December 2018

CHARTERED ACCOUNTANCY PROFESSIONAL CAP-II
REVISION TEST PAPER

December 2018
The Institute of Chartered Accountants of Nepal

Paper 1: Advanced Accounting

Revision Questions
Business Combination
Question No 1:
The following is the Balance Sheet of Blue Star Ltd. as at 32nd Ashadh, 2075:
Liabilities Rs. Assets Rs.
8,000 equity shares of Rs.100 each 800,000 Building 340,000
10% debentures 400,000 Machinery 640,000
Term Loan from Bank 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 acquire 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 32 nd Ashadh, 2075 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 32 nd Ashadh, 2075. 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 1 st Shrawan, 2075 after the acquisition.
Question No 2:
Following is given the Balance Sheets of M/s Himal Ltd. and Hill Ltd. for further course of actions:
Balance Sheet of Himal Ltd.
Rs. Rs.

Share Capital 20,00,000 Fixed Assets 15,00,000
General Reserve 15,00,000 Investment 2,50,000
Current Liabilities 15,00,000 Current Assets 32,50,000
50,00,000 50,00,000
Balance Sheet of Hill Ltd.
Rs. Rs.
General Reserve 5,00,000 Goodwill 1,00,000
Current Liabilities 2,00,000 Current Assets 14,00,000
Proposed dividend 1,00,000
18,00,000 18,00,000
Himal Ltd. absorbed Hill Ltd. on following terms & conditions:
a) Hill Ltd declares a dividend of 10% before absorption for the payment of which it is to
retain sufficient amount of cash.
b) The net worth of Hill Ltd. is valued at Rs. 1,450,000.
c) The purchase consideration is satisfied by the allotment of fully paid shares of Rs. 100
each in Himal Ltd.
Following additional information is also to be taken in to consideration:
 Himal Ltd. holds 2,500 shares of Hill Ltd. at a cost of Rs 200,000.
 The stock of Hill Ltd. includes items valued at Rs. 50,000 from Himal Ltd. (cost Rs.
37,500)
 The creditors of Hill Ltd include Rs. 15,000 due to Himal Ltd.
Required: Show ledger account in the books of Hill Ltd. to give effect to the above and Balance Sheet of
Himal Ltd. after completion of absorption.
Internal Reconstruction
Question No 3:
The following is the Balance Sheet of Pokhara Light Ltd. as on 31.3.2073:
Equity shares of 10,000,000 Fixed assets 12,500,000
Rs.100 each
12% cumulative 5,000,000 Investments 1,000,000
preference (Mark

shares of et
Rs.100 each value
Rs.950
,000)
10% debentures of 4,000,000 Current assets 10,000,000
Rs.100 each
Sundry creditors 5,000,000 P & L A/c 400,000
Provision for 100,000 Preliminary 200,000
taxation expens
es
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.
Cash Flow Statement

Question No 4:
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 1 st March 2016
another investment was made for Rs. 6,250.
Insurance Claim
Question No 5:
A fire broke out in the godown of a business house on Shrawan 08, 2074. Goods costing Rs. 203,000
in a small sub-godown remain unaffected by fire. The goods retrieved in a damaged condition from
the main godown were valued at Rs. 197,000. The following particulars were available from the
books of account:
Stock on the last balance sheet date at 31.03.2074 was Rs. 1,572,000
Purchases for the period from Shrawan 01 to Shrawan 07 were Rs. 3,710,000
Sales during the same period amounted to Rs. 5,260,000
The average gross profit margin was 30% on sales.
The business house has a fire insurance policy for Rs. 1,000,000 in respect of its entire stock.
Required: Assist the accountant of the business house in computing the amount of claim of loss by
fire.
Question No 6:
A fire occurred in the premises of M/s Gadbadh Co. on 30 th Mangsir 2073. Following particulars is
provided to the period 1 st Shrawan 2073 to 30 th Mangsir 2073.
Rs.
st
i) Stock as per Balance Sheet as at 31 Ashadh 2073 99,000
ii) Purchases (including purchase of a machinery Costing Rs. 30,000) 170,000
iii) Wages (including wages for the installation of Machinery Rs. 3,000) 50,000
iv) Sales (including goods sold on approval basis amounting to Rs. 49,500.
No confirmation had been received in respect of two-thirds of such Goods sold on approval basis.
275,000
v) Sales value of goods drawn by proprietor 15,000
vi) Cost of goods sent to consignee on 15 Mangsir 2073 lying unsold With them 16,500
vii) Sales value of goods distributed as free samples 1,500
The average rate of gross profit had been 20% in the past. This selling price had been increased by
20% with effect from 1st Shrawan 2073.

For valuing the stocks for the Balance Sheet as at 31st Ashadh 2073, Rs. 1,000 had been written off
in respect of a slow moving item, the cost of which was Rs. 5,000. A portion of those goods were
sold at a loss of Rs. 500 on the original cost of Rs. 2,500. The remainder of the stock was now
estimated to be worth the original cost.
Subject to the above exceptions, the gross profit had remained at a uniform rate throughout. The
value of goods salvaged was estimated at Rs. 25,000. The enterprise had taken an insurance policy
for Rs. 60,000 which was subject to the average clause.
Required: To ascertain the amount of claim to be filed with the insurance company for the loss of
stock.
Contract Accounting
Question No 7:
M/s Santi Construction started working on a contract on 1 stBaisakh 2074 for Rs. 500,000. On
31stAshad 2074, when the company prepared its final accounts, the following information relating to
the contractor was extracted from his books of accounts:
Particulars Rs.
Material issued from stores and sent to site 160,000
Wages paid 101,200
Wages outstanding on 31-03-2074 37,520
New machines purchased and sent to the site on 1-1-2074 148,000
Direct charges paid 7,500
Direct charges outstanding on 31-03-2074 600
Establishment charges apportioned to contract 6,400
On 31 Ashad 2074 materials lying unused at the site were valued at Rs.21,620. Machines were
depreciated at 20% per annum. Value of work certified by 31stAshad 2074 was Rs. 350,000 while the
cost of work done but yet not certified as on that date was Rs.18,000. On the basis of architect‘s
certificate, the company had received a total sum of Rs. 280,000 from the contractee till 31 stAshadh
2074.
Required: Contract account and relevant portion of the balance sheet in the books of M/s Santi
Construction.
Hire Purchase Transactions

Question No 8:
Omega Enterprises sells computers on hire purchase basis at cost plus 25%. Terms of sales are Rs.
10,000 as down payment and 8 monthly instalments of Rs. 5,000 for each computer. From the
following particulars prepare Hire Purchase Trading Account for the year 2017.
As on 1st January, 2017 last instalment on 30 computers was outstanding as these were not due up to
the end of the previous year.
During 2017 the firm sold 240 computers. As on 31 st December, 2017 the position of instalments
outstanding were as under :
Instalments due but not collected :

2 instalments on 2 computers and last instalment on 6 computers.
Instalments not yet due :
8 instalments on 50 computers, 6 instalments on 30 and last instalment on 20 computers.
Two computers on which 6 instalments were due and one instalment not yet due on 31.12.2017 had to be
repossessed. Repossessed stock is valued at 50% of cost. All other instalments have been received.
Issue of Shares and Debentures

Question No 9:
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).
Question No 10:
Yeti Ltd. with an authorized capital of Rs. 30,000,000 offered to public 400,000 ordinary shares of
NRs.50 each at a premium of NRs.5 each. The payment was to be made as;
NRs.15 on application,
NRs.25 on allotment (including premium) and
NRs.15 on first and final call.
Application totalled 800,000 shares; shares were allotted on a pro-rata basis. Amit who had applied for
800 shares and to whom 400 shares had been allotted failed to pay the balance of allotment money due
from him. His shares were forfeited and then reissued to Tanka as Rs.40 (including premium of NRs.5) per
share as fully paid up. Rojina, another shareholder, failed to pay the call money on 100 shares held by her.
Her shares were also forfeited. Later, these shares were reissued as fully paid to Suchitra for NRs.60 per
share.
Expenses of the issue of shares came to Rs.12,000.
Required: Pass necessary journal entries in the books of M/s Yeti Ltd.
Underwriting of Shares and Debentures

Question No 11:

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
Question No 12
The following is the Balance Sheet of Mr. Sanjay Rijal, a small trader as on 32.3.2075 :
(Figures in Rs. ‗000)
Capital 200 Fixed Assets 145
Creditors 50 Stock 40
Debtors 50
Cash in Hand 5
Cash at Bank 10
250 250
A fire destroyed the accounting records as well as the closing cash of the trader on 32.3.2075. However,
the following information was available :
(a) Debtors and creditors on 32.3.2075 showed an increase of 20% as compared to 31.3.2074.
(b) Credit Period :
Debtors – 1 month Creditors – 2 months
(c) Stock was maintained at the same level throughout the year.
(d) Cash sales constituted 20% of total sales.
(e) All purchases were for credit only.
(f) Current ratio as on 32.3.2075 was exactly 2.
(g) Total expenses excluding depreciation for the year amounted to Rs. 250,000.
(h) Depreciation was provided at 10% on the closing value of fixed assets.

(i) Bank and cash transactions :
(1) Payments to creditors included Rs. 50,000 by cash.
(2) Receipts from debtors included Rs. 5,90,000 by way of cheques.
(3) Cash deposited into the bank Rs. 1,20,000.
(4) Personal drawings from bank Rs. 50,000.
(5) Fixed assets purchased and paid by cheques Rs. 2,25,000.
You are required to prepare:
(a) The Trading and Profit & Loss Account of business for the year ended 32.3.2075 and
(b) A Balance Sheet as on that date.
Assume that cash destroyed by fire is written off in the Profit and Loss Account.
Ratio Analysis
Question No 13:
M/s Nyatapola Enterprises asked you to prepare their Balance Sheet from the particulars furnished
hereunder:
Gross Profit Margin: 10%
Stock Velocity: 12
Capital turnover ratio: 2
Fixed assets turnover ratio: 5
Debt collection period: 1 month
Creditor‘s payment period: 73 days
Gross Profit: Rs. 100,000
Excess of closing stock over opening stock: Rs. 30,000
Make suitable assumptions wherever necessary.
Profit or Loss Pre and Post Incorporation

Question No 14:
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. 23,400,000 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 1 st 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

Managing Director‘s Salary 180,000
Profit 3834,000

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

Question No 15:
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

Question No 16:
The following is the trial balance as on 31 st Ashad 2074 of Amar, Bisnhu and Chetan who had
branches at different places and who shared profits & losses in the ratio of 2:1:2 respectively,
Rs. Rs.
Dr. Cr.

Capitals, 1st Shrawan 2073
Amar 140,000
Bishnu 140,000
Chetan 20,000
Drawings
Amar 22,720
Bishnu 19,920
Chetan 9,160
Patents & Trade Marks 24,000

Sundry Creditors 69,800
Profit & Loss account for the year (before allowing interest @ 10%
on capital, as a charge) 25,000
Sundry Debtors-
Dhankuta 67,500
Pokhara 32,500
Kailali 15,000
Furniture-
Dhankuta 10,000
Pokhara 5,000
Kailali 6,000
Stock-
Dhankuta 46,000
Pokhara 34,000
Kailali 53,000
_______ _______
369,800 369,800
The firm was dissolved on that date. Amar took over Dhankuta Branch, and Bisnu took over Pokhara
Branch; the assets being taken at 10% less than the book values. Patents and Trade Marks were found
valueless. The business at Kailali was sold to a limited company which allotted 6,000 equity shares of
Rs. 10 each credited as fully paid. To pay the liabilities, Amar and Bisnhu introduced cash in the
profit sharing ratio. The cost of winding up came to Rs. 4,000 for which Amar advanced cash. Chetan
is insolvent and can pay nothing. Bishnu received all the shares.
Required: Necessary accounts to close the books of the firm; partners give effect to the correct
position without having to make up losses in cash. Assume the capitals to be fluctuating. Amar
and Bishnu settles accounts themselves.
Accounting for Non-profit making Organization
Question No 17:
Following information has been given for Himalayan Sports Club, Lalitpur for the year ending
31.3.2073 and 31.3.2074

31.3.2073 31.3.2074
Building (subject to 10% depreciation for the current year) 60,000 ?
Furniture (subject to 10% depreciation for the current year) - 20,000
Stock of Sports Materials 5,000 2,000
Prepaid Insurance 3,000 6,000
Subscription Receivable 12,000 8,000
Advance Subscription 6,000 4,000
Locker Rent receivable - 6,000
Advance Locker Rent received - 2,000
Outstanding Rent for Godown 6,000 3,000
12% Investment –General Fund 200,000 200,000
Accrued Interest on Investment - 4,000
Cash Balance 1,000 64,000
Bank Balance 2,000 -
Bank Overdraft - 2,000
Additional information:
(i) Entrance fees received Rs. 20,000, Life membership fees received Rs. 20,000 during the
year.
(ii) Surplus from income and expenditure account Rs. 60,000.
(iii) It is the policy of the club to treat 60% of entrance fees and 40% of life membership fees as
revenue nature.
(iv) The furniture was purchased on 1.4.2073.
Prepare Balance Sheets of the club as on 31.3.2073 and 31.3.2074
Accounting for Banks

Question No 18:
Following information as at third quarter ending FY 2074/75 were drawn from the records of
M/s Mechi Bank Limited as under:
Loan outstanding for Amount Rs.
Upto 3 months 1,673,000
More than 3 months but not more than 6 months 13,612
More than 6 months but not more than 12 months 782

More than 12 months 2,198
Total 1,689,592
The bank has not restructured or rescheduled any of its credit
Following additional information relating to previous quarter ending were extracted from the
records of the bank:
Particulars Amount Rs.
Paid up Equity Share Capital 171,010
General Reserve 155,432
Retained Earnings 87,886
General Loan Loss Provision 16,983
Exchange Equalization Reserve 22,313
Un-audited current year profit 31,991
Deferred Revenue expenses 2,884
The bank is in the process of preparing the documents for quarterly reporting. The bank has
also provided a term loan of Rs.125,000 to a single party during the period under review. As a
reporting and compliance officer of the bank you are required to calculate movement in loan
loss provision amount.
Question No 19:
From the following information calculate Core capital ratio and total capital adequacy ratio of
DDD Bank Ltd. and suggest management about the compliance of the same:
In lakh
Paid up Capital 20,000
General Reserve Fund 377
Retained Earnings 308
Profit for current year 1,945
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

Accounting for Departments
Question No 20:
Department Blue sells goods to Department Black at a profit of 25% on cost and to Department
Pink at 10% profit on cost. Department Black sells goods to Blue and Pink at a profit of 15%
and 20% on sales, respectively. Department Pink charges 20% and 25% profit on cost to
Department Blue and Black, respectively.
Department Managers are entitled to 10% commission on net profit subject to unrealized profit on
departmental sales being eliminated. Departmental profits after charging Managers‘ commission, but
before adjustment of unrealized profit are as under:
Rs.
Department Blue 36,000

Department Black 27,000
Department Pink 18,000
Stocks lying at different departments at the end of the year are as under:
Dept. Blue Dept. Black Dept. Pink

Rs. Rs. Rs.
Transfer from Department Blue — 15,000 11,000
Transfer from Department Black 14,000 — 12,000
Transfer from Department Pink 6,000 5,000 —
Required: Correct departmental Profits after charging Managers‘ commission.
Nepal Accounting Standards (NAS)

Question No 21:
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. While preparing its final accounts for the year ended 32nd Ashad, 2075, a company made
provision for bad debts @5% of its total debtors. In the last week of Jestha 2075 a debtor for Rs.
20 lakhs had suffered heavy loss due to a heavy fire; the loss was not covered by any insurance
policy. In Shrawan 2075 the debtor became a bankrupt. Can the company provide for the full loss
arising out of insolvency of the debtor in the final accounts for the year ended 32 nd Ashad, 2075?
Give your opinion 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. ABC Co. took a machine on lease from XYZ Co. the fair value being Rs. 1,000,000. The
economic life of the machine as well as lease term is 4 years. At the end of each year, ABC Co.
pays Rs. 350,000. The lessee has guaranteed a residual value of Rs. 40,000 on expiry of lease to
the lessor. However, XYZ Co. estimates that the residual value of the machinery will be Rs.
35,000 only. The implicit rate of return is 16% and PV factors at 16% for year 1, year 2, year 3
and year 4 are 0.8621, 0.7432, 0.6407 and 0.5523 respectively. You are required to calculate the
value of machinery to be considered by ABC Co.
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
Question No 22:
(a). Leases
(b). Re-Insurance
(c). Contingent Assets
(d). Non Banking Assets
(e). Debt Service Coverage Ratio
(f). Watch List in Loan loss provisioning
(g). Government Accounting System in Nepal
(h). Outsourcing the Accounting function to third party

SUGGESTED ANSWERS HINT
Business Combination
Answer No 1:
Books of Blue Star Limited
Realization Account
Rs. Rs.
To Building 3,40,000 By Creditors 3,20,000
To Machinery 6,40,000 By B Ltd. 12,10,000
To Stock 2,20,000 By Equity Shareholders A/c (Loss) 60,000
To Debtors 2,60,000
To Goodwill 1,30,000
1,590,000 1,590,000
Bank Account
To Balance b/d 136,000 By 10% debentures 400,000
To Big Star Ltd. 600,000 By Loan from A 160,000
By Equity shareholders A/c 176,000
736,000 736,000
Big Star Ltd. Account

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

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

Balance Sheet as on 1 st Shrawan, 2075 (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 26,000 194,000
Working Notes:
1. Valuation of Goodwill Rs.
Average profit 124,400
Less: 8% of Rs. 880,000 70,400
Super profit 54,000
Value of Goodwill = 54,000 x 4 216,000
2. Net Assets for purchase consideration

Goodwill as valued in W.N.1 216,000
Building 306,000
Machinery 576,000
Stock 198,000
Debtors 260,000
Total Assets 1,556,000
Less: Creditors 320,000
Provision for bad debts 26,000 346,000
Net Assets 1,210,000
Out of this Rs. 600,000 is to be paid in cash and remaining i.e., (1,210,000–600,000) Rs. 610,000 in
shares of Rs. 125/-. Thus, the number of shares to be allotted 610,000/125 = 4,880 shares.
3. Unrealized Profit on Stock Rs.
The stock of Blue Star Ltd. includes goods worth Rs. 100,000 which was sold by
40,000
Big Star Ltd. on profit. Unrealized profit on this stock will be 1,00,000 25,000
1,60,000
As Big Star Ltd. purchased assets of Blue Star Ltd. at a price 10% less than the (10,000)
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.

Answer No 2:
Books of Hill Ltd.
Realisation Account
Particulars Amount Rs. Particulars Amount Rs.
To Good will 1,00,000 By Current Liabilities 2,00,000

To Fixed Assets 3,00,000 By Himal Ltd. 10,87,500
To Current Assets 13,00,000 By Share Capital 2,50,000
By Equity Shareholders a/c ( loss) 1,62,500
17,00,000 17,00,000
Equity Shareholders (outside) Account
Particulars Amount Rs. Particulars Amount Rs.
To Realisation 2,50,000 By Share Capital 10,00,000

To Realisation Loss 1,62,500 By General reserve 5,00,000
To Shares in Himal Ltd 10,87,500
15,00,000 15,00,000
Balance Sheet of Himal Ltd.
(After completion of absorption)
Capital & Liabilities Amount Rs. Assets Amount Rs.

30875 shares @ Rs. 100 fully Himal Ltd. 15,00,000
paid Hill Ltd. 3,00,000
Reserve & Surplus 16,25,000 Investment 50,000

General reserve 15,25,000
Capital reserve 1,00,000 Current Assets 45,47,500
Current Liabilities 16,85,000

63,97,500 63,97,500
Workings:

Adjusted Balance Sheet of Hill Ltd.
Capital & Liabilities Amount Rs Assets Amount Rs.

Share Capital 10,00,000 Fixed assets 3,00,000
General Reserve 5,00,000 Goodwill 1,00,000
Current Liabilities 2,00,000 Current assets 13,00,000*
17,00,000 17,00,000
Hill Ltd retains Rs. 100,000 in cash for dividend (10%) ( 1,400,000-100,000)
1. Total Purchase consideration (based on net worth of Hill Ltd.) is Rs. 1,450,000.
2. Himal Ltd. holds 2,500 shares in Hill Ltd. The percentage of holding is 25%
3. The net purchase consideration to pay Rs. 1,450,000 * ¾ = 1,087,500
4. Calculation of Current Assets
Current assets of Himal Ltd. 3,250,000

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

Himal Ltd. 1,500,000
Hill Ltd. (200,000-15,000) 185,000
1,685,000
6. Calculation of Capital Reserve

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

Internal Reconstruction
Answer No 3:
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 capital: Fixed Assets 87,50,000
1,30,000 equity shares of Rs.40 each 52,00,000 (1,25,00,000 – 37,50,000)
12% Cumulative Preference Shares of Rs. Investments 9,50,000
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
Cash Flow Statement
Answer No 4:

Cash Flow Statement for the year ended on 31st December 2016
Particular Rs. Rs.
1. Cash Flow from Operating Activities 28,800

CNet profit before tax
a Adjustments:
s Depreciation 3,050
hIncrease in provision for doubtful debt 200
Decrease in stock 2,000
FDecrease in creditor (3,370)
l Increase in Debtor (230)
oIncome Tax Paid (18,000)
wNet Cash from Operating Activities 12,450
2. SCash Flow from Investing Activities

t Investment Purchased (6,250)
Sale of Investment 4,800
a
Plant Purchased (5,000)
t Net Cash Flow from Investing Activities (6,450)
e
3. mCash Flow from Financing Activities (5,000)
e Payment of Interim Dividend
nNet increase in cash equivalent 1,000
Add: Opening Cash Balance 8,000
t
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

Insurance Claim
Answer No 5:
Memorandum Trading Account from 1st Shrawan to 8th Shrawan 2074
To Opening stock 1,572,000 By Sales 5,260,000

To Purchases 3,710,000 By Closing Stock 1,600,000
To Gross Profit (30% of Sales) 1,578,000 (Balancing Figure)
Total 6,860,000 6,860,000
Calculation of Amount of Insurance Claim
Value of Stock on 8th Shrawan (as above) 1,600,000

Less:
Value of Stock remaining unaffected by fire 203,000
Agreed Value of damaged goods 197,000 400,000
Loss of Stock 2,000,000
Applying Average Clause:
Amount of Claim = Amount of Policy x Loss of Stock
Stock on the date of Fire
= Rs 1,000,000 x1,200,000
Rs 1,600,000
=Rs 750,000
Answer No 6:
Memorandum Trading Account

for the period from 1.4.2073 to 30.8.2073
Particulars Normal Abnormal Particulars Normal Abnormal
Rs. Rs. Rs. Rs.
Opening Stock (W.N.1) 95,000 5,000 Sales (W.N. 2&1) 240,000 2,000

Stock lying with
customers on approval
Purchases 170,000 (W.N.3) 22,000
Less Machinery
purchase 30,000 140,000 Goods sent to consignee 16,500
Goods drawn by
Wages 50,000 proprietor 10,000
Less: wages for instl.
of machinery 3,000 47,000 Free samples (W.N. 5) 1,000
Gross Profit (33.33% of
sales)
(W.N. 4) 80,000 Loss (W.N.) 500
_________ _________ Stock on the date of fire 72,500 2,500
362,000 5,000 362,000 5,000
Working Notes
(1) Abnormal items: Rs.
Original cost of slow moving items 5,000
cost of slow moving item sold 2,500
Balance of slow moving items in stock 2,500
Original cost of slow moving items sold 2,500
Loss incurred on such sale 500
Sale proceeds of slow moving items 2,000
(2) Sales as given 275,000

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

Less: sales confirmed 16,500
Goods with customers on approval basis

-sales not being confirmed 33,000
Less: profit element 1/3 of Rs. 33,000 11,000
Goods on approval at cost 22,000
(4) Previous year G.P. margin on sales = 20%

Cost 100-20 = 80
Selling price in the current year 100+20 120

G.P Margin in current year 40/120 x 100 33.33%
(5) Sales value of free samples distributed 1,500

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

Stock on the date of fire
Normal items 72,500
Slow moving items 2,500
75,000
Less Salvage 25,000
50,000
Claim (applying average clause
Value of Policy/Stock on the fire date x loss of stock
= 60,000/75,000 x 50,000 =Rs. 40,000
Contract Accounting
Answer No 7:
In the books of M/s Santi Constriction
Contract Account
For the period ended 31.3.2074
Date Particulars Amount Date Particulars Amount
To Materials sent to site 160,000 By Unused materials at site 21,620

To Wages 101,200 By Machines A/c (WDV as on 140,600
Add: Outstanding 37,520 138,720 31stAshad 2074)
To Machines (Cost) 148,000 By Work in Progress:
To Direct Charges 7,500 Certified 350,000
Add: Outstanding 600 8,100 Uncertified 18,000 368,000
To Establishment charges 6,400
To Profit and Loss A/c (Transfer 36,800
of Profit)
To Balance c/d 32,200
530,220 530,220
To Materials at site 21,620
To Machines 140,600
(Refer Working Note No.1)
By Work in Progress:
Certified 350,000
Uncertified 18,000
368,000
Less: Balance b/d 32,200 335,800

Balance Sheet as on 31stAshad 2074 (Relevant Portion only)
Capital and Liabilities Rs. Assets Rs.
Outstanding expenses Machines 148,000

Wages 37,520 Less: Depreciation 7,400 140,600
Direct Charges 600 38,120 Work in Progress:
Capital Account Certified 350,000
Profit on Contract Uncertified 18,000
(Refer Working Note No.2) 36,800 368,000
Less: Profit in Reserve 32,200
Less: Amount Received 280,000 55,800
Unused materials at site 21,620
Working Note
1. Calculation of Written Down Value of Machines on 31stAshad 2074

Cost of Machine on 1stBaisakh 2074 148,000
Less: Depreciation on Rs.148,000 for 3 months @ 20% per annum
=148,000X20/100X3/12 7,400
Net Written Down Value of Machine 140,600
2. Calculation of amount to be transferred from Contract A/c to Profit and Loss A/c
Total surplus in Contract Account as on 31stAshad 2074:
=Rs.21,620+Rs.140,600+Rs.368,000-Rs.160,000-Rs.138,720-Rs.148,000-Rs.8,100-Rs.6,400
=Rs.69,000
Thus Profit to be credited to Profit and Loss Account:
=Rs. 69,000X2/3X280,000/350,000
=Rs.36,800
Hire Purchase Transactions
Answer No 8:
In the books of Omega Enterprises
Hire Purchase Trading Account
for the year ended on 31.12.2017
Dr. Rs. Rs. Cr Rs.
To Hire Purchase Stock By Hire Purchase
(30×Rs. 5,000) 1,50,000 Sales (W.N. 1) 91,40,000
To Goods Sold on By Stock Reserve
Hire Purchase (Rs. 1,50,000×20%) 30,000

(240×Rs. 50,000) 1,20,00,000
To Bad Debts 12,000 By Goods sold on
Hire Purchase
To Loss on Re-possession 16,000 (Rs. 1,20,00,000× 20%) 24,00,000
By Hire Purchase Stock
Less : Instalments 8,000 8,000 [(8×50+6×30+1×20)× 30,00,000
not yet due Rs. 5,000]
To Stock Reserve 6,00,000
(30,00,000 ×20%)
To Profit & Loss A/c
(Transfer of Profit) 18,00,000
1,45,70,000 1,45,70,000
Working Notes :
Rs.
(1) Cash collected:
Cash down payment (240 × Rs. 10,000) 24,00,000
Add : Instalments collected :
Last instalments on 30 computers outstanding on 1.4.99 1,50,000
Instalments due and collected on 240 computers sold
during the year :
Total instalments on 240 computers
(8 × 240 × Rs. 5,000) 96,00,000
Less : Instalments due but not collected
[(2 × 2 + 1 × 6 + 6 × 2) × Rs. 5,000] 1,10,000
Instalments not due on 31.12.99
[(8 × 50 + 6 × 30 + 1 × 20 +
1 × 2) × Rs. 5,000] 30,10,000 31,20,000
90,30,000
Hire purchase sales:
Cash collected 90,30,000
Add : Instalments due but not collected
[(2 × 2 + 1 × 6 + 6 × 2) × Rs. 5,000] 1,10,000
91,40,000
(2) Loss on repossessed computers:
Cost of instalments due but not collected
(6 × 2 × Rs. 4,000) 48,000
Cost of Instalments not yet due
(1 × 2 × Rs. 4,000) 8,000
56,000
Less : Estimated value of repossessed computers
(2 × Rs. 40,000 × 50%) 40,000
Loss 16,000
(3) Bad debts (in respect of repossessed computers):
Instalments due but not collected
(6 × 2 × Rs. 5,000) 60,000
Cost of installments not due on 31.12.99
(1 × 2 × Rs. 5,000 × 80%) 8,000

68,000
Less : Cost of instalments due but not collected
(6 × 2 × Rs. 4,000) 48,000
Cost of instalments not yet due
(1 × 2 × Rs. 4,000) 8,000 56,000
Bad debts 12,000
Issue of Shares and Debentures
Answer No 9:
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
Answer No 10:
Books of M/s Yeti Ltd.
Journal Entries
S.N. Particulars Debit Credit
1. Bank Account Dr. 12,000,000
To Share Application A/c 12,000,000
(Being Share application money received for 800,000 share

at Rs. 15 per Share))

2. Share Application A/c Dr. 12,000,000
To Share Capital A/c 6,000,000
To Share Allotment A/c 6,000,000
(Being Share Application money transferred to share capital

account & excess money received transferred to share
allotment account)
3.
Share Allotment A/c Dr.
To Share Capital A/c 10,000,000
To Share Premium A/c 8,000,000
(Being allotment of 400,000 number of shares made at Rs. 2,000,000

25 per Share)
4.
Bank Account Dr.
Calls in Arrears A/c Dr. 3,996,000

To Share Allotment A/c 4,000
(Being Share Allotment money received except one 4,000,000
shareholder holding 400 shares who failed to pay the
allotment money)
5.
Share First & Final Call A/c Dr.
To Share Capital A/c
(Being first and final call made on share issued) 6,000,000
6,000,000
Bank Account Dr.
6. Calls in Arrears A/c Dr.
To Share First & Final Call A/c 5,992,500
(Being share first & final call money received except 400 7,500
shares held by Mr. Amit and 100 shares held by Rajina who

failed to pay call money) 6,000,000
Share Capital A/c Dr.
Share Premium A/c Dr.
To Share Forfeiture A/c 25,000
7. To Calls in Arrears A/c 2,000
(Being 400 shares held by Amit who failed to pay the 15,500
allotment and first and final call and 100 Shares held by
Rojina who failed to pay the call money forfeited ) 11,500
Bank Account Dr.
Share Forfeiture A/c Dr.

8. To Share Capital A/c
To Share Premium A/c 16,000
(Being Shares forfeited from Amit issued at Rs. 40 6,000

including premium of NRs.5 to Tanka) 20,000
2,000
Bank Account Dr.
To Share Capital A/c

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

Suchitra)
5,000
1,000
Share Forfeiture A/c Dr.
To Capital Reserve A/c

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

11. Deferred Revenue Expenditure A/c Dr. 9,500
To Bank Account
(Being Rs.12,000 paid for share issue accounted under

Deferred Revenue Expenditure account)
12,000
12,000
Working Note;
a. Calculation of Calls in Arrears of Amit Rs.

Amount paid at the time of application = 800×15 = 12,000
Amount utilized in application = 400×15 = 6,000
Excess amount = 12,000 – 6,000 = 6,000
Calls in arrear at the time of Allotment = 400×25 – 6,000 = 4,000
Calls in arrear at the time of First & Final Call = 400×15 = 6,000
b. Calculation of Calls in arrears of Rojina Rs.

Calls in arrear at the time of First & Final Call = 100×15 = 1,500
Underwriting of Shares and Debentures
Answer No 11:
(a) Statement showing the underwriters’ liability (No. of shares)
A & Co. B & Co. C & Co.
Gross Liability 120,000 120,000 120,000
Less: Firm underwriting 10,000 10,000 10,000
110,000 110,000 110,000
Less: Marked applications 72,500 84,000 131,000
37,500 26,000 (21,000)
Less: Unmarked applications distributed to A &
Co. and B & Co. in equal ratio (11,250) (11,250) Nil
26,250 14,750 (21,000)
Less: Surplus of C & Co. distributed to A & Co.
and B & Co. in equal ratio (10,500) (10,500) 21,000
Net liability (excluding firm underwriting) 15,750 4,250 Nil
Add: Firm underwriting 10,000 10,000 10,000
Total liability (No. of shares) 25,750 14,250 10,000
(b) Computation of amounts payable by underwriters

Liability towards shares to be subscribed @ 120 per 3,090,000 1,710,000 1,200,000
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
Answer No 12:
Books of Sanjay Rijal

Trading and Profit & Loss A/c
for the year ended 32.3.2075

(Rs. ‘000) (Rs. ‘000)
To Opening Stock 40 By Sales

To Purchases 360 Cash 180
To Gross Profit 540 Credit 720 900
By Closing Stock 40

940 940
To Expenses 250 By Gross Profit 540
To Depreciation 37
To Cash destroyed 10
To Net Profit 243
540 540
Balance Sheet as on 32.3.2075

Liabilities (Rs ‘000) Assets (Rs ‘000)
Capital 200 Fixed Assets
Add : Net Profit 243 Less : Depreciation (145 + 225 – 37) 333
443 Stock 40
Less : Drawings 50 393 Debtors 60
Creditors 60 Cash at Bank 20
453 453
Working Notes : Cash & Bank A/c
(Rs. ‘000)
Cash Bank Cash Bank
To Balance b/d 5 10 By Creditors 50 300
To Debtors 120 590 By Drawings – 50
To Cash Sales 180 – By Bank (c) 120
To Cash (c) – 120 By Expenses 125 125*
By Assets – 225
By Cash Destroyed 10*
By Balance c/d – 20
305 720 305 720
* balancing figures
Other computations
(1) Debtors Opening balance = Rs. 50,000
Closing balance = Rs. 50,000 + 20% = Rs. 60,000
Credit Sales = Rs. 60,000 × 12 = Rs. 7,20,000
Total Sales = 7,20,000/80% = Rs. 9,00,000

Cash Sales = Rs. 9,00,000 × 20% = Rs. 1,80,000
Receipt of cash from debtors
(50,000 + 7,20,000 – 60,000 – 5,90,000) = Rs. 1,20,000
(2) Creditors Opening balance = Rs. 50,000
Closing balance = Rs. 50,000 + 20% = Rs. 60,000
Credit Purchase = Rs. 60,000 × 6 = Rs. 3,60,000
Payment by cheque
(50,000 + 3,60,000 – 60,000 – 50,000) = Rs. 3,00,000
(3) Closing Bank Balance :
Creditors i.e. current liability = Rs. 60,000
Current assets = Rs. 60,000 × 2 = Rs. 1,20,000
Bank Balance = Current assets – Stock – Debtors
= 1,20,000 – 40,000 – 60,000 = Rs. 20,000
(4) Expenses by cheque : (Balancing figure in Bank A/c)
(Figure Rs. ‗000) (10 + 590 + 120 – 300 – 50 – 225 – 20) = 125
Expenses by cash = 250–125 = 125
(5) Cash destroyed = (balancing figure in Cash A/c)
(Figure Rs. ‗000) (5 + 120 + 180 – 50 – 120 – 125) = 10
Ratio Analysis
Answer No 13:
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.
Profit or Loss Pre and Post Incorporation
14. Answer:
Statement showing calculation of profits for pre and post incorporation periods
For the year ended 31.3.2072 (15 months)
Gross profit Total Ratio Pre Post
Gross Profit 140,40,000 1:8 1560,000 124,80,000
Less: Salaries 2340,000 1:12 180,000 2160,000
Depreciation 360,000 1:4 72,000 288,000
Advertisement 1404,000 1:8 156,000 1248,000
Discount 2340,000 1:8 260,000 2080,000
Managing Director‘s Salary 180,000 Post - 180,000

Office/showroom rent 1440,000 Actual 180,000 1260,000
Miscellaneous office expenses 240,000 1:4 48,000 192,000
Interest paid 1902,000 Actual 702,000 1200,000
Goodwill (loss) 38,000 -
Net Profit - 3,872,000
Working note:
Pre post
1. calculation of time ratio = 1:4 1st Baisakh to 31.3.2071 1.4.2071 to 31.3.2072
3 months 12 months
2. Calculation of sales ratio = 1:8 3x1 = 3 12 x 2 = 24
3. Calculation of staff salary ratio = 1:12 3x1 = 3 12 x 3 = 36
4. calculation of interest 234,00,000 x 12% for 3 100,00,000 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 = 900,0000X12/15 = 720,000
= 900,000 180,000
6. Calculation of gross profit = sales – cost of goods sold = 468,00,000-327,60,000 = 140,40,000
Answer No 15:
Receipts Rs. Rs. Payments Rs.
Rs.
Cash at Bank 60,000 Liquidation expenses 4,600
Assets realised:
Sundry Debtors 160,000 Liquidator‘s remuneration (W.N. 1) 30,400
Stock 120,000 Debenture holders:
Plant & Machinery 360,000 640,000 10% debentures 200,000
Surplus from Land & Interest accrued (W.N.2) 15,000 215,000
Buildings: Preferential creditors 30.000
Amount realised 340,000 Unsecured creditors 370,000
Less: Secured Preference shareholders:

Creditors 100,000 240,000 10% Preference Share
Capital 200,000
Arrear dividend 40,000 240,000
Equity Shareholders
(W.N. 3) :
Rs. 17.50 per share
on 2,000 shares 35,000
Rs. 2.50 per share
on 6,000 shares 15,000 50,000
940,000 940,000
Working Notes:
(1) Liquidator’s remuneration: Rs.
3% on Assets realised (3% of Rs. 980,000) 29,400
2% of the amounts distributed among Equity Shareholders
(2/102 × Rs. 51,000) 1,000
30,400
(2) Interest accrued on 10% debentures
Interest accrued as on 31.3.2073 10,000
Interest accrued upto the date of payment
(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
Answer No 16:
Dr. Profit & Loss Account
Cr.
2074 NPR 2074 NPR
Ashad To Loss for the year 25,000 Ashad By Loss transferred to

31 To Interest on Capitals 31 Amar's Capital 22,000
Amar's Capital 14,000 Bishnu's Capital 11,000
Bishnu's Capital 14,000 Chetan's Capital 22,000 55,000
Chetan's Capital 2,000 30,000
55,000 55,000
Dr. Realization Account

Cr.
2074 NPR 2074 NPR
Ashad To Patents & Trade Marks 24,000 Ashad By Amar's Capital-
31 To Sundry Debtors 115,000 31 Debtors at Dhankuta 67,500
To Furniture 21,000 Furniture at Dhanluta 10,000
To Stock 133,000 Stock at Dhankuta 46,000
To Cash (Expenses) 4,000 Total 123,500
Less : 10% 12,350 111,150
By Bishnu's Capital
Debtors at Pokhara 32,500
Furniture at Pokhara 5,000
Stock at Pokhara 34,000
Total 71,500
Less : 10% 7,150 64,350
By Shares in New Company Ltd 60,000
By Loss transferred to:

Amar's Capital 24,600
Bishnu's Capital 12,300
Chetan's Capital 24,600 61,500
297,000 297,000
Dr. Sundry Creditor Account

Cr.
2074 NPR 2074 NPR
Ashad To Cash 69,800 Ashad By Balance b/d 69,800

31 31
69,800 69,800
Dr. Cash Account

Cr.
2074 NPR 2074 NPR
Ashad To Amar's Capital A/C 46,533 Ashad By Realization A/c (Expenses) 4,000
31 31 By Sundry Creditors 69,800
To Bishnu's Capital A/C 23,267
(Cash advance to pay creditors)
To Amar's Capital A/C
(Cash paid for expenses) 4,000
73,800 73,800
Dr. Shares in New Company Ltd.

