SUGGESTED ANSWERS TO

THE QUESTIONS SET AT

CHARTERED ACCOUNTANCY PROFESSIONAL (CAP)-II LEVEL

JUNE 2021 EXAMINATIONS

Group-I

The Institute of Chartered Accountants of Nepal

(ICAN)
Satdobato, Lalitpur
© The Institute of Chartered Accountants of Nepal
All exam questions and solutions are the copyright of ICAN and can only be used for classroom and
student use in preparation for their CA exams. They cannot be published in any form (paper or soft
copy), or sold for profit in any way, without first gaining the express permission of ICAN. Nor can they
be used as examinations, in whole or in part, by other institutions or awarding bodies.

Year and month of Publication: 2021 December

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 Secretariat of the Board of Studies 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 Secretariat of the Board of Studies. The Council
or the Board of Studies of the Institute is not any way responsible for the correctness or otherwise of
the answers published herewith.

Page 2 of 42
Table of Contents

Paper 1: Advanced Accounting .............................................................................................................. 4

Paper 2: Audit and Assurance ............................................................................................................... 22
Paper 3: Corporate and Other Laws ...................................................................................................... 31
Examiner’s Commentary on Students' Performance in June 2021 Examinations ....................... 41

Page 3 of 42
Paper 1: Advanced Accounting
Attempt all questions. Working notes should form part of the answer.
1. The following are the Balance Sheets of companies as at 31st Ashadh, 2078:

Capital & DHARMA SHARMA DHARMA SHARMA

Assets
Liabilities Ltd. (Rs.) Ltd. (Rs.) Ltd. (Rs.) Ltd. (Rs.)

Equity share
capital 800,000 600,000 Goodwill 600,000 -
(Rs. 100)
General reserve 400,000 300,000 Fixed Assets 500,000 800,000
Investment
allowance - 400,000 Investment 200,000 400,000
reserve
Sundry
500,000 200,000 Current Assets 400,000 300,000
creditors
Total 1,700,000 1,500,000 Total 1,700,000 1,500,000
DHARMA Ltd. took over SHARMA Ltd. on the basis of the respective shares value, adjusting
wherever necessary, the book values of assets and liabilities on the basis of the following
information:
i) Investment allowance reserve amounting to Rs. 200,000 has to carry forward till FY 2079/80
for utilization.
ii) Investments of SHARMA Ltd. included 1,000 shares in DHARMA Ltd. acquired at cost of Rs.
150 per share. The other investments of SHARMA Ltd. have a market value of Rs. 192,500.
iii) The market value of investments of DHARMA Ltd. are to be taken at Rs. 100,000.
iv) Goodwill of DHARMA Ltd. and SHARMA Ltd. are to be taken at Rs. 500,000 and Rs. 100,000
respectively.
v) Fixed assets of DHARMA Ltd. and SHARMA Ltd. are valued at Rs. 600,000 and Rs. 850,000
respectively.
vi) Current assets of DHARMA Ltd. included Rs. 80,000 of stock in trade received from
SHARMA Ltd. at cost plus 25%.
vii) The above scheme has been duly adopted.
Required:
Pass necessary Journal Entries in the books of DHARMA Ltd. and prepare Balance Sheet of
DHARMA Ltd. after taking over the business of SHARMA Ltd. Fractional share to be settled in
cash, rest in shares of DHARMA Ltd. Calculation shall be made to the nearest multiple of a
rupee. 20 marks
Answer
Journal Entries in the Books of DHARMA Ltd.
Dr
Cr Amount
Particulars LF Amount
(Rs)
(Rs)
Business Purchase Account Dr 1,242,500

Page 4 of 42
 To Liquidator of SHARMA Ltd. 1,242,500
(Being purchase consideration due)

Investments Account Dr. 192,500

Goodwill Account Dr. 100,000
Fixed Assets Account Dr. 850,000
Current Assets Account Dr. 300,000
To Sundry Creditors Account 200,000
To Business Purchase Account 1,242,500
(Being assets and liabilities taken over at agreed
value)

Liquidator of SHARMA Ltd. Dr. 1,242,500

To Equity Share Capital Account (Rs. 100) 903,600
To Securities Premium Account (Rs. 37.50) 338,850
To Cash Account 50
(Being purchase consideration discharged)

Goodwill Account Dr. 16,000

To Current Assets (Stock) Account 16,000
(Being elimination of unrealized profit on unsold
stock)

Amalgamation Adjustment Account Dr. 200,000

To Investment Allowance Reserve Account 200,000
(For incorporation of statutory reserve)

Balance Sheet of DHARMA Ltd. As on 31st Ashadh 2078

Amount
Particulars Amount (Rs) Particulars
(Rs)
17,036 shares of Rs. 100 each Fixed Assets 1,350,000
(out of which 9,036 shares are 1,703,600 (500,000 + 850,000)
issued in favour of vendor for
consideration other than
cash)
Goodwill 716,000
General Reserve 400,000
(6,00,000 + 1,00,000 + 16,000)

Page 5 of 42
 Investments 392,500
Securities Premium 338,850
(200,000 + 192,500)

