CS EXAM, 2010

COMMERCE AND ACCOUNTANCY
Paper-I
Time Allowed Three Hours Maximum Marks 300
INSTRUCTIONS
Each question is printed both in Hindi and in English. AnsLUers m.ust be u;ritten in the ·medium specified in the Admission Certifzcate issued to you, u;hich must be stated clearly on the cover of the answer-book zn the space provided for the purpose. No marks u;ill be given for the ansu;ers UJritten in a medium other than that specified in the Admission Certificate. Candidates should attempt Question Nos. :1. and 5 which are compulsory, and any three of the remaining questions selecting at least one question from each Section. Assunte suitable data if considered necessary and indicate the same clearly. The number of marks carried by each question zs indicated at the end of the question.

Section-A
1. Answer the following in about 150 words each I5x4=60
What objectives prompt a company to opt for of shares? Through what sources can such a company execute the scheme of Examine.
How would you classify the different items of cost for the purposes of disclosing these items in a Explain.
What relief is available to an individual under Section of Income-tax Act, 1961 in respect of gratuity received from a public company after rendering services for more than 20 years? Ho-w shall the relief be calculated?
In -what situations are business losses allowed to be set off and carried forward by persons other than those who actually suffered the losses?

2. From the following details of a company, you are required to calculate 'Earning Per Share' 15
Net profit (after tax)-Rs 2,00,000
Preference share capital
(Rs 100 each)-Rs 50,000
Equity share capital
(Rs 10 each)-Rs 1,50,000
Preference shares carry 10°/o dividend and are cumulative and participating to the extent of 50°/o of profits after paying dividend on equity shares of 25o/o and transfer of 10°/o of net profits (after tax} to General Reserves.
You are further informed that last year due to overall recessionary conditions prevailing in the industry, the Company suffered heavy losses, resulting into skipping the dividend on equity shares.
How would you deal 'With the following items in relation to Cash Flow Statement? State in respect of each item (transaction} whether it leads to influw or outflow of cash 15
1. Depreciation
2. Payment of interim dividend
3. Revaluation of assets
4. Issue of bonus shares
5. Transfer of certain sum of money out of profits to General Reserves

From the following information given by XYZ Limited as on 30th June, 2010, prepare a Cost Statement showing Cost of output-Total as well as per unit and Net Profit for the year 30
Information
Rs
Sales 49,000
Purchase of raw materials 15,000
Direct wages 15,000
Rent and other works cost 5,250
Carriage inward 250
Stock at the beginning
of the year 2,500
Raw materials 3,000
Finished goods (50 tons)
Stock at the end of the year 2,750
Raw materials
Factory overheads 750
Sales promotion expenses 1,000
Office expenses 7,500
Selling expenses 2,000
Company produced 750 tons of products. The stock of finished goods at the end is 100 tons. It has to be valued at works cost.
3. From the following particulars, compute total income and tax payable by Mr. A who is disabled and is of 68 years on 31st March, 2010 for the assessment year 2010-11 28
Salary received from the employer-Rs 5,80,000

Annual value of let out house-Rs 30,000

Interest on loan to purchase another house which is self- occupied-Rs 20,000
He sold another house on 1.4.2009 for Rs 15 lakhs. Its fair market value on 1.4.1981 was Rs 2,00,000. He invested on 30.7.2009 • in the bonds of NHAI (Cost inflation index for 2009-10 is 620)
He won Rs 42,000 In racecourse betting
He paid Rs 12,000 by cheque to secure the health insurance of GIC for his wife
He spent on treatment of his mother Rs 20,000, who IS suffering from cancer
(viii) He got agricultural income of Rs 20,000
His m1nor son 1s disabled on whose special education he spent Rs 15,000
He donated Rs 10,000 to Gujarat State Chief Minister Relief Fund

In DJA Company Limited, two public financial institutions-Life Insurance Corporation of India and Industrial Development Bank of India-hold 20°/o and 40°/o of the pald-up share capital respectively. The Company at its Annual General Meeting passed an ordinary resolution appointing X as an auditor for the year 2010-1 L Representatives of the Industrial Development Bank of India remained absent in the meeting. A group of members of the Company objects to the appointment of X as auditor of the Company on the ground that it is violative of the provisions of the Companies Act, 1956.

