SUGGESTED ANSWERS TO

THE QUESTIONS SET AT

CHARTERED ACCOUNTANCY PROFESSIONAL (CAP)-II LEVEL

PRE-EXAM PREPARATION TEST

JUNE 2025
 Suggested Answers June 2025 Pre-exam Preparation Test (CAP II)

The Institute of Chartered Accountants of Nepal

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Year and month of Publication: 2025 April

Disclaimer:

The suggested answers published herein do not constitute the basis for evaluation of the
students' answers in the examination. The answers are prepared by the concerned resource
persons and compiled by the Technical Directorate of the Institute with a view to assist the
students in their education. While due care has been taken in the compilation of answers, if
any errors or omissions are noted, the same may be brought to the attention of the Technical
Directorate. The Council or the Board of Studies of the Institute is not in any way responsible
for the correctness or otherwise of the answers published herewith.

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Contents

Paper 1 -Advanced Accounting……………………………………………….4

Paper 2 -Audit and Assurance ………………………………………………..20

Paper 3 -Corporate and Other Laws …………………………………………31

Paper 4 – Financial Management……………………………………………...47

Paper 5 – Cost and Management Accounting……………………...…………64

Paper 6 - Business Communication and Marketing………………………….82

Paper 7 – Income Tax and VAT ………………………………….…………...93

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Paper 1: Advanced Accounting

All questions are compulsory. Working notes should form part of the answer.
Make assumptions wherever necessary.
1. The following is the Balance Sheet of A Ltd as at 31st March, 2023:

Liabilities Amount in Assets Amount in

NPR NPR
8,000 Equity Shares of 800,000 Building 340,000
Rs. 100 each
10% Debentures 400,000 Machinery 640,000
Loan from A 160,000 Stock 220,000
Creditors 320,000 Debtors 260,000
General Reserve 80,000 Bank 136,000
Goodwill 130,000
Miscellaneous Expenses 34,000
1,760,000 1,760,000
B Ltd agreed to absorb A Ltd. on the following terms and conditions:

1. B Ltd. would take over all assets, except bank balance at their book values less
10%. Goodwill is to be valued at 4 years’ purchase of super profits, assuming that
the normal rate of return be 8% on the combined amount of share capital and
general reserve.
2. B Ltd. is to take over creditors at book value.
3. The purchase consideration is to be paid in cash to the extent of Rs. 600,000 and
balance in fully paid equity shares of Rs. 100 each at Rs. 125 per share.
4. The average profit is Rs. 124,400. The liquidation expenses amounted to Rs.
16,000. B Ltd sold prior to 31st March 2023 goods costing Rs. 120,000 to A Ltd for
Rs. 160,000. Rs. 100,000 worth of goods are still in stock of A Ltd on 31st March
2023. Creditors include Rs. 40,000 still due to B Ltd.
Required: 20
Show the necessary Ledger Accounts to close the books of A Ltd and prepare the
Statement of financial position of B Ltd as at 1st April, 2023 after the takeover.
Answer
1)
Books of A Limited
Realization Account (2 Marks)
Particulars Amount in NPR Particulars Amount in NPR
To Building 340,000 By Creditors 320,000
To Machinery 640,000 By B Ltd. 12,10,000
To Stock 220,000 By Equity 76,000
Shareholders
To Debtors 260,000
To Goodwill 130,000
To Bank 16,000
1,606,000 1606,000

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Bank Account (1 Marks)

Particulars Amount in NPR Particulars Amount in NPR
To Balance B/d 136,000 By Realization 16,000
To B Ltd. 600,000 By 10% Debentures 400,000
By Loan from A 160,000
By Equity Shareholders 160,000
736,000 736,000

10% Debentures Account (1 Marks)

Particulars Amount in NPR Particulars Amount in NPR
To Bank 400,000 By Balance b/d 400,000

400,000 400,000

Loan from A Account (1 Marks)

Particulars Amount in NPR Particulars Amount in NPR
To Bank 160,000 By Balance b/d 160,000

160,000 160,000

Miscellaneous Expenses Account (1 Marks)

Particulars Amount in NPR Particulars Amount in NPR
To Balance B/d 34,000 By Equity Shareholders 34,000

34,000 34,000

General Reserve Account (1 Marks)

Particulars Amount in NPR Particulars Amount in NPR
To Equity Shareholders 80,000 By Balance b/d 80,000

80,000 80,000

B Ltd. Account (1 Marks)

Particulars Amount in NPR Particulars Amount in
NPR
To Realization A/c 12,10,000 By Bank 600,000
By Equity Share in B Ltd 610,000
(4,880 shares at Rs. 125 each)

12,10,000 12,10,000

Equity Shares in B Ltd. Account (1 Marks)

Particulars Amount in NPR Particulars Amount in NPR
To B Ltd. 610,000 By Equity Shareholders 610,000

6,10,000 6,10,000

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Equity Shareholders Account (1 Marks)

Particulars Amount in NPR Particulars Amount in NPR
To Realization 76,000 By Equity Share Capital 800,000
To Miscellaneous 34,000 By General Reserve 80,000
Expenses
To Equity Shares in B 610,000
Ltd.
To Bank 160,000

880,000 880,000

In the Books of
B Ltd.
Statement of Financial Position As on 1st April ,2023
(4 Marks)
Liabilities Amount Assets Amount in
in NPR NPR
4,880 Equity Shares of Rs. 100 488,000 Goodwill 216,000
each
Securities Premium 122,000 Building 306,000
Creditors 280,000 Machinery 576,000
Bank Overdraft 600,000 Stock 183,000
Debtors 194,000
Profit and Loss 15,000
(Unrealized Profit)
1,490,000 1,490,000
Working Notes
1) Valuation of Goodwill (1.5 Marks) Amount in Rs.
Average Profit 124,400
Less: 8% of Rs. 880,000 (70,400)
Super Profit 54,000
Value of Goodwill = 54,000 x 4 216,000
2) Net Assets for Purchase Consideration (2.5 Marks)
Goodwill [as valued in W.N. 1] 216,000
Building [340,000 x 90%] 306,000
Machinery [640,000 x 90%] 576,000
Stock [220,000 x 90%] 198,000
Debtors [260,000 x 90%] 260,000
Total Assets 1556,000
Less: Creditors (320,000)
Less: Provision for bad debts (26,000)
Net Assets 12,10,000
3) Number of Shares to be allotted in B Ltd. (1 Mark)
Total Purchase Considerations 12,10,000
Less: Paid in Cash (600,000)
Amount paid in Equity Share Capital 610,000
Number of Equity Shares (610,000/125) 4,880 Shares
4) Unrealized Profit on Stock (1 Mark)
Amount in Rs.
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The stock of A Ltd. Includes goods worth Rs. 100,000 which was sold by
B Ltd. On profit. Unrealized profit on this stock will be: 25,000
40,000 X 100,000
160,000
As B Ltd purchased assets of A Ltd. at a price 10% less than the book value, (10,000)
10% need to be adjusted from the stock.
(100,000 X 10%)
Amount of Unrealized Profit 15,000

2.
a) The balance sheet of the books as on 31-12-2018 were:
Liabilities Amount Asset Amount
Capital Account: Goodwill 10,000
X 104,000 Fixed Asset 108,000
Y 102,000 Stock 60,000
Creditors 20,000 Debtors 40,000
Bank Balance 8,000
226,000 226,000
X and Y are equal partners. X by agreement retires and Z joins the firms on the
basis of one third share of profits on 01.01.2019. Goodwill and Fixed assets are
valued at Rs. 30,000 and Rs. 140,000 respectively. And it was agreed to be written
up accordingly. Sufficient money is to be introduced so as to enable X to be paid
off and leave Rs. 5,000 cash at bank. Y and Z are to provide such sum as to make
their capital requirement proportionate to their share of profit.
Required: 10
Show Journal entries required and prepare the statement of financial position after
admission of Z.
b) XYZ Enterprises commenced the business of selling washing machines both on
cash basis and by Installments. Installment Sales require a deposit of 20% of Cash
Selling Price with the balance payable in 18 Equal Monthly Installments. No
additional charge is made for this serve. At the end of each financial year, company
takes credit for the profit on Installment sales only in respect of the proportion
represented by Deposits and Installments actually received. The following
transactions took place during the first two years of operation:
(Amounts in Rs.)
Particulars Year 1 Year 2
Cash Sales 35,735 48,920
Installments Sales 321,615 440,280
New Washing Machines Purchased 265,360 287,345
Cash collections on Installments contracts:
Initial Deposit 64,323 88,056
Installments - Year 1 Sales 80,403 128,645
Year 2 Sales 0 110,070
Overdue Installments 16,080 22,015
th
Shop Stock at 16 July (at cost) (at close of 66,340 74,835
financial year)
Required: 10
Prepare (for two year) Hire Purchase Trading Account, HP Debtors Account and
General Trading Account.

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Answer
2 a) Journal Entries (1 Marks for Every Journal Entries*7 =7)

1. Fixed Assets A/c Dr 32,000

To Profit and Loss Adjustment Account 32,000
(Being Sundry Assets Revalued)

2. Profit and Loss A/c Dr 32,000

To X ‘s Capital A/c 16,000
To Y ‘s Capital A/c 16,000
(Being Revaluation Profits distributed)

3. X’s Capital A/c Dr 5,000

Y‘s Capital A/c Dr 5,000
To Goodwill A/c 10,000
(Being Goodwill written off)
4. Y’s Capital A/c Dr 5,000
Z’s Capital A/c Dr 10,000
To X‘s Capital A/c 15,000
(Being goodwill amount adjusted)

5. Goodwill A/c Dr. 30,000

To Y’s Capital A/c 20,000
To Z’s Capital A/c 10,000
(Being Goodwill raised)
6. Cash A/c Dr 127,000
To Y’s Capital A/c 42,000
To Z’s Capital A/c 85,000
(Being Cash Introduced by Partners)
7. X’s Capital A/c Dr 130,000
To Cash A/c 130,000
(Being Cash Paid)

Statement of Financial Position (After Admission of Z) (2 Marks)

Liabilities Amount Assets Amount in
in NPR NPR
Capital: Fixed Assets 140,000
Y 170,000 Goodwill 30,000
Z 85,000 Stock 60,000
Debtors 40,000
Creditors 20,000 Bank 5,000
275,000 275,000
Working Notes:
1. Goodwill Adjustment:
X Y Z
Cr. 15,000 15,000 -
Dr. - 20,000 10,000

15,000 Cr 5,000 Dr. 10,000 Dr.

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2. Partners’ Capital A/c (1 Mark)

Particulars X Y Z Particulars X Y Z
To Goodwill 5,000 5,000 - By Balance B/d 104,000 102,000 -
To X’s 5,000 10,000 By P/L 16,000 16,000 -
Capital A/c Adjustment
To Cash 130,000 By Y’s Capital 5,000
A/c
By Z’s Capital A/c 10,000
By Goodwill A/c 20,000 10,000
To Balance - 170,000 85,000 By Cash A/c 42,000 85,000
c/d
135,000 180,000 95,000 135,000 180,000 95,000

2 b)
Working Notes
1 Computation of HP Sales (Installments Due during the year) (1 Mark)
Particulars Year 1 Year 2
Cash Collections on Installment Contracts:
Cash collected on Initial Deposit 64,323 88,056
Cash collected on Installments due on year 1 Sales 80,403 128,645
Cash collected on Installments due on year 2 sales - 110,070
Closing Installments due and Not Collected 16,080 22,015
160,806 348,786
Less: Opening Installments Due and Not Collected - (16,080)
HP Sales for the year – Credited to HP Trading Account 160,806 332,706

2 Computation of HP Stock (Installments Not Due) (1 Mark)

Particulars Year 1 Years 2
Opening Stock - Installments Not Due as on 17st July - 160,809
HP Sales for the Period 321,615 440,280
Less: Installments Due for the period - HP Sales credited to HP
(160,806) (332,706)
Trading Account
Closing Stock – Installments Not Due as on 31st March at HP
160,809 268,383
Price

3 Computation of Cost of HP Sales (stock Transferred) (1 Mark)

Particular Year 1 Year 2
Opening Stock of Shop Stock - 66,340
Add: Purchase during the year 265,360 287,345
Less: Closing Stock of Shop Stock (66,340) (74,835)
Cost of Goods Sold during the year (including HP Sales)
199,020 278,850
(A)
HP Sales (B) 321,615 440,280
Cash Sales (C) 35,735 48,920
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Total Sales (D= B+C) 357,350 489,200

Ratio Of HP Sales (E= B ÷D) 90% 90%
Cost of HP Sales (Stock Transferred to General Trading A/c [A 179,118 250,965
X E]
Notes: In the absence of information, the Total Cost of Goods sold is apportioned
between Installment Sales and Ordinary Sales in the ratio of Sales.
4 Calculation of Cost of Closing HP Stock (1 Mark)

Year Computation Rs
1 HP Stock At HP Price X (Cost of Stock Transferred + Opening HP 89,560
Stock at cost) =
(HP Sales + Opening HP Stock at HP Price)
= Rs. 160809 X [(Rs.179118+Rs.Nil)/ (Rs. 321615+ NIL)]
2 HP Stock at HP Price X (Cost of Stock Transferred + Opening HP 152,043
Stock at Cost) =
(HP Sales + Opening HP Stock at HP Price)
= Rs. 268383 X (Rs. 250965+Rs.89560)/ (Rs.440280+Rs.160809)
HP Debtors Account (installments due but not collected) (1.5 Marks)
Particular Year 1 Year 2 Particular Year 1 Year 2
To balance b/d 0 176889 By Bank A/c 0 0
To HP Sales A/C (WN 321615 440280 Initial Deposit – given 64323 88056
1)
Installments Collected 80403 238715
By Balance c/d (bal. 176889 290398
fig.)
Total 321615 617169 Total 321615 617169
HP Trading Account for the year ending…………..(2 Marks)
Particulars Year 1 Year 2 Particulars Year 1 Year 2
To Opening HP Stock – 89560 BY HP Sales 160806 332706
Installments not due at A/c – (WN 1)
Cost (WN 4 )
To General Trading A/c 179118 250965 By Closing HP 89560 152043
– (Cost Of HP Sales Stock –
) (WN 3) Installments not
due at Cost –
(WN 4)
By Profit and Loss, A/c 71248 144224
– (Hp Profit transferred
) bal. figure)
Total 250366 484749 Total 250366 484749
General Trading Account for the year ending………………. (2.5 Marks)
Particular Year 1 Year 2 Particular Year 1 Year 2
To Opening Stock - Shop 0 66340 By Cash Sales – 35735 48920
Stock – given given

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To Purchases - given 265360 287345 By HP Trading 179118 250965

A/c (Cost of HP
Sales)
(WN 3)
To P&L A/c (Profit 15833 21035 By Closing Stock - 66340 74835
Transferred) Given
Total 281193 374720 Total 281193 374720
3.
a) XYZ Company of Butwal has branch at Palpa. Goods are sent to Palpa are mostly
supplied from Butwal. On 31st Ashadh 2079 the Branch Balance Sheet after closing
the books was as follows:

Liabilities NPR Assets NPR

Creditors 40,000 Debtor 200,000
Head Office 168,000 Building A/c Nil
(t/f to HO)
Cash 8,000
208,000 208,000
For the six months with Poush end 2079, the following transactions took place at
Palpa Branch.
NPR NPR
Cash Collected from 160,000 Purchases 48,000
Debtors
Discount Allowed 8,000 Sales 240,000
Discount Received 1,200 Wages Paid 20,000
Paid to Creditors 60,000 Salaries (including 4,000
advance Rs. 2,000)
Cash sent to Bank 80,000 General Expenses 1,600
Building A/c( further 4,000 Fire insurance paid for 3,200
payment to contractors) one year
Cash in hand 1,600 Managers Salary for 9 7,200
months
Cash at Bank 28,000
Required: 10
Set out the Head Office Account in Palpa Books as on 30th Poush 2079 and also
the Branch Balance Sheet on the same date. Also give the closing Journal Entries,
assuming all the accounts are transferred to HO A/c.

b) The following is an extract form the Trial Balance of Money Bank Ltd.as at 31
Ashadh 2078:
Rebate on Bills discounted as on 1-4-2077 341,295(Cr.)
Discount Received 850,780(Cr.)
Analysis of the the bills discounted reveals as follows:
Amount (Rs.) Due Date
1,400,000 Aswin 1,2078
4,360,000 Aswin 8,2078
2,820,000 Aswin,21,2078
4,060,000 Kartik 1,2078
3,000,000 Kartik 5, 2078
Required: 5

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Find out the amount of discount to be credited to profit and Loss Account for the
year ending 31 Ashadh 2078 and Pass journal entries. The rate of discount may be
taken at 10% per annum. (Assuming: Shrawan 2078= 31 month days, Bhadra
2078= 30 month days, Aswin 2078=30 month days) 5
Answer
3 a) In the books of Palpa Branch
HO A/c (2 Marks)
DR. CR.
Particulars Amount(Rs) Particulars Amount(Rs)
To Cash/Bank A/c 38,400 By Bal b/d 1,68,000
To Building A/c 4,000 By Sales A/c 2,40,000
To Purchase A/c 48,000 By Discount Earned A/c 1,200
To Salaries A/c 2,000
To Wages A/c 20,000
To General Expenses A/c 1,600
To Fire insurance Premium A/c 1,600
To Manager’s Salary A/c 4,800
To Discount Allowed A/c 8,000
To bal c/d 280,800
TOTAL 409,200 409,200
Balance Sheet of Palpa Branch
as on 30.09.2079 (3 Marks)
Liabilities Amount(Rs) Assets Amount(Rs)
Sundry Creditors 26,800 Debtors 2,72,000
Head Office 2,80,800 Advance Salary 2,000
Advance Insurance 1,600
Premium
Advance Managers 2,400
Salary
Cash & Bank 29,600
307,600 307,600
Journal Entries: (1 Mark each for every Journal Entries *3=3 Marks)
I. Head Office A/c Dr. Rs 4,000
To Building A/c w Rs 4,000
(The transfer for payment for construction of Building to HO)

II. Head Office A/c Dr. Rs 86,000

To Purchase A/c Rs48,000
To Salaries A/c Rs 2,000
To Wages A/c Rs 20,000
To General Expenses A/c Rs 1,600
To Fire Insurance Premium A/c Rs 1,600
To Managers Salary A/c Rs 4,800
To Discount Allowed A/c Rs 8,000
( The debit balance of revenue items transferred to HO A/c)

III. Sales A/c Dr. Rs 2,40,000

Discount Earned A/c Dr. Rs1,200
To Head Office A/c Rs 241,200
( The credit balance of revenue items transferred to HO A/c)
Working Notes:
Cash & Bank A/C (1 Mark)
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Dr. Cr.
Particulars Amount(Rs) Particulars Amount(Rs)
To bal b/d 8,000 By Creditors A/c 60,000
To Debtors A/c 1,60,000 By Building A/c 4,000
By Salaries A/c 4,000
By Wages A/c 20,000
By General Expenses A/c 1,600
By Fire insurance Premium 3,200
A/c
By Manager’s Salary A/c 7,200
By Head Office A/c 38,400
By Bal c/d 29,600
168,000 168,000
Debtors A/C (0.5 Mark)
Dr. Cr.
Particulars Amount(Rs) Particulars Amount(Rs)
To bal b/d 2,00,000 By Cash A/c 1,60,000
To Sales A/c 2,40,000 By Discount Allowed 8,000
By Bal c/d 2,72,000
4,40,000 4,40,000
Creditors A/C (0.5 Mark)
Dr. Cr.
Particulars Amount(Rs) Particulars Amount(Rs)
To discount 1,200 By bal b/d 40,000
received A/c
To Cash & Bank 60,000 By Purchase A/c 48,000
A/c
To Bal c/d 26,800
88,000 88,000

3 b) Calculation of closing balance of Rebate on Bills Discount:

=14,00,000*10%*(31+30+1)/365 = Rs 23,780.82 (0.5 Mark)
=43,60,000*10%*(31+30+8)/365 = Rs 82,421.92 (0.5 Mark)
=28,20,000*10%*(31+30+21)/365 = Rs 63,353.42 (0.5 Mark)
=40,60,000*10%*(31+30+30+1)/365 = Rs102,334.25 (0.5 Mark)
=30,00,000*10%*(31+30+30+5)/365 = Rs 78,904.11 (0.5 Mark)
Total Rebate on Bills Discount = Rs 350,794.52

The amount of discount to be credited to Profit & Loss A/c = Opening Balance of Rebate on
Bills Discount + Discount Received - Closing Balance of Rebate on Bills Discount
= Rs 341,295+Rs 850,780-Rs 350,794.52 = Rs 841,280.48 (1 Mark)

RELEVANT JOURNAL ENTRIES (0.5 Marks * 3 journal Entries= 1.5 Marks)

a) Rebate on Bills Discount A/c Dr. Rs 341,295
To Discount A/c Rs 341,295
(Being opening balance of rebate on bills discount credited to discount a/c)

b) Bank A/c Dr. Rs 850,780

To Discount A/c Rs 850,780
(Being discount amount received during the year)
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c) Discount A/c Dr. Rs 350,794.52

To Rebate on Bills Discount A/c Rs 350,794.52
(Being closing balance of unexpired discount amount transferred to rebate on
bills discount)
4.
a) A doctor, after retiring from government services, started private practice on 1st
January 2020 with NPR 20,000 of his own and NPR. 30,000 borrowed at an interest
of 15% p.a. His accounts for the year were kept on a cash basis and the following
is his summarized cash account:

Particulars Amount in Particulars Amount

NPR in NPR
To Capital 20,000 By Medicines Purchased 24,500
To Loan taken 30,000 By Surgical Equipment 25,000
To Prescription fees 52,500 By Motor Car Purchased 32,000
To Gift from patients 13,500 By Motor Car Expenses 12,000
To Visiting fees 25,000 By Wages and Salaries 10,500
To Fees from Lectures 2,400 By Rent of Clinic 6,000
To Pension received 30,000 By general Expenses 4,900
By Household Expenses 18,000
By Household Furniture 2,500
By Expenses on daughter’s 21,500
Marriage
By Interest on Loan 4,500
By Balance c/d
Bank 11,000
Cash 1,000
173,400 173,400
Additional Information:
• One-third of the motorcar expenses was made to the private use of car and Rs.
3,000 of the wages and salaries are in respect of domestic servants
• The stock of medicines in hand as on 31st December 2020 was valued at Rs.
9,500
Required: 10
Prepare Income and Expenditure account for the year ended 31st December 2020
and Statement of financial position as on that date.
b) Business School maintains separate building fund. As on 31.03.2079, balance of
building fund was Rs. 10,00,000 and it was represented by fixed deposit (8% per
annum) of Rs. 6,00,000 and current account balance Rs. 4,00,000. During the year
2079/80, the school collected as donations towards the building fund Rs. 5,60,000
and transferred 40% of development fees collected Rs. 22,56,500 to building fund.
Capita work progress as on 31st Ashad 2079 was Rs.8,25,000 for which contractor’s
bill up to 75% was paid on 14.4.2079. The extension of building was finished on
31.12.2080 costing Rs. 7,25,000 for which contractor’s bill was fully met. It was
decided to transfer the cost of completed building (Rs.15,50,000) to the
corresponding asset account.
Required: 5
Pass journal entries to incorporate the above transactions in the books of Business
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School for the year 2079/80 and show the trail balance of the building fund ledger.
Answer
4 a)
Income and Expenditure Account (5 Marks for Correct Net Income)
For the year ended 31-12-2020
Particulars Amount in NPR Particulars Amount in NPR
To Medicines consumed 15,000 By Prescription Fees 52,500
Purchases 24,500
Less: Closing stock ( 9,500)
To Motor Car Expenses 8,000 By Gift From 13,500
Patients
To Wages and Salaries 10,500 7,500 By Visiting Fees 25,000
Less: Domestic Servant ( 3000)
To Rent for Clinic 6,000 By Fees from 2,400
Lectures
To General Charges 4,900
To Interest on Loan 4,500
To Net Income 47,500
93,400 93,400
Statement of Financial Position as on 31-12-2020 (3 Marks)
Liabilities Amount in NPR Assets Amount in NPR
Capital: 48,500 Motor Car 32,000
Loan 30,000 Surgical Equipment 25,000
Stock of Medicines 9,500
Cash at Bank 11,000
Cash in Hand 1,000
78,500 78,500
Working Notes:
Capital A/c (2 Marks for Correct calculation of Capital A/C)
For the year ended 31-12-2020
Particulars Amount in Particulars Amount in NPR
NPR
To Drawings: By Cash and bank 20,000
Motor Car Expenses 4,000 By Cash/Bank 30,000
(Pension Income)
Household Expenses 18,000 By Net Income 47,500
Daughter’s Marriage 21,500
Wages for domestic 3,000
Household Furniture 2,500 49,000

To Balance C/d 48,500

97,500 97,500
4 b) (0.5 Marks *8 Journal Entries= 4 Marks)
a) Bank A/c Dr. 560,000
To Building Fund A/c 560,000

(On collection of donations)

b) Bank A/c Dr. 902,600

To Building Fund A/c 902,000

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(40% of the development fees directly)

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

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

d) Interest A/c Dr. 48,000

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

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

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

f) Contractor's a/c Dr. 1,343,750

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

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

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

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

To General Fund A/c 1,550,000
(Corresponding building fund transferred)

Trial Balance of Building Fund as on 31st Ashadh 2080 (1 Mark)

Particulars Dr Cr

Building Fund 1,002,600

Contractor‘s A/c 206,250

Fixed Deposit A/c 648,000

Current a/c 560,850
Total 1,208,850 1,208,850
5.
a) X Ltd. had entered into a non-cancellable contract with Y Ltd. to purchase 10,000
units of raw material at Rs 50 per unit at a contract price of Rs 5,00,000. As per
terms of contract , X Ltd. would have to pay Rs 60,000 to exit the said contract.
Ltd has discontinued manufacturing the product that would use the said raw
material. For that X Ltd. has identified a third party to whom it can sell the said
raw material at Rs 45 per unit. How should X Metals Ltd. account for this
transaction in its books of account in respect of the above contract? 5

b) Bibek Ltd. took a factory premises on lease on 01.04.2073 for Rs. 1,00,000 per
month. The lease is operating lease. During Ashadh, 2074, Bibek Ltd. relocates its
operation to a new factory building. The lease of the old factory premises continues
to live upto 31.12.2076. The lease cannot be cancelled and cannot be sub-let to
another user. The auditor insists that lease rent of balance 33 months upto
31.12.2076 should be provided in the accounts for the year ending 31.03.2074.

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Bibek Ltd. seeks your advice.5

c) Ayush Traders Private Limited commenced trading business on 1 January 2015.
On that date the company purchased a building for NPR. 120,000 to be depreciated
over 30 years with no residual value. Ayush Traders Private Limited uses a
revaluation model for buildings. After five years on 1 January 2020, the building
has a fair value of NPR 175,000. It still has a further 25 years of useful life
remaining. Calculate the annual depreciation charge to profit or loss in each year of
the asset's life, and the revaluation surplus as at 1 January 2020 as per Nepal
Accounting Standard on Property Plant and Equipment? 5
Answer
5 a) These circumstances do indicate an onerous contract. The only benefit to be derived from the
purchase contract costing Rs 5,00,000 are the proceeds from the sale contact, which are Rs
4,50,000. Therefore, a provision should be made for the onerous element of Rs 50,000, being
the lower of cost of fulfilling the contract and the penal cost of cancellation of Rs 60,000.

5 b) In accordance with the provisions of NAS 37, Provisions, Contingent Liabilities and
Contingent Assets, if an entity has a contract that is onerous, the present obligation under the
contract shall be recognized and measured as a provision. An onerous contract is a contract
in which the unavoidable cost of meeting the obligations under the contract exceed the
economic benefits expected to be received under it. In the given case, the operating lease
contract has become onerous as the economic benefit of lease contract for next 33 months up
to 31.12.2076 will be nil. However, the lessee, Bibek Ltd., has to pay lease rent of
Rs.3,300,000 (i.e. Rs.100,000 p.m. for next 33 months). Therefore, provision on account of
Rs.3,300,000 is to be provided in the accounts for the year ending 31.03.2074.
Hence auditor’s contention to provide for the lease rent of balance 33 months upto
31.12.2076 in the accounts for the year ending 31.03.2074 is correct.