Cr.
2074 NPR 2074 NPR
Ashad To Realization A/c 60,000 Ashad By Bishnu's Capital A/c 60,000
31 31
60,000 60,000
Dr. Partners’ Capital

Cr.
Particulars Amar Bishnu Chetan Particulars Amar Bishnu Chetan
To Drawings 22,720 19,920 9,160 By Balance b/d 140,000 140,000 20,000

To Profit & Loss A/c 22,000 11,000 22,000 By Interest on Capital 14,000 14,000 2,000
To Balance c/d 109,280 123,080 - By Balance c/d - - 9,160
154,000 154,000 31,160 154,000 154,000 31,160

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

Note: Chetan's loss has been divided between Amar and Bishnu in the ratio of 109,280 : 123,080
respectively.
Accounting for Non-profit making organization
Answer No 17:
Balance Sheet of Himalayan Sports Club
As on 31.3.2073
Liabilities Amount Rs. Assets Amount Rs.

Outstanding Rent 6,000 Building 60,000
Advance Subscription 6,000 Stock of Sports Materials 5,000
Capital Fund 271,000 Prepaid Insurance 3,000
(Balancing figure) Subscription receivable 12,000
12% Investment – General Fund 200,000
Cash balance 1,000
Bank balance 2,000
283,000 283,000
Balance Sheet of Himalayan Sports Club
As on 31.3.2074
Liabilities Amount Rs. Assets Amount Rs.

Outstanding Rent 3,000 Building (less depreciation) 54,000
Advance Subscription 4,000 Furniture (less depreciation) 18,000
Advance Locker Rent 2,000 Stock of Sports Materials 2,000
Bank Overdraft 2,000 Prepaid Insurance 6,000
Subscription receivable 8,000
Capital Fund Locker Rent receivable 6,000
Opening 12% Investment – General Fund 200,000
271,000 Accrued interest 4,000
Add: Entrance fee (40%) Cash balance 64,000
8,000 351,000
Add: Life M. Fee (60%)
12,000
Add: Surplus
60,000
362,000 362,000

Accounting for Banks
Answer No 18:
As per the provision of the NRB Directives, a bank can provide credit up to 25% of its core capital to
a single party. This limit is called the single obligor limit (SOL). While calculating the SOL, core
capital of previous quarter shall be taken as base. In case any excess credit than SOL, additional
100% provision shall be made for such excess credit amount.
Before calculating the provision amount, SOL of the bank shall be tested upon.
Computation of SOL and credit amount in excess of SOL

Particulars Amount
Core Capital
Paid up Equity Share Capital 171,010
General reserve 155,432
Retained earnings 87,886
Un-audited current year cumulative profit 31,991
Less: Deferred Revenue expenses (2,884)
Total Core capital 443,435
Single obligor limit ( 25% of the core capital) 110,859
Loan to single party 125,000
Loan in excess of SOL 14,141
Computation of loan loss provision amount as per NRB Directive
Computation of Loan Loss Provision amount

Categories Loan Amt Provision Provision
Rate Amount
Not due or <=3 months Pass 1,673,000 1% 16,730

>3 months <= 6 mths Sub-standard 13,612 25% 3,403
>6 months <= 12 mths Doubtful 782 50% 391
>12 months Loss 2,198 100% 2,198
Total 1,689,592 22,722
Additional provision for loan in excess of SOL 14,141
Total Provision amount 36,863
Mechi Bank Ltd

Movement in Provision Amount
For Third Quarter of Fiscal Year 2074/75

Amount in NPR
Particulars Amount
Opening Provision amount 16,983
Closing Provision amount 36,863
Movement in provision amount (addition during the quarter) 19,880
Answer No 19:
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
Profit for current year 1,945
Less: Loan Given to Relatives of Staffs (37)
Total core capital 22,593
c. Supplementary Capital
Particular Amount
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%
Accounting for Departments

Answer No 20:
Calculation of Correct Profit

Dept. Dept. Dept.
Blue Black Pink
Rs. Rs. Rs.
Profit after charging managers‘ commission 36,000 27,000 18,000
Add back: Managers‘ commission (1/9) 4,000 3,000 2,000
40,000 30,000 20,000

Less: Unrealized profit on stock
(Working Note) 4,000 4,500 2,000
Profit before Manager‘s commission 36,000 25,500 18,000
Less: Commission for Department
Manager @10% 3,600 2,550 1,800
32,400 22,950 16,200
Working Note:
Stock lying with
Dept. Blue Dept. Black Dept. Pink Total
Rs. Rs. Rs. Rs.
Unrealized Profit of:
Department Blue 1/5×15,000 =3,000 1/11×11,000 =1,000 4,000
Department Black 0.15×14,000 =2,100 0.20×12,000 =2,400 4,500
Department Pink 1/6×6,000 =1,000 1/5×5,000 =1,000 2,000
Nepal Accounting Standards (NAS)
Answer No 21:
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. Hence, revenue should not be recognized in
this case.

(b). As per NAS ‗Events after the reporting period‘, adjustment to assets and liabilities are required
for the events occurring after the balance sheet date that provide additional information
materially affecting the determination of the amounts relating to conditions existing at the
balance sheet date.
A debtor for Rs. 20 lakhs suffered heavy loss due to fire in the last week of Jestha 2075 which
was not covered by insurance. This information with its implications was already known to the
company. The act that he became bankrupt in Shrawn 2075 (after the balance sheet date) is only
an additional information related to the condition existing on the balance sheet date.
Accordingly full provision for bad debts amounting to Rs. 20 lakhs should be made, to cover the
loss arising due to the insolvency of a debtor, in the final accounts for the year ended 32nd Ashad
2075. Since the company has already made 5% provision of its total debtors, additional
provision amounting Rs. 19 lakhs should be made in the books for the year ended 32nd Ashad
2075.
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). As per Nepal Accounting Standard (NAS) ‗Leases‘, the lessee should recognize the lease as an
asset and a liability at the inception of a finance lease. Such recognition should be at an amount
equal to the fair value of the leased asset at the inception of lease. However if the fair value of
the leased asset exceeds the present value of minimum lease payment from the standpoint of the
lessee, the amount recorded as an asset and liability should be the present value of minimum
lease payments from the standpoint of the lessee.
Value of machinery: In the given case, fair value of the machinery is Rs. 1,000,000 and the net
present value of minimum lease payments is Rs. 1,001,497 (working note). As the present value
of the machine is more than the fair value of the machine, the machine and the corresponding
liability will be recorded at fair value of Rs. 1,000,000.
Working note: Present value of minimum lease payments
Annual lease rental X PV Factor = 350,000 X (0.8621+0.7432+0.6407+0.5523) = 979,405

Present value of guaranteed residual value = 40,000 X 0.5523 = 22,092
Total 1,001,497
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

Answer No 22:
(a). Leases
A lease is a contract calling for the lessee (user) to pay the lessor (owner) for use of the property.
A rental agreement is a lease in which the asset is tangible property. Leases for intangible
property can include use of a computer program (similar to a license, but with different
provisions), or use of a radio frequency (such as a contract with a cell-phone provider). It is a
written agreement under which a property owner allows a tenant to use the property for a
specified period of time and rent. The lease will either provide specific provisions regarding the
responsibilities and rights of the lessee and lessor, or there will be automatic provisions as a
result of local law. In general, by paying the negotiated fee to the lessor, the lessee (also called a
tenant) has possession and use (the rental) of the leased property to the exclusion of the lessor
and all others except with the invitation of the tenant

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

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.
(e). Debt Service Coverage Ratio

The ratio is a key financial ratio for the lenders.
 Debt servicing means timely payment of principal amount of instalments plus interest.

 Borrower should be able to service the debt out of the profits. Profit means the profit
available for debt servicing.
 This ratio is calculated as:
Profit available for Debt Servicing
Loan instalments +Interest
 This ratio normally should be 1.33 but a higher coverage is of advantage to the
business as it improves its strength to service the debts promptly
(f). Watch list in Loan loss provisioning
Nepal Rastra Bank (NRB) 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 overdue for more than a month.
2. Short term/Working Capital Loans that are not renewed on time and are renewed on
temporary basis.
3. Loan and advances to customers/ group of customers who have been categorized as non
performing by other banks and financial institutions.
4. Firms/Companies/Organizations having negative net worth or net loss though interest and
principal are served on regular basis.
5. Loan and advances having multiple banking exposure more than Rs. 1 billion and have
not entered into consortium agreement.
6. Specifically specified by NRB after due inspection.
(g). 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.
(h). Outsourcing the Accounting function to third party

Recently a growing trend has developed for outsourcing the accounting function to a third party.
The consideration for doing this is to save cost and to utilize the expertise of the outsourced
party. The third party maintains the accounting software and the client data, does the processing
and hands over the report from time to time.
Benefits of outsourcing the accounting function to third party:
1. The organization that outsources its accounting function is able to save time to concentrate
on the core areas of business activity.
2. The organization is able to utilize the expertise of the third party in undertaking the
accounting work.
3. Storage and maintenance of the data is in the hand of professional people.
4. The organization is not bothered about people leaving the organization in key accounting
positions. The proposition is proving to be economically and more sensible as they do not
have train the people again. Hence the training cost is saved.

Paper 2: Audit and Assurance

Revision Questions
Question No 1:
XYZ ltd has appointed you as the statutory auditor of a company for the first time. what other
auditing techniques would you employ for conducting the statutory audit apart from adopting the
conventional audit procedures when auditing for the first time?
Question No 2:
Designing an Audit Strategy is the backbone of the Audit Planning" process. Discuss.
Question No 3:
What are the considerations to be kept in mind while performing analytical procedures on data
prepared by the client?
Question No 4
You have been appointed as the auditor of a QFX cinema hall. Draw an audit programme in respect
of its Revenue and Expenditure.
Question No 5
What are the points to be considered while evaluating the "knowledge of the Business" in the conduct
of an audit?
Question No 6
PQR & Co. was appointed as auditor of Himalayam Airways Ltd. As the audit partner what factors
shall be considered in the development of overall audit plan?
Question No 7
Draw out an audit plan to enquire into causes of abnormal wastage of raw materials..
Question No 8
What are general matters to be considered by an auditor while taking up an engagement?
Question No 9
What are the major sources of obtaining information about the client's business?
Question No 10
As an internal auditor of a Cement Manufacturing Company, draft an audit programme for
verification of transportation charges for dispatches from the factory.
Question No 11

As an auditor of garment manufacturing company for the last five years you have observed that new
venture of online shopping has been added by the company during current year. As an auditor what
factors would be considered by you in formulating the audit strategy of the company?
Question No 12
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 13
X Ltd closed its manufacturing operations and sold all its manufacturing fixed assets during the
financial year ended 31st March, 2015. However it intends continue its operations as a trading
company. in respect of other fixed assets, the company carried out a physical verification as at the
end of 31st March, 2015 and found a material discrepancy to the tune of 1 lac, which was written off
and is disclosed separately in the Statement of Profit and Loss.
Kindly incorporate the above in your audit report.
Question No 14
a. Big and Small Ltd. received a show cause notice from central excise department intending to levy
a demand of 25 lakhs in December 2014. The company replied to the above notice in January
2015 contending that it is not liable for the levy. No further action was initiated by the central
excise department upto the finalization of the audit for the year ended on 393, March, 2095. As
the auditor of the company, what is your role in this?
b. Director of T Ltd. draws an advance of US$ 200 per day in connection with the foreign trip
undertaken on behalf of the company. On his return he files a declaration stating that entire
advance was expended without any supporting or evidence. T Ltd. books the entire expenses on
the basis of such declaration. As the auditor of T Ltd. how do you deal with this?
Question No 15:
Write a short note on
a. Emphasis of matter paragraph in Audit Reports.

b. Certificate for Special Purpose vs. Audit Report.
c. Haphazard Sampling
d. Audit Risk.
e. Factors relevant in evaluation of Inherent Risk
f. Statistical and Non-Statistical Sampling.
Question No 16:
What are the features of a qualified Audit Report?
Question No 17:
Discuss the various aspects to be considered by the Statutory Auditor before qualifying his report.
Question No 18:

Illustrate, as a statutory auditor, how you would give a report where all qualifications are not
quantifiable.
Question No 19:
The auditor should take into account the aggregate of all uncorrected misstatements including those
involving estimates in his assessment of materiality in audit.
Question No 20:
"Obtaining audit evidence in performing compliance and substantive procedures. " Comment.
Question No 21:
Describe the principal methods of selection of samples.

Answer No 1:
A statutory auditor conducting audit of a private company for the first time would do well in case he
obtains knowledge of the business of the company to understand and assess the kind of audit
procedures to be employed by him as per Nepal Standards on Auditing 315 "Identifying an assessing
the risk of material misstatement through understanding the entity and its environment " and Nepal
Standards on Auditing 330 ―The Auditor‘s responses to assessed risks" respectively. Knowledge of
the business is a frame of reference within which the auditor exercises professional judgment.
Understanding the business and using this information appropriately assists the auditor in:
(i) Assessing risks and identifying problems.
(ii) Planning and performing the audit effectively and efficiently.
(iii) Evaluating audit evidence.
Such knowledge would enable the auditor to identify and understand the events, transactions and
practices that, in the auditor's judgment, may have a significant effect on the financial statements or
on the examination or audit report.
As far as adoption of conventional audit procedures is concerned, if size of the business is large, the
application of conventional procedure would involve extraordinary more time resulting into more
cost and even then the auditor would not get the required satisfaction as to the figures contained in
the financial statements. There may be some instances where internal control systems are quite weak,
it may perhaps be advisable to stick to conventional audit procedures such as vouching, et c. in detail.
In any case, application of compliance procedure to evaluate the internal control systems in
operations would enable the auditor to determine nature, extent and timing of substantive procedures.
Test-check approach is an accepted auditing procedure, which aims to test transactions on the basis
of selection of samples from the entire population. The auditor would also consider the specific audit
objectives to be achieved and the audit procedures which are likely to best achieve those objective s.
In addition, when audit sampling is appropriate, consideration of the nature of the audit evidence
sought and possible error conditions or other characteristics relating to that audit evidence will assist
the auditor in defining what constitutes an error and what population to use for sampling. For example,
when performing tests of control over an entity's purchasing procedures, the auditor will be
concerned with matters such as whether an invoice was clerically checked and properly approved. On
the other hand, when performing substantive procedures on invoices processed during the period, the
auditor will be concerned with matters such as the proper reflection of the monetary amounts of such
invoices in the financial statements.
After performing vouching, it is necessary for an auditor to perform verification of balances

contained in the financial statements. Verification and valuation of assets and liabilities contained in
the balance sheet would involve obtaining evidence through methods like physical observations,
confirmation, computation, inspection of documents and analytical reviews.
Direct confirmation procedure provides an independent audit evidence to analyze the financial
information contained in the accounting records. For example, confirmation may be done for trade
receivables, trade payables, investments lying with third parties, bank balances, etc.
Apart from conducting audit procedures like vouching and verification, it is quite useful to employ
analytical review procedures; In fact, analytical review procedures would provide substantive audit
evidence to support various assertions in the financial statements. Over a period of time, the
analytical review as a method of obtaining evidence has emerged as a significant auditing
procedures. As per NSA 520, ―analytical procedures‖ means the analysis of significant ratios and
trends including the resulting investigation of fluctuations and relationships that are inconsistent with

other relevant information or which deviate from predicted amounts. Analytical procedures in
planning the audit use both financial and non-financial information, for example, the relationship
between sales and square footage of selling space or volume of goods sold. The auditor's reliance on
substantive procedures to reduce detection risk relating to specific financial statement assertions may
be derived from tests of details, from analytical procedures, or from a combination of both. The
decision about which procedures to use to achieve a particular audit objective is base d on the
auditor's judgment about the expected effectiveness and efficiency of the available procedures in
reducing detection risk for specific financial statement assertions. It further states that when
analytical procedures identify significant fluctuations or relationships that are inconsistent with other
relevant information or that deviate from predicted amounts, the auditor should investigate and
obtain adequate explanations and appropriate corroborative evidence.
A walk through is a procedure in which an auditor traces a transaction from its initiation through the
company's information systems to the point when it is reflected in the financial reports. The auditor
should perform one walk through, at a minimum, for each major class of transactions. A walk-
through provides evidence to confirm that the auditor understands
(1) the process flow of transactions,
(2) the design of identified controls for internal control components, including those related to
preventing and detecting fraud, and
(3) whether all points in the process have been identified at which misstatements related to relevant
financial statement assertion could occur.
Walk through also provide evidence to evaluate the effectiveness of the controls' design and confirm
that the controls have been placed in operation.
When performing a walk-through, the auditor should:
(i) Be sure that the walk-through encompasses the complete process (initiation, authorization,
recording, processing and reporting) for each significant process identified, including controls
intended to address fraud risk.
(ii) Ask the entity's personnel, at each of key stage in the process, about their understanding of what
the company's prescribed procedures require.
(iii) Determine whether processing procedures are performed as expected on a timely basis, and look
for any exceptions to prescribed procedures and controls.
(iv) Evaluate the quality of evidence provided and perform procedures that produce a level of
evidence consistent with the auditor's objectives. The auditor should follow the whole process,
using the same documents and technology that company staff use, asking questions of different
personnel at each significant stage and asking follow- up questions to identify any abuse of
controls or fraud indicators.
(v) Once a walk-through is performed, the auditor may carry forward the documentation, noting
updates, unless significant changes make preparation of new documentation more efficient. If
such significant changes occur in the process flow of transactions or supporting computer
applications, the auditor should evaluate the nature of changes and the effect on related
accounts. The auditor should determine whether it is necessary to walk through transactions that
were processed both before and after the change.
Cut-off procedures mean procedures employed to ensure the separation of transactions at the end of
one year from those in the commencement of the next year. Usually, the problem of overlapping is
found in inventory accounting since quite often goods are sold but passed on to the buyer only after
the year is over or goods are bought but received only after the close of the year. This situation may

create considerable problem for the proper stock taking of inventory. Therefore, the principal areas of
application of cut-off procedures involve sales, purchases and stock. The auditor should satisfy
himself by examination and test check that these procedures adequately ensure that:
1. Goods purchased for which property has passed to the client have in fact been included in
inventories and that the liability if any, has been provided for.
2. Goods sold have been excluded from the inventories and credit has been taken for sales.
The auditor may examine a sample of documents evidencing the movement of stocks into and out of
stores, including documents pertaining to period shortly before and shortly after the cut -off date, and
check whether the stocks represented by those documents were included or excluded, as appropriate,
during the stock-taking.
Therefore, a statutory auditor who has been appointed for the first time must resort to evaluation of
internal control system through performance of compliance procedures based on the knowledge of
the client's business followed by vouching on a selected basis having regard to sampling. Physical
observation and direct confirmation are also useful audit techniques in the verification of items
contained in the financial statements. Ratio analysis or analytical procedures would also provide
audit evidence as to various assertions contained in the financial statements.
Answer No 2:
Audit strategy is concerned with designing optimized 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 shall 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: NSA 315 "Identify and assessing the risk of material
misstatement through understanding the entity and its environment" and NSA 330 ―The Auditors‘
responses to assessed risks" respectively states that in performing an audit of financial
statements, the auditor should obtain knowledge of the business sufficient to enable the auditor to
identify and understand the events, transactions and practices that, in the auditor's judgment, may
have a significant effect on the financial statements or on the examination or audit report.
Knowledge of the business is a frame of reference within which the auditor exercises
professional judgment. Understanding the business and using this information appropriately
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.
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.
iii. Evaluating Inherent Risk: To assess inherent risk, the auditor would use professional judgment
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:
a) considering the results of gathering or updating information about the client; and
b) making preliminary judgments 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 judgments as to materiality and identified inherent risks. Audit strategy
also considers main points relating to planning and controlling the audit or comment s 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 3
When the auditor intends to perform analytical procedures on data prepared by the client, he should
consider the following:
i. Determine the suitability of particular substantive analytical procedures for given assertions,
taking account of the assessed risks of material misstatement and tests of details, if any, for
these assertions;
ii. Evaluate the reliability of data from which the auditor's expectation of recorded amounts or
ratios is developed, taking account of source, comparability, and nature and relevance of
information available, and controls over preparation;
iii. Develop an expectation of recorded amounts or ratios and evaluate whether the expectation is
sufficiently precise to identify a misstatement that, individually or when aggregated with
other misstatements, may cause the financial statements to be materially misstated; and
iv. Determine the amount of any difference of recorded amounts from expected values that is
acceptable without further investigation and if analytical procedures performed in accordance
with this NSA identify fluctuations or relationships that are inconsistent with other relevant
information or that differ from expected values by a significant amount, the auditor shall
investigate such differences by:
v. Inquiring of management and obtaining appropriate audit evidence relevant to management's
responses; and
vi. Performing other audit procedures as necessary in the circumstances.
Answer No 4
i. Peruse the Memorandum of Association and Articles of Association of the entity.
ii. Ensure the object clause permits the entity to engage in this type of business.
iii. In the case of income from sale of tickets:
iv. Verify the control system as to how it is ensured that the collections on sale of tickets of various
shows are properly accounted.
v. Verify the system of relating to online booking of various shows and the system of realization of

money.
vi. Check that there is overall system of reconciliation of collections with the number of seats
available for different shows on a day.
vii. Verify the internal control system and its effectiveness relating to the income from cafe shops,
pubs etc., located within the multiplex.
viii. Verify the system of control exercised relating to the income receivable from advertisements
exhibited within the premises and inside the hall such as hoarding, banners, slides, short films
etc.
ix. In the case of payment to the distributors verify the system of payment which may be either
through out right payment or percentage of collection or a combination of both. Ensure at the
time of settlement any payment of advance made to the distributor is also adjusted against the
amount due.
x. Verify the system of payment of salaries and other benefits to the employees and ensure that
statutory requirements are complied with.
xi. Verify the payments effected in respect of the maintenance of the building and ensure the same is
in order.
Answer No 5
The broad matters to be considered while obtaining knowledge of business for a new audit
assignment are set out in NSA 315 "Identify and assessing the risk of material misstatement through
understanding the entity and its environment‖. These are:
i. Relevant industry, regulatory, economic and other external factors including the applicable
financial reporting framework.
ii. The nature of the entity, including:
a.its operations;
b. its ownership and governance structures;
c.the types of investments that the entity is making and plans to make, including
investments in special-purpose entities; and
d. the way that the entity is structured and how it is financed; to enable the auditor to
understand the classes of transactions, account balances, and disclosures to be expected
in the financial statements.
iii. The entity's selection and application of accounting policies.
iv. The entity's objectives and strategies, and those related business risks that may result in risks of
material misstatement.
v. The measurement and review of the entity's financial performance.
In addition to the importance of knowledge of the client's business in establishing the overall audit
plan, such knowledge helps the auditor to identify areas of special audit consideration, to evaluate the
reasonableness both of accounting estimates and management representations, and to make judgment
regarding the appropriateness of accounting policies and disclosures.
Answer No 6
Overall plan is basically intended to provide direction for audit work programming and includes the
determination of timing, manpower development and co-ordination of work with the client, other
auditors and other experts. The auditor should consider the following matters in developing his
overall plan for the expected scope and conduct of the audit:
i. Terms of his engagement and any statutory responsibilities.

ii. Nature and timing of reports or other communications.

iii. Applicable Legal or Statutory requirements.
iv. Accounting policies adopted by the clients and changes, if any, in those policies.
v. The effects of new accounting and auditing pronouncement on the audit.
vi. Identification of significant audit areas.
vii. Setting of materiality levels for the audit purpose.
viii. Conditions requiring special attention such as the possibility of material error or fraud or
involvement of parties in whom directors or persons who are substantial owners of the entity
are interested and with whom transactions are likely.
ix. Degree of reliance to be placed on the accounting system and internal control.
x. Possible rotation of emphasis on specific audit areas.
xi. Nature and extent of audit evidence to be obtained.
xii. Work of the internal auditors and the extent of reliance on their work, if any in the audit.
xiii. Involvement of other auditors in the audit of subsidiaries or branches of the client and
involvement of experts.
xiv. Allocation of works to be undertaken between joint auditors and the procedures for its control
and review.
xv. Establishing and coordinating staffing requirements.
Answer No 7
To locate the reasons for the abnormal wastage, the auditor should first of all assess the general
requirements as under:
i. Procure a list of raw materials, showing the names and detailed characteristics of each raw
material.
ii. Obtain the standard consumption figures, and ascertain the basis according to which normal
wastage figures have been worked out.
iii. 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.
iv. 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.
v. Obtain reports of Preventive Maintenance Programme of machinery to ensure that the quality
of goods manufacture is not of sub-standard nature or leads to high scrap work.
vi. Assess whether personnel employed are properly trained and working efficiently.
vii. See whether quality control techniques have been consistent or have undergone any change.
viii. Examine inventory plans and procedures in report of transportation storage efficiency,
deterioration, pilferage and whether the same are audited regularly.
ix. Examine whether the basis adopted for calculating wastage for the month is the same as was
adopted for the other three months.
x. Obtain a statement showing break up of wastage figures in storage, handling and process for
the previous four months under reference and compare the results of the analysis for each of
the four months.
xi. In addition, some specific reasons for abnormal wastage in process may be considered by the
auditor are as under:
xii. 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.
xiii. Machine breakdown, power failure, etc. may also result into loss of materials in process.
Check the machine utilization statements.
xiv. 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.
xv. 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.
xvi. Abnormal wastage in storage and handling may arise due to the following reasons:
xvii. 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.
xviii. Accidental, theft or fire losses in storage: The auditor should examine the possibility of these
for the purpose.
xix. 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.
Answer No 8
General Economic factors:
General level of economic activity (for example, recession, growth)
(a) The market and competition.
(b) Cyclical or seasonal activity.
(c) Government policies.
(d) The industry- important conditions affecting the client's business
(e) The market and competitions.
(f) Cyclical or seasonal activity.
(g) Changes in product technology.
(h) Business risk.
The entity:
i. Management and ownership- important characteristics.
ii. Operating Management.
iii. The entity's business - products markets, suppliers, expenses, operations.
iv. Nature of business(es) (for example manufacturing whole seller, financial services,
import/ exports).
v. Location of production facilities, warehouses, offices.
vi. Employment (for example, by location, supply, wage levels, union contracts, pension
commitments, Government regulation).
vii. Products or services and markets.
viii. Financial performance- factors concerning the entity's financial condition and
profitability.
ix. Reporting environment- external influences which affect management in the preparation
of the financial statements.
x. Legislation:
xi. Regulatory environment and requirements.
xii. Taxation both direct and indirect.

Answer No 9
The auditor can obtain information about client's business from the following sources:
i. The client's annual Reports to shareholders;

ii. Minutes of meetings of shareholders, board of directors and important committees;
iii. Internal financial management report for current and previous periods, including budgets, if
any;
iv. The previous year's audit working papers, and other relevant files;
v. Firm personnel responsible for non audit services to the client who may be able to provide
information on matters that may affect the audit;
vi. Discussions with the client;
vii. The client's policy and procedures manual;
viii. Relevant publications of the Institute of Chartered Accountants of India and other
professional bodies, industry publication, trade Journals, magazines, newspapers or text books;
ix. Consideration of the state of the economy and its effects on the client's business;
x. Visits to the client's premises and plant facilities to the management.
Answer No 10
Procedure for Audit of Transportation Charges:
i. Check rates contracted with transporters for carriage of goods.

ii. Check whether the rates mentioned as per the contract are correctly taken in the transporter's
Invoice.
iii. In case of discrepancy, check whether the same is authorized by the appropriate sanctioning
authority.
iv. Check that the transporters invoice includes a delivery challan which has customers stamp
indicating the receipt of goods.
v. In case there is no stamp on the delivery challan, check whether the goods are received back and
there is a corresponding inward note.
vi. Check whether all the goods to be dispatched have a transport booking order reference.
vii. Check whether each transporter's invoice mentions the transport booking order reference.
viii. Check whether all the transport booking orders have corresponding transporters names.
ix. Check whether the transport booking orders are pre-numbered.
x. Check whether all the invoices are correctly booked in the books of accounts.
xi. In case there is an additional charge by the transporter due to extra carriage, check for the
relevant supporting (like material Inward Note/Customer Rejection Note) and necessary
authorization by the sanctioning authority.
xii. Check whether service-tax on the transporters is correctly calculated and accounted.
xiii. Verify that there is a mechanism for linking all the Transport Bills to the sale invoices.
Answer No 11
While formulating the audit strategy for a company, following factors may be considered -
General Factors:
i. The engagement objectives.
ii. The results of the business review, including major developments in the client's business and
industry, significant operating results and financial arrangements.
iii. Preliminary judgments as to materiality.

iv. Identified inherent risks. The team should also consider the risk of fraud and, in particular,
any evidence of a high level of risk to the firm. They should take into account the results of
procedures for the acceptance and continuation of clients.
v. The degree to which the team should carry out further assessment of controls as a means of
reducing substantive tests.
vi. The broad nature, extent and timing of substantive tests, or changes to the previous year's
strategy for substantive testing.
vii. Main points relating to planning and controlling the audit or comments on the adequacy of
the existing arrangements.
viii. Specific Factors for Online Shopping:
ix. The auditor shall also obtain an understanding of the information system including the related
business processes due to new venture of online shopping in the following areas:
x. The classes of transactions in the entity's operations that are significant to the financial
statements;
xi. The procedures, within both information technology (IT) and manual systems, by which
those transactions are initiated, recorded, processed, corrected as necessary, transferred to the
general ledger and reported in the financial statements;
xii. The related accounting records, supporting information and specific accounts in the financial
statements that are used to initiate, record, process and report transactions; this i ncludes the
correction of incorrect information and how information is transferred to the general ledger.
The records may be in either manual or electronic form;
xiii. How the information system captures events and conditions, other than transactions, that are
significant to the financial statements;
xiv. Controls surrounding journal entries, including non-standard journal entries used to record
non-recurring, unusual transactions or adjustments.
Answer No 12
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 .
Types of Modification to the Auditor's Opinion: Modified opinion may be defined as a qualified
opinion, an adverse opinion or a disclaimer of opinion.
a. 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.
b. 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.
c. 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 13:
As per NSA 570 "Going Concern", when the auditor concludes that the use of the going concern
assumption is appropriate in the circumstances but a material uncertainty exists, the auditor shall
determine whether the financial statements-
a. Adequately describe the principal events or conditions that may cast significant doubt on the
entity's ability to continue as a going concern and management's plans to deal with these
events or conditions; and
b. Disclose clearly that there is a material uncertainty related to events or conditions that may
cast significant doubt on the entity's ability to continue as a going concern.
In the given case, X Ltd. has sold out its manufacturing fixed assets during the year. However, it
intends to continue its operations as a trading company. Therefore, selling of manufactur ing fixed
assets does not affect the going concern assumption of the company. Additionally, while carrying out
physical verification of fixed assets, a material discrepancy to the tune of 1 lac was found, which was
written off and disclosed separately in the Statement of Profit and Loss. Hence, this fact needs to be
disclosed in the Audit Report as follows:
Para in the Audit Report-
We have made our viewpoint from the facts of the case and on the basis of guidance drawn from AS
1. We report as under-
As per Nepal Accounting Standard (NAS) 1, "Presentation of Financial statements", the enterprise is
normally viewed as a going concern that is as continuing its operation for the foreseeable future. It is
assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing
materially the scale of its operations." Although the company has disposed of its manufacturing fixed
assets during the financial year ending on 31-03-2015, it is still a going concern in the form of a
trading company. We also report that on physical verification of other fixed assets, a material
discrepancy to the tune of 1 Lac was noticed and that the same has been properly dealt with in the
books of account.
Answer No 14
a. The auditor shall obtain sufficient appropriate audit evidence regarding compliance with the
provisions of those laws and regulations generally recognized to have a direct effect on the
determination of material amounts and disclosures in the financial statements including fax and
labor laws.
During the audit, the auditor shall remain alert to the possibility that other audit procedures
applied may bring instances of non-compliance or suspected non-compliance with laws and
regulations to the auditor's attention. Then the auditor shall discuss the matter with management
and, where appropriate, those charged with governance. 1f management or, as appropriate, those
charged with governance do not provide sufficient information that supports that the entity is in
compliance with laws and regulations and, in the auditor's judgment, the effect of the suspected
non-compliance may be material to the financial statements, the auditor shall consider the need to
obtain legal advice. In case, 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.

Further, as per NAS 37 "Provisions, Contingent liabilities and Contingent Assets" future events
that may affect the amount required to settle an obligation should be reflected in the amount of a
provision where there is sufficient objective evidence that the event will occur.
In the present case of Big and Small Ltd., issuance of show cause notice by Excise Department
does not tantamount to demand payable by the Company. In so far as the Company has replied to
the notice and no further correspondence was received from the Department. This show cause
notice may be an alert or indication of non-compliance for the auditor. So auditor need to discuss
with management and apply additional procedure. If the auditor concludes that there is non -
compliance then provision for the same should be made as per AS 37. The auditor shoul d also
report the amount of dues not deposited on account of dispute and the forum where dispute is
pending, in his audit report. If the management does not accept the request, the auditor should
qualify the audit report accordingly or vice versa.
b. 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.
The director concerned should provide proof of 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 15
g. Emphasis of matter paragraph in Audit Reports.
An auditor's report can be modified for matters that do not affect the auditor's opinion. 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 matte r. 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' understandin g 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 infor mation
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.
h. Certificate for Special Purpose vs. Audit Report.