Investment Allowance Current Assets 683,950

200,000
Reserve (700,000 – 50 – 16,000)
Sundry Creditors 700,000 Amalgamation Adj. Account 200,000
3,342,450 3,342,450
Working Note 1:
Calculation of net asset value of shares
DHARMA Ltd (Rs) SHARMA Ltd (Rs)
Goodwill 500,000 100,000
Fixed Assets 600,000 850,000 Investments
100,000 330,000* Current Assets
400,000 300,000
1,600,000 1,580,000
Less: Sundry Creditors 500,000 200,000
Net assets 1,100,000 1,380,000 Number of shares
8,000 6,000
Value per equity share 137.50 230
*Investments of SHARMA Ltd. are calculated as follows:
Amount (Rs.)
Shares in DHARMA Ltd. (1,000  137.50) 137,500
Market value of remaining investments (given) 192,500
330,000
Working Note 2.
Calculation of Purchase Consideration
Amount (Rs.)
Net assets of SHARMA Ltd. 380,000
Value of Shares of DHARMA Ltd. 137.50
Number of shares to be issued in DHARMA Ltd. to SHARMA Ltd. 10,036.36
(13,80,000  137.50)
Less: Shares already held by SHARMA Ltd. 1,000
Additional shares to be issued 9,036.36
Total value of shares to be issued (9036  137.50) 1,242,450
Cash payment for fractional share (.36  137.50) 50
1,242,500
2.
a) Balance Sheet of M/s Mustang Ltd. as on 31st Ashadh, 2077 and 2078 are as follows:
(Rs.in '000)

Page 6 of 42
 Liabilities 31-03-77 31-03-78 Assets 31-03-77 31-03-78
Equity share capital 1,000 1,150 Land & 500 480
buildings
Capital reserve - 10 Machinery 750 820
General reserve 250 300 Investments 100 50
Profit and loss A/c 150 180 Stock 300 280
Long term loan from 500 400 Sundry debtors 400 420
bank
Sundry creditors 500 400 Cash in hand 200 165
Provision for taxation 50 60 Cash at bank 300 410
Proposed dividends 100 125
Total 2,550 2,625 Total 2,550 2,625
Additional information:
i) Dividend of Rs. 100,000 was paid during the year ended 31st Ashadh, 2078.
ii) Machinery purchased during the year for Rs. 125,000.
iii) Company sold some investments at a profit of Rs. 10,000 which was credited to capital
reserve.
iv) Depreciation written off on land and building Rs. 20,000.
v) Income tax provided during the year Rs. 55,000.
Required:
Prepare a cash flow statement for the year ended 31st Ashadh, 2078 as per NAS 7 using indirect
method. 10 marks
b) Ramlal, a readymade garment trader, keeps his books of account under single entry system. On the
closing date, i.e. on 31st Ashadh, 2076 his statement of affairs stood as follows:
Liabilities Amount (Rs.) Assets Amount (Rs.)
Raman's capital 480,000 Building 325,000
Loan 150,000 Furniture 50,000
Creditors 310,000 Motor car 90,000
Stock 200,000
Debtors 170,000
Cash in hand 20,000
Cash at bank 85,000
Total 940,000 Total 940,000
Riots occurred and a fire broke out on the evening of 31st Ashadh, 2077, destroying the books of
accounts. On that day, the cashier had absconded with the available cash. You are furnished with
the following information:
i) Sales for the year ended 31 st Ashadh, 2077 were 20% higher than the previous year's sales,
out of which, 20% sales were for cash. He always sells his goods at cost plus 25%. There
were no cash purchases.

Page 7 of 42
 ii) Collection from debtors amounted to Rs. 1,400,000, out of which Rs. 350,000 was received
in cash.
iii) Business expenses amounted to Rs. 200,000, of which Rs. 50,000 were outstanding on 31 st
Ashadh, 2077 and Rs. 60,000 paid by cheques.
iv) Gross profit as per last year's audited accounts was Rs. 300,000.
v) Provide depreciation on building and furniture at 5% each and motor car at 20%.
vi) His private records and the Bank Statement disclosed the following transactions for the year
2076/77:
Particulars Amount (Rs.)
Payment to creditors (paid by cheques) 1,375,000
Personal drawings (paid by cheques) 75,000
Repairs (paid by cash) 10,000
Travelling expenses (paid by cash) 15,000
Cash deposited in bank 715,000
Cash withdrawn from bank 120,000
vii) Stock level was maintained at Rs. 300,000 all throughout the year.
viii) The amount defalcated by the cashier is to be written off to the Profit and Loss A/c.
Required:
Prepare Trading and Profit and Loss A/c for the year ended 31st Ashadh, 2077 and Balance Sheet
as on that date of Ramlal. All the workings should form part of the answer. 10 marks
Answer
2 a) Cash Flow Statement
for the year ended on 31st Ashadh, 2078

S. No. Particulars Rs. Rs.

I Cash flow from Operating Activities
Net profit made during the year (W.N.1) 260,000
Add: Depreciation on machinery (W.N.2) 55,000
Add: Depreciation on land and building 20,000
Operating profit before change in working capital 335,000
Add: Decrease in stock (3,00,000 – 2,80,000) 20,000
Less: Increase in sundry debtors(4,20,000 – 4,00,000) (20,000)
Less: Decrease in sundry creditors (5,00,000 – 4,00,000) (100,000)
Less: Income tax paid (W.N.3) (45,000)
Net cash generated from operating activities 1,90,000
II Cash flow from Investing Activities
Purchase of machinery (125,000)
Sale of investment (50,000 + 10,000) 60,000

