Suggested Answer CAP II June 2017r

CHARTERED ACCOUNTANCY PROFESSIONAL CAP-II
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SUGGESTED ANSWER
A.
June 2017
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D IT
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The Institute of Chartered Accountants of Nepal
TRP
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A.
Advanced Accounting
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Suggested
Roll No……………. Maximum Marks - 100
Total No. of Questions - 6 Total No. of Printed Pages - 14
Time Allowed - 3 Hours
Marks
Attempt all questions. Working notes should form part of the answer.
1. The following are the ledger balances of Sri Babubhaj for the year ended 31st March
2015.
(Rs.)
Capital Account 2,00,000
Drawing Account 15,250
Sundry Creditors 56,562
Loans taken on Mortgage 20,000
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Sundry Debtors 17,800
Goodwill 10,000
Interest on Mortgage Loan 400
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Cash in Hand 364
Bad Debts Provision (Cr.) 450
Plant & Machinery 22,500
Sales less Returns A. 1,50,210
Cash at Bank 6,756
Electric Power 3,250
Discount Paid 1,216
Dividends Received 3,250
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Bills Payables 11,575
Investment reserve as at 1st April, 2014(Cr.) 1,250
Purchase less Returns 1,65,265
Salaries 15,200
Rent and Rates 3,756
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Electricity Charges 2,120

Insurances 1,000
Advertisement 17,256
Stock on 1st April, 2014
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Raw Materials 51,265

Finished Goods 12,625
Factory Land & Buildings
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21,200
Bad Debts 450
Carriage Inwards 5,210
Wages 18,560
Investments at Market Price as on 1st April, 2014 36,150
Bills Receivables 16,263
Outstanding Expenses 2,100
General Expenses 4,065
Prepaid Insurances 200
Discount 2715
a) Factory buildings were constructed on land purchased for Rs. 10,000 during the
year but this was wrongly posted to purchase account.
b) Provide depreciation at 10% on plant and 5% on buildings.
c) Interest has to be provided on mortgage loan at 6% per annum keeping in view
the fact that a sum of Rs. 5,000 was repaid on 30th June, 2014.
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d) The market value of the investments as at 31st march, 2015 was Rs. 37,000. The
investment reserve account represents the difference between the cost and market
value.
e) Electricity charges were paid in advance to the extent of Rs. 155.
f) Some investments were sold during the year for Rs. 1,260 realising a profit of Rs.
125 when compared to their market value on 1st April, 2014. The sale proceeds
were, however, credited to the sales account.
g) Provision for bad debts should be maintained at 10%.
h) Out of the bills receivables, one bill for Rs. 1,200 matured for the payment in the
last week of March, 2015. However, the bankers informed that they could not
collect the said bill on 31st March, 2015. The information was not recorded in the
books.
i) The closing stock was as follows:
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Raw materials Rs. 85,263
Finished goods Rs. 64,987
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You are required to prepare the Manufacturing, Trading, and Profit and Loss
account and the Balance Sheet. 20
Answer
A.
SHRI BABUBHAJ
Manufacturing, Trading, & Profit and Loss Account
For the Year Ending 31st March, 2015
Rs. Rs. Rs.
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To Material Consumed: By Trading A/C( Cost of
Goods produced during the
Year 1,51,597
Opening Stock 51,265

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Purchase less return 1,55,265

2,06,530
Less; Closing Stock 85,263 1,21,267
To Wages 18,560
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To Carriage Inwards 5,210

To Electric Power 3,250
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To Depreciation on
Plant & Machinery 2,250
Factory Building 1,060 3,310
1,51,597 1,51,597
To Opening Stock By Sales 1,48,950

Finished Goods 12,625 By Closing Stock of
Finished goods 64,987
To Cost of Goods Produced 1,51,597
To Gross Profit c/d 49,715
2,13,937 2,13,937
To Salaries 15,200 By Gross profit b/d 49,715

To General Expenses 4,065 By Discount 2,715
To Rent and Rates 3,756 By Dividend Received 3,250
To Electricity 1,965 By Profit on Sale of
Investment 125
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To Advertising 17,256
To Insurances 1,000
To Interest on Mortgage Loan 1,275
To Provision for bad Debts 1900
Add: Bad Debts 450
2,350
Less: Existing Provision 450 1,900
To Discount Allowed 1,216
To Net Profit transferred to Capital A/C 8,172
55,805 55,805
Balance Sheet of Shri Babubhaj as on 31st March, 2015
Capital & Liabilities Assets
Rs. Rs. Rs. Rs.
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Capital 2,00,000 Fixed Assets
Add: Profit 8,172 Goodwill 10,000
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2,08,172 Factory Land &
Less: Drawing 15,250 1,92,922 Building 21,200
Addition during
The year
A. 10000
Investment Reserve 3,235 31,200
Loan on Mortgage 20,000 Less: Depreciation1,060 30,140
Add: Interest accrued 875 20,875
Sundry Creditors 56,562 Plant & Machinery 22,500
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Bills Payables 11,575 Less: Depreciation 2,250 20,250
Expenses Outstanding 2,100 Investment at Market Value 37,000
Suspense Account 9 Current Assets
Stock in Trade(assumed at cost)
Raw Materials 85,263
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Finished Goods 64,987 150,250

Sundry Debtors 19,000
Less: Provision for
Bad debts 1,900 17,100
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Bills Receivables 15,063

Cash In Hand 364
Cash at Bank 6,756
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Prepaid Expenses 355

2,87,278 2,87,278
Notes:
(i) Rs. 10,000 has been deducted from purchases and added to Land & Buildings.
(ii) Rs. 1200 has been deducted from Bills Receivables and added to the sundry debtors.
(iii) Rs. 1260 has been deducted from Sales, being sale proceeds of investments the cost Rs. 1135
has been from investments.
(iv) The cost of investments is Rs. 35,015 i.e. Rs. 36,150 less Rs. 1135. Since these have to be
shown at Rs. 37,000, Rs. 1985(i.e. Rs. 37000-Rs. 35015) has been added to investment Reserve
which now becomes Rs. 3235. Strictly, speaking the cost, of investments sold being less than
the market value, the profit should be more than Rs. 125.
However, the cost of each investment would be different hence this point has been ignored.
(v) Interest on Mortgage Loan:
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Interest on Rs. 25,000 @ 6% for 3 months 375
Interest on Rs. 20,000@6% for 9 months 900
1275
Less: Paid 400
Outstanding 875
2.
a) The summarized Balance Sheet of Krishna Ltd. As on 31st Ashad, 2073 was as
follows:
Amount Amount
Liabilities Assets (Rs.)
(Rs.)
Equity Shares of Rs. 10 fully 30,00,000 Goodwill 5,00,000
paid Profit Reserves
Export 8,50,000 Tangible Fixed Assets 30,00,000
General Reserves 50,000 Stock 10,40,000
Profit and Loss Account 5,50,000 Debtors 1,80,000
9% Debentures 5,00,000 Cash & Bank 2,80,000
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Trade Creditors 1,00,000 Preliminary Expenses 50,000
50,50,000 50,50,000
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Radha Ltd. agreed to absorb the business of Krishna Ltd. with effect from 1
Shrawan, 2073.
i) The purchase consideration settled by Radha Ltd. as agreed:

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(i) 4,50,000 equity shares of Rs. 10 each issued by Radha Ltd. by valuing
its share @ Rs. 15 per share.
(ii) Cash payment equivalent to Rs. 2.50 for every share in Krishna Ltd.
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ii) The issue of such an amount of fully paid 8% debentures in Radha Ltd. at
96% as is sufficient to discharge 9% debentures in Krishna Ltd. at a
premium of 20%.
iii) Radha Ltd. will take over the tangible fixed assets at 100% more than the
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book value, stock at Rs. 7,10,000 and debtors at their face value subject to a
provision of 5% for doubtful debts.
iv) The actual cost of liquidation of Krishna Ltd. was Rs. 75,000. Liquidation
cost of Krishna Ltd. is to be reimbursed by Radha Ltd. to the extent of Rs.
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50,000.
v) Statutory reserves are to be maintained for 1 more year.
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You are required to: 10

(i) Close the books of Krishna Ltd. by preparing realisation account, Radha
Ltd. Account, shareholders account and debenture account.
(ii) Pass journal entries in the books of Radha Ltd. regarding acquisition of
business
b) Fantastic Home Ltd. commenced business on 1st January, 2016. The business is to
sell Radio Recorders and Televisions both in hire -purchase and cash basis. The
information is given below:-
Radio Recorder Television Set
Cost Price (Rs.) 6,000 18,000
Sale Price (Cash) (Rs.) 7,800 19,500
Down payment for H.P. (Rs.) 600 3,000
Monthly instalments for H. P. (Rs.) 360 660
No. of instalments 20 25
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The company purchased goods costing Rs. 24,00,000 in all and made cash sales
totaling Rs. 15,00,000. Stock on hand was valued at Rs. 3,90,000. Hire Purchase
transactions were as follows:
Number Instalments Instalments-due

Sold Collected (customer’s Paying)
Radio Recorders 30 300 15
Television Sets 25 250 10
4 Radio Recorders and 3 Television sets on which only 10 monthly instalments
were collected were repossessed and were valued at Rs. 45,000. This is not
included in the stock mentioned above.
Prepare hire purchase trading account to show the profit or loss made by the hire
vendor company. 10
Answer
a)
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(i) Purchase consideration computation Rs.
Cash payment for(3,00,000xRs.2.5) 7,50,000
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Equity Shares(4,50,000xRs.15) 67,50,000
75,00,000
In the books of Krishna Ltd.
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Realisation Account
Rs. Rs.
To Goodwill 5,00,000 By 9% Debentures 5,00,000
To Tangible Fixed 30,00,000 By Creditors 1,00,000
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To Assets
Stock 10,40,000 By By Radha Ltd. 75,00,000
To Debtors 1,80,000 (Purchase
To Cash & Bank A/c 2,55,000 consideration)
(2,80,000-25,000)
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To Cash & Bank A/c 25,000

(Realization
To expenses)
Profit on realization
Transfer to 31,00,000
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shareholders
81,00,000 81,00,000
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Equity Shareholders A/c

Rs. Rs.
To Preliminary expenses 50,000 By Equity Share Capital 30,00,000
To Equity Shares in Radha Ltd. 67,50,000 By Export Profit 8,50,000
To Cash & Bank A/c Reserves
7,50,000 By General Reserves 50,000
By P&LA/c 5,50,000
By Realization A/c 31,00,000
75,50,000 75,50,000
9%DebenturesAccount
Rs. Rs.
To Realization A/c 5,00,000 B Balance b/d 5,00,000
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Radha Ltd.
Rs. Rs.
To Realization A/c 75,00,000 By Share Capital 67,50,000
7,50,000
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75,00,000 By Bank A/c 75,00,000
(ii) Journal Entries in the books of Radha Ltd.

Rs. Rs.
1 Business Purchase A/c Dr. 75,00,000
To Liquidator of Krishna Ltd 75,00,000
(Being business of Krishna Ltd. taken over)
2 Tangible Fixed Assets Dr. 60,00,000
Stock Dr. 7,10,000
Debtors Dr. 1,80,000
Cash & Bank A/c Dr. 2,55,000
Goodwill A/c (Bal.fig.) Dr. 10,64,000
To Provision for doubtful debts 9,000
To Liability for 9% Debentures 6,00,000
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To Creditors 1,00,000
To Business Purchase account (Being assets 75,00,000
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and liabilities taken over)
3 Amalgamation Adjustment A/c Dr. 8,50,000
To Export Profit Reserves 8,50,000
(Being statutory Reserves taken over)
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4 Goodwill Dr. 50,000
To Bank A/c 50,000
(Liquidation expenses reimbursed))
5 Dr. 75,00,000
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Liquidator of Krishna Ltd.
45,00,000
To Equity Share Capital
22,50,000
To Securities Premium
7,50,000
To Bank A/c
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(Being purchase consideration discharged)

6 Liability for 9% Debentures ( 5,00,000x 120/100) Dr. 6,00,000
Discount on issue of debentures 25,000
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To 8% Debentures (6,00,000x100/96) 6,25,000

(Being liability of debenture holders’ discharged)
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b)
Hire Purchase Trading Account
Rs. Rs.
To Goods Sold on H.P. (1) 7,21,500 By Cash 3,66,000

By Goods repossessed 45,000
To Stock reserve on instalments By Instalments due 12,000
not due (4) 36,600 By Goods sold an H.P. Loading 91,500
By Instalments not yet

Profit and Loss Account (Profit) 55,800 due-stock with customers c/d (3) 29,9,400
813,900 813,900
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Working Notes:
1. Cost Price:
Radio Recorders (30 × 6,000) 1,80,000 30 × 7,800 2,34,000
Television sets (25 × 18000) 4,50,000 25 × 19,500 4,87,500
Total 6,30,000 72,1500
Loading (Margin) = 7,21,500 – 6,30,000 = Rs. 91,500
2. Cash Collected: Radio Reorders Television sets

Rs. Rs
Down Payment 30 × 600 = 18,000 25 × 3000 = 75,000
Instalments 300 × 360 = 1,08,000 250 × 660 = 1,65,000
1,26,000 = 2,40,000
Total 1,26,000 + 240,000 = 3,66,000
3. Instalments not due:
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Radio Recorders:
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Total Instalments on 26 sets = 26 × 20 520
Less: Instalments collected and due (315 – 40) 275
Not yet due 245
Amount 245 × 360 A. = Rs. 88,200
Television Sets
Total Instalments on 22 sets = 22 × 25 550
Less: Collected and due (260-30) 230
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Not yet due 320
Amount 320 × 660 = Rs. 2,11,200
Total Installments not yet due = Rs. 88,200 + Rs. 2,11,200 = Rs. 2,99,400
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4. Stock Reserve
Radio Recorders Television Sets
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Total Amount due H.P.P. 7,800 19,500

Cost 6,000 18,000
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1,800 1,500
Reserve Required 1,800/7,800 X 88,200 1,500/19,500X 2,11,200

Rs. 20,354 Rs. 16246
Total = Rs. 2,0354 + Rs. 16,246 Rs. 36,600
3.
a) Mr. Bhandari commenced business as a cloth merchant on 1st Shrawan, 2068 with
a capital Rs. 20,000. On the same day, he purchased furniture and fittings for Rs.
10,000 in cash.
Other information:
Particulars Amount (Rs.)
Sales (inclusive of cash sales Rs. 47,000) 1,29,000
Purchases( inclusive of cash purchases Rs. 14,000) 1,01,000
Mr. Bhandari’s drawings (50% cloth) 13,200
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Salaries paid to staffs 12,300
Bad debts written off 500
Business expenses paid 11,700
Mr. Bhandari took cloth worth Rs. 700 from the shop for private use and paid
Rs.500 to his son, but he omitted to record these transactions in books. On 31st
Ashad, 2069 his sundry debtors were Rs. 5, 200 and sundry creditors were Rs.
13,600. Stock in hand on 31st Ashad, 2069 was Rs. 18,550.
From the above transactions obtained from his books kept on single entry, you are
asked to prepare financial statements for the year ended 31st Ashad, 2069. 10
b) A fire engulfed in the premises of a business of M/s K on the morning of 1 st July
2016. The building, equipment and stock were destroyed and the salvage recorded
the following:
Building Rs. 4,000, Equipment Rs. 2,500 and Stock Rs. 20,000. The following
other information was obtained from the records saved for the period from 1st
January 2016 to 30th June 2016.
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Sales 11,10,000
Purchases 9,37,500
Cartage Inward 17,500
Wages 7,500
Stock in hand 31st December 2015 1,50,000
Building (Value on 31st December 2015)
Equipment (Value on 31st December 2015)
A. 3,75,000
75,000
Depreciation provision till 31st December 2015 on:
Building 1,25,000
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Equipment 22,500
No depreciation has been provided since 31st December 2015. The latest rate of
depreciation is 5% p.a on building and 15% p.a on equipment by straight line
method. Normally business makes a profit of 25% on sales. You are required to
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prepare the statement of claim for submission to the insurance company. 5

Answer
a)
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Trading and Profit & Loss Account

For the year ended 31.03.2069
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Dr Cr
Particulars NRs Particulars NRs.
To Purchase 101,000 By Sales 1,29,000
Less: Drawings (7,300) 93,700 By Closing Stock 18,550
(6,600+700)
To Gross Profit 53,850
Total 147,550 Total 1,47,550
To Salaries to staff 12,300 By Gross Profit 53,850
To Bad Debts written off 500
To Business expenses 11,700
To Net Profit 29,350
Total 53,850 53,850
Statement of Financial Position

As on 31.03.2069
Capital 20,000 Furniture and Fittings 10,000
Add: Net Profit 29,350 Sundry Debtors 5,200
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Less: Drawings (14,400) 34,950 Cash (W.N-3) 14,800
Sundry Creditors- 13,600 Closing Stock 18,550
48,550 48,550
Working Notes
Sundry Debtors Account
Dr Cr
Particulars Amount Particulars Amount
To Credit Sales (129,000-47,000) 82,000 By Cash 76,300
By Bad Debts 500
By Balance c/d 5,200
82,000 82,000
Sundry Creditors Account

Dr Cr
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To Cash 73,400 By Credit Purchase 87,000
(101,000-14,000)
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To Balance c/d 13,600
87,000 87,000
Cash Account A.
Dr Cr
To Capital 20,000 By Furniture & Fittings 10,000
To Cash Sales 47,000 By Purchases 14,000
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To Sundry Debtors (W.N-1) 76,300 By Sundry Creditors(W.N-2) 73,400
By Salaries to staff 12,300
By Drawings (6,600+500) 7,100
By Business Expenses 11,700
By Balance c/d 14,800
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1,43,300 143,300
b)
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Items Cost Rs. Depreciation Rs. Salvage Rs. Claim Rs.

Stock (w.n 2) 2,80,000 20,000 2,60,000
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Building 3,75,000 1,25,000 + 9,375 4,000 2,36,625

Equipment 75,000 22,500 + 5,625 2,500 44,375
Claim Amount 5,41,000
Working Note:
1. Memorandum Trading Account for the period from 1.1.2016 to 30.6.2016
Particulars Rs. Particulars Rs.
To Opening Stock 1.1.2016 1,50,000 By Sales 11,10,000
To Purchases 9,37,500 By Closing Stock 2,80,000
To Cartage Inward 17,500 ( Balancing figure)
To Wages 7,500
To Gross Profit (25% of 2,77,500
11,10,000)
13,90,000 13,90,000
2. Stock Destroyed Account
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Particulars Rs. Particulars Rs.
To Trading Account 2,80,000 By Stock Salvage Account 20,000
By Balance c/d (For Claim) 2,60,000
280,000 280,000
4.
a) Orchid Ltd. undertook a contract for Rs. 500,000 on 1st Magh 2069, On 30th
Paush 2070, when the accounts were closed, the following details about the
contract were gathered:
Rs.
Materials purchased 1,00,000
Wages paid 45,000
General expenses 10,000
Plant purchased 50,000
Material on hand 30.9.2070 25,000
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Wages accrued 30.9.2070 5,000
Work certified 2,00,000
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Cash received 1,50,000
Work uncertified 15,000
Depreciation on plant 5,000
The above contract contained an escalation clause which read as follows:
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“In the event of price of materials and rates of wages increased by more than 5%
the contract price will be increased accordingly by 25% of the rise in the cost of
materials and wages beyond 5% in each case.”
It was found that since the date of signing the agreement, the price of materials
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and wages rates increased by 25%. The value of the work certified does not take
into account the effect of the above clause.
Prepare the contract account. 12
b) A contractor has entered into a contract to construct a building. The costs on the
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contract worked out to Rs. 10,50,000.

What would be his profit or loss on the contract? 3
i) If the contract is for a fixed price of Rs. 10,00,000
ii) For a price of cost plus 10%.
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Answer
a)
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Contract Account
Rs. Rs.
To Materials 1,00,000 By Work -in –
To 50,000 progress: 2,00,000
Wages(45,000+5000) 10,000 Work certified 15,000
To General Expenses 5,000 Work uncertified 5,000
To Depreciation on 20,000 Contract escalation
Plant 60,000 (Working note 1) 25000
To P&L A/c(W.N.2) 2,45,000 By Materials in hand 2,45,000
To Balance taken to
WIP
Working Notes:
1. Escalation charges:
(a) Materials
Effect of increase in price of materials
Total Increase Upto 5% Rs. Beyond
75,000×25/125 75,000×5/125
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=15,000 =3000 =12000
(b) Wages
Effect of increase in Wage rate
50000×25/125 50000×5/125
=10000 =2000 =8000
(c) Total Increase (a) +(b)=25000 =5000 =20000

(d) Increase in Contract Price 20,000×25/100 = Rs. 5000
Computation of profit transferred to Profit & Loss Account.
Since more than 1/4th but less than ½ of the contract has been competed 1/3 of the profit earned as
reduced on cash basis has been transferred to Profit & Loss account.
80,000×1/3×150000/200000= Rs. 20,000.
b)
i) In this case as the revenue is Rs. 10,00,000 and the cost are Rs. 10,50,00 the loss on
contract is Rs. 50,000.
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ii) In this case, the contractor would receive
Rs. 10,50,000 plus 10% of Rs. 10,50,000 Rs. 11,55,000
Less: Cost incurred 10,50,000
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Profit on the contract Rs. 1,05,000
5.
a) Sagun Ltd. took a factory premises on lease on 01.04.2073 for Rs. 1, 00,000 per
month. The lease is operating lease. During Ashad, 2074, Sagun Ltd. relocates its
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operation to a new factory building. The lease of the old factory premises
continues to live upto 31.12.2076. The lease cannot be cancelled and cannot be
sub-let to another user. The auditor insists that lease rent of balance 33 months
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upto 31.12.2076 should be provided in the accounts for the year ending
31.03.2074. Sagun Ltd. seeks your advice. 5
b) M/s. Laghu Udyog Limited has been charging depreciation on an item of plant and
machinery on straight line basis. The machine as purchased on 1-4-2070 at Rs.
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3,25,000. It is expected to have a total useful life of 5 years from the date of
purchase and residual value of Rs. 25,000. Calculate the book value of the
machine as on 1-4-2072 and the total depreciation charged till 31-3-2072 under
SLM. The company wants to change the method of depreciation and charge
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depreciation @ 20% on WDV from 2072-73. Is it valid to change the method of

depreciation? Explain the treatment required to be done in the books of accounts in
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the context of Accounting Standards.

Ascertain the amount of depreciation to be charged for 2072-73 and the net book
value of the machine as on 31-3-2073 after giving effect of the above change. 5
c) Alpha Ltd. has entered into a sale contract of Rs. 7 crores with Gamma Ltd.
during 2072-73 financial years. The profit on this transaction is Rs. 1 crore. The
delivery of goods to take place during the first month of 2073-74 financial years.
In case of failure of Alpha Ltd. to deliver within the schedule, a compensation of
Rs. 2 crores is to be paid to Gamma Ltd. Alpha Ltd. planned to manufacture the
goods during the last month of 2072-73 financial year. As on balance sheet date
(31.3.2073), the goods were not manufactured and it was unlikely that Alpha Ltd.
will be in a position to meet the contractual obligation. You are required to advise
Alpha Ltd. on requirement of provision for contingency in the financial
statements for the year ended 31st Ashad, 2073, in line with provisions of
Accounting Standards? 5
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Answer
a) In accordance with the provisions of NAS 37 ‘Provisions, Contingent Liabilities and
Contingent Assets’, if an enterprise has a contract that is onerous, the present
obligation under the contract should be recognized and measured as a provision. An onerous
contract is a contract in which the unavoidable cost of meeting the obligations under the
contract exceed the economic benefit expected to be received under it.
In the given case, the operating lease contract has become onerous as the economic benefit of
lease contract for next 33 months up to 31.12.2076 will be nil. However, the lessee, Sagun
Ltd., has to pay lease rent of Rs.3, 300,000 (i.e. Rs.100, 000 p.m. for next 33 months).
Therefore, provision on account of Rs.3, 300,000 is to be provided in the accounts for the
year ending 31.03.2074.
Hence auditor’s contention to provide for the lease rent of balance 33 months upto
31.12.2076 in the accounts for the year ending 31.03.2074 is correct.
b)
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As per NAS 16 ‘ Property, Plant & Equipment’, the depreciation method applied to an asset shall be
reviewed at least at each financial year end and, if there has been a significant change in the expected
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pattern of consumption of the future economic benefits embodied in the asset, the method shall be
changed to reflect the changed pattern. Such a change shall be accounted for as a change in an
accounting estimate in accordance with NAS 08.
As per NAS 08 ‘Accounting Policies, Changes in Accounting Estimates & Errors’, changes in
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accounting estimates shall be adjusted prospectively that means the effect of a change in an accounting
estimate shall be included in the determination of net profit or loss in:
(a) The period of the change, if the change affects the period only; or
(b) The period of the change and future periods, if the change affects both.
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In the given case, the company can change the method of depreciation from year 2072-73 if the
conditions set aside in above paragraph have been fulfilled.
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Depreciation for year 2072-73 and net book value of Machine as on 31.3.73 Rs.
after effect of the change
Book value of Machinery as on 01.04.2072 2,05,000
Current year depreciation as per new method (WDV) (2,05,000 X 20%) 41,000
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Net Book value as on 31.03.2073 (2,05,000–41,000) 1,64,000

Working Note:
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Book Value of Machinery and Depreciation under SLM as on 01-04-2072

Rs.
Cost of Machine purchased on 01.04.2070 3,25,000
Less: Residual Value 25,000
Depreciable amount 3,00,000
Useful life of Machine 5 Years
Depreciation for 2 Years (Rs.3,00,000x2/5) 1,20,000
Book value as on 01.04.2072 2,05,000
c)
NAS 37 “Provisions, Contingent Liabilities and Contingent Assets” provides that when an
enterprise has a present obligation, as a result of past events, that probably requires an outflow of
resources and a reliable estimate can be made of the amount of obligation, a provision should be
recognized.
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Alpha Ltd. has the obligation to deliver the goods within the scheduled time as per the contract. It
is probable that Alpha Ltd. will fail to deliver the goods within the schedule and it is also possible
to estimate the amount of compensation. Therefore, Alpha Ltd. should provide for the contingency
amounting Rs. 2 crores as per NAS 37.
6. Write short notes on: (5×3=15)
a) Employee stock option plan and its importance
b) Adjusting entries and correcting entries
c) Advantages of customized accounting packages
d) Challenges of farm accounting in Nepal
e) Situations which normally leads a lease being classified as finance lease
Answer
a) It is a plan under which the enterprise grants employee stock options. Employee stock option
is a contract that gives the employees of the enterprise the right, but not the obligation, for a
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specified period of time to purchase or subscribe the shares of the company at a fixed or
determinable price.
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The importance of these plans is as follows:
1) Employee stock option plans encourage employees to have higher participation in the
company.
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2) Stock options provide an opportunity to employees to contribute in the growth of the
company.
3) Stock option creates long term wealth in the hands of the employees.
4) They are important means to attract, retain and motivate the best available talent for the
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company.
5) It creates a sense of ownership between the company and its employees.
b)
Generally, adjusting entries are required every accounting period so that a company's
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financial statements reflect the accrual method of accounting.