A certificate is a written confirmation of the accuracy of the facts stated therein and does not involve
any estimate or opinion. The term `certificate' is, therefore, used where the auditor verifies the
accuracy of facts. An auditor may thus, certify the circulation figures of a newspaper or the value of
imports or exports of a company. An auditor's certificate represents that he has verified certain
figures and is in a position to vouch safe their accuracy as per his examination of documents and
books of account.
A report, on the other hand, is a formal statement usually made after an enquiry, examination or
reviews of specified matters under report and includes the reporting auditors opinion thereon. Thus,
when a reporting auditor issues a certificate, he is responsible for the factual accuracy of what is
stated therein. On the other hand, when a reporting auditor gives a report, he is responsible for
ensuring that the report is based on factual data, that his opinion is in due accordance with facts, and
that it is arrived at by the application of due care and skill. The `report' involves expression of
opinion which may differ from one professional to another. There is no question of exactitude in case
of a report since the information contained therein is based on estimates and involves judgement
element.
i. Haphazard Sampling
In haphazard selection, the auditor selects the sample without following a structured technique.
Although no structured technique is used, the auditor would nonetheless avoid any consci ous bias or
predictability for example, avoiding difficult to locate items, or always choosing or avoiding the first
or last entries on a page and thus attempt to ensure that all items in the population have a chance of
selection. Haphazard selection is not appropriate when using statistical sampling.
Haphazard selection of sample, may be an acceptable alternative to random selection of sample,

provided the auditor attempts to draw a representative sample from the entire population with no
intention to either include or exclude specific units.
When the auditor uses this method, care needs to be taken to guard against making a selection that is
biased, for example, towards items which are easily located, as they may not be representative.
j. Audit Risk.
Audit risk is a function of the risks of material misstatement and detection risk. The assessment of risks
is based on audit procedures to obtain information necessary for that purpose and evidence obtained
throughout the audit. The assessment of risks is a matter of professional judgment, rather than a matter
capable of precise measurement.
Audit risk does not include the risk that the auditor might express an opinion that the financial
statements are materially misstated when they are not. This risk is ordinarily insignificant. Further,
audit risk is a technical term related to the process of auditing; it does not refer to the auditor's business
risks such as loss from litigation, adverse publicity, or other events arising in connection with the audit
of financial statements.
Three components of audit risk are:
a. Inherent risk (risk that material errors will occur);
b. Control risk (risk that the client's system of internal control will not prevent or correct such errors);
and
c. detection risk (risk that any remaining material errors will not be detected by the auditor). The

nature of each of these types of risk and their interrelationship is discussed below:
Inherent risk - Inherent risk is higher for some assertions and related classes of transactions, account
balances, and disclosures than for others. For example, it may be higher for complex calculations or for
accounts consisting of amounts derived from accounting estimates that are subject to significant
estimation uncertainty. External circumstances giving rise to business risks may also influence inherent
risk. For example, technological developments might make a particular product obsolete, thereby causing
inventory to be more susceptible to overstatement. Factors in the entity and its environment that relate
to several or all of the classes of transactions, account balances, or disclosures may also influence the
inherent risk related to a specific assertion. Such factors may include, for example, a lack of sufficient
working capital to continue operations or a declining industry characterized by a large number of
business failures.
Control risk - Control risk is a function of the effectiveness of the design, implementation and
maintenance of internal control by management to address identified risks that threaten the
achievement of the entity's objectives relevant to preparation of the entity's financial statements.
However, internal control, no matter how well designed and operated, can only reduce, but not
eliminate, risks of material misstatement in the financial statements, because of the inherent limitations
of internal control. These include, for example, the possibility of human errors or mistakes, or of
controls being circumvented by collusion or inappropriate management override. Accordingly, some
control risk will always exist. The NSAs provide the conditions under which the auditor is required to,
or may choose to, test the operating effectiveness of controls in determining the nature, timing and extent
of substantive procedures to be performed.
Detection risk - For a given level of audit risk, the acceptable level of detection risk bears an inverse
relationship to the assessed risks of material misstatement at the assertion level. For example, the
greater the risks of material misstatement the auditor believes exists, the less the detection risk that can
be accepted and, accordingly, the more persuasive the audit evidence required by the auditor.
Detection risk relates to the nature, timing, and extent of the auditor's procedures that are determined by
the auditor to reduce audit risk to an acceptably low level. It is therefore a function of the effectiveness
of an audit procedure and of its application by the auditor. Matters such as:
 adequate planning;
 proper assignment of personnel to the engagement team;
 the application of professional skepticism; and
 supervision and review of the audit work performed,
 assist to enhance the effectiveness of an audit procedure and of its application and reduce the
possibility that an auditor might select an inappropriate audit procedure, misapply an appropriate audit
procedure, or misinterpret the audit results.
d. Factors relevant in evaluation of Inherent Risk

While developing an overall audit plan, the auditor is required to assess i nherent risk at financial
statement level and is then required to relate his assessment to material account balances and the
class of transactions. To assess inherent risk, the auditor would use professional judgement to
evaluate numerous factors, 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. Normally an auditor evaluates inherent risk by assessing factors such as integrity of
the management, experience and knowledge of the management, turnover of key management
personnel, circumstances which may motivate the management to misstate the financial statement
when its financial performance is not satisfactory, nature of entity's business prone to rapid
technological obsolescence, dealing with large number of related parties etc.

e. Statistical and Non-Statistical Sampling.
Audit sampling means the application of audit procedures to less than 100% of items within a population
of audit relevance such that all sampling units have a chance of selection in order to provide the auditor
with a reasonable basis on which to draw conclusions about the entire population.
The auditor should select sample items in such a way that the sample can be expected to be
representative of the population. This requires that all items in the population have an opportunity of
being selected.
There are two major methods in which the size of the sample and the selection of individual items of the
sample are determined. These methods are statistical and non-statistical sampling.
(i) Statistical sampling: This is a method of audit testing which is more scientific than testing based
entirely on the auditor's own judgment because it involves use of mathematical laws of probability in
determining the appropriate sample size in varying circumstances. Statistical sampling has reasonably
wide application where a population to be tested consists of a large number of similar items and more in
the case of transactions involving compliance testing, trade receivables' confirmation, payroll checking,
vouching of invoices and petty cash vouchers.
(ii) Non-statistical sampling: Under this method, the sample size and its composition are determined on
the basis of the personal experience and knowledge of the auditor. This method has been in common
application for many years because of its simplicity in operation. Traditionally, the auditor on the basis of
his personal experience will determine the size of the sample and express it in terms that number of pages
or personal accounts in the purchases or sales ledger to be checked. For example, March, June &
September may be selected in year one and different months would be selected in the next year. An
attempt would be made to avoid establishing a pattern of selection year after year to maintain an element
of surprise as to what the auditor is going to check. It is a common practice to check large number of
items towards the close of the year so that the adequacy of cut-off procedures can also be determined.
Answer No 16
The Features of a Qualified Audit Report are-
(i) Clarity: The Auditor must express the nature of qualification, in a clear and unambiguous
manner.
(ii) Explanation: Where the Auditor answers any of the statutory affirmations in the negative or
with a qualification, his report shall state the reasons for such answer.
(iii) Placement: All qualifications should be contained in the Auditor's Report. When there are
notes which are subject matter of a qualification, the same should preferably be annexed to the
Auditors' Report. However a reference to the notes to Accounts in the Auditors' Report does
not automatically become a qualification.
(iv) Except for: A quantified opinion should be expressed as "except for" for the effects of the
matter to which qualification related. It would not be appropriate to use phrases such as "with
the foregoing explanation" or "subject to" in the opinion paragraph as these are not sufficiently
clear or forceful.
(v) Quantification: It is also necessary that the auditor should quantify, wherever possible, the
effect of individual as well as the total effect of all qualifications on statement of profit and loss
and/or state of affairs these qualifications on the financial statements in a clear and
unambiguous manner. In circumstances where it is not possible to quantify the effect of the

qualifications accurately the auditor may do so on the estimates made by the manag ement after
carrying out such audit tests as are possible and clearly indicate that the figures given are based
on the estimates of the management.
(vi) Nature of qualification: Vague statements the effect of which on accounts cannot be
ascertained like `the trade receivables balances are subject to confirmation', 'no provision for
taxation has been made in view of the loss during the year' etc., should be avoided.
(vii) Violation of law: Where the company has committed an irregularity resulting in a breach of
law, the Auditor should bring the same to the notice of the shareholders by properly qualifying
his report.
(viii) Notes - Report Relationship - Where notes of a qualificatory nature appear in the accounts,
the Auditors should state all qualifications independently in their report so that the user can
assess the significance of these qualifications.
(ix) Draft Report: The auditor may discuss matters of qualification with the management or those
charged with governance of the company to acquire their views. It is not necessary that the
Auditor should accept the management's view and modify his opinion. But it would enable the
Auditor to accurately draft the qualifications in his Final Report.
Answer No 17
The auditor's report may need modification on account of certain matters which may or may not
affect the auditor's opinion. There may be certain circumstances when an auditor may not be able to
express an unqualified opinion because the effort of such circumstances in the auditor's judgment is,
or may be material to the financial statements, for example, there is a limitation on the scope of the
auditors work or there is a disagreement with management regarding the acceptability of the
accounting policies selected, the method of their application or the adequacy of financial statement
disclosures.
The auditor shall express a qualified opinion when-
(i) 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
(ii) 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 stat ements of
undetected misstatements, if any, could be material but not pervasive.
Further, while qualifying a report, it is important to appreciate as to which of the various items of
statement of fact or statement of opinion require a qualification in respect of audit The auditor may
also see whether the matters constituting the qualification involve a material contravention of any
requirements of the Companies Act which have a bearing on the accounts.
Finally, whenever the auditor expresses an opinion that is other than unqualified, a clear description
of all the substantive reasons should be included in the report and, unless impracticable, a
quantification of the possible effects), individually and in aggregate, on the financial statements
should be mentioned in the auditor's report. A quantified opinion should be expressed as "except for'
for the effects of the matter to which qualification related.
Answer No 18
There may be circumstances when it is not practicable to quantify the effect of modifications made in
the audit report accurately. In such cases, the auditor may do so on the basis of estimates made by the
management after carrying out such audit tests as are possible and clearly indicate the fact that the

figures are based on management estimates. Ordinarily, this information would be set out in a
separate paragraph preceding the opinion or disclaimer of opinion and may include a reference to a
more extensive discussion, if any, in a note to the financial statements.
The following illustration of a qualification where quantification was not possible will explain the
point:
"No provision has been made in respect of product warranties outstanding at the year end. The amount of
provision required in this behalf could not be ascertained."
In the above situation, the overall paragraph would appear as follows:
"We further report that, without considering item mentioned in paragraph (2) above, the effect of which could
not be determined, had the observations made by us in paragraph (1) (not reproduced) an d (2) above been
considered, the profit for the year would have been 500.41 lacs (as against the reported figure of Z 596.07
lacs), reserves and surplus would have been 685.43 lacs (as against the reported figure of ? 781.09 lacs) and
total fixed assets would have been 200.00 lacs (as against the reported figure of ? 229.05 lacs)"
In our opinion and to the best of our information and according to the explanations given to us, except for the
effects of the matter described in the Basis for Qualified Opinion paragraph, the financial statements
give……...”
Answer No 19
In forming his opinion on the financial information, the auditor should consider all material aspects,
either individual or in aggregate which are relatively important for true and fair view of financial
statements. In this context, the auditor should consider whether the effect of aggregate uncorrected
misstatements on the financial information is material. Qualitative considerations also influence an
auditor in reaching a conclusion as to whether the misstatements are material.
The aggregate of uncorrected misstatements comprises:

a. specific misstatements identified by the auditor including the net effect of uncorrected
misstatements identified during the audit of previous periods; and
b. the auditor's best estimate of other misstatements which cannot be specifically identified (that is,
projected errors). The analytical procedures employed by the auditor may give him some
indication about the existence of misstatements, which can be further substantiated by him
through estimates process.
When an auditor uses audit sampling to test an account balance or class of transactions, he projects
the amount of known misstatements identified by him in his sample to the items in the balance or
class from which his sample was selected. That projected misstatement, along with the results of
other substantive tests, contributes to the auditor's assessment of aggregate misstatement in the
balance or class.
If the aggregate of the uncorrected misstatements that the auditor has identified approaches the
materiality level, or if auditor determines that the aggregate of uncorrected misstatements causes the
financial information to be materially misstated, he should consider requesting the management to
adjust the financial information or extending his audit procedures. In any event, the management may
want to adjust the financial information for known misstatements. The adjustment of financial
information may involve, for example, application of appropriate accounting principles, other
adjustments in amounts, or the addition of appropriate disclosure of inadequately disclosed matters.
If the management refuses to adjust the financial information and the results of extended audit
procedures do not enable the auditor to conclude that the aggregate of uncorrected misstatements is
not material, the auditor should express a qualified or adverse opinion, as appropriate.

Answer No 20
In performing compliance and substantive procedures, the auditor may obtain audit evidence by
following methods:
i. Inspection: Inspection involves examining records or documents, whether internal or external, in
paper form, electronic form, or other media, or a physical examination of an asset. Inspection of
records and documents provides audit evidence of varying degrees of reliability, depending on
their nature and source and, in the case of internal records and documents, on the effectiveness of
the controls over their production. An example of inspection used as a test of controls is
inspection of records for evidence of authorization. Some documents represent direct audit
evidence of the existence of an asset, for example, a document constituting a financial instrument
such as a stock or bond. Inspection of such documents may not necessarily provide audit
evidence about ownership or value. In addition, inspecting an executed contract may provide
audit evidence relevant to the entity's application of accounting policies, such as revenue
recognition. Inspection of tangible assets may provide reliable audit evidence with respect to
their existence, but not necessarily about the entity's rights and obligations or the valuation of the
assets. Inspection of individual inventory items may accompany the observation of inventory
counting.
ii. Observation: Observation consists of looking at a process or procedure being performed by the
others. For example, the auditor's observation of inventory counting by the entity's personnel, or
of the performance of control activities. Observation provides audit evidenc e about the
performance of a process or procedure, but is limited to the point in time at which the observation
takes place, and by the fact that the act of being observed may affect how the process or
procedure is performed.
iii. External Confirmation: An external confirmation represents audit evidence obtained by the
auditor as a direct written response to the auditor from a third party (the confirming party), in
paper form, or by electronic or other medium. External confirmation procedures frequently are
relevant when addressing assertions associated with certain account balances and their elements.
However, external confirmations need not be restricted to account balances only. For example,
the auditor may request confirmation of the terms of agreements or transactions an entity has
with third parties; the confirmation request may be designed to ask if any modifications have
been made to the agreement and, if so, what the relevant details are. External confirmation
procedures also are used to obtain audit evidence about the absence of certain conditions, for
example, the absence of a "side agreement" that may influence revenue recognition.
iv. Recalculation: Recalculation consists of checking the arithmetical accuracy of documents or
records. Recalculation may be performed manually or electronically.
v. Re-performance: It involves the auditor's independent execution of procedures or controls that
were originally performed as part of the entity's internal control.
vi. Analytical Procedure: Analytical procedures consist of evaluations of financial information
made by a study of plausible relationships among both financial and non-financial data.
Analytical procedures also encompass the investigation of identified fluctuations and
relationships that are inconsistent with other relevant information or deviate significantly from
predicted amounts.
vii. Inquiry: Inquiry consists of seeking information of knowledgeable persons, both financial and
non- financial, within the entity or outside the entity. Inquiry is used extensively throug hout the
audit in addition to other audit procedures. Inquiries may range from formal written inquiries to
informal oral inquiries. Evaluating responses to inquiries is an integral part of the inquiry
process.

Answer No 21
The principal methods of selecting samples are the use of random selection, systematic selection,
monetary unit sampling selection, haphazard selection and block selection. Each of these methods is
discussed below-
(a) Random selection: This method is applied through random number generators, for example,
random number tables.
(b) Systematic selection: In this method the number of sampling units in the population is divided
by the sample size to give a sampling interval, for example 50, and having determined a starting
point within the first 50, each 501h sampling unit thereafter is selected. Although the starting
point may be determined haphazardly, the sample is more likely to be truly random if it is
determined by use of a computerized random number generator or random number tables.
(c) Monetary Unit sampling: This method is a type of value-weighted selection in which sample
size, selection and evaluation results in a conclusion in monetary amounts.
(d) Haphazard selection: In this method the auditor selects the sample without following a
structured technique. Although no structured technique is used, the auditor would nonetheless
avoid any conscious bias or predictability and thus attempt to ensure that all items in the
population have a chance of selection. Haphazard selection is not appropriate whe n using
statistical sampling.
Block selection: This method involves selection of a block(s) of contiguous items from within the
population. Block selection cannot ordinarily be used in audit sampling because most populations are
structured such that items in a sequence can be expected to have similar characteristics to each other,
but different characteristics from items elsewhere in the population. Although in some circumstances
it may be an appropriate audit procedure to examine a block of items, it would rarely be an
appropriate sample selection technique when the auditor intends to draw valid inferences about the
entire population based on the sample.

Paper 3: Corporate and Other Laws

Revision Questions
Companies Act, 2063 (Including First Amendment)
Question No 1:
Mr. Mohan Das is one of the shareholders of Petrochemicals Ltd. He holds 25,000 numbers of shares in
the company, each of NRs 100 face value, for which NRs 50 each is called, but not yet paid. Despite
extension of time limit for payment and also issue of public notice he still has not paid the called money.
The company decided to forfeit all her shares though only 50% money is unpaid. He claims that the
company‗s move to forfeit 100% shares is unlawful. Give your legal opinion on the same.
Question No 2:
Hari Krishna, a shareholder of a private company wants to sell and transfer all his shares to Buddhi
Prasad, another shareholder of the company. He has no knowledge regarding the transfer of the share of a
private company and wants your advise on the followings:
a. If Hari Krishna is entitled to sell and transfer all his shares to Buddhi Prasad?
b. Are there any restrictions imposed by law in the sell and transfer of shares?
Question No 3:
Mr. Adhikari is one of the shareholders in a company. He borrowed certain sum of loan from a bank
against the pledge or security of the shares held by him. He failed to repay the loan and the bank instituted
legal action against him. It is claimed that since he is defaulter in repaying the loan he must be prevented
from exercising voting right in respect of shares in the annual general meeting for a period until he repays
the loan. What is your opinion?
Question No 4:
ABC Associates has been appointed auditor of ABC Bank Ltd. for the FY 2072/73 in the month of Poush
2072. In the month of Shrawan 2073 he has come to know that his brother in law, living separately and
independently, has been holding 1.5 percent shares of Dena Bank Ltd. State the relevant provisions of the
Companies Act, 2063 attracted by the development and the responsibility of auditors regarding
information and disqualification?
Question No 5
Pathibhara Insurance Ltd. is registered at the Office of Company Registrar (OCR). It has also applied with
the Insurance Board for the license to operate a non-life insurance business. Pending the issuance of the
license from the Board, it held its first annual general meeting which is objected by some of the
shareholders on the ground that a public company having special objective cannot start its business
activities unless license/permission is received from the concerned authority and a certificate of
commencement of business is issued by OCR. Give your opinion on the issue.
Question No 6:
Ganesh Hotels Ltd. is a public company listed at Nepal Stock Exchange Ltd. It couldn‗t appoint its
auditor in the Annual General Meeting (AGM). However, the Annual General Meeting delegated the
power to appoint auditor to the Board of Directors (BoD) based on which the BoD appointed the auditor.
Is this appointment valid?
Question No 7
Nepal Transport Co. Ltd passed a special resolution to amend name and objective clause in its
memorandum of association and articles of association and also informed the same to the Office.
However, one of the shareholders has objected over the change in objective of the company and has filed

a petition at the court against the decision of the company. What are the provisions in the Companies Act,
2063 to make such changes valid?
Nepal Chartered Accountants Act, 2053

Question No 8:
Mr. Sharma FCA has charged a fee for representing his client M/S Fabrics Pvt. Ltd in Tax settlement
commission on the expected relief to his client as a result of the settlement commission. Is this
arrangement is in accordance with the Nepal Chartered Accountant Act, 2053?
Question No 9:
List out the objectives of the ICAN and state the formation of council including the election of
president and vice-president pursuant to the Nepal Chartered Accountants Act, 2053.
Question No 10:
Mr. Johnson, a Sri Lankan citizen passed CAP III level examinations from the Institute of Chartered
Accountants of Nepal in the year 2018. He wants to practice accountancy profession in Nepal. He seeks
your opinion. Advise him in this regard as per Nepal Chartered Accountants Act and Rules.
Banks and Financial Institutions Act, 2073

Question No 11:
Excellence Development Bank Limited (a national level 'B‗class institution licensed from Nepal Rastra
Bank) is operating in profit continuously since last 6 years. It intends to upgrade in 'A‗class Bank. In this
regards it seeks your opinion. Explain the provisions of conversion of lower class financial institutions
into higher class banks or financial institutions as per Banks and Financial Institutions Act, 2073.
Question No 12:
Explain how the meeting of board of directors of a bank and financial institution is conducted, decisions
are made and minutes are prepared?
Question No 13:
Define Capital Fund. What matters are included in Core capital and supplementary Capital.
Question No 14
List out the matters you have to collect from her for the disclosure to be made by the director as per the
Banks and Financial Institutions Act, (BAFIA), 2073.
Nepal Rastra Bank Act, 2058

Question No 15
CA. Gautam was appointed as the Governor of Nepal Rastra Bank on 2074/10/10. He seeks your opinion
as to the provisions of prohibition on vested personal interests applicable to the Governor, Deputy
Governor or directors of Nepal Rastra Bank as per Nepal Rastra Bank, 2058.
Question No 16:
How does Nepal Rastra Bank mobilize Foreign Exchange Reserve? Explain it in the light of Nepal Rastra
Bank Act, 2058.
Question No 17:
What are the functions not to be carried out by the Nepal Rastra Bank?
Industrial Enterprises Act, 2073

Question No 18
Whether women entrepreneur are provided additional facilities and concessions. Advise her as per
Industrial Enterprises Act, 2073.
Question No 19
Enumerate the objective of Industrial Enterprises Act, 2073.
Question No 20:
Explain the functions, duties and power of Industry and Investment Promotion Board under Industrial
Enterprises Act, 2073.
Question No 21:
Mention classifications of Industry. Mention types of Industries as per Nature as defined by Industrial
Enterprises Act, 2073?
Question No 22:
Define Sick Industry and its types.
Securities Act, 2063:

Question No 23:
A body corporate intends to issues securities through the securities markets. Under the Securities Act,
2063. You as an expert of security market, how would you advice the body corporate regarding the issue
of shares under the Securities Act, 2063.
Question No 24
What are the matters to be specified while giving application for license to carry securities dealing?
Question No 25
Securities Act, 2063 provides for establishment of a compensation fund to protect interest of the investors
from a possible loss or damage. Mention about such fund and its operation.
Question No 26
State the circumstances on which the chairperson of Securities Board of Nepal may be removed from
office by the Government of Nepal pursuant to the Securities Act, 2063.
Labour Act, 2074

Question No 27
Go Green Garments Limited was established on 2073/01/10. It has been operating at 60 % of its normal
production capacity and in loss since its incorporation. The managing director of the company is thinking
to engage skilled Pakistani citizens to increase the production of the company. The company seeks your
opinion as to the recruitment of foreign citizen. Explain the relevant provisions as per Labour Act, 2074.
Question No 28:
What are the deductions allowed from the remuneration to be obtained by the worker or employees as per
Labour Act, 2074?
Question No 29
Mention the types of leaves as per Labour Act, 2074.

Bonus Act, 2030
Question No 30
Is Government of Nepal establishments liable to pay bonus to its employees? What are the provisions of
Bonus Act, 2030 and Bonus Rules, 2038 as to paying bonus to the employees of Government of Nepal
establishments?
Question No 31:
Mention the eligibility criteria for entitlement of the bonus by the employee as per the Bonus Act, 2030.
Contract Act, 2056

Question No 32:
Ms. Sarala, when leaving for her month long foreign tour left a packet of mustard seeds with her
neighbour with a condition that she will collect that back after she returns home within a month and she
will not pay anything to him for this work. When she came back from the tour she went to collect the
packet of seeds. To her surprise, the packet of seeds was not safely kept and is not in usable condition.
She complained her neighbour and asked for compensation for the loss she suffered. But the neighbour
pleaded that it was not a commercial transaction but simply a gratuitous bailment and hence he is not
liable to pay any loss. Is this claim valid?
Question No 33:
According to the Contract Act, 2056, 'Contract' means an agreement enforceable by law concluded
between two or more parties for performing or not performing any work. Accordingly, Section 75
provides for reciprocal performance by the parties to the contract. Explain the reciprocity of obligations
and consequences of failure by a party to perform.
Insurance Act, 2049

Question No 34:
Difference between
a. Subrogation and Contribution
b. Insurance agent and insurance broker (in term of their qualifications)
Question No 35:
State the grounds under which the Insurance Board may cancel the registration of an insurance company
(insurer) under the Insurance Act, 2049.
Question No 36
Explain the Liability of an insurer
Social Welfare Act, 2049

Question No 37:
What special programs may be operated by the Government of Nepal relating to the social welfare as per
Social Welfare Act, 2049?
Question No 38

Explain the Objectives of Social Welfare Act, 2049.
Negotiable Instruments Act, 2034

Question No 39
Distinguish between Promissory Note and Bills of Exchange.
Question No 40:
What do you mean by "Not Negotiable Crossing"? Mr. A gives a cheque to Mr. B with not negotiable
crossing. Mr. C Steals the cheque from Mr. B and delivers it to Mr. D with consideration. D takes the
cheque without knowledge that cheque has been stolen cheque. Suggest Mr. D referring Negotiable
Instruments Act, 2034
Question No 41:
Who are the parties of the Negotiable Instrument? What liability is given to such party as mentioned in
the Negotiable Instrument Act, 2034?
WTO
Question No 42:
Point out the basic opportunities of Nepal from the membership of WTO.

Answer No 1
As provided in Section 53(3) of the Companies Act, 2063 (including First Amendment), if a shareholder
fails to pay the sum called and payable in respect of the share within the period as specified in the first
call notice, the second notice should be sent to the concerned shareholder, giving an additional period of
three months specifying clearly that if the payment is made within that period, it shall be accepted, along
with interest at the prescribed rate, and if the shareholder fails to make payment even within that period,
his/her share shall be liable to be forfeited. In case of a public company, such notice should also be
published in a daily newspaper with national circulation for at least three times. If the installment called is
not paid even within the time-limit as mentioned in the second notice, the company may forfeit shares
after retaining the number of shares as fully paid up to the extent of the amount paid on the shares, in
respect of which the company has given such notice or also to the extent of the amount of dividends, if
any, attached in respect of such shares.
In the given case, Mr. Mohan Das has already paid 50% of the share amount. As mentioned above, the
Companies Act 2063, does not allow Petrochemicals Ltd. to forfeit all her shares, but only the half of
shares issued and allotted to him. The company should retain 12,500 number of shares fully paid and the
remaining shares may be forfeited. His claim is legally tenable that all his shares should not be forfeited,
but only the shares for which he failed to pay.
Answers No 2:
a. Shares of a member in a company is considered as moveable property capable of being transferred or
can transfer in the manner provided by the articles of association of the company. In pursuance to
section 42(1) of Companies Act, 2063 and the Memorandum and Articles of Association, the shares
of company may be sold, mortgaged, or pledged as security like moveable property. So Hari Krishna,
a shareholder of the company is entitled to sell and transfer all his shares to Buddhi Prasad, another
shareholder of the company, if Buddhi Prasad is interested to have all the shares of Hari Krishna. Hari
Krishna also has to fulfill the process of the transfer of shares i.e. the approval of the Board of the
company in this respect.
b. Although share is considered as moveable property of a person and is also entitle to dispose it, this
right is not absolute especially in case of private company. The memorandum and article of
association of private companies as against public company contain more rigorous restriction on the
right of its members to transfer shares. The regulation of the company may impose fetters upon the
right of transfer. If the consensus agreement made between the shareholders of the private company
strictly restricts on the transfer of shares, it may not allowed to transfer without complying the
agreement. Accordingly, Section 42(2) of the Companies Act, 2063 imposes certain conditional
restrictions in the sale and transfer of shares, such as, a promoter other than a private company which
has not borrowed loan from any other company may not sell and transfer the shares taken up by him
until the first general meeting of the company is held and all calls of the shares issued in his name are
fully paid-up.
Section 10(c) of the Companies Act, 2063 requires a private company not to sell its shares in public;
it also means that a shareholder of a private company cannot sell its shares in public.
Answer No 3:
Section 71 of the Companies Act, 2063 prescribes the provision regarding right to vote in general
meeting. According to it, the person whose name is registered as shareholder in the shareholder register
book will be entitle to attend the general meeting and cast the vote in the general meeting. Unless the

Articles of Association prohibits, a shareholder who is entitled to vote is not able to personally attend the
meeting, he/she may appoint a proxy to vote in his/her stead, by an instrument of proxy executed in the
prescribed format and signed by him/her and the proxy so appointed shall be entitled to attend or vote in
the meeting, except where the Articles of Association of the concern company so prohibits.
However there are certain cases where the voting rights can be restricted. Section 70 of the Companies
Act, 2063 prescribes the cases of restriction on voting on where a bank or financial institution
incorporated under the prevailing law, which institutes legal action against a shareholder, who has
borrowed a loan from such bank or financial institution against the pledge or security of the shares held
by him/her, for his/her default in repaying the loan, writes to the concerned company to prevent him/her
from exercising voting right in respect of shares, then the company shall prevent such shareholder from
exercising voting right in respect of the shares held by him/her for a period until he/she repays the loan.
As provided under section 70 (5) where a bank or financial institution incorporated under the prevailing
law, which institutes legal action against a shareholder, who has borrowed a loan from such bank or
financial institution against the pledge or security of the shares held by him/her, for his/her default in
repaying the loan, writes to the concerned company to prevent him/her from exercising voting right in
respect of shares, then the company will prevent such shareholder from exercising voting right in respect
of the shares held by him/her for a period until he/she repays the loan.
In the given issue it is claimed that since Mr. Adhikari is defaulter in repaying the loan he must be
prevented from exercising voting right in respect of shares in the annual general meeting for a period until
he repays the loan is maintainable.
Answer No 4:
Section 112 of the Companies Act, 2063 prescribes disqualifications of auditor. According to Section
112(1) following persons shall not be qualified for appointment as auditor and will not continue to hold
office, despite appointment as auditor,
a. A director, advisor appointed with entitlement to regular remuneration or cash benefit, a person or
employee or worker involved in the management of the company or close relative of a director or
and employee of such relative.
b. A debtor who has borrowed moneys from the company in any manner or a person who has failed
to pay any dues payable to the company within the time limit or close relative of such person.
c. A person who has been sentenced to punishment for an offense pertaining to audit and a period of
three years has not elapsed thereafter.
d. A person who has been declared insolvent.
e. A substantial shareholder of the company or a shareholder holding one percent or more of the
paid up capital of the company or his close relative;
f. A person who has been sentenced to punishment for an offense of corruption, fraud or a criminal
offense involving moral turpitude and a period of five years has not elapsed thereafter.
g. An auditor, who has been appointed as an auditor for more than three consecutive terms to
perform the audit of a public company.
h. A company or corporate body with limited liability.
i. A person having interest in any transaction with the company.
According to Section 112(2) the auditor, prior to his appointment, should give information in writing to
the company that he is not disqualified pursuant to sub-section (1). Similarly under Section 112(3) if any
auditor becomes disqualified to audit the accounts of a company or there arises a situation where he
becomes disqualified for appointment or cannot longer continue to act as an auditor of the company, he
should immediately stop performing audit which is required to be performed or is being performed by
him and give information thereof to the company in writing. Under Section 112(4) the audit performed by
an auditor who has been appointed in contravention of this Section will be invalid.

Under Section - 2(z9) of the Companies Act, 2063 "Close relative" means a partition member of an
undivided family or husband, wife, father, mother, mother-in-law, father-in-law, elder brother, younger
brother, elder sister, younger sister, sister-in-law (elder or younger brother's wife), brother-in-law, sister-
in-law, brother-in-law (husband of elder sister), uncle, aunt, maternal uncle, maternal aunt, son, daughter,
daughter-in-law, grand-son, grand-daughter, grand-daughter in- law or son-in-law.
Considering the provisions of Section 112(1)(e) read with Section 2(z9) the appointment of the auditor is
invalid and has to be given up immediately notifying the company.
Answer No 5:
In the given case, it is clear that Pathibhara Insurance Ltd. has not obtained an approval from the Office of
Company Registrar to commence the business. Further, it is also evident that no license has been issued
for the insurance business by the Insurance Board. Provision of Sub-Section (6) puts a condition that in
case of a company having a business that requires approval from the regulating authority, the business
may be commenced only after such approval has been issued. Pathibhara Insurance Ltd. being an
insurance company having license yet to be issued and the approval for commencement of business yet to
be issued, cannot hold the annual general meeting.
Under Section 63(1) of the Companies Act, 2063, no public company should commence its business
without obtaining an approval from the Office of Company Registrar to carry on its business. Section 63
(4) states that without obtaining the approval to commence business no public company should carry out
any act of creating liability or publishing the prospectus. It allows the company to hold extraordinary
general meeting and meeting of the board of directors and operate the management of the company. The
Companies Act does not categorically denies the convening of an annual general meeting. However, the
exceptions to the activities are listed down such as extra ordinary general meeting, board meeting and
management of the company. Annual general meeting has not been put as a exception.
Answer No 6
According to Section 111(1) of the Companies Act, 2063, appointment of an auditor for a public limited
company is the power and obligation of a general meeting of shareholders. There is no authority of the
general meeting that it could delegate its power to the board of directors. Ganesh Hotels Ltd. is a public
limited company. The general meeting of a private limited company can delegate its power to the board of
director to appoint the auditor if the memorandum of association, articles of association or a consensus
agreement had allowed it to do so.
Section 113 gives a solution to a case where the auditor could not be appointed in the general meeting. It
states that in case an auditor could not be appointed in an annual general meeting for any reason or an
annual general meeting could not take place or an auditor appointed in accordance with the provision of
the Companies Act, 2063 could not continue for any reason, the Office of Company Registrar may
appoint the auditor on request from the board of directors.
In the given case, the board of directors could request the Office of Company Registrar for appointment
of auditor but in no case is allowed to appoint by itself regardless of the delegation of power. The
appointment of auditor by the board of directors is not valid.
Answer No 7
Section 21 of the Companies Act 2063 prescribes the provision regarding the amendment of
memorandum of association and articles of association as follows:
1. The general meeting of a company may, amend the memorandum of association or articles of
association, by adopting a special resolution to that effect.

2. The company should give information of any amendment made to the memorandum of association or
articles of association pursuant to Sub-section (1) to the Office within thirty days; and the Office will
record the same and give information thereof to the concerned company, within seven days after the
receipt of such information.
3. If any company has to amend its name along with memorandum of association and articles of
association, it should adopt a special resolution to that effect at its general meeting and make an
application, accompanied by the fees as prescribed, for prior approval of the Office: and if the Office
gives approval to amend the names as per the application so received, the name of that company will
be amended.
Under Section 21(4) of the Act, if a shareholder of a public company who is not satisfied with an
amendment made to the objectives of the company may, on fulfilling the following requirements, file a
petition, setting out the reasons therefore, in the court to have that amendment declared null and void:
(a)A shareholder or shareholders holding at least five percent shares of the paid-up capital of the
company, except the shareholders who consent to or vote for the amendment or alteration, may make a
petition within twenty one days after the adoption of the resolution to amend the objectives of the
company. Where anyone is to file a petition on behalf of one or more than one shareholder entitled to
make petition, the petition has to be filed by a person who is authorized in writing for that purpose.
Unless and until the court is satisfied that the information about the contents, date, time and venue of a
petition made as said above has also been given to the company, the petition shall not be heard. Where a
petition is filed in the court as said above, the amendment made to the objectives of the company will not
be effective pending the final decision or order by the court in that matter. On a petition as referred above,
the court may issue an appropriate order, specifying the following terms and conditions:
a. Declaring the amendment made to the objectives of the company to be fully or partly valid or void,
b. Requiring the company to subscribe for a reasonable value, the shares and other rights held by the
shareholders making a petition under Sub-section (4), upon being disagreed with the making of
alteration in the main objectives of the company,
c. The shares have to be subscribed under Clause (b) from the moneys as referred to in Sub-section(2) of
Section 61; and in the case of a company which has no such moneys, issuing an order to decrease the
capital of the company as if the share capital were decreased to the extent of such subscription by
adopting a special resolution by the company; and where such order is issued, the company shall
amend its memorandum of association and articles of association, subject to the provisions of the Act.
Where an order is issued by the court to fully or partly void the decision made by the company to amend
its objectives, the company will not be entitled to amend its memorandum of association or articles of
association in that matter without permission of the court or in a manner contrary to the order of the court.
Where the memorandum of association or articles of association of a company is altered by an order of
the court or the amendment made by the company is fully or partly endorsed by the court, such alteration
or endorsement shall be enforced as if such alteration or endorsement were made by the general meeting
of the company on its own.
In the given issue it is not clear, if the shareholder, who is not satisfied with the resolution passed
regarding the amendment of objective clause, possess the shares at least five percent shares of the paid-up
capital of the company, and the information about the contents is enough to proceed the case. If possess
all required conditions, the court may entertain the petition and will be decided the case accordingly.
Answer No 8:
In the given question, Mr. Sharma FCA has entered in to an agreement with M/S Fabrics Pvt. Ltd.
representing him in tax settlement commission with charging fee on the basis of expected relief to the
client as a result of the settlement commission. Section 34 of the Chartered Accountant Act, 2053 has
prescribed the provision regarding conduct to be observed by the member. Member having obtained
professional certificate shall fully observe this Act or the Rules framed under this Act. As per subsection
10 of Section 34 of the Nepal Chartered Accountant Act, 2053 no member having obtained the

professional certificate shall base the remuneration to which he or she is entitled for his or her work on a
percentage of profits or on any other uncertain result and, or any other. Hence, the arrangement made by
Mr. Sharma FCA is not in accordance with the Nepal Chartered Accountant Act 2053. Mr Sharma shall
be liable for the professional misconduct.
Answer No 9
Objectives of ICAN:
ICAN has an important role to make accounting profession as reliable, authentic and standard for its
accuracy and enhance economic and social responsibility as a cause for economic development of the
nation. As per Section 5 of the Nepal Chartered Accountants Act, 2053, the objectives of the Institute
shall be as follows: -
a To play the role of a regulatory body to encourage the members to carry on accounting
profession being within the extent of the code of conduct in order to consolidate and develop
accounting profession as a cause for economic development of the nation.
b To enhance social recognition and faith in accounting profession by raising awareness of the
general public towards the importance of accounting profession and the economic and social
responsibility of professional accountants.
c To develop, protect and promote the accounting profession by enabling professional accountants
understand their responsibility towards the importance of accounting profession and accountancy.
d To develop mechanism of registration, evaluation and examination of accounting professionals in
consonance with international norms and practices so as to make the accounting profession
respectable and reliable.
Formation of the Council:
Pursuant to Section 7 (3), the Council shall consist of the following Council members:-
• Ten persons elected by and amongst Chartered Accountant members- Member
• Four persons elected by and amongst Registered Auditors Member
• Three persons nominated by Government of Nepal, upon the recommendation of the Auditor
General, from amongst the persons well experienced in the field of accounting profession.
Member
Election of President and a Vice-President:

Sub-section (4) provides the election of the President and a Vice-President. It reads that the Council
members shall elect a President and a Vice-President from the Fellow Chartered Accountants (FCA)
Council members referred to in clause (a) of subsection (3). The term of office of the chairperson and the
vice- chairperson shall be one year; and upon the expiry of their term of office, they may be elected for
one more term.
Answer No 10
Nepal Chartered Accountant Rules, provides opportunities to foreign nationals qualified from ICAN to
practice the accountancy profession as follows:
Rule 56: Person other than Nepali citizen can practice accountancy profession:
(1) Notwithstanding anything contained anywhere in this Nepal Chartered Accountants Rules, 2061, any
foreign citizen eligible according to these rules can perform accountancy profession in Nepal only after
registering a firm in partnership with a citizen of Nepal.
(2) Nature, scope and limitations of the firm in partnership according to sub-rule (1) shall be as decided
by the council.
(3) Notwithstanding anything contained anywhere in this Nepal Chartered Accountants Rules, 2061 a
foreign citizen performing accountancy profession acquiring membership from the ICAN shall have to

register a firm in partnership as stated in sub-rule (1) within 2 years of the date these rules came into
effect. Rule 58 (5) states the share of a foreign citizen as a partner in an accounting firm shall not exceed
51%.
Answer No 11:
As per Section 38 of Banks and Financial Institutions Act, 2073 any licensed institution of a lower class
which meets the following conditions may, with the approval of the Rastra Bank, be converted into a
licensed institution of one level higher class: Provided that the D class institution shall not be converted
into higher class institution.
(a) If it has the capital prescribed by the Rastra Bank for a licensed institution of such higher class,
(b) If it has been able to earn profits, maintained capital fund as prescribed by NRB and its total non-
performing loan is within the limit prescribed by NRB since five consecutive years,
(c) If it has written off preliminary expenses,
(d) If the shares required to be issued for general public are issued and allotted,
(e) If the general meeting has passed special resolution for conversion of license institution of higher
class,
(f) If it has met all conditions as prescribed by Nepal Rastra Bank.
If on receipt of the approval referred to above, Nepal Rastra Bank shall cause the concerned licensed
institution to amend its memorandum of association and articles of association in accordance with the
laws in force and grant license of higher class institution. In this case Excel Development Bank Limited is
operating in profit continuously since last 6 years. If it satisfies all other conditions as mentioned above it
may be upgraded into 'A‗class Bank with the approval of Nepal Rastra Bank.
Answer No 12
Section 21 of the Banks and Financial Institution Act, 2073 has explained the meeting of board of
directors as follows:
1. Meeting of Board of directors should be held for a minimum twelve times in a year; provided interval
between two meetings should not be more than two months.
2. Meeting should be called by chairman if one third of board of directors request for it in writing.
3. The chairman will preside over the meeting of the board of directors. In the absence of chairman one
person nominated by the majority of the board of directors shall preside over the meeting.
4. No meeting of the board of directors will be held unless minimum 51 percent of the number of
members of the board of directors entitled to vote there are present.
5. The decision of a majority will be accepted in the meeting of the board of directors will be binding
and in the event of tie votes or votes are equal, the decisive (casting) vote can be given by the
chairman.
6. Director cannot participate in the meeting where proposal involving his personal interest is to be
discussed.
7. Minutes of the meeting to record the names of the directors present, the matters discussed and the
decisions made at the meeting shall be kept in a separate register and the same shall be signed by all
the directors present at the meeting. However if any directors is supposed to the decision made in the
meeting or has different views on the matter, the same can be record in the minutes book.
Answer No 13:
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
Answer No 14:
According to Section 24 of the BAFIA, 2073 has provided the matters to be disclosed after assuming the
office by every director. As per the Section, every director shall disclose in writing to the bank or
financial institution the following matters:
1. Full name, address, academic qualification and experience of director.