5 c) As per NAS 16, "Property, Plant and Equipment", if an asset’s carrying amount is increased
as a result of a revaluation, the increase shall be recognized in other comprehensive income
and accumulated in equity under the heading of revaluation surplus. However, the increase
shall be recognized in profit or loss to the extent that it reverses a revaluation decrease if the
same asset previous recognized in profit or loss. [1 mark]
Before the revaluation, the annual depreciation charge is NPR. 4,000 p.a. (i.e., 120,000 / 4
years) on the building. [1 mark] This charge is made in each of the first five years of the
asset's life. The carrying amount of the building will decline by NPR. 20,000 in 5 years (5 ×
NPR 4,000) to NPR 100,000 at 31 December 2019. [0.5 mark]
When the revaluation takes place, the amount of the revaluation is:
New Building value (to be shown in statement of financial position) = NPR. 175,000
Less: Carrying amount as at end of 2019 = (100,000)
Amount of revaluation surplus = 75,000 [1 mark]
The carrying amount of the asset will be increased by NPR. 75,000 and recognized in other
comprehensive income and accumulated in the revaluation surplus as part of equity. [0.5
mark]
After the revaluation,
Annual depreciation will be charged on the building at a new rate of 25 years is
= NPR 175,000/25
= NPR 7,000 per year [1 mark]

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6. Write short notes: (5×3=15)

a) Biological assets and their measurement
b) Accrual and Matching Concept
c) Debt Service Coverage Ratio
d) Offsetting as per NAS-01
e) Accounting treatment of contingency gains
Answer
6 a) Biological assets are living animals and plants. They include sheep, pigs, beef cattle, poultry,
fish, dairy cows, trees in a forest, plants for harvest (for example, wheat and vegetables), trees,
plants and bushes from which agricultural produce is harvested (for example, fruit trees, vines
and tea bushes). [1 mark for meaning]Biological assets related to agriculture activity within
the scope of NAS 41 are measured on initial recognition and subsequent reporting dates at
fair value less costs to sell, unless fair value cannot be measured reliably. [1 mark] The
changes in fair value less costs to sell shall be recognized in profit or loss. [0.5 mark]

6 b) Accrual and Matching Concept:

Accrual Concept: [1.5 marks]
The accrual concept makes a distinction between the actual receipt of cash and the right to
receive cash as regards revenue and actual payment of cash and obligation to pay cash as
regards expenses. So, the revenues are recognized when they become receivable, though the
cash is received or not received, and the expenses are recognized when they become payable
though the cash is paid or not paid. In brief, the accrual concept requires that revenue is
recognized when realized and expenses are recognized when they become due and payable
without regard to the time of cash receipt or cash payment. The following points highlight the
significance of Accrual concept:
• It helps in knowing actual expenses and actual income during a particular time.
• It helps in calculating the net profit of the business.
Matching Concept: [1 mark]
The matching concept states that the revenue and the expenses incurred to earn the revenues
must belong to the same accounting period. So once the revenue is realized, the next step is
to allocate it to the relevant accounting period. The following points highlight the significance
of Matching concept:
• It guides how the expenses should be matched with revenue for determining exact profit or
loss for a particular period.
• It is very helpful for the investors/shareholders to know the exact amount of profit or loss
of the business.
6 c) Debt Service Coverage Ratio The ratio is a key financial ratio for the lenders. Debt servicing
means timely payment of principal amount of instalments plus interest. Borrower should be
able to service the debt out of the profits. Profit means the profit available for debt servicing.
This ratio is calculated as: Profit available for Debt Servicing Loan instalments +Interest This
ratio normally should be 1.33 but a higher coverage is of advantage to the business as it
improves its strength to service the debts promptly

6 d) Offsetting is the presentation of assets and liabilities on a net basis in the financial statement.
[0.5 mark] Offsetting in the statement of comprehensive income or financial position or in
the separate income statement except when offsetting reflects the substance of the transaction

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or other event, detracts from the ability of users both to understand the transaction, other
events and conditions that have occurred and to assess the entity’s future cash flows.[1 mark]
As per NAS-01 “Presentation of Financial Statement”, an entity shall not offset assets and
liabilities or income and expenses, unless required or permitted by NFRS. Measuring assets
net of valuation allowances- for example, obsolescence allowance on inventories and doubtful
debts allowances on receivables is not offsetting. [1 mark]
6 e) Accounting treatment of contingency gains
A gain contingency is an uncertain situation that will be resolved in the future, possibly
resulting in a gain. The accounting standards do not allow the recognition of a gain
contingency prior to settlement of the underlying event. Doing so might result in the
excessively early recognition of revenue (which violates the conservatism principle). Instead,
one must wait for the underlying uncertainty to be settled before a gain can be recognized.
If a contingency may result in a gain, it is allowable to disclose the nature of the contingency
in the notes accompanying the financial statements. However, the disclosure should not make
any potentially misleading statements about the likelihood of realization of the contingent
gain. Doing so might lead a reader of the financial statements to conclude that a gain would
be realized in the near future.
An example of a contingent gain is the prospect for a favorable settlement in a lawsuit or a
tax dispute with a government entity.

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Paper 2: Audit and Assurance

Attempt all questions.

1. As an auditor, give your opinion with explanations on the following cases:
(45=20)
a) XYZ is a manufacturing company. There was huge fire in the factory of XYZ on 1
Ashoj 2079 and fixed assets having written down value of Rs. 10 crores out of total
fixed assets of Rs. 20 crores of the company were destroyed. The financial
statements of the company for the year 2078/79 was approved by the Board on 30
Ashoj 2079 in which fixed assets have been presented at WDV of Rs. 20 crores
despite the several loss due to fire and the information about the loss due to fire is
properly explained in the Notes to the financial statements.

b) UDM Limited has received a grant amount of Rs. 1 Crore from the Government of
Nepal for social activity to be conducted in Humla District during FY 2078/79.
Grant amount was received by the UDM Limited in FY 2078/79. The company has
completed the social activity according to the agreement and recognised full
amount as income in the books of account. However, in FY 2079/80, the
Government of Nepal has conducted a study and concluded that the company has
not completed the activity in line with the agreement and downsized the grant
amount by Rs. 20 Lakh. The accountant of the company has argued that grant
income was already booked as income, therefore no need to consider the transaction
in the books of account.
c) X Pvt Limited purchased goods at the cost of Rs. 40 lakhs in Baisakh, 2080. Till
Ashadh end, 2080, 75% of the stocks were sold. The company wants to disclose
closing stock at Rs. 10 lakhs. The expected sale value of good is Rs. 11 lakhs and
a commission at 10% on sale is payable to the agent.
d) TTU Limited has a piece of land which was purchased in FY 2077/78 at Rs.
100,000. On 31st Ashad, 2080, the land was revalued at Rs. 90,000 which was
previously valued at Rs. 110,000 on 32nd Ashad 2079. The company uses the
revaluation model for its land. The accountant of the company argued that
revaluation loss shall be recognized in profit or loss.
Answer
1 a) As per NAS 10, Events After the Reporting Period, events after the reporting period are those
events, favorable and unfavorable, that occur between the end of the reporting period and the
date when the financial statements are authorized for issue. [0.5 marks]
Two types of events can be identified:
-those that provide evidence of conditions that existed at the end of the reporting period
(adjusting events after the reporting period); and
-those that are indicative of conditions that arose after the reporting period (non-adjusting
events after the reporting period) [1 mark]
So, the event in the given case (fire after reporting period) is a non-adjusting event. An entity
shall not adjust the amounts recognized in its financial statements to reflect non- adjusting
events after the reporting period. [1 mark]
If events after the reporting date impacts going concern status of the entity, the entity is
required to prepare its financial statements on break-up value basis. This does notseem to be
the case here. [0.5 marks]
If non-adjusting events after the reporting period are material, non-disclosure could influence
the economic decisions that users make on the basis of the financial statements.
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Accordingly, an entity shall disclose the following for each material category of non-adjusting
event after the reporting period: [1 mark]
-the nature of the event; and
-an estimate of its financial effect, or a statement that such an estimate cannot be made.
So, presenting fixed assets at Rs 20 crores in the balance sheet with appropriate disclosure in
the Notes to Accounts seems to be appropriate.[1 mark]
1 b) As per NAS 20 “Accounting for Government Grants and Disclosure of Government
Assistance”, an entity shall book grant income when there is reasonable assurance that the
entity will comply with the condition attaching to the grant agreement and the grants will be
received.[1 mark]Similarly, a government grant that becomes receivable as compensation
for expenses or losses already incurred or for the purpose of giving immediate financial
support to the entity with no future related costs shall be recognised in profit or loss of the
period in which it become receivable. [1 mark] Based on aforementioned provision, UDM
Limited has recognized the grant income in FY 2078/79 when the grant was received by the
company for the social activity which was completed in the same year.
However, as per para 32 of NAS 20 if the government grant become repayable such shall be
treated as a change in accounting estimate and the repayment of government grant related to
income shall be applied first against any unamortized deferred credit recognised in respect
of the grant and to the extent that the repayment exceeds any such deferred credit, or where
no deferred credit exists, the repayment shall be recognised immediately in the profit or loss.
[1.5 marks] Here, the Nepal Government has reduced the grant amount by Rs. 20 lakh due
to non-compliance of the agreement by the company in FY 2079/80. Due to which the
company is obliged to repay Rs. 20 Lakh to the Government of Nepal which was already
recorded as income in previous year. Since, there is no deferred credit exist, the company
shall recognise Rs. 20 lakh immediately in the profit or loss in FY 2079/80.[1.5 marks]

1 c) As per NAS 2 “Inventories”, Inventories shall be measured at the lower of cost and net
realisable value. [1 mark] In this case,
Expected sale value 11 lakhs
Less: Commission (10% of 11 lakhs) 1.1 lakh
Net Realisable value 9.9 lakhs [1 mark]
Cost of Inventory (25% of 40 lakhs) 10 lakhs
Value of Inventory (lower of cost and net realisable value) 9.9 lakhs [1 mark]
Thus the intention of company is incorrect and inventory of goods should be measured and
disclosed valued at 9.9 lakhs. [2 marks]

1 d) As per NAS 16 “Property, Plant and Equipment”, an entity using revaluation model shall
recognize the increase as a result of a revaluation in other comprehensive income and
accumulated in equity under the heading revaluation surplus, whereas decrease as a result of
revaluation in profit or loss. However, decrease shall be recognized in other comprehensive
income to the extent of any credit balance existing in the revaluation surplus in respect of that
asset.[1 mark] Here, the company has already booked the revaluation gain of Rs. 10,000 in
FY 2078/79 and in FY 2079/80 there is a revaluation loss of Rs. 20,000. In the light of
aforementioned provision of the standard, the company shall first decrease the credit balance
of revaluation reverse first and only the remaining amount shall be charged to profit or loss.
[1.5 marks]Therefore, the intention TTU Limited to recognize the revaluation loss in profit
or loss is incorrect, it shall recognize as follows:
S.N. Particulars 2078/79 2079/80
1 Carrying Amount/Cost (opening) 100,000 110,000
2 Revalued Amount 110,000 90,000

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3 Revaluation Gain/(Loss) 10,000 (20,000)

Recognition Treatment [1.5 marks]
a Revaluation Surplus via Other comprehensive Income 10,000 (10,000)
b Revaluation loss in Profit or Loss (10,000)
Hence, in FY 2079/80 TTU Limited should recover the revaluation loss of Rs. 10,000 from
revaluation surplus and remaining loss of Rs. 10,000 should be charged to Profit or Loss. [1
mark]
2. Give your comments on the following cases: (45=20)
a) B Ltd. books the expenses of foreign trip of its Director A of US$2,000 based on
the declaration provided by Director A on his return that the advance of US $2,000
taken for the trip was spent. No supporting evidence was provided for the expense
by the Director.
b) Statutory auditor of Saturn Ltd for the year 2079/80 could not find the audit
evidence of machinery amounting to Rs 12 crores. Performance materiality set by
him was Rs 10 crores. In his judgement, other than machinery, financial statements
give true and fair view. He is not sure about the type of opinion to express and
wordings of the basis of opinion paragraph. In reference to NSA 705, suggest him
the opinion and how it is written in Independent Auditor’s Report.
c) One of the audit team members has requested the client to organize a short trip to
nearby hill station for few days, in return, the team shall reconsider the issues raised
in the audit report.
d) In an initial audit engagement, the auditor will have to satisfy about the sufficiency
and appropriateness of ‘Opening Balances' to ensure that they are free from
misstatements, which may materially affect the current period's financial
statements. When financial statements are audited for the first time and after
performing the necessary audit procedures, you are not satisfied about the
correctness of 'Opening Balances', what approach you will adopt in drafting your
audit report.
Answer
2 a) NSA 500 "Audit Evidence" states that an auditor should obtain sufficient appropriate audit
evidence to be able to draw reasonable conclusions on which to base his option. [1 mark] In
the context of the facts of case, ascertain whether the payment made by the company for the
foreign trip form an "allowance" or "reimbursement". An allowance is a fixed sum of money
allowed on the basis of specified criteria. No evidence supporting the expenditure is required
for payment of allowance at specified rate to the director. On the other hand, if the payment
is reimbursement, it should be against actual expenditure. [1 mark for case analysis] The
director concerned should provide proof of expenditure. Since the director has given only a
declaration, the auditor should ascertain other relevant facts as to whether the advance paid is
pursuant to the policy of the company which is based on approximate estimation of the
expenditure normally incurred by a person of the status of a director and the same is applicable
to persons of a similar status within the company. If the auditor considers the advance taken
is reasonable then the declaration can be considered adequate, otherwise he may have to call
for additional documentary evidences.[2 marks for additional procedure that auditor needs
for examination of the situation]

2 b) According to NSA 705, the auditor shall express a qualified opinion when the auditor is unable
to obtain sufficient appropriate audit evidence on which to base the opinion, but the auditor

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concludes that the possible effects on the financial statement of undetected misstatements, if
any could be material but not pervasive.
Here, the amount of machinery for which auditor could not obtain the audit evidence was
material but didn’t seem to be pervasive. Hence qualified opinion can be given. [1.5 marks]

Wording of basis of qualified opinion paragraph:

Basis for Qualified Opinion [0.5 mark for proper heading]
“Fixed assets include the machinery carried at Rs 12 crores in financial statement. We were
unable to obtain sufficient appropriate audit evidence about carrying amount of that
machinery.[1 mark]
We conducted our audit in accordance with Nepal Standards on Auditing (NSAs). Our
responsibilities under those standards are further described in the Auditor’s Responsibilities
for the Audit of the Consolidated Financial Statements section of our report. We are
independent of the company in accordance with the ethical requirements that are relevant to
our audit of the financial statements in [jurisdiction], and we have fulfilled our other ethical
responsibilities in accordance with these requirements. We believe that the audit evidence we
have obtained is sufficient and appropriate to provide a basis for our qualified opinion.” [2
marks (0.5 marks for each element to be included in this paragraph)]

2 c) According to Handbook of the Code of Ethics for Professional Accountants, 2023 section 250
related to Inducement including gifts and hospitality, the auditor shall not accept, offer, or
encourage others to offer or accept, an inducement where the intent is to improperly influence
the behaviour any individual. In the given case the audit team member has demanded for a
short trip to nearby hill station in return to reconsider the issues raised in the audit report
which is inducement to the client to make payment for the trip and in return the audit team
member will change the audit report. [0.5 marks for case analysis] This type of behaviour is
a breach of fundamental principle of integrity. Therefore, the auditor shall be liable for
disciplinary action for this type of inducement by the audit team member. [1.5 marks]

2 d) As per NSA 510 “Initial Audit Engagements-Opening Balances”, the auditor shall obtain
sufficient appropriate audit evidence about whether the opening balances contain
misstatements that materially affect the current period’s financial statements by – [0.5 marks]
(i) Determining whether the prior period’s closing balances have been correctly brought
forward to the current period or, when appropriate, any adjustments have been disclosed
as prior period items in the current year’s Statement of Profit and Loss;
(ii) Determining whether the opening balances reflect the application of appropriate
accounting policies; and
(iii) By evaluating whether audit procedures performed in the current period provide evidence
relevant to the opening balances; or performing specific audit procedures to obtain
evidence regarding the opening balances. [0.5 x 3 = 1.5 marks]
If the auditor obtains audit evidence that the opening balances contain misstatements that
could materially affect the current period’s financial statements, the auditor shall perform such
additional audit procedures as are appropriate in the circumstances to determine the effect on
the current period’s financial statements.[0.5 marks] If the auditor concludes that such
misstatements exist in the current period’s financial statements, the auditor shall communicate
the misstatements with the appropriate level of management and those charged with
governance. [0.5 marks]
Approach for drafting Audit Report: If the auditor concludes that the opening balances contain
a misstatement that materially affects the current period’s financial statements and the effect
of the misstatement is not properly accounted for or not adequately presented. The auditor
shall express a qualified opinion or an adverse opinion, as appropriate. in accordance with

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NSA 705 [1 mark] and in case where the auditor is unable to obtain sufficient appropriate
audit evidence regarding the opening balances, the auditor shall express a qualified opinion
or a disclaimer of opinion, as appropriate, in accordance with NSA 705. [1 mark]
3. Answer the following: (35=15)
a) What do you mean by professional skepticism? Describe the need to plan and
perform audit with an attitude of professional skepticism.
b) What are the elements of a System of Quality Control? Explain.
c) Mr. X, a newly qualified Chartered Accountant wants to apply the concept of
materiality in an audit of the financial statements as a whole. Guide him as to the
factors that may affect the identification of an appropriate benchmark for this
purpose.

Answer
3 a) As per NSA 200: Overall Objectives of the Independent Auditor and the Conduct of
an Audit in Accordance with Nepal Standards on Auditing, an auditor should maintain
professional skepticism throughout the audit. Professional skepticism is an attitude
that includes a questioning mind, being alert to conditions which may indicate possible
misstatement due to error or fraud, and a critical assessment of audit evidence. The
auditor should plan and perform the audit with an attitude of professional skepticism
recognizing that circumstances may exist which cause the financial statements to be
materially misstated.[1.5 marks for 3 points in definition]
Maintaining professional skepticism throughout the audit is necessary if the auditor
is, for example, to reduce the risks of:
• Overlooking unusual circumstances.
• Over generalizing when drawing conclusions from audit observations.
• Using inappropriate assumptions in determining the nature, timing and extent of the
audit procedures and evaluating the results thereof. [0.5 x 3 = 1.5 marks]
Professional skepticism is necessary to the critical assessment of audit evidence. This
includes questioning contradictory audit evidence and the reliability of documents and
responses to inquiries and other information obtained from management and those
charged with governance. [1 mark] It also includes consideration of the sufficiency
and appropriateness of audit evidence obtained in the light of the circumstances, for
example, in the case where fraud risk factors exist and a single document, of a nature
that is susceptible to fraud, is the sole supporting evidence for a material financial
statement amount. [1 mark]

3 b) According to NSQC-1 elements of a System of Quality Control are:

i) Leadership responsibilities of quality within the firm: It requires policies
and procedures within a firm to promote an internal culture recognizing
that quality is essential in performing engagement. [0.5 mark]
ii) Relevant Ethical Requirement: It requires policies and procedures in the
firm to provide reasonable assurance that the firm and its personnel
comply with the relevant ethical requirements. [0.5 mark]
iii) Acceptance and continuance of client relationships and specific
engagements: It requires firm to establish the policies and procedures for
the acceptance and continuance of client relationships and specific
engagements, designed to provide firm the reasonable assurance that it
will undertake the client only when:

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▪ it is competent to perform the engagement and it has capabilities and

resources to do so,
▪ it can comply with ethical requirement,
▪ clients don’t lack integrity. [1 mark]
iv) Human Resources: It requires firm to establish policies and procedures
designed to provide it with reasonable assurance that it has sufficient
personnel with competence, capabilities, and commitment to ethical
principles to perform engagement in accordance with professional
standards and applicable laws and also to enable firm to issue reports that
are appropriate in the circumstances. [1 mark]
v) Engagement Performance: It requires policies and procedures within the
firm to provide reasonable assurance that engagements are performed in
accordance with professional standards and applicable laws and firm
issues reports that are appropriate in the circumstances. [1 mark]
vi) Monitoring: It requires firm to establish a monitoring process in the firm
to provide reasonable assurance that the polices and procedures relating
to the system of quality control are relevant, adequate, and operating
effectively. [1 mark]

3 c) NSA 320 “Materiality in Planning and Performing an Audit” provides the use of Benchmarks
in Determining Materiality for the Financial Statements as a Whole.
Determining materiality involves the exercise of professional judgment. A percentage is
often applied to a chosen benchmark as a starting point in determining materiality for the
financial statements as a whole. Factors that may affect the identification of an appropriate
benchmark include the following: [1 marks for introduction over the relevant topic and
benchmarks determining basis]
(i) The elements of financial statements (for eg., assets, liabilities, equity, revenue, expenses);
(ii) Whether there are items on which the attention of the users of the particular entity’s
financial statements tends to be focused (for example, for the purpose of evaluating
financial performance users may tend to focus on profit, revenue or net assets);
(iii) The nature of the entity, where the entity is at in its life cycle, and the industry and
economic environment in which the entity operates;
(iv) The entity’s ownership structure and the way it is financed (for example, if an entity is
financed solely by debt rather than equity, users may put more emphasis on assets, and
claims on them, than on the entity’s earnings); and
(v) The relative volatility of the benchmark.[0.5x5=2.5 marks]
4. Answer/Comment on the following: (35=15)
a) Laxman, a Chartered Accountant has been approached to provide Second Opinion
by ABC Ltd. Explain the provision on Second Opinion as explained in Code of
Ethics issued by the Institute.
b) Handbook of the Code of Ethics for Professional Accountants, 2023 issued by
ICAN has provided certain principles to be complied by a professional accountant.
Explain those principles in short.
c) In reference to Guidelines on Marketing Professional Services, 2023, give your
views on following matter:
i) A audit firm published information about retirement of one of its partners in a
newspaper.

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ii) Same audit firm advertised for recruitment of a new partner in a newspaper.
iii) Advertisement statement of point (i) and (ii) also contained the matter that it is
the best audit firm in Nepal.
Answer
4 a) Section 321 of ICAN Code of Ethics has stated the provision regarding Second Opinions. [0.5
marks] Professional accountants are required to comply with the fundamental principles and
apply the conceptual framework set out in Section 120 of ICAN Code of Ethics to identify,
evaluate and address threats while providing second opinions. Providing a second opinion to
an entity that is not an existing client might create a self-interest or other threat to compliance
with one or more of the fundamental principles.
A professional accountant might be asked to provide a second opinion on the application of
accounting, auditing, reporting or other standards or principles to
(a) specific circumstances, or
(b) transactions by or on behalf of a company or an entity that is not an existing client.
A threat, for example, a self-interest threat to compliance with the principle of professional
competence and due care, might be created if the second opinion is not based on the same
facts that the existing or predecessor accountant had, or is based on inadequate evidence. [1.5
marks for concept of 2nd opinion and related threats]
Examples of actions that might be safeguards to address such a self-interest threat include:
● With the client’s permission[0.5 mark], obtaining information from the existing or
predecessor accountant.[0.5 mark]
● Describing the limitations surrounding any opinion in communications with the client. [0.5
mark]
● Providing the existing or predecessor accountant with a copy of the opinion
If an entity seeking a second opinion from a professional accountant will not permit the
accountant to communicate with the existing or predecessor accountant, the accountant shall
determine whether the accountant may provide the second opinion sought.[1.5 marks]

4 b) Handbook of the Code of Ethics for Professional Accountants, 2023 has provided five kinds
of fundamental principles which are as under: [1 marks for each principle with short
explanation]
i) Integrity – to be straightforward and honest in all professional and business relationships.
ii) Objectivity – to exercise professional or business judgment without being compromised
by: (i) Bias; (ii) Conflict of interest; or (iii) Undue influence of, or undue reliance on,
individuals, organizations, technology or other factoRs.
iii) Professional Competence and Due Care – to: (i) Attain and maintain professional
knowledge and skill at the level required to ensure that a client or employing organization
receives competent professional service, based on current technical and professional
standards and relevant legislation; and (ii) Act diligently and in accordance with
applicable technical and professional standards.
iv) Confidentiality – to respect the confidentiality of information acquired as a result of
professional and business relationships.
v) Professional Behavior – to: (i) Comply with relevant laws and regulations; (ii) Behave in
a manner consistent with the profession’s responsibility to act in the public interest in all
professional activities and business relationships; and (iii) Avoid any conduct that the
professional accountant knows or should know might discredit the profession.
4 c) According to Guidelines on Marketing Professional Services, 2023
i) Point 4.4.5 allows to publish information about retiring partner in a newspaper, provided
that the member’s name or firm 's name is not given undue prominence and that content
of the information published is appropriate in size and presentation.[1.5 marks]
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ii) Point 4.4.6 allows this for publishing advertisement for recruiting new partner in a
newspaper.[1.5 marks]
iii) This is not permissible according to Point 5 where it is stated that:
• Professional accountant in public practice are prohibited from making exaggerated claims
on services that one is able to offer, qualifications possessed or experience gained.
• Making disparaging reference or unsubstantiated comparison to the works of the others.[2
marks]
5. Answer/Comment on the following: (25=10)
a) What is the provision related to appointment of Auditor as per the Companies Act,
2063?
b) Discuss about the provisions for appointment of auditor of a corporate body
substantially owned by the Government of Nepal under Audit Act, 2075.
Answer
5 a) Section 111 of the Companies Act, 2063 states the provision of appointment of auditor in
following ways: [0.5 marks]
i. The auditor of a company shall be appointed, from amongst the auditors licensed to carry
out audit under the prevailing law, by the annual general meeting, subject to Chapter-18 in
the case of a public company, and, in accordance with the provision as contained in the
memorandum of association, articles of association or consensus agreement,[1.5 marks] if
any failing such provision, by the general meeting in the case of a private company; and
his/ her name shall be forwarded to the Company Registrar Office within fifteen days from
the date of such appointment. [1 mark] Provided, however, that the board of directors may
appoint the auditor prior to the holding of the first annual general meeting, [1 mark]
ii. The auditor appointed pursuant to Sub-Section (1) shall hold office only until the next
annual general meeting.
iii. No auditor or his/her partner or ex-partner or employee or ex-employee shall be appointed
as auditor for more than three consecutive terms to perform the audit of a public company.
Provided, however, that this restriction shall not apply to any partner who ended
partnership or any employee who left the service of such auditor three years before.[0.5 x
2 = 1 mark]

5 b) According to Audit Act, 2075, Corporate body means a corporate body of which more than
fifty percent of the shares or assets are owned by the Government of Nepal, Provincial
Government or Local Level, and this term also includes a body of which more than fifty
percent of the shares or assets are owned by the corporate body. Such corporate bodies are
also known as substantially government owned corporate bodies.[ Introduction to corporate
body-1 marks; Section under which it formulates- 0.25 marks]
Section 11 has the provision related to appointment of auditor of corporate body, according
to it:
A corporate body may appoint an auditor and have its accounts audited by the auditor subject
to the principles specified by the Auditor General. In appointing an auditor, the corporate
body shall consult the Auditor General. The concerned corporate body shall forward a copy
of the report presented by the auditor appointed to the Office of the Auditor General, as well.
If, from the report received, there appears any error in the accounts of such a corporate body,
the Auditor General may give necessary directives to the concerned corporate body and the
auditor in respect of such error, and it shall be the duty of the concerned body and auditor to
abide by such directives. The concerned corporate body shall submit progress details of
implementation, within the specified period by the Auditor General in respect of the matters
indicated by the report received and the directives given by Auditor General.

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6. Write short notes on the following: (42.5=10)

a) Cost Audit
b) Disciplinary Committee
c) Audit risk
d) Audit of Accounting Estimates
Answer
6 a) Cost Audit
Cost Audit represents the verification of cost accounts and check on the adherence to cost
accounting plan. It ascertains the accuracy of cost accounting records to ensure that they are
in conformity with Cost Accounting principles, plans, procedures and objective. Cost audit
provides useful information to the management regarding regulating production, economical
method of operation, reducing cost of operation and reformulating Cost accounting plans. It
aims to identify the undue wastage or losses and ensure that costing system determines the
correct and realistic cost of production. [1.25 marks for meaning and introduction]
Cost Audit comprises following;
• Verification of the cost accounting records such as the accuracy of the cost accounts, cost
reports, cost statements, cost data and costing technique and
• Examination of these records to ensure that they adhere to the cost accounting principles,
plans, procedures and objective. [1.25 marks for scope]

6 b) Disciplinary Committee
As per section 14 of Nepal Chartered Accountants Act, 2053, disciplinary committee
comprises 7 members and it shall be constituted to recommend the council to take necessary
action after investigation upon complaints lodged against any action, contrary to the Nepal
Chartered Accountant Act or regulation or code of conduct framed under this Act, rendered
by any member, or the institute receives any information of such kind.[1.5 marks for
introduction] The Disciplinary committee shall have the authority similar to judicial court, in
respect of summoning concerned person and investing evidence and witnesses. The
disciplinary committee shall recommend to council along with its opinion and finding for
necessary action against a member.

