THE INSTITUTE OF CHARTERED ACCOUNTANTS OF

NEPAL

REVISION TEST PAPER

DECEMBER 2017

CAP –II
Paper 1: ADVANCED ACCOUNTING
 QUESTIONS

Accounting for Departments

1. Department Blue sells goods to Department Black at a profit of 25% on cost and to Department Pink at
10% profit on cost. Department Black sells goods to Blue and Pink at a profit of 15% and 20% on sales,
respectively. Department Pink charges 20% and 25% profit on cost to Department Blue and Black,
respectively.
Department Managers are entitled to 10% commission on net profit subject to unrealized profit on departmental
sales being eliminated. Departmental profits after charging Managers‘ commission, but before adjustment of
unrealized profit are as under:
Rs.
Department Blue 36,000
Department Black 27,000
Department Pink 18,000
Stocks lying at different departments at the end of the year are as under:
Dept. Blue Dept. Black Dept. Pink
Rs. Rs. Rs.
Transfer from Department Blue — 15,000 11,000
Transfer from Department Black 14,000 — 12,000
Transfer from Department Pink 6,000 5,000 —
Required: Correct departmental Profits after charging Managers‘ commission.

Insurance Claim

2. A fire broke out in the godown of a business house on Shrawan 08, 2074. Goods costing Rs. 203,000 in a
small sub-godown remain unaffected by fire. The goods retrieved in a damaged condition from the main
godown were valued at Rs. 197,000. The following particulars were available from the b ooks of account:
Stock on the last balance sheet date at 31.03.2074 was Rs. 1,572,000
Purchases for the period from Shrawan 01 to Shrawan 07 were Rs. 3,710,000
Sales during the same period amounted to Rs. 5,260,000
The average gross profit margin was 30% on sales.
The business house has a fire insurance policy for Rs. 1,000,000 in respect of its entire stock.
Required: Assist the accountant of the business house in computing the amount of claim of loss by fire.

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3. A fire occurred in the premises of M/s Gadbadh Co. on 30 Mangsir 2073. Following particulars is provided
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to the period 1 Shrawan 2073 to 30 Mangsir 2073.
Rs.
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i. Stock as per Balance Sheet as at 31 Ashadh 2073 99,000
ii. Purchases (including purchase of a machinery Costing Rs. 30,000) 170,000
iii. Wages (including wages for the installation of Machinery Rs. 3,000) 50,000
iv. Sales (including goods sold on approval basis amounting to Rs. 49,500. No confirmation
v. had been received in respect of two-thirds of such Goods sold on approval basis. 275,000
vi. Sales value of goods drawn by proprietor 15,000
vii. Cost of goods sent to consignee on 15 Mangsir 2073 lying unsold With them 16,500
viii. Sales value of goods distributed as free samples 1,500

The average rate of gross profit had been 20% in the past. This selling price had been increased by 20% with effect
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from 1 Shrawan 2073.
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For valuing the stocks for the Balance Sheet as at 31 Ashadh 2073, Rs. 1,000 had been written off in respect of a
slow moving item, the cost of which was Rs. 5,000. A portion of those goods were sold at a loss of Rs. 500 on the
original cost of Rs. 2,500. The remainder of the stock was now estimated to be worth the original cost.
Subject to the above exceptions, the gross profit had remained at a uniform rate throughout. The value of goods
salvaged was estimated at Rs. 25,000. The enterprise had taken an insurance policy for Rs. 60,000 which was
subject to the average clause.
Required: To ascertain the amount of claim to be filed with the insurance company for the loss of stock.

Contract Accounting
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4. M/s Santi Construction started working on a contract on 1 Baisakh 2074 for Rs. 500,000. On 31 Ashad
2074, when the company prepared its final accounts, the following information relating to the con tractor
was extracted from his books of accounts:
Particulars Rs.
Material issued from stores and sent to site 160,000
Wages paid 101,200
Wages outstanding on 31-03-2074 37,520
New machines purchased and sent to the site on 1-1-2074 148,000
Direct charges paid 7,500
Direct charges outstanding on 31-03-2074 600
Establishment charges apportioned to contract 6,400
On 31 Ashad 2074 materials lying unused at the site were valued at Rs.21,620. Machines were depreciated
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at 20% per annum. Value of work certified by 31 Ashad 2074 was Rs. 350,000 while the cost of work done
but yet not certified as on that date was Rs.18,000. On the basis of architect‘s certificate, the company had
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received a total sum of Rs. 280,000 from the contractee till 31 Ashadh 2074.
Required: Contract account and relevant portion of the balance sheet in the books of M/s Santi
Construction.

Hire Purchase Transactions

5. Tushal Enterprises, Palpa purchased a machine on Hire Purchase System. The total cost price of the
machine was Rs. 1,500,000 payable 20% down and four annual installments of Rs. 420,000, Rs. 390,000,
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Rs. 360,000 and Rs. 330,000 at the end of the 1 year 2 year, 3 year and 4 year respectively.
Calculate the interest included in each year‘s installment assuming that the sales were made at the
beginning of the year.

Issue of Shares and Debentures

6. Kitkit Limited recently made a public issue in respect of which the following information is available:
a) No. of partly convertible debentures issued 200,000; face value and issue price NRs.100 per
debenture.
b) Convertible portion per debenture 60%, date of conversion on expiry of 6 months from the date of
closing of issue.
c) Date of closure of subscription lists 1.5.2016, date of allotment 1.6.2016, rate of interest on debenture
15% payable from the date of allotment, value of equity share for the purpose of conversion NRs. 60
(Face Value NRs. 10).
d) Underwriting Commission 2%.
e) No. of debentures applied for 150,000.
f) Interest payable on debentures half-yearly on 30th September and 31st March.
Write relevant journal entries for all transactions arising out of the above during the year ended 31st March,
2017 (including cash and bank entries).

7. M/s Yeti Ltd. with an authorized capital of Rs. 30,000,000 offered to public 400,000 ordinary shares of
NRs.50 each at a premium of NRs.5 each. The payment was to be made as;
NRs.15 on application,
NRs.25 on allotment (including premium) and
NRs.15 on first and final call.

Application totalled 800,000 shares; shares were allotted on a pro-rata basis. Amit who had applied for 800
shares and to whom 400 shares had been allotted failed to pay the balance of allotment money due from him.
His shares were forfeited and then reissued to Tanka as Rs.40 (including premium of NRs.5) per share as fully
paid up. Rojina, another shareholder, failed to pay the call money on 100 shares held by her. Her shares were
also forfeited. Later, these shares were reissued as fully paid to Suchitra for NRs.60 per share.
Expenses of the issue of shares came to Rs.12,000.
 Required: Pass necessary journal entries in the books of M/s Yeti Ltd.

Underwriting of Shares and Debentures

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

Incomplete Records
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9. The following is the Balance Sheet of Pathibhara Enterprises on 31 Ashadh, 2072 :
Rs. Rs.
Capital 1,000,000 Fixed Assets 400,000
Creditors (Trade) 140,000 Stock 300,000
Retained Profit 60,000 Debtors 150,000
Cash & Bank 350,000
1,200,000 1,200,000
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The management estimates the purchases and sales for the year ended 31 Ashadh, 2073 as under:
upto 31.2.2073 Ashadh 2073
Rs. Rs.
Purchases 1,410,000 110,000
Sales 1,920,000 200,000
It was decided to invest Rs. 100,000 in purchases of fixed assets, which are depreciated @ 10% on cost. The
time lag for payment to Trade Creditors for purchase and receipt from sales is one month. The business earns
a gross profit of 30% on turnover. The expenses against gross profit amount to 10% of the turnover. The
amount of depreciation is not included in these expenses.
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Draft a Balance Sheet as at 31 Ashadh, 2073 assuming that creditors are all Trade Creditors for purchases
and debtors for sales and there is no other item of current assets and liabilities apart from stock and cash and
bank balances.
Ratio Analysis
10. M/s Nyatapola Enterprises asked you to prepare their Balance Sheet from the particulars furnished
hereunder:
Gross Profit Margin: 10%
Stock Velocity: 12
Capital turnover ratio: 2
Fixed assets turnover ratio: 5
Debt collection period: 1 month
Creditor‘s payment period: 73 days
Gross Profit: Rs. 100,000
Excess of closing stock over opening stock: Rs. 30,000
Make suitable assumptions wherever necessary.

Business Combination
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11. The following is the Balance Sheet of M/s Blue Star Ltd. as at 31 Ashadh, 2073:
Liabilities Rs. Assets Rs.
 8,000 equity shares of Rs.100 each 800,000 Building 340,000
10% debentures 400,000 Machinery 640,000
Loan from A 160,000 Stock 220,000
Creditors 320,000 Debtors 260,000
General Reserve 80,000 Bank 136,000
Goodwill 130,000
Deferred Revenue Exp. 34,000

1,760,000 1,760,000

Big Star Ltd. agreed to absorb Blue Star Ltd. on the following te rms and conditions:
(1) Big Star Ltd. would take over all Assets, except bank balance at their book values less 10%.
Goodwill is to be valued at 4 year‘s purchase of super profits, assuming that the normal rate of
return be 8% on the combined amount of share capital and general reserve.
(2) Big Star Ltd. is to take over creditors at book value.
(3) The purchase consideration is to be paid in cash to the extent of Rs. 600,000 and the balance in
fully paid equity shares of Rs.100 each at Rs.125 per share.
The average profit is Rs. 124,400. The liquidation expenses amounted to Rs. 16,000 to be borne by
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Big Star Ltd. Blue Star Ltd. had purchased prior to 31 Ashadh, 2073 goods costing Rs. 120,000
from Big Star Ltd. for Rs. 160,000. Rs. 100,000 worth of goods is still in stock of Blue Star Ltd. on
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31 Ashadh, 2073. Creditors of Blue Star Ltd. include Rs.40,000 still due to Big Star Ltd.
Show the necessary Ledger Accounts to close the books of Blue Star Ltd. and prepare the Balance
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Sheet (extract) of Big Star Ltd. as at 1 Shrawan, 2073 after the takeover.

12. Following is given the Balance Sheets of M/s Himal Ltd. and Hill Ltd. for further course of actions:
Balance Sheet of Himal Ltd.
Rs. Rs.
Share Capital 20,00,000 Fixed Assets 15,00,000
General Reserve 15,00,000 Investment 2,50,000
Current Liabilities 15,00,000 Current Assets 32,50,000
50,00,000 50,00,000

Balance Sheet of Hill Ltd.

Rs. Rs.
Share Capital 10,00,000 Fixed Assets 3,00,000
General Reserve 5,00,000 Goodwill 1,00,000
Current Liabilities 2,00,000 Current Assets 14,00,000
Proposed dividend 1,00,000
18,00,000 18,00,000

Himal Ltd. absorbed Hill Ltd. on following terms & conditions:

a) Hill Ltd declares a dividend of 10% before absorption for the payment of which it is to retain
sufficient amount of cash.
b) The net worth of Hill Ltd. is valued at Rs. 1,450,000.
c) The purchase consideration is satisfied by the allotment of fully paid shares of Rs. 100 each in
Himal Ltd.
Following additional informations are also to be taken in to consideration:
 Himal Ltd. holds 2,500 shares of Hill Ltd. at a cost of Rs 200,000.
 The stock of Hill Ltd. includes items valued at Rs. 50,000 from Himal Ltd. (cost Rs. 37,500)
 The creditors of Hill Ltd include Rs. 15,000 due to Himal Ltd.

Required: Show ledger account in the books of Hill Ltd. to give effect to the above and Balance Sheet of
Himal Ltd. after completion of absorption.

Internal Reconstruction
13. The following is the Balance Sheet of Pokhara Light Ltd. as on 31.3.2073:
Liabilities Rs. Assets Rs.
Equity shares of Rs.100 each 10,000,000 Fixed assets 12,500,000
12% cumulative preference shares of Rs.100 5,000,000 Investments (Market value 1,000,000
 each Rs.950,000)
10% debentures of Rs.100 each 4,000,000 Current assets 10,000,000
Sundry creditors 5,000,000 P & L A/c 400,000
Provision for taxation 100,000 Preliminary expenses 200,000
24,100,000 24,100,000
The following scheme of reorganization is sanctioned by the AGM and Company Registrar:
(i) All the existing equity shares are reduced to Rs.40 each.
(ii) All preference shares are reduced to Rs.60 each.
(iii) The rate of interest on debentures is increased to 12%. The debenture holders surrender their
existing debentures of Rs.100 each and exchange the same for fresh debentures of Rs. 70 each
for every debenture held by them.
(iv) One of the creditors of the company to whom the company owes Rs. 2,000,000 decide s to forgo
40% of his claim. He is allotted 30,000 equity shares of Rs.40 each in full satisfaction of his
claim.
(v) Fixed assets are to be written down by 30%.
(vi) Current assets are to be revalued at Rs. 4,500,000.
(vii) The taxation liability of the company is settled at Rs.150,000.
(viiii) Investments to be brought to their market value.
(ix) It is decided to write off the fictitious assets.
Pass Journal entries and show the Balance sheet of the company after giving effect to the above.

Profit or Loss Pre and Post Incorporation

14. The partnership of Bara Enterprises decided to convert the partnership into private limited company named
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Churimai Company Pvt. Ltd. with effect from 1 Baisakh 2071. The consideration was agreed at Rs.
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23,400,000 based on firm‘s Balance Sheet as on 31 Chaitra 2070. However, due to some procedural
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difficulties, the company could be incorporated only on 1 Shrawan 2071. Meanwhile, the business was
continued on behalf of the company and the consideration was settled on that da y with interest at 12% p.a.
The same books of accounts were continued by the company, which closed its accounts for the first time
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on 31 Ashadh, 2072 and prepared the following summarized profit and loss account:

Particulars Rs. Particulars Rs.

To Cost of goods sold 327,60,000 By sales 468,00,000
Director‘s Salary 180,000
Total 468,00,000 Total 468,00,000
The company‘s only borrowing was a loan of Rs. 100,00,000 at 12% p.a. to pay the purchase
consideration due to the firm and for working capital requirements. The company was able to double the
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monthly average sales of the company from 1 Shrawan 2071 but the salaries treble from that date. It had
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to occupy additional space from 1 Kartik 2071 for which rent was Rs. 60,000 per month.
Prepare a statement showing apportionment of costs and revenue between pre-incorporation and post-
incorporation periods.

Liquidator’s Final Statement

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15. The following is the Balance Sheet of Himchuli Co. Limited as at 31 Ashadh, 2073:
Liabilities Rs. Assets Rs.
Share Capital: Fixed Assets:
2,000 Equity Shares of Rs. 100 Land & Buildings 400,000
each Rs. 75 per share paid up 150,000 Plant and Machineries 380,000
6,000 equity shares of Rs. 100 Current Assets:
each Rs. 60 per share paid up 360,000 Stock at Cost 110,000
2,000 10% Preference Share of Cash at Bank 60,000
Rs. 100 each fully paid up 200,000 Profit and Loss A/c 240,000
10% Debentures (having a floating Sundry Debtors 220,000
charge on all assets) 200,000
Interest accrued on Debentures
(also secured as above) 10,000
Sundry Creditors 490,000
1,410,000 1,410,000
 On that date, the company went into Voluntary Liquidation. The dividends on preference shares were in arrear
for the last two years. Sundry Creditors include a loan of Rs. 90,000 on mortgage of Land and Buildings. The
assets realized were as under:-
Rs.
Land and Buildings 340,000
Plant & Machineries 360,000
Stock 120,000
Sundry Debtors 160,000
Interest accrued on loan on mortgage of buildings upto the date of payment amounted to Rs. 10,000. The
expenses of Liquidation amounted to Rs. 4,600. The Liquidator is entitled to a remuneration of 3% on all
the assets realized (except cash at bank) and 2% on the amounts distributed among equity shareholders.
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Sundry creditor included preferential creditors Rs. 30,000. All payments were made on 31 Ashwin 2073.
Prepare the liquidator‘s final statement.

Accounting for Partnership

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16. The following is the trial balance as on 31 Ashad 2074 of Amar, Bisnhu and Chetan who had branches at
different places and who shared profits & losses in the ratio of 2:1:2 respectively,
Rs. Rs.
Dr. Cr.
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Capitals, 1 Shrawan 2073
Amar 140,000
Bishnu 140,000
Chetan 20,000
Drawings
Amar 22,720
Bishnu 19,920
Chetan 9,160

Patents & Trade Marks 24,000

Sundry Creditors 69,800
Profit & Loss account for the year (before allowing interest @ 10%
on capital, as a charge) 25,000

Sundry Debtors-
Dhankuta 67,500
Pokhara 32,500
Kailali 15,000

Furniture-
Dhankuta 10,000
Pokhara 5,000
Kailali 6,000

Stock-
Dhankuta 46,000
Pokhara 34,000
Kailali 53,000
_______ _______
369,800 369,800

The firm was dissolved on that date. Amar took over Dhankuta Branch, and Bisnu took over Pokhara Branch; the
assets being taken at 10% less than the book values. Patents and Trade Marks were found valueless. The
business at Kailali was sold to a limited company which allotted 6,000 equity shares of Rs. 10 each credited as
fully paid. To pay the liabilities, Amar and Bisnhu introduced cash in the profit sharing ratio. The cost of winding
up came to Rs. 4,000 for which Amar advanced cash. Chetan is insolvent and can pay nothing. Bishnu received
all the shares.

Required: Necessary accounts to close the books of the firm; partners give effect to the correct position
without having to make up losses in cash. Assume the capitals to be fluctuating. Amar and Bishnu settles
accounts themselves.

Accounting for Non-profit making Organisation

17. Jhapa School maintains separate building fund. As on 31.3.2071, balance of building fund was Rs.
1,000,000 and it was represented by fixed deposit (8% per annum) of Rs. 600,000 and current account
 balance of Rs. 400,000. During the year 2071/72, the school collected as donations towards the building
fund Rs. 560,000 and transferred 40% of developmental fee collected Rs. 2,256,500 to building fund.
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Capital work progress as on 31 Ashadh 2071 was Rs. 825,000 for which contractor‘s bill upto 75% was
paid on 14.4.2071. The extension of building was finished on 31.12.2071 costing Rs. 725,000 for which
contractors‘ bill was fully met. It was decided to transfer the cost of completed building (Rs. 1,550,000) to
the corresponding asset account.
You are required to pass journal entries to incorporate the above transactions in the books of Jhapa School for
the year 2071/72 and show the trial balance of building fund ledger.

Accounting for Banks

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18. SSS Bank Limited provides you the following information regarding Loan Loss provisioning as on 31
Ashadh 2073:

Category Amount Rs.

1. Pass 5,000,000
2. Rescheduled /Restructured 210,000
3. Substandard 500,000
4. Doubtful 300,000
5. Bad 500,000

During financial year 2072-73 additional loans amounting to Rs. 3,000,000 were disbursed. The Bad loans
amounting to Rs. 200,000 was written off during the year. Loans amounting to Rs. 150,000 were shifted from
Doubtful category to Bad category. Similarly, Loans amounting to Rs. 500,000 shifted from Good category to
substandard category and Substandard Loans amounting to Rs. 200,000 were rescheduled during the year.
From the above information, you are required to calculate the loan loss provision and pass necessary journal
entries in the books of SSS Bank Limited as per the directive issued by Nepal Rastra Bank and find the
percentage of total Non-Performing Assets.

19. From the following information calculate Core capital ratio and total capital adequacy ratio of DDD Bank
Ltd. and suggest management about the compliance of the same:
In lakh
Paid up Capital 20,000
General Reserve Fund 377
Retained Earnings 308
Profit for current year 1,945
General Loan Loss Provision 1,215
Investment Adjustment Reserve 22
Loan Given to Relatives of Staffs 37
Risk weighted Exposure for Credit Risk 213,546
Risk weighted Exposure for Operational Risk 4,235
Risk Weighted Exposure for Market Risk 1,618

Cash Flow Statement

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20. The summarized Balance Sheet of Raniban Pvt. Ltd. as on 31 December 2015 and 2016 are as follows:
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Liabilities 2015 2016 Assets 2015 2016
Share Capital 100,000 100,000 Building 46,800 45,000
General Reserve 38,400 42,000 Plant & Machinery 38,280 42,030
Creditors 9750 6380 Goodwill 13,000 13,000
Tax Provision 19,000 21,000 Investment 10,000 11,250
Prov. for doubtful debt 1,000 1,200 Stock 30,000 28,000
Debtors 22,070 22,300
Cash 8,000 9,000
Total 168,150 170,580 Total 168,150 170,580

After taking the following information into account, prepare a cash flow statement for the year ended on
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31 December 2016.
i) Profit for year 2016 was Rs. 8,600 against this had been charged depreciation Rs. 3,050 and
increase in provision for doubtful debt Rs.200/-.
 ii) Income Tax Rs. 18,000 was paid during the year charged against the provision and in addition Rs.
20,000 was charged against profit and carried to the provision.
iii) An interim dividend of Rs. 5,000 was paid in January 2016.
iv) Additional Plant was purchased in September 2015 for Rs. 5,000
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v) Investments (cost Rs. 5,000) were sold for Rs. 4,800 in 2016 and on 1 March 2016 another
investment was made for Rs. 6,250.

Nepal Accounting Standards (NAS)

21. a. On 25th Poush 2073, ABC Advertising Pvt. Ltd. obtained advertising rights for ACC Cup to be held in
Baishakh and Jestha 2074 for Rs. 520 Lakhs.
They furnish the following information:
i) The company obtained the advertisements for 70% available time for Rs. 700 Lakhs by 25th Falgun
2073.
ii) For the balance time they got bookings in 20th Chaitra 2073 for Rs. 240 Lakhs.
iii) All the advertisers paid the full amount at the time of booking the advertisements.
iv) 40% of the advertisements appeared before the public in Baishakh and balance 60% appeared in the
month of Jestha.
Calculate the amount of profit/loss to be recognised for the month Baishakh and Jestha, 2074 as per
relevant accounting standards.

b. When the construction of a qualifying asset is performed by a third party, are borrowing costs capitalised on
the prepayments made to the third party for the acquisition of the asset? State on the basis of relevant NAS.

c. A company is in a dispute involving allegation of infringement of patents by a competitor company who is

seeking damages of a huge sum of Rs. 20 million. The directors are of the opinion that the claim can be
successfully resisted by the company. How would you deal with the same in the annual accounts of the
company?

d. An earthquake destroyed a major warehouse of ABC Ltd. on 30.4.2072. The accounting year of the
company ended on 31.3.2072. The accounts were approved on 30.6.2072. The loss from earthquake is
estimated at Rs. 25 lakhs. State with reasons, whether the loss due to earthquake is an adjusting or non-
adjusting event and how the fact of loss is to be disclosed by the company.

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

f. A company capitalizes interest cost of holding investments and adds to cost of investment every year,
thereby understating interest cost in profit and loss account. Comment on the accounting treatment done by
the company in context of the relevant NAS.
Write Short Notes
22. (a). Contingent Assets
(b). Watch List in Loan loss provisioning
(c). Leases
(d). Government Accounting System in Nepal
(e). Debt Service Coverage Ratio
(f). Advantages of Customized Accounting Packages
(g). Non Banking Assets
(h). Re-Insurance
 SUGGESTED ANSWERS

Accounting for Departments

1. Answer:
Calculation of Correct Profit
Dept. Dept. Dept.
Blue Black Pink
Rs. Rs. Rs.
Profit after charging managers‘ commission 36,000 27,000 18,000
Add back: Managers‘ commission (1/9) 4,000 3,000 2,000
40,000 30,000 20,000
Less: Unrealized profit on stock
(Working Note) 4,000 4,500 2,000
Profit before Manager‘s commission 36,000 25,500 18,000
Less: Commission for Department
Manager @10% 3,600 2,550 1,800
32,400 22,950 16,200
Working Note:
Stock lying with
Dept. Blue Dept. Black Dept. Pink Total
Rs. Rs. Rs. Rs.
Unrealized Profit of:
Department Blue 1/5×15,000 =3,000 1/11×11,000 =1,000 4,000
Department Black 0.15×14,000 =2,100 0.20×12,000 =2,400 4,500
Department Pink 1/6×6,000 =1,000 1/5×5,000 =1,000 2,000

Insurance Claim
2. Answer:

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Memorandum Trading Account from 1 Shrawan to 8 Shrawan 2074

To Opening stock 1,572,000 By Sales 5,260,000

To Purchases 3,710,000 By Closing Stock 1,600,000
To Gross Profit (30% of Sales) 1,578,000 (Balancing Figure)

Total 6,860,000 6,860,000

Calculation of Amount of Insurance Claim

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Value of Stock on 8 Shrawan (as above) 1,600,000
Less:
Value of Stock remaining unaffected by fire 203,000
Agreed Value of damaged goods 197,000 400,000

Loss of Stock 2,000,000

Applying Average Clause:

Amount of Claim = Amount of Policy x Loss of Stock
Stock on the date of Fire
= Rs 1,000,000 x1,200,000
Rs 1,600,000
=Rs 750,000
3. Answer:
Memorandum Trading Account
for the period from 1.4.2073 to 30.8.2073
 Particulars Normal Abnormal Particulars Normal Abnormal
Rs. Rs. Rs. Rs.
Opening Stock (W.N.1) 95,000 5,000 Sales (W.N. 2&1) 240,000 2,000
Stock lying with
customers on approval
Purchases 170,000 (W.N.3) 22,000
Less Machinery purchase 30,000 140,000 Goods sent to consignee 16,500
Wages 50,000 Goods drawn by proprietor 10,000
Less: wages for instl.
of machinery 3,000 47,000 Free samples (W.N. 5) 1,000
Gross Profit (33.33% of
sales)
(W.N. 4) 80,000 Loss (W.N.) 500
_________ _________ Stock on the date of fire 72,500 2,500
362,000 5,000 362,000 5,000

Working Notes
(1) Abnormal items: Rs.
Original cost of slow moving items 5,000
cost of slow moving item sold 2,500
Balance of slow moving items in stock 2,500
Original cost of slow moving items sold 2,500
Loss incurred on such sale 500
Sale proceeds of slow moving items 2,000

(2) Sales as given 275,000

Less: goods sold on approval basis 49,500
225,500
Add: sales confirmed with respect to goods sold on approval basis
(1/3 x 49,500) 16,500
Total sales for the period 242,000
Less: sale of abnormal items 2,000
Normal sales 240,000

(3) Goods sold on approval basis 49,500

Less: sales confirmed 16,500

Goods with customers on approval basis

-sales not being confirmed 33,000
Less: profit element 1/3 of Rs. 33,000 11,000
Goods on approval at cost 22,000

(4) Previous year G.P. margin on sales = 20%

Cost 100-20 = 80
Selling price in the current year 100+20 120
G.P Margin in current year 40/120 x 100 33.33%

(5) Sales value of free samples distributed 1,500

Less: Profit on such sale value @ 33.33% 500
Cost of sample distribution 1000

Statement of Claim Rs.

Stock on the date of fire
 Normal items 72,500
Slow moving items 2,500
75,000
Less Salvage 25,000
50,000
Claim (applying average clause
Value of Policy/Stock on the fire date x loss of stock
= 60,000/75,000 x 50,000 =Rs. 40,000

Contract Accounting
4. Answer:
In the books of M/s Santi Constriction
Contract Account
For the period ended 31.3.2074
Date Particulars Amount Date Particulars Amount
To Materials sent to site 160,000 By Unused materials at site 21,620
To Wages 101,200 By Machines A/c (WDV as on 140,600
st
Add: Outstanding 37,520 138,720 31 Ashad 2074)
To Machines (Cost) 148,000 By Work in Progress:
To Direct Charges 7,500 Certified 350,000
Add: Outstanding 600 8,100 Uncertified 18,000 368,000
To Establishment charges 6,400
To Profit and Loss A/c (Transfer of 36,800
Profit)
To Balance c/d 32,200
530,220 530,220
To Materials at site 21,620
To Machines 140,600
(Refer Working Note No.1)
By Work in Progress:
Certified 350,000
Uncertified 18,000
368,000
Less: Balance b/d 32,200 335,800
st
Balance Sheet as on 31 Ashad 2074 (Relevant Portion only)
Capital and Liabilities Rs. Assets Rs.
Outstanding expenses Machines 148,000
Wages 37,520 Less: Depreciation 7,400 140,600
Direct Charges 600 38,120 Work in Progress:
Capital Account Certified 350,000
Profit on Contract Uncertified 18,000
(Refer Working Note No.2) 36,800 368,000
Less: Profit in Reserve 32,200
Less: Amount Received 280,000 55,800
Unused materials at site 21,620

Working Note
st
1. Calculation of Written Down Value of Machines on 31 Ashad 2074
st
Cost of Machine on 1 Baisakh 2074 148,000
Less: Depreciation on Rs.148,000 for 3 months @ 20% per annum
=148,000X20/100X3/12 7,400
Net Written Down Value of Machine 140,600
2. Calculation of amount to be transferred from Contract A/c to Profit and Loss A/c
st
Total surplus in Contract Account as on 31 Ashad 2074:
=Rs.21,620+Rs.140,600+Rs.368,000-Rs.160,000-Rs.138,720-Rs.148,000-Rs.8,100-Rs.6,400
=Rs.69,000
Thus Profit to be credited to Profit and Loss Account:
 =Rs. 69,000X2/3X280,000/350,000
=Rs.36,800

Hire Purchase Transactions

5. Answer:
(a) Calculation of Interest for each year:
st
Interest for 1 year = Rs. 300,000 x 150/360 = Rs. 125,000
nd
Interest for 2 year = Rs. 300,000 x 108/360 = Rs. 90,000
rd
Interest for 3 year = Rs. 300,000 x 69/360 = Rs. 57,500
th
Interest for 4 year = Rs. 300,000 x 33/360 = Rs. 27,500
Total Rs. 300,000
Working Notes:
1. Hire Purchase Price = Down Payment + Instalments
= 300,000 + (420,000 + 390,000 + 360,000 + 330,000) = 18,00,000
2. Total Interest = H.P. Price – Cash Price
= 1,800,000 – 1,500,000 = 300,000
3. Calculation of ratio of hire purchase price outstanding in the beginning of each year

A B C D=B-C
Year Outstanding Hire Instalment Paid Outstanding Hire
Purchase Price in the Purchase Price at the End
Beginning of each Year of each Year
I 1,500,000 420,000 1,080,000
II 1,080,000 390,000 690,000
III 690,000 360,000 330,000
IV 330,000 330,000 0
Ratio of Outstanding Hire Purchase Price at the beginning of year = 150:108:69:33.

Issue of Shares and Debentures

6. Answer:
Journal Entries
In the books of Kitkit Ltd.
NRs. NRs.
Date Particulars Dr. Cr.

1.5.2016 Bank A/c Dr. 15,000,000

To Debenture Application A/c 15,000,000
(Application money received on 150,000 debentures @ NRs. 100 each)

1.6.2016 Debenture Application A/c Dr. 15,000,000

Underwriters A/c Dr. 5,000,000
To 15% Debentures A/c 20,000,000
(Allotment of 150,000 debentures to applicants and 50,000 debentures to underwriters)

1.6.2016 Underwriting Commission A/c Dr. 400,000

To Underwriters A/c 400,000
(Commission payable to underwriters @ 2% on NRs. 20,000,000)

1.6.2016 Bank A/c Dr. 4,600,000

 To Underwriters A/c 4,600,000
(Amount received from underwriters in settlement of account)

30.9.2016 Debenture Interest A/c Dr. 1,000,000

To Bank A/c 1,000,000
(Interest paid on debentures for 4 months @ 15% on NRs. 20,000,000)

30.10.2016 15% Debentures A/c Dr. 12,000,000

To Equity Share Capital A/c 2,000,000
To Securities Premium A/c 10,000,0000
(Conversion of 60% of debentures into shares of NRs. 60 each with a face value of NRs. 10)

31.3.2017 Debenture Interest A/c Dr. 750,000

To Bank A/c 750,000
(Interest paid on debentures for the half year)

Working Note:
Calculation of Debenture Interest for the half year ended 31st March, 2017
On NRs. 8,000,000 for 6 months @ 15% = NRs. 600,000
On NRs. 12,000,000 for 1 months @ 15% = NRs. 150,000
NRs. 750,000

7. Answer:
Books of M/s Yeti Ltd.
Journal Entries
S.N. Particulars Debit Credit
1. Bank Account Dr. 12,000,000
To Share Application A/c 12,000,000
(Being Share application money received for 800,000 share at Rs.
15 per Share))

2. Share Application A/c Dr. 12,000,000

To Share Capital A/c 6,000,000
To Share Allotment A/c 6,000,000
(Being Share Application money transferred to share capital account
& excess money received transferred to share allotment account)

Share Allotment A/c Dr.

3. To Share Capital A/c 10,000,000
To Share Premium A/c 8,000,000
(Being allotment of 400,000 number of shares made at Rs. 25 per 2,000,000
Share)

Bank Account Dr.

4. Calls in Arrears A/c Dr. 3,996,000
To Share Allotment A/c 4,000
(Being Share Allotment money received except one shareholder 4,000,000
holding 400 shares who failed to pay the allotment money)

Share First & Final Call A/c Dr.

5. To Share Capital A/c
(Being first and final call made on share issued) 6,000,000
6,000,000
Bank Account Dr.
6. Calls in Arrears A/c Dr.
To Share First & Final Call A/c 5,992,500
(Being share first & final call money received except 400 shares held 7,500
by Mr. Amit and 100 shares held by Rajina who failed to pay call 6,000,000
money)

Share Capital A/c Dr.

7. Share Premium A/c Dr. 25,000
To Share Forfeiture A/c 2,000
To Calls in Arrears A/c 15,500
(Being 400 shares held by Amit who failed to pay the allotment and 11,500
 first and final call and 100 Shares held by Rojina who failed to pay
the call money forfeited )

Bank Account Dr.

8. Share Forfeiture A/c Dr. 16,000
To Share Capital A/c 6,000
To Share Premium A/c 20,000
(Being Shares forfeited from Amit issued at Rs. 40 including 2,000
premium of NRs.5 to Tanka)

Bank Account Dr.

9. To Share Capital A/c 6,000
To Share Premium A/c 5,000
(Being Shares forfeited from Rojina reissued at Rs. 60 to Suchitra) 1,000

Share Forfeiture A/c Dr.

To Capital Reserve A/c
10. (Being credit balanced on share forfeited account transferred to 9,500
Capital Reserve A/c) 9,500

Deferred Revenue Expenditure A/c Dr.

To Bank Account
11. (Being Rs.12,000 paid for share issue accounted under Deferred 12,000
Revenue Expenditure account) 12,000

Working Note;
a. Calculation of Calls in Arrears of Amit Rs.
Amount paid at the time of application = 800×15 = 12,000
Amount utilized in application = 400×15 = 6,000
Excess amount = 12,000 – 6,000 = 6,000
Calls in arrear at the time of Allotment = 400×25 – 6,000 = 4,000
Calls in arrear at the time of First & Final Call = 400×15 = 6,000

b. Calculation of Calls in arrears of Rojina Rs.

Calls in arrear at the time of First & Final Call = 100×15 = 1,500

Underwriting of Shares and Debentures

8. Answer:

(a) Statement showing the underwriters’ liability (No. of shares)

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

(b) Computation of amounts payable by underwriters

Liability towards shares to be subscribed @ 120 per share 3,090,000 1,710,000 1,200,000

Less: Commission (5% on 1.2 lakhs shares @ 100 each)

600,000 600,000 600,000
Net amount to be paid by the underwriters 2,490,000 1,110,000 600,000

(c) In the Books of Nepal Capital Ltd.

 Journal Entries
Particulars Dr. Cr.
Rs. Rs.
Underwriting commission A/c Dr. 1,800,000
To A & Co. A/c 600,000
To B & Co. A/c 600,000
To C & Co. A/c 600,000
(Being underwriting commission on the shares underwritten)
A & Co. A/c Dr. 3,090,000
B & Co. A/c Dr. 1,710,000
C & Co. A/c Dr. 1,200,000
To Equity share capital A/c 5,000,000
To Share premium A/c 1,000,000
(Being shares including firm underwritten shares allotted to underwriters)
Bank A/c Dr. 4,200,000
To A & Co. A/c 2,490,000
To B & Co. A/c 1,110,000
To C & Co. A/c 600,000
(Being the amount received towards shares allotted to underwriters less
underwriting commission due to them)

Incomplete Records
9. Answer:
Projected Balance Sheet
st
as on 31 Ashadh, 2073
Liabilities Rs. Assets Rs.
Capital 1,000,000 Fixed Assets 400,000
Profit & Loss Account as on Additions 100,000
st
1 Shrawan, 2072 60,000 500,000
Add: Profit for the year 374,000 434,000 Less: Depreciation (50,000) 450,000
Creditors (Trade) 110,000 Stock in trade336,000
Sundry Debtors 200,000
Cash & Bank Balances 558,000
1,544,000 1,544,000
Working Notes:
Projected Trading and Profit and Loss Account
st
for the year ended 31 Ashadh, 2073
Rs. Rs.
To Opening Stock 300,000 By Sales 2,120,000
To Purchases 1,520,000 By Closing Stock (balancing figure) 336,000
To Gross Profit (30% on sales) 636,000
2,456,000 2,456,000
To Sundry Expenses (10% on sales) 212,000 By Gross Profit b/d 636,000
To Depreciation 50,000
To Net Profit 374,000
636,000 636,000

Cash and Bank Account for the period

st st
1 Shrawan, 2072 to 31 Ashadh, 2073
Rs. Rs.
To Balance b/d 350,000 By Sundry Creditors 1,550,000
To Sundry Debtors 2,070,000 (Rs. 140,000 + Rs. 1,410,000)
(Rs. 150,000 + Rs. 1,920,000) By Expenses 212,000
By Fixed Assets 100,000
By Balance c/d 558,000
2,420,000 2,420,000
 Note: It is assumed that the entire sales and purchases are on credit basis.

Ratio Analysis
10. Answer:
Balance Sheet of Nyatapola Enterprises

Liabilities Rs. Assets Rs.

Capital 500,000 Fixed Assets 200,000
Creditors 186,000 Stock 90,000
Debtors 83,333
Bank Balance (balancing figure) 312,667
686,000 686,000
Working Note
(i) Gross profit= Rs. 100,000
Gross profit margin= 10%
Hence, Sales= Rs. 100,000 x 100/10= Rs. 1,000,000
Cost of goods sold = Sales – Gross profit
= Rs.( 1000,000-100,000)
= Rs. 900,000
Purchase = Cost of goods sold + Increase in stock
= Rs. ( 900,000+30,000) = Rs. 930,000
Average stock= Cost of goods sold/stock velocity
= Rs. 900,000/12=75000
(ii) Capital:
Capital turnover ratio = 2
Sales/Capital=2
Hence, Capital= Rs. 1,000,000/2 = Rs. 500,000
(iii) Creditors:
Creditors payment period = 73 days
Hence, Creditors= Purchases x 73/365 =Rs. 930,000 x 1/5 = Rs. 186,000

(iv) Fixed assets:

Fixed assets turnover ratio = 5
Hence, Fixed Assets = Sales/5= Rs. 1,000,000/5= Rs. 200,000

(v) Closing stock:

Closing stock is Rs. 30,000 more than opening stock; it is Rs. 15000 more than average stock.
Hence, closing stock= Average stock + Rs. 15000
= Rs. 75,000+Rs.15,000= Rs. 90,000
(vi) Debtors:
Debt collection period = 1 month
Hence, debtors= Sales x 1/12 = Rs. 1,000,000 x 1/12 = Rs. 83,333.33
It is assumed that there is no change in capital during the period.

Business Combination
11. Answer:
Books of Blue Star Limited
Realization Account
Rs. Rs.
To Building 3,40,000 By Creditors 3,20,000
 To Machinery 6,40,000 By B Ltd. 12,10,000
To Stock 2,20,000 By Equity Shareholders A/c (Loss) 60,000
To Debtors 2,60,000
To Goodwill 1,30,000
1,590,000 1,590,000

Bank Account
To Balance b/d 136,000 By 10% debentures 400,000
To Big Star Ltd. 600,000 By Loan from A 160,000
By Equity shareholders A/c 176,000
736,000 736,000

Big Star Ltd. Account

To Realisation A/c 1,210,000 By Bank A/c 600,000
By Equity Share holders A/c
(4,880 shares at Rs.125 each in Big Star Ltd.)
610,000
1,210,000 1,210,000

Equity Shareholders Account

To Realisation A/c 60,000 By Equity Share Capital 800,000
To Deferred Revenue Exp. 34,000 By General Reserve 80,000
To Equity shares in Big Star Ltd. 610,000
To Bank A/c 176,000
880,000 880,000

Big Star Ltd.

st
Balance Sheet as on 1 Shrawan, 2073 (An extract)
Liabilities Rs. Assets Rs.
4880 Equity shares of Rs.100 each 488,000 Goodwill 232,000
(Shares have been issued for Building 306,000
consideration other than cash)
Securities Premium 122,000 Machine 576,000
Profit and Loss A/c ….
Less: unrealized profit 15,000 …..
Creditors (320,000 - 40,000) 280,000 Stock (198,000 -15,000) 183,000
Bank Overdraft 616,000 Debtors (260,000 – 40,000) 220,000
Less: Provision for bad debts 26,000 194,000

Working Notes:
1. Valuation of Goodwill Rs.
Average profit 124,400
Less: 8% of Rs. 880,000 70,400
Super profit 54,000
Value of Goodwill = 54,000 x 4 216,000

2. Net Assets for purchase consideration

Goodwill as valued in W.N.1 216,000
Building 306,000
Machinery 576,000
Stock 198,000
Debtors 260,000
Total Assets 1,556,000
Less: Creditors 320,000
Provision for bad debts 26,000 346,000
 Net Assets 1,210,000

Out of this Rs. 600,000 is to be paid in cash and remaining i.e., (1,210,000 –600,000) Rs. 610,000 in shares of
Rs. 125/-. Thus, the number of shares to be allotted 610,000/125 = 4,880 shares.
3. Unrealized Profit on Stock Rs.
The stock of Blue Star Ltd. includes goods worth Rs. 100,000 which was sold by Big Star
40,000
Ltd. on profit. Unrealized profit on this stock will be 1,00,000 25,000
1,60,000
As Big Star Ltd. purchased assets of Blue Star Ltd. at a price 10% less than the book value, (10,000)
10% need to be adjusted from the stock i.e., 10% of Rs.100,000.
Amount of unrealized profit 15,000

4. Liquidation expenses borne by the Big Star Ltd. so that should be debited to Goodwill Account.

12. Answer
Books of Hill Ltd.
Realisation Account

Particulars Amount Rs. Particulars Amount Rs.

To Good will 1,00,000 By Current Liabilities 2,00,000
To Fixed Assets 3,00,000 By Himal Ltd. 10,87,500
To Current Assets 13,00,000 By Share Capital 2,50,000
By Equity Shareholders a/c ( loss) 1,62,500
17,00,000 17,00,000

Equity Shareholders (outside) Account

Particulars Amount Rs. Particulars Amount Rs.
To Realisation 2,50,000 By Share Capital 10,00,000
To Realisation Loss 1,62,500 By General reserve 5,00,000
To Shares in Himal Ltd 10,87,500
15,00,000 15,00,000

Balance Sheet of Himal Ltd.