Page 8 of 42
 Net cash used in investing activities (65,000)
III Cash flow from Financing Activities
Issue of equity shares (11,50,000 – 10,00,000) 1,50,000

Repayment of long term loan from bank

(5,00,000 –4,00,000) (1,00,000)
Dividend paid (1,00,000)
Net cash used in financing activities (50,000)
Net increase in cash and cash equivalent 75,000
Add: Cash and Cash Equivalents at the beginning of the period (2,00,000 +
3,00,000) 5,00,000
Cash and cash equivalents at the end of the period (1,65,000 +4,10,000) 5,75,000
Working Notes
1. Net profit (before tax) made during the year Rs.
Increase in Profit and Loss A/c balance (1,80,000 – 1,50,000) 30,000
Add: Transfer to General Reserve (3,00,000 – 2,50,000) 50,000
Add: Provision for taxation made during the year 55,000
Add: Provided for proposed dividend during the year (W.N.4) 1,25,000
2,60,000

W.N.2 Machinery Account

Particulars Rs. Particulars Rs.
To Balance b/d 7,50,000 By Depreciation (Bal. Fig.) 55,000

To Bank(machinery purchased) 1,25,000 By Balance c/d 8,20,000

Total 8,75,000 Total 8,75,000

W.N.3 Provision for Taxation

Particulars Rs. Particulars Rs.
To Cash (Bal. fig.) 45,000 By Balance b/d 50,000
To Balance c/d 60,000 By Profit & Loss A/c 55,000
Total 1,05,000 Total 1,05,000

W.N.4 Proposed Dividend A/c

Particulars Rs Particulars Rs.
To Bank 1,00,000 By Balance b/d 1,00,000
To Balance c/d 1,25,000 By Profit & Loss A/c (Bal. fig.) 1,25,000

Page 9 of 42
 Total 2,25,000 Total 2,25,000

b) Trading and Profit and Loss Account of Ramlal

For the year ended 31st Ashadh 2077
Amount
Particulars Amount (Rs) Particulars
(Rs)
To Stock 2,00,000 By Sales 18,00,000
To Purchases (Bal. fig.) 15,40,000 By Closing Stock 3,00,000
To Gross Profit c/d 3,60,000
2,100,000 2,100,000

To Business Expenses 2,00,000 By Gross Profit b/d 3,60,000

To Depreciation: 36,750
Building 16,250
Machinery 2,500
Motor Car 18,000
To Repairs 10,000
To Travelling Expenses 15,000
To Loss by theft (cash 20,000
defalcated)
Net Profit 78,250
Total 360,000 Total 360,000

Balance Sheet of Ramlal as at 31st Ashadh 2077

Amount Amount
Capital & Liabilities Assets
(Rs) (Rs)
Capital 480,000 483,250 Building 325,000 308,750
Add: Net Profit 78,250 Less: Depreciation (16,250)
Less: Drawing (75,000)
Loan 150,000 Furniture 50,000 47,500
Less: Depreciation (2,500)
Sundry Creditors 475,000 Motor car 90,000 72,000
Less: Depreciation (18,000)
Outstanding business 50,000 Stock in Trade 300,000
Expenses
Sundry Debtors 210,000
Bank Balance 220,000
Total 1,158,250 Total 1,158,250

Page 10 of 42
 Working Notes
1. Cash and Bank Account
Particulars Cash Bank Particulars Cash Bank
To Balance b/d 20,000 85,000 By Payment to - 1,375,000
Creditors
To Collection 350,000 1,050,000 By Business Expenses 90,000 60,000
from Debtors
To Sales 3,60,000 – By Repairs 10,000 –
(1,800,000 x
20%)
To Cash (C) – 7,15,000 By Cash (C) 120,000
(withdrawal)
By Bank (C) 715,000
To Bank (C) 1,20,000 - By Travelling 15,000 –
Expenses
By Private Drawings - 75,000
By Balance c/d 220,000
By Cash defalcated 20,000
(balancing fig.)
Total 850,000 1,850,000 Total 850,000 1,850,000

2. Calculation of sales during 2076-77

Particulars Amount (Rs)
Gross profit (last year i.e. for year ended 31.3.2076) 300,000
Goods sold at cost plus 25% i.e. 20% of sales 1,500,000
Sales for 2075-76 3,00,000/0.2
Sales for 2076-77 (15,00,000 x 1.2) 1,800,000
Credit sales for 2076-77 1,440,000
(80% of 18,00,000)
3. Debtors a/c
Particulars Amount (Rs) Particulars Amount (Rs)
To, Bal. b/d 170,000 By Cash 350,000
To, Sales (1,800,000 x 80%) 1,440,000 By Bank 1,050,000
Bal. c/d 210,000
Total 1,610,000 Total 1,610,000

