The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of

Trading Stock)

Table of Content
Introduction:........................................................................................................................... 3
Definitions :.............................................................................................................................. 3
Trading Stock and Cost thereto :........................................................................................3
Concepts :................................................................................................................................ 4
Opening Stock :..................................................................................................................4
Purchase :.......................................................................................................................... 4
Amount paid to Vendor :...............................................................................................5
Transportation Cost :.................................................................................................... 5
Duty :............................................................................................................................ 5
Factory Overhead (Cost of Conversion) :.....................................................................5
Closing Stock :................................................................................................................... 6
Quantity at Year End :.................................................................................................. 6
Rate for Closing Stock :................................................................................................6
Points for Students :........................................................................................................... 6
Examples :..........................................................................................................................7
Physical Verification :................................................................................................... 7
Market Value Based :................................................................................................... 8
Cost of Disposal :......................................................................................................... 9
Interchangeable Goods :.............................................................................................. 9
VAT Impacts :............................................................................................................... 9
Repairs of Trading Stock :.......................................................................................... 10
Wrong Opening :........................................................................................................ 10
Cash basis, not in cash :............................................................................................ 10
Different Valuation Method than Accounting :............................................................ 12
Prime or Absorption Cost Valuation :..........................................................................13
Cash basis :................................................................................................................14
Market Value lower in one year than increased :........................................................14
Barter :........................................................................................................................15
Transfer to Foreign Branch :.......................................................................................15
Transfer to Nepal Branch :......................................................................................... 15
Purchased but not received :......................................................................................16
Purchased but not received :......................................................................................16
Applicable Nepal Accounting Standards :........................................................................ 16
Applicable Circulars :.................................................................................................... 16
ICANepal Past Year Questions extract :.......................................................................17
December 10 (CAP III) & December 16 (CAP III)...................................................... 17
December 11 (CAP III)............................................................................................... 18
December 12 (CAP III)............................................................................................... 18
December 13 (CAP III)............................................................................................... 19
December 14 (CAP III)............................................................................................... 19
The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

December 17 (CAP III) & June 17 (CAP II) & June 18 (CAP II) & December 20 (CAP
II) & June 21 (CAP II) & RTP June 21 (CAP II) & RTP June 18 (CAP III).................. 20
December 20 (CAP III) & December 23 (CAP III) RTPs............................................ 20
December 21 (CAP III) & December 22 (CAP III) RTPs............................................ 21
December 22 (CAP III)............................................................................................... 22
June 10 (CAP III)........................................................................................................ 22
June 11 (CAP III)........................................................................................................ 23
June 21 (CAP III) & RTP June 22 (CAP II).................................................................24
June 22 (CAP III)........................................................................................................ 25
June 23 (CAP III)........................................................................................................ 26
December 09 (CAP II)................................................................................................ 27
December 17 (CAP II) & December 18 (CAP II)........................................................ 27
December 19 (CAP II)................................................................................................ 28
December 21 (CAP II)................................................................................................ 29
December 22 (CAP II)................................................................................................ 30
June 15 (CAP II)......................................................................................................... 31
June 16 (CAP II)......................................................................................................... 32
June 22 (CAP II)......................................................................................................... 32
June 23 (CAP II) & RTP June 23 (CAP II)..................................................................33
ICANepal Revision Test Papers (RTPs) Extract :........................................................ 34
December 14 (CAP II)................................................................................................ 34
December 15 (CAP II)................................................................................................ 34
December 17 (CAP II)................................................................................................ 35
December 18 (CAP II)................................................................................................ 37
December 19 (CAP II)................................................................................................ 37
December 20 (CAP II)................................................................................................ 39
December 21 (CAP II)................................................................................................ 41
December 22 (CAP II)................................................................................................ 41
June 17 (CAP II)......................................................................................................... 41
June 18 (CAP II)......................................................................................................... 43
June 19 (CAP II)......................................................................................................... 44
June 20 (CAP II)......................................................................................................... 45
June 23 (CAP II)......................................................................................................... 46
December 14 (CAP III)............................................................................................... 47
December 15 (CAP III)............................................................................................... 48
December 17 (CAP III)............................................................................................... 49
December 18 (CAP III)............................................................................................... 53
December 21 (CAP III)............................................................................................... 54
June 17 (CAP III)........................................................................................................ 55
June 22 (CAP III)........................................................................................................ 56
June 23 (CAP III)........................................................................................................ 57
Some Extra Questions :.................................................................................................58
Thanks and Courtesy Message :........................................................................................ 61
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Cost of Trading Stock (Concept & Examples)

U/S 15

Introduction:
● The Cost of trading stock means the cost of sales. In other words, the cost of trading goods
sold during the year is the cost of trading stock.
● There are three types of assets in the tax base balance sheet with priority of trading stock,
depreciable assets and business assets. Trading Stock is prioritised assets.
● Section 15 describes the cost of trading stock and NAS / IAS 2 Inventories is applied in financial
accounting.

Definitions :
Trading Stock and Cost thereto :

● According to Section 02 : “Trading Stock means the assets owned by a person and sold or
intended to be sold in the ordinary course of a routine business conducted by him, work in
progress on such assets, and inventories of materials that are to be incorporated into such
assets. Provided that, the term shall not include a foreign currency asset.”
● This means only stock of items, even in raw form, processing form or finished form those in the
ordinary course of business might be trading stock.
● Items in the stock that are for future use, like spare parts, stationary or similar are not trading
stock.
○ As per NAS / IAS 02 Inventories, Inventories are assets :
■ Held for sale in the ordinary course of business;
■ In the process of production for such sale; or
■ In the form of materials or supplies to be consumed in the production process or
in the rendering of services.
● Cost of Disposed trading stock is allowed as an allowance on sale of goods.
● This is similar to the cost of goods sold on Trading and Profit or Loss A/c in financial
statements prepared under Nepal Accounting Standards with minor theoretical deviations.
● Verbally, it is called the Cost of Goods Sold for taxation purposes too.
● The cost of trading stock means the cost of sales.
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

● In other words, the cost of trading goods sold during the year is the cost of trading stock.
● Provisions with regard to the determination of cost of sales are clearly stated in Section 15.

● Functionally, the formula is :

Particulars Amount

Opening Value of the Trading Stock (A) Rs ………

Add : Additions (Purchase and Expense) (B) Rs ………

Less : Value of Closing Stock (C) Rs ………

Cost of Sales (A+B-C) Rs ………..

Concepts :
Opening Stock :

● Section 15(3) clearly defines opening stock as closing value of stock at last year end.
● If any person changes its accounting policy of stock valuation for tax purposes from the current
year, under the provision of Section 15(3), opening value should be brought at the quantum of
closing stock value of last year (See Here).
● Even cases of error found in the latter, opening stock cannot be adjusted as in Accounting
Standard under NAS / IAS 08.

Purchase :

● Purchase means all the additions of stock during the year.

● It includes (after Section 21 and Section 13 test) :
○ Amount paid to Vendor. (the invoice value of the purchases)
○ Transportation Cost up to the business place
○ Duty up to the extent it is not refundable
○ Transit Insurance
○ Clearance Expenses
○ Loading and Unloading expenses
○ Bank Charges for honouring the documents
● Valuation of purchase of addition depends upon the basis of accounting too.
● In case of a person adopting cash basis of accounting, it can account the stock related to tax
accounting either in accrual basis (absorption method) or in cash basis (prime cost method).
● The difference of absorption cost and prime cost is :
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Component Absorption Cost Prime Cost Remarks

Direct Materials @ Variable Cost @ Variable Cost Variable so accrual

basis

Direct Labour @ Variable Cost @ Variable Cost Variable so accrual

basis

Direct Overhead @ Variable Cost @ Variable Cost Variable so accrual

basis

Fixed Factory @ Normal Rate Is in the year of Excluding

Overhead (Total Cost / Normal Purchase Depreciation and
Production (±)) (Cash basis) Repair

● The valuation example has been given here. (see here)

Amount paid to Vendor :

● Amount Paid to Vendor, Trade Discount and Quantity Discount to be adjusted, any foreign
exchange transaction to be recorded as per NAS / IAS 21 (Section 24 and Section 28)

Transportation Cost :

● It includes all the transportation cost, normally called carriage inwards.

● Insurance during transportation shall be another eligible part of cost.

Duty :

● It includes any duty paid or payable till ex-factory gate1 like custom duty, local duty, etc.
● For this purpose, excise duty and value added tax on purchase or on import shall not be part of
the cost to the extent of excise duty or value added tax credit limit.
● If the duty is not allowed as credit, the same shall be the cost of goods procured, produced or
imported. (see the example here)

Factory Overhead (Cost of Conversion) :

● Cost of conversion includes the cost up to the point bringing stock to such a position except
finished goods storage and finance cost, as per NAS / IAS 02.

1
EX-FACTORY means the prices prevailing at the factory gate. When a seller quotes to a buyer
“ex-factory price', it means that the freight and transit insurance costs are to the buyer's account. In
other words, the seller will charge the costs of freight and insurance to the buyer.
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

● If a factory has practice to charge depreciation and factory repair to its production, depreciation
and repairs of depreciable assets is not included for tax purpose.
● In case a person having cash basis of accounting, only fixed overhead to be taken on cash
basis.
● Power and fuel expenses, direct consumable store consumption, etc. may be the examples of
variable factory overheads.
● Factory Staff salary, factory electricity expenses, other administrative expenses incurred at a
factory are some of the examples of fixed factory overheads.

Closing Stock :

● Closing stock is computed multiplying Quantity at the year end and Rate thereto.
● Here are minor differences between provision given on Section 15 for tax purposes and NAS /
IAS 02 for accounting.

Quantity at Year End :

● It is found by physical verification at year end.

● Concept of abnormal loss is not under Income Tax (but has special treatment in Value Added
Tax Act, 2052 and Excise Duty Act). Due to this, Unit of Stock Lost due to Abnormal Reasons
are also deducted while computing quantity at year end.

Rate for Closing Stock :

● Valuation of the closing stock of a business for an income year is done at a lower of
followings (each items to be computed separately for tax and accounting both purpose) :
○ Cost of the Trading Stock that remains till the end of the year.
○ Market Price of the trading stock at the end of the year.
● Cost to be taken as per item cost for identifiable goods. (un-interchangeable).
● If the goods are interchangeable (unidentifiable) cost to be taken either in First In First Out
(FIFO) method or the Weighted Average Method for the first time.
● Once a method has opted, it can be changed to another only upon approval of IRD.

