costs 32,080
Recruitment 23,140
Training 31,160
Total Replacement costs 1,12,010
b) Loss in Contribution:
Actual effective direct labour hours = Actual direct labour hours worked — trainees’ unproductive
hours.
=206,000 – (4,000 X 50/100) = 2,04,000 hrs.
Potential effective labour hour = Actual direct labour hours worked - potential direct hours not
worked
=2,06,000 + 6,000
= 2,12,000 hrs.
Effective labour hours lost = Potential effective labour hours – Actual effective labour hours
= 2,12,000- 2,04,000 = 8,000 hours
Or, 8,000 X 100
204,000
= 3.9216%
Had there been no loss of effective hours, production and sales would have gone up by 3.9216%.
The following losses can now be worked out
(a) Loss in contribution. = 7,70,000 x 3.9216%
=Rs. 30,196.
(b) Total profit lost = Loss in saving + loss in contribution
= 112,010 + 30,196
= Rs. 142,206
( c) Potential profit = Net profit before tax + Profit forgone at (b)
= 2,40,000+1,42,206
= Rs. 3,82,206.
(d) Potential sales = Existing sales + sales lost
= 2,400,000+(2,400,000x 3.9216%)
= 24,00,000+94,118
= Rs. 24,94,118
(e) Potential on capital invested = Potential profit
Capital invested
382,206 x 100
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12,00,000
= 31.851%
(f) Potential return on sales = Potential profit
Potential sales
= 382,206 x 100
2,494,118
= 15.324 %
(g) Turnover ratio = Labour hour lost x 100

Potential labour hour
= 8,000 x 100
212000
= 3.774%
Overhead Control
Question No.5
Answer:
Single and Multiple Overhead Rates: Single overhead rate: It is one single overhead absorption rate
for the whole factory. It may be computed as follows:
Single overhead rate = Overhead costs for the entire factory
Total quantity of the base selected
The base can be total output, total labour hours, total machine hours, etc. The single overhead rate
may be applied in factories which produces only one major product on a continuous basis. It may
also be used in factories where the work performed in each department is fairly uniform and
standardized. Multiple overhead rate: It involves computation of separate rates for each production
department, service department, cost center and each product for both fixed and variable overheads.
It may be computed as follows:
Multiple overhead rate = Overhead allocated/ apportioned to department/ cost centre or product
Corresponding base
Under multiple overheads rate, jobs or products are charged with varying amount of factory
overheads depending on the type and number of departments through which they pass. However,
the number of overheads rate which a firm may compute would depend upon two opposing factors
viz. the degree of accuracy desired and the clerical cost involved.
Costs Accounts System, Cost Control (Integrated and Non-integrated Accounting System)
Question No. 6
Answer:
Journals
Dr. Cr.
Particulars Rs. Rs.
Work In Progress Control A/c Dr 55,0000
Factory Overheads Control A/c Dr 15,0000
To Material Control A/c 70,0000
Work In Progress Control A/c Dr 2,00,000
Factory Overheads Control A/c Dr 40,000
To Wages Control A/c 2,40,000
Work In Progress Control A/c Dr 1,50,000
Finished goods Control A/c Dr 50,000
45 | P a g e
Cost of Sales A/c Dr 30,000

To Factory Overhead Control A/c 1,50,000
To Administrative Overhead Control A/c 50,000
To Selling Overhead Control A/c 30,000
Costing Profit & Loss A/c Dr 10,000
To Administrative Overhead Control A/c 10,000
Factory Overhead Control A/c Dr 20,000
To Costing Profit & Loss A/c 20,000
Question No 7
Answer
The following are the advantages of maintaining a cost ledger:
(1) It helps the management in policy decisions as this ledger summarizes all detailed
information regarding cost in subsidiary records.
(2) It provides the basis for analysis of cost and preparation of accounts for each cost
centre for cost ascertainment and control.
(3) It provides a proper control over materials and supplies, labour and overheads.
(4) Standards may be set to provide guidance for measuring and improving efficiency and
cost ledger may furnish necessary accounts for submission to the management for control
purposes.
(5) The maintenance of cost ledger helps in determining the values of closing stocks and
work-in-progress without any delay and makes possible the prompt preparation of
profit and loss account and balance sheet at regular intervals.
(6) It serves as a check on the transactions and records in financial accounts.
(7) It facilitates prompt preparation of costing profit and loss account helps management to
know the results of operation of the firm.
(8) A system of internal check exists through the use of various control accounts. This helps
in detecting errors and thus maintaining accuracy.
(9) When cost accounts are separately maintained, it is possible to maintain confidentiality
of cost data.
Maintenance of cost ledger serves to provide elaborate information for planning, control,
evaluation of performance and decision-making by facilitating generation of internal
reports.
Control Account
In order to facilitate handling of numerous transactions instead of being posted in general ledger
are recorded in subsidiary ledgers. Transactions kept in detail in one or more accounts of the
subsidiary ledgers are posted in totals at the end of the period to control accounts. Control
accounts are the total accounts maintained in the cost ledger. Each total account represents a
46 | P a g e
subsidiary ledger in which individual accounts are maintained. Stores ledger control account, for
instance, represents the stores ledger in which individual stores card are maintained. Individual
debits and credits in stock cards are abstracted, totaled and taken into control account in the cost
ledger. At any time, the total balance in control account and aggregate of individual balances in
subsidiary ledger accounts should agree. Such control accounts:
(i) facilitate compilation of final accounts and reconciliation with financial accounts;
(ii) give a summary of thousands of individual accounts; and furnish the total position i.e., to know
the value of pending jobs or of materials in hand, one need not list individual balances.
Cost Concepts for Decision Making
Question No 8
Answer:
Computation of Sale Price Per Bottle
Output: 60,000 Bottles
Rs.
Variable Cost:
Material 2,70,000
Labour (Rs. 1,97,000 × 80%) 1,57,600
Factory Overheads (Rs.1,20,000 × 60%) 72,000
Administrative Overheads (Rs 52,000 × 35%) 18,200
Commission (9% on Rs.9,00,000 (Working Note -1)) 81,000
Fixed Cost:
Labour (Rs. 1,97,000 × 20%) 39,400
Factory Overheads (Rs. 1,20,000 × 40%) 48,000
Administrative Overheads (Rs. 52,000 × 65%) 33,800
Total Cost 7,20,000
Profit (20% of Rs. 9,00,000) 1,80,000
Sales Proceeds 9,00,000
Sales Price per bottle (Rs.9,00,000/60,000) 15
(ii) Calculation of Break-even Point

Sales Price per Bottle = Rs. 14
Variable Cost per Bottle = Rs.5,93,400 (working note 2)
60,000bottles
= Rs. 9.89
Contribution per Bottle = Rs. 14 – Rs. 9.89 = Rs. 4.11
Break -even Point (in number of Bottles) = Fixed cost
Contribution per bottle
= Rs.1,21,200
Rs.4.11
= 29,489
Break- even Point (in Sales Value) = 29,489 Bottles × Rs.14
= Rs. 4,12,846
47 | P a g e
Working Note
(1) Let the Sales Price be ‘X’
Commission = 9X
100
Profit = 20X
100
X = Rs. 2,70,000 + Rs. 1,57,600 + Rs. 72,000 + Rs.18,200 + Rs. 39,400 + Rs. 48,000 +
Rs. 33,800 + 9X + 20X
100 100
X = 6,39,000 + 9X + 20X
100 100
100X – 9X – 20X = 6,39,00,000
71X = 6,39,00,000
= Rs. 9,00,000
(2)
Total Variable Cost: Rs.
Material 2,70,000
Labour 1,57,600
Factory Overheads 72,000
Administrative Overheads 18,200
Commission [(60,000 Bottles × Rs.14) × 75,600
9%]
5,93,400
Question No. 9
Answer:
(a) Workings:
Statement Showing Profit on Sale of 90,000 units
(Rs.) (Rs.)
Selling Price per unit 80
Less: Variable Cost per unit
Material 32
Conversion Cost 24
Dealers’ Margin 8 64
Contribution per unit 16
Total Contribution (90,000 units × Rs. 16) 14,40,000
Less: Fixed Cost 10,00,000
Profit 4,40,000
In both the proposed suggestions, the fixed costs remain unchanged. Therefore, the present profit of
Rs. 4,40,000 can be maintained by maintaining the total contribution at the present level i.e. Rs.
14,40,000.
48 | P a g e
(i) Reducing Selling Price by 5%

New Selling Price (Rs. 80 − 5% of Rs. 80) = Rs. 76
New Dealer's Margin (10% of Rs. 76) = Rs. 7.60
New Variable Cost (Rs. 32 + Rs. 24 + Rs. 7.60) = Rs. 63.60
New Contribution per unit (Rs. 76 − Rs. 63.60) = Rs. 12.40
Level of sales required for present level of Profits = Total Contribution Required
New Contribution per unit
= Rs. 14,40,000 / Rs. 12.40
= 1,16,129 units
(ii) Increasing Dealer’s Margin by 20%

New Dealer’s Margin after increasing it by 20% = Rs. 8 + (20% of Rs. 8)
= Rs. 9.60
New Variable Cost (Rs. 32 + Rs. 24 + Rs. 9.60) = Rs. 65.60
Contribution (Rs. 80 − Rs. 65.60) = Rs. 14.40
Level of sales required for present level of Profits = Total Contribution Required
New Contribution per unit
= Rs. 14,40,000 / Rs. 14.40
= 1,00,000 units
Conclusion:
The second proposal, i.e., increasing the Dealer's Margin is recommended because:
1. The contribution per unit is higher which is Rs. 14.40 in comparison to Rs. 12.40 in the first
proposal; and
2. The sales (in units) required to earn the same level of profit are lower. They are at 1,00,000 units
as against 1,16,129 units in the first proposal. This means a lower sales effort and less finance
would be required for implementing proposal (ii) as against proposal (i). Of course, under proposal
(ii) the company can earn higher profits than at present level if it can increase its sales beyond
1,00,000 units.
Costing for planning and Control –Budgets

Question No 10
Answer:
(i) Efficiency Ratio = Standard Hours (for actual production) × 100

Actual Hours (worked)
= 75,000 units × 10 hrs. × 100
6,00,000 hrs.
= 125%
(ii) Activity Ratio = Standard Hours (for actual production) × 100

Budgeted Hours
= 75,000 units × 10 hrs. × 100
88,000 units × 10 hrs.
= 85.23%
(iii) Capacity Ratio = Actual Hours (worked) ×100
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Budgeted Hours
= 6,00,000 hrs. × 100
88,000 units × 10 hrs.
= 68.18%
Standard Costing
Question no. 11
Answer:
(a) (i) Material Cost Variance (A + B) = {(SQ × SP) – (AQ × AP)}
3,625 = (SQ × SP) – 59,825
(SQ × SP) = 63,450
(SQA × SPA) + (SQB × SPB) = 63,450
(940 kg × SPA) + (705 kg × 30) = 63,450
(940 kg × SPA) + 21,150 = 63,450
(940 kg × SPA) = 42,300
SPA = Rs.42,300
940kg
Standard Price of Material-A = Rs. 45
Working Note: SQ i.e. quantity of inputs to be used to produce actual output

= 1,480kg
90%
= 1,645 kg
SQA = 800kg  1,645kg.

(800 + 600)
= 940 kg
SQB = 600kg  1,645kg.

(800 + 600)
= 705 kg
(ii) Material Price Variance (A + B) = {(AQ × SP) – (AQ × AP)}

175 = (AQ × SP) – 59,825
(AQ × SP) = 60,000
(AQA × SPA) + (AQB × SPB) = 60,000
(900 kg × 45 (from (i) above)) + (AQB × 30) = 60,000
40,500 + (AQB × 30) = 60,000
(AQB × 30) = 19,500
AQB = 19,500
30
= 650 kg
Actual Quantity of Material B = 650 kg.
iii) (AQ × AP) = 59,825

(AQA × APA) + (AQB × APB) = 59,825
(900 kg × APA) + (650 kg (from (ii) above) × 32.5) = 59,825
(900 kg × APA) + 21,125 = 59,825
(900 kg × APA) = 38,700
APA = 38,700
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900
= 43
Actual Price of Material-A = Rs. 43
(iv) Total Actual Quantity of Material-A and Material-B

= AQA + AQB
= 900 kg + 650 kg (from (ii) above)
= 1,550 kg
Now,
Revised SQA = 800kg × 1,550kg.

(800 + 600)
= 886 kg
Revised SQB = 600kg × 1,550kg.