Examine the validity of X as an auditor of the Company and state whether contention of the members shall be tenable. 20

Examine the taxability of capital gain arising on each of the following transactions ·3x4=12
On the sale of self-generated goodwill of a profession
On transfer of self-generated tenancy rights
On transfer of own right to manufacture
On sale of old car used for personal purposes

4. You being an advisor of a company are asked by your company to advise on the following
1. Company desires to issue 'bonus shares' in lieu of dividend.
2. Whether the Company can use the balance to the credit of 'Securities Premium Account' for the issue of 'bonus shares'?
3. Whether a reserve created for the purposes of 'redemption of debentures' can be used for the issue of 'bonus shares'? Advise the Company. 15
From the following Profit Loss Account of an organization for the year ended 31st March, 2010, find out 'Cash from operations' 15

Profit Loss Account
for the year ended 31st March, 2010
Rs Rs
15
15
Purchases 5,00,000 Sales 8,00,000
Wages Salaries 85,000
Miscellaneous Expenses 61,200
Loss on Sale of Old
Computers 10,900
Depreciation 21,200
Goodwill (written off) 6,000
Transfer to General
Reserves 10,000
Net Profit 1,05,700
8,00,000 8,00,000

Examine the concept of VAT scheme.How does VAT system remove the cascading effect of taxes? 15
Referring to the provisions relating to Service Tax, examine the validity of the following exemptions 15
1. Service provider whose turnover is Rs 6 lakhs
2. Export of services Rs 50 lakhs worth
3. Services to UN Agencies worth Rs 25 lakhs
4. Services provided to Mr. X a developer of SEZ worth Rs 20 lakhs
5. Goods and materials supplied worth Rs 5 lakhs while providing service

Section-B

5. Answer the follovving in about 150 words
each
"Shareholders' wealth maximisation is a theoretically logical and operationally feasible normative goal for guiding tmancial decision-making, while profit maximisation is not." Critically evaluate this statement. 15

What are the decision rules of the Discounted Cash Flow techniques of capital budgeting? 7
"NPV (Net Present Value) technique of capital budgeting decision is superior to the IRR (Internal Rate of Return) technique." Do you agree? 8

Examine the impact of issue of stock dividend on the market price of equity shares of a company with a suitable illustration. 15
Evaluate the benefits of credit rating and the process involved therein. 15

6. The Summarised Balance Sheet of ABC Ltd. as on 31st March, 2009 is as follows with other relevant details
Balance Sheet
as on 31st March, 2009
LW.bilities Rs Assets Rs
(in lakh) (in lakh)
Equity Capital 40·00 Fixed Assets 28-00
Reserve and Cash 2-40
Surplus 6·00 Debtors 18·60
Sundry Creditors 14-00 Inventories 11·00
60·00 60·00
Other information
Sales Rs 52·00 lakhs
H Cost of production
of goods sold Rs 36·00 lakhs
Rs 16·00 lakhs
H Selling and
administration
expenses Rs 12·50 lakhs
Net Profit Rs 3·50 lakhs
The Current Industry Average of the following Ratios of ABC Ltd. is-
1. Current ratio 2·1
2. Sales to Debtors ratio 8·0
3. Inventory tumover 10·2
4. Net profit to Sales
5. Sales to Total assets 2
You are required to calculate Current ratio, Sales to Debtors ratio, Inventory tumover ratio, Net Profit margin and Sales to Total ·assets of ABC Ltd. and compare the same with the industry average. Also give brief comments. 30
"Between two extremes Net Income and Net Operating Income approaches to Capital Structure, there is also a middle view which is perhaps nearer the truth." Examine this statement in detaiL 30

7. Vijay Ltd. 1s a reputed auto parts manufacturing company. Its equity share is selling for Rs 50. The Company expects its earnings per share of Rs 7·50. The Company has a policy of paying 60o/o of its earnings as dividends. The company earns a return of 10°/o on its reinvested profit.
The Company has plans for expansion, for which it wants to issue a 10-year, Rs 1,000 per bond at a premium of Rs 20. The underwriting commission is expected to be Rs 40 per bond. The tax rate applicable to the Company is 35°/o.
After the issue of bonds, the Company wishes to have its debt-equity ratio 30 70.
You are required to work out cost of equity, after-tax cost of bond and overall cost of capital. 30

Unique Storage Private Ltd. Co. is leader in selling small-size storage tanks in Central Gujarat. At present, the Company is selling 100000 tanks at Rs 500 each. At the current level of production, the variable cost per tank is Rs 400 and the total cost per tank is Rs 450. The Company wants to enter in the Northem Gujarat with an aggressive marketing plan. For the purpose, it is thinking of extending credit period from one month to two months, so that entering into new market will be easy in addition to attracting existing distributors. If the credit period is extended, it is estimated that sales will increase by 25 percent. If the required rate of return (before tax} on the investment of the Company is 25 percent, comment on the desirability of the proposed policy. 30

8. What leads to the failure of a merger or acquisition? How should a company ensure that the merger or acquisition is successful? Elaborate. 30
If the use of financial leverage magnifies the earnings per share under favourable economic conditions, why do companies not employ very large amounts of debt in their capital structures? 15
Why is venture capital needed in a country like India? Explain the present position of venture capital schemes launched by All India Financial Institutions. 15

Note English version of the Instructions is printed on the front cover of this question paper.