CAP-I

Fundamentals of Accounting
Suggested Answer
Roll No……………. Maximum Marks - 50

Total No. of Questions - 3 Total No. of Printed Pages -3

Time Allowed - 2 Hours

Marks
Attempt all questions. Working notes should form part of the answer.
1. Mr. Laxman is the proprietor of Morden Electronics. From the following trial balance
and accompanying adjustments of Morden Electronics, prepare trading and profit and
loss account for the year ending 31st Ashadh, 2070 and a balance sheet as on that
date: 15
Debit Balance Amount Credit Balance Amount (Rs.)
(Rs.)
Purchases 6,20,000 Sales 8,30,000
Cash in hand 4,200 Mr. Laxman's Capital 5,77,200
Cash at bank 24,000 Creditors 80,000
Stock of goods on 1-4-2069 1,00,000
Drawings 8,000
Salaries 64,000
Postage and telephones 23,000
Salesmen's commission 70,000
Insurance 18,000
Advertising 34,000
Furniture 44,000
Printing & stationary 6,000
Motor car 96,000
Bad debts 4,000
Cash discounts 8,000
General expenses 60,000
Carriage inwards 20,000
Carriage outwards 44,000
Wages 40,000
Debtors 2,00,000
Total 14,87,200 Total 14,87,200
Additional information:
i) Cost of goods in stock as on 31st Ashadh 2070 Rs. 1,45,000.
ii) Mr. Laxman had withdrawn goods worth Rs. 5,000 during the year.
iii) Purchases include purchase of furniture worth Rs. 10,000.
iv) Debtors include Rs. 5,000 of bad debts.
v) Creditors include a balance of Rs. 4,000 to Mr. Paras in respect of which it has
been decided and settled with the party to pay only Rs. 1,000.
vi) Sales include goods worth Rs. 15,000 sent to Ram & Co. on approval and
remaining unsold as on 31st Ashadh, 2070 was Rs. 10,000 on cost.
vii) Provision for bad debts is to be created at 5% on Sundry debtors.

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viii) Depreciate Furniture by 15% and Motor Car by 20%.
ix) The sales men are entitled to commission of 10% on total sales.

Answer Trading And Profit And Loss Account of Morden Electronics for the year ending 31
Ashad, 2070
Particulars Rs. Particulars Rs.
To Opening Stock 1,00,000 By Sales 8,30,000
To Purchase 6,20,000 Less: Sale on approval 15,000 8,15,000
Less: Drawing 5,000 By Closing Stock 1,45,000
6,15,000 Add: Cost of goods
Less: Wrong inclusion Sold on approval 10,000 1,55,000
Of purchase of
Furniture 10,000 6,05,000
To Wages 40,000
To Carriage Inwards 20,000
To Gross Profit c/d 2,05,000
To Salaries 9,70,000 9,70,000
To Postage and Telephone 64,000 By Gross Profit b/d 2,05,000
To Insurance 23,000 By Rebate from sundry creditors 3,000
To Printing and Stationary 18,000 By Net loss transferred to Capital 1,75,800
To General Expenses 6,000
To Bad debts 4,000 60,000
Add: Additional Bad debt 5,000
Add: Provision for Bad debts 9,000
To Salesmen's commission 70,000 18,000
Add: Outstanding 11,500
To Advertising 81,500
To Cash discount 34,000
To Depreciation *: 8,000
Furniture @15% 8,100
Motor Car @ 20% 19,200
To Carriage outwards 27,300
44,000
Total 3,83,800 Total 3,83,800
*Note: Full year's depreciation has been charged on addition during the year.

Balance Sheet of Morden Electronics as on 31 Ashad, 2070

Liabilities Rs. Assets Rs.
Capital Account Motor Car 96,000
Opening balance 5,77,200 Less: Depreciation
Less: Net Loss as per @20% 19,200 76,800
P & L a/c 1,75,800
4,01,400 Furniture 44,000
Less: Drawings(8000+5000) 13,000 3,88,400 Add: Included wrongly
In Sales 10,000
Sundry creditors 80,000 54,000
Less: Rebate outstanding 3,000 77,000 Less: Depreciation
@15% 8,100 45,900
Salesmen's commission 11,500
Closing Stock 1,45,000
Less: Cost of goods sold
On approval 10,000 1,55,000

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Sundry Debtors 2,00,000

Less: Sale on approval 15,000
Less: Additional Bad debt 5,000
1,80,000
Less: Provision for
Bad debt @ 5% 9,000 1,71,000

Cash at bank 24,000

Cash in hand 4,200
Total 4,76,900 Total 4,76,900

2.
a) A and B are partners of X and Co. sharing profits and losses in 3:2 ratio between
themselves. On 31st March, 2013 the balance sheet of the firm was as follows:
Liabilities Rs. Assets Rs.
Capital A/c: Plant and Machinery 20,000
A 37,000 Furniture and Fitting 5,000
B 28,000 65,000 Stock 15,000
Sundry Debtors 20,000
Sundry Creditors 5,000 Cash on Hand 10,000
70,000 70,000

X agrees to join the business on the following conditions as and from 1.4.2013:
i) He will introduce Rs. 25,000 as his capital and pay Rs. 15,000 to the partners
as premium for goodwill for 1/3rd share of the future profits of the firm.
ii) A revaluation of assets of the firm will be made by reducing the value of plant
and machinery to Rs. 15,000 , Stock by 10%, Furniture and Fitting by Rs.
1,000 and by making a provision of bad and doubtful debts at Rs. 750 on
Sundry Debtors.
You are asked to prepare Revaluation A/c, Capital A/c of partners including the
incoming partner X, Balance Sheet of the firm after admission of X and also find
out the new profit sharing ratio assuming the profit sharing ratio of the old
partners will be in equal proportion after admission. 10
st
b) On 31 December, 2011, plant and machinery account and the corresponding
depreciation provision account of Khetan International Concern, broken down by
year of purchase was as follows:
Year of Plant and Machinery at Accumulated Depreciation
Purchase Cost Provision
1995 20,000 20,000
2001 30,000 30,000
2002 1,00,000 95,000
2003 70,000 59,500
2010 50,000 7,500
2011 30,000 1,500
3,00,000 2,13,500