(800 + 600)
= 664 kg
(v) Material Mix Variance (A + B) = {(RSQ × SP) – (AQ × SP)}

= {(RSQA × SPA) + (RSQB × SPB) – 60,000}
= (886 kg (from (iv) above) × Rs. 45 (from (i) above))
+ (664 kg (from (iv) above) × Rs. 30) – Rs.60,000
= (39,870 + 19,920) – 60,000 = Rs. 210 (A)
Method of Costing
Question No 12
Answer:
Four different methods of costing along with their applicability to concerned industry have been
discussed as below:
(i) Job Costing: The objective under this method of costing is to ascertain the cost of each job
order. A job card is prepared for each job to accumulate costs. The cost of the job is
determined by adding all costs against the job it has incurred. This method of costing is used
in printing press, foundries and general engineering workshops, advertising etc.
(ii) Batch Costing: This system of costing is used where small components/ parts of the same
kind are required to be manufactured in large quantities. Here batch of similar products is
treated as a job and cost of such a job is ascertained as discussed under (1), above. If in a
cycle manufacturing unit, rims are produced in batches of 2,500 units each, then the cost
will be determined in relation to a batch of 2,500 units.
(iii) Contract Costing: If a job is very big and takes a long time for its completion, then method
used for costing is known as Contract Costing. Here the cost of each contract is ascertained
separately. It is suitable for firms engaged in the construction of bridges, roads, buildings
etc.
51 | P a g e
(iv) Operating Costing: The method of Costing used in service rendering undertakings is known
as operating costing. This method of costing is used in undertakings like transport, supply of
water, telephone services, hospitals, nursing homes etc.
Question No 13
Answer:
In batch costing the most important problem is the determination of ‘Economic Batch Quantity’
The determination of economic batch quantity involves two types of costs viz, (i) set up cost and
(ii) carrying cost. With the increase in the batch size, there is an increase in the carrying cost but the
set-up cost per unit of the product is reduced; this situation is reversed when the batch size is
reduced. Thus there is one particular batch size for which both set up and carrying costs are
minimum. This size of a batch is known as economic or optimum batch quantity. Economic batch
quantity can be determined with the help of a table, graph or mathematical formula. The
mathematical formula usually used for its determination is as follows:
EBQ= 2DS
C
Where, D = Annual demand for the product S = Setting up cost per batch C = Carrying cost per unit
of production per annum
Question no. 14
Answer:
Statement of cost per batch and per order
No. of batch = 600 units ÷ 50 units = 12 batches
Particulars Cost per batch Total Cost
(Rs.) (Rs.)
Direct Material Cost 5,000.00 60,000
Direct Wages 500.00 6,000
Oven set-up cost 750.00 9,000
Add: Production Overheads (20% of Direct 100.00 1,200
wages)
Total Production cost 6,350.00 76,200
Add: S&D and Administration overheads 635.00 7,620
(10% of Total production cost)
Total Cost 6,985.00 83,820
Add: Profit (1/3rd of total cost) 2,328.33 27,940
(i) Sales price 9,313.33 1,11,760
No. of units in batch 50 units
(ii) Cost per unit (Rs.6,985 ÷ 50 units) 139.70
Selling price per unit (9,313.33 ÷ 50 units) 186.27
(i) If the order is for 605 cakes, then selling price per cake would be as below:
Particulars Total Cost

(Rs.)
Direct Material Cost 60,500
Direct Wages 6,050
52 | P a g e
Oven set-up cost 9,750

Add: Production Overheads (20% of Direct wages) 1,210
Total Production cost 77,510
Add: S&D and Administration overheads (10% of 7,751
Total production cost)
Total Cost 85,261
Add: Profit (1/3rd of total cost) 28,420
Sales price 1,13,681
No. of units in batch 605 units
Selling price per unit (Rs.1,13,681 ÷ 605 units) 187.90
Contract Costing
Question No 15
Answer
Contract Accounts of M/S. Maa Shakti private limited (Figures in Rs.)

Dr. Cr.
Particulars Amount Particulars Amount
To. Material purchased 5,00,000 By. Material in hand 90,000
Salary to Foreman 90,000 Works cost 14,58,750
Direct wages 2,40,000
Direct expenses 2,70,000
Apportioned expenses 4,00,000
Depreciation 18,750
Supervisor Salary 30,000
15,48,750 15,48,750
Work cost 14,58,750 Work certified 11,00,000
Notional profit 6,010 Work uncertified 3,64,760
14,64,760 14,64,760
Work uncertified
= Cost of 66.67 % (2/3) of the contract is Rs.14, 58,750
= Cost of 100% is [14, 58,750  (100/66.67)] = Rs.21, 88,125
= Cost of 16.67% (work uncertified) is Rs. 21, 88,125  (16.67/100)
= Rs. 3, 64,760
Operating Costing
Question No 16
Answer
Total Number of patients in Year 2021
Patients at Full /below capacity
150 days at full capacity of 25 = 3,750
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80 days at average occupancy of 20 = 1600

Extra bed utilized at peak demand
Total money spent on extra beds = Rs. 8,000
Hiring charges of one bed = Rs.10 per bed per day
Extra bed utilized = (Rs.8,000/10)
= 800
Total number of Patients handled = 3,750+1,600+800
= 6,150
Statement of Cost and Profit

Particulars Amount in Rs. Total in Rs.
A. Income Received (6,150 x 200) 12,30,000
B. Variable Cost
Food supplied to patients 1,00,000
Janitor and other services for patients 25,000
Laundry charges for bed linens 40,000
Medicines supplied 70,000
Doctor fee @ Rs 20,000 per month 2,40,000
Hire charges for extra bed 8,000 4,83,000
Contribution 7,47,000
C. Fixed Cost
Salaries for 2 supervisors @ Rs.2,000 per month for 12 months 48,000
Salaries for 4 nurses @ Rs. 1500 per month for 12 months 72,000
Salaries of 2 ward boys @ Rs.1,000 per month for 12 months 24,000
Rent @ Rs.10,000 per month for 12 months 1,20,000
General Administration Charges 1,00,000
Cost of Oxygen, X rays 90,000
Repair and Maintenance 8,000 4,62,000
Profit 2,85,000
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PAPER 6: BUSINESS COMMUNICATION
55 | P a g e
Revision Questions
Q.N. 1 Read the following letter of application, and answer the questions that follow.
Kathmandu-14
Kalanki, Kathmandu
June 2, 2019
Dr. Suren Malla

Executive Director
New Era Enterprises
Anamnagar, Kathmandu
Subject: An application for the post of online marketing assistant
Dear Dr. Malla,
I am writing you in response to the online announcement that you had uploaded a couple of
days before calling for applications for the post of marketing assistant of online mode. I’m
highly interested in working in the online marketing sector since I have been involved in the
same field for some years.
I have successful professional story in online marketing. I have established a new and
innovative technique of online marketing in an international company. Since I have to carry
both my CA study and marketing career in Nepal, I’m intending to quit the present job at
New Delhi, and join one in Kathmandu.
I have stated every detail about my qualifications, experiences and skills in my resume
which I have attached along with this application. If you think you may call me in person,
my cell no. for Kathmandu contact is 98XXXXXXXX.
I’m looking forward to your positive response.
Sincerely yours,
………………
Vijeta Singal
Questions:
(a) How are the stylistic features in the given case persuasive and formal? Illustrate.
(b) If you were the employer, would you be impressed by the application letter? Why?
(c) How effective is this application letter from the perspective of business English? Discuss.
(d) As Dr Malla, write an e-mail to Ms. Singal enquiring more about her expectations from the
prospective job.
56 | P a g e
Q.N.(2) Read the following part of a job interview, and answer the questions that follow:
Interviewer: Good afternoon. How do you do?
Interviewee: Good afternoon, sir. How do you do? … May I have a seat, sir?
Interviewer: Please have a seat.
Interviewee: Thank you sir.
Interviewer: Well, may I put one of my curiosities, please? … Umm, do you think you’re ready for
the talk?
Interviewee: Yes, of course. Sir, I may try to answer as my best.
Interviewer: O.K. Then, what could be the most essential thing in marketing a beauty product in
the Nepalese context??
Interviewee: Sir, I think … I think it’s advertisement. You know advertisement easily catches the
attention of people and promotes sales. Actually there are many different types of
advertisements. Electronic media have been really influential now. You can put banners and
boards in different parts of the city.
Interviewer: [Tries to interrupt] well, what do you know about ‘you attitude’ in business
communication?
Interviewee: Well, Sir, I think it’s a style of language.
Interviewer: What type of style?
Interviewee: Oh, you try to put your focus on the clients and customers, and …
Questions:
a) How do you observe the role of interviewer in the above case?
b) Critically examine the answer of the interviewee in the above discourse in terms of
relevance, brevity and quality.
c) As the interviewer, you were impressed by the interviewee. Now write an e-mail to the
interviewee informing about your decision.
d) Suppose you are the interviewee, but the interviewer did not inform you about his decision.
Write a follow-up letter to him.
Q.N. (3) What are research data? How are they analysed in a research report? 10
Q.N. (4) If you were in a company where employees have differences regarding their cultures. How
will you tackle the issues caused by intercultural barriers? 10
Q.N. (5) Answer these questions. (5+5=10)
(a) Define the term ‘business communication’? Describe the functions of business
communication.
(b) How can one’s business communication skills be enhanced?
Q.N. (6) Answer these questions. (5+5=10)

a) How are negotiation and mediation processes operated during conflict management?
b) How do proposals and reports differ from each other?
Q.N. (7) Write short notes on the following: (4*2.5=10)

a) Workplace diversity and workplace conflicts
b) Corporate social responsibility (CSR)
c) Ethics in business communication
d) Arbitration and reconciliation
57 | P a g e
e) Settling communication barriers

f) Work plan in the proposal
g) Abstract in a report
h) Qualities of good minute writing
i) Avoiding ethnocentrism in communication
j) Barriers to listening
k) Stages of a job interview
Q. N. (8) Answer these questions. (5*2=10)

a) You are a trained trekking guide for Nepal and SAARC countries. Write a
persuasive letter of application for the post of trekking officer responding to
Himalayan Treks pvt. Ltd.
b) You are interested to apply for an advertised post of marketing officer in an

international company located at Kathmandu in Nepal. Write a very short resume to
attach along with the application.
58 | P a g e
Suggested Answers / Hint:

Question No. 1:
Answers:
a) The stylistic features may vary in terms of formality, persuasiveness, indirectness, etc. in
the given discourse; the style is obviously persuasive and formal. The persuasiveness of
this letter can be seen from the way the writer is trying to present herself and her
circumstances. She makes her writing polite, and states qualifications, experiences and
study conditions in a tone that may win the heart of the employer and he would offer her a
job. In other words, she is able to sell her things in the market successfully. Similarly, the
letter has formal style. The format is visibly formal, and writing is also formal. The
choices of vocabulary (e.g. qualification, career, quit, positive response, etc.) have
strengthened the formality level of the letter.
b) Yes, I think I will be impressed from the letter. There are some important reasons for this.
Firstly, the letter is precise, formal and well-crafted. Similarly, the candidate clearly spell
out her qualifications and experiences in an impressive way. In the same way the letter is
impressive enough because of its conversational tone. The name of the receiver is written,
and the cell number is given for the prospective communication.
c) Business communication is meant for accomplishing the transactions through the medium
of an effective language. In the Nepalese business contexts, where English is used for
different purposes such as business, education, tourism, etc., this letter seems extremely
effective. Its persuasive content, polite language, formal style, conversational tone, data
based writing, appropriate choices of vocabulary, precise and explicit presentation, etc.
have made the letter meet all the qualities of business English. Accuracy in structures and
clarity in meaning have also made the letter effective. We can find cohesion and
coherence in writing. They have made the text well-connected and unified. These qualities
are essential in business language. Effective business English, unlike literature, avoids
figures of speech such as metaphors and intended meanings. This letter has observed this
quality, too.
d)
To: singal23@gmail.com
Subject: enquiry
CC:
Date: March 20,2022
Dear Ms. Singal
Thank you so much indeed for showing interest to start a job in our company.
May I know your position regarding the following issues?
• What is your expectation of the salary per year?
59 | P a g e
• If you get the job, how do you ensure your sustainability in ours?
• How is your view regarding the roles of political ideologies in the workplaces of
the private companies?
I hope you will respond at your earliest so that we can take necessary decision in time.
Thank you.
With warm regards