2. If he or she is a director, office bearer or employee of any other institution, the details of such post
and responsibility thereof.
3. If he or she or any of his or her family members has entered into or going to enter into any kind of
contract with the concerned bank or financial institution, details thereof.
4. If he or she has any kind of interest in the appointment of the chief executive, managing director,
secretary, auditor and general manager, details thereof.
5. Particulars of such shares or debentures in the concerned bank or financial institution or in its holding
or subsidiary company as subscribed by him or her or by his or her family.
6. If he or she is a director of any company, details thereof.
7. If any member of his or her family is working as an officer of the bank or financial institution, details
thereof.
8. Power of Attorney given to the Nepal Rastra Bank to or caused to enquiry regarding the director's
financial and professional background or to or caused to exchange of such notice or information.
9. Self-declaration of his eligibility to be a director as per the Act.
10. Such other details prescribed by the Nepal Rastra Bank as required to be disclosed by the director to
the Board.
Answer No 15
Section 32 of Nepal Rastra Bank Act, 2058 has laid down the provisions of prohibition on vested
personal interests. The Act states:
(1) After appointment to the office of Governor, Deputy Governor or Director shall, in each six months,
should disclose, as prescribed to the Board about any direct or indirect commercial interest of
himself/himself or of his/her family members.
(2) Where any resolution involving personal interest of the Governor, Deputy Governor or Director, shall
disclose to the Board about his personal interest on any matter to be discussed in the meeting of the
Board, prior to the beginning of discussion on such matters. No such Director shall take part in that
meeting.
(3) The Governor and Deputy Governor should make it public the details of property held in his/her
name and in the name of his/her family members within one month from the date of appointment and
retirement.
Answer: No 16:
In pursuance to section 66 of the Nepal Rastra Bank (NRB) Act, 2058, NRB will mobilize Foreign
Exchange Reserve in the following manner:
(1) NRB will mobilize the foreign exchanges reserve. Such reserve will be denominated in the respective
foreign exchange and such reserve will 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 will maintain international reserve at a level, which will 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 will make further
such report and recommendations to Government of Nepal.
(6) NRB will hold the foreign exchange reserve referred to in sub-section (1) in its balance sheet.
Answer No 17:
As per Section 7 of Nepal Rastra Bank Act, 2058, following functions are not to be carried out by Nepal
Rastra Bank:
 Providing any loan, accepting any type of deposit or making any type of financial gift;
 Purchasing shares of any commercial bank, financial institution, public corporation or a company
or acquiring any type of proprietary right in any financial, commercial, agricultural, industrial or
other institution;
 Carrying out any type trade; and
 Acquiring right over movable and immovable property by way of purchase, lease or in any
manner whatsoever; provided that the Bank may acquire such property as required for carrying
out its function or for achieving its objectives.
NRB may carry out the following functions: -
(a) To provide loan to and invest in the shares of the institutions which carry out the functions
helpful in carrying out the function of the Bank or in attaining its objectives, not exceeding 10%
of the total capital of such institutions.
(b) To provide loan to its own employees.
Answer No 18
Section 25 of the Industrial Enterprises Act, 2073 provides additional facilities and concessions for
women entrepreneurs: The additional facilities and concessions are as follows:
1. Notwithstanding anything contained in the prevailing laws, the concession of 35% shall be provided in
the registration fee prevailing at the time of registration if any industry is registered under the sole
ownership of women entrepreneur.
2. Notwithstanding anything contained in the prevailing laws, the concession of 20% shall be provided in
the registration of industrial assets prevailing at the time of registration of assets to any industry registered
under the sole ownership of women entrepreneur,
3. If women entrepreneur wishes to establish industry in an industrial area, she shall be availed space
inside the industrial area with priority as prescribed.
4. Industry registered with the sole ownership of women entrepreneur may be availed export credit as
prescribed for the purposes of export of its industrial production on the basis of financial position of the
business.
Answer No 19:
As provided in the preamble of the Act, the objective of the Industrial Enterprises Act, 2073 is as
follows:
 To create the conducive Industrial Environment of the country, with friendly investment policy,

 To create the increment of the national productivity and employment opportunities,
 To develop the effective, dynamic and production oriented economic policy in the nation,
 To make optimum use of available natural, physical and human resources of the country,
 To give emphasis to promote export by replacing the import through the means of industrial
development,
 To create production oriented dynamic economic policy in the nation
 In substance the Act is enacted for the promotion of industry, establishment and promotion of
investment with a view to speed up of the industrialization by making simple policy.
Answer No 20
As per Section 19 of Industrial Enterprises Act, 2073, in addition to the other function, duties and power
mentioned in this Act, the function, duties and powers of the Industry and Investment Promotion Board
shall be as follows:-
(b) To decide policies related to industrial promotion, investment protection related to enhancement of
industrialization,
(c) To resolve obstacles and confusions in respect of enforcement and implementation of law of
Industry,
(d) To observe and examine regularly country‗s overall industrial policy, legal structure and their system
and to recommend GON for necessary reformation,
(e) To decide policy matters on the basis of existing law regarding foreign investment and technology
transfer,
(f) To cause to follow the ways and means for the prevention of the Environmental pollution,
(g) To recommend GON regarding examination and evaluation of position of industrial development in
the country,
(h) To resolve any difficulties or obstacles regarding the services, facilities by the industries to be
provided to the industries under this Act,
(i) To give direction to the concern authorities resolving problem or cause to resolve by going through
the complaint of the entrepreneurs,
(j) To recommend GON in respect of level, classification and nature of the industries,
(k) To recommend GON relating to the promotion and encouragement of promotion of investment
through research and survey,
(l) To decide policy for ensuring the quality of the goods product,
(m) To advise GON relating to the enforcement of integrated industrial management information,
(n) To do or cause to do for the development of effective competitive and coordinated performance
between the public, private and cooperative sectors,
(o) To do or cause to do act to gain speed of industrialization in the country,
(p) To give directives to the concern authorities to provide facilities and on receipt of the complaint in
this regard,
(q) To perform or cause to perform other acts as prescribed.
Answer No 21
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
Answer No 22:
Section 37 of Industrial Enterprises Act, 2073 defines Sick industries as industry which has been in
operation from last five years from the date of commercial production or commencement of transactions
and is in consecutive loss from last three years not due to intention of the management or weak
management of the industry and Production capacity of such industry is 30% or less than 30% of the total
installed capacity. If above circumstances arises Government of Nepal by making necessary bylaws shall
declare such industry as sick industry.
Section 38 of Industrial Enterprises Act, 2073 defines sick industry into three categories namely: Fully
Sick Industry, Sick Industry and Oriented towards Sick industry.
Answer No 23
To regulate and manage the activities of the securities markets and persons involved in the business of
dealing in securities by regulating the issuance, purchase, sale and exchange of securities for the purpose
of protecting the interests of investors in securities, Securities Act, 2063 is enacted. According to the
provision prescribed by the Securities Act, 2063 the body corporate will issue its securities under as
follows:
Under Section 27(1) of the Act, a body corporate will have to register securities to be issued by it with the
Securities Board of Nepal (SEBON) prior to their issuance. For this a body corporate will have to make
an application in the prescribed format, accompanied by its memorandum of association, articles of
association, documents related with such securities, and the prescribed fees, to the SEBON for registering
securities.
Where an application is received the SEBON will make necessary inquiry into the matter and, if it
considers appropriate to register such securities, register such securities in the register as prescribed,
indicating the details of such securities and issue the securities registration certificate in the prescribed
format to the concerned body corporate.
Under Section 28 where a body corporate allots or sells securities after registering such securities, the
body corporate will have to give a notice along with the details of securities so allotted or sold to the
SEBON within seven days.
Upon receipt of a notice as referred as above, where it appears necessary to make the allotment and sale
of such securities fair and informative for the interests of investors and the body corporate, the Board may
give necessary directive to the concerned body corporate. It shall be the duty of the concerned body
corporate to abide by such directive.
Under Section 29 where a body corporate is to sell and distribute securities to more than fifty persons at a
time, it shall make public issue for the sale and distribution of such securities. The period to be open for
making application of the securities to be issued as above shall be as prescribed. The provisions relating
to the value and allotment of securities for which public issue has to be made will be as prescribed.
Where securities for which public issue has been made once could not be sold and have to be re-issued
again within one year, the body corporate which so issues the securities may, with the approval of the

Board, issue such securities by mentioning the matters which are different than the matters set forth in the
previously published prospectus and the prospectus previously published.
Under section 30 a body corporate will have to get a prospectus approved by the Board for making public
issue of securities in accordance with this Act and publish the prospectus for information to all the
concerned. While publishing the prospectus in such a way, the prospectus shall also mention the place
where the general public can obtain or inspect the prospectus.
However, it is not required to issue a prospectus in the following securities:
(a) Securities issued by Nepal Rastra Bank,
(b) Securities issued against the full guarantee of the Government of Nepal,
(c) Securities proposed to be sold to up to fifty persons at a time,
(d) Securities issued to own workers or employees,
(e) Securities permitted by the Board as to issue and sell without issuing a prospectus.
Under section 31 The Board shall approve only a prospectus which contains such information as may be
adequate for investors to make evaluation as to the assets and liabilities, financial status, profit and loss of
the issuer and matters expected in future.
Under section 34 (1) Everybody corporate issuing securities shall provide information on the following
matters to the Board and its shareholders as soon as possible:
(a) Such matters as may be necessary and supportive to evaluate its financial condition,
(b) Such information as may be capable of affecting the transaction of stock exchanges or the value of
securities.
Under section 34 (2) body corporate issuing securities shall also provide the SEBON and its shareholders
with the notice and information as prescribed, in addition to the above matters.
Answer No 24:
An institution which carries securities business is also a body corporate, which is to be registered under
the Companies Act 2063. According to Section 56 of the Securities Act, 2063 it must obtain license from
the Securities Board under the Securities Act, 2063. Any institution desirous of carrying on dealing in
securities has to make an application with the required documents and fees as prescribed.
Section 57 (2) of the securities Act enumerates the matters to be provided at the time of making an
application to the board for carrying securities dealing business, which are as follows:
i. Type of securities business and services to be provided;
ii. If an agent is to be appointed to carry on securities business and if such business is to be carried on in
collaboration with others, matters pertaining thereto;
iii. In the case of those business persons, as prescribed, who are allowed to carry on business only upon
obtaining a membership of a stock exchange, a recommendation letter of the concerned stock exchange;
and
iv. Grounds proving the ability to carry on the proposed securities business and such other information as
may be specified by the board.
Answer No 25
Sections 53, 54 and 55 of the Securities Act, 2063 provide for stock exchange to establish a compensation
fund and operation of such fund. Section 53: provides the following:
(1) Stock exchange shall establish and operate a compensation fund as may be prescribed by the
Board in order to protect investors against possible loss or damage.
(2) The funds deposited to the fund referred to above shall be used to bear compensation as prescribed.
Section 54 provides for the operation of the fund as follows: The following provisions shall be made in
the Rules in relation to the operation of the compensation fund to be established pursuant to Section 53 or
55:
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 a 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; and
j. Other necessary provisions in relation to compensation.
Section 55 provides for the following:
If a stock exchange is not able to establish and operate the compensation fund pursuant to Section 53 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.
Answer No 26
Section 12 of the Securities Act, 2063 provides the circumstances on which a chairperson of Securities
Board of Nepal may be removed from office. Section 12 (2) states that the Chairperson, as the case may
be, shall be removed from the office in any of the following circumstances:
a. If one is disqualified to be a Chairperson, as the case may be, pursuant to section 11 of this Act,
i. One who is an office bearer of a political party.
ii. A person involved in securities business.
iii. One who is adjudicated as an insolvent.
iv. One who is insane.
v. One who has been convicted by the court of an offence involving moral turpitude.
b. If one commits any act contrary to the interest of investors in securities or any act that may cause loss
or damage to the development of capital markets.
c. If one suffers from lack of competence to implement, or cause to implement, such functions required
to be performed by the Securities Board to attain its objectives pursuant to this Act or the Rules
framed under this Act.
d. If one has been held disqualified to carry any occupation or business by the reason of misconduct and
his or her certificate has been revoked or he or she has thus been restricted to carry on business.
e. If one remains absent from three consecutive meetings of the Board without giving notice to it.
Section 12(1) states that, where there occurs a circumstance for removal of the chairperson of the Board
as above the Government of Nepal shall remove the Chairperson, as the case may be.
Provided that prior to making such removal, the Government of Nepal, shall not deprive the concerned
person of a reasonable opportunity to defend him/herself.
Answer No 27
Section 22 of the Labour Act, 2074 prescribes following provisions for engaging foreign national:
(1) No foreign citizen shall be permitted to be engaged at work by any employer without obtaining wok
permit from the Department.
(2) Notwithstanding anything contained in Sub-section (1), if the skilled worker as required by the
employer cannot be availed from Nepalese citizen, the employer may deploy foreign national at work as
provided in this section.

(3) Before appointing foreign national pursuant to subsection (2) the employer shall publish an
advertisement in national level newspaper for hiring skilled worker from the Nepalese citizens. If an
application from the Nepalese citizen as prescribed is not received or the Nepalese citizen could not be
appointed even after publishing an advertisement, the employer may submit an application to the
Department of Labor along with the evidence of such fact for the approval to appoint a foreign citizen.
(4) If it is found in conduction of an inquiry upon the submission of an application pursuant to subsection
(3), that a Nepalese citizen could not be available, the Department of Labor may grant work permit to
engage a foreign citizen.
(5) The employer who engages foreign citizens at work pursuant to Sub-section (4) shall have to make
arrangements for making the Nepalese citizens skilled and for replacing the foreign citizen gradually by
them.
(6) The work permit fee and other provisions shall be as prescribed.
Answer No 28:
As per section 38 of Labor Act, 2074, the remuneration of workers or employees shall not be deducted
expect under the following circumstances:
(a) In case it is required to deduct against absence,
(b) In case it is required to deduct against loss or damage of cash or kind of the Enterprise caused
intentionally or negligently;
(c) In case it is required to deduct in respect of contribution to provident fund or contribution amount in
respect of insurance or such other contribution amount in respect of social security,
(d) In case it is required to deduct any amount as per the order of judicial or quasi-judicial body,
(e) In case it is required deduct in respect of providing prescribed facilities;
(f) In case it is required to deduct in respect of advance or over payment of remuneration;
(g) In case it is required to deduct in respect of income tax or any other tax levied under prevailing laws.
(h) In case it is required to deduct any amount from remuneration as per collective agreement,
(i) In case it is required to deduct trade union membership fee.
The limit of amount to be deducted, the method of deduction, the period of deduction and other
related matters shall be as prescribed.
Answer No 29
Chapter 9 of Labour Act, 2074 states the various provisions regarding leave. Following are the
summary lists of such leaves:
1. Weekly Holiday (Section 40): Once in every week.
2. Public Holiday (Section 41): 13 days including May day in case of male worker and employee and
14 days including women day in case of female worker and employee.
3. Compensatory Leave (Section 42): If has to work continuously based on nature of work without
taking leave on weekly and public holiday. Such leave has to be taken within 21 days from the date of
working on weekly or public holiday.
4. Home Leave (Section 43): Worker and employee shall get home leave with remuneration considering
1 day home leave for 20 working days.
5. Sick Leave (Section 44): Worker and employee shall get 12 days sick leave with remuneration.
6. Maternity Leave (Section 45): Pregnant women shall get Maternity leave with pay of 14 weeks
before or after delivery. Similarly, father shall also get 15 days of leave with pay.
7. Bereavement Leave (Section 48): Any worker or employee shall avail bereavement leave of 13 days
as required by the religion/culture in case he/she has to observe obscurity during the death of his/her
close relative.

Answer No 30
In the case of government owned establishment, percentage of bonus and other conditions regarding
bonus shall be as decided by the Government of Nepal. It is not clear whether the government can decide
an overall policy for all the government corporations or can decide the policy individually for each
corporation. Bonus Rules, 2038 provide as follows:
(A) Amount to be allocated as Bonus by establishment owned by Nepal government:
1. Every establishment owned by Nepal government, other than a factory, shall be required to allocate
as bonus eight percent of the net profit made by it every fiscal. Provided that, in the case of
establishment for the purpose of trade or management on a monopoly bases in areas specified by
Nepal government, only such percentage as may be prescribed by Nepal government from time to
time shall be allocated for the payment of bonus.
2. Establishment owned by Nepal government, established for the promotion of administrative,
industrial, agricultural or other sectors without any profit motive, shall not be entitled to pay bonus.
3. Except in circumstances mentioned in sub-rule (2), Nepal government may if it so deems necessary,
issue an order sub-section (4) of section 5 of the act prohibiting the payment of bonus by any
establishment owned by it, other than a factory. An establishment that received shall not pay bonus,
and in case it has already made any allocation for the purpose of payment of bonus, it shall cancel it.
4. While imposing a ban under sub-rule (3), Nepal government shall not be required to assign any
reason for doing so. No complaint filed against such order shall be entertained.
(B) Ceiling on authorized amount of bonus to be obtained by employees of establishment owned by
Nepal government:
1. The maximum amount which employees of establishment owned by Nepal government other than a
factory, may obtain during a fiscal year, out of the amount allocated for the payment of bonus under
rule 6, shall be paid at the following rate, subject of sub-rule (2):
2. In the case of office-grade employees, and amount equivalent to one and a half months salary.
3. In the case of employees below the rank of officer, an amount equivalent to three months salary.
4. The maximum amount of bonus to be obtained by an employee of any rank during a fiscal year shall
not exceed Rs. 4,500.
5. Notwithstanding anything contained in sub-rules (1) and (2), in case a low percentage (profit) has
been set aside for the payment of bonus under the restrictive clause of sub-rule (1), bonus shall be
paid in such a way that an employee is paid an amount equivalent to one month‘s salary if the holds
the rank of office of a higher rank, ad to two month‘s salary if he holds a rank below it, or a
maximum amount of Rs. 3,000.
Section 2(b) defines a government owned establishment as an establishment which is wholly or majority
owned by the government and also the establishment in which such establishment has full or majority
ownership. Since different government and establishments are under the control of diriment government
departments and ministers, there is no probability that there will be uniform bonus policy for all the
establishments.
Answer No 31
As per section 6 of the Bonus Act, 2030;
(1) An employee who has worked at least half period in a fiscal year, shall be entitled to obtain bonus
under this Act. Provided that, no employee shall be entitled to obtain Bonus who has worked casually or
in a shift basis.
(2) For the purpose of Sub-section (1), the following periods shall also be computed as a period where an
employee has worked.
(a) A period kept on reserve under any contract under Labour Act, 2074.
(b) A period under which an employee is on any leave with salary.
(c) A period of disablement caused by accident arising in course of business of the
enterprise.

Answer No 32:
As provided under Section 28 of the Contract Act, 2056 bailee's liability as to the security and safety of
goods are as follows:
(1) A bailee shall look after and arrange for the safety of the property received by him/her as bailed
property as mentioned in the terms and conditions of the contract, or as his/her own property in case
nothing has been mentioned in the contract.
(2) Except when otherwise provided for in the contract, in case any bailed property depreciates or is lost,
stolen, damaged, destroyed, decreased or harmed because of a natural calamities despite taking care
and arranging for its security under Sub-section (1), the bailee need not return such property.
Provided that, in case the property is depreciated or is lost, stolen, damaged, destroyed decreased or
harmed because of the negligence or malfide intention of the bailee, or of his/her failure to take care
or ensure its safety according to the terms and conditions of the contract, he/she must return the
property or pay an equivalent amount to the bailer.
(3) In case the bailee uses the bailed property without having the right to do so under the contract or in a
manner contrary to the terms and conditions of the contract, and in case such use causes any loss,
damage, destruction, depreciation or harm to the property, the bailee shall pay for compensation to
the bailer.
(4) Except when otherwise provided for in the contract, the bailee shall not mix-up the bailer's property
with his/her own property.
Provided that, in case the bailee has mixed-up his/her own property with that of the bailer, both
parties shall have title on that property, as well as to the income accruing there from, in proportion to
their respective shares.
(5) In case the bailee has mixed-up his/her own property with the bailer's property and the property so
mixed-up can be separated, the two parties shall have title to their respective property so separated,
and the expenses incurred for separating the property so mixed and the loss, if any caused, to the
bailer while mixing-up such property in that manner shall be borne by the bailee.
(6) In case the bailee has mixed-up his/her own property with the bailer's property without the consent of
the bailer and their property cannot be separated as mentioned in Sub-section (5), the title of the bailer
to the bailee's property shall terminate if he/she agrees to obtain his/her share from the property so
mixed-up. In case the bailer does not agree to take his/her share from such property the bailee shall be
required to pay compensation for his/her property. Under section 11(d) of the Contract Act, 2056,
where any person kees under his personal possession any property belonging to another person that
may be kept as such under the law to keep that property as a bailment property.
In conclusion, bailee is responsible to return the bailed goods as it is and is also liable to make good the
loss, if any, caused to the bailer due to damage on the goods unless it was caused by natural calamity and
he exercised due and proper care irrespective whether it was a gratuitous or non gratuitous bailment.
Answer No 33:
Indeed, a contract is an agreement with a meeting of mind of the parties concerned. So, there should be a
meeting of mind in the performance also. Accordingly, the Contract Act, 2056 vide Section 75 provides
for the reciprocal performance of the parties and consequences for any failure, as follows:
(1) In case a contract has been concluded with a provision requiring both parties to simultaneously fulfill
their respective obligations, and in case one party fundamentally shows a conduct or intention of not
fulfilling his/her obligation the other party shall not be required to fulfill his/her promise.
(2) In case the order of priority relating to fulfillment of any promise has been specified in the contract
itself, it shall be fulfilled accordingly, and in case no such order of priority has been specified, the party
who is required to do so first according to the nature of the contract shall fulfill it.

(3) In case one promise cannot be fulfilled without fulfilling another promise under any contract
containing reciprocal promises, the party, which cannot execute the contract because of the failure of the
other party to fulfill its promise, may recover the loss or damage caused by the failure of the other party to
execute the contract.
(4) In case a contract of the type mentioned in Sub-section (1) has been concluded, and any party
obstructs the other party from performing the contract, the party which becomes unable to perform the
contract may terminate the contract and also recover any loss or damage suffered by him/her from the
termination of the contract in that manner.
Answer No 34:
a. Subrogation and Contribution
Subrogation Contribution
Question of Subrogation does not imply more than Question of contribution comes where there is more than
one insurer. one contract of insurance.
Subrogation is the substitution of one person in place Contribution is the right of the insurers to claim from other
of another person in place of another in relation to the some payment towards the loss and arises only where
claim, its rights, remedies or securities. there is double insurance. It takes place where different
insurers insure the same interest in respect of the same
property and the same perils.
Subrogation does not imply more than one insurance. Contribution implies more than one contract of insurance
each of which undertakes a similar, if not identical,
liability in respect of the same subject matter and the same
interest therein.
The objective is substitution of one person in place of The objective of contribution is to distribute the actual loss
another so that the one who is substituted succeeds to in such a way that each bears his proper share. No one
the rights and remedies of another person. insurer is more liable than any other, no more than the
whole loss can be recovered.
After satisfying the claim, the insurer stands in the In contribution, after making payment to the insured,
place of insured. He may recover from a third party recovers the amount that he has paid in excess of his share
who would have been liable to pay had there been no from other insurers.
insurance.
b. Insurance agent and insurance broker (in term of their qualifications)

Qualification of Insurance Agent
Any person who desires to apply for an Insurance Agent's License under Rule 19 must possess the
following qualifications:
1. He must have passed at least the SLC or equivalent examination in order to work as an Insurance
Agent for life insurance business.
2. He must be a literate person in order to work as an insurance agent for other insurance business.
3. He must have participated in an insurance agent's training program conducted by the Board, or an
institution recognized by the Board, and received a certificate of having completed that training.
Qualification of Insurance Broker

Any person applying for broker's license must have fulfilled the following conditions:
1. He must have won recognition as a corporate body subject to current law.
2. The authorized capital of the corporate body must amount to the figure prescribed by the board.
Provided that the Board shall fix the amount of authorized capital by framing definite guidelines.
3. Twenty-five percent of the total authorized capital of the corporate body must have been deposited in
term account of any commercial bank.
4. The person working as the Chief Manager of the corporate body must have gained 15 year's
experience in functions relating to insurance.
5. All other conditions prescribed by the Board must also be fulfilled.

Answer No 35
Section 13 of the Insurance Act, 2049 provides the grounds for the cancellation of registration of
insurer by the Insurance Board.
As per section 13 of Insurance Act, the Insurance Board may cancel the registration of an insurer
by providing a written notice with effect from the date prescribed in the same notice in the
following circumstances:
a. If the insurance business is not started within six months from the date of obtaining the
certificate.
b. If it is felt that the liability of the insurer exceeds its assets within Nepal.
c. If the insurer could not fulfill the liability pursuant to the decision within three months from
the date of final decision of the court in the case filed under the insurance policy issued
within Nepal.
d. If the head office of the insurance business of any foreign insurer is situated outside Nepal
and in case it felt that Nepalese insurer has not obtained equal facilities there which are
enjoyed by the foreign insurer pursuant to the prevailing law of such company.
e. If the insurer does not open its office inside Nepal.
f. If the insurer does not perform the functions to be performed or has performed any functions
which is not to be performed pursuant to this Act or the rule made under this Act.
Before cancelling the registration of an insurer pursuant to sub-section 1) above, the Insurance Board
shall provide a reasonable time-limit to submit clarification to the concerned insurer, stating the reason for
cancelling its registration.
If the concerned insurer does not submit its clarification within the time period mentioned in sub-section
2) above or clarification submitted by it is found not to be satisfactory, the Insurance Board shall cancel
the registration of such insurer pursuant to sub-section (1) above, and shall publish a notice in two major
newspapers to be published in Nepal for the public information in general.
Answer No 36
Section 17 of the Insurance Act, 2049 prescribes the responsibility of an insurer: According to it the
liability of an insurer will be as follows:
a) The insurer shall pay the compensation in case any actions against the rights and interests of the
Insurance policy holders cause losses by the insurer, employees of the insurer, insurance agents or
surveyors.
b) The insured may submit a complaint to the Board as prescribed , it the liability of compensation for
insurance claim is not assessed within the prescribed period of time or if the liability is assessed to the
disadvantage, or if the insurer does not pay the compensation pursuant to Sub-section (1)
c) The board shall make necessary investigation into the complain submitted pursuant to sub-section (2)
and shall provide a reasonable opportunity to the concerned insurer to submit clarification upon such
complaint.
d) If the clarification submitted by the insurer pursuant to Sub-sec(3) is reasonable , ) the board may
cancel such complaint by mentioning its ground. If the clarification is not reasonable, the board shall
make a decision to pay the reasonable compensation to the complainant.
e) If the board decides to give compensation to the complainant pursuant to sub-sec(4) the insurer shall
pay such amount for the compensation to the concerned insured.
If appeal is made against a decision by the board to pay compensation to the insured shall promptly pay
the compensation plus the interest on the amount of compensation to be set a t the rate as prescribed, for
the date of original decision to the date of final settlement of the case.

Answer No 37:
Pursuant to Section 3 of the Social Welfare Act, the Government of Nepal, by means of different
activities relating to the social welfare work, to support the overall development of the country may
operate the social welfare Program through the concerned Ministry and Social organizations and
institutions. Similarly, as per Section 4, the Government of Nepal may operate special Programs, relating
to the social welfare activity and social service, in the following matters:
(a) To serve interest and render welfare to the children, old age, helpless or disabled people.
(b) To foster participation in development and to promote and protect the welfare, rights and interest of
the women.
(c) 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.
(d) To help to lead a life with dignity to the jobless, poor and illiterate people.
(e) To manage religious places and the activities of the trust Guthi institutions.
(f) To take effective management and actions for the welfare of the backward communities and classes.
Answer No 38:
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.
Answer No 39:
S. N. Bill of Exchange Promissory Note
1 A bill of exchange contains an order to pay. Promissory note contains a promise to pay.
2 The primary liability is that of the drawee after The primary liability is that of the maker who
he has accepted the bill; the drawer ‗s liability is signs the note.
secondary.
3 A bill can be drawn payable to bearer, provided it A promissory note cannot be made payable to
is not payable on demand. bearer.
4 Bills of exchange are sometimes drawn in sets; In the case of promissory note, the necessity for
the position is not the same in the case of acceptance does not arise since the maker of the
promissory note. note is already liable upon it.
5 It cannot be drawn conditionally, but it can be A promissory note can never be conditional.
accepted conditionally with the consent of the
holder.
6 In the case of a bill of exchange, notice of These are unnecessary in respect of a promissory
dishonour, noting and protesting are required to note.
prove dishonor.
Answer No 40:

A person taking a cheque crossed generally or specially bearing in either case the words "Not Negotiable"
shall not have or shall not be able to give a better title to the cheque than the title the person from he took.
In consequence if the title of transferor is defective, the title of transferee would be vitiated by the defect.
The addition of the words "Not Negotiable" in a crossed cheque has a special significance. The use of the
words does not render the cheque non-negotiable but only affects one of the main features of
negotiability. The addition on the words "not negotiable" to the crossing of a cheque, makes the position
different. When such a crossing is placed on a cheque, the holder in due course does not get any better
title than what the transferor had. If the transferor had defective title, the title of holder in due course also
becomes defective. Therefore, he will have to refund the amount of the bill to the true owner. In other
words, the principle of the nobody can pass on a better title than what he himself has will be applicable to
a cheque with a "Not Negotiable" crossing. Thus, cheques with "Not Negotiable' crossing are negotiable
so long as their title is good. Once the title of the transferor or endorser becomes defective the title of the
transferee is also affected by such defect and the transferee cannot claim the right of holder in due course.
D shall not get good title of the instrument since transferor's title is defective. Here C steals the cheque
bearing Not Negotiable and transfer's it to D, despite he has no knowledge that cheque has been stolen. In
case of Not Negotiable crossing title of transferee also becomes defective once the title of transferor's is
defective.
Answer No 41:
Parties of the Negotiable Instrument are as follows:
i. Agent
ii. Heir
iii. Drawer
iv. Bank
v. Maker of promissory note and Acceptor of bill of exchange
vi. Endorser
vii. Parties to holder in due course
viii. Maker or drawer of Negotiable Instrument
ix. Prior party
x. Surety
Liability of the parties of the Negotiable Instrument as mentioned above is stated as follows:
i. Liability of an Agent: If an agent who signs his/her name to a Negotiable Instrument without
indicating thereon that he/she signs as an agent, or he does not intend thereby to incur personal
responsibility, is liable personally to such Negotiable Instrument.
ii. Liability of an Heir: If a person who signs his/her name to a Negotiable Instrument as an heir of a
deceased person is fully liable personally thereon unless he/she expressly limits his liability to the
extent of the assets received by him as such.
iii. Liability of Drawer: In case the Drawer has been provided due notice of dishonour of the bill of
exchange by the acceptor or Drawee, it shall be the duty of the Drawer to Compensate the Holder.
iv. Liability of the Bank Giving Payment of the Cheque: The Bank having sufficient funds of the Drawer
in the account, properly applicable to the payment of the Cheque must pay the Cheque, and, in default
of such payment must compensate the Drawer or Holder in due Course for any loss or damage caused
by such default pursuant to this Act.
v. Liability of Maker of Promisory Note and Acceptor of bill of exchange: The maker of a Promissory
Note or the acceptor of bill of exchange is bound to pay the amount thereof at Maturity when the
Negotiable Instrument is duly presented for the payment. In default of such payment, the maker of the
Promissory Note or the acceptor of the bill of exchange is bound to compensate any party payable for
any loss or damage sustained by him and caused by such default.

vi. Liability of Endorser: Any person who indorses and delivers a Negotiable Instrument expressly
limiting or excluding his/her own liability, shall be responsible to every subsequent Holder except
otherwise a contract is made thereto.
vii. Liability of the Parties to Holder in Due Course: Every prior party to a Negotiable Instrument is liable
thereon to a Holder in due Course until the instrument is duly satisfied.
viii. Liability of maker or drawer to be Equivalent to Principal Debtor: The maker or Drawer of the
Negotiable Instrument until acceptance, and the acceptor are in the absence of a contract to the
contrary respectively liable thereon as principal debtors, and the other parties thereto are liable
thereon as sureties for the maker, Drawer or acceptor, as the case may be.
ix. Prior party to be Equivalent to Principal Debtor in Respect of each Subsequent Party: As between the
parties so liable as sureties, each prior party is, in the absence of a contract to the contrary, liable
thereon as a principal debtor in respect of each subsequent party.
x. Liability of Surety: Notwithstanding anything contained in the prevailing laws, the surety of Bill of
Exchange cannot take stand that only in case the realization could not be possible from the property
of the principal debtor, shall be realized from his/her property, it can be directly realized from the
person being a surety.
Answer No 42
Followings are the basic opportunities of Nepal from the WTO membership:-
(i) Locking in the Liberalization Process WTO membership would help to lock in the ongoing
liberalization process and increase the credibility of initial reform.
(ii) Market Access: The most visible achievement of the Uruguay Round was the commitment on
market access through reduction in tariffs and elimination of WTO inconsistent non-tariff measures
and their bindings, which Nepal may use.
(iii) (iii)Freedom of Transit: Being a landlocked country, secure transit rights would be a major
achievement for Nepal, particularly she would have the legal right to trans-ship goods through
India, using the convenient port, for entry or exit.
(iv) Access to Dispute Settlement Body WTO ensures a common, stronger, faster, impartial, and a
binding mechanism for dispute settlement through Dispute Settlement Body (DSB). After WTO
membership Nepal has the right to challenge any unilateral measures taken by trading partners,
which are against her economic and trade interest, if they are inconsistent with the WTO provisions.
(v) Avoiding costs of Non-membership: As Nepal's major trading partners are members of WTO, she
could not have afforded to remain outside the system and pursue development policies in isolation.
Moreover, the rights and obligations of the Uruguay Round agreements are applicable only to
member countries.
(vi) Special Measures for Least Developed Countries: The WTO agreement has provided special
protective measures for least developed countries like Nepal, measures of special assistance e.g.
technical assistance in the development and strengthen and diversification of their production and
export bases, enable them to maximize benefit from liberalization process, etc.
(vii) Globalization of Foreign Economy: Free trade or open market policy may open up the country's
market all over the world.
(viii) Expansion of Foreign Investment through system of National Treatment.
(ix) Fair Competition: WTO requires fair competition in the world trade for all member countries which
may benefit Nepal.