6 c) Audit risk
Audit risk is the risk that the auditor gives an inappropriate audit opinion when the financial
statements are materially misstated. [1 mark for Meaning and Components] Audit risk
consists of:
a. Inherent risk - the susceptibility of an account balance to material misstatement, assuming
there are no related internal controls;
b. Control risk - the risk that a material misstatement will not be prevented or detected and
corrected on a timely basis by the accounting and internal control systems; and,
c. Detection risk - the risk that the material misstatements will not be detected by the auditor's
substantive procedures. These three components of audit risk are considered during the
planning process in the design of audit procedures in order to reduce audit risk to an
acceptably low level.[1.5 marks for brief introduction of each component]

6 d) Audit of Accounting Estimates

Accounting estimates means an approximation of the amount of an item in the absence of a
precise means of measurement. These are made in condition of uncertainty and involve the
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use of judgement. Responsibility of reasonable estimation is of management however auditor

has to assess the reasonableness of accounting estimates made by the management. [1 mark
for introduction] While doing so auditor has to :
i) Evaluate whether the data on which the estimate is based is accurate, complete and
relevant.
ii) Test the calculation procedure used by the management.
iii) Compare the accounting estimates made for prior periods with actual results of those
periods.
iv) Verify whether the material accounting estimates are reviewed and approved by
management. [1.5 marks for brief auditing process]
7. Distinguish between: (25=10)
a) Hot file review and Cold file review
b) External Confirmation and Written representation
Answer
7 a) Hot file review is conducted usually during the audit and/or audit work is completed but before
the auditor’s reports is issued. This in nature is a detailed review that is conducted with an
aim to find out if there is any weakness in application of audit procedures or if the results have
been misinterpreted. Hot reviews are usually carried out by the senior audit teams or someone
with the same authority who is not connected with the engagement. Such reviews mostly
include meeting with audit team personnel and their individual work so that both work and
the skills of members are improved by pointing out discrepancies and providing
recommendations. NSQC-1 requires hot file review.
Cold file review or cold review is conducted after the reports are signed off. It is performed
by the professional assigned by the firm, internal or external, when all the audit work has been
concluded and the required sufficient appropriate audit evidence has been obtained and
conclusions drawn and reported. The purpose of this review is to ensure compliance with
relevant auditing standards and to analyze weakness in the way whole audit work is completed
and how it can be improved for next similar assignments by updating firm’s quality control
standard, training the staffs etc. Generally, matters like: whether the disclosure requirements
are met, whether the auditing standards and regulations have been properly complied with etc.
are reviewed.
[Meaning & Timing - 0.75 x 2 = 1.5 marks]
[Objective - 0.5 x 2 = 1 mark]
[Responsible person – 0.5 x 2 = 1 mark]
[Scope and Advantage – 0.75 x 2 = 1.5 marks]

7 b)
External Confirmation Written Representation
External confirmation refers to audit Written Representation are statements
evidence obtained as a direct written provided by the management that the
response by the auditor from a third party auditor requires in connection with the audit
(the confirming party)[0.5 mark] of the entity’s financial statements. [0.5
mark]
External confirmation may be received in Written Representation are obtained in
paper form, or by electronic or other written form rather than oral. [0.5 mark]
medium[0.5 mark]

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NSA 505: External Confirmation NSA 580 written representation establish

establishes standards and provide guidance standards and provide guidance on the
on the auditor’s use of external auditor’s responsibility to obtain written
confirmations as a means of obtaining representations from management and,
audit evidence. [0.5 mark] where appropriate, those charged with
governance in an audit of financial
statements. [0.5 mark]
Generally positive or negative It is a written statement that the
confirmation request is sent where the management has fulfilled its responsibility
other party either provides the requested for the preparation of the financial
information or agrees or disagrees with the statements in accordance with the
information in the request. [0.5 mark] applicable financial reporting framework
specific assertions. [0.5 mark]
The auditor shall evaluate whether the Although written representations provide
results of the external confirmation necessary audit evidence, they do not
procedures provide relevant and reliable provide sufficient appropriate audit
audit evidence, or whether further audit evidence on their own about any of the
evidence is necessary. [0.5 mark] matters with which they deal. [0.5 mark]

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Paper 3: Corporate & Other Laws

Attempt all questions.

1. Answer the following questions: (5×5=25)

a) Kathmandu Communication Ltd. incorporated by 7 members. This Company has
issued its shares in public. As we know that it is different from the persons-that is
members, shareholders, who compose it. It has a personality of its own which is
distinct & separate from the personality of its shareholders or members. So, the
company is neither an agent nor a trustee of the shareholders. Which character is
applicable and underline in the facts given? Discuss the character with reference
the legal provision and case laws.
b) Systematic Real Estate Ltd. was in process of incorporation. Mr. Wise Singh a
proposed promoter of the company signed an agreement for the purchase of the
land for the company and provided some advance as agreed. Shortly, after
incorporation the company purchased the land on its name paying the balance
amount to the owner. When Mr. Wise Singh one of the promoter of the company
claimed reimbursement of the amount paid as advance for purchase of land, the
board of directors objected the payment claiming the payment was made prior to
the incorporation of the Company and is not liable to reimburse Mr. Wise Singh. Is
this objection valid? Critically answer the question based on the provisions of the
Companies Act, 2063.
c) Ms. Najma is a shareholder of Ajima Textile Company Pvt Ltd. She has a conflict
with directors of the company. So, she did not attend at annual general meetings of
the company as well. She wants to know about the financial position and
performance of the company. So, she requested for the audit reports approved by
the AGM but the company did not provide it.
In such case, suggest Ms. Najma from where and how she can collect the audit
report of her company pursuant to Companies Act, 2063.
d) M/s Pioner, a Public Limited Company having paid up capital of Rs. 15 million
rupees. Due to severe financial condition, the Company is considering to reduce its
paid up capital at least by 50% of the present capital.
The Company seeks your legal advice on what legal steps are to be taken to reduce
the capital?
e) During the course of Audit of Nepal Agro Limited, auditor of the company found
some irregularities during the course of audit. He would like the shareholders to
know about these irregularities. Therefore, he wants to have the extra ordinary
general meeting (EGM) of the Company convened and he approaches you for
consultation for convening EGM. Could you explain the provision relating to the
EGM of the company can be convened pursuant to the Companies Act, 2063?
Q.1a Answer
Company is purely a creation of law and comes into existence only when it is registered
under the company law. The promoters are the persons who constitute it. It is different
from its promoters and shareholders. So, no members of the company are individually

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liable on the acts of the company. By incorporation under the Act, the company is
vested with a corporate personality quite distinct from individuals who are its members.
Being a separate legal entity is bears its own name and acts. It has a seal of its own. Its
assets are separate and distinct from those of its members. It is capable of owning
property, incurring debts, borrowing money, having a bank account, employing people,
entering into contracts and suing or being suing in the same manner as an individual.
The shareholders are not the agents of the company and so they cannot bind it by their
acts. The company does not hold its property as an agent or trustee in respect of its
liabilities. The entity acts like a natural person but only through a designated person,
whose acts are processed within the ambit of law. It has a personality of its own which
is distinct & separate from the personality of its shareholders or members. It has
perpetual succession. (1 mark)

Companies Act, 2063:

Section 7 has accepted the character of independent corporate body. This section
provided that the company to be a body corporate. Any company incorporated under
this Act shall be an autonomous and corporate body with perpetual succession. Subject
to this Act, company like an individual, acquire, hold, sell, dispose of or otherwise deal
with, any movable or immovable property. A company may sue and be also sued by its
own name. A company may, like an individual, enter into a contract and exercise the
rights and perform the obligations as referred to in the contract. (2 marks)

Case law:
Hence, in the instant facts, corporate personality character is applicable to the company.
In Salomon v. Salomon & co. Ltd. (1897), clearly established the principle that once
a company has been validly constituted under Companies Act, it becomes a legal
person distinct from its members and for this purpose it is immaterial whether any
member has a large or small proportion of the shares, and whether he holds those shares
beneficially or as a mere trustee. It is explained that the company is at law a different
person altogether from the subscribers of the memorandum; and though it may be that
after incorporation the business is precisely the same as before, the same persons are
managers, and the same hands receive the profits, the company is not in law their agent
or trustee.
Main Consequences of Companies’ Corporate Personality
(i) Companies can sue and be sued in their own name
(ii) Companies enjoy perpetual succession
(iii) Companies can hold property and members have no property interest in
company property:

In Lee v. Lee's Air Farming Ltd., (1961), it also held that it is separate and as such,
a claim for compensation was valid. The decision in Salomon's was applied.
In Macaura v. Northern Assurance Co Ltd [1925] AC 619 it is established that
"Shareholders are not, in the eyes of the law, part owners of the undertaking. The
undertaking is something different from the totality of the shareholding." (2 marks)
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Q.1b. Answer
Fact:
Board of Directors objected to the claim of the advance provided for the procurement of
land by Mr. Wise Sign prior to the incorporation of the company. Systematic Real Estate
Ltd. later procured the land by paying the balance amount to the owner of the land. (0.5
marks)
Legal Provision:
Section 17 “Pre-incorporation contract” of the Companies Act, 2063 mentions the
provisions in regard to the treatment of the pre-incorporation contract:
Section 17(1) states that a contract made prior to the incorporation of a company
shall be a proposed contract only, and such contract shall not be binding on the
company.
Section 17(2) states that if, prior to the incorporation of a company, any person carries
on any transaction or borrows money on behalf of the company, such person shall be
personally liable for any contract related with the transaction so carried on, subject to
Sub-section (3).
Section 17(3) states that if, within the time mentioned in any transactions or within the
reasonable time after the incorporation of a company, the company, through its act, action
or conduct, accepts any act, action or conduct, accepts any act, action to borrowing done
or made prior to the date of authorization to commence its transactions or endorses such
act or action, that transaction shall be binding on the company and the other contracting
party; and the person carrying out such act to action shall be released from the personal
liability to be borne pursuant to Subsection (2).
Section 17(4) states that notwithstanding anything contained elsewhere in this Section,
the consensus agreement of a private company shall govern any contracts made prior to
the incorporation of such company. (2.5 marks)
Conclusion:
In the above case as by taking ownership of the land shortly after incorporation,
Systematic Real Estate Ltd. has taken the ownership of that contract by way of
action and conduct i.e. paying rest of the price, taking ownership. Thus, objection
made by the board of director to the claim is not valid. Mr. Wise Singh is very much
entitled get reimbursement of the advance paid by him on behalf of the company
for the land. (2 marks)

Q.1c. Answer
Section 25 of the Companies Act has provision regarding 'Duplicate copies to be issued'.
It has following provisions:
(1) If any shareholder or any other person concerned demands for a duplicate copy of the
memorandum of association, article of association, prospectus, annual accounts and
audit or directors report or any document submitted by the company to the Office, the
concerned company shall provide a duplicate copy of such document by collecting the
fees prescribed in the articles of association.
Provided, however, that any person whoever may demand for such document in the
case of a public company.
(2) If the concerned company does not provide duplicates of such documents pursuant to
Sub-section (1), the Office of the Company Registrar shall provide duplicates of such
documents from its records by collecting the prescribed fees. (3 marks)
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In the given case, Ms. Najma is a shareholder of Ajima Textile Company Pvt Ltd. She
requested for the audit reports approved by the AGM but the company did not
provide it. (0.5 marks)

As per section 25 of the Act, if the concerned company does not provide duplicates of
such documents pursuant to Sub-section (1), the Office shall provide duplicates of such
documents from its records by collecting the prescribed fees.
Hence, pursuant to section 25 of the Act, Ms. Najma may apply to the Office of the
Company Registrar for collecting the audit report of the company. If the company
has already submitted such document, the Office shall provide photocopy of such
audit report by collecting the prescribed fees. (1.5 marks)

Q.1d. Answer
As per section 57 sub-section (1) of the Companies Act 2063, if a company intends to
reduce its share capital, it may, by adopting a special resolution to that effect at its general
meeting, reduce its share capital by obtaining approval of the Court and making necessary
amendment to or alteration in the memorandum of association and articles of association,
accordingly.
Sub-section 2 states that on receipt of approval of the Court, the company may reduce its
share capital as follows:
a) By reducing the capital to such amount as has been paid up where calls for payment
of amount on shares are not fully paid up,
b) By paying back any paid-up share capital,
c) By devaluating the face value of shares where the company has sustained a big loss
or suffered a natural calamity.
Sub-section 3 states that no withstanding anything contained in sub-section (2), a company
which has already become insolvent in accordance with the prevailing law shall not reduce
its capital pursuant to this section. (3.5 marks)
M/s Pioner Limited, should pass a special resolution in the general meeting and reduce
its share capital with prior approval from the court and necessary alterations should be
made in the Memorandum and Articles of Association, to reduce its paid up capital at
least by 50% of the present capital of Rs. 15 million. (1.5 marks)

Q.1e. Answer
The circumstances in which an extra ordinary general meeting (EGM) can be convened as
specified in the Companies Act 2063 are as follows:
Extra-ordinary General Meeting (Section 82):
(1) The board of directors of a company may convene an extra-ordinary general
meeting if it deems necessary.
(2) If, in the course of examining the accounts of a company, it is deemed necessary to
call an extraordinary general meeting for any reason, the auditor may request the
board of directors to call such meeting; and if the board of directors fails to call the
meeting accordingly, the auditor may make an application, setting out the matter,
to the Office; and if an application is so made, the Office may call the extra-ordinary
general meeting of the company.
(3) If the shareholders holding at least ten per cent shares of the paid-up capital of a
company or at least twenty five per cent shareholders of the total number of
shareholders make an application, setting out the reasons thereof, to the registered
office of the company for calling an extraordinary general meeting, the board of
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directors shall call the extra-ordinary general meeting of the company within 30
days from the date of such application.
(4) If the board of directors does not call the extraordinary general meeting within thirty
days from the date on which an application is made pursuant to sub-section (3), the
concerned shareholders may make a petition to the office setting out the matter; and
if such petition is made, the Office may cause to call such meeting.
(5) If the Office deems necessary to call an extraordinary general meeting in view of
the findings of any inspection or investigation or for any other reason, it may itself
call or cause the board of directors to call such meeting. (3.5 marks)
On the basis of above provision, the auditor cannot himself convene EGM. But the
auditor may request the board of directors to call such meeting; and if the board of
directors fails to call the meeting accordingly, the auditor may make an application, to
the Office of the Company Registrar; and if an application is so made, the Office may
call the extra-ordinary general meeting of the company. (1.5 marks)
2. Answer the following questions: (3×5=15)
a) Ms. Pramita Singh a newly appointed CFO of Ramro Bank Ltd, want to know about
the capital fund that a bank should maintain as per Bank and Financial Institution
Act, 2073. As a consultant of bank you are asked to advise the following
i) What is capital fund?
ii) If bank is unable to maintain capital fund what action should be undertaken by
the bank.
b) The Board of Directors of Himal Finance Company Ltd has constituted a Corporate
Social Responsibility (CSR) Committee under the convenorship of the Board
Chairperson. However, the internal auditor of the financial institution
recommended for the reconstitution of the sub-committee on the ground that the
chairperson of the Board cannot be a member in any such sub-committee
constituted by the Board.
Examine legality of the recommendation made by the internal auditor on the basis
of Banks & Financial Institutions Act, 2073.
c) What are the functions of Nepal Rastra Bank as per Nepal Rastra Bank Act, 2058
to achieve the objectives of the Bank?

Q.2a. Answer
i) As per Section 2 (y) of Bank and Financial Institution Act, 2073 “Capital Fund” means
the total sum of primary capital and supplementary capital of a bank or financial institution
as specified by the Rastra Bank and the term also includes other fund or amount as specified
by the Rastra Bank from time to time. (1.5 marks)

ii) Section 42 of Bank and Financial Institution Act, 2073 prescribe provision about Capital
Fund as follows:

(1) A bank or financial institution shall have to maintain a capital fund in the ratio as
prescribed by the Rastra Bank on the basis of its total assets or total risk-weighted
assets. The Rastra Bank may, while prescribing such ratio, also prescribe the ratio of
additional capital fund.
(2)If any bank or financial institution fails to maintain the capital fund in accordance with
Sub-Section (1) above, the Board of Directors of such bank or financial institution
shall have to give information thereof to the Rastra Bank within one month.

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(3) The information given pursuant to Sub-Section (2) above shall also be accompanied
by, inter alia, the reasons for the failure to maintain the capital fund and the plans or
programs prepared by the Board of Directors to increase the capital fund and restore
it to the position as prescribed by the Nepal Rastra Bank.
(4) On receipt of the information referred to in Sub-Section (2) and (3) above, if the
Rastra Bank deems the plan or program submitted by the Board of Directors
reasonable, it may give directive to the concerned bank or financial institution to
implement such plans or programs; and if any amendment or alteration is to be made
in the proposed plans or programs it may give a direction to the concerned bank or
financial institution to amend or alter such plan or programs stating the reasons for
such amendment or alteration, and to implement the same. (3.5 marks)

Q.2b. Answer
Section 26 of the Banks & Financial Institutions Act, 2073 prescribes following provisions
regarding the constitution of sub-committee in a bank or financial institution:
(1) Except as expressly provided for in this Act that particular work shall be carried out by any
particular entity or official, the Board of Directors may constitute one or more sub-
committee(s) for any specific purpose subject to the directives of the Rastra Bank:
Provided that the Chairperson of the Board of Directors shall not be in the sub-committee.
(2) The functions, duties, powers and rules of procedure of the sub-committee constituted
pursuant to Sub-Section (1) and the remuneration or allowances receivable by a member
attending its meetings shall be as specified by the Board of Directors and the functions
carried out by such a sub-committee and expenditures incurred by it shall be clearly
specified in the annual report. (3 marks)
In the given case, the internal auditor of Himal Finance Company Ltd has recommended for
the reconstitution of a sub-committee constituted under the convenorship of the Board
Chairperson. (0.5 marks)
As per section 26 of the Act, the Board of Directors of Himal Finance Company Ltd may
constitute a sub-committee under it and specify its functions. However, the chairperson of the
Board cannot be in the sub-committee.
Hence, the recommendation of the internal auditor for the reconstitution of the CSR Committee
on the ground that Board Chairperson cannot be its convener is valid pursuant to section 26 of
the Banks & Financial Institutions Act, 2073. (1.5 marks)

Q.2c. Answer
To achieve the objectives referred to in Section 4 of Nepal Rastra Bank Act 2058, Section 5 of
the Nepal Rastra Bank Act, 2058 has prescribed the functions, duties and powers of Nepal
Rastra Bank as follows:
a) To issue bank notes and coins;
b) To formulate necessary monetary policies in order to maintain price stability and to
implement or cause to implement them;
c) Formulate foreign exchange policies and to implement or cause to implement them;
d) To determine the system of foreign exchange rate;
e) To manage and operate foreign exchange reserve;
f) To issue license to commercial banks and financial institutions to carry on banking
and financial business and to regulate, inspect, supervise and monitor such
transactions;
f1) To issue directions and standards regarding the regulation, inspection and supervision
of cooperative organizations dealing in savings and credits.

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f2) To regulate, inspect and supervise based on financial governance and risk of
cooperatives having a share capital of more than fifty million rupees or having an
annual transaction equal to that amount, at the request of the cooperative department
by also using the powers provided by existing laws related to cooperatives.
g) To act as a banker, advisor and financial agent of Government of Nepal;
h) To act as the banker of commercial banks and financial institutions and to function
as the lender of the last resort;
i) To establish and promote the system of payment, clearing and settlement and to
regulate these activities;
j) To operate open market transaction through necessary instruments for liquidity
management.
k) To implement or cause to implement any other necessary functions which the Bank
has to carry out in order to achieve the objectives of the Bank under this Act;(0.5 x
10 = 5 marks)
3. Answer the following questions: (2×5=10)
a) Mr. Hiranya Pradhan, representative of ICAN and Mr. Rajeev Agrawal,
representative of FNCCI are the members of Nepal Securities Board (SEBON).
They had some agenda for the Board Meeting and so wrote a request letter to the
Chairperson to call the Board Meeting. The Chairperson refused to call the meeting
mentioning that the request letter should be signed by all the members of the board.
State the meeting and decision provision of Securities Act, 2063 and explain
whether the act of the Chairperson valid?
b) Mr. N is interested to establish insurance company with his friends jointly. He/she
approached you for the provision on prior approval of newly enacted Insurance Act,
2079. Provide the consultation based on provision of prior approval of the Insurance
Act, 2079.

Q.3a. Answer
Section 6 of the Securities Act, 2063, states the provision of Meeting and decision of Board.
As per the section.
1. The chairperson shall call the meeting of the Board as per necessity. Such a meeting
shall be held at least once a month.
2. The meeting of the Board shall be held on such date, at such time and at such place
as may be specified by the chairperson.
3. The meeting of the Board shall be presided over by the chairperson and by a
member chosen by the members from amongst themselves, in the absence of the
chairperson.
4. Where at least two members request in writing to call a meeting of the Board, the
chairperson shall have to call a meeting of the Board within seven days from the
date of receipt of such notice.
5. The secretary of the Board shall provide the agenda to be discussed at the meeting
to the members, along with the notice for the meeting.
6. The presence of more than fifty percent of the total number of members of the
Board shall be deemed to have been constituted a quorum for a meeting of the
Board.
7. A majority opinion shall prevail at the meeting of the Board and in the event of a
tie; the person presiding over the meeting shall exercise the casting vote.

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8. There shall be maintained a separate minute book recording the names of members
present at, matters discussed at and decisions made by each meeting of the Board,
and such a book shall be signed by members present.
9. The decisions made by the Board shall be authenticated by the secretary of the
Board and shall provide to all members.
10. Other procedures relating to the meeting of the Board shall be as determined by the
Board itself. (0.4 x 10 = 4 marks)
Thus, as per point 4 above, the Chairperson should call the meeting of the board within
seven days from the date of receipt of such notice at the request of the two members. The
Chairperson views that the request letter should be signed by all the members of the board
is not valid. (1 mark)

Q.3b. Answer
Insurance Act, 2079 has provision of prior approval in section 26 of the Act. They are as
follows:
1. Any person willing to incorporate a public company as per section 25 to
conduct insurance business, have to submit an application to the Nepal
Insurance Authority along with the prescribed fee for obtaining prior approval
having enclosed therewith the following documents:
a. Memorandum of Association and Articles of Association of the proposed
insurance company.
b. Feasibility study report and details about infrastructures of the proposed
insurance company.
c. Personal details of applicants in the form as prescribed by the Authority,
d. A certified copy of the agreement, if any, made between the applicants prior
to incorporation of the insurance company in relation to incorporation of the
insurance company,
e. Evidence of the statement disclosing the sources of incomes and tax
clearance by the applicants up to the fiscal year immediately preceding for
making of application pursuant to this section,
f. If application is made by any corporate body following details:
i. Copy of board's decision of the corporate body to incorporate insurance
company,
ii. Memorandum of Association and Articles of Association of the
concerned company,
iii. Documents proving capacity to make investments,
iv. Is such corporate body is undertaking the type of business that requires
regulation from any regulatory body as per prevailing laws, copy of
permission granted by such regulatory body to make investment in
insurance business,
g. Other details or documents as specified by Nepal Insurance Authority. (3
marks)
2. Any foreign insurance company, with prior approval of Nepal Insurance
Authority, may open its branch or incorporate an insurance company in
Nepal in joint investment with a body corporate registered in Nepal or a
Nepali citizen.
3. If any foreign insurance company desires to open branch office or to
incorporate an insurance company in Nepal in joint investment to carry on
insurance company, have to submit an application to the Nepal Insurance
Authority along with the prescribed fee for obtaining prior approval.
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4. While submitting application pursuant to sub-section (3), such applicant

shall have to submit the following details and documents in addition to the
details and documents as referred to in sub-section (1):
a. Copy of license of the foreign insurer obtained from concerned
country for carrying on insurance transaction,
b. Copy of renewal of such license obtained from concerned country
for carrying on insurance transaction,
c. Copy of permission granted by regulatory authority of the
concerned foreign country to open branch in Nepal,
d. Copy of board's decision of such foreign corporate body to open
branch or to incorporate an insurance company in Nepal in joint
venture,
e. Previous five year's audit report and audited financial statements
reflecting financial capability,
f. Name and shareholdings of directors of such foreign company and
details about corporate body in which it has financial interest,
g. Other details or documents as specified by Nepal Insurance
Authority.
5. The Nepal Insurance Authority may if it finds appropriate to grant approval
upon examination of the application submitted for prior approval pursuant
to sub-section (1) and sub-section (3) and enclosed documents, grant its
approval within sixty days after filing of the application, in the prescribed
format.
6. If insurer need to amend its memorandum of association or articles of
association, prior approval from Nepal Insurance Authority shall be
obtained. (2 marks)
4. Answer the following questions: (2×5=10)
a) Sky Dimension Ltd., a trader in household goods earned net profit before bonus of
NPR 11,00,000 and allocated the required amount for distribution of bonus in
financial statement of the company. After eight month of closure of fiscal year
management of the company decided to distribute the household goods worth the
amount of the bonus to the employees specifying the problem of cash crunch in the
Company and to comply with the timeline for distribution of bonus. Critically
examine validity of the decision of management to distribute the bonus mentioning
the actual and extended timeline for distribution of bonus based on provisions of
Bonus Act, 2030.
b) Simara Steel Ltd. could not avail skilled manpower for its specialized operation in
Nepal and hence intends to hire manpower from the international market. What are
the provisions in this regard as provided by the Labor Act, 2074?
Q.4a. Answer
Fact:
Management of Sky Dimension Ltd. decided to distribute the household goods worth the
amount of the bonus to the employees specifying the problem cash crunch in the Company
and to comply with the timeline for distribution of bonus. (0.5 marks)
Legal Provision:
Section 9 “Types of Bonus and Period of Distribution Thereof” of the Bonus Act, 2030
mentions about the types and period of distribution of Bonus.
Section 9(1) states that the bonus, to be distributed pursuant to this Act shall be paid in cash.

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Section 9(2) states that the bonus shall have to distribute within a period of eight months
from the close of the fiscal year.
Section 9(3) states that if an application, specifying reasons of not being able to distribute
the bonus within the period of Sub-Section 2 is submitted to the Labour Office by any
Management, the Labour Office may, if the reasons are found genuine, extend the time for a
period of three months at maximum for distribution of bonus or may allow to distribute the
bonuses of two years at a time in the next fiscal year. (3 marks)
Conclusion:
As per provisions of Bonus Act, 2030 in case of distribution of bonus by Sky Dimension Ltd.
i) Management cannot distribute the bonus payable in kind.
ii) Management can apply to the Labour office for the extension of time period for
distribution of bonus in case of genuine cash crunch. (1.5 marks)

Q.4b. Answer
According to the Section 22 of the Labor Act, 2074, employer is prohibited from
employing foreign national as labor without taking work permit from the Department of
Labor.

However, if any skilled labor is not available from Nepalese citizens, can employee foreign
labor on the following condition.

1. Before employing foreign labor employer shall publish advertisement in national daily
newspaper to employee Nepalese citizen for required skilled labor.
2. Even After publishing the notice if application is not received or Nepalese citizen
cannot be selected, employer can apply to Department of Labor for work permit with
such evidence.
3. After the receipt of application on examination of evidence submitted if found
reasonable Department of Labor may grant work permit to employ foreign labor.
4. The employer who engages foreign labor shall make arrangements for making the
Nepalese citizens skilled and gradually replacing the foreign labor.
5. The fees and other provisions relating to the work permit shall be as prescribed. (4.5
marks)
Simara Steel Ltd can hire foreign labor after obtaining permission from the Department of
Labor as mentioned above. (0.5 marks)
5. Answer the following questions: (2×5=10)
a) Enumerate the provisions regarding the constitution of council under Nepal
Chartered Accountants Act, 2053.
b) Explain the formation of disciplinary committee, and the powers vested on it, under
the Nepal Chartered Accountants Act, 2053.

Q.5a. Answer
Section 7 of the Act prescribes the following provisions regarding the constitution of the
council:
(1) A Council, to take up necessary actions required to attain objectives of the Institute in
a well-planned manner and to supervise and manage all activities of the Institute, shall
be constituted.
(2) The Council shall, except as otherwise provided elsewhere in this Act, exercise all
authority and discharge all duties conferred on and assigned to the Institute subject to
the Act and Regulations and Bye- laws framed under this Act.