4. Creditors a/c
Particulars Amount (Rs) Particulars Amount (Rs)

Page 11 of 42
 To Bank 1,375,000 By Bal. b/d 310,000
To Bal. c/d (bal. fig.) 475,000 By Purchases 1,540,000
Total 1,850,000 1,850,000

3.
a) The partners of Ojasvi Enterprises decided to convert the partnership firm in to a private
limited company Tejasvi (P) Ltd. with effect from 1st Baishakh, 2077. However, company could
be incorporated on 1st Ashwin, 2077. The business was continued on behalf of the company
and the consideration of Rs. 600,000 was settled on that day along with interest @ 12% per
annum. The company availed loan of Rs. 900,000 @ 10% per annum on 1st Ashwin, 2077 to
pay purchase consideration and for working capital. The company closed its accounts for the
first time on 31st Ashadh, 2078 and presents you the following summarized profit and loss
account:
Rs. Rs.
Sales 1,980,000
Cost of goods sold 1,188,000
Discount to dealers 46,200
Directors' remuneration 60,000
Salaries 90,000
Rent 135,000
Interest 105,000
Depreciation 30,000
Office expense 105,000
Preliminary expenses (to be written off in first year itself)
Profit 15,000 1,774,200
205,800
Sales from Ashwin, 2077 to Chaitra, 2077 were 2.5 times of the average sales, which further
increased to 3.5 times in Baishakh to Ashadh quarter, 2078. The company recruited additional
work force to expand the business. The salaries from Kartik, 2077 doubled. The company also
acquired additional showroom at monthly rent of Rs. 10,000 from Kartik, 2077.
Required:
Prepare a statement showing apportionment of cost and revenue between pre- incorporation
and post-incorporation periods. Also suggest the purposes for which pre-incorporation profit
& pre- incorporation losses can be used for. 10 marks
b) Following information is provided relating to loan and advances of a commercial bank:
Types of Loan and Advances Rs. in lakhs
 Pass Loan (including loan Rs. 1,800 lakhs extended only
against personal guarantee) 30,000
 Watch List Loan 2,600
 Sub-standard Loan 1,800

Page 12 of 42
  Doubtful Loan (realizable value of collateral Rs. 600 lakhs only) 1,000
 Bad Loan (including loan Rs. 120 lakhs insured with DCGC) 500
 Restructured Loan 1,200
Required: Calculate (i) amount of loan loss provision to be made in the profit and loss account
(ii) total amount of specific LLP. 5 marks
Answer
a) Tejasvi (P) Limited Profit and Loss Account
for 15 months ended 31st Ashadh, 2078
Pre. inc.(5 months) Post inc. (10 months)
Rs Rs
Sales (W.N.1) 3,00,000 16,80,000
Less: Cost of sales 1,80,000 10,08,000
Discount to dealers 7,000 39,200
Directors' remuneration - 60,000
Salaries (W.N.2) 18,750 71,250
Rent (W.N.3) 15,000 1,20,000
Interest (W.N.4) 30,000 75,000
Depreciation 10,000 20,000
Office expenses 35,000 70,000
Preliminary expenses 15,000
Net profit 4,250 2,01,550

Purchases for which pre-incorporation Profits and losses can be used are as follows:
Pre-incorporation Profits can be used for: Pre-Incorporation Losses can be used for:
 writing off Goodwill on acquisition  Setting off against Post-
Incorporation Profit
 writing off Preliminary Expenses
 addition to Goodwill on acquisition
 writing down over-valued assets
 writing off Capital Profit
 Issuing of bonus shares
 Paying up partly paid shares.

Working Notes:
1. Calculation of sales ratio
Let the average sales per month in pre-incorporation period be x
Average Sales (Pre-incorporation) = x× 5 =5 x
Sales (Post incorporation) from Ashwin to Chaitra, 2074 =2×1/2 x ×7 =17.5 x
From Baishakh to Ashadh, 2075 =3×1/2 x ×3 =10.5 x
Total Sales 28.0x

Page 13 of 42
 Sales ratio of Pre-incorporation & post incorporation is 5x:28x

2. Calculation of ratio for salaries

Let the average salary be x
Pre-incorporation salary = x ×5 =5x
Post incorporation salary
Ashwin, 2074 = x
Kartik to Ashadh, 2075 =x ×9×2 =18 x
19 x
Ratio is 5:19
3. Calculation of Rent
Total rent 1,35,000
Less: Additional rent for 9 months @ Rs 10,000 p.m. 90,000
Rent to old premises apportioned in tine ratio 45,000

Apportionment Pre inc. Post Inc.