Dr. Suren Malla
Executive Director
Question No. 2:
Answers:
a) I find the role of interviewer quite standard according to employment communication norms.
Interviewer has made the discourse usual as well as formal. Usually, interviewees seem more
worried about interview than the interviewers, and they are found to be preparing more
intensively for it. But the experts point out that the interviewer(s) should be equally prepared
and systematic for this kind of discourse. The role of the interviewer in this case has also
determined the quality and validity of the interview. Basically the interviewer looks
supportive, creative, and relevant to the context. He seems systematic, prepared and
encouraging rather than dominating and ill prepared. Complex and ambiguous questions may
only harass the interviewee, which is not the goal of any interview. Questions are clear and
language used is simple. The most important thing is that he is well known to the respective
subject matter.
In overall, the interview part is usual and more than average quality. The language is decent
in terms of accuracy, though it’s poor for fluency and natural speech.
(b) The interviewee should be conscious for the given date of interview being ready with plan,
preparation and practice. He/she should respond their interviewer in clear, concise as well as
courteous way. He/she needs to be contextual in terms of relevance, subject matter and
questions.
The interviewee in this discourse is good in subject matter, but less competent in the
communication skills. He or she is really mechanical and tries to put facts regardless to what
is asked in particular. In terms of relevance the role of interviewee is decent, but he or she
never uses the term ‘beauty product’ in answer. In terms of quality it’s rather poor. There’s
more information than what is required. He or she shouldn’t have said “I may try to answer
as my best.” It’s really obvious. Similarly, there’s no point in explaining the types of
advertisement. The answer should be brief and relevant to the question. In the second issue,
the interviewer can’t explain the matter properly. However, in general, the role of
interviewee is satisfactory.
60 | P a g e
c)
From: discover.niranjan26@gmail.com
To: shruti2040@gmail.com
subject: Application for research leader
Date: March 12, 2021
Dear Madam,
Thank you for attending the interview and sharing the noble ideas with us. I am
delighted to inform you that we are impressed from your dealing with the issues
during the interview session.
May I request you to join a refreshment program with us before we reach to the
ultimate decision? We may share further ideas and visit our production field too.
Thanks and Regards,

Niranjan Rai
Executive Director
d)
Kathmandu-12
Kalimati
March 29, 2022
Niranjan Rai
Executive Director
Everest Electric Enterprises
Sundhara, Kathmandu
Subject: A follow up letter
Dear Mr. Rai
I attended an interview for a job at your company two weeks ago, but I am not informed
about what has been your decision about the same. I would be grateful if write me about
what is going on and how long it may take for me to know my result.
I don’t think I’m bothering you, but I’m in the pressure of whether I should join another
company since they are following me regularly.
Yours sincerely
Shruti Sharma
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Question No. 3:
Answer:
Research data are the information presented systematically within a research work. The
rough information elicited from the respondents are systematically tabulated and
presented. They are called data. The data which are taken from the tools such as interview,
questionnaire, and observation are called primary data, and the data which are taken from
the sources such as books, previously published reports and records are called secondary
data.
Proper data need to be collected before they are actually analyzed. The data are usually
collected from the respondents and field observation. There are certain procedures and
tools for data collection. In the survey research, for example, the tools such as
questionnaires, in-depth interviews, focused group discussions, etc. are more effective
than experiments and observations. When the data are collected by using these tools, they
are organized and analyzed by using various tables, graphs, statistical tools such as
percentage, mean, standard deviation, etc. The analysis of the data must be done according
to the objectives of the report. All the information collected may not be needed in our
report, so such data should not be analyzed. The irrelevant ideas/options are to be avoided
from the analysis.
The analysis of data can be quantitative as well as qualitative. The quantitative analysis
involves numerical and statistical operations while qualitative analysis involves textual
interpretations. The quantitative analysis is more objective in its nature, and qualitative
analysis is more subjective and flexible. We choose the data analysis procedures according
to the objectives of our report.
Question No. 4:
Answers:
If I were in the diversified workplace situation, I would try to adopt the maxims of
intercultural communication. Intercultural communication is a very common feature of
today’s business contexts throughout the world. Since we cannot be satisfied with the
business within our territory only, then it is very obvious that new cultures, life styles
and languages are to be accepted and skillfully dealt with in the international and enter-
ethnic situations. First of all, I will conduct a conference in the workplace focusing on
intercultural communication. I will myself try to get adapted in the local context.
Sharing and respecting each other’s cultures and languages will also be encouraged. I
can successfully deal with the diverse workplace by adopting the principles of
intercultural communication. If I were in the given situation, I would adopt the following
precautions, too.:
(a) I will hold meeting with the managers, ex-officers, supervisors, etc. and get
ideas about the working culture and workers’ uniqueness of the new
workplace;
(b) I will get interactions with them on as well as off duty time;
(c) I will learn the local contexts in terms of physical, social, behavioral and
other perspectives;
(d) I will learn some basic communication skills and vocabulary such as greeting
exponents, thanking styles, addressing terms, politeness cues, etc.
(e) I will plan about potential barriers/ obstacles; and so on.
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Question No. 5:
Answers:
(a) Business communication is defined as a variety of language that has speciality of

accomplishing any business transaction, whether formal or informal, top-down or
bottom-up, internal or external. It is a specific communication style or register that is
used for the purposes of the business of some kind. It is believed that the success of
business organizations depend upon many different factors, one of which is obviously
business communication. The major function of business communication is to make
business transactions successful. Particularly, the functions of business communication
include:
(b) To state information;
(c) To instruct;
(d) To give guidelines;
(e) To report;
(f) To persuade;
(g) To buy and sell;
(h) To advertise;
(i) To interact, and so on.
(b) Successful business persons have developed in them effective communication skills. It should
be noted that there are several factors which are responsible for making one’s business
communication successful and effective. The formality level, delivery of content, language style,
format of conventional business writing, etc. are the basic factors that determine the quality of
business communication.
The skilled business personnel are those who have developed in them appropriate business skills so
that they can communicate successfully and get things done accurately. There are various strategies
identified for business persons to enhance communication skills. Basically, they need to develop the
habit of continuous reading and writing about their related field, and they need to take part in the
interaction programs on how to make communication more effective. Other common strategies
include:
• Listening attentively, cooperatively and actively;
• Interacting politely, cooperatively and contextually;
• Behaving with full sense of business ethics;
• Learning to use codes appropriately according to socio-cultural norms and perspectives;
• Developing team spirits, group interactions, conferences and sharing;
• Self-monitoring and collaborating activities;
• Learning to communicate through written as well as electronic modes with accurate format;
• Communication trainings on intercultural communication and workforce diversity;
• Learning to avoid communication barriers such as mental barriers, physical barriers and
semantic barriers;
• Developing the habit of keeping up-to date knowledge through reading and writing.
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Question 6:
Answers:
a) The tow processes negotiation and mediation are the effective ways of settling conflicts
within business organizations. Negotiation helps people to eliminate the basis for conflicts
through bilateral discussions, dialogues and compromise. It is the most preliminary stage in
the process for the conflict resolution. Actually, it refer to the common effort made by two
parties intending to minimize the conflict between the two. It is a significant process of
conflict resolution. It aims to settle the dispute through intra-group facilitation, compromise,
mutual understanding and co-ordination. The two conflicting parties are required to go
through the situation with certain critical reflections, and they are kept together face-to-face
with a kind of realization about the situation. They are ready to reach the solution and get
involved in the negotiation process. They have open discussion with the motive of
negotiation. They try to make ‘give and take’ results on one hand, and on the other they try
to compromise upon certain bottom line of their views and positions. They reach the ‘win-
win’ situation. The role of the third party is quite subtle unlike in the processes such as
mediation and arbitration.
In the process of mediation, there is an involvement of the third party to resolve the conflict
between the two parties. Negotiation does not clearly involve the role of the third party, and
the two conflicting parties stay together with the feeling of ‘give and take’ and they discuss
to reach a point of consensus. But, in the mediation process, there is a third party that brings
together to the conflicting parties and they discuss with the help of the third party that is also
called mediator. The mediator must play a very fair role.
b) Proposals are the plans which are carefully developed for a business or for a research. They
present strategies and methodologies for a research work before the work is executed. The
proposals also present the plans and schemes for specific projects, sales, services, and so on.
They are systematic plans for doing certain business tasks and research. They are usually
persuasive and formal in the style. Usually they involve plans, activities, cost analysis, time
schedule, etc. On the other hand, reports are prepared to present the narratives of the past
events and activities. They are the results of certain research works or business tasks. They
are prepared only after the accomplishment of the given tasks. How the particular task was
performed is included within a report. It presents discussion and results of the topic. The
data are analyzed and the results are outlined in it. In the proposals, the present and the
future tenses are usually used while in the reports, the past tense is usual.
Question 7:
Answers:
(a) Workplace diversity and workplace conflicts

Workplace diversity refers to a situation of a workplace in which the workers are from diverse
identities, cultures and backgrounds. They have different traditions and ways of thinking and doing.
But, workplace conflicts are a bit different from diversity. Diversity can be a cause of conflict but
diversity itself is not a conflict. Conflict refers to some kind of misunderstanding or clash between
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different workers. Both diversities and conflicts are taken as assets of an organization but they need
to be properly managed for the effective operation of the organization.
(b) Corporate social responsibility (CSR)

Corporate social responsibility (CSR) is an essential component of an ethical and responsible
business organization. It is a business movement in which commercial organizations address the
social issues identified through different sources, and run the programs for social welfare. They
invest certain amount of money so that their business as well as the society where they have to
survive can grow together. Different infrastructural activities, educational programs, public health
programs, sports events etc. are conducted by the business organizations as their responsibility to
the society.
(c) Ethics in business communication

Ethics in business communication is constituted by various social values, cultural norms, morality
and legal regularity. It has three major perspectives: economic, legal and philosophical.
Economic perspective refers to the way of avoiding financial abuses and unfair business
competencies. Similarly, legal perspective refers to the way of abiding in rules and following the
regulatory norms. The government rules and regulations must be obeyed properly. And,
philosophical perspective involves respecting others’ cultural values, honoring self- esteem and
making mutual co-operation.
(d)Arbitration and reconciliation

Arbitration is one of the most effective techniques of conflict management. It refers to a legal
attempt to manage conflict. The disputes are legally analyzed. The illegal and unethical points are
pointed out and concerned ones are asked to improve. Some forceful impositions are also used.
Reconciliation is another technique for settling conflicts within business organizations. It may refer
to an institutional practice to bring the conflicting groups together into a consensus; it is an
approach of integration. It tries to show interdependence and coexistence of the conflicting powers.
(e) Settling communication barriers

Different barriers to communication are identified in the business houses. They are to be settled
sensibly in a proper way. There are certain techniques that are regarded as efficient for the
settlement of communication barriers. The barriers caused by the frames of reference can be settled
by trying to understand the workers’ perspective to work. Similarly, noises or physical barriers can
be settled by managing proper technology to work in the noisy workplace and by controlling the
noise if possible. The language related barriers or semantic barriers can be avoided by using the
explicit words and language forms. The cultural and social issues can be managed by trying to
adopt the new cultural trends such as dressing up, mimicking, eating patterns, gossiping ways, etc.
(f) Work plan in the proposal

Proposal is a systematic plan for a research or for an action to be accomplished. A reliable and
systematic work plan needs to be presented in the proposal about how to carry out the research or
action within a given period of time. In other words, the work plan indicates exactly the schedule
for accomplishing every individual task within the project. It describes how what must be done will
be accomplished. More specifically, the work plan includes when the work will begin, how it will
be divided into stages, when it will be finished, what methods or resources will be used and so on.
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(g) Abstract in a report

Abstract is a very short summary of the report that appears in the very beginning part of the report.
It usually presents the primary goal of the report. It also includes the major points on introduction,
method, results and discussion, but in a very precise form. The readers readily know the gist of the
report when they read the abstract, so it helps them to decide whether to continue reading that report
or not.
(h)Qualities of good minute writing

The process of minute writing of a business meeting requires certain qualities or features. First of
all, attendance of members and participants should be recorded. A good minute always involves a
record of the matters discussed and resolutions taken in the meeting. Similarly, there should be
records of decisions in explicit language. There must not be any kind of controversy or dual
meanings of the terms used in it. Other common qualities may include: making an index with topic,
number, date, etc., chairman’s points of approval and disapproval, getting Chairman’s initial at
every changes made in the record book, and signatures of members.
(i) Avoiding ethnocentrism in communication

Ethnocentrism is feeling of one who thinks that his or her identities or values are superior to those
of others. Avoiding such feelings of being superior to the people of other culture or background is
important in the diverse workplaces of today’s context. It is really significant for minimizing
intercultural misunderstandings and conflicts. It is also useful for bridging gaps and for managing
the workplace diversity. We must agree to the point that no culture is superior to the other one.
(J) Barriers to listening

Effective listening is one of the important determinants for the successful business interactions.
Listening becomes more complex in many business contexts because of many different barriers to
it. Listening is a very common receptive skill which often becomes for more complex than most
people think. Complexity in effective and successful listening is mostly caused by many different
factors such as content, channel, etc. of communication. Listening becomes complex because of
various barriers to it, too. Good listeners always look for ways to overcome potential barriers
throughout the listening process.
Barriers to effective listening may vary from physical reception to listener's mental conditions. The
physical barriers such as room acoustics, phone rings and other noises, background music etc. can
be serious when the listener has to extract particular information or content from listening.
Similarly, lack of attention, interruption, schema, prejudgment etc. can be the examples of mental
barriers to effective listening.
(k) Stages of a job interview

Job interview is an important component of employment communication. It displays distinctive
features from other types of interviews. It is usually carried out in three different stages: warming-
up stage, question-answer stage and summing-up stage.
The warming-up stage refers to the stage that exists before the main conversation between the
interviewer and interviewee. In this stage both interviewer and interviewee attempt to be prepared
to lead the interview to a successful communication. The interviewee is prepared with cheerful
appearance and positive thoughts and expectations. The interviewer attempts to make some kind of
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attachment with the interviewee with the help of gestures, welcome note, etc. Similarly, in the
question-answer stage, the content based interaction between the interviewee and the interviewer
takes place. This is the largest stage of job interview. The final stage is known as summing-up stage
in which the interviewer signals pre-closing of the conversation. And finally, the interview gets
wrapped up with conventional thank-you note and farewell exponents.
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PAPER 7: INCOME TAX AND VAT
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Revision Questions
1. Goyal S Private Limited, a private company located at Hetauda having equity capital of Rs. 20 crores.
Royal S International UK based company holding 80 % share of this Goyal S Pvt. Ltd. Extracted the
following information from the Income Statement for the year 2077/78.
Amount in thousand
Particulars Rs. Particulars Rs.