Points for Students :

Here are some critical points for valuation as :

● Any expense, which is addition for this year is to be tested as per Section 21 or Section 13
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

● Mixed cost formula2 for separate items or storages are allowed (obviously, consistency in
valuation is required).
● Accounting stock is always higher than tax stock cost due to factory repair and factory
depreciation impact, if any. Hence, there would be deferred tax in accounting3.
● Persons adopting cash-basis need to account the stock related items in accrual (whether in
prime costing or in absorption costing).
● In case, an error is identified in the earlier income tax return, the error cannot be ratified as
restated based on NAS 02. In such cases, opening stock is the closing stock for earlier years.
○ The taxpayer may address the impact in the stock of current Income Year with
retrospective impact on taxation due to error so as to avoid fees u/s 120 of the Act.
○ Excess Cost claimed due to error in previous Income Year requires a taxpayer to pay
additional tax along with interest u/s 118 and 119.
○ However, based on Section 13, one cannot claim additional expenses if such expense
of previous Income Year is claimed at less than actual.
○ However, it’s up to a taxpayer to address such impact in the Income Year when it is
identified OR wait for IRD for amended assessment u/s 101.
● Financial Cost is not deemed as part of Trading Stock.

Examples :

Physical Verification :

● Kadalia Limited had an opening stock of rice of 10,000 quintals.

● During the year, it purchased 1,00,000 quintals and sold 1,00,000 quintals too.
● At the year end physical counting were done and found 9,500 quintals of rice.
● How much is the closing balance of rice ?

Answer :

● Rate : In income tax, the rate for closing stock is Cost or Market Value whichever is lower while
the rate for closing stock for accounting purposes is Cost or NRV whichever is lower.
● Cost for the merchandise is taken in as :
○ If it is identified : Cost is to be taken on a 1:1 basis.
○ If it is unidentified : FIFO or Weighted Average Method.
● Quantity : Closing Stock quantity is to be taken based on physical counting of inventory.
● So, Value of Closing Stock = Quantity x Rate = 9,500 x Rate

2
The total cost formula is used to combine the variable and fixed costs of providing goods to
determine a total. The formula is: Total cost = (Average fixed cost x average variable cost) x Number
of units produced.
3
IAS 12 defines a deferred tax as being the amount of income tax payable (or receivable) in future
periods in respect of taxable temporary differences.
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Market Value Based :

● Kadaria Enterprises has the following transaction during the year. Find Deductible Cost of
Sales for Tax for Income Year.
Opening Stock FIFO = Rs. 50,000
Purchased during year = Rs. 5,00,000
Sales during year GP ratio 25% = Rs. 5,00,000

● Value of Closing Stock (Market Value)

a). Rs. 1,20,000
b). Rs. 1,50,000
c). Rs. 2,00,000
d). Nil

Answer :

Particulars Amount

Here, Opening Stock 50,000

Purchase 5,00,000

Total Stock Available (A) 5,50,000

Gross Profit (25% Margin) 1,25,000

Cost of Sales (B) 3,75,000

Cost of Closing Stock (C) = A-B 1,75,000

Closing Stock is valued at lower of Cost or Market Price Basis :

Particulars Case A Case B Case C Case D

Total Stock (A) 550,000 550,000 550,000 550,000

Closing Stock Cost (D) (From C above) 175,000 175,000 175,000 175,000

Market Value (E) 120,000 150,000 200,000 0

Value : Minimum of D or E 120,000 150,000 175,000 0

Cost of Goods Sold (COGS) U/S 15 (A-D) 430,000 400,000 375,000 550,000

● Do not use the formula “Cost of Goods Sold = Sales Value - Gross Profit” here in Section 15 of
the Income Tax Act, 2058 as far as
“Cost of Trading Stock = Opening + Purchase + Direct Cost - Closing is applicable.”
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Cost of Disposal :

● Find the Cost of Goods Sold during the year for income tax U/S 15 for Kafle Impex.
● Opening Stock Rs. 200,000; Purchased Rs. 20,000,000. Sales Rs. 30,000,000.
● Gross Profit margin is 20% on cost.
● Use the FIFO Method.

Answer :

● Here, Gross Profit Margin is 20% on Cost means if cost is Rs. 100, Sales is Rs. 120.
● So, Cost of Sales = Sales x 100 / 120 = 30,000,000 x 100 / 120 = 25,000,000
● The Opening Stock and Stock Valuation formula is not required here.

Interchangeable Goods :

● M Ltd has two rooms in its storage.

● The first consignment of procurement was kept in store 1 and the second consignment was in
store 2.
● At year - end physical taking, items were counted and found good in both except 1% of
purchase kept in store 1 was expired.
● Since, the stores for each consignment were separate, obviously the cost of each item can be
found separately.
● If the goods were mixed in a single store, could it be interchangeable? What shall be the
method of cost of each item?

Answer :

● Interchangeable goods are those items of inventory which, if mixed, cannot be separated
accurately. In this case, companies need to value the cost at FIFO or Weighted Average
Method.

VAT Impacts :

● Basuki Traders purchased Rs. 300,000 raw material of 3,000 Kg. excluding VAT.
● At the end of the year there is a stock of 1000 kg.
● Basuki Traders is not registered in VAT.
● Find cost of disposal of stock and closing value. Also find the same if it is VAT Registered

Answer :

● VAT shall impact the cost based on credit avails usual.

 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Particulars If Not Registered If Registered

Opening Stock 0 0

Addition 339,000 300,000

Closing Stock 113,000 100,000

Cost of Sales U/S 15. 226,000 200,000

Repairs of Trading Stock :

● In case of Trading Stock is repaired with or without adding the status.

● In case, Kutaula Enterprise has some trading items as furniture costing Rs. 100,000.
● Some of them damaged and repaired cost Rs. 1,500.
Answer :
● These expenses are addition for cost and total cost of trading stock is Rs. 101,500.

Wrong Opening :

● An audit stock verification during the year revealed that the opening stock of the year was
understated by Rs. 3 Lakhs due to wrong counting in Koirala Ltd.
● You are required to advise the company for the finalisation of accounts for the current year.
Answer :
● The Opening Stock of the year should be adjusted.

Cash basis, not in cash :

 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

● Dahal, Rupakheti, Lamsal and Kunwar are four traders who keep their accounts on cash basis.
● During the year, all four purchased merchandise of Rs. 300,000 and sold all at Rs. 500,000.
Office cost incurred Rs. 100,000 in accrual.
● Payment history for four traders are :

Particulars Dahal Rupakheti Lamsal Kunwar

Purchase 300,000 300,000 300,000 300,000

Status Fully Paid Fully Paid Not Paid till Not Paid till

Sales 500,000 500,000 500,000 500,000

Status Fully Received Not Received till Fully received Not received till

Office Cost 50% Paid Fully Paid Not Paid till Fully Paid

In these cases, under cash basis concept, Income and Expense would generally be said as follows :

Particulars Dahal Rupakheti Lamsal Kunwar

Sales 500,000 0 500,000 0

Purchase 300,000 300,000 0 0

Office Cost 50,000 100,000 0 100,000

Profit 150,000 (400,000) 500,000 (100,000)

All four have the same transaction, same accounting basis but a giant difference in Output. Do you
agree?

Answer :

Of Course No, a Person having cash basis of accounting needs to comply with most portion of
accounting in accordance with the accrual system too.

Section 15 describes an accrual system for a person having cash basis of accounting.

According to the provision of Section 15, status for all four shall be as follows :

Particulars Dahal Rupakheti Lamsal Kunwar

Sales 500,000 500,000 500,000 500,000

Purchase 300,000 300,000 300,000 300,000

Office Cost 50,000 100,000 0 100,000

Profit 150,000 100,000 200,000 100,000

● It means under Cash Basis of Accounting, only the items of overhead and income except
sale of trading stock is on cash basis.
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Different Valuation Method than Accounting :

● Karakheti Maida Udhyog Valued stock on weighted average method and now intends to change
to FIFO method.
● The Cost of Goods sold on the weighted average method of stock valuation was Rs.
25,000,000 for the income year.
● The value of stock at year start and on year end is assessed as follows.
● Find the eligible cost of goods sold u/s 15 if it processed all administrative procedures.

Answer :

Particulars Weighted Average FIFO (revalued)

Opening Stock 4,000,000 4,200,000

Closing Stock 2,200,000 2,000,000

On Existing System, Closing Stock 2,200,000

Cost of Goods Sold 25,000,000

Cost of Total Stock 27,200,000

Less : Opening Stock (4,000,000)

Purchase during the Year 23,200,000

In FIFO, Opening Stock was 4,000,000, irrespective of method of Valuation. (WHY ?)

● If any person changes its accounting policy of stock valuation for tax purposes from the
current year, under the provision of Section 15(3), opening value should be brought at the
quantum of closing stock value of last year

Particulars FIFO (Revalued) Amount

Opening Stock 4,000,000

Purchased during the year 23,200,000

Stock Available for Sale 27,200,000

Less : Closing Stock (2,000,000)

Cost of Goods Sold U/S 15 25,200,000

 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Prime or Absorption Cost Valuation :

Paripatle Kutir Udhyog (FIFO) has following Cost :

● Raw Material Purchased : 1000 Kg Rs. 100,000 (Cash Paid Rs. 90,000, yet to be paid Rs.
10,000)
● Packing Material purchased 300 units Rs. 20,000 (Cash Paid Rs. 30,000 yet to be paid Rs.
2,000)
● Labour Cost Rs. 200,000 (Cash Paid Rs. 150,000, yet to be paid Rs. 20,000).
● Electricity Rs. 20 per unit of Finished Goods (Actual Cost Rs. 8300).
● Factory Rent and other costs Rs. 123,250. The estimate was Rs. 120,000.
● In Baisakh, one equipment costing Rs. 100,000 has been purchased and installed but Rs.
10,000 yet to be paid.
● Normal Production is 400 (actual 410) units.
● Closing Raw Material is 100 Kg finished goods is 100 units.