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(3) The Council shall consist of the following Council members:-

(a) Ten persons elected by and amongst Chartered Accountant members –Member
(b) Four persons elected by and amongst Registered Auditor members –Member
(c) Three persons nominated by Government of Nepal, upon the recommendation of
the Auditor General, from amongst the persons having experience in relation to
account –Member
(4) The Council members shall elect a President and a Vice-President from the Fellow
Chartered Accountants (FCA) Council members referred to in clause (a) of sub-section
(3).
(5) The term of office of the President and the Vice-President shall be ofone year and upon
expiry of the term of office, they shall be eligible tobe elected for one more term.
(6) The term of office of the Council members shall be of three years and upon expiry of
the term of office, they shall be eligible to be re-electedor re-nominated.
(7) The procedures relating to the election of Council members shall be as prescribed.
(8) The functions, duties and authorities of the President and the Vice- President shall be
as prescribed. (5 marks)

Q.5b. Answer
As per Section 14 (1) of the Nepal Chartered Accountants Act, 2053, a Disciplinary
committee comprising of following members shall be constituted to recommend the
council to undertake necessary action after investigation upon lodged against any member
for action contrary to this Act or the Regulations or Code of Conduct framed under this
Act rendered by any person or institute receive any information of such kind.
The committee shall be constituted as follows:
a. A fellow chartered accountant designated by the
council from amongst the councils referred to in
clause (a) of sub section (3) of section 7 Chairman
b. Three persons nominated by council from
amongst the councils Member
c. Two persons nominated by council from the members Member
d. One person nominated by the Auditor General Member (2 marks)

As per Section 14 (2), Notwithstanding anything contained in sub-section (1) at a meeting

to be held to inquire into a complaint claiming that the chairman or any member of the
Disciplinary committee has done any act and action contrary to this Act or the Regulations,
Bye-laws or code of conduct framed under this Act and to make recommendation to the
council for necessary action, such a chairman or a member shall not be entitled to take part
and cost a vote at the meeting.
As per Section 14 (3), The procedures of the meeting of the Disciplinary Committee and
the term of office of the Chairman and members of the Disciplinary Committee shall be as
prescribed.
As per Section 14 (4), The Disciplinary committee shall have the same powers as are vested
in the court in respect of issuing an order to the concerned person, receiving evidences and
examining witnesses.
As per Section 14 (5), The Disciplinary committee shall recommend to the Council along
with its opinion and finding for necessary action against a member or practicing
Accountants found guilty from its investigation, and the council may, considering such a
recommendation impose any of the following punishments on a concerned members or
practicing accountants, according to the degree of the offence.

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a. Reprimanding
b. Removing from the membership for a period up to five years.
c. Prohibiting from carrying on the accounting profession for any particular period.
d. Cancelling the certificate of practice or membership.
As per Section 14 (6), Any Council member against whom the Disciplinary Committee,
after investigating upon the complaint of his action contrary to the Act or Regulations,
Byelaws or code of conduct framed under the Act, has decided to recommend the Council
to take necessary action, shall not be allowed to attend and to vote at the Council meeting
where the Council is hearing at such recommendation.
As per Section 14 (7), Before imposing a punishment referred to in sub-section (5), the
Council shall provide reasonable opportunity to the concerned members to submit their
clarification.
As per Section 14 (8), The concerned member may, if he is not satisfied with the decision
referred to in sub-section (5), file an appeal in the High Court. (3 marks)
6. Answer the following questions: (5×4=20)
a) Global Help Inc. a non-governmental Organization registered in UK wished to
work in Nepal, undertaking social service. Global Help Inc. inquires you about
permission and affiliation with the Social Welfare Council. Can a foreign non-
governmental Organization undertake social welfare works within the Nepal? If it
so, suggest them the affiliation process with the Social Welfare Council with
reference to Social Welfare Act 2049.
b) Mr. 'Y' is an acceptor of a Negotiable Instrument. In which condition he/she shall
be discharged? Could he/she discharge from liability allowing additional time?
Discuss on the relevant provision of the Negotiable Instrument Act, 2034.
c) In real sense a Quasi contract is not a contract at all. But law still imposes an
obligation against a person for the benefit of another even in the absence of contract.
State how far this concept has been incorporated in the National Civil Code, 2074.
d) What are the functions, duties and power of Industry and Investment Promotion
Board specified under the Industrial Enterprises Act, 2076?
e) What are the proposals to be presented for approval in general meeting as special
resolutions? Describe as per the provision of Companies Act, 2063.

Q.6a. Answer
Permission and agreement is provided in Section 12 and Section 13 of Social Welfare Act,
2049 are as follows:
As per Section 12, Any foreign non-governmental organization if desires to work within
the Nepal, before starting the work shall submit an application to the Council for
permission.
The council, after receiving and application may give permission deciding within three
months.
The permitted foreign non-governmental organization, before operating the work within
Nepal shall have to reach in an agreement with the Council. (1.5 marks)

Affiliation process with the Council is provided in Section 13 of the Act.

(1) Social organizations and institutions willing to keep affiliation with the Council
shall have to submit an application as prescribed form.
(2) The organizations and institutions applying for affiliation shall submit and mention
its Constitutions, names of executive committee members, their occupations and
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addresses and the office where the organization or institution has been registered
and the date of the registration along with the application.
(3) After receiving the application for affiliation as above if it deems to be affiliated
such institutions or organization with the Council, the Council shall issue the
certificate as prescribed form taking the fees as prescribed.
(4) The organization or institutions affiliated with the Council may keep out of its
affiliation as prescribed. (2 marks)

In the given case, Global Help Inc. can undertake social welfare work in Nepal after taking
permission and affiliation from the Social Welfare Council fulfilling the terms and
conditions of Section 12 and 13 and other related provision. (0.5 marks)

Q.6b. Answer
Discharge from liability: Section 56 of Negotiable Instrument Act, 2034.
The Drawer, acceptor or endorser of a Negotiable Instrument shall be discharged
from his/her liability in the following conditions:-
(a) If the Holder intentionally cancels the name of the acceptor or endorser with
intent to discharge him/her to such Holder and all parties claiming through
such Holder.
(b) If a Holder thereof who otherwise discharges such acceptor or endorser or
Drawer and to all parties deriving title under such Holder after notice of
such discharge.
(c) If the Negotiable Instrument is payable to bearer or has been indorsed in
blank and such Drawer, acceptor or endorser makes Payment in due Course
of the amount due thereon is discharged to all concerned parties thereto
related with such Negotiable Instrument. (2.5 marks)
Discharge From the Liability by Allowing Additional Time: Section 57
If the Holder allows the acceptor of a Negotiable Instrument a period of more
than two days, exclusive of Public Holiday to consider whether he/she will accept
the same, all prior parties not consenting to such allowance are thereby discharged
from the liability to such Holder. (1.5 marks)

Q.6c. Answer
Quasi contract is formed without containing the essential elements of a valid contract. Thus
it is said that in a real sense a quasi contact is not a contact at all. However, law imposes an
obligation against for the benefit of another even in the absence of a contract. The principle
behind it is that no one should be allowed to be unjustly enriched himself at the expenses of
another. Such obligations are called indirect contract or quasi contract or implied contract
and in cases a term quantum merit is also used. In case anybody has done any certain, legal,
voluntary or unilateral work that keep judicial relation, it shall be deemed to have been made
indirect contract or quasi contract. (1 mark) The Muluki Dewani Samhita, 2074 has
recognized the concept of quasi contract by prescribing the rules in Chapter 15 from Section
648 to 662.
• If other’s property managed voluntarily, not to be abandoned (negotiorum gestio);
• To care or manage property taken in custody;
• Delegator not to be absolved from obligation by delegation of authority;
• Reasonable costs to be paid for saving property in times of Disaster;
• Right to claim reimbursement from person who have received benefits;
• Right to claim for maintenance or nurturing (raising);
• Successor to reimburse expenses incurred in obsequies of Deceased;
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• Relative to bear expenses in maintenance of incompetent Person;

• Reimbursement of expenses incurred for treatment during illness;
• Compensate expenses incurred by any government body for protecting;
• To reimburse amount paid by person interested in;
• To pay price or remuneration;
• Right to recover price of goods or services received;
• Property in custody to be kept as bailed property. (3 marks)

Q.6d. Answer
Section 21(1) of Industrial Enterprise Act, 2076 has provision of the Functions, Duties and
Power of the Industry and Investment Promotion Board.
Major functions, duties and power of the Industry and Investment Promotion Board are as
follows:
(a) to make recommendations to the Government of Nepal for the formulation of
policies relating to industrial promotion, protection and promotion of investment
and industrialization and adoption of relevant policy decisions;
(b) to regularly appraise the policy, institutional, legal, institutional and procedural
framework and modus operandi relating to the overall industrialization of the
country and make recommendations to the Government for necessary reforms;
(c) to make recommendations to the Government of Nepal for the adoption of
necessary policy decisions on foreign investment and technology transfer, subject
to the prevailing law;
(d) to make recommendations to the Government of Nepal for the formulation of
policies relating to industrial pollution control and adoption of relevant policy
decisions;
(e) to make comprehensive evaluation and appraisal of the situation of industrial
development of the country and make suggestions and recommendations to the
Government of Nepal for taking necessary steps;
(f) to hear grievances of entrepreneurs and resolve, or cause to be resolved, the
problems and make guidance to the concerned bodies in this respect;
(g) to make recommendations to the Government of Nepal if it is required to make an
alteration or change in the level, classification and nature of industries;
(h) to carry out, or cause to be carried out, studies, research woks and surveys as
required in the context of enhancing domestic and foreign investment in the
industrial sector;
(i) to do, or cause to be done, necessary work for building a competitive industrial
environment, in effective coordination and harmonious collaboration with the
public, private and cooperative sectors;
(j) to give policy guidelines on matters requiring coordination between the Province
and Local Levels for the development and expansion of industrial enterprises, and
make necessary provision for coordination;
(k) to facilitate the removal of the difficulty or confusion, if any, arising in the
implementation of any law relating to industry;
(l) to coordination or facilitate with respect to the operation of the one stop service
center;
(m) to perform, or cause to be performed, other functions as prescribed. (0.3 x 12 = 4
marks)

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Q.6e. Answer
Section 83 of Companies Act, 2063 has mentioned the matters which are presented in the
general meeting as special resolutions.
(a) Increasing the authorized capital of the company,
(b) Decreasing or altering the share capital of the company,
(c) Altering the name or main objectives of the company,
(d) Amalgamating one company into another company,
(e) Issuing bonus share,
(f) Buying back of own shares by the company,
(g) Selling shares at a discount,
(h) Converting a private company into a public company or vice versa,
(i) Such other matter in respect of which the company is required by this Act or the
articles of association to adopt a special resolution. (0.4 x 9 = 4 marks)

7. Write Short notes: (2×5=10)

a) Establishment of the Nepal Securities Board & its composition as per securities
Act, 2063.
b) Highlight the role of WTO in relation to the international business.
Q.7a. Answer
Nepal Securities Board has been established by under section 3 of the Securities Act, 2063.
It is established in order to regulate and manage the activities of the securities markets and
persons involved in securities business by regulating the issue, purchase sale and exchange
of securities in order to develop capital market and protect the interests of investors in
securities. (1.5 mark)
The Board shall consist the members as follows:
a. A person appointed by the Government of Nepal – Chairperson
b. Joint Secretary, Ministry of Finance – Member
c. Joint Secretary, Ministry of Law, Justice and Parliamentary Affairs – Member
d. Representative, Nepal Rastra Bank – Member
e. Representative, Institute of Chartered Accountants of Nepal – Member
f. Representative, Federation of Nepalese Chambers of Commerce and Industries –
Member
g. A person nominated by the Government of Nepal from amongst the experts who have
obtained at least master's degree in economics, management, finance, commerce or law
form a recognized university and gained at least seven years of experience in stock
exchange, management, capital market development, finance and economic sector –
Member (0.5 x 7 = 3.5 marks)
Q.7b. Answer
WTO was set up to play a very important role in the world economics though settling trade
related disputes through rules, regulations and consensus based agreement mechanisms that
would prevent trade related wars between powerful countries. Through resolving trade
related disputed WTO has got the potential to maintain world peace and bilateral relations
between its member countries through following negotiations, consultations and mediations.
(1.5 marks) The fundamental role of WTO in international business can be listed as under-
▪ WTO facilitates implementation, administration and smooth operations of trade agreements
between the countries.
▪ It provides a forum for the trade negotiations between its member countries.

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▪ Settlements of disputes between the member countries through the established rules and
regulations.
▪ It cooperates with the IMF (International Monitory Fund) and World Bank in terms of
making cohesiveness in making global economic policies. (3.5 marks)

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Paper 4: Financial Management

Attempt all questions.
Working notes should form part of the answer. Make assumptions wherever necessary.

1. Olay is currently considering the launch of a new product. A market survey was
recently commissioned to assess the likely demand for the product and this showed
that the product has an expected life of four years. The survey cost Rs. 30,000 and
this is due for payment in four months’ time. On the basis of the survey information
as well as internal management accounting information relating to costs, the assistant
accountant prepared the following profit forecasts for the product.
Year 1 2 3 4
Rs.000 Rs.000 Rs.000 Rs.000
Sales 180 200 160 120
Cost of sales (115) (140) (110) (85)
Gross profit 65 60 50 35
Variable overheads (27) (30) (24) (18)
Fixed overheads (25) (25) (25) (25)
Market survey written off (30) – – –
Net profit/(loss) (17) 5 1 (8)
These profit forecasts were viewed with disappointment by the directors and there
was a general feeling that the new product should not be launched. The Chief
Executive pointed out that the product achieved profits in only two years of its four-
year life and that over the four-year period as a whole, a net loss was expected.
However, before a meeting that had been arranged to decide formally the future of the
product, the following additional information became available:
(i) The new product will require the use of an existing machine. This has a written
down value of Rs. 80,000 but could be sold for Rs. 70,000 immediately if the
new product is not launched. If the product is launched, it will be sold at the end
of the four-year period for Rs. 10,000.
(ii) Additional working capital of Rs. 20,000 will be required immediately and will be
needed over the four-year period. It will be released at the end of the period.
(iii) The fixed overheads include a figure of Rs. 15,000 per year for depreciation of the
machine and Rs. 5,000 per year for the re-allocation of existing overheads of the
business.
The company has a cost of capital 10%. Ignore taxation.
You are required to:
i) Calculate the net present value of the new product.
ii) Calculate the approximate internal rate of return of the product.
iii) Explain, with reasons, whether or not the product should be launched.
iv) Why can there be conflict in project choice by using NPV and IRR criterion?
(10+5+2+3=20)

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Q.1 Answer
i) Incremental cash flows
The survey has been undertaken already, even though it has not yet been paid for, and
therefore the Rs. 30,000 is a sunk cost.
The depreciation charge of Rs. 15,000 is not a cash-flow. The re-allocated fixed
overheads will be incurred whether or Olay goes ahead with the product. Both of these
amounts may be subtracted from the Rs. 25,000 of fixed overheads in the original
calculations.
The company forgoes Rs. 70,000 of immediate income from the sale of the machine.
Year Year- 0 Year- 1 Year- 2 Year- 3 Year- 4 NPV
Rs.000 Rs.000 Rs.000 Rs.000 Rs.000 Rs.000
Sales 180 200 160 120
Cost of sales (115) (140) (110) (85)
Variable overheads (27) (30) (24) (18)
Fixed overheads (5) (5) (5) (5)
Machine (70) 10
Working capital (20) 20
Incremental cash flows (90) 33 25 21 42
× 10% discount factor 1.000 0.909 0.826 0.751 0.683
Present value (90.00) 30.00 20.65 15.77 28.69 5.11
ii) Approximate Internal Rate of Return
Year Year- 0 Year- 1 Year- 2 Year- 3 Year- 4 NPV
Rs.000 Rs.000 Rs.000 Rs.000 Rs.000 Rs.000
Incremental cash flows (90) 33 25 21 42
× 14% discount factor 1.000 0.877 0.769 0.675 0.592
Present value (90.00) 28.94 19.23 14.18 24.86 (2.79)

IRR=

where a is the lower rate of return, b is the higher rate of return, is the NPV discounted at
a%, and is the NPV discounted at b%.

IRR =

= 12.59%
iii) The product has a positive net present value and an IRR that exceeds the company’s cost of
capital, and this suggests that it should be launched.
The decision is very marginal, however, it would certainly not be worthwhile if the market
survey had not yet been commissioned, in which case the cost of Rs. 30,000 would need to be

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included. A relatively small drop in sales or a small increase in costs would result in a negative
NPV. The company may well be able to find better uses for the Rs. 20,000 that will be spent
now, and for the immediate income of Rs. 70,000 on the sale of the machine.
iv) NPV assumes that intermediate cash flows are reinvested at cost of capital (k) but IRR assumes
that intermediate cash flows are reinvested at internal rate of return (r). Mainly conflicts arises
due to:
• difference in estimated cash outflows of the projects
• difference in timings of cash flows of the projects
• difference in expected lives of the projects
• difference in reinvestment rate assumption.
Allocation of Marks
Part i.
Segregation of outflow in year 0- 2 Marks
Segregation of inflows in year 1-4 – 4 Marks
Calculation of correct NPV – 4 Marks
Part ii- 5 Marks for correct calculation only

2.
a) The current assets and current liabilities of XYZ Ltd. at the end of March 2022
are as follows:
Particulars Amount in (Rs.‘000)
Inventory 5,700
Trade receivables 6,575
Total current assets 12,275
Trade payables 2,137
Overdraft 4,682
Total current liabilities 6,819
Net current assets 5,456
For the year to ending March 2022, XYZ Ltd. had domestic and foreign sales of
Rs. 40 million, all on credit, while cost of sales was Rs. 26 million. Trade
payables are related to both domestic and foreign suppliers.
For the year to ending March 2023, XYZ Ltd. has forecasted that credit sales will
remain at Rs. 40 million while cost of sales will fall to 60% of sales. The
company expects current assets to consist of inventory and trade receivables, and
current liabilities to consist of trade payables and the company’s overdraft.
XYZ Ltd. also plans to achieve the following target working capital ratio for the
year to the end on March 2023:
Inventory Holding Period 60 days
Debtors Collection Period 75 days
Creditors Payment Period 55 days
Current ratio 1.4 times
Assume 365 days in a year.
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Required: (5+5=10)
i) Calculate the working capital cycle of XYZ Ltd. at the end of March 2022
and discuss whether a working capital cycle should be positive or
negative.
ii) Calculate the target quick ratio and the target ratio of sales to net working
capital of XYZ Ltd.at the end of March 2023.

Q.2.a Answer
i. Calculation of working capital cycle at the end of March 2022
Inventory Holding Period = 365 x (5,700/26,000) = 80 days
Debtors Collection Period = 365 x (6,575/40,000) = 60 days
Creditors Payment Period = 365 x (2,137/26,000) = 30 days
Working capital cycle = 80 + 60 – 30 = 110 days
The working cycle of XYZ Ltd. is positive and the company pays its trade suppliers 110
days (on average) before it receives cash from its customers. This represents a financing
need as far as XYZ Ltd. is concerned, which could be funded from a short-term or long-
term source.
If the working capital cycle had been negative, XYZ Ltd. would have been receiving cash
from its customers before it needed to pay its trade suppliers. A company which does not
give credit to its customers can have a negative working capital cycle.
Even if companies might generally prefer to be paid by customers before they have to
pay their suppliers, the question of whether the working capital cycle should be positive
or negative implies that companies are able to make such a choice, but this is not usually
the case. This is because the length of the working capital cycle depends on its elements,
which are inventory holding period, debtors collection period and creditors payment
period, and these elements usually depend on the nature of the business undertaken by a
company and the way that business is conducted by its competitors. The length of the
working capital cycle is usually therefore similar between companies in the same
business sector, but can differ between business sectors.
ii. Target quick ratio and sales to net working capital ratio at the end of March
2023:
Cost of sales = 40,000,000 x 0·6 = Rs. 24,000,000
Inventory using target inventory holding period = 24,000,000 x 60/365 = Rs. 3,945,205
Trade receivables using target debtors collection period = 40,000,000 x 75/365
= Rs. 8,219,178
Creditors using target creditors payment period= 24,000,000 x 55/365 = Rs. 3,616,438
Option 1
If we assume that creditors are the only current liabilities, then:
Current Assets = 3,616,438 × 1.4 = Rs. 5,063,014
However, the actual current assets, including inventory and trade receivables, are:
Inventory + Trade Receivables = 3,945,205 + 8,219,178 = Rs. 12,164,383

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Option 2
Considering that current assets consist solely of inventory and trade receivables, and aiming for a
target current ratio of 1.4, the corresponding current liabilities would be:
Current Liabilities = 12,164,383 ÷ 1.4 = Rs. 8,688,845
Option 1 underestimates the actual current assets by assuming a lower value instead of
considering the given inventory and trade receivables. This leads to an inaccurate calculation of
current liabilities. Option 2 correctly accounts for the actual current assets and provides a
realistic calculation of current liabilities based on the target current ratio of 1.4. Therefore,
Option 2 should be selected.
The target quick ratio (acid test ratio) = 8,219,178/8,688,845 = 0·95 times
Net current assets (WC) at the end of March 2023 = 12,164,383 – 8,688,845 = Rs. 3,475,538
Target sales/net working capital ratio = 40,000,000/3,475,538 = 11.51 times

Allocation of Marks
Qn 2(a) i
Calculation of Inventory Holding Period, Debtors Collection Period and Creditors Payment
Period – 1 Mark each (total 3 marks)
Reasoning part – 2 Marks
Qn 2(a) ii
Calculation of Cost of Sales, Inventory, Trade Receivables and Trade Payables – 0.5 marks each
(Total 2 Marks)
Test of Option 1 & 2 and reasoning – 1 Marks
Calculation of quick ratio and target ratio of sales to net working capital of XYZ Ltd.at the end
of March 2023 – 1 Mark each (Total 2 Marks)

b) United Enterprises is planning to relax its credit policy to motivate customers to

buy on new credit terms. It is expected that the variable cost will remain 75
percent of sales. The incremental sales are expected to be sold on credit. For the
perceived increase in risk of liberalizing the credit terms, the company requires
higher return. The following table shows the projected information:
Credit Policy Required Return on Collection New Sales
Type investment Period(days) (Rs.’000)
Alfa 20% 40 300,000
Beta On 25% 45 400,000
Celta 32% 55 500,000
Delta 40% 70 600,000
Required: 5
Advise as to which credit policy the company should pursue? You may assume 360
days in a year

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Q.2.b Answer

Statement showing the Evaluation of Receivable Management Policies

Rs. In ‘000
Particulars Proposed Proposed Proposed Proposed
Policy Policy Policy Policy
Alfa Beta Celta Delta
A. Expected Profits:
a) Credit Sales 300,000 400,000 500,000 600,000
b) Variable Cost 225,000 300,000 375,000 450,000
c) Expected profit (a)-(b) 75,000 100,000 125,000 150,000
B. Opportunity Cost of Investment in 5,000 9,375 18,333 35,000
Receivables (WN)
Net Benefits (a)-(b) 70,000 90,625 106,667 115,000

Recommendation: Policy Delta should be adopted since the net benefits under this policy is higher than
those under other policies.
Working Note:
Calculation of opportunity cost of Investments in receivables. (Rs.)
Opportunity Cost = Total Cost × Collection Period/360 × Rate of Return/100
Policy A = 225,000×40/360×20% = 5,000
Policy B = 300,000×45/360×25% = 9,375
Policy C = 375,000×55/360×32% = 18,333
Policy D = 450,000×70/360×40% = 35,000
Allocation of Marks
Calculation of Variable Cost – 1 Mark (0.25 mark for each policy)
Calculation of Opportunity Cost – 2 Marks (0.5 Mark for each policy)
Calculation of Net Benefit – 1 Mark (0.25 mark for each policy)
Recommendation – 1 Mark

3.
a) Malina Ltd has balance sheet as at 31 December 2021 included the following:
NPR (million)
22 million ordinary shares (par value NPR 2.5 each) 55
9% Preference Share (par value NPR 10 each) 26
Reserve 20
Retained earnings 36
Loan stock (Base rate + 3%) 100

The loan stock interest is based on base rate of the Bank plus premium. The
current base rate of the Bank is 9%. The interest on loan stock is about to be paid.
On 31 December 2023, the loan stock will be redeemed at NPR 105. The loan
stock are currently traded at NPR 116 cum interest (per NPR100 nominal).
The Preference share is redeemable on 31st December 2024 at NPR 20 each.
Currently preference shares are traded at NPR. 18 per share ex-dividend.
The company has also just paid a dividend on its ordinary shares of NPR 2.32.
This was the total dividend for the year. The company has paid following
dividends in the past:
Year 2021 2020 2019 2018 2017
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Dividend Per Share 2.32 2.05 2.10 1.95 1.91

The shares are currently quoted at NPR 37 each.

The company's corporation tax rate is 30%. Ignore capital gain tax.
Requirements: 8
Determine the company's weighted average cost of capital (WACC) considering
weight as market value of different sources of finance.

Q.3.a Answer
Cost of Equity
Current Price (P0) = NPR 37
Current Dividend (D0) = 2.32
Dividend 4 years earlier = 1.91
Growth rate (g) = (2.32/1.91)(1/4)-1 = 4.98% 1 marks
Cost of Equity (DDM) = D0 x (1+0.0498) /37+5% = 11.59% 1 marks

Cost of Debt
Time Particulars CF DF@5% PV DF@10% PV
Market price (ex-
0 interest) -104 1 (104.00) 1 (104.00)
1 to 2 Interest (net of tax) 8.4 1.859 15.62 1.736 14.58
2 Redemption value 104 0.907 94.33 0.826 85.90
NPV 5.94 (3.51)

Cost of Debt (Kd) = 5%+ 5.94/(5.94-(-3.51)) x (10%-5%) = 8.14% 2 marks

Cost of Preference Share Capital

Time Particulars CF DF@5% PV DF@10% PV
Market price (ex-
0 interest) -18 1 (18.00) 1 (18.00)
1 to 3 Dividend 0.9 2.723 2.45 2.487 2.24
3 Redemption value 20 0.864 17.28 0.751 15.02
NPV 1.73 (0.74)

Cost of Preference Capital (Kp) = 5%+1.73/(1.73-(-0.74)) x (10%-5%) = 8.5% 2 marks

Weighted Average Cost of Capital (WACC)

Weighted
Sources of Finance Weight (market value) Cost Value
Equity (22 mx37) 814.00 11.59% 94.34
Debt (100 mx1.04) 104.00 8.14% 8.47
Preference(2.6 m x 18) 46.80 8.50% 3.98
Total 964.80 106.79
WACC (106.79/964.80) 11.07%
2 marks

b) Garuda Ltd. requires Rs. 500,000 for construction of a new plant. It is

considering following three alternative financial plans:
i) The company may issue 50,000 ordinary shares at Rs. 10 per share;

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ii) The company may issue 25,000 ordinary shares at Rs. 10 per share and 2,500
debentures of Rs. 100 face value bearing 8% rate of interest; and
iii) The company may issue 25,000 ordinary shares at Rs. 10 per share and 2,500
preference shares at Rs. 100 per share bearing 8 % rate of dividend.
The different possible level of earnings before interest and taxes (EBIT) of Garuda
Ltd. are Rs. 10,000; Rs. 20,000; Rs. 40,000; Rs. 60,000 and Rs. 100,000.
Applicable tax rate is 50%.
Required: (6+1=7)
i. Compute the earnings per share under each of the three financial plans and
different levels of EBIT.
ii. Which alternative would you recommend for the company and why?

Q.3 b. Answer
i) Earnings per share under three financial plans for Garuda Limited

First Financial Plan- Issue of equity shares only

Particulars Rs. Rs. Rs. Rs. Rs.

EBIT 10,000 20,000 40,000 60,000 100,000

Interest 0 0 0 0 0

PBT 10,000 20,000 40,000 60,000 100,000

Taxes @50% 5,000 10,000 20,000 30,000 50,000

PAT 5,000 10,000 20,000 30,000 50,000

No of shares 50,000 50,000 50,000 50,000 50,000

EPS 0.10 0.20 0.40 0.60 1.00

Second Financial Plan- Issue of Equity Shares and Debentures

Particulars Rs. Rs. Rs. Rs. Rs.

