Revision - Test - Paper - CAP - II - June - 2017 9

REVISION TEST PAPER
CAP II
(June 2017)
The Institute of Chartered Accountants of Nepal

Satdobato, Lalitpur, Nepal
PO Box : 5289
Tel :
Fax :
Email : ican@ntc.org.np
Website : www.ican.org.np
RTP-CAP II June 2017 @ ICAN Page 1 of 181

Advanced Accounting

QUESTIONS
Accounting for Departments

1. Kumari Enterprise is a retail store with several departments. Goods supplied to each department
are debited to a memorandum department stock account at cost, plus fixed percentage (mark up)
to give the normal selling price. The mark up is credited to a memorandum departmental ―Mark
up Account‖. Any reduction in selling prices (mark down) will require adjustment in the stock
account and in mark up account. The mark up for Department A for the last three years has been
40%. Figures relevant to Department A for the period ended 31 st Ashadh, 2073 were as follows;
Stock 1st Shrawan 2072 at cost Rs. 240,000; Purchases at cost Rs. 540,000; Sales Rs. 960,000. It
is further ascertained that:
(a) Goods purchased in the period were marked down by Rs. 4,200 from a cost of Rs. 48,000.
Marked down stock costing Rs. 12,000 remained unsold on 31 st Ashadh 2073.
(b) Stock shortages at the year end, which had cost Rs. 3,600 were to be written off.
(c) Stock at 1st Shrawan 2072 including goods costing Rs. 24,600 had been sold during the year
and has been mark down in the selling price by Rs. 2,220. The remaining stock had been
sold during the year.
(d) The departmental closing stock is to be valued at cost subject to adjustment for mark up and
mark down.
Prepare Departmental Trading Account, Memorandum Stock Account and Memorandum Mark
up account for the year 2072-73.
Insurance Claim
2. On 12.7.2073 the stock of Hansu Store was damaged by flood. However, following particulars
were furnished from the records saved:
Stock at cost on 1.4.2072 135,000
Stock at 90% of cost on 31.3.2073 162,000
Purchases for the year ended 31.3.2073 645,000
Sales for the year ended 31.3.2073 900,000
Purchases from 1.4.2073 to 12.7.2073 225,000
Sales from 1.4.2073 to 12.7.2073 480,000
Sales upto 12.7.2073 includes Rs. 75,000 being the goods not dispatched to the customers. The
sales invoice price is Rs. 75,000. Purchases upto 12.7.2073 includes machinery acquired for Rs.
15,000.
Purchases upto 12.7.2073 does not include goods worth Rs. 30,000 received from suppliers, as
invoice not received upto the date of fire. These goods have remained in the godown at the time
of incident. The insurance policy is for Rs. 120,000 and it is subject to average clause. Ascertain
the amount of claim for loss of stock.
Investment Accounts
3. Bir Bikram purchased 5,000; 13.5% debentures of face value of Rs. 100 each of Miteri Ltd. on
1st May 2016 at Rs. 105 cum interest basis. The interest on these debentures is payable on March
end and September end respectively. On 1 st August 2016, she again purchased 2,500 of such

debentures at Rs. 102.50 each on cum interest basis. On 1 st October 2016, she sold 2,000
debentures at Rs. 103 each.
The market value of the debentures as at the close of the year was Rs. 106. Prepare the debenture
investment account in the books of Bir Bikram for the period ended 31 st December 2016on
average cost basis.
Accounting for Branches

4. A company has three branches at Thimi, Kapan and Gwarko. The Head Office at Newroad
purchases goods and sends them to branches, to be sold at a uniform percentage of profit on
cost. The following particular are made available to you to enable you to prepare a combined
Trading Account for the year ended 31 st Ashadh, 2073.
Newroad Thimi Kapan Gwarko
Rs. Rs. Rs. Rs.
Stock on 1st Shrawan, 2072 54,000 16,000 12,500 10,000
Purchases in the year 274,000 - - -
Sales - 180,000 120,000 100,000
Stock on 31st Ashadh, 2073 28,000 6,000 5,000 2,500
Branch Accounts on 1st Shrawan, 2072:
Thimi 15,000
Kapan 32,000
Gwarko 4,000
Remittances from Branch 320,000 150,000 100,000 70,000
Head Office invoices goods to the branches at fixed sales prices but maintains branch accounts in its
ledgers at cost price.
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, Rs. 360,000 and Rs. 330,000 at the end of the 1 st year 2nd year, 3rd year and 4th 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. Everest Co. Ltd. issued 200,000 shares of Rs. 100 each at a premium of Rs. 20 per share payable
as follows:
on application Rs. 20
on allotment Rs. 50 (including premium)
on First/ call Rs. 30
on second and final call Rs. 20
Applications were received for 300,000 shares and pro-rata allotment was made to applicants of
240,000 shares. Amount excess received on application was employed on account of sum due on
allotment as part of share capital. Mr. Subash, to whom, 4,000 shares were allotted, failed to pay the
allotment money and on his subsequent failure to pay the first call, his shares were forfeited and Mr.
Dhiraj, the holder of 6,000 shares failed to pay to calls and his shares were forfeited after the second
call. Of the forfeited shares, 8,000 shares were reissued to Mr. Gopal at a discount of 10%, the whole
of Dhiraj's forfeited shares being reissued. Pass necessary journal entries in the books of Everest Co.
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
9. The following is the Balance Sheet of Pathibhara Enterprises on 31st 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
The management estimates the purchases and sales for the year ended 31st 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.

Draft a Balance Sheet as at 31st 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. 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
11. The following is the Balance Sheet of Blue Star Ltd. as at 31st 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 terms 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 Big Star Ltd. Blue Star Ltd. had purchased prior to 31 st 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 31 st 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 Sheet (extract) of Big Star Ltd. as at 1st Shrawan, 2073 after the takeover.
Internal Reconstruction
12. The following is the Balance Sheet of Pokhara Light Ltd. as on 31.3.2073:
Equity shares of Rs.100 each 10,000,000 Fixed assets 12,500,000

12% cumulative preference shares of 5,000,000 Investments (Market value 1,000,000
Rs.100 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 decides
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

13. The partnership of Bara Enterprises decided to convert the partnership into private limited
company named Churimai Company Pvt. Ltd. with effect from 1 st Baisakh 2071. The
consideration was agreed at Rs. 234,00,000 based on firm‘s Balance Sheet as on 31 st Chaitra
2070. However, due to some procedural difficulties, the company could be incorporated only on
1st Shrawan 2071. Meanwhile, the business was continued on behalf of the company and the
consideration was settled on that day with interest at 12% p.a. The same books of accounts were
continued by the company, which closed its accounts for the first time on 31 st 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
To Salaries 2340,000
To Depreciation 360,000
To Advertisement 1404,000
To Discount 2340,000
To Managing Director‘s Salary 180,000
To Miscellaneous Office Expenses 240,000
To Office/Showroom Rent 1440,000
To Interest paid 1902,000
To Net Profit 3834,000
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 monthly average sales of the company from 1 st Shrawan 2071 but the salaries treble
from that date. It had to occupy additional space from 1 st 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
14. The following is the Balance Sheet of Himchuli Co. Limited as at 31st Ashadh, 2073:
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. Sundry creditor included preferential creditors Rs.
30,000. All payments were made on 31 st Ashwin 2073. Prepare the liquidator‘s final statement.
Accounting for Partnership

15. A, B and C were partners of a firm sharing profits and losses in the ratio of 3 : 4 : 3. The
Balance Sheet of the firm, as at 31 st Ashadh, 2072 was as under:
Capital Accounts: Fixed Assets 100,000
A 48,000 Current Assets:
B 64,000 Stock 30,000
C 48,000 160,000 Debtors 60,000
Reserve 20,000 Cash and Bank
30,000
Creditors 40,000
220,000 220,000
The firm had taken a Joint Life Policy for Rs. 100,000; the premium periodically paid was
charged to Income Statement. Partner C died on 30th Poush, 2072. It was agreed between the
remaining partners and the legal representatives of C that:
(i) Goodwill of the firm will be taken at Rs. 60,000.
(ii) Fixed Assets will be written down by Rs. 20,000.
(iii) In lieu of profits, C should be paid at the rate of 25% per annum on his capital as on 31 st
Ashadh, 2072.
Policy money was received and the legal representatives were paid off. The profits for the year
ended 31st Ashadh, 2073, after charging depreciation of Rs. 10,000 (depreciation upto 30 th
Poush was agreed to be Rs. 6,000) were Rs. 48,000. Legal representative claimed proportionate
profit for remaining period after death.
Partners‘ Drawings Accounts showed balances as under:
A Rs. 18,000 (drawn evenly over the year)
B Rs. 24,000 (drawn evenly over the year)
C (up-to-date of death) Rs. 20,000
On the basis of the above figures, please indicate the entitlement of the legal representatives of
C, assuming that they had not been paid anything other than the share in the Joint Life Policy.
Accounting for Non-profit making Organisation

16. 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. Capital work progress as on 31 st 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

17. SSS Bank Limited provides you the following information regarding Loan Loss provisioning as
on 31st 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.
18. 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
19. The summarized Balance Sheet of Raniban Pvt. Ltd. as on 31st December 2015 and 2016 are as
follows:
.
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 31st 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
v) Investments (cost Rs. 5,000) were sold for Rs. 4,800 in 2016 and on 1st March 2016
another investment was made for Rs. 6,250.
Nepal Accounting Standards (NAS)

20. a. Shree Ganesh Ltd. is a manufacturing company produces durable consumer goods with an annual
turnover of Rs. 100 crores. The company receives orders from its commission agents all over the
country, but goods are dispatched directly to the customers. The documents including transport
bills are sent through the bank for collection. At the end of the 6th year, it is found that documents
covering the dispatch of goods worth Rs. 10 crores were still lying with the banks not cleared by
the customers even though the normal collection period of 15 days from the date of dispatch has
expired. Should revenue be recognized in the above case?
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
21. (a). Contingent Assets
(b). Watch List in Loan loss provisioning
(c). Components of Financial Statements
(d). Government Accounting System in Nepal
(e). Prediction of insolvency on the basis of ratios
(f). Advantages of Customized Accounting Packages
(g). Non Banking Assets

SUGGESTED ANSWERS
Accounting for Departments

1. Answer:
In the books of Kumari Enterprise
Departmental Trading Account for the year ended 31.3.2073
To Opening stock 240,000 By Sales 960,000
To Purchases 540,000 By Shortage 3,600
To Gross Profit 270,450 By Closing Stock 86,850
(120,540 – 33,690)
Total 1,050,450 1,050,450
Memorandum Departmental Stock Account (at Selling Price)

To Balance b/d 336,000 By P/L A/c
(240,000+96,000) (Cost of Shortage) 3,600
To Purchases 540,000 By Memorandum Mark up A/c
To Memorandum Departmental Mark 216,000 (loading on shortage) 1,440
up By Mark up A/c (Mark down in
(Mark up on purchases) current purchases) 4,200
By Debtors (Sales) 960,000
By Memorandum Departmental
Mark up A/c (Mark down on 2,220
opening stock) 120,540
By Balance c/d
Total 1,092,000 Total 1,092,000
Memorandum Departmental Mark Up Account

To Memo. Departmental stock a/c 1,440 By Balance b/d 96,000
To Memo. Departmental stock a/c 4,200 (336,000x40/100)
To Memo. Departmental stock a/c 2,220 By To Memo. Departmental stock 216,000
To GP transferred to P/L a/c 270,450 a/c
To Balance c/d 33,690 (540,000x40/100)
(120,500 + 1,050*)x40/100 – (1,050)
Total 312,000 Total 1,092,000
* (4,200 x12,000/48,000) = 1,050)
Working Notes:
1. Calculation of cost of sales
Sales as per books 960,000
Add: Mark down in opening stock (given) 2,220
Add: Mark down in sales out of current purchases 3,150
(4,200 x 36,000/48,000)
Value of sales if there was no mark down 965,370
Less: Gross profit (40/140 of 965,370) subject to mark down (2,220+3.150) 275,820
Cost of sales 689,550
2. Calculation of closing stock

Opening stock 240,000
Add: Purchases 540,000
Less: cost of sales 689,550
Less: Shortage 3,600

Closing stock 86,850
Insurance Claim
2. Answer:
In the books of Hansu Store
Trading Account for the year ended 31.3.2073
To Purchases 645,000 By Closing Stock 180,000
To Gross Profit 300,000 (162,000X90/100)
Total 1,080,000 1,080,000
Memorandum Trading Account

for the period form 1.4.2073 to 12.7.2073
To Purchases 225,000 Less: goods not (75,000) 405,000
Add: goods received but invoice 30,000 dispatched
not (15,000) 240,000 By Closing Stock 150,000
Less: machinery purchased 135,000 (balancing figure)
To Gross Profit (working note)
Total 555,000 Total 555,000
Calculation of insurance claim

Claim subject to average clause: 120,000X150,000/150,0000 = 120,000
Working note:
Gross profit ratio = (300,000/900,000)X 100% = 1/3rd on sales
Amount of gross profit = 405,000 x 1/3 = 135,000
Investment Accounts
3. Answer:
In the books of Bir Bikram
Investment Account (13.5% Debenture)
for the period ended 31.12.2016
Dr. Cr.
Date Particulars Nomina Amoun Interest Date Particulars Nomina Amount Interest
l Value t (Rs.) l Value (Rs.) (Rs.)
(Rs.) (Rs.) (Rs.)
1.5.2016 Bank A/c 500,00 519,37 5,625 30.9.201 Bank A/c 50,625
0 5 6
1.8.2016 Bank A/c 250,00 245,00 11,250 1.10.201 Bank A/c 200,00 206,000 -
0 0 6 0
1.10.2016 P & L A/c  2,167 - 31.12.20 Balance 550,00 560,542 18,563
16 c/d 0
31.12.201 P & L A/c - - 52,313
6
750,00 766,54 69,188 750,00 766,542 69,188
0 2 0

Working Notes:
(i) Interest paid on Rs. 500,000 purchased on 1st May 2016 for the month of April 2016 as part of
purchase price; 500,000 x 13.5% x 1/12 = 5,625
(ii) Interest received on 30 th September 2016
On Rs. 500,000 = 500,000 x 13.5% for 6 months = 33,750
On Rs. 250,000 = 250,000 x 13.5% for 6 months = 16,875
Total 50,625
st
(iii) Interest paid on Rs. 250,000 purchased on 1 August 2016 for April 2016 to July 2016 as part of
purchase price = 250,000 x 13.5% x for 4 months = 11,250
(iv) Loss on sale of debentures
Cost of acquisition = (519,375 + 245,000) x Rs. 200,000/750,000 = 203,833
Less: sale price (2,000 x 103) = 206,000
Profit on sale = 2,167
(v) Cost of balance debentures = (519,375 + 245,000) x Rs. 550,000/750,000 = 560,542
Accounting for Branches

4. Answer:
Combined Trading Account
For the year ended 31st Ashadh 2073
Particular Newroad Thimi Kapan Gwarko Total

To Opening stock at cost 54,000 12,800 10,000 8,000 84,800
(Working note iv)
To Purchases 274,000 - - -
To Goods received from HO at - 136,000 90,000 74,000 300,000
cost (balancing figure)
To Gross profit @ 20% on Sales 36,000 24,000 20,000 80,000
Total 328,000 184,800 124,000 102,000 738,800
By Sales - 180,000 120,000 100,000 400,000
By Goods sent to branch at cost 300,000 - - - 300,000
By Closing Stock at cost 28,000 4,800 4,000 2,000 38,800
(working note iv)
Total 328,000 184,800 124,000 102,000 738,800
Working Notes:
i). Calculation of cost of Stock sent to all branches
Opening stock at HO 54,000
Add: Total Purchases at HO 274,000
Less: Closing stock at HO (28,000)
Goods sent to branches at cost 300,000
ii). Calculation of invoice of goods received from HO by all branches

Closing stock at branch level (total) 13,500
Add: Total sales 400,000
Less: Opening stock at branch level (total) (38,500)
Goods received from HO (total) 375,000
iii) Calculation of profit margin on goods sent to the branches

Goods sent to branches at Invoice Price 375,000
Less: Goods sent to branches at cost price (300,000)
Profit 75,000
Rate of profit margin is 20% of Invoice price or 25% of cost price
iv). Valuation of stock at cost price

Opening Stock Closing stock
Thimi 16,000x80%= 12,800 6,000x80%=4,800
Kapan 12,500x80%=10,000 5,000x80%=4,000
Gwarko 10,000x80%=8,000 2,500x80%=2,000
Hire Purchase Transactions

5. Answer:
(a) Calculation of Interest for each year:
Interest for 1st year = Rs. 300,000 x 150/360 = Rs. 125,000
Interest for 2nd year = Rs. 300,000 x 108/360 = Rs. 90,000
Interest for 3rd year = Rs. 300,000 x 69/360 = Rs. 57,500
Interest for 4th 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
Beginning of each Year End 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:
Journal Entries
In the books of Everest Co. Ltd.
Bank A/c Dr. 6,000,000
To Share Application A/c 6,000,000
(Being application amount received)
Share Application A/c Dr. 6,000,000
To Share Capital A/c 4,000,000
To Bank A/c 1,200,000
To Share Allotment A/c 800,000
(Being application money transferred to share capital,
refunded and excess transferred to allotment )
Share Allotment a/c Dr. 10,000,000
To Share Premium A/c 4,000,000
(Being allotment amount due)
Bank A/c Dr. 9,016,000
Calls in Arrear A/c Dr. 184,000
To Share Allotment A/c 9,200,000
(Being allotment money received except from Mr. Subash)
Share First Call A/c Dr. 6,000,000
(Being first call amount due)
Bank A/c Dr. 5,700,000
To Share First Call A/c 6,000,000
(Being first call money received except from Mr. Subash
and Mr. Dhiraj)
Share Capital A/c Dr. 320,000
Share Premium a/c Dr. 80,000
To Calls in Arrear A/c 304,000
To Share Forfeiture A/c 96,000
(Being forfeiture of shares of Mr. Subash)
Share Final Call A/c Dr. 3,920,000
(Being final call amount due)
Bank A/c Dr. 3,800,000
To Share Final Call A/c 3,920,000
(Being final call money received except from Mr. Dhiraj)
Share Capital A/c Dr. 600,000
To Calls in Arrear A/c 300,000
To Share Forfeiture A/c 300,000
(Being forfeiture of shares of Mr. Dhiraj)
Bank A/c Dr. 720,000
Share Forfeiture A/c Dr. 80,000
To Share Capital A/c 800,000
(Being re-issue of shares @ 90 to Mr. Gopal as fully paid
up)
Share Forfeiture a/c Dr. 268,000
To Capital Reserve A/c 268,000
(Being forfeiture amount transferred to capital Reserve
A/c)
Working Note:
1. No. of Shares applied by Mr. Subash = (240,000/200,000) x 4,000 = 4,800

2. Amount paid my Mr. Subash at the time of application = 4,800 x 20 = 96,000
3. Forfeiture amount available for use = full of Mr. Dhiraj (300,000) + half of Mr. Subash
(96,000/2)
=348,000
4. Amount Transferred to capital reserve = 348,000 – 80,000 = 266,000
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 3,090,000 1,710,000 1,200,000
per share
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
as on 31st Ashadh, 2073
Capital 1,000,000 Fixed Assets 400,000
Profit & Loss Account as on Additions 100,000
1st 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 trade 336,000
Sundry Debtors 200,000
Cash & Bank Balances 558,000
1,544,000 1,544,000
Working Notes:
Projected Trading and Profit and Loss Account
for the year ended 31st 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

1st Shrawan, 2072 to 31st 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

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 Share Holders 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 610,000
Ltd.
To Bank A/c 176,000
880,000 880,000
Big Star Ltd.

Balance Sheet as on 1 st Shrawan, 2073 (An extract)
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 194,000
26,000
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 Ltd. on profit. Unrealized profit on this stock will be
40,000 25,000
1,00,000
1,60,000
As Big Star Ltd. purchased assets of Blue Star Ltd. at a price 10% less than (10,000)
the book value, 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.
Internal Reconstruction
12. 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
(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
(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
(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
Issued, subscribed and paid up Fixed Assets 87,50,000
capital: 52,00,000 (1,25,00,000 – 37,50,000)
1,30,000 equity shares of Rs.40 each
12% Cumulative Preference Shares Investments 9,50,000
of Rs. 60 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
13. 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 = 3x1 = 3 12 x 3 = 36
1:12
4. calculation of interest 234,00,000 x 12% for 3 100,00,000 x 12% for 1 year
months Rs. 1200,000
Rs. 702,000
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

14. Answer:
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 & Machinery360,000 640,000 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
(upto 31st 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

15. Answer:
Computation of entitlement of legal representatives of C
(1) Profits for the half year ended 31 st Ashadh, 2073
Rs.
st
Profits for the year ended 31 Ashadh, 2073 (after depreciation) 48,000
Add: Depreciation 10,000
Profits before depreciation 58,000
Profits for the first half (assumed: evenly spread) 29,000
Less: Depreciation for the first half 6,000
Profits for the first half year (after depreciation) 23,000
Profits for the second half (i.e., 1 st Magh, 2072 to 31st Ashadh, 2073)29,000
Less: Depreciation for the second half 4,000

Profits for the second half year (after depreciation) 25,000
th
(2) Capital Accounts of Partners as on 30 Poush, 2072
Dr. Cr.
A B C A B C
Rs. Rs. Rs. Rs. Rs. Rs.
To Fixed Assets By Balance b/d 48,000 64,000 48,000
(loss on revaluation) 6,000 8,000 6,000 By Reserve 6,000 8,000 6,000
By Goodwill 18,000 24,000 18,000
To Drawings 9,000 12,000 20,000 By Interest
To C Executor‘s A/c 52,000 (Rs. 48,000 @ 25%
To Balance c/d 57,000 76,000 – for 6 months) — — 6,000
72,000 96,000 78,000 72,000 96,000 78,000

(3) Calculation of Proportionate profit to Legal Representative of C
Profit for the second half = 25,000
Proportionate profit to C‘s legal representative = 25,000 x 52,000/(57,000+76,000+52,000)
= 7,027
(4) Amount due to legal representative of C Rs.
Balance in C‘s Executor‘s account 52,000
Amount of profit earned out of unsettled capital [calculated in (3)] 7,027
Total Amount due 59,027
Accounting for Non-profit making organization

16. Answer:
Solution
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

(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

(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)
Trial Balance of Building Fund as on 31st 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

17. Answer:
Calculation of Loan Loss Provisioning
Provision
as on Amount
Loan 31st 31st
Amount 31st Ashad Additional Ashad Rate of Total
Category Ashad 2072 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. 30,00,000
To Cash A/c 30,00,000
(Being Loans given during the year. Assumed that all the loans
are taken in cash)
Profit and Loss A/c
Dr. 2,00,000
Restructured Loans 2,00,000
Dr. 3,00,000
Substandard Loans Dr. 5,00,000
To Pass Loans 1,50,000
To Doubtful Loans 50,000
To Bad Loans

(Being changes of in various categories of loans and advances
during the 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 75,000
provisioning during the 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 1,25,000
during the 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.
18. 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

19. Answer:
Cash Flow Statement for the year ended on 31st December 2016

Particular Rs. Rs.
1. CCash Flow from Operating Activities
aNet profit before tax 28,800
s Adjustments:
hDepreciation 3,050
Increase in provision for doubtful debt 200
FDecrease in stock 2,000
l Decrease in creditor (3,370)
oIncrease in Debtor (230)
wIncome Tax Paid (18,000)
Net Cash from Operating Activities 12,450
2. SCash Flow from Investing Activities
t Investment Purchased (6,250)
aSale of Investment 4,800
t Plant Purchased (5,000)
eNet Cash Flow from Investing Activities (6,450)
3. mCash Flow from Financing Activities
ePayment of Interim Dividend (5,000)
nNet increase in cash equivalent 1,000
t Add: Opening Cash Balance 8,000
Closing Cash Balance 9,000
Adjusted Profit and Loss Account

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

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
20. Answers:
a) According to NAS - 18 on Revenue, revenue from the sale of goods shall be recognized when
 the seller of goods has transferred to the buyer the significant risks and rewards of
ownership of the goods;
 the seller retains neither continuing managerial involvement to the degree usually associated
with ownership nor effective control over the goods sold;
 the amount of revenue can be measured reliably.
 It is probable that the economic benefits associated with the transaction will flow to the
entity; and
 The costs incurred or to be incurred in respect of the transaction can be measured reliably.
Since the transport bills were sent through the bank for collection, it may be said that the seller
entity has retained effective control over the ownership of goods. Further since the documents
were not cleared by the customer even after the expiry of the normal period of collection, there
is an uncertainty in the realization of sale proceeds. Apparently, the amount also appears to be
quite material being 10% of total turnover. Hence, revenue should not be recognized in this
case.
(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

21. 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.
(c). Components of Financial Statements

A complete set of financial statement includes the following components:
1. A statement showing financial position as at the end of the period;
2. A statement of profit or loss and other comprehensive income for the period;
3. A statement of changes in equity for the period;
4. A statement of cash flows for the period;
5. Notes comprising a summary of significant accounting policies and other explanatory
information; and
6. A statement of financial position as at the beginning of the earliest comparative period
when an entity applies an accounting policy retrospectively or makes a retrospective
restatement of items in its financial statements, or when it reclassifies items in its financial
statements.
(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). Prediction of insolvency on the basis of ratios
The relevance of the ratios in predicting insolvency can be elaborated with the help of the
following illustrative ratios as below:
Working capital to total assets indicates the liquidity position of the firm. If the ratio is too
low it indicates inability of the firm to carry on its day to day activities. If it is negative, the
firm will not have fund for its day to operations. If such situation continues, the firm may be
forced to suspend its operations and it may result insolvency in the long run.

Similarly, ratio of sales to total assets indicates the utilization of its assets to generate sales
which ultimately generates surplus for the firm. If it is too low, it indicates that the firm is
keeping idle assets which in long run may result to insolvency.
Another example can be given of retained earnings to total assets. Retained earnings are
cushion for firm‘s health. So if it is too thin it may indicate that firm has very low leverage
and is posed to insolvency earlier.
(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.

Audit and Assurance

Question No 1:
The Auditor is responsible for maintaining an attitude of Professional Skepticism throughout the audit.
Do you agree with the statement?
Question No 2:
―The Auditor is faced with sampling risk in both tests of control and substantive procedures‖. Comment
on this statement with reference to NSA 530 on ―Audit Sampling and other means of testing‖.
Question No 3
―Under NSA–315, an Auditor shall obtain an understanding of the Entity and its Environment‖. What
aspects of the environment should the Auditor cover in this regard?
Question No 4
Designing an Audit Strategy is the backbone of the ―Audit Planning‖ process. Discuss.
Question No 5
What should be the considerations of the auditor to assess Risk of Material Misstatement and
his response to such risks in auditing the company account?
Question No 6
As an auditor of Goodday Ltd. you observed that internal controls were not in use throughout the
period covered under audit. What are the controls objectives you would like to consider to achieve
your purpose?
Question No 7
State the Generalizations about the Reliability of Audit Evidence:
Question No 8
How do you vouch the Patents right obtained by the company
Question No 9
How do you vouch refund of General Insurance Premium paid?
Question No 10
New Pashmina Enterprises (Private) Limited operates a small factory manufacturing garments out of
handloom material for an exclusive shop in a five star hotel. The factory is owned by the owners of the
shop who are more involved with operating the shop and factory is run by a Factory Manager. The
material for the factory are manufactured by around 10 self-employed individuals who are registered
with New Pashmina Enterprises. Each of these individuals is informed of a design and a colour for the
fabric they need to produce by the Factory Manager. New Pashmina Enterprises purchases the entire
quantity of material manufactured by these individuals. These individuals could supply any quantity of
fabric each month. However, minimum quantity supplied at a time is required to be more than 20 metres.
The Factory Manager receives these material and checks for damages and quality. During the period of
audit, auditor was provided following details of wastages of raw materials in percentage, for various
months. You have been asked to enquire into causes of abnormal wastage of raw materials. Draw out an
audit plan.

Wastage percentage are
Bhadra 2073 1.25%

Ashwin 2073 2.17%
Kartik 2073 4.4%
Mangshir 2073 5.1%
Question No 11
Nepal Brick Manufacture Pvt. Ltd. has submitted the financial statements for the year ended
31.03.2073 for audit. The audit assistant observes and brings to your notice that the company's
records show following dues:
Demand for Environment Hazard relating to financial Year 2070-71 R s 36 lacs - Appeal is
pending before District Court since 30-9-72.
As an auditor, how would you bring this fact to the members?
Question No 12
Director of MegaTrend Ltd. draws an advance of US$ 280 per day in connection with the foreign trip
undertaken on behalf of the company. On his return ,he submit the hotel bill of US $ 170 and for
remaining amount he files a declaration stating that amount was spend on local market and local
travelling for which no bill was provided. MegaTrend Ltd. books the balance expenses on the basis of
such declaration. As the auditor of MegaTrend Ltd. how do you deal with this?
Question No 13
Pioneer Cement Ltd. had received a grant of 340 lacs in 2068 from a Nepal Government towards
installation of pollution control machinery on fulfillment of certain conditions. The company,
however, failed to comply with the said conditions and consequently was required to refund the said
amount in 2073
The company debited the said amount to its machinery in 2073 on payment of the same. It also
reworked the depreciation for the said machinery from the date of its purchase and passed necessary
adjusting entries in the year 2073 to incorporate the retrospective impact of the same.
Question No 14
Dhakal Pashmina Product Pvt. Ltd., manufacturing garments, has valued at the year end its closing
inventory of packed finished goods for which company export contracts have been received, at
realizable value inclusive of profit and export cash incentive. As at the year end, the ownership
of the goods has not been transferred to the foreign buyers.
Question No 15
A Nepal Housing Company L t d has constructed a mall and entered into agreement with tenants
towards license fees (monthly rental) and variable license fees, a percentage on the turnover of the
tenant (on an annual basis). Chief Finance Officer wants to account/recognize license fee as
income for 12 months during current year and variable license fees as income during next year,
since invoice is raised in the subsequent year. As an auditor, how would you deal and state in the
statement of Accounting policies?

Question No 16
Premier Garment Ltd. is a manufacturer of readymade garments. It sells its products to franchisees
located across the country. Readymade garment industry is subject to change in trends of fashion
and as such, some of the goods are returned and Premier Garment Ltd. accepts them back as sales
returns. On the basis of past trends such returns are estimated to be at 20% of the sales of any
year. For the financial year 2072-73 Premier Garment Ltd. had accounted for the actual sales
return made upto 31st Ashad 2072 but has not reversed the possible expected return that are
likely to happen after 31st Ashad 2073, in respect of the sale made for the FY 2072-73 Mr. X the
auditor of Premier Garment Ltd wants this to be considered in the accounts for the year ended on
31st Ashad 2073but the company is of the opinion that although there is a probability of some
goods being returned by the franchisees, there is no significant uncertainty regarding the amount
of consideration that will be derived from the sale of goods, since the goods are not in the
possession of the company and risk and rewards of ownership still lie with the franchisees and
the company cannot record sales returns in its books of account in respect of goods that are
likely to be received after the date of balance sheet. Comment.
Question No 17
In the notes to accounts of Sangrilla hardware Ltd. as on 31-03-2073 states that 'Certain machinery
items are lying at customs warehouses birjung and company has paid Rs 70 lakhs up to 30-06-2072
as detention charges, out of which a sum of Rs 4300 lakhs is written back during the year 2072-
73based on settlement with the concerned authorities in respect of a major spares of machinery. For
the remaining machinery items negotiations are pending and total amount of Rs 270 lakhs
paid/provided on account of detention charges have been capitalized and included in the Fixed
Assets/Capital work in progress. The management is of the view that these expenses are directly
attributable to the acquisition of the related Fixed Asset.
Question No 18
Gorkha Foods and Breverage Ltd. provided Rs 34 lakhs for Inventory obsolence in 2072-73. In the
subsequent years, it was determined that 50% of such inventory was usable. The Board of Directors
wants to adjust the same through prior period adjustment.
Question No 19
Under the applicable Standards on Auditing, in what circumstances does the report of the
statutory auditor require modifications? What are the types of modifications possible to the said
report?
Question No 20
Write a short note on Emphasis of matter paragraph in Audit Reports.
Question No 21
Write short note on Performance audit as per ISSAI framework
Question No 22
BRSK & Company have been appointed to audit the accounts of a Clinic What special steps will
you as an auditor suggest to take into consideration in auditing the accounts of this hospital?
Question No 23
M/s SRK & Associates have been appointed to audit the accounts of a Five Star Hotel in Pokhara.
What special steps will you as an auditor suggest to take into consideration in auditing the
accounts of this hotel?
Question No 24
M/s BNP & Associates have been appointed to audit the accounts of a leasing company in Pokhara.
What considerations are to be kept in mind while conducting audit of leasing transaction of a
leasing company?
Question No 25
Indicate briefly the procedures to identify subsequent events requiring adjustment of or disclosure
in the financial statements.

Suggested Answers
Answer No 1:
An attitude of professional skepticism is necessary throughout the audit process for the auditor to reduce
the risk of overlooking unusual circumstances, or over generalizing when drawing conclusions from
audit observations, and of using faulty assumptions in determining the nature, timing and extent of the
audit procedures and evaluating the results thereof. The auditor should plan and perform an audit with an
attitude of professional skepticism recognizing that circumstances may exist that cause the financial
statements to be materially misstated. It is the auditor responsibility to makes a critical assessment, with
a questioning mind, of the validity of audit evidence obtained and is alert to audit evidence that
contradicts or brings into question the reliability of documents and responses to inquiries and other
information obtained from management and those charged with governance. When making inquiries and
performing other audit procedures, the auditor should not be satisfied with less-than persuasive audit
evidence based on a belief that management and those charged with governance are honest and have
integrity. Accordingly, representations from management are also not a substitute for obtaining sufficient
appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor‘s
opinion.
Answer No 2
Audit sampling involves the application of audit procedures to less than 100% of items within a class of
transactions or account balance such that all sampling units have a chance of selection. This will enable
the auditor to obtain and evaluate audit evidence about some characteristic of the items selected in order
to form or assist in forming a conclusion concerning the population from which the sample is drawn.
Sampling risk arises from the possibility that the auditor‘s conclusion, based on a sample may be
different from the conclusion reached if the entire population were subjected to the same audit procedure
Sampling Risk can lead to two types of erroneous conclusions –
In the case of test of control, that controls are most effective than they actually are , or in case of test of
details, that the material misstatement does not exit when in fact it does. The auditor is primarily
concerned with this type of erroneous conclusion because it affect audit effectiveness and is more likely
to lead to an inappropriate audit opinion
In the case of test of control, that controls are less effective than they actually are , or in case of test of
details, that the material misstatement exit when in fact it does not. The auditor is primarily concerned
with this type of erroneous conclusion because it affect audit efficiency as it would usually lead to
additional work to establish that initial conclusion were incorrect.
Answer No 3
In the process of obtaining an understanding of the entity, the auditor should obtain an understanding of
the entity and its environment, including its internal control, sufficient to identify and assess the risks of
material misstatement of the financial statements whether due to fraud or error, and sufficient to design
and perform further audit procedures.
The auditor‘s understanding of the entity and its environment consists of an understanding of the
following aspects:
1. Relevant Industry, Regulatory, and Other External Factors including the applicable financial
reporting framework.
2. Nature of the Entity, including the entity‘s selection and application of accounting policies, including
the reasons for changes thereto.
3. Internal control including (a) its operations, (b) its ownership and governance structures, (c) the types
of investments that the Entity is making and plans to make and (d) the way that the Entity is
structured and how it is financed, (e) existence of Special Purpose Entities, if any to enable the

Auditor to understand the classes of transactions, account balances, and disclosures to be expected in
the Financial Statements.
4. The Entity‘s objectives and strategies and the related business risks that may result in a material
misstatement of the financial statements.
5. Measurement and Review of the Entity‘s financial performance.
Answer No 4
Audit strategy is concerned with designing optimised audit approaches that seeks to achieve the
necessary audit assurance at the lowest cost within the constraints of the information available.
The formulation of audit strategy form the basis of audit planning to achieve the audit objectives in
the most efficient and effective manner. Audit strategy generally involves the following steps:
(i) Obtaining Knowledge of Business:
Knowledge of the business is a frame of reference within which the auditor exercises professional
judgement. Understanding the business and using the information about business assists the
auditor in assessing risks and identifying problems, planning and performing the audit effectively and
efficiently. It also ensures that the audit staff assigned to an audit engagement obtains sufficient
knowledge of the business to enable them to carry out the audit work delegated to them. This would
also ensure that the audit staff understands the need to be alert for additional information and the
need to share that information with the auditor and the other audit staff. In performing an audit of
financial statements, the auditor should have or obtain knowledge of the business sufficient to
enable the auditor to identify and understand the events, transactions and practices that, in the
auditor‘s judgement, may have a significant effect on the financial statements or on the
examination or audit report
(ii) Performing Analytical Procedures:
The use of the analytical procedures during the planning stage requires the extensive use of
accounting and business knowledge and experience to assess the potential for material misstatement
in the financial statements as a whole, because the key aspect of the task is to identify the
relevant risk indicators and to interpret them properly. Furthermore, analytical techniques applied
during the planning stage are not generally as precise as the analytical techniques at the substantive
stage rather it is attention-directing.
(iii) Evaluating Inherent Risk:
To assess inherent risk, the auditor would use professional judgement to evaluate numerous factors
such as quality of accounting system, unusual pressure on management, etc. having regard to his
experience of the entity from previous audit engagements of the entity, any controls established by
management to compensate for a high level of inherent risk, and his knowledge of any significant
changes which, might have taken place since his last assessment.
(iv) Evaluating Internal Control:
The auditor‘s assessment of the control environment is crucial to the decision on whether to make
an extended assessment of controls. This is because a good control environment is conducive to the
maintenance of a reliable system of accounting and control procedures. For strategy purposes, the
auditor should obtain a sufficient understanding of the control environment. The auditor needs an
understanding of the accounting systems, regardless of whether the audit strategy will involve an
extended assessment of internal accounting controls. This is done by:
(i) considering the results of gathering or updating information about the client; and
(ii) making preliminary judgements about materiality, inherent risk and control effectiveness.
These will include identification of the system(s) the auditor proposes to subject to an
extended assessment of controls.