Answer :

Particulars Absorption Cost Prime Cost

Opening Stock (A) 0 0

Purchase & Additions

Material 120,000 120,000

Labour 2,00,000 2,00,000

Variable Overhead 8,300 8,300 (Adjusted)

Fixed Overhead 123,250 0

Total (B) 451,550 328,300

Closing Stock (C)

Raw Material 10,000 10,000

Finished Goods 104,500 74,500

Total of Stock (C) 114,500 84,500

Cost of Goods Sold 3,37,050 2,43,800

Add : Factory Cost 0 1,23,250

Add : Factory Equipment 0 90,000

Cost of Goods Sold 3,37,050 4,57,050

Cost of Closing Stock Computation

 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Per Unit of Production Absorption Cost Prime Cost

Material 225 225 [(900/400)*100]

Labour 500 500 [200,000/400]

Variable Overhead 20 20

Fixed Overhead 300 *****

Total 1045 745

Closing Stock (units) 100 100

Value of Closing Stock 1,04,500 74,500

**** Exactly Meaning-Less.

● Normal Production Unit is used for Fixed OH Rate computation and Actual Production Unit is
used for Variable OH Rate Computation.
● Rate for Closing Stock Unit is used as per given data but if such rate is not available the use
the rate as computed.

Cash basis :

● Following are the direct expenses for the person having a cash basis of accounting.

Particulars Case I Case II

Purchased in Chaitra 5,00,000 5,00,000

Credit Purchase 2,00,000 (50% paid in Cash) 2,00,000 (50% in Cash & 50%
by Bill of Exchange)

Wage Paid 2,00,000 2,00,000

Wages Payable 2,00,000 2,00,000

Physical Stock at the Year End 1/10 th 1/10 th

Market Value lower in one year than increased :

● A Ltd. purchased 2000 Kg of Goods costing Rs. 2000 / Kg in Year 01. Movement and Market
Prices of the goods for next years are as follows :
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Year Closing Stock (Kg) Sold (Kg) Year End Price

1 1700 300 Rs. 1,800

2 900 800 Rs. 1,600

3 200 650 Rs. 1,900

Answer :

● In this case of 3 Years, some stock was lost in year 3, which has no tax impact. The cost has
reduced than market price and increased in the 3rd year.
● Cost of trading Stock disposal u\s 15 shall be computed as follows :

Year Opening / Total Cost Closing Stock Cost of TS Disposal

1 40,00,000 30,60,000 940,000

2 30,60,000 14,40,000 15,00,000

3 14,40,000 3,20,000 **** 11,20,000

● There is no concept of revaluation reserve in taxation (Rs. 1600 is the cost). Once the goods
are valued at market price, it shall be the cost for next year.

Barter :

●Kalikoti Ghee Ltd. exports 100 Quintal Vanaspati Ghee (having cost Rs. 18,00,000) to Tibet
under barter of 1,000 lambs. Market Price of a Lamb is valued at Rs. 2,000.
Answer :
● Here, lamb is purchased at Rs. 2,000,000 and cost of goods sold (Vanaspati Ghee) is Rs.
1,800,000.

Transfer to Foreign Branch :

● Khatwe Impex transferred some stock costing Rs. 500,000 (market value Rs. 600,000)
transferred to its foreign branch in Karachi (we have DTA with Pakistan).
● Half of the transfer remains held for sale in Karachi based on Ashadh-end stock.
● What shall be the tax impact?

Transfer to Nepal Branch :

 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

● John Inc. Pakistan registered transferred some stock costing Rs. 500,000 (market value Rs.
600,000) transferred to its foreign branch in Kaski (we have DTA with Pakistan).
● Half of the transfer remains in stock based on Ashadh-end stock.
● What shall be the tax impact?

Purchased but not received :

● John Inc Pakistan dispatched some goods to Ugarcgandi Impex in Karachi with terms of CIF4
worth Rs. 3 million.
● The goods were accepted by shippers and bills of lading were issued which including other
documents as per letter of credit (sight) were paid on Ashadh 24.
● Find the tax impact ?

Purchased but not received :

● In Ugrachandi Impex’s purchase in (this example), the purchase terms were DDU5 in Incoterm
2000.
● What shall be the tax impact?
● If your answer differs if the letter of credit were for 6 months credit and purchase terms were
2/15 net 182 ?

Applicable Nepal Accounting Standards :

● Nepal Accounting Standard (International Accounting Standard) 02 : Inventories

Applicable Circulars :

● Transport and Insurance Cost shall be allowed to the extent of the amount declared in Custom :
Public Circular dated 2061-04-04. This means the actual bill is disallowed if it has not been
declared in Customs.
● In case of sales deflection found by taxation authority, no allowance (proportionate or
otherwise) is to be allowed for the cost of stock already allowed for - Circular dated 2063-04-03.
This means in case of sale deflection (बिक्री विचलन), sale is taxable but cost is not allowed.

4
Cost, insurance, and freight (CIF) is an international shipping agreement used when freight is
shipped via sea or waterway. Under CIF, the seller is responsible for covering the costs, insurance,
and freight of the buyer's shipment while in transit.
5
DDU Incoterm, which is short for “delivered duty unpaid,” is an international commerce term
(incoterm) which means that the seller will deliver the goods as soon as they are made available at an
agreed-upon location in the country to which they are imported.
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

● Interest paid on trust receipt loan is not cost of purchase but interest u/s 14 : Public circular
dated 2066-02-11.
● As per the circular of the department dated 2066.02.27, interest shall not be included in
calculation of closing stock.

For viewing the respective year papers issued by ICANepal, kindly click on the year text
(blue colour).

ICANepal Past Year Questions extract :

December 10 (CAP III) & December 16 (CAP III)

Majbut Cement (P) Ltd has following transactions during the year 2066/67

Particulars Amount Particulars Amount

Opening Stock 1080,000 Sales 2000,000

Raw Materials 12100,000 Sales Return 2260,000

Purchase

Purchase Return 1500,000 Closing Stock 3500,000

Production Expenses 2000,000

Gross Profit 7560,000

21240,000 21240,000

Additional Information :

● Sales Return includes the cement return of Rs. 1130,000 including VAT.
● Closing Stock includes the sales return goods of Rs. 2260,000 & 50% of Opening Stock.
● Opening Stock includes Repair & Improvement expenses of Rs. 80,000
● Purchase Return is the return of raw materials purchased on Baisakh 2067 & returned in the
month of Jestha 2067. However adjustment is done in VAT Return of Bhadra 2067.
● Production expenses includes the following :
○ The Cost of petrol to run the generator is Rs. 339,0000 including VAT.
○ Repair & Maintenance of Assets (Block D) Rs. 300,000

Answer :
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

December 11 (CAP III)

Compute ………………………… of M/s Himalayan Confectionery P. Ltd. with the following information :

Particulars Amounts

Purchase of Raw Materials 2500,000

Opening Stock of Raw Materials 1500,000

Closing Stock of Raw Materials 1000,000

Sales 6500,000

Factory Overheads 1400,000

Additional Information :

● Of the amount spent in the factory overhead Rs. 100,000 was spent for pollution control
related expenses.

Answer :

December 12 (CAP III)

M/s Solar Power Pvt. Ltd. is engaged in solar power system production for sale in which 60% share
capital is subscribed by DFID which is a tax exemption organisation under Income Tax Act of Nepal.
The following information is available from accounts of the Company for FY 2068/069:

Expenses Amount Income Amount

Raw Material 4000,000 Sales 12300,000

Consumption

Finished Goods Stock 510,000

decreased

Answer :
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

December 13 (CAP III)

Management has provided the following income statement and additional information for FY 2069/70.
From the following details given below compute the tax liability of the business income of Kumar & Co.
for the FY 2069/70. Tax rate is 25%.

Particulars Amounts

Sales 25000,000

Cost of Sales

Opening Stock 1500,000

Raw Materials 11000,000

Freight 900,000

Custom Duty 1500,000

Repair and Maintenance 700,000

Closing Stock 1600,000

Answer :

December 14 (CAP III)

Following are the details of financials of ABC Brandy Company for the year ending on 31stAshadh,
2071. The Company has been situated in the remote part of Rasuwa for the last 5 years.

Particulars Amounts

Opening Stock 500,000

Purchases 5500,000

Transportation 300,000

Sales 12500,000

Additional Information :
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

● Company had a closing stock of inventory costing Rs. 500,000 while the market value of the
same was Rs. 450,000

Answer :

December 17 (CAP III) & June 17 (CAP II) & June 18 (CAP II) & December 20
(CAP II) & June 21 (CAP II) & RTP June 21 (CAP II) & RTP June 18 (CAP III)

Texture Cement Limited is a company engaged in manufacturing and sale of premium grade cement
and it provides employment opportunities to 1,300 people. The company is listed in Nepal Stock
Exchange and it has domestic as well as export sales. Also, the company has 50 foreign employees
out of total employment. Following is the provisional Income Statement of the company for the year
ended Ashadh 31, 2074.

Particulars Amounts

Income

Export Sales 6000,000

Domestic Sales 4000,000

Expenditure

Cost of Materials Consumed 3000,000

Manufacturing Expenses 500,000

Additional Informations :

● Cost of Material Consumed

○ For Export Sales : 1800,000
○ For Local Sales : 1200,000
● Manufacturing Expenses include 30,000 for the electricity bill of the previous year.

Answer :

December 20 (CAP III) & December 23 (CAP III) RTPs

 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Future Industries P. Ltd., special industry as per Industrial Enterprise act 2076, is a resident Nepalese
company. Management of the company has provided you the following extracts related to income and
expenditure for income year 2075/76:

Particulars Amounts Particulars Amounts

Opening Stock 15,000 Sales 1200,000

Purchase of Raw 650,000 Closing Stock 10,000

Materials

Freight Inwards 40,000

Direct Wages 80,000

Manufacturing 150,000
Expenses

Additional Informations :

● Sales include a consignment sold to an related person amounting to Rs. 100,000. The
transaction is worth Rs. 450,000 in an arms’ length deal. IRD has sent a notification to the
company treating it as transfer pricing arrangement and has instructed to book at arm’s
length price.
● Purchase includes Rs. 60,000 incurred for purchase of office equipment in Chaitra 2075.

Answer :

December 21 (CAP III) & December 22 (CAP III) RTPs

Following are the extracts of income statement and relevant information for Gopikrishna Cements P.
Ltd whose 80% shares are held by a non-resident company based in Nigeria. Based on these
information, calculate the taxable income and tax liabilities including the interest, penalty and fees for
FY 2077/78. The return of income was filed by Ashwin 2078.