Depreciation is at the rate of 10% per annum on cost. It is the firm’s policy to
assume that all purchases, sales or disposal of plant occurred on 30th June in the
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relevant year for the purpose of calculating depreciation, irrespective of the
precise date on which these events occurred.
During 2012 the following transactions took place:
i) Purchase of plant and machinery amounted to Rs. 1,50,000.
ii) Plant that had been bought in 2001 for Rs. 17,000 was scrapped.
iii) Plant that had been bought in 2002 for Rs. 9,000 was sold for 500.
iv) Plant that had been bought in 2003 for Rs. 24,000 was sold for Rs. 1,500.
You are required to:
Calculate the provision for depreciation of plant and machinery for the year ended
31st December, 2012. In calculating this provision you should bear in mind that it
is the firm’s policy to show any profit or loss on the sale or disposal of plant as a
completely separate item in the Profit and Loss Account. 3
Prepare the following ledger accounts of fiscal year 2012:
Plant and machinery Account (at cost) ; 2
Depreciation provision Account; 2
Sales or disposal of plant and machinery Account. 3
Answer a)
Dr. Revaluation A/c Cr.
Date Particulars Rs. Date Particulars Rs.
2013 To Plant and Machinery 5,000 2013 By Partner’s Capital A/c
April 1 To Stock A/c 1,500 April By Loss on Revaluation
To Furniture and Fitting A/c 1,000 1 A (3/5) 4,950
To Provision for bad and B(2/5) 3,300 8,250
doubtful debts 750
8,250 8,250
Dr. Partner’s Capital A/c Cr.
Particulars A B X Particulars A B X
To Revaluation A/c 4,950 3,300 - By Balance 37,000 28,000 -
b/d
To A’s & B’s Capital - - 15,000 - - 40,000
A/cs By Cash A/c
44,050 27,700 25,000 12,000 3,000 -
To Balance c/d By X’s
Capital A/c

49,000 31,000 40,000 49,000 31,000 40,000

Balance Sheet of A, B and X as on 1st April, 2013
Liabilities Rs. assets Rs.
Capital A/cs Plant and Machinery 15,000
A 44,050 Furniture and Fitting 4,000
B 27,700 Stock 13,500
X 25,000 96,750 Sundry Debtors 20,000
Sundry Creditors 5,000 Less: Provision for bad and
Doubtful debts 750 19,250
Cash in Hand 50,000
101,750 101,750

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Working Notes:
1. New Profit Sharing Ratio:
On admission of X who will be entitled to 1/3rd share of the future profits of the firm. A and b
would share the remaining 2/3rd in equal proportion 1:1.
A: 2/3 x 1/2 = 1/3
B: 2/3 x 1/2 = 1/3
X: 1/3
A, B and X would share profits and losses in equal ratio.
2. Adjustment of Goodwill:
X pays Rs. 15,000 as premium for goodwill for 1/3rd share of the future profits. Thus total value
of goodwill is Rs. 15,000 x 3 i.e. Rs. 45,000.
Sacrificing Ratio:
A: 3/5 – 1/3 = 4/15
B: 2/5 – 1/3 = 1/15
Hence, sacrificing ratio is 4:1.
Adjustment of X’s share of goodwill through existing partner’s capital A/cs in the profit
sacrificing ratio:
A: Rs. 15,000 x 4/5 = 12,000
B: Rs. 15,000 x 1/5 = 3,000
15,000
b) Calculation of provision for depreciation of plant and machinery of Khetan International
Concern for the year ended 31st December, 2012.

Plant
purchased in: Rs. Rs.
1995 Nil
2001 Nil
2002 5,000

2003 1/2 year at 10% on Rs. 24,000 1,200

1 year at 10% on Rs. 46,000 4,600 5,800
2010 10% on Rs. 50,000 5,000
2011 10% on Rs. 30,000 3,000
2012 1/2 year at 10% on Rs. 1,50,000 7,500
26,300
i.
Khetan International Concern
Plant and Machinery Account (For 2012) at Cost
Rs. Rs.
To Balance b/d 3,00,000 By Disposals Account
To cash/ bank 1,50,000 Scrapped 17,000
Sold 33,000
By balance c/d 4,00,000
4,50,000 4,50,000
ii.
Khetan International Concern
Depreciation Provision Account (For 2012)
Rs. Rs.
To Disposal Account: By Balance c/d 2,13,500

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Scrapped- 2001 17,000 By Profit and Loss A/C 26,300
Sold- 2002 assets 9,000
Sold- 2003 assets 21,600 47,600

To Balance c/d 1,92,200

2,39,800 2,39,800
iii.
Khetan International Concern
Sale or Disposal of Plant and Machinery Account (For 2012)
Rs. Rs.
To Plant and Machinery By Provision for Depreciation 47,600
Scrapped 17,000 By Cash- sales Proceeds 2,000
Sold 33,000 By loss on sales 400

50,000 50,000
Working Note:
Depreciation provision on Scrapped/sold assets
Value Depreciation Provision
Scrapped Assets 2001 100% 17000 17000
Sold Assets 2002 100% 9000 9000
Sold Assets 2003
Up to precious year 85% 24000 20400
Provision of year 2012 1200
21600

3.
a) Ravi and Yukta were friends and in need of funds. On 1st January, Ravi drew a
bill for Rs. 2,00,000 for 3 months on Yukta. On 4th January, Ravi got the bill
discounted at 10% p.a. and remitted half of the proceeds to Yukta. On 1st April,
Ravi could not send the required sum, instead, he accepted Yukta’s bill for
Rs. 1,20,000 for two months. On 4th April, the bill was discounted by Yukta at
12% p.a. Out of this Rs. 7,800 were remitted to Ravi. At maturity of second
bill, due to financial crisis, Ravi became insolvent and only 50 Paise in a rupee
could be recovered from his estate.
Prepare Journal Entries in the Books of Ravi. 5

b) Write short notes on ANY TWO of the following: (2×5=10)