EBIT 10,000 20,000 40,000 60,000 100,000

Interest 20,000 20,000 20,000 20,000 20,000

PBT (10,000) 0 20,000 40,000 80,000

Taxes @50% (5,000) 0 10,000 20,000 40,000

PAT (5,000) 0 10,000 20,000 40,000

No of shares 25,000 25,000 25,000 25,000 25,000

EPS (0.20) 0.00 0.40 0.80 1.60

It is assumed that the company will be able to set off losses against their profit. If the
company has no profits from other operations, losses will be carried forward.
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Third financial plan- Issue of Equity shares and Preference shares

Particulars Rs. Rs. Rs. Rs. Rs.
EBIT 10,000 20,000 40,000 60,000 100,000

Interest 0 0 0 0 0

PBT 10,000 20,000 40,000 60,000 100,000

Taxes @50% 5,000 10,000 20,000 30,000 50,000

PAT 5,000 10,000 20,000 30,000 50,000

Preference 20,000* 20,000* 20,000 20,000 20,000

dividend

PAT for ordinary 0 0 0 10,000 30,000

shareholders

No of shares 25,000 25,000 25,000 25,000 25,000

EPS 0 0 0 0.40 1.20

*It is assumed that preferences shares are non-cumulative and dividend is payable to the
extent profit available to preference shareholders.

ii) The choice of financial plan will depend upon the economic condition. If Garuda Limited’s
sales are increasing, the earnings per share will be maximum under second financial plan
under favorable conditions, debt financing gives more benefit than equity or preference
capital because interest on debt is tax deductible while preference dividend is not.

Allocation of Marks
Qn 3(b) i
Calculation of EPS under different plan – 2 Marks for each Plan (Total 6 Marks)

4.
a) XYZ Ltd. is foreseeing a growth rate of 12% per annum in the next 2 years. The
growth rate is likely to fall to 10% for the third year and fourth year. After that the
growth rate is expected to stabilise at 8% per annum. If the last dividend paid was
Rs. 1.50 per share and the investors' required rate of return is 16%, find out the
intrinsic value per share of Z Ltd. as of date. You may use the following table: 8
Years 0 1 2 3 4 5
Discounting factor at 16% 1 0.86 0.74 0.64 0.55 0.48
Q.4 a. Answer
Present value of dividend stream for first 2 years:
Rs. 1.50 (1.12) x 0.86 + 1.50 (1.12)2 x 0.74
Rs. 1.68 x 0.86 + 1.88 x 0.74
Rs. 1.45 + 1.39 = 2.84 (A)
Present value of dividend stream for next 2 years:
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Rs. 1.88 (1.1) x 0.64 + 1.88 (1.1)2 x 0.55

Rs. 2.07 x 0.64 + 2.28 x 0.55
Rs. 1.33 + 1.25 = 2.58 (B)
Market value of equity share at the end of 4th year computed by using the
constant dividend growth model would be:
P4= D5
Ks - gn
Where D5 is dividend in the fifth year, gn is the growth rate and Ks is required
rate of return.
Now, D5 =D4 (1 + gn)
D5 =Rs. 2.28 ( 1 + 0.08)
=Rs. 2.46
P4 = Rs. 2.46
0.16 - 0.08
= Rs. 30.75
Present market value of P4= 30.75 x 0.55 = Rs. 16.91 (C)
Hence the intrinsic value per share of XYZ Ltd. would be
A + B + C i.e. Rs. 2.84 + 2.58 + 16.91 = Rs. 22.33

Allocation of Marks
Calculation of Dividend of each year – 0.5 Marks for each year (Total 2.5 Marks)
Calculation of P4 – 1.5 Marks
Computation of intrinsic value – 4 Marks

b) Based on the credit rating of the bonds, an investor has decided to apply the
following discount rate for valuing the bonds.

Credit rating Discount rate

AAA 365-days Treasury-bill rate + 2% spread
AA AAA + 4% spread
A AAA + 5% spread

The investor is considering investing in an AA rated, Rs. 1,000 face value bond
currently selling at Rs. 1,010. The bond has five years to maturity and the coupon
rate on the bond is 15% per annum payable annually. The next interest payment is
due one year from today and the bond is redeemable at par. (Assume 365-days
Treasury bill rate to be 8%)

You are required to calculate:

i) Intrinsic value of the bond for the investor. Should the investor invest in
the bond?

ii) Current yield (CY) and the yield to maturity (YTM) of the bond.
(4+3)
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Q.4.b Answer

AA rated face value of bond = Rs. 1,000

Current selling price = Rs 1,010
Maturity period of bond = 5 years
Coupon rate of the bond = 15% per annum payable annually Bond redeemable at par at
the end of 5th year.

Net interest payment is due on year from today.

Discount rate for AA rated bond = 8% + 2% + 4% = 14%

Calculation of Present Value of Cash Inflow from Bond

Year Cash PV Factor @ 14% Present Value

1 150 0.8772 131.58
2 150 0.7695 115.43
3 150 0.6750 101.25
4 150 0.5921 88.82
5 1150 0.5194 597.31
Total 1,034.40

Thus, the intrinsic value of bond is Rs. 1,034.40. Since the intrinsic value of bond
(Rs.1,034.40) is more than its current market value (Rs. 1,010), it is suggested to
purchase the bond.

Current yield = Annual Bond Interest x 100 = 150 x 100 = 14.85%

Market price 1,010

Yield to Maturity (YTM)

P = Rs. 150 x PVIFA @ 15% for 4 years + Rs. 1,150 x PVIF at 15% for 5th year
= (150 x 2.855) + (1,150 x 0.4972 = 428 + 571.78 = 1,000.03

Present value at 14% = Rs. 1,034.40

Present value at 15% = 1,000.03

By interpolation, YTM = 14 + 1,034.40 – 1,010. x 1 = 14% + (24.40 / 34.37) = 14.71%

1,034.40 – 1,000.03
Allocation of Marks
Calculation of Discount Rate – 0.5 Mark
Calculation of Present Value of Bond – 3.5 Marks
Reasoning Part – 1 Mark
Calculation of Current Yield – 1 Mark
Calculation of YTM- 2 Marks

a) All the potential projects of a company are equally risky and as risky as the
company’s other assets. Currently, two projects are being evaluated for the

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investment: Project A has a rate of return of 13% while Project B has a rate of
return of 10%.
Company can borrow unlimited amounts at an interest rate of 10 percent as long
as it finances at its target capital structure, which calls for 45 percent debt and 55
percent common equity. Its last dividend was Rs. 2 and expected constant growth
rate of 4% and its stock sells at a price of Rs. 20 and company falls under tax rate
of 40%.
i) What is the cost of common equity, cost of debt and weighted average cost of
capital?
ii) Which project should the company select?
(4+1=5)
Q.5.a Answer
Given:
Cost of debt or interest rate ( ) = 10%
Proportion of debt in capital structure ( ) = 45%
Proportion of equity in capital structure ( ) = 55%
Last dividend ( ) = Rs. 2
Growth rate (g) = 4%
Current stock price ( ) = Rs. 20
Tax rate (T) = 40%
IRR of project A = 13%
IRR of project B = 10%

i) Cost of common equity ( ) = =

=14.40%
Cost of debt ( ) = (1-T) = 10% (1-0.40)
= 6%
Weighted average cost of capital (WACC) = +

= 6%×0.45 + 14.40%×0.55
= 10.62%
Project selection: Project A should be selected because its IRR is greater than weighted
average cost of capital i.e. 13% > 10.62% and Project B should be rejected as its IRR is
less than weighted average cost of capital i.e. 10% < 10.62%.
Allocation of Marks
Computation of Ke and Kd – 1 Mark each (Total 2 Marks)
Computation of WACC – 2 Marks
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Reasoning – 1 Mark
b) UKG Limited is a pharmaceutical company. Debt used by the company is
assumed to be risk free and market value of its total debt is Rs. 3 crores. The
company has 10 lacs equity shares of Rs. 10 each, market price of which is Rs. 40
at present. Equity beta is 1.40, market risk premium is 6% and NRB bonds are
quoted at 6%. Calculate:
i) Required return on equity shares
ii) Beta of assets
iii) Cost of capital
iv) The company is diversifying into real estates. Average ungeared company in
that industry carries a beta of 1.5. What should be the expected return on this
new venture?
(1+2+1+1=5)
Q.5.b Answer
i) Required return on equity shares =

= 6% + 1.4 × 6%
= 14.40%
ii) Beta of assets =

For this; Market value of shares =10,00,000 × 40 = Rs. 4 crores

Debt equity mix ( ) = 300: 400 (or 3 : 4)
Thus, beta of assets = (0) + ×1.40 (debt is assumed to be risk free)

= 0.80
iii) Cost of capital =

= 6% + 0.8 × 6%
= 10.80%
iv) Required return for new venture =

= 6% + 1.5 × 6%
= 15.00%

c) A local bank advertises the following deal: “Pay us Rs. 1,00,000 a year for 10 years,
then we will pay you or your beneficiaries Rs. 1,00,000 per year forever”. Is this a
good deal if the interest rate available on other deposits is 6 percent? (5)
Q.5.c Answer
Given:
Annual payment for first 10 years (PMT) = Rs. 1,00,000
Perpetual payment after 10 years (Perpetuity) = Rs. 1,00,000
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Interest rate (i) = 6%

Present value of annual payment that we make every year for the first 10 years:
Present Value of Annual Payments = Rs. 1,00,000 ×

= Rs. 1,00,000 × 7.3601

= Rs. 7,36,010
Present value of perpetuity that we receive every year after 10 years:
Value of perpetuity in 10 years = Rs. 1,00,000/0.06
= Rs. 16,66,667
PV of receipt = Rs.

= Rs. 9,30,658
Conclusion: The deal offered by the bank is good because the present value of
perpetuity that we receive after 10 years is higher than the present value of annual
payment that we make every year for the first ten years.
Allocation of Marks
Calculation of PV of annual Payments that we have to pay – 1.5 Marks
Calculation of Value of Perpetuity in 10 years- 1.5 marks
Calculation of PV of Receipt -1.5 Marks
Conclusion – 0.5 Mark

a) Write short note on: (4×2.5 =10)

a) Problems faced in capital budgeting
b) Credit Rating
c) Gearing ratio
d) Share repurchase

Q.6.a Answer
i) Uncertainty of variables e.g. annual cash flows, discounting rates, changes in
technology, inflation rate, changes in tax rates etc.
ii) Lack of adequate capital to undertake all viable profits (capital rationing)
iii) Lack of adequate information on the available investment opportunities e.g. in case of
mutually exclusive profits NPV and IRR may have conflict in ranking of projects
under some circumstances.
iv) Identification of all the quantifiable and non-quantifiable costs and benefits associated
with a project. [0.5 x 4 = 2 marks]

Q.6.b Answer
Credit rating essentially reflects the probability of timely repayment of principal and
interest by a borrower company. It indicates the risk involved in a debt instrument as well
its qualities. Higher the credit rating, greater is the probability that the borrower will
make timely payment of principal and interest and vice-versa. [0.5 mark]
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It has assumed an important place in the modern and developed financial markets. It is a
boon to the companies as well as investors. It facilitates the company in raising funds in
the capital market and helps the investor to select their risk-return trade-off. By indicating
credit-worthiness of a borrower, it helps the investor in arriving at a correct and rational
decision about making investments. Credit rating system plays a vital role in investor
protection. Fair and good credit ratings motivate the public to invest their savings. [1.25
marks]

As a fee-based financial advisory service, credit rating is obviously extremely useful to

the investors, the corporate (borrowers) and banks and financial institutions. To the
investors, it is an indicator expressing the underlying credit quality of a security to be
floated for in the market. The investor is fully informed about the company as any effect
of changes in business/economic conditions on the company is evaluated and published
regularly by the rating agencies. The Corporate borrowers can raise funds at a cheaper
rate with good rating. It minimizes the role of the 'name recognition' and less known
companies can also approach the market on the basis of their rating. [0.75 mark]

Q.6.c Answer
A general term describing a financial ratio that compares some form of owner's equity (or
capital) to borrowed funds. Gearing is a measure of financial leverage, demonstrating the degree
to which a firm's activities are funded by owner's funds versus creditor's funds.[0.5 mark]
The higher a company's degree of leverage, the more the company is considered risky. As for
most ratios, an acceptable level is determined by its comparison to ratios of companies in the
same industry. The best known examples of gearing ratios include the debt-to-equity ratio (total
debt / total equity), times interest earned (EBIT / total interest), equity ratio (equity / assets), and
debt ratio (total debt / total assets). [1.5 marks]
A company with high gearing (high leverage) is more vulnerable to downturns in the business
cycle because the company must continue to service its debt regardless of how bad sales are. A
greater proportion of equity provides a cushion and is seen as a measure of financial strength.
[0.5 mark]

Q.6.d Answer
Share repurchase is the decision of the company to buy back its own shares from the market. The share
repurchase can be from all the shareholders proportionately or through bidding. [0.5 marks] The
company buy backs its own shares when it considers that shares are undervalued. The company also
repurchases its own shares when company has available liquid funds and alternative use of funds are not
available or returns from its alternative use is very low. [1 mark] Generally, share repurchase is done by
the company at fairly high price than prevailing market price. By doing so, company’s shareholders will
be benefitted in two ways. First, they will get their value from sale of shares higher than prevailing
market price. Secondly, the shareholders will earn comparatively higher earnings per share in their
remaining shares because the number of shares will be reduced after buy back. In addition, the company
normally buy backs its share from low yielding funds which after buy back will increase return on
capital employed of the company. Therefore, share repurchase can be considered a form of dividend
distribution to shareholders.[1.5 marks]

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b) Distinguish between: (4×2.5 =10)

a) Stock Split and Bonus Issue
b) Horizontal merger and Vertical Merger
c) Operating leverage & Financial leverage
d) Zero coupon Bond and Deep Discount Bond

Q.7.a Answer
Stock Split and Bonus Issue: [0.4 x 6 = 2.5 marks rounded]
Following differences can be enumerated between stock split and bonus issue:
Stock Split Bonus Issue
It is the process multiplying the existing share It is the process of issuing extra shares to
into more number of shares. existing shareholders in a certain proportion.
Face value of stock reduces in the proportion Face value of share remains same.
of stock split.
Marketability of shares is main objective of Retention of profit is main objective of bonus
stock split when share prices are very high. issue. The investor can avail liquidity of their
bonus issue via secondary market.
It makes stock more liquid in the secondary It offers more new number of shares into the
market offering more shares replacing market.
existing share.
No new fund is generated into the company. New fund is not generated but retained in the
business.
Retained earnings is not affected. Retained earnings is reduced.
Market price will also get split fundamentally. Market price will be adjusted after issue of
bonus issue.

Q.7.b Answer

Horizontal merger takes place when two or more corporate firms dealing in similar lines
of activity combine together. Elimination or reduction in competition, putting an end to
price cutting, economies of scale in production, research and development, marketing and
management are often cited motives underlying such mergers.

Vertical merger occurs when a firm acquires firms upstream from it and/ or firms
downstream from it. In the case of an upstream merger, it extends to the suppliers of raw
materials, and to those firms that sell eventually to the consumer in the event of a
downstream merger. Thus the combination involves two or more stages of production or
distribution that are usually separate. Lower buying cost of materials, lower distribution
costs, assured supplies and market, increasing or creating barriers to entry for potential
competitors or placing them at a cost disadvantage are the chief gains accruing from such
mergers.

[1 mark for meaning and 1.5 marks for relevance/example]

Q.7.c Answer [0.625 x 4 = 2.5 marks]

Operating Leverage Financial Leverage

Operating leverage can be defined as a Financial leverage can be defined as a

firm’s ability to use fixed costs to firm’s ability to use capital structure to
generate more returns. earn better returns and to reduce taxes.

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It ascertains the organization’s cost It ascertains the organization’s capital

structure. Typically, impact of fixed structure. Typically, impact of interest
working expenses or fixed operating costs or interest expenses.
costs.

Operating leverage measures the Financial leverage measures the financial

operating risk or business risk. risk of a business.

Operating leverage can be calculated Financial leverage can be calculated when

when we divide contribution by EBIT of we divide EBIT by EBT of the firm.
the firm.

Q.7.d Answer [0.4 x 6 = 2.5 marks rounded]

Following differences can be drawn between Zero Coupon Bond and Deep Discounted Bond:
Zero Coupon Bond Deep Discount Bond
Bonds issued only at discount price from Bonds issues at large discount price to
nominal value. nominal value.
No coupon rates. Bears coupon rates but at low rates.
No cash payments during the period. Cash Cash are paid during the period and at
payments at maturity only. maturity.
Return represents only capital gain Return represents both capital gain
(difference between redemption value and (difference between redemption value and
issue price). issue price) and interest.
Redeemed at nominal value. Redeemed at nominal value or at premium
depending upon interest rate provided.
Relatively high risk as cash is received at Relatively low risk compared to zero
maturity only. coupon bond as cash flow will be over the
maturity period.

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Paper 5: Cost & Management Accounting

All questions are compulsory. Working notes should form part of the answer.
Make assumptions wherever necessary.

1. Kanchanjunga Cement Ltd. Produces ‘33 grade’ cement for which the company has an
assured market. The output for 2024 has been budgeted at 270,000 units at 90%
capacity utilization. The cost sheet based on output (per unit) is as follows:
Rs.
Selling Price 150
Direct Material 50
Component ‘EY’ 9.5
Direct wages @ Rs. 7 per hour 35
Factory overhead (50% fixed) 35
Selling and distribution overheads (75% variable) 12
Administrative overhead (fixed) 6
The factory overheads are applied on the basis of direct labor hours.
The company at present manufactures component ‘EY,’ one unit of which is required
for each unit of product ’33 grade’. The cost details of 15,000 units of component ‘EY’
are as follows:
Rs.
Direct Materials 27,000
Direct labor 52,500
Variable overheads 26,250
Fixed overheads 36,750
Total 142,500
Following proposals were put up before the Board of Directors for consideration:
(i) An order has been received from abroad for 1,000 units of product ‘53 grade’
cement per month at Rs. 185 per unit. The cost data are:
Direct Material Rs. 65 per unit, Direct Labor 9 hour per unit, selling and
distribution overhead applicable to this product order is Rs. 15 per unit and
variable factory overhead are chargeable on the basis of direct labor hours
(ii) The component ‘EY’ is available for the purchase at the market at Rs. 7.70 per
unit.
(iii) In the event of company deciding to purchase the component ‘EY’ from market,
the company has two alternatives for the use of the capacity so released, which are
as under;
(a) Rent out the released capacity at Rs. 0.75 per hour
(b) Manufacture component ‘GPY’ which can be sold at Rs. 7 per unit. The cost
data of this component for 15,000 units are:
Rs.
Direct Materials 37,500
Direct Labor 26,250
Factory variable overheads 13,125
Other variable overheads 22,500
Total 99,375
You are required to calculate and answer the followings: 20
(i) Prepare a statement showing the contribution and profitability of the company
envisaged in the budget. 5 Marks
(ii) Evaluate the export order and state whether it is acceptable or not. 6 Marks

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(iii) Make an appraisal of proposal to manufacture component ‘EY’ and state whether
the component ‘EY’ should be manufactured in the factory or purchased from the
market. Assume that no alternative use of spare capacity is available. 4 Marks
(iv) Evaluate the alternative use of the spare capacity and state whether to manufacture
or buy the component ‘EY’ and if your decision is to buy the component ‘EY’,
which of the two alternatives for the use of spare capacity will you prefer? 5
Marks
Answer
1)
Working Note:
Variable factory overhead per labor hour
= (Rs 35 per unit of ’33 grade’ cement × 50%) / direct labors to produce a unit of ’33 grade’
cement
= (35×50%) / (35/7) = 3.5 (0.5 Mark)
Component ‘EY’ (per 15,000 units)
Direct Material 27,000
Direct Labor 52,500
Variable factory overhead 26,250 (Direct labor hours× variable factory overhead rate)
Total 105,750
Cost Per Unit 7.05 (0.5 Mark)
Direct Labor Hours for 15,000 Unit of ‘EY’ = 52,500/7 = 7,500 (0.5 Mark)

(i) Profitability as per original Budget

Particulars Detail Rs.
s. (‘000)
Sales (270,000 × 150) (0. 25 Mark) 40,500
Less: Variable Cost
Direct Material (270,000 × 50) (0. 25 Mark) 13,500
Component ‘EY’ (270,000 × 7.05) (W.N.2) (0. 25 1,903.
Mark) 5
Direct Wages (270,000×35) (0. 25 Mark) 9.450
Variable factory overhead (270,000×35×50%(0. 25 4,725
Mark))
Variable selling & distribution (270,000×12× 75%) 2,430
(0. 25 Mark)
Total Variable Cost (0. 25 Mark) 32,008.5
Contribution (0. 25 Mark) 8,491.5
Less: Fixed Cost
Fixed factory overhead (270,000 × 35 × 50%) (0. 4,725
25 Mark)
Fixed selling & distribution overhead (270,000 × 810
12 × 25%) (0. 25 Mark)
Fixed administrative overhead (270,000 × 6) (0. 25 1,620
Mark)
Fixed Cost on Component ‘EY’ (9.5- 661.5
7.05)×270,000 (0. 25 Mark)
Total Fixed Cost (0. 25 Mark) 7,816.5
Total Profit(0. 25 Mark) 675

(ii) Export Order

Calculation of Excess Labor Hours
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Particular Hours Marks

Total hours required on ’33 grade’ (270,000 × 5) 1,350,000 0.5 Mark

Total hours required on component ‘EY’ (270,000 × 135,000 0.5 Mark

0.5)
Total hours utilized @ 90% capacity 1,485,000 0.5 Mark
Total capacity 1,650,000 0.5 Mark
Balance hours available 165,000 0.5 Mark
Hours required for export order (1000 × 12 month × 108,000 0.5 Mark
9 hours)
Excess labor hours 57,000

Evaluation of Proposal
Particular Rs. per unit Marks
Direct Material 65 0.5 Mark
Direct Labor (9 hours × Rs 7 per hour) 63 0.5 Mark
Variable factory overhead (9 hours × Rs 31.5 0.5 Mark
3.5)(W.N.1)
Selling and distribution overheads 15 0.5 Mark
Total Variable Cost 174.5
Selling Price (Export) 185
Contribution 10.5 0.5 Mark
Total additional contribution from export (1,000 units × 12 months × Rs 10.5) = Rs 126,000
Since the availability of capacity confirm its acceptance and there’s additional contribution of
Rs. 126,000, the export order should be accepted. (0.5 Mark)

(iii) Component ‘EY’ Make or Buy

Particulars Make Buy Marks
Cost for per unit of ‘EY’ 7.05 7.70 0.5
(W.N.1) Mark
Units 270,000 270,000 0.5
Mark
Total Cost 1,903,500 2,079,000 1 Mark
Excess Cost of Buying = 2,079,000 – 1,903,500 = 175,700 (1 Mark)
If the company makes the component the out of pocket cost is Rs. 7.05 per unit instead of buying
it at rate of Rs. 7.70 there will be saving of Rs. 0.65 (7.7-7.05) so it will be profitable to make
if the capacity remains idle. (1 Mark)
(iv) Alternative use of the Spare Capacity
(a) Rent Income (135,000 hours × Rs. 0.75) = Rs. 101,250 (1 Mark)
(Note: 135,000 Hours are hours required for making 'EY' which is now released).
(b) Manufacture 'GPY' ( 1 Mark for Working 1 for Contribution Calculation = 2 Marks)
Contribution per unit from making component ‘GPY’
= Rs. 7 – (99,375/ 15,000 Units) = Rs. 0.375 per unit
Direct labor cost per unit of ‘GPY’ = Rs. 26,250/ 15,000 units = Rs 1.75 per unit
No. of labor hours required for one unit of ‘GPY’ = Rs. 1.75/ Rs 7 = 0.25 hours
No. of units of ‘GPY’ in 165,000 hours = 165,000 hours / 0.25 hours = 660,000
Contribution from component ‘GPY’ = 660,000 × Rs 0.375 = Rs 247,500

Rent income from the rent out of released capacity is less than the contribution form “GYP”
and excess cost of buying component ‘EY’, it is not advisable to rent out the released
capacity at Rs 0.75 per hour. (1 Mark)

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As the contribution from “GYP” is greater than the extra variable cost of buying component
‘EY’, the component “GYP” should be manufactured and component ‘EY’ should be
purchased. (1 Mark)

2.
a) A firm manufactures a standard electronic component used in a television sets. The
details of current operations of the firm are as follows:
No. of worker employed : 100
Weekly working hours (including lunch break) : 48
Average number of hours lost due to idle time per employee per week :8
Standard time required per unit : 2 hours
Hourly wage rate : Rs. 15
Current level of efficiency : 80%
For every unit sold, the company is getting a cash profit of Rs. 120 before charging
labour cost [i.e. surplus of sales over cost of production (only cash expenses),
excluding labour cost.
In view of increasing demand for the product, the firm came to an agreement with
the labour union to raise the wage rate by Rs. 3 per hour in return for the workers
reducing the idle time by 4 hours and raising the operational efficiency to 90%.
Evaluate the impact of the decision on the firm’s profit. 10
b) PQR Ltd. is engaged in the production of three products P, Q and R. The Company
calculates Activity cost rates on the basis of Cost Driver capacity which is provided
as below:
Activity Cost driver Cost driver Cost (Rs.)
capacity
Direct Labour Labour Hours 30,000 Labour hours 3,00,000
hours
Production runs No. of production runs 600 Production runs 1,80,000
Quality No. of Inspection 8,000 Inspections 2,40,000
Inspections
The consumption of activities during the period is as under:
Activity/ Products P Q R
Direct Labour hours 10,000 8,000 6,000
Productions runs 200 180 160
Quality Inspections 3,000 2,500 1,500
You are required to:
i) Compute the cost allocated to each product from each activity.
ii) Calculate the cost of unused capacity for each activity.
iii) A potential customer has approached the company for supply of 12,000 units
of a new product ‘S’ to be delivered in lots of 1,500 units per quarter. This will
involve an initial design cost of Rs. 30,000 and per quarter production will
involve the following:
Direct Material Rs.18,000
Direct Labour 1,500 Hours
No. of production runs 15
No. of Quality Inspection 250
Prepare cost sheet segregating direct and indirect cost and compute the Sale value
per quarter of product ‘S’ using ABC system considering a markup of 20% on cost
10

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Answer
2 a) Evaluation of the impact of the agreement on the Firm’s profit
Particulars Current Operations After the Agreement
Total hours available per 4,800 (100 workers @ 48) 4,800
week(1 Mark)
Hours actually worked (1 4,000 (100 workers @ 40) 4,400 (100 workers @ 44)
Mark)
Production possible at 100% 2,000 unit 2,200 units
efficiency @ 2 hours per unit
(1 Mark)
Production at actual level of 2000 × 80% = 1,600 units 2,200 × 90% = 1,980 units
efficiency(1.5 Mark)
Rs. Rs.
Cash profit earned @Rs.120 1,600 units @ Rs.120 = 1,980 units @ Rs. 120 =
per unit before charging labour Rs.192,000 Rs. 237,600
cost(1.5 Mark)
Less: Labour cost for 4,800 4,800 @ Rs. 15 = Rs. 4,800 @ Rs.18 = Rs.
hours (1 Mark) 72,000 86,400
Net cash profit (1 Mark) 120,000 151,200
Increase in profit = Rs. 151,200 – Rs.120,000 = Rs.31,200 (1 Mark)
In spite of an increase of Rs.3 per labour hour should be made with the labour union to cope
with the increasing demand for the product by increasing productivity of workers.(1 Mark)
2 b)
i. Statement of cost allocation to each product from each activity
Product
P (Rs.) Q (Rs.) R (Rs.) Total (Rs.)
Direct Labour 100,000 80,000 60,000 2,40,000
hours (Refer (10,000 Labour (8000 Labour hours (6,000 Labour
WN) (1 Mark) hours X Rs.10) X Rs.10 hours X Rs.10)
Production runs 60,000 54,000 48,000 1,62,000
(Refer WN) (1 (200 production (180 Production (160 Production
Mark) runs X Rs.300) runs X Rs.300) runs X Rs.300)
Quality 90,000 75,000 45,000 2,10,000
Inspections (3,000 Inspections (2,500 inspections (1500 Inspections
(Refer WN) (1 X Rs.30) X Rs.30) X Rs.30)
Mark)
Working Note:
Rate per unit of cost driver (1 Mark)
Direct labour hours Rs.3,00,000/30,000 Labour Hours Rs.10 per labour Hour
Production Runs Rs.180,000/600 Production runs Rs. 300 Per production runs
Quality Inspections Rs. 2,40,000/ 8000 Inspections Rs. 30 per inspection

ii. Computation of cost of unused capacity for each activity.