Old premises rent 15,000 30,000
Additional Rent 90,000
15,000 1,20,000

4. Calculation of Interest
Pre-incorporation period from Baishakh, 2074 to Bhadra, 2074
6,00,000×12×5
{ 100×12
}= Rs 30,000

Post-incorporation period from Ashwin, 2074 to Ashadh, 2075

9,00,000×10×10
{ 100×12
}= Rs 75,000
Rs 1,05,000
b)
Calculation of Loan loss provision and Specific LLP
Rs. in Rs. in
Types of Loan and Advances lakhs LLP lakhs

(i) a. Pass Loan extended Against personal guarantee 1,800 21% 378.00
b. Pass Loan 28,200 1% 282.00
(ii) Watch List Loan 2,600 5% 130.00
General LLP 790.00
(iii) Sub-standard Loan 1,800 25% 450.00

Page 14 of 42
 (iv) a. Doubtful Loan with realizable value of
collateral 600 50% 300.00
b. Doubtful Loan no collateral 400 100% 400.00
(v) a. Bad Loan insured with DCGC 120 25% 30.00
b. Bad Loan 380 100% 380.00
(vi) Restructured Loan 1,200 12.50% 150.00
Specific LLP 1,710.00
Total 37,100 2,500.00
a. Amount to be charged to Profit & Loss account as LLP is Rs. 2,500 lakhs.
b. Amount of specific LLP is Rs. 1,710 lakhs.

4.
a) The following information regarding Nepal Shipping Limited are supplied to you.
 Current ratio 2.5
 Liquid ratio 1.5
 Proprietary ratio 0.75
 Working capital Rs. 60,000
 Reserves and surplus Rs. 40,000
 Bank overdraft Rs. 10,000
 There is no long term loans or fictitious assets
Required:
Make out a statement of assets and liabilities with complete details. 10 marks
b) Aditya Traders of Kathmandu has a branch at Butwal. Following is the information of Butwal
Branch for the year ending 31st Ashadh, 2077:
i) Goods are invoiced to the branch at cost plus 25%
ii) Sales Price is cost plus 40%
iii) Goods sent during the year at invoice price Rs. 1,350,000
iv) Sales during the year Rs. 1,470,000
v) Branch Expenses Rs. 55,000
vi) Stock as on 1st Shrawan, 2076 at Invoice Price Rs. 320,000
Required:
Calculate the profit earned by the branch during the year and Branch Stock Reserve in respect
of unrealized profit. 5 marks
Answer
a) Nepal Shipping Limited
Statement of Assets & Liabilities
Liabilities Amount Assets Amount

Page 15 of 42
 Share Capital WN - 6 200,000.00 Fixed Assets WN -5 180,000.00
Reserves & Surplus 40,000.00 Stock WN - 2 40,000.00
Creditors WN -3 30,000.00 Debtors WN - 7 60,000.00
Bank Loan 10,000.00
Total 280,000.00 280,000.00
Working Notes:
1. Calculation of current assets and current liabilities
Current Assets – Current Liabilities = Working Capital
Current ratio = 2.5 Liquid ratio = 1.5 working capital = Rs. 60,000
Current ratio = current assets/current liabilities
Working capital = current assets – current liabilities
Current assets = 2.5* working capital/1.5
Current assets = 2.5* 60,000/1.5 = 100,000
Current liabilities = Current assets – working capital
Current liabilities = 100,000 – 60,000 = 40,000
2. Calculation of stock
Liquid ratio = Current Assets – stock/ current liabilities
1.5 = 100,000 – stock/40,000
100,000 - Stock = 1.5*40,00 = 60,000
Stock = 100,00- 60,000
Stock = 40,000
3. Calculation of creditors
Creditors = current liabilities – bank overdraft
Creditors = 40,000- 10,000 = 30,000
4. Calculation of proprietary fund
Since no long term loan
Proprietary fund is 0.75 of total
Working capital is Rs. 60,000
Proprietary fund = 60,000/ (1-.75) = 240,000
5. Calculation of fixed assets
Fixed assets = 0.75 * Proprietary fund = 0.75*240,000 = 180,000
6. Calculation of share capital
Share capital = Proprietary fund – reserves and surplus
= 240,000 – 40,000 = 200,000
7. Calculation of Debtors
Current assets = cash and bank + Stock + Debtors
Debtors = current assets – cash & Bank – Stock

Page 16 of 42
 = 100,000 – nil – 40,000 = 60,000
Assuming cash & Bank balance nil as bank overdraft is given.
b) Calculation of profit earned by the branch
Butwal Branch
Trading Account for the year ended 31st Ashadh, 2077
Particulars Amount Rs. Particulars Amount Rs.
To Opening Stock 3,20,000 By Sales 14,70,000
To Goods received by 13,50,000 By Closing stock 3,57,500
Head office (Refer W.N.)
To Expenses 55,000
To Gross profit 102,500
18,27,000 18,27,500
ii) Branch Stock reserve in respect of unrealized profit
= Rs. 3,57,500 × (25/125) = Rs. 71,500
Working Note:
Rs.
Cost Price 100
Invoice Price 125
Sales Price 140
Calculation of closing stock at invoice price
Opening stock at invoice price 3,20,000
Goods received during the year at invoice price 13,50,000
16,70,000
Less: Cost of goods sold at invoice price (14,70,000×(125/140)) (13,12,500)
Closing stock 3,57,500
5.
a) Manakamana Enterprises has been charging depreciation on an item of plant and machinery
on straight line basis. The machine as purchased on 1st Shrawan, 2072 at Rs. 325,000. It is
expected to have a total useful life of 5 years from the date of purchase and residual value of
Rs. 25,000. Calculated the book value of the machine as on 1st Shrawan, 2074 and the total
depreciation charged till 31st Ashadh, 2074 under SLM. The company wants to change the
method of depreciation and charge depreciation @ 20% on WDV from 2074/75. Is it valid to
change the method of depreciation? Explain the treatment required to be done in the books of
accounts in the context of Accounting Standards. Ascertain the amount of depreciation to be
charged for 2074/75 and the net book value of the machine as on 31-3-2075 after giving effect
of the above change. 5 marks
b) A company with a turnover of Rs. 250 crores and an annual advertising budget of Rs. 2 crores
have taken up the marketing of a new product. It was estimated that the company would have
a turnover of Rs. 25 crores from the new product. The company has debited to its Profit and
Loss Account the total expenditure of Rs. 2 crores incurred on extensive special initial
advertisement campaign for the new product. Is the procedure adopted by the company
correct? 5 marks