i) Substance over form
ii) Going concern
iii) Cut-Off procedure
Answer a)
Journal Entries in the books of Ravi
Date Particulars L.F. Dr. (Rs.) Cr. (Rs.)
January Bills Receivable A/c 200,000
1 Dr. 200,000
To Yukta
(Being the acceptance of a bill
received from Yukta)
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January Bank A/c 195,000
4 Dr. 5,000
Discount A/c 200,000
Dr.
To Bills Receivable A/c
(Being the bill discounted @ 10%
p.a.)
January Yukta 100,000
4 Dr. 97,500
To Bank A/c 2,500
To Discount A/c
(Being half the proceeds remitted to
Yukta)
April 1 Yukta 120,000
Dr. 120,000
To Bills Payable A/c
(Being the acceptance of a bill
given to Yukta)
April 4 Bank A/c 7,800
Dr. 2,200
Discount A/c 10,000
Dr.
To Yukta
(Being Rs. 7,800 received from
Yukta and proportionate discount
Rs. 2,200 ( i.e. Rs. 2,400 x Rs.
107,800/ Rs. 117,600) debited)
April 7 Bills Payable A/c 120,000
Dr. 120,000
To Yukta
(Being the second bill dishonoured
on being bankrupt)
Yukta 110,000
Dr. 55,000
To Bank A/c 55,000
To Deficiency A/c
(Being a dividend of 50 paise in
rupee paid to Yukta and the unpaid
balance transferred to Deficiency
A/c)
b)
i) Substance over form:
It is one of the governing principles for selection of accounting policies. The accounting treatment
and presentation in financial statements of transactions and events should be governed by their
substance and not merely by their legal form. A typical example where substance takes
precedence over form is in the case of finance leases. In finance leases, the lessee in substance in
the owner of the assets and lessor is merely the legal owner. The accounting of finance leases is
based on the substance rather than form of the transaction. Based on this principle the lessee
capitalizes the lease equipment as fixed assets, being the owner in substance, whereas, the lessor
records the investment made as a debtors.

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ii) Going Concern:
It is one of the fundamental accounting assumptions for preparation of financial statement based
on generally accepted accounting principles. It assumes that an enterprise is a going concern &
will continue in operation for foreseeable future. Hence, it is assumed that the enterprise has
neither intention nor the need to liquidate or curtail materially the scale of its operations; if such
an intention or need exists, the financial statements may have to be prepared on a different basis
and if so the basis is to be disclosed.

iii) Cut-Off Procedures:

It refers to the procedures adopted by the management to ensure that transaction on one period are
separated from those at the commencement of the next accounting period. The cut-off procedures
is very significant so as to ensure that revenue and expenditure of one year do not get recorded in
the following year, as the same will distort the true and fair view of accounts. These procedures
are applied to ensure that:
Goods purchased, the property which has been received is in fact been included in the inventories
and that the liability has been provided for in case of credit purchase.
Goods sold have been excluded from the inventories and credit has been taken for sales, if the
value of sales is to be recovered, the concerned party has been debited.
The proper procedure has been followed for adjusting the inventory to take into account
movements to and from stock, which have taken place between the stock taking date and balance
sheet date where stock has been taken on a date other than the balance sheet date.

CAP-I, Fundamentals of Economic, Jun-14

Suggested Answer

Total No. of Questions - 2 Maximum Marks - 25

Time Allowed – 1 hour
Attempt all questions. Marks

1. Long Answer Questions: (2×5=10)

a) Discuss about Law of Diminishing Marginal Utility.
b) How are the price and output determined under monopoly in the long run?
Answer:
(a) Law of diminishing marginal Utility:
The law of diminishing marginal utility was first developed by German economist H.H. Gossen.
So this law is also known as the first law of Gossen. But later, Alfred Marshall furnished this law
in an analytical way.
Statement:-
According to the law of diminishing marginal utility, marginal utility of a commodity diminishes
as an individual consumes more units of a commodity. In other words, as a consumer consumes
more units of a commodity, the extra satisfaction or marginal utility that he derives from an extra
unit of the commodity goes on falling.
According to Marshall- “The additional benefit which a person derives from a given increase of
his stock of a thing diminishes with every increase in the stock that he already has.”

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Initially, in the process of consuming only marginal utility declines and not the total utility. The
total utility goes on increasing at a decreasing rate and becomes maximum at a certain point
where marginal utility becomes zero. If the consumer consumes mote unit beyond this point, he
will get disutility or dissatisfaction. In this situation total utility also begins to decline.
The law of diminishing marginal utility describes a familiar and fundamental tendency of human
nature. This law in based on the following assumptions:
1) Rationality: - The consumer is assumed to be rational through the experiment.
2) Homogeneity: - All units of the commodity should be equal in size and quality.
3) Continuity: - The commodity must be consumed continuously. That is, units are consumed
one after another without any interval of time.
4) Constancy: - There should not be any change in income, taste, preferences or fashion of
commodity.
5) Cardinal measurement of utility: - Utility can be numerically expressed by the consumer.
This law can be explained through table and figure.
Units of Commodity Total Utility (TU) Marginal Utility (MU)
1 20 20
2 35 15
3 45 10
4 50 5
5 50 0
6 45 -5

In above table, if consumer continuously consumes 1st, 2nd, 3rd, 4th and 5th units of commodity
marginal utility goes on falling ie, 20, 15, 10, 5 and 0 utils of respectably. If he again consumes
6th unit of commodity, marginal Utility becomes negative and total Utility also decrease.

F
In the above diagram, the units of commodity and the marginal utility are measured on X-axis
and Y-axis respectively. According to the diagram, UU1 is the marginal utility curve which is
formed by the summation of different points (which refers the relation between units of
commodity and their marginal utilities) A, B, C, D, E, F respectively. It slopes downwards, left
to right, indicating that when the consumer consumes more, or more units, of the same
commodity, the marginal utility obtained from each successive unit goes on diminishing and also
becomes negative as shown in the figure.
A point lying on the UU1 curve reflects the initial utility which is more. Point E refers to the
point of satiety or full satisfaction of the consumer because at this point MU is equal to zero.
Point F refers to the condition of disutility because at this point MU is negative.
(b) Monopoly is the form of market structure for a commodity in which there is only
one seller of the commodity. The monopolist has no close substitutes and there