(After completion of absorption)
Capital & Liabilities Amount Rs. Assets Amount Rs.
Share Capital 30,87,500 Fixed Assets 18,00,000
30875 shares @ Rs. 100 fully paid Himal Ltd. 15,00,000
Hill Ltd. 3,00,000
Reserve & Surplus
General reserve 15,25,000 16,25,000 Investment 50,000
Capital reserve 1,00,000
Current Assets 45,47,500
Current Liabilities
16,85,000
63,97,500 63,97,500

Workings:
Adjusted Balance Sheet of Hill Ltd.
Capital & Liabilities Amount Rs Assets Amount Rs.
Share Capital 10,00,000 Fixed assets 3,00,000
General Reserve 5,00,000 Goodwill 1,00,000
Current Liabilities 2,00,000 Current assets 13,00,000*
17,00,000 17,00,000

Hill Ltd retains Rs. 100,000 in cash for dividend (10%) ( 1,400,000-100,000)

1. Total Purchase consideration (based on net worth of Hill Ltd.) is Rs. 1,450,000.

2. Himal Ltd. holds 2,500 shares in Hill Ltd. The percentage of holding is 25%

3. The net purchase consideration to pay Rs. 1,450,000 * ¾ = 1,087,500

 4. Calculation of Current Assets
Current assets of Himal Ltd. 3,250,000
Add Dividend 25,000
3,275,000
Less: intercompany amount 15,000
3,260,000
Current Assets of Hill Ltd. 1,300,000
Less unrealized profit 12,500
(Rs. 50,000-37,500) 1,287,500
Total Current Assets 4,547,500

5. Calculation of Current Liabilities

Himal Ltd. 1,500,000
Hill Ltd. (200,000-15,000) 185,000
1,685,000

6. Calculation of Capital Reserve

Assets taken over from Hill Ltd:
Fixed assets 300,000
Current assets (1,300,000-12,500) 1,287,500
1,587,500
Liabilities:
Investment in Hill Ltd. 200,000
Current Liabilities 200,000
Purchase consideration 1,087,500 1,487,500
Capital Reserve 100,000

Internal Reconstruction
13. Answer:

Journal Entries
in the books of Pokhara Light Ltd.
Rs.
Rs.
(i) Equity Share Capital (Rs.100) A/c Dr. 1,00,00,000
To Equity Share Capital (Rs.40) A/c 40,00,000
To Reconstruction A/c 60,00,000
(Being conversion of equity share capital of Rs.100 each into Rs.40 each as
per reconstruction scheme)

(ii) 12% Cumulative Preference Share capital (Rs.100) A/c Dr. 50,00,000
To 12% Cumulative Preference Share Capital (Rs.60) A/c 30,00,000
To Reconstruction A/c 20,00,000
(Being conversion of 12% cumulative preference share capital of Rs.100
each into Rs.60 each as per reconstruction scheme)

(iii) 10% Debentures A/c Dr. 40,00,000

To 12% Debentures A/c 28,00,000
To Reconstruction A/c 12,00,000
(Being 12% debentures issued to 10% debenture-holders for 70% of their
claims. The balance transferred to capital reduction account as per
reconstruction scheme)

(iv) Sundry Creditors A/c Dr. 20,00,000

To Equity Share Capital A/c 12,00,000
 To Reconstruction A/c 8,00,000
(Being a creditor of Rs.20,00,000 agreed to surrender his claim by 40% and
was allotted 30,000 equity shares of Rs.40 each in full settlement of his
dues as per reconstruction scheme)

(v) Provision for Taxation A/c Dr. 1,00,000

Reconstruction A/c Dr. 50,000
To Current Assets (Bank A/c) 1,50,000
(Being conversion of the provision for taxation into liability for taxation for
settlement of the amount due)
(vi) Reconstruction A/c Dr. 99,50,000
To P & L A/c 4,00,000
To Preliminary Expenses A/c 2,00,000
To Fixed Assets A/c 37,50,000
To Current Assets A/c 55,00,000
To Investments A/c 50,000
To Capital Reserve A/c 50,000
(Being amount of Reconstruction utilized in writing off P & L A/c (Dr.)
Balance, Preliminary Expenses, Fixed Assets, Current Assets, Investments
and the Balance transferred to Capital Reserve)

Balance Sheet of Pokhara Light Ltd. (and reduced)

as on 31.3.2073
Liabilities Rs. Assets Rs.
Issued, subscribed and paid up capital: Fixed Assets 87,50,000
1,30,000 equity shares of Rs.40 each 52,00,000 (1,25,00,000 – 37,50,000)
12% Cumulative Preference Shares of Rs. 60 Investments 9,50,000
each 30,00,000 (10,00,000 – 50,000)
Reserves & Surplus: Current Assets 43,50,000
Capital Reserve 50,000 (45,00,000 – 1,50,000)
Secured Loan:
12% Debentures 28,00,000
Current Liabilities and Provisions:
Sundry Creditors: 30,00,000
(50,00,000 – 20,00,000)
1,40,50,000 1,40,50,000

Working Note:
Reconstruction Account
Rs. Rs.
To Liability for taxation A/c 50,000 By Equity share capital 60,00,000
To P & L A/c 4,00,000 By 12% Cum. preference share 20,00,000
To Preliminary expenses 2,00,000 By 10% Debentures 12,00,000
To Fixed assets 37,50,000 By Sundry creditors 8,00,000
To Current assets 55,00,000
To Investment 50,000
To Capital Reserve 50,000
(balancing figure) _________ _________
1,00,00,000 1,00,00,000
Profit or Loss Pre and Post Incorporation
14. Answer:
Statement showing calculation of profits for pre and post incorporation periods
For the year ended 31.3.2072 (15 months)
Gross profit Total Ratio Pre Post
Gross Profit 140,40,000 1:8 1560,000 124,80,000
Less: Salaries 2340,000 1:12 180,000 2160,000
Depreciation 360,000 1:4 72,000 288,000
Advertisement 1404,000 1:8 156,000 1248,000
Discount 2340,000 1:8 260,000 2080,000
Managing Director‘s Salary 180,000 Post - 180,000
Office/showroom rent 1440,000 Actual 180,000 1260,000
Miscellaneous office expenses 240,000 1:4 48,000 192,000
Interest paid 1902,000 Actual 702,000 1200,000
Goodwill (loss) 38,000 -
Net Profit - 3,872,000

Working note:
Pre post
st
1. calculation of time ratio = 1:4 1 Baisakh to 31.3.2071 1.4.2071 to 31.3.2072
3 months 12 months
2. Calculation of sales ratio = 1:8 3x1 = 3 12 x 2 = 24
3. Calculation of staff salary ratio = 1:12 3x1 = 3 12 x 3 = 36
4. calculation of interest 234,00,000 x 12% for 3 months 100,00,000 x 12% for 1 year
Rs. 702,000 Rs. 1200,000
5. Calculation of Rent
(i) additional rent 60,000x9 = 540,000
(ii) regular rent = (1440,000-540000) 900,0000X3/15 = 180,000 900,0000X12/15 = 720,000
= 900,000
6. Calculation of gross profit = sales – cost of goods sold = 468,00,000-327,60,000 = 140,40,000

Liquidator’s Final Statement

15. Answer:
Liquidator’s Final Statement
Receipts Rs. Rs. Payments Rs.
Rs.
Cash at Bank 60,000 Liquidation expenses 4,600
Assets realised:
Sundry Debtors 160,000 Liquidator‘s remuneration (W.N. 1) 30,400
Stock 120,000 Debenture holders:
Plant & Machinery 360,000 640,000 10% debentures 200,000
Surplus from Land & Interest accrued (W.N.2) 15,000 215,000
Buildings: Preferential creditors 30.000
Amount realised 340,000 Unsecured creditors 370,000
Less: Secured Preference shareholders:
Creditors 100,000 240,000 10% Preference Share
Capital 200,000
Arrear dividend 40,000 240,000
Equity Shareholders
(W.N. 3) :
Rs. 17.50 per share
on 2,000 shares 35,000
Rs. 2.50 per share
on 6,000 shares 15,000 50,000
940,000 940,000
Working Notes:
(1) Liquidator’s remuneration: Rs.
3% on Assets realised (3% of Rs. 980,000) 29,400
2% of the amounts distributed among Equity Shareholders
 (2/102 × Rs. 51,000) 1,000
30,400
(2) Interest accrued on 10% debentures
Interest accrued as on 31.3.2073 10,000
Interest accrued upto the date of payment
st
(upto 31 Ashwin, 2073) 5,000
15,000
(3) Amount payable to Equity Shareholders
Equity Share Capital 510,000
Less: Surplus available for Equity Shareholders 50,000
Loss to be borne by them 460,000
Loss per Equity share (Rs. 460,000/8,000) 57.50
Amount payable to Equity shareholders:
Each Equity share of Rs. 75 paid up 17.50
Each Equity share of Rs. 60 paid up 2.50

Accounting for Partnership

16. Answer:
Dr. Profit & Loss Account Cr.
Date Particulars Amount Date Particulars Amount
2074 NPR 2074 NPR
Ashad To Loss for the year 25,000 Ashad By Loss transferred to
31 To Interest on Capitals 31 Amar's Capital 22,000
Amar's Capital 14,000 Bishnu's Capital 11,000
Bishnu's Capital 14,000 Chetan's Capital 22,000 55,000
Chetan's Capital 2,000 30,000

55,000 55,000

Dr. Realization Account

Cr.
Date Particulars Amount Date Particulars Amount
2074 NPR 2074 NPR
Ashad To Patents & Trade Marks 24,000 Ashad By Amar's Capital-
31 To Sundry Debtors 115,000 31 Debtors at Dhankuta 67,500
To Furniture 21,000 Furniture at Dhanluta 10,000
To Stock 133,000 Stock at Dhankuta 46,000
To Cash (Expenses) 4,000 Total 123,500
Less : 10% 12,350 111,150
By Bishnu's Capital
Debtors at Pokhara 32,500
Furniture at Pokhara 5,000
Stock at Pokhara 34,000
Total 71,500
Less : 10% 7,150 64,350

By Shares in New Company Ltd 60,000

By Loss transferred to:

Amar's Capital 24,600
Bishnu's Capital 12,300
Chetan's Capital 24,600 61,500

297,000 297,000

Dr. Sundry Creditor Account

Cr.
Date Particulars Amount Date Particulars Amount
2074 NPR 2074 NPR
Ashad To Cash 69,800 Ashad By Balance b/d 69,800
31 31
69,800 69,800

Dr. Cash Account

Cr.
Date Particulars Amount Date Particulars Amount
2074 NPR 2074 NPR
Ashad To Amar's Capital A/C 46,533 Ashad By Realization A/c (Expenses) 4,000
31 31 By Sundry Creditors 69,800
To Bishnu's Capital A/C 23,267
(Cash advance to pay creditors)
To Amar's Capital A/C
(Cash paid for expenses) 4,000

73,800 73,800

Dr. Shares in New Company Ltd.

Cr.
Date Particulars Amount Date Particulars Amount
2074 NPR 2074 NPR
Ashad To Realization A/c 60,000 Ashad By Bishnu's Capital A/c 60,000
31 31
60,000 60,000

Dr. Partners’ Capital

Cr.
Particulars Amar Bishnu Chetan Particulars Amar Bishnu Chetan

To Drawings 22,720 19,920 9,160 By Balance b/d 140,000 140,000 20,000

To Profit & Loss A/c 22,000 11,000 22,000 By Interest on Capital 14,000 14,000 2,000
To Balance c/d 109,280 123,080 - By Balance c/d - - 9,160

154,000 154,000 31,160 154,000 154,000 31,160

To Balance b/d 9,160 By Balance b/d 109,280 123,080
To Realization A/c (Assets 111,150 64,350 By Cash 46,533 23,267
taken over) 24,600 12,300 24,600 By Cash Expenses 4,000
To Realization (loss) By Amar's Capital A/c 15,880
To Chetan's Capital A/c 15,880 17,880 By Bishnu Capital A/c 17,880
To Shares in New Co. Ltd. 60,000 By Bishnu's Capital A/c 8,183
To Amar's Capital ( Cash (Cash paid to Amar)
received from Bishnu) 8,183
159,813 154,530 33,760 159,813 154,530 33,760
Note: Chetan's loss has been divided between Amar and Bishnu in the ratio of 109,280 : 123,080 respectively.

Accounting for Non-profit making organization

17. Answer:

a. Bank A/c Dr. 560,000

To Building Fund A/c 560,000
(on collection of donations)

b. Bank A/c Dr. 902,600

To Building Fund A/c 902,000
(40% of the development fees directly)

c. Fixed Deposit a/c Dr. 48,000

 To Interest A/c 48,000
(on accrual of interest)

d. Interest A/c Dr. 48,000

To Building Fund A/c 48,000
(Interest accrued on fixed deposit transferred)

e. Capital work in progress a/c Dr. 725,000

To Contractor‘s a/c 725,000
(Work completed and certified during the year)

f. Contractors‘ a/c Dr. 1,343,750

To Bank A/c 1,343,750
(Payments made during the year)

g. Building a/c Dr. 1,550,000

To Capital Work in progress A/c 1,550,000
(transfer to completed building to asset a/c)

h. Building Fund a/c 1,550,000

To General Fund A/c 1,550,000
(corresponding building fund transferred)
st
Trial Balance of Building Fund as on 31 Ashadh 2072
Dr. Cr.
Building Fund 1,002,600
Contractor‘s A/c 206,250
Fixed Deposit A/c 648,000
Current a/c 560,850

Total 1,208,850 1,208,850

Accounting for Banks

18. Answer:
Calculation of Loan Loss Provisioning
Amount
Loan Amount Provision 31st
31st Ashad as on 31st Additional Ashad Rate of Total
Category 2072 Ashad 2072 Loans Shifting 2073 Provision Provision
1. Pass 5,000,000 50,000 3,000,000 (500,000) 7,500,000 1% 75,000
2. Rescheduled
/Restructured 210,000 26,250 200,000 410,000 12.5% 51,250
3. Substandard 500,000 125,000 300,000 800,000 25% 200,000
4. Doubtful 300,000 150,000 (150,000) 150,000 50% 75,000
5. Bad 500,000 500,000 (50,000) 450,000 100% 450,000
Total 6,510,000 851,250 9,310,000 851,250
Total NPA 1,400,000
NPA % 15.04%

Journal Entries
In the books of SSS Bank Limited
Loans and Advances Dr.
To Cash A/c 30,00,000
(Being Loans given during the year. Assumed that all the loans are taken in 30,00,000
cash)
 Profit and Loss A/c Dr.
Restructured Loans Dr. 2,00,000
Substandard Loans Dr. 2,00,000
To Pass Loans 3,00,000
To Doubtful Loans 5,00,000
To Bad Loans 1,50,000
(Being changes of in various categories of loans and advances during the 50,000
year.)
Profit and Loss A/c Dr.
To LLP Pass Loans 1,25,000
To LLP Restructured Loans 25,000
To LLP Substandard 25,000
(Being changes of in various categories of loans loss provisioning during the 75,000
year.)
LLP Doubtful Loans Dr.
LLP Bad Loans Dr. 75,000
To Profit and Loss A/c 50,000
(Being changes of in various categories of loans and advances during the 1,25,000
year.)
Note:
Though no additional entry is required for the amount of LLP as the amount of LLP last year and this year is same but
individual category wise LLP has changed thus requiring the above journal entries.

19. Answer:
a. Calculation of Total Risk Weighted Assets = 213,546 + 4,235 + 1,618 = 219,399

b. Calculation of Core Capital

Particular Amount
Paid up Capital 20,000
General Reserve Fund 377
Retained Earnings 308
Profit for current year 1,945
Less: Loan Given to Relatives of Staffs (37)
Total core capital 22,593

c. Supplementary Capital
Particular Amount
General Loan Loss Provision 1,215
Investment Adjustment Reserve 22
Total Supplementary Capital 1,237

d. Core Capital Ratio = 22,593 X 100/ 219,399 = 10.29%

e. Total Capital Adequacy Ratio = (22,593 + 1,237) X 100/ 219,399 = 10.86%
f. Compliance with NRB Directives
Particular NRB Actual
Requirement
Core Capital Ratio 6% 10.29%
Total Capital Adequacy Ratio 10% 10.86%

Cash Flow Statement

20. Answer:
st
Cash Flow Statement for the year ended on 31 December 2016
 Particular Rs. Rs.
1. CCash Flow from Operating Activities
a Net profit before tax 28,800
s Adjustments:
h 3,050
Depreciation
200
FIncrease in provision for doubtful debt 2,000
l Decrease in stock (3,370)
o Decrease in creditor (230)
wIncrease in Debtor (18,000)
Income Tax Paid
S
t
a Net Cash from Operating Activities 12,450
2. t Cash Flow from Investing Activities
e Investment Purchased (6,250)
mSale of Investment 4,800
e Plant Purchased (5,000)
n
t Net Cash Flow from Investing Activities (6,450)
3. Cash Flow from Financing Activities
Payment of Interim Dividend (5,000)
Net increase in cash equivalent 1,000
Add: Opening Cash Balance 8,000
Closing Cash Balance 9,000
Adjus
ted Profit and Loss Account
Particulars Rs. Particulars Rs.
To Provision for Tax 20,000 By Profit 28,800
To General Reserve 3,600
To Loss on Sale of Investment 200
To Interim Dividend 5,000

28,800 28,800

Provision for Tax Account

Particulars Rs. Particulars Rs.
To Bank (Tax Paid) 18,000 By Balance b/d 19,000
To Balance c/d 21,000 By P & L A/C (Provision) 20,000

39,000 39,000

Nepal Accounting Standards

21. Answers:

a) According NAS, Revenue Recognition, in a transaction involving the rendering of services, performance
should be measured either under the completed service contract method or under the proportionate
completion method, which ever relates the revenue to the work accomplished. Further as per NAS, it
states that revenue from advertising should be recognized when the service is completed. The Service as
regards advertisement is deemed to be completed when the related advertisement appears before the
public.
In the given problem 40% advertisements appeared in the month of Baisakh 2074 and Balance in the
month of Jestha 2074.
Total Profit Computed as follows:
In Lakhs
Advertisement for 70% of available time obtained in by Falgun 2073 700
Advertisement for remaining available time obtained in by Chaitra 2073 240
 Total 940
Less: cost of advertisement rights (520)
Profit 420
The Profit amounting to Rs 420 Lakhs should be apportioned in the ratio of 40:60 for the months of
Baisakh & Jestha 2074.
Hence the company should recognise Rs 168 Lakhs (Rs 420*40%) and rest Rs 252 Lakhs in the month of
Baisakh and Jestha 2074 respectively.

(b). The borrowing costs incurred by an entity to finance prepayments on a qualifying asset are capitalised on
the same basis as the borrowing costs incurred on assets constructed by the entity.
The capitalisation starts when all three conditions are met: expenditures are incurred, borrowing costs are
incurred, and the activities necessary to prepare the asset for its intended use or sale are in progress.
Expenditures on the asset are incurred when the prepayments are made (payments of the instalments).
Borrowing costs are incurred when borrowing is obtained. The last condition – the activities necessary to
prepare the asset for its intended use or sale are in progress – can vary depending on facts and
circumstances. When the construction process by the third party does not start at the prepayment date,
management assesses whether it is appropriate to start capitalisation from this date or whether it should
be deferred to a later date.

(c). As per NAS 37 ‗Provisions, contingent liabilities and contingent assets‘ a provision should be recognised
when;
(a) an enterprise has a present obligation as a result of a past event.
(b) it is probable that an outflow of resources embodying economic benefits will be required to settle the
obligation; and
(c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no
provision should be recognised.
In the given situation the directors of the company are of the opinion that the claim can be successfully
resisted by the company, therefore there will be no out flow of the resources. The company will disclose
the same as contingent liability by way of the following notes:
‗Ligation is in process against the company relating to a dispute with a competitor who alleges that the
company has infringed patents and is seeking damages of Rs. 20 millions. However, the directors are of
the opinion that the claim can be successfully resisted by the company.‘
(d). Nepal Accounting Standard (NAS) 10 ‗Events after the reporting period‘, states that adjustments to assets
and liabilities are not appropriate for events occurring after the balance sheet date, if such events do not
relate to conditions existing at the balance sheet date. The destruction of warehouse due to earthquake did
not exist on the balance sheet date i.e. 31.3.2072. Therefore, loss occurred due to earthquake is not to be
recognized in the financial year 2071-72.
However, unusual changes affecting the existence or substratum of the enterprise after the balance sheet
date may indicate a need to consider the use of fundamental accounting assumption of going concern in
the preparation of the financial statements. As per the information given in the question, the earthquake
has caused major destruction; therefore fundamental accounting assumption of going concern is called
upon.
Hence, the fact of earthquake together with an estimated loss of Rs. 25 lakhs should be disclosed in the
report of the directors for the financial year 2071-72.
(e). ‗Other Comprehensive Income’s per NAS
Other comprehensive income comprises items of income and expenses (including reclassification
adjustments) that are not recognized in profit and loss as required or permitted by other NFRSs.
The components of other comprehensive income include;
1. changes in revaluation surplus
2. re-measurements of defined benefit plans
3. gains and losses arising from translating the financial statements of a foreign operation
 4. gains and losses from investments in equity instruments measured at fair value through other
comprehensive income in accordance NFRS related with financial instruments
5. the effective portion of gains and losses on hedging instruments in a cash flow hedge
6. for particular liabilities designed as at fair value through profit or loss, the amount of the change in the
fair value that is attributable to changes in the liability‘s credit risk.
(f). The investments other than investment in properties are not qualifying assets as per NAS-23 Borrowing
Costs. Therefore, interest cost of holding such investments cannot be capitalized. Further, even interest
in respect of investment properties can only be capitalized if such properties meet the definition of
qualifying asset, namely, that it necessarily takes a substantial period of time to get ready for its intended
use or sale. Also, where the investment properties meet the definition of ‗qualifying asset‘, for the
capitalization of borrowing costs, the other requirements of the standard such as that borrowing costs
should be directly attributable to the acquisition or construction of the investment property and suspension
of capitalization as per NAS-23 have to be complied with.

Write Short Notes

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

(b). Watch list in Loan loss provisioning

Nepal Rastra Bank has formulated a new category of loan for provisioning purposes. As per the Central
Bank‘s Rule, all loans are required to be classified into 5 different categories including Watch List whereby
5% of the total loan is required to be kept as provisioning though the provision can be reversed when the
loan becomes performing later. Provision made for watch list loans is a general loan loss provision. As per
the circular issued by Central Bank, the loans having the following characteristics are to be classified as
Watch List loans:
1. If interest and principal repayments are outstanding for more than a month.
2. Short term/Working Capital Loans that are not renewed on time and are renewed on temporary
basis.
3. Loans and advances to customers/ group of customers who have been categorized as non
performing by other banks and financial institutions.
4. Firms/Companies/Organizations having negative net worth or net loss though interest and principal
are served on regular basis.
5. Specifically specified by NRB after due inspection.
(c). Leases
A lease is a contract calling for the lessee (user) to pay the lessor (owner) for use of the property. A rental
agreement is a lease in which the asset is tangible property. Leases for intangible property can include use
of a computer program (similar to a license, but with different provisions), or use of a radio frequency (such
as a contract with a cell-phone provider). It is a written agreement under which a property owner allows a
tenant to use the property for a specified period of time and rent. The lease will either provide specific
provisions regarding the responsibilities and rights of the lessee and lessor, or there will be automatic
provisions as a result of local law. In general, by paying the negotiated fee to the lessor, the lessee (also
called a tenant) has possession and use (the rental) of the leased property to the exclusion of the lessor
and all others except with the invitation of the tenant

(d). Government Accounting System in Nepal

Government Accounting System in Nepal is generally on Cash Basis. It has set chart of accounts under
which revenue and expenditure are accounted for. It follows double entry system; however, do not follow
the mercantile system of accounting. Government accounting system broadly classifies expenditure into
administrative and development expenses. Accounting system followed by the government differentiates
Capital expenditures and revenue expenditure in its subsidiary records. Office of the Financial Comptroller
General specifies the chart of accounts under which all the government revenue and expenditure are to be
accounted for.
(e). Debt Service Coverage Ratio
The ratio is a key financial ratio for the lenders.
 Debt servicing means timely payment of principal amount of instalments plus interest.
 Borrower should be able to service the debt out of the profits. Profit means the profit available for
debt servicing.
 This ratio is calculated as:
Profit available for Debt Servicing
Loan instalments +Interest

 This ratio normally should be 1.33 but a higher coverage is of advantage to the business
as it improves its strength to service the debts promptly

(f). Advantages of customized Accounting packages

Following are the advantages of the customized accounting packages:
 The input screens can be tailor made to match the input documents for ease of data entry.
 The reports can be prepared as per the specification of the organization. Many additional MIS
reports can be included in the list of reports.
 Bar-code scanners can be used as input devices suitable for the specific needs of and individual
organization.
 The system can suitably match with the organizational structure of the company.

(g). Non Banking Assets

Bank can sale the property which has taken as collateral security, against loan and advances given to the
borrower in case of default, to recover outstanding principal and interest amount. If such properties couldn‘t
be sold through auction then the bank can assume the properties in its own name. Such assumed property
is called ‗Non Banking Asset (NBA)‘. Recognition of the NBA should be done at lower of total outstanding
amount (principal plus accrued interest thereon as on the date of assume) and prevailing market value of
the properties. The difference between the two should be recorded as an expense in the year of assume.
As per the requirement of the Unified Directives of Nepal Rastra Bank (NRB), 100% provision should be
provided to total value of NBA from the year of assume. It means institution shouldn‘t hold NBA.

(h). Re-insurance
In general insurance there are risks which, because of their magnitude or nature, one insurance company
cannot afford to cover, e.g., aviation insurance. Generally, in such cases, an insurance company insures
the whole risk itself and lays off the amount it has accepted to other insurance of reinsurance companies,
retaining only that much risk which it can absorb.
A reinsurance transaction may thus be defined as an agreement between a 'ceding company' and a 're-
insurer' whereby the former agrees to 'cede' and the later agrees to accept a certain specified share of risk
or liability upon terms as set out in the agreement.
AUDIT AND ASSURANCE
 QUESTIONS

Chapter 1: General Concepts

Auditing and Assurance
Question No 1:
What are the pre-engagement activities for the practicing firm ?

Question No 2:
What are the factors that could impair the firm‘s independence for the engagements ?

Question No 3:
―The auditor shall not agree to a change in the terms of the audit engagement where there is no
reasonable justification for doing so.‖ Explain

Question No 4:
Shrestha & Co are the auditors of Metal Co.Ltd. Metal Co Ltd. have approached the bank to extend their
overdraft limit in order to finance a short term project they intend to undertake. The bank has asked that
cash flow projections be provided for the project and that assurance be provided over the projections by
Shrestha & Co.
Required:
Explain the type of assurance engagement that will be undertaken by Shrestha and Co, the form of
assurance that will be provided in their report and why this type of assurance is appropriate for a cash
flow projection.

Chapter 2: Planning an Audit Engagement

Question No 5:
What are the risk assessment process to determine the audit risk ?

Question No 6:
Define the concept of Audit Materiality

Question No 7:
Explain briefly duties and responsibilities of an auditor in case of material misstatements resulting from
management fraud.

Question no 8:
What are the risk factors relating to fraudulent financial reporting?

Question No 9:
While evaluating the internal control system of a company, auditor concludes that the use of Going
Concern Assumption is appropriate but a Material Uncertainty Exists. Explain what are procedures
followed by the auditor?

Question No 10:
Centronix Pvt ltd is a long established client of your firm. It manufactures electronic items for house hold,
which it sells to a range of wholesalers, on credit.
You are the audit senior and have recently been sent the following extract from the draft statement of
financial position by the finance director.
Budget Actual
Rs '000s Rs '000s Rs'000s Rs
'000s
Non-current assets 523 667
Current assets
Trade accounts receivable 2,187 779
Bank – 78
Current liabilities
Trade accounts payable 978 914
Bank overdraft 7 –
During the course of your conversation with the finance director, you establish that a major new customer
the company had included in its budget went bankrupt during the year. Identify any potential risks for the
audit of Centronix Pvt ltd and explain why you believe they are risks.

Question No 11:
Your client is engaged in developing software for sale and for own use which take substantial time for
development. Enumerate some significant risks and how the company may minimize the impact and
likelihood of such risks ?

Question No 12:
An internal control system has been described as comprising 'the control environment and control
activities. It includes all the policies and procedures (internal controls) adopted by the directors and
management of an entity to assist in achieving their objective of ensuring, as far as practicable, the
orderly and efficient conduct of its business, including adherence to internal policies, the safeguarding of
assets, the prevention and detection of fraud and error, the accuracy and completeness of the accounting
records, and the timely preparation of reliable financial information'.
Explain the meaning and relevance to the auditors giving an opinion on financial statements of each of
the management objectives above.

Question No 13:
Shaan Computer ltd, operates a computerized purchase system. Invoices and credit notes are posted to
the purchases ledger by the purchases ledger department. The computer subsequently raises a cheque
when the invoice has to be paid.
Required
List the controls that should be in operation:
a) Over the addition, amendment and deletion of suppliers, ensuring that the standing data only includes
suppliers from the company's list of authorized suppliers
b) Over purchase invoices and credit notes, to ensure only authorized purchase invoices and credit
notes are posted to the purchase ledger

Question No 14:
Groceries Nepal is the sole shareholder of Rino Nepal Stores, a company which owns five stores in
Kathmandu. The stores sell mainly food and groceries. Each store is run by a full-time manager and three
or four part-time assistants. Groceries Nepal spends on average ½ a day a week at each store, and
spends the rest of his time at home, dealing with his other business interests.
All sales are for cash and are recorded on till rolls which the manager retains. Shop managers' wages are
paid monthly by cheque by Groceries Nepal. Wages of shop assistants are paid in cash out of the
takings. Most purchases are made from local wholesalers and are paid for in cash out of the takings.
Large purchases (over Rs 10,000) must be made by cheques signed by the shop manager and
countersigned by Groceries Nepal.Shop managers bank surplus cash once a week, apart from a float in
the till.
All accounting records including the cash book, wages and sales tax records are maintained by the
manager. Groceries Nepal reviews the weekly bank statements when he visits the shops. He also has a
look at inventory to see if inventory levels appear to be about right. All invoices are also kept in a drawer
by a manager and marked with a cash book reference, and where appropriate a cheque number when
paid.

Required
Discuss the deficiencies in the control systems of Rino Nepal Stores, and how the weaknesses can be
removed

Question No 15:
The Ramani Foundation was established in 1990. The Foundation‘s aim is to provide support to children
from disadvantaged backgrounds who wish to take part in sports such as tennis, badminton and football.
It has a detailed constitution which explains how the Foundation‘s income can be spent. The constitution
also notes that administration expenditure cannot exceed 10% of income in any year. The Foundation‘s
income is derived wholly from voluntary donations.
Sources of donations include:
 (i) Cash collected by volunteers asking the public for donations in shopping areas,
(ii) Cheques sent to the Foundation‘s head office,
(iii) Donations from generous individuals.

Some of these donations have specific clauses attached to them indicating that the initial amount donated
(capital) cannot be spent and that the income (interest) from the donation must be spent on specific
activities, for example, provision of sports equipment. The rules regarding the taxation of charities in the
country Ramani Foundation is based are complicated, with only certain expenditure being allowable for
taxation purposes and donations of capital being treated as income in some situations.
Required:
(a) Identify areas of inherent risk in the Ramani Foundation and explain the effect of each of these risks
on the audit approach.
(b) Explain why the control environment may be weak at the Ramani Foundation .

Question No 16:
On the day of the inventory count, you attended Butwal Depot of Nepal Bottlers Ltd . You observed the
following activities:
1. Pre-numbered Inventory count sheets were being issued to client‘s staff carrying out the count. The
count sheets showed the inventory ledger balances for checking against physical inventory.
2. All count staff were drawn from the inventory warehouse and were counting in teams of two.
3. Three counting teams were allocated to each area of the stores to count, although the teams were
allowed to decide which pair of staff counted which inventory within each area. Staff were warned that
they had to remember which inventory had been counted.
4. Information was recorded on the count sheets in pencil so amendments could be made easily as
required.
5. Any inventory not located on the pre-numbered inventory sheets was recorded on separate inventory
sheets – which were numbered by staff as they were used.
6. At the end of the count, all count sheets were collected and the numeric sequence of the sheets
checked; the sheets were not signed.

Find the weaknesses in the control system for counting inventory at Butwal Depot of Nepal Bottlers Ltd.
For each weakness, explain why it is a weakness and state measures to overcome the weakness.

Chapter 3: Gathering evidence during an audit engagement

Question No 17:
If the auditor identifies a misstatement during the audit of a company, what procedure would be followed
to minimize the risk?

Question No 18:
Nepal Hardware Limited is engage in trading of building materials. Major products are cement, marble
and timber. Total sales for year ended December 31, 20×7 amounted to Rs. 12 million, around 5,500
sales invoices were issued during year. Your risk assessment procedures reflect that the design of
controls are appropriate. However, the management has informed you that some unrecorded cement
sales are suspected
Discuss matters that would you consider in applying analytical procedures as substantive tests, to detect
material misstatement in sales revenues.

Question No 19:
You are auditing the financial statements of Nepal Bakeries for the year ended 31 March 20X7. Nepal
Bakeries is a chain of bakeries operating in 5 locations. The bakeries sell a range of cakes, pastries,
bread, sandwiches, pasties and drinks which customers purchase in cash. The company has had a
‗challenging‘ year, according to its directors, and is renegotiating its bank overdraft facility with its bank.
The income statement for the year ended 31 March 20X6 is shown below together with the draft income
statement for the year ended 31 March 20X7.
Income statements
31 March 20X7 31 March 20X6
 Rs 0 Rs 0
Revenue 4,205 3,764
Cost of sales -1,376 -1,555
Gross profit 2,829 2,209
Operating expenses
Administration -667 -798
Selling and distribution -423 -460
Interest payable -50 -49
Profit/(loss) before tax 1,689 902

Required
As part of your risk assessment procedures for the audit of Nepal Bakeries, perform analytical procedures
on the draft income statement to identify possible risk areas requiring further audit work.

Question No 20:
You are the manager in charge of the audit of Nepal Construction, a building and construction company,
and you are reviewing the non-current asset section of the current audit file for the year ended 30
September 20X5.
You find the following five matters which the audit senior has identified as problem areas. He is reviewing
the company's proposed treatment of the five transactions in the accounts and is not sure that he has yet
carried out sufficient audit work.
i. During the year Nepal Construction built a new canteen for its own staff at a cost of Rs 450,000. This
amount has been included in buildings as at 30 September 20X5.
ii. Loose tools included in the financial statements at a total cost of Rs 166,000 are tools used on two of
the construction sites on which Nepal Construction operates. They are classified as non-current
assets and depreciated over two years.
iii. A dumper truck, previously written-off in the company's accounting records has been refurbished at
a cost of Rs 46,000 and this amount included in plant and machinery as at 30 September 20X5.
iv. The company's main office block has been revalued from Rs 216,000 to Rs 266,000 and this amount
included in the statement of financial position as at 30 September 20X5.
v. A deposit of Rs 20,000 for new equipment has been included under the heading ‗plant and
machinery‘ although the final installment of Rs 35,000 was not paid over until 31 October 20X5,
which was the date of delivery of the plant.

You are required, for each of the above matters, to:

a. Comment on the acceptability of the accounting treatment and disclosure as indicated above.
b. Outline the audit work and evidence required to substantiate the assets.

Question No 21:
Sherwood Textiles, a listed company, manufactures knitted clothes and dyes these clothes and other
textiles. You are carrying out the audit of the accounts of the company for the year ended 30 September
20X6 which show a revenue of about Rs 10 million, and a profit before tax of about Rs 800,000.
You are attending the final audit in December 20X6 and are commencing the audit of trade accounts
receivables, which are shown in the draft accounts at Rs 2,060,000.
The interim audit (tests of control) was carried out in July 20X6 and it showed that there was a good
system of internal control in the sales system and no serious errors were found in the audit tests. The
company's sales ledger is maintained on a computer, which produces at the end of each month:
(i) A list of transactions for the month
(ii) An aged list of balances
(iii) Open item statements which are sent to customers. (Open item statements show all items which
are outstanding on each account, irrespective of their age).

Question No 22:
(a) Explain the importance of the bank letter and describe the procedures used to obtain confirmations
from the bank.
(b) Describe how you would test a client's bank reconciliation.
Question No 23:
You have been assigned to the audit of ABC Co (ABC), and you are drafting the audit programme for
payables and accruals for the year ended 31 December 20X7.
The company operates from a site in Kathmandu. All raw materials are received in the stores and all
deliveries are checked to the delivery note and purchase order. The stores supervisor raises a goods
received note and is also responsible for raising credit requests if there are any problems with the raw
materials delivered.
When the purchase ledger department staff receive the purchase invoices, they match them to the
relevant goods received notes and purchase orders, and post them to the computerised purchase ledger.
Suppliers are paid on the last day of each month. Other payables and accruals consist of tax, wages and
other statutory deductions, accruals and time apportioned expenses such as electricity and telephone.

Required
Describe the audit work you will carry out:
(a) To compare suppliers' statements with balances recorded on the purchase ledger
(b) To check that purchases cut-off has been applied correctly
(c) To confirm that other payables and accruals have been accurately stated.

Question No 24:
You are the audit manager of the company. The audit assistance have sought your advice in respect of
vouching following transactions:
a. Advertisement Expenses:
b. Sale of scrap :
c. Borrowings from a bank:
d. Work in Progress:

Chapter 5: Internal Audit and Corporate Governance

Question No 25:
Define Internal audit function ?

Question No 26:
Explain the Role and function of audit committees ?

Question No 27:
What are the distinction between internal audit and external audit services ?

Question No 28:
The growing recognition by management of the benefits of good internal control and the complexities of
an adequate system of internal control have led to the development of internal auditing as a form of
control over all other internal controls. The emergence of internal auditors as experts in internal control is
the result of an evolutionary process similar in many ways to the evolution of external auditing.
Required
i. Explain why the internal and independent external auditors' review of internal control procedures
differ in purpose.
ii. Explain the reasons why internal auditors should or should not report their findings on internal control
to the following company officials:
a. The board of directors
b. The chief accountant

Question No 29:
Maruti Sujuki designs and manufactures luxury motor vehicles. The company employs 2,500 staff and its
shares are held by 15 individuals, most of them from the same family. The maximum shareholding is 15%
of the share capital. The executive directors are drawn mainly from the shareholders. There are no non-
executive directors because the company legislation in Maruti Sujuki ‘s jurisdiction does not require any.
The executive directors are very successful in running Maruti Sujuki , partly from their training in
production and management techniques, and partly from their ‗hands-on‘ approach providing motivation
to employees. The board are considering a significant expansion of the company. However, the
company‘s bankers are concerned with the standard of financial reporting as the financial director (FD)
has recently left Maruti Sujuki . The board are delaying provision of additional financial information until a
new FD is appointed. Maruti Sujuki does have an internal audit department, although the chief internal
auditor frequently comments that the board of Maruti Sujuki do not understand his reports or provide
sufficient support for his department or the internal control systems within Maruti Sujuki . The board of
Maruti Sujuki concur with this view. ABC & Co, the external auditors have also expressed concern in this
area and the fact that the internal audit department focuses work on control systems, not financial
reporting. ABC & Co are appointed by and report to the board of Maruti Sujuki. The board of Maruti Sujuki
are considering a proposal from the chief internal auditor to establish an audit committee. The committee
would consist of one executive director, the chief internal auditor as well as three new appointees. One
appointee would have a non-executive seat on the board of directors.

Discuss the benefits to Maruti Sujuki of forming an audit committee.

Chapter 6: Audit Conclusion and Reporting

Question no 30
During the course of your audit of the non-current assets of Eastern Engineering Inc at 31 March 20X4,
two problems have arisen.
a. The calculations of the cost of direct labour incurred on assets in the course of construction by the
company's employees have been accidentally destroyed for the early part of the year. The direct
labour cost involved is Rs 10,000.
b. The company incurred development expenditure of Rs 25,000 spent on a viable new product which
will go into production next year and which is expected to last for ten years. The direct labour cost
involved is Rs 10,000.
(c) Other relevant financial information is as follows.
Rs
Profit before tax 100,000
Non-current asset additions 133,000
Assets constructed by company 34,000
Non-current asset at net book value 666,667

Required
i. List the general forms of modification available to auditors in drafting their report and state the
circumstances in which each is appropriate.
ii. State whether you feel that a modified audit report would be necessary for each of the two
circumstances outlined above, giving reasons in each case.
iii. On the assumption that you decide that a modified audit report is necessary with respect to the
treatment of the revaluation, draft the section of the report describing the matter (the whole report is
not required
 ANSWERS

Chapter 1: General Concepts

Auditing and Assurance
Answer No 1:
This is a crucial phase where the practicing firm has to decide whether to accept the new client
relationship or in case of existing client a periodic review whether to continue with the existing
relationship. The decision to accept or continue an audit engagement depends on the client evaluation
and ethical considerations. The firm shall make a periodical review each year for listed and economically
significant entities and document the result thereof. However, the auditor shall remain alert to the
conditions and circumstances requiring reconsideration to continue the existing clients.
The firm shall establish policies and procedures for the acceptance and continuance of client relationships
and specific engagements, designed to provide the firm with reasonable assurance that it will only
undertake or continue relationships and engagements where the firm:
(a) Is competent to perform the engagement and has the capabilities, including time and resources, to do
so;
(b) Can comply with relevant ethical requirements; and
(c) Has considered the integrity of the client

If the issues have been identified, and the firm decides to accept or continue the client relationship or a
specific engagement, the firm shall document how the issues were resolved. The engagement partner
shall be satisfied that the firm‘s policies and procedures were duly followed in acceptance and
continuation of client relationship and audit engagement and shall determine that the conclusions reached
in this regard are appropriate. The auditor shall follow ICAN Code of Ethics with respect to the following
fundamental principles:
 Integrity
 Objectivity
 Professional Competence and Due Care
 Confidentiality, and
 Professional Behavior

The auditor shall be alert to and appropriately address the following threats:
 Self interest
 Self review
 Familiarity
 Intimidation
 Advocacy

Answer No 2:
Auditor while accepting the audit engagement should consider all factors that could impair the firm's
independence for his engagement including ICAN code of ethics. Determine if any of the following
challenges are present:
(a) Other services provided to the entity and its related entities in the previous years.
(b) Proposed or prospective services
(c) Firm financial or business relationships with the client
(d) Ex-firm staff working for the client in a position of influence
(e) Firm professionals who were formerly employed by the client with involvement in the audit
engagement
(f) Audit team's and other covered persons' family members employed by the client
(g) Long association of a senior team member with the client
(h) Acceptance of hospitality that is not clearly insignificant
(i) Threat of replacement over a disagreement with an accounting policy

Answer No 3:
Where a request has come to the auditor to change the terms of engagement, the auditor should consider
the justification given for the change. To accept or decline the request by the auditor is a matter of his
professional judgment having considered the relevant laws, auditing standards and ethical considerations
and the prevalent circumstances. The auditor may agree to the change where the change is required due
to:
a) A change in circumstances that affects the entity‘s requirements for an audit.
b) A misunderstanding concerning the nature of the service originally requested.