Opening stock 30,000 Export Sales 60,000
Purchase cost of imported raw 34,000 Local sales 15,000
materials
Local purchase of finished 12,000 Vehicle transportation charge 1,500
goods on local sales
Custom duty 1,500 Export incentive 1,200
Custom clearance expense 500 Gain on auction sale of factory 200
machineries
Export duty 5 Miscellaneous income 500
Wages 5,000 Exchange gain 1,000
Freight inwards on import 1,200 Interest received 2,000
Freight outwards on export 2,000 Closing stock 32,000
Manufacturing expenses 650
Salaries 4,000
Deposit expenses on Social 1,700
Security Fund (SSF)
Office expenses 2,000
Sales expenses 500
Repair & maintenance 700
Depreciation 2,000
Interest expense 2,500
Exchange loss 300
Donation expenses 1,000
Pollution control cost 600
Advance tax expense 900
Net Profit 10,345
Total 113,400 113,400
Additional Information:
i) Goyal S should sale the manufactured product (garments) to the Royal S at the ratio of the
investment, i.e. 80 % of the total sales. Total export sales includes the export of
Rs.44,000,000 to the Royal S International.
ii) Opening and closing stocks are valued including the factory overhead Rs. 50 per unit,
administration overhead Rs. 20 per unit, repair & maintenance Rs. 75 per unit and
depreciation is not included. The company produced 5000 units during the income year; it
has opening stocks 3000 units and closing stocks 2,500 units. The company follows the
FIFO method.
iii) All local sales amount is related to the local purchased finished products, no opening and
closing stocks of such products.
iv) Miscellaneous income includes the amount recovered from the staff for their lunch
expenses provided at the office premises.
v) Exchange gain is calculated at year end UK Pound receivable on the Export sales.
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vi) Interest credited on the bank's statement has been recorded interest received.
vii) Government provides 3 % incentive on such export if company produced the required
authenticate documents with the application. The above incentive amount was calculated
on the fourth quarter export sales of Income Year 2075/76, whereas claimed and received
in this Income Year.
viii) Purchase cost of imported raw materials includes the payment of Rs. 200,000 to the
custom agent; no invoice was received so far.
ix) Custom clearance expense was an advance paid amount to the custom agent, the details
submitted by the agent as VAT paid at custom Rs. 250,000, service charge with invoice
of Rs. 226,000 with VAT, and miscellaneous expenses Rs. 27,000 with business related
invoices.
x) Salary Rs. 120,000 was paid to an employee from Aswin 01, 2077 without signing the
contract with him as per the labor act. He has obtained the PAN but not opened the bank
account. Amount was also not calculated for SSF related to his salary.
xi) Office expenses include payment of Rs. 200,000 to a lawyer for defending a case against
tax assessment. The lawyer provided a PAN invoice for such services.
xii) Repair and maintenance is related to the maintenance of vehicles.
xiii) The opening depreciation base and transactions of depreciable assets are as follows:
Block Opening depreciation Transactions
base
A 5,000,000 No transactions during the year
B 2,000,000 One computer with VAT of Rs. 67,800 purchased on
Poush 29, 2077 but amount was paid on Magh 02,
2076.
C 2,500,000 One Car for business use with VAT
of Rs. 9,605,000 purchased on Baishak 15, 2078.
D 7,500,000 One machinery depreciated value Rs. 2,000,000 was
sold on Bhadra 15, 2077
xiv) All interest expense is related to the borrowings for the business. Interest expense
includes the payment of Rs. 1,500,000 to Zebor investment Pvt. Ltd., located at Bharatpur,
Chitwan; remaining to the commercial bank. The Royal S International is a major
shareholder of Zebor investment Pvt. Ltd.; it has 35 % of equity share.
xv) Exchange loss has been debited while making payment in foreign currency against the
opening creditors' balance.
xvi) Fifty percent donation expense is related to deposit into federal level COVID-Fund
established by GoN, 25 % cash deposited into COVID Fund of Hetauda Sub-metropolitan
city, remaining 25 % given to the private hospitals to treat the COVID's affected people.
xvii) Advance tax expense is related to the first installment paid at the Poush end, 2077 with
estimated tax return. Then after the company neither paid any tax nor submitted estimated
tax return.
The company wants to full compliance of Income Tax Act, 2058 and rules thereof; you are
requested to assess the tax for the FY 2077/ 2078. Calculate taxable income and tax liability.
2. Mr. Sitaram Dahal is working as financial manager of Star General Insurance Ltd. As per the
requirement of Social Security Fund (SSF), Star General Insurance Ltd. is registered on 10 th Poush
2077. However, deposit in SSF is started from start of Magh 2077. Insurance Company is complying
Labour Act, 2074. Following is the details of income of Mr. Sitaram Dahal for FY 2077/078:
S. Particulars Amount
N. (Rs.)
1 Monthly salary as per appointment letter 75,000
2 Medical Allowance 37,500
3 Festival Allowance 45,000
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4 Children’ Education Allowance 96,340

5 Bonus as per Bonus Act 387,400
6 Loan Installment of Vehicle Paid by Employer 240,000
7 Annual performance allowance 85,000
8 Insurance Compensation (For COVID 19 Insurance Policy- 100,000
Entire Premium is paid by Company)
9 Leave encashment (one month salary) 75,000
• Before the deposit in SSF, company is depositing gratuity of its employee and CIT.
• Mr. Sitaram also donated Rs. 90,000 to a tax-exempt organization.
• Mr. Sitaram also deposited Rs. 225,000 in CIT.
From the above information, you are required to compute the taxable income and tax liability of Mr.
Sitaram Dahal.
3. Nepal Electricity Authority (NEA) hired Mr. Peter, a UK Citizen as Infrastructure Expert with effect
from September 17, 2021. He came to Nepal, 7 days before his joining date on September 10, 2021.
He left Nepal on December 20, 2021 and came back to Nepal after Christmas leave on January 9,
2022, and continued his service for the contract period. After the expiry of contract, he converted his
visa category into Tourist Visa, and went to Annapurna Base Camp for 17 days, and returned to his
home country on April 2, 2022. Comment about the residential status of Mr. Peter.
4. Mr. Amar is working in Hospital representing America, and came to Nepal on 1 st Kartik of Income
Year. His salary and other emoluments are paid by the country he represents. He declared following
sources of income during the Income Year. Applicable rate of exchange is Rs. 104 per $.
Income Amount
Salary $ 3,000 p.m.
Dearness Allowances $ 1,000 p.m.
Foreign Allowances $ 1,500 p.m.
Net Gain from Disposal of Shares Rs. 45,000 (TDS Rs.5000)
He earned assessable income from a business in Nepal Rs. 10,00,000

Windfall gain (Net off TDS) Rs. 18,750
He contributed Rs. 400,000 to CIT for the Income Year.
He claimed reduction for donation to Tax Exempt Entity Rs.100,000.
Compute his tax liability.
5. GA Private Limited a renowned manufacturing company of Nepal. In Financial Year 2076-77 it has
allocated Rs. 10,000,000 i.e. 1% of its annual profit to CSR as per the Industrial Enterprises Act,
2076. Out of such allocated amount company incurred Rs. 8,000,000 for purpose of health
equipment and materials related to the treatment of COVID 19 to the Government Hospital
prescribed by Ministry of Health and Population. At the time of contribution company thought that
such expenses can be deducted for Income Tax Purpose also. But after the announcement of Finance
Act, 2078 on 2078.02.15 company got the information from one of its consultants regarding disallow
of such expenses for tax purpose because for allowance CSR provision should be of 2077-78 rather
than of 2076-77. Explain with reference to the relevant provision whether information provided by
the consultant is as per the provision of Section 31 of Finance Act, 2078?
6. Nepal Soft Ltd. is established as a wholly owned subsidiary of India Soft Ltd. which is 50%
subsidiary of UK Soft Ltd. The following particulars are furnished for your information for FY
2078/79.
i) Net Profit Before Tax As per books Rs. 2,91,000.
ii) Interest Income from FD Rs.80,000.
iii) Donation Paid to political party registered in election Commission Rs. 25,000.
iv) Interest Paid to UK Soft Ltd. for loan availed of Rs.35 lakh @ 16%. The loan has been taken on
Kartik 01, 2078.
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Compute interest allowed U/s 14(2)

7. Kadaria Enterprise has following transaction during the period, from the below information find
deductible cost of sales for tax for Income Year.
Opening Stock FIFO Rs. 50,000
Purchased during year Rs. 500,000
Sales during year GP ratio 25% Rs. 500,000
Value of Closing Stock (market value)
Case a) Rs. 120,000
Case b) Rs. 150,000
Case c) Rs 200,000
Case d) Nil
8. Computation of Repair and Improvement Cost allowed as per Section 16 (Amount in ,000)
Pool A B C D
Opening Depreciation Basis 1,000 1,000 1,000 1,000
Addition 0 0 0 0
Sale of Assets 500 0 800 1,200
Status of Pool Yes Yes No Yes
Actual Repair and Improvement Cost 20 80 60 100
9. M/s Nepal Power Private Limited is engaging in solar power system production for sale in which
60% share capital is subscribed by DFID which is tax exempt organization under Income Tax Act of
Nepal. The following information is available from accounts of the company for I.Y. 2078-79.
Particulars Amount
Sales 12,300,000
Dividend Received 190,000
Scrap Sales 140,000
Consultancy Fee 450,000
Total Revenue 13,080,000
Raw material consumed 4,000,000
Salary and wages 1,800,000
Finished goods stock decreased 510,000
Administrative expenses 600,000
Donation to an Exempt Organization 310,000
Pollution control expenses 690,000
R & D Expenses 1,300,000
Interest paid to DFID 2,950,000
Interest to Bank/FI 70,000
Repair to plants (Allowed) 230,000
Depreciation per Tax Act 432,000
Net Profit before tax 188,000
Compute its taxable income.
10. ABC Private Limited purchased license of Trade Mark as on dated 2075.10.10 for Rs.600, 000. Such
license has been purchased for period of 5 Years and 2 Months. Computation of allowable
depreciation expenses for financial year 2075.76, 2076-2077 and 2078-79.
11. Determine Balancing Charge, Terminal Depreciation, Depreciation and Opening Depreciation Base
for next Income Year of the company.
Particulars Qty. Case A Case B Qty. Case C Case D

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Opening 4 200,000 200,000 4 200,000 200,000

Depreciation Base
Addition (Magh) 2 300,000 300,000 2 300,000 300,000
Amount Derived 2 550,000 250,000 6 550,000 250,000
from Disposal
12. Singha road Ltd. located at Hetauda is a public infrastructure project. The project will be completed
on Chaitra end 2078 as per estimation, and then it will be handover to Government of Nepal.
The Ltd. has incurred loss continuously from income year 2070/71 to 2077/78 as follows:
Income Year Loss amount Rs.