Thus, the audit strategy is evolved after considering the engagement objectives, the results of the
business review, preliminary judgements as to materiality and identified inherent risks.
Audit strategy also considers main points relating to planning and controlling the audit or
comments on adequacy of the existing arrangements. Thus, the overall audit plan involving
determination of timing, manpower, coordination and the directions in which the audit work has to
proceed is dependent upon the audit strategy formulated by the audit firm.
Answer No 5
As per N SA 315, the auditor shall identify and assess the risks of material misstatement at the
financial statement level; and the assertion level for classes of transactions, account balances, and
disclosures to provide a basis for designing and performing further audit procedures. For this
purpose, the auditor shall:
(i) Identify risks throughout the process of obtaining an understanding of the entity and its
environment, including relevant controls that relate to the risks, and by considering the
classes of transactions, account balances, and disclosures in the financial statements;
(ii) Assess the identified risks, and evaluate whether they relate more pervasively to the financial
statements as a whole and potentially affect many assertions;
(iii) Relate the identified risks to what can go wrong at the assertion level, taking account of
relevant controls that the auditor intends to test; and
(iv) Consider the likelihood of misstatement, including the possibility of multiple misstatements,
and whether the potential misstatement is of a magnitude that could result in a material
misstatement.
The auditor shall design and implement overall responses to address the assessed risks of material
misstatement. In designing the audit procedures to be performed, the auditor shall:
(i) Consider the reasons for the assessment given to the risk of material misstatement at the
assertion level for each class of transactions, account balance, and disclosure, including:
• The likelihood of material misstatement due to the particular characteristics of the relevant
class of transactions, account balance, or disclosure; and
• Whether the risk assessment takes into account the relevant controls, thereby requiring
the auditor to obtain audit evidence to determine whether the controls are operating
effectively; and
(ii) Obtain more persuasive audit evidence the higher the auditor‘s assessment of risk.
Answer no 6
The auditor‘s knowledge about the presence or absence of control activities obtained from the
understanding of the other components of internal control assists the auditor in determining
whether it is necessary to devote additional attention to obtaining an understanding of control
activities. Thus, the auditor should consider whether the internal control were in use throughout
the period or not. In the absence of the same, the auditor should consider the following control
objectives for to achieve the purpose:
(i) Policies and procedures adopted by the company for ensuring the orderly and efficient
conduct of its business.
(ii) Adherence to company‘s policies.
(iii) Safeguarding of its assets.
(iv) Prevention and detection of frauds and errors.
(v) Accuracy and completeness of the accounting records.
(vi) Timely preparation of reliable financial information.
(vii) Reliability of entity‘s financial reporting.
(viii) Compliance with applicable laws and regulations.
(ix) Effectiveness and efficiency of its operation.
(x) Assets are verified at reasonable intervals and appropriate action is taken with regard to the
discrepancies.
(xi) Proper authorization of transactions.
(xii) Risk assessment procedures.
(xiii) Monitoring of accounting/financial controls.
(xiv) Changes occurred in the accounting and internal control systems during the period.
(xv) Nature, timing and extent of substantive procedures which the auditor plans to carry out.
(xvi) Nature and amount of the transactions and other events and the balance involved.
(xvii) Supervisory and Physical controls.
(xviii)Reviews of performance.
(xix) Systematic information processing.
(xx) Ensure segregation of duties.
Answer No 7
The reliability of information to be used as audit evidence is influenced by its source, nature, and the
circumstances under which it is obtained, including the controls over its preparation and maintenance.
Even when information to be used as audit evidence is obtained from sources external to the entity,
circumstances may exist that could affect its reliability. For example, information obtained from an
independent external source may not be reliable if the source is not knowledgeable, or a management‟s
expert may lack objectivity. While recognising that exceptions may exist, the following generalisations
about the reliability of audit evidence may be useful:
a. Independent Source
The reliability of audit evidence is increased when it is obtained from independent sources outside the
entity.
b. Effective internal control system
The reliability of audit evidence that is generated internally is increased when the related controls,
including its preparation and maintenance, imposed by the entity are effective.
c. Method of obtaining
Audit evidence obtained directly by the auditor (for example, observation of the application of a control)
is more reliable than audit evidence obtained indirectly or by inference (for example, inquiry about the
application of a control).
d. Form of Audit Document
Audit evidence in documentary form, whether paper, electronic, or other medium, is more reliable than
evidence obtained orally (for example, a contemporaneously written record of a meeting is more reliable
than a subsequent oral representation of the matters discussed).
e. Type of Audit Documents
Audit evidence provided by original documents is more reliable than audit evidence provided by
photocopies or facsimiles, or documents that have been filmed, digitised or otherwise transformed into
electronic form, the reliability of which may depend on the controls over their preparation and
maintenance.
Answer No 8
Matters to be verified in the audit of Patents
• Obtain the list of Patents owned by the Entity as on the Balance Sheet date.
• Examine the dates of registration of Patents with the related authorities and the dates in respect of the
last renewal.
• Obtain the Patent Purchase Agreement and verify / note the following items –
o Powers of Vendor (Seller of Patents) to sell Patent Rights.
o Proper transfer / conveyance of title in favour of the Client (buyer of Patent Rights).
o Manner of payment of purchase consideration – whether lumpsum payment or lumpsum plus
annual royalties, etc.
o Period during which rights are alive
o details of fees to be paid in order to renew Patent Rights.
o Receipts given by Vendor
• Verify whether –
o Amount of consideration paid to Vendor is in tune with the agreement.
o Details of incidental expenses relating to patent purchase e.g. stamp duty, have been properly
capitalised.
• Confirm that Patents are included in the Asset Register or Patent Register for the period under
consideration.
• In case of self–generated Patent Rights, ensure that all costs incurred on their development including
legal and registration expenses for registration are included in the cost.
• Verify the accounting entries as regards Capital / Revenue distinction –
(a) Capitalisation of Lumpsum or other purchase consideration for patent purchased.
(b) Revenue Expenditure for renewal fees paid in respect of patents.
• Examine the valuation of the Patent Rights. It should be seen that the Patent Rights have been valued
at Cost less Depreciation attributable to the expired legal life of the Patent Rights.
• When the product covered by the Patent Rights does not have any sale value, then patents should be
shown at Nil value, irrespective of any residual value.
• Ensure that the Carrying Amount of Patents has been adequately disclosed in the Balance Sheet in
accordance with NAS
Answer No 9
The refund of insurance premium may be because of earlier provisional payment of premium or
may be a policy might have been cancelled at a later date. The auditor should take following steps
while vouching such refunds-
(i) Ascertain the reasons for refund of insurance premium.
(ii) Examine insurance policy or cover note to find out the amount of premium.
(iii) Verify advice of refund received from the insurance company which insurance company sends
when refund is admitted.
(iv) Scrutinise correspondence between the insurance company and the client.
(v) Check entries in the bank book or the bank statement. If necessary, the counterfoil of the pay-in-
slips can also be verified.
Answer No 10
The auditor should assess the general requirements to locate the reasons for the abnormal wastage, as
under:
(i) Procure a list of raw materials, showing the names and detailed characteristics of each raw material.
(ii) Examine laboratory reports and inspection reports to find out if raw materials purchased were of a
poor quality or were of sub-standard quality. This will be most useful if it is possible to identify the
wastage out of each lot that has been purchased.
(iii) Examine the various records maintained for recording separately the various lots purchased and
identification of each lot with actual material consumption and for ascertaining actual wastage
figures therein.
(iv) Examine inventory plans and procedures in report of transportation storage efficiency, deterioration,
pilferage and whether the same are audited regularly.
(v) Obtain the standard consumption figures, and ascertain the basis according to which normal wastage
figures have been worked out. Examine the break-up of a normal wastage into that in process,
storage and handling stages. Also obtain control reports, if any, in respect of manufacturing costs
with reference to predetermined standards.
(vi) A high rate of rejections in the finished lots may also be responsible for abnormal wastage;
therefore, examine the inspectors‘ reports in respect of inspection carried out on the completion of
each stage of work or process.
(vii) Examine whether any new production line was taken up during the month in respect of which
standard input-output ratio is yet to be set-up.
(viii) Obtain reports of Maintenance schedule of machinery to ensure that the poor quality of goods
manufacture is not of sub-standard nature or leads to high scrappage work.
(ix) Check the machine utilisation statements as machine breakdown, power failure, etc. may also result
into loss of materials in process.
(x) Assess whether personnel employed are properly trained and working efficiently.
(xi) See whether quality control techniques have been consistent or have undergone any change.
(xii) It is possible that the wastage may have occurred because the particular lot out of which issues were
made was lying in the store for a long time, leading to deterioration in quality or because of a change
in the weather which may have led to the deterioration. Compare the wastage figures.
(xiii) Examine whether the basis adopted for calculating wastage is the same for all the months.
(xiv) Obtain a statement showing break up of wastage figures in storage, handling and process for the
four months under reference and compare the results of the analysis for each of the four months.
(xv) Abnormal wastage in storage and handling may arise due to the following reasons:
(i) Write offs on account of reconciliation of physical and book inventories: In case of periodical
physical inventory taking, such write offs will be reflected only in the month such
reconciliation takes place.
(ii) Accidental, theft or fire losses in storage: The auditor should examine the possibility of these for
the purpose.
Answer No 11
It is the responsibility of management, with the oversight of those charged with governance, to
ensure that the entity‘s operations are conducted in accordance with the provisions of laws and
regulations, including compliance with the provisions of laws and regulations that determine the
reported amounts and disclosures in an entity‘s financial statements.
The auditor is responsible for obtaining reasonable assurance that the financial statements, taken
as a whole, are free from material misstatement, whether caused by fraud or error. In conducting
an audit of financial statements, the auditor takes into account the applicable legal and regulatory
framework. Owing to the inherent limitations of an audit, there is an unavoidable risk that some
material misstatements in the financial statements may not be detected, even though the audit is
properly planned and performed in accordance with the N SAs. If the auditor concludes that the
non-compliance has a material effect on the financial statements, and has not been adequately
reflected in the financial statements, the auditor shall express a qualified or adverse opinion on
the financial statements.
In the present case, there is Fine for Environment Hazard of Rs 36 Lacs and the company has gone
for an appeal, it needs considerations as to whether the entire demand is disputed on logical basis.
As per NAS 12 ―Provisions, Contingent Liabilities and Contingent Assets‖, partly to the extent
the company considers that the demand is based on some logical basis, that amount may be
provided for and the remaining may be disclosed as the contingent liability. Further, it should be
brought to notice of the members by reporting.
Answer no 12
NSA 500 ―Audit Evidence‖ states that an auditor should obtain sufficient appropriate audit
evidence to be able to draw reasonable conclusions on which to base his option.
In the context of the facts of case, ascertain whether the payment made by the company for the
foreign trip form an ―allowance‖ or ―reimbursement‖. An allowance is a fixed sum of money
allowed or the basis of specified criteria. No evidence supporting the expenditure is required for
payment of allowance to the director. On the other hand, if the payment is reimbursement should be
against actual expenditure.
Since the director has given only a declaration, the auditor should ascertain other relevant facts
as to whether the advance paid is pursuant to the policy of the company which is based on
approximate estimation of the expenditure normally incurred by a person of the status of a
director and the same is applicable to persons of a similar status within the company. If the
auditor considers the advance taken is reasonable then the declaration can be considered
adequate, otherwise he may have to call for additional documentary evidences.
Answer No 13
NAS 10, ―Accounting for Government Grants‖, requires that the amount refundable in respect of a
government grant related to a specific fixed asset is recorded by increasing the book value of the asset
or by reducing the capital reserve or the deferred income balance, as appropriate, by the amount
refundable. The Standard further makes it clear that in the first alternative, i.e., where the book value
of the asset is increased, depreciation on the revised book value should be provided prospe ctively over
the residual useful life of the asset.
As per facts of the case, Pioneer Cement Ltd. had received a grant of 340 lacs in 2068 from a Nepal
Government towards installation of pollution control machinery on fulfilment of certain conditions.
However, the amount of grant has to be refunded since it failed to comply with the prescribed
conditions. In such circumstances, the accounting treatment given by Pioneer Cement Ltd of
increasing the value of the plant and machinery is proper. However, the accounting treatment in
respect of depreciation given by the company of adjustment of depreciation with retrospective effect is
improper
The auditor, therefore, should discuss with the management to make necessary changes in respect of
same and if not agreed to, qualify the report quantifying the impact of the same on profit as well as
assets of the company.
Answer No 14
NAS 4 requires that inventories should be valued as lower of cost and Net realisable value
(NRV). A departure from the general principle can be made if the AS is not applicable or having
regard to the nature of industry. NAS 4 states the exception to lower of cost and Net realizable value
in following case,
(a) work in progress arising under construction contracts, including directly related service
contracts
(b) work in progress arising in the ordinary course of business of service providers;
(c) shares, debentures and other financial instruments held as stock-in-trade; and(
d) producers‘ inventories of livestock, agricultural and forest products
In these inventory, valuation are measured as NRV based on established practices.
In the given case, the sale is assumed under a forward contract but the goods are not of a nature
covered by the above exceptions. Taking into account the facts the closing inventory of finished
goods should have been valued at cost, as it is lower than the realisable value (as it includes
profit). Further, export cash incentives should not be included for valuation purposes.
The auditor should give a qualified report as the policy adopted by the company for valuing its
closing inventory of finished goods on selling price plus export incentives is not correct..
Answer No 15
NAS 7 on Revenue , is mainly concerned with the timing of recognition of revenue in the
statement of profit and loss of an enterprise. The amount of revenue arising on a transaction is
usually determined by agreement between the parties involved in the transaction. However, when
uncertainties exist regarding the determination of the amount, or its associated costs, these
uncertainties may influence the timing of revenue recognition.
Further, as per accrual concept of fundamental accounting assumptions given in NAS 2 ―Accounting
Policies, Changes Accounting Estimates & Errors‖, revenue should be recognised as and when it is
accrued i.e. recorded in the financial statements of the periods to which they relate.
In the present case, monthly rental towards licence fees and variable licence fees as a percentage on
the turnover of the tenant though on annual basis is the income related to common financial
year. Therefore, recognising the fees as revenue cannot be deferred because the invoice is raised
in subsequent period. Hence it should be recognised in the financial year of accrual. Therefore,
the contention of the Chief Financial Officer is not in accordance with NAS 7 and hence the
auditor may qualify the report indicating the understatement of income/profit and that the
Statement of Profit and Loss does not exhibit a true and fair view of the profit or loss.
Answer No 16
N A S 7 on ‗Revenue‘, states that revenue from sale of goods should be recognised when the
seller of goods has transferred to the buyer the property in the goods for a price or all significant
risks and rewards of ownership have been transferred to the buyer and the seller retains no
effective control of the goods transferred to a degree usually associated with ownership and no
significant uncertainty exists regarding the amount of consideration.
Further, revenue recognition is mainly concerned with the timing of recognition of revenue in
statement of profit and loss of an enterprise. The amount of revenue arising on a transac tion is
usually determined by the agreement between the parties involved in the transaction. When
uncertainties exist regarding the determination of the amount, or its associated costs, these
uncertainties may influence the timing of revenue recognition.
In this given case, the company is bearing the risk of sales return and therefore, the company
should not recognize the revenue to the extent of 20% of its sales. The company may disclose
suitable revenue recognition policy in its financial statements separately.
In the absence of the above, the auditor must qualify his report.

Answer No 17
As per NAS 6 ―Property, Plant and Equipment‖, the cost of an item of fixed asset comprise its
purchase price, including import duties and other non-refundable taxes or levies and any directly
attributable cost of bringing the asset to its working condition for its intended use.
Generally, detention charges represent an abnormal expenditure, as these expenditures are not
directly attributable to the cost of asset.
The auditor should qualify the report appropriately as follows:
"Attention is invited to Note to accounts regarding Capitalization of detention charges of Rs 270
lakhs during the year and on account of delays in respect of clearing from custom warehouses for
certain machinery items.
In our opinion the detention charge are not directly attributable to the acquisition of related fixed
assets. The said amount of Rs 270 lakhs should have been written off in the Statement of Profit
and Loss. Had these expenses been so written off the profit for the year would have been
lower by Rs 270lakhs and Reserves & Surplus as well as Fixed Assets/Capital WIP would have been
lower by Rs 270 lakhs."
Answer No 18
As per NAS 5 on " Events After the Balance Sheet Date", prior period items are income or expenses
which arise in the current period as a result of errors or omissions in the preparation of the financial
statements of one or more prior periods. The write-back of provision made in respect of inventories
in the earlier year does not constitute prior period adjustment since it neither constitutes error nor
omission but it merely involves making estimates based on prevailing circumstances when financial
statements were being prepared. It is a mere estimate process involving judgment based on the latest
information available.
An estimate may have to be revised if changes occur regarding the circumstances on which the
estimate was based, or as a result of new information, more experience or subsequent developments.
The revision of the estimate, by its nature, does not bring the adjustment within the definitions of an
extraordinary item or a prior period item.
A change in an accounting estimate may affect the current period only or both the current period and
future periods. In both cases, the effect of the change relating to the current period is recognized as
income or expense in the current period. The effect, if any, on future periods, is recognized in future
periods.
Further, as per SA 540 ―Auditing Accounting Estimates, Including Fair Value Accounting Estimates,
and Related Disclosures‖, the auditor shall review the outcome of accounting estimates included in
the prior period financial statements or where applicable, their subsequent re-estimation for the
purpose of the current period.
In this case, MRE Ltd. provided Rs 34 lakhs for inventory obsolescence in 2072-73. In the
subsequent year due to change in circumstances, it was determined that 50% of such inventory was
usable. Revision of such an estimate does not bring the resulting amount of Rs17 lakhs within the
definition either of a prior period item or of an extraordinary item. The amount, however, involved is
material and requires separate disclosure to understand the financial position and performance of an
enterprise. Accordingly, adjustment in the value of the inventory through prior period item would not
be proper.
Answer No 19

As per N SA 705, ―Modifications to the Opinion in the Independent Auditor‘s Report‖, the auditor
may modify the opinion in the auditor‘s report in the following circumstances:
(i) If the auditor concludes that, based on the audit evidence obtained, the financial statements as
a whole are not free from material misstatement; or
(ii) If the auditor is unable to obtain sufficient appropriate audit evidence to conclude that the
financial statements as a whole are free from material misstatement.
If financial statements prepared in accordance with the requirements of a fair presentation
framework do not achieve fair presentation, the auditor shall discuss the matter with
management and, depending on the requirements of the applicable financial reporting framework
and how the matter is resolved, shall determine whether it is necessary to modify the opinion in
the auditor‘s report in accordance with NSA 705.
Types of modifications possible to the audit report are below-mentioned:
(i) Qualified Opinion: The auditor shall express a qualified opinion when the auditor, having
obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in
the aggregate, are material, but not pervasive, to the financial statements; or the auditor is
unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the
auditor concludes that the possible effects on the financial statements of undetected
misstatements, if any, could be material but not pervasive.
(ii) Adverse Opinion: The auditor shall express an adverse opinion when the auditor, having
obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in
the aggregate, are both material and pervasive to the financial statements.
(iii) Disclaimer of Opinion: The auditor shall disclaim an opinion when the auditor is unable to
obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor
concludes that the possible effects on the financial statements of undetected misstatements,
if any, could be both material and pervasive.
Answer No 20
An auditor‘s report can be modified for matters that do not affect the auditor‘s opinion by adding
an ―emphasis of matter‖ paragraph in an audit report. In certain circumstances, such a paragraph is
added to highlight a matter affecting the financial statements which is included in a note to the
financial statements that more extensively discusses the matter. The addition of such a paragraph
does not affect the auditor‘s opinion.
NSA 706 ―Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent
Auditor‘s Report‖, deals with additional communication in the auditor‘s report when the auditor
considers it necessary to draw users‘ attention to a matter presented or disclosed in the financial
statements that, in the auditor‘s judgment, is of such importance that it is fundamental to users‘
understanding of the financial statements, the auditor shall include an Emphasis of Matter
paragraph in the auditor‘s report provided the auditor has obtained sufficient appropriate audit
evidence that the matter is not materially misstated in the financial statements. Such a paragraph
shall refer only to information presented or disclosed in the financial statements.
Examples of circumstances where the auditor may consider it necessary to include an Emphasis of
Matter paragraph are:
(i) An uncertainty relating to the future outcome of an exceptional litigation or regulatory
action.
(ii) Early application (where permitted) of a new accounting standard that has a pervasive effect
on the financial statements in advance of its effective date.
(iii) A major catastrophe that has had, or continues to have, a significant effect on the entity‘s
financial position.
Answer No 21
Public accountability means that those in charge of a government program or ministry are held
responsible for the efficient and effective running of such organisation. Accountability presupposes
public insight into the activities of the program or ministry. Performance auditing is a way for
taxpayers, financiers, legislatures, executives, ordinary citizens and the media to ‗execute control‘ and
to obtain insight into the running and outcome of different government activities. Performance
auditing also provides answers to questions such as: Do we get value for money or is it possible to
spend the money better or more wisely? A criterion of good governance is that all public services are
subjected to auditing
‗Performance auditing is concerned with the audit of economy, efficiency and effectiveness and
embraces: (a) audit of the economy of administrative activities in accordance with sound
administrative principles and practices, and management policies; (b) audit of the efficiency of
utilization of human, financial and other resources, including examination of information systems,
performance measures and monitoring arrangements, and procedures followed by audited entities for
remedying identified deficiencies; and (c) audit of the effectiveness of performance in relation to
achievement of the objectiveness of the audited entity, and audit of the actual impact of activities
compared with the intended impact‘. Performance auditing is based on decisions made or goals
established by the legislature, and it may be carried out throughout the whole public sector.
Answer No 22
The audit points to be considered by the auditor during the audit of a Hospital are stated below:-
(i) Vouch the Register of patients with copies of bills issued to them. Verify bills for a
selected period with the patients‘ attendance record to see that the bills have been correctly
prepared. S ee that bills have been issued to all patients from whom an amount was
recoverable according to the rules of the Clinic.
(ii) See by reference to the property and Investment Register that all income that should have
been received by way of rent on properties, dividends, and interest on securities settled on
the Clinic, has been collected.
(iii) See that depreciation has been written off against all the assets at the appropriate rates.
(iv) Inspect the bonds, share scrips, title deeds of properties and compare their particulars with
those entered in the property and Investment Registers.
(v) Ascertain that legacies and donations received for a specific purpose have been applied in
the manner agreed upon.
(vi) Verify that grants, if any, received from Government or local authority has been duly
accounted for
(vii) Also, that refund in respect of taxes deducted at source has been claimed.
(viii) Check cash collections as entered in the Cash Book with the receipts, counterfoils and other
evidence .
(ix) Trace all collections of subscription and donations from the Cash Book to the respective
Registers. Reconcile the total subscriptions due as shown by the Subscription Register and
the amount collected and that still outstanding

(x) Vouch all purchases and expenses and verify that the capital expenditure was incurred only
with the prior sanction of the Trustees or the Managing Committee and that appointments and
increments to staff have been duly authorised.
(xi) Compare the totals of various items of expenditure and income with the amount budgeted
for them and report to the Trustees about significant variations which have taken place.
(xii) Examine the internal check as regards the receipt and issue of stores; medicines, linen,
apparatus, clothing, instruments, etc. so as to ensure that purchases have been properly
recorded in the Stock Register and that issues have been made only against proper
authorisation.
(xiii) Obtain inventories, especially of stocks and stores as at the end of the year and check a
percentage of the items physically; also compare their total values with respective ledger
balances.
Answer No 23
In view of nature of business carried out by the hotel industry followinf points asre to be considered
by the auditor during the audit of a Hospital :-
(i) Pilferage is one of the greatest problems in any hotel and it is extremely important to have a
proper internal control to minimize the leakage. The following points should be checked:
a. Effectiveness of arrangement regarding receipts and disbursements of cash.
b. Procedure for purchase and stocking of various commodities and provisions.
c. Procedure regarding billing of the customers in respect of main business and auxiliary
business like room service, telephone, laundry, etc.
d. System regarding recording and physical custody of edibles, wines, cigarettes, crockery and
cutlery, linen, furniture, carpets, etc.
e. Ensure that the trading accounts are prepared preferably weekly, for each sales point. A
scrutiny of the percentage of profit should be made, and any deviation from the norms is
to be investigated.
(ii) The charge for room sales is made from the guest register, and tests are to be carried out to
ensure that the correct numbers of guests are charged for the exact period of stay. Any
difference between the rate charged to the guests and standard room rent is to be investigated to
see that it is properly authorized.
(iii) The total sales reported with the total bills issued at each sales point have to be reconciled.
(iv) Special care must be taken in respect of bills issued to customers who are staying in the
hotel, because they may not be required to pay the bills immediately in cash but at a future date
or by credit cards. Billing is to be done room-wise. It must be ensured that all customers pay
their bills on leaving the hotel or within specified dates.
(v) The stocks in a hotel are all saleable item like food and beverages. Therefore, all movement
and transfer of stocks must be properly documented. Areas where stocks are kept must be kept
locked and the key retained by the departmental manager. The key should be released only to
trusted personnel and unauthorized persons should not be permitted in the stores area.
(vi) Many hotels use specialized professional valuers to count and value the stocks on a continuous
basis throughout the year. The auditor should ensure that all stocks are valued at the year end
and that he should himself be present at the year end physical verification, to the extent
practicable, having regard to materiality , nature and location of inventories
(vii) The fixed assets should be properly depreciated, and the Fixed Assets Register should be
updated.
(viii) In case the hotel employs the casual labour, the auditor should consider, whether adequate
records have been maintained in this respect and there is no manipulation taking place. The
wages payment of the casual labour must also be checked thoroughly.
(ix) The compliance with all statutory provisions, and compliance with the Foreign Exchange
Regulations must also be verified by the auditor, especially because hotels offer facility of
conversion of foreign exchange to local currency.
(x) Consumption shown in various physical stock accounts must be traced to the customers‘ bills
to ensure that all issues to the customers have been billed.
(xi) All payments to the foreign collaborator, if any, are to be checked.
(xii) Expenses and receipts are to be compared with figures of the previous year, having regard to
the average occupancy of visitors and changes in rates.
(xiii) Special receipts on account of letting out of auditorium, banquet hall, spaces for shops,
boutiques, and special shows should be verified with the arrangements made.
(xiv) In depth check should be carried out on the customers' ledgers to verify that all charges have
been properly made and recovered.
(xv) The occupancy rate should be worked out, and compared with other similar hotels, and with
previous year. Material deviations should be investigated.
(xvi) Expenses for painting, decoration, renovation of building, etc. are to be properly checked.
(xvii) The auditor should ensure that the money is recovered from the travel agents as per credit
terms allowed. Commission paid to travel agents should be checked by reference to the
agreement on that behalf.
(xviii) Apart from control over stock of edibles, control over issue and physical stock of linen
crockery, cutlery, glassware, silver, toilet items, etc. should be verified.
(xix) The auditor should verify the restaurant bills with reference to Kitchen order Ticket.
(xx) The auditor should ensure that all taxes have been included in the client's bills.
(xxi) Computation and payment of salaries and wages vis-a-vis number of employees must be
checked.
Answer No 24
In respect of leasing transaction entered into by the leasing company, the following procedures
may be adopted by the auditor.
(i) Obtain the memorandum of company and observe the object clause to see that the goods like
capital goods, consumer durables etc. in respect of which the company can undertake leasing
activities. Further, ensure whether company can undertake financing activities or not, whether
there exists a procedure to ascertain the credit analysis of lessee like lessee‘s ability to meet the
commitment under lease, past credit record, capital strength, availability of collateral security,
etc.
(ii) The lease agreement should be examined and the following points may be noted:
(iii) the description of the lessor, the lessee, the equipment and the location where the
equipment is to be installed. Observe the stipulation that the equipment shall not be
removed from the described location except for repairs. For the sake of identification, the
lessor may also require plates or makings to be attached to the equipment).
(iv) the amount of tenure of lease, dates of payment, late charges, deposits or advances etc.
should be noted.
(v) whether the equipment shall be returned to the lessor on termination of the agreement and

the cost shall be borne by the lessee.
(vi) whether the agreement prohibits the lessee from assigning the subletting the equipment and
authorises the lessor to do so.
(vii) Examine the lease proposal form submitted by the lessee requesting the lessor to provide him
the equipment on lease.
(viii) Ensure that the invoice is retained safely as the lease is a long-term contract.
(ix) Examine the acceptance letter obtained from the lessee indicating that the equipment has
been received in order and is acceptable to the lessee.
(x) See the Board resolution authorising a particular director to execute the lease agreement has
been passed by the lessee.
(xi) See that the copies of the insurance policies have been obtained by the lessor for his records.
Answer no 25
The auditor should perform procedures to obtain sufficient appropriate audit evidence that all
events up to the date of the auditor‘s report that may require adjustment of, or disclosure in, the
financial statements have been identified. The procedure to identify ―subsequent events‖ requiring
adjustment or disclosure in financial statements as laid down as under
(i) Obtaining an understanding of any procedures that management has established to ensure that
subsequent events are identified.
(ii) Inquiring of management and, where appropriate, those change with governance as to whether
any subsequent events have occurred which might affect the financial statements.
(iii) Inquire the management on specific matters on following:
a. Whether new commitments, borrowings or guarantees have been entered into.
b. Whether sales or acquisitions of assets have occurred or are planned.
c. Whether there have been increases in capital or issuance of debt instruments, such as
the issue of new shares, or an agreement to merge or liquidate has been made or is
planned.
d. Whether there have been any developments regarding contingencies.
e. Whether there have been any developments regarding risk areas and contingencies.
f. Whether any unusual accounting adjustments have been made or are contemplated.
g. Whether any events have occurred or are likely to occur which will bring into question
the appropriateness of accounting policies used in the financial statements as would be
the case, for example, if such events call into question the validity of the going concern
assumption.
h. Whether any events have occurred which are relevant to the measurement of estimates
or provisions made in the financial statements.
i. Whether any events have occurred which are relevant to the recoverability of assets.
(iv) Review the minutes, if any, of the meetings, of the entity‘s owners, management and those
charged with governance, that have been held after the date of the financial statements and
inquiring about matters discussed at any such meetings for which minutes are not yet available.
(v) Review the entity‘s latest subsequent interim financial statements, if any.
(vi) Review the entity‘s latest available budgets, cash flow forecasts and other related

management reports for periods after the date of the financial statements.
(vii) Inquire, or extend previous oral or written inquiries, of the entity‘s legal counsel concerning
litigation and claims; or
(viii) Consider whether written representations covering particular subsequent events may be
necessary to support other audit evidence and thereby obtain sufficient appropriate audit
evidence.
When the auditor identifies events that require adjustment of, or disclosure in, the financial
statements, the auditor shall determine whether each such event is appropriately reflected in those
financial statements. If such events have not been considered by the management and which in
the opinion of the auditor are material, the auditor shall modify his report accordingly.

Corporate Law

Nepal Chartered Accountants Act, 2053 and Rules
1. Under what circumstances may the Council of ICAN issue order to remove the name of a
member from the membership register, or order to invalidate the membership and Certificate
of Practice of a member? Answer it in the light of Nepal Chartered Accountants Act, 2053.
Answer:
Pursuant to Section 22 of Nepal Chartered Accountants Act, 2053 the Council of ICAN may issue an
order to remove the name of any member of ICAN from the membership register, in any of the following
circumstances:
(a) If the member is convicted by a court of a criminal offence involving moral turpitude and punished for
such offence;
(b) If the member fails to pay the fees required to be paid to ICAN;
(c) If the member fails to abide by the professional conduct referred to in this Act and the Rules framed
under this Act;
(d) If the member becomes insane; or
(e) If the member dies.
Pursuant to Section 23 of Nepal Chartered Accountants Act, 2053, where an information is received that
the name of any person has happened to be registered in the membership of ICAN by fraud or mistake
and such matter is found to be true upon holding an inquiry into the matter, the Council of ICAN may
cancel the membership registration certificate of such person, and also the Certificate of Practice, if any,
granted to such person; and a notice thereof shall be publicly announced.
2. Mr. Naresh, an Indian national who has recently passed Chartered Accountancy Examination
from ICAI intends to obtain membership and certificate of practice from ICAN. Suggest him
whether Mr. Naresh being a foreign national is eligible to acquire membership and certificate of
practice from ICAN. Discuss with the provisions on recognition of foreign accounting body and
Chartered Accountancy or equivalent examination and training received from any foreign
accounting body under Nepal Chartered Accountants Act, 2053 and regulation framed there
under.
Answer:
A person, who has passed chartered accountancy from any foreign accounting body, shall have to submit
an application, in a prescribed format, to the council of ICAN for recognition; however, Naresh shall have
to pass membership examination conducted by ICAN. If he is passed in membership examination can
apply for the membership of ICAN since ICAI is the recognized foreign body of the ICAN. As per Nepal
Chartered Accountants Act, 2053, foreign national can also become the member of ICAN.
Mr. Naresh is an Indian national and he cannot obtain COP as per the provisions of Nepal Chartered
Accountants Act, 2053 despite being the member of ICAN.
3. What do you mean by Standing Committee of ICAN? How does they constitute? Mention the
formation of Disciplinary Committee as per Nepal Chartered Accountants Act, 2053.
Answer:
Standing Committee means committee formulated by the Nepal Chartered Accountants Act, 2053. As per
Section 13, there are four types of committee:
 Disciplinary Committee
 Examination Committee
 Executive Committee
 Professional Guidelines Committee
Member of one standing committee shall not be the member of another standing committee except for
president and vice president.

Formation of Disciplinary Committee:
(a) A fellow chartered accountant designated by the Council from amongst the councilors referred to in
Clause (a) of Sub-section (3) of Section 7 -Chairperson
(b) Three persons nominated by the Council from amongst the councilors -Member
(c) Two persons nominated by the Council from amongst the members -Member
(d) One person nominated by the Auditor General -Member
4. What are the criteria for disqualifications for membership?

Answer:
As per Section 18 of the Nepal Chartered Accountants Act, 2053, following persons shall not be the
members of The Institute of Chartered Accountants of Nepal (ICAN).
(a) One who has not the qualification referred to in Sub-sections (2) and (3) of Section 16;
(b) One who has not attained the age of Twenty One years;
(c) One who has become insolvent being unable to repay loan to creditors;
(d) One who has been convicted by the court of a criminal offence involving moral turpitude;
(e) One who is of unsound mind.
Companies Act, 2063

5. Explain clearly the doctrine of ‘indoor management’ as applicable in cases of companies
registered under the Companies Act, 2063. Explain the circumstances in which an outsider
dealing with the company cannot claim any relief on the ground of ‘indoor management’.
Answer:
One limitation to the doctrine of constructive notice of the Memorandum and Articles of a company is the
doctrine of indoor management. According to the doctrine of indoor management ,the outsider, dealing
with the company are entitled to assume that as far as the internal proceedings of the company are
concerned, everything has been regularly done. They are bound to rend the registered documents and to
see that the proposed dealing is not inconsistent therewith, but they are not bound to do more, they need
not inquire into the regularity of the internal proceedings as required by the memorandum and articles.
The limitation of the doctrine of constructive notice is known as the ‗Doctrine of indoor management‘,
popularly known as rule in Royal British Bank vs Turquand. Thus the doctrine of indoor management
aims to protect outsiders against the company.
Exceptions:
In the following circumstances an outsider dealing with the company cannot claim any relief on the
ground of indoor management
i. Knowledge of irregularly: Where a person dealing with the company has actual or constructive
notice of the irregularity as regard internal management, he cannot claim the benefit under the
rule of indoor management.
ii. Negligence: where a person dealing with the company could discover the irregularity if he had
made proper inquiries, he cannot claim benefit of the rule of indoor management. The protection
of the rule is also not available where the circumstance surrounding the contract-are so suspicious
as to invite inquiry, and the outsider dealing with the company does not make proper inquiry.
iii. Act void ab initio and forgery: where the acts done in the name of a company are void ab initio,
the doctrine of indoor management does not apply. The doctrine applies only to irregularities that
otherwise might affect a genuine transaction; it does not apply to a forgery. A company can never
be held liable for forgeries committed by its officers.

iv. Acts outside the scope of apparent authority: if an officer of a company enters into a contract
with a third party and if the act of the officer is beyond the scope of his authority, the company
not bound.
v. A person having no knowledge of Articles of Association cannot seek protection under indoor
management.
6. What do you mean by allotment of shares? Write down the process of allotment of shares as per
Companies Act, 2063.
Answer:
When there are a lot of shares subscribed by the general public than the issued share capital, there arises
allotment of shares. Public company shall issue its share through the issuance of prospectus. General
public subscribes shares based on the prospectus. At the time of issue of shares company must issue
shares through securities dealer. At the time of issue of shares provision of underwriter must be made by
the company. Company shall have to allot shares within 3 months from the date of closure of share issue.
After the shares subscription by the general public, there may arises two situations.
i. Under Subscription
 If general public subscribes less than 50% of issued shares including underwriter's commitment. If this
circumstance arises, allotment cannot make. If company applies to Registrar of Company to extend
time limit, Registrar of Company extends time limit up to three months. Even in extended time,
minimum subscription of 50% has not subscribed, amount have to refund to the applicant.
 If general public subscribes exceeding 50% and between 100% of issued share capital including
underwriter's commitment; allotment can be made to the all the applicants based on application
received.
ii. Over Subscription
If general public subscribes exceeding 100% of issued share capital. Allotment shall have to be made
based on pro rata allotment or other conditions as approved by Securities Board of Nepal.
7. ABC Company cannot appoint its auditor in the Sixth Annual General Meeting of the
Company. Consequently, newly appointed Board of Directors of the company appointed auditor
for the coming fiscal year. Give your opinion for appointment of auditor referring Companies
Act, 2063.
Answer:
Auditor appointed by Board of Directors is invalid as per Companies Act, 2063. Where the annual
general meeting of a company fails to appoint an auditor for any reason or where the AGM itself cannot
be held, Office of Company Registrar may, at the request of Board of Directors of the Company, appoint
auditor.
8. A consensus agreement concluded between Mr. A, B, C and D the promoters of Babarmahal
Resort Private Limited making a provision that general meeting of the company shall not be
held. The consensus agreement was submitted to the Company Registrar Office with the
application of incorporation of the company. What shall be the consequence of the above
provision mentioned in consensus agreement?
Answer:
Yes. Shareholders can reach such consensus agreement. Where a consensus agreement concluded
between the shareholders of a private company that the general meeting shall not be held, such private
company shall not required to hold its general meeting during the period of such agreement; however,
Company shall also make provisions on the procedure of making decision on such matters required to be
decided by the general meeting and authority of making such decision.
9. Mention the types of companies as per Companies Act, 2063.
Answer:
As defined under Section 2(a) of Companies Act, 2063 Company means a company incorporated under
the Companies Act, 2063. As classified by the Act, following are the types of Companies:

i. Private Company: As defined by Section 2(b) Private Company means a private company
incorporated under the Companies Act, 2063. The number of shareholders of a private company
shall not exceed fifty; however, any employee who has purchased a share of a company under
scheme of selling shares to employees or any employee who has already purchased a share under
such scheme but is not in service of the company for the time being shall not be counted as a
shareholder. A private company shall add the words ―private limited‘‘ to its name as the last
words. A private company shall not sell its shares and debentures publicly. A private company
shall not pledge, or otherwise transfer title to, its securities to any person other than its
shareholder without fulfilling the procedures contained in the memorandum or consensus
agreement.
ii. Public Company: As defined by Section 2(c) public company means a company other than a
private company. The number of shareholders of a public company shall be seven in minimum
and a maximum of any number. a public company shall add the word ―limited‖ to its name as the
last word. The paid up capital of a public company shall be a minimum of ten million rupees.
iii. Holding Company: As defined by Section 2 (d) Holding Company means a company-having
control over a subsidiary company.
iv. Subsidiary Company: As defined by Section 2 (e) Subsidiary Company means a company
controlled by a holding company.
v. Foreign Company: As defined by Section 2 (f) Foreign Company means a company
incorporated outside Nepal.
vi. Listed Company: As defined by Section 2 (g) Listed Company means public company which
has its securities listed in the stock exchange.
vii. Company Not for Profit Distribution: As defined by Section 2 (h) Company not distributing
profits means company incorporated under conditions that it shall not be entitled to distribute or
pay to its members any dividends or any other moneys out of the profits earned or savings made
for the attainment of any objectives. Except as otherwise provided in Companies Act, a company
not distributing profits shall not distribute dividends among its members or pay, directly or
indirectly, any amount to a member or his/her close relative.
viii. Single Shareholder Company: Single Shareholder Company means a private company having a
single promoter.
10. The Board of Directors of a company has filed a complaint with the Institute of Chartered
Accountants of Nepal against their statutory auditor for his failing to attend the Annual General
Meeting of the Shareholders in which audited financial statements were considered. Examine,
what is the validity of such complain with reference to Companies Act, 2063 and Nepal
Chartered Accountants Act, 2053?
Answer:
Companies Act, 2063 makes it compulsory for every company to appoint a qualified auditor to do the
audit of the accounts maintained by the company. When an auditor is appointed by a company his prime
duty is to conduct audit of financial statements. In the course of fulfilling his duty he has a right to
demand to be furnished the books of accounts and records of a company. An auditor of a company has
right of free and complete access at all times to the books, accounts, and vouchers of the company
whether kept at the head office or elsewhere. He has also the right to require from the officers of the
company or concern director of the company such information and explanation as may be necessary for
the performance of his duties as auditor. Similarly he is entitled to receive notice of and to attend general
meetings of the company and be heard on any part of the business which concerns him as auditor.
As an obligation of auditor he is to make a report to the shareholders of the company on the accounts
examined by him and on every balance sheet and every profit and loss account laid before the company
in general meeting during his tenure of office. Such report can be submitted with ―qualified report‖ as the
case may be.