The change in terms of an audit engagement would not be justified where the change relates to
information that is incorrect, incomplete or otherwise unsatisfactory. For example, where auditor is unable
to obtain sufficient appropriate audit evidence regarding an assertion in a financial statements and the
entity asks for the audit engagement to be changed to a review or agreed upon procedure engagement to
avoid a qualified opinion or disclaimer of opinion. If the auditor is unable to agree to a change of the terms
of the audit engagement and is not permitted by management to continue the original audit engagement,
the auditor should:
a) Withdraw from the audit engagement where possible under applicable law or regulation; and
b) Determine whether there is any obligation, either contractual or otherwise, to report the
circumstances to other parties, such as those charged with governance, owner or regulators.

Answer No 4:
The engagement that Shrestha & Co. are undertaking is a form of review engagement in order to provide
assurance to the bank that the cash flow projections are reasonable.
The assurance engagement is an example of a Limited Assurance Engagement which provides the user
with a moderate level of assurance rather than the high level of assurance provided by Reasonable
Assurance Engagements.
The assurance report is provided by Shrestha & Co. to enable the user of that report to determine what
level of reliance they can place on the information which is the subject of the report.
The form of assurance provided by the report in this case will be ‗negative assurance‘ i.e. that the Auditor
has found nothing to suggest that the cash flow projections are inaccurate. Negative assurance is
appropriate for a cash flow projection because it relates to the future and is therefore uncertain. The
auditor is unable to say with certainty whether the assumptions made are correct.

Chapter 2: Planning an Audit Engagement

Answer No 5:
The auditor knows that audit risk is the risk of failure to detect material misstatements in the financial
statements (i.e., financial statements risks).
NSA-315 deal with the auditor‘s responsibility to identify and assess the risks of material misstatement in
the financial statements, through understanding the entity and its environment, including the entity‘s
internal control. This identification, understanding and assessment provide a basis for designing and
implementing responses to the assessed risks of material misstatement.

Inquiries:
Directed towards:
a) Those charged with the governance and management to understand the environment in which the
financial statements are prepared and to assist in identifying risks of material misstatement due to
fraud or error.
b) Internal audit personnel (if any) about internal audit procedures performed during the year relating to
the design and effectiveness of the entity‘s internal control and whether management has
satisfactorily responded to findings from those procedures.
c) Employees involved in initiating, processing or recording complex or unusual transactions to
evaluate the appropriateness of the selection and application of certain accounting policies.
d) In-house legal counsel (if any) to provide information about such matters as litigation, compliance
with laws and regulations, knowledge of fraud or suspected fraud affecting the entity, warranties,
post-sales obligations, arrangements (such as joint ventures) with business partners and the
meaning of contract terms.
 e) Marketing and sales personnel about changes in the entity‘s marketing strategies, sales trends, or
contractual arrangements with its customers.

Analytical Procedures
a) To identify aspects of the entity of which the auditor was unaware.
b) To identify the existence of unusual transactions or events, and amounts, ratios and trends that might
indicate matters that have audit implications and might identify risks of material misstatement due to
fraud.

Observation and Inspection

Observation and inspection may support the results of inquiries and may also provide information about
the entity and its environment. Examples include:
a) Observation of the entity‘s operations.
b) Inspection of documents (such as business plans and strategies), records, and internal control
manuals.
c) Reports prepared by management (such as quarterly management reports and interim financial
statements) and those charged with the governance (such as minutes of board of directors‘
meetings).
d) The entity‘s premises and plant facilities.

Information Obtained in Prior Period and relevance to the current period.

The auditor shall bring forward his knowledge of previous audits relating to the matters such as:
a) Past misstatements and whether they were corrected on a timely basis.
b) The nature of the entity and its environment, and the entity‘s internal control (including deficiencies in
internal control).
c) Significant changes that the entity or its operations may have undergone since the prior financial
period.

Conclusion as to the relevance to current period

The engagement partner and other key engagement team members shall discuss the susceptibility of the
entity‘s financial statements to material misstatement and then application of the applicable financial
reporting framework to the entity‘s facts and circumstances. The engagement partner shall determine
which matters are to be communicated to engagement team members not involved in the discussion.
Some of the business risk leads to material misstatement of financial statements and
therefore relevant to the audit and needs understanding at an early stage.

Identification of Business Risks of Client

Business risk is a risk resulting from significant conditions, events, circumstances, actions or inactions
that could adversely affect an entity‘s ability to achieve its objectives and execute its strategies, or from
the setting of inappropriate objectives and strategies. The auditor uses the tools available to identify
business risks. Examples of the tools available are Strength, Weaknesses, Opportunities, and Threats
Analysis (SWOT) and Political, Economic, Social and Technological Analysis (PEST).

Answer No 6:
Information is material if it is likely to influence financial statements users‘ decisions. The major reason for
thinking about materiality is to try to fine tune the audit for effectiveness and efficiency. The auditors‘
materiality decision is a multi-factor decision involving both quantitative and qualitative aspects.
Calculated materiality amounts derived using quantitative approaches may be increased or decreased
based on the auditors‘ professional judgment about the possible effect of qualitative factors such as:
 Risk of earnings manipulation, for example, management motivation to ―manage‖ or ―smooth‖
earnings
 Possible effect on misstatements on trends, such as profitability trend
 Presence of restrictive debt covenants
 Magnifying effect of misstatement on share price for company with high price/earnings multiple
 Accuracy and reliability of accounting system
 Imminent acquisition/merger/sale
  Threat of litigation or other external review of the auditors‘ work such as monitoring by
government agency or entity
 Imminent public stock offering
 The risk that there may be undetected misstatements
 Detection of fraud or fraud indicators in prior period

Planning materiality is concerned with whether a misstatement, or an aggregation of misstatements, in an

underlying financial statement item, account balance or class of transaction, is likely to result in a material
misstatement in the financial statements as a whole. Auditors use planning materiality to determine which
financial statement items, account balances and transactions to test and which to not test. Materiality can
be classified in two level :
a) Materiality at Financial Statement Level:

A misstatement of a financial statement item is material when the misstatement, aggregated with
misstatements of other financial statement items, is likely to equal or exceed the level of reporting
materiality.

b) Materiality at Account Balances & Class of Transactions Level:

A misstatement of an account balance underlying a financial statement item is material when the
misstatement, aggregated with misstatements in other account balances underlying the financial
statement item, is likely to result in a material misstatement of the financial statement item. A
misstatement of a transaction underlying an account balance is material when the misstatement,
aggregated with misstatements in other transactions underlying the account balance, is likely to result in
the material misstatement of the account balance.

Answer No 7:
Under NSA-315, auditors are required to evaluate the effectiveness of an entity‘s risk management
framework (internal control) in preventing misstatements whether through fraud or otherwise, in all audits.
Furthermore, auditors are required to be more proactive in their search for fraud. The auditor is
responsible for maintaining an attitude of professional skepticism throughout the audit, recognizing the
possibility that a material misstatement due to fraud could exist, notwithstanding the auditor‘s past
experience of the honesty and integrity of the entity‘s management and those charged with the
governance. Auditors are aware of the possibility of there being misstatements due to fraud.

The objectives of the auditor are:

a) To identify and assess the risks of material misstatement of the financial statements due to fraud;
b) To obtain sufficient appropriate audit evidence regarding the assessed risks of material
misstatement due to fraud, through designing and implementing appropriate responses; and
c) To respond appropriately to fraud or suspected fraud identified during the audit.

The NSA, however, recognize the fact that owing to inherent limitation of an audit, there is an unavoidable
risk that some material misstatements of the financial statements may not be detected, even though the
audit is properly planned and performed in accordance with the NSAs.

Answer no 8:
Risk factors relating to fraudulent financial reporting may be grouped as follows:
(a) Management Characteristics and Influence over the Control Environment
(b) Industry Conditions
(c) Operating Characteristics and Financial Stability

Fraud risk factors relating to misappropriation of assets may be grouped as follows:

(a) Susceptibility of Assets to Misappropriation
a. Large amounts of cash on hand or processed
b. Inventory and other assets' characteristics such as small size with high value and high demand
accompanied with lack of ownership identification
c. Easily convertible assets such as bearer bonds, diamonds or computer chips
(b) Susceptibility of Internal control to ineffectiveness
a. Lack of management oversight
b. Lacking to screen job applicants for positions where employees have access to assets
susceptible to misappropriation
c. Inadequate record keeping for assets susceptible to misappropriation
d. Lack of appropriate segregation of duties
e. Lack of appropriate system of authorization and approval of transactions
f. Poor physical safeguards over assets susceptible to misappropriation
g. Lack of timely and appropriate documentation
h. Lack of mandatory vacations/ job rotations for employees performing key control functions

Answer No 9:
If the conclusion is reached that the use of the going concern assumption is appropriate in the
circumstances but a material uncertainty exists, determine whether the financial statements:
(a) adequately describe the principal events or conditions that may cast significant doubt on the entity's
ability to continue as a going concern and management's plans to deal with these events or
conditions
(b) disclose clearly that there is a material uncertainty related to events or conditions that may cast
significant doubt on the entity's ability to continue as a going concern and, therefore, that it may be
unable to realize its assets and discharge its liabilities in the normal course of business.
If adequate disclosure is made in the financial statements, express an unmodified opinion and include an
emphasis of matter paragraph in the audit report to highlight the existence of a material uncertainty
relating to the event or condition that may cast significant doubt on the entity's ability to continue as a
going concern and to draw attention to the note in the financial statements that discloses the related
events and uncertainty

If adequate disclosure is not made in the financial statements, express a qualified or adverse opinion.
State in the audit report that there is a material uncertainty that may cast significant doubt about the
entity's ability to continue as a going concern.

Answer No 10:
Potential risks relevant to the audit of Centronix Pvt ltd
(1) Credit sales.
Centronix Pvt ltd makes sales on credit. This increases the risk that Centronix Pvt ltd's sales will not be
converted into cash. Trade receivables is likely to be a risky area and the auditors will have to consider
what the best evidence that customers are going to pay is likely to be.

(2) Related industry.

Centronix Pvt ltd manufactures electronic items for house hold. These are sold to wholesalers, but it is
possible that Centronix Pvt ltd's ultimate market is the electronic industry. This is a notoriously volatile
industry, and Centronix Pvt ltd may find that their results fluctuate too, as demand rises and falls. This
suspicion is added to by the bankruptcy of the wholesaler in the year. The auditors must be sure that
accounts which present Centronix Pvt ltd as a viable company are in fact correct.

(3) Controls.
The fact that a major new customer went bankrupt suggests that Centronix Pvt ltd did not undertake a
very thorough credit check on that customer before agreeing to supply them. This implies that the controls
at Centronix Pvt ltd may not be very strong.

(4) Variance.
The actual results are different from budget. This may be explained by the fact that the major customer
went bankrupt, or it may reveal that there are other errors and problems in the reported results, or in the
original budget.

(5) Bankrupt wholesaler.

There is a risk that the result reported contains balances due from the bankrupt wholesaler, which are
likely to be irrecoverable.
Answer No 11:
Possible risks are:
2. Judgments are involved in identifying whether and when there is an identifiable asset that will
generate expected future benefits.
3. The software may not be technically feasible.
4. Technical, financial and other resources may be inadequate.
5. Estimates and judgments involved in cost allocation.
6. The product cannot be guaranteed to be bugs free.
7. Technological obsolescence.

Certain measures to minimize the risk are:

1. Written agreement with the customer specifying when and how much funds will be provided in
advance.
2. Monthly review and monitoring the development
3. Monthly comparison of actual with budgeted cost
4. Recruitment of competent staff
5. Continues feed back from customers

Answer No 12:
The auditors' objective in evaluating and testing internal controls is to determine the degree of reliance
which they may place on the information contained in the accounting records. If they obtain reasonable
assurance by means of tests of controls that the internal control system is effective in ensuring the
completeness and accuracy of the accounting records, they may limit their substantive procedures.

(a) 'The orderly and efficient conduct of its business'

An organization which is efficient and conducts its affairs in an orderly manner is much more likely to be
able to supply the auditors with sufficient appropriate audit evidence on which to base their audit opinion.
More importantly, the level of inherent and control risk will be lower, giving extra assurance that the
financial statements do not contain material errors.

(b) 'Adherence to internal policies'

Management is responsible for setting up an effective system of internal control and management policy
provides the broad framework within which internal controls have to operate. Unless management does
have a pre-determined set of policies, then it is very difficult to imagine how the company could be
expected to operate efficiently. Management policy will cover all aspects of the company's activities,
ranging from broad corporate objectives to specific areas such as wage rates.
Given that the auditors must have a sound understanding of the company's affairs generally, and of
specific areas of control in particular, then the fact that management policies are followed will make the
task of the auditors easier in that they will be able to rely more readily on the information produced by the
systems established by management.

(c) 'Safeguarding of assets'

This objective may relate to the physical protection of assets (for example locking cash in a safe at night)
or to less direct safeguarding (for example ensuring that there is adequate insurance cover for all assets).
It can also be seen as relating to the maintenance of proper records in respect of all assets.
The auditors will be concerned to ensure that the company has properly safeguarded its assets so that
they can form an opinion on the existence of specific assets and whether the company's records can be
taken as a reliable basis for the preparation of financial statements. Reliance on the underlying records
will be particularly significant where the figures in the financial statements are derived from such records
rather than as the result of physical inspection.

(d) 'Prevention and detection of fraud and error'

The directors are responsible for taking reasonable steps to prevent and detect fraud. They are also
responsible for preparing financial statements which give a true and fair view of the entity's affairs.
However, the auditors must plan and perform their audit procedures and evaluate and report the results of
these, recognizing that fraud or error may materially affect the financial statements. A strong system of
 internal control will give the auditors some assurance that frauds and errors are not occurring, unless
management are colluding to overcome that system.

(e) 'Accuracy and completeness of the accounting records'/'timely preparation of reliable financial
information'
This objective is most clearly related to statutory requirements relating to both management and auditors.
The company generally has legal obligations to maintain proper accounting records. The auditors must
form an opinion on whether the company has fulfilled these obligations and also conclude whether the
financial statements agree with the underlying records.

Answer No 13:
(a) Controls over the standing data file containing suppliers' details will include the following.
i. All amendments/additions/deletions to the data should be authorised by a responsible official. A
standard form should be used for such changes.
ii. The amendment forms should be input in batches (with different types of change in different
batches), sequentially numbered and recorded in a batch control book so that any gaps in the
batch numbers can be investigated. The output produced by the computer should be checked to
the input.
iii. A listing of all such adjustments should automatically be produced by the computer and reviewed
by a responsible official, who should also check authorisation.
iv. A listing of suppliers' accounts on which there has been no movement for a specified period should
be produced to allow decisions to be made about possible deletions, thus ensuring that the
standing data is current. The buying department manager might also recommend account closures
on a periodic basis.
v. Users should be controlled by use of passwords. This can also be used as a method of controlling
those who can amend data.
vi. Periodic listings of standing data should be produced in order to verify details (for example
addresses) with suppliers' documents (invoices/ statements).

(b) The input of authorised purchase invoices and credit notes should be controlled in the following
ways.
i. Authorisation should be evidenced by the signature of the responsible official such as the Chief
Accountant. In addition, the invoice or credit note should show initials to demonstrate that the
details have been agreed: to a signed GRN; to a purchase order; to a price list; for additions and
extensions.
ii. There should be adequate segregation of responsibilities between the posting function, inventory
custody and receipt, payment of suppliers and changes to standing data.
iii. Input should be restricted by use of passwords linked to the relevant site number.
iv. A batch control book should be maintained, recording batches in number sequence.Invoices should
be input in batches using pre-numbered batch control sheets. The manually produced invoice total
on the batch control sheet should be agreed to the computer generated total. Credit notes and
invoices should be input in separate batches to avoid one being posted as the other.
v. A program should check calculation of sales tax at standard rate and total of invoice. Nonstandard
sales tax rates should be highlighted.
vi. The input of the supplier code should bring up the supplier name for checking by the operator
against the invoice.
vii. Invoices for suppliers which do not have an account should be prevented from being input.
viii. Any sundry suppliers account should be very tightly controlled and all entries reviewed in full each
month.
ix. An exception report showing unusual expense allocation (by size or account) should be produced
and reviewed by a responsible official. Expenses should be compared to budget and previous
years.
x. There should be monthly reconciliations of purchase ledger balances to suppliers' statements by
someone outside the purchasing (accounting) function.

Answer No 14:
Deficiencies in the system, and their remedies, are as follows.
Inventory
The shops do not appear to have any inventory movement records. Groceries Nepal has also only a very
approximate indication of inventory levels. Hence it will be difficult to detect whether inventory levels are
too high, or too low with a risk of running out of inventory. Theft of inventory would also be difficult to
detect. The company should therefore introduce inventory movement records, detailing values and
volumes.
In addition regular inventory counts should be made either by Groceries Nepal or by staff from another
shop.
Discrepancies between the inventory records and the actual inventory counted should be investigated.

Cash controls
Too much cash appears to be held on site. In addition the fact that most payments appear to be for cash
may mean inadequate documentation is kept. The level of cash on site can be decreased by daily rather
than weekly bankings. In addition the need for cash on site can be decreased by paying wages by
cheque, and by paying all but the smallest payments by cheque.
The cash book should obviously still be maintained but cheque stubs should also show details of amounts
paid. The cash book should be supported by invoices and other supporting documentation, and should be
cross-referenced to the general ledger .

Cash reconciliations
There is no indication of the till-rolls that are kept being reconciled to cash takings.
There should be a daily reconciliation of cash takings and till rolls; this should be reviewed if not
performed by the shop manager.

Bank reconciliations
There is no mention of bank reconciliations taking place.
Bank reconciliations should be carried out at least monthly by the shop manager, and reviewed by the
owner.

Purchases
There is no formal system for recording purchases. Invoices do not appear to be filed in any particular
way. It would be difficult to see whether accounting records were complete, and hence it would be difficult
to prepare a set of accounts from the accounting records available.
In addition the way records are maintained means that accounts would have to be prepared on a cash
basis, and not on an accruals basis.
A purchase day book should be introduced. Invoices should be recorded in the purchase day book, and
filed in a logical order, either by date received or by supplier.

General ledger
There is no general ledger, and again this means that annual accounts cannot easily be prepared (and
also management accounts).
A general ledger should be maintained with entries made from the cash book, wages records and
purchase day book. This will enable accounts to be prepared on an accruals basis.

Supervision
Groceries Nepal does not take a very active part in the business, only signing cheques over Rs 10,000,
and visiting the shops only half a day each week. This may mean that assets can easily go missing, and
Groceries Nepal cannot readily see whether the business is performing as wish. Groceries Nepal should
review wage/sales tax/cash book reconciliations. Management accounts should also be prepared by shop
managers for Groceries Nepal.

Answer No 15:

Identification of Inherent Risk Explanation of Risk effect on audit approach

 It is difficult to estimate that income in the future
Income is from voluntary donations only. There
will be sufficient to meet the expenditure of the
is a risk that donations will fall, especially where
Foundation. Audit of the going concern concept
donors‘ own income is limited by the ‗credit
(as in ensuring that the Foundation can still
crunch‘ etc.
operate) will therefore be quite difficult.

Completeness of income – where there are no Audit tests are unlikely to be effective to meet the
controls to ensure income is complete for assertion of completeness. The audit report may
example sales invoices are not raised to obtain need to be modified and qualified to explain the
donations and donations could be stolen by lack of evidence stating that completeness of
staff. income cannot be confirmed.

Careful review of expenditure will be necessary to

Funds can only be spent in accordance with the
ensure that expenditure is not ‗ultra vires‘ the
aims of the Foundation. There is a risk that
objectives of the Foundation. The auditor will
funds are spent outside the aims of the
need to review the constitution of the Ramani
Foundation
Foundation carefully in this respect.

Taxation rules relevant to charities. There is a The auditor will need to ensure that staff familiar
risk that the rules will be broken due to lack of with the taxation rules affecting the Foundation
correct analysis of income/expenditure. are on the audit team

The trustees may attempt to hide ‗excessive‘

Requirement to report expenditure in
expenditure on administration under other
accordance with the constitution – administration
expense headings. As the auditor has to report on
expenditure can be no more than 10% of total
the accuracy of income and expenditure then
income. Risks here include income being
audit procedures must focus on the accuracy of
overstated to allow expenditure to be overstated.
recording of expenditure.

Donations to Foundation for specific activities for Documentation for any donation will need to be
example provision of sports equipment. There is obtained and then expenditure agreed to the
a risk that donations are not spent in accordance terms of the documentation. Any discrepancies
with donors‘ instructions. will have to be reported to management.

The control environment may be weak at the Ramani Foundation due to:
a. Lack of segregation of duties/responsibilities

There is normally a limited number of staff working in the Foundation meaning that a full system of
internal control including segregation of duties cannot be implemented. Staff are likely to be unclear as to
their exact responsibilities as they are not formal ‗employees‘ and are not part of the formal authority
structure in the Foundation.
b. Volunteer staff

Many staff are volunteers and so will only work at the Foundation on an occasional basis. Controls will be
performed by different staff on different days making the system unreliable.
c. Lack of qualified staff (human resource issues)

Selection of staff is limited – people tend to volunteer for work when they have time – and so they are
unlikely to have professional qualifications or experience to implement or maintain good control systems.
 d. No internal audit department (lack of organizational structure)

Any control system will not be monitored effectively, mainly due to the lack of any internal audit
department. The Foundation will not have the funds or experience to establish internal audit.
e. Attitude of the trustees.

It is not clear how the Foundation‘s trustees view risk. However, where trustees are not professionally
trained or have little time to devote to the Foundation, then there may be an impression that controls are
not important. The overall control environment may therefore be weak as other Foundation workers do
not see the importance of maintaining good controls.

Answer No 16:
Weakness Explanation Measures

Count teams will focus on finding

Count sheets should not state
Inventory sheets stated the that number of items making
the quantity of items so as not to
quantity of items expected undercounting of inventory more
pre-judge how many units will be
to be found in the store likely – teams stop counting when
found.
‗correct‘ number of items found.

Count staff are also responsible for

Count teams should include staff
the inventory. There could be a
Count staff were all drawn who are not responsible for
temptation to hide errors or missing
from the stores inventory to provide
inventory that they have removed
independence in the count.
from the store illegally.

There is a danger that teams will

Count teams allowed to either omit inventory from the count Each team should be given a
decide which areas to or even count inventory twice due precise area of the store to
count to lack of precise instructions on count.
where to count.

Lack of signature makes it difficult

All count sheets should be
Count sheets were not to raise queries regarding items
signed to confirm who actually
signed by the staff carrying counted because the actual staff
carried out the count of individual
out the count carrying out the count are not
items.
known.

Inventory not marked to As above, there is a danger that Inventory should be marked in
indicate it has been inventory will be either omitted or some way to show that it has
counted included twice in the count. been counted to avoid this error.

Recording in pencil means that the

count sheets could be amended
Recording information on after the count has taken place, not Count sheets should be
the count sheets in pencil just during the count. The inventory completed in ink.
balances will then be incorrectly
recorded.
 It is possible that the additional
inventory sheets could be lost as
Count sheets for inventory
there is no overall control of the All inventory sheets, including
not on the pre-numbered
sheets actually being used. Sheets those for ‗extra‘ inventory, should
count sheets were only
may not be numbered by the be pre-numbered.
numbered when used
teams, again giving rise to the
possibility of loss.

Chapter 3: Gathering evidence during an audit engagement

Answer No 17:
If the auditor identifies a misstatement, the auditor shall evaluate whether such a misstatement is
indicative of fraud. If there is such an indication, the auditor shall evaluate the implications of the
misstatement in relation to other aspects of the audit, particularly the reliability of management
representations, recognizing that an instance of fraud is unlikely to be an isolated occurrence.

If the auditor identifies a misstatement, whether material or not, and the auditor has reason to believe that
it is or may be the result of fraud and that management (in particular, senior management) is involved, the
auditor shall re-evaluate the assessment of the risks of material misstatement due to fraud and its
resulting impact on the nature, timing and extent of audit procedures to respond to the assessed risks.
The auditor shall also consider whether circumstances or conditions indicate possible collusion involving
employees, management or third parties when reconsidering there liability of evidence previously
obtained.
If the auditor confirms that, or is unable to conclude whether, the financial statements are materially
misstated as a result of fraud the auditor shall evaluate the implications for the audit.

Communications to Management and with Those Charged with Governance

If the auditor has identified a fraud or has obtained information that indicates that a fraud may exist, the
auditor shall communicate these matters on a timely basis to the appropriate level of management in
order to inform those with primary responsibility for the prevention and detection of fraud of matters
relevant to their responsibilities.
Unless all of those charged with governance are involved in managing the entity, if the auditor has
identified or suspects fraud involving:
(a) management;
(b) employees who have significant roles in internal control; or
(c) others where the fraud results in a material misstatement in the financial statements, the auditor shall
communicate these matters to those charged with governance on a timely basis. If the auditor suspects
fraud involving management, the auditor shall communicate these suspicions to those charged
with governance and discuss with them the nature, timing and extent of audit procedures necessary to
complete the audit.

Written Representations
The auditor shall obtain written representations from management that:
a) It acknowledges its responsibility for the design, implementation and maintenance of internal control
to prevent and detect fraud;
b) It has disclosed to the auditor the results of its assessment of the risk that the financial statements
may be materially misstated as a result of fraud;
c) It has disclosed to the auditor its knowledge of fraud or suspected fraud affecting the entity involving:
(i) Management;
(ii) Employees who have significant roles in internal control; or
(iii) Others where the fraud could have a material effect on the financial statements; and
d) It has disclosed to the auditor its knowledge of any allegations of fraud, or suspected fraud, affecting
the entity‘s financial statements communicated by employees, former employees, analysts, regulators
or others.

Answer No 18:
 Following matters will be considered in applying analytical procedures as substantive procedures in Nepal
Hardware
a. Suitability of using substantive analytical procedures for given assertions:
– Analytical procedures are more efficient and effective in verifying completeness assertion, that is
detecting unrecorded sales. In verification of understatement of cement sales, therefore,
analytical procedures are quite useful.
– Since the internal controls are not weak, analytical procedures are appropriate
– Analytical procedures in this case are useful along with tests of details

i. Reliability of data
– External source of information might include trade journals and newspapers indicating business
trends and selling prices
– Comparability of data is possible through financial analysts reports
– Budgets will be more reliable if they are considered attainable
– Analytical procedures will include comparison of financial and non financial data. For example,
number of cement bags sold with sales revenue. Here the auditor will verify controls
over processing of units purchased and sold.

iii. Whether the expectation is sufficiently precise

– There is an expectation, that higher the sales volume, the higher should be sale revenue.
Comparison of gross margins will also be useful.
– The more the information is disaggregated, the great reliance can be placed on analytical
procedures. If separate data is available for sales and cost of sales of cement, marble and timber,
analytical procedures will be more reliable.

Answer No 19:
In total, Nepal Bakeries‘s profit for the year has increased by 87% which appears at odds with the
revenue figure, which has only increased by 12% in comparison to the previous year. This may indicate
that revenue has been inflated or incorrect cut-off applied, especially given the fact that the directors of
Nepal Bakeries have described the year as ‗challenging‘.

Revenue has increased overall by 12% but cost of sales has fallen by 12% - we would expect an increase
in revenue to be matched by a corresponding increase in cost of sales. Again this may indicate incorrect
allocation of revenue in order for the bank to look favorably on the company and increase its overdraft
facility. It could also indicate an error in the valuation of closing inventory.

The gross profit has increased by 28% compared to the previous period. The audit will need to focus on
this change which is significant, focusing on the revenue and costs of sales figures to establish the
reasons for the increase.

Administration expenses have fallen in comparison to the previous year (decrease of 16%) which is
unusual given that revenue has increased by 12%. We would expect an increase in costs to be in line
with the increase in the revenue figure. This could indicate that expenses may be understated through
incorrect cut-off or incorrectly capitalizing expenditure which should be written off to the income statement
for the year.

A similar issue applies to selling and distribution costs which have fallen by 8% - they have not increased
as expected in line with revenue. There could be legitimate reasons for the change but this area needs to
be investigated further during the audit fieldwork stage.

Interest payable has stayed in line with the previous year (increase of 2%). This figure can be verified
easily during the audit fieldwork by inspecting bank statements and other relevant documentation from the
bank.

Answer No 20:
(a) Acceptability of accounting treatment and disclosure
(i) New staff canteen.
The costs of building a new staff canteen can quite properly be capitalized and treated as part of buildings
in the balance sheet as work has produced future economic benefits. The company's normal depreciation
policy should be applied, subject only to the canteen being completed and in use at the year-end.

(ii) Loose tools.

Loose tools tend to have a very limited life and to be immaterial in value individually. For these reasons
any capitalisation policy must be extremely prudent. The acceptability of this accounting treatment would
depend on the policy in previous years and normal practice within the industry.

(iii) Dumper truck.

The refurbishment costs have obviously extended the useful life of this asset and it therefore seems
reasonable to capitalise the expenditure. Depreciation should be charged on the refurbishment costs over
the estimated remaining useful life.

(iv) Revaluation of office block.

The revaluation of property is acceptable, but the auditors will need to ensure that the company complies
with a number of disclosure requirements. A note to the accounts should give details of the revaluation
and the name of the valuer. The surplus on revaluation should be transferred to a separate non-
distributable reserve in the statement of financial position as part of shareholders' funds. Furthermore, any
other assets of a similar nature to this should also be revalued.

(v) Deposit for new equipment.

As the equipment was not actually in the company's possession and use at the year-end, the deposit
should not have been shown as plant and machinery, but rather as a payment on account. If the amount
was considered to be material a note to the accounts should give details of this prepayment.

(b) The audit work and evidence required to substantiate each of the assets referred to in (a) above
would be as follows.
(i) New staff canteen
i. Physically confirm existence of the asset.
ii. Confirm title to building by reference to central registry certificate.
iii. Ascertain and confirm the details of any security granted over the asset, ensuring that this is
properly recorded and disclosed.
iv. Review the detailed costings of the building and obtain explanations for any material variances
from the original budget. Particular care should be taken in assessing the reasonableness of any
overheads included as an element of cost.
v. Review the depreciation policy for adequacy and consistency.

(ii) Loose tools

i. Visit the two sites where the loose tools are used to confirm the existence and condition of a
sample of them.
ii. Vouch the cost and ownership of the loose tools to purchase invoices and the company's asset
register.
iii. Confirm the company's estimate of a two year life for these assets.
iv. Review control procedures for safe custody of the loose tools.
v. Review the company's policy with regard to scrapping and/or sale of tools no longer required to
ensure that any proceeds are properly recorded and the assets register appropriately updated
and tools are completely recorded.

(iii) Dumper truck

i. Inspect the truck to confirm its existence and to gain evidence of its valuation by reviewing its
condition and the fact that it is still being used.
ii. If the vehicle is used at all on public roads then the vehicle registration document should be
inspected as some evidence of title.
iii. Inspect the insurance policy for the truck as evidence of valuation.
iv. Vouch the expenditure on refurbishment to suppliers' invoices or company's payroll records
where any of the work has been done by the client's own staff.
v. Review the depreciation policy and assess for reasonableness by discussion with management
and past experience of similar vehicles.
(iv) Revaluation of office block
i. Inspect the building to confirm its existence and state of repair.
ii. Examine documents of title to confirm ownership.
iii. Enquire about any charges on the building and confirm that these have been properly recorded
and disclosed.
iv. Review the valuer's certificate and agree to the amount used in the financial statements, with
consideration also being given to his qualifications, experience and reputation.
v. Assess the reasonableness of the valuation by comparison with any similar properties which may
have recently changed hands on the open market.

(v) Deposit for new equipment

i. Agree the payment of the deposit to the contract for purchase of the equipment.
ii. Confirm the existence of the plant following its delivery on 31 October 20X5 as it is unlikely that
the audit work will have been completed by that date.

Answer No 21:
(a) The auditors will carry out the following tests on the list of balances.
i. Agree the balances from the individual sales ledger accounts to the list of balances and vice
versa.
ii. Agree the total of the list to the sales ledger control account.
iii. Cast the list of balances and the sales ledger control account.

Other general tests auditors will carry out will be to:

i. Agree the opening balance on the sales ledger control account to ensure that last year's audit
adjustments were recorded.
ii. Inspect ledger balances for unusual entries.
iii. Perform analytical procedures on trade receivables as follows

– Compare receivables' turnover and receivables' days to the prior year and/or to industry data.
– Perform an age analysis on trade receivables and compare this to the prior year.
– Compare the bad debt expense as a % of sales to the prior year and/or to industry data.
– Examine large customer accounts individually and compare them to the prior year.
The determination of whether the company has made reasonable provision for bad and doubtful debts will
be facilitated as the company produces an aged listing of balances.

Auditors will carry out the following procedures to audit bad debts.
(a) Debts against which specific allowance has been made (and debts written-off) should be
examined in conjunction with correspondence, lawyers'/debt collection agencies' letters,
liquidators' statements and so on, and their necessity or adequacy confirmed.
(b) A general review of relevant correspondence may reveal debts where an allowance is warranted,
but has not been made.
(c) Where specific and/or general allowances have been determined using the aged analysis, the
auditors should ensure that the analysis has been properly prepared by comparing it with the
dates on invoices and matching cash receipts against outstanding invoices. They should check
the reasonableness and consistency of any formula used to calculate general allowances.
(d) Additional tests that should be carried out on individual balances will include ascertaining the
subsequent receipt of cash, paying particular attention to round sum payments on account,
examination of specific invoices and, where appropriate, goods received notes, and enquiry into
any invoices that have not been paid when subsequent invoices have been paid.
(e) Excessive discounts should be examined, as should journal entries transferring balances from
one account to another and journal entries that clear customer balances after the yearend.
(f) Credit notes issued after the year-end should be reviewed and allowances checked where they
refer to current period sales.

In order to audit cut-off and hence completeness, the auditors should, during the physical inventory count,
have obtained details of the last serial numbers of goods outwards issued before the commencement of
the count. The following substantive procedures are designed to test that goods taken into inventory are
not also treated as sales in the year under review and, conversely, goods dispatched are treated as sales
in the year under review and not also treated as inventory.

(i) Review goods outwards and returns inwards notes around year-end to ensure that:
a. Invoices and credit notes are dated in the correct period.
b. Invoices and credit notes are posted to the sales ledger and nominal ledger in the correct period.
(ii) Reconcile entries in the sales ledger control around the year-end to daily batch invoice totals ensuring
batches are posted in correct year.
(iii) Review sales ledger control account around year end for unusual items.
(iv) Review material after-date invoices and ensure that they are properly treated as following year‘s
sales.

(b) The verification of trade receivables by direct confirmation is the normal means of providing audit
evidence to prove that receivables represent bona fide amounts due to the company (existence and
rights and obligations). The audit work required on the various replies to a receivables' circularisation
would be as follows.
(i) Balances agreed by customer
All that is required would be to ensure that the debt does appear to be collectable, by reviewing cash
received after-date or considering the adequacy of any allowance made for a long outstanding amount.

(ii) Balances not agreed by customer

All balance disagreements must be followed up and their effect on total receivables evaluated.
Differences arising that merely represent invoices or cash-in-transit generally do not require adjustment,
but disputed amounts, and errors by the client, may indicate that further substantive work is necessary to
determine whether material adjustments are required.

(iii) Customer is unable to confirm the balance because of the form of records maintained
Certain companies, often computerised, operate systems which make it impossible for them to confirm
the balance on their account. Typically in these circumstances their purchase ledger is merely a list of
unpaid invoices. However, with sufficient information the customer will be able to confirm that any given
invoice is outstanding. Hence the auditors can circularise such enterprises successfully, but they will need
to break down the total on the account into its constituent outstanding invoices.

(iv) Customer does not reply to confirmation letter

When the positive request method is used the auditors must follow up by all practicable means those
customers who fail to respond. Second requests should be sent out in the event of no reply being
received within two or three weeks and if necessary this may be followed by telephoning the customer
with the client's permission.
After two, or even three attempts to obtain confirmation, a list of the outstanding items will normally be
passed to a responsible independent company official who will arrange for them to be investigated.

Alternative audit procedures might include the following.

(1) Check receipt of cash after-date by reviewing post year-end bank statements.
(2) Verify valid purchase orders, if any.
(3) Examine the account to see if the balance represents specific outstanding invoices.
(4) Obtain explanations for invoices remaining unpaid after subsequent ones have been paid.
(5) Observe whether the balance on the account is growing, and if so, find out why by discussions with
management.
(6) Test the company's control over the issue of credit notes and the write-off of bad debts.

Answer No 22:
(a) The bank letter is important because it is independent confirmation of a number of significant matters
in the client's financial statements. It confirms cash and bank balances which may well be a significant
asset. It also provides confirmation of customers‘ assets held as security, customers' other assets held
(as custodian) and contingent liabilities. Auditors also ask the bank to give details of other banks and
branches that the respondent bank is aware have a relationship with the client.

Audit procedures
 i. Obtain written authority from the client to the bank to disclose the necessary information.
ii. Send a bank letter in standard form to the bank in sufficient time for it to arrive at least a month
before the year-end. The letter should state both the year-end date and the previous year-end
date, and should refer to the client's granting of authority.
iii. If additional information over and above what is in the standard letter is requested, send a
separate letter requesting that information.
iv. When confirmation is received from the bank, check that the bank has answered all the questions
in the letter.
v. Follow up all points disclosed in the bank letter.

(b) The following procedures should be carried out on the bank reconciliation.
i. Obtain standard bank confirmations from each bank with which the client conducted business
during the period.
ii. Test arithmetic of bank reconciliation by recasting.
iii. Trace cheques shown as outstanding from the bank reconciliation to the cash book prior to the
year-end and to the after-date bank statements and obtain explanations for any large or unusual
items not cleared at the time of the audit.
iv. Verify by checking paying-in slips that uncleared bankings are paid in prior to the year-end, and
review whether uncleared bankings are cleared quickly after the year-end.
v. Verify balances per cash book according to the reconciliation with cash book and general ledger.
vi. Verify the bank balances with reply to standard bank letter and with the bank statements.
vii. Scrutinize the cash book and bank statements before and after the period-end for exceptional
entries or transfers which have a material effect on the balance shown to be in hand.
viii. Identify whether any accounts are secured on the assets of the company.
ix. Consider whether there is a legal right of set-off of overdrafts against positive bank balances.
x. Determine whether the bank accounts are subject to any restrictions.

Answer No 23:
(a) Audit work
i. Select a sample of balances and compare suppliers' statements with purchase ledger balances. The
extent of the sample will depend on the results of tests of controls and assessment of the
effectiveness of controls within the purchases system.
ii. Select the sample on a random basis. Selection of only large balances or those with many
transactions will not yield an appropriate sample as understatement of liabilities is being tested for. Nil
and negative balances will also need to be included in the sample.
iii. If no statement was available for the supplier, confirmation of the balance from the supplier should be
requested.
a. If the balance agrees exactly, no further work needs to be carried out.
b. Where differences arise these need to be categorised as either in-transit items or other
(including disputed) items. In-transit items will be either goods or cash.
iv. If the difference relates to goods-in-transit, ascertain whether the goods were received before the
year-end by reference to the GRN and that they are included in year-end inventory and purchase
accruals. If not, a cut-off error has occurred and should be investigated. If the goods were received
after the year-end, the difference with the suppliers' accounts is correct.
v. Similarly, cash-in-transit would arise where the payment to the supplier was made by cheque before
the year-end but was not received by him until after the year-end. The date the cheque was raised
and its subsequent clearing through the bank account after the year-end should be verified by
inspecting the cash book and the post year-end bank statements.
vi. However, if the cheque clears after the year-end date, it may indicate that the cheque, though raised
before the year-end was not sent to the supplier until after the year-end. The relevant amount should
be added back to year-end accounts payable and to the end of year bank balance.
vii. Differences which do not arise from in-transit items need to be investigated and appropriate
adjustments made where necessary.
viii. These differences may have arisen due to disputed invoices, where for example the client is
demanding credit against an invoice which the supplier is not willing to agree. The client may decide
not to post the invoice to the supplier account as he does not consider it to be a liability of the
company. However, differences may also arise because invoices have been held back in order to
reduce the level of year-end accounts payable.
ix. If significant unexplained differences are discovered it may be necessary to extend my testing. There
may also be a problem if sufficient suppliers' statements are not available. Alternative procedures, eg
a circularisation may then be required.

(b) Audit work

(i) From the inventory count working papers, the number of the last GRN that was issued before the
year-end will have been noted. Select a sample of GRNs issued in the period immediately before
and immediately after the year-end. The period to be covered would be at least two weeks either
side of the year-end.
(ii) Concentrate the sample on high value items, and more on those GRNs from before the year-end as
these represent the greatest risk of cut-off error.
(iii) Check that the GRNs have a correct number, according to the last GRN issued in the year and
whether the goods were received before or after the year-end.
(iv) For GRNs issued before the year-end, check whether the inventory has been included in the year-
end inventory total. Also check whether the payable is either included in trade payables or purchase
accruals by inspecting the relevant documentation.
(v) For GRNs issued after the year-end, to ensure that the inventory is included in the inventory
records after the year-end. In addition, review the purchase ledger to ensure that the relevant
invoice has been posted to the supplier account after the year-end.

(c) Audit work

(i) Assess the system of control instituted by management to identify and quantify accruals and
accounts payable.
(ii) From the client's sundry payables and accruals listing, check that accruals are calculated correctly
and verify them by reference to subsequent payments. Check that all time apportionments have
been made correctly (for example, for electricity) by recalculation.
(iii) Taxation balances
a. Check the amount paid to the tax authorities by inspecting relevant documentation.
b. The balance at the year-end would normally represent one month's deductions and can be
verified to the payroll records. The payment should be traced from the cash book to the
payment book (if used) and subsequent bank statements.
c. For the sales tax balance, review for reasonableness to the next return. Ensure that the payment
for the previous return was for the correct amount and has cleared through the bank.
(iv) Review the statement of comprehensive income and prior year figures (for any accruals which have
not appeared this year or which did not appear last year) and consider liabilities inherent in the
trade (eg weekly wages) to ensure that all likely accruals have been provided.
(v) Scrutinise payments made after the year-end to ascertain whether any payments made should be
accrued. This will include consideration of any payments relating to the current year which are
made a long time after the year-end.
(vi) Consider and document the basis for round sum accruals and ensure it is consistent with prior
years.
(vii) Ascertain why any payments on account are being made and ensure that the full liability is
provided.
(viii) Accrued interest and basic charges on loans or overdrafts can be agreed to the bank letter
received for audit purposes.