2070/71 1,000,000
2071/72 500,000
2072/73 600,000
2073/74 200,000
2074/75 150,000
2075/76 100,000
2076/77 75,000
2077/78 10,000
During income year 2078/79, it has earned the profit of Rs. 1,500,000 Compute the taxable income
for the income year 2078/79 and carry forward losses for the income year 2079/80 for set off with
references to the provisions of Income Tax Act, 2058 relevant to this project.
13. An entity seeking for approval of retirement fund requests for your expert advice on approval
procedures of retirement fund as per Income Tax laws and also on below mentioned matters:
i) Are there any conditions to be fulfilled by such retirement funds?
ii) If there are any conditions to be fulfilled by such entity and if the entity breaches such
conditions, can the Income tax department cancel its approval?
iii) Does the act mention about its taxability and calculation of income for taxation purpose?
iv) If approval of retirement funds is cancelled, will there be difference in its taxation as per the
Act?
Provide your answer based on the provisions of Income tax act and rules.
14. Mr. A and Mr. B contributed Rs. 4 million and Rs. 6 million respectively and deposited into a
common bank account to be used to purchase a plot of land and to resale the same in the future.
After 6 months of depositing the money into the bank account, they purchased a plot of land for
Rs. 9 million and got the land registered in their joint name. Expenses on registration and
commission at the time of purchasing the land are amounted to Rs. 1 million. Later, they sold the
plot of land for Rs. 17.2 million. Also, they paid Rs. 1.2 million as sales commission and other
incidental expenses pertinent to the disposal. The bank has given interest @ 12% per annum on
such deposit.
Compute the amount to be included as income in the hand of Mr. A and Mr. B.
15. Following is the details of income of Mr. Dal Bahadur Gurung for IY 2078/079.
Particulars Amount (Rs.)
Income from sale of paddy and other crops harvested in own land 320,000.00
within the area prescribed by Land Act, 2021
Pension income from British Gorkha, UK 960,000.00
Amount remitted by his son from US to purchase House in 6,000,000.00
Dharan
Gain on sale of securities listed in NEPSE purchased on 590,000.00
2078.10.30 and sold on 2079.03.15
Dividend received from investment made in Nepalese 95,000.00
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company
Gain on disposal of House and Land that he purchased before 9,080,000.00
20 years and lived for 13 years.
He has paid Rs. 50,000 each for him and his wife’s health insurance premium in Indian
Insurance Company while visiting Hospital in India for regular checkup of his wife. Further, he
paid last instalment of his life insurance premium of Rs. 137,500 this year in UK’s Life
Insurance Company. This life insurance policy will mature is IY 2079/80. Assume Mr. Dal
Bahadur Gurung as single for tax purpose.
Required:
Calculate the Income Tax Liability of Mr. Dal Bahadur Gurung for FY 2078/079.
16. Write short notes of the following with reference to Income Tax Act, 2058.
a) Adjusted Taxable Income
b) Public Circular
c) Assessable Income
d) Long Term Contract
17. Write short notes on the basis of VAT Act, 2052:

a) Reverse charge
b) Conditions for zero rate of tax
c) Collection of tax from other than registered person
d) Tax on transfer of business
18. GS Traders Pvt. Ltd. is in the business of importing and sale of electronic items in Nepal. The details
related to one particular consignment in the year 2077/78 is as given below :
Cost of material as per invoice Rs. 500,000
Bank charges for L/C Rs. 15,000
Insurance Rs. 10,000
Birgunj Dryport clearing agent’s cost Rs. 20,000
Freight up to custom point Rs. 14,000
Freight from custom point to Kathmandu Rs. 7,000
Other tax paid at custom point Rs. 2,500
Nepal custom expenses including 10 % custom duty Rs. 60,000
Demurrage charge paid at custom point Rs. 10,000
Discount receivable Rs. 20,000
Further information:
Discount receivable is not factored in the invoice and will be paid subsequently.
The purchase price is without adjusting the discount.
Answer the following:
i) How the taxable value is determined in case of import of goods. Briefly

mention with reference to the provisions of Value Added Tax Act, 2052.
ii) Compute the Value Added Tax payable at custom point as per above
information.
iii) The company intends to sell the lot at 20% profit over the total cost. What
price should it be selling and what will be the VAT amount on sale?
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19. Jhapa Tea State Pvt. Ltd. is a tea processing and producing industry, located in Jhapa. It has a tea
production farm. It has local sales and export and provided the following information related to
the month of Bhadra, 2078.
Particulars Transactions Amount
Rs.
Local Sales 5,00,000.00
Local tea leaves sales 5,00,000.00
Export 20,00,000.00
Paid Wages and others that are VAT exempt 10,00,000.00
Building constructed on its own and completed in Bhadra, cost incurred as follows:
Total purchase materials amount from VAT-registered suppliers 30,00,000.00
up to Shrawan 2078
Wages paid up to Shrawan 2078 5,00,000.00
Total purchase materials amount from VAT registered parties in 12,00,000.00
Bhadra, 2078
Paid to the municipality for the completion certificate 3,00,000.00
Wages payable 5,00,000.00
Compute the VAT amount payable/receivable by the Tea estate highlighting the provisions of
the VAT Act, 2052 for the Month. Assume no vat on opening. Also, give your views on how
much amount can be claim for refund and how much amount to be paid?
20. Below is transactions of Himal Beverage Private Limited for the month of Shrawan 2078 to Magh
2078. It has not yet filed any VAT return for these periods.
Particulars Shrawan Bhadra Asoj Kartik Mangsir Poush Magh
2078 2078 2078 2078 2078 2078 2078
Export Sales 20,00,000 30,00,00 40,00,00 50,00,000 60,00,00 70,00,000 20,00,000
0 0 0
Domestic Sales 80,00,000 90,00,00 1,00,00,00 1,10,00,000 1,00,00,00 1,00,00,00 30,00,000
0 0 0 0
Vatable Purchase 5,00,00,000 30,00,00 20,00,00 35,00,000 40,00,00 5,00,00,00
of Goods and 0 0 0 0
Services
Purchase of Car 1,00,00,000
for CEO
Purchase of Truck 50,00,00
for transportation 0
of goods
Petrol Expenses 50,000 10,000
Diesel Expenses 30,000 50,000
Consultancy fee 2,00,000
(invoice dated
2077.07.25)
You are required to compute VAT payable receivable for each month and advise management regarding VAT
refund process for all the relevant months. All the above figures are excluding VAT.
21. Ms. Kathmandu Trading House deals in used goods and has following transaction details for the
month of Chaitra 2077. Calculate the VAT payable/receivable for the month.
Purchase (including VAT) Sales (excluding VAT)

Chairs 20,000 25,000
Motorbike 35,000 45,000
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Refrigerator 10,000 9,000

Cupboard 8,000 7,000
Bookshelf 12,000 15,000
Scooter 25,000 in stock
How the VAT payable is determined in case of used goods by Kathmandu Trading
House?
What would be your calculation if the transaction were of trading assets of Kathmandu
Trading House and not the used goods?
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Suggested Answer / Hints:

1. Calculation of taxable income and tax liability
Rs. in thousand
Local
Remark
Particulars Section Export sales/ Total
s
income
Items to be Included in Business Income
Sales U/s 7(2)(Kha) 60,000.00 15,000.00 75,000.00 W.N. 1
Vehicle Transportation Charge on Local Sales U/s 7(2)(Ka) - 1,500.00 1,500.00
Export incentive U/s 7(2)(Kha) - 1,200.00 1,200.00 W.N.2
Miscellaneous Income U/s 7(2) - 500.00 500.00
Exchange Gain - - - W.N. 3
U/s
Interest received - 2,000.00 2,000.00
7(2)(Chha)
Total Income 60,000.00 20,200.00 80,200.00
Allowable Expenses
Cost of stock in trade U/s 15 40,329.50 12,000.00 52,329.50 W.N.4
General Deduction U/s 13 8,865.00 1,640.00 10,505.00 W.N.5
Depreciation U/s 19 2,801.78 525.33 3,327.11 W.N.6
Repair & Maintenance U/s 16 298.67 74.67 373.33 W.N.7
Interest Expenses U/s 14(1) 800.00 200.00 1,000.00 W.N.8
Section 29 of
Donation to Province Level COVID Fund Finance Act, 400.00 100.00 500.00 W.N.9
2078
Section 29 of
Donation to Local Level COVID Fund Finance Act, 200.00 50.00 250.00 W.N.9
2078
Total deductible Expenses 53,694.94 14,590.00 68,284.94
Adjusted Taxable Income 6,305.06 5,610.00 11,915.06
Interest Expenses U/s 14(2) 1,200.00 300.00 1,500.00 W.N.10
Pollution Control Cost U/s 17 480.00 120.00 600.00 W.N.11
Taxable Income 4,625.06 5,190.00 9,815.06
Tax Rate 12% 25% W.N. 11
Tax Liability 555.01 1,297.50 1,852.51
Less: Advance Tax 900.00
Net Tax Payable 952.51
Working Note 1
If any person is eligible for separate benefit U/s 11 then, export sales and local sales shall be
segregated assuming that income derived by the separate person as per Section 11(4). Common
expenses to be allocated on the basis of Sales
Particulars Amount Ratio

Export Sales 60000 8
Local Sales 15000 2
75000 10
Working Note 2
As right to receive an export incentive of Income Year 2075-76 is occurred during this year, therefore
amount received during an income year shall be included in Income.
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Working Note 3
As per 24 (4), exchange gain/losses has to be adjusted in receiving or making payment. The exchange gain
calculated on the receivable amount is not considered the income for the Income Year as per this section.
Working Note 4:
Cost of trading stock U/s 15
Particulars Detail Amount Remarks
Opening Stock 30,000.00
Less: Administrative Overhead 60.00 Separately deductible U/s 13
Less: Repair and Maintenance Expenses 225.00 Separately deductible U/s 16
Balance Opening Stock 29,715.00
Add: Cost of Material Purchase during the year
Purchase cost of imported raw materials 34,000.00

Not deductible U/s 21(1)(Gha
Less: Expenses without invoice 200.00 33,800.00
2)
Add: Custom Duty 1,500.00 1,500.00
Add: Custom clearance expenses
Service Charge Invoice 200.00
Miscellaneous Expenses 27.00 227.00
Wages 5,000.00
Freight inwards on import 1,200.00
Manufacturing expenses 650.00
Total Cost of Material Purchase during the
42,377.00
year
Less: Closing Stock 32,000.00
Less: Administrative Overhead 50.00 Separately deductible U/s 13
Less: Repair and Maintenance Expenses 187.50 Separately deductible U/s 16
Balance Closing Stock 31,762.50

Cost of trading stock 40,329.50
Working Note 5:
General Deduction U/s 13
Particulars Export Sales Local Sales Total
Export Duty 5.00 - 5.00
Freight outwards on export 2,000.00 - 2,000.00
Salaries 3,200.00 800.00 4,000.00
Deposit Expenses Social Security Fund 1,360.00 340.00 1,700.00
Office Expenses 1,600.00 400.00 2,000.00
Sales Expenses 400.00 100.00 500.00
Exchange Loss 300.00 - 300.00
Total General Deduction 8,865.00 1,640.00 10,505.00
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Additional Note:
• Salary Rs. 120,000 was paid in cash to an employee without signing the contract is allowable
expenses, because the monthly cash paid amount limited only Rs. 120,000 and he has obtained
the PAN.
• Payment of Rs. 200,000 to a lawyer for defending a case against tax assessment is allowable
expense, because the amount is below than Rs. 500,000 as prescribed by VAT Act.
Working Note 6:
Depreciation
Particulars Block-A Block-B Block-C Block-D Total

Opening depreciation base
5,000.00 2,000.00 2,500.00 7,500.00 17,000.00
Add: Absorbed Additions
- - - - -
Upto Poush
- 60.00 - - 60.00
Upto Chaitra
- - - - -
Upto Ashad
- - 2,833.33 - 2,833.33
Less: Amount derived from
disposal - - - 2,200.00 2,200.00
Depreciation Base
5,000.00 2,060.00 5,333.33 5,300.00 17,693.33
Normal Depreciation Rate 5% 25% 20% 15%
Depreciation (Normal)
250.00 515.00 1,066.67 795.00 2,626.67
Depreciation for manufacturing
(80%) 200.00 412.00 853.33 636.00 2,101.33
Depreciation (Additional for
manufacturing) 66.67 137.33 284.44 212.00 700.44
Total Depreciation (for
manufacturing) 266.67 549.33 1,137.78 848.00 2,801.78
Total Depreciation (for trading)
50.00 103.00 213.33 159.00 525.33
Total depreciation
3,327.11
The computer cost is full allowable for depreciation base, because it was purchased on Poush, Car
purchased with VAT Rs. 9,605,000; it is Rs. 8,500,000 without VAT. Total cost of the car is Rs. 8,500,000.
Out of this, 1/3 is considered for depreciation base.
The machinery with depreciated value Rs. 2,000,000 was sold, the gain on such sales given Rs.200,00. So
that total disposal value is Rs. 2,200,00.
Working Note 7:
Repair and Maintenance Expenses
Particulars Block C
7% X Depreciation Base 373.33
Actual Repair Expenses 700.00
Lower of above 373.33
Export Sales 298.67
Domestic Sales 74.67
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Working Note 8:
Interest Expenses
Particulars Export Sales Domestic Sales Total
Expense 800 200 1000
Total 800 200 1000
Working Note 9:
Donation to Province and Local level COVID fund
Particulars Export Sales Domestic Sales Total Remarks
Donation of Province Level COVID Fund 400 100 500
Donation of Local Level COVID Fund 200 50 250
Donation to private hospital 0 0 0 Deduction not allowed
Total 600 150 750
Donation deposited into COVID Fund established by Nepal government including local level
government is allowed as expenses, donation given to private hospitals is not allowable.
Working Note 10:

Interest Expenses U/s 14(2)
Particulars Note Detail Amount
Actual Expenses 1,500.00
Limit as per Section 14(2) 7,157.53
All interest derived by the entity 2,000.00
Adjusted Taxable Income 11,915.06
Less: Actual Pollution Control Cost 600.00
Adjusted Taxable Income for Section 14(2) 11,315.06
Add: Any interest expenses 1,000.00
Less: Any Interest Income 2,000.00
50% X (Adjusted Taxable Income + Any Interest Expenses -Any
5,157.53
Interest Income)
Allowed U/s 14(2) Lower of above 1,500.00
Export Sales 1,200.00
Working Note 11:

Pollution control cost
Particulars Note Detail Amount

Actual Expenses 600.00
Limit as per Section 17 5,207.53
Adjusted Taxable Income 11,915.06
Less: Actual Interest to controlled foreign entity 1,500.00
Adjusted Taxable Income for Section 17 10,415.06

50% of Adjusted Taxable Income 5,207.53
Allowed U/s 17 Lower of above 600.00
Export Sales 480.00
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Working Note 12:

Tax Rate
Particulars Provision Export Sales Other Income
Normal Rate Schedule 1 Section 2(1) 25% 25%
Less: Rebate @ 20% for Special Industry Section 11(2Kha)(Kha) 5% 0%
Balance 20% 25%
Less: Rebate @ 20% for Export Sales Section 11(2Nga)(Kha) 4% 0%
Balance 16% 25%
Less: Rebate @ 25% for Manufacturing and
Export Sales Section 11(2Nga)(Ga) 4% 0%
Effective Rate of Tax 12% 25%
2. Mr. Sitaram Dahal

Computation of Taxable Income:
Particulars Section Note Amount (Rs.)
Basic Salary U/s 8(2)(Ka) 900000 * 60% 540,000.00
Employers Contribution to
Provident Fund U/s 8(2)(Cha) (540000*10%) 54,000.00
Gratuity U/s 8(2)(Cha) (540000*8.33%) 44,982.00
Additional Employers Contribution
in SSF (1.67% of Basic for 6 month
by employer) U/s 8(2)(Cha) (540000*1.67%)*6/12 4,509.00
Allowance U/s 8(2)(Kha) 900000 * 40% 360,000.00
Medical Allowance U/s 8(2)(Kha) 37,500.00
Festival Allowance U/s 8(2)(Kha) 45,000.00
Children Education Allowance U/s 8(2)(Kha) 96,340.00
Bonus as per Bonus Act U/s 8(2)(Ka) 387,400.00
Loan Installment Paid by Employer U/s 8(2)(Chha) 240,000.00
Annual performance allowance U/s 8(2)(Kha) 85,000.00
Insurance Compensation U/s 31 1 -
Leave Encashment U/s 8(2)(Ka) 75,000.00
Total Assessable Income 1,969,731.00
Less: Allowable Contribution in
ARF U/s 63 2 385,191.00
Adjusted Taxable Income 1,584,540.00
Less: Donation to Exempt Entity U/s 12 3 79,227.00
Taxable Income 1,505,313.00
Computation of Tax Liability of Mr. Sita Ram Dahal for the Income Year 2077-78 as per
Schedule 1 Section 1(1)
Particulars Rate Amount
Upto Rs. 400000 0% 0
Next Rs. 100000 10% 10,000
Next Rs. 200000 20% 40,000
Balance Rs. 805313 30% 241,593.90
Total Income Tax Payable 291,593.90
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Note 1:
As per SSF Act, if the total salary is not bifurcated into basic & DA/allowances, 60% of
monthly salary shall be considered as basic & 40% as allowances.
Note 2:
Least of the following shall be allowed U/s 63
i) Actual Contribution 385,191.00
ii) Monetary Limit 500,000.00
iii) 1/3 of Assessable Income 656,577.00
Least of the above 385,191.00
Note 3:
i) Actual Donation 90,000.00
ii) Monetary Limit 100,000.00
iii) 5% X Adjusted Taxable Income 79,227.00
Least 79,227.00
3. As per Section 2(Ka Nga), Natural Person is resident for an Income Year if he stayed for 183 days or
more in 365 consecutive days. As per the clarification of Income Tax Directive, 365 consecutive days
should be read as Income Year.
Determination of Residential Status of Mr. Peter for an Income Year 2021-22 (2078-79)
Income Period of Stay Number of Days Residential Status

Year
2021-22 10.09.2021 to 20.12.2021, (30-10+1)+31+30+20+(31- Resident
(2078-79) 09.01.2022 to 02.04.2022 9+1)+28+31+2 = 186
Note: Date of arrival and date of departure shall be inclusive.
4. Computation of Taxable Income of Mr. Amar for the Income Year 2077-78
Particulars Section Note Detail Amount

Income from Employment 8
Salary 8(2)(Ka) (3000x12x104) 3,744,000
Dearness Allowances 8(2)(Kha) (1000x12x104) 1,248,000
Foreign Allowances 8(2)(Kha) (1500x12x104) 1,872,000
Assessable Income From 6,864,000
Employment(A)
Income from Investment
Net Gain from Disposal of 9(2)(Kha) 45000+5000 50,000
Shares
Assessable Income from 50,000
Investment (B)
Income from Business
Assessable Income from 7(2) 1,000,000
Business (C)
Total Assessable Income 7,914,000
(A+B+C)
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Less: Contribution to 63 1 300,000

Approved Retirement Fund
Adjusted Taxable Income 7,614,000
Less: Donation 12 2 1,00,000
Taxable Income 7,514,000
Note 1:
Least of the following shall be allowed to be deducted as per Section 63
a) Rs. 300,000
b) Actual Contribution Rs. 400,000
c) 1/3 of Assessable Income = 7,914,000/3 = 2,638,000
Least = Rs. 300,000
Note 2 :
Least of the following shall be allowed to be deducted as per Section 12
d) Rs. 100,000
e) Actual Donation Rs. 100,000
f) 5% of Adjusted Taxable Income = 7,614,000 x 5%= 380,700
Least = Rs. 100,000
Note 3 :
Windfall Gain is subject to withholding tax @ 25 % U/S 88Ka. Such withholding payment shall be
treated as final withholding payment U/S 92(1) therefore shall not be included in income.
Computation of Tax Liability of Mr. Amar for the Income Year 2077-78
As taxable income is more than Rs. 400,000 and it includes gain on disposal of Non-Business
Chargeable Assets therefore tax amount shall be calculated as per Schedule 1 Section 1(4) as follows:
Step 1:
a) Taxable Income – Gain On Disposal of NBCA
= 7,514,000 – 50,000
= 7,464,000
b) Rs. 400,000
Whichever is higher = Rs. 7,464,000
Tax Shall be Calculated as per Schedule 1 Section 1(1) as follows :
Particulars Rate Amount

Up to Rs. 4,00,000 1 % Social Security Tax 4,000
Next Rs. 100,000 10% 10,000
Next Rs. 200,000 20% 40,000
Next Rs. 1,300,000 30% 3,90,000
Balance Rs. 5,464,000 36% 1967,040
Total Tax Payable 2,411,040
Step 2:
Balance Taxable Income = Taxable Income – Higher of Step 1
= 7,514,000 – 7,464,000
= 50,000
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Tax @ 10% as per Schedule 1 Section 1 (4) = 50000 X 10% = 5,000
Total Tax Payable = Step 1 + Step 2 = 2,411,040 + 5,000 = 2,416,040
Net Tax Payable = 2,416,040 – 5,000 = 2411,040
5. As per Section 31 of Finance Act, 2078, Out of the amount set aside for Corporate Social
Responsibility (CSR) in the FY 2020-21 (2077-78), the expenses incurred for the construction of
specialized hospitals and for providing health equipment and materials related to the treatment of
COVID 19 to the designated medical institutions as prescribed by Ministry of Health and
Population, GoN are deductible for the computation of taxable income.
6. Calculation of the Interest allowable for deduction as per provisions of Income Tax Act, 2058
Particulars Amount
Net Profit as per Books 291,000
Add: Donation Paid to Political Party 25,000
Add: Interest paid to UK Soft 420,000
Adjusted Taxable Income 736,000
Least of the following shall be allowed U/s 14(2)

a) Actual Interest Paid to Controlling Entity = 420,000
b) All interest derived + 50% (Adjusted Taxable Income – Any Interest Income + Any Interest
Expenses) = 80000+50%(736000-80000+0)= 408,000
Least = Rs. 408,000
7. Computation of Cost of Trading Stock as per Books
Sales during the year 5,00,000

Less: Gross Profit @ 25% 1,25,000
Cost of Trading Stock as per Books 3,75,000
Computation of Cost of Closing Stock

Opening Stock 50,000
Add: Purchased During the Year 500,000
Less: Cost of Trading Stock 375,000
Closing Stock 175,000
Valuation of Closing Stock

Case Cost Market Value Lower
A 175,000 120,000 120,000
B 175,000 150,000 150,000
C 175,000 2,00,000 175,000
D 175,000 0 0
Computation of Cost of Trading Stock as per Section 15
Particulars Case A Case B Case C Case D

Opening Stock 50,000 50,000 50,000 50,000
Add: Purchase 500,000 500,000 500,000 500,000
Less: Closing 120,000 150,000 175,000 0
Stock
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Cost of Trading 430,000 400,000 375,000 5,50,000

Stock as per
Section 15
8. Computation of Repair and Improvement Cost allowed U/s 16

Pool A B C D
Opening Depreciation Basis 1000 1000 1000 1000
Add: Absorbed Addition 0 0 0 0
Less: Amount Derived from Disposal 500 0 800 1200
Depreciation Base 500 1000 0 0
7% of Depreciation Base 35 70 0 0
Actual Expenses 20 80 60 100
Allowed U/s 16 20 70 60 0
Note: If there is no assets in block of assets then entire repair and improvement cost shall be allowed
in same year.
9. Taxable Income of the Company shall be computed here under:
Particulars Amount Remarks

Items to be included in Income
Sales 12,300,000
Dividend Received - Final Withholding Payment
therefore not included in
income
Scrap Sales 140,000
Consultancy Fee 450,000
Total amounts to be included in Income 12,890,000
Less: Deductible Expenses
Raw material consumed 4,000,000
Salary and wages 1,800,000
Finished goods stock decreased 510,000
Administrative expenses 600,000
Interest to Bank/FI 70,000
Repair to plants (Allowed) 230,000
Depreciation per Tax Act 432,000
Total Deductible Expenses 7,642,000
Adjusted Taxable Income 5,248,000
Less: Interest Paid to Exempt Controlled 1,664,000 Note 1
Resident Entity
Less: Pollution Control Cost 499,000 Note 1
Less: Research and Development Cost 804,000 Note 1
Less: Donation to tax exempt entity 15,400 Note 1
Taxable Income 2,265,600
Note: 1
Computation of Adjusted Taxable Income for the purpose of Section 12, 14(2), 17 and 18
Particulars Section 12 Section 14(2) Section 17 Section 18

Adjusted Taxable Income as per 5,248,000 5,248,000 5,248,000 5,248,000
above calculation
Less: Actual interest to controlling 2,950,000 - 2,950,000 2,950,000
entity
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Less: Actual Pollution Control Cost 690,000 690,000 - 690,000

Less: Actual Research and 1,300,000 1,300,000 1,300,000 -
Development Cost
Adjusted Taxable Income 308,000 3,258,000 998,000 1,608,000
Least of the following shall be allowed U/s 14(2)

i) Actual Interest to controlling entity = 2950,000
ii) All interest income + 50% X(Adjusted Taxable Income-Any Interest Income + Any Interest
Expenses)
=0+50% X (3,258,000-0+70,000) = 16,64,000
Allowed = 1,664,000

i) Actual pollution control cost = 690,000
ii) 50% X Adjusted Taxable Income = 499,000
Allowed = 499,000
i) Actual research and development cost = 1,300,000
Allowed = 804,000
i) Actual Donation = 3,10,000
iii) Monetary Limit = 100,000
Allowed = 15,400
10. Computation of allowable depreciation
Particulars 2075-76 2076-77 2077-78