It is typical for the adjusting entries to be dated as of the last day of the accounting period
and to include an income statement account and a balance sheet account.
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Adjusting entries are necessary to:

I. accrue expenses and losses and the related liabilities.
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II. accrue revenues and gains and the related assets.

III. defer expenses and the related assets.
IV. defer revenues and the related liabilities.
V. record depreciation expense or bad debts expense and the change in the related contra asset
account.
A correcting entry is needed only if an error is discovered in an account. Correcting entries

can involve any combination of income statement and balance sheet accounts.
Correcting entries are recorded if:
I. an erroneous amount was used in a previously posted entry.
II. an entry was recorded in the wrong account.
c)
Following are the advantages of the customized accounting packages:
1. The input screens can be tailor made to match the input documents for ease of data entry.
2. The reports can be as per the specification of the organization. Many additional MIS reports
can be included in the list of reports.
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3. Bar-codes canners can be used as input devices suitable for the specific need so fan
individual organization.
4. The system can suitably match with the organizational structure of the company.
d)
There are many challenges of farm accounting in Nepal. Some of the challenges are as follows:
1) Agriculture sector in Nepal is unorganized. It is dominated by small farmers and most of these
small famers hold only few acres of land. The average size of holding of land is very small for
commercial farming.
2) Most of the small farmers are illiterate and very poor. Hence, they are neither aware about the
necessity of accounting nor they can afford the expenses of employing someone to maintain the
account.
3) Even big farmers who own considerable land do not keep any accounting to ascertain the profit
from the operations or to take any economic decisions.
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4) Even the state does not impose the strong provision of maintaining the farm accounting.
e)
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Whether a lease is a finance lease or an operating lease depends on the substance of the transaction
rather than the form of the contract. Finance lease is a lease, which transfers substantially all the risks
and rewards incidental to ownership of an asset to the lessee by the lessor but not the legal ownership.
A.
As per NAS 17, situation that individually or in combination would normally lead to a lease being
classified as a finance lease are:
1) The lessee will get the ownership of leased asset at the end of the lease term.
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2) The lessee has an option to purchase the leased asset at the end of the lease term at price, which is
lower than its expected fair value at the date on which option will be exercised.
3) The lease term covers the major part of the economic life of asset even if title is not transferred.
4) At the beginning of lease term, present value of minimum lease rental amount covers at least
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substantially all the fair value of leased asset.

5) The leased assets are of such a specialized nature that only the lessee can use them without major
modifications.
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Audit and Assurance
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Suggested
Total No. of Questions- 7 Total No. of Printed Pages- 2

Marks
Attempt all questions.
1. As an auditor, give your opinion with explanations on the following cases: (45=20)
a) CA Aarjit Dongol has been appointed as statutory auditor of MNO Limited for the fiscal
year 2072/73. He has been holding certain paid up share capital of the company since the
year 2070. Is the appointment of CA Dongol valid?
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b) Nice Guy Ltd. sells goods with a cost of Rs. 100,000 to Start-up Co. for Rs. 140,000 and
a credit period of six months. Nice Guy’s normal cash price would have been Rs. 125,000
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with a credit period of one month or with a Rs. 5,000 discount for cash on delivery. The
company wishes to book the revenue as Rs. 140,000.
c) AA Ltd. provided Rs 64 lakhs for Inventory obsolescence in 2072/73. In the subsequent
year, it was determined that 50% of such inventory was usable. The Board of Directors
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wants to adjust the same through prior period adjustment.
d) A firm of a father and a son is receiving Rs. 2 lakhs towards job work done for XYZ Ltd.
during the year ended on 32.03.2072. The total job work charges paid by XYZ Ltd.
during the year are over Rs. 50 lakhs. The father is a Managing Director of XYZ Ltd.
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having substantial holding. The Managing Director told the auditor that since he is not
involved in the activities of the firm and since the amount paid to it is insignificant; there
is no need to disclose the transaction. He further contended that such a payment made in
the last year was not disclosed. Is Managing Director right in his approach?
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Answer:
a) Section 112 of the Companies Act, 2063 states the disqualifications of an auditor. As per the
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Act, none of the certain persons or the firms or companies in which such persons are partners
shall be qualified for appointment as auditor and shall, despite appointment as auditor, continue
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to hold office.
Provision regarding appointing shareholder as auditor as per Section 112 Sub Section c of
Company Act, 2063 states that: persons or the firms or companies who is substantial
shareholder of the company or a shareholder holding one percent or more of the paid up capital
of the company or his close relative cannot be appointed as auditor.
In the given case, the percentage of holding of paid up capital is not mentioned. If CA Dongol
himself or firm or company in which he is partner or shareholder, or his close relative do not
hold one percent or more than one percent of the paid up capital of MNO Limited only then he
is qualified to be appointed as auditor.
b) Effectively, Nice Guy Ltd is financing Start-up Co. for a period of six months. The normal price
would have been Rs. 125,000 as the goods sold with a credit period of six months. Therefore,
cash discount should not be applicable for the goods sold on credit settlement. Sales revenue
should be accounted for Rs. 125000 being the fair value of consideration receivable. The
difference between the nominal amount of Rs. 140,000 and the normal price of goods Rs.
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125000 i.e. Rs. 15,000 would be recognized as interest income over the period of finance of six
months.
As per NAS 18, Revenue is the gross inflow of economic benefits during the period arising in
the course of the ordinary activities of an entity when those inflows result in increases in equity,
other than increases relating to contributions from equity participants. In a given case it has been
shown after deducting in the purchase which is not as per this standard and it should be
disclosed in gross as per this NAS.
c) As per NAS 10 on "Events after the Reporting Date ", prior period items are income or expenses
which arise in the current period as a result of errors or omissions in the preparation of the
financial statements of one or more prior periods. The write-back of provision made in respect
of inventories in the earlier year does not constitute prior period adjustment since it neither
constitutes error nor omission but it merely involves making estimates based on prevailing
circumstances when financial statements were being prepared. It is a mere estimate process
involving judgment based on the latest information available.
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An estimate may have to be revised if changes occur regarding the circumstances on which the
estimate was based, or as a result of new information, more experience or subsequent
developments. The revision of the estimate, by its nature, does not bring the adjustment within
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the definitions of an extraordinary item or a prior period item.
In this case, AA Ltd. provided Rs 64 lakhs for inventory obsolescence in 2072-73. In the
subsequent year due to change in circumstances, it was determined that 50% of such inventory
was usable. Revision of such an estimate does not bring the resulting amount of Rs.32 lakhs
A.
within the definition either of a prior period item or of an extraordinary item. The amount,
however, involved is material and requires separate disclosure to understand the financial
position and performance of an enterprise. Accordingly, adjustment in the value of the inventory
through prior period item would not be appropriate.
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d) Nepal Accounting Standard 24,“Related Party Disclosures” applies to the facts of the case.
NAS 24 requires disclosure of party relationship and transactions between a reporting enterprise
and its related parties. The parties are considered to be related if at any time during the reporting
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period, one party has the ability to control the other party or exercise significant influence over
the other party in making decisions.
In the given case, the managing director of XYZ Ltd. is a partner in the firm with his son, which
has been paid Rs. 2 lakhs as job work charges. The managing director is having a substantial
holding in the firm. The case is covered by NAS 24. The approach of the managing director is
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not tenable under the standard and accordingly all disclosure requirements have to be complied.
Since there is related party transaction the contention of managing Director is not correct and the
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auditor should advise him to make proper disclosure as required by NAS and if the management
refuses, the auditor shall express a qualified report.
2. Give your comments on the following cases: (45=20)

a) The Joint Merger Committee of Alpha Bank and Beta Bank has appointed CA Ramarjun
as Due Diligence Auditor of both banks for the merger process. The appointment letter
has following clause regarding fees: “Fees amounting to Rs.300, 000 for each bank
(exclusive of VAT) shall be paid on submission of DDA report. Additional payment of
Rs.150,000 (inclusive of VAT) shall be made, if the merger is successful.”
b) CA Chandan was appointed auditor of Delta Telecom Ltd. He presented audit plan where
in ten teams comprising 4 personnel in each team will be visiting 40 branches (out of 50)
across the country for a total of around 4 months. The finance controller of Delta Telecom
offered SIM cards for all the team members engaged in the audit with one year free 4G
data and voice services and unlimited one year free 10 MB internet to Auditor’s Office as
logistic support so that communication/emails with all the members are uninterrupted
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during the course of audit. It is expected that CA Chandan will be appointed as auditor for
next two years as well. The general one time price of SIM cards and installation charges
for internet however shall have to be paid for. The Finance Controller requests for
replacing some of the branches with others for audit.
c) Verisk Limited has employed an Independent Actuary (Dansk & Co.) for actuarial
valuation of its employees’ long term liabilities for the year end 31st Ashadh 2073. This
was the first year of actuarial valuation. CA Mangesh was statutory auditor for the
company. He was satisfied with the appropriateness and reasonableness of the
assumptions and methods used along with financial data reflected in the financial
statement and decided to issue an unmodified report. He also added following in his
report for more clarity on the subject “The employees’ long term liabilities is based on
actuarial valuation by Dansk & C0.”
d) .Sagar International Ltd. has acquired a solar power system on 01.04.2072 for Rs. 100
lakhs. On 02.04.2072, it applied to Alternative Energy Promotion Board of Nepal for a
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50% subsidy. The subsidy application was finally approved on 01.06.2073. While
finalizing the accounts, the company has accounted the subsidy as adjusting event after
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reporting period. The board of directors has not yet authorized the financials for issue.
Answer: 2(a)
Section 240 “Fees and other types of remuneration” of Code of Ethics of ICAN , ( Part B) states that
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Professional services should not be offered or rendered to a client under an arrangement whereby no
fee will be charged unless a specified finding or result is obtained or when the fee is otherwise
contingent upon the findings or results of such services. Fees charged on a percentage or similar
basis should be regarded as contingent.
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In the given instance; though the first part of the clause of fee is straight forward and will be received
on submission of the DDA report, the second part of the fee is contingent upon the successful
merger. The second part of the fee will not be there if the merger is unsuccessful. It is understood
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that the success of merger shall be significantly influenced by the DDA Report. This may also cause
self-interest threat on the objectivity of the assignment. Given the facts, CA Ramarjun should not
accept the assignment based on the given terms of fee.
Answer:2(b)
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Section 260 “Gifts & Hospitality” of Code of Ethics ICAN, Part B states that acceptance of goods
and services from a client may create a threat to self-interest threat or familiarity threat to objectivity.
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Goods and services should not be accepted except on business terms no more favorable than those
generally available to others. The existence and significance of any threat will depend on the nature,
value, and intent of the offer.
In the given case, the purchase of SIM cards at regular price seem no more favorable that to others
and the facility seemed normal in terms of logistic support for smooth conduction of the audit works.
However, the offer for free 4G data charges, voice service and internet for one year which is
extended beyond the normal course (4 months) of audit execution period. Therefore, it may not be
concluded that the offer is in normal course without the specific intent to influence the decision
making. Acceptance of the offer may pose a threat on independence and objectivity and hence should
not be accepted.
Answer:2(c)
NSA 620 “Using the work of an expert” requires that “when issuing an unmodified auditor’s report,
the auditor should not refer to the work of an expert”. Such reference might be misunderstood to be a
qualification of the auditor’s opinion or diversion of responsibility, neither of which is intended.
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In the given context, the reporting by CA Mangesh is more inclined to “emphasis of matter” under
modified reports (matters that do not affect the auditor’s opinion). Hence, CA Mangesh should not
refer the actuarial valuation in his audit report. However, he must ensure that adequate disclosures
about the actuarial valuation and the related figures have been reflected by the Management in the
Financial Statement.
Answer:2(d)
NAS 10 on “events after reporting period” requires the value of assets and liabilities to be adjusted
for events occurring after the balance sheet date which occur upto the date of approval of accounts
by the Board of Directors ( authorized for issue) if they provide evidence of the conditions existing at
the end of the reporting period. Since, in this case books of account have not been approved, grant of
subsidy will be considered as an adjusting event. Hence, the accounts should be adjusted for the
subsidy in 2072-73.
Hence, the subsidy should be either credited to the cost of the system or alternatively may be treated
as deferred income to be written off over the useful life in proportion in which depreciation is written
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off.
3. Answer the following: (35=15)
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a) NSA 300 Planning an Audit of Financial Statements provides guidance to assist auditors
in planning an audit. Explain the benefits of audit planning.
b) NSA 210 Agreeing the Terms of Audit Engagements requires auditors to agree the terms
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of an engagement with those charged with governance and formalize these in an
engagement letter. Identify and explain the factors which would indicate that an
engagement letter for an existing audit client should be revised.
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c) Explain about the factors that influence the reliability of Audit Evidence.
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Answer: 3(a)
Benefits of audit planning
Audit planning is addressed by NSA 300 Planning an Audit of Financial Statements. It states that
adequate planning benefits the audit of financial statements in several ways:
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 Helping the auditor to devote appropriate attention to important areas of the audit.
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 Helping the auditor to identify and resolve potential problems on a timely basis.
 Helping the auditor to properly organize and manage the audit engagement so that it is
performed in an effective and efficient manner.
 Assisting in the selection of engagement team members with appropriate levels of capabilities
and competence to respond to anticipated risks and the proper assignment of work to them.
 Facilitating the direction and supervision of engagement team members and the review of their
work.
 Assisting, where applicable, in coordination of work done by experts.
Answer: 3(b)
Engagement letters for recurring/existing clients should be revised if any of the following factors
are present:
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 Any indication that the entity misunderstands the objective and scope of the audit, as this
misunderstanding would need to be clarified.
 Any revised or special terms of the audit engagement, as these would require inclusion in the
engagement letter.
 A recent change of senior management or significant change in ownership. The letter is
signed by a director on behalf of those charged with governance; if there have been
significant changes in management they need to be made aware of what the audit engagement
letter includes.
 A significant change in nature or size of the entity’s business. The approach taken by the
auditor may need to change to reflect the change in the entity and this should be clarified in
the engagement letter.
 A change in legal or regulatory requirements. The engagement letter is a contract; hence if
legal or regulatory changes occur, then the contract could be out of date.
 A change in the financial reporting framework adopted in the preparation of the financial
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statements. The engagement letter clarifies the role of auditors and those charged with
governance, it identifies the reporting framework of the financial statements and if these
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changes, then the letter requires updating.
 A change in other reporting requirements. Other reporting requirements may be stipulated in
the engagement letter; hence if these change, the letter should be updated.
Answer: 3(c)
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The reliability of information to be used as audit evidence is influenced by its source, nature, and
the circumstances under which it is obtained, including the controls over its preparation and
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maintenance. Even when information to be used as audit evidence is obtained from sources
external to the entity, circumstances may exist that could affect its reliability. For example,
information obtained from an independent external source may not be reliable if the expert may
lack objectivity. While recognizing that exceptions may exist, the following generalizations about
the reliability of audit evidence may be useful:
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(i) Independent Source - The reliability of audit evidence is increased when it is obtained
from independent sources outside the entity.
(ii) Effective internal control system - The reliability of audit evidence that is generated
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internally is increased when the related controls, including its preparation and maintenance,
imposed by the entity are effective.
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(iii) Method of obtaining - Audit evidence obtained directly by the auditor (for example,
observation of the application of a control) is more reliable than audit evidence obtained indirectly
or by inference (for example, inquiry about the application of a control).
(iv) Form of Audit Document - Audit evidence in documentary form, whether paper,
electronic, or other medium, is more reliable than evidence obtained orally (for example, a
contemporaneously written record of a meeting is more reliable than a subsequent oral
representation of the matters discussed).
(v) Type of Documents - Audit evidence provided by original documents is more reliable
than audit evidence provided by photocopies or facsimiles, or documents that have been filmed,
digitized or otherwise transformed into electronic form, the reliability of which may depend on the
controls over their preparation and maintenance.
4. Answer/Comment on the following: (35=15)
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a) Rabin & Associates; Chartered Accountants has been operating a separate bank account
for keeping client`s money in course of availing fund manager service to the client. The
interest earned on such account during financial year 2072/73 amounting Rs. 100,000 has
been transferred to firm`s bank account and booked as miscellaneous income with
corresponding miscellaneous income & expenditure in client`s bank account.
b) When professional accountant performs services in a country other than Nepal and
differences on specific matters exist between ethical requirements of the two countries,
write down the three provisions to be applied to professional accountant on such situation.
c) You are the auditor of Peace Nepal Ltd. for FY 2072/73. Peace Nepal Ltd. is seeking your
assistance for preparation of accounting records for F.Y. 2072/73.
Answer Q. No.4 (a): :
As per Section 270 “Custody of Client Assets” of Code of Ethics of the Institute of Chartered
Accountants of Nepal, it has been clearly stated that: “All interest earned on clients` monies should be
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credited to the client`s account".
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The accounting entries made by Rabin & Associates; chartered accountants for interest income in
client`s account is initially correct. But subsequent transfer of interest income to firm's account by
booking as miscellaneous expense in client`s account is not correct.
A.
In the light of the provision contained in Section 270 of Code of Ethics , a professional accountant in
public practice entrusted with money (or other assets) belonging to others shall therefore;
a) Keep such assets separately from personal or firm assets;
b) Use such assets only for the intended purpose;
c) Be ready to present accounting of those assets and any income generated from such assets at all
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time to the client; and
d) Comply all the relevant laws and regulations applicable for the custody of client\s assets.
Hence, Rabin & Associates has breached the code of ethics as prescribed by ICAN and is under the
disciplinary action for non-compliance of ICAN code of ethics.
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Answer Q. No. 4 (b) :
As per Section 6.3 of the Code of Ethics of the institute of the chartered accountants of Nepal
provisions applied to professional in such situation are:
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(i) When the ethical requirements of the country in which the services are being performed are less
strict than the ICAN Code of Ethics, then the ICAN Code of Ethics should be applied.
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(ii) When the ethical requirements of the country in which services are being performed are stricter
than the ICAN Code of Ethics, then the ethical requirements in the country where services are
being performed should be applied.
(iii).When the ethical requirements of Nepal are mandatory for services performed outside that country
and are stricter than set out in (i) and (ii) above, then the ethical requirements of Nepal should
be applied. (In the case of cross border advertising and solicitation it should be dealt as per
provision under section 14.)
Answer Q. No. 4 (c):
As per section 8.5 of the code of ethics of ICAN following requirements should be considered by the
independent auditor before assisting client for preparing accounting records:
(i) Should not have any relationship or combination of relationships with the client or any conflict of
interest which would impair integrity or independence.
(ii) The client should accept the responsibility for the statements.
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(iii)Should not assume the role of employee or of management conducting the operations of an
enterprise.
(iv) Staff assigned to the preparation of accounting records ideally should not participate in the
examination of such records. The fact that the professional accountant in public practice has
processed or maintained certain records does not eliminate the need to make sufficient audit tests.
In the light of the provision contained in Section 8.5 of Code of Ethics of the Institute of Chartered
Accountants of Nepal ; I would like to the ensure the compliance of aforesaid provision before
accepting such request of my client.
5. Answer the following: (25=10)

a) Explain the procedures for appointment of auditor of corporate bodies wholly owned by
Government of Nepal.
b) Define the term "Performance Audit".
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Answers Q. No.5 (a):
Section 6 of Audit Act 2048 (1991 AD), deals with the provision for appointing Auditor of Corporate
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Bodies Wholly Owned by Government of Nepal. The related provisions are:
 As per Section 6 (1); notwithstanding anything contained in the existing laws, the audit of the
corporate bodies wholly owned by Government of Nepal shall be audited by the Auditor General
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pursuant to this Act.
 As per section 6 (2); If the Auditor General is constrained by time and resources to audit the
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corporate bodies wholly owned by Government of Nepal pursuant to Sub-section (1) he/she may
appoint license holder auditors under the prevailing laws an assistant. While appointing auditor
as such, he/she shall give priority to the Nepali citizen.
 As per section 6 (3); The auditor appointed pursuant to Sub-section (2) shall act under the direction,
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supervision and control of the Auditor General.

 As per section 6 (4); The powers, functions, duties and responsibilities of the auditors appointed
pursuant to Sub-section (2) and the procedures to be followed by them in course audit and provisions
relating to their report shall be as prescribed by the Auditor General.
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 As per section 6 (5); The remuneration to be paid by the concerned organization to the auditors
appointed pursuant to Sub-section (2) shall be fixed by the Auditor General keeping in view the
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volume of financial transactions, status of accounts, number of branches and sub-branches, work
load and work progress of the concerned organization.
Answers Q. No.5 (b):
According to INTOSAI’s Auditing Standards, performance audit is an independent examination of the

efficiency and effectiveness of government undertakings, programs or organizations, with due regard to
economy, and the aim of leading to improvements.
Performance audit is based on decisions made or goals established by the legislature, and it may be
carried out throughout the whole public sector.
Performance audit is concerned with the audit of economy, efficiency and effectiveness (the three E’s).
A performance audit assignment may include all/one or a combination of two aspects of “3Es”.
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“Economy” means the acquisition of the appropriate quality and quantity of human, financial, physical
and information resources at the appropriate times and at the lower cost possible. It is minimising the
cost of resources used for an activity (input), having due regard to appropriate quality.
“Efficiency” means the use of human, financial, physical and information resources such that the
output is maximized for any given set of resource inputs, or input is minimized for any given
quantity and quality of output.
“Effectiveness” means the achievement of the objectives or other intended effects of activities. It
addresses whether policy objectives or goals have been met and whether this can be attributed to the
policy pursued.
The concept of performance auditing emerged in response to:
 increasing demand for information on efficiency and economy in managing resources and the
effectiveness with which objectives are met;
 need to determine whether :
 the operations of audit entities were conducted in a way that ensures the best possible use of
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resources or considering the 3Es;

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officials in the public sector have met their accountability obligations;
 reporting on performance is credible and adequate.
Regularity and propriety related issues which impact performance may be considered in the conduct of
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performance audits.
6. Write short notes on the following: (42.5=10)

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a) Uses of Negative External Confirmation Requests
b) Use of Assertion in an Audit of Financial Statements
c) Key Audit Matters
d) Powers to issue Directives by the Auditor General
Answer:
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a) Uses of Negative External Confirmation Requests

A negative external confirmation request asks the respondent to reply only in the event of
disagreement with the information provided in the request. However, when no response has been
received to a negative confirmation request, the auditor remains aware that there will be no explicit
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evidence that intended third parties have received the confirmation requests and verified that the
information contained therein is correct. Accordingly, the use of negative confirmation requests
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ordinarily provides less reliable evidence than the use of positive confirmation requests, and the
auditor considers performing other substantive procedures to supplement the use of negative
confirmations.
Negative confirmation requests may be used to reduce audit risk to an acceptable level when: (a) the
assessed level of inherent and control risk is low; (b) a large number of small balances is involved; (c)
a substantial number of errors is not expected; and (d) the auditor has no reason to believe that
respondents will disregard these requests.
b) Use of Assertion in an Audit of Financial Statements

Assertions are the implicit or explicit claims and representations made by the management
responsible for the preparation of financial statements regarding the appropriateness of the
various elements of financial statements and disclosures.
Auditor may use those assertions for audit examination during audit of Financial Statements. In
preparing financial statements, management is making implicit or explicit claims (i.e. assertions)
regarding the recognition, measurement and presentation
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of assets, liabilities, equity, income, expenses and disclosures in accordance with the applicable
financial reporting framework (e.g. NAS/NFRS).
Following Assertions for class of transaction, account balance and disclosures can be used.
 Occurrence,
 Completeness,
 Accuracy cut-off,
 Classification and understandability
 Existence,
 Rights and Obligations
 Valuation and allocation
c) Key Audit Matters
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Those matters that, in auditor's professional judgment, are of most significant in the audit of
financial statements of the current period are referred as key audit matters. Such key audit matters
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are selected from matters communicated with those charged with governance. The auditor is
required to communicate such matters to those charged with governance and include in audit
report in the Key Audit Matters Section.
The purpose of communicating key audit matters is to enhance the communicative value of
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auditor's report by providing greater transparency about the audit that was performed.
Communicating key audit matters provides additional information to intended users of the
financial statements to assist them in understanding those matters which are of most significance
in the audit of the financial statements. Communicating key audit matters is not a substitute for
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disclosure in the financial statements or the substitute for the auditor expressing a modified
opinion. In determining key audit matters, auditor may take into account the areas of higher
assessed risks and areas requiring significant management judgment.
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d) Powers to issue Directives by the Auditor General

The Auditor General may, subject to the Constitution of Nepal and the prevailing laws,
issue directives to the concerned Government Offices, and Corporate Bodies wholly or
substantially owned by Government of Nepal, from time to time to make proper
arrangements on matters of accounts and to maintain regularity therein. It shall be the
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duty of the concerned offices or organizations to abide by such directives.