Answer No 24:
a. Advertisement Expenses:

It should be vouched on the following basis :

i. Verify the bill/invoice from advertising agency to ensure that rates charged for different types of
advertisement are as per contract.
ii. See that advertisement relates to client‘s business.
iii. Inspect the receipt issued by the agency.
iv. Ascertain the nature of expenditure – revenue deferred and see that it has been recorded
properly
 v. Ascertain the period for which payment is made and see that pre-paid is carried forward to
balance sheet.
vi. Compare the statement of account with the ledger account.
vii. See that all outstanding advertisement bills have been provided for.

b. Sale of scrap :
i. Review the internal control as regards generation, storage and disposal of scrap.
ii. Check whether the organization is maintaining reasonable record for generation of Scrap.
iii. Analyze the raw material used, production and generation pattern of scrap and compare the
same with figures of earlier year.
iv. Check the rates at which scrap has been sold and compare the rate with previous year.
v. Vouch sales, with invoices raised, advertisement for tender, rate contract with scrap dealers.
vi. Ensure that there exists a proper control procedure to identify scrap and good units and they are
not mixed up and sold as scrap.
vii. Make an overall assessment of the value of realization from scrap as to its reasonableness.

c. Borrowings from a bank:

Borrowings from a bank may be either in the form of overdraft limits; or short term or medium term or long
term loans. The audit procedures which an auditor may adopt are outlined below:
i. Ensure that balance as per books of the client and the bank statement tally. In case of difference
between the two amounts, reconciliation statement prepared by the client should account for
reasons.
ii. Examine whether borrowings from the bank have been duly authorized.
iii. Examine documents to ensure that statutory requirements, if any, with regards to creation and
registration charges have been met.
iv. Examine the loan agreement and ensure that the terms therein have been duly complied with.
v. Ascertain the purpose for which loan has been raised and examine whether end use of the funds
have been accordingly made.

d. Work in Progress:
(a) Involve a technical expert in verification and valuation of WIP, if necessary.
(b) Ensure that cost sheets are duly attested by the works manager.
(c) Test the correctness of the cost sheet by verification quantities, Cost of material wages and other
charges with reference to the record.
(d) Verify stage of completion with component of cost involved with underlying records.
(e) Compare the unit cost as shown by the cost sheet with standard cost for any large variations.
(f) Ensure that the allocation of overhead expenses has been made on reasonable basis and is same
as used in earlier period.
(g) Compare the cost sheet with that of the previous year and if there is any large variation, investigate
the reason thereof.

Chapter 5: Internal Audit and Corporate Governance

Answer No 25:
Internal audit function is an appraisal activity established or provided as a service to the entity. Its
functions include, amongst other things, examining, evaluating and monitoring the adequacy and
effectiveness of internal control.
This working paper is relevant when the external auditor has determined, in accordance with NSA 315,
that the internal audit function is likely to be relevant to the audit. The internal audit function is considered
relevant when the nature of the internal audit function's responsibilities and activities are related to the
entity's financial reporting, and the auditor expects to use the work of the internal auditors to modify the
nature or timing, or reduce the extent, of audit procedures to be performed. However, the external auditor
has sole responsibility for the audit opinion expressed, and that responsibility is not reduced by the
external auditor's use of the work of the internal auditors.
The objectives of the external auditor, where the entity has an internal audit function that the external
auditor has determined is likely to be relevant to the audit, are:
(a) To determine whether, and to what extent, to use specific work of the internal auditors; and
(b) If using the specific work of the internal auditors, to determine whether that work is adequate for
the purposes of the audit.

Answer No 26:
An audit committee is a sub-committee of the board of directors, usually containing a number of
nonexecutive directors. The role and function of the audit committee is as following
 Improve the quality of financial reporting, by reviewing the financial statements on behalf of the
Board
 Create a climate of discipline and control which will reduce the opportunity for fraud
 Enable the non-executive directors to contribute an independent judgment and play a positive
role
 Help the finance director, by providing a forum in which he can raise issues of concern, and which
he can use to get things done which might otherwise be difficult
 Strengthen the position of the external auditor, by providing a channel of communication and
forum for issues of concern
 Provide a framework within which the external auditor can assert his independence in the event
of a dispute with management
 Strengthen the position of the internal audit function, by providing a greater degree of
independence from management
 Increase public confidence in the credibility and objectivity of financial statements

The main role and responsibilities should be set out in written terms of reference and should include:
 To monitor the integrity of the financial statements of the company and any formal
announcements relating to the company's financial performance, reviewing significant financial
reporting issues and judgments contained in them
 To review the company's internal financial controls and, unless expressly addressed by a
separate board risk committee composed of independent directors or by the board itself, the
company's control and risk management systems
 To monitor and review the effectiveness of the company's internal audit function
 To make recommendations to the board for it to put to the shareholders for their approval in
general meeting in relation to the appointment of the external auditor and to approve the
remuneration and terms of engagement of the external auditors
 To monitor and review the external auditor's independence, objectivity and effectiveness, taking
into consideration relevant UK professional and regulatory requirements
 To develop and implement policy on engagement of the external auditor to supply non-audit
services, taking into account relevant ethical guidance regarding the provisions of non-audit
services by the external audit firm and to report to the board, identifying any matters in respect of
which it considers that action or improvement is needed, and making recommendations as to the
steps to be taken

Answer No 27:
The external audit is focused on the financial statements, whereas the internal audit is focused on the
operations of the entire business.
The following table highlights the key differences between internal and external audit.
Internal audit External audit
Internal audit External audit
Designed to add value and improve An exercise to enable auditors to express
Objective
an organisation's operations. an opinion on the financial statements.
 Reports to the board of directors, or
Reports to the shareholders or members of
other people charged with
a company on the truth and fairness of the
governance, such as the audit
Reporting accounts. Audit report is publicly available
committee. Reports are private and
to the shareholders and other interested
for the directors and management of
parties.
the company.

Work relates to the operations of the

Scope Work relates to the financial statements.
organisation.

Often employees of the organisation, Independent of the company and its

Relationship although sometimes the function is management. Usually appointed by the
outsourced. shareholders.
Strategic long term planning carried Planning carried out to achieve objective
out, to achieve objective of regarding truth and fairness of financial
assignments, with no materiality level statements. Materiality level set during
Planning and being set. Some audits may be planning (may be amended during course
collection of procedural, rather than risk-based. of audit). External audit work is risk-based.
Evidence mainly from interviewing Evidence collected using a variety of
staff and inspecting documents (ie not procedures per NSAs to obtain sufficient
external). appropriate audit evidence

Answer No 28:
Internal auditors review and test the system of internal control and report to management in order to
improve the information received by managers and to help in their task of running the company. They will
recommend changes to the system to ensure that management receives objective information which is
efficiently produced. They also have a duty to search for and discover fraud.

The external auditors review the system of internal control in order to determine the extent of the
substantive work required on the year-end accounts. The external auditors report to the shareholders
rather than the managers or directors. They report on the truth and fairness of the financial statements,
not directly on the system of internal control. External auditors usually however issue a report to
management, laying out any areas of weakness and recommendations for improvement in the system of
internal control. They do not have a specific duty to detect fraud, although they should plan their audit
procedures so as to detect any material misstatements in the accounts on which they give an opinion.

(b)
(i) Board of directors
A high level of independence is achieved by the internal auditors if they report directly to the board. There
may be problems with this approach.
(1) The members of the board may not understand all the implications of the internal audit reports when
accounting or technical information is required.
(2) The board may not have enough time to spend considering the reports in sufficient depth. Important
recommendations might therefore remain unimplemented.
A way around these problems might be to delegate the review of internal audit reports to an audit
committee, which would act as a sub-committee to the main board. The audit committee should be made
up largely of non-executive directors who have more time and independence from the day-to-day running
of the company.

(ii) Chief accountant

It would be inappropriate for internal audit to report to the chief accountant, who is in charge of running
the system of internal control. It may be feasible for him or her to receive the report as well as the board.
Otherwise, the internal audit function cannot be effectively independent as the chief accountant may
suppress unfavourable reports or may just not act on the recommendations of such reports.

Answer No 29:
 a. Providing the directors with financial expertise

Maruti Sujuki currently has no financial director leading to potential errors in financial reporting. The other
directors do not have financial knowledge and will have to spend a lot of time ensuring reporting
requirements are met. As at least one member of the audit committee will have recent, relevant financial
experience they can provide expertise to the board temporarily allowing the directors to focus on
operational issues.
b. Improvements to internal controls

The board of Maruti Sujuki do not understand the reports of internal audit means that attention to control
systems may be inadequate with the board not expressing the need for internal controls throughout the
organisation. By having an audit committee the control environment will be improved with the committee
able to ensure that the board and management understand the need for strong internal controls.
c. Less reliance on external auditors

The lack of understanding on the board of internal audit reports due to lack of financial knowledge means
that too much relaiance may be placed on the work of external audit. An audit committee will provide an
independent reporting mechanism for external audit and will have the financial expertise to recommend to
the board how to implement the recommendations of external audit.
d. External auditor appointment

In order to ensure independence the external auditor should be appointed by an audit committee. This
reduces the risk that the external auditor becomes too familiar with the board and is appointed for reasons
other than ability. Maruti Sujuki currently appoint the external auditor through the board, so by
establishing an audit committee the external auditor can be appointed independently using the expertise
of the committee.
e. Compliance with Corporate Governance policy

The corporate governance policy recommends that an audit committee be set up . Maruti Sujuki is not
listed and is not required to follow the requirements, but following them may provide benefits such as
improved transparency. Having an audit committee will show Maruti Sujuki ‘s stakeholders that they are
committed to strong internal controls and financial reporting. This may make it easier for Maruti Sujuki to
raise finance.
f. Improved Independence

Maruti Sujuki does not have any non-executive directors which means that the decisions made by the
executive directors are not challenged by independent directors. As an audit committee is made up of
non-executive directors and one of these could be appointed to the board. This will provide the board with
some independent advice.

Chapter 6: Audit Conclusion and Reporting

Answer No 30 :
i. The auditor may need to modify the opinion under one of two main circumstances:
– The auditor concludes that the financial statements as a whole are not free from material
misstatements or
– The auditor cannot obtain sufficient appropriate audit evidence to conclude that the financial
statements as a whole are free from material misstatement.

For both circumstances there can be two 'levels' of modified opinion:

a. Material but not pervasive, where the circumstances prompting the misstatement or possible
misstatement are material.
b. Material and pervasive to the overall view shown by the financial statements, ie the financial
statements are or could be misleading. These will result in an adverse opinion (financial
statements are misstated) or a disclaimer of opinion (the auditor is unable to obtain sufficient
appropriate audit evidence).

ii. Whether a qualification of the audit opinion would be required in the circumstances described would
depend on whether or not the auditors considered either of them to be material to the financial
statements as a whole. An item is likely to be considered material in the context of a company's
 financial statements if its omission, misstatement or non-disclosure would prevent a proper
understanding of those statements on the part of a potential user.

Loss of records relating to direct labour costs for assets in the course of construction
The loss of records supporting one of the asset figures in the statement of financial position would cause
a limitation in scope of the auditor‘s work because the auditor would be unable to obtain sufficient
appropriate audit evidence. The Rs 10,000 represents 29.4% of the expenditure incurred during the year
on assets in course of construction but only 6% of total additions to non-current assets during the year
and 1.5% of the year-end net book value for non-current assets. The total amount of Rs 10,000
represents 10% of pre-tax profit but, as in relation to asset values, the real consideration by the auditor
should be the materiality of any over- or under-statement of assets resulting from error in arriving at the
Rs 10,000 rather than the total figure itself.

Provided there are no suspicious circumstances surrounding the loss of these records and the total figure
for additions to assets in the course of construction seems reasonable in the light of other audit evidence
obtained, then it is unlikely that this matter would be seen as sufficiently material to merit any modification
of the audit opinion. If other records have been lost as well, however, it may be necessary for the auditor
to comment on the directors' failure to maintain proper books and records.

iii. Qualified audit opinion extract

Basis for qualified opinion
As explained in note ... development costs in respect of a potential new product have been deducted in
full against profit instead of being spread over the life of the relevant product as required by IAS 38; the
effect of so doing has been to decrease profits before and after tax for the year by Rs 25,000.

Qualified opinion
In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion paragraph,
the financial statements present fairly, in all material respects, (or give a true and fair view of) the financial
position of Eastern Engineering Inc as at March 31, 20X4, and (of) its financial performance and its cash
flows for the year then ended in accordance with International Financial Reporting Standards.
 Paper: 3

Corporate & Other Laws

 Nepal Chartered Accountants Act, 2053 and Rules
Question No 1:
ICAN received a registered letter containing a complaint against Mr. Rameshwar Yadav, a member of ICAN that
he conducts audit in partnership with a person who has not obtained a certificate of practice, which is a prohibited
under the Act. How and what action the Council of ICAN can take against Mr. Rameshwar Yadav for not
upholding the code of conduct under Nepal Chartered Accountants Act, 2053?

Question No 2:
In the vacant of two councilors (one is Chartered Accountant (CA) and one is government appointed),
whose tenure remains for more than two years, has been appointed by council. Is such appointment
valid one? Meeting has held in the absence of two councilors and decisions have been reached on
various subject matters? Is those decisions are valid?

Question No 3:
What do you have understanding about council of The Institute of Chartered Accountants of Nepal
(ICAN) as per Nepal Chartered Accountants Act, 2053:
a) A Registered Auditor can become the president of the ICAN Council.
b) Tenure of the president shall be of three years.
c) There is no role of Government of Nepal while appointing councilors.
d) Meeting of the council shall be held at least 6 times in a year.
e) The decision of the meeting of the council shall be authenticated by chairperson of the Council.

Question No 4:
Mention the provisions of Nepal Chartered Accountants Act, 2053 on the following questions:

a) There are three types of Membership.

b) Chartered Accountant holding Certificate of Practice (COP) can engage in the job too.
c) Only the practicing chartered accountants need to renew their license and members do not have
to renew membership.
d) There is no upper limit of audit ceiling for chartered accountants.
e) Curriculum Development Board decides the syllabus of the Chartered Accountancy Course.

Companies Act, 2063

Question No 5:
Mention following activities are allowed or not y Companies Act, 2063:
a) Company provided loan facilities to a shareholder to purchase its own shares.
b) A public company commences its business after incorporation.
c) Mohan Private Limited establishes its own partnership business.
d) Ram Bahadur, a shareholder who has not paid calls on shares attended and voted in the General
Meeting of the Company.
e) Board of Directors delegated authority to its staff to make calls on shares.

Question No 6:
Jumla Apple Public Limited want to reduce the paid up share capital of the Company, but do not
aware of the provisions of the Companies Act. Give your suggestions on the followings:

a. How can a company reduce it's paid up share capital?

b. Can Board of Directors decide to reduce share capital?
c. Is there need to take approval from any authority?
d. What words shall be added as part of its name after reduction of share capital?
 e. What is the liability of the shareholders in respect of reduced share capital?

Question No 7:
Give your opinion on each case based on the Provisions of Companies Act, 2063:
i) Consensus agreement of Baneshwor Private Limited states that there shall not be held meeting
of the Board of Directors and Annual General Meeting. Does such agreement is valid?
ii) Company not for profit distribution is established with the objectives to earn profit.
iii) Financial statements of a public company contain only the signatures of a chairperson and a
director out of 7 Board of Directors. Can that company issue financial statements for
shareholders?
iv) Shareholder of a company has casted vote as per one shareholder one vote in election of Board
of Directors its Annual General Meeting.
v) Capital Stock Exchange Private Limited wishes to establish as a stock exchange with Rs. 50
million paid up capital.

Question No 8:
A Company was in the process of incorporation. Promoters of the company signed an agreement for
the purchase of certain furniture for the company and payment was to be made to the suppliers of
furniture by the company after incorporation. The company was incorporated and the furniture was
used by it. Shortly after incorporation, the company went into liquidation and the debt could not he
paid by the company for the recovery of money. Examine whether promoters can he held liable or
company be liable for payment under the following situation:
i. In case of a Public Limited Company?
ii. In case of a Private Limited Company?

Question No 9:
What are the Procedures for Conversion of a private company into the Public company.

Question No 10:
Write Short notes on Substantial Shareholder

Bank and Financial Institution Act, 2073

Question No 11
What are the criteria to become higher class licensed bank and financial institutions as per Bank and Financial
Institution Act, 2073?

Question No 12
Write Short notes on Exchange Equalization Fund as per Bank and Financial Institutions Act, 2073.
Securities Act 2063
Question No 13:
Define types of securities business as per Securities Act, 2063.

Question No 14:
What are the functions, duties and powers of stock exchange as per Securities Act, 2063:

Question No 15:
Mention the liability for matters referred to in prospectus as per Securities Act, 2063:

Nepal Rastra Bank Act, 2058

Question No 16:
What are the privileges and facilities of Nepal Rastra Bank as per Nepal Rastra Bank Act, 2058?

Question No 17:
Mention the procedures of appointment of Governor of Nepal Rastra Bank.
 Industrial Enterprises Act, 2073:
Question No 18:
What do you mean by Sick industry as per Industrial Enterprises Act, 2073?

Question No 19:
Mention the National Priority Industry?

Labour Act, 2048

Question No 20:
Mention the provisions of engaging Non-Nepalese Citizens at work as per Labour Act, 2048.

Question No 21:
Mention the provisions of Welfare Officer as per Labour Act, 2048.

Question No 22:
When Strike cannot be called as per Labour Act, 2048?

Bonus Act, 2030

Question No 23:
Can bonus be paid in kind too? Write the concept of bonus, time limit of payment and maximum
bonus payable amount. Similarly, mention who shall be eligible to obtain bonus and restriction to
obtain bonus.

Question No 24:
Write Criteria that Restricts to Obtain Bonus.

Question No 25:
How disputes of Bonus need to be settled as per Bonus Act, 2030?

Contract Act, 2056

Question No 26:
Mention various types of offer under contract Act, 2056.

Question No 27:
Mention the circumstances in which contracts need not be performed:

Question No 28:
What circumstances do not include fundamental changes?

Insurance Act, 2049

Question No 29:
Mention Objectives of Insurance Act and Define Life Insurance as per Insurance Act, 2049.

Question No 30:
What is the Difference between Reinsurance and Double Insurance:

Question No 31:
Mention the License provision of an Insurer under Insurance Act, 2049.

Question No 32:
Mention the Order of Priority in Settlement of liabilities as per Insurance Act, 2049.
 Negotiable Instruments Act, 2034
Question No 33:
What are the presumptions of Negotiable Instruments as per Negotiable Instruments Act, 2034?

Question No 34:
Differentiate between Negotiation and Assignment:

Question No 35:
What do you mean by Ambiguous Negotiable Instrument:

Question No 36:
How Date of Maturity calculated in Negotiable Instruments?
Question No 37:
What is the validity of negotiable instrument without consideration:

Question No 38:
When Notice of Dishonour is Unnecessary as per Negotiable Instruments Act, 2034 ?

Social Welfare Act, 2049

Question No 39:
Mention the objectives of establishment of the Social Welfare Council:

Question No 40:
What are the sources of fund of the Social Welfare Council?

Question No 41:
Mention the provisions of Annual Report as per Social Welfare Council.

Miscellaneous Provisions:
Question No 42:
What do you know about Finance Bill and Finance Act

Question No 43:
Mention in Brief History of Nepal's WTO Membership:
 Answer
Nepal Chartered Accountants Act, 2053 and Rules
Answer No 1:
Pursuant to section 35 of Nepal Chartered Accountants Act, 1997 where a member having obtained the
professional certificate does not observe the conduct set forth in this Act or the Rules framed under this Act or
such member violates this Act or the Rules framed under this Act, the concerned person may make a complaint
to ICAN Council against such member Rameshwar Yadav under this provision.
Where there is a reason to believe that the member Rameshwar Yadav having obtained the
professional certificate has not observed the conduct required to be observed, the Secretary of ICAN,
shall submit a motion, accompanied by the available fact, to the Council of ICAN for taking action
against him.
The Council of ICAN thereupon refers this case to the Disciplinary Committee of ICAN for
investigation under sections 11(k) and 14 of this Act. The Disciplinary Committee shall exercise its
authority similar to a judicial court while investigating evidences and witnesses under section 14(4) of
this Act.
The Disciplinary committee shall make recommendation, along with its opinion and finding, to the
Council for taking necessary action against him if found guilty from its investigation, and the Council
may, in view of such recommendation, impose any of the following penalties on Rameshwar Yadav,
according to the gravity of the offence committed under section 34(2) of this Act:
(a) Reprimanding;
(b) Removing from the membership for a period not exceeding Five years;
(c) Prohibiting from carrying on the accounting profession for any specific period;
(d) Canceling the professional certificate or membership.
Before imposing a punishment as said above the Council should provide a reasonable opportunity to
the concerned member to submit their clarification as an opportunity of being heard.

Answer No 2:
If the tenure of elected council members remains for more than one year, the vacancy shall be fulfilled
through election. Similarly, if there is vacancy of government nominated council members, such
member shall be appointed on by Government of Nepal on the recommendation of Office of Auditor
General. So the appointment made by council is invalid for both the vacant position.
As per Section 12 of Nepal Chartered Accountants Act, 2053 any action undertaken according to
decision of the Council, where any seat of councilors remained vacant, shall not be invalid merely on
the ground thereof. The decision of the council is valid one.

Answer No 3:
a. As per Nepal Chartered Accountants Act, 2053 the councilors shall elect a fellow chartered
accountant elected form amongst chartered accountants. As the Act allows only the fellow
chartered accountants to become chairperson of the Council, registered auditor cannot become
the chairperson of The Institute of Chartered Accountants of Nepal (ICAN).
b. Tenure of the Councilors shall be of three years; however, tenure of president shall be of one
year and can be re elected for maximum one more tenures.
c. Out of 17 councilors, three councilors shall be nominated by Government of Nepal on the
recommendation of Office of the Auditor General. For the rest councilors, there is no role of
Government of Nepal.
d. Section 10 (2) of Nepal Chartered Accountants Act, 2053 states that Council shall generally meet
Six times in a year, and the interval between the two consecutive meetings shall not be more than
Three months. That‘s why decision of the council is in line with the spirit of the Act.
e. Section 10 (7) of Nepal Chartered Accountants Act, 2053 states that decisions of the Council
shall be authenticated by the Executive Director of The Institute of Chartered Accountants of
Nepal (ICAN).

Answer No 4:
 a. As per Section 16 of Nepal Chartered Accountants Act, 2053, there are two types of membership
namely chartered accountant and registered auditor.
b. ICAN Council has decided to implement One Man One Profession for Chartered Accountants,
that‘s why chartered accountant member holding Certificate of Practice (COP) can not join in
service/ job.
c. Members in professional practice as well as in job need to renew their membership within 60 days
from the expiry of each fiscal year.
d. Chartered Accountants members can sign financial statements of any amount without restrictions;
however, for audit of insurance company only a fellow chartered accountant can do the audit.
e. The Institute of Chartered Accountants of Nepal is an autonomous body and all the roles and
responsibilities of ICAN shall be taken over by council. Section 24 of the Nepal Chartered
Accountants Act, 2053 states that Council may determine educational standards, curricula and
course-books as required to become an accountancy practitioner and there is no role of
Curriculum Development Board while determining syllabus of chartered accountancy education.

Companies Act, 2063

Answer No 5:
a) Company provided loan facilities to a shareholder to purchase its own shares.
As per section 62 of Companies Act, 2063, Company shall not provide financial assistance to purchase its
own shares to its own shareholder; consequently, above provision is not as per Companies Act, 2063.

b) A public company commences its business after incorporation.

As per Section 63 of Companies Act, every public company shall obtain certificate of commencement
before starting its business activities. So above activities is not allowed for public limited company.

c) Mohan Private Limited establishes its own partnership business.

As per section 10 "Terms to be abided by Company" a company shall not open a partnership or private
firm. Establishment of partnership business by Mohan Private Limited is inconsistent with the Companies
Act, 2063.

d) Ram Bahadur, a shareholder who has not paid calls on shares attended and voted in the General
Meeting of the Company.
As per Section 70 (3) of Companies Act, 2063, any shareholder who has not paid calls on the shares
shall not be entitled to attend and vote in the general meeting of the Company. Here, Ram Bahadur has
not paid calls on shares shall not be eligible to attend as well as eligible for voting in general meeting.

e) Board of Directors delegated authority to its staff to make calls on shares.

As per Section 95(6), Board of directors cannot delegate its authority to any committee or staff. They have
to perform certain activities by themselves. One of such activities include power to make calls on shares.
So the delegation of authority by Board of directors is not allowed by Companies Act, 2063.

Answer No 6:
Section 57 deals with the reduction of share capital by adopting special resolution at general meeting by
obtaining prior approval from court and making necessary amendments in Memorandum of Association and
Articles of Association.

a. As per Section 57(2) the company may reduce its share capital as follows:
(i) By reducing the capital to such amount as has been paid up where calls for payment of amount on
shares are not fully paid up,
(ii) By paying back any paid-up share capital,
(iii) By devaluating the face value of shares where the company has sustained a big loss or suffered a
natural calamity.
b. No. Authority to decide for reduction of the share capital is with General meeting of the company by adopting
special resolution.
c. Yes there need to take prior approval from Commercial bench of high court.
 d. As per Section 58 (10) a company is ordered to add to its name the words ―capital reduced, those words
shall, until the expiration of the period specified by the Court, be deemed to be an integral part of the
name of the company.
e. As per Section 59(5) of the Companies Act, 2063 No shareholder shall be liable to pay an amount in excess
of the face value of a share at the time of the subscription of such share by him/her.

Answer No 7:
i. Consensus agreement of Baneshwor Private Limited states that there shall not be held
meeting of the Board of Directors and Annual General Meeting. Does such agreement is
valid?
If consensus agreement clearly states there shall not be Board of Directors and Annual General
Meeting such an agreement of the promoters of the private company is valid one. Section 145 of
Companies Act, 2063 states that if consensus agreement provides that there shall not be Board of
Directors and Annual General Meeting, such agreement is valid between the promoters of the
company; however, consensus agreement shall also state that who shall perform the functions of be
Board of Directors and Annual General Meeting in the absence of such meetings.

ii. Company not for profit distribution is established with the objectives to earn profit.
As per Section 3 (1) of Companies Act 2063, any person desirous of undertaking any enterprise with
profit motive may, either singly or jointly with others, incorporate a company for the attainment of one
or more objectives set forth in the Memorandum of Association. Here, not for profit company can also
establish with an objective of profit earnings; however, they shall not distribute profit in any manner.

iii. Financial statements of a public company contain only the signatures of a chairperson and
a director out of 7 Board of Directors. Can that company issue financial statements for
shareholders?
Audited financial statements of the company shall have to be approved by the Board of Directors and
signed by the Chairperson of the Board of Directors and at least one director. After approval of the
financial statements by the Board of Directors; it is authorized for issue to the shareholders and
general public. (Refer: Section 108 (7) of Companies Act, 2063.)

iv. Shareholder of a company has casted vote as per one shareholder one vote in election of
Board of Directors its Annual General Meeting.
Except otherwise provided in the Articles of Association, on a poll of election of directors, every
shareholders shall be entitled to cast vote on the basis of number of shares held multiplying the
number of shares held by each shareholders. The voting in the election of Board of Directors is
inconsistent with the provisions of the Companies Act, 2063.

v. Capital Stock Exchange Private Limited wishes to establish as a stock exchange with Rs. 50
million paid up capital.
As per section 12 of the Companies Act, 2063, notwithstanding anything mentioned in the Act,
company operating in the areas of banking transactions, financial transactions, insurance business,
stock exchange business, pension fund or mutual fund or company operating other business or
transaction as prescribed must be established as public limited company.
Accordingly, capital stock Exchange Private Limited; being a company dealing in stock exchange
business shall not be established as private limited company though the capital requirement of public
company as per the companies Act, 2063 and Securities Act, 2063 has met.

Answer No 8:
Section 17 (1) of Companies Act, 2063 states that a contract made prior to the incorporation of a
company shall be a proposed contract only and such contract shall not be binding on the Company.
Section 17(2) states that if prior to the incorporation of a company, any person carries on any
transaction or borrows moneys on behalf of the company, such person shall be personally liable for
any contract related with the transaction so carried on.
Further a company cannot ratify a contract entered into by the promoters on its behalf before its
incorporation. Therefore it cannot ratify a contract entered into by the promoters on its behalf before
its incorporation. Therefore, it cannot by adoption or ratification obtain the benefit of the contract
purported to have been made on its behalf before it came into existence as ratification by the
company when formed is legally impossible. The doctrine of ratification applies only of an agent
contracts for a principal who is in existence and who is competent to contract at the time of contract
by the agent. The company can if it desires, enter into a new contract, after its incorporation with the
other party. The contract may be on the same basis and terms as given in the pre-incorporation
contract made by the promoters.

Based on above:
i) In case of public company: If Memorandum of Association of the company mentions that
company shall bear the expenses held on pre-incorporation. It shall be the responsibility of the
company. Similarly, if company adopts pre-incorporation contract through its acceptance, conduct
and behavior, company shall be liable. In other case, persons who sign on behalf of the proposed
company shall have to take personal responsibility. In this case, company has accepted the contract
through the use of the furniture purchased by the proposed company.
ii) In case of private company: Pre incorporation contract shall be dealt by the provisions as
mentioned in Memorandum of Association, Articles of Association and Consensus Agreement.

Answer No 9:
If the general meeting of the private company, by adopting a special resolution, decides to convert a
company into public company
If 25% or more of the shares of a private company are subscribed by one or more than one public
company
If a private company subscribes 25% or more of the shares of a public company
 Notify to the ROC within 30 days from the occurrence of such above criteria.
 After receipt of application by the ROC, give a conversion certificate within 60 days.
 If any private company is converted into a public company pursuant to this section, any subsidiary company
of that company ipso facto becomes public company.

All the assets and liabilities of the private company becomes assets and liabilities of the public
company.

Answer No 10:
Section 50 (1) of the Companies Act, 2063, a person on his own or through his representatives, holding 5% or
more of paid up capital in ordinary shares, having full voting rights, of a public company is called as a substantial/
core shareholder. In case of companies with paid up capital of Rs. 250 million and above, shareholders holding
1% or more in ordinary shares with full voting rights are known as substantial shareholders.
A substantial shareholder is required to give notice to the company disclosing full particulars of the shares held,
with representative‘s name and address, within 30 days from the date on which he realizes that he has become a
substantial shareholder as per Section 50 sub section 2.

Bank and Financial Institution Act, 2073

Answer No 11:
 Section 38 deals with the up gradation of bank and financial institutions. For the same prior approval
of Nepal Rastra Bank is needed; however, D class licensed institutions shall not be eligible for the up
gradation. Following are the criteria:
a) Paid up capital requirement of higher class licensed institution has reached
b) Capital fund has been maintained in continuous 5 years as per the directives of NRB, continuous net profit
for 5 years and average non performing loan for previous continuous five years is within the limit
prescribed by NRB.
c) Fully written off preliminary expenses
d) Public shares has been offered and shares are allotted to general public
e) General Meeting has passed special resolution for the up gradation of bank and financial institution
f) Other criteria as prescribed by NRB have been fulfilled.

Answer No 12:
Section 45 of Bank and Financial Institutions Act, 2073 States that a licensed institution which has
obtained the license to carry on foreign exchange transactions shall make necessary accounts
adjustments in the profit and loss account of the revaluation profits earned as a result of fluctuations in the
exchange rates of foreign currencies, other than the Indian currency, every year at the end of the same
fiscal year.

While making such accounts adjustment in the profit and loss account, if revaluation earning has been
made in any fiscal year, at least twenty five per cent of such profits shall be credited to the exchange
equalization fund.

Provided that in the case of revaluation profit-loss resulting from fluctuation in the exchange rate of the
Indian currency, it shall be as prescribed by the Rastra Bank.

Similarly, Section 45 (2) States that no amount credited to the exchange equalization fund pursuant to
Sub-section (1) shall, without the approval of the Rastra Bank, be spent or transferred for any purpose
other than the adjustment of loss resulting from the devaluation of foreign currencies.

Securities Act 2063

Answer No 13:
As mentioned by Section 63 of Securities Act, 2063, following are the types of securities:
(a) Securities brokerage,
(b) Securities trade,
(c) Issue and sales management,
(d) Investment management,
(e) Investment consultancy service,
(f) Collective investment fund management,
(g) Securities registration or securities central deposit service or custodial service,
(h) Service relating to the settlement of the account of securities transactions,
(i) Market maker,
(j) Such other business as may be specified by the Board to be a securities business.

Answer No 14:
Section 45 of Securities Act, 2063 mentions the functions, duties and powers of the stock exchange as
follows:
a. To carry on, or cause to be carried on, transactions in securities to be carried on through it in a
transparent, fair and regular manner,
b. In carrying on the stock exchange, to carry on, or cause to be carried on, the same, having regard
to the interest of general public investors,
 c. To get its members to fully comply with this Act and the Rules and Bye-laws framed under this
Act and monitor and supervise, or cause to be monitored and supervised, the matters pertaining
thereto,
d. To manage such a transaction place as may be adequate and convenient for operating securities
transaction,
e. To manage such employees as may be efficient in carrying on transactions,
f. To arrange for such facilities and systems as may be adequate and proper for emergency and
security provisions,
g. To frame Bye-laws, with the permission of the Board, for enlisting of securities for the
arrangements of the exchange, purchase or sale of securities and making provisions relating to
membership,
h. To perform or cause to be performed such other functions as may be required for the operation of
the stock exchange.

Answer No 15:
As per Section 33 of Securities Act, 2063 states the following for the liability for matters contained in the
prospectus:

 The concerned body corporate and the director signing a prospectus and the expert preparing such a prospectus
shall be personally and collectively liable for the truth of the details and documents underpinning the information
set down in the prospectus submitted to the Board for the purpose of registering securities with the Board and
obtaining permission to issue such securities.

 Where any person who subscribes for any securities on the faith of the matters set down in the prospectus
subsequently sustains any loss or damage by the reason that the matters set down in the prospectus have been
set down with mala fide intention or untrue or false statements have been included therein knowingly, the body,
director or experts preparing the prospectus shall be liable to pay compensation for such loss or damage.
Provided that no director shall be liable to pay such compensation if he or she proves that he or she has
resigned prior to making a decision on the matters set down in the prospectus with ulterior motive or knowingly
or that he or she did not know that the prospectus was untrue.

 Where any investor sustains any loss or damage by the reason that the prospectus, information, statements or
returns submitted by a body corporate to the Board, such an investor may make a petition to the concerned
District Court for compensation within thirty five days from the date of knowledge within one year after the
making of investment.

Nepal Rastra Bank Act, 2058

Answer No 16:
As per Section 8 of Nepal Rastra Bank Act, 2058 notwithstanding anything contained in the prevailing
laws, the Bank shall be entitled to the following privileges and facilities: -
a. Exemption from all types of taxes, fees and charges on the incomes, capital transactions, houses,
land, assets etc.;
b. No requirement for the payment of registration fee for registration of the deeds of loan or refinance to
be given by the Bank;
c. No requirement of revenue stamps on any of the documents relating to the Bank;
d. There would be no tax, fee, charge, duty on the export and import of bank notes, coins, gold, silver
and the paper, metal, chemicals, and other materials to be used for printing bank notes and minting
coins.

Answer No 17:
 Section 15 of Nepal Rastra Bank Act, 2058 deals about the provision for Governor's appointment:
 Government of Nepal, the Council of Ministers shall appoint Governor on the basis of the recommendation of the
Recommendation Committee formed by Government of Nepal.
 Government of Nepal, the Council of Ministers shall, for the appointment of Governor, form a Recommendation
Committee as follows:-
(a) Minister of Finance -Chairperson
(b) One person from among the former Governors - Member
(c) One person designated by Government of Nepal from amongst the persons renowned in the fields of
Economic, Monitory, Banking, Finance and Commercial Law. -Member
 While making recommendation for the appointment of Governor, committee formed as above, shall recommend to
Government of Nepal, the Council of Ministers the names of three persons renowned in the field of economic,
monetary, banking, finance, commerce, management, commercial law and from among the Deputy Governors.
 Government of Nepal, the Council of Ministers shall, out of the names, appoint one person to the Office of
Governor.

Industrial Enterprises Act, 2073:

Answer No 18:
Section 37 of Industrial Enterprises Act, 2073 defines Sick industries as industry which has been in
operation from last five years from the date of commercial production or commencement of transactions
and is in consecutive loss from last three years not due to intention of the management or weak
management of the industry and Production capacity of such industry is 30% or less than 30% of the total
installed capacity. If above circumstances arises Government of Nepal by making necessary bylaws shall
declare such industry as sick industry.

Section 38 of Industrial Enterprises Act, 2073 defines sick industry into three categories namely: Fully
Sick Industry, Sick Industry and Oriented towards Sick industry.

Answer No 19:
As per Section 17 and Annexure 9 of the Industrial Enterprises Act, 2073 following industries fall
under National Priority Industry:
 Energy Based Industry
 Agro Forest Based Industry
 Construction Industry
 Export Promotion Industry
 Adventure tourism with infrastructures, Village tourism, Environmental tourism, golf course, polo,
pony trekking, trekking, water rafting, assembly, conferences tourism, sports tourism, religious
tourism, cultural tourism, entertainment park construction and operation, wildlife reserve.
 Mineral excavation, excavation and production of petroleum, natural gas and fuel.
 Industry producing cement and clinker utilizing local limestone, pulp and paper, sugar, chemical
fertilizer, powder milk, medicine manufacturing, waste production and processing, industry
producing fuel saving equipments, industry producing pollution control devices, industry
producing equipments for disabled people, Agriculture equipments, industry producing machinery,
and industry producing vehicles using electricity
 Hospital, nursing home, animal hospital, primary health post, health laboratory, chemical research
lab and teaching and training institute established outside Kathmandu Valley, Pokhara Sub-
metropolitan and Sub-metropolitan and municipality of terai region.
 Cottage Industry

Labour Act, 2048

Answer No 20:
As per Section 4A of Labour Act, 2048, following are the provisions for employing non Nepali Citizens:
 Non-Nepalese citizens shall not be permitted to be engaged at work in any of the posts within Nepal.
 Notwithstanding anything contained above, if a Nepalese citizen could not be available for any skilled
technical post even after publishing an advertisement in national level public newspapers and journals, the
manager may submit an application to the Department of Labour along with the evidence of such fact for the
approval to appoint a non-Nepalese citizen.
 If it is found, in conduction of an inquiry upon the submission of any application, that a Nepalese citizen
would not be available for the skilled technical post mentioned in the application, the Department of Labour
may, on the recommendation of the Labour Office, grant approval to engage a non-Nepalese citizen at work
years for a maximum period of up to five years not exceeding two years at a time and, in the specialized kind
of skilled technical post, for a period up to seven years.
 The Manager, who engages non-Nepalese citizens at work pursuant to above, shall have to make
arrangements for making the Nepalese citizens skilled and for replacing the non-Nepalese citizens gradually
by them. "
Answer No 21:
Section 68 of Labour Act, 2048 deals with the provisions of Welfare Officer as follows:

 One welfare Officer shall have to be appointed in Enterprise where two hundred fifty or more workers or
employees are engaged and one additional Assistant Welfare Officer shall have to be appointed where there
are more than one thousand workers or employee.
 In the enterprise where there are less than two hundred fifty workers or employees, the Proprietor may
designate or appoint any officer of the Enterprise as the Welfare Officer.
 Where the Welfare Officer and Assistant Welfare Officer are appointed the Department of Labour shall be
informed of such appointment.

Answer No 22:
Section 78 prohibits to carry out the strike in the following cases:

 Notwithstanding anything mentioned hereinabove in Labour Act, if any existing law has prohibited the strike
to be done by workers or employees the workers or employees of such Enterprise shall not be entitled to go
on strike.
 Any employee appointed or deputed on the duty of control, security and guard of any Enterprise shall also
not be entitled to go in a strike.
 The employees prohibited to strike as per Labour Act, may submit their genuine demands to the Proprietor.
If such demands are not fulfilled and a dispute has been created Government of Nepal shall constitute a
tribunal for solving it. The decision of the Tribunal shall be final and binding upon both of the parties.
 No strike or lock-out may be done during the proceeding under Collective Disputes..

Bonus Act, 2030

Answer No 23:
As per section 9 of Bonus Act, 2030 bonus to be distributed in cash only; bonus cannot distributed in
kind.
Concept:
Bonus means an extra incentive given to the worker and employee who have served more than half
of working period during a fiscal year. Bonus shall be apportioned on 10% net profit by the
enterprises employing 10 or more than worker and employee. Bonus to be distributed by Tea estate
as well as industries established in industrial zone where less than 10 workers or employee are
working. Bonus shall be distributed for the hard working of worker and employee so that enterprise is
able to generate profit through their hard working.
Time Limit:
The bonus shall have to distribute within a period of eight months from the closure of the fiscal year.
If an application, specifying reasons of not being able to distribute the bonus within the period of 8
months from the expiry of each fiscal year is submitted to Labour Office by any management, Labour
Office may, if the reasons are found genuine, extend the time for a period of three months at
maximum for distribution of bonus or may allow to distribute the bonuses of two years at a time in the
next fiscal year.
Maximum Bonus
(a) An amount equivalent to the salary or wage of Six months, to an employee, who obtains up to
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
thousand One Rupees to Fifteen Thousand Rupees as salary or wage.
 (c) An amount equivalent to or wage salary of Three months to an employee who obtains more than
Fifteen Thousand rupees as salary or wage. The minimum bonus amount to be obtained under
Clause (b) and (c) of shall not be less than the maximum bonus amount to be obtained under Clause
(a) and (b) respectively.

Answer No 24:
Section 8 of Bonus Act, 2030 deals with restrictions for payment of Bonus:
An employee shall not be entitled to obtain bonus under this Act, if he/she is punished or dismissed from
service for committing any act as follows: Provided that, this Section shall not be deemed to be prejudiced
to obtain in the case of the bonus for a period before committing such a punishable act.
(a) Theft of the property of the enterprise or any damage to such property.
(b) Illegal strike or abetment to other for such strike,
(c) Riots or breaching of discipline.

Answer No 25:
Section 16 states following provisions for disputes settlement of bonus as per Bonus Act, 2030:

 If any dispute arises between employee and management with respect to the bonus to be payable under this
Act, the Labour Office shall resolve such dispute by negotiations having invited both the parties.
 If the dispute could not be resolved by negotiations pursuant as above, the Labour Office shall ask to the
concerned Enterprise and employees to produce necessary documents and statements of accounts and
shall give a decision on the basis of such documents and statements.
 The party who is dissatisfied with the decision of Labour Office made pursuant to above, may appeal to the
Labour Court, within thirty five days of receipt of such notice and the decision made by the Labour Court
shall be final.

Contract Act, 2056

Answer No 26:
Various types of offer under Contract Act, 2056 are as follows:
i) Expressed and Implied Offer:
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.

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 group of persons are
identified in this offer. The identified person or group of persons only make an acceptance for the purpose
of generating contract.
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.

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
up to 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.

Answer No 27:
Section 73 of Contract Act 2073, states the following where work under a contract
need not be performed in any of the following circumstances
(a) In case one party to the contract absolves the other party from fulfilling the obligations
according to the contract;
(b) In case a voidable contract is made void by the party concerned;
(c) In case one cannot execute the contract due to its violation by the other party;
(c) In case it becomes unnecessary to perform the work mentioned in the contract under any
provision of this Act;
(d) In case it becomes unnecessary to comply with the contract under Section 79.

Answer No 28:
As per Section 79(3) of Contract Act, 2056 following shall not be deemed to have come in the situation
prevailing at the time of signing the contract in any of the following circumstances:
(a) In case it becomes difficult to perform the contract;
(b) In case profit margin is low or loss is expected;
(c) In case any party to a contract is dependent upon any third party who is not a party to the contract for
performing the contract, if the third party commits a mistake or becomes unfit;
(d) In the event of strikes and lockouts;
(e) In case it becomes necessary to pay additional tax, fee or other revenue;
(f) In case the contract has been signed with several objectives and only some of them cannot be fulfilled.