Opening Depreciation Base 0 6,00,000 6,00,000
Add: Absorbed Addition 4,00,000 0 0
Depreciation Base 4,00,000 600,000 600,000
Depreciation Rate 20% 20% 20%
Depreciation 80,000 120,000 120,000
Closing Depreciation Base 400,000 600,000 600,000
Add: Unabsorbed Addition 200,000 0 0
Opening Depreciation Base for next income 600,000 600,000 600,000
year
11. Computation of Balancing Charge, Terminal Depreciation, Depreciation and Opening

Depreciation Base for the next income year
Particulars Case A Case B Case C Case D
Opening Depreciation Base 200,000 200,000 200,000 200,000
Add: Absorbed Addition (Magh) 2/3 200,000 200,000 200,000 200,000
Add: Unabsorbed Addition 0 0 100,000 100,000
Less: Amount Derived from Disposal 550,000 250,000 550,000 250,000
Depreciation Base 0 150,000 0 0
Depreciation Rate 25% 25% 25% 25%
Depreciation 0 37,500 0 0
Amount to be Included in income 150,000 0 0 0
Balancing Charge 0 0 50,000 0
Terminal Depreciation 0 0 0 250,000
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Closing Depreciation Base 0 112,500 0 0

Add: Unabsorbed Addition 100,000 100,000 0 0
Opening depreciation base for next Income 100,000 212,500 0 0
Year
12. Computation of allowable loss to be set off and balance loss to be carried forward to next
Income Year
Income Year Loss Set Off Carried Remarks

Forward
2070-71 1000,000 Lapsed - Only previous 7 years loss is
allowed to be carried forward and
setoff
2071-72 500,000 500,000
2072-73 600,000 600,000
2073-74 200,000 200,000
2074-75 150,000 150,000
2075-76 100,000 50,000 50,000
2076-77 75,000 - 75,000
2077-78 10,000 - 10,000
Total Loss Set Off - 1,500,000 1,35,000
13. As per section 63(1) of the act, if a person wants to establish an approved retirement fund, it has
to obtain a written and prior permission from Inland Revenue Department (IRD). On receipt of
application, department may approve its application on the terms and conditions specified in the
rules.
i) As per Rule 20(2) of Income tax rules, following are the conditions applicable for
granting the approved status:
Ka) The funds or deposits received by an approved retirement fund should be invested in
accepted investments. According to the rule, the accepted investments are Investments
in CIT established as per prevailing law, investments in government bonds, investments
in banks or investment in finance companies having license from NRB to conduct
financial transactions, Investment for consortium financing and Investment in
beneficiaries other than its own shareholders.
Ka1) Paid up capital of such entity shall be at least 1 Crore.
Ka2) Number of beneficiaries, workers or employees shall be at least one thousand
Kha) The management of the fund should be done separately from that of the employer, if the
fund accepts the retirement contribution from the employer on behalf of the employees.
But this provision is not applicable for its employees or workers.
Ga) The contribution amount should be deposited in the fund, within one month in case the
expenses are booked during the month of Ashadh or within fifteen days in case the
expenses are booked during the months of other than Ashash.
Gha)The retirement payments to the beneficiaries could be made only under these
circumstances: on retirement of employees, on achievement of an age of fifty eight
years of the beneficiary, on death or on the occurrence of permanent disability of the
beneficiary.
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ii) As per Rule 20(3) of Income tax rules, IRD may withdraw the approval if the fund does not
function according to the conditions specified. On withdrawn of approval, the fund is
converted into an unapproved retirement fund.
iii) As per section 64(2) of the act, income of an approved retirement fund is exempt from income
tax. In the calculation of income of a retirement fund, following amounts are not considered:
Ka) The contributions received from the members are not included in the income of the fund.
Kha) The retirement expenses to the members are not included in the expenses of the fund.
Ga) Interest of beneficiary in the retirement fund shall not be fund liability.
iv) If approval of retirement fund is cancelled by IRD, it has to pay income tax @25% on the
amounts calculated as follows:
v) Contributions received by the fund from the day approval is granted to the day of approval
being withdrawn plus any other amount that would be included in the income if the approval
were not granted minus retirement payments made from the day of the approval being granted
to the day of the approval being withdrawn.
14. Computation of amount to be included in the hands of Mr. A and Mr. B
Particulars Amount (In Million)

Amount derived from disposal of Land 17.2
Less: Outgoings
Purchase price of Land 9
Registration and Commission Expenses 1
Commission on Sales 1.2
Net Gain on Disposal of Land 6
Income of Mr. A U/s 30 2.4
Income of Mr. B U/s 30 3.6
15. Computation of Taxable Income of Mr. Dal Bahadur Gurung for the Income Year
2078-79
Particulars Section Note Amount

Items to be Included in Income
Income from sale of paddy and other crops harvested
in own land within the area prescribed by Land Act,
2021 U/s 11(1) 1 -
Pension income from British Gorkha, UK U/s 10(Ja) 2 -

Amount remitted by his son from US to purchase
House in Dharan U/s 67 3 -
Gain on Sale of listed share U/s 9(2)(Kha) 590,000

Dividend received from investment made in Nepalese
company U/s 9(3) 4 -
Gain on disposal of House and Land that he
purchased before 20 years and lived for 13 years. U/s 9(2)(Kha) 5 -
Assessable Income
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590,000
Schedule 1
Less: Health Insurance Premium Section 1(16) 6 -
Schedule 1
Less: Life Insurance Premium Section 1(12) 7 25,000
Taxable Income 565,000
Computation of Tax Liability of Mr. Dal Bahadur Gurung for the Income Year 2078-79 as
per Schedule 1 Section 1(3) and (4)
Step 1:
Higher of the following shall be taxable as per Schedule 1 Section 1(1)

a) Rs. 400000
b) Taxable Income - Gain on Disposal of NBCA = 0
Higher = Rs. 400000
Tax liability as per Schedule 1 Section 1(1) = 0
Step 2:
Balance Taxable Income = Taxable Income - Higher of Step 1

Balance Taxable Income = 5,65,000 - 400,000 = 165,000
Income Tax on balance taxable income as per Schedule 1 Section
1(4) @ 7.5% = 12,375
Total Tax Payable = Step 1 + Step 2 = 0+12,375 = 12,375
Note: 1
As per Sub Section (1) of Section 11, an agricultural income derived from sources in Nepal
during an income year by a person, other than the income from an agriculture business derived
by a registered firm, or company, or partnership, or a corporate body, or through the land above
the holding ceiling as prescribed in the Land Act, 2021, is exempt from income tax.
But, if any income is earned by carrying on agricultural business by being registered as any
firm, company, partnership firm and other corporate body, 50 % tax on applicable income tax
shall be exempted.
Note:2
Pension received by a Nepali citizen retired from the army or police service of a foreign country
provided the amounts are payable from the public fund of that country shall be exempt from tax
89 | P a g e
Note:3
Amount remitted by his son from US to purchase House in Dharan shall not be treated as a
source of income in Nepal for Mr. Dal Bahadur Gurung.
Note:4
Dividend Income is subject to withholding tax @ 5% U/s 88(2)(Ka). Such withholding payment
shall be trated as Final Withholding Payment U/s 92(1)(Ka). Therefore, shall not be included in
Income from Business U/s 9(3).
Note: 5
Non-Business Chargeable Assets Means land, buildings and interest-in-entity, or securities,
other than the following assets:
Private house of a Natural person in the following conditions:
1. Under continued ownership for 10 years or more, and
2. Stayed in the house for 10 years or more continuously or at different times by the person.
Explanation: "Private House" for the purpose of this clause means building, the land occupied
by the building and additional land equal to area of land occupied by building or 1-ropani [5,476
st-508.7370m2] whichever is lower.
Note 6: As per Sub Section (16) of Section 1 of Schedule 1, Notwithstanding this Section, the
tax payable by a resident natural person who pays premium under health insurance policy to
resident insurance company, shall be calculated under this Section only on residual amount of
taxable income remained after deducting Actual Health Insurance Premium amount or Rs.
20,000 per annum whichever is less.
16.
a) Adjusted Taxable Income
Answer:
Means Taxable Income of a Person without reducing any amount under Section12 and
without deducting expense under Section14(2), S17 or 18 in an Income Year.
b) Public Circular
Answer:
To achieve consistency in the implementation of this Act and to make the tax administration
simple and provide guidance to persons affected by this Act, including officers of the
Department, the Department may issue in writing public circulars setting out the
Department’s interpretation of this Act.
The Department shall make public circulars issued under subsection (1) available to the
public on website of department or national level newpaper, or telecast or publish through
any other electronic medium. A public circular issued shall be binding on the Department.
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c) Assessable Income
Answer:
As per Section 6, Subject to this Act, the following income of a person for an income-year
from any employment, business, investment or windfall gain shall be the assessable income:-
(Ka) income of a resident person from the employment, business, investment

or windfall gain of the year irrespective of the location of the source of
the income; and
(Kha) income of a non-resident person from the employment, business,

investment or windfall gain of the year but only to the extent the income
has a source in Nepal.
Provided that, the assessable income does not include any income
exempt under sections 11 or 64 or both.
d) Long Term Contract
Answer:
For the purpose of Section 26, a long-term contract of a person means a contract of the
following conditions-
(Ka) the term of the contract exceeds 12 months; and
(Kha) the contract is either a contract for manufacture, installation, or construction, or, in
relation to each, the performance of related services; or a contract with a deferred
return that is not an excluded contract.
17.
a) Reverse charge
Answer:
Generally, VAT is collected and paid by the seller of goods. However, in some cases Act
has cast responsibility upon the purchaser of goods to pay VAT. This responsibility of
paying VAT on purchaser is termed as ‘Reverse VAT’. Section 8(2) and 8(3) of Value
Added Tax Act, 2052 has provided as follows:
i) VAT for Service Received from Foreign Party:
As per Section 8(2) of Value Added Tax Act, 2052, any person whether registered or not in
Nepal receiving services from a person who is not registered and is outside Nepal shall
have to assess and collect tax at the taxable value at the time of payment in accordance
with this Act and the Rules framed under this Act.
ii) VAT from Housing Developers:
Section 8(3) of Value Added Tax Act, 2052, mention that If a construction of commercial
purpose building or apartment or shopping complex or similar other structure as specified
by the Department, of which value is more than Five Million Rupees, has been made from
a person who is not registered, it shall be deemed as it has been constructed from registered
person and shall deposit the tax. In case tax is not deposited, it shall be assessed and
collected from the owner of such structure.
b) Conditions for zero rate of tax
91 | P a g e
Answer:
Zero Rate Tax means VAT is applicable at zero rates. In these cases, input tax credit is
available to the person. Schedule 2 of the Value Added Tax Act, 2052 has provided zero
rated VAT items as follows:
i) Export of Goods
ii) Export of Services
iii) Goods and Services imported by a person or body corporate availing diplomatic
facility or customs facility as per recommendation of Government of Nepal
iv) If Sales Tax was earlier exempt as per treaty or agreement
v) Sales made to industries established in Special Economic Zone
vi) Battery for Solar Power on recommendation of Alternate Power Promotion Centre
vii) Equipments for hydro power on recommendation of specified body

viii) If paintings, handicrafts, carving and similar other handicrafts produced a cottage and
small scale industry within Nepal are exported
ix) Import or local purchase of scooters used by persons with disabilities shall, if such
scooters are registered in their name in the Office of Transport Management
c) Collection of tax from other than registered person

Answer:
In general, VAT paid on purchase is qualified for credit if it is supported by tax invoice in
prescribed format. Here are few exemptions where tax paid on purchase is eligible for credit
without tax invoice. They are:
VAT paid against reverse charging
Taxable items purchased from GoN
Import supported by Pragyapan Patra
Wood purchased from community forest.
d) Tax on transfer of business

Answer:
As per Sub Section (1) of Section 5Ka, notwithstanding anything elsewhere in Act, no tax is
levied in the transfer of business of Registered Person by sale to another Registered Person or
transferred ownership of the business to heir after death. Such transfer or sale of business to
be informed to the Department as Prescribed.
As per Sub Section (2) of Section 5Ka, Notwithstanding anything contained in Sub-sec.(1),
tax obligation of so transferred industry of business, either registered or requires to be
registered, shall be borne by the transferee.
18. i) As per Section 12(5), Except otherwise provided in this Act, the taxable value for any imported
goods shall be its customs' value including transportation, insurance, freight, commissions of agents
92 | P a g e
and other persons, plus customs duties, countervailing duties plus any other taxes if levied on
imports, but it shall not include VAT.
ii) Computation of Taxable Value at the time of Import as per VAT Act, 2054
Particulars Note Amount

Cost of material as per invoice 500,000
Bank Charges for L/C Note 1 -
Insurance 10,000
Birgunj dry port clearing agent's cost Note 2 -
Freight up to custom point 14,000
Total cost up to custom point 524,000
10 % custom duty (10 % of Rs. 544,000) 52,400
Other tax paid at custom 2,500
Demurrage charge Note 3 10,000
Freight from custom point to Kathmandu Note 4 -
Discount Receivable Note 5 -
Taxable Value 588,900
VAT payable at custom point 13% 76,557
Note1: Bank charges for L/C are not forming part of the value of goods for custom purposes.
Note2: Birgunj dry port clearing agent’s cost are not forming part of the value of goods for custom
purposes
Note3: Demurrage charge paid to customs for delay in clearing is part of the value of the goods for
VAT purpose.
Note4: Freight from custom point to Kathmandu is not included at custom point.
Note5: Discount receivable is not deducted because the importer has not received at the time of
purchase.
Note6: Only custom duty is included in the taxable value as Act does not allow other expenses to be
part of the value of goods for VAT purpose, though this forms part of the cost of importer.
iii) Computation of Selling Price and applicable VAT on sales
Particulars Amount
Cost of material as per invoice 500,000
Bank Charges for L/C 15,000
Insurance 10,000
Birgunj dry port clearing agent's cost 20,000
Freight up to custom point 14,000
Freight from custom point to Kathmandu 7,000
Nepal Custom Expenses Including 60,000
Custom Duty
Other tax paid at custom 2,500
93 | P a g e
Demurrage charge 10,000

Total Cost 638,500
Less: Discount Receivable 20,000
Net Cost 618,500
Profit Margin @ 25% on Cost 154,625
Sales Price excluding VAT 773,125
VAT Payable on Sales 100,506
19.
i) Calculation of VAT Receivable/Payable for the month of Bhadra 2078
Particulars VAT Rs.