Particulars Amounts

Sales 500,000,000

Cost of Goods Sold 250,000,000

Additional Informations :

● There was a prior period expense item included in the inventory cost for Rs. 1,000,000.
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Answer :

December 22 (CAP III)

Big Cement Industries is a public limited company listed with Nepal Stock Exchange and substantially
owned by Bharat Cements Limited, Mumbai India. Big Cement has its plant in Pyuthan District and
Corporate Office in Lagankhel, Lalitpur. The industry started commercial production in Ashwin 2070
and provides direct employment to 565 people throughout the year out of which 350 are Nepalese and
135 are women. Beside sales of Big Mark cement in the local market, it also exports clinker to its
parent company Bharat Cements Limited, India. Following is the extract of profit and loss statement for
the year are ended 32 Asar 2079:

Particulars Amounts (in ‘000)

Sale of Cement 1245,000

Export of Clinker 645,000

Cost of Goods Sold 1122,500

Additional Informations :

● Cost of goods sold includes cost of obsolete material Rs. 655,000

● The company's pricing policy of cost plus 20% but the clinker exported to Bharat Cements
Limited is priced on cost plus 10%. (not useful for Section 15 of Income Tax Act, 2058)

Answer :

June 10 (CAP III)

Following Profit & Loss Account is produced to you by the Accountant of M/S Strong Cements Co. Ltd.,
listed manufacturing company in NEPSE.

Particulars Amounts Particulars Amounts

Cost of Goods Sold 75,000,000 Sales 100,000,000

Additional Informations :

● Opening Stock is understated by Rs. 5000,000 and Closing Stock is understated by Rs.
10,000,000.
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

● Cost of Goods Sold includes

○ Computer purchase for office purpose as on 01/09/2066 for Rs. 200,000;
○ Cost of purchase of equipment for extract of minerals is Rs. 3,000,000 on 31/01/2067
and
○ Land for the office complex is purchased for Rs. 300,000 as on 01/09/2066.
○ The purchased assets were used immediately.

Answer :

June 11 (CAP III)

M/S XYZ Jute Mills (P) Ltd, produces Jute bags and trades on raw Jute purchased from the market. It
has produced the profit and loss account for the year 2066/67 as follows:

Particular Trading Manufact Total Particular Trading Manufact Total

s uring s uring

Opening 1,000,000 3,000,000 4,000,000 Sales 10,000,00 100,000,0 110,000,0

Stock 0 00 00

Purchase 10,000,00 10,000,00 20,000,00 Closing 5,000,000 5,000,000 10,000,00

0 0 0 Stock 0

Productio 0 75,000,00 75,000,00 ,

n 0 0
Expenses

Gross 4,000,000 17,000,00 21,000,00

profit 0 0

15,000,00 105,000,0 120,000,0 15,000,00 105,000,0 120,000,0

0 00 00 0 00 00

Additional Informations

● The Company has accepted the sale in under invoicing as assessed by IRO i.e. under
invoiced trading sales Rs. 100,000 and manufacturing sales Rs. 1,000,000 as on 15.03.067.
However, the assessment order is given in 04.04.067 by IRO.
● Closing Stock of Manufacturing unit includes following

Particulars Remarks Amounts

Raw Materials 2,000,000

Finished Goods 3,000,000

 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Raw Materials 1,000,000

Production Expenses 500,000

(Salary / Wages)

Repair of Plant and 1,200,000

Machinery

Depreciation 200,000

Interest 100,000

Total 5,000,000

Repair of Plant and Machinery expenses is included in Production Expenses of Rs.

75,000,000.

Answer :

June 21 (CAP III) & RTP June 22 (CAP II)

Goyal S Private Limited, a private company located at Hetauda having equity capital of Rs. 20 crores.
Royal S International UK based company holding 80 % share of Goyal S Pvt. Ltd. Extracted the
following information from the Income Statement for the year 2076/77.

Particulars Amount (in ‘000) Particulars Amount (in ‘000)

Opening Stock 30,000 Export Sales 60,000

Purchase Cost of 34,000 Local Sales 15,000

Imported Raw
Materials

Local Purchase of 12,000 Vehicle Transportation 1,500

Finished Goods Charge on Local Sales

Custom Duty 1,500 Export Incentive 1,200

Custom Clearance 500

Expenses

Export Duty 5

Wages 5,000
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Freight inwards on 1,200

Import

Freight outwards on 2,000 Closing Stock 32,000

export

Manufacturing 650
Expenses

Additional Informations :

● Goyal S should sell the manufactured product (garments) to the Royal S at the ratio of the
investment, i.e. 80 % of the total sales. Total export sales includes the export of Rs.
44,000,000 to the Royal S International.
● Opening and Closing stocks are valued including the factory overhead Rs. 50 per unit,
administration overhead Rs. 20 per unit, repair and maintenance Rs. 75 per unit and
depreciation is not included. The Company produced 5,000 units during the income year,
opening stocks 3,000 units and closing stocks 2,500 units. The Company follows the FIFO
method.
● All local sales amount is related to the local purchased finished products, no opening and
closing stocks of such products.
● Purchase cost of imported raw materials includes the payment of Rs. 200,000 to the custom
agent; no invoice was received so far.
● Custom clearance expense was an advance paid amount to the custom agent, the details
submitted by the agent as VAT paid at custom Rs. 250,000, service charge with invoice of
Rs. 226,000 with VAT, and miscellaneous expenses Rs. 27,000 with business related
invoices.

Answer :

June 22 (CAP III)

M/s Ganapati Oil Pvt. Ltd., an Oil producing industry is established and operating in Hetauda Industrial
District since 2074 Jestha. The company has provided employment to 200 Nepali citizens out of which
70 are women and 50 are Dalits. You are asked by the Company to assess the total tax liability up to
Falgun 06, 2078 as per the following information extracted from the books of account for the year
2077/78.

Particulars Amount Amount

Local Sales 53,212.50

Export 35,475.00

Opening Stock 15,000

 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Cost of Imported raw materials 20,000

Locally purchased raw 10,000

materials

Insurance for imported raw 150

materials

Custom Duty 2,000

Excise duty on imported 100

materials

Freight on import 2,000

Wages for labour 4,000

Variable overhead for 5,000

production

Factory rent 2,000

Production Supervisor Salary 2,400

Insurance for stocks and 125

factories

Closing Stock 20,000

Additional Informations :

● The opening and closing stock are valued Rs. 14,500,000 and 18,000,000 respectively as per
Income Tax Act, 2058.
● The imported raw materials include US $ 5,000 (exchange rate was 117 per US $) imported
on 15 Ashad, 2077 while the payment was made on 10 Magh, 2077.
● The insurance of the stocks and factory is renewed on Poush 30 each year.

Answers :

June 23 (CAP III)

Nepal Herbals Limited is a public limited company listed with Nepal Stock Exchange engaged in
manufacturing herbal soap and other toiletries in Bardia District. The industry has started commercial
production since Ashwin 2070 and provides direct employment to 591 people throughout the year out
of which 312 are Nepalese and 136 are women. The company’s entire production is exported to Japan
through its office in Kathmandu that is owned by the company in Sinamangal and partly rented to
Buddha Air. Paid-up capital of the company is NRs 2 billion of which 65% is held by NORINCO
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Investments China and balance listed with NEPSE as ordinary shares. Operating result of the company
for the income year 2078/79 is provided as follows:

Particulars Amount Particulars Amount

Opening Stock 25,000 Export Sales 4,000,000

Purchase of Raw 2,000,000 Closing Stock 450,000

Materials

Wages 60,000

Freight inwards 15,000

Additional Informations :

● Closing stock was overvalued by Rs. 10,000.

● Purchase includes Rs 100,000 incurred to purchase a machine. Cash payment of Rs. 80,000
to a supplier was included in the purchase figure.

Answer :

December 09 (CAP II)

Mr. Nayak also conducts a small trading business M/S Nayak Concerns of his own. Information relating
to which are as follows:

Particulars Amounts Particulars Amounts

Opening Stock 80,000 Sales 500,000

Purchase 390,000 Closing Stock 120,000

Gross Profit 150,000

Total 620,000 Total 620,000

Answer :

December 17 (CAP II) & December 18 (CAP II)

 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

I & M Pvt. Ltd. Kathmandu, a manufacturing company, deals in production and sales of garments.
Based upon the following information, you are requested to ascertain taxable income and tax liability
for Income Year 2073/74.

Particulars Amounts

Export Sales 300,00,000

Opening Stock 75,00,000

Raw Material Import 70,00,000

Freight for Raw Materials 9,00,000

Custom Duty paid for Raw Materials 15,00,000

Custom Agent Fees 1,50,000

VAT for Import 15,00,000

Wages for Production 30,00,000

Overhead Cost 20,00,000

Additional Informations :

● Sales include VAT Refund of Rs. 10,00,000 paid at custom point for import of raw material.
● The opening stock and closing stock has been recorded 1,000 pieces and 1,200 pieces
respectively.
● The opening stock includes factory fixed overhead Rs. 10 per piece and repair and
maintenance Rs. 15 per piece.
● During the year, the company produces 2,000 pieces of garments and the overhead cost
includes equal rate of previous years fixed overhead and repair and maintenance cost.
● Administrative expenses, includes travelling cost Rs. 1,00,000 of employees during the
import of raw material. Entertainment expenses Rs. 50,000 provided to the Custom’s
employee and custom agenet during the import.

Answer :

December 19 (CAP II)

Royal Industries Private Limited is a private company solely owned by Punjabi family residing in
Kupandole since last 15 years. Royal Industries is the contract manufacturer of goods for a Chinese
company located in Sanxi province of Peoples Republic of China. The company’s entire production is
exported to China through its factory cum office building in Kathmandu that is owned by the company
and partly rented to a restaurant. Operating result of the company for the income year 2075/76 is
provided as follows:
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Particulars Amounts Particulars Amounts

Opening Stock Export Sales 5,748,520

Raw Materials 25,000 Closing Stock

Work in Progress 76,292 Raw Materials 43,260

Finished Goods 56,460 Work in Progress 55,190

Purchase of Raw 3,212,400 Finished Goods 112,325

Materials

Wages 148,900

Freight Inwards 58,960

Additional Informations :

● Closing stock of Work-in-progress was overvalued by Rs. 10,000.