Insurance Act, 2049

Answer No 29:
Objectives of Insurance Act, 2049 is to establish Insurance Board and to systematize, regularize, develop
and regulate the Insurance Business within Nepal.
Similarly, Section 2(f) Defines Life Insurance as "the business relating to a contract regarding to the life of
any person under which he/she or his/her heir in the event of his/her death, will be paid a particular
amount in case a specified amount is paid in installment on the basis of his/her age."

Answer No 30:
Following are the main differences between Reinsurance and Double Insurance:
Reinsurance Double Insurance

In Double insurance the insured gets the same subject matter insured with
Reinsurance business entered into by the original insurer
more than one insurer or under more than one policy with the same
with other insurers.
insurer.

In Reinsurance the insured cannot claim any part of his loss In Double insurance the insured can claim only his actual loss from each
from the reinsurer. of the insurer up to the amount insured with them.

In Reinsurance the reinsured will claim a part of the loss

In Double insurance each insurer is liable to contribute on proportionate
proportionate to the risk reinsured by him with the
basis towards loss suffered by the insured.
reinsurers.
 Answer No 31:
 No Person shall operate or cause to operate the Insurance Business without obtaining a certificate pursuant
to Insurance Act.
 Any national or foreign corporate body desirous to operate an Insurance Business shall submit an
application to the office of the Board in the prescribed form along with the following documents and
prescribed fees for the registration of its name as an Insurer:
a) Memorandum and articles of association of the corporate body,
b) Insurance Business to be operated and its policies and terms and conditions,
c) If life Insurance Business to be operated, documents displaying calculations of the premiums to be
received in operating such business and liability,
d) The documents regarding the methods of utilizing the amounts to be received from the Insurance, and
e) Other necessary documents as prescribed by the Board.
 The Board shall make necessary investigation upon the application received pursuant to above and shall
make an inquiry with the applicant, if necessary, and shall register the name of such applicant in the
prescribed register-book by mentioning the types of the Insurance Business to be operated by the applicant
and shall provide the registration certificate of Insurer to the applicant in the form as prescribed. In case
there is any reasonable ground for not registering the name, the Board shall inform the concerned applicant
accordingly.
 Notwithstanding anything contained elsewhere in Insurance Act, in the case of the Life Insurance, the Board
shall, with the approval of the Nepal Government, issue a certificate to operate the Business, based on the
fulfillment of the criteria which it has fixed, from time to time, in respect of the operation of the Insurance
Business.

Answer No 32:
Section 41B of Insurance Act, 2049 states the following provisions for settlement of liabilities as under:
If any Insurer is dissolved due to the cancellation of its registration pursuant to Section 13, the liabilities
shall be settled in the following order of priority :-
(a) The expenses incurred for the dissolution,
(b) The amount to be paid against the insurance claims to the Insured pursuant to Section 16,
(c) The remuneration and other outstanding amounts to be obtained by the employees of the Insurer,
(d) Loan amounts,
(e) The amount to be paid to the Board,
(f) The amount to be paid to the Government of Nepal.

Negotiable Instruments Act, 2034

Answer No 33:
As per Section 103 of Negotiable Instruments Act, 2034, following are the assumptions of Negotiable
Instruments Act, 2034:
 That the negotiable instrument was made or drawn for consideration and every party who made itself bound
in respect thereof did so for consideration;
 That the negotiable instrument was drawn on the date shown on the face of it.
 That the bill of exchange was accepted before its maturity i.e. before it became overdue.
 That the Negotiable instrument was transferred before its maturity
 That the endorsement appearing upon a negotiable instrument were made in the order in which they appear.
 That an instrument which has been lost was properly stamped.
 That the holder of a negotiable instrument is the holder in due course, except when the instrument has been
obtained from its lawful owner or its lawful custodian. Likewise, if it has been obtained from a maker or
acceptor by means of an offence or fraud, it is the holder to prove that he is the holder in due course.
 Answer No 34:
Basis of Distinction Negotiation Assignment

In case of Negotiation, assignee acquires rights Assignee does not acquire the right of holder in due course
Ownership
of a holder in due course. but has only the right, title and interest of assignor.

Assignment of chose in action, notice of assignment must

Notice of Transfer Notice of Transfer is not necessary.
be served by the assignee on his/her debtor.

In case of transfer of negotiable instrument In case of transfer of assignment, consideration must be

Consideration
consideration is presumed. proved as in case of any other contract.

In case of Bearer instrument, negotiation

Documents must be in writings and signed by the
requires either delivery. In case of order
Transferor.
instrument, endorsement and delivery.

Answer No 35:
As per Section 3 of Negotiable Instruments Act, 2034 where a Negotiable Instrument may be
construed either as a Promissory Note or Bill of Exchange the Holder may at his /her election treat it
as either.

Answer No 36:
As per Section 9 of Negotiable Instruments Act, 2034 while calculating the date of payment of the
Negotiable Instrument to be payable after a specified period, it is calculated by excluding the day
written in the Negotiable Instrument or the day of presentment for the acceptance.

Answer No 37:
As per Section 26 of Negotiable Instruments Act, 2034 A Negotiable Instrument made, accepted,
indorsed or transferred without consideration against the prevailing law creates no obligation of
payment between the parties to the transaction. If any person has transferred such Negotiable
Instrument with or without Endorsement to a Holder for consideration, such Holder deriving title for
him/her, may recover the amount due on such Negotiable Instrument from the transferor for
consideration or any prior party thereto.

Answer 38:
As per Section 70 of Negotiable Instruments Act, 2034 No notice of dishonour is necessary in the
following conditions:-
(a) When it is dispensed with by the party entitled thereto,
(b) When the Drawer has countermanded payment,
(c) When the party has not suffered damage for want of notice,
(d) When the acceptor is also a Drawer,
(e) In the case of a Promissory Note which is not negotiable.
(f) When the party entitled to notice cannot after due search be found, or the party bound to give notice, is
for any other reason, unable without any fault of his/her own to give it,
(g) When the party entitled to notice, knowing the facts, promises unconditionally to pay the amount due
on the Negotiable Instrument.

Social Welfare Act, 2049

Answer No 39:
As per Social Welfare Act, 2049 following are the Objectives of Social Welfare council:
To make effective co-ordination, co-operation, mobilization and promotion of the social organizations and
institutions, in order to run social activities in more organized way.
Answer No 40:
As per Section 17 of the Social Welfare Act, 2049, following are the fund of the Council:

 Money received from Government of Nepal.

 Money received from foreign Governments, international organizations or foreign organizations, through
Government of Nepal.
 Money received from the movable or immovable property of the Council.
 Money received from any individual, institutions or countries in the form of donation, assistance, grants and
presents.
 Money received from any other sources.

Answer No 41:
As per Section 23 of Social Welfare Act, 2049 following are the provisions of annual report of Social
Welfare Council:
The Council shall submit an audit report to the Government of Nepal within the period of six months after
the completion of its fiscal year, along with detail descriptions of its work and activities.
Social organizations or institutions affiliated with the Council shall submit audit report, to the Council
within the period of six months after the completion of fiscal year along with the detail descriptions of their
work and activities.
Miscellaneous Provisions:
Answer No 42:
Finance Bill
The Finance Bill is presented at the time of presentation of the budget before Parliament in fulfilment of
the requirement of the constitution, detailing the imposition, abolition, remission, alteration or regulation of
taxes proposed in the Budget. Finance Bill generally seeks approval of the Parliament for raising
resources through taxes. When the proposals are introduced to the Legislative Parliament it is called as a
Finance Bill.
Finance Act
Once finance bill is passed by the Parliament and assented to by the President, Finance Bill becomes the
Finance Act for that year. Finance Act refers to the headline fiscal (budgetary) legislation enacted by the
Parliament, containing multiple provisions as to taxes, duties, exemptions and reliefs at least once per
year, and in particular setting out the principal tax rates for each fiscal year. It is through the Finance Act
that amendments are made to the various Acts like Income Tax Act, Value Added Tax, Customs Act,
Excise Act etc.

Answer No 43:
Nepal's membership to WTO is the result of an effort of 14 years. Nepal has applied to GATT in 1989 in
view of cold relation with India regarding the Trade and Transit Treaty. In early nineties, Nepal initiated
formal effort to be membership of GATT with the initiation of economic reform programs and it gained the
observer status in 1993 and participated in the final meeting of the Uruguay round. Nepal applied formally
for membership of WTO in 1995 and submitted its Memorandum of Foreign Trade Regime in 1998,
Geneva, after three rounds of working party meetings during the period of 2003. Nepal finally granted the
th
WTO membership in Cancum Conference. Application submitted by Nepal is accepted in 24 March 2004
rd
and membership granted on 23 April 2004.
 Paper: 4

Financial Management
 QUESTIONS
Capital Budgeting

Question No. 1
An educational institute is planning to install air conditioners for its new computer center. It has received
proposals from 2 manufacturers. The first proposal is for 6 window air conditioners @ Rs. 25,000 each
with useful life of 6 years. The other is for the installation of split air conditioners of an equal capacity
costing Rs. 200,000 having 10 years of useful life. The cash operating costs associated with each
proposal are given below:
Year Proposal I Proposal II
1 Rs. 20,000 Rs. 18,000
2 20,000 18,000
3 20,000 18,000
4 25,000 22,000
5 25,000 22,000
6 25,000 22,000
7 26,000
8 26,000
9 26,000
10 26,000
The salvage value of the window air conditioners at the end of 6 years is expected to be Rs. 10,000 and
that of split air conditioners Rs. 15,000. Advise the educational institute which proposal should be
selected by it if its opportunity cost of fund is 10%.

Question No. 2
A local department store is considering the renovation of its appliances department. The renovation will
cost the store Rs. 10,00,000. Its incremental CFAT is very sensitive to general economic conditions as
estimated below:
The Greek alphabet
Business/Economic Cycle Probability Incremental CFAT
Peak 0.1 Rs. 800,000
Expansion 0.2 500,000
Recovery 0.4 400,000
Contraction 0.2 300,000
Trough 0.1 200,000
The store thinks that the probability distribution of possible incremental CFAT exits for each of the 4 years
during which appliance department will be functioning. The firm‘s cost of capital is 10%. Find out the
project‘s expected NPV.

Question No. 3
The following information is provided by ABC Ltd. :
 Purchase price of each Machine Rs. 600,000
 Working Capital Rs. 300,000
 Useful life of each machine 4 years
 Estimated salvage value at the end of useful life Rs. 100,000
 Cash Salvage value at the end of useful life Rs. 120,000
 Method of Depreciation SLM
 Tax Rate 30%
 Cost of Capital 10%
 Earnings before depreciation & Tax
 Machine Year 1 Year 2 Year 3 Year 4
Machine X 300,000 300,000 300,000 300,000
Machine Y - 100,000 200,000 1,200,000

Required:
Which of the machine should be purchased on the basis of MIRR?

Ratio Analysis
Question No. 4
st
MN Limited gives you the following information related for the year ending 31 March 2009
a) Current Ratio 2.5:1
b) Debt-Equity Ratio 1:1.5
c) Return on Total Assets 15%
d) Total Assets Turnover Ratio 2
e) Gross Profit Ratio 20%
f) Stock Turnover Ratio 7
g) Current Market Price per Equity Share Rs.16
h) Net Working Capital Rs. 450,000
i) Fixed Assets Rs. 10,00,000
j) 60,000 Equity Shares of Rs. 10 each
k) 20,000 9% Preference Shares of Rs. 10 each
l) Opening Stock Rs. 380,000

You are required to calculate:

i) Quick Ratio
ii) Fixed Assets Turnover Ratio
iii) Proprietary Ratio
iv) Earnings per Share
v) Price – Earnings Ratio

Bond Valuation
Question No. 5
Suppose Ford Motor Company sold an issue of bonds with a 10-year maturity, a Rs.1,000 par value, a 10 percent
coupon rate, and semiannual interest payments.
a) Two years after the bonds were issued, the going rate of interest on bonds such as these fell to 6
percent. At what price would the bonds sell?
b) Suppose that, 2 years after the initial offering, the going interest rate had risen to 12 percent. At what
price would the bonds sell?
c) Suppose that the conditions in part a existed – that is, interest rate fell to 6 percent 2 years after the
issue date. Suppose further that the interest rate remained at 6 percent for the next 8 years. What
would happen to the price of the Ford Motor Company bonds over time?

Equity Valuation
Question No. 6
D Ltd. is foreseeing a growth rate of 12% per annum in the next two years. The growth rate is likely to be 10%
for the third and fourth year. After that the growth rate is expected to stabilize at 8% per annum. If the last
dividend was Rs. 1.50 per share and the investor‘s required rate of return is 16%, determine th e current value of
equity share of the company.

Working Capital Management – Requirement & Forecasting

Question No. 7
An engineering company is considering its working capital investment for the year 2003 -04. The estimated fixed
assets and current liabilities for the next year are Rs.6.63 crore and Rs.5.967 crore respectively. The sales and
earnings before interest and taxes (EBIT) depend on investment in its current assets  particularly inventory and
receivables. The company is examining the following alternative working capital policies:
 Working Capital Investment in Estimated EBIT
Policy Current Assets Sales
(Rs. Crore) (Rs. Crore) (Rs. Crore)
Conservative 11.475 31.365 3.1365
Moderate 9.945 29.325 2.9325
Aggressive 6.63 25.50 2.55

You are required to calculate the following for each policy:

(i) Rate of return on total assets.

(ii) Net working capital position.

(iii) Current assets to fixed assets ratio.

(iv) Discuss the risk-return trade off of each working capital policy.

Receivable Management
Question No. 8
The SB Company‘s annual credit sales are 150 crores. Cost of sales 80%. The company‘s existing credit term is
1/35, net 60. Generally 60 percent of the customers avail the cash discount facility. The percentage default rate is
0.5%. The company is considering of two alternative changes in its credit terms:

Expected % of customers availing Increase in Default

Policy Credit Terms
discount sales percentage

A 2/10, net 60 80 5% 1

B 3/10, net 110 95 10% 1.5

What strategy should be followed by the SB company if the required rate of return is 18%? Take 360 days in a year.

Cash Management
Question No. 9
ST Carpet currently maintains a centralized billing system at its head office to handle average daily collection of
Rs. 300,000. The total time for mailing, processing and clearing is about 5 days.
i) If the opportunity cost on short term fund is 12%, how much is the time lag of 5 days costing the firm?
ii) If the firm designs a lockbox system with regional bank that will reduce float by 2 days and wi ll also
reduce the annual expenses of the collection department by Rs. 30,000, what is the maximum
acceptable compensating balance the firm should be willing to pay?

Dividend Distribution Policy

Question No. 10
The Welch Company is considering three independent projects, each of which requires a Rs.5 million
investment. The estimated internal rate of return (IRR) and cost of capital for these projects are presented
below:

Project H (high risk): Cost of capital = 16%; IRR = 20%

Project M (medium risk): Cost of capital = 12%; IRR = 10%
Project L (low risk): Cost of capital = 8%; IRR = 9%

Note that the project's cost of capital varies because the projects have different levels of risk. The
company's optimal capital structure calls for 50 percent debt and 50 percent common equity. Welch
expects to have net income Rs.7,287,500. If Welch bases its dividend on the residual model (all
distributions are in the form of dividends), what will its payout ratio be?
Question No. 11
X Ltd., has 8 lakhs equity shares outstanding at the beginning of the year 2003. The current market price per
share is Rs. 120. The Board of Directors of the company is contemplating Rs. 6.4 per share as dividend. The
rate of capitalization, appropriate to the risk-class to which the company belongs, is 9.6%:

(i) Based on M-M Approach, calculate the market price of the share of the company, when the dividend is –
(a) declared; and (b) not declared.

(ii) How many new shares are to be issued by the company, if the company desires to fu nd an investment
budget of Rs. 3.20 crores by the end of the year assuming net income for the year will be Rs. 1.60 crores?

Capital Structure, Leverage & Cost of Capital

Question No. 12
ABC Limited has an EBIT of Rs. 1 lakh. Its cost of debt is 10% and the outstanding debt amounts to Rs. 4
lakh. The overall capitalization rate is 12.5%. The company decides to raise a sum of Rs. 1 lakh through
debt at 10% and uses the proceeds to pay off the equity shareholders.
Required:
Calculate the total value of the firm and also the equity capitalization rate.

Question No. 13
From the following details of HPL Ltd., Calculate the Cost of Capital.

Debt Amount Nominal Interest

Foreign Loan USD 100 Mio 5%
Domestic Loan Rs. 2200 Mio 12%
Current Exchange Rate : Rs. 100 per USD
Equity Capital : Rs. 6,000 Mio
Unlevered Beta : 0.6
Risk Free Rate : 6%
Market Premium : 8%
Tax Rate : 30%

Question No. 14
A company is currently earning an EBIT of Rs. 12 lakhs. Its present borrowings are:
Particulars Amount (Rs.in Lakh)
11% Term Loan 40
Working Capital:
Borrowing from Bank @ 16% 33
Public Deposit @ 12% 15
The company is proposing for obtaining for an additional bank borrowing of Rs. 25 lakh in order to support
the growing sales. The increase in EBIT is expected to be 20%.

Required:
Calculate the change in interest coverage ratio after the additional borrowing and comment.

Time Value of Money

Question No. 15
To complete your last year in business school and then go through law school, you will need Rs.10,000
per year for 4 years, starting next year (that is, you will need to withdraw the first Rs.10,000 one year
 from today). Your rich uncle offers to put you through school, and he will deposit in a bank paying 7
percent interest a sum of money that is sufficient to provide that four payments of Rs.10,000 each. His
deposit will be made today.
a) How large must the deposit be?
b) How much will be in the account immediately after you make the first withdrawal? After the last
withdrawal?

Risk & Return Theory

Question No. 16
A firm is considering two alternative proposals for the next summer.
a) Purchasing and selling air conditioners
b) Purchasing and selling rain coats
The firm has limited space available in its stores. It can accommodate only one item at a time. From the
following details, you are required to identify the alternative which would be most profitable for the firm:

Air Conditioners
Weather Probability % Net Return Rs.
Hot summer 20 90,000
Normal summer 55 50,000
Cool summer 25 -10,000

Rain Coats
Weather Probability % Net Return Rs.
Hot summer 20 80,000
Normal summer 60 30,000
Cool summer 20 20,000

Mutual Fund
Question No. 17
Mr. X purchased 4,000 units of Laxmi Value Fund (Mutual Fund Scheme) at Rs. 12.5 per unit as on
Ashadh 31, 2073. As on Ashadh 31, 2074 , he received Rs. 1.5 as cash dividend and Re.1 as capital
gains distribution per unit.

Required:
a) The return on investment if the NAV per unit as on Ashadh End 2074 is Rs. 13.
b) The return on investment as on Ashadh End 2074 if all dividends and capital gains distributions are
reinvested into additional units of the fund at Rs. 12.6 per unit.

Question No. 18
Explain the important ratios that would be used in each of the following situations:
(i) A bank is approached by a company for a loan of 50 lakhs for working capital purposes.
(ii) A long term creditor interested in determining whether his claim is adequately secured.
(iii) A shareholder who is examining his portfolio and who is to decide whether he should hold or sell his
holding in the company.
(iv) A finance manager interested to know the effectiveness with which a firm uses its available resources.

Question No. 19 – Differentiate Between:

i) Money Market Vs. Capital Market
ii) Factoring and Bill discounting
iii) Euro Bonds and Foreign Bonds
iv) Cash Flow Vs Fund Flow Statement
v) Open Ended Vs. Close Ended Mutual Fund
Question No. 20 – Write Short Notes
i) EVA (Economic Value Added):
ii) Reverse Takeover
iii) Pecking Order Theory
iv) Indifference Point
v) Front Running
 Answers
Answer No 1:
As the projects have disparity in life, equivalent annual cost approach is followed.

Proposal I

Particulars Year Cost (Rs.) PV factor@10% PV (Rs.)

Purchase Cost 0 150,000 1 150,000

Operating Costs 1 20,000 0.909 18,180
2 20,000 0.826 16,520
3 20,000 0.751 15,020
4 25,000 0.683 17,075
5 25,000 0.621 15,525
6 25,000 0.564 14,100
Salvage Value 6 -10,000 0.564 -5,640
Total PV 240,780
PVIFA10%,6 yrs 4.335

240,780/4.335
Equivalent Annual Cost (EAC) = Total PV/ PVIFA10%,6 yrs
= Rs. 55,543

Proposal II
Particulars Year Cost (Rs.) PV factor@10% PV (Rs.)
Purchase Cost 0 200,000 1 200,000
Operating Costs 1 18,000 0.909 16,262
2 18,000 0.826 14,868
3 18,000 0.751 13,518
4 22,000 0.683 15,026
5 22,000 0.621 13,662
6 22,000 0.564 12,408
7 26,000 0.513 13,338
8 26,000 0.467 12,142
9 26,000 0.424 11,024
10 26,000 0.386 10,036
Salvage Value 10 -15,000 0.386 -5,790
Total PV 338,174
PVIFA10%,10 yrs 6.145

Equivalent Annual Cost (EAC) = Total PV/ PVIFA10%,6 yrs Rs. 55,032
The educational institute should go for split air conditioners as their equivalent annual cost is lower.

Answer No 2 :

Business/Economic Expected Annual Incremental

Probability Incremental CFAT
Cycle CFAT

Peak 0.1 Rs. 800,000 Rs. 80,000

Expansion 0.2 500,000 100,000
Recovery 0.4 400,000 160,000
Contraction 0.2 300,000 60,000
Trough 0.1 200,000 20,000
420,000

Annual Incremental CFAT Rs. 420,000

PV factor @ 10% for year 1-4 3.167
Total PV 1,331,400
Less: NCO 1,000,000
NPV (Expected) 331,400

Answer No. 3:
For Machine X
Particulars Year 1 Year 2 Year 3 Year 4
EBDT 300,000 300,000 300,000 300,000
Less: Dep. -125,000 -125,000 -125,000 -125,000
EBT 175,000 175,000 175,000 175,000
Less: Tax@ 30% -52,500 -52,500 -52,500 -52,500
EAT 122,500 122,500 122,500 122,500
Add: Dep. 125,000 125,000 125,000 125,000
CFAT 247,500 247,500 247,500 247,500
Add: Release of
300,000
WC

Add: Salvage
120,000
value

Less: Tax on
profit on sale

{30% of Rs.
20,000 (i.e. Rs.
-6,000
120,000 – Rs.
100,000)}

Total CFAT for

the final year
661,500
 Compounding
Year CFAT Terminal Value
Factor@10%

1 247,500 = 1.331 329,423

2 247,500 = 1.210 299,475

3 247,500 = 1.100 272,250

4 661,500 1 661,500

Total TV 15,62,648

PV of Outflows =

= = 1.736

r= -1 = 0.1479 or 14.79%

For Machine Y, r = 16.66%. Hence machine Y should be purchased.

Answer No 4:
i) Quick Ratio = Quick Assets/Current Liabilities = 330,000/300,000 = 1.1
ii) Fixed Assets Turnover Ratio = Sales/Fixed Assets = 3500,000/1000,000 = 3.5
iii) Proprietary Ratio = Net Worth or Equity/Total Assets = 1050,000/1750,000 = 0.6

iv) Earnings per Share (EPS) = (PAT – Pref. Dividend)/No. of Equity Shares

= (262,500 – 18,000)/60,000
= Rs. 4.075 per share

v) Price – Earnings Ratio = MPS/EPS = 16/4.075 = 3.926

Workings
Net Working Capital = CA – CL = 2.5 – 1 = 1.5
Current Assets = (Net Working Capital x2.5)/1.5
= (450,000 x 2.5)/1.5
= Rs. 750,000
Current Liabilities = Rs. 300,000

Sales = 2 x Total Assets = 2 x (1000,000 + 750,000) = Rs. 3,500,000

Cost of Goods Sold = 100 -20 = 80% of Sales = Rs. 2,800,000

Stock Turnover Ratio = COGS/Average Inventory

7 = 2,800,000/(Op. stock +Cl. Stock)/2
Closing Stock = 420,000

Quick Assets = CA – Closing Stock = Rs. 330,000

Debt/Equity = 1/1.5
Assets - Equity = Equity /1.5
Equity = (Assets x1.5)/2.5 = Rs. 1,050,000
Profit after Tax = Total Assets x Return on Total Assets = 1750,000 x 15% = Rs. 262,000

Answer No 5 :
a) Value of Bond (V0) = I/2 (PVIFAkd/2, nx2) + M (PVIFAkd/2, nx2)
= 100/2 (PVIFA6%/2, 8x2) + 1,000 (PVIFA6%/2, 8x2)
= 50 x 12.5611 + 1000 x 0.632
= Rs. 1,251.26
b) Value of bond, if going rate is 12%
V0 = Rs. 898.89

c) If the interest rates remain constant at 6% for the 8 years, value of the bond would fall gradually from Rs.
1,251.26 to Rs. 1,000 at maturity date.

Answer No 6:
The current value of equity share of D Ltd. is sum of the following:

(i) Presently value (PV) of dividends payments during 1-4 years; and

(ii) Present value (PV) of expected market price at the end of the fourth year based on constant growth rate of
8 per cent.

Year Dividend PV factor at 16% Total PV (in Rs.)

1 1.50(1 + 0.12)=1.68 0.862 1.45
2 1.68 (1+0.12)= 1.88 0.743 1.40
3 1.88 (1 + 0.10)=2.07 0.641 1.33
4 2.07 (1 + 0.10)= 2.28 0.552 1.26
Total 5.44

Present value of the market price (P 4 ): end of the fourth year –

P 4 = D 5 / (Ke-g) = Rs. 2.28 (1.08) / (16%  8%) = Rs. 30.78

PV of Rs. 30.78 = Rs. 30.780.552 = Rs. 16.99

Hence,

Value of equity shares Rs. 5.44  Rs. 16.99 = Rs. 22.43

Answer No 7:

Working Capital Investment Policy (Rs. in Crores)

Conservative Moderate Aggressive

1. Current assets 11.475 9.945 6.630

2. Fixed assets 6.630 6.630 6.630

3. Total assets 18.105 16.575 13.26

4. Current liabilities 5.967 5.967 5.967

5. Estimated sales 31.365 29.325 25.50

 6. Estimated EBIT 3.1365 2.9325 2.55

7. Current ratio {(1) / (4)} 1.92 1.67 1.11

Computation of following for each policy:
(i) Rate of return on total assets 17.32 17.69 19.23
(in percentages): [(6)/(3)]  100
(ii) Net working capital position : 5.508 3.978 0.663
(in crores) [(1)(4)]

(iii) Current assets to fixed assets ratio: [(1) / (2)] 1.73 1.50 1.00

(iv) Risk return trade off:

The net working capital or current ratio is a measure of risk. Rate of return on total assets is a measure of
return. The expected risk and return are minimum in the case of conservative investment policy and
maximum in the case of aggressive investment policy. The firm can improve profitability by reducing
investment in working capital.

Answer No 8:

Existing Policy Proposed Policy A Proposed Policy B

Particulars
a) Credit sales 150 157.5 165
b) Total cost (other than bad debts & cash
120 128 132
discount)
c) Bad Debts 0.75 1.58 2.47
d) Cash Discount 0.9 2.52 4.7
A. Expected Profit (a-b-c-d) 28.35 27.4 25.83
B. Opportunity Cost of Investment in
2.7 1.26 0.99
Receivable

(total cost x collection period/360 x rate of

(120x45/365x18%) (128x20/365x18%) (132x15/365x18%)
return)

Net Benefits (A-B) 25.65 26.14 24.84

The proposed policy A should be adopted as the net benefits under this policy is higher than those under other
policies.

Working Note:
Calculation of Average Collection Period
Existing Policy: (35 days x 60%) + (60 days x 40%) = 45 days
Proposed Policy A = 10 days x 80% + 60 days x 20% = 20 days
Proposed Policy B = 10 days x 95% + 110 days x 5% = 15 days

Answer No 9:
Cost for 5 days time lag = Average daily collection x opportunity cost x time period
= 300,000 x 12% x 5
= Rs. 180,000
The five days delay in mailing, processing and clearing time would cost Rs. 180,000 to the firm.

If the firm designs a lockbox system, it will reduce float by two days so that the firm will be able to save an
opportunity costs of two days cash investment along with an annual expenses saving of Rs. 30,000.
Opportunity cost saving = 2 days x Rs. 300,000 x 12% = Rs. 72,000
Reduction in annual expense = Rs. 30,000
Total annual net saving = Rs. 72,000 + Rs. 30,000 = Rs. 102,000

The firm should maintain that much amount in compensating balance whose opportunity cost at the rate
of 12 percent does not exceed Rs. 102,000.

Therefore, the maximum acceptable amount of compensating balance is given by

Compensating balance = Annual Saving / Rate of opportunity cost = 102,000/0.12

= Rs. 850,000

Answer No 10:
Project M is not undertaken as its cost of capital is higher than IRR.
Total fund requirement = 5 + 5 = Rs. 10 Million
50% of 10 Mio is raised from debt and the remaining 50% i.e. 5 Mio is financed by equity.
Dividend to be paid = Net income – fund requirement
= 7,287,500 – 5,000,000
=Rs. 2,287,500
Dividend Payout ratio = 2287,500/7287500*100 = 31.39%

Answer No 11:
Modigliani and Miller ( M-M) – Dividend Irrelevancy Model:
P1  D1
P0 
1 K e
Where Po = Existing market price per share i.e. Rs. 120

P1 = Market price of share at the year end (to be determined)

D1 = Contemplated dividend per share i.e. Rs. 6.4

Ke = Capitalization rate i.e. 9.6%.

(i) (a) Calculation of share price when dividend is declared:

P1  D1
P0 
1 K e
P1  6.4
120 
1  0.096
120 × 1.096 = P 1 + 6.4

P1 = 120 × 1.096 – 6.4 = Rs.125.12

(b) Calculation of share price when dividend is not declared:

P1  D1
P0 
1 K e
P1  0
120 
1  0.096
120 × 1.096 = P 1 + 0 P1 = Rs. 131.52

(ii) Calculation of No. of shares to be issued:

(Rs. in lakhs)
 Particulars If dividend If dividend not
declared declared

Net Income 160 160

Less: Dividend paid 51.20 -

Retained earnings 108.80 160

Investment budget 320 320

Amount to be raised by issue of new shares (i) 211.20 160

Market price per share (ii) 125.12 131.52

No. of new shares to be issued (ii) 1,68,798 1,21,655

Answer No 12:
Particulars Amount (Rs.)
Earnings Before Interest & Taxes (EBIT) 100,000

Overall capitalization rate (k) 12.5%

Market Value of firm (V): 800,000

x 100 = x100
500,000
Total value of Debt (B) : (400,000+100,000)
Market Value of Equity :S = V-B 300,000
Equity Capitalization rate

16.67%
Ke = = =

Answer No 13:
Total Debt = 100 x 100 + 2,200 = Rs.12,200 Million
Average Interest rate: (5 x 10,000 + 12 x 2,200)/12,200 = 6.26%

After tax cost of borrowing (Kd) = I x (1-t) = 6.26 (1-0.3) = 4.38%

Debt Equity Ratio = 12,200/6,000 = 2.03

Levered Beta ( )= x {E+D(1-t)}/E = 0.6x{6000+12200(1-0.3)}/6000 =0.6 *2.4233 = 1.454

Cost of Equity (CAPM model), Ke = Rf + (Rf-Rm)

= 6 + 1.454 *8

= 17.63%

WACC = Ke(E/(E+D) + Kd (D/(E+D)

= 17.63(6000/(6000+12200) + 4.38 (12200/(6000+12200)

= 5.81 + 2.94

= 8.75%
Answer No 14:
The current EBIT level = Rs. 12 lakhs

Calculation of interest amount:

Term Loans = 40*11% = Rs. 4.40 lakh
Borrowing from Bank = 33*16% = Rs. 5.28 lakh
Public Deposit = 15*12% = Rs. 1.80 lakh
Total Rs. 11.48 lakh

Interest Coverage Ratio = = 12/11.48 = 1.05

Revised EBIT = 12 lakhs x1.2 = Rs. 14.40 lakh

Revised Interest = 11.48 + 25*16% = 15.48 lakhs

Revised Interest Coverage Ratio = 14.40/15.48 = 0.93

Hence, the additional bank borrowing to support the growing sales would deteriorate interest coverage
ratio by 11.5%.

Answer No 15:

a) The size of deposit = 10,000 x PVIFA7%,4 yrs = 10,000 x 3.3872

= Rs. 33,872
b) The amount after first withdrawal = 33,872 x 1.07 – 10,000 = Rs. 26,243
After the last withdrawal, the amount will be nil in the account.

Answer No 16:

i) Statement showing the expected return from selling air conditioners

Weather Probability % (p) Net Return Rs. (r) Expected Return

(p x r)
Hot summer 20 90,000 18,000
Normal summer 55 50,000 27,500
Cool summer 25 (10,000) (2,500)
Total 100 43,000

ii) Statement showing the expected return from selling rain coats
Expected Return
Weather Probability % (p) Net Return Rs. (r)
(p x r)
Hot summer 20 80,000 16,000
Normal summer 60 30,000 18,000
Cool summer 20 20,000 4,000
Total 100 38,000

The above calculation shows that the air conditioners are expected to generate a return of Rs. 43,000 in
the coming season as compared to Rs. 38,000 by rain coats. Hence, it will be advisable for the firm to
market rain coats in the coming season.

Answer No 17:
 a) Total Return % =

= 24%
b) If all dividends and capital gains are reinvested
Total amount reinvested = 2.5 x 4,000 = Rs. 10,000

Additional units added = 10,000/12.6 = 794 units

Total units = 4,000 + 794 = 4,794 units

Value of 4,794 units as on Asadh 31, 2074 = 4794 x 13 = Rs. 62,317
Price paid for 4,000 units on Ashadh 31, 2073 = 4,000 x 12.5 = Rs.50,000

Return = = 24.63%

Answer No 18:

Important Ratios used in different situations are:

(i) Liquidity Ratios- Here Liquidity or short-term solvency ratios would be used by the bank to check the
ability of the company to pay its short-term liabilities. A bank may use Current ratio and Quick ratio to
judge short terms solvency of the firm.

(ii) Capital Structure/Leverage Ratios- Here the long-term creditor would use the capital
structure/leverage ratios to ensure the long term stability and structure of the firm. A long term creditors
interested in the determining whether his claim is adequately secured may use Debt-service coverage
and interest coverage ratio.

(iii) Profitability Ratios- The shareholder would use the profitability ratios to measure the profitability or the
operational efficiency of the firm to see the final results of business operations. A shareholder may use
return on equity, earning per share and dividend per share.

(iv) Activity Ratios- The finance manager would use these ratios to evaluate the efficiency with which the
firm manages and utilizes its assets. Some important ratios are (a) Capital turnover ratio (b) Current and
fixed assets turnover ratio (c) Stock, Debtors and Creditors turnover ratio

Answer No 19 –
Differentiate Between:
 Money Market and Capital Market

The capital market deals in financial assets. Financial assets comprises of shares, debentures, mutual funds
etc. The capital market is also known as stock market.

Stock market and money market are two basic components of Indian financial system. Capital market deals
with long and medium term instruments of financing while money market deals with short term instruments.

Some of the points of distinction between capital market and money market are as follows:

Money Market Capital Market

(i) There is no classification between primary There is a classification between primary market
market and secondary market
and secondary market.
 (ii) It deals for funds of short-term requirement. It deals with funds of long-term requirement.

(iii) Money market instruments include interbank Capital Market instruments are shares, mutual
call money, notice money upto 14 days,
fund units and debt instruments.
certificate of deposits, commercial paper,
treasury bills.

(iv) Money market participants are banks, Capital Market participants include retail
financial institution, NRB and Government
investors, institutional investors like Mutual
Funds, Financial Institutions, corporate and
banks, SEBON, NEPSE, merchant bankers etc.

 Factoring and Bill discounting:

The main differences between Factoring and Bill discounting are:

 While factoring is management of book-debts, bill discounting is a sort of borrowing from
commercial banks.

 In factoring no grace period is given, whereas in bill discounting grace period is 3 days.

 For factoring there is no Specific Act, whereas in case of bill discounting Negotiable Instruments
Act applies.

 Factoring is a portfolio of complementary financial services whereas bill discounting is usually on

case to case basis.

 In factoring the basis of financing is turnover. Whereas in bill discounting it is the security
provision as well as the requirement of finance which determine the amount of financing.

 In factoring the risk of bad debts is passed on to the factor, whereas in bill discounting it is still
retained by the business.

 Euro Bonds and Foreign Bonds

Euro Bonds: Euro bonds are debt instruments which are not denominated in the currency of the country
in which they are issued. E.g. a Yen note floated in Germany. Such bonds are generally issued in a
bearer form rather than as registered bonds and in such cases they do not contain the investor‘s names
or the country of their origin. These bonds are an attractive proposition to investors seeking privacy.
Foreign Bonds: These are debt instruments issued by foreign corporations or foreign governments.
Such bonds are exposed to default risk, especially the corporate bonds. These bonds are denominated in
the currency of the country where they are issued, however, in case these bonds are issued in a currency
other than the investors home currency, they are exposed to exchange rate risks. An example of a foreign
bon ‗A British firm placing Dollar denominated bonds in USA‘.

 Cash Flow Vs Fund Flow Statement

The points of distinction between cash flow and funds flow statement are as below:
Cash flow statement Funds flow statement
(i) It ascertains the changes in balance of cash (i) It ascertains the changes in financial
in hand and bank. position between two accounting periods.
(ii) It analyses the reasons for changes in (ii) It analyses the reasons for change in
balance of cash in hand and bank financial position between two balance sheets

(iii) It shows the inflows and outflows of cash. (iii) It reveals the sources and application of
finds.
(iv) It is an important tool for short term analysis. (iv) It helps to test whether working capital
has been effectively used or not.
Open Ended Vs. Close Ended Mutual Fund
Open Ended: Not listed, without having maturity period, Fund Manager provides the liquidity to the unit holders by
buying or selling the units regularly or as required by investors, NAV published on daily basis.

Closed Ended: Listed with stock exchange (NEPSE), having fixed maturity period, unit holders can buy and sell the
MF unit through secondary markets, NAV is published on periodic basis (weekly and monthly).

Answer No. 20
Write Short Notes
 EVA (Economic Value Added):
EVA measures economic profit/loss as opposed to accounting profit/loss. EVA calculates profit/loss after taking
into account the cost of capital, which is weighted average cost of equity and debt. Accounting profit, on other
hand, ignores cost of equity and thus overstates profit or understates loss.

EVA=NOPAT–K×WACC

Where, NOPAT = Net Operating Profit after Tax = EBIT × (1 – T)

K = Capital employed (equity + debt)
WACC = Weighted average cost of capital.
The estimates are fine tuned through several adjustments. For instance, NOPAT is estimated excluding non-
recurring income or expenditure. EVA is a residual income which a company earns after capital costs are
deducted. It measures the profitability of a company after having taken into account the cost of all capital
including equity. Therefore, EVA represents the value added to the shareholders by generating operating profits
in excess of the cost of capital employed in the business.
EVA increases if :
(i) Operating profits grow without employing additional capital.
(ii) Additional capital is invested in projects that give higher returns than the cost of incurring new capital and
(iii) Unproductive capital is liquidated i.e. curtailing the unproductive uses of capital.

 Reverse Takeover
A reverse takeover or reverse merger takeover (reverse IPO) is the acquisition of a public company by a private
company so that the private company can bypass the lengthy and complex process of going public. The
transaction typically requires reorganization of capitalization of the acquiring company.
Sometimes, it might be possible that a company continuously trades as a public company but has no or very
little assets and what remains only its internal structure and shareholders. This type of merger is also known as
"back door listing".
Reverse merger brings following benefits to acquiring private company:
 Easy capital market accessibility
 Less time consuming and less cost for becoming public
 Benefits of tax on carry forward losses of acquired company
This concept is yet to be implemented in Nepalese Capital Market as no such publicly traded company has
been acquired by the private company till date.

 Pecking Order Theory

The pecking order theory was proposed by Donaldson in 1961. The pecking order theory suggests that
firm rely for finance, as much as they can, on internally generated funds. If internally generated funds
are not enough then they will move to additional debt finance then equity. This is because the issue
cost of internally generated funds have the lowest issue cost and cost of new equity is the highest.
Myers has suggested that the firm follows a ‗modified pecking order‘ in their approach to financing.
Myers has suggested asymmetric information as a reason for heavy reliance on internal generated
funds. He demonstrates that with asymmetric information, equity shares are interpreted by the market
as bad news since managers are only motivated to issue equity share when share markets are
undeveloped. Further, the use of internal finance ensures that there is regular source of finance which
might be in line with company‘s expansion programme. If additional funds are required over and above
internally generated funds, then borrowings will be next alternative in this theory.

Thus, pecking order theory rests on:

 (i) Stickly dividend policy,

(ii) A preference for internal funds,

(ii) An aversion to issue equity shares.

 Indifference Point
The concept of indifference point is relevant when we have to make a choice out of two proposed capital
structures. One capital structure may have no financial leverage, i.e. no debt and other may have financial
leverage, i.e., other may have debt or one may have lower degree of financial leverages and other may have
higher degree of financial leverage. Here our decision criteria is E.P.S. At one level of EBIT, one capital
structure may result in higher EPS than the other capital structure, at other level of EBIT it may be just
reverse. Indifference point is that level of EBIT at which E.P.S. is the same under both capital structures. If
the company is likely to have EBIT higher than the indifference point, it should opt for the capital structure
with lower degree of financial leverage. If its EBIT is likely to be equal to indifference point, it may go for
either of the two capital structures as both will result same E.P.S.

(EBIT - Int) (I - Tax) (EBIT - Int) (I - Tax)


Indifference Point =
N1 N2

 Front Running
Front running is the act of placing an order ahead of a customer‘s order to take advantage of the price
impact that the customer‘s order will have. For example, if you know a customer is ordering a large quantity
that is likely to drive up the price, you could take advantage of this information by buying in advance of that
customer‘s order.
 Paper: 5

Cost and Management Accounting

 QUESTIONS

Costs concepts and costing methods

Question No. 1
a) Define Explicit costs. How is it different from implicit costs?
b) Enumerate the factors which are to be considered before installing a system of cost
accounting in a manufacturing organization.
c) Explain Profit centers and investment centers.
d) Discuss the accounting treatment of defectives in Cost Accounts.
e) Describe job Costing and Batch Costing giving example of industries where these are used?

Material Control
Question No. 2
a) Discuss briefly the considerations governing the fixation of the maximum and minimum
levels of inventory.

b) IPL Limited uses a small casting in one of its finished products. The castings are purchased
from a foundry. IPL Limited purchases 54,000 castings per year at a cost of Rs. 800 per
casting.