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7. Distinguish between: (25=10)

a) Computerized and manual accounting system
b) Auditing around computer and Audit through computer
Answer:
a) Distinction between computerized and Manual Accounting System:
i. Faster and efficient in processing of information in computerized system and no such faster
and efficient in processing of information in manual system
ii. Automatic generation of accounting documents like invoices, cheques and statement of
account which manual system cannot produce.
iii. With the larger reductions in the cost of hardware and software and availability of user-
friendly accounting software package, it is relatively cheaper like maintaining a manual
accounting system;
iv. More timely information can be produced than manual system
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v. No more manual processing of the data- all automatically posted to the various
ledgers/accounts and many types of useful reports can be automatically generated for
management to make decisions where as such reports cannot generated on manual system
vi. Power failure, computer viruses and hackers are the inherent problems of using computerized
systems, such risk not remain in manual system
vii. Once data been input into the system, automatically the output are obtained hence the data
being input needs to be validated for accuracy and completeness, we should not forget concept
of GIGO (Garbage In(Input) Garbage out ( Output) where validation in manual system can be
checked on inception
viii. Accounting system not properly set up to meet the requirement of the business due to badly
programmed or inappropriate software or hardware or personnel problems can caused more
havoc, where manual system does not have such problem.
ix. Danger of computer fraud if proper level of control and security whether internal and external
b)
i. Audit Around the Computer: Audit around the computer involves forming of an audit opinion
wherein the existence of computer is not taken into account. Rather the principle of
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conventional audit like examination of internal controls and substantive testing is done. The
auditor views the computer as a black box, as the application system processing is not
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examined directly. The main advantage of auditing around the computer is its simplicity.
Audit around the computer is applicable in the following situations:
ii. The system is simple and uses generalized software that is well tested and widely used.
iii. Processing mainly consists of sorting the input data and updating the master file in sequence.
A.
iv. Audit trail is clear. Detailed reports are prepared at key processing points within the system.
v. Control over input transactions can be maintained through normal methods, i.e. separation of
duties, and management supervision.
Generalized software packages, like payroll and provident fund package, accounts receivable and
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payable package, etc. are available, developed by software vendors. Though, the auditor may
decide not to go in details of the processing aspects, if there are well tested widely used packages
provided by a reputed vendor. However, he has to ensure that there are adequate controls to
prevent unauthorized modifications of the package. However, it may be noted that all such
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generalized packages do not make the system amenable to audit. Some software packages provide
generalized functions that still must be selected and combined to achieve the required application
system. In such a case, instead of simply examining the systems input and output, the auditor must
check the system in depth to satisfy him about such system. The main disadvantages of the system
of auditing around the computer are:
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a) It is not beneficial for complex systems of large scale in very large multi-unit, multi locational
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companies, having various inter unit transactions. It can be used only in case of small
organizations having simple operations.
b) It is difficult for the auditor to assess the degradation in the system in case of change in
environment, and whether the system can cope with a changed environment.
(ii) Auditing through the Computer: This approach involves actual use of computer for
processing the information by auditor. The circumstances, where auditing through the computer is
done are as follows:
(i) The organization has developed either in house or through a reputed vendor, a software
package suitable to its requirement, because of inability of a generalized package to cater to the
complex nature of transactions.
(ii) The system processes very large volumes of output. This makes examination of validity of
input and output difficult.
(iii) The major part of the internal control system in the organization is in the computer system
itself, as the majority of the records is processed through the computer. Examples are system in
bank, insurance companies, online booking in case of Railway, etc.
(iv)The logic of the system is quite complex, and there is virtually no visible audit trail. The
auditor has to use the computer to test the logic and controls existing within the system.
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The auditor has to use the computer system itself for verification, for which he has to be
sufficiently computer literate, and should have adequate technical knowledge and expertise. The
auditor can through the computer, increase his performance, and can rely on the data processing by
carrying out the required tests and applying his skill
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A.
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Corporate Law
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Suggested Answers
Marks
1. Answer the following questions: (5×5=25)
a) The directors of Orbit Fibers Pvt. Ltd. borrowed a sum of money from NCC Bank. The company’s
articles provided that the directors might borrow loan as may from time to time be authorized by a
resolution passed at a general meeting of the company. When the bank sued the company to
recover debt, the shareholders claimed that there had been no such resolution passed authorizing
the loan, hence, the loan is ultra-vires and not binding to the company. Can the bank recover the
debt amount against the company? Explain.
b) Mr. Sharma, 20 Years old, has been appointed as a director of XYZ Ltd. by its promoters. Ms.
Shanti, a shareholder, opposed on such appointment. Whether Mr. Sharma’s appointment as a
director is legal? What kinds of mechanisms of appointing a director are there in Companies Act,
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2063? Explain.
c) Running Bulls Pvt. Ltd. is an emerging investment company having sound track record in profit
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earning established by a group of new investors five years ago. Now they have intended to convert
this private limited company to public limited company but have no idea about the relevant legal
provisions; therefore, they appointed you as an expert on this matter. Advise them on the basis of
the relevant provision of the Companies Act, 2063.
A.
d) Board of Director of XYZ Insurance Company is in the opinion to increase their capital with the
medium of Further Public Offering (FPO) in premium price. Advise the BOD of the insurance
company regarding the pre-conditions of and the procedures for issuing FPO at premium price
citing the relevant provision of the Companies Act, 2063.
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e) Promoters of a prospective company Bhatbhateni Ltd. applied to the Company Registrar Office for
its registration. Few days after filing the application, the Company Registrar office refused its
registration. Now in this context, state the circumstances under which the Company Registrar
Office may refuse registration of prospective company Bhatbhateni Ltd.?
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Answers:
a) The doctrine of indoor management has been developed to rescue the third parties or to enable
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them to be secured from the internal irregularities committed by the directors which they should
manage. Similarly, it saves the third parties from the rigour of the strict implication of the doctrine
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of constructive notice. This implies that the outsiders are not bound to inquire whether the act of
the directors which is related to internal management had been properly and regularly performed.
It was ruled in the case of Royal British Bank v. Turquand:(1856) 6 E. & B. 327 that where the
directors exceed their powers or infringe the restrictions imposed upon them, the company may be
bound; for an outsider dealing with the company is required to see that the transaction on the face
of it is regular and consistent with the articles.
In this case, the company is bound by the loan. Once it was found that the directors could borrow
subject to a resolution, the Bank had the right to infer that the necessary resolution must have been
passed. When third party has dealt with the company through the board of directors which is not
ultra-vires to the Articles and Memorandum of the company, the company cannot avoid liability to
pay the loan to the bank on the ground that such resolution never been passed at the general
meeting of the company.
b) XYZ Company is a public company. The director, Mr. Sharma, appointed by promoters, is of 20
years old. Section 89 (1) (a) of the Companies Act has provided the various grounds for
disqualification among them one is below Twenty One years old. Obviously, he is under age of
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requirements age to become director of a public company. Therefore, Mr. Sharma is disqualified
for the post of director of such company. On the other hand, the opposing logic and complaint of
Ms. Shanti is valid and Mr. Sharma could not hold the office of a director in accordance with the
section 89(3)(a) of the Companies Act.
A director of a company can be appointed following the procedures mention in the companies Act
and through the mechanism as provided.
a. Appointment by Promoters:
Basically, the primary authority of appointment of director is rest on the General Meeting
(GM). However, Promoters can also appoint director in the preliminary phase of any
company. Promoters can exercise the appointing authority before the first general meeting is
held. These directors are called first directors or can be called interim period director of a
company. They are remained in the post of director till other directors are appointed by the
GM. It mentioned in the first proviso of section 87(1).
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b. Appointment by Board of Directors (BoD) :
Such kind of appointment is made for the interim or remaining period. BoD may appoint the
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directors in the vacant post only. Second Proviso of Section 87 (1) has provided such
mechanism and procedure. If the office of any director appointed by the annual general
meeting is vacated for any reason, the board of directors shall appoint another director in that
vacancy. A.
c. Appointment by General Meeting (GM):
It is already said that the primary authority of appointment of director is rest upon the GM.
Other mechanisms are exercised such power in the extraordinary situation. Section 87(1) has
provided such authority to GM. In a private company directors are appointed as provided in its
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AoA (Sec 86).
d. Appointment by Corporate Body :

A corporate body can also appoint the directors. On the basis of amount of shares it holds,
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can appoint directors and an alternative director as well as to attend the meeting and exercise
voting right in his absence on the proportional basis of the total number of directors and
numbers of shares hold.
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c) As per the Section 13 (1) of the Companies Act, 2063; a private company shall be converted into a
public company if the general meeting of the private company, by adopting a special resolution, decides
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to convert that company into a public company, Provided, however, that no private company shall be
capable of being converted into a public company unless and until it fulfills the requirements to be
fulfilled under Companies Act 2063 for being a public company.
1. Number of shareholder should be minimum of 7.
2. The paid-up capital shall be a minimum of ten million rupees.
So, in the above case of the Running Bulls Pvt. Ltd, it can be changed to public company by adopting
special resolution in the general meeting and also fulfilling all other criteria required for registration of
the Public Limited Company as per the Companies Act, 2063.
d) As per section 29 (1) of the Companies Act, 2063 any company fulfilling the following conditions
may, with the prior approval of the Office, issue shares at a premium:
(a) The company has been making profits and distributing dividends for three consecutive years,
(b) The company’s net worth exceeds its total liabilities,
(c) The company’s general meeting has decided to issue shares at a premium.
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Further as per the sub section (2) of the section 29, where the shares are sold at a premium
pursuant to Sub-section (1), a sum in excess of the face value, out of the proceeds thereof, shall be
deposited in a premium account to be opened to that effect.
e) Section 6 of the Companies Act, 2063 provides the circumstances under which the Company
Registrar's Office may refuse to register the prospective company Bhatbhateni Ltd.
Pursuant to Section 6 of the Companies Act, 2063 the Company Registrar's Office may refuse to
register the prospective company Bhatbhateni Ltd in any of the following circumstances,
a. If the name of the proposed company is identical with the name by which a company in
existence has been previously registered or so resembles the name of that company as it might
cause misleading.
b. If the name or objective of the proposed company is contrary to the prevailing law or appears
to be improper or undesirable in view of public interest, morality, decency, etiquette etc or
reflects criminal motive.
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c. If the name of the proposed company is identical with the name of which registration has been
cancelled pursuant to this Act or that of a company which has been insolvent under the
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prevailing law or so resembles such name as it might cause misleading and a period of five
years has not expired after such cancellation of registration or insolvency.
d. If the requirements for the incorporation of a company under this Act are not fulfilled.
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If Company Registrar's Office refuses to register the prospective company Bhatbhateni Ltd in any
of the circumstances referred to in section 6(1) of Companies Act, 2063, it shall give a notice there
of, accompanied by the reason there for, to the applicant Bhatbhateni Ltd, no later than 15 days
after the date of application made for the incorporation of company pursuant to section 4 of
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Companies Act, 2063.

a) What are the functions not to be carried out by the Nepal Rastra Bank under the Nepal Rastra
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Bank Act, 2058?

b) Kantipur Bank limited has adopted special resolution for buy back of its 10 percent share out of
the money borrowed by issuing the 10% Debenture. But the bank is in doubt regarding the
decision made whether it is in contradiction with the relevant provision of Banking and
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Financial Institution Act, 2063 and seek your opinion on this matter. Suggest the bank about
the relevant provision of the Banking and Financial Institution Act, 2063 regarding decision of
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the bank to buy back its share.

c) Grand Finance Co. Ltd. had stopped its business continuously for more than 1 month. Further,
it was complained against the Finance Co. for the violation of law and banking rules, therefore,
NRB formed an inquiry committee to recommend whether the license of the Finance Co.
withdrawn. State the legal provisions of BAFIA, 2063 regarding the cancellation of the license
obtained by a licensed institution to carry on the financial transactions by the NRB
Answers:
a) As per Section 7 of Nepal Rastra Bank Act, 2058, except otherwise provided for in
this Act, the Bank shall not carry out the following functions:
(a) Providing any loan, accepting any type of deposit or making any type of financial gift;
(b) Purchasing shares of any commercial bank, financial institution, public corporation or a
company or acquiring any type of proprietary right in any financial, commercial, agricultural,
industrial or other institution;
(c) Carrying out any type of trade; and
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(d) Acquiring right over movable and immovable property by way of purchase, lease or in any
manner whatsoever.
Provided that the Bank may acquire such property as required for carrying out its function or for
achieving its objectives.
Notwithstanding anything contained in Sub-section (1), the Bank may carry out the following
functions: -
(a) To provide loan to and invest in the shares of the institutions which carry out the functions
helpful in carrying out the function of the Bank or in attaining its objectives, not exceeding
ten percent of the total capital of such institutions.
(b) To provide loan to its own employees.
b) As per section 10 (1) of the Banking and Financial Institution Act, 2063; no bank or financial
institution shall purchase its own shares (buy-back) or lend moneys against security of its own
shares.
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But as per sub section (2), notwithstanding anything contained in Sub-section (1), in following
circumstances, a bank or financial institution may, with the approval of the Nepal Rastra Bank,
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buy back its shares out of its free reserves available for being distributed as dividends not
exceeding the percentage prescribed by the Rastra Bank.
1. If all the shares issued by the Bank / FI is fully subscribed
2. If shares issued by the Bank / FI is listed in Securities Board.
A.
3. If Article of Association of Bank / FI has provision of buyback of own share.
4. If special resolution on buy back of own share is passed in General Meeting of Bank / FI.
5. If the loan payable by the bank is not more than double of share capital after buy back and
general reserve.
6. If amount of such buyback is not more than 20 % share capital and general reserve.
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7. If such buyback is not against the directives of Nepal Rastra Bank regarding buyback of own
share.
So, the special resolution adopted by the Kantipur Bank for buy back of its share out of the money
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borrowed by issuing debenture is in contradiction to the provision of section 10 (2) of the Banking
and Financial Institution Act 2063 which cannot be executed.
c) As a regulatory body, the Nepal Rastra Bank shall have full authority to regulate and systematize
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the functions and activities of all licensed institutions. It is the bank of banks. Section 35 (2) of the
Bank and Financial Institutions Act, 2063 has stated that the Rastra Bank may cancel the license
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obtained by a licensed institution to carry on the financial transactions pursuant to this Act in any
of the following circumstances.
(1) If the concerned licensed bank or financial institution requests for the cancellation of its
license.
(2) If it fails to carry on the financial transactions within six months from the date of receipt of
the license.
(3) If it stops carrying on the financial transactions since more than one month ago
continuously.
(4) If it carries on the financial transactions in such a manner as to be contrary to the rights and
interests of depositors.
(5) If it violates the conditions prescribed by the Rastra Bank.
(6) If it fails to comply with the orders or directives issued by the Rastra Bank.
(7) If it becomes insolvent.
(8) If the bank or financial institution is found to have obtained the license by submitting false
details.
(9) If the licensed institution is merged with another bank or financial institution.
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As the Grand Finance Co. Ltd. has stopped its financial transaction for more than one month
continuously, the NRB can take action to cancel the license obtained by it to carry on the financial
transaction.

a) State the circumstances on which the chairperson of Securities Board of Nepal may
be removed from office by the Government of Nepal pursuant to the Securities Act,
2053.
b) Mention the provision of Revolving Fund as per Securities Act, 2063.
Answers:
a) Section 12 of the Securities Act, 2053 provides the circumstances on which a chairperson of
Securities Board of Nepal may be removed from office.
Section 12 (2) states that the Chairperson, as the case may be, shall be removed from the office in
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any of the following circumstances:
a. If one is disqualified to be a Chairperson, as the case may be, pursuant to section 11 of
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this Act,
i. One who is an office bearer of a political party.
ii. A person involved in securities business.
iii. One who is adjudicated as an insolvent.
A.
iv. One who is insane.
v. One who has been convicted by the court of an offence involving moral
turpitude.
b. If one commits any act contrary to the interest of investors in securities or any act that
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may cause loss or damage to the development of capital markets.
c. If one suffers from lack of competence to implement, or cause to implement, such
functions required to be performed by the Securities Board to attain its objectives
pursuant to this Act or the Rules framed under this Act.
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d. If one has been held disqualified to carry any occupation or business by the reason of
misconduct and his or her certificate has been revoked or he or she has thus been
restricted to carry on business.
e. If one remains absent from three consecutive meetings of the Board without giving
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notice to it.
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Section 12(1) states that, where there occurs a circumstances for removal of the chairperson
of the Board as above the Government of Nepal shall remove the Chairperson, as the case
may be.
Provided that prior to making such removal, the Government of Nepal, shall not deprive the
concerned person of a reasonable opportunity to defend him/herself.
b) As per section 23 of the Securities Act, 2063 regarding Revolving Fund:

(1)The Board may establish a revolving fund to manage its source of income and such amounts as
specified by the Board shall be credited to that fund each year.
(2)The amounts of the revolving fund may be held in securities issued by the Government of Nepal
or in such a periodic account as may be prescribed by the Board.
(3)Generally, no moneys held in the revolving fund, other than income earned out of the moneys in
that fund, shall be spent.
(4)Provisions relating to the operation of the revolving fund shall be as prescribed.
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a) 33.33% of the total employees are under disputes and want to start collective
disputes and go for the strike. Is this possible? How strike may be initiated? Give
your answer by referring Labor Act, 2048.
b) Describe when and how bonus is to be transferred to welfare fund under bonus Act,
2030.
Answers:
a) As per section 73 of the Labor Act, 2048; prescribe the procedure for collective dispute,
(1) The claim shall have to be presented in writing to the concerned Proprietors signed by at least
fifty one percent of the workers.
(2) Upon receipt of the claim the Proprietor shall hold bilateral discussion with the Representatives
of workers .
(3) If the dispute could not be solved as per (2) above, the dispute shall be solved within fifteen
days by holding bilateral discussion in the presence of Labour Office.
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(4) If the dispute could not be solved through the bilateral discussion the dispute may be referred to
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a mediator and decide the dispute within fifteen days.
(5) If the mediator or the Committee does not make a decision within the time-limit or Nepal
Government does not give decision on appeal within sixty days from the date of filing such appeal,
the workers or employees may strike. A.
Here in the given case, only 33.33% worker or employees are under disputes so this is not regarded
as collective disputes and can’t go for the strike.
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b) Section 13 of Bonus Act 2030 states that seventy percent of the residuary amount after
distribution of bonus from the allocated amount for the bonus pursuant to clause 5 of Bonus Act
shall be deposited with the Welfare Fund established in accordance with section 37 of the Labor
Act, 2048 and remaining thirty percent shall be deposited with the National Level Welfare Fund,
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established by Government of Nepal for the interest of the employees of the enterprises. The
operation of the welfare funds as provided shall be in participation of employees as prescribed.
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a) State the different types of membership issued by Nepal Chartered Accountant
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council. Also, mention the qualifications of a person to hold such membership

pursuant to the Nepal Chartered Accountants Act, 2053.
b) What are the punishment provisions in the Nepal Chartered Accountants Act, 2053.
?
Answers:
a) Pursuant to section 16 (1) of the Nepal chartered Accountants Act 2053, there are two types of
membership which are issued by the Nepal chartered accountants council, chartered accountant
member and registered auditor member.
Pursuant to section 18 of the Nepal chartered Accountants Act 2053, the following persons are
disqualified to be a member of the ICAN
1) Persons not possessing qualification under sub section 2 & 3 of the section 16 of the Nepal
chartered accountants Act, 2053
2) Persons not attaining the age of 21 years of old
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3) Insolvent person
4) Person punished by a competent court on the charge of committing crime of moral turpitude.
5) Person of unsound mind
b) Punishment provisions as provided in the section 41 of Nepal chartered Accountants Act 2053 are
as follows:
(1) A person, who carries out audit without obtaining a Certificate of Practice, pursuant to this Act,
shall be liable of punishment with a penalty of maximum two thousand rupees or with an
imprisonment for a maximum period of three months or with both.
(2) A person, who in contravention of Section 6 uses the name or the seal of the Institute or exercises
any type of authority bestowed to the Institute, shall be punished with a penalty of one thousand rupees
maximum on first conviction, and on any subsequent conviction thereafter, a maximum penalty of
five thousand rupees or imprisonment for a maximum period of six months or both.
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Provided that this sub-section shall not apply to the organizations or university established under their
own legislation or the units within the Institute.
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(3) A person, who has not obtained a Certificate of Practice and is proved to have signed any
document in capacity of the member holding Certificate of Practice, shall be liable to punishment with
a penalty up to two thousand rupees or imprisonment for a period of up to three months or both.
(4) A member, who commits any act contrary to the provisions of this Act or Regulations framed
under this Act other than the provisions of this section, shall be suspended for a maximum period of
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five years and shall be liable of punishment with a maximum penalty of two thousand rupees or
imprisonment for a maximum period of three months or both.
(5) A complainant who lodges a complaint, without any reasonable cause to make complaint and it is
proved that the complaint was made with an intention to harass a member, shall be liable to
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punishment with fine up to one thousand rupees.
(6) The complaint cases, except those to be heard under Section 14, lodged in the Council against any
member, pursuant to Section 35, shall be instituted in the concerned High Court.
6) Answer the following: (5×4=20)

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a) Mention the classifications of Industries under section 3 of The Industrial

Enterprises Act, 2049?
b) Mr. A, a foreign nationals, has wished to establish a social organization for
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undertaking social service. He has asked you about permission and affiliation with
the Social Welfare Council. Can a foreign national works within the Government
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of Nepal by establishing non-governmental organization? If it so, provide him the

affiliation process with the council.
c) Mr. Anil gives a cheque to Mr. Bhola with "not negotiable" crossing. Mr.
Chandra steals the cheque from Mr. Bhola and delivers to Mr. Durga for
consideration. Durga takes the cheque without knowledge that cheque has
been stolen cheque. Suggest Mr. Durga referring Negotiable Instrument Act,
2034.
d) Mention various types of offers in regard to contract law.
e) Explain the provisions relating to ceiling on bonus payment to be made to the
employees as per the Bonus Act, 2030.
Answers:
a) Classifications of Industries under section 3 of The Industrial Enterprises Act 2049 are as
follows:
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i) Manufacturing Industries
Which produces goods by utilizing or processing raw materials, semi processed materials,
by products or waste products or any other goods.
ii) Energy based Industries
Industries generating energy from water resources, wind, solar, coal, natural oil, gas, bio
gas or any other sources.
iii) Agro based Industries
Business mainly based on agriculture or forest products such as integrated sericulture and
silk production, horticulture and fruit processing, animal husbandry, dairy industry, poultry
farming, fishery, tea gardening and processing, vegetable seed farming, mushroom,
vegetable farming or vegetable processing, tissue culture, green house, bee keeping honey
production, rubber farming, floriculture and production and forestry related business such
as lease hold forest, agro forestry
iv) Mineral Industries
Mineral excavation or processing thereof.
v) Tourism Industries
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Tourist lodging, Motel, Hotel, Restaurant, resort, Travel agency, skiing, gliding, water
rafting, cable car complex, pony trekking, Hot air ballooning, Para sailing, golf course,
Polo, Horse riding etc.
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vi) Service Industries
Workshop, Printing press, Consultancy services, ginning and bailing business,
Cinematography, construction business, Public transportation business, Photography,
Hospital, Nursing home, Educational and training institution, Laboratory, Air services,
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Cold storage etc.
vii) Construction Industries
Road, Bridge, Ropeway, Railway, Trolley bus, Tunnel, Flying bridge, and Industrial,
commercial or Residential complex construction and operation.
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b) Permission and agreement is provided in section 12 Social Welfare Act 2049

are as follows:
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1. Any foreign non-governmental organization if desires to work within the Nepal, before
starting the work shall submit an application to the Council for permission.
2. The council, after receiving and application pursuant to sub-section (1) may give
permission deciding within three months.
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3. The permitted foreign non-governmental organization, pursuant to sub-section (2) before

operating the work within Nepal shall have to reach in an agreement with the Council.
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Affiliation with the Council is provided in section 13.
(1) Social organizations and institutions willing to keep affiliation with the Council
shall have to submit an application as prescribed form.
(2) The organizations and institutions applying pursuant to sub-section (1) shall submit
and mention its Constitutions, names of executive committee members, their
occupations and addresses and the office where the organization or institution has
been registered and the date of the registration along with the application.
(3) After receiving the application pursuant to sub-section (1) if it deems to be affiliated
such institutions or organization with the Council, the Council shall issue the
certificate as prescribed form taking the fees as prescribed.
(4) The organization or institutions affiliated with the Council may keep out its
affiliation as prescribed.
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In the given case, Mr. A can establish a non-governmental organization undertaking social
welfare work after taking permission and affiliation from the Social Welfare Council
fulfilling the terms and conditions of section 12 and 13 and other related provision.
c) "Not negotiable" crossing does not make negotiable instrument not transferable. Any instrument
with "not negotiable" crossing means that it is negotiable until its title is good.
Section 89 of Negotiable Instrument Act 2034 make provision regarding Cheque bearing "not
negotiable". A person taking a cheque crossed generally or specially bearing in either case the
words "not negotiable" shall not have, and shall not be capable of giving a better title to the cheque
than that which the person from whom he took it had.
There is general rule that holder in due course obtain better title than the transferor. However in
case of negotiable instrument having "Not negotiable" crossing does not obtain better title than the
transferor.
Principle of "Nemo Dat Quod Non Habet" which means "No one can transfer title better than he
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himself had" is applicable in case of negotiable instrument having "Not negotiable" crossing.
So in the given case Mr. Durga is holder in due course, but as the negotiable instrument is having
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"Not negotiable" crossing he cannot get better title than Mr. Chandra. As Mr. Chandra has no title
over the instrument being stolen by him and accordingly Mr. Durga also does not have title over
the instrument.
Person taking the Negotiable Instrument having "Not negotiable" crossing should inquire and
assure the title of the transferor over Negotiable Instrument.
A.
d) Various types of offer under contract Act are as follows:
i) Expressed and Implied Offer:
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Expressed offer is made by words spoken and written by the parties.
Implied offer is one which inferred from the conduct of a person or the circumstances of the
particular case.
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ii) Specific and General Offer :

The word 'specific' says to someone or something expressly. An offer which is forwarded to
a particular person or that particular group or persons is known as specific offer. Person or
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group of person are identified in this offer. The identified person or group of persons only
make an acceptance for the purpose of generating contract.
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Other hand, an offer addressed to the world at large/public in general is known as a general
offer. Such an offer can be accepted by any person by fulfilling the terms of the offer with
notice of the offer. Contract is made to a person who come forward and make an
acceptance into the terms. In this offer receiver of offer is not identified so it is called
general offer.
iii) Counter Offer:
An offer presenting with an amendment or altering by a person to which original offer is

made is called counter offer. It can also called reverse offer. It amends or alters to first or
original offer from so called promiser. While counter offer is made it could not be called as
an acceptance.
iv) Cross offer/Identical Offer:
When two offers, similar in all respects, are made by one party to the other, in ignorance of
each other's offer, they are cross offers. Such offers are also called as identical offers. Such
offer constitutes a contract while one offer is made an acceptance.
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v) Standing Offer :
There is a series of continuous offer is called standing offer. It means such sort of offer
stands for the specific period and promiser should provide or perform series of goods or
actions. A standing offer is in the nature of a tender where a person invites tender to another
to supply certain goods at a certain rate upto a fixed period. It is an open or continuing
offer. Such kind of offer does not become a binding contract as soon as it is accepted.
e) Section 7 of Bonus Act 2030, prescribe the ceiling on the distribution of

bonus.
(1) The management shall assess the percentage of bonus amount to be obtained by an
Employee in a Fiscal year. Whatever the percentage assessed by the management, the bonus to be
obtained by an employee shall not exceed the following amounts:
a) An amount equivalent to the salary or wage of Six months, to an employee, who obtains upto
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Five Thousand Rupees as salary or wage.
b) An amount equivalent to the salary or wage of Four months to an employee, who obtains Five
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thousand One Rupees to Fifteen Thousand Rupees as salary or wage.
c) An amount equivalent to the wage or salary of Three months to an employee who obtains more
than Fifteen Thousand rupees as salary or wage.
(2) The minimum bonus amount to be obtained under Clauses (b) and (c) of Sub-section (3) of this
A.
section above shall not be less than the maximum bonus amount to be obtained under Clauses (a)
and (b) respectively as above.
7) Write short notes on the following: (2×5=10)

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a) Certificate of Practice (COP) under Nepal Chartered Accountants Act, 2053

b) Pre-incorporation contracts.
Answers:
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a) Section 2(j) of Nepal Chartered Accountants Act, 2053 defines the Certificate
of Practice (COP)
"Certificate of Practice (COP)" means the certificate issued pursuant to section 28, to render
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accounting profession.
Section 28 of Nepal Chartered Accountants Act, 2053 states that
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"Certificate of Practice (COP)"