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are strong barrier to entry into the industry. As a result seller has full control over
the supply of the commodity. Thus he is the price maker.
Benham: “A monopolist is literally a single seller and monopoly power is based entirely on
control over the supply”
In reality pure monopoly is a myth which is found rarely in the real world. In the real world, only
imperfect monopoly can be found where the monopolist has to face substitutes. For example,
Nepal Electricity Authority may be called imperfect monopolist since it has to face competition
of distance substitutes like kerosene, petrol, gas, candle, solar etc. in different use.
There is no difference between the firm and industry in monopoly.
In the long run, there is sufficiently long time available to the firm to adjust its output to the
changing demand. The firm can adjust its output to the changed demand not only by varying the
variable factors but also by changing the fixed factor such as plant and machinery etc.
In the long run also the monopolist is in equilibrium at a point where its marginal revenue (MR)
is equal to its marginal cost (MC) and MC curve cuts the MR curve from below. In the short run,
monopolist can earn super normal profits, normal profits or losses. Therefore the monopolist
price is greater than, equal to or less than the average cost in the short run. But in the long run the
monopolist price would be higher than the average cost because in the long run, the greater
possibilities is that monopolist can earn super normal profit. Because there is no possibility of
entry of new firms into the industry. Therefore in the long run the monopolist price is not less
than the average cost (AC). If the monopolist price is less than AC in the long run the firm would
prefer to close down its business and to leave the market rather than suffer financial losses.
Therefore in the long run the monopolists earn super normal profit but in the rare case he can
earn the normal profit.
It is to be noted that the size of the plant and the degree of its utilization of a particular size of
plant of a monopolist depends fully on market demand. Monopolist may reach optimum scale
(minimum point of LAC) or remains at sub-optimal scale (falling part of LAC) or may cross
optimum scale (beyond minimum point of LAC) according to market condition. There is no
certainty to reach optimum scale in the long run in monopoly as in perfect competition. In
general, the monopolist produces less then optimum output.

In this figure, OY axis measures revenue and cost and OX axis measures output. E is the
equilibrium point where the two conditions i.e. (a) MR is equal to MC and (b) MC curve also
cuts the MR curve from below, are fulfilled. OP is the equilibrium price.
Here, TR = Area OPQM
TC = Area OSRM
Total profit = TR – TC
Total profit = Area OPQM – Area OSRM

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Total profit = Area PQRS
Thus the monopolist firm maximizes the profit at OM level of output. OM is the equilibrium
output and OP is the equilibrium price at E point. The monopolist operates his plant at a sub
optimal capacity and it is indicated by point R where the falling part of AC cuts the MQ vertical
line. Thus, the portion RS of the plant is unused capacity.
2. Short Answer Questions (Any Five): (5×3=15)
a) Economics is science of wealth. Discuss.
b) Define indifference curve.
c) Briefly explain the stage of diminishing return under law of variable proportion.
d) Distinguish between economic cost and accounting cost.
e) Define Balance of payment and Balance of trade.
f) What are the main three importances of cottage and small scale industry for the
development of the country? Explain.
Answer:
a) Earlier economists (known as the classical economists) like Adam Smith and his distinguished
followers J.S. Mill, F.A. Walker, J.B. Say, David Ricardo, etc. treated economics as a science of
wealth. Adam Smith universally regarded as the Father of Economics, defined economics as a
science, dealing mainly with the question of how wealth was produced and distributed. The
emphasis on wealth reveals itself in the very title of Smith’s book. “The great objective of the
political economy of every country”, wrote Smith, “is to increase the riches and power of that
country”. Adam Smith, therefore, thought of economics as an inquiry into the nature and causes
of the wealth of Nations. In short, economics is a science of wealth.
The disciples of Adam Smith continued to stress the role of economics as the study of wealth.
According to J.B. Say, “Economics is the study of the laws which govern wealth.” Prof. Walker
supported Adam Smith’s definition by saying, “Economics is that body of knowledge which
relates ot wealth”. J.S. Mill wrote, “Economics investigates into the nature of wealth and laws of
production and distribution.” Thus economics was considered as a science of wealth. The main
points in the definitions are:
1. Economics is the study of wealth only; it deals with consumption, production, exchange and
distribution of wealth.
2. Only such material commodities, as constitute wealth are scarce and useful. Non-material
things like services and free goods are not included in wealth.
3. Economics is only concerned with the activities, of the economic man not of the non-
economic man.
4. The source of the wealth of a nation is the laborer whose productivity would be increased
through the division of labour.
5. The ultimate goal of human beings is to earn wealth, because wealth is only the means for
satisfying human wants.
6. This definition laid stress on the existence of the free capitalist economy.
7. Classicists gave the key or first place to wealth and secondary place for the man in the study
of economics. In other words, the subject matter of economics as wealth.
b) The Indifference Curve analysis is developed to overcome the defects of marginal utility
analysis or cardinal approach. An indifference curve represents satisfaction of a consumer from
two commodities. It is drawn on the assumption that for all possible points on an indifference
curve, the total utility remains the same. An indifference curve represents preference of the
consumer between two commodities.On the basis of consumer's scale of preference, we can

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draw indifference curves. An indifference curve represents satisfaction of a consumer from two
commodities. It is drawn on the assumption that for all possible points on an indifference curve,
the total utility remains the same. An indifference curve represents preference of the consumer
between two commodities.
We can explain indifference curve with an example of apple and orange. Let us suppose that if a
consumer wants to buy some units of apples and oranges. The consumer does not make
purchases of the amount of these commodities arbitrarily. He knows it well that one combination
of apples and oranges gives him as much satisfaction as another combination of less apples and
more oranges or another combination of more apples and less oranges. Thus the consumer will
have combination of apples and oranges in his mind. All the combination yields same
satisfaction to the consumer. So the consumer will be indifferent to choose any combination
from the various combinations. We can further explain it with the help of following indifference
schedule.
Indifference schedule
Combination Apples Oranges
1 15 1
2 11 2
3 8 3
4 6 4
5 5 5
In the table given above, the consumer is assumed to be purchasing combination of apples and
oranges. He tells us that he is indifferent between the 5 combinations given above. When we
show these combinations on a graph showing apples in one axis and orange on another axis we
obtain a curve. This curve is called indifference curve. An indifference curve is the locus of all
the points representing various combinations of two commodities giving the same satisfaction to
the consumer.
Y
Commod Y Commodity

IC
O X
Commodi X Commodity

In the above diagram, IC is the indifference curve showing the various combinations of the two
commodities which give the consumer equal satisfaction. An indifference curve may therefore be
defined as the locus of the various combinations of two commodities, which yield the same total
satisfaction to the consumer. The curve is also called as the iso-utility curve or a curve of equal
utility.
It is not necessary that there should be only one combination of two commodities. There might
be versions combinations of two commodities representing greater and lesser satisfactions than
the previous one. In this case there will be numbers of indifference curve. If there will be
numerous of indifference curve then there will be called as indifference map.
Y
mmodity