The castings are used evenly throughout the year in the production process on a
360-days-per-year basis. The company estimates that it costs Rs. 9,000 to place a single
purchase order and about Rs. 300 to carry one casting in inventory for a year. The high
carrying costs result from the need to keep the castings in carefully controlled
temperature and humidity conditions, and from the high cost of insurance.
Delivery from the foundry generally takes 6 days, but it can take as much as 10 days.
The days of delivery time and percentage of their occurrence are shown in the following
tabulation:
Delivery time (days) : 6 7 8 9 10
Percentage of occurrence : 75 10 5 5 5
Required:
(i) Compute the economic order quantity (EOQ).
(ii) Assume the company is willing to assume a 15% risk of being out of stock. What
would be the safety stock? The re-order point?

(iii) Assume the company is willing to assume a 5% risk of being out of stock. What would
be the safety stock? The re-order point?
(iv) Assume 5% stock-out risk. What would be the total cost of ordering and carrying
inventory for one year?
(v) Refer to the original data. Assume that using process re-engineering the company
reduces its cost of placing a purchase order to only Rs. 600. In addition company
estimates that when the waste and inefficiency caused by inventories are considered,
the true cost of carrying a unit in stock is Rs. 720 per year.
(a) Compute the new EOQ.
(b) How frequently would the company be placing an order, as compared to the
old purchasing policy?

Labour Control
Question No. 3
a) It should be management‘s endeavor to increase inventory turnover but to reduce labour
turnover. Expand and illustrate the idea contained in this statement.

b) Two workmen, Andrew and Baker, produce the same product using the same material.
Andrew is paid bonus according to Halsey plan, while Baker is paid bonus according to Rowan
plan. The time allowed to manufacture the product is 100 hours. Andrew has taken 60 hours
and Baker has taken 80 hours to complete the product. The normal hourly rate of wages of
workman Andrew is Rs. 24 per hour. The total earnings of both the workers are same.
Calculate normal hourly rate of wages of workman Baker.

Overhead
Question No. 4
a) From the details furnished below you are required to compute a comprehensive machine-
hour rate:

Original purchase price of the machine (subject to Rs. 3,24,000

depreciation at 10% per annum on original cost)
Normal working hours for the month 200 hours
(The machine works for only 75% of normal capacity)
 Wages to Machine-man Rs. 125 per day (of 8 hours)
Wages to Helper (machine attendant) Rs. 75 per day (of 8 hours)
Power cost for the month for the time worked Rs.15,000
Supervision charges apportioned for the machine Centre
for the month Rs. 3,000
Electricity & Lighting for the month Rs. 7,500
Repairs & maintenance (machine) including Consumable stores per month Rs. 17,500
Insurance of Plant & Building (apportioned) for the year Rs. 16,250
Other general expense per annum Rs. 27,500
The workers are paid a fixed Dearness allowance of Rs. 1,575 per month.
Production bonus payable to workers in terms of an award is equal to 33.33% of
basic wages and dearness allowance. Add 10% of the basic wage and dearness
allowance against leave wages and holidays with pay to arrive at a comprehensive
labour-wage for debit to production.

b) M.L. Auto Ltd. is a manufacturer of auto components and the details of its expenses
for the year 2073 are given below:
(Rs.)
(i) Opening Stock of Material 1,50,000
(ii) Closing Stock of Material 2,00,000
(iii) Purchase of Material 18,50,000
(iv) Direct Labour 9,50,000
(v) Factory Overhead 3,80,000
(vi) Administrative Overhead 2,50,400
During 2074, the company has received an order from a car manufacturer where it
estimates that the cost of material and labour will be Rs. 8,00,000 and Rs.
4,50,000 respectively. M.L. Auto Ltd. charges factory overhead as a percentage of
direct labour and administrative overhead as a percentage of factory cost based on
previous year's cost.
Cost of delivery of the components at customer's premises is estimated at Rs. 45,000.
You are required to:
(i) Calculate the overhead recovery rates based on actual costs for 2073.
(ii) Prepare a detailed cost statement for the order received in 2074 and the
price to be quoted if the company wants to earn a profit of 10% on sales.

Costs Accounts System, Cost Control (Integrated and Non-integrated Accounting System)
Question No. 5
The following figures, have been extracted from the Financial Accounts of a Manufacturing
Firm for the first year of its operation:
 Particulars (Rs.)
Direct Material Consumption 50,00,000
Direct Wages 30,00,000
Factory Overhead 16,00,000
Administration Overheads 7,00,000
Selling and Distribution Overheads 9,60,000
Bad Debts 80,000
Preliminary Expenses written off 40,000
Legal Charges 10,000
Dividends Received 1,00,000
The
Interest Received on Deposits 20,000
cost
Sales (1,20,000 units) 1,20,00,000
Closing Stock :
Finished Goods (4,000 units) 3,20,000
Work-in-Progress 2,40,000

accounts for the same period reveal that the direct material consumption was
Rs. 56,00,000. Factory overhead is recovered at 20% on prime cost. Administration
overhead is recovered at Rs. 6 per unit of production. Selling and distribution
overheads are recovered at Rs. 8 per unit sold.
Prepare the Profit and Loss Accounts both as per financial records and as per cost
records. Reconcile the profits as per the two records.

Methods of Costing
Question No. 6
a) SV chemicals Limited processes 9,00,000 kgs. of raw material in a month purchased
at Rs. 95 per kg in department X. The input output ratio of department X is 100 : 90.
Processing of the material results in two joint products being produced ‗P1‘ and ‗P2‘
in the ratio of 60 : 40. Product ‗P1‘ can be sold at split off stage or can be further
processed in department Y and sold as a new product ‗YP1 ‘. The input output ratio of
department Y is 100 : 95. Department Y is utilized only for further processing of
product ‗P1‘ to product ‗YP1‘. Individual departmental expenses are as follows:

Dept. X (Rs. Dept. Y (Rs.

lakhs) lakhs)
Direct Materials 95.00 14.00
Direct Wages 80.00 27.00
Variable Overheads 100.00 35.00
Fixed Overheads 75.00 52.00
Total

350.00 128.00

Further, selling expenses to be incurred on three products are:

Particulars Amount (Rs. in lakhs)
Product ‗P1‘ 28.38
Product ‗P2‘ 25.00
Product ‗YP1‘ 19.00

Selling price of the products ‗P1‘ and ‗P2 ‘ at split off point is Rs. 110 per kg and
Rs. 325 per kg respectively. Selling price of new product ‗YP1 ‘ is Rs. 150 per kg.
You are required to:
 (i) Prepare a statement showing apportionment of joint costs, in the ratio of value
of sales, net of selling expenses.
(ii) Statement showing profitability at split off point.

(iii) Statement of profitability of ‗YP 1‘.

(iv) Would you recommend further processing of P1?

b) M/s ABID Constructions undertook a contract at a price of Rs. 171.00 lacs. The relevant
data for the year ended 31st Ashadh, 2074 are as under:

Particulars
(Rs. ‘ 000)
Material issued at site
7700
Direct Wages paid 3300

Site office cost 550

Material return to store 175

Work certified 12650

Work uncertified 225

Progress Payment Received 10120

Prepaid site office cost as on 31-03-2074 50

Direct wages outstanding as on 31-03-2074 100

Material issued at site as on 31-03-2074 110

Additional Information:
(a) A plant was purchased for the contract at Rs. 8,00,000 on 01-12-2073.
(b) Depreciation @ 15% per annum is to be charged.
(c) Material which cost Rs. 1,30,000 was destroyed by fire.
Prepare:
(i) Contract Account for the year ended 31st Ashadh, 2074 and compute the profit to
be taken to the Profit & Loss Account.
(ii) Account of Contractee.
(iii) Profit & Loss Account showing the relevant items.
(iv) Balance Sheet showing the relevant items.

c) Happy Transport Service is a Delhi based national goods transport service provider,
owning four trucks for this purpose. The cost of running and maintaining these trucks
are as follows:

Particulars Amount
Diesel cost Rs.13.75 per km.
Engine oil Rs. 4,200 for every 13,000 km.
Repair and maintenance Rs. 12,000 for every 10,000 km.
Driver‘s salary Rs. 18,000 per truck per month
Cleaner‘s salary Rs. 7,500 per truck per month
Supervision and other general expenses Rs. 12,000 per month
 Cost of loading of goods Rs.150 per Metric Ton (MT)

Each trucks were purchased for Rs. 20 lakhs with an estimated life of 7,20,000 km.
During the next month, it is expecting 6 bookings, the details are as follows:

Sl.No. Journey Distance in km Weight- Up (in MT) Weight- Down (in MT)
1. Delhi to Kochi 2,700 14 6
2. Delhi to Guwahati 1,890 12 0
3. Delhi to Vijayawada 1,840 15 0
4. Delhi to Varanasi 815 10 0
5. Delhi to Asansol 1,280 12 4
6. Delhi to Chennai 2,185 10 8
Total 10,710 73 18

Required
(i) Calculate the total absolute Ton-km for the vehicles.
(ii) Calculate the cost per ton-km.

d) M J Pvt. Ltd. produces a product "SKY" which passes through two processes, viz.
Process-A and Process-B. The details for the year ending 31st Ashadh, 2074 are as
follows:

Particulars Process –A in Rs. Process – B in Rs.

40,000 Units introduced at a cost of 3,60,000 -
Material Consumed 2,42,000 2,25,000
Direct Wages 2,58,000 1,90,000
Manufacturing Expenses 1,96,000 1,23,720
Output in Units 37,000 27,000
Normal Wastage of Input 5% 10%
Scrap Value (per unit) 15 20
Selling Price (per unit) 37 61
Additional Information:
(a) 80% of the output of Process-A, was passed on to the next process and the
balance was sold. The entire output of Process- B was sold.
(b) Indirect expenses for the year was Rs. 4,48,080.
(c) It is assumed that Process-A and Process-B are not responsibility centre.
Required:
(i) Prepare Process-A and Process-B Account.
(ii) Prepare Profit & Loss Account showing the net profit I net loss for the year.

Cost Concepts for Decision Making

Question No. 7
a) ABC Baggage Ltd. sells different styles of laptop bags with identical purchase costs
and selling prices. The company is trying to find out the profitability of opening another
store which will have the following expenses and revenues:

Particulars Amount per piece ( Rs.)

Selling Price 600
Variable costs:
Material cost 410
Salesmen‘s commission 60
Total variable cost 470
Annual fixed expenses are: ( Rs.)
Rent 6,00,000
 Office and administrative expenses 20,00,000
Advertising 8,00,000
Other fixed expenses 2,00,000

For the each following independent situation, you are required to:
(i) Calculate the annual break-even point in units and in value. Also
determine the profit or loss if 35,000 units of bags are sold.
(ii) The sales commissions are proposed to be discontinued, but instead a fixed
amount of Rs. 9,00,000 is to be incurred in fixed salaries. A reduction in
selling price of 5% is also proposed. What will be the break-even point in
units?
(iii) It is proposed to pay the store manager Rs. 5 per piece as further
commission. The selling price is also proposed to be increased by 5%. What
would be the break-even point in units?

b) Maryanne Petrochemicals Ltd. is operating at 80 % capacity and presents the

following information:
Break-even Sales Rs. 400 crores
P/V Ratio 30 %
Margin of Safety Rs. 120 crores
Maryanne‘s management has decided to increase production to 95 % capacity level
with the following modifications:
(a) The selling price will be reduced by 10%.
(b) The variable cost will be increased by 2% on sales
(c) The fixed costs will increase by Rs. 50 crores, including depreciation on
additions, but excluding interest on additional capital.
Additional capital of Rs. 100 crores will be needed for capital expenditure and
working capital. Required:
(i) Indicate the sales figure, with the working, that will be needed to earn Rs. 20
crores over and above the present profit and also meet 15% interest on the
additional capital.
(ii) What will be the revised
(a) Break-even Sales
(b) P/V Ratio
(c) Margin of Safety

Costing for planning and Control –Budgets

Question No.8
a) Aditya Ltd. manufactures two products K and H. The sales director has anticipated
to sale 8,000 units of Product K and 4,200 units of Product H. The Standard cost
data for the products for next year are as follows:

Direct Materials: Product – K per unit Product –H per unit

-Material X @ Rs. 15 per kg. 12 kg 15 kg
-Material Y@ Rs. 16 per kg. 15 kg 6 kg
-Material Z @ Rs. 5 per ltr. 8 kg 14 kg
Direct wages:
-Unskilled @ Rs. 40 per hour 12 hour 10 hour
-Skilled @ Rs. 75 per hour 8 hour 5 hour

Budgeted stocks for next year are as follows:

Product- K Product- H
(Units) (Units)
1st Shrawan, 2073 800 1,600
st
31 Ashadh, 2074 1,000 2,100
 Material-X (kg) Material-Y (kg) Material-Z (ltr)
1st Shrawan, 2073 25,000 30,000 14,000
st
31 Ashadh, 2074 30,000 18,000 7,500

Prepare the following budgets for next year:

(a) Production budget, in units;
(b) Material purchase budget, in quantity and in value;
(c) Direct labour budget, in hours and in value.

b) Vivekananda Primary School has a total of 150 students consisting of 5 sections with 30
students per section. The school plans for a picnic around the city during the weekend
to places such as the zoo, the Japanese park, Birla planetarium etc. A private transport
operator has come forward to lease out the buses for taking the students. Each bus will
have a maximum capacity of 50 (excluding 2 seats reserved for the teachers
accompanying the students.) The school will employ two teachers for each bus
paying them an allowance of Rs. 500 per teacher. It will also lease out the required
number of buses. The following are the other cost estimates:

Particulars Cost per student (Rs.)

Breakfast 50
Lunch 100
Tea 30
Entrance fee at zoo 20
Bus hire charge 6,500 per bus
Special permit fee 500 per bus
Block Entrance fee at the planetarium 2,500
Prizes to students for games 2,500

No costs are incurred in respect of the accompanying teachers (except the allowances of
Rs. 500 per teacher).
You are required to prepare:
(a) A flexible budget estimating the total cost for the students‘ levels of 30, 60, 90,
120 and 150. Each item of cost is to be indicated separately.
(b) Compute the average cost per student at these levels.
(c) What will be your conclusions regarding the break-even level of
students if the school proposes to collect Rs. 450 per student.

Standard Costing
Question No. 9
a) SJ Ltd. has furnished the following information:

Standard overhead absorption rate per unit Rs. 20

Standard rate per hour Rs. 4
Budgeted production 12,000 units
Actual production 15,560 units
Actual overheads were Rs. 2,95,000 out of which Rs. 62,500 fixed .
Actual hours 74,000
Overheads are based on the following flexible budget
 Production (units) 8,0 10,000 14,000
00
Total Overheads (Rs.) 1,80,000 2,10,000 2,70,000
You are required to calculate the following overhead variances (on hour‘s
basis) with appropriate workings:
(i) Variable overhead efficiency and expenditure variance
(ii) Fixed overhead efficiency and capacity variance.

The following information has been provided by a company:

Number of units produced and sold 6,000
Standard labour rate per hour Rs. 8
Standard hours required for 6,000 units -
Actual hours required 17,094 hours
b)
Labour efficiency 105.3%
Labour rate variance Rs. 68,376 (A)
You are required to calculate:
(i) Actual labour rate per hour
ii) Standard hours required for 6,000 units
(iii) Labour Efficiency variance
(iv) Standard labour cost per unit
(v) Actual labour cost per unit.

Uniform Costing and Inter-firm comparison

Question No. 10
a. What are the limitations of Uniform Costing?
b. Write short note on inter firm comparison and limitations of Inter-firm Comparison?

Cost control and cost reduction

Question No. 11
a) Briefly discuss how the synergetic effect helps in reduction in costs.
b) Distinguish between Cost Control and Cost Reduction.
 SUGGESTED ANSWERS / HINTS

Answer 1 (a)
Explicit costs: These costs are also known as out of pocket costs. It refers to those costs
which involves immediate payment of cash. Salaries, wages, postage and telegram, interest
on loan etc. are some examples of explicit costs because they involve immediate cash
payment. These payments are recorded in the books of account and can be easily measured.
Main points of difference: The following are the main points of difference between Explicit and
Implicit costs.
(i) Implicit costs do not involve any immediate cash payment. As such they are also known as
imputed costs or economic costs.
(ii) Implicit costs are not recorded in the books of account but yet, they are important for
certain types of managerial decisions such as equipment replacement and relative
profitability of two alternative courses of action.

Answer 1 (b)
Before installation of a system of cost accounting in a manufacturing organization the under
mentioned factors should be studied:
(a) Objective: The objective of costing system, for example whether it is being introduced for
fixing prices or for insisting a system of cost control.
(b) Nature of Business or Industry: The Industry in which business is operating. Every
business industry has its own peculiar feature and costing objectives. According to its cost
information requirement cost accounting methods are followed. For example Indian Oil
Corporation Ltd. has to maintain process wise cost accounts to find out cost incurred on a
particular process say in crude refinement process etc.
(c) Organisational Hierarchy: Costing system should fulfill the requirement of different level
of management. Top management is concerned with the corporate strategy, strategic
level management is concerned with marketing strategy, product diversification, product
pricing etc. Operational level management needs the information on standard quantity to
be consumed, report on idle time etc.
(d) Knowing the product: Nature of product determines the type of costing system to be
implemented. The product which has by-products requires costing system which account
for by-products as well. In case of perishable or short self- life, marginal costing method is
required to know the contribution and minimum price at which it can be sold.
(e) Knowing the production process: A good costing system can never be established
without the complete knowledge of the production process. Cost apportionment can be
done on the most appropriate and scientific basis if a cost accountant can identify degree
of effort or resources consumed in a particular process. This also includes some basic
technical know-how and process peculiarity.
(f) Information synchronisation: Establishment of a department or a system requires
substantial amount of organisational resources. While drafting a costing system,
information needs of various other departments should be taken into account. For
example in a typical business organisation accounts department needs to submit monthly
stock statement to its lender bank, quantity wise stock details at the time filing returns to
tax authorities etc.

(g) Method of maintenance of cost records: The manner in which Cost and Financial
accounts could be inter-locked into a single integral accounting system and in which
results of separate sets of accounts, cost and financial, could be reconciled by means of
control accounts.

(h) Statutory compliances and audit: Records are to be maintained to comply with
statutory requirements, standards to be followed (Cost Accounting Standards and
Accounting Standards).
 (i) Information Attributes: Information generated from the Costing system should be
possess all the attributes of an information i.e. complete, accurate, timeliness,
confidentiality etc. This also meets the requirements of management information system.

Answer 1 (c)
Profit Centres and Investment Centres:
Profit Centres are the part of a business which is accountable for both cost and revenue.
These are responsible for generating and maximizing profits. Performance of these centres is
measured with the volume of profit it earns.
Investment Centres are the profit centres with additional responsibility for capital investment
and possibly for financing. These centres are concerned with earning an adequate return on
investment as performance is measured by its returns on investment.

Answer 1 (d)

Accounting treatment of defectives in cost accounts:

Defectives refer to those units or portions of production, which do not meet
the prescribed specifications. Such units can be reworked or re-conditioned by the
use of additional material, labour and /or processing and brought to the point of either
standard or sub-standard units.
The possible way of treating defectives in Cost Accounts are as below:
1. When defectives are normal and it is not beneficial to identity them
job-wise, then the following methods may be used.
(a) Charged to good products: The cost of rectification of normal
defectives is charged to good units. This method is used when defectives
rectified are normal.
(b) Charged to general overheads. If the department responsible
for defectives cannot be identified, the rework costs are charged to
general overheads.
(c) Charged to departmental overheads: If the department
responsible for defectives can be correctly identified, the rectification
costs should be charged to that department.
2. When normal defectives are easily identifiable with specific job the
rework costs are debited to the identified job.
3. When defectives are abnormal and are due to causes within
the control of the organization, the rework cost should be charged to the
Costing Profit and Loss Account.
Answer 1 (e)
Job Costing: It is a method of costing which is used when the work is
undertaken as per the customer‘s special requirement. When an inquiry is received
from the customer, costs expected to be incurred on the job are estimated and on the
basis of this estimate, a price is quoted to the customer. Actual cost of materials,
labour and overheads are accumulated and on the completion of job, these actual
costs are compared with the quoted price and thus the profit or loss on it is
determined.
Job costing is applicable in printing press, hardware, ship-building, heavy
machinery, foundry, general engineering works, machine tools, interior decoration,
repairs and other similar work.
 Batch Costing: It is a variant of job costing. Under batch costing, a lot of
similar units which comprises the batch may be used as a unit for ascertaining cost.
In the case of batch costing separate cost sheets are maintained for each batch of
products by assigning a batch number. Cost per unit in a batch is ascertained by
dividing the total cost of a batch by the number of units produced in that batch.
Such a method of costing is used in the case of pharmaceutical or drug
industries, readymade garment industries, industries, manufacturing electronic parts of
T.V. radio sets etc.

Answer 2 (a)
(a) Considerations for the fixation of maximum level of inventory.
Maximum level of an inventory item is its maximum quantity held in
stock at any time. The mathematical formula used for its determination is as
follows:
Maximum level = Re-order level – (Min. Consumption × Min. Re-order period) +
Re-order quantity
The important considerations which should govern the fixation of
maximum level for various inventory items are as follows:
(1) The fixation of maximum level of an inventory item requires
information about re- order level. The re-order level itself depends upon its
maximum rate of consumption and maximum delivery period. It in fact is
the product of maximum consumption of inventory item and its maximum
delivery period.
(2) Knowledge about minimum consumption and minimum delivery
period for each inventory item should also be known.
(3) The determination of maximum level also requires the figure of
re-order quantity or economic order quantity. Economic order quantity
means the quantity of inventory to be ordered so that total ordering and
storage cost is minimum.
(4) Availability of funds, storage capacity, nature of items and
their price also are important for the fixation of maximum level.
(5) In the case of important materials due to their irregular supply,
the maximum level should be high.
Considerations for the fixation of minimum level of inventory
Minimum level indicates the lowest figures of inventory balance, which must
be maintained in hand at all times, so that there is no stoppage of production due to
non- availability of inventory. The formula used for its calculation is as follows:
Minimum level of inventory = Re-order level – (Average consumption × Average
delivery time).
The main considerations for the fixation of minimum level of inventory are
as follows:
1. Information about maximum consumption and maximum
delivery period in respect of each item to determine its re-order level.
2. Average rate of consumption for each inventory item.
3. Average delivery period for each item. The period can
be calculated by averaging the maximum and minimum period.

Answer 2 (b)
(i) Computation of economic order quantity (EOQ)
 Annual requirement (A) = 54,000 castings

Cost per casting (C) Ordering = Rs. 800

cost (O) = Rs. 9,000 per order

Carrying cost per casting p.a. (C × i) = Rs. 300

EOQ =
2AO 2 × 54, 000 units × `9,
C×i 000
= 1800 Castings
Rs.300
 (ii) Safety stock (Assuming a 15% risk of being out of stock)

From the probability table given in the question, we can see that 85% certainty in
delivery time is achieved when delivery period is 7days i.e. at 15% risk level of
being out of stock, the maximum delivery period should not exceed 7 days.

Annual demand
Safety stock =
×(Max.lead time - Avg.lead time) 360 days

54,000units
= ×(7 days - 6 days)
360 days

= 150 castings

Re-order point (level) = Safety Stock + Average lead time consumption

= 150 units + (6 days × 150 units) = 1,050 castings.

(ii) Safety stocks (Assuming a 5% risk of being out of stock)

From the probability table given in the question, we can see that 95% certainty in delivery
time is achieved when delivery period is 9 days i.e. at 5% risk level of being out of stock,
the maximum delivery period should not exceed 9 days.
Annualdemand
Safety stock =
×(Max.lead time - Avg.lead time) 360 days
54,000units
= ×(9 days - 6 days) = 450
castings
360 days
Re-order point (level) = Safety Stock + Average lead time consumption
= 450 units + (6 days × 150 units) = 1,350 castings.

(iii) At 5% stock-out risk the total cost of ordering and carrying cost is as follows:
Annualdemand
Total cost of ordering = ×Cost per order
EOQ

54,000units
= × 9,000
1,800units
= Rs. 2,70,000
 Total cost of carrying =(Safety Stock + ½ EOQ) × Carrying cost per unit p.a.
=(450 units + ½ × 1,800 units) Rs. 300
= Rs. 4,05,000

(iv) (a) Computation of new :

EOQ = 2 × 54, 000 units × Rs.

600
Rs.720
= 300 castings

54,000units
(b)Total number of orders to be placed in a year are = 180 times
300units

Under new purchasing policy IPL Ltd. has to place order in every 2nd day, however under the old
purchasing policy it was every 12th day.

Answer 3 (a)
Inventory turnover: It is a ratio of the value of materials consumed during a period to the average
value of inventory held during the period. A high inventory turnover indicates fast movement of stock.
Labour turnover: It is defined as an index denoting change in the labour force for an organization during a
specified period. Labour turnover in excess of normal rate is termed as high and below it as low turnover.
Effects of high inventory turnover and low labour turnover: High inventory turnover reduces the investment
of funds in inventory and thus accounts for the effective use of the concern‘s financial resources. It
also accounts for the increase of profitability of a business concern. As against high labour turnover the low
labour turnover is preferred because high labour turnover causes-decrease in production targets; increase
in the chances of break-down of machines at the shop floor level; increase in the number of accidents;
loss of customers and their brand loyalty due to either non-supply of the finished goods or due to sub-
standard production of finished goods; increase in the cost of selection, recruitment and training;
increase in the material wastage and tools breakage.
All the above listed effects of high labour turnover account for the increase in the cost of production/
process/ service. This increase in the cost finally accounts for the reduction of concern‘s profitability.
Thus, it is necessary to keep the labour turnover at a low level.
As such, it is correct that management should endeavour to increase inventory turnover and reduce
labour turnover for optimum and best utilization of available resources and reduce the cost of production
and thus increase the profitability of the organization.

Answer 3 (b)

Andrew Baker
Time allowed (Hours)
100 100
Time taken (Hours) 60 80
Time saved (Hours) 40 20
Let the rate of wages of the worker Baker is ‗L‘ per hour
Normal Wages Rs. 1,440 Rs. 80 L

(60 hours× 24) (80 hours× L)

Bonus Rs. 480* Rs. 16 L**

RTP-CAP II -2017 December @ICAN

 Total earnings Rs. 1,920 Rs. 96 L

* Bonus under Halsey system =½ × Time saved ×Rate hour

½ ×40 hours×24 = Rs. 480

Time saved ×
** Bonus under Rowan system = Time worked ×Rate per hour
Time allowed

20hours
= × 80hours × L = 16 L
100hours

According to the problem,

Total earnings of Andrew = Total earnings of Baker

Rs. 1,920 = Rs. 96 L
L = Rs. 20
Therefore, Hourly rate of wages of Baker is Rs. 20 per hour.

Answer 4 (a)
Effective machine hours = 200 hours × 75% = 150 hours
Computation of Comprehensive Machine Hour Rate
Particulars Per Month (Rs.) Per Hour (Rs.)
Fixed Cost :
Supervision Charges 3,000.00
Electricity and Lighting 7,500.00
Insurance of Plant and building (Rs. 16,250/12) 1,354.17
Other General Expenses ( Rs. 27,500/12) 2,291.67
Depreciation ( Rs. 32,400/12) 2,700.00
16,845.84 112.31
Direct Cost
Repairs and maintenance 17,500.00 116.67
Power 15,000.00 100.00
Wages of machine man 44.91
Wages of Helper 32.91
Machine Hour rate ( Comprehensive) 406.86

Wages per machine hour

Particulars Machine Man Helper
Wages for 200 hours
Machine- man ( Rs. 125*25) 3,125.00
Helper - 1,875.00
Dearness allowance (DA) 1,575.00 1,575.00
4,700.00 3,450.00
Production bonus (1/3 of Basic and DA) 1,567.00 1,150.00
Leave wages (10% of Basic and DA) 470.00 345.00
6,737.00 4,945.00
Effective wage rate per machine hour Rs.44.91 Rs.32.97

Answer 4 (b)

RTP-CAP II -2017 December @ICAN

 (i) Calculation of Overhead Recovery Rate:
Factory Overheadin 2073
Factory Overhead Recovery Rate = ×100
Direct Labour Costs in 2073

Rs.3,80,000
= ×100 = 40% of Direct labour
Rs. 9,50,000
Administrative Overhead Recovery Rate

Ad min istrative Overhead in 2073

= ×100
Factory Costs in 2073 (W.N.)

Rs. 2,50,400
= ×100 = 8% of Factory Cost
Rs.31,30,000

Working Note: Calculation of Factory Cost in 2073

Particulars Amount (Rs.)

Opening Stock of Material 1,50,000
Add: Purchase of Material 18,50,000
Less: Closing Stock of Material (2,00,000)
Material Consumed 18,00,000
Direct Labour 9,50,000
Prime Cost 27,50,000
Factory Overhead 3,80,000
Factory Cost 31,30,000

ii) Detailed Cost Statement for the Order received from M.L. Auto Ltd. during 2074

Particulars Amount (Rs.)

Material 8,00,000
Labour 4,50,000
Factory Overhead (40% of Rs. 4,50,000) 1,80,000
Factory Cost 14,30,000
Administrative Overhead (8% of Rs. 14,30,000) 1,14,400
Cost of delivery 45,000
Total Cost 15,89,400
Add: Profit @ 10% of Sales or 11.11% of cost or 1/9 of 15,89,400 1,76,600
Sales value (Price to be quoted for the order) (Rs. 15,89,400 /0.9) 17,66,000

Hence the price to be quoted is Rs.17,66,000 if the company wants to earn a profit of 10%
on sales.

RTP-CAP II -2017 December @ICAN

Answer 5 (a)
Profit and Loss Account
(As per financial records)
(Rs.) (Rs.)
To Direct Material 50,00,000 By Sales (1,20,000 units) 1,20,00,000
To Direct Wages 30,00,000 By Closing Stock
To Factory Overheads 16,00,000 WIP 2,40,000
‖ Gross Profit 29,60,000 Finished Goods (4,000 units) 3,20,000
1,25,60,000 1,25,60,000
To Administration Overheads 7,00,000 By Gross Profit b/d 29,60,000
‖ Selling and Distribution ‖ Dividend 1,00,000
Overheads 9,60,000 ‖ Interest 20,000

Bad Debts 80,000

‖ Preliminary Expenses written off 40,000
‖ Legal Charge 10,000
‖ Net Profit 12,90,000 ________
‖ 30,80,000 30,80,000

Statement of Cost and Profit

(As per Cost Records)
Total (Rs.)
Direct Material 56,00,000
Direct Wages 30,00,000
Prime Cost 86,00,000
Factory Overhead 17,20,000
1,03,20,000
Less: Closing Stock (WIP) (2,40,000)
Works Cost (1,24,000 units) 1,00,80,000
Administration overhead (1,24,000 units @ Rs. 6 p.u.) 7,44,000
Cost of production of (1,24,000 units) 1,08,24,000
Less: Finished Goods (4,000 units @ Rs. 87.29) (3,49,160)
Cost of goods sold (1,20,000 units) 1,04,74,840
Selling and Distribution Overhead (1,20,000 @ Rs. 8 p.u.) 9,60,000
Cost of Sales 1,14,34,840
Net profit (Balancing figure) 5,65,160
Sales Revenue 120,00,000

Statement of Reconciliation of profit as obtained under Cost and Financial Accounts

(Rs.) (Rs.)
Profit as per Cost Records 5,65,160
Add: Excess of Material Consumption 6,00,000
― Factory Overhead 1,20,000
― Administration Overhead 44,000

RTP-CAP II -2017 December @ICAN

 Dividend Received 1,00,000
Interest Received 20,000 8,84,000
14,49,160
Less: Bad debts 80,000
Preliminary expenses written off 40,000
Legal Charges 10,000
Over-valuation of stock in cost book (`3,49,160 – 29,160 (1,59,160)
`3,20,000)
Profit as per Financial Records 12,90,000

Answer 6(a)
Working Notes:
Input output ratio of material processed in Department X = 100 : 90

Particulars Quantity (Kg)

Material input 9,00,000
Less: Loss of material in process @ 10% of 9,00,000 90,000
kgs
Output
8,10,000

Output of department X is product ‗P1‘ and ‗P2‘ in the ratio of 60 : 40.

60 × 8,10, 000
Output ‗P1‘ 100 = 4,86,000 kgs

Output ‗P2‘ = 40 ×8,10,000 = 3,24,000 kgs

100

Statement showing ratio of net sales

Product P1 P2 Total
Quantity (kgs) 4,86,000 3,24,000 8,10,000
Selling price per kg (Rs.) 110.00 325.00
Sales Value (Rs. Lakhs) 534.60 1,053.00 1,587.60
Less: Selling Expenses 28.38 25.00 53.38
Net Sales 506.22 10,28.00 1,534.22
Ratio 33% 67% 100.00

Computation of Joint Costs

Particulars Amount (Rs.Lakhs)
Raw Material input 9,00,000 kgs @ Rs. 95 per kg 855.00
Direct Materials 95.00
Direct Wages 80.00
Variable Overheads 100.00
Fixed Overheads 75.00
Total 1,205.00

(i) Statement showing apportionment of joint costs in the ratio of net sales
Particulars Amount (Rs. In lakhs)
Joint cost of P1 – 33% of Rs.1,205 lakhs 397.65
Joint cost of P2 – 67% of Rs.1,205 lakhs 807.35
Total
1,205.00

RTP-CAP II -2017 December @ICAN

 (ii) Statement showing profitability at split off point
Product P1 P2 Total
Net Sales Value (Rs. in lakhs) – [A] 506.22 1028.00 1534.22
Less: Joint costs (Rs. in lakhs) 397.65 807.35 1205.00
Profit (Rs. in lakhs) [A] – [B]
108.57 220.65 329.22

(iii) Statement of profitability of product ‘YP1’

Particulars YP1
Sales Value (` in lakhs) [A] Less: 629.55
397.65
Cost of P1 807.35
128.00
Cost of Department Y

Selling Expenses of Product ‗YP1‘ 19.00

544.65
Total Costs [B]
Profit (Rs. in lakhs) [A] – [B] 147.90

Working Note: Computation of product ‗YP1‘

Quantity of product P1 input used =- 4,86,000 kgs
Input output ratio of material processed in Department Y = 100 : 95
Particulars Quantity (Kg)
Material input 4,86,000
Less: Loss of material in process @ 5% of 4,86,000 24,300
Output
4,61,700

Sales Value of YP1 = 4,61,700 kgs @ Rs. 150 per kg = Rs. 692.55 lakhs
(iv) Further processing of product P1 and converting to product YP 1 is beneficial as the profit of
the company increases by Rs.39.33 lakhs.
Working Note:
Profit of Product ‗YP1 ‘ 147.90L
Profit of Product ‗P1 108.57 L
Increase in profit after further processing 39.33 L

Answer 6(b)
(i) Contract Account
Particulars Amount ( in Particulars Amount ( in
Rs. ‘000) Rs. ‘000)
To Material issued 7,700 By Material returned 175
To Direct wages 3,300 By P/L a/c ( Material 130
destroyed by Fire)
Add: Outstanding 100 3,400 By WIP
- Work uncertified 225
- Work certified 12,650 12,875
To Site Office Cost 550 By material at site 110
Less: Prepaid 50 500
RTP-CAP II -2017 December @ICAN
Depreciation 40
Notional Profit 1,650
13,290 13,290
To P / L A/c 880 Notional Profit 1,650
( Working Note -2)
To WIP ( Reserve) 770
1,650 1,650

4 months
* Depreciation on plant = Rs. 8,00,000 × 15% ×
12 months
= Rs. 40,000

(ii) Contractee’s Account

Particulars Amount ( in Particulars Amount ( in
Rs.’000) Rs.’000)

To Balance c/d 10,120 By Bank A/c 10,120

10,120 10,120

(iii) Relevant items of Profit & Loss Account

Particulars Amount ( in Particulars Amount (Rs.

Rs.000) in Rs.000)

To Contract A/c 130 By Contract A/c 880

(loss of material due to fire) (Profit on contract)
750
To Net Profit

880 880

(i) Balance Sheet (Extracts) as on 31st Ashadh, 2074 (Amount in Rs.000)

Liablities Amount Amount Assets Amount Amount
(Rs.) (Rs.) (Rs.) (Rs.)
Plant at Cost 800
Add: profit 750 Less: depreciation 40 760
Outstanding 100 Contract WIP
wages - Uncertified 225
12650
- Certified (770)
(10120) 1985
- Reserve

- Advances

Material at site 110

Prepaid Exp. 50
Working Notes:
Work Certified
1. Percentage of Completion = ×100
Value of contract

Rs.1,26, 50, 000

= ×100 = 73.98%
RTP-CAP II -2017 December @ICAN
 Rs.1,71,00,000
2. Profit from the incomplete contract
2 CashRe ceived
= Notional Profit × ×
3 Work Certified

= Rs. 8,80,000

Answer 6 (c)
(i) Calculation of Absolute Ton-km for the next month:
Journey Distance Weight-Up Ton-km Weight- Ton-km Total
in km (in MT) Down
(in MT)

(a) (b) (c)=(a)×(b) (d) (e) =(a)×(d) (c) + (e)

Delhi to Kochi 2,700 14 37,800 6 16,200 54,000
Delhi to Guwahati 1,890 12 22,680 0 0 22,680
Delhi to 1,840 15 27,600 0 0 27,600
Vijayawada

Delhi to Varanasi 815 10 8,150 0 0 8,150

Delhi to Asansol 1,280 12 15,360 4 5,120 20,480
Delhi to Chennai 2,185 10 21,850 8 17,480 39,330
Total 10,710 73 1,33,440 18 38,800 1,72,240

Total Ton-Km = 1,72,240 ton-km

(ii) Calculation of cost per ton-km:
Particulars Amount Amount (Rs.)
A. Running cost: (Rs.)

- Diesel Cost {Rs.13.75 × (10,710 × 2)} 2,94,525.00

- Engine oil cost ( Rs.4, 200/13,000 km × 21, 420 km) 6,920.31

- Cost of loading of goods {Rs.150 × (73+18)} 13,650.00

- Depreciation ( Rs.20, 00, 000/720,000 km × 21, 420 km ) 59,500.00 3,74,595.31

B. Repairs & Maintenance Cost 25,704
(Rs.12, 000/10,000 km × 21, 420 km )

C. Standing Charges
- Drivers‘ salary (Rs.18,000 × 4 trucks) 72,000
- Cleaners‘ salary (Rs.7,500 × 4 trucks) 30,000
- Supervision and other general exp. 12,000 1,14,000
Total Cost (A + B + C) 5,14,299.31
Total ton-km 1,72,240
Cost per ton-km 2.99

Answer 6 (d)
(i) Process- A Account
RTP-CAP II -2017 December @ICAN
Particulars Units Amount ( Particulars Units Amount (
Rs.) Rs.)
To Input 40,000 3,60,000 By Normal Wastage 2,000 30,000
(2,000 units × Rs.15
To matetial 2,42,000 By Abnormal Loss a/c 1,000 27,000
(1000 units × Rs.27)
To direct wages 2,58,000 By Process –B 29,600 7,99,200
(29,600 units ×Rs. 27)
To Manufacturing exp. 1,96,000 By P/L A/c 7,400 1,99,800
( 7,400 units × Rs. 27)
40,000 10,56,000 40,000 10,56,000

R s . 10, 56,000 - Rs. 30, 000

Cost per unit = = Rs. 27 per unit
40,000 units - 2,000 units

Normal wastage = 40,000 units × 5% = 2,000 units

Abnormal loss = 40,000 units – (37,000 units + 2,000 units) = 1,000 units
Transfer to Process- B = 37,000 units × 80% = 29,600 units
Sale = 37,000 units × 20% = 7,400 units

Process- B Account
Particulars Units Amount ( Particulars Units Amount (
Rs.) Rs.)
To Process –A a/c 29,600 7,99,200 By Normal Wastage 2960 59,200
(2,960 units × Rs.20
To Material 2,25,000 By P/L A/c 27,000 12,96,000
( 27,000 units × Rs. 48)
To Direct wages 1,90,000
To Manufacturing Exp. 1,23,720
To Abnormal Gain 360 17,280
(360 units × Rs.48)
29,960 13,55,200 29,960 13,55,200

Rs.13, 37, 920 – Rs. 59, 200

Cost per unit = = Rs. 48 per unit
29,600 units - 2,960 units

Normal wastage = 29,600 units × 10% = 2,960 units

Abnormal gain = (27,000 units + 2,960 units) – 29,600 units = 360 units
(ii) Profit & Loss Account

Particulars Amount Particulars Amount

To Process- A A/c 1,99,800 By Sales:
- Process A 2,73,000
(7,400 units ×Rs. 37)
To Process- B A/c 12,96,000 - Process B 16,47,000

(27,000 units × Rs.61)

To Abnormal loss A/c 12,000 By Abnormal gain 10,080
To Indirect Expenses 4,48,080 By Net loss 25,000
19,55,880 19,55,880

Working Notes:

Normal wastage (Loss) Account

Particulars Units Amount Particulars Units Amount
(Rs.) (Rs)

RTP-CAP II -2017 December @ICAN

 To Process- A A/c 2,000 30,000 By Abnormal Gain A/c 360 7,200
(360 units × Rs.20)
To Process- B A/c 2,960 59,200 By Bank (Sales) 4,600 82,000

4,960 89,200 4,960 89,200

Abnormal Loss Account

Particulars Units Amount Particulars Units Amount
(Rs.) (Rs.)

To Process- A A/c 1,000 27,000 By Bank A/c 1,000 15,000

(1,000 units ×Rs. 15)
By Profit & Loss A/c --- 12,000

1,000 27,000 1,000 27,000

Abnormal Gain Account

Particulars Units Amount Particulars Units Amount
(Rs.) (Rs.)