Opening VAT 0
Input VAT 130,000
Total VAT receivable 130,000
Output VAT (WN 1) 65,000
VAT receivable 65,000
ii) VAT refund and claim

The export value is 66.67 % during the month. The export value in this month is more than 40% of
the transaction, the company can claim the amount for a refund of Rs. 65,000 while filling the VAT
return instead of carrying forward.
Further, the company has to pay the tax amount of Rs. 1,30,000 before filing the VAT return under
section 8(3) as calculated in Working note 3. For this, the deposit should be made specified revenue
head. The company can't adjust this amount against the receivable. This amount related to the
transaction upto Bhadra, created the liability on Ashwin, 2078. So, this paid amount will be carried
forward but limited to the sales ratio. Amount of Rs. 1,08,333 (130,000*83.33%) can be claimed as
input while filing the VAT return to the month of Aswin, 2078.
Working Note 1: Calculation of Output VAT

Sales Sales amount VAT Remarks
Local Sales 5,00,000 65,000
Local tea leaves sales 5,00,000 0 VAT exempt
Export 20,00,000 0 0%
Total Output 30,00,000 65,000
Working Note 2: Calculation of Input VAT

The Tea State has no taxable items for claiming Input VAT excepts for building
construction, so, the input VAT is
VAT Paid on Construction material during the month of Bhadra only Rs.
1,56,000 (i.e. 1200,000 X 13%)
VAT Rules 40(4) states that if purchase items are used for VAT exemption. In
case a taxpayer carrying out the transactions of both taxable and tax-exempt
goods or services fails to establish the direct relationship of the purchased or
imported goods with the sale of taxable goods or services, such taxpayer may
deduct the amount of tax paid on their purchases or imports by calculating the
proportion of the value of taxable transaction out of the total sale value. The
94 | P a g e
building is used for exempted tea as well as taxable tea. So, VAT can claim as
input proportionately.
Vat Exempt Sales ratio is 16.67 % (500,000/30,00,000)

So, Input VAT is 1,30,000 (156000*(100%-16.67%=83.33%)
Working Note 3
Section 8(3) of the Value Added Tax Act requires that when a building,
apartment or shopping complex of more than 50 lakhs rupees constructed for
commercial purpose or other similar infrastructure of such type prescribed by
the Department, though being constructed through an unregistered person, tax
shall be deposited as if such construction is done through a registered person. In
case no such deposit is made, tax shall be assessed and recovered from the
person having ownership of such infrastructure.
The tea state constructed the building itself, this section is also applicable for
the user of the construction work. The total construction amount exceeded the
50 lakhs, so reverse vat is applicable.
Particulars Taxable items Rs. Exempted items Rs.

Total purchase materials amount from 30,00,000
VAT-registered suppliers up to Shrawan
2078
Wages paid up to Shrawan 2078 5,00,000
Total purchase materials amount from 12,00,000
VAT registered parties in Bhadra, 2078
Paid to the municipality for the 0 Not constitute the
completion certificate construction cost
Wages payable 0 5,00,000
Total Construction cost 42,00,000 10,00,000
Total without VAT 52,00,000
VAT to be paid as per this section 1,30,000
As given in the question that no opening VAT receivable or payable in the month of
Bhadra therefore, it is assumed that VAT on purchase material upto Shrawan 2078 has
already being adjusted with the output VAT of previous month. Therefore, no input VAT
has been considered for such purchase in the month of Bhadra 2078.
20. Calculation of VAT Payable/Receivable amount

Shrawan Bhadra Asoj Kartik Mangsir Poush Magh
Particulars
2078 2078 2078 2078 2078 2078 2078
VAT on Export Sales 0 0 0 0 0 0 0
VAT on Domestic
1,040,000
Sales 1,170,000 1,300,000 1,430,000 1,300,000 1,300,000 390,000
Total VAT Payable 1,040,000

1,170,000 1,300,000 1,430,000 1,300,000 1,300,000 390,000
VAT Credit:
Vatable Purchase of
6,500,000
Goods and Services 390,000 260,000 455,000 520,000 6,500,000
Purchase of Car for
520,000
CEO
95 | P a g e
[only 40% VAT Credit

available as per Rule
41)
Purchase of Truck for
transportation of goods
[Full Credit is available 650,000
for transport purpose]
Petrol Expenses
[VAT Credit not - -
allowed]
Diesel Expenses
[VAT Credit not - -
allowed]
Consultancy fee
(invoice dated
2076.07.25)
[Invoice is within 12 26,000
months period, hence
VAT Credit allowed]
Total VAT Credit 7,020,000
416,000 910,000 455,000 520,000 6,500,000 -
VAT Payable for the
month 754,000 390,000 975,000 780,000 390,000
VAT Receivable for
5,980,000
the month 5,200,000
Opening VAT Credit - 5,980,000 5,226,000 4,836,000 3,861,000 3,081,000 8,281,000

Closing VAT Credit 5,980,000
5,226,000 4,836,000 3,861,000 3,081,000 8,281,000 7,891,000
Sales Ratio
Export Sales 2,000,000
3,000,000 4,000,000 5,000,000 6,000,000 7,000,000 2,000,000
Domestic Sales 8,000,000
9,000,000 10,000,000 11,000,000 10,000,000 10,000,000 3,000,000
Total Sales 10,000,000
12,000,000 14,000,000 16,000,000 16,000,000 17,000,000 5,000,000
Export Sales % 20% 25% 28.57% 31.25% 37.50% 41.18% 40%
In the above case, Himal Beverage Private Limited does not have to pay VAT for
these months since it has VAT Credit of Rs 7,891,000 at the end of Magh 2078.
VAT Refund Process:
VAT Act, 2052 prescribes that a Tax Payer may file application for VAT refund if –
(a) It has unadjusted VAT credit for continuous 4 months, or
(b) if in any month it has export sales of more than 40%, and there is VAT credit in
such month, then Tax Payer may file application for VAT refund of such month.
In the given case, in the month of Poush 2078, the Company has Export sales of
41.18% which is more than 40%, and there is VAT receivable of Rs 52,00,000 for the
month. Hence, it may file application for refund of VAT of Rs 52,00,000.
Further, before filing application for VAT refund of Rs 52,00,000 for the month of Poush
2078, the net VAT credit balance of Rs 3,861,000 is there at the end of Kartik 2078.
Company can also file application for such VAT refund since the same has been unadjusted
96 | P a g e
for the continuous 4 months starting Shrawan 2078.
21. Section 17(5) of Value Added Tax Act provides that for dealers registered to deal in the used goods, the
VAT set off facility shall be as prescribed by the VAT Rules. It means that VAT paid on purchase is not
allowed to be claimed straight way.
Rule 33 of Value Added Tax Rules 2053 provides for the process of determination of VAT payable in case of
used items. A person dealing on used goods should maintain the full record of items purchased and sold,
including the description of the items bought etc. In case of used goods, VAT is collected on the difference
between the sales and cost of purchase (including VAT).
Therefore, the taxable value in such case is as follows:
Taxable value = Sales price – purchase price including VAT on individual basis
Invoice shall be raised for each items sold and separate record shall be kept for purchase and sales items. When
the goods are sold at price lower than the cost including VAT then in such case tax invoice need not be issued
and no tax needs to be collected. There shall be no VAT credit or refund in case of used goods dealer because
the payable arises only after the item is sold and no input credit is computed as the purchase price itself is
including VAT.
Proper records prescribed by Rules needs to be maintained; if such records are not kept then tax
officer may assess the tax on the full sales value.
Calculation of VAT payable for the month of Chaitra 2077.

Purchase Sales taxable value VAT
Chairs 20,000 25,000 5,000 650
Motorbike 35,000 45,000 10,000 1,300
Bookshelf 12,000 15,000 3,000 390
Total 67,000 85,000 18,000 2,340
If the goods were brand new then the calculation of VAT would be as follows:
Purchase VAT Receivable Sales VAT Payable
Chairs 20,000 2,301 25,000 3,250

Motorbike 35,000 4,027 45,000 5,850
Refrigerator 10,000 1,150 9,000 1,170
Cupboard 8,000 920 7,000 910
Bookshelf 12,000 1,381 15,000 1,950
Scooter 25,000 2,876 - -
Total 12,655 13,130
Net VAT Payable Rs. 475
‘THE END’
97 | P a g e

CAP II Group II June 2022

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CHARTERED ACCOUNTANCY PROFESSIONAL II (CAP-II)

Revision Test Paper

PAPER 4: Financial Management……………………………03

PAPER 5: Cost and Management Accounting……………......36

PAPER 6: Business Communication……………………….…55

PAPER 7: Income Tax and VAT……………..……………….68

PAPER 4: FINANCIAL MANAGEMENT

CHAPTER: Time Value of Money:

CHAPTER: Strategic Finance and Policy:

Debt to total funds 2:5

CHAPTER: Analysis of Financial Statements:

CHAPTER: Capital Investment Decision:

1) Drivers Salary, Rs 80,000 per month, Annual increments 3%

CHAPTER: Working Capital Management and Financial Forecasting

Sales for the year (all credit) Rs 90,00,000

Reserves and surplus to share capital 1:1.5

You are required to prepare:

Cost per unit (Rs)

To assess working capital requirement, the following additional information is given:

You are required to prepare for the two years:

CHAPTER: Dividend Distribution Policy

X Ltd. Y Ltd. Z Ltd.

CHAPTER: Valuation of Securities:

Number of equity shares 600,000 180,000

CHAPTER: Risk and Return:

CHAPTER: Overview of Capital Markets:

CHAPTER: Short Notes from Overall Syllabous:

Suggested Answers /Hints:

CHAPTER: Time Value of Money:

Future Value of amount deposited from year 1 to 10 6027709

Hence, ABC Bank should have nominal rate of 7.94%

CHAPTER: Strategic Finance and Policy:

Equity share Capital (100,000 x 100) Rs 100,00,000

3) Return on Investment (ROI) = EBIT/Capital Employed

Particulars Amount (Rs )

Less: Tax @ 40% 9,60,000

Particulars Existing Alternative Schemes

Output (units in lakhs) 1 1.5 1.5 1.5

CHAPTER: Analysis of Financial Statements:

CHAPTER: Capital Investment Decision:

Step-2: Computation of Annual Cash Flow after Tax (CFAT):

Step-3: Computation of NPV:

4) Adjustment of Working Capital:

5) Computation of Cost of Capital (Discount Rate):

a) Calculation of NPV (Purchase Vs Hire)

2) Annual Operating costs (Purchase Option):

3) Assumption: Year = 360 days

Question No. 10:

PART –I: (If there is no other asset in a block):

2) Annual Cash inflows (CFAT):

Depreciation (working 2,500,000 1,875,000 1,406,250 1,054,688 0

3) Determination of NPV (If Salvage Value = Rs 10 Lakh):

4) Determination of NPV (If Salvage Value = Zero):

2) Tax Saving on short term capital loss:

a) Cash outflows would remain unchanged.

d) Determination of NPV (If Salvage Value = Rs 10 Lakh):

(iii) Computation of NPV

CHAPTER: Working Capital Management and Financial Forecasting

2) Statement showing working capital requirement:

= 58, 50,000/1.5 = 39, 00,000

Question No. 13:

2) Statement showing estimation of working capital requirement (Total Approach):

CHAPTER: Dividend Distribution Policy