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In the above figure an indifference map of a consumer is shown which consists of three
indifference curves. The indifference map, thus, represents a collection of indifference curve
where each curves shows a certain level of satisfaction to the consumer.
c) Law of variable proportion is the new name for the law of diminishing return. The economists
like Marshall, Benham, Samuelson, John Robinsion etc have contributed to the development to
this law. This law indicates the short run production function. This law indicates the production
with one factor variable while other factors of production are kept constant. This law indicates
that continuous change in the proportion of the factors of production change the production first
at increasing rate, and then it changes takes place at diminishing rate.
There are three stages of law of variable proportion
1. Stage of increasing return
2. Stage of diminishing return
3. Stage of negative return

Stage of diminishing return is the second stage of law of variable proportion and this is explain
with the help of the following production schedule and diagram:

Units of
TP AP MP Stage
variable factor
1 10 10.0 -
2 24 12.0 14
I Stage
3 39 13.0 15
4 52 13.0 13
5 61 12.2 9
6 66 11.0 5 II Stage
7 66 9.4 0
8 64 8.0 -2 III Stage

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In the diminishing return stage, the total product (TP) continues to increase in diminishing rate.
Both AP and MP are decline. This stage ends when MP is zero. The total product is maximum
and this can be indicated by above schedule and diagram. In this stage the variable factor is more
as compare to fixed factor and so production will be decreased. In this stage the fixed factor is
over utilized and become inadequate to the variable factor. The variable factor cannot substitute
to the fixed factor so the diminishing return operates. The stage of diminishing operates because
of the indivisibility of the fixed factor.
d) Accounting Costs and Economic Costs
When an accountant evaluates the financial position of a business, he takes only monetary
expenses incurred on factor services owned by outsiders, except the producer, in calculation.
Thus, it consists only of explicit costs.
Economic costs are the aggregate of explicit costs and implicit costs (i.e. imputed costs and
normal profit). These costs include both actual monetary expenditure on inputs which are
purchased or hired and imputed value of the inputs ( e.g. land, labour and capital) owned and
provided by the entrepreneur including normal profit.
Accounting cost = Explicit cost (or money cost)
Economic cost = Explicit costs + Implicit cost
Or, Economic cost = Accounting cost + (Imputed cost + Normal profit)
e) BOP is the systematic record of all economic transactions. It includes not only visible items but
also invisible items such as shipping, banking, insurance services, interest, gifts, etc. All the
countries are either to make payments to others or to receive from others. BOP is thus, a
statement of payments and receipts. Kindleberger defines BOP as, “a systematic record of all
economic transactions between the residents of the reporting country and the residents of
foreign countries during a given period of time.”
1. It is a systematic record of all economic transactions between one country and the rest of the
world.
2. It includes all transactions, visible as well as invisible.
3. It relates to a period of time. Generally, it is an annual statement.
4. It adopts a double entry book-keeping system. It has two sides: credit side and debit side.
Receipts are recorded on the credit side and payments on the debit side.
5. When receipts are equal to payments, BOP is in equilibrium; when receipts are greater than
payments, there is surplus in BOP; when payments are greater than receipts, there if deficit in
BOP.
6. In the accounting sense, total credits and debits in the BOP statement always balance each
other.
But balance of trade is only a major component of balance of payment. It is represented in the
trade and merchandise account section of the current account in the balance of payment.
However, balance of payment includes, apart from balance of trade or merchandise account, the
invisible account. Therefore. We can say that since balance of trade is only a partial study of the
total economic transaction in international trade, it has it has a little analytical significance. It is
the balance of payment, which provides a complete record of international economic transactions
and has a great analytical and economic significance.
f) There is a great Importance of cottage and small scale industry in a country like Nepal where
most of the peoples are not well educated and more employed. There is lack of technical
efficiency, capital and other essential elements of production. The importance of cottage and
small scale industry in a country is needed also for the economic development as well as the
mobilization of local skill and resources. The importance of cottage and small scale industry in
a country for the economic development of the country can be illustrated as follows:
1. Increase in the opportunities of employment

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Most of the Nepalese are engage in the agriculture. They are not busy all the seasons in the
agriculture activities. They are only busy for 4/5 months in the agriculture sector and are
leisure for rest months. There is a great importance of cottage and small scale industry to
provide the employment for the unemployed and partially employed manpower.
2. Utilization of local resources
The cottage and small scale industries are based on local raw materials. Such raw materials
are scattered all over the country. With the establishment of cottage and small scale
industries, the raw materials are utilized otherwise they are unutilized or wasted. As a result
income of the people is increased along the increase in employment opportunities.

3. Easy to establish (low capital)

There is less difficulty to establish cottage and small scale industry in comparison to large-
scale industries. Neither a large amount of investment needed nor the high technical
knowledge and foreign raw material is needed to establish such industry. As all the essential
things are available in local and domestic market it is easy to establish such industries.

CAP-I, Fundamentals of Management, Jun-14

Suggested Answer
Roll No........................ Maximum Marks - 25

Total No. of Questions - 2 Total No. of Printed Pages -1

Time Allowed – 1 Hour Marks

Attempt all questions.
1. Answer the following questions: (2×5=10)
a) Explain the components of Human Resource Management.
b) What are the limitations of Taylor's scientific management theory.
Answer:
a) The term human resource management is the improved version of the personnel management.
Human resource management is concerned with "people" dimension in management. Human
resource management refers to the practices and polices one need to carry out the personnel
aspects of management job. Acquisition, development, utilization and maintenance are four
important components of human resource management.
Acquisition ensures entry of right number of people at the right place at right time in the
organization. It consists of human resource planning, job analysis, recruitment, selection and
socialization of employees. Development ensures proper competencies of employees to handle
jobs. As the situation changes, the employees need additional training, education and professional
skills to cope with the job challenges. Assessing development needs, employee training,
management development and career development are important activities of development.
Utilization is another important component of human resource management which ensures
willingness of employees for increasing productivity by doing jobs effectively. It consists of
motivation, job design, performance appraisal and reward management. The key to higher
productivity lies in creating a motivational climate, wherein the employees seem to be deriving
satisfaction by doing their job, Maintenance is a component which is related to retaining
employees in the organization. It is concerned with providing the safe working conditions and
good working environment in the work place. Maintenance consists of labour relations, employee
discipline, grievance handling and welfare.