To Normal loss A/c 360 7,200 By Process- B A/c 360 17,280

(360 units ×Rs. 20)
To Profit & Loss A/c 10,080

360 17,280 360 17,280

Answer 7 (a)
(i) Total Fixed Cost = Rs. 6,00,000 + Rs. 20,00,000 + Rs. 8,00,000 + Rs. 2,00,000
= Rs. 36,00,000
Contribution per unit = Rs. 600 - Rs. 470 = Rs. 130

Contribution per unit

P/V Ratio = ×100
SellingPrice

130
×100 = 21.67%
600

Total Fixed Cost

Break-even Point = ×100
Contribution per unit

36, 00, 000

= 27,692.31 or 27,693 units

130
RTP-CAP II -2017 December @ICAN
 Total Fixed Cost
Break-even Sales = =
P / V Ratio

36, 00, 000

= 1,66,12,829
21.67%

Calculation of Profit/ (loss):

Total Contribution (Rs. 130 × 35,000 units) = Rs. 45,50,000
Less: Fixed Cost = Rs. 36,00,000
Profit = Rs. 9,50,000
(ii) Revised Selling Price = Rs. 600 – 5% of Rs. 600 = Rs. 570
Revised Variable cost = Rs. 410
Revised Contribution = Rs. 570 – Rs. 410 = Rs. 160

Break-even Point =
Rs. 36, 00, 000 +Rs. 9, 00, 000
Rs. 160
= 28,125 units
(iii) Revised Selling Price = Rs. 600 + 5% of Rs. 600 = Rs. 630
Revised Variable cost = Rs. 470 + Rs. 5 = Rs. 475
Revised Contribution = Rs. 630 – Rs. 475 = Rs. 155
Break-even Point =
Rs. 36, 00, 000
Rs. 155
= 23,225.81 or 23,226 units
Answer 7(b)
Working Notes:
1. Total Sales = Break -even Sales + Margin of Safety
= Rs. 400 crores + Rs. 120 crores
= Rs. 520 crores
2. Variable Cost = Total Sales × (1- P/V Ratio)
= Rs. 520 crores × (1 – 0.3)
= Rs. 364 crores
3. Fixed Cost = Break-even Sales × P/V Ratio
= Rs. 400 crores × 30%
= Rs. 120 crores
4. Profit = Total Sales – (Variable Cost + Fixed Cost)
= Rs. 520 crores – (Rs. 364 crores + Rs. 120 crores)
= Rs. 36 crores
(i) Revised Sales figure to earn profit of Rs. 56 crores (i.e. Rs. 36 crores + Rs. 20 crores)

Revised Sales =
RevisedRevised
Fixed Cost
P / *V+Ratio
Desired
* * Profit
= Rs. 185 crores + Rs. 56 crores
28%

= Rs. 860.71 Crores

RTP-CAP II -2017 December @ICAN

 *Revised Fixed Cost = Present Fixed Cost + Increment in fixed cost + Interest on
additional Capital
= Rs. 120 crores + Rs. 50 crores + 15% of Rs. 100 crores
= Rs. 185 crores

**Revised P/V Ratio : Let current selling price per unit be Rs. 100.
Therefore, Reduced selling price per unit = Rs. 100 × 90% = Rs. 90
Revised Variable Cost on Sales = 70%+ 2% = 72% Variable Cost per
unit = Rs. 90 × 72%
= Rs. 64.80
Contribution per unit = Rs. 90 - Rs. 64.80 = Rs. 25.20
Revised P/V Ratio =Contribution × 100
Sales
= Rs. 25.2 ×100
Rs. 90
= 28%

(ii) (a) Revised Break-even Sales =Fixed Cost ×100

P/V Ratio
= Rs. 185 crores
28%
= Rs. 660.71 crores

(b) Revised P/V Ratio = 28 % (as calculated above)

(c) Revised Margin of safety = Total Sales – Break-even Sales
= Rs. 860.71 crores - Rs. 660.71 crores
= Rs. 200 crores.

Answer 8 (a)
(a) Production Budget (in units)
Product- K Product- H
(units) (units)

Expected sales Add: 8,000 4,200

Closing stock Less: 1,000 2,100 (1,600)
Opening stock (800)
Units to be produced
8,200 4,700

(b) Material Purchase Budget

Particulars Material –X ( kg.) Material –Y ( kg.) Material –Z ( kg.)
Material Required
- Product -K 98,400 1,23,000 65,600
( 8,200 units × 12 kg) ( 8,200 units × 15 kg) ( 8,200 units × 8 ltr.)
- Product -H 70,500 28,200 65,800
(4,700 units ×15 kg) (4,700 units ×6 kg) (4,700 units ×14 ltr.)
Total 1,68,900 1,51,200 1,31,400
Add: Closing Stock 30,000 18,000 7,500
Less : Opening Stock (25,000) (30,000) (14,000)
Quantity to be purchased 1,73,900 1,39,200 1,24,500
RTP-CAP II -2017 December @ICAN
 Rate Rs. 15 per kg Rs. 16 per kg Rs. 5 per ltr
Purchase Cost Rs. 26,08,500 Rs. 22,27,200 Rs. 6,24,500

(c) Direct Labour Budget

Particulars Unskilled ( Hours) Skilled ( Hours)
For Product K 98,400 65,600
8,200 units ×12 hours) 8,200 units ×8 hours)
For Product H 47,000 23,500
4,700 units ×10 hours) 4,700 units 5 hours)
Labour hours required 145,400 89,100
Rate Rs. 40 per hour Rs. 75 per hour
Wages to be paid Rs. 58,16,000 Rs. 66,82,500

Answer 8 (b)
(a) Flexible Budget
Level of students 30 60 90 120 150
Variable Costs (Rs.)
Breakfast at Rs. 50 1,500 3,000 4,500 6,000 7,500
Lunch at Rs. 100 3,000 6,000 9,000 12,000 15,000
Tea at Rs. 30 900 1,800 2,700 3,600 4,500
Entrance fee at zoo at Rs. 20 600 1,200 1,800 2,400 3,000
Variable cost at Rs. 200 6,000 12,000 18,000 24,000 30,000
Semi-variable costs (Rs.)
Bus hire charge 6,500 13,000 13,000 19,500 19,500
Special permit fee 500 1,000 1,000 1,500 1,500
Allowance to teachers 1,000 2,000 2,000 3,000 3,000
8,000 16,000 16,000 24,000 24,000
Fixed costs (Rs.)
Block entrance fee other than zoo 2,500 2,500 2,500 2,500 2,500
Prizes to students for games 2,500 2,500 2,500 2,500 2,500
5,000 5,000 5,000 5,000 5,000
Total Cost 19,000 33,000 39,000 53,000 59,000
(b) Average cost per student 633.33 550.00 433.33 441.67 393.33
(Total Cost /Number of
Students)

(c) Calculation of Break-even level of students:

Collection per student Rs. 450
Variable cost per student Rs. 200
Contribution per student Rs. 250
Semi-variable costs for levels of 50, 100 and 150 students.
Level of students 50 100 150
Semi-variable costs 8,000 16,000 24,000
Fixed costs 5,000 5,000 5,000
13,000 21,000 29,000

RTP-CAP II -2017 December @ICAN

 Break- even students [Fixed 52 84 116
cost / Contribution per student]

There are two practically possible break-even levels, i.e., 84 students and 116 students.
Break-even level of 52 is outside the level of 50 and hence shall be ignored.

Answer 9 (a)

Workings:
(a) Variable Overhead rate per unit
Difference of Overhead at two level
=
Difference in Pr oduction units

2,10, 000 - 1, 80, 000

= = Rs. 15
10,000 units - 8,000 units
(b) Fixed Overhead = Rs. 1,80,000 - (8,000 units × Rs. 15) = Rs. 60,000
Std.Overhead AbsorptionRate
(c) Standard hours per unit of production =
Std.Rate per hour

20
= = 5 hours
4

Variable Overhead per unit

(d) Standard Variable Overhead Rate per hour =
Std.hour per unit

15
= = Rs. 3
5 hours
(e) Standard Fixed Overhead Rate per hour = Rs. 4- Rs. 3 = Rs. 1
(f) Actual Variable Overhead = Rs. 2,95,000 – Rs. 62,500= Rs. 2,32,500
2, 32, 500 Rs.
(g) Actual Variable Overhead Rate per Hour = 3.1419
74,000 hours
(h) Budgeted hours = 12,000 units ×5 hours = 60,000 hours (i) Standard Hours
for Actual Production = 15,560 units×5 hours = 77,800 hours
(i) Variable Overhead Efficiency and Expenditure Variance:
Variable Overhead Efficiency Variance = Std. Rate per hour (Std. Hours – Actual Hours)
= Rs. 3 (77,800 hours - 74,000 hours)
= Rs. 11,400 (F)
Variable Overhead Expenditure Variance = Actual Hours (Std. Rate - Actual Rate)
= 74,000 hours (Rs. 3 - Rs. 3.1419)
= Rs. 10,500 (A)
(ii) Fixed Overhead Efficiency and Capacity Variance:
Fixed Overhead Efficiency Variance = Std. Rate per Hour (Std. Hours-Actual Hours)
= Rs. 1(77,800 hours -74,000 hours)
= Rs. 3,800 (F)
Fixed Overheads Capacity Variance = Std. Rate per Hour (Actual Hours -Budgeted Hours)
= Rs. 1(74,000 hours – 60,000 hours)
= Rs. 74,000 - Rs. 60,000
RTP-CAP II -2017 December @ICAN
 = Rs. 14,000 (F)

Answer 9 (b)

SR – Standard labour Rate per Hour

AR – Actual labour rate per hour
SH – Standard Hours
AH – Actual hours
(i) Actual labour rate per hour:
Labour rate Variance = AH (SR – AR)
= 17,094 (Rs. 8 – AR) = 68,376 (A) = - 68,376
= Rs. 8 – AR = - 4
Or, AR = Rs. 12 (ii) Standard
hour required for 6,000 units:
SH ×100
Labor Efficiency =
AH

= 105.3
AH×105.3
SH =
100

17,094 hours ×105.3

=
100
= 17,999.982 or, SH = 18,000 hours
(iii) Labor Efficiency Variance = SR (SH – AH)
= Rs. 8(18,000 – 17,094)
= 8 × 906 = Rs. 7,248 (F)
(iv) Standard Labor Cost per Unit
18,000 hours × 8
=
6,000 units
= Rs. 24

(v) Actual Labor Cost per Unit

17,094 hours × 12
=
6,000 units
= 34.19

Answer 10 (a)
The limitations of Uniform Costing are as follows;
i. Sometimes it is not possible to adopt uniform standards, methods and procedures of costing in different firms due to
differing circumstances in which they operate. Hence, the adoption of uniform costing becomes difficult in such firms.
ii. Disclosure of cost information and other data is an essential requirement of a uniform costing system. Many firms do not
wish to share such information with their competitors in the same industry.
iii. Small firms in an industry believe that uniform costing system is only meant for big and medium size firms, because they
cannot afford it.
iv. It induces monopolistic trend in the business, due to which prices may be increased artificially and supplies withheld.

Answer 10 (b)
Inter firm comparison is a technique of evaluating the performance, efficiency, costs and profits of firms in an
industry. It consists of voluntary exchange of information/data concerning costs, prices profits productivity and
over-all efficiency among firms engaged in similar type of operations for the purpose of bringing improvement

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 in efficiency and indicating the weaknesses. Such a comparison will be possible where uniform costing is in
operation. Inter firm comparison indicates the efficiency of production and selling, adequacy of profits, weak
spots etc. in the organization.
The following are the limitations in the implementation of a scheme of Inter-firm Comparison:
(i) There is a fear of losing secrecy of the production method or some peculiar process or method among the
top management..
(ii) Middle management is usually not convinced with the utility of such a comparison.
(iii) In the absence of suitable cost accounting system, the figures supplied may not be reliable for the purpose
of comparison.
(iv) Suitable basis for comparison may not be available.

Answer 11 (a)
Where two or more products which are following the same production pattern, consumes same materials and
same set of labour skills are produced and managed together. This manufacturing synchronization gives
better efficiency in usage, production and handling of these products. Due to this synergetic effect idle time is
reduced, effort is saved and in turn associated costs can also be saved.

Answer 11 (b)

Cost Control Cost Reduction

1. Cost control aims at maintaining the costs in 1. Cost reduction is concerned with
accordance with the established standards. reducing costs. It challenges all
standards and endeavours to better
them continuously

2. Cost control seeks to attain lowest 2. Cost reduction recognises no condition

possible cost under existing conditions. as permanent, since a change will result
in lower cost.

3. In case of Cost Control, emphasis is on past 3. In case of cost reduction it is on

and present present and future.

4. Cost Control is a preventive function 4. Cost reduction is a corrective function.

It operates even when an efficient cost
control system exists.

5. Cost control ends when targets are 5. Cost reduction has no visible end.
achieved

RTP-CAP II -2017 December @ICAN

 Paper-6

Business Communication

RTP-CAP II -2017 December @ICAN

 Questions
Question No 1:
Read the following case carefully, and answer the questions given below:
Dr. Chandani Barma is the CEO at one of the reputed banking companies in Nepal. She was appointed for the
post due to the rich international exposure and experience that she had attained in the banking sector. Right
from her appointment she has realized that the company is not making remarkable progress despite the
proactive role of the entire team of staff and directors. She has recently investigated from her preliminary survey
that succeeding at her workplace has a serious threat due to the subtle conflict among the promoters of the bank
that constitute the Board of Directors. The policies that they‘ve adopted are not perfectly matching with the
contexts of the new-era market. Neither have they been able to launch the innovative and fascinating programs
for their clients and customers.
During informal communication, they often blame each other of not being ready for taking risks for the promotion
of the bank. But, in the Board meeting, neither of them spell out clearly about the challenges and changes they
desire to have in their company. In this condition, the CEO, Dr. Barma has had a proposal approved from the
BoD to carry out a comprehensive survey among the shareholders of the company about their desires to have
challenges and changes in the company.
Now, Dr. Barma is required to develop research tools, collect data, analyze data and prepare an analytical
survey report with useful findings and recommendations.
Required
a) Dr. Barma is required to prepare an analytical report. What are the basic features of this type of report? What are its
major components?
b) Prepare a set of questionnaire for the survey as one of the tools of data collection.
c) Write two objectives and the statement of problem that Dr. Barma would present in her report.
d) How is information organized in this report? Illustrate.

Question No 2:
st
Workforce diversity has become a common phenomenon in the 21 century workplace. Many drawbacks have been identified
though there are some important aspects of workplace diversity. Point out precisely the problems and settlement techniques of
these problems.

Question No 3:
(a) You saw an online announcement for a vacancy for your desirable post in a multinational company. Write an e-mail
responding to the announcement in a persuasive and influencing style.

(b) Conflicts are common assets of business organizations. They need to be managed successfully to avoid bad results of
them. Negotiation is one of the effective ways of settling conflicts within business organizations. Discuss the process of
negotiation as an effective means of conflict resolution.

Question No 4:
Write short notes on ANY FOUR of the following: (4*2.5=10)
a) Stages of job interview
b) Graphics in business communication
c) Cross culture communication
d) Overcoming group problems
e) Benefits of corporate social responsibilities

Question No 5:
Point out the major roles of individual members to make team work remarkably successful in business projects.

Question No 6:
Both proposal and report are important forms of research writing. They adopt the norms of academic writing. But, these two
writings are essentially different. Discuss briefly how a report is different from a proposal.

Question No 7:
Communication basically includes two major processes: encoding and decoding. Elaborate the roles of these basic concepts in
communication, and discuss their relationships in brief.

Question No 8:
Business ethics is usually viewed from three different perspectives: economic, legal and philosophical. Discuss each of them in
brief.

RTP-CAP II -2017 December @ICAN

Question No 9:
Define nonverbal communication, and discuss in brief the role of non-verbal communication in the multicultural workplace.

Question No 10:
How are results and discussions presented in the business reports? Illustrate with examples.

RTP-CAP II -2017 December @ICAN

 Suggested Answer

Answers No 1:
a) An analytical repot is usually a research report. It is also called investigative report. It is prepared on the basis of the
information obtained from respondents of the related field. It requires basically the research tools such as
questionnaires, interview, focused group discussion, observation report, tests, discourse analysis, etc. Scientific
analysis and possible interpretations of the data are made in this type of report.

The basic components of an analytical report are: introduction, background, statement of problem, objectives,
methodology, analysis and interpretation, findings, and recommendations.

b) Questionnaire for the shareholders of Siddhi Bank, Kathmandu

Tick the best option. (SA: strongly agree, A: agree, NA: not agree)

Questions SA A NA
1. I prefer risks and challenges in business; they help to grow the company.

2. Risks are useful to motivate me to work and concentrate on duty.

3. I don‘t like to be tied up by business commitments and relationships. It‘s good to keep
on what is with us conventionally.

4. I‘m ready to allow the BoD to invest excessively on new technology and globalization
of market.

5. I don‘t care whether one failure in business loses everything. So, our bank must invest
as required on the innovative activities.

6. I‘d like to follow the same pattern of business since it has to bear less or no risk.

c) The objectives of the report

 To present the accurate views of the shareholders of the bank towards taking risks in the growth of business;
 To recommend the BoD about adopting useful strategies for business growth with certain innovations.

Statement of problem
Siddhi Bank Pvt. Limited has been launching a number of financial programs and activities including
saving, loans, e-remit, e-banking, etc. The recent perspectives and practices of the banking corporate
have been rapidly and vastly changing. In the fast growing era of this sector this bank has not been able
to attain relatively the expected success. In this particular situation, a mini-research among the
shareholders became urgency of time so that it could give useful guidelines to the executives and Board
of Directors in achieving the corporate goals. This report has been prepared as a result of this urgency.
It has been prepared after a very systematic survey research.
d) The information can be organized systematically by categorizing it into different issue based themes such as
options for investment, desires to update the IT service, desires to take risk, desire for changes, desires for no-risk,
and so on. Then the information is tabulated to ensure more systematic data for the report. The data can be
organized and analysed using tables, graphs, statistical tools such as percentage, mean, standard deviation, etc.
The irrelevant ideas/options are avoided from analysis. While organizing the data, the extremely high level desires
are arranged in one part, the average level of remarks in the other, and the low level desires for changes and
challenges are organized in the different sub-section.

Answer No 2:

RTP-CAP II -2017 December @ICAN

 Major problems of workplace diversity:

 Various interpretations of the same event and information

 High possibilities of conflicts and misunderstandings
 Lack of cooperation and working morale
 Social, racial, and cultural disputes
 Low level of work productivity

Techniques of settlement
 Conduct a diversity audit
 Conduct regularly meetings, discussions, and workshops
 Train workers on multicultural communication, sensitivity, and efficiency
 Encourage social responsibilities
 Encourage informal conversations
 Organize refreshment packages such as tours, visits, different movies & documentaries, and so on

Answer No 3:

(a)
To:

Subject: An application for the post of IT officer

Sir,

I saw your online announcement for the post of IT officer, and I would like to apply for the same. I have
gone through your job descriptions, requirements and conditions. I have come to realize that my academic
profile and professional experiences will most essentially match with your job requirements.

I have attached my CV along with this application. I am looking forward to your quick response.

Regards

…………….

b.

Working in groups may invite many different issues in an business organization. One of the most common issues is
conflict among the group members. At the same time certain measures for conflict resolution are also identified.
Negotiation is one of the very useful and effective processes of conflict resolution. It helps people to eliminate the
basis for conflicts through bilateral discussions, dialogues and compromise. It is the most preliminary stage in the
process for the conflict resolution.

The term ‗negotiation‘ is used commonly in the sector of business communication to refer to the common effort made
by two parties intending to minimize the conflict between the two. It is a significant process of conflict resolution. It
aims to settle the dispute through intra-group facilitation, compromise, mutual understanding and co-ordination. The
two conflicting parties are required to go through the situation with certain critical reflections, and they are kept
together face-to-face with a kind of realization about the situation. They are ready to reach the solution and get
involved in the negotiation process. They have open discussion with the motive of negotiation. They try to make ‗give
and take‘ results on one hand, and on the other they try to compromise upon certain bottom line of their views and
positions. They reach the ‗win-win‘ situation. The role of the third party is quite subtle unlike in the processes such as
mediation and arbitration.

Answer No 4:
RTP-CAP II -2017 December @ICAN
 a) Stages of job interview
Job interview, an important component of employment communication, displays distinctive features from other
types of interviews. It is usually carried out in three different stages: warming-up stage, question-answer stage
and summing-up stage.

The warming-up stage refers to the stage that exists before the main conversation between the interviewer and
interviewee. In this stage both interviewer and interviewee attempt to be prepared to lead the interview to a
successful communication. The interviewee is prepared with cheerful appearance and positive thoughts and
expectations. The interviewer attempts to make some kind of attachment with the interviewee with the help of
gestures, welcome note, etc. Similarly, in the question-answer stage, the content based interaction between the
interviewee and the interviewer takes place. This is the largest stage of job interview. The final stage is known as
summing-up stage in which the interviewer signals pre-closing of the conversation. And finally, the interview gets
wrapped up with conventional thank-you note and farewell exponents.

b) Graphics in business communication

Graphics, one of the highly effective non-verbal tools commonly used in business communication refer to different
designs, drawings or pictures that we keep in our power point slides, advertisements, business texts, brochures,
instructions, manuals, etc. The usefulness of graphics in business communication can never be underestimated
since graphic representation of information becomes not only clear and precise but also impressive and
persuasive. It is commonly believed that a picture is worth thousand words. Line graphs, histograms, bar charts,
pie charts, figures, etc. are the common examples of graphics.

c) Cross culture communication

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 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.

d) Overcoming group problems

Working in groups may invite a number of problems though it is believed that team work contributes to attaining
the organizational goals and missions. The group problems are to be settled so that the expected outcomes can
be ensured. Some of the important strategies for overcoming the group problems are:

 Working with group spirit and identity;

 Discouraging personal skepticism, lobbying, influences and thoughts;
 Training on group autonomy and group dynamism;
 Generating the sense of cooperation, endurance and collaboration…
e) Corporate social responsibility (CSR)
Corporate social responsibility (CSR) is an essential component of an ethical and responsible business
organization. It is a business movement in which commercial organizations address the social issues identified
through different sources, and run the programs for social welfare. They invest certain amount of money so that
their business as well as the society where they have to survive can grow together. Different infrastructural
activities, educational programs, public health programs, sports events etc. are conducted by the business
organizations as their responsibility to the society.

Answer No 5:
Roles of individuals in groups

 Observing group principles, rules and guidelines

 Avoiding stereotyped perceptions and thoughts

RTP-CAP II -2017 December @ICAN

  Avoiding biased and skeptic attitudes
 Active and creative contribution to the group mission
 Keeping group interests above individual interests
 Having proper communication, and sharing the ideas and innovations
 Being loyal, courteous and faithful, and so on.

Answer No 6:
Parameters Report Proposal
To narrate, describe what happened.
Goals To show a situation, or a summary of some To show what will happen and how.
event, or dealing.

Narration, summary, graphic analysis, Persuasive, with plans, possible benefits,

Presentation
description, factual information, future activities, budget, time schedule…
Analytical & informational Business & research
Types Formal& informal Solicited & unsolicited
Structural & organizational

Answer No 7:
 Business communication involves a number of linguistic and non linguistic elements such as words, phrases,
discourse markers, graphic tools, paralanguage features, instruments and so on which are used by the
participants to give a specific meaning.
 It is human mind that is essentially important in making the meaning of what we have used as linguistic or
nonlinguistic device for communication. The mind gives or determines particular meaning of the linguistic or non-
linguistic devices. The sender‘s mind is responsible for encoding the meaning of language used.
 With the help of linguistic, socio- cultural, and experiential knowledge, a speaker encodes the meaning of his or
her speech, and intends that the receiver will also decode the meaning in the same way.
 To be more specific, encoding is a sender‘s mental process of presenting ideas or information in oral or written
form, using sounds, letters, words, figures or symbols.
 Decoding is the receiver‘s mental process or act of assigning the meaning to the words and symbols used by the
speakers or writers.
 While encoding is concerned with production, decoding is concerned with perception of discourse meaning in
context.

Answer No 8:
 Principles of conducts to govern people
 Social values, cultural norms, morality and legal regularity
 Economic perspective: avoiding financial abuses, unfair business competencies
 Legal: abiding in rules, following regulatory norms
 Philosophical perspective: respecting others‘ cultural values, honor of self esteem, mutual co-operation, etc.

Answer No 9:
 Communication without the use of words
 Use of body language, gestures, signs and symbols
 More powerful to express particular meanings than verbal tools
 In multicultural contexts, words may create confusions and conflicts, but nonverbal communication involves
extra-linguistic features that are universal in nature.
 Meaning is conveyed more appropriately and accurately
 Sign-symbol- meaning relationship can be established and practiced
 There are many cases where signs and symbols are more effective to convey a message than the words.
For example, traffic signs can never be replaced by the words of a language. Otherwise, communication
would be less effective and in many cases it would be impossible.
 Body movement, distance or space, signs or symbols, charts or graphs, pictures, models, mimes, etc. are
useful devices of non verbal communication that can be adopted in multicultural contexts.

RTP-CAP II -2017 December @ICAN

 Answer No 10:
 Narrating and reporting the facts as found
 Summarizing and paraphrasing the ideas
 Describing, explaining, and interpreting the information
 Comparing, contrasting and concluding
 Presenting facts in graphic forms
 Analyzing data through statistical tools
 Maintaining uniformity and conciseness
 Gathering, classifying, and tabulating the data

RTP-CAP II -2017 December @ICAN

 Paper: 7

Income Tax & VAT

RTP-CAP II -2017 December @ICAN

Income Tax

Question No 1:
Suryodaya Products is engaged in production of plastic pipes. The income statement of the company for FY
2073.74 is given below:

Particulars Amount (Rs.) Remarks

Sales of goods 65,000,000.00
Bad Debt Recovered 550,000.00 30% previously disallowed as bad debt expense
Miscellaneous Income 1,075,900.00
Closing Stock of goods 1,500,000.00
Total of Credit Side 68,125,900.00
Opening Stock of Goods 12,000,450.00
Purchase of Raw Materials 9,950,000.00
The cost of electricity includes the electricity bill
of Rs. 1900 per month for 12 month of the
Electricity 1,240,000.00 house of Chairman
Diesel for Generator 1,240,000.00
There are 109 employees, out of which 101 are
Nepali citizen, and out of Nepali 35 are among
Women, Dalit and Disabled. Rs. 105000 is the
wage related to previous year accounted this
Wages 15,900,000.00 year
Rs. 55,000 is advance salary provided to sick
Salary 6,580,000.00 employee, related to month Shrawan of 2074.
Rs. 770,000 is the amound paid to retired
Gratuity expense 1,980,000.00 employee
Bad Debt for the year 290,000.00
Rs. 24000 is telephone bill of mobile phone of
Telephone 90,000.00 son of Director
Medical Expenses 150,000.00
Sales promotion expenses 9,500,000.00
Repair of Machine 1,200,000.00
Repair of Building 1,590,000.00
Repair of Truck 190,000.00
Repair of Car 59,000.00
Depreciation 1,050,000.00
Net Profit before tax 5,116,450.00
Total of Debit Side 68,125,900.00

Details of Assets are

pool Opening WDV of assets
A (Factory Building) 5,590,000.00
D (Machine and Truck) 10,178,000.00
C (Automobiles) 1,598,000.00

Required
a) Calculate the allowed Depreciation and Repair for the FY
b) Calculate the Assessable Income from Business and Taxable income from Business
c) Calculate the Tax liability for the IY.

RTP-CAP II -2017 December @ICAN

Question No 2:
Pentagon Apartments Pvt. Ltd. is constructing the commercial complex at Mahaboudha of Kathmandu, during the
IY 2073.74 the construction completed on end of Mangshir 2073 and commercial lease started from 2073 Poush
1. Other details are given below:

Particulars Amount (Rs.)

Rent Income 10,312,500.00
Total Income 10,312,500.00
Expenses
Salary of staff 1,065,000.00
Diesel for Generator 140,980.00
Petrol for Vehicle of Managing Director 580,500.00
Communication Cost 150,000.00
Interest on Loan 5,065,090.00
Service Charge on Loan 56,090.00
Insurance of Building 980,000.00
Water & Electricity 90,600.00
Office Expenses 50,680.00
Total Expenses 8,178,940.00
There are 375 shutters, which are rented to business houses with rent of Rs. 27,500 per month from Poush 1
2073.
The WIP excluding land cost upto Ashad end 2073 was Rs. 36,090,050, the total cost is segregated by the
Construction Consultant as follows;

Civil Structure 45%

Electrical Fittings (attached to building) 13%
Water fittings and treatment facilities (attached to buildings) 11%
Air Conditioners and Elevators 15%
Others Furniture‘s 16%
Total 100%

This year upto the Mangshir end Rs. 56 lacs cost was incurred for wages on painting and making the building
ready for letting out. The cost booked upto last year on civil structure is 55% items/construction materials
purchased are VAT attractive and others are 100% VAT attractive. Others if any is not VAT attractive.
Calculate the Tax payable for IY 2073.74 by the company showing the advance tax, if any.

Question No 3:
Sauraha Wildlife Resort Pvt. Ltd. has provided the following information for FY 2073.74.

Particulars Amount (Rs.)

Sales 101,005,000.00
Total 101,005,000.00
Consumption of consumables/inventories 45,060,900.00
Salary and wages 25,080,900.00
Electricity 1,590,800.00
Tour Guide expenses 1,190,500.00
Other office expenses 195,060.00
Total Expenses 73,118,160.00
Net Profit before tax 27,886,840.00

RTP-CAP II -2017 December @ICAN

The loss carried forward is Rs. 19,569,911.00

The same is related as follows:

FY 2072.73 305,000.00
FY 2071.72 4,506,900.00
FY 2070.71 1,480,920.00
FY 2069.70 205,930.00
FY 2068.69 1,980,560.00
FY 2067.68 2,890,500.00
FY 2066.67 2,590,601.00
FY 2066.67 5,609,500.00

And the Assets of the resort are as follows: Opening WDV

Building 19,050,600.00
Room Bed and Furniture Sets 6,509,800.00
Kitchen Utensils 1,560,900.00
The company purchased software costing Rs. 1,590,000 INR on Magh of 2073 from Indian supplier, and the
software has 12 years life
The company had 170 Nepali employees working throughout the year.

Question No 4:
The information from the financial statement of Nepal Nirman Sewa Pvt. Ltd. for FY is given below:

Particulars Amount (Rs.)

Turnover from Construction Works 197,509,050.00
Turnover from Lease Rental of Leasehold Building 12,605,004.00
Electricity and other services income provided to the tenants of the building 7,050,900.00
Total Income 217,164,954.00
Construction Materials Purchase 107,590,050.00
Sub Contractor Works 25,090,750.00
Wages 25,098,060.00
Salary to Employees 18,090,600.00
Opening Stock of Construction Materials 19,086,500.00
Opening Stock of Work in Progress (WIP) 15,090,504.00
Total Expenses 210,046,464.00

The expense are excluding depreciation on Building which is leasehold development for 25 year lease term with
total initial cost of Rs. 1250 lacs, and the company has construction machines with opening WDV of Rs. 175 lacs.
Repair on building is Rs. 1,980,500 and Repair of construction machine is Rs. 790,560. The wages are of
construction activity and salary to employees includes the head office management employees.

During the year there is exchange loss of Rs. 1,050,000 out of which Rs. 750,000 is realized loss and remaining is
revaluation loss.

The closing inventory of construction materials is Rs. 14,500,900 and WIP is Rs. 16,058,900.
Calculate the assessable income and taxable income of the company for the year.

The company has paid Rs. 1,050,000 on Poush 2073 and further Rs. 950,000 on Chaitra 2073 but has not
submitted the estimated tax return, calculate the fine and penalty if applicable, if the company has submitted the
tax return on 15.Kartik.2074 and paid the tax liability if any on the same date. (The extension approval is not
obtained).

Question No 5:
RTP-CAP II -2017 December @ICAN
Mrs. Khanal was working with CAMRIS International in Nepal Office Kathmandu upto Magh 2073 with following
terms and facilities:

Particulars Amount Remarks

Salary 225,000.00 per month
Dashain Allowance 225,000.00 one month, received on Ashoj
Children Education Allowance 22,500.00 per month
Medical Allowance 225,000.00 one month, received on Ashoj
30,000 by both employer and her per
Contribution to Approved Retirement Fund 30,000.00
month
Donation 250,000.00 paid to Tax exempt organization on Kartik
Cost of Life Policy 90,000.00 50% paid by employer on Mangshir

st
From 1 of Falgun 2073 she joined with CAMRIS International Asia Office at Manila, Philippines and went to
Manila on same day. The facilities are same, with additional out of home country allowance of 1,500 USD per
month and accommodation facilities provided by the employer on Manila.

She has paid the required tax till Magh 2073, claiming after Falgun she need not to pay tax in Nepal.
Give your opinion regarding the applicability tax and recalculate the tax, if applicable in Nepal. (you can take 1
USD =105 NRS)

Question No 6:
Mr. Shayam Katuwal has following income receipts during the IY 2073.74, calculate the net tax liability. (The
amounts shown are net amounts received).

Particulars Amount (Rs.) Remarks

Tax deducted and deposited by
House Rent Income 180,000.00 tenants
Tax deducted and deposited by
Bank Interest income - Global IME Bank Ltd 95,000.00 bank
Tax deducted and deposited by
Natural Resource Payment 700,000.00 the payer

Interest income from Mark Formulation Pvt. Ltd. ( for tax deducted and deposited by
unsecured loan) 85,000.00 Mark Formulation
tax deducted and deposited by
Dividend Income from Unilever Nepal Ltd 47,500.00 Unilever Nepal
Income from Prime Life Insurance for life insurance tax deducted and deposited by
policy 95,000.00 Prime Life
Gift related to investment income 50,000.00

Salary paid to Mr. Jyoti, who maintains the detailed

records and collects the house rent, natural resource
related income and dividend 25,000.00
Expenses related to natural resource 34,900.00
Life Insurance premium paid to Prime Life Insurance 23,560.00

Repair of Building (the building is the same which is

leased for rent) 23,450.00
Donation paid to tax exempt organisation 45,672.00

The Opening Depreciation Base of Building, no addition

and sales proceeds during the year 2,240,950.00

Question No 7:
Mrs. Joshi is retired employee of government office, she received in the three financial year as salary and benefits
are, in the financial year 2070/071 NPR. 750,000, financial year 2071/072 NPR. 890,000 and financial year
RTP-CAP II -2017 December @ICAN
2072/073 is NPR. 1000,000. The account of the office has calculate the tax liability by considering total sum of
three financial year is one financial year in the year 2072/073 and deposit tax liability according in the financial
year 2072/073.
- State your view in this regard, imposition of tax in the income of Mrs. Joshi?
- Define imposition of Tax as per Income Tax Act 2058?
- What are the provisions for Social Security tax in financial act 2073? Whether social security tax is
applicable to Mrs. Joshi, who has only pension income?

Question No 8:
Nepal Telecommunications Authority (NTA) hired Mr. Swanstiger, a Polish Citizen as Rural Communication
Infrastructure expert with effect from Sep 1 2015 (2072/06/01). He came to Nepal, 7 days before his joining date.
He remained in Nepal for next 6 months, during the period he visited his home country on the occasion of
Christmas, for the purpose he left Nepal on 9/Poush/2072 and came to Nepal after Christmas leave on
23/Poush/2072, and continued his service for the contract period. After the expiry of contract, he converted his
visa category to Tourist Visa, and went to Annapurna Base Camp for 17 days, and returned to his home country
st
on 21 day.

Question No 9:
Mr. Z is a trader based in Shantinagar, Kathmandu. He deals in retail sales of different consumer items, and he
has no other income than the retail sales. During the Income Year 2072/73, he has total business turnover of Rs.
1,885,000. He made a payment of Rs. 60,000 on 1st Jestha 2073 in relation to purchase of Wai Wai Noodles from
a dealer in cash. It was not a public holiday. Is the payment in cash deductible for tax purpose? What would be
your answer if the payment was made in a place where there is no banking facility within the periphery of 10 KM of
his business place?

Question No 10:
th
Mr. Joshi, is appointed as Chief Executive Officer (CEO) of Bishal Bank Ltd. by the 167 Meeting of Board of
st
Director of Bank held on 31 Ashad 2072 for four years. The compensation arrangements for Chief Executive
Officer of Bank during the tenure are;
i. A monthly remuneration of NPR 1,525,000/-pm (Nepali Fifteen lakhs twenty five thousand a month) Tax
will be deducted at source (TDS) as per Income Tax Act 2058.
ii. Reimbursement of the cost of Mobile Phone bill and can use dual SIM.
iii. For security reasons 1 security guard for 24 hours a day at his residence and one body guard (security
guard) during the period when he leaves home and duty of body guard is ended when he enters the
house. Normal period of office hour is 8 hour, being busy in office work Mr. Joshi normally works for 12
hours a day.
iv. Bank will cover the Medical and Accidental Insurance under the policy purchased by the Bank as per
approval schemes.
v. A Mercedes-Benz (or equivalent) with driver with mileage within Nepal. The same will be the property of
the bank and assigned to the CEO for his use for the tenure of the contract.
vi. Annual, casual, and other leave will be the same as applicable to other staff of the Bank as per the HR
Policy.
vii. Annual Dashain Bonus totaling one month of the monthly remuneration at the time of payment of the
Dashain Bonus to staffs of the Bank.
viii. Entitle to the Statutory Bonus as applicable to other staffs of the Bank after the closure of the Fiscal year,
at the time statutory Bonus is paid to all staffs.

In addition to above the following information‘s are available for financial year,
 He received NPR. 900,000 as Bonus of financial year.
 He has life insurance plan with Delta Life Insurance Company for which annual insurance premium is paid
by him is NRR. 75.000.
 PL Security service (P.) Ltd. provides security service as per this agreement with the Bank and for that PL
Security service (P.) Ltd. charge NPR. 15,000 including VAT for per security personnel, the duty hour of
security guard is 8 hour shift.
RTP-CAP II -2017 December @ICAN
  XYZ Securities Pvt. Ltd. provide Security of Body Guards service to CEO as per the agreement of CEO
with Bank and for that XYZ Securities Pvt. Ltd. charge NPR.14, 500 including Vat for per security
personnel. The duty hour of security guard is 8 hour shift, if the security guard/body guard has to work less
than 8 hour the same is calculated as 8 hour shift also.
 He made contribution to approved provident fund is NPR. 1,500,000.
CEO has submitted the Bill of Medical treatment of NPR. 25,000.
Required
Calculate the tax liability of the CEO for financial year 2073/074 and state the relevant provision of Income Tax
Act.

Question No 11:
Secured General Insurance Nepal Ltd has provided the following information for FY 2072.73.

Particulars Amount (Rs.)

Net Premium Received 400,000,000.00
Commission on insurance ceded 20,000,000.00
Opening unexpired risk reserve 150,000,000.00
Opening claim outstanding 23,000,000.00
commission on reinsurance accepted 10,000,000.00
agent commission 15,000,000.00
management expenses 100,000,000.00
claim paid during the year 100,000,000.00
closing claim outstanding 30,000,000.00
interest income on Fixed Deposit (Gross) 50,000,000.00
Allowable depreciation 60,000,000.00
miscellaneous income 25,000,000.00
claim received from reinsurance 50,000,000.00
carried forward loss from FY 2071.72 100,000,000.00

Others
- Sale of salvage accepted by company from the insured at the time of claim settlement Rs. 56,500
including VAT was not recorded above.
- Management expense includes : Telephone expense Rs. 100,000 of Jestha 2072
- The company has taxable profit of Rs. 50,000,000 before adjusting loss for FY 2071.72.

Question No 12:
Define the followings with respect to Income Tax Act 2058.
a)Permanent Establishment
b)Non Business Chargeable Asset
c) Exempt Organization
d)Company
e)Service Fee

Question No 13:
Calculate the amount of withholding tax to be deducted by resident person on following payment
with reference to Income Tax Act 2058.
a)Service fee of Rs. 98 lakhs paid to Timro Hamro Bank Ltd., Kathmandu.
b) Dividend of Rs. 10 lakhs paid to the natural person by ABC Mutual Fund which includes
Rs. 5 lakhs from dividend income from resident companies.
c)Commission of Rs. 11.30 lakhs including VAT paid by a manufacturer of cement to the
wholesaler against Tax Invoice issued by wholesaler to manufacturer.
RTP-CAP II -2017 December @ICAN
 d) Reinsurance premium of Rs. 10 lakhs paid to non-resident Insurance Company.
e)A Mutual Fund Company gave loan of Rs. 100 lakhs to a resident company, in return it
received Rs. 110 lakhs after one year at the time of loan repayment.
f) Fee of Rs. 10,000 by ICAN to a Chartered Accountant for preparing a Revision Test
Paper.
g) Service fee of Rs. 100,000 paid to local consultant not register in VAT.
h) A resident employment company paid commission of Rs. 5 lacs to non-resident.
i) Profit of Rs. 20 lakhs distributed by a partnership firm.
j) Rent of land, land & building & furniture Rs 50,000 each.

Question No 14:
Write Short Notes in respect to Income Tax Act 2058.
a)Advance Ruling
b)Public Circular
c) Jeopardy Assessment

Question No 15:
Discuss in Brief.
a)Couples
b)Repair and Improvement Expenses
c) Tax Exempted Incomes
d)Medical Tax Credit and Approved Medical Expenses
e)Basis of Tax Accounting

VALUE ADDED TAX

Question No 16
The following is the information related to Gorkha Ayurvedic Pvt. Ltd. Which is engaged in production of various
ayurvedic medicines and cosmetics. Calculate the VAT payable/receivable for the FY 2073.74.

Particulars Amount (Rs.)

Purchase of medicinal herbs directly from villagers 2,570,000.00
Purchase of other raw materials 2,145,000.00
Purchase of Processing Machine 1,045,000.00
Purchase of Alto 800 Maruti Car (which shall be used for business promotion purpose by the
1,540,000.00
Director)
Packing materials 1,035,000.00
Salary 2,120,000.00
Purchase of lunch box for employees 125,000.00
Sales of ayurvedic medicine in Nepal 2,590,000.00
Sales of ayurvedic cosmetics in Nepal 3,175,600.00
Sales of ayurvedic medicine (Exported) 890,000.00
Sales of ayurvedic cosmetics products (Exported) 3,140,000.00

All purchase and sales figures given above are excluding VAT (if applicable).

Question No 17:
Happy world travels pvt ltd is engaged in providing various services which includes ticketing of air tickets, tour
package sales and rental services of tourist vehicles, the information is related to fiscal year 2073.74.

RTP-CAP II -2017 December @ICAN

 Particulars Amount (Rs.) Remarks
Sales income from air ticket
56,090,500.00 sold to individual persons with in Nepal
sales
Sales of tour package 25,090,000.00 sold to individual persons with in Nepal
vehicle rental services 19,058,000.00 sold to individual persons with in Nepal
sold to travel agent company of
sale of tour package 12,000,000.00 Singagpore which sends the tourists to
Nepal based upon the sales contract
Total Income 112,238,500.00
Purchase of Air tickets 54,480,000.00
the tour package purchase includes the
hotel bill of various hotels on various
Purchase of tour package 18,500,600.00
places on which the tourists are sent by
the travels
Vehicle Purchased 7,600,000.00
internet expenses 200,000.00
insurance expenses 1,900,000.00 insurance of tourists
Salary 5,500,900.00
Total expenses 88,181,500.00

The amounts above are excluding VAT (if applicable), calculate the VAT receivable/payable by the company
during the FY 2073.74 assuming no opening VAT payable/receivable.

Question No 18:
Write short notes on the followings with relevant provisions of VAT Act/Rule.
a) Time and place of supply
b) Market Value and determination of market value of transaction.
c) Assessment of Tax by tax officer and conditions for such assessment.

Question No 19:
Write short notes on the following
a) Temporary registration for VAT
b) Proportionate credit
c) Transfer of business
d) Market value

Question No 20:
Write Short Notes
a. What are conditions for refund of VAT for foreign individuals visiting Nepal.
b. State the relevant provision of VAT Act/Rule for cancellation of registration and procedure for cancellation of
registration.
c. What shall be the fine and penalty chargeable under the following situations as per VAT Act, 2052? i) Late
payment of VAT amount.
ii) Tax plate not kept/misplaced.

ANSWER

INCOME TAX

Answer No 1:

Particulars Amount (Rs.) Remarks

Disposal of Trading Stock 65,000,000.00
30% previously disallowed as bad debt
Bad Debt Recovered 385,000.00
expense, so 70% included in income now.