● Raw Material Purchase includes Rs. 100,000 incurred to purchase a machine.
● Cash payment of Rs. 80,000 to a supplier was also included in the purchase figure.

Answer :

December 21 (CAP II)

ABC P. Ltd. is a special industry as per Industrial Enterprise Act 2076. Relevant extracts related to
income and expenditure for income year 2077/78 are as follows:

Particulars Amounts Particulars Amounts

Opening Stock 4,500,000 Sales 18,000,000

Purchase of Raw 8,500,000 Closing Stock 4,800,000

materials

Freight Inwards 400,000

Direct Wages 800,000

Manufacturing 1,20,000
Expenses

Administrative 400,000
Expenses
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Additional Informations :

● The opening stock and closing stock has been recorded 45,000 pieces and 50,000 pieces
respectively. The opening stock includes factory fixed overhead Rs. 15 per piece and repair
and maintenance Rs. 10 per piece (related to machinery). During the year, the company
produced 200,000 pieces of garments and the overhead cost includes equal rate of previous
years fixed overhead and repair and maintenance cost.
● Additionally, administrative expenses includes payment made to wages amounting to Rs.
250,000 The breakup of these payments are as: Rs. 2,500 paid to 60 workers and Rs. 5,000
paid to 20 workers, each.

Answer :

December 22 (CAP II)

Akash Industries Ltd., a manufacturing company listed in NEPSE, deals in production and sales of
Packaged Food. Based upon the following information, you are requested to ascertain taxable income
and tax liability for Income Year 2078/79.

Particulars Amounts

Sales 185,000,000

Opening Stock 20,000,000

Purchase of Raw Materials 70,000,000

Closing Stock of Raw Materials 15,000,000

Carriage Inwards 5,000,000

Carriage Outwards 12,000,000

Direct Labor 15,000,000

General Overhead Cost 20,000,000

Additional Informations :

● Sales figure is inclusinve of excise duty @ 2 %

● Opening Stock consists of damaged goods of Rs. 2,000,000 which was sold for Rs. 650,000
inclusive of VAT which is not included in above income.
● Purchase of raw material includes purchase of Herbs from farmers without PAN invoice
amounting Rs. 2,500,000.
● Net realizable value of closing stock was determined by the verification team amounting Rs.
13,600,000 only.
● Carriage outward expense consists invoice of Rs. 1,000,000 dated 31 Ashad, 2078.
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

● Direct Labour includes payment of Rs. 1,200,000 to the labors without PAN in cash.

Answer :

June 15 (CAP II)

Gorkhali Cement (P.) Ltd., Rupendehi, has the following transactions during the year 20X71/X-72:

Particulars Amounts

Sales 31,000,000

Cost of Sales 17,600,000

Additional Informations :

● Cost of Sales include the following :

Particulars Remarks Amounts

Opening Stocks 700,000

Clinker & other Raw Material 18,000,000

Purchase

Manufacturing Expenses

Salary & Wages for Factory 1,200,000

Repair & Maintenance 400,000

Expenses

Other Overhead Expenses 300,000

Total Manufacturing Expenses 1,900,000

Closing Stocks 3,000,000

Cost of Sales 11,900,000

● Cost of Stocks includes the repair and maintenance expenses, which is approximately 2 %
of the valuation.

Answer :
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

June 16 (CAP II)

Shalimar Trading & Manufacturing Co. Ltd., located at Birjung in which Garima Charitable Trust an
exempt entity holds 35% of share capital. Shalimar Trading & Manufacturing Co. Ltd. provide you
manufacturing and profit and loss account for the financial year 20X-71/X-72 are as follows:

Particulars Amounts Particulars Amounts

Opening Stock of RM 550,000 Sales 3,000,000

Purchases 1,150,000

Direct Manufacturing 300,000

Cost

Freight 100,000

Gross Profit 1,100,000 Closing Stock 200,000

Additional Informations :

● Opening Stock is undervalued by 20 % and Closing Stock is overvalued by 25 %.

Answer :

June 22 (CAP II)

Nepal Manufacturing Company a special industry engaged in production of electronic goods. The
income statement of the company for the F.Y. 2077/78 is as follows:

Particulars Amounts

Sales of Electronic Goods 3,500,000

Closing Stock 500,000

Opening Stock 150,000

Purchase 1,500,000

Water & Electricity 140,000

 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Additional Informations :

● The cost of water and electricity includes payment of Rs. 12,000 for the month of Ashadh
2077.
● Value of Opening stock was overvalued by Rs. 50,000.

Answer :

June 23 (CAP II) & RTP June 23 (CAP II)

Kohalpur Cement Pvt. Ltd. is a cement manufacturing industry registered with Department of Industries
for production of cement in Nepal. Calculate of Income Tax of the company for FY 2078/79 based on
the following information:

Particulars Amounts

Revenue from sale of cements 40,000,000

Purchase of Clinkers (Raw materials) 19,375,000

Loading Expenses (Freight Inwards) 750,000

Direct Wages 1,125,000

Manufacturing Expenses 2,750,000

Opening Inventory of Cement 4,375,000

Additional Informations :

● Opening Stock of cement was 35,000 kg and closing stock was 15,000 Kg.
● Value of the opening stock including repair and maintenance at Rs. 10 per kg (related to
plant and machinery at factory).
● During the year, the company manufactured 240,000 kg of cement.
● The company does not maintain stock of clinkers at the beginning or at the end of the
financial year.
● The management claims that all the purchased clinkers were consumed for production of
cement. (you are not required to consider process loss)
● Administrative expenses include payment to 40 temporary workers @ Rs. 3500 per day and
out of which 20 workers do not have PAN. However TDS had been deducted.
Answer :
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

ICANepal Revision Test Papers (RTPs) Extract :

December 14 (CAP II)

XYZ Pvt. Ltd. is a trading firm of Mr. X being single shareholder; has the following profit & loss account
for the F/Y 2070/71

Particulars Amounts (in ‘000) Particulars Amounts (in ‘000)

Opening Stock 20,000 Sales 100,000

Purchase 80,000 Closing Stock 20,000

Direct Expenses 5,000

Gross Profit 16,000

Additional Informations :

● Direct Expenses includes the followings:

○ Rs. 100,000 is a freight bill of 2070.03.28.
○ Rs. 200,000 is an expenditure incurred in weeding ceremony of son of Mr. X.
○ Rs. 100,000 is a rent paid to house owner through fund transfer from companies bank
to bank of house owner.
● Closing Stock is undervalued by Rs. 5,000,000
● The firm has sale of Whiskey & Rice.

Answer :

December 15 (CAP II)

Question :
Gurans Oil Pvt. Ltd. engaged in producing edible oils, keeps books of accounts under cash basis of
accounting. You just joined in the company as Chief Accountant. With the help of assistant accountant,
you obtained the following information. Now you are required to compute income tax payable for the
income year 2071/72.

Particulars Amounts Particulars Amounts

Payment for Purchase 7,000,000 Sales realised 10,000,000

 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Personnel Expense 1,500,000

paid

Wage expense paid 900,000

● Further information gathered by the assistants are as follows:

Particulars Opening Amounts Closing Amounts

Debtors 100,000 1,300,000

Creditors 300,000 100,000

Wages payables 50,000 100,000

Answer :

Question :
M/s Nepal Solar System Pvt. Ltd. (NSS Pvt. Ltd.) is engaging in solar power system production for sale
in which 65% share capital is subscribed by a NGO Nepal Youth Development Organization (NYDO)
which is a tax exemption organization under Income Tax Act of Nepal. The following information is
available from accounts of the Company for FY 2070/71:

Particulars Debit / Credit Amount (Rs)

Raw Material Consumption Debit 4,000,000

Finished Goods Stock Debit 510,000

decreased

Sales Credit 12,300,000

Scrap Sales Credit 140,000

Answer :

December 17 (CAP II)

Question :
Suryodaya Products is engaged in production of plastic pipes. The income statement of the company
for FY 2073.74 is given below:
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Particulars Amount Remarks

Sale of Goods 65,000,000

Closing Stock of Goods 1,500,000

Opening Stock of Goods 12,000,450

Purchase of Raw Materials 9,950,000

Electricity 1,240,000 The Cost of Electricity includes the electricity bill of

Rs. 1900 per month for 12 month of the house of
Chairman

Diesel for Generator 1,40,000

Wages 15,900,000 There are 109 employees, out of which 101 are
Nepali Citizens, and out of Nepali 35 are among
Women, Dalit and Disabled. Rs. 105,000 is the
wage related to previous year accounts this year.

Answer :

Question : (Similar to December 20 (CAP III) RTP Q.No. 4)

The information from the financial statement of Nepal Nirman Sewa Pvt. Ltd. for FY is given below:

Particulars Amount (Rs)

Turnover from Construction Works 197,509,050

Turnover from Lease Rental of Leasehold Building 12,605,004

Electricity and other services income provided to the tenants of the 7,050,900
building

Construction Materials Purchase 107,590,050

Sub Contractor Works 25,090,750

Wages 25,098,060

Opening Stock of Construction Materials 19,086,500

Opening Stock of Work in Progress (WIP) 15,090,504

Additional Informations :

● The wages are for construction activity.

 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

● The closing inventory of construction materials is Rs. 14,500,900 and WIP is Rs. 16,058,900.

Answer :

December 18 (CAP II)

Question :
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 Remarks

Sale of Cement 106,450,000 55% Export Sales & Remaining Local Sales

Sales of Scrap Items 5,540,000

Closing Stock of Raw & 7,590,600

Packing materials

Closing Stock of goods 17,590,000

Opening Stock of Goods 19,550,450

Purchase of Raw Materials 26,789,000 Includes the basic ingredients of cements

Purchase of Packing Materials 14,560,900

Electricity 4,590,240

Transportation Cost of 24,560,000 This cost also includes the repair of fleet of
Limestone from Ore to Factory transport equipments Rs. 1,250,000

Wages 15,546,000 Rs. 46,000 is wage for repair of machinery

Answer :

December 19 (CAP II)

 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Question :
Nepal Pharma Pvt. Ltd. is producing different types of drugs and eye lenses. Most of raw materials for
the same is imported from foreign countries. The sales analysis shows that, 80% of eye lens are
exported to different countries, the medicines are sold within Nepal. Due to its goodwill, as per approval
of concerned authority of Nepal Government, the imported raw materials are re-sold to other
pharmaceuticals and cosmetic business in Nepal. Calculate the tax liability of the company for Income
Year (2075.76 with latest provisions of Income Act as amended by Budget for FY 2076.77) based upon
following information:

Particulars Amount (Rs.)