Paper 4: Financial Management

Revision Questions
Capital Budgeting
Question No 1:
Dhangadhi Fun City Private Limited is evaluating on investment projects for investment in new
machinery to produce a recently-developed product. The cost of the machinery, which is payable
immediately, is Rs. 9,000,000, and the scrap value of the machinery at the end of four years, is expected
to be Rs. 800,000. Capital allowances (tax-allowable depreciation) can be claimed on this investment on a
25% reducing balance basis. Information on results from the investment has been forecast to be as
follows:
Year 1 2 3 4
Sales volume (units/year) 60,000 85,000 75,000 110,000
Selling price (Rs. /unit) 50 40 35 30
Variable cost (Rs. /unit) 15 16 17 18
Fixed costs (Rs. /year) 250,000 375,000 425,000 450,000
This information must be adjusted to allow for selling price inflation of 10% per year and variable cost
inflation of 5% per year. Fixed costs, which are wholly attributable to the project, have already been
adjusted for inflation.
Dhangadhi Fun City Private Limited pays profit tax of 25% per year on one year in arrears.
Dhangadhi Fun City Private Limited has a nominal before-tax weighted average cost of capital of 12%
and a nominal after-tax weighted average cost of capital of 7%.
Required:
Calculate the net present value of the project and comment on whether this project is financially
acceptable to Dhangadhi Fun City Private Limited.
Question No 2:
Answer the following questions with justifications:
(i) Discuss why we use cash flows and not accounting profits when evaluating projects.
(ii) Describe how the problem of poor project selection by the internal rate of return (IRR) method in
mutually exclusive projects can be overcome.
Cash Flow statement

Question No 3
Following are the condensed Balance Sheets of Trishakti Ltd. for two years and the Statement of Profit
and Loss for one year:
Balance Sheet as at end of Ashadh
(Figures in Rs. „000)
Particulars 2075 2074

Equity Share Capital 150 110
9% Redeemable Preference Shares 10 40
Capital Redemption Reserve 10 -
General Reserve 15 10
Profit and Loss Account balance 30 20
12% Debenture with convertible option 20 40

Other Term Loans 15 30
TOTAL 250 250

Fixed Assets less Depreciation 130 100
Long Term Investments 40 50
Working Capital 80 100
TOTAL 250 250
Statement of Profit and Loss

for the year ended 31st Ashadh, 2075
(Figures in Rs. ―000‖)
Sales 600
Less: Cost of Sales (400)
200
Less:
Establishment Charges 30
Selling and Distribution Expenses 60
Loss on Sale of Equipment 15
Interest Expenses 5 (110)
90
Add:
Interest Income 4
Foreign Exchange Gain 10
Dividend Income 2
Damages received for loss of reputation 14 30
120
Less: Depreciation (50)
70
Taxes (30)
40
Dividends (15)
Net profit carried to Balance Sheet 25
Chief accountant of Trishakti Ltd. informed that ledgers relating to debtors, creditors and stock for both
the years were seized by the income tax authorities for the purpose of investigation and the same would
not be available for at least three months. However, he is able to furnish the following data:
(Figures in Rs. „000)

Particulars Ashadh end 2075 Ashadh end 2074
Dividend receivable 2 4
Interest receivable 3 2
Cash on hand and with bank 7 10
Investment maturing within two 3 2
months
TOTAL 15 18
Interest payable 4 5
Taxes payable 6 3
TOTAL 10 8
Current Ratio 1.5 1.4
Acid test ratio 1.1 0.8
It is also gathered that debenture-holders owning 50% of the debentures outstanding as on Ashadh end
2074 exercised the option for conversion into equity shares during the financial year ending on Ashadh

2075 and the same was put through. Besides, an equipment was sold for Rs. 12,000 during the financial
year 2074/75.
Required:
Prepare a cash flow statement for the financial year 2074/75 under direct method.
Ratio Analysis
Question No 4
The following are the financial statements of Sunrise Ltd. for 2074/75.
Balance Sheet of Sunrise Ltd. as on Ashadh end 2074/75
Liabilities Amount (Rs.) Assets Amount (Rs.)

Equity Share Capital 550,000 Cash 200,000
Reserves 298,000 Debtors 600,000
Preference Share Capital 402,000 Stock 800,000
Long – Term Debts 1,100,000 Fixed Assets (Net) 1900,000
Creditors 100,000
Bills Payable 300,000
Outstanding Expenses 600,000
Provision for Tax 150,000
TOTAL 3,500,000 TOTAL 3,500,000
Income Statement of Sunrise Ltd.

for the year ending Ashadh, 2075
Rs. Rs.
Sales
Cash 400,000
Credit 1,400,000 1,800,000
Less: Expenses
Cost of Goods Sold 1,000,000
Selling, Administration and General Expenses 50,000
Depreciation 125,000
Interest on Long-term Debt 80,000 1,255,000
Profit Before Taxes 545,000
Taxes 327,000
Profit After Taxes 218,000
Less: Preference Dividend 30,000
Net Profit for Ordinary Shareholders 188,000
Add: Reserve at 1 Shrawan 2074 150,000
Profit Available to Ordinary Shareholders 338,000
Less: Dividend Paid to Equity Shareholders 40,000
Reserve at Ashadh end 2075 298,000
The ratios for the previous two years relating to the company and the industry ratios are given below:
2072/073 2073/74 Industry
Current Ratio 2.51 2.06 2.15
Acid-test Ratio 1.08 0.99 1.12
Debtors Turnover 5.80 4.90 6.00
Stock Turnover 3.79 3.02 3.79
Long-term Debt to Total Capital 31% 35% 34%
Gross Profit Margin 37% 40% 41%
Net Profit Margin 17% 15% 16%

Return on Equity 23% 28% 20%
Return on Total Assets 8% 7% 8%
Tangible Assets Turnover 0.80 0.70 1.00
Interest Coverage 9.5 8.89 9
Based on the above financial statement and ratios of the company and the industry provided
Above, you are required to:
a) Calculate the same ratios as provided above for 2074/75,
b) Evaluate the company‗s financial position of the company on the basis of these ratios and
Past ratios of the company and the industry,
Bond Valuation
Question No 5
Fun Limited has outstanding a Rs. 1000 face value bond with a 12% coupon rate and 3 years
remaining until final maturity. Interest payments are made semi-annually.
You are required to answer the following questions with appropriate supporting computations:
i) What value should you place on this bond if your nominal annual required rate of return is 10 percent;
and
ii) Assuming a bond similar to the one described above except that is a zero-coupon, pure discount bond,
what value should you place on this bond if your nominal annual required rate of return is 16 per cent.
(Assume a semiannual compounding.)
Equity Valuation
Question No 6
An investor has made investment in the equity share of INOX Private Limited. The Capitalization
rate of the company is 20 per cent and the current dividend is 25 per share.
You are required to calculate the value of the company‗s equity share if the company is slowly
sinking with an annual decline rate of 10% in the dividend.
Working Capital Management & Financial Forecasting

Question No 7
Green Private Limited has following annual figures;
Particulars Amount (Rs.)
Sales promotion expenses, paid quarterly in advance 450,000
Materials consumed (suppliers extend four months credit) 1,000,000
Sales (at three months credit) 4,200,000
Wages paid (monthly in arrear) 200,000
Manufacturing expenses outstanding at the end of the year 55,000
(Cash expenses are paid one month in arrear)
Total administrative expenses, paid as above 151,000
The company sells its products on gross profit of 25% counting depreciation as part of the cost of
production. It keeps three month stock of raw materials and two months stock of finished goods,
and a cash balance of Rs. 55,000.
Assuming a 10% safety margin, work out the working capital requirements of the company on
cash cost basis. Ignore work – in – process.

Receivable management
Question No 8
National Trading Limited currently has annual sales of Rs. 500,000 and an average collection
period of 30 days. It is considering a more liberal credit policy. If the credit period is extended, the
company expects sales and bad debt losses to increase in the following manner:
Credit Policy Increase in credit period Increase in sales (Rs.) Bad debts % of total Sales
A 10 days 25,000 1.2
B 15 days 35,000 1.5
C 30 days 40,000 1.8
D 42 days 50,000 2.2
The selling price per unit is Rs. 2. Average cost per unit at the current level of operation is Rs. 1.50 and
variable cost per unit is Rs. 1.20. The current bad debt loss is 1% of the total sales and the required rate of
return on investments is 20%. Ignore taxes and assume 360 days in a year.
Required:
Recommend the credit policy to be adopted.
Cash Management
Question No 9
Rato Gurans Resort & Training Center Private Limited writes cheques that average Rs 20,000 daily.
These cheques take an average of 6 days to clear. It receives payments that average Rs 22,000 daily. It
takes 3 days before these cheques are available to the firm. Calculate payment float, collection float and
net float.
Cash Conversion Cycle

Question No 10
The Aarav & company annual sale is Rs 1,440,000 and annual credit purchases are Rs 864,000. The
company has following current assets and liabilities;
Inventory Rs 240,000
Receivables Rs180, 000
Accounts payable Rs 120,000
Calculate Inventory conversion period, receivable conversion period, payable deferral period & cash
conversion cycle?
Dividend Distribution Policy

Question No 11
Shikhar Private Limited has a target capital structure that consists of 30% equity rest debt. The Shikhar
anticipates that its capital budget for the upcoming year will be Rs 5,000,000. If Shikhar reports net
income of Rs 3,000,000 and follows a residual dividend payout policy, what will be its dividend payout
ratio?
Question No 12
For each of the companies described below, would you expect it to have a low, medium, or high dividend
payout ratio? Explain why?

a) A company with a large proportion of inside ownership, all of whom are high income individuals.
b) A growth company with an abundance of good investment opportunities.
c) A company that has high liquidity and much unused borrowing capacity and experiencing ordinary
growth.
d) A dividend paying company that experiences an unexpected drop in earnings from an upward sloping
trend line.
e) A company with volatile earnings and high business risk.
Capital Structure
Question No 13
As an investment manager, you are provided with the following information:
Investment in Initial Price Dividend (Rs.) Market Price at the Beta (Risk Factor)
(Rs.) year-end (Rs.)
Equity Share of 250 20 400 0.8
ABC Cement
Ltd.
Equity Share of 350 20 600 0.7
BCD Sugar Ltd.
Equity Share of 450 20 1,050 0.5
DEF Distillery
Ltd.
Government of 1,000 140 1,005 0.99
Nepal Bonds
Risk-free return may be taken at 15%.

You are required to calculate:
i) Expected rate of return on market portfolio,
ii) Expected rate of return of individual portfolio using Capital Asset Pricing Model (CAPM),
iii) Average return of portfolio.
Question No 14
The capital structure of Kosheli Collection Pvt. Ltd. as at Ashadh End 2075 was as under:
Particulars Rs. (in lakhs)
Equity share capital 80
Reserves 32
8% preference share capital 40
12% debentures 64
Kosheli Collection Pvt. Ltd. earns a profit of Rs. 32 lakhs annually on an average before deduction of
income-tax, which works out to 35% and interest on debentures.
Normal return on equity shares of companies similarly placed is 9.6%
Provided:
a) Profit after tax covers fixed interest and fixed dividends at least 3 Times
b) Capital gearing ratio is 0.75
c) Yield on share is calculated at 50% of profits distributed and at 5% on undistributed Profits.
d) Kosheli Collecion Pvt. Ltd. has been regularly paying equity dividend of 8%.

You are required to compute the value per equity share of the company making suitable assumption as
regards the risk premium to be added in the case of Kosheli Collection Pvt. Ltd. as compared to the
industry average.
Leverage
Question No.15
The following details of Sagarmatha Ltd. for the year ended on Ashadh end, 2075 are given below:
Operating leverage : 1.4
Combined leverage : 2.8
Fixed cost (excluding interest) : Rs. 204 thousand
Sales : Rs. 3,000 thousand
12% Debentures of Rs. 100 each : Rs. 2,125 thousand
Equity shares capital of Rs. 100 each : Rs. 1,700 thousand
Income-tax rate : 30 per cent
Required:
Calculate the P/V ratio and Earnings per share (EPS).
Cost of Capital
Question No 16
XYZ Limited has following book value capital structure;
Particulars Amount (in
Lakhs)
Equity Capital (in shares of Rs. 100 each, fully paid - up at par) 1,200
9% Preference Share Capital (in shares of Rs. 100 each, fully paid- up at par 1000
11% Debenture (of Rs. 100 each) 900
13% Term Loan 360
Preference share, redeemable after 8 years, is currently selling at Rs. 90 per share. Debentures,
redeemable after 3 years, are selling at Rs. 75 per debenture. The next expected dividend per share on
equity shares is Rs. 24 and the dividend per share is expected to grow at the rate of 5%. The market price
per share is Rs. 350. The income tax rate for the company is 40%.
Required:
a) Calculate the weighted average cost of capital using market value proportion and
b) Determine the weighted marginal cost of capital for the company, if it raises Rs 400 lakhs next year,
given the following information:
i) The amount will be raised by equity and debt in equal proportions.
ii) The company expects to retain Rs. 120 lakhs earnings next year.
iii) The additional issue of equity shares will result in the net price per share being fixed at
Rs. 275
Time value of Money

Question No 17

Kohalpur Auto is offering free credit on a motorcycle costing Rs 100,000 for which Rs 40,000 should be
paid as cash down payment and rest at the end of 2 years. Dhangadhi Auto will give Rs 5000 off the list
price for the same motorcycle but does not offer free credit. Which company is offering the better deal to
buyers if market interest rate is 10%?
Risk & Return Theory

Question No 18
Consider the following information relating to two stocks, A and B:
Year Return on A (%) Return on B (%) Economic condition
Probability
2016 15 16 Good 0.5
2017 11 12 Bad 0.5
Required:
i) The expected return on a portfolio, containing A and B in the proportion of 25% and 55%
respectively.
ii) The standard deviation of return from each of the two stocks.
iii) The covariance of returns from the two stocks.
iv) Correlation coefficient between the returns of the two stocks.
Overview of Nepalese Capital Market

Question No 19
Siddhartha Limited issued 1 for 10 right shares on Jestha 20, 2075 at an exercise price of Rs. 100 per
share. Market value of its shares immediately prior to the rights issue was Rs. 290 per share. Siddhartha
Limited had 10 lakh shares before the issuance of rights shares. All rights were exercised by shareholders.
Calculate Theoretical Ex-right price.
Mutual Fund
Question No 20
The following particulars relates to Reliable Balance Fund – 1 scheme:
S.NO Particulars Amount
1 Investment in Fixed deposit 4,000,000
2 Investment in Shares at cost
 Life Insurance Companies 3,500,000
 Banking Companies 2,500,000
 Hydropower companies 5,500,000
 Non – Life Insurance companies 7,500,000
3 Cash and Other Assets in Hand (even throughout the fund period) 1,000,000
4 Expenses payables as on closing date 2,000,000
5 No of units outstanding 1,000,000
The particulars relating to sectoral index are as follows:
Sector Index on date of purchase Index on the valuation date

Life Insurance Companies 1400 2500

Banking Companies 1350 1100
Hydropower Companies 1500 2100
Non – Life Insurance Companies 1800 3700
You are required to compute:
i) Net Asset value of the fund
ii) Net Asset value per unit
iii) If the period under consideration is 3 years, and the fund has distributed Rs. 2 per unit per year as
cash dividend, ascertain the net return (Annualized)
Question No 21
Distinguish between:
a) Recourse and Non-recourse Factoring
b) Floatation cost and Transaction Costs
c) Business Risk and Financial Risk
d) Investment bankers Vs. Mortgage bankers
e) Risk aversion Vs. Risk diversification
f) Risk and Uncertainty
g) Financial distress and Insolvency
Question No 22
Write Short Notes on:
a) Leveraged Buyout
b) Debt trap
c) Significance of Debt-equity Ratio as a Measure of Long-term Solvency
d) Tax consideration influencing the dividend policy of the firm
e) Commercial paper
f) Financial distress
g) Line of credit with a bank

Answer No 1:
Calculation of net present value (NPV)

As nominal after-tax cash flows are to be discounted, the nominal after-tax weighted average cost of capital of 7% must be
used.
Calculation of Net Present Value (Rs.)

Particular Year 1 2 3 4 5
Sales revenue WN1 3,300,000 4,114,000 3,493,875 4,831,530
Variable costs WN2 (945,000) (1,499,400) (1,475,925) (2,406,690)
Contribution 2,355,000 2,614,600 2,017,950 2,424,840
Fixed Costs (250,000) (375,000) (425,000) (450,000)
Taxable cash flow 2,105,000 2,239,600 1,592,950 1,974,840
Tax Liabilities (526,250) (559,900) (398,238) (493,710)
CA tax benefits WN3 562,500 421,875 316,406 749,219
After – tax cash flow 2,105,000 2,275,850 1,454,925 1,893,008 255,509
Scrap value 800,000
Net Cash flow 2,105,000 2,275,850 1,454,925 2,693,008 255,509
DF at 7% 0.9346 0.8734 0.8163 0.7629 0.7130
Present Values 1,967,333 1,987,727 1,187,655 2,054,496 182,178
Present Value of Cash inflows = Rs.7, 379,389
Cost of Machine = Rs.9, 000,000
Net Present Value (NPV) = - Rs.1, 620,611
The project has a negative NPV of Rs. -1,620,611, so it is financially rejected to Dhangadhi Fun City Private Limited.
However, as this is a recently-developed product, it may be appropriate to use a project-specific discount rate that reflects
the risk of the new product launch.
Working Note 1: Calculation of inflation adjusted Sales Revenue
Year 1 2 3 4
Price Inflation 100% 110% 121% 133.1% 146.41%
Selling price (Rs./unit) 50 40 35 30
Inflated selling price (Rs./unit) 55 48.4 46.585 43.923
Sales revenue (Rs./year) 3,300,000 4,114,000 3,493,875 4,831,530
Working Note 2: Calculation of inflation adjusted Variable Cost
Year 1 2 3 4
Price Inflation 100% 105% 110.25% 115.762% 121.55%
Variable cost (Rs./unit) 15 16 17 18
Inflated variable cost (Rs./unit) 15.75 17.64 19.679 21.879
Variable cost (Rs./year) 945,000 1,499,400 1,475,925 2,406,690

Working Note 3: Calculation of capital allowance tax-benefits
Year 1 2 3 4
Capital Assets (Depreciation 9,000,000 6,750,000 5,062,500 2,996,875*
base) (Rs.)
Depreciation Rate 25% 25% 25%
Depreciation Amount (Rs.) 2,250,000 1,687,500 1,265,625 2,996,875
Tax Rate 25% 25% 25% 25%
Capital allowance tax benefits 562,500 421,875 316,406 749,219
(Can be adjusted in the year of
relevant tax payable)
*Note: Capital base for 4th year = 5,062,500-1,265,625-800,000 = 2,996,875
Answer No 2
i. Cash flows represent something that can actually be used to pay the capital suppliers. Accounting
profits do not equate to cash and so could not be taken to represent sums that could be paid to capital
suppliers. Accounting profits are drawn up on an accrual basis and include non-cash items, such as
depreciation. Accountants will also seek to apportion costs across the company, which may have no
bearing on a project‘s cash flows. A company may be making profits but the cash could be draining
out of the company. This is because the accounts don‘t reflect the cash expenditures on capital, or
movements in net working capital. Therefore, we use cash flows and not accounting profits when
evaluating
Projects.
ii. One of the failings of IRR is that it can give misleading guidance in project selection between
competing mutually exclusive projects. For example, project A may have a higher IRR than project
B, but actually has a lower NPV. Picking project A would not maximize shareholders wealth. To
overcome this problem, we can look at the differential cash flows of the two projects. Take the project
with the larger cash flows (defender), and then subtract from it the cash flows of the other project
(challenger). Calculate the IRR of the differential cash flows. If the IRR is greater than the cost of
capital, keep the defender (project A), and vice versa if the IRR is less than the cost of capital.
Answer No.3 Cash Flow Statement

For the year ended 2075
Cash flow from operating activities (Figures in Rs. ‘000)

Cash received from customers (WN 2) 621
Cash paid to suppliers & Employees (WN 3) (406)
Operating expenses paid (WN 4) (90)
Cash generated from operations 125
Income Tax paid (WN 5) (27)
Cash flow before extraordinary item 98
Add Extraordinary Items;
Foreign Exchange Gain 10
Damages for loss of reputation 14

Net cash from operating activities 122
Cash flow from investing activities

Purchases of fixed assets (WN 6) (107)
Proceeds from sale of Equipment 12
Proceeds from sale of investments (50 – 40) 10
Dividend Received (WN 7) 4
Interest Received (WN 7) 3
Net cash used in investment activities (78)
Cash flow from financing activities

Proceeds from issue of equity share capital (WN 8) 20
Redemption for Preference Share Capital (30)
Repayment of term loan (15)
Dividend paid (15)
Interest paid (WN 9) (6)
Net cash from financing activities (46)
Net Decrease in cash and cash equivalents (2)
Cash and cash equivalents at the beginning of the year 12
Cash and cash equivalents at the end of the year 10
Working Notes: (figures in Rs. ‘000)

1. Determining the value of Current Assets and Current Liabilities 2074 2075
Current Ratio 1.40 1.50
Working Capital 100 80
Current Liabilities (100/0.4) & (80/0.5) 250 160
Current Assets (250+100) & (160+80) 350 240
Acid Test Ratio 0.8 1.10
Quick Assets (QA) (CL * ATR) 200 176
Stock (CA- QA) 150 64
Other Current Assets (as given)
(Dividend + Interest + Cash Equivalents + Investment maturing) 18 15
Therefore, Debtors 182 161
Creditors 242 150
(CL – Interest payable – Taxes payable)
2. Cash Receipts from customers

Sales (on accrual basis) 600
Add: Opening debtors (WN 1) 182
Less: Closing debtors (WN 1) (161)
Cash Received from customers 621
3. Cash paid to suppliers

Cost of sales 400
Add: Opening creditors (WN1) 242
Closing stock (WN1) 64
Less: Closing creditors (WN1) (150)
Opening stock (WN1) (150)
406
4. Operating Expenses Paid

Establishment Charges 30
Selling & Distribution expenses 60
90
5. Tax paid during the year
Tax payable in the beginning 3
Add: Provision for tax 30
Less: Tax payable at the end (6)
Tax paid during the year 27
6. Purchase of Fixed Assets

Balance at the end 130
Add: Depreciation for current year 50
Assets sold (Book Value) (12+15) 27
Balance at the beginning (100)
Purchase of Fixed Assets during the year: 107
7. Interest and Dividend received during the year

Interest Dividend Total
Opening Balance 2 4 6
Add: Accrued Income (Current Year) 4 2 6
Less: Closing Balance (3) (2) (5)
Received during the year 3 4 7
8. Issue of Equity Share Capital for Cash

Capital at the end 150
Less: Capital issued to debenture – holders (20)
(Conversion - 50% of 40)
Less: Opening Capital (110)
Capital Issued for Cash 20
9. Interest paid during the year

Balance in the beginning 5
Add: Accrued during the year 5
Less: balance at the end (4)
Paid during the year 6

10. Cash & Cash Equivalents 2074 2075
Cash and Bank 10 7
Investments 2 3
12 10
11. Profit & Loss Account

Opening Balance 20
Profit for Current year 25
Less: Transfer to General Reserve (15 -10) (5)
Transfer to Capital Redemption Reserve (10-0) (10)
30
12. The preference share capital in the beginning and at the end was Rs. 40 and Rs. 10 thousand
respectively. This redemption is backed by the issue of Equity Share Capital of Rs. 20
thousand and transfer of Profit and Loss Account balance of Rs. 10 thousand to Capital
Redemption Reserve Account.
Answer No 4
(a) The ratios for 2074/075 for Sunrise Ltd. are computed as follows:
Computation Ratio for 2074/075
1. Current Ratio 1,600,000/1,000,000 1.60

2. Acid-test Ratio 800,000/1,000,000 0.80
3. Debtors Turnover 1,400,000/600,000 2.33
4. Stock Turnover 1,000,000/8,00,000 1.25
5. Long-term Debt to Total Capital 1,110,000/2,350,000 47.23%
6. Gross Profit Margin 800,000/1,800,000 44.44%
7. Net Profit Margin 218,000/1,800,000 12.11%
8. Return on Equity 188,000/848,000 22.17%
9. Return on Total Assets (545,000 + 80,000) (1 – 0.6)/3,500,000 7.14%
10. Tangible Assets Turnover 1,800,000/3,500,000 0.51
11. Interest Coverage 625,000/80,000 7.81
(b) Based on the ratios computed above, evaluation of the company’s position is presented below:
(i) The liquidity position of the firm is falling which is evident from the Ratios 1 to 4 computed above.
(ii) The gross profit margin is constant and matches with the industry average, but the net profit margin
ratio is declining. The two ratios together imply that the company‗s selling and administrative
expenses, depreciation and interest charges are on the rise.
(iii) The decline in the net margin (Ratio 7) is partly due to rapid increase in debt (Ratio 5). The return on
equity (Ratio 8) has been declining while the return on assets is rising (Ratio 9).
(iv) The decline in the net margin and the return on equity can also be attributed to the decline in assets
turnover (Ratio 10).
(v) The impact of the increase in debt and overall decline in profitability are also shown by reduction in
the interest coverage (Ratio 11).

Answer No 5
(i) Value of Bond when kd = 10%

We have, value of a bond (V) = I/2 (PVIFA kd, 2n) + MV (PVIF kd, 2n), where
years and 2n is the number of semi-annual periods until maturity.
Substituting the given values in the above formula, we get:

V = (Rs. 120/ 2) (PVIFA 0.05, 6) + Rs. 1000 (PVIF 0.05, 6)
= Rs. 60 (5.076) + Rs. 1,000 (0.746)
= Rs. 304.56 + Rs. 746 = Rs. 1,050.56.
(ii) Value of Zero Coupon Bond when kd = 16%

The value of this type of bond is found out simply by discounting the maturity value of the bond
to the present. Thus,
V = Rs. 1,000 (PVIF 0.08, 6) = Rs. 1,000 (0.630) = Rs. 630
Answer No 6
The value of the company‗s equity share is given by the following formula:
Ve = D1/(k – g), where D1 is the dividend in the year 1, k is the capitalization rate and g is the
growth rate in dividend.
The value of equity share in the given condition is derived as follows:

Ve = Rs. 25 (1 – 0.10)/[(0.20 – (– 0.10)] = Rs. 25 x 0.90/0.30 = Rs. 22.50/0.30 = Rs. 75
Answer No 7
Statement of Working Capital requirements (cash cost basis)
Particulars Amount Amount

A) Current Assets
Sales Promotion (Prepaid expenses) (450,000/12)X3 112,500
Materials (1,000,000/12)X3 250,000
Finished Goods (W.N. 1) (1,860,000/12)X2 310,000
Debtors (W. N. 2) (2,461,000/12)X3 615,250
Cash 55,000 1,342,750
B) Current Liabilities
Wages Outstanding (200,000/12)X1 16,666.66
Creditors for materials 333,333.33
(1,000,000/12)X4 55,000
Manufacturing Expenses 12,583.33 417,583.32
Administrative Expenses
(151,000/12)X1 925,166.68
92,516.67
Net Working Capital (A- B)
Add Safety Margin 10% 1,017,683.35

Total Working Capital Requirements
Working Note 1
Computation of Annual Cash cost of Production Amount
Material Consumed 1,000,000
Wages 200,000
Manufacturing expenses (Rs. 55,000X12) 660,000
Total Cash cost of Production 1,860,000
Working Note 2
Computation of Annual Cash cost of Sales Amount
Cash cost of production (W. N.1) 1,860,000
Administrative Expenses 151,000
Sales promotion Expenses 450,000
Total Cash cost of sales 2,461,000
Answer No 8
The firm will maximize the shareholders value if it extends its period by additional 30 days (since
expected Return is higher than required return). In fact, it can further relax credit period until its expected
return 20% or net gain becomes zero.
Particulars Increase in credit period

Existing 10 days 15 days 30 days 42 days
A Credit Period (days) 30 40 45 60 72
B Annual Sales (Rs.) 500,000 525,000 535,000 540,000 550,000
C Level of Receivables 41,667 58,333 66,875 90,000 110,000
(at sales value (AxB)/360 (Rs.)
D Incremental investment in - 16,667 25,208 48,333 68,333
receivables
(C-41,667) (Rs.)
E Required Incremental Profit at 20% - 3,333 5,042 9,667 13,667
(0.20XD (Rs.)
F Incremental contribution on - 10,000 14,000 16,000 20,000
additional sales @40% (2-1.2)/2
(Rs.)
G Bad debt losses (BX %bad debts) 5,000 6,300 8,025 9,720 12,100
(Rs.)
H Incremental Bad debt losses - 1,300 3,025 4,720 7,100
(G-5,000) (Rs.)
I Incremental expected profit - 8,700 10,975 11,280 12,900
(F-H) (Rs.)
J Net Gain (I-E) (Rs.) - 5,367 5,933 1,613 (767)

Alternatively,
The investment in receivables can be calculated at cost. At current level of sales, the firm's average unit
cost is Rs. 1.50. Since variable cost per unit is 1.20, we can find the fixed cost as follows:
Fixed Cost = Total Cost-Variable Cost

= (Rs.5,00,000) x 1.50/Rs. 2 - (Rs.5,00,000) x Rs.1.20/Rs.2
= Rs. 375,000 - Rs. 3,00,000
= Rs. 75,000
Thus, the total cost for different level of sales (assuming unit price and fixed cost do not change):
Sales (Rs.) Variable Cost (Rs.) Fixed Cost (Rs.) Total Cost (Rs.)
525,000 525,000X1.20/2 =315,000 75,000 390,000
535,000 535,000X1.20/2 =321,000 75,000 396,000
540,000 540,000X1.20/2 =324,000 75,000 399,000
550,000 550,000X1.20/2 =330,000 75,000 405,000
Investment in account receivables will be:
Investment in Receivables (Rs.) Changes in Investment (Rs.)

(375,000) X30/360 = 31,250 -
(390,000) X40/360 = 43,333 12,083
(396,000) X45/360 = 49,500 18,250
(399,000) X60/360 = 66,500 35,250
(405,000) X72/360 = 81,000 49,750
The net gain from the credit policy can be re-calculated using incremental investment in accounts
receivables at cost. It would be higher now.
Particulars Increase in credit period
Existing 10 days 15 days 30 days 42 days
A Credit Period (days) 30 40 45 60 72
B Incremental investment in - 12,083 18,250 35,250 49,750
receivables
(Rs.)
C Cost of Investment at 20% (Rs.) - 2,417 3,650 7,050 9,950
D Incremental bad debt losses (Rs.) - 1,300 3,025 4,720 7,100
E Incremental contribution on - 10,000 14,000 16,000 20,000
additional sales @ 40% (2-1.2)/2
(Rs.)
F Net Gain (E-D-C) (Rs.) - 6,283 7,325 4,230 2,950
In this case, the credit policy can be extended up to 42 days.
Answer No 9
(i) Payment float = 20,000X6 = Rs 120,000
Collection float = 22,000X3 = Rs 66,000
Net float = Payment float – Collection float
= 120,000 – 66,000 = Rs 54,000

Answer No 10
Inventory Conversion Period (ICP) = 360X Inventory = 360X240,000 = 60 days

Sales 1440,000
Receivable Conversion Period (RCP) = 360X Receivables = 360X180,000 = 45 days
Sales 1,440,000
Payable Deferral Period (PDP) = 360X Accounts Payable = 360X120,000 = 50 days

Credit Purchases 864,000
Cash Conversion Cycle (CCC) = ICP +RCP –PDP = 60+45-50 = 55 days
Answer No 11
Equity ratio = 30%

Debt ratio = 100 -30 = 70%
Total Capital budget needed = Rs 5,000,000
Equity Financing = Total budget needed X Equity ratio
= 5,000,000X30% = Rs 1,500,000
Residual Income = Total Income – Equity Financing

= 3000,000 – 1,500,000
= Rs 1,500,000
In this way Shikhar Private limited residual income is Rs 1,500,000, which can be distributed as
dividend if the company follows a residual dividend payout policy and the dividend payout ratio
will be as below:
Dividend Payout Ratio = Dividend /Net Income = 1,500,000/3,000,000 = 0.50 or 50%
Answer No 12
(i) Low payout ratio. Highly taxed owners probably will want to realize their returns through capital
gains.
(ii) Low payout ratio. There will be no or low residual funds.
(iii) Medium or high payout ratio. There are likely to be funds left over after funding capital
expenditures. Moreover, the liquidity and access to borrowing give the company considerable
flexibility.
(iv) Medium or high payout ratio. Unless the company cuts its dividend, which probably is unlikely in
the short run, its payout ratio will rise with the drop in earnings.
(v) Low payout ratio. The company will probably wish to retain earnings to build its financial
strength in order to offset the business risk.

Answer No 13
Investment In Investment amount Dividend (Rs.) Capital Gain (Rs.)

Equity Share of ABC 250 20 150
Cement Limited
Equity Share of BCD 350 20 250
Sugar Limited
Equity Share of DEF 450 20 600
Distillery Limited
Government of Nepal 1,000 140 5
Bonds
Total 2,050 200 1,005
(i) Expected Rate of Return on Market Portfolio :

= Dividend Earned + Capital Appreciation x 100
Initial Investment
= 200 + 1,005 x 100 = 1,205/2,050 x 100 = 58.78%
2,050
(ii) Expected rate of return of individual portfolio using Capital Asset Pricing Model
(CAPM)
Now, we can calculate the expected rate of return on individual portfolio by applying
CAPM.
E (Ri) = Rf + βi (Rm – Rf)
ABC Cement Ltd = 15 + 0.8 (58.78 – 15) = 15 + 0.8 x 43.78 = 50.02%

BCD Sugar Ltd = 15 + 0.7 (58.78 – 15) = 15 + 0.7 x 43.78 = 45.65%
DEF Distillery Ltd. = 15 + 0.5 (58.78 – 15) = 15 + 0.5 x 43.78 = 36.89%
Government of Nepal Bonds = 15 + 0.99 (58.78 – 15) = 15 + 0.99 x 43.78 = 58.34%
(iii) Average Return of the Portfolio:

= (50.02 + 45.65 + 36.89 + 58.34)/4 = 190.90/4 = 47.73%
Answer No 14
(i) Calculation of Capital Gearing Ratio
Capital Gearing Ratio = Fixed Interest bearing funds

Equity Shareholders Funds
= Preference Share Capital+Debentures = 4,000,000+6,400,000 =10,400,000 =0.93

Equity Share Capital + Reserves 8,000,000+3,200,000 11,200,000
(ii) Calculation of Yield on Equity Shares:

Yield on equity shares is calculated at 50% of profits distributed and 5% on undistributed profits:

(Rs.)
50% on distributed profits* (Rs. 640,000 × 50/100) 320,000
5% on undistributed profits** (Rs. 620,800 × 5/100) 31,040
Yield on equity shares 351,040
Yield on equity shares % = Yield on shares X100

Equity Share Capital
= 351040 X100 =4.39% or 4.388%

8,000,000
Working Note:
1. Distributed and Undistributed Profit
Profit before Interest and Income Tax: Rs. 3,200,000
Less: Interest on Debenture (64 x 0.12) 768,000
Profit before Income Tax Rs. 2,432,000
Income Tax (2,432,000 x 0.35) 851,200
Profit after tax 1,580,800
Less: Preference Dividend (4,000,000 x 0.08) 320,000
1,260,800
Equity Dividend* (8,000,000 x 0.08) 640,000
Undistributed Profit** 620,800
2. Interest and Fixed Dividend Coverage:
Profit after Tax Rs. 1,580,800
Add: Interest on Debenture 768,000
Rs. 2,348,800
Debenture interest and preference dividend (768,000+320,000) Rs. 1,088,000

Interest and fixed dividend coverage (Rs. 2,348,800 / Rs. 1,088,000) 2.1588, say, 2.16 times
Calculation of Expected Yield on Equity Shares

There is a scope for assumptions regarding rates (in terms of percentage for every one time of difference
between Kosheli Collection Pvt. Ltd. and Industry average of risk premium involved with respect to
interest and fixed dividend coverage and Capital Gearing Ratio. The solution has been worked out below
by assuming the risk premium as:
i. 1% for every one time of difference for Interest and Fixed Dividend Coverage
ii. 2% for every one time of difference for Capital Gearing Ratio.
Interest and fixed dividend coverage of Kosheli Collection Pvt. Ltd. is 2.16 times but the industry average
is 3 times.
Risk premium is therefore added to Kosheli Collection Pvt. Ltd. shares @ 1% for every 1 time difference.
Thus, the Risk Premium = 3.00 – 2.16 (1%) = 0.84 (1%) = 0.84%
Capital gearing ratio of Kosheli Collection Pvt. Ltd. is 0.93 but the industry average is 0.75 times.
Therefore, risk premium is added to Kosheli Collection Pvt. Ltd. shares @ 2% for every 1 time
difference.
Risk Premium = (0.75 – 0.93) (2%)= 0.18 (2%) = 0.36%
(%)
Normal return expected 9.60

Add: Risk premium for low interest and fixed dividend coverage 0.84
Add: Risk premium for high interest gearing ratio 0.36
Expected yield 10.80
Value of Equity Share
= Actual Yield X Paid up Value of Share = 4.39 X100 = Rs. 40.65

Expected Yield 10.80
Answer No 15
(i) Calculation of P/V Ratio:

P/ V Ratio = Contribution / Sales X 100
Operating Leverage = C / (C – F) X 100
1.4 =C / C -204,000
1.4 (C – 204,000) = C
1.4 C – 285,600 = C
0.4 C = 285,600
Therefore, C = 285,000/0.4 = Rs. 714,000
P/V ratio = 714,000 /3,000,000 X 100 = 23.8%
(ii) Calculation of EPS:
EBT = Contribution – Fixed Cost – Interest = 714,000 – 204,000 – 255,000 = Rs. 255,000
(Interest =Rs. 2,125,000 × 12% =Rs. 255,000
EAT = EBT – Tax = 255,000 – 76,500 = Rs. 178,500
(Tax = Rs. 255,000 × 30% = Rs. 76,500)
EPS = EAT / No. of Equity Shares = 178,500/17,000 = Rs. 10.50.
Answer No 16
Working Notes:
1. Cost of Equity Capital (Ke) and Cost of Retained Earnings(Kr)
Ke = D1/P0+g = 24/350 + 0.05 = 0.07 + 0.05 = 0.12 or 12%
2. Cost of Preference Share Capital (Kp)

Kp = D+ [RV – Net Procceds]/N = 9+ [100 – 90]/8 =9+1.25 =0.1079 or
10.79%
[RV + Net Proceeds] /2 [100+90]/2 95
3. Cost of Debentures (Kd)

Kd = Interest [100% - Tax rate] + [RV – Net Proceeds]/N
[RV + Net Proceeds]/2
= 11 [100% – 40%] + [100 – 75]/3

[100 + 75]/2
= 6.6 + 8.333
87.5
= 0.171 or 17.1%

4. Cost of Term Loan (Kt)
Kt = Interest (1- t) = 13X 60% = 7.8%
5. Cost of Fresh Equity Shares (ke)

Ke = D1/P0 +g = 24/275 + 0.05 = 0.0872 + 0.05 = 0.1372 or 13.72%
a) Calculation of Weighted average cost of capital (WACC) using market value

proportion:
Source of Finance Market Value Weight Cost of Weighted cost

(Rs. in Capital of capital%
Lakhs)
Equity Capital 4,200 0.684 0.12 0.08208
(12 Lakh shares X Rs. 350
9% Preference Capital 900 0.147 0.1079 0.01586
(10 lakh shares X Rs. 90
11% Debenture 675 0.110 0.171 0.01881
(9 lakh debentures X Rs. 75
13% term Loan 360 0.059 0.078 0.00460
Total 6,135 1 WACC 0.12135
Therefore, WACC = 12.135%
Note: Retained earnings are not considered for calculating WACC since it does not have any
market value separately. The market value of equity shares reflects the value of retained
earnings as well.
b) Calculation of Weighted average cost of capital (WACC) XYZ Limited when it raises Rs
400 lakhs next year:
Source of Finance Amount Weight Cost of Weighted cost