(1)Member willing to carry out audit profession shall make an application, in a prescribed
format, for Certificate of Practice, along with the prescribed fees, to the Institute.
(2)The Council, prescribed that the applying member as per sub-section (1), has fulfilled all
conditions prescribed by the Council, shall provide a Certificate of Practice, in a prescribed
format, to such member.
(3)The Council shall ensure that the members observe or shall cause to observe conditions
prescribed for members holding Certificate of Practice may prescribe Code of Conduct for such
member.
b) Pre-incorporation contract:
Contracts entered into on behalf and for the company by the supposed or future directors
or any other persons with third persons before its incorporation is called pre-incorporation
contracts. A general rule is that pre-incorporation contracts are void and not binding to the
company.
Section 17 of Companies Act 2063 had made provision related to Pre-incorporation contract.
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(1) A contract made prior to the incorporation of a company shall be a proposed
contract only, and such contract shall not be binding on the company.
(2) If, prior to the incorporation of a company, any person carries on any transaction or
borrowed moneys on behalf of the company, such person shall be personally liable for any
contract related with the transaction so carried on, subject to (3) below.
(3) If, within the time mentioned in any transaction or within the reasonable time after
the incorporation of a company, the company through its act, action or conduct, accepts
any act, action or borrowing done or made prior to the date of authorization to commence
its transactions or endorses such act or action, that transaction shall be binding on the
company and the other contracting party; and the person carrying out such act or action
shall be released from the personal liability to be borne pursuant to sub-section (2).
(4) Notwithstanding anything contained elsewhere in this Section, the consensus
agreement of a private company shall govern any contracts made prior to the incorporation
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of such company.
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A.
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A.
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Financial Management
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Suggested
Total No. of Questions – 7 Total No. of Printed Pages –4
Time Allowed – 3 Hours
Marks
Working notes should form part of the answer. Make assumptions wherever necessary.
1. ABC Ltd. is evaluating two investment projects independently with different
investment modality. Information for these projects are as follows:
Investment Analysis 1:
This is an investment in new machinery to produce a recently-developed product. The
cost of the machinery, which is payable immediately, is Rs. 1,500,000, and the scrap
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value of the machinery at the end of four years, is expected to be Rs. 100,000.
Depreciation for tax purpose can be claimed on this machinery on a 25% reducing
balance basis. Information on future returns from the investment has been forecasted
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to be as follows:
Year 1 2 3 4
Sales volume (units/year) 50,000 95,000 140,000 75,000
Selling price (Rs./unit) 25.00 A.24.00 23.00 23.00
Variable cost (Rs./unit) 10.00 11.00 12.00 12.50
Fixed costs (Rs./year) 105,000 115,000 125,000 125,000
This information must be adjusted to allow for selling price inflation of 4% per year
and variable cost inflation of 2.5% per year. Fixed costs, which are wholly
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attributable to the project, have already been adjusted for inflation. ABC Ltd. pays
profit tax of 30% per year one year in arrears.
Investment Analysis 2:
ABC Ltd. plans to replace an existing machine and must choose between two
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machines. Machine 1 has an initial cost of Rs. 200,000 and will have a scrap value of
Rs. 25,000 after four years. Machine 2 has an initial cost of Rs. 225,000 and will have
a scrap value of Rs. 50,000 after three years. Annual maintenance costs of the two
machines are as follows:
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Year 1 2 3 4
Machine 1 (Rs./year) 25,000 29,000 32,000 35,000
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Machine 2 (Rs./year) 15,000 20,000 25,000 -

Where relevant, all information relating to investment analysis 2 has already been
adjusted to include expected future inflation.
Taxation and depreciation allowances must be ignored in relation to Machine 1 and
Machine 2.
Other information:
ABC Ltd. has a nominal before-tax weighted average cost of capital of 12% and a
nominal after-tax weighted average cost of capital of 7%.
Required: (10+6+4=20)
a) Calculate the net present value of investment analysis 1 and comment on whether
this project is financially acceptable to ABC Ltd.
b) Calculate the equivalent annual costs of Machine 1 and Machine 2 in investment
analysis 2, and discuss which machine should be purchased.
c) Critically discuss the use of sensitivity analysis and probability analysis as ways
of including risk in the investment appraisal process, referring in your answer to
the relative effectiveness of each method.
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Answer
(a) Calculation of net present value (NPV) of Investment Analysis 1:
As nominal after-tax cash flows are to be discounted, the nominal after-tax weighted average cost of
capital of 7% must be used.
(Rs.’000)
Year 1 2 3 4 5
Sales revenue (WN1) 1,300 2,466 3,622 2,018
Variable costs (WN2) (513) (1,098) (1,809) (1,035)
Contribution 787 1,368 1,813 983
Fixed costs (105) (115) (125) (125)
Taxable cash flow 682 1,253 1,688 858
Tax liabilities @30% (205) (376) (506) (257)
Depreciation tax benefits (WN3) 113 84 63 160
After-tax cash flow 682 1,161 1,396 415 (97)
Scrap value - - - 100 -
Net cash flow 682 1,161 1,396 515 (97)
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PVIF at 7% 0·935 0·873 0·816 0·763 0·713
Present values 638 1,014 1,139 393 (69)
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Rs'.000
Present value of cash inflows 3,115
Cost of machine (1,500)
NPV 1,615
A.
Investment 1 has a positive NPV of Rs.1,615,000, so it is financially acceptable to ABC Ltd.
Workings:
1. Sales revenue
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Year 1 2 3 4
Selling price (Rs./unit) 25.00 24.00 23.00 23.00
Inflated selling price (Rs./unit)[sp×(1+i)n] 26.00 25.96 25.87 26.91
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Sales revenue (Rs./year) 1,300,000 2,466,200 3,621,800 2,018,250

2. Variable cost
Year 1 2 3 4
Variable cost (Rs./unit) 10.00 11.00 12.00 12.50
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Inflated variable cost (Rs./unit) [vc×(1+i)n] 10.25 11.56 12.92 13.80

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Variable costs (Rs./year) 512,500 1,098,200 1,808,800 1,035,000

3. Depreciation tax benefits
Year Capital allowance Tax benefit Year benefit received
1 1,500,000 x 0.25 = Rs.375,000 375,000 x 0.3 = Rs.112,500 2
2 1,125,000 x 0.25 = Rs.281,250 281,250 x 0.3 = Rs.84,375 3
3 843,750 x 0·25 = Rs.210,938 210,938 x 0.3 = Rs.63,281 4
4 Rs.532,812* 532,812 x 0.3 = Rs.159,844 5
*843,750 – 210,938 – 100,000 = Rs.532,812

Alternative calculation of net cash flow is acceptable.
(b) Calculation of equivalent annual cost for machine 1:
Since taxation and capital allowances are to be ignored, and where relevant all information relating
to project 2 has already been adjusted to include future inflation, the correct discount rate to use
here is the nominal before-tax weighted average cost of capital of 12%.
Year 0 1 2 3 4
Maintenance costs (Rs.) --- (25,000) (29,000) (32,000) (35,000)
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Investment and scrap (Rs.) (200,000) - - - 25,000
Net cash flow (Rs.) (200,000) (25,000) (29,000) (32,000) (10,000)
Discount at 12% 1.000 0.893 0.797 0.712 0.636
Present values (200,000) (22,325) (23,113) (22,784) (6,360)
Total present value of cash flows Rs.274,582
Cumulative present value factor 3.038
Equivalent annual cost = 274,582/3.038
= Rs.90,382
Calculation of equivalent annual cost for machine 2:
Year 0 1 2 3
Maintenance costs (Rs.) - (15,000) (20,000) (25,000)
Investment and scrap (Rs.) (225,000) - - 50,000
Net cash flow (Rs.) (225,000) (15,000) (20,000) 25,000
Discount at 12% 1.000 0.893 0.797 0.712
Present values (225,000) (13,395) (15,940) 17,800
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Total present value of cash flows Rs.2,36,535
Cumulative present value factor 2·402
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Equivalent annual cost = 2,36,535/2·402
= Rs.98,474
The machine with the lowest equivalent annual cost should be purchased and calculation shows
this to be Machine 1. A.
(c) Within the context of investment appraisal, risk relates to the variability of returns and so it can be
quantified, for example by forecasting the probabilities related to future cash flows. From this point
of view, risk can be differentiated from uncertainty, which cannot be quantified. Uncertainty can
be said to increase with project life, while risk increases with the variability of returns.
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It is commonly said that risk can be included in the investment appraisal process by using
sensitivity analysis, which determines the effect on project net present value of a change in
individual project variables. The analysis highlights the project variable to which the project net
present value is most sensitive in relative terms. However, since sensitivity analysis changes only
one variable at a time, it ignores interrelationships between project variables.
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While sensitivity analysis can indicate the key or critical variable, it does not indicate the
likelihood of a change in the future value of this variable, i.e. sensitivity analysis does not indicate
the probability of a change in the future value of the key or critical variable. For this reason, given
the earlier comments on risk and uncertainty, it can be said that sensitivity analysis is not a method
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of including risk in the investment appraisal process.

Probability analysis, as its name implies, attaches probabilities to the expected future cash flows of
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an investment project and uses these to calculate the expected net present value (ENPV). The
ENPV is the average NPV that would be expected to occur if an investment project could be
repeated a large number of times. The ENPV can also be seen as the mean or expected value of an
NPV probability distribution. Given the earlier discussion of risk and uncertainty, it is clear that
probability analysis is a way of including a consideration of risk in the investment appraisal
process. It is certainly a more effective way of considering the risk of investment projects than
sensitivity analysis.
A weakness of probability analysis, however, lies in the difficulty of estimating the probabilities
that are to be attached to expected future cash flows. While these probabilities can be based on
expert judgement and previous experience of similar investment projects, there remains an element
of subjectivity which cannot be escaped.
2.
a) A public company is commencing a new project for manufacturing of a plastic
component. The following cost information has been ascertained for annual
production of 12,000 units at full capacity:
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Particulars Cost per unit (Rs.)
Materials 40
Direct labour and variable expenses 20
Fixed manufacturing expenses 6
Depreciation 10
Fixed administrative expenses 4
80
Selling price per unit is expected to be Rs. 96 and selling expenses Rs. 5 per unit,
80% of which is variable.
In the first two years of operations, production and sales are expected to be as
follows:
Year Production (No. of units) Sales (No. of units)
1 6,000 5,000
2 9,000 8,500
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Following additional information is available:
Stock of materials : 2.25 months’ average consumption
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Work in process : Nil
Debtors : 1 month’s average sales
Cash Balance : Rs. 10,000
Creditors for supply of materials : 1 month’s average purchase during the year
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Creditors for expenses : 1 month’s average of all expenses during the year
Required: 10
Prepare projected profit and loss account and statement of working capital
requirement for the two years.
b) Nepal Ltd. provides you the following information:
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Gross profit ratio 40%, Net profit (after tax) ratio 12%, Operating profit ratio
30%, 15% Debt-Equity ratio 2:1, Tax rate 50%, Shareholder’s fund Rs. 400,000.
Required: 5
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Calculate (i) Gross profit (ii) Operating expenses (iii) Interest coverage ratio, (iv)
Return on capital employed, (v) Return on shareholders’ funds.
Answer
a)
i) Projected Profit and Loss Account
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Particulars Year 1 Year 2

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Production (Units) 6,000 9,000

Sales (Units) 5,000 8,500
Rs. Rs.
Sales Revenue (a) (sales units × Rs. 96) 480,000 816,000
Cost of Production:
Materials (production unit× Rs.40) 240,000 360,000
Direct labour and variable expenses (@ Rs. 20 p.u.) 120,000 180,000
Fixed Manufacturing cost ( 12000 units × Rs. 6) 72,000 72,000
Depreciation ( 12000 units × Rs. 10) 120,000 120,000
Fixed administration expenses (12000 units × Rs. 4) 48,000 48,000
Cost of Production: 600,000 780,000
Add: Opening stock of finished goods ( Yr 1 nil ; Yr-

2 1000 units) (@ Rs. 600,000/6,000 units) 0 100,000
600,000 880,000
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Less: Closing stock of finished goods ( Yr 1 - 1000 *

units, Yr 2 -1500 units) (@production cost per unit) 100,000 130,000
Cost of goods sold 500,000 750,000
Add: Selling expenses
- Variable @ Rs. 4 p.u. 20,000 34,000
-Fixed ( 12000 units @ Re. 1) 12,000 12,000
Cost of sales (b ) 532,000 796,000
Profit / ( Loss) (a- b) -52,000 20,000
*Alternative
Average cost method can also used
8,80,000 ×1,500
9,000+1,000
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=1,32,000
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ii) Calculation of Creditors for Supply of Materials
Particulars Year 1 (Rs.) Year 2 (Rs.)
Materials consumed 240,000 360,000
Add: Closing stock (2.25 month consumption) A. 45,000 67,500
285,000 427,500
Less: Opening Stock - 45,000
Purchases 285,000 382,500
Average purchase per month (Creditors) 23,750 31,875
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iii) Calculation of creditors for Expenses
Total direct labour, manufacturing,
administration and selling expenses for the
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year 272,000 346,000
Average per month 22,667 28,833

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iv ) Computation of Projected Statement of Working Capital Requirement

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Current Assets:
Stock of materials (2.25months' average
consumption) 45,000 67,500
Stock of Finished goods 100,000 130,000
Debtors (one month average sales) 40,000 68,000
Cash 10,000 10,000
Total (a) 195,000 275,500
Current Liabilities:
Creditors for supply of materials 23,750 31,875
Creditors for expenses 22,667 28,833
Total (b) 46,417 60,708
Estimated Working Capital (a- b) 148,583 214,792

b)
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15% Debt = Rs. 400,000 × 2 = Rs. 800,000
Interest on Debt = 15% × 800000 = Rs. 120,000
Assume the sales be x;

Sales X
Less: Cost of Goods Sold 0.6x
Gross Profit 0.4x
Less: operating expenses 0.1x
Operating profit @ 30% 0.3x
Less: Interest on long term debt 120,000
Profit before tax 0.3x-Rs 120,000
Less: Tax 50%(0.3x-120000)
Profit after tax 0.15x-60,000
Net profit ratio = Profit after tax/Net Sales x 100%
12% = (0.15x-60,000)/x
0.15x-0.12x = 60,000
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x = 60,000/0.03
Sales = Rs. 20,00,000
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Gross Profit = 40% of Rs 20,00,000
= Rs 800,000
Operating Expenses = 10% of Rs 20,00,000 = Rs 200,000
Interest coverage ratio = Profit before interest and tax/Interest on long term debt
A.
=(0.3×2,000,000)/120,000 = 5 times
Return on Capital Employed=Profit before interest and tax/Capital employed x 100%
=30% of 20,00,000 X 100 = 50%
12,00,000
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Return on Shareholders fund= Profit after interest and tax/Shareholders fund X
100%
= Rs. 240,000/400,000 x 100 = 60%
Note:
Profit after interest and Tax = 50%[0.3x20,00,000-120,000)
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=50%[600,000-120,000]
= 240,000
3.
a) Consider the following information of a manufacturing company:
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Installed capacity 4,000 units

Actual production and sales 75% of the capacity
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Selling price Rs. 30 per unit

Variable cost Rs. 15 per unit
Fixed cost:
Under situation I: Rs. 15,000
Under situation II: Rs. 20,000
Capital structure:
Particulars Financial Plan
A (Rs.) B (Rs.)
Equity 10,000 15,000
20% Debt 10,000 5,000
20,000 20,000
Required: 8
Calculate the operating leverage, financial leverage and combined leverage under
situation I and II and financial plan A and B.
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b) RP Ltd. has annual sales of Rs. 400 crores. It sells 80 percent of its products on a
60-day credit. Its average collection period is 80 days. The company’s bad debts,
based on the past experience, could be estimated as 0.9 percent of credit sales.
The company’s annual cost of administering credit sales is 0.46875%. It is
possible to avoid Rs. 4,000,000 of these costs if credit administration is
transferred by the company to a factor. The factor will charge 1.75 percent non-
recourse commission for his services. He can extend advance against receivables
to the company at an interest rate 16.5 percent after withholding 10 percent as
reserve.
Required: 7
Should the company hire services of the factors? Assume 15% Required Rate of
Return and 360 days in a year.
Answer
a)
Operating Leverage:
Particulars Situation-I (Rs.) Situation-II (Rs.)
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Sales (3,000 units@Rs.30 per unit) 90,000 90,000
Less: Variable Costs @ Rs.15 per (45,000) (45,000)
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unit
Contribution 45,000 45,000
Less: Fixed Cost 15,000 20,000
EBIT 30,000 25,000
Operating Leverage 45,000/30,000 45,000/25,000
(Contribution/EBIT)
A.
=1.5 =1.8
Financial Leverage:
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Situation I
Plan A (Rs.) Plan B (Rs.)
EBIT 30,000 30,000
Less: Interest on Debt (2,000) (1,000)
EBT 28,000 29,000
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Financial Leverage 30,000/28,000 30,000/29,000

(EBIT/EBT)
= 1.07 = 1.03
Situation II
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EBIT 25,000 25,000

Less: Interest on Debt (2,000) (1,000)
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EBT 23,000 24,000

Financial Leverage 25,000/23,000 25,000/24,000
(EBIT/EBT)
= 1.09 = 1.04
Combined Leverage:
Plan A (Rs.) Plan B (Rs.)
Situation I 1.5 x 1.07 = 1.61 1.5 x 1.03 = 1.55
Situation II 1.8 x 1.09 = 1.96 1.8 x 1.04 = 1.87
b) Calculation of Factoring Commission, Interest charged and Advance Granted
Particulars Amount (Rs
in Crores)
Average Level of Receivable ( 320 X 80 )/360 71.11
Less: Factoring Commission (1.75% X 71.11) 1.24
Less: Factoring Reserve (10% of 71.11) 7.11
Eligible amount of advance 62.76
Less: Interest charged on advance (62.76 X 16.5%X80/360) 2.30
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Actual amount received from factor 60.46
STATEMENT SHOWING THE EVALUATION OF FACTORING ARRANGEMENT
Particulars Amount (Rs in Crores)
A. Annual Benefits of Factoring to the firm:
Credit administration cost avoided 0.40
Bad Debt avoided (0.9% of 320 crores) 2.88
Total 3.28
B. Annual Cost of Factoring to the firm
Factoring Commission (1.24 X 360)/80 5.60
Interest Charged on advance granted (2.3X360/80) 10.35
Total 15.95
C. Net annual cost of Factoring to the firm: 12.67
Rate of Effective cost = Net Annual Cost/Actual 20.96%
advance granted = 12.67/60.46
Or
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12.67 ×100% =20.19%
*
62.76
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If computed before interest it is acceptable.
Recommendation: The company should continue with its in house credit

A.
management since its Rate of Effective Cost is less than the cost of other
sources of financing (i.e. 15%)
Working Notes:
i. Credit Sales = 400 crores x 80% = 320 crores
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4.
a) The equity beta of Fence Co. is 0.9 and the company has issued 10 million
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ordinary shares. The market value of each ordinary share is Rs. 7.50. The
company is also financed by 7% bonds with a nominal value of Rs. 100 per bond,
which will be redeemed in seven years’ time at nominal value. The bonds have a
total nominal value of Rs. 14 million. Interest on the bonds has just been paid and
the current market value of each bond is Rs. 107.14.
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Fence Co. plans to invest in a project which is different to its existing business
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operations and has identified a company, Hex Co. as the project. The equity beta
of Hex Co. is 1.2 and the company has an equity market value of Rs. 54 million.
The market value of the debt of Hex Co. is Rs. 12 million.
The risk-free rate of return is 4% per year and the average return on the stock
market is 11% per year. Both companies pay corporation tax at a rate of 20% per
year.
Required: (4+4=8)
i) Calculate the current weighted average cost of capital of Fence Co.
ii) Calculate a cost of equity which could be used in appraising the new project.
b) Bhardhwaj Trader Ltd. is a growing supplier of office materials. Analysts project
the following free cash flow during the next 3 years of operation of the company,
after which the free cash flow is expected to grow at a constant rate of 7%.
Year 1 2 3
Free cash flow (Rs. in millions) (20) 30 40
The firm's weighted average cost of capital is 13%.
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Required: (3+2+2=7)
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i) What is the terminal value of free cash flows after 3 year?
ii) What is the value of the firm today?
iii) If the company has Rs. 100 million in debt and 10 million ordinary shares
outstanding, what is the price per share?
Answer
a) i) Calculation of WACC
WACC = (Ke ×We) + (Kd × Wd )
The current cost of equity can be calculated using the capital asset pricing model.
Equity or market risk premium = market rate of return – risk free rate
=11% – 4 %
= 7%
Cost of equity (Ke) = 4% + (0·9 x 7%)
= 4% + 6·3%
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= 10·3%
After-tax cost of debt using trial and error:
After-tax interest payment = 100 x 0·07 x (1 – 0·2) = Rs.5·60 per bond.
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Year Cash flow Rs. 5% discount PV (Rs.) 4% discount PV (Rs.)
0 market value (107·14) 1·000 (107·14) 1·000 (107·14)
1–7 interest 5·60 5·786 A. 32·40 6·002 33·61
7 redemption 100·00 0·711 71·10 0·760 76·00
* (3·64) 2·47
After-tax cost of debt = 4 + ((5 – 4) x 2·47)/(2·47 + 3·64)
= 4 + 0·4
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= 4·4%
* OR
Kd = A.I(1-t) + CO – CI
n______
CO + CI
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2
= 7(1-0.2) + 100 – 107.14
7______
100+ 107.14
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= 5.6 – 1.02
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103.57
= 4.42 %
Market value of equity = 10,000,000 x 7·50

= Rs.75,000,000
Market value of Fence Co debt = 14,000,000 x 107·14/100
= Rs.15,000,000
Total market value of company = 75,000,000 + 15,000,000
= Rs.90,000,000
WACC = ((10·3 x 75/90) + (4·4 x 15/90)
= 8.58 % +0.73 %
= 9.31 %
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(ii) Since the investment project is different to business operations, its business risk is different to
that of existing operations. A cost of equity for appraising it can, therefore, be found using the
capital asset pricing model.
Ungearing Hex company equity beta
Asset beta = 1·2 x 54/(54 + (12 x 0·8))
= 1·2 x 54/63·6
= 1·019
Regearing asset beta
Market value of debt = Rs.15m (calculated in part (a))
Regeared asset beta = 1·019 x (75 + (15 x 0·8))/75
= 1·019 x 87/75
= 1·182
Using the CAPM

Equity or market risk premium = 11% – 4%
= 7%
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Cost of equity = 4 + (1·182 x 7)
= 4 + 8·3
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= 12·3%
b)
i) Terminal Value of Free Cash Flows after 3rd year:
A.
Free Cash Flow of 3rd year (1+g)
=
(WACC-g)
40(1+0.07)
=
0.13-0.07
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= Rs. 713.33 Million

ii) Calculation of Value of the Firm Today
Year FCF/Terminal Value (Rs. in millions) PVIF @ 13% PV (Rs. in
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millions)
1 (20) 0.8850 (17.70)
2 30 0.7831 23.493
3 40 0.6931 27.724
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3 713.33 0.6931 494.41

Value of the Firm Today 527.927
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iii) Calculation of Price Per Share

Value of Common
Equity = Value of Firm Today - Value of Debt
= 527.927 Million - 100 Million
= Rs. 427.927 Million
Value of Equity
Price Per Share =
No. of Equity Share
Rs. 427.927 Million

=
10 Million
= Rs. 42.7927
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5.
a) TL Ltd. provides you with following figures:
Particulars Rs.
Profit before interest and tax 260,000
Less: Interest on debentures @ 12% 60,000
Profit before tax 200,000
Less: Income tax @ 50% 100,000
Profit after tax 100,000
Number of equity shares (of Rs. 10 each) 40,000
EPS (Earning per share) (Rs.) 2.50
Market price per share (Rs.) 25
PE Ratio 10
The company has undistributed reserves of Rs. 600,000. The company needs Rs.
200,000 for expansion. This amount will earn at the same rate as funds already
employed. A debt equity ratio Debt/ (Debt+ Equity) of more than 35% will push
the P/E Ratio of the company down to 8 and raise the interest rate on additional
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amount borrowed to 14%.
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Required: 5
i) What will be the price of the share, if the additional fund are raised as debt?
ii) What will be the price of the share, if the amount is raised by issuing equity
shares? A.
b) Mr. X wants to get her daughter admitted into a medical college after 15 years
from now. He will require total Rs. 2,500,000 to get admission into the college.
For this, he has identified a fund, which pays interest at 9% p.a.
Required: 5
Determine the amount to be invested:
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i) If Mr. X decides to make annual payment into the fund at the end of each year.
ii) If Mr. X decides to invest a lump sum in the fund at the end of the year.
iii) If Mr. X decides to make annual payment into the fund at the beginning of
each year.
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[FVIF/CVF(15, 0.09) = 3.642, FVIFA/CVFA(15, 0.09) = 29.361]

c) The following data relat to two securities, A and B:
A B
Expected Return 22% 17%
D
Beta Factor 1.5 0.7

Risk Free Interest rate is 10% and Return on Market is 18%.
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Required: 5
Find out whether the securities A and B are correctly priced?
Answer
a)
Computation of existing capital and return on capital employed: -
Rs.
Equity share Capital 40,000 x 10 4,00,000
12% debentures 60 000 /12% 5,00,000
Undistributed Reserves 6,00,000
Existing Capital 15,00,000
Return on Capital employed 2,60,000/ 15,00,000 x 100%

= 17.33%
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Calculation of Debt Equity Ratio
( Amount in Rs.)
Plan I (Debt Plan) Plan II (Equity Plan)
Existing Equity (Capital + 10,00,000 10,00,000
Reserve)
Additional equity - 2,00,000
Total equity (A) 10,00,000 12,00,000
Existing Debt 5,00,000 5,00,000
Additional Debt 2,00,000 -
Total Debt (B) 7,00,000 5,00,000
DE Ratio = Debt/( Debt + equity) 7 00 000/1,7000,000 500,000/(1,700,000 x
x 100 100
= 41.18% = 29.41%
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Applicable P/E Ratio 8 10
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Computation of probable market price of share after expansion:-
(i) ( ii ) (Rs.)
Plan I (Debt) Plan II
(Equity)
EBIT (17,00,000 x 17.33%)
2. Interest (Existing + Additional)
A. 2,94,610
88,000
2,94,610
60,000
3. PBT (1-2) 2,06,610 2,34,610
4. Tax @ 50% 1,03,305 1,17,305
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5. PAT (3-4) 1,03,305 1,17,305

6. Preference Dividend - -
7. Equity Earnings (5-6) 1,03,305 1,17,305
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8. No. of equity shares (Existing + 40,000 48,000

Additional)
9. EPS 2.58 2.44
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10. P/E Ratio 8 10