Page 17 of 42
 c) ABC Ltd. has entered into a contract for the provision of services over a two-year period. The
total contract price is Rs. 150,000. In the first year costs of Rs. 60,000 have been incurred and
50% of the work has been completed. The contract has not progressed as expected and ABC
Ltd. is not sure of the ultimate outcome, but believes that the costs incurred to date will be
recovered from the customer. ABC Ltd. initially expected to earn a profit of Rs. 20,000 on the
contract. Company is struggling with the amount of revenue to be recognized in the first year
of contract. Suggest the right amount of revenue to be recognized, clearly indicating the
provision of relevant standard. 5 marks
d) ABC Ltd. has entered into a contract for the provision of services over a two-year period. The
total contract price is Rs. 150,000. In the first year costs of Rs. 60,000 have been incurred and
50% of the work has been completed. The contract has not progressed as expected and ABC
Ltd. is not sure of the ultimate outcome, but believes that the costs incurred to date will be
recovered from the customer. ABC Ltd. initially expected to earn a profit of Rs. 20,000 on the
contract. Company is struggling with the amount of revenue to be recognized in the first year
of contract. Suggest the right amount of revenue to be recognized, clearly indicating the
provision of relevant standard. 5 marks
Answer
a) As per NAS 16, Property, Plant & Equipment, the depreciation method applied to an asset shall be
reviewed at least at each financial year end and, if there has been a significant change in the
expected pattern of consumption of the future economic benefits embodied in the asset, the method
shall be changed to reflect the changed pattern. Such a change shall be accounted for as a change
in an accounting estimate in accordance with NAS 8. As per NAS 8, Accounting Policies, Changes
in Accounting Estimates & Errors, changes in accounting estimates shall be adjusted prospectively
that means the effect of a change in an accounting estimate shall be included in the determination
of net profit or loss in:
(a) The period of the change, if the change affects the period only; or
(b) The period of the change and future periods, if the change affects both.
In the given case, the company can change the method of depreciation from year 2074-75 if the
conditions set aside in above paragraph have been fulfilled.
Depreciation for year 2074-75 and net book value of Machine as on 31.3.75 after effect of the
change
Book value of Machinery as on 01.04.2074 Rs.2,05,000
Current year depreciation as per new method (WDV) Rs.41,000
(205,000 X 20%)
Net Book value as on 31.03.2075 Rs.1,64,000
(205,000–41,000)
Book Value of Machinery and Depreciation under SLM as on 01-04-2074
Cost of Machine purchased on 01.04.2072 Rs.3,25,000
Less: Residual Value Rs.25,000
Depreciable amount Rs.3,00,000
Useful life of Machine 5 Years
Depreciation for 2 Years (Rs.3,00,000x2/5) Rs.1,20,000
Book value as on01.04.2074 Rs.2,05,000
b) As per NAS, expenditure on an intangible item should be recognized as an expense when it is in
current unless it forms part of the cost of an intangible asset.

Page 18 of 42
 In the given case, advertisement expenditure of Rs. 2 crores had been taken up for the marketing
of a new product which may provide future economic benefits to an enterprise by having a turnover
Rs. 25 crores. Here, no intangible asset or other asset is acquired or created that can be recognized.
Therefore, the accounting treatment by the company of debiting the entire advertisement
expenditure of Rs. 2 crores to the profit and loss account of the year is correct.
c) As per NAS 18, Revenue, revenue from rendering of services shall be recognized on the basis of
stage of completion. However, when outcome of the transaction involving the rendering of services
cannot be estimated reliably, revenue shall be recognized only to the extent of the cost incurred that
are recoverable.
In the given case, it is clear that the company is not in position to estimate the outcome of service
contract and the company expects that the costs incurred to date will be recovered. So, as per NAS
18, Revenue, the company shall recognize revenue to the extent of cost incurred i.e. Rs. 60,000.