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b) The scientific management theory, propounded by F. w. Taylor is focused on job to be perform.
Productivity and efficiency are the goals of this theory. The theory is based on seven renowned
principles; however there are some limitations of this theory. They are;
i) It is mechanistic and less applicable in dynamic and complex organizations

ii) It neglects human aspects. Workers are treated as machine.

iii) There is no best method of doing job in all work situations.

iv) Works becomes monotonous.

v) It is manly applicable to labor intensive work.

vi) It focuses on efficiency of an individual worker does not favour group work.

2. Answer the following in brief (Any Five): (5×3=15)

a) Methods of communication
b) Leadership functions
c) Advantages of decentralization
d) Social responsibility
e) Decision making environment
f) What are the five levels of needs based on the hierarchy of need theory?
Answer:
a) Methods of communication
Effective communication depends on the proper selection of method/s of communication.
Primarily there are three methods of communication in organisations.
 Written communication. There are different forms of written communication. Some of these
are letters, memos, reports, manuals, and forms. These days email is one of the most used
letterforms of transmitting information.
 Non-verbal communication. There are basically two elements in non-verbal communication--
human elements and environmental elements. Whereas human elements include facial
expressions and body language, environmental elements refer to office design and building
architecture.
 Oral communication. This is the most frequently used and an effective form of communication.
One can record or repeat in case of distortion and make communication clear in course of oral
behavioural transactions. It is an effective and very useful way to communicate in the sense that
the speaker gets opportunities to transmit information by using body language and can also make
tone ups and downs to send the real meaning of the message for the receiver.
b) Leadership functions
Leaders are responsible for developing vision, communicating this among organisational members,
and to implement it by creating an environment for all so as to materialize the vision. More
specifically functions of leaders include the following:
 Creating a vision: Creating vision is an important function of all corporate leaders. Primarily,
vision in an individual sense is in the heads and hearts of leaders. But when this personal vision
is shared and accepted by all people in a group, team or organisation, it will be a shared vision.
The most important thing of a shared vision is that all organisational members will have a
guiding map on “what do they want to create?” Moreover, shared vision creates a sense of
commonality that permeates throughout the organisation.
 Managing through communication: Leaders must have ability to communicate their visions

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throughout the organisation so that all members share visions. An effective leader can assure its
followers about the future by prescribing and communicating a clear-cut vision. As vision is
clearly stated, followers will be committed to achieve it. Thus the role of communication is
most important for the developing a feeling of shared vision in organisational setting.
 Empowerment: Leaders should provide substantial authority and ask for decision-making from
their followers. For this purpose, leaders have to share authority, power and resources among
employees in organisations. Moreover, effective leaders should be sensitive to employees’
needs to tap their motivation and capability.
 Self-understanding: Leaders must have self-understanding of their own strengths and
weaknesses. Many people are poor in self-evaluation that may hamper their ability and quality
to lead the people effectively. When a leader is able to make self-evaluation and finds himself or
herself weak at a certain level of performance, s/he can recruit individuals who can offset such
weaknesses.

c) Advantages of decentralization

Decentralisation encourages managers at all levels to make decisions and solve their problems. It
also encourages accepting authority and responsibility by the managers at different
organisational levels. It provides more freedom and independence for managers in making
decisions.
 Motivates employees at work. When employees are trusted and given authority they feel
honored that subsequently motivate them to work.
 Develops skills of managers and ensures their growth. When authority is given and
decision making is trusted on subordinates, s/he develops skills to do so. This trend helps
employees to develop their decision making skills and potential to grow in the future.
 Coordination of activities can be increased. Among the activities of the same level of
management coordination will improve after decentralisation.
 Facilitates product diversification. With the decentralisation of authority, organisations
can diversify its activities in the new product line. Naturally, as the organisation grows
after diversification it needs to decentralize its authority and responsibility in other product
lines.

d) Social responsibility focuses on what an organization does to society and what it does for society.
Business firms, at all times have been expected to operate within the law and within prevailing
norms of society. However, during the past few decades, social responsibility of business became
an extremely broad and deep subject.
The concept of social responsibility of business is defined in varied ways. Some people define it as
the responsibility of business to society to perform its economic function of production and
supplying goods and services in a very efficient manner, so as to maximize its profitability. Others
view it as the obligation of business to consider the interests of society and of its major groups and
give due weightage to them while making its economic decisions and undertaking economic
activities. Still others define the concept as the philanthropic and charitable disposition and
activities of business enterprises for such causes as promotion of education and health, removal of
poverty, acceleration of rural development and so on.
Simply the social responsibility of business can be defined as its responsibility and commitment to
society beyond the basic, traditional economic functions of producing and supplying goods and

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services. As the economic agents of society for deployment and utilization of economic resources,
business enterprises are responsible to society to understand the nature of economic power they
command, to recognize the limits of their power and to exercise their power with restraint so as to
promote social good, uphold public interest and preserve social values.
e) Decision making environment is the conditions in which decision is done. The decision making
environment or the conditions are certainty, risk and uncertainty.
A state of certainty exists when the manager knows the available alternatives as well as the
outcomes of decisions. In an environment characterized by certainty, full information is available
on all the factors relevant to the problem and its solutions. The decision maker has access to
accurate and reliable information. Hence, under such conditions a perfectly accurate decision can
be made. Decision making under conditions of certainty is quite simple.
Decision cannot be made under the conditions of certainty all the time. Some element of risk is
involved in decision making. A state of risk exists when the manager is aware about the available
alternatives but is unaware about the outcomes of the decision. Here he is not completely sure of
the availability or reliability of information. In other words, the expected results are not
deterministic but only probabilistic because the future conditions cannot be predicted with
accuracy in the absence of full information.
Under conditions of uncertainty, the manager faces a situation in which information is neither
available nor reliable. Several random forces operate in the environment which makes it
unpredictable. The variables change fast with complex interaction so the managers have no means
of getting a grasp of them. The decision makers need to use their intuition, judgment and
experience in making decisions under the conditions of uncertainty.
f) According to the hierarchy of need theory propounded by A. Maslow the five levels of needs are:
i) Physiological needs: They are basic survival needs such as foods , shelter, sex clothing etc.
ii) Safety needs: They are the needs for protection from physical and emotional harm and
economic threat.
iii) Social needs: They are the needs for affection, belongingness, friendship and social
acceptance.
iv) Esteem needs: They are the needs for recognition, self respect, status praise and prestige,
and
v) Self actualization needs: they are the needs for self development, creativity, talent
utilization tec.