11. Market Price [= EPS × P/E Ratio] 20.64 24.40
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b)
(i) To get Rs. 25,00,000 after 15 years from now, Mr. X needs to deposit an amount at the end of
each year, which gets accumulated @ 9% p.a. for 15 years to become an amount to Rs. 25,00,000.
Future Value = Annual payment x FVIFAn, I
Annual payment = future value /FVIFAn, I = 25,00,000/29.361 = Rs.85,146.96 p.a.
(ii) To get Rs. 25,00,000 after 14, one years from now. Mr. X needs to deposit a lump sum payment
to the fund which gets accumulated @ 9% p.a. for 14 years to become an amount to Rs. 25,00,000.
Future Value = Amount x P.V Single sum factor 9% for 14 years.
Amount = 25,00,000 × 0.2992= Rs. 748,000
(iii) To get Rs. 25,00,000 after 15 years from now, Mr. X needs to deposit an amount at the
beginning of each year which gets accumulated @ 9% p.a. for 15 years to become an amount to
Rs. 25,00,000.
Future Value = Annual payment x (FVIFAn, i) x (1+i)
Annual Payment = 25,00,000/ (29.361 x 1.09) = Rs. 78, 117.68 p.a.
c)
Calculation of return under CAPM
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Company A=Rf+B(Rm-Rf)
=10+1.5(18-10)
=22%
Company B=Rf+B(Rm-Rf)
=10+0.7(18-10)
=15.6%
Security E(R) Expected Return Return under CAPM Position
A 22% 22% Correctly Priced
B 17% 15.6% Under Priced
The return from security A exactly equal to the calculated return under CAPM hence it is correctly
priced securities.
The return from security B is better than the return under CAPM. It indicates a favorable position;
i.e. the security is currently traded at underpriced position.
6. Write short note/ answer on: (4×2.5=10)
a) Venture capital financing methods
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b) Conflict in project choice using PI and NPV criterion
c) Application supported by blocked account (ASBA)
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d) ‘Loan syndication is one of the project finance services.’ Discuss.
Answer
a)
A.
Venture Capital financing refers to financing of high risk ventures promoted by new qualified
entrepreneurs who require funds to give shape to their ideas. Here, a financier (called venture
capitalist) invest in the equity or debt of an entrepreneur (promoter) undertaking who has a potentially
successful business idea but does not have desired track record or financing backing. Generally,
venture capital funding is associated with heavy initial investment business like energy conservation,
NC
quality up gradation or with sunrise sector like information technology.
Methods of venture capital financing

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i) Equity financing: The investor’s contribution does not exceed 49% of the total equity capital of
the undertaking. Hence, the effective control and ownership remains with the entrepreneur.
ii) Conditional Loan: A conditional loan is repayable in the form of royalty after the venture is able
to generate sales. No interest is paid on such loans. Sometimes, the entrepreneur has a choice of
paying high rate of interest instead of royalty on sales once the activity becomes commercially
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sound.
iii) Income note: It is a hybrid type of finance, which combines the features of both conventional
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loan and conditional loan. The entrepreneur has to pay both interest and royalty on sales but at
substantially low rates.
iv) Participating debentures: Interest on such debentures is payable at three different rates based on
the phase of operations as under.
b)
The conflict in project choice using PI and NPV criterion arises in case of mutual exclusive
projects of unequal investment size having different net present values because NPV gives ranking
on the basis of absolute amount whereas PI gives ranking on the basis of ratio. In such a case,
mutual exclusive project having highest NPV should be selected since it would increase the firm’s
wealth if the project is accepted which is consistent with the wealth maximization objective of the
financial management.
c)
Application Supported by Blocked Amount (ASBA) refers to an application mechanism for
subscribing to initial public offers (IPO) or to Further public offering (FPO). The system which
ensures that the applicant's money remains in his/her bank account till the shares are allotted. The
applicant‘s bank account will only be debited post allotment of the shares. The amount debited
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depends on the shares/MF units allotted to the applicant and the remaining amount, if any, is freed
for use. SEBON has introduced ASBA system from Magh 2073. However, the option, though
available, is not mandatory for the investors. They can continue to make applications through the
existing facility of applying with cash/cheque. Prior to ASBA while applying in an IPO or FPO,
the entire amount had to be paid up front with the applications. In case there was no allotment or
part-allotment, the amount would get refunded to the applicant after 45-75 days. This was a lost
opportunity as the funds did not earn any interest during the period either. However, if the
application is made via ASBA, the funds stay blocked in the investor‘s account, but continue to
earn the interest. Further, operational hassle of collecting and or depositing refund slip can be
avoided.
d)
Loan syndication involves obtaining commitment for term loans from the financial institutions and
banks to finance the project. Basically it refers to the services rendered by merchant bankers in
arranging and procuring credit from financial institutions, banks and other lending and investment
organisation or financing the client project cost or working capital requirements.
Loan syndication is in fact a tie up of term loans from the different financial institutions. The
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process of loan syndication involves various formalities such as:
i. Preparation of project details,
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ii. Preparation of loan application,
iii. Selection of financial institutions for loan syndication,
iv. Issue of sanction letter of intent from the financial institutions,
v. Compliance of terms and conditions for availing of the loan,
A.
vi. Documentation, and
vii. Disbursement of the loan.
7. Distinguish between: (4×2.5=10)
a) Growth firm and Declining firm for relevance of dividend
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b) Permanent and Temporary working capital
c) IPO and FPO
d) Risk and Uncertainty
Answer
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a)
According to the relevance theory of dividend, dividends are relevant and the amount of dividend affects
the value of the firm. Walter, Gorden and others propounded that dividend decisions are relevant in
influencing the value of the firm.
D
Growth Firm
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In growth firms internal rate of return is greater than the normal rate (r>k). Therefore, r/k factor will be
greater than 1. Such firms must reinvest retained earnings since existing alternative investments offer a
lower return than the firm is able to secure. Each rupee of retained earnings will have a weighting in
Walter`s formula than a comparable rupee of dividend.
Thus, large the firm retains, higher the value of the firm. Optimum dividend payout ratio for such a firm
will be zero.
Declining Firm
Firms which earn on their investments less than the minimum rate required by investments are designated
as declining firms. The management of such firms would like to distribute its earnings to the stockholders
so that they may either spend it or invest elsewhere to earn higher return than earned by the declining
firms. Under such a situation each rupee of retained earnings will receive lower weight than dividends and
market value of the firm will tend to be maximum when it does not retain earnings at all.
b)
Permanent Working Capital
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It refers to a certain minimum level of current assets, which is essential for the firm to carry on
its business irrespective of the level of operations. This is the irreducible minimum amount
necessary for maintaining the circulation of the current assets. This minimum level of investment
in current assets is permanently locked up in business and is, therefore, referred to as permanent
or fixed or hardcore working capital. It is permanent in the same way as investment in firm’s
fixed assets is. This amount of working capital should be financed with long term funds.
Temporary Working Capital.
It refers to the amount of working capital over and above the fixed minimum amount of working
capital, which is required to meet seasonal and other temporary requirements. It may keep on
fluctuating from period to period depend upon the several factors. It is also called fluctuating or
variable or seasonal working capital.
c)
An initial public offering (IPO) is the first time that the stock of a company is offered to a large
public. IPOs are often issued by smaller, younger companies seeking capital to expand, but they
can also be done by large privately owned companies looking to become publicly traded. A
further public offer (FPO) is an issuing of shares to investors by a public company that is already
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listed on an exchange. An FPO is essentially a stock issue of supplementary shares made by a
company that is already publicly listed and has gone through the IPO process.
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The main differences are as follows:
 A company makes an IPO for raising money and an FPO for adding to the initial public
offerings or for managing capital structure.
 IPO is the first sale whereas the FPO is the second sale for expanding businesses.

A.
IPOs are risky investments as an individual investor cannot predict what will happen to
the initial trading in the coming days. In the case of FPOs, the risk is lower as an investor
already has an idea about the investment and future growth of the company.
 IPOs are more profitable than FPOs.
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d)
In common parlance, the terms "Risk" and "Uncertainty" have synonymous meaning. However, they
differ from each other:
Risk may be defined as “the chance of future loss that can be foreseen”. In other words, in case of
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risk an estimate can be made about the degree of happening of the loss. This is usually done by
assigning probabilities to the risk on the basis of past data and the probable trends.
Whereas uncertainty may be defined as “the unforeseen chance for future loss or damages.” In
case of uncertainty since the firm cannot anticipate the future loss and hence it cannot directly
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deal with it in its planning process, as is possible in the case of risk

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A.
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Cost and Management Accounting

D IT
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Suggested
Total No. of Questions: 6 Total No. of Printed Pages - 16
Marks
All questions are compulsory. Working notes should form part of the answer.
Make assumptions wherever necessary.
1. In a chemical manufacturing company, three products A, B and C emerge at a single
split off stage in department P. Product A is further processed in department Q, product
B in department R and product C in department S. There is no loss in further Processing
of any of the three products. The cost data for a month are as under:
Cost of raw materials introduced in department P Rs. 12,68,800

Departments Direct Wages (Rs )
M
P 3,84,000
Q 96,000
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R 64,000
S 36,000
Factory overheads of Rs. 4,64,000 are to be apportioned to the departments on direct

wage basis.
A.
During the month under reference, the company sold all three products after processing
them further as under:
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Products A B C
Output sold (kg.) 44,000 40,000 20,000
Selling Price per kg. (Rs.) 32 24 16
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There is no opening or closing stocks. If these products were sold at the split off stage,
that is, without further processing, the selling prices would have been Rs. 20, Rs. 22 and
Rs. 10 each per kg. respectively for A, B and C.
D
Required: (6+9+3+2=20)
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a) Prepare a statement showing the apportionment of joint costs to joint products.

b) Present a statement showing product-wise and total profit for the month under
reference as per the company’s current processing policy.
c) What processing decision should have been taken to improve the profitability of the
company?
d) Calculate the product-wise and total profit arising from your recommendation in (c)
above.
Answer:
a) Statement showing the apportionment of joint costs to joint products
Products
A B C Total
Output sold Kg.: (I) 44,000 40,000 20,000
Selling price per kg. at split 20 22 10
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off (Rs. ): (II)
Sales value at split off
8,80,000 8,80,000 2,00,000 19,60,000
(Rs.): (I) x (II)
Joint costs (costs incurred
8,80,000 8,80,000 2,00,000 19,60,000
in department
P (Rs.)
(apportioned on the basis of
sales value at the
point of split off) i.e.
(22:22:5) (Working Note
1)
b) Statement showing product-wise and total profit for the month under reference
(as per the company’s current processing policy)
Products
M
A B C Total
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Output (kg.) : (a) 44,000 40,000 20,000
Selling price per kg. after
32 24 16
further processing (Rs. ): (b)
Sales value after further 14,08,000 9,60,000 3,20,000
A. 26,88,000
processing (Rs. ).:(c) = {(a) x
(b)}
Joint costs (Rs. ): (d) 8,80,000 8,80,000 2,00,000 19,60,000
Further processing costs (Rs.):
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(e)
(Working Note 2) 1,72,800 1,15,200 64,800 3,52,800
Total costs (Rs.): (f) = [(d) +
10,52,800 9,95,200 2,64,800 23,12,800
(e)}
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Profit/ (Loss) (Rs.): [(c))– (f)} 3,55,200 (35,200) 55,200 3,75,200
Alternatively:
D
Incremental sales revenue

5,28,000 80,000 1,20,000
(Rs. )
(44,000 units (40,000 units (20,000 units
AU
x Rs. 12) x Rs. 2) x Rs. 6)

Less: Further processing
costs (Rs. )
[Refer to Working Note 2 (ii)] 1,72,800 1,15,200 64,800
Incremental net profit / (loss) 3,55,200 (35,200) 55,200
c) Processing decision to improve the profitability of the company.

44,000 units of product A and 20,000 units of product C should be further processed
because the incremental sales revenue generated after further processing is more
than the further processing costs incurred. 40,000 units of product B should be sold
at the point of-split off because the incremental revenue generated after further
processing is less than the further processing costs.
d) The product wise and total profit arising from the recommendation in (c) above is
as follows:
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Product A B C Total
Profit (Rs. ) 3,55,200 - 55,200 4,10,400
Working Notes:
1. Statement of department-wise costs
P Q R S
(Rs.) (Rs.) (Rs.) (Rs.)
Raw materials 12,68,800
Wages 3,84,000 96,000 64,000 36,000
Overheads 3,07,200 76,800 51,200 28,800
(Apportioned on basis of the
departmental direct wages i.e.
M
96:24:16:9)
Total Cost 19,60,000 1,72,800 1,15,200 64,800
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2. Joint costs and further processing costs
(i) Costs incurred in the department P are joint costs of products A, B and C
and are equal to Rs. 19,60,000. A.
(ii) Costs incurred in the departments Q, R and S are further processing costs of
products A, B and C respectively. Further processing costs of products A, B
and C thus are Rs. 1,72,800; Rs. 1,15,200 and Rs. 64,800 respectively.
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2.
a) Adarsh Mahila Udhyog which has been regularly producing and marketing a very
popular washing powder named ‘Ujyalo’ intends to present its budget for the fourth
quarter of 2073/74.
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The following information are made available for this purpose.
1) It expects to sell 50,000 bags of Ujyalo during the fourth quarter of 2073/74 at
the selling price of Rs.90 per bag.
2) Each bag of Ujyalo requires 2.5 kgs. of raw-material ‘A’ and 7.5 kgs. of raw-
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material ‘B’
3) Stock levels are planned as follows:
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Beginning of quarter End of quarter

Finished bags of ‘Ujyalo’ (Nos.) 15,000 11,000
Raw-material A (Kgs.) 32,000 26,000
Raw-material B (Kgs.) 57,000 47,000
Empty bags (Nos.) 37,000 28,000
4) Raw-materials A costs Rs.12 per kg., B costs Rs.2 per kg. and empty bag costs
Rs. 8 each.
5) It requires 9 minutes of direct labour time to produce and fill one bag of
‘Ujyalo’. Labour cost is Rs. 50 per hour.
6) Variable manufacturing costs are Rs. 4.50 per bag and fixed manufacturing
costs Rs. 3,00,000 per quarter.
7) Variable selling and administration expenses are 5% of sales and fixed
administration and selling expenses are Rs. 2,50,000 per quarter.
Required: (1+4+2+3=10)
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i) Prepare a production budget for the fourth quarter.

ii) Prepare a raw-materials purchase budget for A, B and empty bags for the fourth
quarter in terms of quantity as well as rupees.
iii) Compute the budgeted variable cost to produce one bag of ‘Ujyalo’.
iv) Prepare a statement of budgeted net income for the fourth quarter in terms of
both per unit and total cost data.
b) Pathibhara Paints Ltd. produces product ‘Royal Play’ a special effect paint which
passes through two processes before it is completed and transferred to finished stock.
The following data relates to Chaitra 2073.
Particulars Process-I Process-II Finished Stock
Rs. Rs. Rs.
Opening Stock 1,50,000 1,80,000 4,50,000
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Direct Materials 3,00,000 3,15,000 -
Direct Wages 2,24,000 2,25,000 -
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Factory Overheads 2,10,000 90,000 -
Closing Stock 74,000 90,000 2,25,000
Inter process profit included
in Opening Stock NIL 30,000 1,65,000
Output of Process-I is transferred to Process-II at 25 percent profit on the transfer
A.
price, whereas output of process-II is transferred to finished stock at 25 percent on
total cost. Stocks in processes are valued at prime cost. Finished stock is valued at
the price at which it is received from process-II. Sales for the month is Rs.
28,00,000.
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Required: (2+4+4=10)
i) Process-I account.
ii) Process-II account.
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iii) Finished stock account.
2 (a). Solution
(i) Production Budget of ‘Ujyalo’ for the fourth quarter

D
Bags (Nos.)
Budgeted sales 50,000
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Add: Desired closing stock 11,000

Total requirements 61,000
Less: Opening stock 15,000
Required production 46,000
(ii) Raw-materials purchase budget in quantity as well as in rupees for 46,000 bags of
‘Ujyalo’
A B Empty Bags
Kgs. Kgs. Nos.
Production requirement per
Bag of ‘Ujyalo’ 2.5 7.5 1
Requirement for 46,000 bags 1,15,000 3,45,000 46,000
Add: desired closing stock 26,000 47,000 28,000
Total requirements 1,41,000 3,92,000 74,000
Less: Opening stock 32,000 57,000 37,000
Quantity to be purchased 1,09,000 3,35,000 37,000
Cost per Kg./Bag Rs. 12 Rs. 2 Rs. 8
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Cost of purchase (Rs.) 13,08,000 6,70,000 2,96,000
(iii) Computation of budgeted variable cost of production of one bag of ‘Ujyalo’.

Rs. Rs.
Raw-material A: (2.5 Kg. × Rs. 12) 30.00
Raw-material B: (7.5 Kg. × Rs. 2) 15.00 45.00
Empty Bag 8.00
Direct Labour (Rs. 50 × 9/60) 7.50
Variable manufacturing overhead 4.50
Variable cost of production per bag 65.00
(iv) Statement of budgeted net income for the fourth quarter

Per Bag Total
Rs. Rs.
Sale value (50,000 bags) 90.00 45,00,000
Less: variable costs
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Production cost 65.00 32,50,000
Selling & administration expenses
(5% of Sale price) 4.50 2,25,000
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69.50 34,75,000
Budgeted contribution 20.50 10,25,000
Less: Fixed costs
Manufacturing Rs.300,000 A.
Admn & selling Rs.250,000 5,50,000
Budgeted net income 4,75,000
2 (b). Solution
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Process-I account
Particulars Total (Rs.) Cost (Rs.) Profit Particulars Total (Rs.) Cost Profit
(Rs.) (Rs.) (Rs.)
To - By
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Opening transfer to
Balance 1,50,000 1,50,000 Process-II 10,80,000 8,10,000 2,70,000
To Direct -
Materials 3,00,000 3,00,000
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To Direct -
Wages 2,24,000 2,24,000
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6,74,000 6,74,000 -
Less: -
Closing
Stock 74,000 74,000
Prime Cost 6,00,000 6,00,000 -
To Factory -
Overheads 2,10,000 2,10,000
Total cost 8,10,000 8,10,000 -
Profit 25%
on transfer
price
(33.33% on
cost) 2,70,000 - 2,70,000
10,80,000 8,10,000 2,70,000 10,80,000 8,10,000 2,70,000
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Process-II account
Particulars Total (Rs.) Cost (Rs.) Profit Particulars Total (Rs.) Cost (Rs.) Profit
(Rs.) (Rs.)
To By
Opening transfer to
Balance 1,80,000 1,50,000 30,000 Finished
Stock 22,50,000 15,15,000 7,35,000
To Direct -
Materials 3,15,000 3,15,000
To Direct -
Wages 2,25,000 2,25,000
To
Transfer
from
Process-I 10,80,000 8,10,000 2,70,000
18,00,000 15,00,000 3,00,000
M
Less:
Closing
CO
Stock 90,000 75,000 15,000
Prime Cost 17,10,000 14,25,000 2,85000
To Factory
Overheads 90,000 90,000 -
Total cost 18,00,000 15,15,000 2,85,000
Profit 20%
A.
on transfer
price (25%
on cost) 4,50,000 - 4,50,000
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22,50,000 15,15,000 7,35,000 22,50,000 15,15,000 7,35,000
Working note:
Profit element in closing stock- Process-II = Rs.(3,00,000/18,00,000) × Rs. 90,000
= Rs. 15,000
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Finished stock account

Particulars Total (Rs.) Cost (Rs.) Profit Particulars Total (Rs.) Cost (Rs.) Profit
(Rs.) (Rs.)
To By Sales 28,00,000 16,50,000 11,50,000
D
Opening
Balance 4,50,000 2,85,000 1,65,000
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To
Transfer
from
Process-II 22,50,000 15,15,000 7,35,000
27,00,000 18,00,000 9,00,000
Less:
Closing
Stock 2,25,000 1,50,000 75,000
Total cost 24,75,000 16,50,000 8,25,000
Profit
(Balancing
figure) 3,25,000 - 3,25,000
28,00,000 16,50,000 11,50,000 28,00,000 16,50,000 11,50,000
Working note:
Profit element in closing stock-Finished stock = Rs. (9,00,000/27,00,000) × Rs. 2,25,000
= Rs. 75,000
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3.
a) XYZ Ltd. produces washing detergent powder "Diyalo" in a batch of 10 Kgs.
Standard material inputs required for 10 Kg. of "Diyalo" are as follows:
Material Quantity (in Kg.) Rate per Kg. (Rs.)

A 5 110
B 3 320
C 3 460
During the month of June 2016, actual production was 5,000 Kgs. of "Diyalo" for
which the actual quantities of material used for a batch and the prices paid thereof
are as under:
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Material Quantity (in kgs.) Rate per kg. (Rs.)
A 6 115
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B 2.5 330
C 2 405
You are required to calculate the following variances based on the above given
information for the month of June 2016. A. 10
i) Material Cost Variance
ii) Material Price Variance
iii) Material Usage Variance
iv) Material Mix Variance
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v) Material Yield Variance
b) Deluxe Limited undertook a contract for Rs. 5,00,000 on 1st July 2016. On 30th June
2017, when the accounts were closed, the following details about the contract were
gathered:
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Rs. Rs.
Wages accrued
Materials purchased 1,00,000 30.6.2017 5,000
Wage paid 45,000 Work Certified 2,00,000
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General expenses 10,000 Cash received 1,50,000

Plant purchased 50,000 Work Uncertified 15,000
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Materials on hand
30.6.2017 25,000 Depreciation on plant 5,000
The above contract contained an escalation clause which reads as follows:
In the event of prices of materials and rates of wages increase by more than 5%, the
contract price will be increased accordingly by 25% of the rise in the cost of
materials and wages beyond 5% in each case.
It was found that since the date of signing the agreement the prices of materials and
wages rates increased by 25%. The value of the work certified does not take into
account the effect of above clause.
Prepare the contract account. 8

c) Describe briefly on method of Accounting of administrative overhead. 2
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Answer:
a)
SQ – Standard Quantity of Materials for Actual Output:
A 5 kgs. × 5,000 kgs = 2,500 kgs.
10 kgs.
B 3 kgs × 5,000 kgs = 1,500 kgs.
10 kgs
C 3 kgs × 5,000 kgs = 1,500 kgs.
10 kgs
AQ – Actual Quantity of Materials used for Actual Output:

A 6 kgs. × 5,000 kgs = 3,000 kgs.
10 kgs.
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B 2.5 kgs × 5,000 kgs = 1,250 kgs.
10 kgs
C 2 kgs × 5,000 kgs = 1,000 kgs.
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10 kgs
RSQ – Revised Standrad Quantity of Materials:

A 5 kgs. × 5,250 kgs = 2,386 kgs.A.
11 kgs.
B 3 kgs × 5,250 kgs = 1,432 kgs.
11 kgs
C 3 kgs × 5,250 kgs = 1,432 kgs.
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11 kgs
Material SQ × SP AQ × SP AQ × AP RSQ × SP
A 2,500 kgs × Rs. 110 3,000 kgs ×Rs. 110 3,000 kgs ×Rs. 115 2,386 kgs ×Rs. 110
= Rs. 2,75,000 = Rs. 3,30,000 = Rs. 3,45,000 = Rs. 2,62,460
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B 1,500 kgs × Rs. 320 1,250 kgs × Rs. 320 1,250 kgs × Rs. 330 1,432 kgs × Rs. 320
= Rs. 4,80,000 = Rs. 4,00,000 = Rs. 4,12,500 = Rs. 4,58,240
C 1,500 kgs × Rs. 460 1,000 kgs × Rs. 460 1,000 kgs × Rs. 405 1,432 kgs × Rs. 460
= Rs. 6,90,000 = Rs. 4,60,000 = Rs. 4,05,000 = Rs. 6,58,720
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Total Rs. 14,45,000 Rs. 11,90,000 Rs. 11,62,500 Rs. 13,79,420

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(i) Material Cost Variance = Std. Cost – Actual Cost

(SQ × SP) – (AQ × AP)
A = Rs. 2,75,000 – Rs. 3,45,000 = Rs. 70,000 (A)
B = Rs. 4,80,000 – Rs. 4,12,500 = Rs. 67,500 (F)
C = Rs. 6,90,000 – Rs. 4,05,000 = Rs. 2,85,000 (F)
Rs. 2,82,500 (F)
(ii) Material Price Variance = Actual Qty. (Std. Price – Actual Price)
(AQ × SP) – (AQ × AP)
A = Rs. 3,30,000 – Rs. 3,45,000 = Rs. 15,000 (A)
B = Rs. 4,00,000 – Rs. 4,12,500 = Rs. 12,500 (A)
C = Rs. 4,60,000 – Rs. 4,05,000 = Rs. 55,000 (F)
Rs. 27,500 (F)
(iii)Material Usage Variance = Std. Price (Std. Qty. – Actual Qty.)
(SQ × SP) – (AQ × SP)
A = Rs. 2,75,000 – Rs. 3,30,000 = Rs. 55,000 (A)
B = Rs. 4,80,000 – Rs. 4,00,000 = Rs. 80,000 (F)
C = Rs. 6,90,000 – Rs. 4,60,000 = Rs. 2,30,000 (F)
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Rs. 2,55,000 (F)
(iv) Material Mix Variance = Std. Price (Revised Std. Qty. – Actual Qty.)
(RSQ × SP) – (AQ × SP)
A = Rs. 2,62,460 – Rs. 3,30,000 = Rs. 67,540 (A)
B = Rs. 4,58,240 – Rs. 4,00,000 = Rs. 58,240 (F)
C = Rs. 6,58,720 – Rs. 4,60,000 = Rs. 1,98,720 (F)
Rs. 1,89,420 (F)
(v) Material Yield Variance = Std. Price (Std. Qty. – Revised Std. Qty.)
(SQ × SP) – (RSQ × SP)
A = Rs. 2,75,000 – Rs. 2,62,460 = Rs. 12,540 (F)
B = Rs. 4,80,000 – Rs. 4,58,240 = Rs. 21,760 (F)
C = Rs. 6,90,000 – Rs. 6,58,720 = Rs. 31,280 (F)
Rs. 65,580 (F)
b)
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In the Books of Deluxe Ltd. For the period 1st July 2016- 30th June 2017.
Contract Account
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Rs.
To Materials 1,00,000 By Work-in-progress:
To Wages (45,000 +
5,000) 50,000 Work certified
A. 2,00,000
To General expenses 10,000 Work uncertified 15,000
To Depreciation on By Contract
Plant 5,000 escalation(WN: 1) 5,000
To Profit : P&L (WN:
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2) 20,000 By Materials in hand 25,000
WIP
(Reserve) 60,000
2,45,000 2,45,000
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Working Notes:
1. Escalation Charges:
(a)Material
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Total increase up to 5% beyond

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Effect of increase in 75000*(25/125) 75,000*(5/125)