Sales of eye lens 202,500,000

Sales of Medicines 106,500,000

Sales of Raw Materials 10,550,000

Cost of Materials Consumed (eye lens) 109,580,000

Cost of Materials Consumed (medicines) 48,560,000

Manufacturing Expenses 32,025,000

Cost of Packing Materials 1,925,000

Electricity 2,275,000

Additional Informations :

● The Cost of electricity includes the penalty for late payment Rs. 75,000.
● Salary and wage booked and paid to employees not having PAN is Rs. 450,000, out of which
Rs. 225,000 is wage paid Rs. 450 and 550 each day per labor for miscellaneous works. The
company has employed 189 employees out of which 39 are Indian whole the year.

Answer :

Question :
Swastik Garment Pvt. Ltd. is manufacturing different garments in brand “Everest”. The garments is very
famous among high altitude tourists visiting Nepal, and normally on return the tourist again purchase
some of the garments and carry with them. As per sales analytics the total sales comprises - 35%
sales to tourists on arrival to Nepal, 25% sales to tourists on return to their countries. Out of remaining,
60% is domestic sales for Nepali customers and 40% is export sales to Europe. As per given
information, calculate the tax liability for FY 2075.76.

Particulars Amounts

Sales 125,090,000
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Raw Garment Consumed 43,075,000

Other Raw Materials consumed 12,056,000

Factory Rent 1,250,000

Wages and Salary 9,860,000

Electricity 450,000

Insurance of Factory 145,000

Insurance of Employees 245,000

Carrying and Transportation 2,546,000

Answer :

Question :
Vijay General Construction and Trade P. Ltd. is ‘A’ Class Construction Company. The details of
financial information is given below.

Particulars Amount (Rs)

Construction Revenue 456,000,000

Revenue from Construction Engineering 124,500,000

Consultancy

Cost of Concrete 46,500,000

Cost of Cement 47,800,000

Cost of Iron / Rod 78,050,000

Cost of Miscellaneous raw materials 12,450,000

Direct Employee Cost 56,500,000

Answer :

December 20 (CAP II)

Question :
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

The information for FY 2076.77 of Juvenile Products pvt. Ltd is given below, based on the information
calculated the tax liability of the company for fiscal year 2076.77 as per latest provisions on Income tax
act 2058 as amended by Finance Act 2077.78.

Particulars Amount (Rs.) Remarks

Sale of goods 67,732,946

Closing Stock of Goods 1,559,860

Opening Stock of Goods 12,012,906

Purchase of Raw Materials 9,975,640

Electricity 1,285,860 The Cost of Electricity includes

the electricity bill of Rs. 24,500
per month for 12 month of the
house of Directors

Wages 15,900,000

Answer :

Question :
The Recovery Drugs Pvt. Ltd. located at Simra of Bara Districts have furnished you the following
information, calculate the tax liability of the company for the fiscal year with latest provisions of income
tax act. The sales of medicines are made half within Nepal and half of the products are exported to
Bhutan.

Particulars Amounts

Sales of goods 116,050,000

Closing Stock of Goods 7,969,500

Opening Stock of Goods 10,627,740.76

Purchase of Raw Materials 27,860,560

Electricity 4,773,849.60

Wages 14,065,584

Answer :
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Question :
Rising Resorts Pvt. Ltd. was established 4 years ago with capital of 60 crores, and during this year
converted into a public ltd company. The operation was started from this year on 1st of Baisakh, the
opening WDV of assets is the Work in progress upto last year classified as respective assets on this
year. The interest on loan borrowed as capitalized upto last year, for this year the same is charged to
revenue. Calculate the tax liability of the public limited company for this year with latest provisions of
income tax act 2058.

Particulars Amount

Sales Revenue 134,750,000

Cost of Food 24,750,000

Cost of Beverage 19,250,000

Cost of Room Consumables 15,950,000

Answer :

December 21 (CAP II)

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December 22 (CAP II)

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June 17 (CAP II)

 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Question :
Given is the Income Statement of Triveny Footware Company Pvt. Ltd, which is involved in production
of foot wares by importing raw materials and selling the finished goods, as well as importing the Foot
wares (shoes) and selling into the Nepali market for Income Year 2072.73

Particulars Note Amounts

Sales Revenue 01 50,000,000

Cost of Goods Sold 02 37,500,000

Gross Profit 12,500,000

Additional Informations :

● Sale consists of Sale of Goods produced by own factory is 75 % and rest is sale of goods
imported.
● Cost of goods sold is derived as follows :

Particulars Amounts

Opening Inventory of Raw Materials 3,558,900

Opening Inventory of WIP 750,000

Purchase of Raw Materials (imported from India)

Cost (INR) 115,000,000 18,400,000

Import Duty 2,815,200

● 15% Cost plus 2% transportation cost and
● Transit Insurance up to the border (Raxaul) as valued by
Customs while submitting the Import Declaration Form to
Customs.
(the cost includes transportation and insurance in terms of trade
with the supplier)

Wages 4,750,000

Electricity 1,275,000

Closing Inventory of Raw Materials 1,645,000

Closing Inventory of WIP 782,000

Closing Inventory of Manufactured Goods 2,308,900

COGS of Manufactured Goods 26,813,200

Opening Inventory of goods 3,150,980

 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Purchase of Goods

Cost (INR) 5,172,887.50 8,276,620

Direct Cost 1,715,200

Closing Inventory of Goods 2,456,000

COGS of Goods (Goods Traded) 10,686,800

Total COGS 37,500,000

● Out of Wages, Rs. 120,000 is paid for repair of Machinery, which is included by the factory
accountant into wage of goods manufactured.
● The direct cost includes the cost of fuel of Toyota RAV4 Car used by Managing Director of
Company for personal use Rs. 56,900.

June 18 (CAP II)

Question
Nepal Pharmacy Ltd is engaged in production of pharmaceutical products. During the year mentioned,
it won the tender to supply medicines to Nepal Government and due to non- production of certain
medicines used for heart and mental patients, has imported and provided to Nepal Government. The
income statement of the company for FY 2073.74 is given below:

Particulars Amount

Sales of Goods 105,500,000

Closing Stock of Goods 7,590,000

Opening Stock of Goods 9,550,450

Purchase of Raw Materials 26,789,000

Import of Medicines (not produced by factory) 24,560,900

Electricity 4,590,240

Wages 13,524,600

Additional Informations :

● The sales given is including the sales of medicines produced by own factory as well as the
imported from Singapore. The ratio of sales of own factory produced medicine to imported
medicine is 55:45.
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

● Upto last year there was only transaction of own factory produced medicines, and closing
inventory includes 65% imported medicines.
Answer :

June 19 (CAP II)

Question :
Surya Shoe Pvt. Ltd. is engaged in production and sale of high quality foot wares, one of brand
‘SuperFoot’ is very famous among the consumers of India and the next brand ‘AmagingFoot’ is famous
among the Nepalese consumers. 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) based upon following
information:

Particulars Amounts

Domestic Sales of ‘AmazingFoot’ Brand 12,500,000

Export Sales of ‘SuperFoot’ brand 16,500,000

Cost of Materials consumed 9,580,000

Manufacturing Expenses 2,025,000

Cost of Packing Materials 925,000

Electricity 275,000

Employee Cost 5,660,000

Additional Informations :

● The electricity bill includes Rs. 25,000 additional fine imposed by Nepal Electricity Authority
for delay payment of bill and Rs. 50,000 related to previous year.

Answer :

Question :
Fashionable World Pvt. Ltd. is exporting high end Pashmina to European countries, but being in initial
years of business kept its financial records as per Cash Received and Cash Paid (cash basis). The
record of the company shows the following for FY 2074.75.

Particulars Payments Receipts

 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Raw Materials 6,000,000

Wages for Labour 500,000

Variable Production Overhead 250,000

Factory Rent 1,200,000

Production Incharge Salary 250,000

Insurance of Factory 117,000

Additional Informations :

● Normal production capacity of the company is 5000 units per year, but actual production was
4500 units during the income year. The company has 1500 units in stocks as per FIFO
method at the end of the year.

Answer :

June 20 (CAP II)

Question :
Shivam Plastic Industries has provided the following information for fiscal year 2076/77. Calculate the
tax for the income year.

Particulars Amounts

Domestic Sales 187,500,000

Export Sales 125,000,000

Sales of Scraps 1,010,000

Cost of Materials consumed 177,500,000

Wages 48,060,000

Hear and Power 18,025,000

Packing Materials 2,895,000

Employee Cost 14,560,000

Answer :
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Question :
Himalyan Breweries Pvt. Ltd. produces “Himalyan Vodka” which is very famous in Nepal and after
launch in Europe and Africa, has gained momentum in the business. For the given fiscal year it sold 65
% in Nepal and 35% exported. Calculate the tax liability of the company for the fiscal year based on the
information below. The only tax paid by the company was Rs. 5400000 on Poush end, the final
assessment is made on Magh of next year and tax is also pain on same day, calculate the fine, penalty
for this case as per Income Tax Act 2058

Particulars Amounts

Sales 359,000,000

Scrap Sales (within Nepal) 1,518,000

Raw Materials Consumed 128,900,000

Factory Rent 14,500,000

Brew Master Consultancy Expenses 9,085,000

Wages 7,500,000

Power, Water and Heat 5,546,000

Penalty by NEA for Demand Charge for 3 Phase Line 1,275,000

Insurance of Factory, Stock 456,000

Answer :

June 23 (CAP II)

Question :
You have been asked to calculate the income tax liability of Second to None P. Ltd. The accountant has
provided you the following information :

Particulars Amounts Particulars Amounts

Opening Stock 100,000 Sales 4,000,000

Purchase 2,500,000 Closing Stock 920,000

Wages 200,000
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Gross Profit 2,120,000

Additional Informations :

● Purchase includes Rs. 50,000 for the purchase of a laptop for personal use of the director.
● Wages does not include outstanding wages for Rs. 5,000
● Closing Stock was incorrectly overvalued by 15%

December 14 (CAP III)

Question :
Horizontal Pvt. Ltd. is an industrial cigarette manufacturing industry. Compute the tax liability including
interest and penalty payable by the company on the basis of the following information for the income
tax year 2070/71.
● Sales as per ledger Rs. 350 million
● Sales as per VAT Statement Rs. 525 million
● Opening Stock of Raw Materials Rs. 15 Million
● Cost of Raw Material purchase including transportation Rs. 150 million
● Interest on trade service used for material purchase through L/C Rs. 20 million
● Closing Stock of Raw Materials Rs. 20 Million
● Processing Cost Rs. 30 Million
● Opening Stock of finished goods Rs. 10 million
● Closing Stock of finished goods Rs. 8 million
● As per ledger, export Rs. 140 million out of above sales.
● The difference between sales with VAT return statements is caused by Excise Duty.
● Finished goods valued including all related cost.