RTP-CAP II -2017 December @ICAN

 Miscellaneous Income 1,075,900.00
Total of Income 66,460,900.00
Opening Stock + Purchase + direct expenses
Cost of Disposal of Trading Stock 40,307,650.00 - closing stock, Rs. 1,900 pm of electricity bill
disallowed.
Rs. 55,000 is advance salary provided to sick
Salary 1,525,000.00 employee, related to month Shrawan of 2074
disallowed
Provision for gratuity disallowed, paid is
Gratuity 770,000.00
allowed
Bad Debt for the year - bad debt disallowed
Rs. 24000 is telephone bill of mobile phone of
Telephone 66,000.00
son of Director disallowed
Medical Expenses 150,000.00
Sales promotion expenses 9,500,000.00
Repair 1,215,620.00 Note 1
Depreciation 2,834,400.00 Note 1
Total deduction 56,368,670.00
taxable income 10,092,230.00
tax rate for special industry is 20% and 20%
rebate because of more than 100 Nepali
tax rate 16%
workers with 1/3rd among Women, Dalit and
Disabled
tax 1,614,756.80

Note 1 : Calculation of Depreciation and Repair

Opening WDV Dep. rate
pool of assets (%) Depreciation Actual repair 7% of DBV allowed repair
A 5,590,000.00 6.67 372,666.67 1,590,000.00 391,300.00 391,300.00
D 10,178,000.00 20.00 2,035,600.00 1,390,000.00 712,460.00 712,460.00
C 1,598,000.00 26.67 426,133.33 190,000.00 111,860.00 111,860.00
2,834,400.00 1,215,620.00

Answer No 2:
Particulars Amount Remarks
Advance Tax is 10% of rent
Rent Income 10,312,500.00 income =10,312,500
Total Income 10,312,500.00
Expenses
Salary of staff 1,065,000.00
Diesel for Generator 140,980.00
Petrol for Vehicle of Managing Director - Disallowed
Communication Cost 150,000.00
Interest on Loan 5,065,090.00
Service Charge on Loan 56,090.00
Insurance of Building 980,000.00
Water & Electricity 90,600.00
Office Expenses 50,680.00
Depreciation 3,864,638.38 Note 1
Total Expenses 11,463,078.38
Assessable income from investment (1,150,578.38)
Taxable Income (1,150,578.38)

RTP-CAP II -2017 December @ICAN

 Loss Carried Forward to next year (1,150,578.38)
Advance Tax 1,031,250.00

Note 1
Opening Depreciation Base Value and Depreciation is calculated as follows

Opening WIP (a) 36,090,050.00

Part of Building (Civil structure, water facilities and electrical fittings which can not be
69%
separately identified are building parts) (b)
Building ( c= a*b) 24,902,134.50
building shown as WIP which are not accounted through VAT Bill/VAT payments (out of
7,308,235.13
total 45% is civil part, and 45% is not vat items shown as WIP) (d=c*45%*45*)
Add : 13% reverse charging for more than 50 lacs construction (e=d*13%) 950,070.57
Total Building (f=e+c) 25,852,205.07
Addition as painting wages (g) 5,600,000.00
Add : 13% reverse charge for more than 50 lacs construction (h=g*13%) 728,000.00
Total Building (i=f+g+h) 32,180,205.07

Capitalized Depreciatio
Pool Asset Opening DBV Part DBV n Rate Depreciation

A Building 32,180,205.07 100% 32,180,205.07 5% 1,609,010.25

Furniture‘s (16% of
B opening WIP) 5,774,408.00 100% 5,774,408.00 25% 1,443,602.00
AC and Elevator
(15% of Opening
D WIP) 5,413,507.50 100% 5,413,507.50 15% 812,026.13
3,864,638.38

Answer No. 3
Particulars Amount (Rs.)
Sales 101,005,000.00
Total Income 101,005,000.00
Expenses
Consumption of consumables/inventories 45,060,900.00
Salary and wages 25,080,900.00
Electricity 1,590,800.00
Tour Guide expenses 1,190,500.00
Other office expenses 195,060.00
Depreciation (Note 1)
2,402,695.00
Total Expenses 75,520,855.00
Assessable Income 25,484,145.00
Add : Carried Forward Loss (upto 7 year allowed, allowed loss from FY
2072.73 to FY 2067.68) 11,369,810.00
Taxable Income 14,114,335.00
Tax Rate (25% - 30%*35% = 17.5%) (For Tourism related industry providing
100 or more employees throughout the year 70% on normal tax is applied). 17.50%
Tax 2,470,008.63

Note 1
Depreci
Po Absorbe
Asset Opening WDV Addition DBV ation Depreciation
ol d Portion
Rate

RTP-CAP II -2017 December @ICAN

 A Building 19,050,600.00 19,050,600.00 5% 952,530.00
Room Bed
Sets and
D 8,070,700.00 8,070,700.00 15% 1,210,605.00
Kitchen
Utensils
E Software 2,874,720.00 100% 2,874,720.00 8.33% 239,560.00

For Resort/Hotel the Room bed sets/furniture and Kitchen Utensils are Core Assets, as per IRD circular the core
assets for such nature of entity shall be grouped under Pool D.

The software cost is 1,590,000*1.6 and add 13% Reverse Charge VAT to be capitalized
The Depreciation Rate of Software is 1/12% =8.33%

Answer No. 4
Income from Business
Particulars Amount (Rs.)
Turnover from Construction Works 197,509,050.00
Total Income 197,509,050.00
Deductions
Direct Cost
Opening Stock of Construction Materials 19,086,500.00
Opening Stock of Work in Progress (WIP) 15,090,504.00
Construction Materials Purchase 107,590,050.00
Sub Contractor Works 25,090,750.00
Wages 25,098,060.00
Less : Closing Inventory of Materials -14,500,900.00
Less : Closing Inventory of WIP -16,058,900.00
Exchange Loss 682,116.45
Depreciation 2,625,000.00 WN
Repair 790,560.00 WN
Salary to Employees 16,453,194.47 WN
Total Deductions 181,946,934.92
Assessable income from Business 15,562,115.08
Income from Investment
Turnover from Lease Rental of Leasehold Building 12,605,004.00
Electricity and other services income provided to the tenants of the building 7,050,900.00
Total Income 19,655,904.00
Deductions
Exchange Loss 67,883.55 WN
Depreciation 5,000,000.00 WN
Repair 1,980,500.00 WN
Salary to Employees 1,637,405.53 WN
Total Deductions 8,617,905.53
Assessable income from Investment 11,037,998.47
Assessable Income 26,600,113.55
Taxable Income 26,600,113.55
Tax Liability (25%) (Without Fine/Penalty) 6,650,028.39
Total Fine /Interest 412,537.17 WN
Total Tax Liability 7,062,565.56

RTP-CAP II -2017 December @ICAN

Working Notes
Revenue from Business 197,509,050.00 90.95%
Revenue from Investment 19,655,904.00 9.05%
Total Income 217,164,954.00 100.00%

For segregation of Common expenses (Salary and Exchange loss) the ratio of Business income and investment
income is taken.

Salary 18,090,600.00
Related to Business (90.95%) 16,453,194.47
Related to Investment (9.05%) 1,637,405.53
Exchange Loss 1,050,000.00
Realized Loss 750,000.00
Only Realized Loss can be claimed as deduction allowable
Related to Business (90.95%) 682,116.45
Related to Investment (9.05%) 67,883.55
Depreciation and Repair
Depreciation and Repair on Building (Related to Investment)
Building Total Capitalized Cost 125,000,000.00
Lease period 25 years
Charge as depreciation per annum 5,000,000.00
Repair of building is allowed by section 13 (not by section 16) (all allowed) 1,980,500.00
Depreciation and Repair on Machine (Related to Business)
Opening WDV 17,500,000.00
Depreciation Rate 15%
Depreciation on Machine 2,625,000.00
7% limit for repair 1,225,000.00
Actual repair 790,560.00
Allowed repair (related to business) 790,560.00

Calculation of Fine/Penalty and interest

Section 117
Fine for not submitting Estimated Tax Return 2,000.00
Fine for not submitting the Tax Return within Ashoj 2074 18,097.08
(Rs. 100 per month or 0.1% per annum of turnover for each month of delay, take
maximum) (217,164,954*0.1%*1/12 or 100 whichever is higher)
Total for 117 20,097.08
Section 118
Tax Liability 6,650,028.39
First Installment (40%) 2,660,011.35
Paid 1,050,000.00
Deficit 1,610,011.35
Interest on Deficit for 3 months @ 15% p.a. 60,375.43
Second Installment (70%) 4,655,019.87
Paid (1,050,000+950,000) 2,000,000.00
Deficit 2,655,019.87
Interest on Deficit for 3 months @ 15% p.a. 99,563.25
Last Installment (100%) 6,650,028.39

RTP-CAP II -2017 December @ICAN

 Paid 2,000,000.00
Deficit 4,650,028.39
Interest on Deficit for 3 months @ 15% p.a. 174,376.06
Total for 118 334,314.74
Section 119
Total to be paid till Ashoj 2074 6,650,028.39
Paid till Ashoj 2,000,000.00
Deficit 4,650,028.39
Remaining is paid on 15 Kartik (so delay is for 1 month) (Interest for 1 month @ 15%
58,125.35
p.a.)
Total for 119 58,125.35

Answer No 5:
As per Section 2, the resident is the person who resides in Nepal for 183 days or more in consecutive 365 days.
For any day upto 2073 Magh end, Mrs. Khanal has resided in Nepal for more than 183 days in 365 consecutive
days, so she is resident for IY 2073.74 and she need to pay tax on Global Income in Nepal.

The tax calculated and paid till Magh is ok and she further need to recalculate the tax including the income earned
in Philippines and need to deposit the deficit tax. For same we need to calculate the tax paid till Magh 2073 and
again recalculate the tax for the whole IY and then deficit can be calculated.

Calculation of Tax paid till Magh 2073

Particulars Amount Total Amount Remarks
Salary 225,000.00 1,575,000.00 7 month
Dashain Allowance 225,000.00 225,000.00 1 time
Children Educaiton Allowance 22,500.00 157,500.00 7 month
Medical Allowance 225,000.00 225,000.00 1 time
Retirement Fund part of employer 30,000.00 210,000.00 7 month
50% of total
Life policy contribution by employer 90,000.00 45,000.00
policy as income
Assessable income 2,437,500.00
Reduction
Donation (5% of AI or 100000 or actual take
100,000.00
lowest)
Life Policy (20000 or actual take lowest) 20,000.00
Retirement Fund (60000*7 or 300000 or 1/3rd of
300,000.00
AI, take lowest)
Taxable income 2,017,500.00

Assuming She claims as Couple Amount (Rs.) Rate Tax (Rs.)

First 400,000.00 1% 4,000.00
Next 100,000.00 15% 15,000.00
Remaining 1,517,500.00 25% 379,375.00
Tax paid till Magh 2073 398,375.00

Now total tax for the Income Year 2073.74 is calculated as follows:

Particulars Amount Total Amount Remarks

Salary 225,000.00 2,700,000.00 12 month
Dashain Allowance 225,000.00 225,000.00 1 time
Children Education Allowance 22,500.00 270,000.00 12 month
Medical Allowance 225,000.00 225,000.00 1 time

RTP-CAP II -2017 December @ICAN

 Retirement Fund part of
30,000.00 360,000.00 12 month
employer
Out of Home Country
USD 1500 787,500.00 5 month
Allowance
She is provided
accommodation for
5 months of the IY,
Quantification of
2% of salary 22,500.00 so 5/12th part of 2%
Accommodation
of annual salary is
quantified as income
(2,700,000*2%*5/12)
Life policy contribution by 50% of total policy
90,000.00 45,000.00
employer as income
Assessable income 4,635,000.00
Reduction
Donation (5% of AI or 100000
100,000.00
or actual take lowest)
Life Policy (20,000 or actual
20,000.00
take lowest)
Retirement Fund (60,000*12
or 300000 or 1/3rd of AI, take 300,000.00
lowest)
Taxable income 4,215,000.00
Assuming She claims as
amount tax tax amount
Couple
First 400,000.00 1% 4,000.00
Next 100,000.00 15% 15,000.00
Remaining 3,715,000.00 25% 928,750.00
Surcharge 1,215,000.00 40 % of 25 % tax 121,500.00
Total Tax 1,069,250.00
Tax paid till Magh 2073 398,375.00
Deficit 670,875.00

Answer No 6:
Particulars Amount (Rs.) tax amount total income remarks

House Rent Income 180,000.00 20,000.00 200,000.00 final

Bank Interest income - Global
IME Bank Ltd 95,000.00 5,000.00 100,000.00 final

Natural Resource Payment 700,000.00 123,529.41 823,529.41 non final

Interest income from Mark
Formulation Pvt. Ltd. ( for
unsecured loan) 85,000.00 15,000.00 100,000.00 non final
Dividend Income from Unilever
Nepal Ltd 47,500.00 2,500.00 50,000.00 final
Income from Prime Life
Insurance for life insurance
policy 95,000.00 5,000.00 100,000.00 final
Gift related to investment
income 50,000.00 12,500.00 50,000.00 final
Total income 923,529.41
Salary paid to Mr. Jyoti, who allowed to the
maintains the detailed records extent of ratio of
and collects the house rent, non final income
natural resource related income to total income
and dividend 25,000.00 16,219.01 only
RTP-CAP II -2017 December @ICAN
Expenses related to natural
resource 34,900.00 34,900.00 whole allowed
Repair of Building (the building
is the same which is leased for
rent) 23,450.00 disallowed
total expenses 51,119.01
assessable income 872,410.40
Less : Reductions
(Rs. 20,000 or
actual which ever is
life insurance lower) 20,000.00
(Rs. 100,000 or 5%
of AI or actual
donation whichever is lower) 43,620.52
taxable income 808,789.88
amount Rate tax
400,000 1% 4,000
100,000 15% 15,000

308,789.88 25% 77,197.47

total tax to be paid 96,197.47

tax already paid 138,529.41

Mr. Subedi has advance tax with
government, (no tax liability)
net tax liability 42,331.94

Answer No 7:
Calculation of tax liability by considering three year income in one year i. e. financial year 2072/073 is not in line
with income tax provisions. Imposition of tax is applicable for each income year as per income tax act section 3.
Accordingly tax liability of Mrs. Joshi shall be calculated separately each financial year it means tax liability of
financial year 2070/071, 2071/072 and 2072/073 and tax liability is deposited to IRO.

It is further supported by: ―Income tax is imposed on yearly basis of income. Supreme court on the issue of past
employees of Nepal Rastra Bank vide case no.2677, decided on 2064/04/23 that Income Tax on pension income
should calculate on yearly basis.‖

As per section 3 of income tax act 2058, imposition of tax means:

Income tax is hereby imposed on and realised from every person as follows for each income-year: -

(a) a person, who has taxable income for the year;

(b) a foreign permanent establishment of a non-resident person situated in Nepal and has repatriated income for
the year as mentioned in subsection (3) and (4) of section 68; and

(c) a person, who receives a final withholding payment during the year.

As per section 24 of financial act 2073, annexure 1 section 1 of income tax act 2058 if income of individual up to
NPR. 350,000 or couple NPR. 400,000 than social security tax shall be applicable 1%. Social security tax shall be
deducted at time of payment and deposited is separate social security tax revenue account. Social security tax
shall not applicable to retirement income.
According Mrs. Joshi has pension income so social security tax is not applicable.

Answer No 8:
For natural person resident is the person who resides in Nepal for 183 days or more within continuous 365 days
(section 2(Ka Nga)(1)(Kha)).
Mr. Swanstiger for Income Year 2072.73 has resided in Nepal for following days:
Assuming 30 days in each Nepali Month
Month Days of Stay Remarks

RTP-CAP II -2017 December @ICAN

 st
Bhadra 2072 7 Came Nepal before 7 days of 1 Ashoj

Ashoj 2072 30

Kartik 2072 30

Mangshir 2072 30

Poush 2072 17 9 days before the leave and 8 days after the leave

Magh 2072 30

Falgun 2072 30 Contract expired from this month

th st
Chaitra 2072 21 On the 7 month, the returned on 21 day

Total 195

So he is resident for IY 2072.73.

Answer No 9

Any payment exceeding Rs. 50,000 at a time by a person is not deductible for tax purpose when the
turnover of the person exceeds Rs. 2,000,000 and the payment does not satisfy the exceptions mentioned in
Sec. 21 (2). Since the turnover of Mr. X does not exceed Rs. 20 Lakhs, any payment in cash is eligible for
deduction provided conditions laid down by other provisions of the Act are satisfied.

Answer No 10:

Amount
Particular Details
(Rs.)
Gross Salary Paid For the year 15,25000*12 18,300,000

Vehicle Facility 0.5% of Gross Salary 91,500

Dashain Bonus 1,525,000

Statutory Bonus 900,000

Incentives & Facilities (WN#1) 888,000

Total Taxable 21,704,500

Less insurance Premium 20,000

Assessable Income 21,684,500

Less:

Contribution to Provident fund 300,000

Taxable Income 21,384,500

First 400,000*1% 4,000

Next 100,000*15% 15,000

next up to 2,500,000 2,000,000*25% 500,000

above 2,500,000 18,884,500*35% 6,609,575

Total Tax Liability 7,128,575

Less : Medical Tax Credit * 750

Net Tax Liability 7,127,825

* for claiming the medical tax credit, Mr. Joshi need to submit income tax return,

RTP-CAP II -2017 December @ICAN

 Further, as per section 97(2) of Income Tax Act 2058 if income of individual person is more than Rs. 40
Lakh than return of income is required to submit as per section 96 of Income Tax Act 2058. (Amended by
financial Act 2074).

Working Note #1
As per the agreement with the CEO of the Bank, for security reasons 1 guard 24 hours a day at his
residence, and working hour of one security guard is 8 hour, so for each day 3 guards are required.

Mr. Johsi normally works for 12 hour a day, which means 2 shift of guard is required for one day.

The payment of expenses for security is related to benefits of CEO, so calculation of tax liability this
expense is included in income.

PL Security service (P.) Ltd.

Particulars Qty Rate Amount
Security Guards 3.00 15,000.00 45,000.00
XYZ Securities Pvt. Ltd.
Particulars Qty Rate Amount
Security Body Guards 2.00 14,500.00 29,000.00
Monthly 74,000.00
Yearly 888,000.00

Working Note #2
Contribution to Provident fund NPR. 300,000 is allowed as deduction as per section 21 of Income Tax
Rules 2059. As per provision of this section,1/3 of assessable income or NPR. 300,000 whichever is less
is allowed as deduction.

Working Note #3
As per section 1(12) of Schedule 1 of Income Tax Act 2058 life insurance premium is deductible up to
NPR.20,000 or premium amount whichever is less.

WN#4
Vehicle Facility 0.5% of Gross Salary (NPR. 91,500) is included in income as per section 13(1ka) of
Income Tax Rules 2059.

Answer no 11:
Inclusions Amount (Rs.)
Net Premium Received 400,000,000.00
Commission on insurance ceded 20,000,000.00
Commission on insurance ceded 150,000,000.00
Commission on insurance ceded 23,000,000.00
interest income on Fixed Deposit (Gross) 50,000,000.00
miscellaneous income 25,000,000.00
claim received from reinsurance 50,000,000.00
sale of salvage (56500/1.13) 49,646.02
Total Income 718,049,646.02
Deductions
commission on reinsurance accepted 10,000,000.00
agent commission 15,000,000.00
management expenses (less 100000 telephone prior period expenses) 99,900,000.00
Claim paid during the year 100,000,000.00
closing claim outstanding (115% of closing claim outstanding is allowable) 30,000,000.00
Closing unexpired risk reserve (50% of net premium received is allowable) 200,000,000.00
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 Depreciation 60,000,000.00
carried forward loss of FY 2071.72 (50000000 is adjusted in FY 2071.72) 50,000,000.00
Total deductions 564,900,000.00
Assessable Income 153,149,646.02
Taxable Income 153,149,646.02
Tax (@ 30% ) 45,944,893.81

Answer No 12:
a)Permanent Establishment as per section 2 (Ka) (Da)( s) (b): „Permanent Establishment‟ (PE) means an
establishment where a person wholly or partly carries on a business. The establishment refers to the
head office, factory, premises, site office, branch office etc. In additional to that, these
undernoted establishment are also defined as PE :
- An establishment where a person wholly or partially carries on a business through an agent, when the
agent is not a general agent of independent status.
- An establishment where a person has, is using, or is installing main equipment or machineries (factory
premises).
- One or more establishment within a country where a person furnishes, whether through employees or
otherwise, technical, professional, or consultancy service for a period or periods aggregating more
than 90 days within any 12 months.
- An establishment where a person is engaged in a construction, assembly, or installation project for 90
days or more, and a place where a person conducting supervisory activities in relation to such a
project.

b) Non Business Chargeable Asset

As per paragraph (b) of Section 2 of Income Tax Act 2058; NBCA means securities or an interest in an
entity as well as land and building but excludes the following assets:
- Business Assets, depreciable assets or trading stock
- A private resident of an individual that has been
Owned continuously for ten years or more, and

Lived in by the individual continuously or intermittently for a total of ten years or

more.

Clarification: For the purpose of this paragraph private residence means private building and area of
land covered by building or one ropani land, whichever is lower.

- Interest of any beneficiary in retirement fund.

- A land, land and building and private residence of an individual that is disposed of for less than 30
lakhs.
- Assets of an individual that is disposed of by way of any type of transfer other than sales and
purchase made within three generations.

c)As per paragraph (w) of Section 2 of Income Tax Act, exempt organization means the following entities:
- Following entities registered with the Department as an exempt organization:
i) A social, religious, educational, or a charitable organization of public character
established without having a profit motive,
ii) An amateur sporting association formed for the purpose of promoting social or sporting facilities
not involving the acquisition of gain.
- A political party registered with the Election Commission

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 - A village municipality, municipality/sub-metropolis/metropolis or district coordination committee,
provided that, any entity, giving benefit to any person from the assets of, and amounts derived by the
entity except in pursuit of the entity‘s function as per its objectives or as payment for assets or service
rendered to the entity by the person, is not exempt from tax.

d) As per paragraph (8) of Section 2, company means a company established under the company laws for
the time being in force and the following institutions shall also be treated as company for tax purpose:
- Corporate body established under the laws for the time being in force
- Any unincorporated association, committee, institution, society, or group of persons other than a
partnership or a proprietorship firm (whether or not registered) or a trust
- A partnership firm (whether or not registered under the laws for the time being in force) that has 20 or
more partners, a retirement fund, a co-operative, a unit trust, or a joint venture;
- Foreign company; and
- Any foreign institution prescribed by the Director-General

e)As per paragraph (s d) of section 2, service fee means any fee paid to a person based on market values,
for services rendered by the person and includes a commission or a meeting allowance, management
fee, or technical service fee.

Answer No 13:
a)As per section 88 (1)(4), service fee payment to entity engaged in VAT exempt transaction is 1.5%
withholding tax deductible, hence 1.5% of 98 lakhs, i.e. 1.47 lakhs to be deducted.
b) As per section 88 (1)(6), dividend paid by a mutual fund to natural person is taxed @ 5%. However, as
per section 54(3), dividend distributed by any company out of dividend income which is already dividend
tax deducted, is dividend tax exempt payment. Again as per section 88(4)(ª), dividend payment to
mutual fund is dividend tax exempt i.e. dividend tax not deducted. Hence, it is subject to dividend tax
deduction @ 5% i.e., 50,000 is to be deducted.
c) As per section 88(1), commission is withholding tax deductible @ 15%, hence withholding tax shall be
15% on commission (excluding VAT) is Rs. 1.5 lakhs.
d) As per section 89 (3)(v), Insurance premium paid to non-resident is 1.5% withholding tax deductible.
Hence, Rs. 15,000 is to be deducted as withholding tax.
e) As per section 88 (4)(u), interest paid to mutual fund is not withholding tax deductible. Here receipt of
amount excess of Loan is interest as per section (2) i.e. Rs 10 lakhs (Rs 110 - 100) is not withholding
tax deductible.
f) As per section 88 (4), question paper fee is not withholding tax deductible payment. Here, it is payment
against RTP, so withholding tax @ 15% is to be deducted i.e. Rs. 1500.
g) As per section 88 (1), service paid is 15% withholding tax deductible. Hence, it is Rs. 15,000.
h) As per section 88 (1)(2), commission paid by resident employment company to company is to non-
resident is 5% withholding tax deductible, hence, it is Rs. 25,000.
i) As per section 54, dividend paid by partnership firm is 5% withholding tax deductible. Hence, withholding
tax is Rs. 100,000.
j) As per section 88 (1)(5), rent is 10% withholding tax deductible payment, hence, Rs. 15,000 is to be
deducted.

Answer No 14:
a)Advance Ruling
a) The department may, upon application in writing by a person, issue to the person by notice in writing
a personal ruling setting out the Department‟s position regarding the application of this Act to the person
with respect to an agreement proposed or entered into by the person.

Notwithstanding subsection (a), the department may not issue a ruling under subsection (a) with respect
to an issue involving the application of this Act that is presently before a court or that has been decided
by a court.

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 Where the person makes the following prior to the issue of a ruling under subsection (a), the ruling
binding on the Department with respect to the application of this Act (as in force at the time of the ruling)
to the person with respect to the arrangement.
i. A full and true disclosure to the Department of all aspects of the arrangement relevant to the ruling;
and
ii. The arrangement proceeds in all material respects as described in the person‟s application for the
ruling.

Where a personal ruling issued under subsection (a) and a public circular issued under section (75)
contradict each other, priority shall be given to the terms of the personal ruling in respect of the person
to whom the ruling is issued.
Before issuing ruling, Department may permit applicant or his representation to furnish any deficiency of
documents.

As per Rule 22;

i. Applicant should file application in prescribed format.
ii. Department has to give decision within 45 days of application.
iii. If department didn‘t issue personal ruling within 45 days, applicant may file for
administrative review or appeal to revenue tribunal.

b)Public Circular
As per section 75 of Income Tax Act, 2058;
a) To achieve consistency in the implementation of this act and to make the tax administration simple
and provide guidance to the persons affected by this act, including officers of the Department, the
Department may issue in writing public circulars setting out the Department‘s interpretation of this Act.
b) The Department shall make public circulars issued under subsection (a) available to the public at
offices of the Department and at such other locations or by such other medium as the Department may
determine.
c) A public circular issued under subsection (a) shall be binding on the department.

c)Jeopardy Assessment
If tax within a income year or after income year but before statutory time limit of filing of return is
Jeopardy assessment. It is of two types:
- Jeopardy assessment as self-assessment [Section 100(1)]
- Jeopardy assessment by tax authorities. [Section 100(2)]
Jeopardy assessment by the IRO is possible only under anyone of these conditions:
a. The person becomes bankrupt, is wound-up, or goes into liquidation.
b. The person is about to leave Nepal indefinitely.
c. The person is about to leave the business conducting in Nepal.
d. The IRD otherwise considers it appropriate.

Under any one of the above conditions the IRO may serve a notice to the taxpayer to submit a tax return
for the specified period of the year within specified days. In the case of a taxpayer who submits the
return as per the notification or does not submit it, in either case, the income tax assessment is
supposed to be made as per the provisions of Sec. 99(2). But Sec.100(2) has given an authority to
respective IRO to make a jeopardy assessment in the above case on the basis of the best judgement
adopted by the IRO

The period taken by the IRO for such a jeopardy assessment may be a part of the year or the whole
year. In such a case, the notice is meant for an assessment of the whole year, and the taxpayer has to
file the return within the time specified in the notice but in no way can wait for the period as specified in
Section 96.
The respective IRO can make a jeopardy assessment only if it has a reasonable belief that the figures
produced or deemed to be produced by the taxpayer do not exhibit the real position of the tax liability of
the taxpayer for the period.

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 According to Section 100(2), the following pieces of information are considered for the jeopardy
assessment:
a) Assessable income of the taxpayer from business, employment or investment, i.e. from all the
sources.
b) Taxable income of the taxpayer during the year and the total amount of tax due to the taxpayer, and
c) In the case of a taxpayer, which is a foreign permanent establishment, the income remitted to a
foreign country during the period and tax payable on such a remittance.
Before issuing an order for jeopardy assessment, the IRO has to serve a notice to the taxpayer stating
the reason of disagreement over the figures given in the return field or the figures available to the IRO. A
period of seven days should be given to the taxpayer to explain and produce evidence against the IRO‘s
contention.

In case a jeopardy assessment is made for a whole year, the taxpayer is not required to submit a tax
return under Sec. 96(1). But if it is for part of the year, the taxpayer has to file a return under sec.96(1)
and the treatment of tax paid as per the jeopardy assessment shall be as advance payment of tax and
could be adjusted against the tax payable as calculated as per the self assessment for the year.
When the IRO has made a jeopardy assessment, it has to issue an order to the taxpayer stating the
following assessment:
a) The total tax payable by the taxpayer for the period of assessment and the tax due to him;
b) The method of calculation of the tax liability.
c) The reason of the Jeopardy assessment by the IRO.
d) The period within which the tax due is payable; and
e) Where, when and how to appeal against the order if the taxpayer is not satisfied with the jeopardy
assessment.

In case of competent authority of contracting state having treaty regarding Avoidance of Fiscal Evasion
seek any tax arrears on that country to be collected from the person in Nepal, then taxation authority
can collect the tax to the extent of valid and bona fide request of competent authority. The assessment
based on these request are assessment classified as jeopardy assessment of tax collecting for another
country.

Answer No 15:
a)As per section 50,
i) A resident natural person and a resident spouse of the person may, by notice in writing elect to be
treated as a single individual for a particular income year.

ii) Each spouse of a couple making an election as above with respect to an income-year is jointly and
severally liable with the other spouse for any tax payable by the couple for the year.

iii) What so ever mentioned in above (i) and (ii) resident widow or widower responsible to take care of
dependents shall be treated as couple.

b) As per Section 16, Repair and Improvement Costs provision is as follows;

i) For the purpose of calculating a person‘s income for an income – year from any business or
investment, there shall be deducted all costs to the extent incurred during the year in respect of the
repair or improvement of depreciable assets owned and used by the person during the year in the
production of the person‘s income from the business or investment.
ii) Notwithstanding mentioned in (i), the deduction allowed with respect to all depreciable assets in a
particular pool of depreciable assets of the person shall not exceed seven percent of depreciation basis
of the pool at the end of the income year. However, the limitation shall not be applicable on overhauling
of aircraft as required by Standards of Civil Aviation Authority of Nepal.
iii) Any excess cost of repair and improvement, or a part thereof, for which a deduction is not allowed as
a result of the limitation of (ii), can be added to the depreciation basis prevailing in the beginning of the
subsequent income year, of the pool to which it relates.

c)As per Section 10 of Income Tax Act, the following amounts are tax exempted incomes:
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 i) Amounts derived by a person entitled to privileges under a bilateral or a multilateral treaty concluded
between Nepal Government and a foreign country or an international organization.

ii) Amounts derived by an individual from employment in the public service of the government of a
foreign country.

Provided that The individual is a resident person solely by reason of performing the employment or is a
non-resident person; and The amounts are payable from the public funds of the country.

iii) Amounts derived from public fund of the foreign country by an individual who is not a citizen of Nepal
as referred to in paragraph (ii) or by a member of the immediate family of the individual.
iv) Amounts derived by an individual who is not a citizen of Nepal from employment by Nepal
Government on terms of tax exemption.
v) Allowances paid by Nepal Government to widows, elder citizens, or physically disabled individuals.
vi) Amounts derived by way of gift, bequest, inheritance, or scholarship, except as required to be
included in calculating income under section 7, 8 or 9 and
vii) Amounts derived by an exempt organization by way of

a) Gift; or
b) Other contributions that are directly related to the organization‘s function referred to in paragraph(s)
(1) of the definition of exempt organization in section 2, whether or not the contribution is made in return
for consideration provided by the organization, or
c) Income earned by Nepal Rastra Bank as per its objective, or
d) Income earned by Securities Board of Nepal as per its objective.

viii) Pension received by a Nepali citizen retired from the army or police service of a foreign country
provided the amounts are payable from the public fund of that country.
ix) Any income of Nepal Government.

d) If a resident natural person becomes ill, his treatment cost is qualify for medical tax credit under Sec. 51.
Eligible Medical Cost (EMC) is cost of treatments including fee paid to doctor, lab cost, dispensary cost
and other associated costs. In EMC, cosmetic medical cost is not included. If a person has medical
insurance, premium paid for it is deemed as EMC.
Medical Tax Credit Limit (MTCL) is as follows:
= (EMC + Medical Insurance Premium – Insurance Compensation) * 15%
Maximum limit of medical tax credit is Rs. 750 for a year. If a person has MTCL is more than Rs. 750 or
have tax payable is less than Rs. 750, any unrelieved MTCL is carried forward to next years.
As per Rule 17(1), the following shall be treated as approved medical expenses:
Health Insurance Premium
Amount as per bill including medical expenses of approved hospital, nursing home, health center or
doctor
As per Rule 17(2), the following shall not be included in approved medical expenses:
Expenses of Cosmetic Surgery
Insurance claimed medical expenses

e)Basis of Tax Accounting

As similar in accounting, basis of accounting is also cash basis of accounting and accrual basis of
accounting. Both cash basis and accrual basis are not conceptually same for both tax and accountings.
Statutory cash basis for tax: Income from employment and income from investments in case of a
natural person has to be accounted in cash basis of accounting.
Statutory accrual basis for tax: Company should keep its tax accounts on accrual basis of accounting.
Banking business, as licensed from Nepal Rastra Bank can keep its accounts based on directives.
Again, co-peratives can maintain its interest income in cash basis.
Optional basis for tax: Income from business of a natural person and income of entity other than a
company (partnership and trust) may opt either basis for taxation.

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Value Added Tax
Answer No 16:
allowed tax
Tax / (exempt,
Particulars Amount (Rs.) (taxable ratio *
if exempted)
tax)
Purchase of medicinal herbs directly from villagers 2,570,000.00 Exempt
Purchase of other raw materials 2,145,000.00 278,850.00 179,785.32
Purchase of Processing Machine 1,045,000.00 135,850.00 87,587.72
Purchase of Alto 800 Maruti Car (which shall be used
1,540,000.00 80,080.00 51,630.66
for business promotion purpose by the Director)
Packing materials 1,035,000.00 134,550.00 86,749.56
Salary 2,120,000.00 exempt
Purchase of lunch box for employees 125,000.00 16,250.00 disallowed
tax
Sales of ayurvedic medicine in Nepal 2,590,000.00 exempt
Sales of ayurvedic cosmetics in Nepal 3,175,600.00 412,828.00
Sales of ayurvedic medicine (Exported) 890,000.00 exempt
Sales of ayurvedic cosmetics products (Exported) 3,140,000.00 -
ratio of taxable sales 0.6447
64.47%
total tax collected on sales 412,828.00
total tax paid and allowed on purchase 405,753.25
tax to be paid to government 7,074.75

Answer No 17:
Allowed
Particulars Amount (Rs.) VAT Remarks
portion of VAT
Sales income from air ticket sales 56,090,500.00 Exempted
Sales of tour package 25,090,000.00 3,261,700.00 1,630,850.00
vehicle rental services 19,058,000.00 2,477,540.00 1,238,770.00
sale of tour package 12,000,000.00 0% - export of service
Total Income 112,238,500.00 2,869,620.00
Purchase of Air tickets 54,480,000.00 Exempted
Purchase of tour package 18,500,600.00 2,405,078.00 1,202,539.00
60% of taxable
Vehicle Purchased 7,600,000.00 988,000.00 296,400.00 ratio of VAT
allowed
internet expenses 200,000.00 26,000.00 7,800.00
insurance expenses 1,900,000.00 247,000.00 74,100.00
NO VAT on
Salary 5,500,900.00
Salary
Total expenses 88,181,500.00 1,580,839.00
(Taxable sales/
Taxable Ratio 0.50
Total Sales)
Total VAT Collected 2,869,620.00
Total VAT Allowed for claim 1,580,839.00
VAT Payable 1,288,781.00

Answer No 18:

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 a) As per Section 6 of VAT Act, the time of supply goods or services shall be considered to have taken place
at the earliest time of the following times:
The time supplier issued an invoice
In the case of the supply of goods, when the recipient removes or takes possession of the goods from the
supplier's transaction place;
In the case of the supply of services when the services are provided; and
When the supplier receives a consideration for goods or services
Following shall be the provision for the time of supply in the following cases :
(a) In the case of services which are continuously provided, namely, telecommunication services or similar
other public services, when the invoice is issued;

(b) Where there is a contractual provision for paying partially the value of goods or services in more than one
day on an installment basis, the supply time shall be the earliest day on which the payment is made or the
day on which the payment is to be made according to the contract;

(c) In the case of goods or service which are so used as not to be allowed an offset under this Act, the time
when such Goods or Services are used;

As per Rule 15 of VAT Rules 2054 the following places shall be deemed to be the place of supply of goods:-

(a) In the case of movable goods transferred by sale, the place where such goods were sold or transferred,
(b) In the case of any immovable goods whose location can't be transferred even if their ownership is
changed, the place where such goods are located,
c) In the case of imported goods, the customs point in the Kingdom of Nepal through which such goods are
imported into the Kingdom of Nepal,
(d) In case any producer or vendor supplies the goods to himself, the place where the producer or vendor of
such goods resides.

As per Rule 16 of VAT Rules 2054 the following places shall be deemed to be the place of supply of
services:-
The place of supply of a service shall be the place where the benefit of that service is received.

b) As per section 2(k) of Value Added Tax Act 2052, "Market Value" means the price as determined pursuant
to Section 13;
As per section 13 of Value Added Tax Act 2052, market value related provisions are:

(1) The market value of goods or services shall be determined as the consideration in money which the
supply of these goods or services would generally be agreed on if the transaction were made under similar
circumstances at that date in Nepal taking into consideration the characteristics, quality, quantity,
materials, and any other relevant factor, being a supply freely offered and made between persons who are
unrelated.

(2) For the purpose of this section the method for the determination of market value hall be as prescribed.

(3) Where the market value of goods or services could not be determined under subsection 1) and

(2), it shall be determined in accordance with a process determined by the Director General.

In addition to this section, Section 22 of Value Added Rules 2053 mention that, for determining the market
value under Section 13 of the Act, the tax officer shall determine the market value by studying the
transactions and value of other vendors registered in regard to the transaction of the same nature. In
cases where the market value of any goods or services cannot be determined as set forth in sub-section
(3) of Section 13 of the Act, the Director General shall determine the value on the basis also of the
information received in that regard by him from the registered persons of the same nature.

c) As per section 20 of the Value Added Tax 2052, in the following circumstances the tax officer have right
to assess the tax.
 In case the tax return are not submitted within the prescribed time limit.
 In case incomplete or defective tax return are submitted.

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  In case false return are submitted.
 In case the tax officer has reasons to believe that the amount of tax has been shown at a lower figure.
 In case the tax officer has reasons to believe that the sale has been made by under invoicing.
 In case there is under invoicing with the associate companies.
 In case the person is carrying transaction without being registered, thought required to mandatory
registration.
 In case sale made without invoicing.
 In case tax collected by the unregistered persons.

Answer No 19:

a) Temporary Registration for VAT Section 10A of Value Added Tax Act, 2052 provides for temporary
registration of VAT. Any unregistered person desiring to engage in any short-term taxable transactions of goods or
services at fair, show, demonstration, display, exhibitions etc. has to apply for a temporary VAT registration. In the
application, tax officer may demand deposit of the tax as appropriate. Existing registered person can transfer
goods for transaction to the place of exhibition or fair. Within seven days of completion of the fair, show,
demonstration, display, exhibition etc., temporary registered person has to submit VAT return of the transactions
made in such fair, show or exhibition and clear the required taxes collected thereon.

b) Proportionate credit Value Added Tax (VAT) paid on purchase is allowed as full set off if output of
registered person is VAT attractive only. Similarly, VAT paid on purchase is not allowed as credit in full if the
output is VAT exempted. There can be cases, where registered person deals both VAT attractive and VAT exempt
items at a time; in such situation VAT credit is allowed on the VAT paid on purchase of:
Raw material for VAT attractive output full credit Rule 40(3) Raw material for VAT exempted output no credit
Rule 40(3) Common cost (Raw material or overhead) proportionate credit Rule 40(4)
As per Rule 40(4), the tax payer dealing in both taxable and tax exempt goods and services shall apportion the
common cost in the ratio of taxable sales value to total sales value. The tax payer can claim credit for VAT paid on
purchase or import proportionally in the ratio of taxable sales to total sales value.

c) Transfer of Business Section 5(A). In case of transfer of business under either of the following two
conditions, Value Added Tax will not be applicable on the transfer of ownership of a business: - When a registered
person sells its business to any other registered person; or - A business is transferred to any inheritor on the death
of an owner. In case a registered person transfers the whole of its business to any other registered person, the
transferor is not required to charge tax on the transfer, if Form of Schedule 4 has agreed and submitted with the
Tax Officer. In this case, VAT liability due or further rose of the transferor, or VAT credit in the hand of transferor
has to be shifted to the transferee.

d) As per section 13 of VAT Act, market value of goods or services supplied should be determined as the
consideration which the supply of these goods and services would generally be agreed on if the transaction was
made under similar circumstances at that date in Nepal taking into consideration the characteristics, quality,
quantity materials and any other relevant factors, being a supply freely offered and made between persons who
are unrelated.

Answer No 20

a) The following conditions should be fulfilled to claim the VAT refund as per section 25Ka of VAT
Act, 2052:
i) Taxable goods worth at least 25,000 (as mended by Finance Act 2073) must be bought, (previously 15,000).
ii) The person must carry these goods along with him/herself
iii) The person must leave Nepal through Airways.
iv) A service charge of 3% shall be deducted from the refund amount.

b) As per Section 11 of the VAT Act 2052, the following are the provision for cancellation of
registration
(a) In the case of an incorporated body, if the incorporated body is closed down, sold or transferred or if the
incorporated body otherwise ceases to exist;

(b) In the case of an individual ownership, if the owner dies;

(c) In the case of a partnership firm, if it is dissolved; and
(d) If a registered person ceases to be engaged in taxable transactions.
(e) If a person is registered in error

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In case, the person is voluntarily registered, cancellation of registration can only be done after at least one year
period has elapsed after registration.
In case the condition for de-registration is triggered and the person is willing to deregister, an application might be
filed within 30 days of such de-registration event along with the VAT returns till such date and any VAT due.
If the tax payer has any input tax credit claimed stocks or capital assets on date of such application, such assets
are considered to be as disposed for VAT purchase. VAT should be paid for such deemed disposed items on
basis of their market value.
In case a person has applied for cancellation of its registration number has to produce its records and documents
for audit within fifteen day of the application to the tax office. The tax officer shall audit the records and documents
and within three months of the application submitted may allow or reject the cancellation.
Once the application for cancellation of registration is submitted as per sub-rule (1) of rule 12, tax return shall
have to be submitted until the notice of cancellation or within three months.
It shall be the responsibility of concerned tax officer to give notice to the person submitted the application for
cancellation of registration, about the cancellation, within three months of submission of application.

c)
i) Late payment of VAT amount. Additional fee: On late payment of VAT amount to Inland Revenue,
additional fee of 10% annually shall be imposed on payable VAT amount (Section 19 (2)). Interest
On late payment of VAT amount to Inland Revenue, 15% annual interest shall be imposed in such
outstanding amount. (Section 26).

ii) Tax plate not kept/misplaced. As per section 29(1) if tax plate is not kept, penalty @ 2000 per
week shall be charged and if it is not kept at prescribed place, penalty @ 1000 shall be imposed.

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