Price of Materials =15,000 =3,000 =12,000
(b)Wage
Effect of increase in 50,000*(25/125) 50,000*( 5/125)
Wage rate =10,000 =2,000 =8,000
Total Increase (a-b) =25,000 =5,000 =20,000
Increase in contract price
(25% of Increase beyond 5%) 20,000*(25/100)= 5000
2. Computation of Profit transferred to Profit & Loss Account:
Since more than 1/4th but less than ½ of the contract has been completed, 1/3 of the profit
earned as reduced on cash basis has been transferred to Profit and Loss Account.
80,000 * 1/3 * 1, 50,000/ 2, 00,000 = Rs. 20,000.
c) Method of Accounting of administrative overhead
There are three distinct methods of accounting of administrative overheads.
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(a)Appropriation of Administrative Overheads between Production and sales Department
(b) Charging to Profit and loss Account
This method is used when the overhead not directly related to production and selling &
distribution, where difficult to determine suitable base.
(c) Treatment of administrative overheads as a separate additional to cost of Production
This method considers administration as a separate function like production and sale.
4.
a) Auto Ltd. manufactures pistons used in car engines. As per the study conducted by
the Auto Manufacturers Association, there will be a demand of 80 million pistons in
the coming year. Auto Ltd. is expected to have a market share of 1.15% of the total
market demand of the pistons in the coming year. It is estimated that it costs Rs.1.50
as inventory holding cost per piston per month and that the set-up cost per run of
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piston manufacture is Rs. 3,500.
i) What would be the optimum run size for piston manufacturing?
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ii) Assuming that the company has a policy of manufacturing 40,000 pistons per
run, how much extra costs the company would be incurring as compared to the
optimum run suggested in (i) above? 5
A.
b) A manufacturing unit has purchased and installed a new machine of Rs. 12,70,000
to its fleet of 7 existing machines. The new machine has an estimated life of 12
years and is expected to realize Rs. 70,000 as scrap at the end of its working life.
Other relevant data are as follows:
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1) Budgeted working hours are 2,592 based on 8 hours per day for 324 days. This
includes 300 hours for plant maintenance and 92 hours for setting up of plant.
2) Estimated cost of maintenance of the machine is Rs. 25,000 (p. a,).
3) The machine requires a special chemical solution, which is replaced at the end
of each week (6 days in a week) at a cost of Rs. 400 each time.
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4) Four operators control operation of 8 machines and the average wages per
person amounts to Rs. 420 per week plus 15% fringe benefits.
5) Electricity used by the machine during the production is 16 units per hour at a
cost of Rs. 3 per unit. No current is taken during maintenance and setting up.
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6) Departmental and genera1 works overhead allocated to the operation during last
year was Rs. 50,000. During the current year it is estimated to increase 10% of
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this amount.
Calculate machine hour rate, if (a) setting up time is unproductive; (b) setting up
time is productive. 5
c) An Executive manager of Nepal Bank Ltd. spends Rs. 10.00 per kilometer on taxi
fares for his office work. He is considering two other alternatives, the purchase of a
new Nano car or a second hand Alto car. The estimated cost figures are as follows:
Items New Nano Car Old Alto Car

Purchase Price Rs. 1,35,000 Rs. 1,60,000
Sale price, after 5 years Rs. 25,000 Rs. 40,000
Repairs and servicing per annum Rs. 12,000 Rs. 18,000
Taxes and insurance per annum Rs. 3,200 Rs. 2,400
Petrol consumption per liter 20 km 15 km
Petrol/Diesel price, per liter Rs. 68 Rs. 42
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He estimates that he has to travel 10,800 km. annually. Which of the three
alternatives will be economical? If his official visit increases and he has to do
18,000 km per annum what should be his decision? 5
Answer:
a)
i) Optimum Run Size:
Optimum run size or Economic Batch Quantity (EBQ) =
Where, D = Annual demand i.e. 1.15% of 8,00,00,000 = 9,20,000 units

S = Set-up cost per run = Rs. 3,500
C = Inventory holding cost per unit per annum
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= Rs.1.5 × 12 months = Rs. 18
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EBQ =
= 18,915 units
(ii) Calculation of Total Cost of set-up and inventory holding
A.
Batch size No. of set-ups Set-up Cost (Rs.) Inventory holding Total Cost
cost (Rs.) (Rs.)
A 40,000 units 23 80,500 3,60,000 4,40,500
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(9,20,000/40,000) (23 × Rs. 3,500) (40,000*Rs.18/2)
B 18,915 units 48.64 1,70,235 1,70,235 3,40,470

(9,20,000/18,915) (48.64 × Rs.3,500) (18,915*Rs.18/2)
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Extra Cost (A – B) 100,030
b)
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Computation of Machine hour Rate

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Per year Per hour Per hour

(unproductive) (productive)
Standing charges
Operators wages
4x 420 x 54 90,720
Add: Fringe Benefits 15% 13,608
1,04,328
Departmental and general
overhead
(50,000+ 5,000) 55,000
Total Standing Charges for 8
1,59,328
machines
Cost per Machine (1,59,328/8) 19,916
Cost per Machine hour
9.05
(19,916/2,200)
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(19,916/2,292) 8.69
Machine hours:
Setting time unproductive
(2,592-300-92)= 2200
Setting time productive (2,592-
300)= 2,292
Machine expenses
Depreciation (12,70,000 - 45.45
70,000)/(12*2,200)
(12,70,000-70,000)/(12*2,292) 43.63
Electricity (l6*3) 48.00

(16*3*2,200)/2,292 46.07
Special chemical solution 9.82 9.42
(400x54)/2,200
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(400x54)/2,292
Maitenance (25,000/2,200) 11.36 10.91
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(25,000/2,292)
Machine Hour Rate 123.68 118.72
c)
A.
Note: Alternatively depreciation can be placed under standing charge.
Statement showing comparative costs of alternatives modes of conveyance

New Nano Old Alto
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Item Car Car Taxi
Rs. Rs. Rs.
Fixed costs per annum:
Depreciation 22,000 24,000
Repairs and servicing 12,000 18,000
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Taxes and insurance 3,200 2,400

(A) Total 37,200 44,400
Variable costs per annum:
(B) Petrol Diesel: 10,800km 36,720 30,240
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(C) Petrol Diesel: 18,000 km 61,200 50,400

Total Costs:
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10,800 km (A+B) 73,920 74,640 1,08,000

18,000 km (A+C) 98,400 94,800 1,80,000
Conclusion. For present official tour of 10,800 km, the total cost for the new Nano car
is the lowest and thus this is the cheapest alternative. But when official tour increases
to 18,000 km per annum the old Alto car will be cheapest.
5.
a) Saubhagya Ltd is operating at 70 percent capacity and presents the following
information:
Break-even point Rs. 200 crores

P/V ratio 40 per cent
Margin of safety Rs.50 crores
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Saubhagya’s management has decided to increase the production to 95 percent
capacity level with the following modifications:
1) The selling price will be reduced by 8 per cent.

2) The variable cost will be reduced by 5 percent on sales.
3) The fixed cost will increase by Rs. 20 crores, including depreciation on
additions, but excluding interest on additional capital.
4) Additional capital of Rs. 50 crores will be needed for capital expenditure and
working capital.
Required: 7
i) Indicate the sales figures, with the working, that will be needed to earn Rs. 10
crores over and above the present profit and also meet 20 % interest on
additional capital.
ii) What will be the revised?
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i) P/V Ratio.
ii) Break-even point.
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iii) Margin of safety.
b) Outline the Important Factors for the control of labour cost. 4
c) Outline the main objective of uniform costing. 4
Answer:
A.
5 (a).
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Working notes:
1. Total sales = Break-even sales + Margin of safety
= Rs. 200 crores + Rs. 50 crores
= Rs. 250 crores.
2. P/V Ratio = 40%
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Variable cost = 60% of sales

= Rs. 250 crores x 60%
= Rs. 150 crores
3. Fixed Cost = Break-even sales x P/V Ratio
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= Rs. 200 crores x 40%

=Rs. 80 crores
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4. Total Cost = Rs. 150 crores + 80 Crores

= Rs. 230 crores
5. Profit = Rs. 250 crores – 230 crores
= Rs. 20 crores
6. Revised P/V Ratio

Let the present selling price is Rs. 100.00
Revised selling price (Rs. 100 – Rs.8) Rs. 92.00
Revised variable cost (Reduced from 60% to 55%)
(Rs. 100 x 0.55) Rs. 55.00
Contribution Rs. 37.00
New P/V Ratio = (Contribution/Sales) x 100

= (Rs. 37.00/Rs. 92.00) x 100
= 40.217%
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A. Revised sales
(Rs. in crores)
Present fixed cost 80
Increase in fixed cost 20
Interest @ 20% on additional capital of Rs. 50 crore 10
Total revised fixed cost 110
Required contribution = Rs. 110 crores + Rs. 30 crores

= Rs. 140 crores
Required Sales = Required contribution/ New P/V Ratio

= Rs. 140 crores/40.217%
= Rs. 348.11 crores
B. (i) Revised P/V Ratio = 40.217% (working note 6)

(ii) Revised BEP = Revised Fixed cost/ New P/V Ratio
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= Rs. 110 crores/40.217%
= Rs. 273.516 crores
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(iii) Revised Margin of safety = Revised sales – Revised BE sales
= Rs. 348.11 crores – 273.516 crores
= Rs. 74.594 crores
5 (b).
A.
To exercise an effective control over the labour cost, the essential requisite is efficient utilization of
labour and allied factors. The main points which need consideration for controlling labour cost are
the following.
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1. Assessment of manpower requirement

2. Control over time keeping and time booking
3. Time and motion study
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4. Control over ideal time and overtime

5. Control over labour turnover
6. Wage system and Incentive system
7. Job Evaluation and Merit ratings
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8. Labour Productivity
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5 (c).
The main objectives of uniform costing are as follows:
 To facilitate the comparisons of cost and performance of different units in the same
industry.
 To eliminate unhealthy competition among the different units of an industry.
 To improve production capacity level and labor efficiency by comparing the production
costs of different units with each other.
 To provide relevant cost information to the government for fixing and regulating prices
of the products.
 To bring standardization and uniformity in the operation of participating units.
6. Distinguish between the following : (4×2.5=10)

a) Job Costing and Process Costing
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b) Just in Time manufacturing and Traditional manufacturing
c) Absorption costing and Variable Costing
d) Job evaluation and Job Rating
a) Distinction between Job Costing and Process Costing
Job Costing Process Costing

1) Production is carried on by specific order. 1) Production is a continuous flow and the
products are homogeneous.
2) Costs are determined by jobs or batches of 2)Costs are compiled on time basis i.e for
products. production for a given accounting period for
each process
3) Various jobs are separate and independent 3) Processes are related to each other
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products also lose their individual entity.
4) Unit cost of a job is calculated by dividing 4) The unit cost of a process which is
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the total cost by units produced in the lot or computed by dividing the total cost for the
batch. period into the output of the process during
that period is an average cost(after adjusting
opening and closing WIP)for the period.
5) Costs are calculated when a job is 5) Costs are calculated at the end of the
A.
completed. period under each process.
6) There may not be opening or closing WIP 6) Production in process costing is
in an accounting period. continuous and therefore there is normally
WIP at beginning and closing.
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7) There is normally no transfer from one job 7) Transfer from one process to another is a
to another .It will be only when there is usual feature.
surplus or excess production.
8) Each product unit is different and therefore 8) Production is standardized and stable the
more managerial attention is needed for control is, therefore easier.
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proper control.
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b) Distinction between Just in Time and Traditional Manufacturing

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Just in Time manufacturing Traditional manufacturing

1. It is a demand pull system. 1. It is a production push system.
2.There is insignificant or zero inventories 2.There is significant inventories
3.There are manufacturing sales (work 3. There is process structure
centers)
4. There is multifunction labor. 4. There is specialized labor.
5. There is total quality management system. 5.There is acceptable quality labor(AQL)
6. It uses simple cost accounting 6. It uses complex cost accounting system.
c) Distinction between absorption and variable Costing
The basic difference between absorption and variable costing relates to the handling of fixed
manufacturing overhead. Under absorption costing, fixed manufacturing overhead is treated as a
period cost and is deducted in full from the current periods revenue. The other differences are:
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1. The value of closing stock under absorption costing will be more as the unit cost under it is more
than the variable cost.
2. The cost of manufacturing under variable costing is less than the absorption costing
3. Variable costing takes contribution margin as the basis for decision making and absorption
costing takes the profit as the basis
4. Absorption of overheads is a major issue under absorption costing and it is a non-issue under
variable costing.
5. Absorption costing is accepted for external reporting and the variable costing is found to be
useful to decision -making by the management, hence internal orientation.
d.) Distinction between Job Evaluation and Merit Rating
Job evaluation. It can be defined as the process of analysis and assessment of jobs to ascertain
reliably their relative worth and to provide management with a reasonably sound basis for
determining the basic internal wage and salary structure for the various job positio ns. In
other words, job evaluation provides a rationale for differential wages and salaries for
different groups of employees and ensures that these differentials are consistent and
equitable.
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Merit Rating. It is a systematic evaluation of the personality and performance of each employee
by his supervisor or some other qualified persons.
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Thus the main points of distinction between job evaluation and merit rating are as follows:
1. Job evaluation is the assessment of the relative worth of jobs within a company and
merit rating is the assessment of the relative worth of the man behind a job. In other
A.
words job evaluation rate the jobs while merit rating rate employees on their jobs.
2. Job evaluation and its accomplishment are means to set up a rational wage and sa lary
structure whereas merit rating provides scientific basis for determining fair wages for
each worker based on his ability and performance.
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3. Job evaluation simplifies wage administration by bringing auniformity in wage rates.
On the other hand merit rating is used to determine fair rate of pay for different workers
on the basis of their performance.
D IT
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A.
Business Communication
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D
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Suggested
Roll No……………. Maximum Marks – 100
Total No. of Questions - 8 Total No. of Printed Pages -5
Marks
All questions are compulsory.
Section -'A'
1. Read the following case carefully and answer the questions given below: (4×5=20)
Avishek manages the customer relations department of a public utility company. The
department is responsible for replying to customer requests for information and to
customer complaints. There are seven typists in the department who handle the
correspondence to customers dedicated by the staff.
Avishek recently promoted Rachana to office supervisor. Rachana had been a typist in
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the department for ten years. She was considered the fastest and most accurate typist
who had ever worked for Avishek. Rachana has the best attendance record in the
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department and Avishek considered her his most dependable employee. She was very
well liked by all the typists and they considered her to be a good personal friend.
As a supervisor, Rachana does a good job handing out work assignments, but she does
A.
little else to supervise the typists. She does not like to criticize the typists and does not
enforce office rules. No matter what a typist does, Rachana will not take any
disciplinary action. She makes no attempts to check the work of the typists for
compliance with quality standards or to see that work is completed on time. In fact, she
spends most of her time typing to reduce the work load of other typists.
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The human resource department has been receiving an increasing number of complaints
from various staff from different departments about the poor quality of the typing and
about the slow turnaround time of the work. A number of the complaints target towards
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Rachana’s poor supervisory skills. Complaints were also received about the typists
under Rachana taking excessively long coffee breaks and spending time on personal
phone calls. The human resource department conveyed the complaints to Avishek who
has been asked to inquire and rectify the problem.
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When Avishek talked to the typists, they told him that Rachana frequently invites them
to her house for dinner or to play bridge. It appears to Avishek that the typists all like
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Rachana as a friend, but they are becoming concerned about her lack of supervisory
skills. Avishek mentions to Rachana that she should focus her effort on improving the
work of the typists. She replied, “These woman are my friends and I don’t feel right
cracking down on them”.
Questions:
a) Can an individual effectively manage a group and be a close personal friend with
group members?
ANS: An individual's managing a group depends on the organizational context and the personalities of
ones' colleagues. The elasticity of relation depends, also, according to the situation and types of job one
has to perform. It seems that almost every organization is managed by an individual because there is
always a corporate head, who takes charges of and monitors overall office affairs. In this connection an
individual is believed to manage a group. However, the role of subordinates, although marginalized, has
greater importance in maintaining the group bonding. Hence, an individual, no doubt, requires to
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maintain friendly relation with his subordinates, group members and coworkers. Similarly, as far as
close and personal friendship is concerned, an individual should have two "selves" i.e. personal and
official. Acknowledging the office hierarchy and portfolio systems one can still maintain a good relation
but not that friendly. One should very carefully regard the limitations in office affairs to maintain a
conducive office atmosphere.
b) What should Avishek do to ensure that the work of the typists will improve?
ANS: Avishek as a manager must have been vigilant from the beginning with every possible activities of
his staff. Although 'it is better late than never', Avishek requires to find out the root causes of the activities
taking place in the office and he needs to take the decision that gets win-win situation. Avishek should call
Rachana and inquire her about her perception to the coworkers. Rachana must have been too friendly may
be because she has any other "domestic psychological disturbance" as a result she loves to hangout with
the office coworkers. Rachana along with other typists' performances can be improved with asking for as
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well as giving advices and recommendation. May be she is frustrated with the low payment system and
that is a type of "systematic soldering" as a protest. Simply promoting to the position doesn’t ensure her
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financial stability. Avishek must be responsible to review his managerial skill as well. Besides these,
Avishek may invite an expert and motivate Rachana along with other typist colleagues to motivate and
excel their skill in everyday affairs.
c) Should Rachana have been promoted to office supervisor?
A.
ANS: The manager understands the need of the organization and go for the appropriate recruitment
procedures. Most of the time the manager will have eyes on the staff in the organization if they are capable
of taking the responsibilities and give their best performances. In case the candidate is fit within the
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organization a manager doesn’t go for costly and lengthy recruitment process. Avishek must have thought
Rachana a best fit and promoted her. Nonetheless, Avishek as a manager must have reviewed the
performances and should envision the characteristics of the individual he is promoting. In this case
Avishek seems to find Rachana very dependable for the post thus Rachana's promotion doesn’t look
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illogical. By the same token, Rachana's past performances aptly qualify her for the position. Despite of
promoting her to the post, Avishek should have shrewd eyes to observe her performance record, internal
operational, external operational and personal communication. In my view promoting Rachana is not a
blunder but the activities after her promotion needed to be monitored carefully.
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d) If you were Rachana, what would you do?

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ANS: I would definitely talk to Avishek about all the ongoing activities frankly. I would also request
Avishek to check the work on his own rather than listening to others. Other might have reported negatively
out of jealousy over my promotion in the office. Further, if there were some witnesses on the blaming
made, I will review them and take the chance as an opportunity to appropriate myself in the organizational
culture. Moreover, I would express my understanding that the office work is not disturbed because of my
friendly relation with other members in the organization. I would pay close attention, monitor the fellow
workers politely and hold a meeting on how to improve work performances to excel oneself for the career
growth.
2. There are several factors that can contribute to a successful multinational meeting.
Discuss any five of the most essential factors that contribute to the success of
international business meeting. 10
Answer:
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Multinational meetings are core concerns of today’s business communication. Along with the
globalization of market, business organizations have growing tendencies of extending across
the cultural and national boundaries. In this context, international business meetings have
become a major issue for consideration among the practitioners of multinational business. The
most important factor has become communication, i.e. language and its specific style. The
value of international communication is growing. Apart from communication channel and
process, there are several other factors that make meaningful contribution to a successful
international business meeting. Some of them include:
 Topic for discussion: the participants of the international meetings must be update with
what is being talked about. They have to think in advance about exactly what it is that they
want to discuss and decide.
 Participants: the participants of the international meetings need to know who will be the
other participants in the meeting. The basic cultural norms, interests, expertise, positions,
etc. of the other participants will help to make the contributions in the meeting more
relevant, cooperative and successful.
 Means of communication: in the multinational meetings, the choice of code is remarkably
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important. The proficiency in the international language like English needs to be fairly
high. Appropriate preparation about relevant vocabulary, business terms, structures,
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exponents, utterances, etc. is prerequisite to the multinational meetings.
 Manner of interaction: interaction in the multinational meetings follows the general maxims
of politeness and cooperation. The participants must be polite as well as cooperative in the
discussion. Furthermore, they should not hesitate to interrupt and argue freely in the
discussion. The native speakers of the dominant language are not expected to dominate the
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discussion. Listening to others is essential for every participant.
 Use of nonverbal cues: the nonverbal devices such as gestures, body postures, signs, etc.
also play important role in the multinational meetings. Cross-cultural interpretations and
understandings of the nonverbal devices are to be considered properly so that conflicts are
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less likely.
3.
a) Define notice and mention what its various parts are. 5
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b) You are the president of Student’s Association of Life School. Write a notice
informing the students about an audition for Radio Show. 5
Answer 3(a):
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A notice is the most common method of communication, which gives information regarding
an important event that is about to take place. A notice conveys information in a very precise
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manner. These are the parts of notice:
1. Name of organization
2. Word Notice
3. Date of issue
4. Subject
5. Purpose
6. Details of schedule
7. Sign, name, designation
Answer 3(b):
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Life School
Notice
April
Audition for Radio Show

Our school will be presenting a popular Radio Show named Children’s World . Talented
students willing to conjure up original items on the theme Adventure can participate.
Date: April ,
Time: PM
Venue: School Auditorium
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For further details, please contact the undersigned.
Asmita Roy
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######
President, Student’s Association
4. Write differences between/ short notes on:

a) Formal and Informal reports
A. (4×2.5=10)
b) Cross culture communication

c) Resolving Conflict
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d) Channel breakdowns
Answer:
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a) The differences between formal and informal reports include tone, structure, scope,
content and purpose. Another difference is that formal reports are often used in academic
papers or to provide a lengthy overview of a major change or development within a
business, while informal reports are used for shorter documents, such as memos and
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newsletters. Consequently, formal reports are more detailed than informal reports.
Formal reports have a set structure: an introduction, body and conclusion. However,
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informal reports can be structured in any way. Formal reports also have a formal tone and
use third-person narrative, while most informal reports use first- or second-person
narrative. Although some informal reports use a professional tone, it is not required in
many cases.
The scope of informal and formal reports is another major difference. Formal reports
analyze a specific topic in great detail. On the other hand, informal reports are often very
brief and only include the most relevant information.
Formal reports also provide evidence to back up the information in the report. Since
informal reports are brief, this is not included in this type of report. Formal reports usually
include citations for the sources used to generate the report. Charts, graphs and statistical
information are also common components of formal reports. This information provides
evidence and summarizes the findings of the report.
b) The increasing diversity in the workplace poses challenges to the workers as well their
managers. Along with globalization of business, workplace diversity in the workplace has
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become a burning issue in the sector of business and management. As solution has a
phenomenon emerged quite lately, i.e. intercultural communication which is also known as
cross-cultural communication. It refers to the way of communication between the people of
different cultures, without posing any kind of threat to any kind of culture. The
international languages and their nativised varieties are commonly used as effective means
of intercultural communication. Basically, the workers of a business house are given
trainings on intercultural norms, values, beliefs and practices. And, they are given
guidelines to communicate each other in line with the perspectives of different cultures.
c) Conflict in team activities can arise for a number of reasons: competition for resources,
disagreement over goals or responsibilities, poor communication, power struggles, or
fundamental differences in values, attitudes, and personalities. Teamwork isn’t necessarily
about happiness and harmony; even teams that have some interpersonal friction can excel
with effective leadership and team players committed to strong results. The following seven
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measures can help team members successfully resolve conflict:
i. Proactive behavior: Deal with minor conflict before it becomes major conflict.
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ii.Communication: Get those directly involved in a conflict to participate in resolving it.
iii.Openness: Get feelings out in the open before dealing with the main issues.
iv. Research: Seek factual reasons for a problem before seeking solutions.
v. Flexibility: Don’t let anyone lock into a position before considering other solutions.
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vi. Fair play: Insist on fair outcomes and don’t let anyone avoid a fair solution by hiding
behind the rules.
vii.Alliance: Get opponents to fight together against an “outside force” instead of against
each other.
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d) Sometimes the channel simply breaks down and fails to deliver the message at all. A
colleague you were counting on to deliver a message to your boss might have forgotten to
do so, or a computer server might have crashed and prevented your blog from updating.
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Everyone in an organization can help minimize barriers and distractions. In any situation, a
small dose of common sense and courtesy goes a long way. Turn off that mobile phone
before you step into a meeting. Don’t talk across the tops of other people’s cubicles. Be
sensitive to personal differences, too. For instance, some people enjoy working with music
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on, but music is a huge distraction for others, so use headphones. Finally, take steps to
insulate yourself from distractions. Don’t let messages interrupt you every minute of the
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day. Instead, try to set aside time to attend to messages all at once so that you can focus the
rest of the time.
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Marketing
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Suggested
Roll No……………. Maximum Marks – 50
Marks
All questions are compulsory.
Section -'B'
5. Read the following case carefully and answer the questions given below: (45=20)
Five years ago, Kathmandu college, was established in Tinkune, Kathmandu by a group of
Kathmandu University MBA graduates to retain the students of elite class family in the
country by offering high quality education by renowned professors. At present more than
five hundred students are studying in various programs such BBS, BBA, and BHM. The
college is affiliated to Tribhuvan University. There are 50 renowned faculty members in
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the college which consists of 20 full time and 30 part time faculty members. There are also
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15 administrative staffs to run various programs. The college is running in morning and
day shifts.
From the very beginning, the college has been practicing odd pricing while determining the
fee structure for their programs where as their competitors has been practicing even
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pricing. For example, annual fee structure of Kathmandu college is: BBS Rs.99,000, BBA
Rs.119,000, and BHM Rs.129,000. There is no provision of discount for anyone. They
charge same fee structure for all students. But their nearest competitor has been offering
various discount offers based on student’s score in 10+2.
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Similarly, they have been promoting their college aggressively from the very beginning.
For advertising, they are using radio, TV and daily newspaper. They always participate in
education fair organized by Kathmandu Post. Prospectus and leaflet have also been used
for college promotion. Famous film star, Rajesh Hamal is used as a brand ambassador of
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the college to create brand awareness.