Answer :

Question : (Similar to June 18, CAP III, RTP Q.No. 03)

You are appointed as a tax advisor of Metroexim Pvt. Ltd on 30 Falgun, 2070. ……….
● Total Sales Rs. 26,674,925. The ledger shows export Rs. 21,674,925 and Local Sales Rs.
5,000,000.
● Cost of Sales Rs. 18,492,000. The Ledger shows Opening Stock valued Rs. 1,992,000 under
Section 15 of the Income Tax Act, Raw Material purchase during the year Rs. 18,500,000.
Direct Expenses Rs. 3,000,000 and Closing Stock valued Rs. 2,500,000 as per price of raw
material.
● Direct Expenses includes allowable repair and maintenance Rs. 100,000 and depreciation Rs.
300,000 of the machinery used for the production. Other Variable Direct Expenses are
electricity charges, wages, freight, stores consumed, etc. Total Rs. 2,600,000. All direct
expenses are allowable as per relevant provision of the Income Tax Act.
● Company has no policy to include the direct cost to the finished goods. Such costs are directly
booked in the ledger and total amount presented in the Trading Account.
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

● VAT invoices are used in all transactions but not included in above figures.
● Per Kg selling price is Rs. 145, Per Kg, opening Valuation is Rs. 120 and 25,000 Kg is in
finished stock at the end. No opening and closing stock of raw material. The company has
followed the FIFO method.

Answer :

December 15 (CAP III)

Question :
Jai Hanuman Ltd. (Special Industry) furnished its income statement for the income year 2071-72 as
under :

Particulars Schedule Amount ( in Million)

Sales 100

Change in Stock 1 (80)

Other Direct Expenses 2 (7.5)

Operating Profit 12.5

Schedule 01 : Changes in Stock

Particulars Rs (in Million)

Opening Stock 15

Purchase 75

Less : Closing Stock (10)

Total 80

Schedule 02 : Other Direct Expenses

Particulars Rs (in Million)

Freight Inward 4

Direct Wages 2

Manufacturing Expenses 1.5

Total 7.5
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Additional Informations :

Schedule 01 : Changes in Stock :

● Closing Stock Valuation as per Income Tax Act Rs. 9.5 Million
● Purchase included the following
○ Payment of VAT on purchase of raw material of Rs. 0.13 million was booked as
expenditure. (Note : The Company is a VAT registered person).
○ Rs. 1 Million paid in cash to farmers who supplied raw agricultural products to the
company in previous year.
○ Purchase of Rs. 1 million during the year but the payment was made through
depositing cash into the supplier's bank account.
○ Raw Materials of Rs. 2.5 Million that was received on 2072/03/31 at a factory.
However, the tax invoice that was submitted later on contained the date of
2072/04/01.

Schedule 02 : Other Direct Expenses :

● Direct Wages included :
○ Rs. 0.15 Million on the omission of recording of wages of Ashad of previous year.
○ Rs. 0.1 Million worth of gratuity payment to two employees during the year by debiting
provision for gratuity which was disallowed during previous years when it was booked
as expenditure in the financial accounts.
● Manufacturing expenses included :
○ Consumption of store was booked on current market price of the year end as per the
replacement cost policy of the company i.e. of Rs. 1 Million actual cost was booked
for Rs. 0.75 Million.
○ Salary of Rs. 1 Million of General Manager (GM), Indian Citizen who was newly
appointed in the company on 2071/11/01, previously he was in India, without
deducting with-holding tax.

Answer :

December 17 (CAP III)

Question :
Solar energy is the cleanest and most abundant renewable energy source available, and the U.S. has
some of the richest solar resources in the world. Modern technology can harness this energy for a
variety of uses, including generating electricity, providing light or a comfortable interior environment,
and heating water for domestic, commercial, or industrial use. With this concept M/s US Solar Power
Pvt. Ltd. is engaging solar power system production for sale in Nepal, which 75% of Share capital is
subscribed to USAID. USAID is tax exemption organization under Income Tax Act 2058 of Nepal.
Financial Transaction of the company during the financial year are as under:

Particulars Amounts

Sales 36,900,000
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Less : Cost of Goods Sold 15,620,000

Raw Material Consumption 8,000,000

Salary and Wages 5,400,000

Finished Goods Stock decreased 1,530,000

Repair of Plants 690,000

Gross Profit 21,280,000

Answer :

Question : (Similar to Q.No. 03, December 18 (CAP III) RTP), (Similar to Q. No. 01, June 19 (CAP
III) RTP), (Similar to Q. No. 01, June 21 (CAP III) RTP)
Following are the financial statements of Ghatal Sugar Mills Pvt. Ltd. Registered Address at
Bageshwar Rural Municipality, word no. 5 Sirad, Dadeldhura.

Ghatal Sugar Mills P. Ltd.

Statement of Income

For the Period End 31st Ashad 2075

Particulars Note Amount

Sales Proceeds 13 766,500,000

Less : Cost of Goods Sold 14 521,250,000

Gross Profit 245,250,000

Notes to Financial Statements :

Particulars (Note 13) Amount

Sales Proceeds

Sugar 659,250,0000

Molasses 67,500,000

Rectified Sprite 31,500,000

Sugar Cane 8,250,000

Total Sales 766,500,000

 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Particulars (Note 14) Amount

Cost of Goods Sold

Opening Stocks 66,000,000

Sugar 40,000,000

Molasses 6,000,000

Rectified Sprite 20,000,000

Raw Materials Purchased 315,000,000

Sugarcane 300,000,000

Freight for Cane Purchase 10,000,000

Sugarcane Center Expenses 5,000,000

Production Expenses 140,250,000

Wages of Labour 93,500,000

Electricity 2,750,000

Repair and Maintenance of Plant 11,000,000

Pollution Control Expenses 2,750,000

Consumable Stores 8,250,000

Plant & Factory Building’s Depreciation 22,000,000

Total 521,250,000

Additional Informations :

● Sales of sugarcane to its 100% subsidiary company at 5% mark up on its cost. Though the
market price at that time was 15% more than that of total cost.
● Opening stock. Valuation of stock as on 31/03/2075 as per NAS 2 Inventory is NPR. 66 lac
and as per Income Tax act is NPR. 60 lac.
● Purchase of sugarcane include :
○ Payment of NPR. 20 lac as compensation to farmers against cane was not purchased
by the company at the time in previous year.
○ Sugar cane is purchased from local farmers and vendors. Payment to one of local
vendors is done by depositing 60 lacs in Bank account and NPR 6 lac in cash and
rest through account payee cheque.
● Cane center expenses include, liquor expenses of NPR 5 lacs incurred for Labour and NPR.
5 lacs for staff refreshment expenses through various vouchers less than NPR. 500 each
with no supporting bills.
● Wages expenses include NPR. 100 lacs of the labour used for construction of building as on
15.03.2075. Wages of NPR. 100 Lacs for 120 labours used in production has been paid
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

without deducting withholding tax.

Answer :

Question : (Similar to December 18 (CAP III) RTP, Q.No.2), (Similar to December 19, (CAP III)
RTP, Q.No. 05), (Similar to June 17 (CAP III) RTP, Q.No. 8)
Chand Group of Companies, Mahendranagar is the manufacturer of chocolates and traders of
chocolates. For both purposes it has opened M/s Chocolates Pvt Ltd. with two divisions ALFA
DIVISION (Manufacturer of Chocolate) and DELTA (Trading of chocolate).It‘s factory site is located at
Gorkha District, an earthquake affected area. Notes to annual financial statements and Statement of
income during financial year 2073/74 is as under:

Notes to Annual Financial Statements :

Particulars ALFA DELTA

Sales Proceeds

Sales 450,000,000 31,000,000

Export Sales 75,000,000 15,000,000

Sales Returns

Total Sales 525,000,000 46,000,000

Cost of Goods Sold

Opening Stocks 11,250,000 3,750,000

Raw Materials Purchased 50,000,000 37,500,000

Production Expenses 187,500,000 0

Raw Materials Returns 0 0

Closing Stock (18,750,000) (18,750,000)

Total 230,000,000 22,500,000

Salary Allowances 17,500,000 3,750,000

Additional Informations :

● The company has accepted the sale under invoicing as assessed by IRO i.e. under invoiced
Trading Sales NPR. 1,000,000 and manufacturing sales NPR. 4,500,000, as on 16.02.074.
However, the assessment order was given in 05.04.074 by IRO.
● All Salary Allowance and NPR .77,000,000 out of Production Expenses is payment to
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

workers and staff of the company as wages & salary. The Status of the worker and staff in
Manufacturing Unit for the year is as follows :

Particulars Nepali Workers

Men 330

Women 178

Total 508

● The company has accepted the sale under invoicing as assessed by IRO i.e. under invoiced
Trading sales NPR. 500,000 and manufacturing sales NPR. 5,000,000, as on 15.03.074.
However the assessment order is given in 04.04.2074 by IRO
● Closing Stocks of ALFA division includes :

Particulars Amounts Amounts

Raw Materials 5,000,000

Finished Goods

Raw Materials 2,500,000

Production Expenses 1,000,000

Repair Plant & Machinery 6,000,000

Depreciation 1,000,000

Interest 500,000 11,000,000

Total 16,000,000
● Repair of Plant and Machinery expenses is included in Production Expenses of NPR.
9,000,000

● The Company consumed 55% of Local raw materials for its production.
Answer :

December 18 (CAP III)

Question :
Following are the information of the Manufacturing Ltd. a resident company for the financial year
2074/075.