The auditor‘s role in the general meeting will be just to facilitate understanding the financial report.
Nepal Chartered Accountants Act, 2053 does not make mandatory the presence of auditor in the Annual
General Meeting. So it is not mandatory duty of an auditor to be present in general meeting. It is a part of
the moral duty of the auditor to be present in the general meeting. So, whatever the complaint made by
Board directors do not carry validity.
11. What do you mean by Debenture Trustee? What are the matters to be included in agreement
between company and debenture trustee.
Answer:
Section 2 (t) of Companies Act, 2063 states that Debenture Trustee means a body corporate undertaking
the responsibility for the protection of interests of debenture-holders at the time of issuance of debentures
by a company.
(1) An agreement has to be concluded between a company issuing debentures and a debenture trustee
acting as a trustee for the protection of the interest of debenture-holders, in respect of the debentures to
be raised by such company.
(2) An agreement to be concluded shall set out the following matters:
(a) that the debenture trustee is entitled to carry out, or cause to be carried out, valuation of the
company‘s assets, project analysis or management analysis,
(b) the period of repayment of the principal and interest of debentures subscribed by the debenture-
holder, interest rate, mode of repayment of the principal and interest, mode of repayment of the principal
and interest, and matter of conversion of debentures into shares, if there is such provision,
(c) Matters, relating to a provision made on the lights of other creditors over the assets of the company
and liabilities that may arise there from in the future.
(d) A provision that, in the case of violation or non-fulfillment of the terms mentioned in the agreement
or for any other reasonable reason, if it is required to take the control of financial transactions of the
company or to take possession if the security as referred to in the agreement, the debenture trustee may
take in his/her possession the assets or properties of such company to the property that he has taken as
the security of guarantee or hold the security of guarantee with himself/herself or sell the same by
auction or in any other appropriate manner,
(e) Procedures for payment by the company of the service charges and other direct expenses of the
debenture trustee,
(f) That the debenture trustee shall not be liable to any loss or damage caused to the company or the
debenture-holder from any act done by the trustee in that capacity,
(g) That, in the event of occurrence of any circumstances necessitating the liquidation of the company,
the debenture trustee is entitled to take such legal action as may be taken in behalf of the debenture-
holder and exercise the powers of the debenture holder.
(h) Other necessary matters on the protection of interest of the debenture-holder.
Bank and Financial Institutions Act, 2063
12. Mr. Sitaram is a promoter of Public Bank Limited established in 2070 BS. Mr. Sitaram wants to
sell out the shares undertaken by him. Advice to him for sell of shares based on Bank and
Financial Institutions Act, 2063.
Answer:
Section 9 of Bank and Financial Institutions Act, 2063 states that the promoter of a bank or financial
institution shall not be entitled to sell or pledge any share registered in his or her name for at least five
years from the date of commencement of financial transactions. Provided that if there arises a special
circumstance due to the emergence of any obstruction or hindrance in the operation of a bank or financial
institution, nothing shall be deemed to prevent the granting of permission by Nepal Rastra Bank to the
promoters to sell shares between or among them.
If the promoter of a bank or financial institution wishes to sell or pledge the shares held in his or her
name after five years from the date of commencement of financial transactions by the bank or financial
institution, he or she may sell or pledge such shares, subject to the conditions prescribed by Nepal Rastra
Bank. Consequently, Mr. Sitaram cannot sell or pledge or sell shares until the expiry of 5 years from the
date of commencement of financial transactions; since Bank has established only in 2070 BS.
13. Define Capital Fund. What matters are included in Core capital and supplementary Capital.
Answer:
Core capital Ratio = Core capital x 100
Total of the risk-weight assets
Capital fund Ratio = Core capital + Supplementary capital x 100

Total of the risk-weight assets
Total of risk-weight assets = Total risk-weight assets within the balance-sheet + total risk-weight
transaction outside the balance sheet.
Matters to be included in Primary Capital /Core Capital:
1) Paid up Capital (ordinary shares)
2) Proposed bonus share
3) Share premium
4) Irredeemable preferential share
5) General Reserve Fund
6) Accumulated profit/(loss)
7) Amount of profit and loss of the current Fiscal year as shown in the balance-sheet
8) Capital Redemption Reserve Fund
9) Capital Adjustment Fund
10) Calls in advance
11) Other Free Reserves
Matters to be deducted from core capital:
•Amount for goodwill
•Amount invested in shares and securities in excess of limits
•Amount invested in securities of the company having financial interests
•Fictitious Asset
•Amount invested in purchase of land and houses for self use not complying with the Directives of
this Bank
•Amount invested in land development and housing construction in excess of limits
•The share underwriting could not be sold within the stipulated time
•The credit and other facilities made available to the persons and organizations banned by the
prevailing laws
Matters to be included in Secondary Capital/Supplementary Capital

1) Provisions of loan loss made for pass loan
2) Additional loan loss provision
3) Hybrid capital instruments
4) Unsecured Subordinated Term Debt
5) Exchange Equalization Fund
6) Assets revaluation Fund
7) Investment adjustment Fund
14. Mention Restriction to distribute dividend by Bank and Financial Institutions.
Answer:
As per Section 46 of Bank and Financial Institutions Act, 2063 before declaration of dividend by bank
and financial institutions following conditions need to fulfill:
 Recovered all of its preliminary expenses;
 Recovered all of its losses sustained by it until the previous year;
 Amount shall have to set aside for capital fund;
 Amount shall have to set aside for risk bearing fund;
 Amount shall have to set aside for general reserve fund;
 Shares set aside for public issue are issued and fully paid up,
 Before declaration and distribution of dividend, approval of Neal Rastra Bank needs to be obtained.
Securities Act 2063
15. Out of 7 members of the Securities Board of Nepal, six members except chairperson have
decided to remove chairperson from the Board. Give your opinion based on Securities Act,
2063.
Answer:
As per Section 7 of Securities Act, 2063 Government of Nepal shall appoint the chairperson of the
Securities Board of Nepal to act as the chief administrator and to perform day to day business of the
Board. Government of Nepal shall appoint to the office of chairperson an appropriate person from
amongst the renowned persons who have obtained at least master's degree and gained at least seven years
of experience in the field of stock exchange, management, capital market development, economics,
finance commerce, management or law.
There shall be formed a committee under the convenorship of the member of National Planning
Commission responsible for the concerned sector and consisting of the Secretary at the Ministry of
Finance and an expert in the field of securities as its members, for recommending a name for the purpose
of appointment of chairperson. While, recommending a name for chairperson Recommendation
Committee recommends names of at least three persons who have possessed the qualification. In this
way chairperson of Securities Exchange Board of Nepal has been appointed.
Removal of Chairperson:
Conditions for Removal:
 Chairperson commits any act or action contrary to the interests of the Securities Exchange Board of
Nepal or
 Chairperson commits any act or action contrary to the interests of the development of capital market or
 Chairperson commits any act or action contrary to the interests of causes any loss and damage to the
Securities Exchange Board of Nepal
Appointment of Inquiry Committee:
Before removal of chairperson, Government of Nepal may form an inquiry committee and on
recommendation of such a committee, remove him or her from the office of the chairperson. Provided
that prior to removal from his or her office, the Chairperson shall be provided with appropriate
opportunity to defend him/ her.
Majority decisions of the members shall be valid only in case of the decisions of the meeting of
Securities Board of Nepal; however, for the removal of members or chairperson of the Board, appointing
authority only can remove.
Conclusion:
Majority decisions of the members cannot remove chairperson of Securities Board of Nepal. Only the
appointing authority i.e. Government of Nepal by forming an inquiry committee and giving reasonable
opportunity to defend to the chairperson can remove from the post.
16. Define Compensation Fund as per Securities Act, 2063.
Answer:
Section 53 of Securities Act, 2063 states that a stock exchange shall establish and operate one such
compensation fund as may be prescribed by the SEBON in order to protect investors against possible
loss or damage. The funds deposited to the fund shall be used to bear compensation as prescribed.
Similarly, Section 54 states that the following provisions shall be made in the Rules in relation to the
operation of the compensation fund:
(a) Provisions relating to the deposit of money to the fund,
(b) Maximum amount to be paid as compensation from the fund,
(c) Provisions relating to the accounts and audit of the fund,
(d) Conditions for making claim to obtain amount from the compensation fund and procedures from
making such a claim,
(e) Conditions where any claim cannot be made on the compensation fund,
(f) Procedures for taking action and making decision on payment of money as claimed from the
compensation fund,
(g) Maximum limit of amount payable as compensation to one person,
(h) Other necessary matters in relation to the examination of compensation claims,
(i) Provisions to be made in the event of the revocation of the license of a stock exchange,
(j) Other necessary provisions in relation to compensation.
If a stock exchange is not able to establish and operate the compensation fund in order to protect
investors against possible loss and damage or does not pay or fails to pay the amount of compensation to
be payable as prescribed, the Board may establish and operate the compensation fund as prescribed or
make necessary provisions in relation to the payment of the amount of compensation required to be paid
as prescribed.
17. How stock exchange shall be established in Nepal as per the current securities laws?
Answer:
Process of Establishment:
i. Prior approval from Securities Board of Nepal
ii. Certificate of incorporation from Registrar of Companies
iii. License to conduct stock exchange and
iv. Certificate of Commencement from Registrar of Companies.
A public company shall have to make an application in such format and accompanied by such details.
Documents and fee as may be prescribed.
A body corporate which makes an application to the Board for a license to carry on a stock exchange
shall set out the following matters in the application:
(a) Legal provisions of establishing the body corporate its memorandum of association stipulates that the
body corporate has been established with object to establish and operate at stock exchange,
(b) The body corporate maintains its paid up capital as prescribed by the Board that such capital is not
less than fifty million rupees so long as the body corporate operates the stock exchange,
(c) There are sufficient grounds to the satisfaction of the Board that the body corporate can provide such
infrastructures and facilities as may be required to operate the stock exchange,
(d) Matters relating to enlisting or making similar other provisions to recognize securities to be
transacted through itself,
(e) Matters that the interests of investors would be protected through regular operation of transactions in
securities through the provisions and systems to be adopted by the body corporate in relation to the
exchange and transactions proposed by the body corporate for the operation of the stock exchange,
(f) That it has appropriate provisions on settlement of transactions in the stock exchange and publication
of records thereof and statements of transactions,
(g) That complaints filed in relation to transactions carried on by its members can be examined in a
proper manner,
(h) That action can be taken as mentioned in the Bye-laws in the event of failure of its members to fulfill
the liabilities under the contract.
Nepal Rastra Bank Act, 2058
18. Can a practicing chartered accountant having 20 years of experience be qualified to become
a deputy governor? Who appoints deputy governor? What is the tenure of deputy governor?
Qualification of Deputy Governor:
No. A practicing chartered accountant having 20 years of experience cannot become deputy governor of
Nepal Rastra Bank. To become a deputy governor he must be a special class officer of the Nepal Rastra
Bank.
Who appoints deputy Governor?
Government of Nepal shall appoint deputy governor on the basis of recommendation made by Governor.
Governor shall recommend the double the number of vacant positions from the special class officer of
NRB on the basis of their performance and capability.
Tenure of Deputy Governor and reappointment:
 Deputy Governor shall have tenure of 5 years.
 Government of Nepal may, reappoint the retiring directors for any term, if it is deemed necessary.
19. Allocation of Net Profit and Net Loss as per Nepal Rastra Bank Act, 2058.
Allocation of Net Profit:
(1) In case the Bank makes a profit in any fiscal year, the allocation and use of such profit shall be made
in according to the following priority:-
(a) Unless five percent of the total monetary liability of the NRB shown in the balance sheet is met, an
amount equal to five percent of the net profit of each year shall be allocated from the profit and kept in
the monetary liability fund. The amount deposited in the monetary liability fund shall be used only for
the purpose of fulfilling the financial liability of the NRB.
(b) An amount prescribed by the Board not less than ten percent of the net profit of the Bank shall be
allocated in the general reserve fund established by the NRB.
(c) While allocating an amount in the general reserve fund pursuant to Clause, an additional amount shall
be appropriated to cover the capital expenses referred to in the annual budget of the NRB.
(d) The amount equal to the revaluation profit shall be kept in the revaluation reserve fund.
(e) The Board shall, having appropriated the amounts referred to in above (a), (b), (c) and (d),
appropriate the remaining profit in other funds as may be necessary and pay the remaining amount to
Government of Nepal.
(2) The amount allocated to general reserve fund pursuant to Sub-section 1 Clause (b) and (c) shall be
used only for the purpose of recovering the loss.
Allocation of Net Loss:
(1) In case the NRB sustain net loss in any fiscal year, such loss shall be allocated as follows:-
(a) In cases where the total operation loss and revaluation loss have been included in the net loss, the
amount of the total operation loss shall be charged to the general reserve fund or to the capital account.
The amount of revaluation loss shall be debited to the revaluation reserve fund. While making such
allocation, if the revaluation reserve fund also is at loss, it shall be debited to general reserve fund or the
capital account.
(b) In case the net loss is due to accumulation of the total operation loss and the revaluation loss, the
amount of such net loss shall be debited to the revaluation fund. If the balance of the revaluation reserve
fund would be negative after such allocation, it shall be debited to the general reserve fund or the capital
fund.
(2) The Government of Nepal shall bear the loss that cannot be adjusted after making allocation pursuant
to Sub-section (1).
20. How does Nepal Rastra Bank mobilize Foreign Exchange Reserve? Explain it in the light of
Nepal Rastra Bank (NRB) Act, 2058
Answer:
In pursuance to section 66 of NRB Act, 2058, NRB shall mobilize Foreign Exchange Reserve in the
following manner:
(1) NRB shall mobilize the foreign exchanges reserve. Such reserve shall be denominated in the
respective foreign exchange and such reserve shall consist of the following assets:-
(a) Gold and other precious metals held by or for the account of NRB;
(b) Foreign currencies held by or for the account of NRB;
(c) Foreign currencies held in the accounts of NRB on the books of a foreign central bank or other
foreign banks;
(d) Special drawing rights (SDR) held by NRB at the International Monetary Fund;
(e) Bill of exchange, promissory note, certificate of deposit, bonds, and other debt instrument payable in
convertible foreign currencies issued by any debtor or liability holder and held by NRB;
(f) Any forward purchase or repurchase agreements of NRB concluded with or guaranteed by foreign
central banks or public international financial institutions, and any futures and option contracts of NRB
providing for payment in freely convertible foreign currency.
(2) While selecting the assets referred to in Sub-section (1), due consideration should be given to NRB's
capital and liquidity to maximize earnings.
(3) NRB shall maintain international reserve at a level, which shall be adequate for the execution of
monitory and exchange rate policies and for the prompt settlement of the international transaction.
(4) If international reserves have declined or, in the opinion of Bank, are in danger of declining to such
an extent as to jeopardize the execution of the monetary or exchange rate policies in the prompt
settlement of the country's international transactions, NRB shall submit to Government of Nepal a report
on the international reserves position and the causes which have led or may lead to such a decline,
together with such recommendations as it considers necessary to remedy the situation.
(5) Until such time as, the situation referred in Sub-section (4) has been rectified, NRB shall make
further such report and recommendations to Government of Nepal.
(6) NRB shall hold the foreign exchange reserve referred to in sub-section (1) in its balance sheet.
Industrial Enterprises Act, 2073
21. What are the classifications of Industry? What are the types of Industries as per Nature as
defined by Industrial Enterprises Act, 2073?
Answer:
Industry can be classified as follows:
 Micro Enterprises
 Cottage Industry
 Small Scale Industry: Industry having Fixed Capital for up to Rs. 100 million.
 Medium Industry
 Large Industry
As per Nature of Industry same can be classified as follows:
 Energy Based Industry
 Manufacturing
 Agro Forest Based Industry
 Mineral Industry
 Construction Industry

 Tourism Industry
 Information Technology and Communication Based Industry
 Service Oriented Industry
22. What do you mean by Sick Industry?

Answer:
As per Section 37 of Industrial Enterprises Act, 2073 if any industry has commended its commercial
production or carried out its transactions since at least five years and is in losses for at least 3 years due
to circumstances beyond the control of management and not due to the lack of competence or intention
of the management and industry's total production capacity is 30% or less than it. If the above
circumstance arises, Government of Nepal may declare such industry by following the procedures as per
the standards set.
23. Mention the National Priority Industry?

Answer:
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
24. A company wants to employ foreign citizen to improve in the production quality. Based on
Labour Act, 2048, Answer the following questions:
i. Can foreign national appointment is possible in Nepal?
ii. If yes, write down the process.
iii. Who gives permission to appoint foreign national?
iv. Up-to when foreign national can be employed?
v. What need to fulfill by industry after completing 7 years?
Answer:
i. Foreign national shall not eligible for appointment in Nepal. However, if there is lack of qualified
human resources, they shall eligible for recruitment.

ii. Advertisement shall have to publish in national daily newspaper or journal inviting Nepali citizen
for the recruitment. Enterprise has to submit an application to the Department of Labour along
with the evidence of such fact for the approval to appoint a non-Nepalese citizen.
iii. Department of Labour may, on the recommendation of the Labour Office, grant approval to
engage a non-Nepalese citizen.
iv. Maximum period of upto five years not exceeding two years at a time and, in the specialized kind
of skilled technical post, for a period upto seven years.
v. Enterprise shall have to make arrangements for making the Nepalese citizens skilled and for
replacing the non-Nepalese citizens gradually.
25. Mention the procedures of keeping on Reserve of workers and employees as per Labour Act,
2048.
Answer:
Keeping on Reserve
In case where the curtailment of production or service in any Enterprise for some period is necessary or
where operation of the Enterprise cannot be continued for some special circumstance, proprietor may
curtail its production or service or may close the enterprise or a part of thereof subject to following
provision:
To keep the worker or employee permission from the Labour Office in case of a period up to fifteen days
and from the Department of Labour in case of a period for more than that shall have to be taken. The
Labour Office shall, inform the Department of Labour of such permission in case it has given
permission.
While doing curtailment in the production or service, any worker working on shifts or on wages or
permanent worker or employee of the enterprise except the employee shall be kept reserve on the
condition of receiving half of his/her remuneration. Provided that, such worker or employee shall
continue to receive the appropriate facilities which he/she is receiving.
If any worker or employee kept in reserve refuse to work on another assignment or similar nature equal
on remuneration offered by the proprietor in the same enterprise or another Enterprise under his/her
control or if he/her does not come in the enterprise once a day during office hours or on other situations
as prescribed, the proprietor may withheld the remuneration and facility of such worker and employee.
26. Write the Special Provisions relating to Tea Estate.

Answer:
The special provision in respect of the tea estate shall be as follows:
(a) Formation of Committee:
Government of Nepal may constitute, as prescribed, a Committee to provide necessary advice on
promotion, policy formulation and other related matters in respect of the tea estates.
(b) Provision for Quarter:
The Proprietor shall have to make arrangements for appropriate quarters within the tea-estate for the
workers who do not have their residence nearby.
(c) Provisions of Primary Health Care:
The Proprietor shall have establish a primary health care center under the responsibility of a trained
employee in order to provide free primary treatment of minor injuries to the workers and employees
engaged within the tea-estate and to the members of their family.
(d) Safety Devices:
The Proprietor shall have to provide safety devices and equipment required for personal protection of the
workers of the tea-estate.
(e) Provisions of Primary School:
The Proprietor of a Tea-estate shall run a primary school if there are fifty or more children of the age
between five and fourteen years, receiving primary education, of the workers residing in the quarters

provided by the tea-estate and in case there is no school within a distance of one kilometer from the tea-
state.
(f) Daily Consumer Goods:
The Proprietor shall have to arrange to make the daily consumer goods easily available to the workers
and employees, if there is no market near the tea-estate.
(g) Provision for Entertainment:
The Proprietor shall have to make necessary arrangements for appropriate sports facilities within the tea-
estate for physical and mental development of the workers of the tea-estate.
(h) To get the works done on contract:
This provision shall not be deemed to prevent from entering into agreement between the Proprietor and
the workers of the tea-estate in respect of doing certain specified works of the tea-estate under contract.
27. Mention the Difference between Strike and Lock out

Strike
In case the demands are not solved through the process mentioned in Sub-section (6) of Section 74 the
workers and employees wish to strike in the Enterprise, a notice in writing stating the claims and their
rationale, including with a resolution passed by at least sixty percent of the total workers and employees
through secret ballot, shall have to be provided to the concerned Proprietor thirty days in advance and an
information thereof shall also be given to the Department of Labour, concerned Labour Office and the
local administration and a strike may be started thereafter only.
Lock Out
If a strike has been started or continued without giving prior notice as mentioned in Section 75 or if the
collective dispute is not solved through the process mentioned in Sub-section (6) of Section 74, the
Proprietor may declare a lock-out of the Enterprise after submitting the justifications with its rationale
and obtaining the approval of Government of Nepal.
Before declaring a lock-out, the Proprietor shall issue a notice for the information of workers and
employees seven days in advance specifying the date of effecting the lock-out and announcing that the
Enterprise shall be locked-out if the strike is not called off.
If there is a situation with possibility of damage to the Enterprise through riot, violence, destruction, etc
from the workers and employees during the strike the Proprietor may cause lock-out even without
following the process. If a lockout is made in the Enterprise in such situation, the Labour office and the
Department of Labour shall be informed about the lock-out with reasons within three days.
Government of Nepal may at any time declare the lock-out of an enterprise as void, in case it appears
irrational or it is likely to cause a breach in law and order conditions of the country or it is contrary to the
economic interests of country.
28. How collective disputes shall be settled as per Labour Act, 2048?
Answer:
Procedures Relating to Submission of Claims of Collective Dispute:
i. The claim relating to collective right, interest or privilege shall have to be presented in writing to
the concerned Proprietors signed by at least fifty one percent of the concerned workers or
employees and in the claims their representatives shall have to be nominated and the claim shall be
presented through such representatives.
ii. Upon receipt of the claim relating to the dispute, the Proprietor shall hold bilateral discussion with
the representatives as mentioned in the same Sub-section and solve the dispute within twenty-one
days and shall enter into an agreement.
iii. If the dispute could not be solved, the dispute shall be solved within fifteen days by holding
bilateral discussion in the presence of Labour Office.

iv. If the dispute could not be solved through the bilateral discussion, the dispute may be referred to a
mediator appointed, with mutual consent of proprietor and the workers and employees, or if no
such mediator could be appointed, with mutual consent of proprietor and the workers and
employees, or if no such mediator could be appointed, to a tripartite committee constituted, with
consent of both parties, by Government of Nepal having equal representation from the workers or
employees, the Proprietor and the government.
v. The mediator or the committee appointed shall decide the dispute within fifteen days.
vi. Any parties if not satisfied with the decision made pursuant to above, may appeal to Government of
Nepal within thirty five days from the date of receipt of notice of the decision.
vii. If the mediator or the Committee does not make a decision within the time-limit or, in case where
an appeal is filed before Government of Nepal, a decision thereon is not made by Government of
Nepal within sixty days from the date of filing such appeal, the workers or employees may strike.
Bonus Act, 2031
29. 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. How much penalties be imposed as per Bonus Act, 2031.
Answer:
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.
Restriction to Obtain 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.
Penalties:
As per Section 20 of Bonus Act, Department of Labor may fine up to Rs. 5,000 to any person for
violation of Bonus Act and Rules.
30. A company having head office and 4 branches has following profit and loss for fiscal year
2071/72. Determine whether the company needs to declare bonus as per Bonus Act, 2030. Does
the loss generating branches employee eligible to get bonus?
Head office Profit Rs. 150,000
Butwal Branch Loss Rs. 50,000
Biratnagar Branch Loss Rs. 35,000
Birgunj Branch Loss Rs. 25,000
Birtamod Branch Profit Rs. 10,000
Answer:
For the purpose of computation of bonus under Bonus Act, 2030 the branches or sub-branches of any
enterprise situated in various places shall be treated as part of the Enterprise. Establishment includes
departments, undertakings and branches too. After considering all the profit and losses, if there is net
profit; enterprise shall have to declare 10% of bonus amount from the net profit of the Enterprise. In the
above case, enterprise has to declare 10% bonus on Rs. 50,000.
Similarly, Section 6 of the Bonus Act, 2030 states that every employee who has worked for more than
half of the working period to be worked in a fiscal year shall be entitled to obtain bonus. Instead of
determining branch wise profit and loss, profit and loss statement of the enterprise as a whole shall be
calculated considering branches and sub branches as a single enterprises and if employee works for more
than half of the working period of an enterprise, they are eligible to get bonus provided all the other
requirement of the Bonus Act, 2030 has been fulfilled.
Here, the employee of the Branch shall be eligible to get bonus, if they have worked more than half of
the working period of the company.
31. Nepal Oil Corporation (NOC) a Government owned corporation has able to generate profit of
Rs. 10 Million. Board of Directors of NOC has declared 10% staff bonus from the net profit
and distributed to its employee. Give your opinion can NOC declare bonus from the Net
profit?
Answer:
Section 5(3) of Bonus Act, 2030 states that the percentage of bonus and other matter relating to bonus
which is to be distributed by the Government owned enterprises shall be as determined by Government
of Nepal.
Every establishment owned by the Government of Nepal, other than factory shall be required to allocate
bonus eight percent of the net profit made by it every fiscal year. The Government of Nepal may also, if
it so deems necessary, issue an order under the Act, prohibiting the payment of bonus by any
establishment owned by it, other than a factory.
In the Above case, NOC is government owned corporation and need to obtain prior approval from
Government of Nepal before declaration of bonus. The declaration of bonus made by the Board of
Directors is inconsistent and invalid as per Bonus Act, 2030. Similarly, NOC cannot declare 10% bonus
from its net profit because percentage of bonus to be distributed shall be as prescribed by Government of
Nepal.
Contract Act, 2056
32. Sher Bahadur left his motorbike in a workshop for repair. Dinesh, the senior mechanic of the
workshop said that Sher Bahadur’s motorbike would be ready by the evening. When Sher

Bahadur went to get his motorbike back, Dinesh denied returning his bike saying Sher
Bahadur did not pay the bill amount as per the rules of the workshop. Can Dinesh hold the
bike? Is there any contract between them and is there any other solution as per other
prevailing laws of Nepal?
Answer:
Section 32 of Contract Act, 2056 states that in case person has given any property for repair,
improvement or renovation in any way to any person, the latter shall return it to the former after
collecting expense or service charge fixed for repair, improvement or renovation. The property handed
over for repair shall be returned to the concerned owner after repairing, improving or renovating it within
the period mentioned in the contract. In case it is not returned within the prescribed period, or any
additional loss or damage is caused to the property or the property is damaged in such a way as to
become unusable in the course of repair, improvement or renovation, action shall be taken as provided
for in the contract, and if no provision has been made in the connection in that contract, an appropriate
compensation shall be paid to the concerned owner.
Notwithstanding anything contained elsewhere, the person repairing, improving or renovating any
property may keep it with him/her until the cost of repair, improvement or renovation or the service
charge fixed for that purpose is paid. In case the cost or service charge is not paid within a reasonable
period, the person repairing, improving or renovating the property may recover his/her expenses or
service charge by selling the property.
Hence, Sher Bahadur must pay the agreed amount as per the contract to get his motorbike back;
otherwise Dinesh, the senior mechanic can hold until it is paid.
Insurance Act, 2049
33. State following is true or false with reasons as per Insurance Act, 2049.
i. An insurance company established to provide life as well as non life insurance business.
Answer: Section 12 of Insurance Act, 2049 states that no national or foreign corporate body shall be
registered as an Insurer, to operate both life insurance as well as non-life insurance business.
ii. Due to market practices and to attract insured, insurer issued insurance policy on credit.
Answer: Section 27 states that no insurer shall hold the insurance risk of any category of Insurance
Business until it receives the premium of the insurance to be obtained by it. It shall be deemed that
the insurer has undertaken the insurance business only after receiving the insurance premium by it
for holding the risk.
iii. Board of Directors appointed liquidator to liquidate insurance companies.
Answer: Section 18 states that Government of Nepal may appoint a liquidator, if any insurer has
been dissolved due to the cancellation of its registration. Board of directors cannot take decision to
liquidate insurance companies.
iv. Foreign insurance company issues insurance premium without establishing its office in
Nepal.
Answer: Section 13 of the Insurance Act, 2049 states that, if the insurer does not open its office
inside Nepal, license of such insurance business shall be cancelled. So before start of issuance of
insurance premium, must establish insurance company's office within Nepal.
v. Employee's salary amount paid firstly than the loan amount at the time of liquidation.
Answer: Yes. This is valid. As per Section 41B of Insurance Act 2049, states that remuneration and
other outstanding amounts to be obtained by the employees of the insurer comes first in order of
priority than loan amount.
34. What do you mean by liquidation of insurance company? Mention order of priority in
settlement of liabilities in case of liquidation of insurer.
Answer:

Liquidation of insurance company means existence of company is in the process of end. As per Section
18, liquidator of insurance company shall be appointed by Government of Nepal. After the completion of
liquidation process, perpetual succession of the company and separate legal existence comes to an end.
Order of Priority in Settlement of Liabilities:
(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

35. Mention following based on Negotiable Instruments Act, 2034:
i. Kumar is a major and his sister "Kriti" is a minor. Both executed a promissory note in
favour of Girish. Examine the validity of the promissory note.
Answer: A negotiable instrument cannot be made invalid only on the reason that one of the party is
a minor. Since a minor is not liable to a negotiable instrument, Kumar is liable to pay Girish and
other party, who is a minor is not liable.
ii. P draws a bill on "Q". Q accepts the bill for without any consideration. The bill is
transferred to "R" without any consideration. R transfers the bill to "S" for certain
consideration. Explain whether "S" can demand any payment from earlier parties or he
can only demand the payment from just "R". What are the rights and liabilities of other
parties?
Answer: "S" can recover the amount of bill from all the prior parties as he the holder for certain
value/consideration.
No party except "S" can recover the amount of the bill from all prior parties since a negotiable
instrument creates no legal obligation of payment if it is drawn, accepted or endorsed or
transferred without any consideration.
iii. X who obtains a cheque drawn by Y by way of gift. Whether X is holder or not?
Answer: X is holder as he is entitled to the cheque in his own name.
iv. A, the payable of cheque, who is prohibited by a court order from receiving the amount of
cheque.
Answer: A is not a holder as he is not entitled to the amount as per the court's order.
v. A cheque is drawn payable to "B or order". It is stolen and the thief forges B's endorsement
and endorses it to C. The banker pays the cheque in due course. Can B recover the money
from the banker?
Answer: The drawee bank is discharged when it pays a cheque payable to order when it is purported to
be endorsed by or on behalf of the payee. Even though the endorsement of Mr. B is forged, the banker is
protected and discharged. The true owner, B, cannot recover the money from drawee bank.
36. How the date of maturity of Negotiable Instrument be calculated? What would be the due
date, when the maturity of negotiable instrument falls on a public holiday? Ascertain the Date
of maturity of a bill payable 120 days after the date. The bill of exchange was drawn on 1st
June 2015? Explain with reference to the provisions of Negotiable Instruments Act, 2034?
Answer:
The maturity of a bill, not payable on demand, at
sight or on presentment, is at maturity on the third
day after the day on which it is expressed to be
payable. Two days are allowed as days of grace
exclusive of public holiday. No days of grace are
allowed in the case of a bill payable on demand, at
sight, or presentment.
When the last day of grace falls on a day, which is
public holiday, the instrument is due and payable
on the next preceding business day.
In this case the day of presentment for sight is to be executed i.e. 1st June, 2015. The period of 120 days
ends on 21 September, 2015 (June 29 days+ July 31 days+ August 31 days+ September 29 days=120
days). Two days of grace are to be added. It falls due on 1st October 2015, which is the date of maturity.
37. Write about the Notice of Dishonor in case of non acceptance and non-payment.
Answer:
Dishonor by Non Acceptance:
A bill may be dishonored either by non-acceptance or by non-payment. A dishonor by non acceptance
may take place in any one of the following circumstances:
a) When the drawee either does not accept the bill
within 48 hours of presentment or refuse to accept it;
b) When one of several drawees, not being partners,
makes default in acceptance;
c) When drawee gives a qualified acceptance;
d) When presentment for acceptance is excused and the
bill remains unaccepted; and
e) When the drawee is incompetent to contract.
Note that presentment is not necessary where the drawee after diligent, search cannot be discovered, or
where the drawee is incompetent to contract or here the drawee is fictitious person.
When a bill has been dishonored by non acceptance, it gives the holder an immediate right to have
recourse against the drawer or the endorser. Since a dishonor by non acceptance constitutes a material
ground entitling the holder to take action against the drawer, he need not wait till the maturity of the bill
for it to be dishonored on presentment for payment.
Dishonor by Non Payment:

An instrument is dishonored by non-payment when the party primarily liable e.g.; the acceptor of a bills
of exchange, maker of a promissory note or the drawee of a cheque, make default in payment. An
instrument is also dishonored for non-payment when presentment for payment excused and the
instrument, when overdue, remains unpaid.
38. Mention the Assumptions of Negotiable Instruments based on Negotiable Instruments Act,
2034
Section 103 of the Negotiable Instruments Act, 2034 specifies the following presumptions of
negotiable instruments:
(a) That every Negotiable Instrument was made or drawn for consideration and that every such
instrument, when it has been accepted, indorsed negotiated or transferred, was, accepted, indorsed,
negotiated or transferred for consideration in accordance with the prevailing law,
(b) That every Negotiable Instrument bearing a date was made or drawn on such date,
(c) That every transfer of a Negotiable Instrument was made before its Maturity,
(d) That every accepted bill of exchange was accepted within a reasonable time after its date and before
its Maturity,

(e) That the endorsements appearing upon a Negotiable Instrument were made in the order in which they
appear thereon,
(f) That the Holder of a Negotiable Instrument is a Holder in due Course.
Social Welfare Act, 2049

39. What are the objectives of Social Welfare Act
Answer:
i. All around development of Nepalese people and Nepalese society,
ii. To relate social welfare activities and various social welfare oriented activities to tie up with
reconstruction activities,
iii. To provide humanistic livelihood to the weak and helpless individual, class and community and
make them enable;
iv. To provide status and respect to the welfare oriented institutions and individuals and
v. To develop a co-ordination between social welfare oriented institutions and organizations.
40. What are the special programs relating to social welfare? Mention social welfare activity and to
whom shall have to make compliance of Social Welfare Act, 2049?
Answer:
Special Program relating to social welfare
 To serve interest and render welfare to the children, old age, helpless or disabled people.
 To foster participation in development and to promote and protect the welfare, rights and interest
of the women.
 To rehabilitate and help to lead a life of dignity to the victims of social mischief's and also to
juvenile delinquency, drug addicts and similar people involved in other kind of addictions.
 To help to lead a life with dignity to the jobless, poor and illiterate people.
 To manage religious places and the activities of the trust Guthi institutions.
 To take effective management and actions for the welfare of the backward communities and
classes.
As per Section 2 (a) of Social Welfare Act, 2049 "Social welfare activity” means the welfare activity
oriented towards the economic and social up-liftment and self-reliance to the weak, helpless and
disable individuals.
Social Welfare Act shall be applicable to social organization and institution.
41. Write down the concept of Finance Bill and Act

Answer:
Concept of Finance Bill
When the proposals are introduced to the Legislative Parliament it is called as a Finance Bill. The
Finance Bill is presented at the time of presentation of the budget before Parliament in fulfillment 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.
Concept of 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.
42. Mention the Main Source of Law.