The college management has tried their best to provide quality education. It has already
gained popularity for quality education. The result is excellent in comparison to other
competitive colleges.
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Last month, college management had conducted a students’ satisfaction survey by

distributing closed ended questionnaires. In the survey, it was found that students are not
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satisfied with college management. Students dissatisfaction is related with poor

infrastructure, lack of sports facilities and no welcome and farewell programs. It was found
that students were highly satisfied with faculty members but not satisfied with
administrative staffs.
As you are the student of marketing, the college management is going consult with you to
solve the problem identified during survey.
a) Are they customer oriented marketer? Give your opinion.
b) Comment on the brand name Kathmandu College.
c) Is odd pricing appropriate for the college? Give your argument.
d) What is the main issue of the case? Explain.
Answer
a)
Ans: In my opinion, they are not customer oriented marketers. Customer orientation is one of the
fundamental principles of new marketing concept. To be a customer oriented marketer, they must create
highly satisfy customers by offering high value. Customer satisfaction must be their motto to become a
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customer oriented marketer. In the above case, it has mentioned that as per the students’ satisfaction
survey, students are not satisfied to the college management. It means marketing program designed by the
management is not customer friendly. In the above case, it has also been mentioned that they have been
relied upon aggressive promotion like advertising and event management. By implementing selling
concept of marketing, no marketer can be a customer oriented marketer. In nutshell, it is concluded that
they are not customer oriented marketer.
b)
Ans: In Nepalese context, the word ‘Kathmandu’ is multi-used brand. There are so many marketers who
use Kathmandu as a brand. Marketers use brand name mainly for identification and differentiation. But
multi-used brand can not give specific brand identity to identify and differentiate the brand from brands.
For example, Kathmandu University, Kathmandu Hospital, Kathmandu steel, Bank of Kathmandu,
Kathmandu Engineering college, Kathmandu college of Management etc. Selected brand must be strong,
favorable and unique for specific brand positioning. Thus, brand name Kathmandu college is not
appropriate from marketing perspective. It only creates confusion to customers.
c)
Ans: odd pricing is a type of psychological pricing. It is suitable for price sensitive customers as it gives
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psychologically cheaper feeling for economy minded customers. Based on the above case, it is mentioned
that the college management has tried their best to provide quality education and it has already gained
popularity for quality education. So, to reflect quality in fee structure of the Kathmandu college it is not
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good to set odd pricing. Odd pricing is appropriate if marketer want to establish their product as a cheaper
product. So, for quality positioning it is better to set even pricing such as Rs. 100,000, Rs. 120,000 and Rs.
130,000 instead of Rs. 99,000, Rs. 119,000 and Rs. 129,000.
d) A.
Ans: Based on the given case, the main issue of the case is students’ dissatisfaction because of the
inappropriate marketing mix. Their target market is elite class people, and pricing and promotion strategies
they adopted are not appropriate as per the characteristics of target market. Mere quality education and
excellent result is not enough to satisfy their target market. They must design their marketing program as
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per the need of target market. Implementation of traditional marketing concept by inappropriate marketing
mix has led to student’s dissatisfaction. Thus, they must be customer oriented marketer and must
formulate appropriate marketing program as per the need and characteristics of target market.
6. Give the meaning of marketing environment and explain the components of micro
environment of marketing. (4+6=10)
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Answer
A company’s marketing environment consists of all the factors and forces outside marketing that affect
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marketing management’s ability to build and maintain successful relationships with target customers.
Successful companies know the vital importance of constantly watching and adapting to the changing
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environment. As we move into the twenty-first century, both the customers and marketers wonder what
the future will bring. The environment continues to change rapidly. More than any other group in the
company, marketer must be trend trackers and opportunity seekers.
According to Professor Philip Kotler, “marketing environment comprises all the actors and forces
outside marketing that affect marketing management’s ability to develop and maintain successful
transactions with its target customers.”
The marketing environment surrounds and impacts upon the organization. There are two key
perspectives on the marketing environment, namely the macro environment and the micro environment.
The major components of the micro environment of marketing are as follows:
i. The company:
In designing marketing plans, marketing management takes other company groups into account –
groups such as top management, finance, R & D, purchasing, operations, and accounting etc. All these
interrelated groups form the internal environment. Together, all of these departments have an impact on
the marketing department’s plans and actions. Under the marketing concept, all of these functions must
“think customer”. They should work in harmony to provide superior customer value and satisfaction.
ii. Suppliers
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Suppliers form an important link in the company’s overall customer value delivery system. They
provide the resources needed by the company to produce its goods and services. Supplier problems can
seriously affect marketing. Marketing managers must watch supply availability – supply shortages or
delays, labor strikes, and other events can cost sales in the short run and damage customer satisfaction
in the long run. Marketing managers also monitor the price trends of their key inputs. Rising supply
costs may force price increases that can harm the company’s sales volume.
iii. Marketing intermediaries
Marketing intermediaries help the company to promote, sell, and distribute its goods to final buyers.
They include resellers, physical distribution firms, marketing services agencies and financial
intermediaries.
Like suppliers, marketing intermediaries form an important component of the company’s overall value
delivery system. In its quest to create satisfying customer relationships, the company must do more than
just optimize its own performance. It must partner effectively with marketing intermediaries to optimize
the performance of the entire system.
iv. Customers
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The company needs to study five types of customer markets closely. Consumer markets consists of
individuals and households that buy goods and services for personal consumption. Business markets
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buy goods and services for further processing or for use in their production process, whereas reseller
markets buy goods and services to resell at a profit. Government markets are made up of government
agencies that buy goods and services to produce public services or transfer the goods and services to
others who need them. Finally, international markets consist of these buyers in other countries,
including consumers, producers, resellers and governments. Each market type has special
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characteristics that call for careful study by the seller.
v. Competitors
The marketing concept states that to be successful, a company must provide greater customer value and
satisfaction than its competitors do. Thus, marketers must do more than simply adapt to the needs of
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target customers. They also must gain strategic advantage by positioning their offerings strongly against
competitors’ offerings in the mind of consumers.
Competition can be generic, product, brand, price and non price.
vi. Publics
The company’s marketing environment also includes various publics likefinancial publics, media
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publics, local publics, internal publics, government publics, citizen-action publics, general public etc.
7.
a) Explain the criteria for evaluating market segments. 5
b) What is buyer behavior? Explain briefly the role of age in buying decision. (2+3=5)
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Answer
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a) After completing the segmentation of market that should be evaluated and better market segments
should be identified. While evaluating market segment, the company should analyze the size and
growth of the segments structural attractiveness of the segments and objectives and resources of
the company.
i. Segment size and growth:
While evaluating market segments, at first information about sale, growth rate and expected
profit should be collected and analyzed. The segment size and growth rate should be the best. But
size and the growth rate should be looked comparatively. Some companies like to target those
markets which have prospective of large quantity sale, high growth rate and high share of profit.
But such market segment may not be attractive for all companies. The companies select the best
market segment on the basis of their efficiency, means, and resources.
ii. Segment attractiveness:
While evaluating market segment, the size, growth rate and profit should be analyzed and its
structural attractiveness be considered. According to Michael Porter, The structural components to
affect attractiveness of market segments are competitors, substitute products, Buyer’s power, and
supplier’s power. Etc. should be studied.
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iii. Company’s objectives and resources:
Even if the size, growth, and structural attractiveness is favorable in the market segments,
the company should compulsorily consider its objectives and resources. Some market segments
may attractive but they should be abandoned, if they are not suitable to the company’s long term
objective. Thus, a company should select only those market segments which are suited to the
company’s objectives. Similarly, while analyzing market segments, production facilities employees
and their abilities, financial condition, means and resources also should be considered.
iv. Inter segment relationship:
Firm should pay much attention for segment interrelationships in terms of cost performance
and technology. Existing distribution channel, advertising media and agency can be used or not ?
The firm also give much attention for inter segment coordination which helps to improve the
overall performance of the organization.
v. Ethical Consideration:
Ethical aspects of various segments should also evaluated with due consideration to environmental
concerns. Well being of customers and society should be carefully evaluated.
vi. Government policies:
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Government policies, rules and regulations should be carefully considered for evaluating the
market segments. Ignorance of law is of no excuse. Thus, legal provisions should be strictly
complied within evaluating segments.
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b) A buyer is anyone who might buy a given product. A buyer may be either an individual person or
an organization that have an interest in the product and the means to acquire it. Cravens, Hills and
Woodruff define ‘buyer behavior’ as ‘the activities and actions of people (and organizations) that purchase and use economic goods and
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services, including, the influences on these activities and actions’.
Buyer behavior is affected by a number of factors including economic forces, demographic forces,
psychological forces, behavior-related forces, etc.
Now, let us try to find the answer the question relating how age affects the buying decision of a
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buyer while buying a particular product.

On the basis of age, people can be classified into various groups such as children, youths and old-
aged people. Similarly, each age group can also be divided into various groups – including, 0 – 5, 5
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– 10, 10 – 15, 15 – 25, 25 – 35, 35 – 45, 45 – 55, 55 – 65, and above 65 years. The taste,
preferences and the choice of each age group differ from one another.
For example, children prefer to buy toys or related items, Youths may be attracted more towards
fashion product, music items, sports items, etc. Similarly, the choice of old-aged people is to some
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extent saturated and may like traditional items.

Marketers need to motivate and satisfy different age-groups in different ways, because all of them
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cannot be satisfied with similar items, offers, and treatment.

8. Briefly explain the following: (5×2=10)
a) Marketing Information System (MkIS)
b) Green marketing
c) Service product
d) Holistic marketing concept
e) Point out the objectives of distribution
Answer
a) Marketing Information System (MkIS) is a mechanism established for providing decision making data
and information to marketing planner and marketers. It is an ongoing organizational process includes
the activities such as collection of information, sorting, analysis, evaluation and timely dissemination
of information to marketing decision makers.
b) Green marketing refers to the process of selling products and/or services based on their environmental
benefits. Such a product or service may be environmentally friendly in itself or produced in an
environmentally friendly way.
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c) Any activity or benefits that one party can offer to another that is essentially intangible is called
service product. The product is normally inseparable from service provider. Service product and its
price and quality are varied according to service provider, capacity, goodwill, place and time.
Production and consumption of service are done at same time. So, no organization can keep or store
service. Communication, hotel, restaurant, counseling, and insurance are the example of service
product.
d) The holistic concept explains that there are so many categories of customers, including individuals and
organizations or individual consumers and society as well, whose needs and wants are unlimited and
are not identifiable at all times. And on the other hand, there is high level of competition in the market.
All the needs of customers cannot be satisfied by a single marketing effort or limited marketing efforts
like in the above-mentioned marketing concepts; in order to meet all these needs and satisfy all
customers, marketer needs to use all possible marketing tools and effort.
The major tools of this concept are:
i. Integrated Marketing: This concept emphasis to utilize all available resources
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effectively and efficiently to satisfy the various needs and problems of the customers.
ii. Relationship Marketing: This concept emphasizes to establish and maintain good
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relation with all the social groups so that they perceive the company and its products
positively.
iii. Managing Internal Marketing: This concept emphasizes to make all the internal staffs
customer-oriented so that they can provide better services and treatment to customers
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for their satisfaction.
iv. Societal marketing: This concept also emphasizes to focus on social needs and
problems and work for welfare and wellbeing in society.
e) Main objectives of distributions are:
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i. Delivery of satisfaction
ii. Standard of living
iii. Value addition
iv. Communication
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v. Employment
vi. Efficiency
vii. Financing
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Income Tax and VAT
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Suggested
Marks
Attempt all questions. Working note should form part of the answer.
6. Citizen Cement Ltd. is a company situated in Biratnagar and listed in Nepal Stock
Exchange and engaged in manufacturing and sale of premium grade cement for Nepal
and Export. Following is the provisional Income Statement of Citizen Cement Ltd., for
the year ended Ashad 31, 2073.
Income
Export Sales 60,00,000
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Domestic Sales 40,00,000
Dividend Received (Net of Tax) 1,50,000
Rent Income (Related with Business) 50,000
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Total Income 1,02,00,000
Expenditure
Cost of Materials Consumed 30,00,000
Manufacturing Expenses A. 5,00,000
Employee Cost 10,00,000
Selling and Administrative Expenses 15,00,000
Interest and Bank Charges 5,00,000
Exchange Loss 2,50,000
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Depreciation 5,00,000
Bad Debt Written Off 70,000
Loss on Sale of Assets 3,00,000
Total Expenditure 76,20,000
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Operating Profit 25,80,000

Add: Provision for Doubtful Receivables Written Back 7,20,000
Less: Provision for Bonus 3,00,000
Profit Before Tax 30,00,000
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Additional information:
a) Cost of material consumed
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For export sales : Rs. 18,00,000

For local sales : Rs. 12,00,000
b) Exchange loss includes Rs. 1,00,000 against revaluation of creditors at the year end
date.
c) Asset detail for income tax purpose is as below –
Building Plant and Computer, Vehicles

Machinery Office
Equipment and
Furniture
Opening 11,00,000 1,00,00,000 15,00,000 29,50,000
Depreciation
Base
Addition upto - - 2,00,000 -
Poush End
Addition Magh to 6,00,000 - 1,50,000 -
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Chaitra end
Addition Baishak - - - 9,00,000
to Ashad End
Sales Proceed - 15,00,000
d) Manufacturing expenses includes repair and maintenance expenses as below:
Building Repair and Maintenance : Rs. 1,50,000
Office Equipment Repair and Maintenance : Rs. 50,000
Vehicle Repair and Maintenance : Rs. 20,000
e) Selling and Distribution Expenses includes Rs. 7,00,000 donation given to Prime
Minister Disaster Relief Fund and Rs. 3,00,000 given for construction of school.
f) Bonus of Rs. 2,00,000 only distributed to the employees till the time of filing of
income tax return. It has been decided by the management not to pay the
undistributed portion.
g) Following expenses are of below nature:
a. Rs. 50,000 included in employee cost for staff welfare is for personal use of
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directors.
b. Manufacturing expenses includes Rs. 30,000 for electricity bill of previous
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years.
c. Selling and administrative expenses includes Rs. 10,000 for business promotion
which is not related to business.
h) Company employed 1,300 Nepali employees during the whole year out of which 50
employees are foreign employee. A.
Based on the above information, please advise Citizen Cement Ltd. regarding. (5+15=20)
i) Various tax exemptions available to them as per Income Tax Act, 2058, and
which tax exemptions Citizen Cement Ltd. should opt for?
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ii) Compute taxable income and tax liability of the company segregating income on
the basis of cost of material consumed for common cost and income.
Answer
a. Various Tax Exemptions Available to Citizen Cement Limited as per Income Tax Act, 2058
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As per section 11 of Income Tax Act, 2058 below are the exemptions available to Citizen Cement Limited being
a Special Industry.
i. Citizen Cement Limited employs more than 1,200 Nepali employees whole year. So, it is entitled
for 20% tax rebate as per section 11(3)(Ka) for employing 1,200 or more Nepali Employees
ii. Citizen Cements Limited has export sales. So, 25% tax rebate for export Income only as per section
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11(3)(3Nga).
iii. Citizen Cements Limited is a listed production based Company. Hence, it is entitled to 10% rebate
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as per section 11(3)(3chha) .

b. Selection of Tax Exemption
i. As per section 11(5), if more than one tax exemption is available for the same income, then only
one tax exemption should be availed as per choice of the Taxpayer
ii. Hence, Citizen Cement Limited should choose the most beneficial option among the following
exemptions .
Exemption Rebate on Export Income Rebate on
Domestic
Income
20% tax rebate as per section 20% 20%
11(3)(Ka) for employing 1,200 or
more Nepali Employees
25% tax rebate for export Income 25% 0%
only as per section 11(3)(3anga)
10% rebate as per section 10% 10%
11(3)(3chha) for Citizen Cements
Limited is a listed production based
Company
Therefore, Selection of Exemption 25% tax rebate for export 20% tax rebate
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shall be: Income only as per section as per section
11(3)(3anga) 11(3)(Ka) for
employing
1,200 or more
Nepali
Employees
Computation of Taxable Income of Citizen Cement Limited

for the year ended Ashadh 31, 2073
Amount Rs.
Particulars Export Domestic Total Remarks
Income Income
Income From
Business:
Export Sales 60,00,000 - 60,00,000
Domestic Sales - 40,00,000 40,00,000
Dividend - - - Final
Withholding
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Tax
Rent Income - 50,000 50,000
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Total Income 60,00,000 40,50,000 1,00,50,000
Allowable Expenses :
Cost of Material 18,00,000 12,00,000 30,00,000
Consumed
Manufacturing 1,50,000 1,00,000 2,50,000 Working Note 1
Expenses
Employee Cost 5,70,000
A.3,80,000 9,50,000 Working Note 2
Selling and 7,14,000 4,76,000 11,90,000 Working Note 3
Administrative
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Expenses
Interest and Bank 3,00,000 2,00,000 5,00,000
Charges
Exchange Loss 150,000 100,000 2,50,000 Working Note 4
Bad debt Written Off - Not Allowed
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Loss on Sale of Asset - Separate

Treatment
Provision for doubtful - Earlier
receivables written disallowed,
back hence not
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considered in
Income
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Provision for Bonus 1,20,000 80,000 2,00,000 Working Note 5

Depreciation 19,00,000 12,66,667 31,66,667 Working Note 6
Repair and 1,05,000 70,000 1,75,000 Working Note 7
Maintenance
Total Allowable 58,09,000 38,72,667 96,81,667
Expenses
Net taxable Income 1,91,000 1,77,333 3,68,333
Income Tax @ 20% 38,200 35,467 73,667
being Special
Industry
25% tax rebate for 9,550 - 9,550
export Income only as
per section
11(3)(3anga)
20% tax rebate for - 7,093 7,093
Domestic Income as
per section 11(3)(Ka)
for employing more
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than 1,200 Nepali
Employees
Net Tax Liability 28,650 28,374 57,024
Common Cost and Income Allocation Ratio for Export Income and Local Income
Amount Rs. Ratio for Allocation
Cost of Material Consumed for Export 18,00,000 60% of total Cost or Income
Sales
Cost of Material Consumed for Local 12,00,000 40% of total Cost or Income
Sales
Total 30,00,000
Working Note : 1 Manufacturing Expenses :

Particulars Amount Rs.
Manufacturing Expenses as per Income Statement 5,00,000
Less : Repair and Maintenance Expenses (Separate Treatment)
Building Repair and Maintenance 1,50,000
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Office Equipment Repair and Maintenance 50,000
Vehicle Repair and Maintenance 20,000
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Less : Prior Period Electricity Expenses not allowed 30,000
Net Allowable Manufacturing Expenses 2,50,000
Manufacturing Expenses for Export Income – 60% of Total Expenses 1,50,000
Manufacturing Expenses for Domestic Income – 40% of Total 1,00,000
Expenses A.
Working Note : 2 Employee Cost
Particulars Amount
Employee Cost as per Income Statement 10,00,000
Less : Personal nature staff welfare expenses not allowed 50,000
Net Allowable Employee Cost 9,50,000
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Employee Cost for Export Income – 60% of Total Expenses 5,70,000
Employee Cost for Domestic Income – 40% of Total Expenses 3,80,000
Working Note : 3 Selling and Administrative Expenses
Particulars Amount
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Selling and Administrative Expenses as per Income Statement 15,00,000

Less : Donation given to School not allowed 300,000
Less : Business promotion Expenses not related to business 10,000
Net Allowable Selling and Administrative Expenses 11,90,000
Selling and Administrative Expenses for Export Income – 60% of 7,14,000
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Total Expenses
Selling and Administrative Expenses for Domestic Income – 40% of 4,76,000
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Total Expenses
Donation given to Prime Minister Disaster Relief Fund allowable.
Working Note : 4 Exchange Loss
Particulars Amount
Exchange Loss as per Income Statement 2,50,000
Allowable Exchange Loss 2,50,000
Exchange Loss for Export Income – 60% of Total Expenses 150,000
Exchange Loss for Domestic Income – 40% of Total Expenses 100,000
Working Note : 5 Provision for Bonus

Particulars Amount
Provision for Bonus as per Income Statement 3,00,000
Less : Undistributed Bonus 1,00,000
Net Allowable Exchange Loss 2,00,000
Bonus for Export Income – 60% of Total Expenses 1,20,000
Bonus for Domestic Income – 40% of Total Expenses 80,000
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Working Note : 6 Depreciation
Particulars Block A Block B Block C Block D Total
Building Computer, Vehicles Plant and
Office Machinery
Equipment
and
Furniture
Opening Depreciation 11,00,000 15,00,000 29,50,000 1,00,00,000 65,50,000
Base
Addition upto Poush – - 2,00,000 - - 2,00,000
100%
Addition from Magh to 4,00,000 1,00,000 - - 5,00,000
Chaitra – 2/3rd
Addition for Baishak to - - 3,00,000 - 3,00,000
Ashad – 1/3rd
Less : Disposal of Asset - - (15,00,000) - (15,00,000)
Depreciation Base for 15,00,000 18,00,000 17,50,000 1,00,00,000 1,50,50,000
income year 2072-73
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Depreciation rate 5% 25% 20% 15%
Depreciation Amount 75,000 4,50,000 3,50,000 15,00,000 23,75,000
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Additional Depreciation 25,000 1,50,000 1,16,667 5,00,000 8,25,000
for Special Industry
1/3rd of normal
Depreciation
Total Depreciation 1,00,000 6,00,000 4,66,667 20,00,000 31,66,667
A.
Depreciation for Export Income – 60% of Total Expenses
Depreciation Expenses for Domestic Income – 40% of Total Expenses
19,00,000
12,66,667
Working Note : 7 Repair and Maintenance
Particulars Block A Block B Block C Block D Total
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Building Computer, Vehicles Plant and
Office Machinery
Equipment
and
Furniture
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Depreciation Base for 15,00,000 18,00,000 17,50,000 1,00,00,000 1,50,50,000

income year 2072-73
Allowable Repair and 1,05,000 1,26,000 1,22,500 7,00,000 10,53,500
Maintenance- 7% of
Depreciation Base
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Actual Repair and 1,50,000 50,000 20,000 - 2,20,000

Maintenance
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Allowable Repair and 1,05,000 50,000 20,000 - 1,75,000

Maintenance
Balance to be Capitalized 45,000 - - 45,000
Next Year
Repair and Maintenance for Export Income – 60% of Total Expenses 1,05,000
Repair and Maintenance Expenses for Domestic Income – 40% of Total 70,000
Expenses
Note:
Answer will be different if Bad Debts Written Off has been shown as an expense.
7. Mohani Sharma was school English teacher in a reputed private school located at remote
area (classified as A class area by GON) between shrawan 2072 to Poush 2072. She
joined an international organization located at Kathmandu immediately after resigning
with effect from 1st Magh 2072.
Mrs. Sharma has received following salary and benefits during the income year 2072-
73:
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A) Salary & benefit received from private school
Basic Salary (Gross) 50,000 p.m.
Dashain Allowance 50,000
House Rent Allowance 5,000 p.m.
Remote Area Allowance 10,000 p.m.
Leave Encashment 25,000
B) Salary & benefit received from INGO in Kathmandu
Basic Salary (Gross) 1,00,000 p.m.
Advance Salary 1 month
House Rent Allowance 25,000 p.m.
Telephone Allowance 5,000 p.m.
Travelling & Daily Allowance (TADA) 10,000/day
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School tuition fees of Mrs. Sharma children directly paid by 4,000 p.m.
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INGO.
Other information:
i) Mrs. Sharma managed to deposit in retirement fund approved by IRD operated by
listed commercial bank in Kathmandu. She has deposited 4,50,000 in the retirement
A.
fund within income year 2072-73.
ii) Mrs. Sharma contributed donation of Rs. 3,00,000 to tax exempt organization.
iii) Mrs. Sharma had gone outstation for 25 days to monitor INGO activities. TADA
provided to Mrs. Sharma is only to pay cost of foods & lodging charges. Mrs.
Sharma could only submit bills of Rs. 50,000 incurred by her for food and lodging
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charges.
iv) Life insurance premium paid by Mrs. Sharma Rs. 25,000.
v) Mrs. Sharma was sick and incurred medical expenses of Rs. 5,000 to hospital run by
GON.
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vi) TDS deducted & deposited by school for Mrs. Sharma salary & benefits withdrawn
by her up to Poush 2072 was Rs. 63,388 and INGO had deposited 1,00,000 within
the end of Ashad 2073.
Required: (6+1+3=10)
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(a) Calculate taxable income and tax liability of Mrs. Sharma for the income year
2072-73.
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(b) Does Mrs. Sharma require to file income tax return as per the provision of
Income Tax Act, 2058.
(c) Compute amount of TDS need to be deposited as last installment for the salary
& benefit withdrawn by Mrs. Sharma during the income year 2072-73.
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Answer
Computation of Taxable Income of Mrs. Sharma for income year 2072-73

Description Amt. Rs. Note
A. Salary & benefit received from private school:
Basic Salary –(50,000 x 6 months) 300,000
Dashain Allowance 50,000
House Rent Allowance–(5,000 x 6 months) 30,000
Remote area allowance–(10,000 x 6 months) 60,000
Leave encashment 25,000
B. Salary & benefit received from INGO in Ktm:
Basic Salary –(100,000 x 6 months) 600,000
Advance Salary-(1 month basic pay) 100,000
House Rent Allowance–(25,000 x 6 months) 150,000
Telephone Allowance–(5,000 x 6 months) 30,000
Travelling & Daily Allowance (TADA) 200,000 (Rs. 10,000*25-50,000)
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Tuition fees of children –(4,000 x 6 months) 24,000
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Total assessable income 1,569,000
Less: Deduction:
Contribution to approved retirement fund:
Minimum of : A. (300,000)
1) Maximum of Rs. 300,000
2) 1/3 of Ass. Income (Rs. 1,569,000/3)
3) Actual contribution Rs. 450,000
Adjusted taxable Income (Rs. 1,569,000-Rs. 300,000) 1,269,000
Donation to tax exempt organization:
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Minimum of :
1) Maximum of Rs. 100,000
2) 5% of Adj. taxable income (5% of 1,269,000) (63,450)
3) Actual contribution Rs. 300,000
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Remote area allowance- (Rs. 50,000/2)- six months (25,000) Only ½ allowed
Life insurance premium (20,000) Maximum available
Taxable Income 1,160,550
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Computation of Tax Liability of Mrs. Sharma for income year 2072-73

(Assumed Couple Status)
Tax Liability
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Particulars
Taxable income 1,160,550
Social security Tax 1%- up to 300,000 3,000
15%- tax up to next 100,000 15,000
25%- tax up to next 760,550 190,137
Tax Payable 208,137
Less: Reduction:
1.Medical benefit tax:
Minimum of:
1) 15 % of approved medical exp. (15 % of Rs. 5,000) 750
2) Actual eligible medical exp. + unrecovered medical exp. earlier
3) Rs. 750 per annum
Total Tax Payable 207,388
Less: Withholding Tax 163,388
Net Tax payable 44,000
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Note:
 Marks will be awarded even if tax liability has been computed as per the tax rate of
Income Year 2073-74
 If she elects single natural person option then also answer will be correct and womens tax
credit shall be available to her.
 If student assume leave encashment as retirement payment then also answer will be
correct.
ii. Mrs. Sharma need to file income tax return of income year 2072-73 if she claimed/wants
to claim donation provided to tax exempt organization. However, if she does not claim/does
not want to claim donation from her income tax liability she is not required to file income tax
return for income year 2072-73.
iii. Mrs. Sharma is required to disclose amount of salary & benefits withdrawn & TDS
deducted & deposited by her previous employer (School) during relevant year to
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existing/present employer (INGO). The new employer (INGO) will adjust the salary &
benefit withdrawn by her from previous employer and TDS deposited by them during relevant
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year while computing assessable income and final tax liability of Mrs. Sharma for income
year 2072-73.
Total tax payable of Mrs. Sharma for the financial year 2072-73 was Rs. 2,08,137, her
previous employer deposited Rs. 63,388 and Rs. 100,000 had been already deposited by
present employer resulting balance of Rs. 44,000 as last installment of tax payable for the
A.
income year 2072 - 73.
Note: Leave encashment is not considered as retirement payment.
8.
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a) Mr. Apurva Das has 250 shares of Nabil Bank Ltd. from IPO. Bonus shares has been
distributed 300% (100% before Income Tax Act and remaining thereafter) till now.
He became a non-resident for income year 2072-73. The market value at the time of
introduction of the Act was Rs. 1,800 and at the time of becoming non-resident was
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Rs. 2,600. Quoting the related criteria for deemed disposal of shares, advise him if
any tax liability arises on those shares for income year 2072-73. 5
b) Calculate the TDS to be deducted on following cases:– (2.5+2.5=5)
th
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i) Mr. Santosh Sharma has bought a house on 20 Asoj 2067 for Rs. 90,00,000
including registration expenses and other expenses. Again, he has purchased a
plot of land on 3rd Chaitra 2070 for Rs. 1,50,00,000 including registration
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expenses and other expenses. He sold both of the property on 22nd Mangsir 2073
to Mr. Binod Sharma for Rs. 3,00,00,000 and Rs. 3,50,00,000 respectively.
Stating the relevant provisions of the Income Tax Act, 2058, advise whether
TDS needs to be deducted or not in the said transaction, and if yes, advise who
will deduct the TDS and amount of TDS to be deducted on the above
transaction.
ii) Mr. Shyam Silwal and Everest Holdings Pvt. Ltd. are shareholders of Shree
Holdings Pvt. Ltd. Mr. Shyam Silwal holds 5,000 shares and Everest Holdings
Pvt. Ltd. holds 10,000 shares of Shree Holdings Pvt. Ltd. which is 10% and 20%
shares of total shares of Shree Holdings Pvt. Ltd. respectively.
Mr. Shyam Silwal has purchased said share from Mr. Naresh Rana on 25
Mangsir 2065 for Rs. 22,50,000. He sold the said share on 25 Poush 2073 for Rs.
30,00,000. He has paid interest of Rs. 5,00,000 against loan taken for purchase
of the said share.
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Everest Holdings Pvt. Ltd. is a promoter shareholder of the Shree Holdings Pvt.
Ltd., and has paid Rs. 10,00,000. Everest Holdings Pvt. Ltd. sold the said share
on 25 Poush 2073 for Rs. 60,00,000. Everest Holdings Pvt. Ltd. has purchased
the said share from their own capital.
Stating the relevant provisions of the Income Tax Act, 2058, advise Shree
Holdings Pvt. Ltd. whether TDS needs to be deducted or not in the said
transaction, and if yes, compute TDS amount to be deducted by Shree Holdings
Pvt. Ltd. on the above transaction.
Answer
a)
According to Section 40 (3) (Cha), if a person turns to be a non-resident; his/her assets, except the
land or buildings situated in Nepal, are deemed to have made a disposal.
So, Mr. Das has made a disposal of the shares. The tax liability is calculated as below:
S. Particulars Workings Amount Rs.