Financial Statements of the Manufacturing Ltd. for the Financial Year 2074/75
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Particulars Amount Particulars Amount

Opening Stock 75,000 Sales 7,750,000

Purchase of Raw 3,250,000 Closing Stock 50,000

Materials

Freight Inwards 200,000

Direct Wages 400,000

Manufacturing 750,000
Expenses

Additional Informations :

● Purchase includes NPR. 160,000 incurred for purchase of office equipment in Chaitra 2074.

Answer :

December 21 (CAP III)

Question :
Based on the following financial information for the FY 2077/78 of M/s Maa Durga Industries Ltd., a
manufacturing industry established and operated on industrial village since 2073.04.15, calculate
income tax liability of the company with considering the relevant provisions of Income Tax Act, 2058
and relevant Finance Act: The company has provided employment to 150 Nepali citizens out of which
40 are women and 15 are Dalits.

Particulars Amount Particulars Amount

Opening Stock 3,500,000 Sales 50,000,000

Purchase of Raw 30,065,000 Closing Stock 4,500,000

Materials

Direct Wages 36,00,000

Freight 1,800,000

Factory Utilities 500,500

Additional Informations :

● Purchase of raw materials includes Rs. 90,000 incurred for purchase of furniture in Mangsir
2077.
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

● Insurance Compensation of Rs.500,000 was received for the loss of stock. The amount was
booked receivable last year.

Answer :

June 17 (CAP III)

Question :
Cement Sigma Pvt. Ltd. has the following statement of Income and transaction during the year
2072/073.

Statement of Income

For the Period End 31st Ashad 2073

Particulars Remarks Amounts

Sales 13 53,220,000

Less : Cost of Goods Sold 14 30,540,000

Gross Profit 22,680,000

Note to Financial Statements

Particulars (13) Amounts

Sales 60,000,000

Less : Return 6,780,000

Total Sales 53,220,000

Particulars (14) Amounts

Cost of Goods Sold

Opening Stocks 3,240,000

Raw Materials Purchased 36,300,000

Production Expenses 6,000,000

Raw Materials Returns (4,500,000)

Closing Stock (10,500,000)

 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Total 30,540,000

Additional Informations :

● Sales Return includes the Cement Return of NPR. 3,390,000 including VAT.
● Closing Stocks includes the sales returned goods of NPR. 6,780,000 & 50% of Opening
Stock.
● Opening Stock includes Repair & Maintenance Expenses of NPR. 240,000
● Purchase Return is return of Raw Materials purchased Baisakh 2073 & Return in months in
Jestha 2073. However Adjustment is done in VAT Return of Bhadra 2073.
● Production Expenses includes the following
○ The cost of petrol to run Generator of NPR. 1,017,000 including VAT.
○ Repair & Maintenance of Assets (Block D) NPR. 900,000

Answer :

June 22 (CAP III)

Question :
Based on the following information from financial statement of M/s Pathivara Industries Ltd., a special
industry with 900 Nepali employees and 50 Indian employees for the financial year 2077/78, calculate
income tax liability of the company considering the relevant provisions of Income Tax Act, 2058 and
relevant Finance Act:

Profit and Loss Account

For the year ending Ashadh 31, 2078

Particulars Amount ( in ‘000)

Sales of goods - Domestic 525,000

Sales of goods - Abroad 225,000

Sales of scrap 1,000

Cost of goods sold for domestic sales 393,750

Cost of goods sold for export sales 157,500

Employee benefits expenses 15,000

Additional Informations :

● Cost of goods sold-domestic include commission given to the sales agents Rs. 50,000 on
which no TDS has been deducted and transportation expenses of Rs.250,000 without
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

PAN/VAT bills.
● Repair and maintenance of plants and machinery (Rs. 2,500,000) is included in the cost of
goods sold.

Answer :

June 23 (CAP III)

Question :
Suman Jyoti Ltd. deals in the production of various cosmetic products. Following information are given
for Income Year 2078/79:

Particulars Amount (Rs.)

Sales 2,84,00,000

Opening Stock 20,00,000

Purchase of Raw Materials 1,70,00,000

Closing Stock of Raw Materials 15,00,000

Carriage Inward 500,000

Custom Duty Refund (Under Drawback) 200,000

Repair & Maintenance (Allowable) 259,700

Direct Labour 20,00,000

General Overhead Cost relating to production 15,00,000

Additional Informations :

● Opening stock consists of damaged goods of Rs. 3,00,000 which were sold for Rs. 1,50,000
inclusive of VAT which is not included in above income. For this Purpose, the company has
already obtained the prior approval from the respective Tax office for claiming the VAT input.
● Market Value of closing stock was Rs. 12,60,000 only.

Answer :
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Some Extra Questions :

Question :
Bright Textile Pvt. Ltd. is engaged in production and sale of garment in Nepal and foreign markets.
Company has an opening stock of finished goods worth Rs. 12 lakhs. During the year, the company
expensed Rs. 45 lakhs on purchase of raw materials and Rs. 2 lakhs paid as carriage inward for the
same. Likewise, the company has expensed Rs. 11 lakhs for factory labour. Similarly, Rs 6 lakhs is
incurred as variable factory overhead. At last the company has paid Rs. 3.5 lakhs as fixed factory
overhead including 0.5 lakhs for repair of the production plant. Entire opening stock is sold and
production of the year is observed at 1200 units. Of which 60% were sold and 8% were stolen. You are
required to determine the cost of trading stock for the year. Assume FIFO method.

Answer :

Computation of Cost of Trading Stock for the Year u/s 15

Particulars Remarks Amounts

Opening Stock 1200,000

Cost of Raw Materials 45,00,000

Add : Carriage Inward 2,00,000

Add : Direct Labour 11,00,000

Add : Variable Factory 6,00,000

Overhead

Add : Fixed Factory Overhead 3.5-0.5 3,00,000

Total Cost of Production 67,00,000

Unit Produced in an Year 1200 units

Per unit Cost of Production Rs. 5583.33

Sold Unit of FG 60 % of 1200 units 720 Units

Stolen Units of FG 8 % of 1200 units 96 Units

Closing Stock of FG 1200 - 720 - 96 384 Units

Value of Closing Stock 384 units * 5583.333 21,44,000

 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Cost of Trading Stock Opening Stock + Cost of 57,56,000

Production - Closing Stock

Question :
Details of Cost incurred by a Company in IY 2079/80 is as below :

Particulars Amount (Rs.)

Cost of Material Consumed 5,000,000

Direct Labour Cost 1,200,000

Variable Factory Overhead (including factory depreciation of Rs. 75,000) 450,000

Fixed Factory Overhead (including machine repair Rs. 500 per unit) 300,000

Administrative Expenses 180,000

Selling and Distribution Expenses 90,000

Details of goods produced and sold are as below :

Particulars Units

Production during the year 100

Sale During the Year 60

Abnormal Loss 4

Normal Loss 2

Required :
● Determine the cost of trading stock for tax purposes using absorption cost method and prime
cost method.

Answer :
 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Calculation of Cost of Trading Stock U/s 15

As per Absorption Cost Method

Particulars Amount (Rs)

Opening Stock (A) 0

Add : Cost of Production

Material Consumed 5,000,000

Labour Cost 1,200,000

Variable Factory Overhead (450,000 - 75,000) 375,000

Fixed Factory Overhead (300,000 - 500 * 98) 251,000

Total Cost of Production (B) 6,826,000

Closing Stock (C) 2,465,273

Cost of Trading Stock [A+B-C] 4,360,727

W.N. 01 Calculation of Value of Closing Stock

Closing Stock Unit = Production Unit - Normal Loss - Sold Unit - Abnormal Loss
= 100 - 2 - 4 - 60 = 34 Units

Cost per unit (Fixed OH) = Total Fixed Factory OH / Higher of (“Normal” or “Actual”) Unit
= 251,000 / 98 = Rs. 2,561.2245

Cost per unit (Variable Part) = Total Variable Factory Overhead / Actual Production Unit
= 6,575,000 / 94 = Rs. 69,946.8085

● Normal Production Unit = Total Production Unit - Normal Loss = 100 - 2 = 98 Units
● Actual Production Unit = Normal Production Unit - Abnormal Loss = 98 - 4 = 94 Units

Value of Closing Stock = Closing Stock Unit * Rate per Unit

= 34 Units * (2,561.2245 + 69,946.8085) = Rs. 2,465,273.122

Calculation of Cost of Trading Stock U/s 15

As per Prime Cost Method

Particulars Amount (Rs)

Opening Stock (A) 0

 The Income Tax Act, 2058 : Concept and Examples of Section 15 (Cost of
Trading Stock)

Add : Cost of Production

Material Consumed 5,000,000

Labour Cost 1,200,000

Variable Factory Overhead (450,000 - 75,000) 375,000

Fixed Factory Overhead (300,000 - 500 * 98) 251,000

Total Cost of Production (B) 6,575,000

Closing Stock (C) 2,378,192

Cost of Trading Stock [A+B-C] 4,196,808

W.N. 01 Calculation of Value of Closing Stock

Closing Stock Unit = Production Unit - Normal Loss - Sold Unit - Abnormal Loss
= 100 - 2 - 4 - 60 = 34 Units

Cost per unit (Fixed OH) = Total Fixed Factory OH / Higher of (“Normal” or “Actual”) Unit
= 251,000 / 98 = Rs. 2,561.2245

Cost per unit (Variable Part) = Total Variable Factory Overhead / Actual Production Unit
= 6,575,000 / 94 = Rs. 69,946.8085

● Normal Production Unit = Total Production Unit - Normal Loss = 100 - 2 = 98 Units
● Actual Production Unit = Normal Production Unit - Abnormal Loss = 98 - 4 = 94 Units

Value of Closing Stock = Closing Stock Unit * Rate per Unit

= 34 Units * (2,561.2245 + 69,946.8085) = Rs. 2,378,191.489

Thanks and Courtesy Message :

● Mr. Bhavanath Dahal, C.A.
● Mr. Prabin Raj Kafle, C.A.
● The Inland Revenue Department for Income Tax Directive
● All the tutors of Paper 07 of CAP II Level and Paper 06 of CAP III Level under The ICANepal
Board.
● The Institute of Chartered Accountant of Nepal (ICANepal) for respective resource materials.
● All the seniors and the juniors CA Students
● All those friends who have contributed their valuable time and efforts for making this Note.