CAP-I, Commercial Mathematics & Statistics, June 2014

Suggested Answer
Roll No........................ Maximum Marks - 25
Total No. of Questions - 2 Total No. of Printed Pages -1
Time Allowed - 1 Hour Marks
Attempt all questions.
1. (4×4=16)
a) Compute the standard deviation of household size from the following frequency
distribution of 500 households:

X 1 2 3 4 5 6 7 8 9
F 92 49 52 82 102 60 35 24 4
b) From the table of group index numbers and group weights given below, calculate the
cost of living index number.
Group Index Number Weight
Food 428 45

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Clothing 240 15
Fuel and electricity 200 8
Rent 125 20
Miscellaneous 170 12

c) Following distribution shows about the expenditure of 100 families. However the
median is known to be 50. Find the missing frequencies.
Expenditure: 0-20 20-40 40-60 60-80 80-100
No. of families: 14 ? 27 ? 15
d) The odds in the favor of an event A are 3:4. The odds against another independent
event are 7:4. What is the probability that at least one of the events will happen?
Answer:
a) Solution
Since the S.D. is unaffected by change of origin, we write y = x – 4; then
x f y =x-4 fy f
1 92 -3 -276 828
2 49 -2 -98 196
3 52 -1 -52 52
4 82 0 0 0
5 102 1 102 102
6 60 2 120 240
7 35 3 105 315
8 24 4 96 384
9 4 5 20 100
Total 500 17 2217

∑ ∑
We know, ( )

Substituting these values, ( )

√

b) Solution
COMPUTATION TABLE
Group Group Index (I) Weight (W) IW
Food 428 45 19,260
Clothing 240 15 3,600
Fuel and electricity 200 8 1,600
Rent 125 20 2,500
Miscellaneous 170 12 2,040
Total 100 29,000

∑
Cost of Living Index = ∑
c) Solution: Let f1 and f2 be the missing frequencies for the corresponding classes 20-40 and
60-80 respectively.
Here, N= 56+f1+f2=100
 f1+f2 = 44
As median is 50, median class is 40-60
Here, l  40, h  20, f  27, c. f .  14  f1 , M d  50

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N 
 2  C. f . 
Md  l    h
 f 
 
f1  22.5  23
Also, f 2  44  f1  44  23  21
d) Solution
The probabilities of occurrence of A = and B are:
( ) ( )

Since A and B are independent, ( )

The probability of occurrence of at least one of the events A and B
( ) ( ) ( )

2. (3×3=9)
c) A machine depreciates at the rate of 10% of its value at the beginning of a year. The
machine was purchased for Rs. 5,810 and the scrape value realized when sold was Rs.
2,250. Find the number of years the machine was used.
d) The Nanglo chain has significantly increased its investment in inventory over the last
six months. The information is given below.
Month: Aug. Sep. Oct. Nov. Dec. Jan.
Inventory: 4 4 6 8 9 10
(Rs in Lakhs)
Develop the linear estimating equation to estimate the inventory level in February.
e) The probability that a contractor will get a plumbing contract is 2/3 and the
probability that he will not get an electric contract is 5/9. If the probability of getting
at least one contract is 4/5, what is the probability that he will get both?
Answer:

a) Solution
Here, P = Rs. 5,810, A = Rs. 2,250 i = 0.1 n=?
We know,
( )
( )

(̅ )
( )

years approximately

b) Solution: Let Y = a +bX be the trend equation

Where, Y= inventory

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X= time (coded)
Months (x) Coaded time X2 XY
X= 2(x-3.5) Inventory (Y)
Aug. (1) -5 4 25 -20
Sep. (2) -3 4 9 -12
Oct. (3) -1 6 1 -6
Nov. (4) 1 8 1 8
Dec. (5) 3 9 9 27
Jan. (6) 5 10 25 50
∑X=0 ∑Y=41 ∑X2=70 ∑XY=47
Since, ∑X= 0,
Y 41
 a=   6.833
n 6
XY 47
and b=   0.67
X 2 70
 Required estimating equation is Y= 6.833 + 0.67X
Estimated inventory level in Feb.
For Feb, X=7
 Coded time, X= 2 (7-3.5)=7
 Yc= 6.833+0.67×7 =Rs.11.52 (Lakhs)

c) Solution: Let A be the event of getting plumbing contract and

B ,, ,, ,, ,, ,, electric contract.
given, P(A) = 2/3
1-P(B) = 5/9
4
 P(B) = 1-5/9 =
9
4
Probability (getting at least one contract) = P (AUB) =
5
P(A B) = ?
We know, P(A B) = P (A) + P (B) –P (A B)
4 2 4
or,   - P (A B)
5 3 9
2 4 4
or, P(A B)=  
3 9 5

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CAP-I, Mercantile law, Jun-14

Suggested Answer
Roll No……………. Maximum Marks - 25

Total No. of Questions - 2 Total No. of Printed Pages -1

Time Allowed - 1 Hour

Marks
Attempt all questions.

1. Answer the following questions: (2×5=10)

a) What are the conditions the concerned department may cancel the registration of a
firm under the provision of partnership Act 2020? 5

b) Define the term “Partnership” under Nepalese Partnership Act 2020. Who is
“Holding out Partner”? Explain.
Answer:
a) 1.Section 11B.1 of the partnership Act 2020 has empowered to Concerned
department to cancel the registration of firm in case of following
conditions:-

i) If a firm registered for commercial business fails to cause to effect renewal of the firm within
stipulated time.
ii) If the partners submit an application to terminate the registration of the firm upon setting out
reasonable reasons thereof to the concerned Department.
iii) If a firm fails to submit the particulars sought by the concerned Department pursuant to
Section 11a of partnership Act 2020, within prescribed period.
iv) If an industry related firm closes down the operating industry, whether by providing notice
thereof to the concerned Department or not.
v) If an industry related firm fails to cause to effect the renewal of the firm within the
prescribed time from the expiry of validity period to renew the firm; or fails to submit the
written progress report on the action as maybe required to be taken for the construction of
factory, purchase of machinery or tools or equipment and operation of the industry in order
to establish and operate the industry as per the condition of the license despite the firm has
been renewed.
vi) If a firm commits an act in contravention of partnership Act 2020 or Rules framed
hereunder.
b)