(Rs. in Capital of capital%
Lakhs)
Retained Earnings 120 0.3 0.12 0.036
Equity Shares 80 0.2 0.1372 0.02744
Debt 200 0.5 0.171 0.0855
Total 400 1 WACC 0.1489
Therefore, WACC of raising Rs. 400 lakh next year = 14.89%
Answer No 17
Kohalpur Auto

PV of total payment = Cash payment + Balance (PVIFk%, n)
= 40,000+60,000 (PVIF10%, 2)
= 40,000+60,000X0.8264
= 40,000 + 49,584 = 89,584
Dhangadhi Auto
PV of total payment = Cost price – Price off or discount
= 100,000 – 5,000
= Rs 95,000
The total cost charged by Kohalpur Auto (Rs 89,584) is less than the total cost charged by
Dhangadhi Auto (Rs 95,000), Therefore Kohalpur Auto is offering the better deal.
Answer No 18
i) Expected return of the portfolio A and B, containing 25% A and 55% B

Expected Return {E (A)} = (15+ 11)/2 = 13%
Expected Return {E (B)} = (16+ 12)/2 = 14%
Expected Return on portfolio {Rp} = 0.25(13) + 0.55(14) = 3.25%+ 7.7% = 10.95%
ii) Standard deviation of return from each stock

Stock A:
Variance = 0.5 (15-13)2 + 0.5 (11-13)2 = 4%
Standard deviation = 2%
Stock B:
Variance = 0.5 (16-14)2 + 0.5 (12-14)2 = 4%
Standard deviation = 2%
iii) Covariance of return from stocks A and B

CovAB = 0.5 (15-13) (16 -14) + 0.5 (11 -13) (12 – 14) = 4%
iv) Correlation of coefficient between the returns of the two stocks

rAB = CovAB/Standard deviation A and B = 4/2X2 =1
Answer No 19
Particulars Amount in Lakh

Market value before right issue 2,900

(Rs. 290X10 lakh shares)
Cash raised from right issue (10 lakh 100
shares/10X Rs 100)
Total Number of shares post right issue (10 + 1 11
lakh shares)
Theoretical Ex – right price {(2,900 + 100)/11} 272.73 per share
Answer No 20
(i) Computation of Net Assets Value (NAV) of the Fund

S.No Particulars Amount
1 Investment in Fixed Deposit 4,000,000
2 Market Value of shares in –
 Life Insurance Companies[3,500,000/1400*2500] 6,250,000
 Banking Companies[2,500,000/1350*1100] 2,037,037.03
 Hydropower Companies[ 5,500,000/1500*2100] 7,699,999.99
 Non – Life Insurance Companies[7,500,000/1800*3700] 15,416,666.66
3 Cash and other assets 1,000,000

Total Assets of the Fund 36,403,703.68
Less : Liabilities Outstanding Expenses (2,000,000)
Net Assets Value of the Fund 34,403,703.68
(ii) Computation of NAV per unit
Net Assets Value of the Fund = 34,403,703.68
No of units outstanding = 1,000,000 units
NAV per unit = Net Assets Value of the Fund = 34,403,703.68/1,000,000 = Rs 34.40
No of units outstanding
(iii) Computation of Net Return (Annualized)

Computation of Opening NAV
S.No Particulars Amount
1 Investment in Fixed Deposit 4,000,000
2 Investment in Shares (at Cost)
 Life Insurance Companies 3,500,000
 Banking Companies 2,500,000
 Hydropower Companies 5,500,000
 Non – Life Insurance Companies 7,500,000
3 Cash and other assets 1,000,000

Net Assets Value 24,000,000
No of Units Outstanding 1,000,000
NAV Per Unit 24

Return (in %) = Dividend + Realized Capital Gains + Unrealized Capital Gains
Initial Investment (NAV per unit at beginning)
= D1+CG1+ (NAV1-NAV0) X100

NAV0
= (2X3) + (34.40-24)X100
24
= 68.33%
Therefore, Return per annum = 68.33%/3 = 22.77%
Answer No 21
a) In a recourse or pure factoring, the factor firm is only involved in the work of collection of the
receivables. It does not bear any risk of default by the debtors. Such a risk will have to be invariably
borne by the selling firm. Thus, in case of default by a customer, the selling firm will have to refund
the amount of advance together with charges as per the agreement which was given by the factor to
the selling firm against the receivables.
In a non-recourse factoring, the factor firm purchases the receivable of the selling firm by paying the
agreed amount (sales value less commission) to the latter. The payment may be made immediately or
after receiving from the customer buying.
The main feature of non-recourse factoring is that the risk of default by the buyer is borne by the
factor firm and the selling firm receives the sales amount. Thus, this type of factoring will result in
the purchase of receivable by the factor firm.
In non-recourse factoring, the factor also undertakes the receivables management including
evaluation of creditworthiness, thereby also assessing the risk of bad debts. In this type of factoring,
the factor firm will normally insist on discounting the seller‟s entire book debts subject to careful
examination of the debtors and their creditworthiness. In such cases, the seller is entitled to sell to
other customers not evaluated as credit-worthy but these sales would obviously be excluded from the
services of the non - recourse factor.
b) Floatation cost refers to the cost involved in raising capital from the market, for instance,
underwriting, commission, brokerage and other expenses. The presence of floatation costs affects the
balancing nature of internal (retained earnings) and external (dividend payments) financing. The
introduction of floatation costs implies that the net proceeds from the sale of new shares would be less
than the face value of the shares, depending upon their size.
Transaction costs refer to costs associated with the sale of securities by the shareholder investors. In
the Modigliani Miller Hypothesis, it is assumed that if dividends are not paid (or earnings are
retained), the investors desirous of current income to meet consumption need can sell a part of their
holdings without incurring any cost, like brokerage and so on. This is obviously an unrealistic

assumption. Since the sale of securities involves cost, to get current income equivalent to the
dividend, if paid, the investors would have to sell securities in excess of income that they will receive.
c) Business Risk is defined as the uncertainty inherent in projections of future Return on Assets (ROA),
or of Returns on Equity (ROE) if the firm uses no debt. Business risk is the single most important
determinant of capital structure. Business risk varies from one industry to another and also among
firms in given industry.
Financial risk is the additional risk placed on the common stockholders as a result of using financial
leverage, which results when a firm uses fixed income securities (debt and preferred stock) to raise
capital. Thus, it is the portion of stockholders‟ risk, over and above basic business risk, resulting from
the manner in which the firm is financed.
d) Investment bankers are middlemen who are involved in the sale of stocks and bonds. When a
company decides to raise funds, an investment bank comes up with the proposal to buy the issue at
wholesale and then go to sell the same to investors at retail. Being in the business of matching users
of funds with suppliers, investment bankers can sell issues more efficiently than the issuing company.
For the services provided, they receive fee as the difference between the amounts received from the
sale of securities to the public and the amount paid to the companies.
Mortgage bankers are involved in acquiring and placing mortgages. The mortgages to the mortgage
bankers come through the individuals, businesses and builders and real estate agents. These bankers
do not hold mortgages in their own portfolios for a long time. They usually service these for the
ultimate investors. They receive fees from the ultimate investor for the services provided to them.
e) Risk aversion is the reluctance of a person to accept a bargain with an uncertain payoff rather than
another bargain with more certain, but possibly lower, expected payoff. For example, a risk-averse
investor might choose to put his or her money into a bank account with a low but guaranteed interest
rate, rather than into a stock that may have high returns, but also has a chance of becoming worthless.
An investor is said to be risk averse if he prefers less risk to more risk, all else being equal.
Risk Diversification refers to minimization of risk which an investor may choose by investing in
various types of securities. An investor may not want to concentrate his investment in a single risky
security, as a result of which he may choose to invest in various other securities to minimize his level
of risk and harmonize his returns.
f) In common parlan, the terms „Risk‟ and „Uncertainty‟ have synonymous meaning. However, they
differ from each other.
Risk may be defined as ―the chance of future loss that can be foreseen‖. In other word, in case of risk
an estimate can be made about the degree of happening of the loss. This is usually done by assigning
probabilities to the risk on the basis of past data and the probable trends.
Uncertainty may be defined as‖ the unforeseen chance for future loss or damages.‖ In case of
uncertainty, since the firm cannot anticipate the future loss, and hence it cannot directly deal with it in
its planning process, as is possible in the case of risk. For example, a firm can not foresee the loss
which may be due to destruction of its plant in account of earthquake.
g) Financial distress is a situation where a firm‘s operating cash flows are insufficient to meet its
current obligations (and so the firm must take some kind of corrective action) financial distress may

lead a firm to default on a contract, and it may involve financial restructuring between the firm, its
creditors, and its shareholders in most cases, the firm is forced to take actions that it would not have
taken if it had sufficient cash flow.
Insolvency is a term which generally means an inability to repay debts stock-based insolvency occurs
when the value of a firm‘s assets is less than what is owed on its debt flow-based insolvency occurs
when the firm‘s cash flows are insufficient to cover contractually required payments.
Answer No.22
a) Leveraged Buyout – It is an ownership transfer consummated primarily with debt. Sometimes it is
also called as asset- based financing, the debt is secured by the assets of the enterprise involved.
While some leveraged buyouts involve the acquisition of an entire company, many involve the
purchase of a division of a company or some other sub unit. Frequently the sale is to the management
of the division being sold, the company having decided that the division no longer fits its strategic
objectives. Another distinct feature is that leveraged buyouts are cash purchases, as opposed to stock
purchases. Finally the business unit involved invariably becomes a privately held as opposed to a
publicly held company.
b) Debt Trap is a situation where you add on a new debt in order to pay an existing debt. Generally,
when the firm in overleveraged all the credit sources are exhausted, firm arrives at a situation of debt
trap. It is a situation in which an entity borrows money, but does not have enough money to make the
interest payments on the loan, so it takes out another loan--with its own interest payments--to cover
the first loan's payments. They will likely have to borrow again to pay off the second loan, creating a
crippling cycle. It is an incentive structure that lures individuals into accepting long-term debt
obligations under conditions that strongly favor the lender. Victims of debt traps are often prevented
from discharging the debt through techniques such as unusually high or variable interest rates,
changing payment plans, and unreasonably high penalties for late payments.
c) The Debt-equity (D/E) ratio is calculated by comparing the long term debts with the total
shareholders‘ funds. The D/E ratio throws light on the margin of safety available to the debt providers
of the firm. If a firm with a high D/E ratio fails, then a part of the financial loss may have to be borne
by the debt providers. Thus, the greater the D/E ratio, higher would be the risk of the lenders. From
the view point of shareholders, a high D/E ratio implies that the firm is having a high degree of
financial leverage which offers the opportunity and benefit of trading on equity. In such a case, if the
rate of return of the firm is more than the cost of debt, then higher degree of financial leverage means
relatively higher return to the shareholders.
The higher D/E ratio may also have an impact on the ability of a firm to service the debt. In addition
to the payment of principal and interest on debt, such a ratio might have an adverse impact on a
firm‟s ability to pay other fixed and contractual payments in addition to the principal and interest. On
the contrary, a low D/E ratio implies a low risk to the lenders and creditors for the firm but it will not
offer the benefit of trading on equity. Therefore, a proper balance between the proportion of debt and
equity is very much essential in order to take care of the interests of both the lenders and the
shareholders and for the long term sustainability and solvency of the firm.
d) The firm's dividend policy is directed by the provisions of income-tax law. If a firm has a large
number of owners, in high tax bracket, its dividend policy may be to have higher retention. As against
this if the majority of shareholders are in lower tax bracket requiring regular income the firm may
resort to higher dividend payout, because they need current income and the greater certainty
associated with receiving the dividend now, instead of the less certain prospect of capital gains later.

e) Commercial Paper - It is an important money market instrument in advanced countries like USA to
raise short term funds. It is a form of unsecured promissory note issued by firms to raise short term
funds. The commercial paper market in the USA is a blue-chip market where financially sound and
highest rated companies are able to issue commercial papers. The buyers of commercial paper include
banks, insurance companies, unit trusts and firms with surplus funds to invest for a short period with
minimum risk. Given this objective of the investors in the commercial paper market, there would be
demand for commercial papers of highly creditworthy companies.
f) Financial distress is a term used to indicate a condition when promises to creditors of a company are
broken or honored with difficulty. Sometimes financial distress can lead to bankruptcy. Financial
distress is usually associated with some costs to the company; these are known as costs of financial
distress. This is a situation where a firm‘s operating cash flows are not sufficient to satisfy current
obligations and the firm is forced to take corrective action. Financial distress may lead a firm to
default on a contract, and it may involve financial restructuring between the firm, its creditors, and its
equity investors.
g) A line of credit with a bank is an informal arrangement between a bank and its customers specifying
the maximum amount of credit which the bank will permit the firm to borrow at any point of time.
Normally, credit lines are established for a one-year period. The line of credit is renewed by the bank
once it receives the latest annual report and reviews the progress of the borrower. The amount of the
line of credit depends on the bank‘s assessment of the creditworthiness and the credit needs of the
borrower.
A line of credit may be adjusted upwards or downwards at the time of renewal based on the changes
in these conditions. The cash budget of a firm is an indicator of the borrower‘s short term credit
needs. The firm usually seeks a line of credit amount slightly in excess of maximum or peak
borrowing needs during the forthcoming year to give a margin of safety. The bank may impose a
‗clean up‘ provision in a line of credit arrangement. Accordingly, the borrower would be required to
clean up the bank debt for a specified period of time during the year. Such a cleanup period is usually
one to two months. It is, however, to be noted that a line of credit does not constitute a legal
commitment on the part of the bank to extend credit. The borrower is informed of the line of credit
through a letter indicating that the bank is willing to extend credit up to a certain amount. If the credit
worthiness of the borrower gets deteriorated during the year, the bank might not want to extend credit
or reduce the amount of credit already intimated.

Paper 5: Cost and Management Accounting

Revision Questions
Costs concepts and costing methods

Question No. 1
a) What do you understand by Operating Costs? Describe its essential features and
state where it can be usefully implemented?
b) 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.
c) Define Product costs. Describe three different purposes for computing product
costs.
d) Explain the following:
(i) Explicit costs (ii) Engineered costs
e) What is Cost accounting? Enumerate its important objectives.
Material Control
Question No. 2
a) Discuss briefly the considerations governing the fixation of the maximum and
minimum levels of inventory.
b) A Ltd. manufactures pistons used in car engines. As per the study conducted by the
Auto Parts Manufacturers Association, there will be a demand of 80 million pistons in
the coming year. A Ltd. is expected to have a market share of 1.15% of the total
market demand of the pistons in the coming year. It is estimated that it costs Rs.1.50
as inventory holding cost per piston per month and that the set-up cost per run of
piston manufacture is Rs. 3,500.
(i) What would be the optimum run size for piston manufacturing?
(ii) Assuming that the company has a policy of manufacturing 40,000 pistons per
run, how much extra costs the company would be incurring as compared to the
optimum run suggested in (i) above?
Labour Control
Question No. 3
a) The existing Incentive system of Alpha Limited is as under:

Normal working week 5 days of hours each plus 3 late shifts of 3
hours each
Rate of Payment Day work : Rs. 160 per hour
Late shift ; Rs .225 per hour
Average output per operator for 49- hours week 120 articles
i.e. including 3 late shifts
In order to increase output and eliminate overtime, it was decided to switch on to a

system of payment by results. The following information is obtained:
Time-rate (as usual) Rs.160 Per hour

Basic time allowed for 15 articles 5 hours
Price- work rate Add 20% to basic price-rate
Premium Bonus Add 50% to time.
Required:
1) Prepare a Statement showing hours worked, weekly earnings, number of articles
produced and labour cost per article for one operator under the following systems;
a) Existing time-rate
b) Straight piece-work
c) Rowan System
d) Halsey Premium system
Assume that 135 articles are produced in a 40-hour week under straight piece work, Rowan
Premium system, and Halsey premium system above and worker earns half the time saved
under Halsey premium system.
b) In a factory working six days in a week and eight hours each day, a worker is paid at the
rate of Rs. 100 per day basic plus D.A. @ 120% of basic. He is allowed to take 30 minutes
off during his hours shift for meals -break and a 10 minutes recess for rest. During a week,
his card showed that his time was chargeable to:
Job X 15 hrs.
Job Y 12 hrs.
Job Z 13 hrs.
The time not booked was wasted while waiting for a job. In Cost Accounting, how would
you allocate the wages of the workers for the week?
Overhead
Question No. 4
a) A machine shop has 8 identical Drilling machine manned by 6 operators. The machine
cannot be worked without an operator wholly engaged on it. The original cost of all these
machine works out to Rs 8 lakhs. These particulars are furnished for a 6 months period:
Normal available hours per month 208
Absenteeism (without pay) hours 18
Leave (with pay) hours 20
Normal idle time unavoidable-hours 10
Average rate of wages per worker for 8 hours a day Rs. 20
Production bonus estimated 15% on wages

Value of power consumed Rs 8,050
Supervision and indirect labour Rs. 3,300
Lighting and electricity Rs. 1,200
These particulars are for a year
Repairs and maintenance including consumables 3% of value of machines.
Insurance Rs 40,000
Depreciation 10% of original cost.
Other sundry works expenses Rs. 12,000
General management expenses allocated Rs. 54,530
You are required to work out a comprehensive machine hour rare for the machine shop.
b) M.L. Auto Ltd. is a manufacturer of auto components and the details of its
expenses for the year 2074 are given below:
(Rs.)
(i) Opening Stock of Material 1,50,000

(ii) Closing Stock of Material 2,00,000
(iii) Purchase of Material 18,50,000
(iv) Direct Labour 9,50,000
(v) Factory Overhead 3,80,000
(vi) Administrative Overhead 2,50,400
During 2075, the company has received an order from a car manufacturer where it
estimates that the cost of material and labour will be Rs. 8,00,000 and Rs. 4,50,000
respectively. M.L. Auto Ltd. charges factory overhead as a percentage of direct labour and
administrative overhead as a percentage of factory cost based on previous year's cost.
Cost of delivery of the components at customer's premises is estimated at Rs. 45,000. You are
required to:
(i) Calculate the overhead recovery rates based on actual costs for 2074.
(ii) Prepare a detailed cost statement for the order received in 2075 and the price to be
quoted if the company wants to earn a profit of 10% on sales.
Costs Accounts System, Cost Control (Integrated and Non-integrated Accounting System)
Question No. 5
a) ABC Ltd. has furnished the following information from the financial books for the
year ended 31st Ashadh, 2075:
Profit & Loss Account
(Rs.) (Rs.)
To Opening stock (500 units at 70,000 By Sales (10,250 units) 28,70,000
Rs.140 each)
To Material consumed 10,40,000 By Closing stock
To Wages 6,00,000 (250 units at Rs. 200 each) 50,000

To Gross profit c/d 12,10,000
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,
2075;
(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) The following data are available for a product for the month of July, 2018:
Particular Process-I (Rs) Process-II (Rs)
Opening work -in-progress Nil Nil
Costs incurred during the month;
-Direct materials 6,00,000
-Labour 1,20,000 1,60,000
-Factory overheads 2,40,000 2,00,000
Units of Production:
Received in process 40,000 36,000
Completed and transferred 36,000 32,000
Closing working-in-progress 2,000 ?
Normal loss in process 2,000 1,500
Production remaining in process has to be valued as follows:

Materials 100% Labour 50% Overheads 50%
There has been no abnormal loss in Process -II
The company follows weighted average method for valuing inventory.
Prepare Process Accounts after working out the missing figures and with detailed workings.

b) JRP Resorts (P) Ltd. offers three types of rooms to its guests, viz Deluxe room, Super
Deluxe room and Luxury Suite. You are required to ascertain the tariff to be charged to
the customers for different types of rooms on the basis of following information:
Type of Room Number of Rooms Occupancy
Deluxe Room 100 90%
Super Deluxe Room 60 75%
Luxury Suite 40 60%
Rent of 'Super Deluxe' room is to be fixed at 2 times of 'Deluxe room' and that 'Luxury
Suite ' is 3 times of 'Deluxe room'. Annual expenses are as follows:
Particulars Amount(Rs in lakhs)

Staff salaries 680.00
Lighting, Heating and Power 300.00
Repairs, Maintenance and 180.00
Renovation
Linen 30.00
Laundry charges 24.00
Interior decoration 75.00
Sundries 30.28
An attendant for each room was provided when the room was occupied and he was paid Rs.500
per day towards wages. Further, depreciation is to be provided on building @5% on Rs 900
lakhs, furniture and fixtures @ 10% on Rs 90 lakhs and air conditioners @10% on Rs 75 lakhs.
Profit to be provided @25% on total taking and assume 360 days in a year.
c) 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.
c. Prepare a statement showing the product wise profit or loss for the month.
d) Dream house (P) Ltd. is engaged in building two residential housing projects in the city.
Particulars related to two housing projects are as below :
Particulars HP-1(Rs.) HP-2(Rs.)

Work in Progress on 1st Shrawan 2074 7,80,000 2,80,000
Materials Purchased 6,20,000 8,10,000
Land purchased near to the site to open an office - 12,00,00
Brokerage and registration fee paid on the above - 60,000
purchase
Wages paid 85,000 62,000
Wages outstanding as on 31st Ashadh, 2075 12,000 8,400
Donation paid to local clubs 5,000 2,500
Plant hire charges paid for three years effecting from 72,000 57,000
1st Shrawan 2074
Value of materials at site as on 31st Ashadh, 2075 47,000 52,000
Contract price of the projects 48,00,000 36,00,000
Value of work certified 20,50,000 16,10,000
Work nor certified 1,90,000 1,40,000
A concrete mixture machine was bought on 1st Shrawan 2074 for Rs 8,20,000 and used for 180
days in HP-1 and for 100 days in HP-2 . Depreciation is provided @15% p.a.( this machine can
be used for any other projects )
As per the contract agreement contractee shall retain 20% of work certified as retention money.
Prepare contract account for the two housing projects showing the profit or loss on each project
for the year ended 31st Ashadh, 2075
e) In order to develop tourism, ABCL airline has been given permit to operate three flights in
a week between X and Y cities (both side). The airline operates a single aircraft of 160 seats
capacity. The normal occupancy is estimated at 60% throughout the year of 52 weeks. The
one-way fare is Rs. 7,200. The cost of operation of flights are:
Fuel cost (variable) Rs. 96,000 per flight

Food served on board on non-chargeable basis Rs.125 per passenger
Commission 5% of fare applicable for all booking
Fixed cost:
Aircraft lease Rs. 3,50,000 per flight
Landing Charges Rs. 72,000 per flight
Required:
(i) Calculate the net operating income per flight.
(ii) The airline expects that its occupancy will increase to 108 passengers per flight if the
fare is reduced to Rs. 6,720. Advise whether this proposal should be implemented or
not.
Cost Concepts for Decision Making
Question No. 7
a. MNP Ltd sold 2,75,000 units of its product at Rs. 37.50 per unit. Variable costs are
Rs. 17.50 per unit (manufacturing costs of Rs. 14 and selling cost Rs. 3.50 per
unit). Fixed costs are incurred uniformly throughout the year and amount to
Rs. 35,00,000 (including depreciation of Rs.15,00,000). there are no beginning or
ending inventories.
Required:
(i) Estimate breakeven sales level quantity and cash breakeven sales level quantity.
(ii) Estimate the P/V ratio.
(iii) Estimate the number of units that must be sold to earn an income (EBIT) of
Rs. 2, 50,000.
(iv) Estimate the sales level achieve an after-tax income (PAT) of Rs. 2, 50,000.
Assume 40% corporate Income Tax rate.
b) ABC Baggage Ltd. sells different styles of laptop bags with identical purchase costs
and selling prices. The company is trying to find out the profitability of opening
another store which will have the following expenses and revenues:

Particulars Amount per piece ( Rs.)
Selling Price 600
Variable costs:
Material cost 410
Salesmen‘s commission 60
Total variable cost 470
Annual fixed expenses are: ( Rs.)
Rent 6,00,000
Office and administrative expenses 20,00,000
Advertising 8,00,000
Other fixed expenses 2,00,000
For the each following independent situation, you are required to:
(i) Calculate the annual break-even point in units and in value. Also determine the
profit or loss if 35,000 units of bags are sold.
(ii) The sales commissions are proposed to be discontinued, but instead a fixed amount of
Rs. 9,00,000 is to be incurred in fixed salaries. A reduction in selling price of 5% is
also proposed. What will be the break-even point in units?
(iii) It is proposed to pay the store manager Rs. 5 per piece as further commission. The
selling price is also proposed to be increased by 5%. What would be the break-even
point in units?
Costing for planning and Control –Budgets
Question No.8
a) TQM Ltd. has furnished the following information for the month ending 30th June 2018:
Master Budget Actual Variance
Units Production and sold 80,000 72,000
Sales (Rs.) 3,20,000 2,80,000 40,000 (A)
Direct material (Rs.) 80,000 73,600 6,400 (F)
Direct wages (Rs.) 1,20,000 1,04,800 15,200 (F)
Variable overheads (Rs.) 40,000 37,600 2,400 (F)
Fixed overhead (Rs.) 40,000 39,200 800 (F)
Total Cost 2,80,000 2,55,200
The Standard costs of the products are as follows:
Per Unit (Rs.)

Direct material (1 kg at the rate of Rs 1per kg.) 1.00

Direct wages (1 hour at the rate of Rs 1.50) 1.50
Variable overheads (1 hour at the rate of Rs 0.50) 0.50
Actual results for the month showed that 78,400 kg of material were used and 70,400 labour
hours were recorded.
Required:
i. Prepare Flexible budget for the month and compare with actual results.
ii. Calculate Material, Labour, Sales Price, Variable Overhead and Fixed Overhead
Expenditure variances and Sales Volume (Profit) Variance.
b) A single product company estimated its sales for the next year quarter-wise as under :
Quarter Sales (Units)

I 30,000
II 37,500
III 41,250
IV 45,000
The opening stock of finished goods is 10,000 units and the company expects to maintain
the closing stock of finished goods at 16,250 units at the end of the year. The production
pattern in each quarter is based on 80% of the sales of the current quarter and 20% of the
sales of the next quarter.
The opening stock of raw materials in the beginning of the year is 10,000 kg. and the closing
stock at the end of the year is required to be maintained at 5,000 kg. Each unit of finished
output requires 2 kg. of raw materials.
The company proposes to purchase the entire annual requirement of raw materials in the first
three quarters in the proportion and at the prices given below:
Quarter Total Purchase of Raw Materials % to Price Per Kg.
I 30% 2
II 50% 3
III 20% 4
The value of the opening stock of raw materials in the beginning of the year is Rs. 20,000. You
are required to present the following for the next year, quarter wise:
(i) Production budget (in units).
(ii) Raw material consumption budget (in quantity).
(iii) Raw material purchase budget (in quantity and value).

Standard Costing
Question No. 9
a) Describe three distinct groups of variances that arise in standard costing.

b) ABC Ltd. had prepared the following estimation for the month of June:
Quantity Rate (Rs) Amount
(Rs.)
Material-A 800 kg 45.00 36,000
Material-B 600 kg 30.00 18,000
Skilled labour 1,000 hours 37.50 37,500
Unskilled labour 800 hours 22.00 17,600
Normal loss was expected to be 10% of total input materials and an idle labour time of 5% of
expected labour hours was also estimated.
At the end of the month the following information has been collected from the cost accounting
department:
The company has produced 1,480 kg finished product by using the followings:
Quantity Rate (Rs) Amount

(Rs.)
Material-A 900 kg 43.00 38,700
Material-B 650 kg 32.50 21,125
Skilled labour 1,200 hours 35.50 42,600
Unskilled labour 860 hourrs 23.00 19,780
You are required to calculation:

a) Material Cost Variance;
b) Material Price Variance;
c) Material Mix variance:
d) Material Yield Variance;
e) Labour Cost Variance;
f) Labour Efficiency Variance;
g) Labour Yield Variance;
Uniform Costing and Inter-firm comparison
Question No. 10
a. What are the limitations of Uniform Costing?

b. What are the advantages of Inter-firm Comparison?

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

Answer No 1 (a)
Operating Costs are the costs incurred by undertakings which do not manufacture any
product but provide a service. Such undertakings for example are — Transport concerns, Gas
agencies; Electricity Undertakings; Hospitals; Theatres etc. Because of the varied nature of
activities carried out by the service undertakings, the cost system used is obviously
different from that followed in manufacturing concerns.
The essential features of operating costs are as follows:

(1) The operating costs can be classified under three categories. For example e, in the
case of transport undertaking these three categories are as follows:
(a) Operating and running charges: It includes expenses of variable nature.
For example, expenses on petrol, diesel, lubricating oil, and grease etc.
(b) Maintenance charges: These expenses are of semi-variable nature and includes
the cost of tyres and tubes, repairs and maintenance, spares and accessories,
overhaul, etc.
(c) Fixed or standing charges: These includes garage rent, insurance, road license,
depreciation, interest on capital, salary of operating manager, etc.
(2) The cost unit used is composite like passenger -mile; Kilowatt-hour, etc.
It can be implemented in all firms of transport, airlines, bus -service, etc., and by all firms
of distribution undertakings.
Answer No 1 (b)
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 No 1 (c)

Definition of product costs: Product costs are inventoriable costs. These are the costs,
which are assigned to the product. Under marginal costing variable manufacturing costs and
under absorption costing, total manufacturing costs constitute product costs.
Purposes for computing product costs:

The three different purposes for computing product costs are as follows:
(i) Preparation of financial statements: Here focus is on inventoriable costs.
(ii) Product pricing: It is an important purpose for which product costs are used.
For this purpose, the cost of the areas along with the value chain should be included to
make the product available to the customer.
(iii) Contracting with government agencies: For this purpose, government agencies may not
allow the contractors to recover research and development and marketing costs under cost
plus contracts.
Answer No 1 (d)
(i) Explicit Costs - These costs are also known as out of pocket costs and refer to costs
involving immediate payment of cash. Salaries, wages, postage and telegram, printing
and stationery, interest on loan etc. are some examples of explicit costs involving
immediate cash payment.
(ii) Engineered Costs - These are costs that result specifically from a clear cause and effect
relationship between inputs and outputs. The relationship is usually personally
observable. Examples of inputs are direct material costs, direct labour costs etc.
Answer No 1 (e)
Cost Accounting is defined as "the process of accounting for cost which begins with the
recording of income and expenditure or the bases on which they are calculated and ends with
the preparation of periodical statements and reports for ascertaining and controlling costs."
The main objectives of the cost accounting are as follows:
(a) Ascertainment of cost: There are two methods of ascertaining costs, viz., Post Costing
and Continuous Costing. Post Costing means, analysis of actual information as recorded
in financial books. Continuous Costing, aims at collecting information about cost as and
when the activity takes place so that as soon as a job is completed the cost of completion
would be known.
(b) Determination of selling price: Business enterprises run on a profit making basis. It is
thus necessary that the revenue should be greater than the costs incurred. Cost
accounting provides the information regarding the cost to make and sell the product or
services produced.
(c) Cost control and cost reduction: To exercise cost control, the following steps should be
observed:
(i) Determine clearly the objective.
(ii) Measure the actual performance.
(iii) Investigate into the causes of failure to perform according to plan;
(iv) Institute corrective action.

(d) Cost Reduction may be defined ―as the achievement of real and permanent reduction in
the unit cost of goods manufactured or services rendered without impairing their
suitability for the use intended or diminution in the quality of the product.‖
(e) Ascertaining the profit of each activity: The profit of any activity can be ascertained by
matching cost with the revenue of that activity. The purpose under this step is to
determine costing profit or loss of any activity on an objective basis.
(f) Assisting management in decision making: Decision making is defined as a process of
selecting a course of action out of two or more alternative courses. For making a choice
between different courses of action, it is necessary to make a comparison of the
outcomes, which may be arrived under different alternatives.
Answer No 2 (a)
(a) Considerations for the fixation of maximum level of inventory.

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

The main considerations for the fixation of minimum level of inventory are as
follows:
1. Information about maximum consumption and maximum delivery period in respect
of each item to determine its re-order level.
2. Average rate of consumption for each inventory item.
3. Average delivery period for each item. The period can be calculated by
averaging the maximum and minimum period.
Answer No 2 (b)
i) Optimum run size or Economic Batch Quantity (EBQ) = √

C
Where, D= Annual demand i.e. 1.15% of 8,00,00,000 = 9,20,000 units

S = Set-up cost per run = Rs. 3,500
C = Inventory holding cost per unit per annum
= Rs. 1.5 12 months = 18
EBQ = √ = 18,915 units
ii) Calculation of Total Cost of set-up and inventory holing

Batch size No. of setups Set-up cost (Rs.) Inventory Total Cost (Rs)
holding cost
(Rs.)
40,000
A Units 23 80,500 3,60,000 4,40,500
(23×Rs 3,500) 40,000×Rs.18
40,000 2
18,915
B Units 49 1,17,500 1,71,235 3,41,735
(49×Rs 3,500) 18,915×Rs.18
18,915 2
Extra Cost (A-B) 98,765
Answer No 3 (a)
Table showing Labour Cost per Article
Method of Payment Hours Weekly Number of Labour cost

worked earnings Rs. articles per article

produced Rs.
Existing time rate (WN-1) 49 8,425.00 120 70.21
Straight piece rate system(WN-2) 40 8,640.00 135 64.00
Rowan Premium System (WN-3) 40 9,007.41 135 66.72
Halsey Premium System(WN-4) 40 8,600.00 135 63.70
Working Notes;
1 Existing time rate
Weekly wages:
Normal shift (40 hours× Rs. 160) Rs. 6,400
Late shift (9 hours× Rs. 225) Rs. 2,025
Rs. 8,425
2. Piece Rate System
15 articles are produced in 5 hours
Therefore, to produce 135 articles, hours required is 5 hours × 135 articles =45 hours
15 articles
Cost of producing 135 articles:

At basic time rate (45 hours× Rs. 160) Rs. 7,200
Add: Bonus @20% on basic Piece rate
Rs. 7,200 ×20%×135 articles
135 articles Rs. 1,440
Earning for week Rs. 8,640
3. Rowan Premium System
i) Time allowed for producing 135 articles 5 hours ×135 articles×150%

15 articles = 67.5 hours
ii) Time taken to produce 135 articles =40.0 hours

iii) Time Saved = =27.5 hours
Earning under Rowan Premium System:

=(Time taken× Rate per hour)+ ( Time Saved × Time taken ×Rate per hour)
Time allowed
=(40 hours × Rs. 160) + ( 27.5 hours × 40 hours × 160)

67.5 hours = Rs. 9,007.41
4. Halsey Premium System

=(Time taken× Rate per hour)+ (1/2×Time saved × Rate per hour)
= (40 hours × Rs. 160) +(1/2×27.5 hours×160) = Rs. 6,400+ Rs. 2,200

= Rs. 8,600
Answer No 3 (b)
Working notes:
(i) Total effective hours in a week :
[(8 hrs. – (30 mts. + 10 mts.)] × 6 days = 44 hours
(ii) Total wages for a week :
(Rs. 100 + 120% of Rs. 100) × 6 days = Rs. 1,320
(iii) Wage rate per hour : = Rs. 30
(iv) Time wasted waiting for
job (Abnormal idle time): = 44 hrs. – (15 hrs. + 12 hrs. + 13 hrs.)
= 4 hrs.
Allocation of wages in Cost Accounting
(Rs.)
Allocated to Job X : 15 hours × Rs. 30 = 450
Allocated to Job Y : 12 hours × Rs. 30 = 360
Allocated to Job Z : 13 hours × Rs. 30 = 390
Charged to Costing Profit & Loss
A/c : 4 hours × Rs. 30 = 120
Total 1,320
Answer No 4 (a)
Computation of comprehensive machine hour rate of machine shop

(Rs.)
Operator's wages(Refer to working note 2) 17,100
Production bonus(15% on wages) 2,565
Power consumed 8,050
Supervision and indirect labour 3,300
Lighting and electricity 1,200
Repairs and maintenance 12,000
Insurance 20,000
Depreciation 40,000
Sundry works expenses 6,000
General management Expenses 27,265
1,37,480
Machine hour rate = Total overhead of machine shop

Hours of machines operation

= Rs. 1,37,480
5.760
(Refer to working note 1) = Rs. 23.87
Working notes.
1. Computation of hours, for which 6 operators are available for 6 month.
Normal available hour's p.m.per operator 208
Less: Absenteeism hours 18

Less : Leave hours 20
Less : Idle time hours 10
48
Utilizable hour p.m. per operator 160
Total utilizable hours for 6 operators and for 6 months are = 160×6×6 = 5,760 hours
As machine cannot be worked without an operator wholly engaged on them therefore, hours for
which 6 operators are available for 6 months are the hours for which machines can be used.
Hence 5,760 hours represent total machine hours.
2. Computation of operator's wages

Average rate of wages: Rs. 20 = Rs. 2.50 per hour
8
Hours per month for which wages are paid to a worker ( 208 hours- 18 hours)
= 190 hours.
Total wages paid to operators for 6 months
=190 hours ×6×6× Rs 2.50 = Rs 17,100
Answer 4 (b)
(i) Calculation of Overhead Recovery Rate:

Factory Overheadin 2074
Factory Overhead Recovery Rate = ×100
Direct Labour Costs in 2074
Rs.3,80,000
= ×100 = 40% of Direct labour
Rs. 9,50,000
Administrative Overhead Recovery Rate

Administrative Overhead in 2074
= ×100
Factory Costs in 2074 (W.N.)
Rs. 2,50,400
= ×100 = 8% of Factory Cost
Rs.31,30,000
Working Note: Calculation of Factory Cost in 2074

Opening Stock of Material 1,50,000
Add: Purchase of Material 18,50,000
Less: Closing Stock of Material (2,00,000)
Material Consumed 18,00,000
Direct Labour 9,50,000
Prime Cost 27,50,000
Factory Overhead 3,80,000
Factory Cost 31,30,000
ii) Detailed Cost Statement for the Order received from M.L. Auto Ltd. during 2075