No.
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1. Incomings 1000 shares *Rs. 2,600 (WN1) 2,600,000.00
2. Outgoings 500 shares * Rs. 1,800.00 900,000.00
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(WN2)
3. Gain Incomings – Outgoings 1,700,000.00
4. Deduction Under Section 36 Nil
5. Net Gain 1,700,000.00
6. Tax Rate 5% (WN3) 85,000.00
Workings:
A.
1. Original Shares 250 + 300% bonus shares i.e 750 = 1000 shares. Market value is taken for
calculating incomings.
2. Outgoings for assets of before the introduction of the Income Tax Act is taken as the
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market value at the time of the introduction of the Income Tax Act.
3. The tax rate for listed shares is 5% as per Section 1 (4) of schedule 1 of the
Act.
b) i)
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1. As per section 95ka(3) of income tax Act, TDS will be collected by Malpot Office on disposal of Land or
Building as below at the time of registration
a. if the ownership of non business chargeable asset being Land or building is for more than 5 years,
then @ 2.5%
b. if the ownership of non business chargeable asset being Land or building is for less than 5 years,
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then @ 5%
2. Hence, TDS will be deducted by Malpot Office at the time of registration as below
a. On a sale of House purchased on 20th Asoj 2067 –
AU
i. House has been owned for more than 5 years.

ii. Hence, TDS will be deducted @ 2.5% of
Sales Proceed - Rs 3,00,00,000
Less : Cost - Rs 90,00,000
Income - Rs 2,10,00,000
TDS @ 2.5% - Rs 5,25,000
b. On a sale of Land purchased on 3rd Chaitra 2070 .
i. Land has been owned for more less than 5 years.
ii. Hence, TDS will be deducted @ 5% of
Sales Proceed - Rs 3,50,00,000
Less : Cost - Rs 1,50,00,000
Income - Rs 2,00,00,000
TDS @ 5% - Rs 10,00,000
ii)
1. As per section 95ka(2)(kha) of income tax Act, in the case of share not listed in Nepal Stock Exchange,
TDS will be collected by the Company whose shares has been disposed off on disposal of shares as below
a. if the shares are disposed off by natural person, then @ 10%
b. if the shares are disposed off by any other person other than natural person, then @ 15%
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2. Hence, TDS will be deducted by Shree Holdings Private Limited at the time of disposal of shares as below –
a. On a sale of Shares by Mr. Shyam Silwal
i. TDS will be deducted @ 10% of
Sales Proceed - Rs 30,00,000
Less : Cost - Rs 22,50,000
Less : Interest - Rs 5,00,000
Income - Rs 2,50,000
TDS @ 10% - Rs 25,000
b. On a sale of Shares by Everest Holdings Private Limited
i. TDS will be deducted @ 15% of
Sales Proceed - Rs 60,00,000
Less : Cost - Rs 10,00,000
Income - Rs 50,00,000
TDS @ 15% - Rs 7,50,000
9.
a) Mrs. Aang Futi has stayed in Nepal in the following periods. Find out the residential
status of her for the income years 2072-73 and 2073-74. 5
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Period of Stay
2071 Falgun 14 to Chaitra 11
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2072 Baishakh 13 to Ashadh 26
2072 Shrawan 3 to Bhadra 25
2072 Marga 8 to Falgun 13 A.
2073 Jeshtha 18 to Bhadra 16
The number of days in the relevant months are as follows:
Year (BS) Month No. of Year (BS) Month No. of
Days Days
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2071 Falgun 30 2072 Poush 30
Chaitra 30 Magh 29
2072 Baishakh 31 Falgun 30
Jeshtha 32 Chaitra 30
IT
Ashadh 31 2073 Baishakh 31

Shrawan 32 Jeshtha 32
Bhadra 31 Ashadh 31
Ashwin 30 Shrawan 32
Kartik 30 Bhadra 31
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Marga 29
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b) Mr. Naresh Yadav has been working as a Chief Legal Advisor of a bank. During the
income year 2072-73, he has received remuneration income of Rs. 50,00,000 from
the bank after deducting TDS of Rs. 22,00,000. During the year he has won a lottery
of Rs. 10,00,000. Company deducted TDS of Rs. 2,50,000 on the said lottery and
paid him Rs. 7,50,000. He has income of Rs. 5,00,000 from his agricultural farm. He
has also received dividend of Rs. 5,00,000 on the shares invested by him in an
insurance company. Insurance Company has deducted TDS of Rs. 25,000 on the
said amount, and paid balance Rs. 4,75,000. He has also received bonus share of Rs.
2,00,000 on the shares invested by him in a Hydro Power Company. Hydro Power
Company has deposited TDS of Rs. 10,000 on the said bonus share. 5
Discussing the relevant provisions of the Income Tax Act, 2058 determine whether
he is required to file Income Tax Return or not, if yes, prepare his Income Tax
Return.
c) Sitaram Poudel has received a notice from Tax officer on 1st Chaitra 2072 for
submission of Income Tax Return for income year 2072-73 by 1st Baishakh 2073.
He has been planning to migrate to Australia. Sitaram Poudel’s contention is he need
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not have to submit tax return since he has income from employment only, and due
date of filing income tax return is also end of Asoj.
Stating the relevant provisions of Income Tax Act, 2058, please advise Sitaram
Poudel on the above matter. 5
d) Calculate the tax liabilities for income year 2072-73 in the following cases. 5
i) Fine Distillery Pvt. Ltd. in Mustang District started its business of producing
apple cider with 11% alcohol by volume since 2069-70. For the first time during
the income year 2072-73 company made taxable profit of Rs. 1,150,080 prior to
the adjustment of previous years assessed loss of Rs. 6,55,000.
ii) Gulf Bank, a Dubai based banking company has an office in Kathmandu for its
wholesale banking service to local banks. During the year it made Rs. 75,00,000
profit from the operation in Nepal of which Rs. 50,00,000 was repatriated to
head office Dubai.
Answer
a)
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Test for 2072/73
Step 1: The last day of her stay in the Income Year is 2073 Ashadh End and the previous 365 days
is from 2072 Shrawan 1.
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Period of Stay Days Total Days in Cumulative Days
the Period
2072 Shrawan 3 to Bhadra 25 30+25 55 55
2072 Marga 8 to Falgun 13 22+30+29+13 94
A. 149
2073 Jeshtha 18 to Ashadh 15+31 46 195
End
Since, she has stayed 183 days or more i.e 195 days in the consecutive previous 365 days, she is a
resident for Income Year 2072/73 as per Clause (KaNga)(1) (Kha) of Section 2.
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Test for 2073/74

Step 1: The last day of her stay is 2073 Bhadra 16 and the previous 365 days is from 2072 Bhadra
17.
IT
Period of Stay Days Total Days in Cumulative

the Period Days
2072 Bhadra 17 to Bhadra 25 9 9 9
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2072 Marga 8 to Falgun 13 22+30+29+14 95 104

2073 Jeshtha 18 to Bhadra 16 15+31+32+16 94 198
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Since, she has stayed 183 days or more in the consecutive previous 365 days, she is a resident for
Income Year 2073/74 as per Clause (KaNga) (1) (Kha) of Section 2.
Notes:
1. In lack of precise mention in the Act, both the arrival and departure dates are taken as the
period of stay.
2. Had the first test not satisfied for the condition of a residential status, second test could be
carried in the consecutive 365 days looking back from the end date of interrupted previous
period’s stay in that Income Year
3. If students refer provision as per Income Tax Directive (Income Year wise) then also marks
will be awarded.
b)
As per section 97(2) of Income Tax Act, natural person having income of more than Rs 40 lacs per annum
compulsorily needs to file Income Tax return. Hence, Mr. Naresh Yadav has to file Income Tax Return
Income Tax Return of Mr. Naresh Yadav for income year 2072-73
(2 marks each for inclusion and deduction part)
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Particulars Amount
Inclusion
Remuneration Income (gross) 72,00,000
Windfall Gain 10,00,000
Agriculture Income 5,00,000
Dividend from Insurance Company 5,00,000
Bonus Share from Hydro Power Company 2,00,000
Total Income 94,00,000
Less : Deductions
Windfall Gain subject to final withholding 10,00,000
Tax Exempt Income u/s 10 - Agriculture Income 5,00,000
Income Received after deduction of Final With holding 5,00,000
Tax : Dividend from Insurance Company
Income Received after deduction of Final With holding 2,00,000
Tax : Bonus Share from Hydro Power Company
Total Deduction 22,00,000
Net Taxable Income 72,00,000
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c)
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As per section 96(5) of Income Tax Act, 2058, Tax Office can issue notice in writing to any person for
filing of tax return of any income year or part of any income year even before date of filing of income tax
return as per section 96(1) subject to provisions of section 100 in below cases
1. If the said person has become insolvent, or is under heavy debt, or has been dissolved
2. If the said person is leaving Nepal for uncertain period of time
A.
3. If the said person is going to discontinue the work in Nepal
4. In any other case as deemed justified by Tax office
Hence, considering the above provision of Income tax Act, 2058, it is advised to Sitaram for submission of
Tax Return as asked by the Tax Office since he is planning to migrate to Australia
NC
d)
i) Tax Liabilities of Fine Distillery
Profit before carried loss setoff 1,150,080

Less: unrelieved loss of the previous years 655,000
IT
Taxable Profit 495,080

Tax @ 30% 148,524
Less: 40% tax rebate for producing fruit based wine in
extremely undeveloped area
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59,409
Final Tax Liability 89,114
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ii) Tax Liabilities of Gulf Bank

Tax on profit from the operation in Nepal @ 30 %
2,250,000
Tax on profit repatriated to Dubai @ 5% 250,000
Total Tax Liability of Gulf Bank 25,00,000
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10.
a) Define the following terms as per Income tax Act, 2058. (2×2.5=5)
i) Company
ii) Natural person
b) What are the possible methods of taking foreign tax credit to avoid double taxation
of resident person? 5
Answer
a)
i) Company:
As per section 2 (da) “Company” means any company incorporated under the company’s law in
force, and for the purpose of tax following institutions shall also be treated as if they were
companies:
a. Any corporate body established under the law in force;
b. Any unincorporated union, board, association or society or except registered or
unregistered sole proprietorship firm and partnership or trust;
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c. Any partnership firm consisting of Twenty or more partners whether registered or not under
the law in force, and any retirement fund, cooperatives institution, unit trust, joint venture;
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d. Any foreign company;
e. Any foreign institution as specified by Director General.
ii) Natural Person:

“Natural person” as defined by section 2 (wa) as follows:
a. A single natural person;
A.
b. A proprietorship firm 100% owned by a single natural person;
c. A couple opted being as a single taxation unit under section 50;
d. A natural person being widow or widower with dependent opted being as a single taxation
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unit under section 50.
b)
The following methods of foreign tax credit is prescribed as per Section 71 of the Income Tax Act,
2058 to avoid double taxation of a resident person:
a) Credit Method: Income from foreign country is taxable to the person in his country of residence
IT
and permitted to set off of tax paid in foreign country (generally to the extent of effective tax rate
of country of residence)
b) Expense Method: Tax paid in foreign country is eligible to claim as expenses while computing
taxable income in his country of resident
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11. LUC Group Nepal is an emerging business house established by group of clever
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business minds. It carries diversified business activities under same permanent account
number and group motto is halo to hydro. Business activities of the group for the month
of Bhadra 2073 is as follows:
a) Account receivable from a client for contract completed, approved and invoiced
during the month Rs. 36,55,434.
b) Sales of cellular mobile phone during the month Rs. 12,55,660 of which amount Rs.
4,56,360 was sold to non registered customers.
c) Fruits & vegetable sales during the month Rs. 5,34,600 of which Rs. 1,53,600 was
sales of packed garlic in stock since last 3 months.
d) Deep cycled lid acid battery sales Rs. 12,56,400 out of total Rs. 3,25,600 was sold to
Safa Tempo workshop with recommendation from Ministry of Population &
Environments.
e) Industrial machineries for bakery, confectionary & distillery falling under
Harmonized code 84.39 sold during the month Rs. 55,24,300
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f) The group has following purchase/Import during the month exclusive of VAT,
where applicable
 Cement, Iron Nails, Bricks Rs. 21,22,456
 Cellular Mobile & its parts Rs. 16,56,400
 Battery Rs. 7,85,900
 Tower cranes for construction use Rs. 55,60,300
 Fruits & Vegetable Rs. 4,26,300
 Bakery, confectionary & distillery machineries for trading purpose Rs.
60,65,480
 Statutory & internal audit fees Rs. 4,75,000
 Computer for official use Rs.3,25,400
 Stationeries Rs. 5,25,600
 Purchase of car for group president Rs. 40,00,000
g) During the same month internal auditor of the group submitted their report to the
management that reveals:
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 Purchase book of VAT for the month of Shrawan 2072 was over casted by Rs.
87,500.
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 No credit claim for the VAT amount Rs. 56,980 paid to department of roads for
auction purchase of road roller during the month of Kartik 2072.
 No adjustment for batteries used for office purpose amounting Rs. 45,600 during
the month of Jestha 2073. A.
Required: (8+2=10)
i) VAT statement for the month of Bhadra 2073 and VAT payable by the group
assuming there was no opening VAT credit.
ii) Discuss about VAT refundable, if any.
NC
Answer
1. Statement of VAT collection by LUC Group during B
2073…………………………….
Particulars Standard Zero Exempt Total
IT
Construction Revenue billed

(3655434/1.13) 3,234,897.35 3,234,897.35
Sales of Cellular mobile phone 1,255,600.00 1,255,600.00
Fruits & Vegetable 153,600.00 381,000.00 534,600.00
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Battery Sales 930800 325,600.00 1,256,400.00

Industrial Machineries 5,524,300.00 5,524,300.00
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Deemed sale of battery self use

during Jestha 2073 reported by
internal auditor
45,600.00 45,600.00
Total 5,620,497.35 6,230,900.00 11,851,397.35
Tax Rate 13% -
Tax collection 730,664.65 - 730,664.65
Proportionate ration of Taxable & exempt transaction
Total Transaction 11,851,397.35 100%

Taxable Transaction 5,620,497.35 47.42%
Exempt Transaction 6,230,900.00 52.58%
2. Statement of VAT Credit during Bhadra 2073
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Particulars Full Partial No Total
Cement, iron, nail & bricks 2,122,456.00 2,122,456.00
Cellular mobile 1656400 1,656,400.00
Battery 785,900.00 785,900.00
Statutory & internal Audit fees 475,000.00 475,000.00
Computer for office 325,400.00 325,400.00
Stationeries 525,600.00 525,600.00
Car Purchase (4000000*0.4) 1,600,000.00 1,600,000.00
Total 4,564,756.00 2,926,000.00 - 7,490,756.00
VAT paid on Purchase 593,418.28 380,380.00 - 973,798.28
Credit eligible VAT Ratio 100% 47.42%% -
Credit eligible VAT amount 593,418.28 180,376.20 - 773794.48
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(Fruits & vegetables, machineries & tower crane are non VAT items listed in Schedule 1)
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i. VAT Statement for the Month of Bhadra
VAT Collected on sales (Note 1) 730,664.65

VAT Paid on Purchase (Note 2) A. 773,794.48
VAT payable/(credit forward) (43129.83)
Opening VAT Credit -
Adjusted VAT credit(Road Roller Purchased from DOR during Kartik 2072)
(56,980.00)
Total VAT credit forwarded for Aswin 2073 (100,109.83)
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VAT refundable:
Of the total cellular mobile phones Rs. 799,300.00 was sold to registered buyers. LUC Group Nepal can claim
for refund of 40% VAT paid on purchase/import of Cellular mobile & its accessories that is sold to registered
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taxpayers.
Notes:
 Deep cycled lid acid battery is included in both schedule 1 & 2. Students treating
this item as exempt or 0 rated both are correct answer.
 Mistake in casting of VAT Purchase account has no adjustments as the period of
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mistake has elapsed one year.

12.
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a) ABC Oil & Ghee industry having factory at Lalitpur, Nepal producing Mustard oil,
Vanaspati ghee and other processed cooking oil in Nepal as given below. The sales
of ABC Oil & Ghee industry to VAT registered and unregistered person are in the
ration of 40% and 60% respectively. The ABC Oil & Ghee industry had following
sales transaction during the month of Falgun, 2073:
(Amount in Rs.)
S.N. Particulars Sale
1. Mustard oil- (Domestic mustard seeds) 6,00,000
2. Mustard oil- (Imported mustard seeds) 4,00,000
3. Vanaspati Ghee- (Domestically produced) 4,00,000
4. Vanaspati Ghee- (Imported) 6,00,000
5. Other processed cooking oil 10,00,000
Total 30,00,000
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(102)
Whereas XYZ oil industry having factory at Bhaktapur import processed edible
cooking oil in bulk quantities and refill it in small packages before sale. The XYZ
oil industry had following sales transaction during the month of Falgun, 2073:
(Amount in Rs.)
S.N. Particulars Sale
1. Refilled small oil packages (Imported 10,00,000
processed edible cooking oil in bulk
quantities)
Total 30,00,000
Required: 5
Compute the amount of VAT refund available if any to ABC Oil & Ghee industry
and XYZ Oil Industry with reference to the provision of schedule I of VAT Act.
b) Recondition House Baneshwor dealing in used goods made following Purchase &
sales during Kartik 2073:
Item Purchase with VAT (Rs.) Sales without VAT (Rs.)
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Sofa 14000 21000
Freeze 32000 43000
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Wooden Furniture 45000 38000
Calculate the amount of VAT payable by recondition house. 5
Answer
a) A.
Any domestic industry producing Mustard oil, domestically produced Vanaspati Ghee and other
processed cooking oil in Nepal and sells to registered person then such domestic industry can have
facility of Vat refund (Square off arrangement) as per schedule-I of Vat Act. Vat collected only to
the extent of 40% from registered person on sale of Mustard oil, domestically produced Vanaspati
Ghee and other processed cooking oil are refundable in accordance with the procedure specified by
NC
Inland Revenue Department. However the facility of such VAT refund under schedule-I is not
available on vat collected on sale of Vanaspati Ghee not produced in Nepal and to those domestic
industries which import only processed edible cooking oil in bulk quantities and refill it in small
packages before sale
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Sales to registered person are only 40% of total sales hence sales & VAT collected from registered
person are as follows:
Amount in Rs.
S.N. Particulars Sale to Reg. VAT
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Person only (40%) Collected

1. Mustard oil- (Domestic mustard seeds) 240,000 31,200
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2. Mustard oil- (Imported mustard seeds) 160,000 20,800

3. Vanaspati Ghee- (Domestically produced) 160,000 20,800
4. Vanaspati Ghee- (Imported) 240,000 31,200
5. Other processed cooking oil 400,000 52,000
Total 1,200,000 156,000
Vat collected only to the extent of 40% from registered person on sale of Mustard oil, domestically
produced Vanaspati Ghee only and other processed cooking oil, hence the ABC Oil & Ghee
industry can have facility of VAT refund under schedule-I of Vat Act are as follows:
Amount in Rs.
S.N. Particulars VAT Collected VAT Refund
from Reg. Person (40%)
1. Mustard oil- (Domestic mustard seeds) 31,200 12,480
2. Mustard oil- (Imported mustard seeds) 20,800 8,320
3. Vanaspati Ghee- (Domestically produced) 20,800 8,320
4. Vanaspati Ghee- (Imported) 31,200
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(103)
5. Other processed cooking oil 52,000 10,400
Total 156,000 39,520
ABC Oil & Ghee industry can have facility of VAT refund of Rs. 39,520 as per schedule-I of Vat
Act
However XYZ oil industry import only processed edible cooking oil in bulk quantities and refill it
in small packages before sale, hence it could not have facility of VAT refund under schedule-I of
VAT Act.
b)
Statement of VAT payable by Recondition House Baneshwar……………………3
Purchase Sales Taxable VAT
inclusive exclusive Value Payable
Item of VAT of VAT
Sofa 14,000.00 21,000.00 7,000.00 910.00
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Freeze 32,000.00 43,000.00 11,000.00 1,430.00
Wooden Furniture 45,000.00 38,000.00 -
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Total 2,340.00
There is negative value addition of Rs. 7000 from wooden furniture. It is required to determine
taxable value of each individual used item and there is no provision for setoff for negative value
A.
addition. Recondition house is not required to issue tax invoice for sale of wooden furniture
13. Answer the followings with reference to VAT Act/Rules (4×2.5=10)

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a) State the provisions on input tax credit on VAT paid on the lost goods
b) Advise about the threshold of procurement for goods, service, and construction
contract that a public institution requires to procure mandatorily from VAT
registered party.
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c) Can an unregistered person collect VAT?

d) Enumerate the transactions that are VAT attracted.
Answer
D
a)
In case the loss of assets by fire, theft, accident, accidental damages, terror or riot compels a person to
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write off the goods/(assets) or sale it at lower selling rate, the person shall made an application in
writing to respective Inland Revenue Office along with evidence within 30 days of happening of such
incidence.
The tax office shall investigate the matter and finalize the quantum of tax credit to be allowed to claim.
On the basis of such investigation, the tax office may allow the tax payer to claim input tax credit of
vat paid on such assets/ (goods).
In case the assets are insured the tax officer may allow the tax payer to claim input tax credit on such
goods to the extent of compensation paid by the insurance company.
b)
As per Rule No 6Ka of VAT Rules, 2053; a Government body, public institution or registered person
should acquire consultancy service for more than Rs. 1 lakh in a year or providing contract for more than
Rs. 20 lakh only from registered person.
Likewise, Rule 56 mentions that while purchasing or acquiring the goods or services on which tax of
value of five thousand rupees is payable at a time within the State of Nepal by GON or the association,
organization or office owned by GON or constitutional bodies, such goods or services shall be
purchased or acquired only with a registered person.
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(104)
c)
As per Section 15 of VAT Act, normally a person who is not registered shall not issue an invoice or
other document showing the collection of tax and shall not collect tax. But Sub-section 3 of Section
mentions that tax should be recovered on sale of taxable goods or services by local body,
international organization or mission situated in Nepal, Government of Nepal or public corporations
dealing in VAT exempt goods.
d)
According to Section 5 (1) of VAT Act, except otherwise provided for in this Act, VAT shall be imposed on the following
transactions:
(Ka) Goods or services supplied into the State of Nepal,
(Kha) Goods or services imported into the State of Nepal,
(Ga) Goods or services exported outside the State of Nepal,
Sub-section 3 stipulates that notwithstanding Subsection (1), no tax shall be levied on the transactions of
goods or services set forth in Schedule 1.
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A.
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D IT
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CHARTERED ACCOUNTANCY PROFESSIONAL CAP-II

The Institute of Chartered Accountants of Nepal

Electricity Charges 2,120

Raw Materials 51,265

Opening Stock 51,265

Purchase less return 1,55,265

To Carriage Inwards 5,210

To Opening Stock By Sales 1,48,950

To Salaries 15,200 By Gross profit b/d 49,715

Balance Sheet of Shri Babubhaj as on 31st March, 2015

Capital & Liabilities Assets

Rs. Rs. Rs. Rs.

Finished Goods 64,987 150,250

Bills Receivables 15,063

Prepaid Expenses 355

(v) Interest on Mortgage Loan:

i) The purchase consideration settled by Radha Ltd. as agreed:

You are required to: 10

Number Instalments Instalments-due

To Cash & Bank A/c 25,000

Equity Shareholders A/c

(ii) Journal Entries in the books of Radha Ltd.

(Being purchase consideration discharged)

To 8% Debentures (6,00,000x100/96) 6,25,000

To Goods Sold on H.P. (1) 7,21,500 By Cash 3,66,000

By Instalments not yet

2. Cash Collected: Radio Reorders Television sets

3. Instalments not due:

Total Amount due H.P.P. 7,800 19,500

Reserve Required 1,800/7,800 X 88,200 1,500/19,500X 2,11,200

prepare the statement of claim for submission to the insurance company. 5

Trading and Profit & Loss Account

Statement of Financial Position

Sundry Creditors Account

Items Cost Rs. Depreciation Rs. Salvage Rs. Claim Rs.

Building 3,75,000 1,25,000 + 9,375 4,000 2,36,625

2. Stock Destroyed Account

contract worked out to Rs. 10,50,000.

(c) Total Increase (a) +(b)=25000 =5000 =20000

depreciation @ 20% on WDV from 2072-73. Is it valid to change the method of

the context of Accounting Standards.

Net Book value as on 31.03.2073 (2,05,000–41,000) 1,64,000

Book Value of Machinery and Depreciation under SLM as on 01-04-2072

financial statements reflect the accrual method of accounting.

Adjusting entries are necessary to:

II. accrue revenues and gains and the related assets.

A correcting entry is needed only if an error is discovered in an account. Correcting entries

substantially all the fair value of leased asset.

Roll No……………. Maximum Marks - 100

Total No. of Questions- 7 Total No. of Printed Pages- 2

Time Allowed - 3 Hours

2. Give your comments on the following cases: (45=20)

3. Answer the following: (35=15)

4. Answer/Comment on the following: (35=15)

Answer Q. No. 4 (b) :

Answer Q. No. 4 (c):

5. Answer the following: (25=10)

supervision and control of the Auditor General.

Answers Q. No.5 (b):

According to INTOSAI’s Auditing Standards, performance audit is an independent examination of the