6. Write short notes on: (5×3=15 marks)

a) Average clause and its importance in insurance
b) Translation of foreign currency monetary and non-monetary items at the end of each reporting
period as per NAS 21
c) Statutory Liquidity Ratio (SLR)
d) Reserve for outstanding insurance claim payables
e) Window dressing
Answer
a) Some unscrupulous businessmen may resort to under-insurance of stocks in order to save some
amount of premium. Under-insurance means insuring for a lesser value. Under- insurance is
resorted to because, usually the loss will not be total and therefore, in spite of under-insurance, the
businessman can recover his loss. For example, stocks worth Rs.10,00,000 may be insured for, say
Rs. 60,000, because the inured knows, from experience, that in the event of fire not all his stocks
are likely to be lost. (There are, of course, materials like plastics, cotton and other materials where
nothing can be saved in the event of fire. These are exceptions.) So, if there is a fire and the actual
loss is Rs. 50,000, the insured can recover the absence of an’ average clause’. To prevent such
misuse of insurance, the policy incorporates an average clause.
By inserting average clause, the insured is insured is called upon to bear a portion of loss himself
in the event of under-insurance. The main object of this clause is to discourage under-insurance, to
encourage full-insurance and, above all, to impress upon the property owner the necessity of having
his property valued accurately before insurance. Under this clause the loss is suffered by both
insurer and insured proportionately. This is based on the principle that, in case of under –insurance,
the owner of the property himself acts as an insurer to the extent the property has not been insured
with the insurance company .If, for example, a building of Rs. 60,000, is insured for Rs. 50,000,
then, to the extent of Rs. 10,000, the owner himself is acting as insurer and will bear proportionate
losses. If, because of fire there is a complete loss of building of Rs.60,000 then insurance company
will bear only Rs. 50,000 and the proprietor of the building will bear Rs. 10,000. If the loss is less
than Rs. 60,000, then the share of the insurance company is reduced proportionately. The formula,
therefore, may be laid down as follows:
Loss to be borne by the insurance company
𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑝𝑜𝑙𝑖𝑐𝑦
= 𝑇𝑜𝑡𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑝𝑟𝑜𝑝𝑒𝑟𝑡𝑦×Actual loss
50,000
= 60,000 × 60,000 = Rs. 50,000

(when there is a complete loss)

Page 19 of 42
 If the actual loss to the building is estimated at Rs. 30,000 then insurance company will pay:
𝑃𝑜𝑙𝑖𝑐𝑦
Claim= 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑝𝑟𝑜𝑝𝑒𝑟𝑡𝑦 𝑖𝑛𝑠𝑢𝑟𝑒𝑑×Actual loss
50,000
= 60,000×30,000 = Rs. 25,000

b) At the end of each reporting period foreign currency monetary and non-monetary items are
translated as follows.
i) Foreign currency monetary items shall be translated using the closing rate.
ii) non-monetary items that are measured in terms of historical cost in a foreign currency shall be
translated using the exchange rate at the date of the transaction and
Non-monetary items that are measured at fair value in a foreign currency shall be translated using
the exchange rate at the date when the fair value was measured.
c) Provision relating to statutory Liquidity Ratio
The licensed banks and financial institution should maintain liquid assets as a prescribed percentage
of total domestic deposit. Banks and financial institution of classes 'A', 'B', 'C and D' shall have to
maintain the SLR as below:
 10% for Class “A” commercial bank,
 8% for Class “B” development bank and
 7% for Class “C” Financial Institution.
 4% for Class “D” Financial Institution.
For SLR the following assets shall be considered as liquid assets:
(a) Investment in Nepal Government Securities
(b) Amount kept at Nepal Rastra Bank for Cash Reserve Ratio purpose
(c) Cash balance at own vault
(d) Amount kept at class “A” Commercial Bank by class “B”, “C” and “D” Financial
(e) Institution for Cash Reserve Ratio purpose.
(f) Amount kept by Financial Institution other than national level financial institution in
(g) other Bank and Financial Institution which is receivable on demand.
(h) Amount invested in international securities issued in Nepalese currency.
(i) The particulars of statutory liquidity ratio at prescribed format shall be submitted to
NRB with15 days of next month.
d) Reserve for Outstanding Insurance Claim Payables
As Per Rule 15 of the Insurance Regulation 2049, every insurer shall provide an amount of
one hundred fifteen percent (115%) of the remaining amounts of the payment against the
claim made by the Insurer before the expiry of each fiscal year. Such amount shall be
recognized as income in next year.
e) Window dressing is actions taken to improve the appearance of a company's financial statements.
Window dressing is particularly common when a business has a large number of shareholders, so
that management can give the appearance of a well-run company to investors who probably do not
have much day-to-day contact with the business. It may also be used when a company wants to
impress a lender in order to qualify for a loan. If a business is closely held, the owners are usually
better informed about company results, so there is no reason for anyone to apply window dressing
to the financial statements.

Page 20 of 42
Examples of window dressing are:
 Cash. Postpone paying suppliers, so that the period-end cash balance appears higher than it
should be.
 Accounts receivable. Record an unusually low bad debt expense, so that the accounts
receivable (and therefore the current ratio) figure looks better than is really the case.
 Fixed assets. Sell off those fixed assets with large amounts of accumulated depreciation
associated with them, so the net book value of the remaining assets appears to indicate a
relatively new cluster of assets.
 Revenue. Offer customers an early shipment discount, thereby accelerating revenues from a
future period into the current period.
 Depreciation. Switch from accelerated to straight-line depreciation in order to reduce the
amount of depreciation charged to expense in the current period. The mid-month convention
can also be used to further delay expense recognition.
 Expenses. Withhold supplier expenses, so that they are recorded in a later period