Particulars Rs.
Direct Labour Hours (Rs. 300,000- 2,40,000) OR 6000 X Rs. 10 (0.5Mark) 60,000
Production Runs (Rs. 1,80,000- Rs. 162,000) OR 60 X Rs.300 (0.5Mark) 18,000
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Quality Inspection (Rs. 240,000- Rs. 210,000) OR (1000 X Rs. 30) (0.5Mark) 30,000
Total cost of Unused Capacity(0.5Mark) 1,08,000

iii. Cost Sheet and Computation of Sales value per quarter of product ‘S’ using ABC Systems
Particulars Rs.
1500 Units of Product ‘S’ to be delivered per quarter
Initial Design cost per quarter (Rs.30000/8 Quarters) (0.5 Mark) 3,750
Direct Material cost (0.5 Mark) 18,000
Direct Labour cost (1,500 Labour hours X Rs.10) (0.5 Mark) 15,000
Direct Cost (A) 36,750
Set up cost (15 Production runs X Rs.300) (0.5 Mark) 4,500
Inspection cost (250 Inspections X Rs.30) (0.5 Mark) 7,500
Indirect cost (B) 12,000
Total Cost (A+B) (0.5 Mark) 48,750
Add: Mark-up (20% on cost) (0.5 Mark) 9,750
Sale Value 58,500
Selling Price per unit ‘S’ (Rs.58,500/1500 Units) (0.5 Mark) 39

3. As on 31 Ashad 2080, following information is extracted from books of contractor G

Builders in relation to a contract for construction of water pipe line:
a. Contract price NRs. 1,000,000
b. Contract commencement date: 1 Shrawan, 2079
c. Materials issued to site NRs. 300,000, Cost of materials remaining at site
25,000. During the year, material costing NRs. 25,000 were found damaged and
it was scrapped for NRs. 20,000.
d. For the use of contract, Machinery A was purchased for NRs. 500,000 and
Machinery B was purchased for NRs. 200,000. After using for six month,
Machinery B was sold for NRs. 190,000. G Builders depreciates its Machinery
@ 15% using written down value method.
e. Other contract cost incurred were:

Wages NRs. 125,000

Machinery purchased NRs.700,000
Sundry expenses NRs.24,000
Cash
Site office expenses NRs.36,000 received
from contractee, being 80% of certified work, was NRs. 512,000. At the end of the
year, work of 18,000. was not certified. On later date, it was certified for NRs.
22,000.
The contractor recognizes the profit on contract based on estimated profit. It is
estimated that the contract would be complete by Ashwin, 2081 and following
estimates are available:
a. Additional materials of NRs. 200,000. in addition to that already in site would
be required. Additional materials shall be purchased in credit and can be paid
after completion of the contract.
b. Further wages would be NRs. 80,000.
c. Site office expense is fixed in nature and shall be incurred in time proportion.
Further, sundry expenses of NRs. 12,000 would be incurred.
d. Site engineers estimate that additional cost may be required for drilling the
pipeline. The contractor would like to provision 2.5% of total estimated contract
cost including provision for the drilling works.
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Required: 8
Contract account as on 31 Ashad 2080 and a statement showing estimated profit.
a) Chankhule ltd. manufactures two products using two types of materials and one
grade of labour. Shown below is an extract from the company’s working papers for
the next month’s budget:
Product X Product Y
Budgeted sales (in units) 2,400 3,600
Budgeted material consumption per unit (in kg)
Material A 5 3
Material B 4 6
Standard labour hours allowed per unit of product 3 5
Material A and Material B cost Rs. 4 and Rs. 6 per kg and labours are paid Rs. 25
per hour. Overtime premium is 50% and is payable, if a worker works for more
than 48 hours a week. There are 180 direct workers.
The target productivity ratio (or efficiency ratio) for the productive hours worked
by the direct workers in actually manufacturing the products is 80%. In addition the
non-productive down time is budgeted at 20% of the productive hours worked.
There are four 6 days weeks in the budgeted period and it is anticipated that sales
and production will occur evenly throughout the whole period.
It is anticipated that stock at the beginning of the period will be:
Product X: 500 units
Product Y: 200 units
Material A: 1,000 kgs
Material B: 500 kgs
The anticipated closing stocks for budget period are as below:
Product X: 5 days' sales
Product Y: 6 days' sales
Material A: 10 days' consumption
Material B: 6 days' consumption
You are required to calculate the Material Purchase Budget and the Wages Budget
for the direct workers, showing the quantities and values, for the next month. 8
b) Discuss the treatment of market research expenses, obsolete inventory and royalty
expenses in cost records. 4
Answer
3 a)
In the Books of G Builders
Contract Account
to Materials 300,000.00 by Machinery A (WN 1) 425,000.00
to Wages 125,000.00 by Materials 25,000.00
to Machinery purchased 700,000.00 by Loss on sale of materials (WN 5,000.00
2)
to Sundry expenses 24,000.00 by Sale of materials 25,000.00
to Site office expenses 36,000.00 by Sale of Plant B 190,000.00
by Work uncertified 18,000.00
to Profit on sale of plant 5,000.00 2.5
M
to Notional profit c/d 133,000.00 by Work certified 640,000.00

1,323,000.00 1,323,000.00
by Notional profit b/d 133,000.00

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to Profit transfer to P&L ac 56,746.67

(WN3) 0.5
to Balance (Reserve) 76253.33
133,000.00 - 133,000.00

Estimated Profit
A Total Expenditure to date 1,190,000.00
Less: Reduction on total cost
B (425000+25000+5000+20000+190000) - 665,000.00
Cost incurred to date 520,000.00
Add: Further expenses
Wages 80,000.00
Materials (200000+25000) 225,000.00
Sundry expenses 12,000.00
Depreciation of plant A 15,937.50 2M
Site office expenses (36000*3/12) 9,000.00
Total estimated cost before provision 866,937.50
Add: Provision for contingencies
(866937.5*2.5%)/97.5% 22,229.17
Total estimated cost 889166.67

Contract price 1,000,000.00 0.5

Profit 110,833.33
WN 1
A B
Machinery cost 500000 200000
Depreciation 15% 75000 15000
WDV 425000 185000
Sales price 190000
Profit 5000
WDV of Year 1 425000 0 1M
Depreciation for 3 months (further cost) 15937.5
WN 2
Sale value of material 20000
Cost of materials 25000
Profit on sales of material -5000 0.5
M
WN 3
Transfer to P&L A/c
Estimated total profit x WC/CPXCR/WC 1.5
110833.33*640000/100000*512000/640000= 56,746.67 M

3 b) Number of days in budget period = 4 weeks × 6 days = 24 days

Number of units to be produced
Product X Product Y
(units) (units)
Budgeted Sales 2,400 3,600
Add: Closing Stock(0.5 Mark) 500 900
=(2,400/24)×5 = (3,600/24) ×
6
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Less: Opening Stock 500 200

Total Number of Units produced (1 2,400 4,300
Mark)

(i) Material Purchase Budget

Material A Material B
(kg) (kg)
Material
Product X (0.5 Mark) 12,000 9,600
(2,400 × 5 kg) (2,400 × 4 kg)
Product Y(0.5 Mark) 12,900 25,800
(4,300 × 3 kg) (4,300 × 6 kg)
24,900 35,400
Add: Closing Stock(0.5 Mark) 10,375 8,850
(24,900/24)×10 (35,400/24)×6
Less: Opening Stock 1,000 500
Quantity to be purchased(0.5 Mark) 34,275 43,750
Price per kg of Material Rs. 4 Rs. 6
Total Cost(0.5 Mark) Rs. 137,100 Rs. 262,500

(ii) Wages Budget

Product X Product Y
(Hours) (Hours)
Units to be produced 2,400 4,300
Standard hours allowed per unit 3 4
Total Standard Hours allowed (0.5 7,200 21,500
Mark)
Productive hours required for 9,000 26,875
production (0.5 Mark) (7,200/80%) (21,500/80%)
Add: Nonproductive down time(0.5 1,800 5,375
Mark) (9,000×20%) (26,875×20%)
Hours to be paid(0.5 Mark) 10,800 32,250
Total Hours to be paid = 43,050 (10,800 + 32,250) (0.5 Mark)
Hours to be paid at normal rate = 4 weeks × 48 hours × 180 workers = 34,560 hours (0.5 Mark)
Hours to be paid at premium rate = 43,050 hours – 34,560 hours = 5,790 hours (0.5 Mark)
Total wages to be paid = 34,560 hours × Rs 25 + 5,790 hours × Rs (25 + 50% of 25)
= Rs. 864,000 + Rs. 217,125
= Rs. 1,081,125(0.5 Mark)
3 c) Treatment of Market Research expenses in Cost Records:
Many times organizations appoint professional bodies or conduct by themselves a study of
potential market for their products. This study is aimed at finding the customer's needs, their
habits, changing market for the products, technological changes in the product, competition
etc., Such expenses are to be treated as a part of selling and distribution cost. (1.5 Mark)
Treatment of Obsolete Inventory in Cost Records:
Obsolete Inventory may consist of raw materials or stores of finished goods. In either case, a
write-off is made direct to Profit and Loss a/c and no charge is made to the cost of production.
Treatment of Royalty in Cost Records: (1 Mark)
Royalties are prices paid to acquire the right to manufacture and / or sell some goods generally
belonging to the Government like Mines, Sand mining etc, When the Royalty is paid to
acquire the right to manufacture or to produce the cost of the Royalty should be charged as a
production cost and included in Production Overhead. (1.5 Mark)

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4.
a) CAT Ltd. uses standard cost for maintaining cost records. For the next budget year,
it has compiled following information in relation to its product AT:
Sales 200,000 Units
Production 240,000 Units
Standard Cost of one unit of product AT:
Direct material 0.5 Kg at NRs. 50 per unit
Labour cost 30 minutes at NRs. 90 per hour
Variable production overhead Rs. 40 per labour hour
Variable selling expenses Rs. 36 per unit
Estimate of fixed production overhead, at normal production level of 115,000 unit
p.a. NRs. 1,380,000.
Fixed selling expenses p.a. NRs. 2,500,000.
The company wants to sell the product by adding margin of 76.47% to cost of sales.
Using absorption costing, determine the gross profit and net profit of the company
for the budget year. 5
b) In the factory, the basic wage rate is Rs.10 Per Hour and overhead rates are as
follows:
Before and after normal working hours 175% of Basic wage rate
Saturdays and holidays 225% of Basic wage rates
During the previous year, the following hours were worked
Normal time 100,000 hours
Overtime before & after working hours 20,000 Hours
Overtime on Saturdays and Holidays 5,000 Hours
Total 1,25,000 Hours
The following hours have been worked on Job Z:
Normal 1,000 Hours
Overtime before and after working hours 100 Hours
Overtime on Saturdays & Holidays 25 Hours
Total 1,125 Hours
You are required to calculate the labour cost chargeable to jobs ‘Z’ and overhead
in each of the following instances: 5
i) Where overtime is worked regularly throughout the year as a policy due to
labour shortage.
ii) Where overtime is worked irregularly to meet requirement of production.
iii) Where overtime is worked at the request of the customer to expediate the job
c) Following details are related to a manufacturing concern:
Re-order Level: 16,000 units
Economic Order Quality: 90,000 units
Minimum Stock Level: 100,000 units
Maximum Stock Level: 190,000 units
Average Lead Time: 6 days
Difference between minimum lead time and Maximum lead time: 4 days
Calculate: 5
(i) Maximum consumption per day
(ii) Minimum consumption per day

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Answer
4 a)
Particulars Amt in NRs Marks
Sales (WN 1- 20,400,000.00 * 176.47%) 35,999,880.00 0.5
Cost of sales (20,400,000.00)
Overabsorbed overhead
(1380000*40000/20000) 480,000 1
Gross Profit 16,079,880.00 0.5
Selling expenses Variable
(200000*36) (7,200,000.00 ) 0.5
Selling expenses Fixed (2,500,000.00) 0.5

Net profit 6,379,880.00 0.5

WN 1: Cost of Sales
Materials (240000*0.5*50) 6,000,000.00

Labour (240000*30/60*90) 10,800,000.00

Variable overhead (240000*30/60*40) 4,800,000.00
Fixed overhead (2400000/200000*2400000) 2,880,000.00

Cost of Production 24,480,000.00

Closing Stock (40000*24480000/240000) (4,080,000.00) 0.5 Marks

Cost of Sales 20,400,000.00 1 Marks

4 b) Computation of average inflated wage rate (Including Overtime Premium)

Basic wage rate Rs.10 per hour
Overtime wage rate before and after working Rs.10 X 175% Rs.17.50 per
hours (0.25 Mark) hour
Overtime wage rate for Saturday and Rs.10 X225% Rs.22.50 per
holiday(0.25 Mark) hour
Annual wages for the previous year for normal 100,000 hours X Rs.10 Rs.10,00,000
time
Wages for overtime before and after working 20,000 Hours X 17.50 Rs. 350,000
hours
Wages for overtime on Sundays & Holidays 5,000 Hours X 22.50 Rs.112,500
Total Wages for 125,000 hours(0.25 Mark) Rs, 14,62,500
Average inflated wage rate(0.25 Mark) Rs.14,62,500/ 125,000 11.70 hours
hours
i. Where overtime is worked regularly, as a policy due to labour shortage, the
overtime premium is treated as a part of labour cost and job is charged at an inflated
wage rate. Hence, labour cost chargeable to job Z = total hours X inflated wage rate
= 1125 hours X 11.70 = Rs. 13,162.50
(1 Mark)
ii. Where overtime is worked irregularly to meet the requirements of production,
Basic wage is charged to the job and overtime premium is charged to factory overhead
as under: (1.5 Marks)
Labour cost chargeable to Job Z= 1125 hours @ Rs.10 per hour =Rs. 11,250
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Factory OH {100 Hrs X (17.5-10)} Rs. 750

{25 hours X (22.50-10)} Rs.312.50
Total factory Overhead Rs. 1,062.50
iii. Where overtime is worked at the request of the customer, Overtime premium is also
charged to the job as under: (1.5 Marks)
Job Z: 1,125 hours @ Rs.10 Per hour Rs.11,250
Overtime premium {100 hours X (17.50-10)} Rs. 750
{25hours [22.50-10)} Rs.312.50
Total Rs.12,312.50
4 c) Difference between Minimum lead time Maximum lead time = 4 days
Max. lead time – Min. lead time = 4 days
Or, Max. lead time = Min. lead time + 4 days.............................................(i)
Average lead time is given as 6 days i.e.
Max. lead time + Min. lead time
2
= 6 days..................................................... (ii)
Putting the value of (i) in (ii),
Max. lead time + Min. lead time
2
= 6 days
Or, Min. lead time + 4 days + Min. lead time = 12 days
Or, 2 Min. lead time = 8 days
Or, Minimum lead time 8 days
2
= 4 days (1 Mark)
Putting this Minimum lead time value in (i), we get
Maximum lead time = 4 days + 4 days = 8 days (1 Mark)
(i) Maximum consumption per day:
Re-order level = Max. Re-order period × Maximum Consumption per day
1,60,000 units = 8 days × Maximum Consumption per day
Or, Maximum Consumption per day = 1,60,000 units
8 days
= 20,000 units (1 Mark)
(ii) Minimum Consumption per day:
Maximum Stock Level =
Re-order level + Re-order Quantity – (Min. lead time × Min. Consumption per day)
Or, 1,90,000 units = 1,60,000 units + 90,000 units – (4 days × Min. Consumption per day)
Or, 4 days × Min. Consumption per day = 2,50,000 units – 1,90,000 units
Or, Minimum Consumption per day = 60,000 units/ 4 days
= 15,000 units (2 Marks)
5.
a) ABC Ltd. is operating at 70 Percent Capacity and presents the following
information:
Break- Even point Rs. 200 Crore
P/V Ratio 40 Percent
Margin of Safety Rs. 50 Crore
ABC’s Management has decided to increase the production to 95% capacity level
with the following modifications:
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1. The selling price will be reduced by 8%

2. The variable cost will be further reduced by 5% on existing Sales price
3. The fixed cost will increase by Rs. 20 Crore, including depreciation on
additions but excluding interest on additional capital.
4. Additional capital of Rs. 50 Crores will be needed for capital expenditure and
working capital
Required: 7
a) Indicate the sales figures, with the working, that will be needed to earn Rs.10
Crores over and above the present profit and also meet 20% interest on
additional Capital.
b) What will be the revised?
i) P/V Ratio
ii) Break-even Point
iii) Margin of Safety
b) Explain briefly the advantages of perpetual inventory system. 4
c) How is cost audit useful to the government? 4
Answer
5 a) Working Notes
1. Total Sales = Break even Sales + Margin of safety
= 200 Crore + 50 Crore = Rs. 250 Crore
2. P/V ratio = 40%
3. Variable Cost = 60% of Sales
4. = 250 Crore * 60% = Rs.150 Crore
5. Fixed cost = Break- Even Sales X P/V ratio
= 200 Crore X 40% = Rs. 80 Crore (0.5 Mark)
6. Total Cost = VC+ FC= 150+80 = Rs. 230 Crore(0.5 Mark)
7. Profit = Sales- Total Cost = Rs. 20 Crore(0.5 Mark)
8. Revised P/V Ratio (1 Mark)
Let the present selling price is Rs.100
Revised Selling price [100-8] Rs. 92
Revised variable cost (Reduced from 60% to 55%) [100*55%} Rs. 55
Contribution Rs. 37
New P/V Ratio =Contribution/Sales X100
=37/92 X100 = 40.217%
a) Revised Sales: Rs. In Crore
Present Fixed cost Rs. 80
Increase in fixed cost Rs.20
Interest @20% on additional capital of 50 Crore Rs.10
Total Revised fixed cost Rs. 110 Crore (1 Mark)
Required Contribution =FC+ Present profit+ Additional profit
= 110+ 20+ 10 = 140 Crore (0.5 Mark)
Required Sales: =Required contribution/ New PV ratio
=140/40.217%
=348.11 Crores (0.5 Mark)
b)
i) Revised PV Ratio = 40.217% (Refer working notes) (0.5 Mark)
ii) Revised BEP = Revised FC/ New PV Ratio
=110/ 40.217%
= 273.516 Crores (1 Mark)
iii) Revised Margin of Safety =Revised Sales- Revised BE sales
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=348.11 – 273.516
=74.594 Crore (1 Mark)
5 b) Advantages of Perpetual inventory system. (Recommended 0.5 Marks for every valid point)
i) The system serves as a moral check on the stores staff. They keep the stores record up-to-
date and are differed from committing dishonest acts. ( 1 Mark)
ii) Interim financial accounts can be prepared with regular convenience because the long and
costly work of actual stock taking is avoided. ( 0.5 Mark)
iii) Over -investment in stock can be avoided because quantity and value of materials in stock
is always known. ( 0.5 Mark)
iv) In case of destruction of stock by fire, the system helps in settling the insurance claim as
correct stock figures can be readily obtained. ( 0.5 Mark)
v) loss of stock due to pilferage or obsolesce etc, is detected at an early stage and suitable
steps can be taken to prevent its recurrence. ( 0.5 Mark)
vi) Timely replenishment of stock is facilitated as the management may be informed daily of
the number of units and the value of each kind of material on hand. This tends to eliminate
delays and shut down in production activities.( 1 Mark)
5 c) The usefulness of cost audit to the government are listed below. (Recommended 0.5 Marks for
every valid point)
i) When the government enters a cost-plus contract, cost audit helps the government to fix
the price of the contract.(1 Mark)
ii) It helps in the fixation of selling prices of essential commodities and thus undue
profiteering is checked. (1 Mark)
iii) It enables the government to focus its attention on inefficient units. (0.5 M)
iv) It enables the government to decide in favor of giving protection to certain industries. (0.5
M)
v) Cost audit facilitates settlement of trade disputes brought to the government. (0.5 M)
vi) Accurate use of cost data creates healthy competition among the various units in an
industry, which ultimately helps to control inflation. (0.5 M)
6. Write short notes on the followings: (4×2.5=10)
a) Period Cost
b) Treatment of by-product cost in cost accounting
c) Limitations of break-even analysis
d) Key Factors

Answer (0.5 Mark for every relevant Point)

6 a) The costs which are not associated with production are called period costs. They are treated
as an expense of the period in which they are incurred. They may be fixed or variable. They
are charged against the revenue of the relevant period. Differences between opinions exist
whether certain costs should be considered as product or period costs. There is an opinion
that variable manufacturing costs are product costs whereas fixed manufacturing and other
costs are period costs as they are closely related to the passage of time than to manufacturing
of product.

6 b) Treatment of by-product cost in Cost Accounting:

i) When they are of small total value, the amount realized from their sale may be dealt as
follows:
➢ Sales value of the by-product may be credited to Costing profit & Loss Account and
no credit be given in Cost Accounting. The credit to Costing Profit & Loss Account

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here is treated either as a miscellaneous income or as additional sales revenue. (1

Marks)
➢ The sale proceeds of the by-product may be treated as deduction from the total costs.
The sales proceeds should be deducted either from production cost or cost of sales. (0.5
Mark)
ii) when they require further processing:
➢ In this case, the net realizable value of the by- product at the split off point may be
arrived at by subtracting the further processing cost from realizable value of by-
products. If the value is small, it may be treated as discussed in (i) above. (1 Marks)

6 c) The limitations of break-even analysis are (0.5 Mark for every point relevant)
• All costs cannot be separated into variable and fixed costs with accuracy.
• Fixed costs may change because of change in management policy or after a range of
activity.
• Selling price may change because of increase or decrease in output, market demand
&supply, competition etc.
• In case of multiple products, the sales mix need not necessarily be constant.
• Entire production need not necessarily be sold in practice
• Time value of money is ignored.

6 d) In marginal costing, products which yield highest contribution are sold in maximum quantities
with the objective to maximize the profit. It is generally assumed that there will be no
limitation which may create restriction in increasing quantities of one or more products. But
in practice, there may be a number of factors which may create limitation viz shortage of
material, labor, plant capacity or sales. These are called key factors or limiting factors.
Contribution per unit of key factor must be considered to decide upon the priority of product
to be produced and sold to maximize the profit. (0.5 Mark for every relevant point)

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Paper 6: Business Communication and Marketing

All questions are compulsory.

Section -'A'

1. Read this case and analyze it in detail, using the questions given below.
Sandy Jones supervises a clerical and secretarial pool of eight employees at the
American Standard Insurance Company. Her group is responsible for typing and
filing the insurance claims and registrations for Standard's customers in the
Southern region. It is high-volume work that, although requiring speed and ac-
curacy, is often tedious.
Sandy is proud of her unit because they get the work done well. Generally, Sandy
enjoys her job and likes the people she works with. Most of her subordinates are
young women who recently graduated from high school, some from the same
school. By and large, this is their first regular job.
Sandy has one headache, though, and that headache is Katherine Bruskowicz.
Katherine is a very good worker, perhaps quicker and more accurate than anyone
else in the unit. She learned the job very quickly and now finishes her work before
the others. The only problem with Katherine, as Sandy told a friend at lunch one
day, is that "she's just a pain in the ass."
"For example," Sandy said, "Katherine talks all the time. Now I know the work
can be tedious, and I let the girls talk as long as they get their work done, but
Katherine can get really loud at times, especially when I'm gone. I know, I've
gotten complaints from others." Sandy is worried that Katherine's talkative- ness
may become an annoyance and distraction to the other employees.
Even more disturbing than the volume of her talk is its content. Katherine seems to
delight in verbally harassing and intimidating the other employees in the unit.
She brags about all the boyfriends she has. She'll often mock how other
employees dress or talk, and will argue with them about doing certain tasks. She
even picks on Sharon regularly, teasing her about her weight and lack of boyfriends.
Some of the employees in the unit have become accustomed to Katherine and
can now take her in stride, although there are others who have a more difficult time
dealing with her, and whom she still upsets. In either case, the employees in the unit
have to make adjustments, and morale in the unit stays low. Sandy is certain that
if Katherine weren't there, everyone would be much happier.
Sandy has informally talked with Katherine a few times about these matters, and
Katherine will behave for a day or two, then pick up again where she left off.
Questions: (4×5=20)
a) How has Katherine's behavior specifically impacted the work environment and
the morale of Sandy's team at the American Standard Insurance Company?
b) What specific steps has Sandy taken to address Katherine's disruptive behavior,
and how effective have these measures been in curbing the issue?
c) What potential consequences or disciplinary actions can be implemented by
Sandy and the company if Katherine's behavior continues despite informal
discussions and warnings?

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d) How can Sandy ensure a fair and supportive resolution for both Katherine and the
affected employees, and what strategies can be employed to improve the overall
teamwork and morale in her unit?
Answer
1 a) Katherine's behavior has had a significant negative impact on the work environment
and team morale. Her excessive talking disrupts the focus and concentration of her
colleagues, particularly in a high-volume, accuracy-driven job like processing
insurance claims and registrations. This negatively affects their productivity and job
satisfaction. Furthermore, Katherine's verbal harassment and intimidation create a
hostile work environment, making it difficult for her colleagues to perform their tasks
without undue stress and anxiety. The employees have had to make adjustments to
accommodate her behavior, further reducing their overall morale and job satisfaction.
(0.50 Marks for 8 relevant points and 1 Mark for core context coverage.)
1b) Sandy has made informal attempts to address Katherine's behavior, but the
effectiveness of these measures has been limited. Although Katherine temporarily
improves her behavior after these discussions, she soon reverts to her disruptive
conduct. This suggests that a more formal, structured approach is necessary to address
the issue effectively. Informal discussions alone may not be enough to bring about
lasting change in Katherine's behavior, and a more comprehensive intervention plan is
needed. (0.50 Marks for 8 relevant points and 1 Mark for core context coverage.)
1c) If Katherine's behavior continues despite prior warnings and discussions, it's essential
to consider potential consequences or disciplinary actions. This should be in alignment
with the company's established policies on workplace conduct and disciplinary
measures. The specific consequences may range from verbal or written warnings to
suspension or, in extreme cases, termination. The severity of the consequence should
be commensurate with the nature and persistence of Katherine's disruptive behavior.
The aim is not only to correct her behavior but also to maintain a fair and respectful
work environment for all employees. (0.50 Marks for 8 relevant points and 1 Mark
for core context coverage.)
1d) To ensure a fair and supportive resolution for all parties involved, Sandy should
consider a multi-faceted approach. This includes ongoing communication with
Katherine to understand the root causes of her behavior and offer any necessary support
or resources. Simultaneously, it's crucial to provide support and encouragement to the
affected employees. Sandy may also consider implementing team-building activities
and workshops on communication and conflict resolution to enhance the overall
dynamics of the team. These measures can contribute to improving morale within the
unit, creating a more positive and productive work environment while addressing the
issue at hand. (0.50 Marks for 8 relevant points and 1 Mark for core context
coverage.)

2. You are organizing a company event for 80 participants, including engineers, product
managers, and marketing staff. The event will take place at Hotel Oasis in Paradiseville,
and you are considering two date options: April 20-24 and July 10-14. Write a letter
asking for the pertinent information you need from the hotel manager to aid in planning
the event. (10)

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Answer
2) March 23, 2023

Subject: Inquiry Regarding Hosting a Company Event (1 Mark)

Dear Sir/Ma’am (1 Mark)

I am John Tamang, representing TechSolutions Inc. We are planning a company-wide
event for 80 participants, comprising engineers, product managers, and marketing staff.
We are considering Hotel Oasis in Paradiseville as a potential venue and would like to
gather essential information. (2 Marks for Starting Para)
We anticipate requiring around 80 rooms and three conference rooms for one and a half
days. Please provide the following details:
1. Room Rates: Kindly share room rates for April 20-24 and July 10-14.
2. Conference Facilities: Information about available facilities and associated costs.
3. Entertainment Options: Insights into nearby recreational activities and entertainment for
families.( 4 Marks for Core Para)

We value your prompt response to aid our planning. You can reach me at [email protected]
or 98511515151 to discuss this further or schedule a meeting.
Thank you for your time. (1 Mark for Closing)

Sincerely,
John Tamang
Chief Executive (1 Mark)

3. Answer the following questions briefly. (2×5=10)

a) You are recruited as a research officer in an international business organization and
asked by the regional office in Kathmandu to carry out research and present a
report. To put in your proposal, prepare a timetable for researching and writing
your final report.
b) Discuss the key ways to deliver a persuasive message.
Answer
3 a) Time schedule for preparing final report
Activities Allocated time duration Marks

Planning and conceptualizing: proposal July 3- July 17 (2 weeks) 1 Mark

writing
Preparing research tools: July 18-August 2 (2 weeks) 1 Mark
questionnaires and interview schedules
Field visits: data collection August 3-September 15 (6 0.5 Mark
weeks)
Data analysis and interpretation September 16-October1 (2 0.5 Mark
weeks)

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Preparing the first draft of the report October 1st week 0.5 Mark

Editing and revising October 2nd week 0.5 Mark

Submitting the final report October 17, 2023 1

Mark

3 b) Persuasion is the ability to influence others to accept your point of view. It is not an attempt
to trap someone into taking action favorable to the communicator. For persuasion to be
effective, you must understand your product, service, or idea; know your audience; anticipate
the arguments that might come from the audience; and have a rational and logical response to
those arguments. One should remember persuasion need not be a hard sell; it can simply be a
way of getting a client or his/her supervisor to say yes. Professionals in all fields benefit from
well-prepared communications that persuade others to accept their ideas or buy their products,
services, or ideas. (0.50 Marks for 8 relevant points and 1 Mark for core context coverage.)