Answer:
1. Legislation
The law made by parliament is called legislation. It is also said that statute law or enacted law. E.g.
Nepal chartered Accountants Act 2053. Legislative law is the most important source in our legal system.
Legislative law must not contradict to the constitution.
2. Precedent
Precedent means the earlier decision of the court that is taken as a rule for the cases that come later. It is
past instance. This is seen as an example to be followed in a similar situation later. As source of law the
principle laid down by the Supreme Court is binding, upon all the courts and authorities.
In case of Ram Chandra Mahato vs. Land Office Dhanusha 2028; The Supreme Court held that "There
should be similar facts to follow the precedent."
3. Custom
Custom is the habitual behavioral system of the human society. It is a particular way of behavior among
members of a group or a society .It is a particular way of behavior among members of a group or a
society which is observed by individuals and social groups because it has been long established. It is the
usage of long period in a community .It is the outcome of ancient behaviors pursed by the people in the
society. A custom is based upon the following characteristics: 1.it is the usage from long period or time
immemorial 2.It should be followed continuously .3.It should be rational and positive. 4. It should not be
immoral. 5. It should not be against the public welfare and justice. 6. It should not be against the state
law.
4. Agreements
Generally, agreement means two or more persons agree to do certain act with the consent of each other.
Agreement or commercial treaty is also one of the sources of business laws. Likewise, two or more
persons can enter any agreement under the existing law .These types of agreements are treated as law.
For example sale of goods, employment, insurance, subscribing shares in a company, forming
partnership are agreements. These agreements are treated as law by the courts of law.
5. Writings and opinions
Writings of the various scholars and opinion of the experts are also most important sources of law. These
are the guidelines to the lawmakers. Scholars may express their opinion or commentaries in the various
aspects of business law through journals, newspapers or books.

Financial Management

Capital Budgeting
Q. No. 1
Ajanta Leasing Company is considering a proposal to lease out a school bus. The bus can be
purchased for Rs. 5,00,000 and, in turn, be leased out at Rs. 1,25,000 per year for 8 years with
payments occurring at the end of each year:
(i) Estimate the internal rate of return for the company assuming tax is ignored.
(ii) What should be the yearly lease payment charged by the company in order to earn 20 per cent
annual compounded rate of return before expenses and taxes?
(iii) Calculate the annual lease rent to be charged so as to amount to 20% after tax annual
compound rate of return, based on the following assumptions:
(i) Tax rate is 40%;
(ii) Straight line depreciation;
(iii) Annual expenses of Rs. 50,000; and
(iv) Resale value Rs. 1,00,000 after the turn.
Q. No. 2
Amnil Co is appraising the purchase of a new machine, costing Rs.1·5 million, to replace an existing
machine which is becoming out of date and which has no resale value. The forecast levels of production
and sales for the goods produced by the new machine, which has a maximum capacity of 400,000 units
per year, are as follows:
Year 1 2 3 4
Sales volume (units/year) 350,000 380,000 400,000 400,000
The new machine will incur fixed annual maintenance costs of Rs.145,000 per year. Variable costs are
expected to be Rs. 3 per unit and selling price is expected to be Rs. 5·65 per unit. These costs and selling
price estimates are in current price terms and do not take account of general inflation, which is forecast to
be 4·7% per year.
It is expected that the new machine will need replacing in four years‘ time due to advances in
technology. The resale value of the new machine is expected to be Rs. 200,000 at that time, in future
value terms.
The purchase price of the new machine is payable at the start of the first year of the four-year life of the
machine. Working capital investment of Rs.150,000 will already exist at the start of the four-year period,
due to the operation of the existing machine. This investment in working capital is expected to increase
in nominal terms in line with the general rate of inflation.
Amnil pays corporation tax one year in arrears at an annual rate of 27% and can claim 25% reducing
balance tax-allowable depreciation on the purchase price of the new machine. The company has a real
after-tax weighted average cost of capital of 6% and a nominal after-tax weighted average cost of capital
of 11%.
Required:
(a) Using a nominal terms net present value approach, evaluate whether purchasing the new machine is
financially acceptable.
Q. No. 3
The Board of ABC Co has decided to limit investment funds to Rs.10 million for the next year and is
preparing its capital budget. The company is considering five projects, as follows:
Initial investment (Rs.) Net present value (Rs.)
Project A 2,500,000 1,000,000
Project B 2,200,000 1,550,000
Project C 2,600,000 1,350,000
Project D 1,900,000 1,500,000
Project E 5,000,000 To be calculated
All five projects have a project life of four years. Projects A, B, C and D are divisible, and Projects B and
D are mutually exclusive. All net present values are in nominal, after-tax terms.
Project E
This is a strategically important project which the Board of ABC Co has decided must be undertaken in
order for the company to remain competitive, regardless of its financial acceptability. Information
relating to the future cash flows of this project is as follows:
Year 1 2 3 4
Sales volume (units) 12,000 13,000 10,000 10,000
Selling price (Rs./unit) 450 475 500 570
Variable cost (Rs./unit) 260 280 295 320
Fixed costs (Rs. ‘000) 750 750 750 750
These forecasts are before taking account of selling price inflation of 5·0% per year, variable costs
inflation of 6·0% per year and fixed cost inflation of 3·5% per year. The fixed costs are incremental fixed
costs which are associated with Project E. At the end of four years, machinery from the project will be
sold for scrap with a value of Rs. 400,000. Tax allowable depreciation on the initial investment cost of
Project E is available on a 25% reducing balance basis and ABC Co pays corporation tax of 28% per
year, one year in arrears. A balancing charge or allowance is available at the end of the fourth year of
operation.
ABC Co has a nominal after-tax cost of capital of 13% per year.
Required:
(a) Calculate the nominal after-tax net present value of Project E and comment on the financial
acceptability of this project.
(b) Calculate the maximum net present value which can be obtained from investing the fund of Rs.10
million, assuming here that the nominal after-tax NPV of Project E is zero.
(c) Discuss the reasons why the Board of ABC Co may have decided to limit investment funds for the
next year.
Cash Flow Statement

Q. No. 4
From the information contained in Income Statement and Balance Sheet of ‗A‘ Ltd., prepare Cash
Flow Statement:
Income Statement for the year ended March 31, 2016
Rs.
Net Sales (A 2,52,00,000
)
Less:
Cash Cost of Sales 1,98,00,000
Depreciation 6,00,000
Salaries and Wages 24,00,000
Operating Expenses 8,00,000
Provision for Taxation 8,80,000
(B 2,44,80,000
)
Net Operating Profit (A – B) 7,20,000
Non-recurring Income – Profits on sale of 1,20,000
equipment
8,40,000
Retained earnings and profits brought forward 15,18,000
23,58,000
Dividends declared and paid during the year 7,20,000
Profit and Loss Account balance as on March 16,38,000
31, 2016
Balance Sheet as on
Assets March 31, 2015 March 31, 2016
(Rs.) (Rs.)
Fixed Assets:
Land 4,80,000 9,60,000
Buildings and Equipment 36,00,000 57,60,000
Current Assets:
Cash 6,00,000 7,20,000
Debtors 16,80,000 18,60,000
Stock 26,40,000 9,60,000
Advances 78,000 90,000
90,78,000 1,03,50,000
Balance Sheet as on
Liabilities and Equity March 31, 2015 March 31, 2016
(Rs.) (Rs.)
Share Capital 36,00,000 44,40,000
Surplus in Profit and Loss 15,18,000 16,38,000
Account
Sundry Creditors 24,00,000 23,40,000
Outstanding Expenses 2,40,000 4,80,000
Income-tax payable 1,20,000 1,32,000
Accumulated Depreciation
on Buildings and 12,00,000 13,20,000
Equipment
90,78,000 1,03,50,000
The original cost of equipment sold during the year 2005-06 was Rs. 7,20,000.
Ratio Analysis
Q. No. 5
From the following information, prepare a summarized Balance Sheet as at 31st March, 2012:

Working Capital Rs.2,40,000
Bank overdraft Rs.40,000
Fixed Assets to Proprietary ratio 0.75
Reserves and Surplus Rs.1,60,000
Current ratio 2.5
Liquid ratio 1.5
Bond Valuation
Q. No. 6
A Commercial Bank is preparing to sell a 8 year bond of Rs. 1,000 at 10% coupon rate p.a. The bond
amount will be amortized equally over its life. If an investor has a minimum required rate of 8%, what is
the present value of the bond?
Equity Valuation
Q. No. 7
A share of Goodwill Limited is currently quoted at, a price earnings ratio of 7.5 times. The retained
earnings per share being 37.5% is Rs. 3 per share. Compute:
(1) The company‘s cost of equity, if investors expect annual growth rate of 12%.
(2) If anticipated growth rate is 13% p.a., calculate the indicated market price, with same cost of
capital.
(3) If the company‘s cost of capital is 18% and anticipated growth rate is 15% p.a., calculate the
market price per share, assuming other conditions remain the same.
Working Capital Management – Requirement & Forecasting

Q. No. 8
A proforma cost sheet of a Company provides the following particulars:
Amount per
unit
(Rs.)
Raw materials cost 100
Direct labour cost 37.50
Overheads cost 75
Total cost 212.50
Profit 37.50
Selling Price 250
The Company keeps raw material in stock, on an average for one month; work -in-progress, on an
average for one week; and finished goods in stock, on an average for two weeks.
The credit allowed by suppliers is three weeks and company allows four weeks credit to its debtors.
The lag in payment of wages is one week and lag in payment of overhead expenses is two weeks.
The Company sells one-fifth of the output against cash and maintains cash-in-hand and at bank put
together at Rs.37,500.
Required:

Prepare a statement showing estimate of Working Capital needed to finance an activity level of
1,30,000 units of production. Assume that production is carried on evenly throughout the year, and
wages and overheads accrue similarly. Work-in-progress stock is 80% complete in all respects.
Receivable Management
Q. No. 9
XYZ Co currently has income of Rs.30 million per year, of which 80% is from credit sales, and a net
profit margin of 10%. Due to fierce competition, XYZ Co has lost market share and is looking for ways
to win back former customers and to keep the loyalty of existing customers. The sales director has
pointed out that a major competitor of XYZ Co. currently offers an early settlement discount of 0·5% for
settlement within 30 days, while XYZ Co itself does not offer an early settlement discount. He suggests
that if XYZ Co could match this early settlement discount, annual income from credit sales would
increase by 20%.
Credit customers of XYZ Co take an average of 51 days to settle invoices. Approximately 0·5% of the
company‘s credit sales have historically become bad debts each year and written off as irrecoverable.
The finance director has been advised that offering an early settlement discount of 0·5% for payment
within 30 days would increase administration costs by Rs. 35,000 per year, while 75% of credit
customers would be likely to take the discount. The credit controller believes that bad debts would fall to
0·375% of credit sales if the early settlement discount were introduced.
XYZ Co has an average short-term cost of finance of 4% per year. Assume that there are 360 days in
each year.
Required:
Evaluate whether XYZ Co should introduce the early settlement discount.
Cash Management
Q. No. 10
RM Technology 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 clea ring 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
will 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?
Cash Conversion Cycle

Q. No. 11
The Goodwill Company is considering determining the effect of its inventory turnover ratio and days
sales outstanding (DSO) on its cash flow cycle. The company‘s 2012 sales (all on credit) were Rs.
180,000 and it earned a net profit of 5 percent. The cost of goods sold equals 85% of sales. Inventory was
turned over 8 times during the year and its DSO was 36 days. The firm had fixed assets totaling Rs.
40,000. The company‘s payable deferral period is 30 days.
a) What is the length of the firm‘s cash conversion cycle?
b) Calculate the total assets turnover ratio.
c) Calculate ROA assuming holding of cash and marketable securities is negligible.
Dividend Distribution Policy
Q. No. 12
From the following information, ascertain whether the firm is following an optimal dividend policy as
per Walter‘s model:
Total Earnings Rs. 600,000
No. of Equity share of Rs. 100 each 40,000
Dividend Paid Rs. 160,000
Price-Earnings (P/E) Ratio 10
The firm is expected to maintain its rate of return of fresh investment. What should be the payout ratio at
which dividend policy will have no effect on the value of the share? Will your decision change if the P/E
ration is 5 instead of 10?
Q. No. 13
M Ltd. has a capital of Rs. 10,00,000 in equity shares of Rs. 100 each. The shares are currently quoted at
par. The company proposes declaration of a dividend of Rs. 10 per share. The capitalization rate for the
risk class to which the company belongs is 12%. What will be the market price of the share at the end of
the year, if – (i) no dividend is declared; and (ii) 10% dividend is declared?
Assuming that the company pays the dividend and has net profits of Rs. 5,00,000 and makes new
investments of Rs. 10,00,000 during the period, how many new shares must be issued ? Use the M. M.
Model
Capital Structure, Leverage & Cost of Capital

Q. No. 14
A Company earns a profit of Rs.3,00,000 per annum after meeting its Interest liability of Rs.1,20,000
on 12% debentures. The Tax rate is 50%. The number of Equity Shares of Rs.10 each are 80,000 and
the retained earnings amount to Rs.12,00,000. The company proposes to take up an expansion
scheme for which a sum of Rs.4,00,000 is required. It is anticipated that after expansion, the
company will be able to achieve the same return on investment as at present. The funds required for
expansion can be raised either through debt at the rate of 12% or by issuing Equity Shares at par.
Required:
(i) Compute the Earnings Per Share (EPS), if:
 the additional funds were raised as debt
 the additional funds were raised by issue of equity shares.
(ii) Advise the company as to which source of finance is preferable.
Q. No. 15
The Modern Chemicals ltd. requires Rs. 25,00,000 for a new plant. This plant is expected to yield
earnings before interest and taxes of Rs. 5,00,000. While deciding about the financial plan, the
company considers the objective of maximizing earnings per share. It has three alternatives to
finance the project–by raising debt of Rs. 2,50,000 or Rs. 10,00,000 or Rs. 15,00,000 and the
balance, in each case, by issuing equity shares. The company‘s share is currently selling at Rs. 150,
but is expected to decline to Rs. 125 in case the funds are borrowed in excess of Rs. 10,00,000. The
funds can be borrowed at the rate of 10% upto Rs. 2,50,000, at 15% over Rs. 2,50,00 and upto Rs.
10,00,000 and at 20% over Rs. 10,00,000. The tax rate applicable to the company is 50%. Which
form of financing should the company choose?
Q. No. 16
The following figures are made available to you:
Rs.

Net profits for the year 18,00,000
Less: Interest on secured debentures at 15% p.a.
(debentures were issued 3 months after the commencement of the year) 1,12,500
16,87,500
Less: Income-tax at 35% and dividend distribution tax 8,43,750
Profit after tax 8,43,750
Number of equity shares (Rs. 10 each) 1,00,000
Market quotation of equity share Rs. 109.70
The company has accumulated revenue reserves of Rs. 12 lakhs. The company is examining a
project calling for an investment obligation of Rs. 10 lakhs. This investment is expected to earn the
same rate of return as funds already employed.
You are informed that a debt equity ratio (Debt divided by debt plus equity) higher than 60% will
cause the price earnings ratio to come down by 25% and the interest rate on additional borrowals
will cost company 300 basis points more than on their current borrowal on secured debentures.
You are required to advise the company on the probable price of the equity share, if
(a) the additional investment were to be raised by way of loans; or
(b) the additional investment were to be raised by way of equity.
Q. No. 17
The following is the capital structure of Simons Company Ltd. as on 31.12.1998:
Rs.
Equity shares: 10,000 shares (of Rs. 100 each) 10,00,000
10% Preference Shares (of Rs. 100 each) 4,00,000
12% Debentures 6,00,000
20,00,000
The market price of the company‘s share is Rs. 110 and it is expected that a dividend of Rs. 10 per
share would be declared for the year 1998. The dividend growth rate is 6%:
(i) If the company is in the 50% tax bracket, compute the weighted average cost of capital.
(ii) Assuming that in order to finance an expansion plan, the company intends to borrow a fund of
Rs. 10 lakh bearing 14% rate of interest, what will be the company‘s revised weighted average
cost of capital? This financing decision is expected to increase dividend from Rs. 10 to Rs. 12
per share. However, the market price of equity share is expected to decline from Rs. 110 to Rs.
105 per share.
Time Value of Money

Q. No. 18
Nepal Investment Bank pays 7 percent interest, compounded annually, on time deposits. Himalayan
Bank pays 6 percent interest, compounded quarterly.
a) Based on effective interest rates, in which bank would you prefer to deposit your money?
b) Could your choice of banks be influenced by the fact that you might want to withdraw your funds
during the year as opposed to at the end of the year? In answering this question, assume that
funds must be left on deposit during the entire compounding period in order for you to receive
any interest.

Risk & Return Theory
Q. No. 19
A Ltd. has a choice among three projects X, Y and Z. The following information has been estimated:
Market Profits (Rs. ‘000)
D1 D2 D3
Demand
Projects
X 190 50 15
Y 110 200 160
Z 150 140 110
Probabilities are D1 = 0.6, D2 = 0.2, D3 = 0.2
a) Which project should be undertaken if decision is made by expected value approach?
b) Calculate the expected value of perfect information?

Overview of Nepalese Capital Market
Q. No. 20
Kumari Bank Limited issued 1 for 2 right shares on Magh 30, 2073 at an exercise price of Rs. 100 per
share. Market value of its shares immediately prior to the rights issue was Rs. 500 per share. Kumari
Bank had 20 million shares before the issuance of rights shares. All rights were exercised by
shareholders.
Calculate Theoretical Ex-right price.
Mutual Fund
Q. No. 21
a. What is Net Assets Value (NAV) and how it is computed?
b. The portfolio composition of a Balanced Mutual Fund is as follows:
Stocks No. of Price per
shares share
A 20,000 Rs. 350
B 30,000 Rs. 400
C 40,000 Rs. 200
D 60,000 Rs. 250
The fund has not borrowed any funds, but its accrued management fee with the Fund Manager
currently totals Rs. 1,000,000. Further, the fund has investment of Rs. 40,00,000 in time deposit and
call account balance of Rs. 8,00,000. The accrued but not realized interest on bank deposits as on the
date of calculation of NAV is Rs. 200,000. There are 4 million units outstanding.
Required: i) What is the Net Asset Value (NAV) per unit of the fund?
ii) Would you buy or sell units of the fund if they are trading at Rs. 12.85 per unit?
Q. No. 22 – Differentiate Between:

 IPO and FPO
 Depository and Depository Participant
 Open and Closed Ended Mutual Fund
 Factoring and Bill Discounting
 Money market and Capital market
 Euro Bond and Foreign Bond
 Primary and Secondary market
Q. No. 23 – Write Short Notes

 Functions of Merchant Bankers
 Application Supported by Blocked Account (ASBA)
 Functions of Stock Exchanges
 Debt securitization
 Angel Investor
 Packing Credit Facility
 Merger & Acquisition
 Credit Rating
 Mutual Fund
 Financial Distress
Suggested Answers

Q. No. 1
5,00,000
(i) Payback period = = 4.00
1,25,000
PV factor closest to 4.00 in 8 years is 4.078 at 18%
Thus IRR = 18%
Note: Students may also arrive at the answer of 18.63% instead of 18% if exact
calculation are made as follows:-
PV factor in 8 years at 19% is 3.9544
Interpolating for 4.00
4.0776 - 4.000
IRR = 18%   18.63%
4.0776 - 3.9544
(ii) Desired lease rent to earn 20% IRR before expenses and taxes:
5,00,000 5,00,000
Lease Rent = = = Rs. 1,30,310.13 p.a.
PVIFA 8 yr, 20% 3.837
(iii) Revised lease rental (suppose x) on school bus to earn 20% return based on the given conditions.
PV factor [(x – E – D) (1 – T) + D] + (PV factor × S.V.) = Co
3.837 [(x – 50,000 – 50,000) (1 – .4) + 50,000] + (.233 × 1,00,000) = 5,00,000
3.837 [.6x – 60,000 + 50,000)] + 23,300 = 5,00,000
2.3022x = 5,15,070
x = 2,23,729.47
Verification
Lease rental 2,23,729.47
Less: Expenses + Depreciation 1,00,000.00
EBT 1,23,729.47
Less tax 40% 49,491.79
PAT 74,237.68
Add: Depreciation 50,000.00
CFAT 1,24,237.68
Co - PV of SV 5,00,000 - 23,300
= = 3.837 or 20%
CFAT 1,24,237.68
Q. No. 2
(Rs. In ‗000)
Year 1 2 3 4 5
Sales income 2,072 2,352 2,596 2,716
Variable cost (1,099) (1,250) (1,376) (1,444)
Contribution 973 1,102 1,220 1,272
Maintenance cost (152) (159) (166) (174)
Cash flow before tax 821 943 1,054 1,098
Tax (222) (255) (285) (296)
Depreciation benefits 101 76 57 117
Cash flow after tax 821 822 875 870 (179)
Working capital (7) (7) (8) (8)
Resale value 200
Net cash flow 814 815 867 1,062 (179)
Discount at 11% 0.901 0.812 0.731 0.659 0.593
Present values 733 662 634 700 (106)
Rs. In ‗000
PV of future cash flows 2,623
Initial investment (1,500)
––––––
Net present value 1,123
––––––
The investment in the new machine has a positive net present value and is therefore financially
acceptable.
Q. No. 3
a)
Calculation of NPV (Rs.
'000)
Year 1 2 3 4 5
Sales income 5,670 6,808 5,788 6,928
Variable cost (3,307) (4,090) (3,514) (4,040)
Contribution 2,363 2,718 2,274 2,888
Fixed cost (776) (803) (832) (861)
Cash flow before tax 1,587 1,915 1,442 2,027
Tax at 28% - 444 536 404 568
Depreciation tax benefit 350 263 197 479
Cash flow after tax 1,587 1,821 1,169 1,820 (89)
Scrap value 400
Net cash flow 1,587 1,821 1,169 2,220 (89)
Discount at 13% 0.885 0.783 0.693 0.613 0.543
Present values 1,404 1,426 810 1,362 (48)
Sum of present values 4,954

Initial investment -5,000
Net present value (46)
Although the NPV of the project is negative and so financially it is not acceptable, the Board of ABC Co
haS decided that it must be undertaken as it is strategically important.
Workings
Year 1 2 3 4
Selling price (Rs./unit) 450.00 475.00 500.00 570.00
Inflated selling price
(Rs./unit) 472.50 523.69 578.81 692.84
Sales volume (units/year) 12,000 13,000 10,000 10,000
Sales income (Rs. '000/year) 5,670 6,808 5,788 6,928
Variable cost (Rs. /unit) 260 280 295 320

Inflated variable cost (Rs.
/unit) 275.60 314.61 351.35 403.99
Variable cost (Rs. '000/year) 3,307.20 4,089.93 3,513.50 4,039.90
Year Tax allowable depreciation Tax Benefit

1 5,000,000 x 0·25 = Rs. 1,250,000 1,250,000 x 0·28 = Rs. 350,000
2 3,750,000 x 0·25 = Rs. 937,500 937,500 x 0·28 = Rs. 262,500
3 2,812,500 x 0·25 = Rs. 703,125 703,125 x 0·28 = Rs. 196,875
4 1,709,375* 1,709,375 x 0·28 = Rs. 478,625
*5,000,000 – 1,250,000 – 937,500 – 703,125 – 400,000
b) Calculation of Maximum NPV

Project A B C D E
Investment (Rs. ' 000) 2,500 2,200 2,600 1,900 5,000
NPV (Rs. ' 000) 1,000 1,550 1,350 1,500 nil
PV of future cash flows 3,500 3,750 3,950 3,400 5,000
Profitability index 1.40 1.70 1.52 1.79 1.00
Ranking 4 3 2 1
Project E has been ranked first as it must be undertaken. Project B cannot be undertaken if Project D is
undertaken, as the two projects are mutually exclusive.
Calculation of maximum NPV

Investment (Rs.
Projects 000) NPV (Rs. '000)
Project E 5,000 nil
Project D 1900 1500
Project C 2600 1350
Project A 500 200
Total 10,000 3,050
As Project A is divisible and only Rs. 500,000 (20%) of its Rs. 2,500,000 initial cost is available after
cumulative investment in Projects E, D and C, the NPV from the project is Rs. 200,000 (20% of Rs.
1,000,000).
c) When a company restricts or limits investment funds, it is undertaking ‗soft‘ or internal capital
rationing. Capital rationing means that a company is unable to invest in all projects with a positive net
present value and hence it is not acting to maximize shareholder wealth.
There are several reasons why the Board of ABC Co may have decided to limit investment funds for
the next year. It may not wish to issue new equity finance in order to avoid diluting earning per share.
Issuing new equity finance may also increase the risk of a company‘s shares being bought by a
potential acquirer, leading to a future takeover bid.
The Board of ABC Co may not wish to issue new debt finance if it wishes to avoid increasing its
commitment to fixed interest payments. This could be because economic prospects are seen as poor or
challenging, or because existing debt obligations are high and so the Board does not wish to increase
them.
The Board of ABC Co may wish to follow a strategy of organic growth, financing capital investment
projects from retained earnings rather than seeking additional external finance.
The Board of ABC Co may wish to create an internal market for capital investment funds, so that
capital investment proposals must compete for the limited funds made available in the budget set by
the Board. This competition would mean that only robust capital investment projects would be funded,
while marginal capital investment projects would be rejected.
Q. No. 4
Cash Flow Statement of Company A Ltd.
for the year ending March 31, 2016
Cash flows from Operating Activities
Rs.
Net Profits before Tax and Extra-ordinary Item 16,00,000
Add: Depreciation 6,00,000
Operating Profits before Working Capital Changes 22,00,000
Increase in Debtors (1,80,000)
Decrease in Stock 16,80,000
Increase in Advances (12,000)
Decrease in Sundry Creditors (60,000)
Increase in Outstanding Expenses 2,40,000
Cash Generated from Operations 38,68,000
Income tax Paid 8,68,000
Net Cash from Operations 30,00,000
Cash flows from Investment Activities

Rs.
Purchase of Land (4,80,000)
Purchase of Buildings and Equipment (28,80,000)
Sale of Equipment 3,60,000
Net Cash used in Investment Activities (30,00,000)
Cash flows from Financing Activities
Rs.
Issue of Share Capital 8,40,000
Dividends Paid (7,20,000)
Net Cash from Financing Activities 1,20,000
Net increase in Cash and Cash Equivalents 1,20,000

Cash and Cash Equivalents at the beginning 6,00,000
Cash and Cash Equivalents at the end 7,20,000
Buildings and Equipment Account
Rs. Rs.
Balance b/d 36,00,000 Sale of Asset 7,20,000
Cash/Bank Balance c/d 57,60,000
(purchase) 28,80,000 ________
(Balancing figure)
64,80,000 64,80,000
Accumulated Depreciation on
Buildings and Equipment Account
Rs. Rs.
Sale of Asset Balance b/d 12,00,000
(Accumulated 4,80,000 Profit and Loss 6,00,000
depreciation) (Provisional)
Balance c/d 13,20,000 ________
18,00,000 18,00,000
Sale of Asset Account
Rs.
Original Cost 7,20,000
Less: Accumulated Depreciation 4,80,000
Net Cost 2,40,000
Profit on Sale of Asset 1,20,000
Sale Proceeds from Asset Sales 3,60,000
Q. No. 5
Working notes:
1. Current assets and Current liabilities computation:
Current assets 2.5 Current assets Current liabilities

 or  = k (say)
Current liabilities 1 2.5 1
Or Current assets = 2.5 k and Current liabilities = k
Or Working capital = ( Current assets  Current liabilities)
Or Rs.2,40,000 = k (2.5  1) = 1.5 k
Or k = Rs. 1,60,000
 Current liabilities = Rs. 1,60,000
Current assets = Rs.1,60,000  2.5 = Rs.4,00,000
2. Computation of stock
Liquid assets
Liquid ratio =
Current liabilities

Current assets - Stock
Or 1.5 =
Rs.1,60,000
Or 1.5  Rs.1,60,000 = Rs.4,00,000  Stock
Or Stock = Rs.1,60,000
3. Computation of Proprietary fund; Fixed assets; Capital and Sundry creditors

Fixed assets
Proprietary ratio =  0.75
Proprietary fund
 Fixed assets = 0.75 Proprietary fund
and Net working capital = 0.25 Proprietary fund
Or Rs.2,40,000/0.25 = Proprietary fund
Or Proprietary fund = Rs.9,60,000
and Fixed assets = 0.75 proprietary fund
= 0.75  Rs.9,60,000
= Rs.7,20,000
Capital = Proprietary fund  Reserves & Surplus
= Rs.9,60,000  Rs.1,60,000
= Rs.8,00,000
Sundry creditors = (Current liabilities  Bank overdraft)
= (Rs.1,60,000  Rs.40,000)
= Rs.1,20,000
Balance Sheet
Rs. Rs.
Capital 8,00,000 Fixed assets 7,20,000
Reserves & Surplus 1,60,000 Stock 1,60,000
Bank overdraft 40,000 Current assets 2,40,000
Sundry creditors 1,20,000
11,20,000 11,20,000
Q. No. 6
The bond's cash flows and present values are determined as follows
Principal Total Cash PV
Interest Payment @ 10% amortized Outflow factor Present
Years (Rs.) (Rs.) (Rs.) @8% Value
1 1000*10% =100.0 125 225.0 0.926 208.33
2 (1000-125)*10% = 87.5 125 212.5 0.857 182.18
3 (1000-250)*10% = 75.0 125 200.0 0.794 158.77

4 62.5 125 187.5 0.735 137.82
5 50.0 125 175.0 0.681 119.10
6 37.5 125 162.5 0.630 102.40
7 25.0 125 150.0 0.583 87.52
8 12.5 125 137.5 0.540 74.29

450 1000 1450 1,070.42
The value of bond today is Rs. 1,070.42.
Q. No. 7
1. Calculation of cost of capital

Retained earnings 37.5% Rs. 3 per share
Dividend* 62.5% Rs. 5 per share
EPS 100.0% Rs. 8 per share
P/E ratio 7.5
times
Market price is Rs. 7.5  8 = Rs. 60 per share
Cost of equity capital = (Dividend/price  100) + growth
%
= (5/60  100) + 12% = 20.33%.
*  
Rs. 3
 62.5  Rs. 5 
 37.5 
2. Market price = Dividend/(cost of equity capital %  growth rate %) = 5/(20.33%  13%) =
5/7.33% = Rs. 68.21 per share.
3. Market price = Dividend/(cost of equity capital %  growth rate %) = 5/(18%  15%)
= 5/3% = Rs. 166.66 per share.
Q. No. 8
(a) Activity level: 1,30,000 units

Statement showing Estimate of Working Capital Needs
A. Investment in Inventory:
Raw material inventory: 1 month 10,00,000

*
 4 
1,30,000  Rs. 100 
 52 
WIP Inventory : 1 week 1,30,000  0.80  212.50 

1
 52  4,25,000
Finished goods inventory: 2 weeks
 2  10,62,500
1,30,000   212.50
 52 
B. Investment in Debtors: 4 weeks at cost
 4 4  17,00,000
1,30,000   212.50
 5 52 
C. Cash balance 37,500
D. Investment in Current Assets (A + B + C) 42,25,000
E. Current Liabilities:
Creditors : 3 weeks
 3  7,50,000
1,30,000 100 
 52 
Deferred wages : 1 week
 1  93,750
1,30,000  37.50 
 52 
Deferred overheads : 2 weeks
 2  3,75,000 12,18,750
1,30,000   75 
 52 
Net Working Capital Needs 30,06,250
* For calculation purposes, 4 weeks has been considered as equivalent to a month.
Q. No. 9
Current credit sales income = 30,000,000 x 0·8 = Rs.24,000,000
Credit sales income after introducing discount = 24,000,000 x 1·2 = Rs.28,800,000
Increase in income by introducing discount = 24,000,000 x 0·2 = Rs. 4,800,000
Increase in net profit (profit before interest and tax) = 4,800,000 x 0·1 = Rs.480,000
Current level of bad debts = 24,000,000 x 0·005 = Rs.120,000 per year
Revised level of bad debts = 28,800,000 x 0·00375 = Rs.108,000 per year
This would be a benefit of 120,000 – 108,000 = Rs. 12,000 per year
Rs. ‘000
Trade receivables taking discount = 28,800,000 x 0·75 x 30/360 = 1,800
Trade receivables not taking discount = 28,800,000 x 0·25 x 51/360= 1,020
Revised level of trade receivables 2,820

Current trade receivables = 24,000,000 x 51/360 = 3,400
Reduction in trade receivables 580
Rs. Rs.
Benefits
Reduction in financing costs = 580,000 x 0·04 = 23,200
Increase in net profit = 480,000
Reduction in bad debts = 12,000

––––––––
515,200
Costs
Increase in administration costs 35,000
Cost of discount = 28,800,000 x 0·005 x 0·75 = 108,000
––––––––
143,000
––––––––
Net benefit of proposed early settlement discount = Rs. 372,200
––––––––
Q. No. 10
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
Q. No. 11
a) Cash conversion cycle

= Inventory conversion cycle + receivable conversion period –
payable deferral period
= 45 days + 36 days – 30 days
= 51 days
b) Assets turnover ratio = = = 2.33 times
c) Return on Assets (ROA) = = = 11.67%
Working Notes
Inventory Conversion period = = 360/8 = 45 days
Inventory turnover =

8=
Inventory = Rs. 19,125
Receivable collection period =
Receivables = Rs. 18,000
Total Assets = Fixed assets + Current assets

= Fixed assets + Inventory + Receivables
= 40,000 + 19,125 + 18,000
= Rs. 77,125
Q. No. 12
Dividend per share (D) = 160,000/40,000 = Rs. 4

Earnings per share (E) = 600,000/40,000 = Rs. 15
Rate of return on firm‘s investment (r) = =15%
Cost of Capital (Ke) = 1/P/E ratio = 1/10 = 10%

According to Walter‘s model, price of share (P) is calculated as follows:
P=
= Rs. 205
Calculation of Payout ratio at which dividend policy will have no effect on the value of the share
Firm‘s dividend payout ratio = Rs. 1,60,000/ Rs. 6,00,000 = 0.2667 or 26.67%
Rate of return of the firm (r) is 15%, which is more than its cost of capital (Ke) is 10%. Therefore, by
distributing 16.67% of earnings, the firm is not following an optimal dividend policy. The optimal
dividend policy for the firm would be to pay zero dividend and in such case, the market value of share
under Walter‘s model would be as follows :
P=
= Rs. 225
The market value of the share would increase by not paying dividend and by retaining all the earnings of
the company
Calculation of market value of share when P/E ratio is 5 instead of 10
The Ke of the firm is the inverse of P/E ratio i.e. 1/5 = 0.20. In such case Ke > r

P=
= Rs. 61.25
Under the situation, P/E ratio is 5 the optimum dividend policy for the company would be 100%
dividend payout at which the value of the firm would be maximum.
Q. No. 13
i) Calculation of share price under MM Hypothesis – Dividend Irrelevancy Model
a) When dividend is not declared

100 =
= Rs. 112
b) When dividend is declared
100 =
= Rs. 102
ii) Calculation of Number of shares to be issued
If no dividend If dividend
Particulars
declared declared
Net Income 500,000 500,000
Less: Dividend - 100,000
Retained Earnings 500,000 400,000
New Investments 1,000,000 1,000,000
Amount to be raised by issue of new shares 500,000 600,000

(A)
112 102
Market price per share (B)
4,464 5,882
New shares to be issued (A/B)
Q. No. 14
Working Notes:
1. Capital employed before expansion plan :
Rs.
Equity shares 8,00,000
Debentures 10,00,000
(Rs.1,20,000/12)  100
Retained earnings 12,00,000
Total capital employed 30,00,000
2. Earnings before the payment of interest and tax (EBIT)
Rs.
Profit 3,00,000
Interest 1,20,000
EBIT 4,20,000
3. Return on investment (ROI)
EBIT Rs.4,20,000
ROI =  100   100 = 14%
Capital employed Rs.30,00,000
4. Earnings before the payment of interest and tax (EBIT) after expansion
After expansion, capital employed = Rs.34,00,000
Desired EBIT = 14%  Rs.34,00,000 = Rs.4,76,000
(i) Statement showing Earning Per Share (EPS)

(Under present and anticipated expansion scheme)
Present situation Expansion scheme
Additional funds raised as
Debt Equity
Rs. Rs. Rs.
EBIT: (A) 4,20,000 4,76,000 476,000
(Refer to Working note (Refer to Working note 4)
2)
Interest  Old 1,20,000 1,20,000 1,20,000
capital
 New capital  48,000 
(Rs.4,00,000 
12%)
Total interest : (B) 1,20,000 1,68,000 1,20,000
EBT:{(A)  3,00,000 3,08,000 3,56,000
(B)}
Less: Tax 1,50,000 1,54,000 1,78,000
(50% of EBT)
PAT 1,50,000 1,54,000 1,78,000
EPS 1.875 1.925 1.48
(Rs.1,50,000/ (Rs.1,54,000/ (Rs.1,78,000/
80,000) 80,000) 1,20,000)
(ii) Advise to the Company: Since EPS is greater in the case when company arranges additional
funds as debt. Therefore, debt scheme is better.
Q. No. 15
Calculation of Earnings per share for three alternatives to finance the project
Alternatives
I II III
To raise debt of Rs. To raise debt of Rs. To raise debt of Rs.
Particulars 2,50,000 10,00,000 15,00,000
and equity of Rs. and equity of Rs. and equity of Rs.
22,50,000 15,00,000 10,00,000
Rs. Rs. Rs.
Earnings before interest and tax 5,00,000 5,00,000 5,00,000
Less: Interest on debt 25,000 1,37,500 2,37,500
at the rate of (10% on Rs. (10% on Rs. (10% on Rs.
2,50,000) 2,50,000) 2,50,000)
(15% on Rs. (15% on Rs.
2,50,000) 7,50,000)
________________ _________________ (20% on Rs.
5,00,000)
Earning before tax 4,75,000 3,62,500 2,62,500
Less: Tax @ 50% 2,37,500 1,81,250 1,31,250
Earnings after tax: (A) 2,37,500 1,81,250 1,31,250
Number of shares: (B) 15,000 10,000 8,000
(Refer to working note)
Earning per share: (A) / (B) 15.833 18.125 16.406
Decision: The earning per share is higher in alternative II i.e. if the company finance the project by
raising debt of Rs. 10,00,000 and issue equity shares of Rs. 15,00,000. Therefore the company
should choose this alternative to finance the project.
Working Note:
Alternatives
I II III
Equity financing : (A) Rs. 22,50,000 Rs. 15,00,000 Rs. 10,00,000
Market price per share: (B) Rs. 150 Rs. 150 Rs. 125
Number of equity shares : 15,000 10,000 8,000
(A)/(B)
Q. No. 16
Working Note:
Present earning/share: Rs.
Profit before taxes 16,87,500
Less: Tax at 35%
5,90,625
No. of equity shares

1,00,000
Rs.10,96,875
E.P.S.
1,00,000
E.P.S. = Rs. 10.97
Market price Rs. 109.70
Rs.109.70
Hence,P/E   10
Rs.10.97
(a) Probable price/share, if the additional investment were to be raised by way of loans
Present capital employed: Rs.
Equity 10,00,000
Debenture (Long term) 10,00,000
Revenue reserves 12,00,000 Rs. 32,00,000
Pre-interest and pre-tax profits given Rs. 18 lakhs

Rs.18 lakhs  100
Rate of return EBIT   56.25%
Rs. 32 lakhs
Debt equity ratio, if Rs. 10 lakhs (additional investment) were to be borrowed
(Debt Rs. 20 lakhs and equity Rs. 22 lakhs), will be
Rs. 20 lakhs  100
 47.6%
Rs. 42 lakhs
since, the debt equity ratio will not exceed 60% P/E will remain same.
If Rs. 10 lakhs is to be borrowed, the earning will be as under:
Rs. Rs.
Return of 56.25% on Rs. 42 lakhs 23,62,500
Less: Interest at 15% on existing Rs. 10 lakhs debentures 1,50,000
Interest on fresh borrowed amount of Rs. 10 lakhs at 18% 1,80,000 3,30,000
Profit after interest before tax 20,32,500
Less: Tax at 35% 7,11,375
No. of equity shares 1,00,000

Rs.13,21,125
E.P.S.  Rs.13.21
Rs.1,00,000
Probable price of equity share = Rs. 13.21  10
= Rs. 132.10
(b) Probable price/share, if additional investment were to be raised by way of equity.
If Rs. 10 lakhs were to be raised by way of equity shares at market rates. The existing market
price of Rs. 109.70 may come down a little and may possibly settle at Rs. 100. Hence, new
equity shares to be raised will be
Rs. 10,00,000/Rs. 100 = 10,000 shares.
If Rs. 10 lakhs is to be raised by way of equity shares, the earning will be as under:
Rs.
Profit before interest and tax 23,62,500
Less: Interest on debentures
1,50,000
Profit after interest before tax 22,12,500
Less: Tax @ 35%
7,74,375
No. of equity shares 1,10,000
 Rs.14,38,125 
E.P.S.    Rs.13.07
 1,10,000 
Probable price of equity share = Rs. 13.07  10
= Rs. 130.70
The suggested solution will be to issue fresh debentures to finance expansion.
Q. No. 17
(i) Computation of the weighted average cost of capital

Source of finance Proportion After tax cost (%) (1-tax Weighted average
rate i.e. 50%) cost of capital (%)
(a) (b) (c) (d)= (b)  (c)
Equity share 0.5 15.09 7.54
(Refer to working note 1)
10% Preference share 0.2 10.00 2.00
12% Debentures 0.3 6.00 1.80
Weighted average cost of capital 11.34
(ii) Computation of Revised weighted average cost of capital

Source of finance Proportion After tax cost (%) (1-tax Weighted average
rate i.e. 50%) cost of capital (%)
(a) (b) (c) (d)= (b)  (c)
Equity share 0.333 17.42 5.80
(Refer to working note 2)
10% Preference share 0.133 10.00 1.33
12% Debentures 0.200 6.00 1.20
14% Loan 0.333 7.00 2.33
Revised weighted average cost of capital 10.66
Working Notes:
(1) Cost of equity shares (K e)
Dividend per share
Ke   Growth rate
Market price per share
10
  0.06
110
= 0.1509 or 15.09%
(2) Revised cost of equity shares (K e)
12
Revised K e   0.06
105
= 0.1742 or 17.42%
Q. No. 18
a) Nepal Investment Bank pays 7% interest annually.