Material 8,00,000
Labour 4,50,000
Factory Overhead (40% of Rs. 4,50,000) 1,80,000
Factory Cost 14,30,000
Administrative Overhead (8% of Rs. 14,30,000) 1,14,400
Cost of delivery 45,000
Total Cost 15,89,400
Add: Profit @ 10% of Sales or 11.11% of cost or 1/9 of 15,89,400 1,76,600
Sales value (Price to be quoted for the order) (Rs. 15,89,400 /0.9) 17,66,000
Hence the price to be quoted is Rs.17,66,000 if the company wants to earn a profit of 10%
on sales.
Answer 5 (a):
(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) 10,000 24,00,000
Total 10,500 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 (`) 19,000 Under
(R s .recovery
)
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 No 6(a):
Statement of Equivalent Units (Process-I)
Input Particulars Output Equivalent Production

(Units) (Units) Materials Labour and overheads
Units (%) Units (%)
40,000 Introduced 36,000 36,000 100 36,000 100
and completed
Normal loss 2,000 - - - -
Closing stock 2,000 2,000 100 1,000 50
40,000 40,000 38,000 37,000
Computation of cost per Equivalent Unit for each element of cost ( Process-I)
Elements of Cost Total Equivalent units Cost per Equivalent

cost (Rs) units ( Rs)
Direct Materials 6,00,000 38,000 15.7895
Labour 1,20,000 37,000 3.2432
Factory Overhead 2,40,000 37,000 6.4865
Statement of Apportionment of Cost
Items Element Equivalent units cost per Cost (Rs) Total (Rs)
unit(Rs)
Units introduced Materials 36,000 15.7895 5,68,422.00
and completed Labour 36,000 3.2432 1,16,755.20
Overhead 36,000 6.4865 2,33,514.00
9,18,691.20
Materials 2,000 15.7895 31,579.00
Closing Stock Labour 1,000 3.2432 3,243.20
Overhead 1,000 6.4865 6,486.50 41,308.70

Process-I Account
Particulars Units Amount Particulars Units Amount (Rs)

(Rs)
To Materials 40,000 6,00,000 By Normal Loss 2,000 -
To Labour 1,20,000 By Process-2 36,000 9,18,691
To Overhead 2,40,000 BY Closing stock 2,000 41,309
40,000 9,60,000 40,000 960,000
Statement of Equivalent Units (Process-II)
Input Particulars Output Equivalent Production

(Units) (Units) Matetials Labour and
overhead
Units (%) Units (%)
36,000 Units transferred
from Process-I
Normal loss 1,500 - - -- -
Completed 32,000 32,000 100 32,000 100
Closing stock 2,500 2,500 100 1,250 50
(Balancing figure)
36,000 36,000 34,500 33,250
Computation of cost per Equivalent Unit for each element of cost ( Process-I)
Elements of Cost Total Equivalent Cost per

cost units Equivalent
(Rs) units ( Rs)
Cost of 36,000 units 9,18,691 34,500 26.6287
transferred from Process-I
Labour 1,60,000 33,250 4.8120
Factory Overhead 2,00,000 33250 6.0150
Statement of Apportionment of Cost
Items Element Equivalent cost per Cost (Rs) Total (Rs)

units unit(Rs)
Units introduced Materials 32,000 26.6287 8,52,118.40 11,98,582.40

and completed Labour 32,000 4.8120 1,53,984.00
Overhead 32,000 6.0150 1,92,480.00
Materials 2,500 26.6287 66,571.75

Closing Stock Labour 1,250 4.8120 6,015.00
Overhead 1,250 6.0150 7,518.75 80,105.50
Process-II Account
Particulars Units Amount Particulars Units Amount

(Rs) (Rs)
To Units introduced 36,000 9,18,691 By Normal Loss 1,500 -
To Labour 1,60,000 By Process-2 32,000 11,98,582
To Overhead 2,00,000 By Closing stock 2,500 80,109*
36,000 12,78,691 36,000 12,78,691
* Difference arose due to rounding-off has been adjusted.
Answer No 6(b):
Operation cost statement of JRP Resort (P) Limited
Particulars Cost per annum

(Rs in lakhs )
Staff salaries 680.00
Lighting, Heating and Power 300.00
Repairs, Maintenance and Renovation 180.00
Linen 30.00
Laundry charges 24.00
Interior decoration 75.00
Sundries 30.28
Room Attendant's wages (working Note 3) 286.20
Depreciation (Working Note 4) 61.50
Total cost for the year 1666.98
Computation of profit:
Let Rs x be the rent for Deluxe room.
Equivalent deluxe room days are 90,720 (Working note 2)

Total takings = Rs 90,720x
Profit is 25% of total takings.
Profit = 25% of Rs 90,720 x =Rs 22,680 x
Total takings = Total Cost + Profit
Rs 90,720 x =Rs 16,66,98,000 +Rs 22,680x
Rs 90,720 x - Rs 22,680x = Rs 16,66,98,000
Rs 68,040x= Rs 16,66,98,000
x= Rs 16,66,98,000 =Rs 2,450

Rs 68,040
Rent to be charged for Deluxe room Rs 2,450
Rent to be charged for Super deluxe room ( Rs2,450×2) Rs 4,900
Rent to be charged for Luxury Suite (Rs 2,450×3) Rs7,350
Working Notes:
1. Computation of Room Occupancy
Type of Room No. of room× No. of days × Occupancy% Room days

Deluxe Room 100 room× 360 day × 90% occupancy 32,400
Super Deluxe Room 60 room× 360 day × 75% occupancy 16,200
Luxury Suite 40 room× 360 day × 60% occupancy 8,640
Total 57,240
2. Computation of equivalent Deluxe room days
Rent of 'Super Deluxe' room is to be fixed at 2 times of 'Deluxe room' and that 'Luxury
Suite ' is 3 times of 'Deluxe room'. Therefore equivalent room days would be :
Type of Room Room days Equivalent Deluxe room days

Deluxe Room 32,400× 1 32,400
Super Deluxe Room 16,200× 2 32,400
Luxury Suite 8,640× 3 25,920
Total 90,720

3. Computation of room attendant's wages
Room occupancy days × Rs 500 Per day
57,240 room-days × Rs. 500 = Rs 2,86,20,000
4. Computation of Depreciation per annum
Particulars Cost (Rs) Rate of Depreciation (Rs)

Depreciation
Building 900,00,000 5% 45,00,000
Furniture and Fixtures 90,00,00 10% 9,00,000
Air Conditioner 75,00,000 10% 7,50,000
61,50,000
Answer No 6 (c) :
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 (Ltr.) 1,44,000 2,16,000
Selling price per Ltr. (R s . ) 64 41
Sales value (R s . ) 92,16,000 88,56,000
Share in Joint cost (128:123) 87,71,200 84,28,575

1,71,99,775 1,71,99,775
×123 ⎟
×128 ⎟
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 HSD 89,76,000 86,48,000
respectively
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 No 6 (d)
Contract Account for the year ended 31st Ashadh, 2075

Particulars HP-1 HP-2 particulars HP-1 HP-2
(Rs.) (Rs.) (Rs.) (Rs.)
To Balance b/d W-I-P 7,80,000 2,80,000 By Closing 47,000 52,000
Material at site
To Material Purchased 6,20,000 8,10,00 By W-I-P
To wages: Value of work 20,50,000 16,10,000
(Rs.8,5000+ Rs 12,000) 97,000 certified
(Rs 62,000+ Rs 8,400) 70,400

Cost of work not 1,90,000 1,40,000
Certified
To Donation to local 5,000 2,500
club*
To Plant hire charge: 24,000
(Rs. 72,000×1/3)
(Rs. 57,000×1/3) 19,000
To Depreciation on
concrete mixture**
(8,20,000×15%180/365) 60,658
(8,20,000×15%100/365) 33,699
To Notional profit 7,00,342 5,86,401
(balance c\d)
22,87,000 18,02,000 22,87,000 18,02,000
To Costing p & L A/c 1,86,758 1,56,374 By Notional profit 7,00,342 5,86,401
(WN-2) (balance b/d)
To Costing P & L 5,13,584 4,30,027
Reserve A/c
7,00,342 5,86,401 7,00,342 5,86,401
*Assuming donation paid to local club was exclusively for the above projects, hence
included in the contract account.
**Depreciation on concrete mixture machine is charged on the basis of number of days
used for the projects as it is clearly mentioned in the question that this machine can be
used for other projects also.
Working Notes:
1. Computation of Stage of completion of the projects:
Value of work certified ×100

Value of contact
HP-1= Rs. 20,50,000 ×100

Rs. 48,00,000 =42.71%
HP-2= Rs. 16,10,000 ×100

Rs. 36,00,000 =44.72%

2. Computation of profit to be recognized in the Costing profit and loss A/c
1/3×Notional profit × Cash Received

Value of work certified
HP-1=1/3× Rs. 7,00,342×80% =Rs. 1,86,758
HP-2=1/3× Rs. 5,86,401×80% =Rs. 1,56,374
(Land purchased and brokerage and registration fee paid for this purpose cannot be
charged to contract account, hence not included in the contract account)
Answer No 6 (e)
(i) No. of passengers 160 seats ˟ 60% = 96
(Rs.) (Rs.)
Fare collection (96 passengers ˟ Rs. 7,200) 6,91,200
Variable costs:
Fuel 96,000
Food (96 passengers ˟ Rs.125) 12,000
Commission (5% of Rs.6,91,200) 34,560 1,42,560
Contribution per flight 5,48,640
Fixed costs:
Aircraft Lease 3,50,000
Landing charges 72,000 4,22,000
Net income per flight 1,26,640
(ii)
Fare collection (108 passengers ˟ Rs. 6,720) 7,25,760
Variable costs:
Fuel 96,000
Food (108 passengers ˟ Rs.125) 13,500
Commission (5% of Rs. 7,25,760) 36,288 1,45,788
Contribution 5,79,972
There is an increase in contribution by Rs. 31,332. Hence the proposal is
acceptable.
Answer No 7 (a)

(i) Contribution = Rs. 37.50 - Rs. 17.50 = Rs. 20 per unit.
Fixed cos t
Break even Sales Quantity =
Contribution margin per unit
35,00,000
= =1,75,000 units
20
Cash Fixed Cost

Cash Break even Sales Qty= = 20,00,000 =1, 00,000 units.
Contribution margin per unit 20
Contribution / unit 20
(ii) P/V ratio = ×100 = ×100 = 53.33 %
Rs.37.50
Selling Pr ice / unit
(iii) No. of units that must be sold to earn an Income (EBIT) of Rs. 2, 50,000
Fixed cost + Desired EBIT level
Contribution m argin per unit
35, 00, 000 +2, 50, 000
=
20
= 1,87,500 units
(iv) After Tax Income (PAT) = Rs.2, 50,000
Tax rate = 40%
2, 50, 000
Desired level of Profit before tax = ×100 = Rs.4,16,667
60
Fixed Cost +Desired Pr ofit
Estimate Sales Level =
⎝ P / V ratio⎠
35,00, 000 + 4,16,667 Rs.
= Rs. = 73,43,750
53.33%
Answer No 7(b)
(i) Total Fixed Cost = Rs. 6,00,000 + Rs. 20,00,000 + Rs. 8,00,000 + Rs. 2,00,000
= Rs. 36,00,000
Contribution per unit = Rs. 600 - Rs. 470 = Rs. 130

Contribution per unit
P/V Ratio = ×100
SellingPrice
130
×100 = 21.67%
600
Total Fixed Cost

Break-even Point = ×100
Contribution per unit
36, 00, 000

= 27,692.31 or 27,693 units
130
Total Fixed Cost

Break-even Sales = =
P / V Ratio
36, 00, 000

= 1,66,12,829
21.67%
Calculation of Profit/ (loss):

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

Break-even Point =
Rs. 36, 00, 000 +Rs. 9, 00, 000
Rs. 160
= 28,125 units
(iii) Revised Selling Price = Rs. 600 + 5% of Rs. 600 = Rs. 630
Revised Variable cost = Rs. 470 + Rs. 5 = Rs. 475
Revised Contribution = Rs. 630 – Rs. 475 = Rs. 155

Break-even Point =
Rs. 36, 00, 000
Rs. 155
= 23,225.81 or 23,226 units
Answer No 8 (a)
I. Statement showing Flexible Budget and Its comparison with actual
Master Flexible Budget (at Actual

Budget standard cost) for Variance
80,000 72,000
Per unit 72,000 units
units units
A Sales 3,20,000 4.00 2,88,000 2,80,000 8,000(A)
B Direct Material 80,000 1.00 72,000 73,600 1,600(A)
C Direct wages 1,20,000 1.50 1,08,000 1,04,800 3,200(F)
D Variable overhead 40,000 0.50 36,000 37,600 1,600(A)
E Total variable 2,40,000 3.00 2,16,000 2,16,000 -

overhead
F Contribution 80,000 1.00 72,000 64,000 -
G Fixed overhead 40,000 0.50 40,000 39,200 800(F)

H Net profit 40,000 0.50 32,000 24,800 7,200(A)
II. Variances:
Sales price Variance = Actual Quaintly (Standard Rate- Actual Rate)

= 72,000 units (Rs. 4.00-Rs 3.89) = Rs. 8,000 (A)
Direct Material Cost Variance = Standard Cost for Actual output- Actual cost
= Rs.72,000- Rs.73,600= Rs.1,600(A)
Direct Material Price Variance = Actual Quaintly ( Standard Rate- Actual Rate)
=78,400 units {Rs. 1.00 - Rs 73,600}
78,400 units
= Rs.4,800 (F)
Direct Material Usage variance = Standard Rate ( Std. Qty- Actual Quantity)
= Rs.(72,000 unit -78,400 units) = Rs. 6,400(A)
Direct Labour Cost Variance = Standard Cost for actual output-Actual cost
= Rs.1,08,000- Rs.1,04,800= Rs.3,200(F)
Direct Labour Rate Variance = Actual Hour (Standard Rate-Actual Rate)

=70,400 hours { Rs.1.5 - Rs.1,04,800 )
70,400 hours
= Rs. 800(F)
Direct Labour Efficiency = Standard Rate (Standard Hour- Actual hour)

= Rs. 1.5 (72,000-70,400)= Rs. 2,400(F)
Variable Overhead =Recovered Variable Overhead- Actual variable

overhead
=(72,000 units× Rs. 0.50)- Rs. 37,600= Rs.1,600(A)
Fixed Overhead Expenditure =Budgeted Fixed overhead-Actual fixed overhead

= Rs. 40,000- Rs. 39,200= Rs. 800(F)
Sales Volume (Profit) Variance =Std. Profit (Budgeted Quantity -Actual Quantity)
= Rs 0.50 (80,000-72,000)= Rs. 4,000(A)
Answer No 8 (b)
Working Note : Total Annual Production (in units)
Sales in 4 quarters 1,53,750 units

Add : Closing balance 16,250 units
1,70,000
units
Less : Opening balance 10,000 units
Total number of units to be produced in the next year 1,60,000
(i) Production Budget (in units)

I II III IV
Sales 30,000 37,500 41,250 45,000 1,53,750
Production in current quarter 24,000 30,000 33,000 36,000
(80% of the sale of current quarter)
Production for next quarter 7,500 8,250 9,000 12,250*
(20% of the sale of next quarter)
Total production 31,500 38,250 42,000 48,250 1,60,000
* Difference figure.
(ii) Raw material consumption budget in quantity
Quarters Total
I II III IV
Units to be produced in
each quarter: (A) 31,500 38,250 42,000 48,250 1,60,000
Raw material con-
sumption p.u. (kg.): (B) 2 2 2 2
Total raw material
consumption (Kg.) : (A ×63,000 76,500 84,000 96,500 3,20,000
B)
(iii) Raw material purchase budget (in quantity)
Raw material required for production (kg.) 3,20,000

Add : Closing balance of raw material (kg.) 5,000
3,25,000

Less : Opening balance (kg.) 10,000
Material to be purchased (kg.) 3,15,000
Raw material purchase budget (in value)
Quarters % of annual require- Quantity of Rate Amount

ment (Qty.)for raw material kg.
per
purchasing raw to be purchased
material (kg.) (Rs. ) (Rs. )
(1) (2) (3) (4) (5) = (3) × (4)
I 30 94,500 2 1,89,000
(3,15,000 kg. × 30%)
II 50 1,57,500 3 4,72,500
(3,15,000 kg. × 50%)
III 20 63,000 4 2,52,000
(3,15,000 kg. × 20%)
Total : 3,15,000 9,13,500
Answer No 9 (a)
The three distinct groups of variances that arise in standard costing are:
(i) Variances of e f f i c i e n c y . These ar e t h e variance, which arise due to

efficiency or inefficiency in use of material, labour etc.
(ii) Variances of prices and rates: These are the variances, which arise due to
changes in procurement price and standard price.
(iii) Variances due to volume: These represent the effect of difference between
actual activity and standard level of activity.
Answer No 9 (b)
Material Variance
Material SQ SP SQ×AP RSQ RSQ×SP AQ AQ×S AP AQ×AP
(WN-1) (RS) (Rs) (WN-2) (Rs) P (Rs) (Rs)
(Rs)
A 940 kg 45.00 42,300 886 kg 39,870 900 kg 40,500 43.00 38,700

B 705 kg 30.00 21,150 664 kg 19,920 650 kg 19,500 32.50 21,125
1645 kg 63,450 1550 kg 59,790 1550 kg 60,000 59,825

WN-1 Standard Quantity (SQ) :
Material A- 800 kg × 1,480 kg

0.9×1400 kg =939.68 or 940 kg
Material B- 600 kg ×1,480 kg

0.9×1400 kg = 704.76 or 705 kg
WN-2 Revised Standard Quantity (RSQ):
Material A- 800 kg × 1,550 kg

1400 kg = 885.71 or 886 kg
Material B- 600 kg × 1,550 kg

1400 kg = 664.28 or 664 kg
a) Material Cost Variance (A+B) = {(SQ×SP)-(AQ×AP)}

= {(63,450-59,825) = 3,625 (F)
b) Material Price Variance (A+B) = {(AQ×SP)-(AQ×AP)}

= (60,000-59,825) = 175 (F)
c) Material Mix Variance (A+B) = {(RSQ×SP)-(AQ×SP)}

= (59,790-60,000) = 210 (A)
d) Material Yield Variance (A+B) = {(SQ×SP)-(RSQ×SP)}
= (63,450-59,790) = 3,660 (F)
Labour Variance
Labour SH SR SH×S RSH RSH×S AH AH×SR AR AH*AR
(WN-3) (Rs) R (WN-4) R (Rs) (Rs) (Rs)
(Rs) (Rs)
Skilled 1,116 hrs 37.50 41,850 1144 42,900 1,200 45,000 35.50 42,600
Unskilled 893 hrs 22.00 19,646 916 20,152 860 18,920 23.00 19,780
2,009 hrs 61,496 2,060 63,052 2,060 63,920 62,380
WN-3 Standard Hours (SH);
Skilled Labour - 0.95×1000 hr. ×1480 kg

0.90×1,400 kg = 1,115.87 or 1,116 hrs.

Unskilled Labour - 0.95×800 hr. ×1480 kg
0.90×1,400 kg = 892.69 or 893 hrs.
WN-4 Revised Standard Hours (RSH)
Skilled Labour = 1000 hr. ×2,060 hr.

1,800 hr = 1,144.44 or 1,144 hrs.
Unskilled Labour - 800 hr. ×2,060 hr.

1800 hr = 915.56 or 916 hrs.
e) Labour Cost Variance (Skilled + Unskilled) = {(SH×SR)-(AH×AR)}

=(61,496-62,380) = 884(A)
f) Labour Efficiency Variance (Skilled + Unskilled) = {(SH×SR)-(AH×SR)}

= (61,496-63,920) = 2,424 (A)
g) Labour Yield Variance (Skilled + Unskilled) = {(SH×SR)-(RSH×SR)}
= ( 61,496-63,052) =1,556 (A)
Answer No 10 (a)
The limitations of Uniform Costing are as follows;
i. Sometimes it is not possible to adopt uniform standards, methods and procedures of costing
in different firms due to differing circumstances in which they operate. Hence, the adoption
of uniform costing becomes difficult in such firms.
ii. Disclosure of cost information and other data is an essential requirement of a uniform
costing system. Many firms do not wish to share such information with their competitors in
the same industry.
iii. Small firms in an industry believe that uniform costing system is only meant for big and
medium size firms, because they cannot afford it.
iv. It induces monopolistic trend in the business, due to which prices may be increased
artificially and supplies withheld.
Answer No 10 (b)
The main advantages of Inter-Firm Comparison are:

(i) Such a comparison gives an overall view of the industry as a whole to its members.
The present position of the industry, progress made during the past and future of the
industry.
(ii) It helps a concern in knowing its strengths or weaknesses in relation to others so that
remedial measures may be taken.
(iii) It ensures an unbiased specialized reporting on particular problems of the concern.
(iv) It develops cost consciousness among members of the industry.
(v) It helps Government in effecting price regulation.
(vi) It helps to improve the quality of products manufactured and to reduce the cost of
production. It is thus advantageous to the industry to the industry as well as to the
society.
Answer No 11 (a)
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.

Paper 6: Business Communication & Marketing

Revision Questions
Question No 1
Read the following case carefully, and answer the questions given below:
Samrant Singh, a PhD scholar in International Business Communication is requested by a
reputed multinational company for presenting a paper in their annual celebration on 'promoting
intercultural communication in the diverse workplace'. The administration director of the
company has also informed Mr Singh that conflicts usually arise in their workplace without any
apparent reason. According to the director, no significant attention was paid towards
communication aspect in the beginning, but they have come to realize now that the main cause of
the usual conflicts in the operational level is lack of proper communication among the staff, who
represent from different cultural and national backgrounds.
Mr Singh is provided with the required data, and is requested to suggest some important
strategies through the presentation paper to promote intercultural communication in the
company. From a preliminary survey Mr Singh has found that the company has more than one
hundred employees having at least twelve nationalities. He is now expecting to learn more about
the code they use while they are in work and the approach they take while they make decisions.
a) Mr Singh is expecting to learn more about the variety of code the staffs use while they are in
work and the approach they take while they make decisions. Now, write an e-mail on behalf
of Mr Singh to the administration director asking about the information that he is expecting
to learn.
b) In this specific context, what strategies of intercultural communication do you think will be
involved and discussed in the presentation paper of Mr Amayta?
c) Do you believe that conflicts arise in the workplace due to the lack of proper
communication? What can be done to overcome such conflicts?
Question No 2:
Elaborate the concepts of encoding and decoding as the two major processes of communication. 10
Question No 3:
What do you mean by workplace diversity? What are the major problems of workplace diversity? And,
how can workplace diversity be managed?
Question No 4:
Discuss the usefulness of audio-visual aids in an effective presentation of business reports, research
papers and proposals.
Question No 5:

Discuss the concept of ethics in business communication. What role does it have in the success of a
business organization?
Question No 6:
Write short notes on:

a) Qualities of good minute writing
b) Paralanguage
c) Avoiding ethnocentrism in communication
Question No 7
Proposal and report are important forms of research writing. However, they essentially differ regarding
various perspectives. Discuss briefly how a report is different from a proposal.
Question No 8:
Conflicts are assumed to be common assets of business organizations. They need to be managed
successfully to avoid bad results of them. Negotiation is one of the effective ways of settling conflicts
within business organizations. Discuss the process of negotiation as an effective means of conflict
resolution.
Question No 9:
Write short notes on ANY FOUR of the following:
a) Graphics in business communication
b) Overcoming group problems
c) Corporate social responsibilities
d) Roles of individuals in a group
e) Ethics in business communication
Question No 10:
What are barriers to effective listening? Explain in brief how they can be overcome.
Question No 11:
What are the major strategies for organizing information in the analytical reports? Critically examine the
relevance of each of these strategies.
Question No 12:
Write short notes on ANY FOUR of the following:
a) Workforce diversity
b) Buffers
c) Group dynamics
d) Work plan in the proposal

Answer No 1(a):
From: discover.samrant@gmail.com
To: admns.sony@yahoo.com
Sub: general information
Dear Mr. Agrawal,

I received what you wrote about the current situation of your diverse workforce. I'm working
on the same paper that I'm asked to present at the annual ceremony. I'd be much pleased if
you sent me some information about the variety of code you and your staffs use during work,
and about the approach you adopt while making important decisions. Please, make it clear
whether you use multiple languages, or international codes, or any others. Similarly, please
also mention whether you involve your staffs in the important in-house decisions or not. If
you do so, which approach do you adopt?
Regards,
Samrant Singh
Answer No 1(b):
The researches have pointed out that intercultural communication in the diverse workplace can
be managed as an organizational asset with some specific efforts and strategies. In order to
reduce the misunderstandings caused by work place diversity, cross cultural communication
networks need to be established. The followings are some of the important strategies that can be
adopted for the management of the cultural diversity in a workplace, and that can be involved
and discussed in a presentation paper:
 Promoting cross-cultural relationship between /among people of diverse cultures working in

diverse work situation, each respecting each other‘s cultural norms and values, and
 Changing traditional cultural perceptions incompatible with the changing needs of today with
the help of frequent meetings and training programs.
 Allowing different languages for official work. Cultures of even minorities need to be
acknowledged.
 Conducting seminars, workshops, etc. to familiarize people with each other.
 Building cohesive multi-cultural work teams.
 Creating a corporate culture that can accommodate diversity to maximize the potential of the
workforce.
Answer No 1(c):

Obviously, conflicts arise in the workplace due to the lack of proper communication systems and channels
in an organization. Communication is one of many causes of conflict in a workplace. In the multicultural
context as in the given case, lack of proper communication may create very serious misunderstandings
and conflicts among the co-workers. However, conflicts can be managed with the help of appropriate
skills and strategies. Firstly, intercultural communication should be made easy and effective in the diverse
workplace. Similarly, people need to be trained not only about verbal communication tools but also about
non verbal and paralinguistic ones. Additionally, values, beliefs and practices of each culture should be
equally acknowledged in order to overcome such conflicts. International code can also be much useful.
Stories, songs, videos, etc. can be exposed to the people so that they can understand each other‘s cultures,
values and practices.
Answer No 2:
 Business communication involves a number of linguistic and non linguistic elements such as words,
phrases, discourse markers, graphic tools, paralanguage features, instruments and so on which are
used by the participants to give a specific meaning. The way of assigning meaning to such symbols
and words is known as encoding.
 It is human mind that is essentially important in making the meaning of what has been used as
linguistic or nonlinguistic device for communication. The speaker‘s mind gives or determines
particular meaning of the linguistic or non-linguistic devices. This is to say the sender‘s mind is
responsible for giving the meaning of the language used. The process is known as encoding.
 With the help of linguistic, socio- cultural, and experiential knowledge, a speaker encodes the
meaning of his or her speech, and intends that the receiver will also decode the meaning in the same
way.
 To be more specific, encoding is a sender‘s mental process of presenting ideas or information in oral
or written form, using sounds, letters, words, figures or symbols.
 Decoding is the receiver‘s mental process or act of assigning the meaning to the words and symbols
used by the speakers or writers.
 While encoding is concerned with production, decoding is concerned with perception of discourse
meaning in context.
When the message encoded by the sender is decoded properly by the receiver, the process of
communication is successful.
Answer No 3:
The reality of the present day work-situation entails that the changing world has permitted people with
diverse culture, identity and ideology to work together for a common goal of business, trade and industry.
Such diversity in the workplace is commonly termed as ‗workplace diversity‘ in the field of international
business communication.
 The term is also defined in the reference to the characteristic feature of cross-cultural
communication.
 Cross cultural campaigns are conducted in every sector such as business, education, communication,
media, and so on.

 The increasing diversity of the workplace has posed a challenge to the managers and executive
heads.
 Messages may be interpreted differently by workers of different gender, racial and cultural
background.
 Employees may not be able to adjust themselves into the diverse cultural situation, and can be
misunderstood.
 Because of lack of cooperation and support, conflicts between the workers may also arise.
 The workplace faith is important to regularize and accomplish the work in diverse situation. Having
faith on work promotes sincerity and honesty in the work.
 Developing multicultural sensitivity in workers may help us manage diversity in the workplace.
 Conducting interaction programs, talks, tours and visits, trainings, etc. may also help manage the
diversity.
Answer No 4
 Of different tips for making the presentation sufficiently systematic and comprehensible to the
audience, the use of audio visual aids is one of the strongest one.
 Audio visual aids help to make comprehensive interactions, displays, and demonstrations.
 A wide range of audio visual equipment, including power point devices are required in a presentation.
A kind of variety is brought in contents as well as delivery techniques.
 Speaking continuously may be monotonous, boring, and incomprehensible for the listeners. So,
participatory approach should be adopted. And for this, audiovisual aids are a must. They make
presentation more interactive, interesting, and comprehensible.
 The presentation must be accompanied with some audio visual materials such as the computer, the pp
projector, the charts, pictures, figures, etc. according to the context we are in.
Answer No 5:
 Communication system of an organization needs to be ethically rational and reliable.

 Ethics is related to what is good or right. To say and know verbally what ethics is in fact less important
than behaving ethically in the business organizations.
 Behaving ethically virtually means following certain norms and values of the business principles. The
violation of such values and norms is subjected to the violation of ethical values.
 Ethical communication system believes in fair and reliable dissemination of information so as to
maintain faith and justice among the people inside and outside the organization.
 A business organization has to deal with a number of its stakeholders. Its communication system
should be ethically rational and reliable for its sustainability.
 For avoiding unethical dealings within organization such as gossiping, using grapevine, doing
conspiracy, etc.
 to avoid plagiarism, which a deceitful practice
 For forming ethical organizational leadership and structure
Answer No 6 (a)

 Attendance record of members and participants
 Record of the matters discussed and resolutions taken
 Records of decisions in explicit language
 Making an index with topic, number, date, etc.
 Chairman‘s points of approval and disapproval
 Getting Chairman‘s initial at every changes made in the record book
 Signatures of members
Answer No 6 (b)
 The vocal qualities of speech

 Also called vocalic feature
 It has important influence in making the meaning in communication. It is more about how we speak.
 Voice quality, pause, pitch variation, fluency, silence style, etc. are the major components of
paralanguage.
 These may signify very specific meaning in communication such as speaker‘s state of age, gender,
personality, seriousness, patience, etc.
 The paralanguage features are important for expressing specialty of meaning or message. They may also
help us predict the expectations of the participants.
Answer No 6 (C)
 Avoiding one‘s feelings of being superior or inferior to the people of other culture or background
 For minimizing intercultural misunderstandings and conflicts
 For bridging gaps and for managing the workplace diversity
 No culture is superior to other one
Answer No 7:
The report and the proposal can be distinguished specifically in the points below.
Parameters Report Proposal
Goals To narrate, describe what happened. To show what will happen and how.
To show a situation, or a summary of
some event, or dealing.
Presentation Narration, summary, graphic analysis, Persuasive, with plans, possible
description, factual information, … benefits, future activities, budget,
time schedule…

Types Analytical & informational Business & research
Formal& informal Solicited & unsolicited
Structural & organizational ……..
……
Answer no 8:
 Working in groups may invite many different issues in a business organization. One of the most
common issues is conflict among the group members. At the same time certain measures for conflict
resolution are also identified.
 Negotiation is one of the very useful and effective processes of conflict resolution. It helps people to
eliminate the basis for conflicts through bilateral discussions, dialogues and compromise. It is the
most preliminary stage in the process for the conflict resolution.
 The term ‗negotiation‘ is used commonly in the sector of business communication to refer to the
common effort made by two parties intending to minimize the conflict between the two.
 It is a significant process of conflict resolution. It aims to settle the dispute through intra-group
facilitation, compromise, mutual understanding and co-ordination.
 The two conflicting parties are required to go through the situation with certain critical reflections,
and they are kept together face-to-face with a kind of realization about the situation. They are ready to
reach the solution and get involved in the negotiation process.
 They have open discussion with the motive of negotiation. They try to make ‗give and take‘ results on
one hand, and on the other they try to compromise upon certain bottom line of their views and
positions.
 They reach the ‗win-win‘ situation. The role of the third party is quite subtle unlike in the processes
such as mediation and arbitration.
Answers No 9:
e) Graphics in business communication
Graphics, one of the highly effective non-verbal tools commonly used in business communication refer to
different designs, drawings or pictures that we keep in our power point slides, advertisements, business
texts, brochures, instructions, manuals, etc. The usefulness of graphics in business communication can
never be underestimated since graphic representation of information becomes not only clear and precise
but also impressive and persuasive. It is commonly believed that a picture is worth thousand words. Line
graphs, histograms, bar charts, pie charts, figures, etc. are the common examples of graphics.
f) Overcoming group problems

Working in groups may invite a number of problems though it is believed that team work contributes to
attaining the organizational goals and missions. The group problems are to be settled so that the expected
outcomes can be ensured. Some of the important strategies for overcoming the group problems are:
 Working with group spirit and identity;
 Discouraging personal skepticism, lobbying, influences and thoughts;

 Training on group autonomy and group dynamism;
 Generating the sense of cooperation, endurance and collaboration…
g) 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.
(d) Roles of individuals in a group

 Observing group principles, rules and guidelines
 Avoiding stereotyped perceptions and thoughts
 Avoiding biased and skeptic attitudes
 Active and creative contribution to the group mission
 Keeping group interests above individual interests
 Having proper communication, and sharing the ideas and innovations
 Being loyal, courteous and faithful, and so on.
(e) Ethics in business communication

Ethics in business communication is constituted by various social values, cultural norms, morality and
legal regularity. It has three major perspectives: economic, legal and philosophical.
Economic perspective refers to the way of avoiding financial abuses and unfair business competencies.
Similarly, legal perspective refers to the way of abiding in rules and following the regulatory norms. The
government rules and regulations must be obeyed properly. And, philosophical perspective involves
respecting others‘ cultural values, honoring self esteem and making mutual co-operation.
Answer No 10:
 Complexity in effective listening is mostly caused by many different factors such as content, channel
and barriers to it, too. Good listeners always look for ways to overcome potential barriers throughout
the listening process.
 Barriers to effective listening may vary from physical reception to listener's mental conditions. The
physical barriers such as room acoustics, phone rings and other noises, background music etc. can be
serious when the listener has to extract particular information or content from listening.
 Similarly, lack of attention, interruption, schema, prejudgment etc. can be the examples of mental
barriers to effective listening.
 Some of the strategies for overcoming the barriers to effective listening can be:
 try to minimize the sources of physical barriers such as noises and poor acoustics
 avoid selective listening and focus on the speaker
 keep an open mind and avoid prejudgment
 try to interpret the message from the context of the speaker

 do not interrupt the speaker
 write, record or try to capture the information
 try to associate, categorize and visualize the information
 pay proper attention
Answer No 11:
 Three Major strategies for organizing information in analytical reports are (1) focusing on conclusions (2)
focusing on recommendations and (3) focusing on arguments.
 When one is writing an analytical report for those audiences who are receptive in nature, information can
be organized focusing on writer's conclusions and judgments based on experience and research. The
audiences are likely to trust such judgments or conclusions, and may agree with the writer. The report can
be structured around those conclusions and findings, using a direct approach. However, focusing directly
on conclusions does have potential drawbacks. It may make everything the writer says seem too simple
and personified. The audiences can have reservations about the writer's conclusions.
 When the analytical report is more concerned to what ought to be done in a particular situation than to
what is existing, the report can be structured focusing on recommendations. According to this approach
recommendations will be unfolded directly by following different steps of analysis and different modes of
conclusions. The report writer needs to be much sensible of whether the recommendations would invite
any risk in the business in future.
 Reports can be organized focusing on arguments, too. Instead of drawing clear conclusions and
recommendations the report may also present certain logical analysis of specific situations along with
many different alternative ideas, solutions or options. More scientific approach is adopted in such type of
organization strategy. When the report aims at collaborative and persuasive issues, the focusing on
arguments approach would be more suitable. However, this strategy may create certain confusions among
the options. So, it seems better if the writer gives specification for each argument or option in the report.
Answer No 12(a)
 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.
Answer No 12(b)
 Buffers are the tools for creating indirect but courteous relationship with the people in written transactions
such as bad news letters, follow up letters, and other general correspondences.
 A buffer is useful to establish common ground with the reader. But, a poorly written buffer can mislead
and sometimes insult the reader. Good buffers have balanced elements of communication, and give good
impression to the readers.
 Agreement, appreciation, cooperation, politeness, fairness, etc. are some of the types of buffers which are
important in most of the business correspondences.

Answer No 12(c)
 Strength of team work is always appreciated in the sector of business and organizational management.
The role of each member in the team or group is important in order to accomplish group tasks and get
success in business.
 To accomplish the business goals successfully, team members constantly contact with one another. The
interactions and processes that take place between the members of a team are called group dynamics.
 Some teams are more effective than others simply because the dynamics of the group facilitate member
input and the resolution of differences.
 Group dynamics are affected by several factors: the role that team members assume, the current phase of
team development, the team's success in resolving conflict, and its success in overcoming resistance.
 Group dynamics promote understanding and cooperation among the members.
Answer No 12 (d)
 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 what must be done and how it 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.