4. Write short notes on: (4×2.5=10)

a) Conflict resolution.
b) Paralinguistics
c) Digital Communication Tools
d) Crisis Communication
Answer
4 a) Conflict resolution (0.50 Marks for 5 relevant points.)
• Identify the source of the conflict.
• Communicate clearly and respectfully.
• Listen to the other person's perspective.
• Try to find a mutually beneficial solution.
• Be flexible and open to compromise.
• Seek guidance from a supervisor or mentor if necessary.

4 b) Paralinguistics refers to the non-verbal elements of speech that convey meaning beyond the
words themselves. It encompasses various vocal and non-vocal cues that people use to
communicate, such as tone of voice, pitch, volume, speed, rhythm, intonation, and vocal
qualities. Examples of certain phrases used are ‘oh’, ‘right’, ‘I know’, ‘really’. European and
Latin American women tend to use ‘mm’: South-East Asian women tend to use ‘oh’ or ‘ah’.
(0.50 Marks for 5 relevant points.)

4 c) Digital communication tools are software or applications that enable people to exchange
information, messages, and data electronically using digital devices like computers,
smartphones, or tablets. These tools encompass a wide range of platforms and technologies,
including email, instant messaging apps, social media networks, video conferencing software,
and more.
Digital communication tools have become a big part of our daily lives. We can send emails
to our teachers, chat with friends on social media, or have video meetings with coworkers.
These tools have made it possible for us to work, learn, and connect with others, especially
during times when meeting in person may not be an option. They help us share information
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and ideas, making the world feel smaller and more connected. (0.50 Marks for 5 relevant
points.)

4 d) Crisis communication is when we talk about serious problems or emergencies. It's all about
sharing information to help people stay safe and informed. In a crisis, being clear and honest
is super important. You need to tell people what's happening and what they should do. It's
also crucial to be quick, so people get the information they need fast. Crisis communication
can happen on TV, social media, or through official statements. The goal is to keep everyone
know and manage the situation well. So, during a crisis, clear and fast communication is key
to keeping everyone safe and informed. (0.50 Marks for 5 relevant points.

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All questions are compulsory.

Section -'B'
5. Read the case given below and answer the questions that followed. [20]

Ram Bahadur Thapa recently took voluntary retirement from Nepal Bank Ltd. at the age of 56. He
worked in this same bank for the last 30 years. At retirement he received Rs. 12 lacks as gratuity.
He is father of three sons – Shyam Bahadur (26), Harka Bahadur (20) and Gokul Bahadur (16).
His wife Sharmila (50) is still working in a secondary school as math teacher. They live in a two-
bedroom house in Sitapaila, Kathmandu.

In 1990, he had bought a Sony 20” TV and a Chinese VCD. These were the only means of
entertainment for the family. The TV set had grown too old and needed replacement. The set had
worn out beyond any possibility of repair. Sharmila also proposed that the family should exchange
both TV and VCD and buy a modern flat screen TV and DVD. Ram Bahadur agreed on the
proposal to replace the TV but disagreed on buying the DVD. He argued that the VCD is all right
and serves the purpose of occasional viewing of movies. Harka Bahadur insisted that the image
and sound quality of DVD is far better than that of the VCD. He argued “everybody today has a
DVD”. He suggested that his father should visit some shops in Mahabaudha and listen to the sound
and image quality of the DVDs. Ram Bahadur asked his son “what should I do with the old VCD,
no one would buy it even for Rs. 1000”. Harka Bahadur suggested that it should be thrown away
as garbage.

Ram Bahadur agreed to his son’s suggestion and took him to the market to look at the DVD
alternatives. The price range of the different brands varied between Rs. 3500 for the Chinese to
Rs. 9000 for Korean DVDs. Ram Bahadur was highly impressed with the DVDs convenience and
the slim look. Both the Chinese and Korean products looked similar. He wanted to buy cheaper
one, but his son suggested buying the more expensive one. Harka Bahadur insisted on buying a
popular brand “Samsung is so popular and has high image; besides, it has a warranty period of two
years”. Ram Bahadur argued “the Chinese is not only cheap but strong, see the last VCD is still
working for the last 15 years.” They could not decide on the brand to buy and finally agreed that
they would consult the other family members and buy that brand which receives the highest vote.

1.How did Ram Bahadur’s family recognize their needs?

Answer
Need is a state of felt deprivation. Consumer purchases various goods and services to satisfy their
needs. Need recognition is the starting point of consumer behavior. Need is activated because of
the internal stimuli and external stimuli. A need is recognized when there is change in either the
actual or the ideal state of the consumer.
In Ram Bahadur’s family, the TV set had grown too old and needed replacement. The set had worn
out beyond any possibility of repair. This indicates a decrease in the actual state. But in case of
DVD, old VCD is still working for its occasional use, but Ram Bahadur’s son and wife are insisting
him to buy DVD. It indicates increase in ideal state. Similarly, need of TV set is activated because
of the internal stimuli and need of DVD is activated because of the external stimuli as Ram
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Bahadur’s son has expressed his view about the picture and sound quality of DVD and he also had
said that everybody had DVD in their home.
Thus, the family recognized their needs because of, decrease in actual state in case of TV and
increase of ideal state in case of DVD. (0.5 Marks *10 relevant points= 5 Marks)

2.What are the sources of information used by Ram Bahadur’s family?

Answer
Information search is the second stage in consumer buying process. Customers obtain information
from internal source and external source. Internal source is related with retrieval of their own
memory. If information retrieved from internal source is not enough, consumers search
information from external sources. External source includes personal, commercial, public and
experimental sources.
In Ram Bahadur’s family, both internal as well as external sources of information were used. Ram
Bahadur, his wife, and his son have used internal sources of information by the retrieval of their
own memory. Additionally, they have used commercial sources of information from the
shopkeeper of Mahabaudha. They also used the information from experimental sources by
observing picture and sound quality of the TV and DVD at the shop. (0.5 Marks *10 relevant
points= 5 Marks)
3. Discuss the role played by various members in the buying process of TV and DVD.
Answer
In consumer buying decision process, role played by different family members may be of initiator,
influence, decider, purchaser etc. In Ram Bahadur’s family, Ram Bahadur’s wife Samrila has
played the role of initiator as she has proposed to exchange both TV and VCD. She has also
initiated to purchase flat screen TV and DVD. Ram Bahadur and his son have played the role of
influencers as Ram Bahadur, in the beginning, not interested to buy DVD. In the later phase he has
insisted to buy Chinese DVD as he is the satisfied customer of Chinese VCD. It was purchased in
1990 and which was still working for its occasion use. Similarly, his son Harka Bahadur has tried
to influence Ram Bahadur to purchase DVD because of its picture and sound quality. Again Harka
Bahadur has also suggested his father to visit Mahabaudha. He has also insisted to buy Korean
DVD. He has tried to influence Ram Bahadur to purchase Korean DVD by explaining popularity
of Samsung brand and warranty period of two years. But other family members have played no
role in the given case. (0.5 Marks *10 relevant points= 5 Marks)

4. Discuss the brand preference of Ram Bahadur and his son about Chinese and Korean DVD.
Answer
In the given case, there is no confusion about purchasing TV set. In case of DVD Ram Bahadur
and his son Harka Bahadur have different choices. Ram Bahadur wants to purchase Chinese DVD
whereas his son Harka Bahadur is in favor of Korean DVD. Ram Bahadur is satisfied customer of
existing Chinese VCD. Thus, as a satisfied customer he wants to purchase Chinese DVD.
Similarly, Harka Bahadur is in favor of Korean DVD because of his age and personality factor. He
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is also inspired by the brand consciousness because in consumer behavior, young people are highly
brand conscious than older people. In the given case, age of Ram Bahadur is 56 and age of Harka
Bahadur is only 20. Again, in consumer behavior, young people are risk taker and matured people
are risk avoider. In the given case, this risk taking behavior is also reflected in their brand
preference while selecting Chinese or Korean DVD. (0.5 Marks *10 relevant points= 5 Marks)

6. Explain the components of marketing mix for tangible goods. [10]

Answer
The marketing tools developed by the marketer to influence the market is known as “Marketing
Mix”. The marketing mix consists all the marketing efforts the company does to attain company
goal. The mix is represented as 4Ps: Product, Place, Price and Promotion. (1 Mark for
Introduction)

1. Product:
Product is anything which satisfies the needs of consumers. It has utility, usefulness to the buyers.
A product is the sum of the physical and psychological satisfaction it provides to the buyers. It is
an idea or object developed by the organizations to offer to the customers like service, facility,
haircut, a pair of shoes, etc. Product is produced or created by the organization that is to add value
for exchange with the customer. Exchange of the product satisfies the customers need and
organization fulfills its object. A product connects firm with market. Products are either tangible
or intangible. Intangible products are services. (0.25 Mark for every relevant sentence*8 =
2Marks)

2. Place, Pipe or Distribution System

This
It is a system developed by the producer to transfer products from point of production to the point of consumption.
system facilitates the exchange process. Through this system the products move from producers
to consumers. A marketing channel can be understood as a large pipeline with products, their titles
or ownership, communications, finance and payment and risk flows through it. It is a system of
interdependent organizations that facilitate the transfer of ownership as products move from
producers to buyers. The system includes channel members and physical transfer. (0.25 Mark for
every relevant sentence*8 = 2Marks)

3. Price
Price is the value of the goods or service expressed in money such as dollar, pound, rupees, etc. It
is the price of ownership, authority to consume or utilize the product and service. It is the value of
utility, usefulness created by producer. Thus, price is the money exchanged for utility. Price is
determined by the producer but it has to be accepted by the consumer. So from consumers point
of view price is the perceived value or utility they are going to get from product. The price paid is
based upon the expected satisfaction consumers will receive from a product or service. (0.25 Mark
for every relevant sentence*8 = 2Marks)

4. Promotion
Promotion consists of all the methods and techniques used by an enterprise to highlight its
company image and products. Promotion is a method to influence the consumer’s decision-making
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behavior. It is persuasive communication and aims that the customers will act as designed by the
company. It aims to motivate consumers and create effective demand. The meaningful
communication bridges the gap between the producers and the actual or potential customers as
well as trade intermediaries. (0.25 Mark for every relevant sentence*8 = 2Marks)
Conclusion ( 1 Mark)

7. Answer the following questions.

a. What is promotion? What are the components of promotion mix? Discuss. [5]

Answer
Promotion is the element in an organization’s marketing mix that serves to inform, persuade, and
remind the market of a product and/ or organization selling in the hope of influencing the
recipients’ feelings, beliefs, or behaviour. It is popularly known as marketing communication.
Promotion is mainly concerned with the efforts to influence target market. promotional program
is designed to give information about goods or services to prospective customers to make them
confident and to remind them of the goods or services. However its ultimate objective is to
influence or bring change in customers' thinking, attitude, behavior and belief. In clear meaning,
objective of promotion is to influence prospective customers, arouse curiosity in them about goods
or services, receive purchase order from them and make them real customers. (2 Mark)
Promotion mix includes personal selling, advertising, sales promotion, publicity, public relations
and direct marketing which can be explained as follows:
i. Personal selling: To encourage or persuade potential customers on individual basis to buy goods
or services is called personal selling. Business firms make their efforts to reach public and sell
their products. In this, sales representatives present goods to potential customers and persuade or
motivate them to buy. This is very old and popular technique. (0.5 Mark)
ii. Advertising: The other method of promotion is advertising. This is used as non-personal mass
communication. Well-known sponsors use advertisement by paying money to make customers
know about their goods or services. Such advertisements are communicated through radio, TV,
newspapers, etc. (0.5 Mark)
iii. Sales promotion: Sales promotion is used as complementary of advertisement and in
coordination with personal selling. Sales promotion is often used as short-term strategy in order to
achieve certain objective in target market. Trade fair, exhibition, display, sample distribution,
coupon, gift etc. programs are conducted in sales promotion. (0.5 Mark)
iv. Publicity: Sales promotion can also be done through publicity. Like advertisement, this is also
mass communication process to create demand for goods or services, but cost is not paid for it.
Business firms hold press conference, photography, news broadcasting, publicity, etc. and
distribute different advertising materials to pressmen. News presentation may create positive
attitude in customers. (0.5 Mark)
v. Public relations: Public relation is building good relations with company's various publics by
obtaining favourable publicity, building up a good corporate image and handling or heading off
unfavourable rumours, stories and events. It is more target-oriented method than others. This is
such a planned effort by which the attitude, thought, idea, and belief of target customers is
influenced. Effort for public relation is reflected in newspapers, annual reports, etc. (0.5 Mark)
vi. Direct marketing: It is direct connections with carefully targeted individual customers to both
obtain and immediate response and cultivate lasting customer relationship- the use of direct mail,

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the telephone, email, internet and other tools to communicate directly with specific customers. (0.5
Mark)
b. What are the components of physical distribution? [5]

Answer
The key components of physical distribution include:
1.Warehousing: Warehousing involves the storage of goods at various points in the supply chain.
Warehouses serve as temporary storage facilities and distribution centers for products. (1 Mark)
2.Transportation: Transportation is a critical component of physical distribution. It includes the
movement of goods from one location to another. Common transportation modes include trucks,
ships, airplanes, trains, and even pipelines. (1 Mark)
3.Inventory Management: Effective inventory management is crucial for optimizing physical
distribution. It involves managing stock levels, determining reorder points and minimizing
carrying costs while ensuring that products are readily available when needed. (1 Mark)
4.Order Processing: This component involves receiving and processing customer orders. It
includes tasks such as order entry, order verification, and order fulfillment. Efficient order
processing can lead to shorter delivery times and improved customer satisfaction. (1 Mark)
5.Packaging: Packaging plays a vital role in physical distribution. Packaging also influences
product presentation and branding. (0.5 Mark)
6.Materials Handling: Materials handling involves the loading and unloading of products during
transportation and warehousing. It includes the use of equipment like forklifts, conveyors, and
pallet jacks to move goods efficiently. (0.5 Mark)
8. Write short notes on: [5×2=10]
a) Product line and product mix

Answer
A product line represents a group of related products, often with similar characteristics, marketed
under a single brand or category. The product mix, on the other hand, encompasses the entire range
of products and product lines offered by a company to meet diverse customer needs and market
demands. Both concepts are essential in marketing and product management for effectively
managing and expanding a company's product offerings. (0.5 Marks *4 Relevant points =
2Marks)

b) Holistic concept

Answer
Holistic marketing is a marketing strategy that focuses on the entire business as a whole,
considering all the elements and activities that impact the customer's experience and satisfaction.
It takes into account the integration of various marketing components to create a comprehensive
and unified approach. Holistic marketing goes beyond traditional marketing practices, which often
focus on individual elements like advertising, sales, or product development. Instead, it looks at
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the big picture and how all aspects of the business can work together to create a consistent and
meaningful customer experience. (0.5 Marks *4 Relevant points = 2Marks)
c) Internal record system

Answer
Internal record system is one of the components of marketing information system. It collects
various types of scattered data which are located inside the company. The heart of the internal
record system is the order-to-payment cycle.
Marketing managers rely on data from internal reports about orders, sales, prices, costs, inventory
levels, receivables, payables and so on. Today many companies organize information in databases-
customer databases, product databases, salesperson databases and so forth- and then combine data
from the different databases. Companies warehouse these data and make them easily accessible to
decision makers to better plan, target, and track marketing programs. (0.5 Marks *4 Relevant
points = 2Marks)

d) Labeling

Answer
The function of putting identification mark on the package is called labeling. So labeling is a part
of packaging and branding and promotion. It is also used as sales support promotion, as it includes
name, how to use, when to use, benefits, producers name, etc. It is one of the important parts of
product and promotion. (0.5 Marks *4 Relevant points= 2Marks)

e) Physical distribution

Answer
Physical distribution is the main component of distribution. Physical distribution is the activities
through which goods are flow from the point of production to the point of consumption for sale.
Physical distribution is the planning and controlling of physical flow of materials, final goods and
related information from point of origin to point of consumption to meet customer’s requirements
at a profit. Physical distribution is the movement of goods from one place to another place.
(0.5 Marks *4 Relevant points= 2Marks)

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Paper 7:Income Tax & VAT

Attempt all questions. Working note should form part of the answer.

1. Nepal Skin Care Pvt. Ltd., a subsidiary of Korean Skin Care Pvt. Ltd., Korea, is a
manufacturer of various skin care products. Following information are given for
Income Year 2079/80:
Particulars Amount (Rs.)
Sales 5,55,00,000
Sales of scrap 22,00,000
Interest Income 18,00,000
Recovery of Bad debts 100,000
Other Income 12,00,000
Opening Stock 25,00,000
Purchase of Raw Material 2,50,00,000
Closing Stock 28,00,000
Carriage Inward and outward 900,000
Direct Labour 30,00,000
Factory Overhead relating to production 35,00,000
Administrative expenses 45,00,000
Selling and Distribution expenses 60,00,000
Interest expenses 15,00,000
Research and development expenditure 12,00,000
Depreciation 67,45,000
Repair and maintenance – Building 11,00,000
Repair and maintenance- office equipment 200,000
Repair and maintenance- Furniture and fixtures 50,000
Repair and maintenance –Plant and machinery 860,000
Repair and maintenance –Vehicle 500,000
Bad Debts Written Off 500,000
Other expenses 90,000
Additional information:
i) Bad debts recovered were not allowed to be expensed off for income tax purpose
in the previous years.
ii) The opening stock was valued including factory overhead cost which included
repair and maintenance expenses portion of Rs.50,000.
iii) Direct labour includes payment amounting to Rs.68,000 out of which Rs.1,000
was paid to 18 workers each and Rs.5,000 paid to 10 workers each involved for
temporary work. Those laborers do not hold PAN.
iv) Administrative expenses include medical expenses of Rs.100,000 which was paid
for medical treatment of wife of director in Korea and expenses pertaining to prior
period of Rs.150,000 which was omitted to be booked in previous year.
v) Selling and distribution expenses include Rs.200,000 donation provided to a
registered political party and Rs.100,000 to a school which is not a tax-exempt
organization.
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vi) Interest Expenses include interest for the loan of Rs.30,00,000 at rate of 10%
taken for purchase of a new plant and machinery on Asar 1, 2080, and the assets
was put to use on Bhadra 2080 only. Other than this, the interest expenses include
bank overdraft interest of Rs.1,075,000 and the rest was paid to parent company
of Korea for the loan taken this year.
vii) Bad debts were written off with the decision of board as it was pending for 5 years,
and the debtor is declared bankrupt.
viii) Other expenses include tax paid to the local government of Rs.40,000.
ix) The Written Down Value of fixed assets for Income Tax at the beginning of the
year is as follows:
Land Rs. 2,00,00,000
Building Rs. 1,00,00,000
Vehicle Rs. 80,00,000
Office equipment and furniture Rs. 65,00,000
Plant and Machinery Rs. 1,20,00,000
x) Office equipment worth Rs.95,000 was purchased on Chaitra 2079.
xi) Old Plant and machinery and old delivery VAN with WDV of Rs. 100,000 and
Rs.80,000 was disposed off for Rs. 1,25,000 and Rs.100,000 in Baisakh, 2080.
The gain on sales is recorded under other income.
xii) The industry is established and operated in industrial village for 2 years and has
employees of total 100 Nepalese of which 40 are females.
You are required to ascertain the tax liability of Nepal Skin Care Pvt. Ltd. for Income
Year 2079/80. 20
Answer
1)
Computation of Taxable Income and Tax liability of Nepal Skin Care Pvt. Ltd.
for the Income Year 2079/80
Particulars Amount (Rs.) Notes Marks
Sales 55,500,000
Sales of scrap 2,200,000
Interest income 1,800,000
Bad debts recovered - WN 1
Other income 1,155,000 WN 2
Inclusion 60,655,000 1M
Deduction:
Administrative expenses 4,250,000 WN 3
Selling and distribution expenses 5,700,000 WN 4
Bad debts written off 500,000 WN 5
Other expenses 90,000 WN 6
Interest under section 14(1) 1,075,000
Cost of Goods Sold u/s 15 32,000,000 WN 7
Depreciation expenses u/s 19 7,436,388.89 WN 8
Repair and Maintenance u/s 16 2,281,250 WN 9
Total Deduction 53,340,977.5 1M
Adjusted Taxable Income 7,322,361.11
Less:
Interest expenses 14 (2) 400,000 WN 12
Research and Development expenditure 1,200,000 WN 13

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Assessable Income 5,722,361,11

Donation under section 12 100,000 WN 14
Taxable Income 5,622,361.11 1M
Tax rate 10% WN 15
Tax liability 562,236.11 1M
Working Notes
1. Bad debts recovered were not allowed as expenses earlier, so need not be included in
income. (0.5 Marks)
2. Other income (0.5 Marks) 12,00,000
Less: gain on sale of vehicle (100,000-55,000) 45,000
Other income to be included in income Rs.11,55,000
3. Administrative expenses (1 Marks)
Particulars Amount Rs. Remarks
Administrative expenditure 45,00,000
Less: personal expense of director 100,000 Personal nature expenses are
not deductible.
Less: prior period expenses 150,000 Expenses incurred during the
year in earning income from
Business is only deductible
Administrative expenses to be 42,50,000
deducted
4. Selling and distribution expenses (1 Marks)
Particulars Amount Rs. Remarks
Selling and distribution expenses 60,00,000
Donation to non- tax exempt
Less: Donation to school 100,000 entity not allowed
Less: Donation to political party 200,000 To be claimed separately
Expenses to be deducted 5,700,000
5. It has been assumed that debt claim cannot be realized or recovered since the debtor is
bankrupt, so the bad debts written off is allowed to deduct. (0.5 Marks)
6. Tax paid to local government is allowed to be deducted. (0.5 Marks)
7. Cost of goods sold (2 Marks)
Particulars Amount Rs.
Opening stock 2,500,000
Less: repair and maintenance portion in
valuation of opening stock 50,000
Purchase of raw materials 25,000,000
Add: production expenses
Direct Labour 3,000,000
Less: Non PAN wages (5000*10) 50,000
Carriage Inward and outward 900,000
Factory Overhead relating to production 3,500,000
Less: Closing stock 2,800,000
Cost of goods sold 32,000,000
• Non-PAN expenditure except time basis wages upto Rs.3,000 is not deductible u/s
21(1) (Gha1).

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8. Depreciation (2 Marks)
Particulars Block A Block B Block C Block D
Opening WDV 10,000,000 8,000,000 6,500,000 12,000,000

Addition up to Chaitra 63,333

Less: Receipts from
100,000 125,000
Disposal

Depreciation base 10,000,000 8,063,333 6,400,000 11,875,000

Depreciation rate for
special industry 6.67% 33.33% 26.67% 20.00%
Depreciation 667,000.00 2,687,508.89 1,706,880 2,375,000.00
Total Depreciation Rs.7,436,388.89
• As machinery is not used during the year therefore, no depreciation shall be charged in
such assets for the year. Further, interest on a loan borrowed for the purchase of such
assets i.e. Rs. 25,000 (3000,000*10%*1/12) is also not deductible u/s 14(1) but
capitalized to the total cost of asset.
9. Repair and maintenance (1 Marks)
Particulars Block A Block B Block C Block D
7% of Depreciation Base 700,000.00 564,433.31 448,000.00 831,250.00
Actual Repair 1,100,000.00 500,000.00 250,000.00 860,000.00
Deductible Repair (lower of
7% or actual) 700,000.00 500,000.00 250,000.00 831,250.00
Total repair and maintenance - Rs.2,281,250
10. Calculation of actual interest paid to controlling entity. (1 Marks)
Total interest exp 15,00,000
Less: Interest for loan of machinery 25,000
Less: Interest on overdraft 1,075,000
Interest paid to controlling entity 400,000
11. Computation of Adjusted Taxable Income for the purpose of Section 12, 14(2) and 18
(1 Marks)
Particulars Section 12 Section 18 Section 14(2)
Adjusted Taxable Income as per
above calculation 7,322,361.11 7,322,361.11 7,322,361.11
Less: Actual interest to controlling 400,000
entity
Less: Actual Research and 1,200,000 1,200,000
development exp
Adjusted Taxable Income 5,722,361.11 7,322,361.11 6,122,361.11
12. Computation of allowable interest under section 14(2) (2 Marks)
Particulars Amount
Adjusted Taxable Income 6,112,361.11
Add: Interest under 14 (1) 1,075,000
Less: Interest income 1,800,000
Adjusted Taxable Income before interest items 5,387,361.11
50% of Adjusted Taxable Income before interest items 2,693,680.55
Add: Interest income 1,800,000

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Maximum ceiling of the interest deductible 4,493,680.55

Actual interest paid 400,000
Deductible interest (lower of actual and maximum ceiling) 400,000
13. Computation of allowable research and development expenditure under section 18
Least of the following is deductible. (0.5 Marks)
50% of ATI (7,322,361.11*50%) 3,661,180.55
Actual expenses 12,00,000
Deductible 12,00,000
14. Donation is deductible less of following: (0.5 Marks)
5% of ATI (5,722,361.11*5%) 286,118.05
Actual donation to political party (tax exempt entity) 200,000
Deductible 100,000
15. Computation of effective tax rate (2 Marks)
Particulars Provision Option 1 Option 2
Normal rate 25% 25%
Less: Exemption @ 20% for special U/s 5% 5%
industry 11(2Kha)(Kha)
Balance 20% 20%
Less: Exemption @ 10% for direct U/s 11(3ka) 2% -
employment to 100 Nepalese
18%
Less: Additional 10% exemption for U/s 11(3ka) 1.8
including 33% women in
employment
Less: Exemption @50% for entity U/s 11 (3Da) - 10%
operated in industrial village
Effective rate 16.2% 10%
• As per section 11 (2kha) (kha): Special Industries operated throughout the year are
entitled for concession of 20% on applicable tax rate.
• As per section 11 (3) (Ka): Special Industries employing 100 or more than 100
Nepalese Citizens are allowed to pay only 90 percent of tax liability. Additional
10% rebate is provided in tax liability if such industry has employed more than
100 Nepalese Citizens including 1/3rd of such staffs amongst Women, Dalit &
Disabled persons.
• As per section 11 (3Da) Special industry established and operated on industrial
region or industrial village shall have concession of 50% in applicable tax rate for 3
years and concession of 25 percent in applicable tax rate upto next five years from
the date of commencement.
• As per Section 11(5), a person eligible for more than one concession under this
section with respect to the same income shall be entitled to have one concession of
their own choice. Therefore, the entity should opt for 10% Income Tax Rate.
2. Ms. Sabina is working in a corporation on a 2-year contract term. She is also retired
employee from the same corporation receiving monthly pension income. She recently
retired but was hired again by the management due to her specialized skill,
knowledge and long experience in the field, and receives following benefits from the
corporation. Calculate her estimated tax for FY 2080-81.