But, the effective annual rate (EAR) of Himalayan Bank will be:
EAR = -1
= -1
= 6.14%
Nepal Investment bank is preferred.
b) If there is possibility of withdrawing amount before the year end, placement of fund at Nepal
Investment Bank does not earn any interest whereas Himalayan bank provides interest until most recent
quarter. In such case, Himalayan bank is preferred.
Q. No. 19
a) Computation of expected values
Project Demand Profit (Rs. ‘000) Probability Expected Profit

D1 190 0.6 114
X D2 50 0.2 10
D3 15 0.2 3
Expected Value 127
D1 110 0.6 66
Y D2 200 0.2 40
D3 160 0.2 32
Expected Value 138
D1 150 0.6 90
Z D2 140 0.2 28
D3 110 0.2 22
Expected Value 140
Project Z should be undertaken as it has highest expected value of Rs. 140,000.
b) Computation of expected value of perfect information

In order to obtain perfect information from market researcher about the future state of demand, a
company has to pay for the information to the maximum extent of amount over the expected
value without the information.
Demand Project Profit (Rs. ‘000) Probability Expected Value

selected (Rs. ‘000)
D1 X 190 0.6 114
D2 Y 200 0.2 40
D3 Y 160 0.2 32
Expected Value with perfect information 186
Hence, Expected value of perfect information = 186-140 = Rs. 46 i.e. Rs. 46,000
Q. No. 20
Particulars Figure in Million

Market Value before right issue 10,000
(Rs. 500X20 million shares)
Cash raised from right issue (20 1,000
million shares/2 X Rs.100)
Total Number of Shares post 30
right issue (20+10 million shares)
Theoretical Ex-right price Rs. 366.67 per share
{(10,000+1,000)/30}
Q. No. 21
Net Asset Value (NAV)

It is the amount which a unit holder would receive if the mutual fund were wound up. It is the net value
of all assets less liabilities. NAV represents the market value of total assets of the Fund less total
liabilities attributable to those assets. NAV changes daily as the value of assets and liabilities changes
daily. NAV is computed as a value per unit of holding.
The fund‘s net assets are defined as the assets less liabilities and NAV per unit is computed as follows:
NAV =
Where net assets of the scheme is defined as below:

Net Assets of the Scheme = Market value of investments + Receivable + Other accrued income + other
assets – Accrued Expenses – Other Payables – Other Liabilities

b)
i) Calculation of NAV per unit
No. of
Stocks Shares Price Value
A 20,000 350 7,000,000
B 30,000 400 12,000,000
C 40,000 200 8,000,000
D 60,000 250 15,000,000
Total value of Investments 42,000,000
Time Deposit (Fixed Deposit) 4,000,000
Bank Balance 800,000
Interest Receivable 200,000
Total Assets (a) 47,000,000
Liabilities (Management fee payable) (b) 1,000,000
Net Assets (a-b) 46,000,000
No. of Units Outstanding 4,000,000
Net Assets Value (NAV) per unit* 11.5
*NAV = Net Assets/No. of Units
ii) As the NAV of the unit is less than current market price, it is being traded at premium price and hence
it is advised to sell the unit.
Q. No. 22
IPO and FPO
An initial public offering (IPO) is the first time that the stock of a company is offered to a large public.
IPOs are often issued by smaller, younger companies seeking capital to expand, but they can also be
done by large privately owned companies looking to become publicly traded.
A follow-on public offer (FPO) is an issuing of shares to investors by a public company that is already
listed on an exchange. An FPO is essentially a stock issue of supplementary shares made by a company
that is already publicly listed and has gone through the IPO process.
The main differences are as follows:
 A company makes an IPO for raising money and an FPO for adding to the initial public offerings
or for managing capital structure.
 Initial Public Offering is the first sale whereas the Follow-up Public Offering is the second sale
for expanding businesses.
 IPOs are risky investments as an individual investor cannot predict what will happen to the initial
trading in the coming days. In the case of FPOs, the risk is lower as an investor already has an
idea about the investment and future growth of the company.
 Initial Public Offerings are more profitable than Follow up Public Offerings.
Depository & Depository Participant
A depository is an organisation which holds securities (like shares, debentures, bonds, government
securities, mutual fund units etc.) of investors in electronic form at the request of the investors through a
registered Depository Participant. It also provides services related to transactions in securities. The

investor has to open a demat account to avail the services of depository. Additionally, the depository
maintains the record in the account of the investors.
CDS and Clearing Ltd. is the sole Depository in Nepal established in 2067 B.S. under Company Act
2063 with an objective to render service of dematerialization of securities. It is wholly owned subsidiary
company of Nepal Stock Exchange Ltd. (NEPSE).
A Depository Participant is an agent of the depository who has received the registration certificate from
the Securities Board of Nepal (SEBON) and the membership license from CDSC.
To be an authorized DP, the DP has to comply following eligibility criteria:
 Shall be a Bank or Financial Institution, Stock Broker, Registrar and Transfer Agent, custodian or
such other entity as may be prescribed by the SEBON from time to time,
 Shall have minimum net worth of rupees ten million,
 Have not been black listed by Credit Information Bureau
As of January, 2017, 60 companies (Merchant Bankers, stock brokers and BFIs) have taken license
of Depository Participants. They serve as member to the CDS & Clearing Ltd. and open and operate
Dmat A/c for their clients.
Open Ended and Closed 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).
Factoring and Bill discounting
The main differences between Factoring and Bill discounting are:

(1) While factoring is management of book-debts, bill discounting is a sort of borrowing from
commercial banks.
(2) In factoring no grace period is given, whereas in bill discounting grace peri od is 3 days.
(3) For factoring there is no Specific Act, whereas in case of bill discounting Negotiable
Instruments Act applies.
(4) Factoring is a portfolio of complementary financial services whereas bill discounting is usually
on case to case basis.
(5) 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.
(6) In factoring the risk of bad debts is passed on to the factor, whereas in bill discounting it is still
retained by the business.
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 further classification There is a classification between

between primary market and primary market and secondary market.
secondary market
(ii) It deals with funds of short-term It deals with funds of long-term
requirement. requirement.
(iii) Money market instruments include Capital Market instruments are shares
interbank call money, certificate of and debt instruments.
deposits, commercial paper,
treasury bills.
(iv) Money market participants are Capital Market participants include
banks, financial institution, central retail investors, Stock exchanges,
bank and Government brokers, merchant bankers and
institutional investors like Mutual
Funds, Insurance companies, Financial
Institutions, corporate and banks.
Euro Bond and Foreign Bond
Euro bonds are debt instruments which are not denominated in the currency of the country in which they
are issued. E.g. a Yen bond floated in Germany.
Foreign bonds 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. An example of a foreign bond is ‗A British firm placing Dollar
denominated bonds in USA‘.
Primary and Secondary Markets
Nature of Securities:
The primary markets deal with new securities, that is, securities, which were not previously available and
are, therefore, offered to the investing public for the first time. The stock market, on the other hand, is a
market for old securities, i.e. securities which have been issued already and granted stock exchange
quotation. The stock exchanges, therefore, provide a regular and continuous market for buying and
selling of securities.
Nature of Financing:
Primary market provides additional funds to the issuing companies either for starting a new enterprise or
for the expansion or diversification of the existing one and, therefore, its contribution to company
financing is direct. In contrast, the secondary markets can in no circumstance supply additional funds
since the company is not involved in the transaction. This, however, does not mean that the stock
markets do not have relevance in the process of transfer of resources from savers to investors. Their role
regarding the supply of capital is indirect. The existence of secondary markets provides institutional
facilities for the continuous purchase and sale of securities and lends liquidity and marketability thus,
playing an important part in the process.
Organizational Differences:
The stock exchanges have physical existence and are located in a particular geographical area. The
primary market is not rooted in any particular spot and has no geographical existence. The primary
market has neither any tangible form of any administrative organizational setup like that of stock
exchanges, nor is it subjected to any centralized control and administration for the consummation of its
business. It is recognized only by the services that it renders to the lenders and borrowers of capital funds
at the time of any particular operation.
Risk:
Investment in secondary market is relatively more risky than in primary market.
Q. No. 23
Functions of Merchant Bankers:
The basic function of merchant banker or investment banker is marketing of corporate and other
securities. In the process, it performs a number of services concerning various aspects of marketing,
viz., origination, underwriting, and distribution, of securities. According to Securities
Businessperson (Merchant Bankers) Regulations, a licensed merchant banker in Nepal can undertake
functions of issue management, underwriting of securities, share registrations related services and
portfolio management services. Now, merchant bankers are designing innovative instruments and
perform a number of other services both for the issuing companies as well as the investors. The
activities or services performed by merchant bankers include:
 Management and marketing of new issues.
 Underwriting of new issues.
 Share registration related services
 Investment or Portfolio management services
 Investment advisory service
 Demat related services
 Corporate advisory services such as mergers & acquisitions, business valuation, feasibility
study, fund raising, business plan etc.
 Providing venture capital and operating private equity
 Loan Syndication
 Leasing services.
 Operating mutual funds and off shore funds.
 Providing assistance for technical and financial collaborations and joint ventures.
 Management of and dealing in commercial paper.
 Investment services for non-resident Nepalese.
 Project promotion services.
 Project finance.
Application Supported by Blocked Account (ASBA)
Application Supported by Blocked Amount (ASBA) refers to an application mechanism for subscribing
to initial public offers (IPO). The system which ensures that the applicant's money remains in his/her
bank account till the shares are allotted. The applicant‘s bank account will only be debited post allotment
of the shares. The amount debited depends on the shares/MF units allotted to the applicant and the
remaining amount, if any, is freed for use.
SEBON has introduced ASBA system from Magh 2073. However, the option, though available, is not
mandatory for the investors. They can continue to make applications through the existing facility of
applying with cash/cheque.
Prior to ASBA while applying in an IPO, the entire amount had to be paid up front with the applications.
In case there was no allotment or part-allotment, the amount would get refunded to the applicant after 45-
75 days. This was a lost opportunity as the funds did not earn any interest during the period either.
However, if the application is made via ASBA, the funds stay blocked in the investor‘s account, but
continue to earn the interest. Further, operational hassle of collecting and or depositing refund slip can be
avoided.
Functions of Stock Exchanges
Functions of the stock exchanges can be summarized as follows:
Liquidity and Marketability of Securities:

The basic function of the stock market is the creation of a continuous market for securities, enabling
them to be liquidated, where investors can convert their securities into cash at any time at the prevailing
market price. It also provides investors the opportunity to change their portfolio as and when they want
to change, i.e. they can at any time sell one security and purchase another, thus giving them
marketability.
Fair Price Determination:

This market is almost a perfectly competitive market as there are large number of buyers and sellers. Due
to nearly perfect information, active bidding take places from both sides. This ensures the fair price to be
determined by demand and supply forces.
Source for Long term Funds:

Corporate, Government and public bodies raise funds from the equity market. These securities are
negotiable and transferable. They are traded and change hands from one investor to the other without
affecting the long-term availability of funds to the issuing companies.
Helps in Capital Formation:

There is nexus between the savings and the investments of the community. The savings of the
community are mobilized and channeled by stock exchanges for investment into those sectors and units
which are favored by the community at large, on the basis of such criteria as good return, appreciation of
capital, and so on. Stock exchanges render this service by arranging for the preliminary distribution of
new issues of capital, offered through prospectus, as also offers for sale of existing securities, in an
orderly and systematic manner. They themselves administer the same, by ensuring that the various
requisites of listing (such as offering at least the prescribed minimum percentage of capital to the public,
keeping the subscription list open for a minimum period of days, making provision for receiving
applications at least at the prescribed centres, allotting the shares against applications on a fair and
unconditional basis) are duly complied with. Members of stock exchanges also assist in the flotation of
new issues by acting (i) as brokers, in which capacity they, inter alia, try to procure subscription from
investors spread all over the country, and (ii) as underwriters. Stock exchanges also provide a forum for
trading in rights shares of companies already listed, thereby enabling a new class of investors to take up a
part of the rights in the place of existing shareholders who renounce their rights for monetary
considerations.
Reflects the General State of Economy:

The performance of the stock markets reflects the boom and depression in the economy. It indicates the
general state of the economy to all those concerned, who can take suitable steps in time. The Government
takes suitable monetary and fiscal steps depending upon the state of the economy.
Debt securitisation
Securitisation is a process in which illiquid assets are pooled into marketable securities that can be sold
to investors. These assets are generally secured by personal or real property such as automobiles, real
estate, or equipments loans but in some cases are unsecured
The following example illustrates the process in a conceptual manner:

A finance company has issued a large number of car loans. It desires to raise further cash so as to be in
a position to issue more loans. One way to achieve this goal is by selling all the existing loans,
however, in the absence of a liquid secondary market for individual car loans, this may not be feasible.
Instead, the company pools a large number of these loans and sells interest in the pool to investors. This
process helps the company to raise finances and get the loans off its Balance sheet. These finances shall
help the company disburse further loans. Similarly, the process is beneficial to the investors as it creates
a liquid investment in a diversified pool of auto loans, which may be an attractive option to other fixed
income instruments. The whole process is carried out in such a way, that the ultimate debtors- the car
owners – may not be aware of the transaction. They shall continue making payments the way they were
doing before, however, these payments shall reach the new investors instead of the company they (the
car owners) had financed their car from.
The process of securitisation is generally without recourse, i.e. the investor bears the credit risk or risk of
default and the issuer is under an obligation to pay to investors only if the cash flows are received by him
from the collateral. The issuer however, has a right to legal recourse in the event of default. The risk run
by the investor can be further reduced through credit enhancement facilities like insurance, letters of
credit and guarantees.
Benefits to the Originator

 The assets are shifted off the balance sheet, thus giving the originator recourse to off balance
sheet funding.
 It converts illiquid assets to liquid portfolio.
 It facilitates better balance sheet management as assets are transferred off balance sheet
facilitating satisfaction of capital adequacy norms.
 The originator‘s credit rating enhances.
For the investor securitisation opens up new investment avenues. Though the investor bears the credit
risk, the securities are tied up to definite assets.
Angel Investor
Angel investors invest in small startups or entrepreneurs. Often, angel investors are among an
entrepreneur's family and friends. The capital angel investors provide may be a one-time investment to
help the business propel or an ongoing injection of money to support and carry the company through its
difficult early stages.
Angel investors provide more favorable terms compared to other lenders, since they usually invest in the
entrepreneur starting the business rather than the viability of the business. Angel investors are focused on
helping startups take their first steps, rather than the possible profit they may get from the business.
Essentially, angel investors are the opposite of venture capitalists.
Angel investors are often retired entrepreneurs or executives, who may be interested in angel investing
for reasons that go beyond pure monetary return. These include wanting to keep abreast of current
developments in a particular business arena, mentoring another generation of entrepreneurs, and making
use of their experience and networks on a less than full-time basis. Thus, in addition to funds, angel
investors can often provide valuable management advice and important contacts. Because there are no
public exchanges listing their securities, private companies meet angel investors in several ways,
including referrals from the investors' trusted sources and other business contacts; at investor conferences
and symposia; and at meetings organized by groups of angels where companies pitch directly to investor
in face-to-face meetings.
Packing Credit facilities
Packing credit is an advance made available by banks to an exporter. Any exporter, having at hand a
firm export order placed with him by his foreign buyer on an irrevocable letter of credit opened in
his favour, can approach a bank for availing of packing credit. An advance so taken by an exporter is
required to be liquidated within 180 days from the date of its commencement by negotiation of
export bills or receipt of export proceeds in an approved manner. Thus Packing Credit is essentially a
short-term advance.
Normally, banks insist upon their customers to lodge the irrevocable letters of credit opened in favor
of the customer by the overseas buyers. The letter of credit and firms‘ sale contracts not only serve
as evidence of a definite arrangement for realization of the export proceeds but also indicate the
amount of finance required by the exporter. Packing Credit, in the case of customers of long standing
may also be granted against firm contracts entered into by them with overseas buyers. Packing credit
may be of the following types:
(i) Clean Packing credit: This is an advance made available to an exporter only on production
of a firm export order or a letter of credit without exercising any charge or control over raw
material or finished goods. It is a clean type of export advance. Each proposal is weighted
according to particular requirements of the trade and credit worthiness of the exporter. A
suitable margin has to be maintained. Also, Export Credit Guarantee Corporation (ECGC)
cover should be obtained by the bank.
(ii) Packing credit against hypothecation of goods: Export finance is made available on certain
terms and conditions where the exporter has pledgeable interest and the goods are
hypothecated to the bank as security with stipulated margin. At the time of utilizing the
advance, the exporter is required to submit, along with the firm export order or letter of
credit, relative stock statements and thereafter continue submitting them every fortnight and
whenever there is any movement in stocks.
(iii) Packing credit against pledge of goods: Export finance is made available on certain terms
and conditions where the exportable finished goods are pledged to the banks with approved
clearing agents who will ship the same from time to time as required by the exporter. The
possessions of the goods so pledged lies with the bank and are kept under its lock and key.
Merger & Acquisition
Mergers and acquisitions (abbreviated M&A) are corporate strategy, corporate finance and management
dealing with the buying, selling, dividing and combining of different companies and similar entities that
can help an enterprise grow rapidly in its sector or location of origin, or a new field or new location,
without creating a subsidiary, or using a joint venture. Mergers and acquisitions activity can be defined
as a type of restructuring in that they result in some entity reorganization with the aim to provide growth
or positive value. Consolidation of an industry or sector occurs when widespread M&A activity
concentrates the resources of many small companies into a few larger ones.

In a merger, two or more companies combine into a single entity and lose their separate identity. But the
acquisition means purchasing a controlling interest in the share capital of the target company.
The distinction between a "merger" and an "acquisition" has become increasingly blurred in various
respects (particularly in terms of the ultimate economic outcome), although it has not completely
disappeared in all situations. From a legal point of view, a merger is a legal consolidation of two
companies into one entity, whereas an acquisition occurs when one company takes over another and
completely establishes itself as the new owner (in which case the target company still exists as an
independent legal entity controlled by the acquirer).
Credit Rating
Credit rating essentially reflects the probability of timely repayment of principal and interest by a
borrower company. It indicates the risk involved in a debt instrument as well its qualities. Higher
the credit rating, greater is the probability that the borrower will make timely payment of principal
and interest and vice-versa.
It has assumed an important place in the modern and developed financial markets. It is a boon to t he
companies as well as investors. It facilitates the company in raising funds in the capital market and
helps the investor to select their risk-return trade-off. By indicating credit-worthiness of a borrower,
it helps the investor in arriving at a correct and rational decision about making investments.
Credit rating system plays a vital role in investor protection. Fair and good credit ratings motivate
the public to invest their savings.
As a fee-based financial advisory service, credit rating is obviously extremely useful to the investors,
the corporate (borrowers) and banks and financial institutions. To the investors, it is an indicator
expressing the underlying credit quality of a security to be floated for in the market. The investor is
fully informed about the company as any effect of changes in business/economic conditions on the
company is evaluated and published regularly by the rating agencies. The Corporate borrowers can
raise funds at a cheaper rate with good rating. It minimizes the role of the ‗name recognition‘ and
less known companies can also approach the market on the basis of their rating. The fund ratings are
useful to the banks and other financial institutions while deciding lending and investment strategies.
Mutual Fund
A mutual fund is a type of professionally managed collective investment scheme that pools money from
many investors and invest such fund into a portfolio of securities. It is a pool of investors‘ of money
invested and managed by a professional fund manager. Mutual Fund collects fund by issuing units to the
individual or institutional investors and the buyer of such units are called unit holders. The performance
of a mutual fund is generally measured by its Net Asset Value (NAV) which is published on regular
basis.
Advantages of Mutual Fund

 Professional and Technical Management
 Low/Limited Risk
 Objective Related Investment
 High Liquidity
 Convenience and Easy Investing
 Low Transaction Cost
 Maintaining Portfolio with Small Investment
 Regular Information Update
 Transparency and Regulated
 Tax Benefits

Constitutions of a mutual fund
a) Sponsor
b) Fund Manager (Asset Management Company)
c) Depository (Registrar & Transfer Agent)\
d) Fund Supervisors (Trustees)
e) Custodian
Financial Distress
Financial distress is a term in corporate finance used to indicate a condition when promises/obligations to
creditors of a company are broken or honored with difficulty. If financial distress cannot be relieved, it
can lead to bankruptcy. Financial distress is usually associated with some costs to the company. A
common example of a cost of financial distress is bankruptcy costs. These direct costs include auditors'
fees, legal fees, management fees and other payments. Cost of financial distress can occur even if
bankruptcy is avoided (indirect costs).
Financial distress in companies requires management attention and might lead to reduced attention on the
operations of the company.
Another source of indirect costs of financial distress are higher costs of capital as usually banks increase
the interest rates if a state of financial distressed occurs.
If high debt burden is the cause of financial distress, the company can undergo a debt restructuring. If
operational issues are the reason for the distress, the company can negotiate a payment holiday with its
creditors and improve operations to be again able to service its debt.

Cost and Management Accounting

QUESTIONS
Costs concepts and costing methods

Question No. 1
a) A Ltd. is engaged in production of sugar. While producing sugar molasses
is also produced. Molasses is identified as by-product of sugar. Suggest the treatment of
molasses in the cost accounts of A Ltd.
b) Discuss cost classification based on variability and controllability.
c) Differentiate between ―scrap‖ and "defectives‖ and how they are treated in
cost accounting.
d) Discuss accounting treatment of idle capacity costs in cost accounting.
Material Control
Question No. 2
a) Raw materials ‗AXE‘ costing Rs. 150 per kg. and ‗BXE‘ costing Rs. 90 per kg. are mixed in
equal proportions for making product ‗A‘. The loss of material in processing works out to
25% of the product. The production expenses are allocated at 40% of direct material cost.
The end product is priced with a margin of 20% over the total cost.
Material ‗BXE‘ is not easily available and substitute raw material ‗CXE‘ has been found for
‗BXE‘ costing Rs. 75 per kg. It is required to keep the proportion of this substitute material in
the mixture as low as possible and at the same time maintain the selling price of the end
product at existing level and ensure the same quantum of profit as at present.
You are required to compute the ratio of the mix of the raw materials ‗AXE‘ and ‗CXE‘.
b) Arnav Udyog, a small scale manufacturer, produces a product X by using two raw materials A
and B in the ratio of 3:2. Material A is perishable in nature and if not used within 5 days of
purchase it becomes obsolete. Material B is durable in nature and can be used even after
one year. The company has estimated a sales volume of 30,000 kg. for the month of July
2017 and expects that the trend will continue for the entire year. The ratio of input and
output is 5:3. The purchase price of per kilogram of raw material A and B is R s. 15 and
Rs.22 respectively exclusive of taxes. Material A can be purchased from the local market
within 1 to 2 days period. On the other hand Material B is purchased from neighboring
state and it takes 2 to 4 days to receive the material in the store.
To place an order the company has to incur an administrative cost of Rs. 120. Carrying
cost for Material A and B is 15% and 5% respectively.
At present Material A is purchased in a lot of 8,000 kg. to avail 10% discount on market
price.
VAT applicable for material A is 13% (credit available) and Local Development Tax
on Material B is 2% (credit not available).
Company works for 25 days in a month and production is carried out evenly. You are
required to calculate:
(i) Economic Order Quantity (EOQ) for each material;
(ii) Maximum stock level for Material A;
(iii) Calculate saving/ loss in Material A if purchase quantity equals to EOQ.
Labour Control
Question No. 3
Arnav Limited manufactures and sales plastic chairs. It pays wages under the differential piece
rate system by following F.W. Taylor‘s System with a standard piece rate of R s . 12.50 per
unit of chair produced by the workers. Standard production per hour is 4 chairs. Each worker is
supposed to work 8 hours a day from Monday to Friday and 5 hours on Saturday. Presently,
there are 118 workers who are entitled for this plan.
The plant and machinery used to manufacture the chairs was purchased long back and does not
match with the efficiency of the workers. Workers appraised their concerns to the management
and demanded wages on the time rate basis i.e. Rs. 50 per hour and the incentive under the
Halsey Premium plan.
The following production estimates has been made for the month of June, 2017 under the three
scenarios:
Scenario Worst case Optimal case Best case

Production (in units) 42,400 84,960 1,27,400
Required:
a) Calculate total wages and average wages per worker per month, under the each scenario,
when
i) Current system of wages and incentive payment system is followed
ii) Workers‘ demand for time rate wages and Halsey premium plan is accepted.
b) Mr. K, during the month of May 2017, has produced 1,050 units. What will be impact on
his earning if he will be able to produce the same number of units in next month also.
Should he support the workers‘ demand?
(Take 4 working weeks in a month)
Overhead
Question No. 4
a) Explain Single and Multiple Overhead Rates.
b) PQR manufacturers – a small scale enterprise, produces a single product and has adopted a policy
to recover the production overheads of the factory by adopting a single blanket rate based on
machine hours. The annual budgeted production overheads for the year 2016-17 are
R s . 44,00,000 and budgeted annual machine hours are 2,20,000.
For a period of first six months of the financial year 2016 -2017, following information were
extracted from the books:
Actual production overheads R s . 24,88,200

Amount included in the production overheads:
Paid as per court‘s order R s . 1,28,000
Expenses of previous year booked in current year R s . 1,200
Paid to workers for strike period under an award R s . 44,000
Obsolete stores written off R s . 6,700
Production and sales data of the concern for the first six months are as under:
Production:
Finished goods 24,000 units
Works-in-progress
(50% complete in every respect) 18,000 units
Sale:
Finished goods 21,600 units
The actual machine hours worked during the period were 1,16,000 hours. It is revealed from
the analysis of information that ¼ of the under/ over absorption was due to defective
production policies and the balance was attributable to increase/decrease in costs.
Required:
(i) Determine the amount of under/over absorption of production overheads for the six
months period of 2016-17.
(ii) Show the accounting treatment of under/ over absorption of production overheads,
and
(iii) Apportion the under/ over absorbed overheads over the items.
Costs Accounts System, Cost Control (Integrated and Non-integrated Accounting System)
Question No. 5
a) What are the reasons for disagreement of profits as per cost accounts and
financial accounts? Discuss.
b) ABC Ltd. has furnished the following information from the financial books for the year
ended 31st Ashadh, 2073:
Profit & Loss Account
(Rs.) (Rs.)
To Opening stock (500 units at 70,000
By Sales (10,250 28,70,000
Rs.140 each) units)
To Material consumed 10,40,000 By Closing stock
To Wages 6,00,000 (250 units at Rs. 200 50,000
To Gross profit c/d 12,10,000 each)
29,20,000 29,20,000
To Factory overheads 3,79,000 By Gross profit b/d 12,10,000
To Administration overheads 4,24,000 By Interest 1,000
To Selling expenses 2,20,000 By Rent received 40,000
To Bad debts 16,000
To Preliminary expenses 20,000
To Net profit 1,92,000
12,51,000 12,51,000
The cost sheet shows the cost of materials at Rs. 104 per unit and the labour cost at Rs.
60 per unit. The factory overheads are absorbed at 60% of labour cost and administration
overheads at 20% of factory cost. Selling expenses are charged at Rs. 24 per unit. The
opening stock of finished goods is valued at Rs. 180 per unit.
You are required to prepare:
(i) A statement showing profit as per Cost accounts for the year ended 31st Ashadh,
2073;
(ii) Statement showing the reconciliation of profit as disclosed in Cost accounts with
the profit shown in financial accounts.
Methods of Costing
Question No. 6
a) A contractor commenced a building contract on Magh 1, 2071. The contract price is R s .
4,40,000. The following data pertaining to the contract for the year 2072-2073 has been compiled
from his books and is as under :
(R s . )
Sharawan 1, 2072 Work-in-progress not certified 55,000
Materials at site 2,000
2072–73 Expenses incurred :
Materials issued 1,12,000
Wages paid 1,08,000
Hire of plant 20,000
Other expenses 34,000
Ashadh 31, 2073 Materials at site 4,000
Work-in-progress : Not certified 8,000
Work-in-progress : Certified 4,05,000
The cash received represents 80% of work certified. It has been estimated that further costs to
complete the contract will be R s . 23,000 including the materials at site as on Ashadh 31, 2073.
Required :
Determine the profit on the contract for the year 2072-73 on prudent basis, which has to be
credited to Costing P/L A/c.
b) Indian Oil Refinery Ltd. refines crude oil and produces two joint product Gasoline and HSD
in the ratio of 4:6. The refining is done in three processes.
Crude oil is first fed in Process-A, from where the two products Gasoline and HSD
are get separated. After separation from Process-A, Gasoline and HSD are further
processed in Process- B and Process- C respectively. During the month of July, 2016,
4,50,000 Ltr. of crude oil were processed in Process-A at a total cost of R s . 1,71,99,775.
In Process-B, Gasoline is further processed at a cost of R s . 10,80,000.
In Process- C, HSD is further processed at a cost of R s . 1,35,000.

The Input output ratio for the each process is as follows: Process-
A 1 : 0.80
Process- B 1 : 0.95
Process- C 1 : 0.90
The details of sales during the month are:
Gasoline HSD
Quantity sold (Ltr.) 1,32,000 1,88,000
Sales price per Ltr.( R s . ) 68 46
There were no opening stocks. If these products were sold at split-off point, the
selling price of Gasoline and HSD would be R s . 64 and R s . 41 per Ltr. respectively.
Required:
a. Prepare a statement showing the apportionment of joint cost to
Gasoline and HSD in proportion of sales value at split off point.
b. Prepare a statement showing the cost per Ltr. of each product
indicating joint cost, processing cost and total cost separately.
Prepare a statement showing the product wise profit or loss for the month.
c) Gopal Milk Co-Operative Society (GMCS) collects raw milk from the farmers of Ramgarh,
Pratapgarh and Devgarh panchayats and processes these milk to make various dairy
products. GMCS has its own vehicles (tankers) to collect and bring the milk to the processing
plant. Vehicles are parked in the GMCS‘s garage situated within the plant compound.
Following are the some information related with the vehicles:
RamgarhPratapgar Devgarh
No. of vehicles assigned 4 3 h 5
No. of trips a day 3 2 2
One way distance from the processing 24 k.m. 34 k.m. 16 k.m.
planttax paid p.m. (Rs.)
Toll 2,850 3,020 ---
All the 5 vehicles assigned to Devgarh panchayat, were purchased five years back at
a cost of Rs.9,25,000 each. The 4 vehicles assigned to Ramgarh panchayat, were
purchased two years back at a cost of Rs.11,02,000 each and the remaining vehicles
assigned to Pratapgarh were purchased last year at a cost of Rs.13,12,000 each. With the
purchase of each vehicle a two years free servicing warranty is provided. A vehicle gives 10
kmpl mileage in the first two year of purchase, 8 kmpl in next two years and 6 kmpl
afterwards. The vehicles are subject to depreciation of 10% p.a. on straight line basis
irrespective of usage. A vehicle has the capacity to carry 25,000 litres of milk but on an
average only 70% of the total capacity is utilized.
The following expenditure is related with the vehicles:

Salary to a Driver (a driver for each Rs.18,000 p.m.
vehicle) Rs. 11,000 p.m.
Salary to a Cleaner (a cleaner for
each vehicle) Rs. 1,350 per vehicle per month
Allocated garage parking Rs. 3,000 for every complete 5,000
fee Servicing cost k.m. run.
Rs.58.00
Price of diesel per litre
From the above information you are required to calculate

a. Total operating cost per month for each vehicle. (Take 30 days for the
month)
b. Vehicle operating cost per litre of milk.
d) A Company produces a component, which passes through two processes. During

the month of April, 2016, materials for 40,000 components were put into Process I of which
30,000 were completed and transferred to Process II. Those not transferred to Process II were
100% complete as to materials cost and 50% complete as to labour and overheads cost. The
Process I costs incurred were as follows:
Direct Materials Rs. 15,000
Direct Wages Rs. 18,000
Factory Overheads Rs. 12,000
Of those transferred to Process II, 28,000 units were completed and transferred to
finished goods stores. There was a normal loss with no salvage value of 200 units in
Process II. There were 1,800 units, remained unfinished in the process with 100% complete
as to materials and 25% complete as regard to wages and overheads.
No further process material costs occur after introduction at the first process until
the end of the second process, when protective packing is applied to the completed
components. The process and packing costs incurred at the end of the Process II were:
Packing Materials Rs. 4,000
Direct Wages Rs. 3,500
Factory Overheads Rs. 4,500
Required:
(i) Prepare Statement of Equivalent Production, Cost per unit and Process I A/c.
(ii) Prepare statement of Equivalent Production, Cost per unit and Process II A/c.
Cost Concepts for Decision Making

Question No. 7
a) Arnav Ltd. manufacture and sales its product R-9. The following figures
have been collected from cost records of last year for the product R-9:
Elements of Cost Variable Cost portion Fixed Cost

Direct Material Direct 30% of Cost of Goods Sold -
Labour Factory 15% of Cost of Goods Sold -
Overhead 10% of Cost of Goods Sold Rs. 230,000
Administration Overhead 2% of Cost of Goods Sold Rs. 71,000
Selling & Distribution Overhead 4% of Cost of Sales Rs. 68,000
Last Year 5,000 units were sold at Rs.185 per unit. From the given data find the
followings:
(a) Break-even Sales (in rupees)
(b) Profit earned during last year
(c) Margin of safety (in %)
(d) Profit if the sales were 10% less than the actual sales.
(e)
b) Mega Company has just completed its first year of operations. The unit costs on a
normal costing basis are as under:
(Rs.)
Direct material 4 kg @ Rs. 4 = 16.00
Direct labour 3 hrs @ Rs. 18 = 54.00
Variable overhead 3 hrs @ Rs. 4 = 12.00
Fixed overhead 3 hrs @ Rs. 6 = 18.00
100.00
Selling and administrative costs:

Variable Rs. 20 per unit
Fixed Rs. 7,60,000
During the year the company has the following activity:
Units produced = 24,000

Units sold = 21,500
Rs.168
Unit selling price =
Direct labour hours worked = 72,000
Actual fixed overhead was Rs. 48,000 less than the budgeted fixed overhead. Budgeted variable
overhead was Rs. 20,000 less than the actual variable overhead. The company used an
expected actual activity level of 72,000 direct labour hours to compute the predetermine
overhead rates.
Required :

(i) Compute the unit cost and total income under:
(a) Absorption costing
(b) Marginal costing
(ii) Under or over absorption of overhead.
(iii) Reconcile the difference between the total income under absorption and marginal costing.
Costing for planning and Control –Budgets

Question No.8
a) Concorde Ltd. manufactures two products using two types of materials and one grade of labour.
Shown below is an extract from the company‘s working papers for the next month‘s budget:
Product-A Product-B
Budgeted sales (in units) 2,400 3,600
Budgeted material consumption per unit (in kg):
Material-X 5 3
Material-Y 4 6
Standard labour hours allowed per unit of product 3 5
Material-X and Material-Y cost Rs. 4 and Rs. 6 per kg and labours are paid Rs. 25 per hour.
Overtime premium is 50% and is payable, if a worker works for more than 40 hours a week. There
are 180 direct workers.
The target productivity ratio (or efficiency ratio) for the productive hours worked by the direct
workers in actually manufacturing the products is 80%. In addition the non-productive down-time is
budgeted at 20% of the productive hours worked.
There are four 5-days weeks in the budgeted period and it is anticipated that sales and production
will occur evenly throughout the whole period.
It is anticipated that stock at the beginning of the period will be:
Product-A 400 units
Product-B 200 units
Material-X 1,000 kgs.
Material-Y 500 kgs
The anticipated closing stocks for budget period are as below:
Product-A 4 days sales
Product-B 5 days sales
Material-X 10 days consumption
Material-Y 6 days consumption

Required:
Calculate the Material Purchase Budget and the Wages Budget for the direct workers, showing the
quantities and values, for the next month.
b) A department of AXY Company attains sales of Rs. 6,00,000 at 80% of its normal capacity. Its
expenses are given below:
(Rs.) Selling Costs :
Office salaries 90,000 Salaries 8% of sales
General expenses 2% of sales Travelling expenses 2% of sales
Depreciation 7,500 Sales office 1% of sales
Rent and rates 8,750 General expenses 1% of sales
Distribution costs:
Wages (Rs.) 15,000
Rent 1% of sales
Other expenses 4% of sales
Draw up Flexible Administration, Selling and Distribution Costs Budget, operating at 90

per cent, 100 per cent and 110 per cent of normal capacity.
Standard Costing
Question No. 9
a. Gama Ltd. has furnished the following standard cost data per' unit of production: Material 10 kg
@ Rs. 10 per kg.
Labour 6 hours @ Rs. 5.50 per hour
Variable overhead 6 hours @ Rs. 10 per hour.
Fixed overhead Rs.4,50,000 per month (Based on a normal volume of 30,000 labour hours.)
The actual cost data for the month of August 2016 are as follows:
Material used 50,000 kg at a cost of Rs. 5,25,000.
Labour paid Rs. 1,55,000 for 31,000 hours worked
Variable overheads Rs. 2,93,000
Fixed overheads Rs. 4,70,000 Actual
production 4,800 units. Calculate:
(i) Material Cost Variance.
(ii) Labour Cost Variance.
(iii) Fixed Overhead Cost Variance.
(iv) Variable Overhead Cost Variance.
Uniform Costing and Inter-firm comparison

Question No. 10
a. Describe the objectives of Uniform Costing.
b. What are the Advantages of Inter-Firm Comparison?