“Partnership”
As per section 3 of the Nepalese Partnership Act 2020, Partnership means “any business registered
in the record of government of Nepal under this act by several individuals under a single name, after
concluding an agreement among themselves providing for the participation in all its transactions by
all partners on behalf of every partner or by any partner on behalf of all partners and for sharing of
profits”.
“Holding out Partner”
If any person represents to the outside through spoken or written or by his conduct or by lending his
name that he is partner, then he is stopped from denying his partner in the partnership firm and
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granted credit to the firm. This is called holding out partner or partner by estoppels of the firm or
nominal partner also. Actually, such partner is not a partner of the firm because he has no agreement
with the other partner, no sharing of profit and losses, no voice in the management, may not be
knowing the exact place of the business however he holds himself out to be a partner, he becomes
responsible to outsiders as a partner on the principle of estoppel.

2. Answer the following questions:

a) What are the conditions/circumstances under which a contract needs not be
performed? Answer. 5
b) What do you mean by 'Undue Influence'? What are the presumptions on it? 5
c) Distinguish between 'Sale' and 'Agreement to Sale' 5
Answer:
a) A contract is made by the parties to do or not to do something and the obligations
raised by it must be performed by them. They are bound to perform it, but it is not
an absolute rule. There are some conditions under which a contract needs not to be
performed. Such conditions are mentioned under section 73 of Nepalese Contract
Act, 2000. They are as below:

i. In case, where a party to a contract relieves the other party from performing his obligations
wholly or partially, a contract needs not to be performed by the excused party.
ii. In the case of voidable contract: A contract without free consent of the party is voidable at
the option of such aggrieved party. If the aggrieved party rescinds the contract through legal
action, the other party is also immune from performing the contract.
iii. In the case of breach: If one party to the contract breaches any terms of the contract, the other
party is discharged from performing his promise as a consequence of breaking of former
party.
iv. In case of application of any legal provision: When a contract becomes unnecessary to
perform due to the application of any provisions of the law in force, the contract need not be
performed.
v. In the case of subsequent impossibility: Where a contract becomes impossible to perform
subsequently due to the changes in law or circumstances as prescribed under section 79 of
the Nepalese Contract Act, 2000, there is no need to further performance. The destruction of
subject-matter, subsequent illegality, death or personal incapacity may be illustrations.
b) Undue Influence is the domination of will of others by moral coercion. It is an
abuse of one's position and moral to achieve unfair benefit.

Undue influence is a wrong pressure put on someone which prevents that person from acting
independently. It is an influence which compels another person to do something which he would not
have done if he had been a free mind. Thus undue influence is the domination of a weak mind by a
strong mind to the extent of exploitation in the context of an agreement. In this circumstance
expectation of free mind and the free consent is almost impossible

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A contract by undue influence is a voidable contract, which is up to the aggrieved party whether to
affirm it or to make void.
Explanation to Section 14(1)(b) of Nepal Contract Act, 2056 states that an influence imposed by a
person upon another with the intention to achieve an undue advantage for his own interest or benefit
from the other, who is under the former's influence and who can be asked to do any work according
to his will is known as undue influence.
Presumption of Undue Influence
Undue influence may be presumed to exist in the following cases where a person is in a position to
dominate the will of the other.
i. Where a party holds a real or apparent authority over the other
Where a dominant party holds real and seen relationship with other party like, Master and
servant, convict and police, parent and child may create an agreement by undue influence.
ii. Where a party stands in a fiduciary relationship to the other
Fiduciary relationship means the relationship of mutual trust and confidence. Such a
relationship that is supposed to exist in doctor and patient, lawyer and client, trustee and
beneficiary may be created by undue influence. But there is no presumption of undue influence
between husband and wife, principal and agent.
iii. Where a party playing a role of guardian or protector
When a party makes a contract with a person whose mental capacity is temporarily or
permanently affected by reason of old age, illness or mental or bodily distress it is often subject
to influence of others and the law provides protections to such a distressed person. Example: A
woman of great fortune was illiterate and made a gift of almost all of her property to her
nephew who was managing her estates. The agreement cannot be deemed to have been made
on the ground of undue influence.

c) Followings are the distinction between 'Sale' and 'Agreement to Sale'

i. Nature of Contract:
'Sale' is an executed contract whereas 'Agreement to Sale' is an executory contract.
ii. Transfer of ownership:
In 'Sale', ownership of goods is transferred immediately whereas in 'Agreement to Sale' it will be
taken place in future or only after fulfillment of certain condition.
iii. Right of buyer:
'Sale' creates jus in rem (right against goods) and buyer gets right to enjoy goods against the
whole world but 'Agreement to Sale' creates jus in personam (right against person) and buyer
will have right only against seller.
iv. Transfer of Risk:
In 'Sale', risk is that of seller and he will have to bear any loss or damage on the goods that may
arise after sale but in case of 'Agreement to Sale' risk remains with the seller.
v. Right to resale:
In 'Sale', once seller sells goods to a buyer the seller will never have right to resell the same
goods again. However, in case of 'Agreement to Sale', it is possible.
vi. Seller's right against buyer's breach:
In 'Sale', seller can sue a buyer for price but in 'Agreement to Sell' buyer can be sued for
damages.
vii. Buyer's right against seller's breach:
In 'Sale', buyer as well as third party who bought the goods can sue seller for damages but in
'Agreement to Sale', seller can be sued only for damages, if any.
viii. Types of goods:

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Only existing and specific goods may be sold in 'Sale' contract whereas seller can sell future,
contingent and unascertained goods in case of 'Agreement to Sale'
ix. Buyer's insolvency:
In 'Sale', if a buyer is declared insolvent and goods are lying with seller, whether or not price is
paid, the seller must deliver goods to the official receiver or assignee of the buyer and claim for a
rateable dividend for the price he is to receive. But in case of 'Agreement to Sale', the seller may
refuse to deliver the goods unless full price is paid.
x. Seller's insolvency:
Since the ownership is already transferred in 'Sale' of contract, the buyer may claim goods from
the official reciver or assignee of the insolvent seller. In 'Agreement to Sale', the buyer can only
claim for a rateable dividend if price for the goods are already paid.

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