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10
Particulars Amount
Basic Salary per month 350,000
Grade per month 20,000
Dearness Allowance per month 15,000
Remote Allowance per month 40,000
Pension per month 150,000
Provident Fund 10% of Basic Salary & Grade
Besides above payments, she gets following perks from the corporation.
i) She lives in rented building. The rent of the building is paid by corporation at Rs.
30,000 per month.
ii) She is also provided with office car. However, the car is utilized for office
purpose only.
iii) She is also provided two air tickets to travel to home per year. The ticket costs Rs.
15,000 in total.
iv) There are two helpers in her residence with monthly salary of Rs. 30,000. The
corporation pays 50% of the monthly salary directly to the helpers.
v) All the water and electricity bill of the rented building is paid by the corporation
which totals Rs. 10,000 per month.
vi) She is also paid Rs. 500 per month mobile recharge facility.
vii) She was rewarded with Rs. 100,000 cash prize before retirement however, the
payment was received during the FY 2080/81.
viii) She was also provided Rs. 40,000 for her accumulated leaves which were
unutilized during retirement in FY 2080/81.
ix) She is working in remote area class A as per the contract.
x) She has opted Single in FY 2080/81.
Answer
2)
Ms. Sabina (Single Opted)
Estimated Tax Liability
FY 2080/81
Calculation of Taxable Income
Particulars Note Regular Pension Total
Employment
Basic Salary (0.25 Mark) 4,200,000 4,200,000
Grade (0.25 Mark) 240,000 240,000
Dearness Allowance (0.25 Mark) 180,000 180,000
Remote Allowance (0.25 Mark) 480,000 480,000
Pension (0.25 Mark) - 1,800,000 1,800,000
Provident Fund (0.25 Mark) 444,000 444,000
(10% x (350,000+20000)*12)
Residence Facility (0.25 Mark) 1 88,800 88,800
Car Facility (0.25 Mark) 2 - -
Air Ticket Facility (0.25 Mark) 3 15,000 15,000
Helpers Salary (0.25 Mark) 3 15,000 15,000
(30,000 x 50%)
Utility Facility (0.25 Mark) 3 120,000 120,000
Mobile Facility (0.25 Mark) 3 6,000 6,000
Cash Prize (0.25 Mark) 4 100,000 100,000
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Leave Payment (0.25 Mark) 5 - -

Income from Employment 5,888,800 1,800,000 7,688,800

Assessable Income (0.50 Marks) 5,888,800 1,800,000 7,688,800
Reduction
1. Remote Allowance Location Class A 6 (50,000) (50,000)
(0.25 Mark)
2. Pensioner's Income (0.5 Mark) 7 (250,000) (250,000)
(50% x 500,000)
3. Contribution to Retirement Fund 6 (300,000) (300,000)
Minimum of
a. Rs. 300,000 (0.25 Mark)
b. 1/3rd of Assessable Income
= 1/3 x 7,688,800 = 2,562,933.33 (0.5
Mark)
c. Actual Contribution
Employer's and Employee’s total 20%
= 888,000 (0.25 Mark)
Taxable Income (0.50 Marks) 5,538,800.00 1,550,000 7,088,800.00
Calculation of Tax Liability
Tax
Slab Tax Rate Taxable Income Amount
Up to 500,000 (0.25 Mark) 1% 500,000 5,000
Additional 200,000 (0.25 Mark) 10% 200,000 20,000
Additional 300,000 (0.25 Mark) 20% 300,000 60,000
Additional 1,000,000 (0.25 Mark) 30% 1,000,000 300,000
Additional 3,000,000 (0.25 Mark) 36% 3,000,000 1,080,000
Above 5,000,000 (0.25 Mark) 39% 1,588,800 619,632
Total 6,588,800 2,084,632
Less: Female Tax Credit (0.25 Mark) 10% 208,463
Estimated Tax Liability (0.25 Mark) 1,876,169
Note 1. If residence facility is provided to the employee either on owned or rented building,
the quantification is 2% of Basic Salary plus Grade. (0.25 Mark)
Note 2. Since the car provided is used for official purpose only, there shall not be any
quantification for the facility. (0.25 Mark)
Note 3. Utilities, helpers, transportation benefits paid by the employer shall be included in
income less any cost contribution made by the employee. (0.25 Mark)
Note 4. As per section 22(2), income from employment and investment of a Natural Person
is calculated on cash basis for tax purpose. Though the cash prize was declared in
earlier period, it was received in later income year. Therefore, the amount is included
in income in the running income year on cash receipt basis. (0.25 Mark)
Note 5. The payment of accumulated leave is in consonance with the retirement payment to
the employee. Though the payment is received in later income year, the payment is
still a retirement payment. This kind of retirement payment is a final withholding
income, therefore is not required to be included in the income from employment.
(0.25 Mark)
Note 6. Remote allowance and provident fund facility is provided to the employee based on
current employment terms. Therefore, this facility is taken only on the current
employment income. (0.25 Mark)
Note 7. Pension Income rebate facility is taken only on the pension income. (0.25 Mark)
3.

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a) Mr. Santosh Shrestha purchased 55% shares of AB Ventures Pvt Ltd on 05 Ashoj,
2080 whose assets and liabilities are as below on the same date:
Land: Cost 20,00,000 Market Value 2,00,00,000 and Government Rate 80,00,000
Receivables: 1,00,00,000 out of which a party with outstanding 20,00,000 has
been declared insolvent by court.
Payable: 75,00,000 out of which 25,00,000 is advance received from the old
shareholder.
Stock: Cost 50,00,000 Market Rate 75,00,000 out of which 5,00,000 is damaged
and scrap value of the same is expected to be 1,00,000.
Vehicle: WDV 10,00,000 is sold at 25,00,000 to the earlier owner one day after
the transfer of shares.
Accumulated loss carried forward during the time is 2,50,00,000.
Mr. Shrestha paid 200 per share for 55,000 shares having face value of 100.
Calculate gain/loss and tax to be paid (if any) on 05 Ashoj, 2080 by AB Ventures
Pvt. Ltd. and outgoing shareholders in accordance with provisions of Income Tax
Act, 2058. 5
b) Mention the tax rate on following payments and whether the tax is final or
advance withholding tax or withholding not required in following cases as
applicable for Income Year 2080/81. 5
i) Service fee paid to VAT exempt service provider.
ii) Interest paid to Natural Person by Banks and Financial Institutions.
iii) Interest paid to Life Insurance Companies by Banks and Financial Institutions.
iv) Royalty paid to a Novel Writer for film production based on the Novel.
v) Student enrollment and tuition fees paid by the student her/himself going to abroad.
Answer
3 a)
Calculation of Net Gain/(Loss) at the time of Change of Control
Disposal Marks
Particulars Note Book Value
Value Profit / (Loss)
I 0.25M
Land 2,000,000 20,000,000 18,000,000
Ii 0.25M
Receivables 10,000,000 8,000,000 (2,000,000)
iii 0.25M
Payables 7,500,000 7,500,000 -
Iv 0.25M
Stock 5,000,000 7,100,000 2,100,000
V 0.25M
Vehicle 1,000,000 2,500,000 1,500,000
Gain / (Loss) on 0.25M
Disposal 19,600,000
vi 0.5M
Accumulated Loss (25,000,000)
Net Gain/ (Loss) on 0.5M
Disposal after Setoff
of Loss (5,400,000)
Working Note:
i. Market rate needs to be considered not the government rate. (0.25 Marks)
ii. Since the party has been declared insolvent by the court, thereby such amount needs to
be deducted from receivable balance. (0.25 Marks)
iii. Advance from old shareholder is as good as payable to others, thereby it should be
included as external liability.(0.25 Marks)

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iv. Market rate needs to be considered for stock valuation and expected loss on sale of
damaged goods should be recorded for above calculation. (0.25 Marks)
v. Sales value of vehicle should be considered as market value. (0.25 Marks)
vi. Accumulated loss till date can be set off from the gain at the time of change of control
however, remaining loss is not allowed to carry forward. (0.25 Marks)
Calculation of gain/(loss) and tax to be paid by outgoing shareholder (1 Marks)
Particulars Amount
Purchase Consideration Received 11,000,000
Cost of Shares Held 5,500,000
Net Gain / (Loss) 5,500,000
Tax Rate 10%
Tax Payable 550,000

3 b)
SN Tax Rate Withholding Type (1 Mark each)
i. 1.5% Advance
ii. 6% Final
iii. 5% Advance
iv. 1.5% Advance
v. 3% Not Withholding Tax, but collected by BFIs during fund remittance.
4.
a) Ncell Ltd hired Mr. Chyang, a Chinese Citizen as Telecommunication Expert
with effect from September 17, 2022. He came to Nepal, 7 days before his joining
date on September 10, 2022. He left Nepal on December 20, 2022 and came back
to Nepal after Christmas leave on January 9, 2023, and continued his service for
the contract period. After the expiry of contract, he converted his visa category
into Tourist Visa, and went to Annapurna Base Camp for 17 days, and returned to
his home country on April 2, 2023. Comment about the residential status of Mr.
Chyang. 5
b) A telecom company has to file estimated return of income for income year 2079-
80 . The company has provided the following details:
Estimated Revenue Rs. 4,500 crores
Estimated deductible expenses Rs. 2,500 crores
Corporate Tax rate 30 %
The banks and financial institutions has deducted Rs. 30 crores of TDS up to
Poush 26, 2079 on its interest income and previous year tax credit is Rs. 20
crores.
You are required to calculate the advance tax to be deposited on Poush end 2079,
citing the provisions of installment payment of Income Tax and estimated return
to be filed by the company as per Income Tax Act, 2058. 5
c) Reliable Builders is a construction company engaged in the construction business.
During the year the company obtained a contract to construct a commercial
apartment with a contract term of 3 years. Initial contract price is fixed at Rs.
93,500,000. At the beginning, the contractor estimated the 15% profit from the
contract. However, in year 2 the contractor has estimated 12% profit on its initial
contract price despite an increment in contract price to Rs. 100,000,000 as
variation order. The actual cost for year 1 to 3 comes to Rs. 38,000,000 Rs.
24,100,000 and Rs. 25,000,000.
Now you are required to determine the amount of gain or loss to be included in
the income of Reliable Builders in the 3rd year. 5

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d) Mrs Salomi works in a Non Governmental Organisation having annual

remuneration of Rs. 700,000. She has done health insurance of Rs. 200,000. by
paying insurance premium of Rs. 20,000. She get hospitalized and incurred
medical expenses of Rs. 50,000. out of which the insurance company only
compensated Rs.30,000.
Find the amount of medical tax credit and Also find the Female tax credit and
total tax liability for Income Year 2079-80 opting either deduction of medical tax
credit or insurance premium beneficial to her. 5
Answer
4 a) As per Section 2(Ka Nga), An individual is resident of Nepal for an Income Year if s/he
stayed for 183 days or more in 365 consecutive days. As per the clarification of Income Tax
Directive, 365 consecutive days should be read as Income Year. [1 mark]
Determination of Residential Status of Mr. Chyang for an Income Year 2022-23 (2079-
80)
Income Period of Stay Number of Days Marking scheme
Year
2022-23 10.09.2022 to (30-10+1)+31+30+20= 102 1 mark for correct
(2079-80) 20.12.2022, calculation

09.01.2023 to (31-9+1)+28+31+2=84 1 mark for correct

02.04.2023 calculation

Total 186
The Date of arrival and date of departure shall be inclusive for the calculation of stay. [1
mark]
Since Mr. Chyang, a Chinese Citizen has stayed in Nepal for 186 days i.e. more than 183
days in 365 consecutive days, so He is resident for income year 2022-23 (2078-79) and
liable to pay tax on his global income under Sec. 1 (1) or 1 (2) of Schedule 1 of the Income
Tax Act. [1 mark]

4 b) As per Sub Section (1) of Section 94, a person who derives or expects to derive any
assessable income during an income-year from a business or investment shall be required
to pay tax for the year by three installments with 40% by the end of Poush, 70% by the end
of Chaitra and 100% by the end of Ashadh for the income year. [1 marks]
As per the above provision following shall be the estimated tax payable:
Particulars Amount in Crores Notes Marking Scheme
Estimated Revenue 4500
Estimated deductible expenses 2500
Estimated Taxable Income 2000 0.5 marks
Estimated Tax payable 600 (2000*30%) 0.25 marks
Installment Due
on Poush 240 0.25 marks
on Chaitra 180 0.25 marks
on Ashadh 180 0.25 marks
The previous year tax credit, tax withhold on person’s income including deemed TDS shall
be reduced from the estimated tax payable to arrive at due Tax. [1 marks]
Installment tax to be paid on Poush, 2078 along with estimated return
Particulars Amount in Crores Marking Scheme
Installment Due 240 0.25 marks
90% of Installment Due 216 0.25 marks
Less: Tax Deduction at Source 30 0.25 marks

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Less: Previous year tax credit 20 0.25 marks

Net Installment Payable 166 0.25 marks
As per Sec 95 of the Act, every person requiring to pay tax in installment shall file
estimated tax return at the payment of first installment in a manner and formed prescribed
by the department. [0.25 marks]
4 c)

Year 1 Year 2 Year 3 Marks

Intitial Contract Price 93,500,000.00 93,500,000.00 93,500,000.00

1M
Add: Variation Order 6,500,000.00 6,500,000.00 (Note
1)
Total Contract Price 93,500,000.00 100,000,000.00 100,000,000.00

Estimated Cost of
Completion 79,475,000.00 79,475,000.00 79,475,000.00
Add: Revision in Estimated 1M
Cost - 6,305,000.00 7,625,000.00
Estimated revised cost of
completion 79,475,000.00 85,780,000.00 87,100,000.00

Actual Cost Incurred up to

previous year 38,000,000.00 62,100,000.00
1M
Current Year Cost 38,000,000.00 24,100,000.00 25,000,000.00

Total Cost till date 38,000,000.00 62,100,000.00 87,100,000.00

% of Completion 47.81% 72.39% 100.00%

Cumulative revenue till date 44,705,882.35 70,222,662.63 97,000,000.00

Less: Cost Till date 38,000,000.00 62,100,000.00

Cumulative Profit/(Loss) 6,705,882.35 8,122,662.63 9,900,000.00

Less: Gain/(Loss)
recognized up to last year - 6,705,882.35 8,122,662.63 1M

Gain/(Loss) for the year 6,705,882.35 1,416,780.27 1,777,337.37 1M

Calculation of Variation Order (Note 1)

Final Contract Price- Initial Contract Price
=100,000,000-93,500,000
=Rs 6,500,000

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4 d) If a resident natural person being female has remuneration income only, she is allowed to
female tax credit @10% of total tax liability as per schedule 1 of Income tax act,2058. (0.5
marks)
A resident natural person who have done health insurance with resident insurance company
shall be entitled to the deduction of actual premium paid or Rs. 20,000 whichever is less
from taxable income. (0.5 marks)
If a resident natural person becomes ill, his/her treatment cost is qualified for medical tax
credit under section 51 of the Act. The approved medical shall exclude the expenses for
which compensation has been obtained from insurance claim. The amount is 15% of
approved medical cost or Rs.750 whichever is lower. (1 marks)
Computation of Tax credit:

Taxable Income 700,000 0.25 mark

Less: Health Insurance premium (20,000) 0.25 mark
Tax Applicable Income 680,000
Tax liability
On First Rs. 500,000 @1% 5,000 0.25 mark
Next Rs 180,000 @10% 18,000 0.25 mark
Total 23,000
Female tax credit @10% 2,300 0.25 mark
Net Tax Liability 20,700 0.25 mark

Total medical Expenses 50,000

Less: Compensation from Insurance (30,000) 0.25 mark
Approved medical Expenses 20,000
15% amount 3,0ss00
Limit 1,500
Medical Tax Credit Amount 1,500s 0.25 mark
Mrs. Salomi will be beneficial to avail deduction of health insurance premium instead of
medical tax credit. If she availed medical tax credit of Rs.750, the tax applicable income
will increase by Rs.20,000 and tax by Rs.1,800(considering female tax credit). (1 marks)
5. Write short notes of the following with reference to Income Tax Act, 2058. (4×2.5=10)
a) Entity
b) Long Term Contract
c) General rule against Tax Avoidance
d) Terminal Depreciation
Answer
5 a) Entity (0.5 Marks for every points)
Entity means the following organization or body:
(1) A partnership, trust or company,
(2) Rural Municipality, Municipality or District Coordination Committee,
(3) Government of Nepal, State Government and Local Level
(4) Any foreign government or provincial or local government under that government or a
public international organization established by any treaty, or
(5) A permanent establishment of the organization or body referred to in clauses (1), (2) and
(3), which is not situated in a country of which it is a resident.

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5 b) Long Term Contract

As per Section 26 of Income Tax Act 2058, a long-term contract is a contract for production,
installation, construction, or the services related to the production, installation or
construction, which runs for more than twelve months and the consideration is payable
interim payment or running bills system.(1.5 Marks)
To establish a long-term contract under this section, there should on one hand be a deferred
return as a condition of the contract, and on the other the contract should not be an excluded
contract. (1 Mark)
5 c) General rule against Tax Avoidance
As per Section 35 (0.25 Mark) of Income Tax Act 2058, in case IRD thinks that a person has
made such an arrangement so as to reduce the tax liability, the IRD may (0.5 Mark):
• Re-characterize an arrangement or part of an arrangement that is entered into or carried
out as part of a tax avoidance scheme; (0.5 Mark)
• Avoid an arrangement or part of it that does not have any material economic effect: or
• Re-characterize an arrangement or part of it, which does not reflect its materiality.(0.5
Mark)
Here a tax avoidance scheme refers to any arrangement made by a person with the purpose of
avoiding or reducing the tax liability. (0.5 Mark)

5 d) Terminal Depreciation
Terminal depreciation means allowance of remaining figure in disposal or otherwise.(0.5
Mark) Normally, terminal depreciation arises in the following 3 situations:
(a)Small Value- If remaining value after normal depreciation (included accelerated too) is
lower than Rs. 2,000, the remaining value. (0.5 Mark)
(b) Pool Disposal- If pool is disposed, remaining value, if any. (0.5 Mark)
(c)Replacement and Transfer- In case of BOOT, powerhouse construction, generation and
transmission of power, replacement of plant and transfer. (0.5 Mark)
In case a person leaves business, remaining value of depreciable asset shall not deem as
terminal depreciation but assumed as disposal at market value u/s 45. (0.5 Marks)

6. Bikram Construction Pvt. Ltd. has got the contract to build road from Department of
Roads, Babarmahal. Following are the details of transaction during Shrawan 2080:
Sales = 5,50,00,000.00
Purchase
Construction materials= 75,00,000.00
Staff refreshment expense = 2,50,000.00
Staff meeting expenses = 3,50,000.00
Diesel = 30,00,000.00
Excavator = 80,00,000.00
Single Cab Bolero = 25,00,000.00
i20 Car = 26,50,000.00
Petrol = 5,00,000.00
Consultancy remitted to Indian company after TDS deduction = 8,50,000.00
Office building constructed = 75,00,000.00
Transportation expenses = 15,00,000.00
Additional information:
i) Opening VAT receivable was 1,25,000.00.
ii) Amount mentioned above are exclusive of VAT.
iii) Diesel purchase amounting 5,00,000.00 was on 1 Bhadra, 2080.
iv) Department of Roads deducted and deposited the VAT respectively in above sales
invoice issued by the company.

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v) Staff meeting was conducted in resort registered in VAT and the resort didn't
charge any rental charges. All expenses were incurred for foods, snacks and
drinks (non-alcoholic).
vi) Out of the total building construction cost, 5,00,000 was for purchase of sand
from supplier which was not registered in VAT, 3,50,000 expense was for daily
wage-based workers and 2,50,000 was for labor contractor who was registered in
PAN.
vii) Transportation expenses was from Transport service provider not registered in
VAT.
You are required to calculate the amount of VAT payable/receivable from the above
information for the month of Shrawan 2080. Also determine the actual amount of
VAT to be deposited by the firm. 10
Answer
6) Calculation of VAT Payable/Receivable and Net VAT amount to be deposited:
VAT VAT
Particulars Note Amount Remarks
Receivable Payable

Sales (0.25 Marks) 55,000,000 7,150,000

Construction Material
7,500,000 975,000 Fully Allowed
(0.25 Marks)
Staff Refreshment
250,000 - Not Applicable
Expenses (0.25 Marks)
Staff Meeting Expenses
350,000 - Not allowed
(0.25 Marks)
5,00,000 Not
Allowed for
Diesel (0.25 Marks) 2,500,000 325,000
purchase on 1
Bhadra
Excavator (0.25 Marks) 8,000,000 1,040,000 Fully Allowed
Single Cab Bolero (0.25
2,500,000 325,000 Fully Allowed
Marks)
Only 40% Vat
i20 Car(0.50 Marks) 2,650,000 137,800
Allowed
Petrol(0.25 Marks) 500,000 - Not Allowed
Consultancy Fee(0.50 Reverse Vat
1 1,000,000 130,000
Marks) Section 8 (2)
Reverse Vat
Office Building (0.50 Section 8 (3)is
2 7,500,000 832,000
Marks) not eligible to
claim as input
Transportation expenses Reverse Vat
1,500,000 195,000
(0.50 Marks) Section 8 (2Ka)
Sub Total (0.50
3,959,800 7,150,000
Marks)
VAT Receivable /
3,190,200
Payable (0.25 Marks)
Opening VAT
Earlier Credit
Receivable (0.25 (125,000)
Allowed
Marks)
Reverse VAT deposited (130,000)
VAT Deposited by 3 (2,145,000)
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GON (0.5 Marks)

Net VAT to be
(790,200)
deposited (0.5 Marks)
Note:
1. Calculation of VAT in Office Building construction: (1.5 Mark)

Particulars Amount VAT Remarks

Total building cost 7,500,000
Reverse Vat Section 8 (3)
Less: Expenses without VAT is not eligible for input
1,100,000 143,000 claim
Eligible to claim input
Vatable purchase
6,400,000 832,000 VAT
Total VAT 975,000
2. Calculation of Reverse VAT in service import: ( 1 Mark)
Particulars Amount
A) Amount remitted after TDS (15%) 850,000
Total expense to be booked (A/85%) 1,000,000
Reverse VAT @ 13% 130,000
As per section 25Ga1, while making the payment by the public entity as per the prevailing
laws concerning public procurement or by the entity having full or partial ownership of Nepal
Government to the concerned contractor or supplier against the goods or services or goods
and service supplied under a contract agreement or contract, the amount deposited to tax can
be adjusted with the tax amount payable by such contractor or supplier. VAT to be deducted
and deposited by Department of Roads to Income Tax office shall be at the rate of 30 percent
of total VAT. (1.5 Mark)
7.
a) ABC company Ltd in Kathmandu imports goods from USA and directly supplied
to retailers. Additional information is as follows:
Total Invoice price Rs 12,00,000
Valuation adopted by Custom Officer Rs 15,00,000
Freight and Insurance up to Custom Point Rs.75,000
Inland Transportation Rs 100,000
Transportation from Warehouse to Retailers Rs 50,000
Custom duty is 30%, Gross profit is 20% on cost.
You are required to calculate the Net VAT payable on sales by the company. 5
b) Answer the followings with reference to Value Added Tax Act/Rules, whether the
statements are true or false, with reasons.
i) VAT @ 13% is applicable on transfer of business to VAT registered person.
ii) There is no fine for customers who don’t take invoice and fine of 10,000 is
charged to the supplier who doesn’t issue VAT invoice.
iii) Fine of 10,000 shall be charged for not maintaining accounts up to date and
20,000 shall be fined when the taxpayer does not allow for inspection by tax
officer.
iv) While assessing the tax by the Tax Officer, the Tax Officer shall provide 21
days to the concerned person to submit the clarification.
v) Fine of rupees 20,000 shall be charged to the person who uses E-billing
software which allows to edit the previously issued invoice which had errors. 5

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Answer
7 a)
Calculation of VAT Payable
Amount in
Particulars Rs.
Total Invoice price 1,200,000
Freight and Insurance upto Custom Point 75,000
Custom Duty 472,500
Inland Transportation 100,000
Transportation from Warehouse to Retailers 50,000
Total Cost price excluding VAT 1,897,500 1 Marks
Add: Gross profit
(Total cost of Goods excluding VAT*20%) 379,500
Sale price (Vatable) 2,277,000 1 Marks
VAT @13% 296,010
Less: VAT paid at Custom office 266,175
Net VAT Payable 29,835 1 Marks

Note 1: Calculation of Custom Duty and VAT

Customs Valuation 1,500,000 0.25 Marks
Freight and Insurance upto Custom Point 75,000 0.25Marks
Transaction Value 1,575,000 0.25 Marks
Custom Duty 472,500 0.25Marks
Taxable Value 2,047,500
VAT payable at Custom office 266,175 1 Marks
Note 2: VAT paid on Custom is eligible for VAT Credit.
7 b)
i) False, As per Section 5Ka, while selling the entire business by VAT registered
person to another registered person or when the business is transferred to the legal
heir in case of death of proprietor, no VAT shall be applicable. (1 Mark)
ii) False, as per Section 29, fine of 1,000 (each time) shall be charged to the person not
willing to take the invoice and fine of 10,000 (each time) shall be charged to the
person not issuing tax invoice. (1 Mark)
iii) True, as per Section 29, fine of 10,000 shall be imposed for not maintaining
accounts up to date and 20,000 shall be fined when the taxpayer does not allow for
inspection by tax officer. (1 Mark)
iv) True, while assessing the tax by the Tax Officer, the Tax Officer shall provide 21
days to the concerned person to submit the clarification. (1 Mark)
v) False, fine of rupees 5,00,000 shall be charged to the person who uses E-billing
software which allows to edit or delete the data. (1 Mark)
8. Write short notes: (5×2=10)
a) Taxable Transactions
b) Proportionate credit
c) Difference between Zero rated and VAT exempted goods/services
d) Appeal in the Revenue Tribunal
e) Electronic Invoicing

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sssAnswer
8 a) Taxable Transactions:
Taxable Transaction means the following Transactions as per Value Added Tax Act, 2052
on which VAT is levied as per sec 5(1).
i. Supply of goods or services within Nepal, (0.5 Mark)
ii. Import of goods or services into Nepal, (0.5 Mark)
iii.Export of goods or services outside of Nepal. (0.5 Mark)
Tax shall be levied on the value of each taxable transaction. However, where the goods or
services are listed in Schedule-1 of the Value Added Tax Act, there shall not be applicability
of Value Added Tax. (0.5 Mark)

8 b) Proportionate Credit
As per Rule 40(3) and 40(4) of VAT rules, 2053, in cases where any taxpayer deals with
both the taxable goods and services and non-taxable goods and services, the following
principle shall be applicable: (0.5 Mark)
i. Tax paid on purchase or import that is specifically identifiable to taxable goods and
services is allowed at full while claiming Input Tax Credit. (0.5 Mark)
ii. Tax paid on purchase that is specifically identifiable to non taxable goods and services is
not eligible for any Tax Credit. (0.5 Mark)
iii.Tax paid on purchase or import such goods or services that fails to establish direct
relations with taxable and non-taxable goods and services shall be eligible for Tax Credit
in proportion to the value of taxable transactions out of total value of sales. (0.5 Mark)

8c) Difference between Zero rated and VAT exempted goods/services ( 0.5 marks for any four
points)
Basis Zero rated goods/services VAT exempted goods/services
Rate of VAT VAT is levied at Zero Percent VAT is not levied at all
Type of Goods It includes goods and services Basically, It includes basic goods
normally related to export. and services
VAT Invoice A VAT Invoice shall be issued as VAT Invoice is not required to be
per the format prescribed by VAT issued for transaction of such
regulation items
VAT credit Full VAT credit, which means No VAT credit, which means, if
on purchase there value added tax is paid at the time
will not be any load of value added of purchase, such value added tax
tax on output will become part of output
Registration The person dealing in Zero rated The person dealing exclusively in
Requirement items shall be registered for VAT Non VAT items is relieved from
purpose. registration formality.
Other The person dealing in Zero Rated The person dealing exclusively in
formalities as Items shall observe other formality No VAT items is relieved from all
per the Act as per VAT Act, such as formalities to be observed as per
maintenance of sales and purchase the Act
register duly certified from Tax
Officer, submission of VAT return,
etc.
Example Zero rated goods/services are listed VAT exempted goods/services are
in schedule 2 of VAT Act. listed in schedule 1 of VAT Act.

s
There is provision for Appeal in the Revenue Tribunal in the VAT Act, 2052. As per the
section 32(1), A person who is not satisfied with an order of suspension of transaction
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pursuant to section 30 or a decision made by Director General pursuant to section 31A i.e.
Administrative Review, may file an appeal in the Revenue Tribunal. (1.5 Marks)
The person filing appeal to Revenue tribunal has to give written notification accompanied
by a copy of appeal to the department within 15 days of the date of filing an appeal. (1
Mark)

8e) Electronic invoicing

The Value added Tax Act,2052 under section 14Ka has provisioned regarding electronic
invoice. A taxpayer may after obtaining prior approval from the Department, issue electronic
invoice. (1 Mark)
The department may publish a notice and cause taxpayer specified in the notice to
mandatorily issued Electronic invoice and order to link the electronic medium of the taxpayer
to Central Bill Monitoring System of Department. (0.5 Mark)
The department shall make and supply working procedures relating to safety and
trustworthiness of software or equipment that issue invoice through electronic medium. Such
shall be complied by concerned manufacturer, distributor and user. (0.5 Mark)

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