Cost control and cost reduction
Question No. 11
a) Distinguish between Cost Control and Cost Reduction.
b) Enumerate the scope of Cost Reduction.

SUGGESTED ANSWERS / HINTS
Answer 1 (a)
Molasses is a by product of sugar and treatment of by-product in cost accounting is as
follows.
When these are of small total value, the amount realized from their sale may be dealt as
follows:
 Sales value of the by-product may be credited to Costing Profit and Loss Account
and no credit be given in Cost Accounting. The credit to Costing Profit and Loss
Account is treated here either as a miscellaneous income or as additional sales revenue.
 The sale proceeds of the by-product may be treated as deduction from the total costs.
The sales proceeds should be deducted either from production cost or cost of sales.
When they require further processing: In this case, the net realisable value of the by-
product at the split-off point may be arrived at by subtracting the further processing cost
from realisable value of by-product. If the value is small, it may be treated as discussed in (i)
above.
Answer 1 (b)
Cost classification based on variability
(a) Fixed Costs – These are the costs which are incurred for a period, and which, within certain output
and turnover limits, tend to be unaffected by fluctuations in the levels of activity (output or
turnover). They do not tend to increase or decrease with the changes in output. For example, rent,
insurance of factory building etc., remain the same for different levels of production.
(b) Variable Costs – These costs tend to vary with the volume of activity. Any increase in the activity
results in an increase in the variable cost and vice-versa. For example, cost of direct labour, etc.
(c) Semi-variable Costs – These costs contain both fixed and variable components and are thus partly
affected by fluctuations in the level of activity. Examples of semi variable costs are telephone bills,
gas and electricity etc.
Cost classification based on controllability
(a) Controllable Costs - Cost that can be controlled, typically by a cost, profit or investment centre
manager is called controllable cost. Controllable costs incurred in a particular responsibility centre
can be influenced by the action of the executive heading that responsibility centre. For example,
direct costs comprising direct labour, direct material, direct expenses and some of the overheads are
generally controllable by the shop level management.
Uncontrollable Costs - Costs which cannot be influenced by the action of a specified member of
an undertaking are known as uncontrollable costs. For example, expenditure incurred by, say, the
tool room is controllable by the foreman in-charge of that section but the share of the tool-room
expenditure which is apportioned to a machine shop is not to be controlled by the machine shop
foreman.
Answer 1 (c)
Scrap: Scrap is incidental residence from certain type of manufacture, usually of
small amount and low value, recoverable without further processing.
The cost of scrap is borne by good units and income from scrap is treated as other
income.
Defectives: Defectives are portion of production which can be rectified by incurring

additional cost. Normal defectives can be avoided by quality control. Normal defectives
are charged to good products.
Abnormal defectives are charged to Costing Profit and Loss Account.
Answer 1 (d)
Treatment of Idle Capacity Cost
(a) If idle capacity is due to unavoidable reasons such as repairs &

maintenance, changeover of job etc., a supplementary overhead rate may be used to
recover the idle capacity cost. In this case, the costs are charged to production capacity
utilized.
(b) If idle capacity cost is due to avoidable reasons such as faulty planning, power
failure etc, the cost should be charged to Costing P&L A/c.
(c) If idle capacity is due to seasonal factors, then the cost should be charged to cost
of Production by inflating overhead rates.
Answer 2 (a)
Working Notes:
(i) Computation of material mix ratio:
Let 1 kg. of product A requires 1.25 kg. of input of materials AX E and B X E
Raw materials are mixed in equal proportions.
Then raw material A X E = ½ ×1.25 kg. = 0.625 kg.
Then raw material B X E = ½ ×1.25 kg. = 0.625 kg.
(ii) Computation of selling price per kg. of product A
(Rs.)
Raw material A X E 0.625 kg. × Rs.150 = Rs. 93.75
Raw material B X E 0.625 kg. × Rs.90 = Rs. 56.25 150.00
Production expenses (40% of material cost) 60.00

Total cost 210.00
Add: profit 20% of total cost 42.00
Selling price 252.00
Computation of proportions of materials A X E and C X E in ‘A’
Let material C X E required in product A be ‗m‘ kg.
Then for producing 1 kg of product ‗A‘, material A X E requirement = (1.25 -
To maintain same level of profit and selling price as per Working note (ii), it is required that the
total cost of material in 1 kg. of product A should not exceed Rs. 150.
i.e., m kg. × Rs. - m) kg. × Rs.150 = Rs.150
or 75 m + 187.5 – 150 m = 150
or 75 m = 37.5
or m = 0.5 kg.
Raw material A X E requirement in product A = 1.25 – 0.5 = 0.75 kg.
So, proportion of material A X E and C X E = 0.75 : 0.50 i.e. 3 : 2
Answer 2 (b)
1. Workings:
Monthly Production of X = 30,000 kgs.

Raw Material Required = 30,000/3 × 5
= 50,000 kgs.
50,000/5
Material A = ×3
= 30,000 k g
50,000/5
Material B = ×2
=20,000 Kg
(i) Calculation of Economic Order Quantity (EOQ):
Material A =
2Annual consumptionOrder cos t
Carrying cost per unit p.a.
= 2(30, 000 kg.12 months)  Rs.120
(15% of Rs.15)
= = 6,196.77 kg. or 6,197 kg.
8,64,00,000
2.25
Material B =
2(20, 000 kg.12 months) 
Rs.120
= = 7,164.97 or 7,165 kg.
(5% of Rs.22.44*)
5,76,00,000
1.122
*Purchase price + 2% Local Development Tax = 22 + 2% of 22 = 22.44
(ii) Calculation of Maximum Stock level: Since, the Material A is perishable in
nature and it required to be used within 5 days, hence, the Maximum Stock Level
shall be lower of two:
(a) Stock equal to 5 days consumption
30,000kg.
= ×5 days
25 days
= 6,000 kg.
a) Maximum Stock Level for Material A:
Re-order Quantity + Re-order level – (Min consumption* × Min. lead time)
Where, Re-order Quantity = 8,000 kg.
Re-order level = Max. Consumption* × Max. Lead time
= 30,000/25 × 2 days = 2,400 kg.
Maximum stock Level = 8,000 kg. + 2,400 kg. - (30,000/25 × 1 day)
= 10,400 – 1,200 = 9,200 kg.
Stock required for 5 days consumption is lower than the maximum stock level
calculated through the formula. Therefore, Maximum Stock Level will be 6,000 kg.
(*Since, production is processed evenly throughout the month hence material
consumption will also be even.)
(iii) Calculation of Savings/ loss in Material A if purchase quantity equals to EOQ.
Purchase Quantity = Purchase Quantity =

8,000 kg. EOQ i.e. 6,197 kg.
Annual consumption 3,60,000 kg. 3,60,000 kg.

(30,000 × 12 months) (30,000 × 12 months)
No. of orders [Note- 60 60
(i)] (3,60,000 ÷ 6,000) (3,60,000 ÷ 6,000)
R s . 7,200 R s . 7,200
Ordering Cost (a) (R s . 120 × 60) (R s . 120 × 60)
R s . 8,100 R s . 6,972
Carrying Cost (b) (15% of 13.50 × (15% of 15 × 3,098.5)
4,000)
[Note- (ii)] R s . 54,00,000
R s . 48,60,000
Purchase Cost (c) (for (15 × 3,60,000)
(R s 13.50 × 3,60,000)
good portion) R s . 1,77,300
Rs. 16,20,000
Loss due to obsolescence (d) [R s . 15 × (60 × 197)]
[R s . 13.5 × (60 × 2,000)]
[Note- (iii)]
Total Cost [(a) + (b) + (c) +

(d)]
Rs. 64,95,300 Rs. 55,91,472
If purchase quantity equals to EOQ, there will be a saving of R s . 9,03,828 i.e.

R s . 64,95,300 - R s . 55,91,472.
Notes: (i) As after 5 days of purchase the Material A gets obsolete, the quantity in excess
of 5 days consumption i.e. 6,000 kg. are wasted. Hence, after 6,000 kg. a fresh order
needs to be given.
(ii) Carrying cost is incurred on average stock of Materials purchased.
(iii) the excess quantity of material gets obsolete and loss has to be incurred.
Answer 3
(a) Calculation of Total wages and average wages per worker per month.
(i) When Current system of wages and incentive payment system is followed:
Worst case Optimal case Best case
I Standard Production (in 84,960 84,960 84,960
units)
(45 hours × 4 units × 4 weeks
× 118 workers)
II No. of units to be produced 42,400 84,960 1,27,400

III Efficiency {(II ÷ I) × 100} 49.91% 100% 149.95%
IV Differential piece rate* Rs.10 Rs. 15 Rs. 15

(12.5× 0.8) (12.5 × 1.2) (12.5 × 1.2)
V Total Wages (II × IV) Rs. 4,24,000 Rs. 12,74,400 Rs. 19,11,000
VI Average wages per worker Rs. 3,593.22 Rs. 10,800 Rs. 16,194.92
(V ÷ 118)
*For efficiency less than 100%, 83% of piece rate and for efficiency more than or equals to
100%, 125% of piece rate may also be taken.
(ii) When workers’ demand for time rate wages and Halsey premium plan is accepted:
Worst case Optimal case Best case
I No. of units expected to be 42,400 84,960 1,27,400
produced (units)
II Standard no. units in an hour 4 4 4

(units)
III Standard Hours (I ÷ II) 10,600 21,240 31,850
IV Expected working hours 21,240 21,240 21,240

(45 hours × 4 weeks × 118
worker)
V Hours to be saved (III – IV) -- -- 10,610
VI Time wages (IV × 50) 10,62,000 10,62,000 10,62,000

VII Incentive under Halsey -- -- 2,65,250
Premium Plan
1
× Time saved× 50
2
VIII Total Wages (VI +VII) 10,62,000 10,62,000 13,27,250
IX

Average wages per worker 9,000 9,000 11,247.88
(VIII ÷ 118)
(b) Calculation of gain or loss in the current monthly income of Mr. K:
Wages earned in May 2017:

Standard production unit (45 hours × 4 weeks × 4
units) 720 units
No. of units produced 1,050 units

Efficiency 145.83%
Differential piece rate (refer the above part) Rs. 15
I Total wages (1,050 units × 15) Rs. 15,750

Expected wages under the new scheme
Standard hours (1,050 units ÷ 4 units) 262.50 hours
Expected hours to be taken 180 hours

(45 hours × 4 weeks)
Time saved 82.50 hours
Time wages (180 hours × 50) Rs. 9,000

1 Rs. 2,062.50
Incentive × Time saved× 50

2
II Total expected wages Rs. 11,062.50
Loss from the proposed scheme (II – I) Rs. 4,687.50
Supporting the demand of colleague workers will cost Rs. 4,687.50 in the next month to
Mr. K.
Answer 4 (a)
Single and Multiple Overhead Rates:
Single overhead rate: It is one single overhead absorption rate for the whole factory. It may
be computed as follows:
Overhead costs for the entire factory
Single overhead rate =
Total quantity of the base selected
The base can be total output, total labour hours, total machine hours, etc.
The single overhead rate may be applied in factories which produces only one major
product on a continuous basis. It may also be used in factories where the work performed in
each department is fairly uniform and standardizedultiple overhead rate: It involves
computation of separate rates for each production department, service department, cost
center and each product for both fixed and variable overheads. It may be computed as
follows:
Multiple overhead rate

Overhead allocated / appportioned to each department/ cost centre or product
=
Corresponding base
Under multiple overheads rate, jobs or products are charged with varying amount of factory
overheads depending on the type and number of departments through which they
pass. However, the number of overheads rate which a firm may compute would depend upon
two opposing factors viz. the degree of accuracy desired and the clerical cost involved
Answer 4 (b)
(i) Amount of under/ over absorption of production overheads during the period of first
six months of the year 2016-2017:
Amount Amount
(R s . ) (R s . )
Total production overheads actually incurred 24,88,200
during the period
Less: Amount paid to worker as per court order 1,28,000
Expenses of previous year booked in the 1,200
current year
Wages paid for the strike period under an 44,000
Award
Obsolete stores written off 6,700 (1,79,900)
23,08,300
Less: Production overheads absorbed as per
machine hour rate (1,16,000 hours × 20*) 23,20,000
Amount of over absorbed production 11,700

Overheads
44,00,000
*Budgeted Machine hour rate (Blanket rate) = 2,20,000 hours = R s . 20 per hour
(ii) Accounting treatment of over absorbed production overheads: As, one fourth of the
over absorbed overheads were due to defective production policies, this being abnormal,
hence should be transferred to Costing Profit and Loss Account.
Amount to be transferred to Costing Profit and Loss Account = (11,700 * ¼) R s . 2,925.
Balance of over absorbed production overheads should be distributed over Works in

progress, Finished goods and Cost of sales by applying supplementary rate*.
Amount to be distributed = (11,700 * ¾) R s . 8,775
Supplementary rate = R s . 8,875 = 0.2689 per unit

33,000 units
(iii) Apportionment of under absorbed production overheads over WIP, Finished goods and Cost of
sales:
Equivalent Amount
completed units (R s . )
Work-in-Progress (18,000 units × 50%
× 0.2689) 9,000 2,420
Finished goods (2,400 units × 0.2689) 2,400 646
Cost of sales (21,600 units × 0.2689) 21,600 5,809
Total 33,000 8,875
Answer 5 (a)
Reasons for disagreement of profits as per cost and financial accounts: The various
reasons for disagreement of profits shown by the two sets of books viz., cost and
financial may be listed as below:
1. Items appearing only in financial accounts: The following items of income
and expenditure are normally included in financial accounts and not in cost
accounts. Their inclusion in cost accounts might lead to unwise managerial
decisions. These items are:
(i) Income:
(a) Profit on sale of assets
(b) Interest received
(c) Dividend received
(d) Rent receivable
(e) Share Transfer fees
(ii) Expenditure
(a) Loss on sale of assets
(b) Uninsured destruction of assets
(c) Loss due to scrapping of plan and machinery
(d) Preliminary expenses written off
(e) Goodwill written off
(f) Underwriting commission and debenture discount written off
(g) Interest on mortgage and loans
(h) Fines and penalties
(iii) Appropriation
(a) Dividends
(b) Reserves
(c) Dividend equalization fund, Sinking fund etc.
2. Items appearing only in cost accounts: There are some items which are
included in cost accounts but not in financial account. These are:
(a) Notional interest on capital;
(b) Notional rent on premises owned.
3. Under or over-absorption of overhead: In cost accounts overheads are

charged to production at pre-determined rates where in financial accounts
actual amount of overhead is charged, the difference gives rise under or over-
absorption; causing a difference in profits.
4. Different bases of stock valuation: In financial books, stocks are valued at cost
or market price, whichever is lower. In cost books, however, stock of materials
may be valued on FIFO or LIFO basis and work-in-progress may be valued at
prime cost or works cost. Differences in store valuation may thus cause a
difference between the two profits.
Depreciation: The amount of depreciation charge may be different in the two sets of books
either because of the different methods of calculating depreciation or the rates adopted. In
company accounts, for instance, the straight line method may be adopted whereas in financial
accounts it may be the diminishing balance method.
Answer 5 (b)
(i) Statement of Profit as per Cost Accounts
Units (R s . )
Opening stock @ R s . 180 per unit 500 90,000
Cost of production @ R s . 240 per unit
(Refer Working Note 1)
Total 10,000
10,500 24,00,000
24,90,000
Less: Closing stock @ R s . 240 per unit (250) (60,000)
10,250 24,30,000
Selling expenses @ R s . 24 per unit 2,46,000
Cost of sales 26,76,000
Profit (Balancing figure) 1,94,000
Sales 10,250 28,70,000
Working Notes:
(i) Statement of Cost (10,000 units)
Total cost (R s . ) Cost per unit (R s . )

Materials 10,40,000 104.00
Wages 6,00,000 60.00
Factory Overhead 60% of wages 3,60,000 36.00
Factory cost 20,00,000 200.00
Administrative overhead 20% of 4,00,000 40.00
factory cost
Total cost 24,00,000 240.00
(ii) Statement of Differences between the two set of accounts:
Financial A/c Cost A/c Difference Remarks

Factory overhead (`) (`)
3,79,000 3,60,000 (`) (R s .recovery
19,000 Under )
Administrative 4,24,000 4,00,000 24,000 Under recovery
overhead
Selling expenses 2,20,000 2,46,000 26,000 Over recovery
Opening stock 70,000 90,000 20,000 Over recovery
Closing stock 50,000 60,000 10,000 Over recovery
ii) Reconciliation Statement
(R s . )
Profit as per cost accounts 1,94,000
Add: Over-recovery of selling overhead in Cost A/c 26,000
Add: Over-valuation of opening stock in Cost A/c 20,000
Add: Income excluded from Cost A/c
Interest 1,000
Rent 40,000 41,000
Less: Under recovery of Overhead in Cost A/c
Factory Overhead 19,000
Administrative Overhead 24,000 (43,000)
Less: Over-valuation of closing stock in Cost A/c (10,000)
Less: Expenses excluded from Cost A/c
Bad debts 16,000
Preliminary expenses 20,000 (36,000)
Profit as per financial account 1,92,000
Answer 6(a)
Contract Account for the year 2072-73
Dr. Cr.
Particulars (R s . ) Particulars (R s . )
1.4.2072
To Work-in-progress 55,000 By Materials at site 4,000
(not certified)
To Materials at site 2,000
2072–73
By Cost of contract c/d (to
To Materials issued 1,12,000 date) 3,27,000
To Wages paid 1,08,000
To Hire of plant 20,000
To Other expenses 34,000 _______
3,31,000 3,31,000
31.3.73
To Cost of contract b/d 3,27,000 By Work-certified 4,05,000
(to date) By Work-not certified 8,000
To Costing Profit & loss A/c 66,273
To Profit in reserve 19,727 _______
4,13,000 4,13,000
Profit for the year 2072-73 = R s . 4,13,000 – R s . 3,27,000 = R s . 86,000
Estimated profit (on the completion of the contract)
(R s . )
Cost of the contract (to date) 3,27,000
Further cost of completing the contract 23,000
Total cost: (A) 3,50,000
Contract price: (B) 4,40,000
Estimated profit on the completion of contract: {(A) – (B)} 90,000
Work certified Rs. 4,05,000
Since, × 100 = × 100 = 92.05%
Contract price Rs. 4,40,000

Profit = Estimated profit × Cash received
Contract price
= Rs. 90,000 × 3,24,0004,40,000 = Rs. 66,273
Answer 6 (b)
Calculation of quantity produced
Process- A (Ltr.) Process- B Process- C (Ltr.)

Input 4,50,000 (Ltr.) 1,44,000 2,16,000
Normal Loss (90,000) (7,200) (21,600)
(20% of 4,50,000 ltr.) (5% of 1,44,000 ltr.) (10% of 2,16,000 ltr.)
3,60,000 1,36,800 1,94,400
Production of Gasoline 1,44,000 136,800 --
Production of HSD 2,16,000 -- 1,94,400
(i) Statement of apportionment of joint cost on the basis of sale value at split-off
point
Gasoline HSD
Output at split-off point 1,44,000 2,16,000
(Ltr.) price per Ltr. (R s . ) 64
Selling 41
Sales value (R s . ) 92,16,000 88,56,000
Share in Joint cost 87,71,200 84,28,575
(128:123) 1,71,99,775 1,71,99,775
×128 ×123
⎟ 251 ⎟ 251
(i) Statement of cost per Litre.
Gasoline HSD
Output (Ltr.) 1,36,800 1,94,400
Share in joint cost (R s . ) 87,71,200 84,28,575
Cost per Ltr. (R s . ) (Joint cost) 64.11 43.36
Further processing cost (R s . ) 10,80,000 1,35,000
Further processing cost per Ltr. (R s . ) 7.89 0.69
Total cost per Ltr. (R s . ) 72.00 44.05
(ii) Statement of profit
Gasoline HSD
Output (Ltr.) 1,36,800 1,94,400
Sales (Ltr.) 1,32,000 1,88,000
Closing stock (Ltr.) 4,800 6,400
(R s . ) (R s . )
Sales @ 68 and 46 for Gasoline and 89,76,000 86,48,000
respectively
HSD
Add: closing stock (Ltr.) (at full cost) 3,45,600 2,81,920
Value of production 93,21,600 89,29,920
Less: Share in joint cost 87,71,200 84,28,575
Further processing 10,80,000 1,35,000
Profit/ (Loss) (5,29,600) 3,66,345
Answer 6 (c)
i) Calculation of Operating Cost per month for each vehicle

Ramgarh Pratapgar Devgarh Total
A. Running Costs: h
- Cost of diesel (Working 1,25,28 70,992 92,800 2,89,072
Note- 2) 0
- Servicing cost (Working 9,000 --- 3,000 12,000
Note- 3)
1,34,28 70,992 95,800 3,01,072
B. Fixed Costs: 0
- Salary to drivers
72,000 54,000 90,000 2,16,000
(4 drivers (3 drivers (5 drivers
× 18,000) × 18,000) × 18,000)
44,000 33,000 55,000 1,32,000
- Salary to cleaners (4 cleaners (3 cleaners (5 cleaners
× 11,000) × 11,000) × 11,000)
5,400 4,050 6,750 16,200
- Allocated garage parking (4 vehicles (3 vehicles (5 vehicles
fee × 1,350) × 1,350) × 1,350)
36,733 32,800 38,542 1,08,075
- Depreciation (Working
2,850 3,020 --- 5,870
Note- 4)
1,60,98 1,26,870 1,90,292 4,78,145
- Toll tax passes
3
2,95,26 1,97,862 2,86,092 7,79,217
3
73,815.7 65,954 57,218.40 64,934.7
Total [A + B] ( 2,95,263 ÷ ( 1,97,862 ÷ 3 ( 2,86,092 ÷ 5 ( 7,79,217
5 5
Operating Cost per vehicle 4 vehicles vehicles) vehicles) ÷12
) (ii) Vehicle operating cost per litre of milk
vehicles)
Total Operating Cost per month 7, 79, 217
=
= 0.053
Total milk carried amonth 1,47,00,000Litres (WorkingNote 5)
1. Distance covered by the vehicles in a month
Route Total Distance (in K.M.)
Ramgarh (4 vehicles × 3 trips × 2 × 24 km. × 30 days) 17,280

Pratapgarh (3 vehicles × 2 trips × 2 × 34 km. × 30 days) 12,240
Devgarh (5 vehicles × 2 trips × 2 × 16 km. × 30 days) 9,600
2. Cost of diesel consumption

Ramgarh Pratapgarh Devgarh
Total distance travelled (K.M.) 17,280 12,240 9,600
Mileage per litre of diesel 8 kmpl 10 kmpl 6 kmpl
Diesel consumption (Litre) 2,160 1,224 1,600
(17,280 ÷ 8) (12,240 ÷ 10) (9,600 ÷ 6)
Cost of diesel consumption 1,25,280 70,992 92,800
per
@ litre
58 (Rs.)
3. Servicing Cost
Ramgarh Pratapgar Devgarh
Total distance travelled 17,280 h 12,240 9,600
(K.M.) under free service No
Covered Yes No
warranty
No. of services required 3 2 1
(17,280 k.m. (12,240 k.m. (9,600 k.m.
÷ 5,000 k.m.) ÷ 5,000 ÷ 5,000
k.m.) k.m.)
Total Service Cost (Rs.) 9,000 --- 3,000
( 3,000 × 3) ( 3,000 × 1)
4. Calculation of Depreciation
Ramgarh Pratapgarh Devgarh
No. of 4 3 5
vehicles
Cost of a 11,02,000 13,12,000 9,25,000
vehicle
Total Cost 44,08,000 39,36,000 46,25,000
of vehicles
Depreciation 36,733 32,800 38,542
per month 44,08,000×10 % 39,36,000×10% 46,25,000×10 %
⎟ 12months 12 months
12 months
5. Total volume of Milk Carried

Route Milk Qty. (Litre)
Ramgarh ( 25,000 ltr. × 0.7 × 4 vehicles × 3 trips × 30 days) 63,00,000
Pratapgarh (25,000 ltr. × 0.7 × 3 vehicles × 2 trips × 30 days) 31,50,000
Devgarh (25,000 ltr. × 0.7 × 5 vehicles × 2 trips × 30 days) 52,50,000
1,47,00,000

d)
Process I
Statement of Equivalent Production and Cost
Input Particulars Outpu Equivalent Production
(Units t Materials Lab Overheads
) Units (% Units (%ourUnits (% Units
40,000 Completed 30,000 100 ) 30,000 100) 30,000 100 ) 30,000
Closing WIP 10,000 100 10,000 50 5,000 50 5,000
40,000 40,000 40,000 35,000 35,000
Particulars Materials Labour Overhea Total

Cost incurred (Rs. ) 15,000 18,000 d
12,000 45,000
Equivalent units 40,000 35,000 35,000
Cost per equivalent unit (Rs.) 0.3750 0.5143 0.3428 1.2321
Process- I Account
Particulars Units (Rs.) Particulars Units (Rs.)
To Materials 40,000 15,000 By Process-II A/c 30,000 36,964
(30,000 units ×
Rs.1.2321)
To Labour 18,000 By Closing WIP 10,000 8,036*
To Overhead 12,000
40,000 45,000 40,000 45,000
* (Material 10,000 units × Rs. 0.3750) + (Labour 5,000 units × Rs. 0.5143) + (Overheads
5,000 units ×Rs.0.3428) = Rs.3,750 + Rs. 2,572 + Rs. 1,714 = Rs. 8,036
Process II
Statement of Equivalent Production and Cost
Input Particulars Output Equivalent Production
(Units Units Materials Labour Overheads
) (%) Units (% ) Units (%) Units
30,000 Completed 28,000 10 28,00 10 28,000 100 28,000
Normal 200 0 0
-- 0 -- --
WIPloss 1,800 10 1,80 25 450 25 450
30,000 30,000 0 29,800 28,450 28,450
0
Particulars Materials Labour Overhea Total

Process-I Cost 36,964 -- -- d 36,964
Cost incurred (Rs. ) -- 3,500 4,500 8,000
Equivalent units 29,800 28,450 28,450
Cost per equivalent unit (Rs.) 1.2404 0.1230 0.1582 1.5216
Process- II Account
Particulars Units (Rs.) Particulars Units (Rs.)
To Process-I A/c 30,000 36,964 By Normal loss 200 --
A/c
To Packing -- 4,000 By Finished 28,000* 46,605
Material Goods Stock
To Direct Wages -- 3,500 A/cClosing WIP 1,800** 2,359
By
To Factory -- 4,500
Overhead 30,000 48,964 30,000 48,964
* 28,000 × Rs. 1.5216 = Rs. 42,605 + Rs. 4,000 (Packing Material Cost) = Rs.46,605
** 1,800 units × Rs. 1.2404 + 450 units × (Rs. 0.1230 + Rs. 0.1582) = Rs.2,359
7 a)
Working Notes:
(i) Calculation of Cost of Goods Sold (COGS):
COGS = {(DM- 0.3 COGS) + (DL- 0.15 COGS) + (FOH- 0.10 COGS +
2,30,000) + (G&AOH- 0.02 COGS + 71,000)}
Or COGS = 0.57 COGS + 3,01,000
Or COGS = 3,01,000
0.43
= Rs..7,00,000
(ii) Calculation of Cost of Sales (COS):
COS = COGS + (S&DOH- 0.04 COS + 68,000)
Or COS = 7,00,000 + (0.04 COS + 68,000)
Or COS =
7,68,000
= Rs.8,00,000
0.96
Calculation of Variable Costs:

iii)
Direct Material- (0.3 × 7,00,000) 2,10,000
Direct Labour- (0.15 × 7,00,000) 1,05,000
Factory Overhead- (0.10 × 7,00,000) 70,000
General & Administration OH- (0.02 × 7,00,000) 14,000
Selling & Distribution OH (0.04 × 8,00,000) 32,000
Rs. 4,31,000
(iv Calculation of total Fixed Costs:
) Factory Overhead- 2,30,000
General & Administration 71,000
OH- Selling & Distribution 68,000
OH Rs. 3,69,000
(v) Calculation of P/V Ratio:
Contribution
P/V Ratio = ×100
Sales

Sales -Variable Costs
= ×100
Sales
(185×5, 000 units) – Rs. 4, 31, 000
= ×100 = 53.41%
185×5,000units
Fixed C os ts
(a) Break-Even Sales =
P/ VRatio
= 3,69,000
53.41%
= Rs. 6,90,882
(b) Profit earned during the last year
= (Sales – Total Variable Costs) – Total Fixed Costs

= ( 9,25,000 - 4,31,000) - 3,69,000
= Rs.1,25,000
Sales -Breakeven sales
(c) Margin of Safety (%) = ×100
Sales
9, 25, 000 -6, 90, 882
= ×100 = 25.31%
9,25,000
(d) Profit if the sales were 10% less than the actual sales:
Profit = 90% ( 9,25,000 - 4,31,000) - 3,69,000
= 4,44,600 - 3,69,000 = Rs.75,600
Answer 7 (b)
(i) Computation of Unit Cost & Total Income
Unit Absorption Costing Marginal Costing

Cost (Rs.) (Rs.)
Direct Material 16.00 16.00
Direct Labour 54.00 54.00
Variable Overhead 12.00 12.00
Fixed Overhead 18.00 --
Unit Cost 100.00 82.00
Income Statements
Absorption (Rs.)
Sales (21,500 units × Rs.168)
Costing 36,12,000
Less: Cost of goods sold (21,500 × Rs.100)
RTP-CAP II June21,50,000
2017 @ ICAN Page 138 of 181
Less: Over Absorption [Refer to calculation 28,00 21,22,000
under (ii)] 0 14,90,000
Less: Selling & Distribution Expenses 11,90,000
Profit 3,00,000
Marginal (Rs.)
Sales (as above) Costing 36,12,000
Less: Cost of goods sold (21,500 units × Rs.82)
17,63,000
Add: Under Absorption [Refer to calculation under (ii)] 17,83,000
20,000 18,29,000
Less: Selling & Distribution Expenses 4,30,000
Contribution 13,99,000
Less: Fixed Factory and Selling & Distribution Overhead
(Rs. 38,400 + Rs. 7,60,000) 11,44,000
Profit 2,55,000
(ii) Under or over absorption of overhead:

Budgeted Fixed Overhead Rs.
72,000 hrs. × Rs. 6 4,32,000
Less: Over-absorption 48,000
Actual Fixed Overhead 3,84,000
Budgeted Variable Overhead
72,000 Hrs. × Rs.4 2,88,000
Add: Under- absorption 20,000
Actual Variable Overhead 3,08,000
Both Fixed & Variable Overhead applied
72,000 Hrs × Rs. 10 7,20,000
Actual Overhead (3,84,000 + 3,08,000) 6,92,000
Over- Absorption 28,000
(iii Reconciliation of Profit
) Difference in Profit: Rs. 3,00,000 – Rs. 2,55,000 = Rs. 45,000
Due to Fixed Factory Overhead being included in Closing Stock in Costing
Absorption not in Marginal Costing.
Therefore, Difference in Profit = Fixed Overhead Rate (Production – Sale)
= Rs.18 (24,000 – 21,500) = Rs.45,000
Answer 8 (a)
Number of days in budget period = 4 weeks × 5 days = 20 days
Number of units to be produced
Product-A Product-B
(units) (units)
Budgeted Sales 2,400 3,600
Add: Closing stock
2,400units × 4days 3,600units 480 900

× 5days
20days 20days
Less: Opening stock 400 200
2,480 4,300
(i) Material Purchase Budget
Material-X (Kg.) Material-Y (Kg.)