Paper 7:Income Tax and VAT

Revision Questions
Income Tax
Question No 1:
Nepal Cement Pvt. Ltd. is engaged in production of cement, the factory is located at Dang and
own ore of limestone is mainly used for production of raw materials, in addition some required
other raw materials are also purchased from market. There is high demand of standard quality
cement in Nepal and also export is significant. Calculate the tax liability of the company for
Income Year (2075.76 with latest provisions of Income Act as amended by Budget for FY
2075.76):
Particulars Amount (Rs.) Remarks

55% Export Sales and 45%
Sales of cement 106,450,000.00
Sales in Nepal
Sales of Scarp items 5,540,000.00
Closing stock of raw and packing
7,590,600.00
materials
Closing Stock of goods 17,590,000.00
Total of Credit Side 137,170,600.00
Opening Stock of Goods 19,550,450.00
Includes the basic ingredients
Purchase of Raw Materials 26,789,000.00
of cement
Purchase of Packing Materials 14,560,900.00
Electricity 4,590,240.00
This cost also includes the
Transportation cost of limestone
24,560,000.00 repair of fleet of transport
from ore to factory
equipments Rs. 1250000
Rs. 46000 is wage for repair of
Wages 15,546,000.00
machinery
Salary 3,560,920.00
This is cost paid as per Labor
Act 2074 to retirement fund by
Gratuity expense 1,546,520.00 the company, the amount will
be received by employees on
retirement
Bad Debt for the year 4,501,000.00
Rs. 12000 per month was the
Telephone 854,600.00 cost of telephone of house of
Chairperson
This cost includes the Liquor
Sales promotion expenses 2,564,050.00
purchased 64050 and

distributed on the Dashain to
the Stockiests
Rs. 1160800 is the cash
distributed to the dealers on
Sales Tour by the Sales
Director through Cash, the
Sales commission to Dealers 4,560,800.00
cash for each dealer is more
than Rs. 50000 and all paid on
weekdays, the dealers are
located on the City areas
Repair of Machine 1,200,000.00
Repair of Building 1,590,000.00
Repair of Car 59,000.00
Depreciation 6,050,000.00
Net Profit before tax 5,087,120.00
Total of Debit Side 137,170,600.00 -
Details of Assets are

Pool Opening WDV of assets
A (Factory Building) 15,590,000.00
D (Plant and Machineries) 90,07,000.00
D (Delivery Truck Fleet) 5,005,000.00
C (Automobiles) 2,550,000.00
There are 109 employees, out of which 101 are Nepali citizen, and out of Nepali 35 are among
Women, Dalit and Disabled.
The upto previous year the company was engaged in selling the cement by importing from India,
and the loss from previous five years is Rs. (70) lacs.
Required
a) Calculate the allowed Depreciation and Repair for the FY
b) Calculate the Assessable Income from Business and Taxable income from Business
c) Calculate the Tax liability for the IY with mentioning the tax rate for the business with
rebate/discount available if any.
Question No 2:
Worldwide engineering consultancy pvt ltd have furnished the following details for the income
year, calculate net tax payable by the company for the income year.

Sales of services 45,000,000.00 25% Export Sales and 75% Sales in Nepal
Interest income from Bank 145,000.00 Net of Tax
Dividend income from
Standard Chartered Bank 250,000.00 Net of Tax
Total Income 45,395,000.00
This is for purchasing the tender document for providing
Cost of tender document 175,000.00 consultancy service to Nepal Government
The company has not made any provision for Employee
Benefits, but at the end of year as per recommendation of
Statutory Auditor the management decided to make
provision for employee benefits regarding the gratuity,
festival allowance as required by Labor Act 2074, and all
the payment shall be made to employees in case of festival
allowance and gratuity shall be funded to Approved
Retirement Fund Account (Employees Provided Fund). The
Salary of Employees 14,500,000.00 total basic salary of employees was rs. 9050000.
Salary of employees on
contract for less than 35
hours in a week, for total These employees are hired for fulfilling the consultancy
of 2 week for each service to China Power Limited intending to invest in
employee 2,040,000.00 Monorail in Kathmandu Valley
Electricity 245,000.00
Travelling and
Transportation 1,050,000.00 50% is travelling to China for the report presentation
Wages 275,000.00 0
Printing and Stationery 210,000.00
Office amenities 145,000.00
Internet 270,000.00
Telephone 289,000.00
Business Promotion On scrutiny Rs. 122500 expense have no appropriate
Expenses 756,000.00 supporting documents
Net Profit before tax 25,440,000.00
Total of Debit Side 45,395,000.00 -
Question No 3:
Hotel Wildlife Pvt. Ltd. at Bardiya has provided the following details for the Income Year.
Sales Income 99,500,000.00
Cost of Food 22,500,000.00
Cost of Beverage 12,750,000.00

Salary of employees 7,590,000.00
Wages 750,000.00
Bad Debt of the Year 1,975,000.00
Software Maintenance Expenses 125,000.00
Repair 2,025,000.00
Total of Expenses 48,605,000.00
The loss upto previous years was 105,00,000. The current year is 11th year of operation, and loss
for last year was Rs. 15 lacs, the remaining is equal for previous years.
Building was completed and used for business on 1.Bhadra with cost of Rs. 665,00,000, the
software purchased for 1000000 with life of 9 years and Kitchen Equipments all purchased on 25
Shrawan for 40 lacs and the bed sets of 45 rooms was acquired for 75 lacs. The repair was for
building 925000 and remaining garden development. Calculate the tax for current year.
Question No 4:
Mrs. Bidhya has revealed her income, calculate the applicable tax for income year, showing all
the workings and explanations.
Particulars Amount Remarks
Salary 375,000.00 per month

Children Education Allowance 10% of basic salary per month
Medical Allowance 10% basic salary per month
Contribution to Approved
Retirement Fund 25,000.00 per month, only by her
Rs. 75000 is paid to tax exempt
organization and remaining is also paid
to another tax exempt organization with
pre approval of Inland Revenue
Donation 1,075,000.00 Department
Life Insurance Premium 50,000.00 45% paid by employer
Health insurance premium 50,000.00 45% paid by employer

all paid by employer, and it is policy of
employer to make the cover the group
Group Accident premium 10,000.00 accidental insurance to all employees
Additionally other facilities are as follows:
- Car costing Rs. 35,00,000 for official use with driver, the salary of driver is Rs. 25,000 per
month
- Telephone allowance of Rs. 3,000 per month

- The employee benefits are not included above, and as per provision of Labor Act the
employer agreed to additionally provide for Provided Fund and Gratuity and the same
shall be deposited per month into the approved retirement fund.
Question No 5:
Following income is earned by Mr. Suresh, calculate total tax to be paid for the respective
income year.
Rent income from the building at Newroad Rs. 325,000 per month. The interest income from
Nepal Bank Limited Rs. 450,000. Dividend income from Unilever Nepal Ltd Rs. 95,000. Exam
paper preparation and evaluation from KU Rs. 75,000. Payment received from Nepal Water
Company for providing the land with natural source of water at Rasuwa Rs. 1050000. Interest
received from Nepal Water Company for the secured loan provided to company Rs. 350000. All
the payments received are net of tax (if applicable).
Donated Rs. 55,000 to Dhurmus Suntali Foundation (which is tax exempt)

He has purchased life insurance policy with payment of Rs. 35,600. He contributes Rs. 10,000
per month to Citizen Employees Fund for his future saving plan.
Question No 6:
The details of Kathmandu Buildings Pvt. Ltd. which has Kathmadu Complex at Khichapokhari,
New Road and the building is rented for various commercial enterprises is as follows:

37,500,000.0
Rent Income The amount is received net of tax from the tenants
0
Claim from Insurance
1,075,000.00
Company
Bad Debt Recovered 675,000.00 30% previously disallowed
39,250,000.0
Total Income
0
Expenses
Building Repair 3,570,000.00 Building opening WDV is 45000000
Elevator Repair 1,275,000.00 Elevator opening WDV is 9750000
Salary 1,075,000.00
Interest on Loan from bank 3,550,000.00
Interest on loan from The amount is paid to the persons without treatment of
1,295,000.00
individual persons Tax applicable, if any
Others 2,195,000.00
14,210,000.0
Total Expenses
0

Calculate the tax payable for the year
Question No 7:
Mr. Park, a Australian citizen came to Nepal as Consultant of MCC on 7.Ashad. 2074, and
returned to Australia via Hongkong transit through Silk Air on 19.Bhadra.2074, reached to
Australia on 23.Bhadra.2074, and again revisited Nepal on 11.Magh.2074 and remained in Nepal
till 22.Baisakh.2075. Show by calculation the residential status of Mr. Park as per Income Tax
Act, 2058 of Nepal for respective Income Years?
Question No 8:
Mr. Bhandari is Consultant Engineer with Nepal Telecommunication Authority and has received
Rs. 1,050,000. upto Chaitra of 2074. He had went to Malaysia and worked with National Mobile
of Malaysia and received Rs. 450,000 from Baisakh to Ashad 2075. The tax deducted on
Malaysia on his income is Rs. 125,000. Calculate the tax liability in Nepal for IY 2074.75 (with
latest rates). The retirement contribution in Nepal is 130,000.
Question No 9:
Paramount School (pvt. Ltd.) has furnished the following information for Education Year 2074.
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
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
2073 Chaitra is Rs. 45,06,900 which is received Rs. 10,25,000 on Baisakh 2074 and rest
is received in between Shrawan to Poush 2074. The Closing Fee receivable on Chaitra
2074 is Rs. 82,70,000 which is not received till Bhadra 2075. 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 2074 and no
tax is required to be paid. Suggest the management with respective provisions of Income
Tax Act 2058.
Question No 10:
What do you mean by Final Withholding Payments and what are the payments treated as final
withholdings as per Income Tax Act, 2058?
Question No 11
Write short note on Taxpayers Rights under the Income Tax Act 2058.
Question No 12:
Define Permanent Establishment as per Income Tax Act 2058.
Question No 13:
Define Exempt organization as per Income Tax Act 2058.
Question No 14:
Define Company As per Income Tax Act 2058
Question No 15:
Differentiate between public circular and advance ruling in respect to Income Tax Act 2058.
Question No 16:
Write Short notes on following as per Income Tax Act 2058
a) Trustee
b) Royalty

c) Permanent Establishment
d) Investment Insurance
e) Jeopardy Assessment
f) Couple
g) Repair and Improvement Expenses
Value Added Tax

Question No 17:
The details of Nepal Publication Pvt. Ltd. for income year is given, below calculate the net VAT
payable for the year. The amounts given are excluding VAT, if applicable.
54,560,000.0
Sales of Books
0
47,085,000.0
Sales of Copy and printed stationery items
0
101,645,000.
Total of Income
00
22,560,400.0
Purchase of paper
0
19,650,030.0
purchase of ink
0
insurance of machine 4,560,900.00
Internet Expenses 2,560,450.00
Electricity bill paid to Nepal Electricity Authority 3,560,900.00
Purchase of software costing 15 lacs INR from India for managing the integrated design
2,400,000.00
and print
Purchase of Car 3,000,000.00
Question No 18:
Amma Builders is building the multi-story boutique rented apartment at Bhaktapur, and has
furnished the following details:
Purchase of Hardware 205,060,000.00

Purchase of Land 225,090,000.00
Interest paid to bank 75,000,000.00
Paid to workers (daily wages) 125,090,000.00
Paid to contractor 236,090,000.00
Total Cost 866,330,000.00

The cost is excluding the consultancy fee per month of Rs. 250,000 paid to Mr. Awale,
consultant engineer for 10 months. Give your opinion as per VAT Act/Rule. The amounts given
are excluding VAT, if applicable.
Question No 19:
The income details of Integrated Engineering Consultancy Pvt. Ltd. has provided the services to
abroad prospective investors and Nepal Government as well. The Import of Survey Equipments
costing 1,575,000 USD, 1 USD =109, 35% customs and 100,000 USD transportation upto
custom point is the only purchase for the year. Calculate the Net VAT payable by the company
to Nepal Government.
Study of pre feasibility for China Metro 22,500,000.00

Detailed Design of Budhigandaki for US Power 317,500,000.00
Detailed study of Nepalgunj airport for Nepal Government 106,500,000.00
Environment Assessment for Mid mountain highway for Nepal Government 97,500,000.00
Total Sales 544,000,000.00
Question No 20:
The royalty of Wood of Khayer tree of government forest is Rs. 1,050 per sq. ft. Mr. Janak has
cut down the tree (from his own the private forest) and agreed to sale the wood to Furniture
World Pvt. Ltd. at 1,325 per sq. ft. Give your opinion of applicability of VAT.
Question No 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?
Question No 22:
Describe the circumstances beyond the control to submit return and pay taxes under the value
Added Tax Act, 2052.
Question No 23:
What is the provision for time and place of supply as per VAT Act 2052/ Rule 2054.

Question No 24:
State the provision of person collecting VAT other than VAT registered person.
Question No 25:
Is NO VAT and Zero VAT implies same, discuss with example.

Answer No 1:
Particulars Export Unit Domestic Unit Remarks

Sales (Disposal of 55% sale is Export and 45% is
Trading Stock) 58,547,500.00 47,902,500.00 domestic sales
in absence of additional
information, the scrap sales is
assumed to sold here in Nepal
Sales of Scrap - 5,540,000.00 (No Export)
Total of Income 58,547,500.00 53,442,500.00

Cost of Disposal of
Trading Stock
Opening Inventory 10,752,747.50 8,797,702.50 Segregated in the ratio of sales
Purchase 22,742,445.00 18,607,455.00 Segregated in the ratio of sales

Direct Expenses
Electricity apportioned in the
Electricity 2,524,632.00 2,065,608.00 ratio of sales
The repair of transport fleet
claimed on repair, and remaining
Transport cost 12,820,500.00 10,489,500.00 claimed on ratio of sales
46000 wage on repair of
machine excluded and remaining
Wage 8,525,000.00 6,975,000.00 apportioned in the ratio of sales
Closing Inventory (13,849,330.00) (11,331,270.00) Segregated in the ratio of sales

Cost of Disposal of
Trading Stock 43,515,994.50 35,603,995.50
Salary apportioned in the ratio of
Salary 1,958,506.00 1,602,414.00 sales
gratuity apportioned in the ratio
Gratuity 850,586.00 695,934.00 of sales
Bad Debt for the year - - Bad Debt disallowed

Telephone after disallowing the
personal expense 144,000
Telephone 407,330.00 333,270.00 apportioned in the ratio of sales
Sales promotion after
disallowing the liquor
Sales promotion (entertainment) apportioned in
expenses 1,375,000.00 1,125,000.00 the ratio of sales
After disallowing the cash paid
to dealers in excess of Rs.
50,000 on bank available
Sales Commission 1,870,000.00 1,530,000.00 location on bank opening day ,

amount apportioned on the ratio
of sales
Repair 1,172,127.00 959,013.00 Note 1
Depreciation 1,951,583.33 1,596,750.00 Note 1
Total deduction 53,101,126.83 43,446,376.50
taxable income 5,446,373.17 9,996,123.50

The tax rate for special industry
is 20%. For domestic sales as
with 100 or more employees
90% of tax is applied further
10% rebate for employing at
least 33% including women,
Dalit and disabled, so net tax for
domestic is
20%*90%*90%=16.2%. For
export 25% rebate is allowed
and net tax is 15%, so beneficial
to tax payer is to opt for 15%
tax rate 16.20% 15% instead of 16.2%.
tax 882,312.45 1,499,418.53
P Allowed repair
oo Opening Actual 7% of (Minimum of
l WDV of Asset Dep rate (%) Depreciation Repair wdv Actual or 7%)
1,091,300.
A 15,590,000.00 6.67 1,039,333.33 1,590,000.00 00 1,091,300.00
D 14,012,000.00 20.00 2,450,000.00 2,450,000.00 980,840.00 980,840.00
C 2,550,000.00 26.67 59,000.00 59,000.00 178,500.00 59,000.00
3,548,333.33 4,099,000.00 2,131,140.00
Answer No 2:

75% sale is Export and 25% is domestic
Sales 45,000,000.00
sales

The interest income is income from
business "income from investment directly
Interest income from bank 170,588.24
related to business", and net of tax means
15% interest tax is deducted by bank
Dividend income is Income from
Dividend Income - Investment, and the same is final
withholding income
Total of Income 45,170,588.24
Cost of Disposal of Trading
Stock
Cost of tender document 175,000.00
The employee benefit of festival
allowance is one month salary
Salary of Employees 16,008,031.67
(9050000/12) and gratuity funded by
company is 8.33% of total basic salary
Salary of employees on contract
for less than 35 hours in a week,
2,040,000.00
for total of 2 week for each
employee
Electricity 245,000.00
Travelling and Transportation 1,050,000.00
Wages 206,250.00
Office amenities 108,750.00
Internet 270,000.00
Telephone 289,000.00
Rs. 122500 expense without supporting
Business Promotion Expenses 633,500.00
excluded
Taxable Income 23,935,056.57
tax rate 25.00
tax 5,983,764.14
15% tax on interest deducted by bank is
Advance Tax 25,588.24
claimed as advance tax
Net Tax Payable 5,958,175.91
The export by normal business have no any rebate/ discount.
Answer No 3
Sales Income 99,500,000.00
Cost of Food 22,500,000.00

Cost of Beverage 12,750,000.00
Salary of employees 7,590,000.00
Wages 750,000.00
Bad Debt of the Year -
Software Maintenance Expenses (under repair) -
Depreciation (Note 1) 4,036,100.00
Repair (Note 1) 1,275,000.00
Total of Expenses 49,791,100.00
Loss Carried Forward (Loss for each year from 1 to 9 year is 10 lacs and
for 10th year is 15 lacs, the loss for 7 years is allowed i.r. 10*6+15=75 7,500,000.00
lacs)
42,208,900.00
Taxable Income
Tax Rate 25%
Tax
10,552,225.00
Note 1
Capitalized Depreciation Actual Allowable
Pool Depreciation 7% of DBV
Amount Rate Repair Repair
Pool 3,325,000.00 4,655,000.00 925,000.00 925,000.00 3,325,000.00 4,655,000.00
A
Pool 600,000.00 280,000.00 1,100,000.00 280,000.00 600,000.00 280,000.00
D
Pool 111,100.00 70,000.00 125,000.00 70,000.00 111,100.00 70,000.00
E
4,036,100.00 1,275,000.00 4,036,100.00
The gardening expense is repair of Pool D and Bed Sets of Hotels are core assets and thus
classified as assets under Pool D.
The software depreciation rate is 1/9 years =11.11%
Answer No 4:
Particulars Amount Total Amount Remarks
Salary 375,000.00 4,500,000.00
as per Labor act, one month
Festival Allowance 375,000.00 375,000.00
of basic salary per year
Children Education Allowance 37,500.00 450,000.00
Medical Allowance 37,500.00 450,000.00

10% of basic salary is
Retirement fund contribution 37,500.00 450,000.00 contributed by employer as
per provision of Labor Act
Life policy contribution by 45% of total policy cost as
50,000.00 22,500.00
employer income
45% of total policy cost as
Cost of Health Insurance Policy 50,000.00 22,500.00
income
Equally provided by
Group Accident premium - - employer, thus not included
as income
0.5% of Annual Salary as
quantification of vehicle
Quantification of Vehicle 22,500.00 22,500.00
facility and thus drivers salary
not included as income
Telephone Allowance 2,500.00 30,000.00
Assessable income 6,322,500.00
Reduction
Donation to tax exempt
organization (5% of AI or
Donation 75,000.00
100000 or actual Rs. 75000
take lowest)
Donation with approval of
Donation 632,250.00 IRD (10% of AI, or 10 lacs or
actual Rs. 10 lacs)
Life Policy 25,000.00 25000 or actual take lowest
Health Insurance Policy Cost 20,000.00 20000 or actual take lowest
Contribution to approved
retirement fund is 1/rd of AI
or 300,000 or actual. Actual
Retirement Fund 300,000.00 contribution is
375000*12*20%+25000*12=
12 lacs, taking lower the 3
lacs is allowed
Taxable income 5,270,250.00
Assuming She claims as Couple
First 400,000.00 1% 4,000.00
Next 100,000.00 10% 10,000.00
Next 200,000.00 20% 40,000.00
Next 4,570,250.00 30% 1,371,075.00
20% of 30% =
Surcharge for more than 20 lacs 3,270,250.00 196,215.00
6%
Total Tax 1,621,290.00
Assuming She claims as Single
First 350,000.00 1% 3,500.00
Next 100,000.00 10% 10,000.00
Next 200,000.00 20% 40,000.00

Next 4,620,250.00 30% 1,386,075.00
20% of 30% =
Surcharge for more than 20 lacs 3,270,250.00 196,215.00
6%
Total Tax 1,635,790.00
Less : 10% rebate for female 16,357.90
Net Tax 1,619,432.10
The single option is beneficial for her.
Answer No 5:
Tax Amount
Particulars Nature of Income Income (Rs.) Details/Explanation
(NRs.)
Rent by natural person is not tax
applicable, the tax is payable to
Not to be included
local government as per their
Rent on Income from 3,900,000.00 -
respective legislation, For
rent
Income Tax the income is
neither includible nor taxable
Interest from The Interest from Nepal Bank is
Final Withholding 473,684.21 23,684.21
Nepal Bank Ltd after 5% TDS
Dividend from
Final Withholding 100,000.00 Dividend is after tax of 5%
Unilever Nepal
Exam paper
Final Withholding 88,235.29 13,235.29 The fee is after tax of 15%
evaluation
Income from
Nepal Water Non Final
Company for (Included in income 1,235,294.12 185,294.12 the 1050000 is after 15% tax
natural resource calculation)
(water)
Interest from Non Final
Nepal Water (Included in income 411,764.71 61,764.71 the income is after tax 15%
Company calculation)
Assessable Only the non final income are
1,647,058.82
Income added
Less: Reduction
5% of AI or
100,000 or
Donation 55,000.00 55,000
which is
lowest
25,000 or
Life insurance 35,600
25,000.00
premium which is
lowest
Contribution to 1/3rd of AI,
Approved 120,000.00 300000 or
Retirement Fund Actual

(10000*12)
whcihever is
lower
Tax Calculation
First (Social
Security Tax not
applicable for 400,000.00 1% -
investment
income
Next 100,000.00 10% 10,000.00
Next 200,000.00 20% 40,000.00
Next 747,058.82 30% 224,117.65
Total 274,117.65
Claim for
247,058.82
Advance Tax
Net tax payable 27,058.82
Answer No 6:
Solution Amount (Rs.)
the amount received is net of tax
Rent Income 41,666,666.67
(TDS rate 10%()
Claim from Insurance Company 1,075,000.00
Bad Debt Recovered 472,500.00 Only 70% is includible income
Total income 43,214,166.67
Salary 1,075,000.00
Interest on Loan from bank 3,550,000.00
The interest should be paid after 15%
Interest on loan from individual persons 1,523,529.41 TDS, so total expenditure grossing up
of the net interest
Others 2,195,000.00
Depreciation 3,712,500.00
Repair 3,832,500.00
Tax Rate 0.25
Tax 6,518,909.31
Advance Tax Paid 4,166,666.67
Net Tax to be paid 2,352,242.65
DBV Dep. Depreciation 7% of DBV Actual Repair Allowable

Rate Repair
Pool
A 45,000,000.00 5 2,250,000.00 3,150,000.00 3,570,000.00 3,150,000.00
Pool
D 9,750,000.00 15 1,462,500.00 682,500.00 1,275,000.00 682,500.00
Total 54,750,000.00 3,712,500.00 3,832,500.00 4,845,000.00 3,832,500.00
Answer No 7
For Natural Person, the residential status is determined from the following conditions
- Normal place of adobe is Nepal

- Has resided for 183 days or more in consecutive 365 days of any income year
Mr. Park‘s residential status is determined from the second condition (as first condition is not
satisfied).
For Income Year 73/74
He has came to Nepal on 7.Ashad.2074 and the Income Year ends on 30.Ashad.2074 (taking 30
days in a month), his days of stay are 24 days, which is less than 183 days so non-resident.
(assumed he has not came to Nepal at least 365 days before 7.Ashad.2074)
For Income Year 74/75

She is in Nepal from 7.Ashad.2074 to 19.Bhadra.2074 which is 24+30+19=73 days
From 11.Magh to 22.Baisakh which is 18+30+30+22 = 100 days
So total days of his stay is 73+100=173<183 days, so he is non resident for Income Year
2074.75.
Answer No 8:
Amount
Particulars
(Rs.)
Employment Income In Nepal 1,050,000.00
Employment income in Malaysia 450,000.00
Assessable Income 1,500,000.00
Less: Retirement Fund Reduction (1/3rd of AI, 300,000 or actual 130,000, taking
130,000.00
the minimum of actual)
Tax Calculation
First 400,000 4,000.00
Next 100,000 10,000.00
Next 200,000 40,000.00

Remaining 670,000 201,000.00
Total Tax before foreign tax credit 255,000.00
Foreign Tax Credit = tax before foreign tax credit/taxable income 18.61%
Foreign Tax Credit (foreign income * 18.61%) 83,759.12
Net Tax Payable income in Nepal 171,240.88
Answer No. 9:
As per section 22 of Income Tax Act 2058, the accounting for tax by company shall be kept as
per Accrual Basis. The school 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
2073.74 (from 2073/04/01 to 2074/03/end) and 2074.75 (from 2074.04.01 to 2075.03.end). The
information given above are not complete for IY 2073.74, so the calculation of taxable income
for IY 2074.75 is as follows:
Particulars Amount (Nrs.) Note
Student Admission Fee i
Student Annual Service Fee 2,367,525.00 ii
Student Monthly Tuition Fee 20,623,487.75 iii
Expenses
Salary of Faculty 20,812,500.00
Printing & Stationery 420,676.50 iv
Other Expenses 548,235.75
i) This fee is collected on 2073 Baisakh for education year 2073, which is part of
income year 2073.74, since the admission fee is normally the first criteria to be
registered as student and on 2075 Baisakh the admission fee shall be collected by the
school from its students, so the fee is not considered as income for IY 2074.75.
(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 2074 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 2074.75.
iii) This fee is collected every months and this amount is total collection from 2074
Baisakh to Chaitra 2074 and collection of Rs. 45,06,900 opening fee of 2073 Chairta
collected during 2074. So our monthly tuition fee income is collected during every
month of 2074 is Rs. (20978217-4506900)/12 = 13,72,609.75. The fee receivable at
Chaitra 2074 Rs. 82,70,000 is also to be recognized as income for IY 2074.75
although not recovered till 2075 Bhadra as per Accrual Basis of accounting for
Income Tax.
iv) All the expenses are said paid during 12 month period of 2074, so for IY 2074-75 the
9 month of 2074 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.
Answer No 10:
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.
Answer No 11

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
Answer No 12
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.
Answer No 13:
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.
Answer No 14
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.
Answer No 15
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.
Answer No 16:
a) As per sec 2(u) of Income tax Act, 2058, A "Trustee" means an individual or Goothi or
corporate body holding assets in a fiduciary capacity, whether held alone or jointly with other
individuals or corporate bodies, and includes the following persons-
(i) any executor or administrator of a deceased individual's estate;

(ii) any liquidator, receiver, or trustee;
(iii) any person having, either in a private or official capacity, the possession, direction,
control, or management of the assets of an incapacitated person;
(iv) any person who manages assets under a private foundation or other similar arrangement;
and

(v) any person in a similar position to a person mentioned in subparagraphs (i), (ii), (iii) and
(iv).
b) As per sec 2(ak) of Income tax Act, 2058, "Royalty" means any payment made under a lease
of an intangible asset and includes any payment made for the following purpose:-
(i) the use of, or the right to use, a copyright, patent, design, model, plan, secret
formula or process, or trademark;
(ii) the supply of know-how;
(iii) the use of, or right to use, a cinematography film, video tape, sound recording, or any
other like medium and the supply of information concerning industrial, commercial, or
scientific experience;
(iv) the supply of assistance ancillary to a matter referred to in paragraphs (i), (ii) or (iii); or
(v) a total or partial forbearance with respect to a matter referred to in paragraphs (i), (ii), (iii)
or (iv). provided that, the term
c) As per sec 2(bb) of Income tax Act, 2058, "Permanent establishment" means a place where a
person wholly or partly carries on a business, and includes the following places:-
(i) 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;
(ii) a place where a person has, is using, or is installing substantial equipment or substantial
machinery;
(iii) 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
(iv) 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.
d) As per sec 2(am) of Income tax Act, 2058, "Investment insurance" means insurance of any of
the following classes:
(i) insurance where the event covered is the death of an individual who is the insured or an
associate of the insured;
(ii) insurance where the event covered is an individual who is the insured or an associate of
the
insured sustaining personal injury or becoming incapacitated in a particular manner;
(iii) insurance where the insurance agreement is expressed to be in effect for at least five
years or
without limit of time and is not terminable by the insurer before the expiry of five years
except in special circumstances specified in the contract;

(iv) insurance under which an amount or series of amounts is to become payable to the
insured in the future; and
(v) reinsurance of insurance referred to under subparagraphs (i), (ii),or (iv); and
(vi) reinsurance of reinsurance referred to under subparagraph (v).
e) Jeopardy Assessment
If tax within a income year or after income year but before statutory time limit of filing of
return is Jeopardy assessment. It is of two types:
- Jeopardy assessment as self-assessment [Section 100(1)]
- Jeopardy assessment by tax authorities. [Section 100(2)]
Jeopardy assessment by the IRO is possible only under anyone of these conditions:
a. The person becomes bankrupt, is wound-up, or goes into liquidation.
b. The person is about to leave Nepal indefinitely.
c. The person is about to leave the business conducting in Nepal.
d. The IRD otherwise considers it appropriate.
Under any one of the above conditions the IRO may serve a notice to the taxpayer to submit
a tax return for the specified period of the year within specified days. In the case of a
taxpayer who submits the return as per the notification or does not submit it, in either case,
the income tax assessment is supposed to be made as per the provisions of Sec. 99(2). But
Sec.100(2) has given an authority to respective IRO to make a jeopardy assessment in the
above case on the basis of the best judgement adopted by the IRO
The period taken by the IRO for such a jeopardy assessment may be a part of the year or the
whole year. In such a case, the notice is meant for an assessment of the whole year, and the
taxpayer has to file the return within the time specified in the notice but in no way can wait
for the period as specified in Section 96.
The respective IRO can make a jeopardy assessment only if it has a reasonable belief that the
figures produced or deemed to be produced by the taxpayer do not exhibit the real position of
the tax liability of the taxpayer for the period.
According to Section 100(2), the following pieces of information are considered for the
jeopardy assessment:
a) Assessable income of the taxpayer from business, employment or investment, i.e. from all
the sources.
b) Taxable income of the taxpayer during the year and the total amount of tax due to the
taxpayer, and
c) In the case of a taxpayer, which is a foreign permanent establishment, the income remitted
to a foreign country during the period and tax payable on such a remittance.
Before issuing an order for jeopardy assessment, the IRO has to serve a notice to the taxpayer

stating the reason of disagreement over the figures given in the return field or the figures
available to the IRO. A period of seven days should be given to the taxpayer to explain and
produce evidence against the IRO‘s contention.
In case a jeopardy assessment is made for a whole year, the taxpayer is not required to submit
a tax return under Sec. 96(1). But if it is for part of the year, the taxpayer has to file a return
under sec.96(1)
and the treatment of tax paid as per the jeopardy assessment shall be as advance payment of
tax and could be adjusted against the tax payable as calculated as per the self assessment for
the year.
When the IRO has made a jeopardy assessment, it has to issue an order to the taxpayer
stating the following assessment:
a) The total tax payable by the taxpayer for the period of assessment and the tax due to him;
b) The method of calculation of the tax liability.
c) The reason of the Jeopardy assessment by the IRO.
d) The period within which the tax due is payable; and
e) Where, when and how to appeal against the order if the taxpayer is not satisfied with the
jeopardy assessment.
In case of competent authority of contracting state having treaty regarding Avoidance of

Fiscal Evasion seek any tax arrears on that country to be collected from the person in Nepal,
then taxation authority can collect the tax to the extent of valid and bona fide request of
competent authority. The assessment based on these request are assessment classified as
jeopardy assessment of tax collecting for another country.
f) Couple U/S 50,

i) A resident natural person and a resident spouse of the person may, by notice in writing
elect to be treated as a single individual for a particular income year.
ii) Each spouse of a couple making an election as above with respect to an income-year is
jointly and severally liable with the other spouse for any tax payable by the couple for the
year.
iii) What so ever mentioned in above (i) and (ii) resident widow or widower responsible to
take care of dependents shall be treated as couple.
g) As per Section 16, Repair and Improvement Costs provision is as follows;

i) For the purpose of calculating a person‘s income for an income – year from any business
or investment, there shall be deducted all costs to the extent incurred during the year in
respect of the repair or improvement of depreciable assets owned and used by the person
during the year in the production of the person‘s income from the business or investment.
ii) Notwithstanding mentioned in (i), the deduction allowed with respect to all depreciable

assets in a particular pool of depreciable assets of the person shall not exceed seven percent
of depreciation basis of the pool at the end of the income year. However, the limitation shall
not be applicable on overhauling of aircraft as required by Standards of Civil Aviation
Authority of Nepal.
iii) Any excess cost of repair and improvement, or a part thereof, for which a deduction is not
allowed as a result of the limitation of (ii), can be added to the depreciation basis prevailing
in the beginning of the subsequent income year, of the pool to which it relates.
Answer No 17:
Calculation of output tax
Amount Before
Particulars Taxable Non Taxable Tax
Tax
Sales of Books 54,560,000.00 54,560,000.00 7,092,800.00
Sales of Copy and printed stationery
47,085,000.00 47,085,000.00 -
items
Total 101,645,000.00 47,085,000.00 54,560,000.00 7,092,800.00
Taxable Sales Ratio 46.32%

Amount
Particulars Taxable Non Taxable Tax
Before Tax
Purchase of paper 22,560,400.00 22,560,400.00
purchase of ink 19,650,030.00 19,650,030.00 2,554,503.90
insurance of machine 4,560,900.00 4,560,900.00 - 592,917.00
Internet Expenses 2,560,450.00 2,560,450.00 332,858.50
Electricity bill paid to Nepal Electricity
3,560,900.00 3,560,900.00
Authority
Purchase of software costing 15 lacs INR
from India for managing the integrated
design and print (The VAT on purchase 2,400,000.00 2,400,000.00 312,000.00
of software is not paid to supplier,
however paid as reverse charging.
Purchase of Car 3,000,000.00 3,000,000.00 390,000.00
Total Tax 4182279.4
Less: Adjustment of 60% of VAT paid
234,000.00
on car
Total Tax Paid 3,948,279.40
Only the taxable sales ratio portion is
1,828,960.95
allowed for claim (46.32%)
Net VAT Payable 5,263,839.05

Answer No 18
As per VAT Act, the business equivalent to Hotel/Apartment are required to construct the
building from the VAT registered contractor, if not VAT as reverse charge need to be paid. The
amount of reverse charge is calculated as follows:
Paid to workers (daily wages) 125,090,000.00
Consultancy fee 2,500,000.00
Total Cost 868,830,000.00
Non Vat Attractive Cost
VAT already paid cost
Amount of reverse charge to be applied (This is the amount of wages and consultancy
127,590,000.00
fee)
VAT 13% 16,586,700.00
Answer No 19:
Particulars Amount 13% VAT
Study of pre feasibility for China Metro 22,500,000.00 -
Detailed Design of Budhigandaki for US Power 317,500,000.00 -

Detailed study of Nepalgunj airport for Nepal Government 106,500,000.00 13,845,000.00
Environment Assessment for Mid mountain highway for Nepal
Government 97,500,000.00 12,675,000.00
Total 544,000,000.00 26,520,000.00
Purchase of Equipment including customs (1,575,000+100,000
USD + 35% custom, at 1 USD =109 NPR) 226,125,000.00 29,396,250.00
Here the export of services is 0% VAT, so taxable sales ratio is (2,876,250.00)

need not be computed, all the VAT paid on custom is allowed VAT
for credit. So Net VAT payable Receivable
Answer No. 20:
The market value of wood of private forest (Section 12 Ka of VAT Act 2052) is higher of royalty
fixed for government forest rate or actual sale price. Here the sale price is Rs. 1,325 per sq. ft.

and government wood royalty rate is Rs. 1,050 per sq. ft. So Mr. Janak needs to pay 13% of Rs.
1,325 per sq. ft. of VAT to respective Forest Office .
Answer No 21:
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.
Answer No. 22
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.
Answer No 23:
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.
Answer No. 24
As per section 15 of VAT Act,
(1) A person who is not registered shall not issue an invoice or other document showing the
collection of tax and shall not collect tax.
(2) If a person who is not registered collects tax, the tax so collected shall be assessed and
collected from him
(3) Government of Nepal, local bodies, international agencies and commissions or public
corporation must collect tax if transaction of taxable goods or services is done.
Answer No 25:
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.

-Good Luck-

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CHARTERED ACCOUNTANCY PROFESSIONAL CAP-II

REVISION TEST PAPER

The Institute of Chartered Accountants of Nepal

The Institute of Chartered Accountants of Nepal

The Institute of Chartered Accountants of Nepal

8,000 equity shares of Rs.100 each 800,000 Building 340,000

10% debentures 400,000 Machinery 640,000

Term Loan from Bank 160,000 Stock 220,000

Creditors 320,000 Debtors 260,000

General Reserve 80,000 Bank 136,000

Deferred Revenue Exp. 34,000

The Institute of Chartered Accountants of Nepal

General Reserve 15,00,000 Investment 2,50,000

Current Liabilities 15,00,000 Current Assets 32,50,000

Balance Sheet of Hill Ltd.

Share Capital 10,00,000 Fixed Assets 3,00,000

General Reserve 5,00,000 Goodwill 1,00,000

Current Liabilities 2,00,000 Current Assets 14,00,000

Proposed dividend 1,00,000

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

The Institute of Chartered Accountants of Nepal

Cash Flow Statement

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

The Institute of Chartered Accountants of Nepal

The Institute of Chartered Accountants of Nepal

Hire Purchase Transactions

The Institute of Chartered Accountants of Nepal

Issue of Shares and Debentures

Underwriting of Shares and Debentures

The Institute of Chartered Accountants of Nepal

B & Co. 84,000 shares

C & Co. 131,000 shares

Total 287,500 shares

The Institute of Chartered Accountants of Nepal

Profit or Loss Pre and Post Incorporation

Particulars Rs. Particulars Rs.

To Cost of goods sold 327,60,000 By sales 468,00,000

The Institute of Chartered Accountants of Nepal

Liquidator’s Final Statement

Accounting for Partnership

The Institute of Chartered Accountants of Nepal

Patents & Trade Marks 24,000

Accounting for Non-profit making Organization

The Institute of Chartered Accountants of Nepal

Accounting for Banks

Upto 3 months 1,673,000

More than 3 months but not more than 6 months 13,612

More than 6 months but not more than 12 months 782

The Institute of Chartered Accountants of Nepal

The bank has not restructured or rescheduled any of its credit

Paid up Equity Share Capital 171,010

General Reserve 155,432