Material required :
Product-A 12,400 9,920
(2,480 units × 5 kg.) (2,480 units × 4 kg.)
Product-B 12,900 25,800
(4,300 units × 3 kg.) (4,300 units × 6 kg.)
25,300 35,720
Add: Closing stock
35,720kgs
25,300kgs. × 10days . × 6days 12,650 10,716
20days 20days
Less: Opening stock 1,000 500
Quantity to be purchased 36,950 45,936
Rate per kg. of Material Rs. 4 Rs. 6
Total Cost Rs. 1,47,800 Rs. 2,75,616
(ii) Wages Budget
Product-A (Hours) Product-B (Hours)

Units to be produced 2,480 units 4,300 units
Standard hours allowed per unit 3 5
Total Standard Hours allowed 7,440 21,500
Productive hours required for 7,440hours 21,500hours
=9,300 =26,875
production 80% 80%
Add: Non-Productive down time 1,860 hours. 5,375 hours.
(20%
of 9,300 hours) (20% of 26,875 hours)
Hours to be paid 11,160 32,250
Total Hours to be paid
= 43,410 hours (11,160 + 32,250)

Hours to be paid at normal rate = 4 weeks × 40 hours × 180 workers = 28,800 hours
Hours to be paid at premium rate = 43,410 hours – 28,800 hours = 14,610 hours
Total wages to be paid = 28,800 hours × 25 + 14,610 hours × Rs.37.5
= Rs.7,20,000 + Rs.5,47,875
= Rs.12,67,875
Answer 8 (b)
Flexible Budget/ For the period ….
80% 90% 100% 110%
(Rs.) (Rs.) (Rs.) (Rs)
Sales 6,00,000 6,75,000 7,50,000 8,25,000
Administration Costs:
Office Salaries (fixed) 90,000 90,000 90,000 90,000
General expenses (2% of Sales) 12,000 13,500 15,000 16,500
Depreciation (fixed) 7,500 7,500 7,500 7,500
Rent and rates (fixed) 8,750 8,750 8,750 8,750
(A) Total Adm. Costs 1,18,250 1,19,750 1,21,250 1,22,750
Selling Costs :
Salaries (8% of sales) 48,000 54,000 60,000 66,000
Travelling expenses (2% of sales) 12,000 13,500 15,000 16,500
Sales office (1% of sales) 6,000 6,750 7,500 8,250
General expenses (1% of sales) 6,000 6,750 7,500 8,250
(B) Total Selling Costs 72,000 81,000 90,000 99,000
Distribution Costs :
Wages (fixed) 15,000 15,000 15,000 15,000
Rent (1% of sales) 6,000 6,750 7,500 8,250
Other expenses (4% of sales) 24,000 27,000 30,000 33,000
(C) Total Distribution Costs 45,000 48,750 52,500 56,250
Total Costs (A + B + C) 2,35,250 2,49,500 2,63,750 2,78,000
Note : All fixed costs have been assumed to remain unchanged even at 110% capacity.
However, in practice, fixed costs may change when capacity utilisation exceeds 100%.
Answer 9
Budgeted Production 30,000 hours ÷ 6 hours per unit = 5,000 units
Budgeted Fixed Overhead Rate= Rs.4,50,000 ÷ 5,000 units = Rs. 90 per unit
Or
= Rs. 4,50,000 ÷ 30,000 hours = Rs. 15 per hour.
(i) Material Cost Variance = (Std. Qty. × Std. Price) – (Actual Qty. × Actual Price)
= (4,800 units × 10 kg. × Rs.10) - Rs.5,25,000
= Rs.4.80,000 – Rs.5,25,000
= Rs.45,000 (A)
(ii) Labour Cost Variance = (Std. Hours × Std. Rate) – (Actual Hours × Actual rate)
= (4,800 units × 6 hours × Rs. 5.50) – Rs.1,55,000
= Rs.1,58,400 – Rs.1,55,000

= Rs.3,400 (F)
(iii) Fixed Overhead Cost Variance = (Budgeted Rate × Actual Qty) – Actual Overhead
= (Rs.90 x 4,800 units) – Rs.4,70,000
= Rs. 38,000 (A)
OR = (Budgeted Rate × Std. Hours) – Actual Overhead
= (Rs. 15 x 4,800 units × 6 hours) – Rs.4,70,000
= Rs. 38,000 (A)
(iv) Variable Overhead Cost Variance= (Std. Rate × Std. Hours) – Actual Overhead
= (4,800 units × 6 hours × Rs. 10) - Rs. 2,93,000
= Rs.2,88,00 - Rs.2,93,000
= Rs.5,000 (A)
Answer 10 (a)
The main objectives of uniform costing are as follows:-
a. To facilitate the comparisons of cost and performance of different units in the same industry;
it provides objective basis.
b. To eliminate unhealthy competition among the different units of an industry.
c. To improve production capacity level and labor efficiency by comparing the production cost
of different units with each other.
d. To provide relevant cost information/data to the government for fixing and regulating prices
of the products.
e. To bring standardization and uniformity in the operation of participating units.
f. To reduce production, administration, selling and distributions costs, and to exercise control
on fixed costs.
Answer 10 (b)
The main advantages of inter-firm comparison are as follows:
1. Such a comparison gives an overall view of the industry as a while to its members the present
position of the industry, progress made during the past and the future of the industry.
2. It helps a concern in knowing its strengths or weaknesses in relation to others so that remedial
measures may be taken.
3. It ensures an unbiased specialized reporting on particular problems of the concern.
4. It develops cost consciousness among members of the industry.
5. It helps government in effecting price regulation.
6. It helps to improve the quality of products manufactured and to reduce the cost of production.
It is thus advantageous to the industry as well as to the society.
Answer 11 (a)
Cost Control Cost Reduction
1. Cost control aims at maintaining the 1. Cost reduction is concerned with
costs in accordance with the established reducing costs. It challenges all
standards. standards and endeavours to better
2. Cost control seeks to attain lowest themreduction
2. Cost continuously
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 3. In case of cost reduction it is
past and present on 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
Answer 11 (b)
Cost reduction is attainable in almost all areas of business activities. There is perhaps no
situation which cannot be improved. It covers a wide range like new layout, product design,
production methods, materials and machines in factories as well as in offices, innovation in
marketing, etc. it also extends to specific activities like purchasing, handling, packing, shipping
warehousing, marketing, use of administrative facilities and even utilization of financial
resources.
Excessive cost may results in every organization from:
a. Lack of information about raw materials, processes, products, components etc.
b. Lack of utilization of ideas generated from performance and economic analysis.
c. Honest but wrong beliefs that certain things are impossible for achievement.
d. Temporary circumstances like features developed under pressure or modifications made to
meet certain circumstances.
e. Habits and attitudes of confirming to one conventional method.
It is not necessary for management to proceed in any specific sequence in considering the
various aspects of cost reduction and it may be necessary to start the campaign in more than one
direction at the same time.

Business Communication

[Note: The question items included in this set of preparation materials are all based on the model of
ICAN exams. But, entire set is not a model because this set includes more practice items than those given
in the exam.]
1. Read the following case carefully, and answer the questions given below: (5*4=20)
Mr. Samraj Kunwar has recently completed MBA degree from a recognized university in the USA. He
has been searching for a suitable job in his native city Kathmandu with a goal of localizing the global
knowledge and experience in the current context of Nepal. Mr. Kunwar has attempted to identify and
prepare himself for the appropriate job in Nepal. Recently he has noticed an online announcement for
the vacancy of a suitable post for him in one of the leading banking institutions of Nepal. According to
the announcement, the company is looking for the candidate who has rich international exposure and
experience in the banking sector. The major responsibility of the selected candidate would be
concerned with maintaining the appropriate transactions and relationships with the international
bankers. Mr. Kunwar realizes that he meets all the qualifications and requirements stated in the
vacancy announcement, but he knows he does not have sufficient experience in the practical field. He
has only superficial experience of international banking systems since he had done his MBA internship
in a bank in New York.
Questions:
a) What would Mr. Kunwar do for the identification of the appropriate employment for him? And,
what does he need to do prepare himself to appropriately address the vacancy announcement
that he has seen online?
b) Write an e-mail that Mr. Kunwar would send to the employer he has encountered online.
c) Mr. Kunwar realizes that he does not possess sufficient experience for the job that he is going to
apply. Write in a paragraph how he would persuade the employer?
d) Suppose Mr. Kunwar sent the e-mail with an application and a resume to the employer, and the
employer also responded him through an e-mail with some positive remarks on his resume and
statements. But, it has been more than one month that the employer has called neither for
interview nor for any other types of tests. Now, as Mr. Kunwar, write a follow up letter to the
employer.
Answers:
a) During the job search process immediately after the completion of the academic courses
of university, the fresh candidates are required to adopt a number of useful strategies and
considerations. Most primarily, they need to identify the appropriate job for them individually.
In the given case of Mr. Kunwar too, for the identification of job, he would attempt to find
some matches between his educational and personal strengths and the nature of the prospective
job. He needs to judge his own specific qualities, distinct personal competencies,
qualifications, communication skills, etc.
When Mr. Kunwar identifies the appropriate job (e.g. an officer in the commercial bank), he
needs to adopt some accurately effective strategies for the preparation for that job. In the given
case, Mr. Kunwar has seen an online announcement for the vacancy of a post that he thinks
suitable for him. In this context, he needs to prepare a persuasive resume and submit to the
employer along with a short persuasive application. He is required to prepare other application
documents such as reference letters, academic certificates, character certificates,
recommendation letters, experience letters, internship certificate, and so on. More importantly,
Mr. Kunwar needs to acquire effective interview skills for all phases- before interview, during
interview and after interview.

b)
From: discover.samraj@gmail.com
To: Himalayan_bank.org.com
subject: Application for the post of IR officer
Date: October 12, 2016

Dear sirs,
I came to learn from your website that your bank, a leading banking institution
in Nepal has been searching for a dynamic resource person as an international
relationship officer. It's a big matter of pleasure for me that I have completed my
MBA degree from a reputed US university with specialization in the
international banking. I had done exactly same nature of job during my
internship program as you have required now. I did my internship at Global
Bank in New York for a year under close supervision of my university professors
and bank administrators. I'm fully convinced that I can be the fittest candidate
for your requirement.
I will submit my complete application and resume when you receive and
positively respond to this e-mail.
Regards,
Samraj Kunwar
c) In the given case, Mr. Kunwar does not possess any professional experience in the related
field. In this context, he would persuade the employer from his other strong features and
competencies related with academic qualifications, international degree, seminar papers
presented in the US, assignments completed in the university, mini research and project works
carried out by him, and so on. He would emphasize the detail of the job that he performed
during the internship period. His basic motive would be to match between what he has and
what the employer requires him to have.
d)
New Baneshor, Kathmandu

December 2, 2016
Ananda Dev Mishra
Administrative Director
Himalayan Bank Limited
Kathmandu, Nepal
Subject: Follow-up letter
Dear Mr. Mishra,
I had submitted you a letter of application and a copy of my resume through an e-mail
responding to your online advertisement for the post of IR Officer. I appreciate your way
of responding the email with detail information and feedbacks. I received a couple of
emails from you in which you had shown a favor with my qualifications and skills. I
submitted the additional documents that you had asked for. However, I have not received
any response from you now for more than a month. Would you please inform me how the
process of recruitment is getting on?
Sincerely yours,
……………..
Samraj Kunwar
2. Discuss the importance of ethics in business communication, and differentiate between ethical
dilemmas and ethical lapses. 10
Answer:
Ethics in business communication generally refers to the set of principles guided for good conduct of
business dealings. They govern a business person or a group so that trust can be derived from
communication as well as from transaction. Ethical people are perceived by consumers and others as
trust worthy, fair and impartial, respecting the rights of others and showing concern about the impact
of their actions on the society. They usually obey the communicative maxims of cooperative and
politeness principles. Ethical communication can obviously lead the business activities towards
success and perfection. Ethical communication includes all relevant information that excludes false
traps and tricks. The massage is true in every sense, and is not deceptive in any way. In contrast,
unethical communication can include falsehoods and misleading information. Ethical communication
is a major key for the success of a business transaction.
Ethical behavior is a companywide concern, of course, but every company has responsibilities to its
each stakeholder. In some situations, what is right for a group or a person can be wrong for another.
There can be many alternative solutions for a particular issue, but they cannot be equally favorable
for all people. In such situations, ethical people may not be able to tell the truth or to take absolutely
right decisions. They're forced to think about a better choice among many different valid alternatives.
This is known as ethical dilemma. On the other hand, the term 'an ethical lapse' refers to a clearly
unethical or illegal choice, When a person (e.g. an official) or a group knows that something is
wrong, and yet does it anyway, it is known as ethical lapses.
3. One of the HODs in your organization doesn’t prefer listening to his staff and clients, and tends
to interrupt them time and again. As a General Manager, what do you suggest to him about
improving his communication skills? (10)
Answer:
It is an essential matter for consideration that business persons and officials must abide within the
maxims of business communication. Communication strategies are very important for them to make
business a success. The HODs of a company need to be highly skilled and tactful to have their business
accomplished through their staff as well as clients. If anyone of them lacks proper communication skill,
the whole company may fall in problems and conflicts. So, I would suggest, as the managing director to
such HOD of my company- whether explicitly by writing to him, or implicitly through workshop,
interaction program, etc.- in the following points:
i. Listen, and make wider perception of what others say. Meaning lies in the mind of people not merely
in the words someone has used. So, intended meaning of clients and staff should be interpreted putting
the discourse in particular context.
ii. Frequent interaction, meetings, workshops, talks, etc. may help you minimize misunderstanding and
make your dealing more productive.
iii. Cross-cultural communication devices should be developed, and understood in a proper way. Non-
verbal communication may help you conversation properly successful and complete.
iii. International audiences expect better communication and conversation. Be formal as well as informal
in communication according to topic and context of business dealing.
v. Be brief, relevant, and context worthy during instruction and interaction to your clients and staff
members. This is an important maxim of pragmatic theory.
3) Write a conversation in about five exchanges between two employees who have fallen
unintentionally in a conflict and wish to repair their misunderstanding. You may predict any
situation and topic on which the conflict took place. (5)
Answers:
[Pratap Rana, the Branch Manager and Rohit Gurung, the HOD of Department of Loan at
Kathmandu Bank Limited, Kirtipur are in a problem of communication due to the conflict they had in the
case of providing a loan of amount one million rupees to Sahara Feeds Pvt. Ltd. Dr. Mukunda Sharma, a
senior officer from centre is trying to mediate between the two. After a series of talks individually with
both of them, Dr. Sharma carries Mr. Gurung to the office room of Mr. Rana.]
Mr Rana: Hey, good morning, my boss. Long time no see!

Dr. Sharma: Good morning, sir. Long time no see. (Both laugh)
Mr Gurung: Good morning, sir.
Mr Rana: Good morning. Please, have your seats…Both of you please. Oh, tea?
Dr Sharma: Well, Mr Rana, … Mr Gurung has something to say before you. If I were you,…
Mr Rana: I understand… understand now… this happens quite usually… in the large office like ours.
Yes, it happens as you said earlier. Actually, I could not get the point properly then, there.
Mr Gurung: I‘m really sorry, sir. I did not know that that type of smile would have a negative
impression, particularly in your culture. And, I thought you took my relation with Mrs
Shrestha in a different way...Well, everything has been clear and really funny after Dr Sharma
has interpreted the conditions of our misunderstanding.
Dr Sharma: Yeah, that‘s the point. Isn‘t it, Mr Rana?
Mr Rana: Oh, yes. Thank you, sir. Thank you very much.
[Now, they are engaged in an informal talk along with tea, and feel that the conflict between the two has
been resolved in an appropriate way. Dr Sharma’s role as a mediator has been acknowledged. ]
4. Read the following part of job interview, and answer the questions that follow: (5+5=10)
Interviewer: Well, do you think you’re ready for the talk?
Interviewee: Yes, of course. Sir, I may try to answer as my best.
Interviewer: O.K. Then, what could be the most essential thing in marketing a
beauty product?
Interviewee: Sir, I think … I think it’s advertisement. You know advertisement easily
catches the attention of people and promotes sales. Actually there are many
different types of advertisements. Electronic media have been really
influential now. You can put banners and boards in different parts of the city.
Interviewer: [Tries to interrupt] well, what do you know about ‘you attitude’ in
business communication?
Interviewee: Well, Sir, I think it’s a style of language.
Interviewer: What type of style?
Interviewee: Oh, you try to put your focus on the clients and costumers, and …
Questions:
a) What should be the role of interviewer in a job interview? Critically view the role of the
interviewer of the given discourse. (2+3=5)
b) What should be the role of interviewee in the job interview? Critically examine the answer of
the interviewee in the above discourse in terms of relevance, brevity and quality. (2+3=5)
Answers:
a) Interview is a very technical and usually formal discourse. It‘s really common and important concern
in business communication. Usually, interviewees seem more worried about interview than the
interviewers, and they are found to be preparing more intensively for it. But the experts point out that
the interviewer(s) should be equally prepared and systematic for this kind of discourse. The role of
the interviewer determines the quality and validity of the interview. Basically the interviewers are
required to be supportive, creative, and relevant to the context. They should be systematic, prepared
and encouraging rather than dominating and ill prepared. Complex and ambiguous questions may
only harass the interviewee, which is not the goal of any interview. Questions should be clear and
language used should be simple. The most important thing for the interviewers is that they must be
best known to their respective subject matter.
The given piece of interview sounds rather artificial, and the role of interviewer is no more than that
of an investigator. The discourse is just like ‗inquiry-response‘ pattern. The interviewer never uses
any encouraging or supportive exponents, neither is he or she systematic and coherent. Two really
less related factors ‗you attitude‘ in business correspondence and marking strategies are asked
without any link between the two ideas. The creativity and expertise of the interviewer is not seen in
this matter. In overall, the interview part is usual and of average quality. The language is decent in
terms of accuracy, though it‘s poor for fluency and natural speech.
(b) The interviewee should be conscious for the given date of interview being ready with plan,
preparation and practice. He/she should respond their interviewer in clear, concise as well as
courteous way. He/she needs to be contextual in terms of relevance, subject matter and questions.
The interviewee in this discourse is good in subject matter, but less competent in the communication
skills. He or she is really mechanical and tries to put facts regardless to what is asked in particular.
In terms of relevance the role of interviewee is decent, but he or she never uses the term ‗beauty
product in answer. In terms of quality it‘s rather poor. There‘s more information than what is
required. He or she shouldn‘t have said ―I may try to answer as my best.‖ It‘s really obvious.
Similarly, there‘s no point in explaining the types of advertisement. The answer should be brief and
relevant to the question. In the second issue, the interviewer can‘t explain the matter properly.
However, in general, the role of interviewee is satisfactory.
5. Briefly explain FOUR of the following: (4*2.5=10)
a) Circular letter
b) Individuals in group
c) Workforce diversity
d) Work plan in the proposal
e) Corporate social responsibility
ANSWERS:
a) Circular letter: Circular letter is an example of operational communication particularly internal
communication. It is generally written to inform a group of people or different departments of an
organization about what has happened in relation to organizational routine, program, provisions and
changes. The circular is also meant for giving instructions and commands to the concerned officials or
executives. It is often downward in nature. Such letters intend to seek support and cooperation from the
addressee. A circular letter should be informative, brief and direct. The tone of language is rather
persuasive and cordial. And you attitude is more preferred. It is also commonly used in informing people
about the details of meetings, programs and any occasion.
b) Individuals in group: Individuals as group members have important roles and contributions to
achieving the goal of the group. They should acquire certain qualities and they should bear certain
responsibilities as individual members. Some of the roles and responsibilities can be outlined as:
 Complying with group principles, strategies, and limitations working in a group spirit
 Avoiding biased attitudes towards fellow members and group performance
 Active participation in group programs
 Keeping group interests above individual interests, and so on.
 Group for diversity of views and alternatives
 Individual roles for increased mutual accountability and collective achievement
c)Workforce diversity
Workforce diversity refers to the diverse situation of the workers in an organization derived from
their socio-cultural and national identities, backgrounds, and behaviors. When people and products
move across the borders, the workplace can be diverse enough because of norms, age, gender, values,

education, conventions, etc. of the workers. People who grew up in the same ethnic and cultural
background are most likely to share the similar patterns of social behavior in their workplace too. In
multinational companies people from different backgrounds might have different ways of perception,
understanding and behaving. Such diversity may invite many problems including conflicts and
misunderstandings. Proper communication can minimize the potential drawbacks of workforce
diversity.
d)Work plan in the proposal

Proposal is a systematic plan for a research or for an action to be accomplished. A reliable and
systematic work plan needs to be presented in the proposal about how to carry out the research or
action within a given period of time. In other words, the work plan indicates exactly the schedule for
accomplishing every individual task within the project. It describes how what must be done will be
accomplished. More specifically, the work plan includes: when the work will begin, how it will be
divided into stages, when it will be finished, what methods or resources will be used, and so on.
e) Corporate social responsibility
Every business organization must recognize a useful business strategy where corporate responsibilities
upon the welfare and development of the society would be translated into practice. It's a very common
global practice that business organizations invest enough money for the development and other
different activities of the society where they survive and do business. This type of feeling of a
business organization about the corporate responsibility for the society is known as corporate social
responsibility (CSR). CSR is the responsibility of business to society. It has four components:
economic responsibility, social responsibility, legal responsibility and ethical responsibility. CSR
establishes a better public image and promotes the business with public favor.
*****************************

Income tax and VAT

For June 2017 Examinations of The Institute of Chartered Accountants of Nepal (ICAN)
Income Tax
1. Given is the Income Statement of Triveny Footware Company Pvt. Ltd, which is involved in production
of foot wares by importing raw materials and selling the finished goods, as well as importing the Foot
wares (shoes) and selling into the Nepali market for Income Year 2072.73.
Particulars Note Amount (Nrs.)

Sales Revenue 1 50,000,000.00
Less : Cost of Goods Sold 2 37,500,000.00
Gross Profit 12,500,000.00
Add : Discount Income 450,000.00
Less : Other Expenses
Salary 3 3,400,000.00
Office Expenses 4 1,279,030.00
Finance Cost 5 3,450,000.00
Depreciation 6 1,240,030.00
Net Profit Before Tax 3,580,940.00
Note 1 : Sale of Sale of Goods produced by own factory is 75% and rest is Sale of goods imported.
Note 2 : Cost of goods sold is derived as follows
Particulars Amount (Nrs.)
Opening inventory of raw materials 3,558,900.00
opening inventroy of WIP 750,000.00
Purchase of raw materials (imported from India)
Cost INR 115,000,000 18,400,000.00
Import Duty - 15% of Cost plus 2% transportation cost and
transit insurance upto boarder (Rauxaul) as Valued by
customs while submitting the Import Declaration Form to
Customs. (the cost includes transportation and insurance in
terms of trade with the supplier) 2,815,200.00
Wages 4,750,000.00
Electricity 1,275,000.00
Closing Inventory of Raw materials 1,645,000.00
Closing inventory of WIP 782,000.00
Closing inventory of Manufactured Goods 2,308,900.00
COGS of Manufactured Goods 26,813,200.00
Opening inventory of goods 3,150,980.00

Purchase of goods
Cost INR 5,172,887.5 8,276,620.00
Direct cost 1,715,200.00
Closing Inventory of goods 2,456,000.00
COGS of Goods (goods traded) 10,686,800.00

Total COGS 37,500,000.00
Out of Wages, Rs. 120,000 is paid for repair of Machinery, which is included by the factory accountant
into wage of goods manufactured.
The direct cost includes the cost of fuel of Toyota RAV4 Car used by Managing Director of Company
for personal use Rs. 56,900.
Note 3 : Salary to Marketing Manager is Rs. 50,000 per month plus performance bonus of 1.5% of
annual sales, the performance bonus is not included in the salay by the accountant.
Note 4 : Office Expense includes Bad debt of Rs. 275,000 which is written off by the accounts
department without confirming to marketing department which has possibility of recovery as said by
marketing department.
Note 5 : Finance Cost is claimed as follows
Particulars Loan Amount Interest Rate (% p.a.) Interest Amount (Nrs.)

(Nrs.)
Term Loan for
Financing the Building,
Machinery used in
production process 30,000,000.00 8% 2,400,000.00
Working Capital Loan
for financing of raw
materials & WIP 10,000,000.00 8.50% 850,000.00
Working Capital Loan
for Inventory financing
(except raw materials
and WIP inventory)
(bank extends the WC

Loan facility based on
average inventory) 2,352,941.18 8.50% 200,000.00
3,450,000.00
Total
Note 6 : Depreciation is calculated for financial statement by the accountant as follows:

Addition Depreciation
Particulars Opening DBV Addition Depreciation
date Rate
2072
Building 5,000,000.00 2,500,000.00 10% 562,500.00
Chaitra
Showroom Assets
(Furnishing and 1,000,000.00 2072 Poush 400,000.00 15% 180,000.00
decoration)
Vehicle (Toyota 2073 5,000,000.00 12% 100,000.00
RAV 4) Baisakh
Machinery 2,650,200.00 15% 397,530.00
Total 1,240,030.00
The depreciation is calculated by the management from the next month of addition. DBV- Depreciation
Base Value.
Required : Calculate the Tax payable by the company for the income year showing relevant calculations.
Answer to question 1
Manufacturing
Particulars Working Note Trading Unit
Unit
Sales Revenue 1.00 37,500,000.00 12,500,000.00
Other income 337,500.00 112,500.00
Total Inclusions 37,837,500.00 12,612,500.00
Less : Deductions
Finance cost (u/s 14) 2.00 3,308,335.90 141,664.10
Disposal of Trading Stock (u/s 15) 3.00 26,693,200.00 10,629,900.00
repair (u/s 16) 4.00 120,000.00 -
depreciation (u/s 19) 5.00 1,441,151.11 -
Others (u/s 13) 6.00 3,865,522.50 1,288,507.50
Total Deductions 35,428,209.51 12,060,071.60
Taxable Income 2,409,290.49 552,428.40
Tax Rate 20% 25%
Tax 481,858.10 138,107.10
Note 1 :
Particulars Manufacturing Unit Trading Unit

Sales revenue (75% on manufacturing unit, 25%
on Trading unit) 37,500,000.00 12,500,000.00
Other Income ((75% on manufacturing unit, 25%
on Trading unit) 337,500.00 112,500.00
Note 2 :

Finance Cost (u/s 14) 3,308,335.90 141,664.10
Cost of term loan (Term Loan is used for
financing building and machinery which is fully
2,400,000.00
used in production process, so all claimed under
manufacturing unit)
Cost of WC loan for RM & WIP inventory (WC
loan for RM and WIP financing is related to
850,000.00
manufacturing process, so all claimed under
manufacturing unit)
Cost of WC loan for FG inventory (Cost of WC
loan financed for FG goods is segregated on the 58,335.90 141,664.10
basis of average inventory of Finished Goods)
Average inventory of Finished Goods 1,154,450.00 2,803,490.00
Note 3
Cost of Disposal of Trading Stock (u/s 15) 26,693,200.00 10,629,900.00
Opening Stock of Raw Materials 3,558,900.00
Opening Stock of WIP 750,000.00
Opening Stock of Finished Goods 3,150,980.00

Add :
Raw Materials Purchase 18,400,000.00
Finished Goods purchase 8,276,620.00

Direct Cost on purchase (fuel cost of vehicle not
allowable for trading unit, because of personal use
of vehicle by the MD) 2,815,200.00 1,658,300.00
Add : Cost of Production
wage (the wage on repair of machine claimed as
repair cost) 4,630,000.00
electricity 1,275,000.00
Less :
Closing inventory of RM 1,645,000.00
Closing inventory of WIP 782,000.00
Closing Inventory of FG 2,308,900.00 2,456,000.00
Note 4

Repair Cost (u/s 16) 120,000.00
Pool DBV Allowable Repair limit Actual Allowable
A 6,666,666.67 466,666.67 - -
B 1,400,000.00 98,000.00 - -
D 2,650,200.00 185,514.00 120,000.00 120,000.00

(DBV carried from the Depreciation calculation table)
Note 5
Particulars Manufacturing unit Trading unit
Depreciation (u/s 19) 1,441,151.11
Addition Depreciation
Pool Opening DBV DBV Depreciation Closing
Absorbed Rate
A 5,000,000.00 1,666,666.67 6,666,666.67 6.67% 444,444.44 6,222,222.22
B 1,000,000.00 400,000.00 1,400,000.00 33.33% 466,666.67 933,333.33
D 2,650,200.00 0 2,650,200.00 20.00% 530,040.00 2,120,160.00
Total
1,441,151.11
Closing WDV Unabsorbed addition unallowed repair Opening DBV for next year
6,222,222.22 833,333.33 7,055,555.56
933,333.33 - 933,333.33
2,120,160.00 - 2,120,160.00
The depreciation of RAV 4 Vehicle is used for personal use, so depreciation is not allowed for claim
All assets except RAV 4 vehicle are used in manufacturing business, so all depreciation claimed under
manufacturing unit
Depreciation rate is inflated by 1/3rd being special industry (for manufacturing unit) as per Schedule 2 of
Income Tax Act 2058
Note 6
Other Expenses (u/s 13) 3,865,522.50 1,288,507.50

Salary (salary and performance bonus of 1.5% of
sales distributed in the ratio of sales, 75% and 25%) 3,112,500.00 1,037,500.00
Office Expenses (office expense less bad debt
distributed in the ratio of sales, 75% and 25%) 753,022.50 251,007.50
2. Nepal Airlines Corporation Hired Mr. Frank Cooper, a German Citizen as Senior Instructor Pilot for its
new Airbus to instruct the Nepali pilots about the Airbus flight operation with effect from Sep 1 2015
(2072/06/01). He came to Nepal, 7 days before his joining date as Senior Instructor Pilot. For the purpose
of instructing the pilots, Mr. Cooper himself flies the Airbus from Kathmandu to Delhi, Kathmandu to
Qualalampur, Kathmandu to Riyadh and Kathmandu to Abu Dhabi as per weekly schedule of Nepal
Airlines. The first flight was on Sep 1 2015 from Kathmandu to Delhi and return back same day to
Nepal, same operates every Monday and Saturday. The Kathmandu Qualalampur trip is on every
Wednesday, Kathmandu Riyadh trip is every Friday and Kathmandu Abu Dhabi trip is every Sunday,

every flight returns same day to Kathmandu from the destination cities. The terms of contract mentioned
as follows:
- Monthly Salary of 7,500 Euro, Salary is paid on advance to Mr. Cooper on 1st of every month,
through Euro Bank account of Mr. Cooper opened at Standard Chartered Bank Nepal Ltd, the
exchange rate on the payment date was NRs. 130, 131, 134, 136, 131, 132, 137 per 1 Euro.
Other facilities are as follows (amounts are in NRs.)
- Technical Allowance 65,000 per month
- Sweet Room at Soaltee Crown Plaza paid by Nepal Airlines on behalf of Mr. Cooper 95,000 per
month
- Office Vehicle picks and drops Mr. Cooper from/to Airport/Hotel every time he needs to go
to/return from airport
- Mr. Cooper, intends to learn Nepali Language, and Nepal Airlines arranged for Nepali Language
class at Bishwabhasa Campus with total 6 month package of 55,000.
- Mr. Cooper‘s monthly telephone bill of 6,500, internet bill of 3,000 is paid by Nepal Airlines
- The cost of Fitness Club at Soaltee Crown Plaza, with joining fee of Rs. 75,000 and monthly cost
of 22,500 paid by Nepal Airlines.
- Nepal Airlines arranged the Visa with approval from Department of Labor for living in Nepal till
hired by Nepal Airlines of Mr. Cooper with Visa/Approval fee of 87,000
- On successful training to Nepali Pilots, Mr. Cooper will return to Germany, which needs at least
6 months, as per information it took 7 months to train the Nepali pilots.
- After 7 months, Mr. Cooper was offered by CAAN (Civil Aviation Authority of Nepal) for
training on Air Safety to Air Traffic Controllers/Pilots for total amount of 300,000 for 5 day
training; Mr. Cooper happily accepted the offer without receiving the amount (he offered his
training as his homage to CAAN).
- After finishing the workshop with CAAN, Mr. Cooper returned to Germany on 16th of Baisakh
2073.
- The cost of airfare from Munich to Kathmandu Rs. 150,000 for coming to Kathmandu and from
Kathmandu to Munich Rs. 120,000 on return is offered by Nepal Airlines, as honorarium to Mr.
Cooper, the same was not mentioned on the contract.
- Mr. Cooper visited Pashupati Old Age Home (Operated by Social Welfare Council with tax
exemption status) on the occasion of his birthday (17 January) and donated Rs. 105,000.
a) As per the information given above, ascertain the residential status of Mr. Cooper as per Income
Tax Act, 2058.
b) Mr. Cooper, being German Citizen, contends with the Management of Nepal Airlines that he will
pay tax in Germany and is not required to pay tax in Nepal. Is he correct?
c) If liable for tax, calculate the tax required to be deducted by Nepal Airlines on payment to Mr.
Cooper, showing the assessable income and taxable income. He opted for couple.
d) What will be the applicability of tax on Training to CAAN by Mr. Cooper, and calculate the tax,
if applicable.
Answer to question no 2
a) 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)).
For Income Year 2072.73
Mr. Cooper Came to Nepal on 7 days before 2072/06/01 (i.e. 2072/05/24, assuming 30 days on
Bhadra 2072)

He visits to Delhi, Qualalampur, Riyadh, Abu Dhabi as Senior Instructor Pilot every week as per
schedule of flight however during those visits, Mr. Cooper‘s stay is counted as Nepal. So he
resides in Nepal till 16th of Baikakh 2073 from 2072/05/24.
Assuming 30 days in each Nepali Month the total days of stay in Nepal is
Month Days of
Stay
Bhadra 2072 7
Ashoj 2072 30
Kartik 2072 30
Mangshir 30
2072
Poush 2072 30
Magh 2072 30
Falgun 2072 30
Chaitra 2072 30
Baisakh 2073 16
Total 233
Taking the exit day (2073/01/16) as reference point for calculation, 365 continuous period starts
from 2072/01/17 (2072/01/17 to 2073/01/16 has 365 days, 1 year period), and during that
continuous 365 days, 233 days is the stay of Mr. Cooper‘s days in Nepal, so as per the section
2(Ka Nga)(1)(Kha)) of Income Tax Act 2058, Mr. Cooper is resident for Income Year 2072.73.
b) As per Section 3 of Income Tax Act, tax is imposed and collected from the person who has
taxable income during any Income Year.
Contention of Mr. Cooper to pay tax in Germany and not to pay in Nepal is not correct, as he has
taxable income in Nepal, so needs to pay tax as per provisions of Income Tax Act 2058.
c) Mr. Cooper is liable to tax as per Income Tax Act 2058 and the tax is calculated as follows:
Amount
Particulars Details Details
(Nrs.)
Salary Euro Rate
Ashoj 7500 130 975,000.00
Kartik 7500 131 982,500.00
Mangshir 7500 134 1,005,000.00
Poush 7500 136 1,020,000.00
Magh 7500 131 982,500.00
Falgun 7500 132 990,000.00
Chaitra 7500 137 1,027,500.00
Unit
Technical Allowance 65000 7 455,000.00
Accommodation Facility directly paid 95000 7 665,000.00
Cost of Nepali Language Class directly paid 55000 1 55,000.00
Telephone 6500 7 45,500.00
Internet 3000 7 21,000.00
Cost of Fitness Club Joining Fee 75000 1 75,000.00
Cost of Fitness Club Monthly fee 22500 5 157,500.00
Cost of Visa/Approval 87000 1 87,000.00
Cost of Airfare
Coming to Kathmandu 150000 1 150,000.00
Return to Munich 120000 1 120,000.00
Assessable Income 8,813,500.00
Less : Reduction
Donation (as per Section 12(2)
100,000
(5% of 8,813,500 or Rs. 100,000 or Rs. 105,000
whichever is lowest)
Taxable Income 8,713,500.00
Tax Liability Calculation
First Slab (Social Security Tax) 300,000.00 1% 3,000.00
Second Slab 100,000.00 15% 15,000.00
Next Slab (Below 25 lacs) 2,100,000.00 25% 525,000.00
Next Slab (Above 25 lacs) 6,213,500.00 25% 1,553,375.00
Surcharge (40% surcharge on tax above 25 lacs) 1,553,375.00 40% 621,350.00
Total Tax
2,717,725.00
d) The training fee only offered by CAAN to Mr. Cooper, and not received by Mr, Cooper, so the
amount not paid is not income of Mr. Cooper, no income has no application of tax as per Income
Tax Act.
3. Following Information is available from the Financial Statement of Suryodaya Bank Nepal Ltd.
Amount (in Nrs.)

Particulars FY 2070/71 FY 2071/72 FY 2072/73
Loan Outstanding at the end 4,080,000.00 5,303,950.00 6,759,811.00
Non Banking Assets upto previous year 102,465.00 82,716.00 48,205.00
Non Banking Assets Recovered during the year 30,730.00 56,901.00
Bad accepted as Non Banking Assets During the
10,981.00 22,390.00 7,000.00
Year
Loan Written Off upto previous Year 301,408.00 301,408.00 170,708.00

Written Off Loan recovered during the year 130,700.00 170,708.00
Loan Loss Provision upto previous year 81,600.00
Loan loss provision expenses in Income Statement 26,112.00 133,945.00 133,262.00
Complete the table for required data for calculation of allowable expenses of Loan Loss Provision (LLP)
Expenses as per Section 59 of Income Tax Act. LLP expenses claimed upto previous year for income tax
purpose is same as per the financial statement.
Answer to the question no 3
As per section 59(Ka) of Income Tax Act, the allowable limit for LLP during any income year is 5% of
the Gross Loan (Loan Outstanding + Non Banking Assets at the end of fiscal year + Loan Written Off
but not recovered till the end of fiscal year) for the particular year less claimed LLP upto previous year or
the LLP expenses of the Bank whichever is lower. The detailed calculation is as follows:
Amount (in Nrs.)
Particulars FY 2070/71 FY 2071/72 FY 2072/73

Loan Outstanding at the end (a) 4,080,000.00 5,303,950.00 6,759,811.00
Non Banking Assets upto previous year (b) 102,465.00 82,716.00 48,205.00
Non Banking Assets Recovered during the year
30,730.00 56,901.00
(c.)
Bad accepted as Non Banking Assets During the
10,981.00 22,390.00 7,000.00
Year (d)
Closing NBA the end of Fiscal Year (e=b + d - c) 82,716.00 48,205.00 55,205.00
Loan Written Off upto previous Year (f) 301,408.00 301,408.00 170,708.00
Written Off Loan recovered during the year (g) 130,700.00 170,708.00
Closing Loan Written Off but not recovered till
301,408.00 170,708.00 -
the end of Fiscal Year (h=f-g)
Total Loan Limit (i=a+e+h) 4,464,124.00 5,522,863.00 6,815,016.00
Loan Loss Provision upto previous year (j) 81,600.00 107,712.00 241,657.00
Loan loss provision expenses in Income
26,112.00 133,945.00 133,262.00
Statement (k)
Total LLP as per Income statement (l = j + k) 107,712.00 241,657.00 374,919.00
5% of Loan Limit (m= 5% of i) 223,206.20 276,143.15 340,750.80
Allowed (n=m-l) 115,494.20 34,486.15 (34,168.20)
Allowable LLP expenses (Minimum of n or k) 26,112.00 34,486.15 (34,168.20)*
* the amount in brackets is income i.e. needs to be included in income while calculating the tax.

4. Mrs. Shalmali Sharma has following incomes during income year 2072.73, and seeking your advice
regarding tax treatment on her income. She has opted for couple and also told Rs. 35,000 is donated to
Family Planning Association Nepal which is tax exempt organisation, during the year. She has purchased
life policy of Rs. 2,500,000 and premium paid during the year for the life policy is Rs. 17,900.
- Rent income on her commercial complex at Putalisadak, from Rastriya Banijya Bank Ltd per
month Rs. 56,000, the same is increased by 10% from Chaitra 2072 as per terms of rent
agreement. As per the agreement, Rastriya Banijya Bank Ltd credits the saving account of Mrs.
Sharma at the same branch with the agreed amount.
- She has 5 year Fixed Deposit with Rastriya Banijya Bank Ltd of Rs. 2,500,000 with interest rate
of 11% p.a., opening the FD account on 2071.09.23.
- The interest on FD and rent is paid by Rastriya Banijya Bank to Mrs. Sharma‘s Saving account
opened at the same branch, the interest on saving account credited during the year was Rs.
13,405.
- Mrs. Sharma has provided unsecured loan of Rs. 3,200,000 to Tinau Hydropower Company Ltd
on 2072.01.01 for 1 year, with agreed interest rate of 18% p.a., the interest and principal both to
be converted to the equity shares of Tinau Hydropower Company Ltd after one year. After
conversion of loan and interest to equity share of hydropower, she became the Director of
company and received Meeting Allowance of Rs. 17,000 on hand at the meeting day 2073.02.17.
- Mrs. Sharma has received Rs. 95,000 as the dividend from Nepal Telecom on 2073.03.21 as
decided and declared by the annual general meeting of Nepal Telecom from the profits of FY
2071.72.
- Mrs. Sharma owns 4 Ropani land at Matatirtha VDC, and the water is extracted and sold by
Nepal Water Company Ltd from that land with annual payment of Rs. 170,000 to Mrs. Sharma
for use of Water from the land.
Answer to question no. 4

Tax
Nature of
Particulars Income (NRs.) Amount
Income
(NRs.) Details/Explanation
Rs. 56,000 per month from Sharawan to Falgun
2072, and Rs. 56,000*110% = 61,600 from Chaitra
2072 to Ashad 2073. As per the language of
Final question, the agreed amount is credited to bank
Rent 771,555.56 77,155.56
Withholding account of Mrs. Sharma, so the amount received is
after tax, i.e. the amount mentioned is net of tax
(90%).
= (56000*8+56000*4*1.1)/0.9
The FD was opened on 2071.09.23, for our
Interest
calculation the income for Income Year 2072.73 is
Income on
Final to be considered, which is 2,500,000 * 11%, and as
Fixed 275,000.00 13,750.00
Withholding per question, no information regarding TDS on
Deposit
interest is mentioned, which implies RBB deducts
from Bank
5% TDS on payment of interest.
Interest
Income on Final The interest on saving deposit during the income
13,405.00 670.25
Saving Withholding year is Rs. 13,405, 5% TDS deducted by bank on
Deposit payment.
from Bank
Interest
Income The loan of Rs. 3,200,000 is provided on 2072.01.01
from Tinau Includible for 1 year, for Income Year 2072.73 the period is of
432,000.00 64,800.00
Hydropower Income 9 months (from 2072.04.01 to 2072 Chaitra end),
Company interest income is 3,200,000 *18%*9/12, and 15%
Ltd TDS on interest is deducted by the company.
Rs. 95,000 dividend is received by Mrs. Sharma,
Final here received implies she has received the net
Dividend 100,000.00 5,000.00
Withholding amount, the total income is Rs. 95,000/95% (NTC
has deducted 5% TDS on payment of dividend).
Rs. 170,000 is received for Water extraction charge
Natural (the same is Natural Resource Payment), and Rs.
Includible
Resource 200,000.00 30,000.00 170,000 received implies net amount is received by
Income
Payment Mrs. Sharma, total amount is 170,000/85% (15%
TDS is deducted by Nepal Water Company Ltd).
Final Meeting Fee received on hand is Rs. 17,000, 15%
Meeting Fee 17,000 3,000.00
Withholding TDS Rs. 3,000 deducted by Hydropower Company.
Total Assessable Income
from Investment/ Total 632,000.00 94,800.00
Claimable Tax
Less:
Donation (5% of 632,000 or 100,000 or 35,000
31,600.00
which is lowest)
Life insurance premium (20,000 or 17,9000 which is
17,900.00
lowest)
Taxable income 582,500.00
Tax Calculation
First (Social Security Tax not
300,000.00
applicable for investment income)
Next 100,000.00 15% 15,000.00
Remaining 182,500.00 25% 45,625.00
Total 60,625.00
Claim for Advance Tax 94,800.00
Net Advance Tax 34,175.00
5. Nepal Pharmaceuticals Company Ltd is located at bank of Kaligandaki river of Tanahun District. The
sewage of the factory is harmful chemical, and on study of the factory sewage system, the Consultant
hired by Ministry of Environment suggested for the installation of Advanced Automated Chemical
Analyzer and the treatment of sewage is done before the sewage reaches the river. The Board of Director
accepted the proposal, and thus the installation of the Analyzer is done on the factory. After analysis of
the available analyzers, the GlobalMED Suppliers of Hongkong is found best. The cost as per Performa
invoice is HKD 1,500,000 with CIF (Cost insurance and freight) upto Kolkata and installation service is
part of cost of the product. The customs rate is 3.5%, The Company purchased the analyzer and installed
on 2073/1/27.
While preparing the financial statements, the finance officer of the company has capitalized the Analyzer
as Fixed Assets under pool D and calculated depreciation @ 15% on the cost for 2 months for Income
year 2072.73. (Exchange rate on purchase day 1 HKD = 16 NRs.). The customs office of Bhairahawa has
added 0.5% of CIF Kolkata cost as insurance and transportation cost upto Bhairahawa while calculating
the custom. The actual cost of insurance and transportation upto factory site was NRs. 220,000. The
company is also registered with Department of Industry as Manufacturing Industry. The adjusted taxable
income of the company for income year 2072/73 is NRs 30.5 Million; the impact of depreciation is as
allowable as per income tax act/rule for calculating adjusted taxable income.
Suggest the management about the treatment of the cost of analyzer and claim of depreciation by the
finance officer as per provisions of Income Tax Act 2058.
According to section 17 of Income tax Act 2058, expenses incurred in the course of business during any
income year for controlling pollution shall be allowed for deduction to certain extent. Such expenses
shall be allowed for deduction to the extent of actual expense incurred or 50% of adjusted taxable (for all
business) whichever is less. However, any excess amount that could not be allowed for deduction due to
above ceiling shall be capitalized at the beginning of next year in pool D and depreciation shall be
charged as per schedule 2 of Income Tax Act 2058.
Thus as per the above provision, for Income Year 2072.73, the amount spent on the Advanced Automatic
Chemical Analyzer is Pollution Control Cost (u/s 17) and not Fixed Assets to be capitalized.
Particulars Amount (NRs.)

Cost (1,500,000 * 16) 24,000,000.00
Customs (1,500,000 *16 *100.5%*3.5%)
(The extra 0.5% of cost as valuation of insurance and
transportation by customs for calculating customs duty) 844,200.00
Cost of Insurance & transportation from Kolkata to site (The
extra 0.5% of cost as valuation of insurance and transportation
by customs for calculating customs duty, actual cost is added as
cost of analyzer) 220,000.00
Total 25,064,200.00
Actual expense incurred (a) 25,064,200.00
50% of Adjusted Taxable income (b=50% of 30.5 million) 15,250,000.00
Allowable expenses as Pollution Control Cost (c= min of a or b) 15,250,000.00
Not Allowed for IY 2072.73 (d=a-c) 9,814,200.00
The amount 9,814,200.00 is capitalized to Pool D to arrive the opening depreciation base value for IY
2073.74 (next income year).
For income year 2072.73, the cost on analyzer is claimed under section 17 (as shown above) not under
section 19 (as depreciation).
The depreciation calculated by the finance officer for IY 2072.73 is not allowed for claim (as per
question the depreciation for tax is calculated correctly, i.e. the adjusted taxable income is after allowable
deprecation as per income tax act/rule, so reverse calculation for depreciation and adjusted taxable
income is not done.
For Income Year 2073.74, the depreciation shall be calculated after adding the above unallowed amount
Rs. 9,814,200 on pool D, and the rate of depreciation shall be 20% (15%+1/3rd of 15% for
pharmaceutical industry (special industry)as per Schedule 2 of Income Tax Act.
6. Given in the financial information of Sky Nepal Life Insurance Company Ltd for FY 2072.73.
Particular Amount (Nrs.)

Net Premium Received 240,000,000
Total Policy values 1,600,000,000
Commission provided to Re-insurer 950,000
Commission received from Re-insurer 1,610,000
Agent commission 3,120,000
Income from Interest on FD from investment in Nepali
5,216,640
Bank (net of tax)
Income from Dividend from investment in Nepal
850,000
Telecom Shares (net of tax)
Surrender value paid (premium collected 750,000) 675,000
Policy amount paid to the policy beneficiary of deceased
750,000
policy holder (Premium collected 250,000)
Management Expenses 3,570,000
Amount transferred to insurance fund this year 36,250,000
Calculate the tax liability and net tax payable/receivable of the company for IY 2072.73.
The calculation on income from investment insurance (life insurance) business shall be as prescribed by
the section 61 of Income Tax Act 2058, the same is given below:
Income Amount (Nrs.)

Commission received from Re-insurer 1,610,000
Interest income from FD investment (52,16,640/85%, the amount is net
6,137,224
of 15% withholding tax)
Dividend income is Final Withholding, so not to be includible income
Total Inclusion of income 7,747,224
Deduction:
Commission provided to Re-insurer 950,000
Agent commission 3,120,000
Loss on Settlement of Liability (Note 1) 425,000
Management Expenses 3,570,000
Total Deductible expenses 8,065,000
Taxable income (deductible expenses is more than inclusive income so
taxable income is zero, the amount 317,766 shall be carried forward for
next year as claimable loss of business) -
Tax Liability @ 25% -
Less : Advance Tax (52,16,640*15%/85%, the 15% TDS on interest is
claimable, the TDS on dividend is not claimable since the dividend
being final withholding income) 920,584
Net Tax Liability/ Advance tax carried forward for next year claim (920,584)
Note 1
Calculation of Loss on Settlement of Liability Amount (Nrs.)
Payment to Policy holder on surrender 675,000
Premium Received on the surrendered policy 750,000
Gain on surrender of policy 75,000
Policy amount paid to the policy beneficiary of deceased policy
holder 750,000
Premium Received on behalf of policy 250,000
Loss on disposal of liability (500,000)
Total Loss on Settlement of Liability (425,000)
7. Sunshine English Boarding School (pvt. Ltd.) located at Bhairahawa has furnished the following
information for Education Year 2072.
Particulars Note Amount (Nrs.)

Incomes
Student Admission Fee A 4,050,000.00
Student Annual Service Fee B 3,156,700.00
Student Monthly Tuition Fee C 20,978,217.00
Total Income 28,184,917.00
Expenses
Salary of Faculty 27,750,000.00
Printing & Stationery 560,902.00
Other Expenses 730,981.00
Total Expenses 29,041,883.00
a- As per the information the education year used by the school is from Baisakh to Chaitra of year.
The Student Admission Fee is collected on Baisakh of each year on admission of the students
b- The annual service fee is also received on Baisakh of each year for the services such as lab,
library, internet, computer lab, sports facility, extra-curricular activities etc. to be provided during
the whole education year.
c- The monthly tuition fee is collected every month.
d- As per the system of the recording, the cash received from students is booked as respective
income by the school. The opening tuition fee receivable of previous year 2071 Chaitra is Rs.
45,06,900 which is received Rs. 10,25,000 on Baisakh 2072 and rest is received in between
Shrawan to Poush 2072. The Closing Fee receivable on Chaitra 2072 is Rs. 82,70,000 which is
not received till Bhadra 2073. The expenses given are cash payments for respective heading
during the year.
e- The Management of the School contends there is loss for the education year 2072 and no tax is
required to be paid. Suggest the management with respective provisions of Income Tax Act 2058.
As per section 22 of Income Tax Act 2058, the accounting for tax by company shall be kept as per
Accrual Basis. The Sunshine English Boarding School (Pvt. Ltd.) being company as per Section 2 of
Income Tax Act 2058 shall keep the accounting as per Accrual Basis.
Similarly as per Section 2(Jha) of Income Tax Act, the income year shall be from first of Shrawan of any
year to end of Ashad of next year. For the company, the income year shall be 2071.72 (from 2071/04/01
to 2072/03/end) and 2072.73 (from 2072.04.01 to 2073.03.end). The information given above are not
complete for IY 2071.72, so the calculation of taxable income for IY 2072.73 is as follows:
Amount
Particulars Note
(Nrs.)
Student Admission Fee i
Student Annual Service
2,367,525.00 ii
Fee
Student Monthly Tuition
20,623,487.75 iii
Fee
Total Income 22,991,012.75
Expenses
Salary of Faculty 20,812,500.00
Printing & Stationery 420,676.50 iv
Other Expenses 548,235.75
Total Expenses 21,781,412.25
Taxable income 1,209,600.50
i) This fee is collected on 2072 Baisakh for education year 2072, which is part of income year
2071.72, since the admission fee is normally the first criteria to be registered as student and
on 2073 Baisakh the admission fee shall be collected by the school from its students, so the
fee is not considered as income for IY 2072.73. (Alternative approach may me to take
proportionate income for 9 months assuming the admission fee is recognized over the 12
month period education year equally).
ii) This fee is also collected on 2072 Baisakh for annual activities/services to be provided to the
students, so it should be proportionately divided for 12 months, and 9 months fee shall be
included as income for IY 2072.73
iii) This fee is collected every months and this amount is total collection from 2072 Baisakh to
Chaitra 2072 and collection of Rs. 45,06,900 opening fee of 2071 Chairta collected during
2072. So our monthly tuition fee income is collected during every month of 2072 is Rs.
(20978217-4506900)/12 = 13,72,609.75. The fee receivable at Chaitra 2072 Rs. 82,70,000 is

also to be recognized as income for IY 2072.73 although not recovered till 2073 Bhadra as
per Accrual Basis of accounting for Income Tax.
iv) All the expenses are said paid during 12 month period of 2072, so for IY 2072-73 the 9 month of
2072 are included, so 9/12th part of expenses are deducted.
Conclusion: The Company shall keep accounting on accrual basis for income tax purpose, and the
education year followed by school is not valid for income tax purpose and contention of management as
loss bearing and not paying tax is not correct.
8. Mr. Chop Lal Nakarmi of Dhangadi owns following vehicles and has following income and expenditure.
Suggest the applicability of tax as per provisions of Income Tax Act 2058 (as applicable to IY 2073.74).
expenses of each trip except

Charge per rounds of trips during
Particulars depreciation (salary, allowance of staff
trip (Nrs.) the year
and repair/fuel)
Power Triller 1570 210 760
Auto Rickshaw 230 750 160
Car 2500 350 1510
Truck 3590 165 1890

As per Schedule 1 of Income Tax Act 2058 (with latest amendment by Finance Act 2073 applicable for
IY 2073.74) the person engaged in vehicle hiring business has to pay fixed amount of tax per vehicle as
per category of vehicle, no detailed calculation as income and deduction of expenditure is required. The
total amount payable by Mr. Nakarmi for the IY 2073.74 is as follows:
Particulars Tax per vehicle (Nrs.)

Power Triller 1,000
Auto Rickshaw 1,550
Car 2,400
Truck 3,000
Total 7,950
Since, Mr. Nakarmi is natural person, so the tax paid by him is final and no return is required to be filed.
9. As per information provided by the Finance Manager of Wildlife Happy Life Resort Pvt. Ltd. located at
Sauraha of Chitwan, show by calculation the allowable depreciation and limit of repair and improvement
expenses for Income Year 2073.74.
Amount (in Nrs.)
Opening
Addition date and
Particulars Depreciation Addition Disposal
information
Base
Old part with WDV
Building 7,560,000.00 2,110,000.00 21 Poush 2073 710,000 sold on Chaitra
2073 for 475,000
Room Bed 12 Kartik 2073 Rs. Old sets scrapped off for
4,140,000.00 4,230,000.00
Sets & 21,50,000, and remaining Rs. 160,000

Mattresses on 24 Magh 2073
Office
Furniture,
1,050,000.00
Printer and
Computers
Air
5,070,000.00
Conditioners
Kitchen
2,360,000.00
Equipments
Acquired and installed on
16 Magh 2073, as per
agreement with the
Authorised supplier for
Nepal, the software
IDS Software license is for 7.5 years
2,100,000.00
System with annual maintenance
support fee of Rs. 23,000
per annum to be paid
upfront at the start of the
year, the first year fee is
waived
De
pre
Absorb
cia
ed Lim
tio
Opening Portion Absorbed Disposal DBV for IY Depreciat Rep
ool Addition n
DBV of Addition Proceeds 2073.74 ion (7%
Ra
Additio DBV
te
n
(%
)
4,230,000.0 383,000.0 536
A 4,140,000.00 4,230,000.00 710,000.00 7,660,000.00 5%
0 0 0
4,230,000.0
Building 4,140,000.00 100% 4,230,000.00 710,000.00 7,660,000.00
0
25 262,500.0 73,5
B 1,050,000.00 - - - 1,050,000.00
% 0
Office
Furnitur
e,
Printer 1,050,000.00 1,050,000.00
and
Comput
ers
11,570,000.0 4,230,000.0 14,946,666.6 15 2,242,000. 1,04
D 3,536,666.67 160,000.00
0 0 7 % 00 6.
Room 4,140,000.00 2,150,000.0 100.00 2,150,000.00 160,000.00 7,516,666.67
Bed Sets 0 %
&
Mattress
es
2,080,000.0
66.67% 1,386,666.67
0
Air
Conditio 5,070,000.00 5,070,000.00
ners
Kitchen
Equipm 2,360,000.00 2,360,000.00
ents
E
IDS
13.
Softwar 2,100,000.0 186,666.6 98,0
- 66.67% 1,400,000.00 - 1,400,000.00 33
e 0 7
%
System
Note 1- For Pool A, B, C, and D the individual identity of assets is lost on depreciation calculation, so
depreciation is calculated on the total of each pool
Note 2- The Room Bed Sets and Mattresses is Core Asset of Hotel Business, so is part of Pool D
Note 3 - The rate of depreciation for Pool E IDS Software System is 1/period of license = 1/7.5 yrs =
13.33 % p.a.
10. After reviewing the books of accounts of Hope Traders Pvt. Ltd. dealing with electronic items, you found
that the turnover of company is Rs. 78,90,000 and taxable income of the company for IY 2072.73 is Rs.
17,80,000. The details of tax paid by the company is Rs. 130,000 on Poush end 2072 and filed the
estimated tax return on Poush 28 2072, paid Rs. 56,000 on Chaitra 27, 2072 and final payment shall be
done as per your recommendation on Kartik 27, 2073, no extension for tax return filing is obtained by
the company. Show by calculation the final tax amount payable on that date by the company.
Amount (in Nrs.)
Taxable Income 1,780,000

Tax Rate 25% 25%
Tax Liability 445,000.00

Fine under section 117 (for not filing estimated tax return, estimated return
filed so not required) -
Fine under section 117 (for not submitting self assessment tax return till
Ashoj end 2073, no extension obtained from IRD - Rs. 100 per month or
0.1% of turnover (without deducting the expenses) p.a. for one month
whichever is higher, assumed that the return is submitted on Kartik 27, 2073 657.50
after our suggestion) (MAXIMUM of (78,90,000*0.1%*1/12 or 100*1)
Interest under section 118 16,218.75
Interest under section 119 3,237.50
Total Tax Liability 464,456.25
Less : Tax already paid 186,000.00
Net tax payable till Kartik end 2073 (interest, fine, penalty calculated by
taking day as full month, so the return filing and amount to be paid will be
same till Kartik end 2073 or on day Kartik 27, 2073) 278,456.25
Working for interest, fine, penalty
Installment
Required Required Deposited Deficit Fine Fine period
First -40% 178,000.00 130,000.00 48,000.00 1,800.00 3 months
Second -70% 311,500.00 186,000.00 125,500.00 4,706.25 3 months

Final installment-
100% 445,000.00 186,000.00 259,000.00 9,712.50 3 months
Total Interest u/s 118 16,218.75
Interest under 119 445,000.00 186,000.00 259,000.00 3,237.50 1 months
11. Suggest to Mrs. Sunita Sangtan about the following incomes earned by her
a) Received Rs. 360,000 from Save the Children, Sector Office as house rent from her house located
at Old Baneshwor
b) Received Rs. 15,000 as dividend from Baneshwor Tole Development Cooperative Ltd on Ashoj
17, 2073 which is AGM day of the cooperative.
c) Received Rs. 2,700 as meeting fee for participating on the Member Capacity Development
Committee of the cooperative before 3 day of AGM.
d) She working as guest lecturer to Global College of Management for subject Business
Organization and she received Rs. 8,500 for three class room business simulation conducted on
Shrawan 2073.
e) Her bank account at Bank of Kathmandu is credited for interest on Ashoj end 2073 Rs. 2,200 and
Rs. 220,000 for maturity of bond, Development Bond Kha 2073 issued by Nepal Rastra Bank
f) She has worked as Financial Analyst member for evaluation of project Safer Motherhood
conducted by Save the Children as per appointment made by Social Welfare Council (SWC) and
received Rs. 85,000 from SWC.
As per question Mrs. Sangtan has received all the amounts during IY 2073.74, which implies that the
incomes are after applicable withholding tax deducted by the payer on payment.
a) House Rent income of Rs. 360,000 received, which is after deduction of 10% TDS (tax deducted
at source) by save the children, final withholding income as per section 92
b) Dividend income of Rs. 15,000 received from Baneshwor Tole Development Cooperative Ltd,
which is after deduction of 5% TDS, final withholding income as per section 92
c) Meeting fee received Rs. 8,500 from Baneshwor Tole Development Cooperative Ltd, which is
after deduction of 15% TDS, final withholding income as per section 92
d) Part time guest lecturer fee received from Global College of Management Rs. 8,500, which is
after deduction of 15% TDS, final withholding income
e) Interest on Development Bond Kha 2073 Rs. 2,200, which is after deduction of 5% TDS, final
withholding income. The sale proceeds of Development bond Rs. 220,000 is not income which is
assumed to be sold at the par value (cost of investment and sale proceeds are same).
f) Financial Analyst member income from Social Welfare Council Rs. 85,000, with is after
deduction of 15% TDS, final withholding
Since all her incomes are final withholding nature, so no need to calculate the taxable income and no
need to file income tax return for the respective income year.
12. Define the Trading Stock, Depreciable Assets, Non Business Chargeable Assets and Business Assets
with reference to Income Tax Act 2058.

As per section 2 (ka yng) of Income Tax Act, 2058, "Trading Stock" means the assets owned by a person
and for sale in the ordinary course of business, work-in-progress on such assets and inventories of
materials that are to be included into such assets. Provided that the term shall not include an asset in
foreign currency.
As per section 2 (ka, ra) of Income Tax Act, 2058, "Depreciable Asset" means an asset which is used for
generation of income from any business or investment and whose value declines due to wear and tear,
obsolescence, or the passing of time. Provided, the term shall not include trading stock.
As per Section (2) (da) of Income Tax Act 2058, non-business chargeable assets means securities or an
interest in an entity as well as land and buildings held by a natural person but excludes the following
assets.
(i) business assets, depreciable assets, of trading stock;
(ii) a private residence 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;
private resident means Building or area covered by building or one rupani land whichever is less.
(iii) interest belonging to a beneficiary in a retirement fund;

(iv) land and private building of an individual that is disposed off for less than rupees three million; or
non-business assets of an individual that is disposed off by way of any type of transfer, other than sales
and purchase, made within three generations.
As per section 2(ka ta) of Income Tax Act, 2058, "Business Asset" means an asset used in business.
Provided, the term shall not include trading stock or a depreciable asset in business.
13. What do you mean by Final Withholding Payments and what are the payments treated as final
withholdings as per Income Tax Act, 2058?

As per Section 2(Ga) of Income Tax Act, 2058, final withholding payment is defined as the payments
specified under Section 92 such as dividend, rent, gains, interest and payment to a non-resident person,
which is to be made after withholding final tax.
Final withholding payments are the payments made after deducting tax at source at specified rate
prescribed under Income Tax Act, 2058. The tax, thus, deducted shall be the final tax. The person
receiving the final withholding payments does not have to include this amount in his other taxable
income.
According to Section 92 of Income Tax Act, 2058, following payments are treated as final withholding
payments:
 Dividend paid by a resident company.

 Rent for lease of land or building and associated fittings and fixtures, having a source in\ Nepal,
and that is received by an individual other than the individual carrying on business.
 Payment made by resident person for gains from investment insurance.
 Payments made as gain from unapproved Retirement Fund.
 Interest payment, as specified under Section 88(3), made by bank, financial institution or any
entity issuing bond or company listed as per the prevailing law.
 Payments made to non-resident persons that are subject to withholding tax under section 87, 88,
or 89.
 Retirement payments made by Nepal Government or from the Approved or Unapproved
Retirement Fund including all types of retirement payments (except regular pension payment).
 Meeting fee, payments made for occasional teaching.
 Payment against windfall gain.
14. Write short note on Taxpayers Rights under the Income Tax Act 2058.

As per section 74 of Income Tax Act 2058, a taxpayer with respect of paying tax under Income Tax Act
shall have the following rights:
o right to get respectful behavior;
o right to receive tax related information as per the prevailing laws;
o right to get opportunity of submitting proof in own favour in respect of tax matters;
o right to appoint lawyers or auditors for defense; and
o right to secrecy in respect of tax matters and keep it inviolable
15. Define Permanent Establishment as per Income Tax Act 2058.

As per Section 2(bb) of Income Tax Act, Permanent establishment means a place where a person wholly
or partly carries on a business, and includes the following places:-
(1) a place where a person wholly or partly carries on a business through an agent, other than a general
agent of independent status acting in the ordinary course of business as such;
(2) a place where a person has, is using, or is installing substantial equipment or substantial machinery;
(3) one or more places within a country where a person furnishes (whether through employees or
otherwise) related services (including technical, professional, or consultancy services) for a period or
periods aggregating more than 90 days within any 12 month period; or
(4) a place where a person is engaged in a construction, assembly, or installation project for 90 days or
more, including a place where a person is conducting supervisory activities in relation to such a project.
16. Define Exempt organization as per Income Tax Act 2058.

As per Section 2(s) of Income Tax Act 2058, Exempt organisation means the following entites:-
(1) Following entities registered with the Department as an exempt organization:
(a) a social, religious, educational, or a charitable organization of a public character established without
having a profit motive,
(b) an amateur sporting association formed for the purpose of promoting social or sporting facilities not
involving the acquisition of gain,
(2) a political party registered with the Election Commission,
(3) a village development committee, municipality or district development 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 services rendered to the
entity by the person, is not exempt from tax.

17. Define Company As per Income Tax Act 2058.

As per section 2(m) of Income Tax act 2058, 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:-
(1) Corporate body established under the laws for the time being in force;
(2) 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;
(3) 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;
(4) Foreign company; and (5) any foreign institution prescribed by the Director-General.
18. Differentiate between public circular and advance ruling in respect to Income Tax Act 2058.
As per Section 75 of the Income Tax Act 2058, public circular is the circular issued in writing by Inland
Revenue Department setting out the Department's interpretation of Income Tax Act in order to achieve
consistency in the implementation of the Act and to make the tax administration simple and provide
guidance to persons affected by the Act, including officers of the Department. The circular, thus, issued
will be made public and shall be binding on the Department also.
On the other hand, if there is any confusion in the application of the provisions of Income Tax, 2058, or
for the sake of clarification of any doubt relating to the provisions of the Act, an individual or entity may
opt for seeking Advance Ruling from IRD under Section 76 In case an individual or entity makes a
written application to IRD seeking IRD's position or view regarding the application of this Act with
respect to an arrangement proposed, IRD under the signature of Director General may issue, in writing,
an advance ruling in this regard. However, IRD should not issue an advance ruling on the matters under
consideration of any court or decided by a court.
Value Added Tax (VAT)

19. A business (named Resunga Business Trade Pvt. Ltd.) is engaged in import and sales of various types of
goods from India, China, Hongkong and Singapore. During Income Year 2072.73 imported following
goods from various countries:
India INR 100,000 (1 INR = 1.6 NPR)

China RMB 15,000 (1 RMB = 15 NPR)
Hongkong HKD 20,000 (1 HKD = 15 NPR)
Singapore SGD 35,000 (1 SGD = 66 NPR)
All goods are imported though Calcutta Port through Karkarvitta Customs, and custom charged on goods
by Kakarvitta Custom is 15%, and VAT is imposed at normal rate except for some goods imported from
China which are 45% VAT exempted goods.
The business is continued in Nepal with sales & distribution channel as Resunga Business Trade Pvt.
Ltd. as Importer, and other layers as Wholesaler, Distributer and Final consumer. The businesses added
following mark up on the sales activity
Resunga Business Trade Pvt. Ltd. Rs. 300,000 administrative expenses and 15% mark up on sales
Wholesaler Rs. 200,000 administrative expense and 10% profit on cost
Distributor Rs. 220,000 administrative expenses and 20% mark up on sales
Required
- VAT paid by each business to Nepal Government at each stage of sales channel
- Final Cost of consumer for the goods (separately for VAT attractive goods and VAT
exempted goods)

Amount
Calculation for First Chain of Business (Resunga Business Trade Pvt. Ltd.)
(Nrs.)
Imported Foreign
Rate of Exchange Total Taxable Tax Exempt
form Currency
India 100,000.00 1.60 160,000.00 160,000.00
Hongkong 20,000.00 15.00 300,000.00 300,000.00
Singapore 35,000.00 66.00 2,310,000.00 2,310,000.00
China 15,000.00 15.00 225,000.00 123,750.00 101,250.00
Total 2,995,000.00 2,893,750.00 101,250.00
Add : 15% Custom 449,250.00 434,062.50 15,187.50
Total Base of VAT Calculation on Import 3,444,250.00 3,327,812.50 116,437.50
VAT 13 % paid on import 432,615.63 432,615.63 Exempt
Add : 300,000 administrative expenses (Administrative
expenses distributed in the ratio of total cost for taxable
300,000.00 289,858.10 10,141.90
and tax exempt goods, as per question the total
administrative expense is for sale of total of goods
Cost of Sales 3,744,250.00 3,617,670.60 126,579.40
Value Addition (15% margin on sales) (The margin is
660,750.00 638,412.46 22,337.54
15% on sales price, the cost is 85% of sales)
Sale Price 4,405,000.00 4,256,083.06 148,916.94
VAT on Sales 553,290.80 553,290.80 Exempt
Less : VAT paid on purchase/import 432,615.63 432,615.63
Net VAT Payable 120,675.17 120,675.17
Total in
Calculation for Second Chain of Business (Wholesaler) Taxable Tax Exempt
NRs.
Purchase Cost 4,405,000.00 4,256,083.06 148,916.94
VAT on Purchase 553,290.80 553,290.80 Exempt
Add : administrative expenses (200,000 distributed in the
200,000.00 193,238.73 6,761.27
ratio of purchase cost)
Total Cost 4,605,000.00 4,449,321.79 155,678.21
Add : Value Addition (10% margin on cost) 460,500.00 444,932.18 15,567.82
Sales Price 5,065,500.00 4,894,253.96 171,246.04
Add : 13% VAT on sales 636,253.02 636,253.02 Exempt
Less : VAT paid on purchase 553,290.80 553,290.80
Net VAT payable 82,962.22 82,962.22
Total in
Calculation for Third Chain of Business (Dealer) Taxable Tax Exempt
NRs.
Purchase Cost 5,065,500.00 4,894,253.96 171,246.04
Add : administrative expenses (220,000 distributed in the
220,000.00 212,562.60 7,437.40
ratio of purchase cost)
Total Cost 5,285,500.00 5,106,816.57 178,683.43
Add : Value Addition (20% margin on sales) 1,321,375.00 1,276,704.14 44,670.86
Sales Price 6,606,875.00 6,383,520.71 223,354.29
Add : 13% VAT on sales 829,857.69 829,857.69 Exempt
Less : VAT paid on purchase 636,253.02 636,253.02
Net VAT payable 193,604.68 193,604.68
Calculation for Final Consumer (Final Chain on Total in
Taxable Tax Exempt
business) NRs.
Purchase Cost 6,606,875.00 6,383,520.71 223,354.29
Total Cost 7,436,732.69 7,213,378.40 223,354.29
20. The following foreigners travelling by air came to Nepal by hearing the slogan of Nepal Tourism year.
They are very smart and could be able to find out that they can claim VAT if certain conditions are
fulfilled by them. They find Nepalese market very lucrative and want to do shopping and get benefit of
Value Added Tax as given by Nepal Government. They have the following transactions and they want to
claim VAT refund and seek your opinion that how much they can exactly get the Refund.
Mr. American, a resident of USA purchased a Laptop amounting to Rs. 60,000 excluding VAT
and donated the same to an NGO serving poor and disable people.
Mr. Europe, a resident of Holland purchased a Handycam amounting to Rs. 30,000 including
VAT and took same along with him.
Mr. Bharat, a resident of India purchased VCD Player amounting to Rs. 12,000 including VAT
and took the same along with him.
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.
Based on above conditions the refund amount is calculated below in each of the cases:
Person Taxable Amount VAT paid on Allowable for refund Refund
(Nrs.) purchase (13%) Amount
(VAT less
3% service
charge)
No, All above condition not
Mr. American 60,000.00 7,800.00 satisfied
Yes, All above condition
Mr. Europe 26,548.67 3,451.33 satisfied 3,347.79
No, All above condition not
Mr. Bharat 10,619.47 1,380.53 satisfied
21. What is market Value as per Value Added Tax 2052? Mention the relevant provision applicable to
market Value as per Value Added Tax 2052?
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.
22. Describe the circumstances beyond the control to submit return and pay taxes under the value Added Tax
Act, 2052.
As per Rule 35 of Vat Rule 2053, the following circumstances shall be deemed to be circumstances
beyond control for the purpose of sub-section (4) of Section 19 of the Act;
i. In case the person required to pay tax becomes disabled due to falling ill; up to seven days of the
date of his recovery.
ii. In case the person required to pay tax is to obsequies; up to seven days of the end of the
obsequies,
iii. In case a woman required to pay tax delivers a child; up to thirty five days of the date of delivery,
iv. In case the person required to pay tax dies or become insane or disappears and his heir or
guardian submits an application within thirty five days of the date of such incident; up to seven
days of receipt of such application,
v. In circumstances when the person required to pay tax has not been able to come to the IRO
because of the closure of a road due to floods, landslides of similar other reasons; up to seven
days of opening of the road,
vi. In circumstances when he cannot come to the IRO due to total Strike of transport; up to the next
day of the end of such strike.
vii. In case where the natural calamities like fire earthquake, arises; up to thirty days from the date
when such calamities occur.
In case an additional time limit shall be required to be requested due to circumstances beyond control
referred to point (ii),(iii),(iv),(v) & (vii) above; the recommendation of the concerned Village
Development Committee or Municipality shall be submitted.
While requesting for an additional time-limit due to the circumstance referred to point no,(vi), the
recommendation of the Village Development Committee or Municipality concerned with the place
where the Strike of means of transport has taken place, shall be submitted.
23. What is the provision for time and place of supply as per VAT Act 2052/ Rule 2054.
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:
a) The time supplier issued an invoice

b) In the case of the supply of goods, when the recipient removes or takes possession of the goods
from the supplier's transaction place;
c) In the case of the supply of services when the services are provided; and
d) 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.
24. State the relevant provision of VAT Act/Rule for Cancellation of Registration.
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

25. State the provision of VAT Act 2052 and Rule 2054 relating to goods/or services in respect of which the
deduction is not allowed/ and or partially allowed.
As per Section 17 of VAT Act 2052 and Rule 41 of VAT Rules 2054 the deduction is not allowed on the
following goods/ or services
(a) Beverage,
(b) Alcohol or alcohol mixed beverage like wine, beer,
(c) Light petroleum (petrol) fuel for motor vehicles,
(d) Entertainment expenditure,
Tax may be deducted on the following goods in the following proportion (partially allowed):-
(a) On automobiles, Forty per cent of the cost price.
26. Differentiate between NO VAT and Zero VAT, with one practical example.
Schedule 1 of VAT Act 2052 (and amended by latest Finance Act) has listed the VAT exempt goods and
services and Schedule 2 of the act has listed the goods and services for which VAT is payable at Zero
rate.
VAT exempt goods and services are those goods and services, for which the application of VAT
(economic value addition) is not relevant, whereas for the goods and services listed under zero rates
category the payment of VAT is at Zero rate.
In practice, zero rate has more financial benefit to the business unit compared with VAT exempt
goods/services.
For example:
A is business which sold goods worth Rs. 100,000 which are VAT exempted.
Suppose the business has purchased the goods at Rs. 70,000, and his office expenditure has Internet
Expenses Rs. 10,000 and VAT Rs. 1,300 is paid for subscribing the internet.
The total margin on the above economic activity is
Margin = Sales – (Purchase + Cost) = 100,000 – 70,000-(10,000+1,300) = Rs. 18,700
B is business which has dealt with zero rate goods/service, for which the sales price is 100,000 + 0%
VAT, and the input cost is 70,000 + 13% VAT, and internet expense of Rs. 10,000 + 13% VAT.
The total margin on this economic activity is
Margin = Sales – (Purchase + Cost) = 100,000 – 70,000 - 10,000 = Rs. 20,000
Further the VAT paid on cost 70,000*13% and paid on internet 10,000*13% is refundable to the
business by Nepal government.
In respect of both economic activities, the difference is dealing of VAT exempt or Zero rated
goods/services, but the impact is different which is the fundamental difference on No VAT and Zero
VAT.

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REVISION TEST PAPER

The Institute of Chartered Accountants of Nepal

RTP-CAP II June 2017 @ ICAN Page 1 of 181

RTP-CAP II June 2017 @ ICAN Page 2 of 181

Accounting for Departments

RTP-CAP II June 2017 @ ICAN Page 3 of 181

Accounting for Branches

Hire Purchase Transactions

Issue of Shares and Debentures

Underwriting of Shares and Debentures

RTP-CAP II June 2017 @ ICAN Page 5 of 181

RTP-CAP II June 2017 @ ICAN Page 6 of 181

Profit or Loss Pre and Post Incorporation

Accounting for Partnership

Accounting for Non-profit making Organisation

Accounting for Banks

Category Amount Rs.

Cash Flow Statement

Nepal Accounting Standards (NAS)

RTP-CAP II June 2017 @ ICAN Page 10 of 181

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

RTP-CAP II June 2017 @ ICAN Page 11 of 181

Accounting for Departments

Memorandum Departmental Stock Account (at Selling Price)

Memorandum Departmental Mark Up Account

2. Calculation of closing stock

RTP-CAP II June 2017 @ ICAN Page 12 of 181

Memorandum Trading Account

Calculation of insurance claim

RTP-CAP II June 2017 @ ICAN Page 13 of 181

Accounting for Branches

Particular Newroad Thimi Kapan Gwarko Total

ii). Calculation of invoice of goods received from HO by all branches

iii) Calculation of profit margin on goods sent to the branches

iv). Valuation of stock at cost price

Hire Purchase Transactions

Issue of Shares and Debentures

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

RTP-CAP II June 2017 @ ICAN Page 15 of 181

1.6.2016 Underwriting Commission A/c Dr. 400,000

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

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

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

1. No. of Shares applied by Mr. Subash = (240,000/200,000) x 4,000 = 4,800

Underwriting of Shares and Debentures

(b) Computation of amounts payable by underwriters

(c) In the Books of Nepal Capital Ltd.

Cash and Bank Account for the period

Liabilities Rs. Assets Rs.

Average stock= Cost of goods sold/stock velocity

(iv) Fixed assets:

(v) Closing stock:

RTP-CAP II June 2017 @ ICAN Page 20 of 181

Equity Share Holders Account

Big Star Ltd.

2. Net Assets for purchase consideration

RTP-CAP II June 2017 @ ICAN Page 21 of 181