Page 21 of 42
Paper 2: Audit and Assurance
1. As an auditor, give your opinion with explanations on the following cases: (45=20 marks)
a) XYZ Limited has provided Rs. 50 lakhs for Inventory obsolescence in 2076/77. In the subsequent
year, it was determined that 45% of such inventory was usable. The Board of Directors is in the
view of adjusting same through prior period adjustment.
b) The ABC Ltd., while valuing its finished goods inventory at the year-end wants to include interest
on Bank Overdraft as an element of cost, for the reason that overdraft has been taken specifically
for the purpose of financing current assets like inventory and for meeting day to day working
expenses.
c) XYZ is a manufacturing company. There was huge fire in the factory of XYZ on 1 Ashoj 2077 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 2076/77 was
approved by the Board on 30 Ashoj 2077 in which fixed assets have been presented at WDV of Rs.
20 crores despite the severe loss due to fire and the information about the loss due to fire is properly
explained in the Notes to the financial statements.
d) You are the auditor of Success Ltd. some shareholders of Success Ltd. lodged complain against you
citing that you failed to send the auditor’s report to them.
Answer
a) As per NAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, prior period
errors are omissions from and misstatement in an entity’s financial statements for one or more prior
periods arising from a failure to use or misuse of reliable information that was available when
financial statements for those period where authorized for issue and could reasonably be expected
to have been obtained and taken into account in the preparation and presentation of those financial
statements. Such errors include the effects of mathematical mistakes, mistakes in applying
accounting polices oversights or misrepresentations of facts, and fraud. In light of these facts, the
write-back of provision made in respect of inventories in the earlier year does not constitute prior
period errors (adjustment) since it neither constitutes error nor omission but it merely involves
making estimates based on prevailing circumstances when financial statements were being
prepared. It is a mere estimate process involving judgment based on the latest information available
at that particular time.
An estimate may have to be revised if changes occur regarding the circumstances on which the
estimate was based, or as a result of new information, more experience or subsequent
developments. The revision of the estimate, by its nature, does not bring the adjustment within the
definitions of prior period errors discussed above.
In this case, XYZ Ltd. provided Rs 50 lakhs for inventory obsolescence in 2076/77. In the
subsequent year, due to change in circumstances, it was determined that 45% of such inventory
was usable. Revision of such an estimate does not bring the resulting amount of Rs.22.5 lakhs
within the definition of a prior period errors requiring adjustment in prior period. The amount,
however, involved is material and requires separate disclosure to understand the financial position
and performance of an enterprise. Accordingly, adjustment in the value of the inventory through
prior period item would not be appropriate.
b) As per NAS 2, Inventories, cost of inventories comprises all costs of purchase, costs of conversion
and other costs incurred in bringing the inventories to their present location and condition. NAS
23, Borrowing Costs includes inventories as qualifying assets and borrowing cost that are directly
attributable to the acquisition, construction or production of qualifying assets are included in the
cost of that asset. In the given case, Bank overdraft was taken for the purpose of financing current
assets not especially for the inventories. Therefore, the proposal of ABC Ltd. to include interest
on bank overdraft as an element of cost of inventories is not acceptable because it does not form
part of cost of production.

Page 22 of 42
c) 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. 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)
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.
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 not seem to be the case here.
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. Accordingly, an entity
shall disclose the following for each material category of non-adjusting event after the reporting
period:

 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.
d) Section 115 of the Company Act, 2063 lays down the functions and duties of auditor. As per
provisions of the law, it is no part of the auditor’s duty to send a copy of his report to members
(shareholders) of the company individually. The auditor’s duty concludes once he forwards his
report to the company. It is the responsibility of company to send the report to every member
(shareholders) of the company. In Re Allen Craig and Company (London) Ltd., 1934 it was held
that duty of the auditor after having signed the report to be annexed to a balance sheet is confirmed
only to forwarding his report to the secretary of the company. It will be for the secretary or the
director to convene a general meeting and send the balance sheet and report to the members (or
other person) entitled to receive it. Hence in the given case, the auditor cannot be held liable for the
failure to send the report to the shareholders.
2. Give your comments on the following cases: (45=20 marks)
a) You are appointed as manager of quality control section in one of the leading audit firms of Nepal.
The senior partner of the firm instructs you to draft objectives statement for quality control policies
and procedures.
b) The auditor of a company is unable to obtain audit evidence relating to business promotion
expenses of Rs. 1 lakh. The company has earned net profit of Rs. 1 Arab and has net asset base of
Rs. 10 Arab. The management explains that the expense is genuine although the said invoices are
misplaced. However, auditor requests the management either not to charge the said promotional
expenses to profit or loss statement or he will qualify his audit report. The auditor does not have
any other issue on the faithful presentation and preparation of the financial statements.
c) Mr. Small, auditor of Big Ltd., has his office and residence in the building owned by Big Ltd. Mr.
Small has been given 10% concession in rent by the company as compared to other tenants.
d) Mr. R Pandey and Mr. H Pahari are the two chartered accountants who just qualified their exams
and took membership from ICAN in Bhadra 2076. Mr. R Pandey, who without holding the
Certificate of Practice, signed a document in capacity of the member holding Certificate of Practice
and Mr. H Pahari, as being a member of ICAN, committed an act contrary to the provisions of
Nepal Chartered Accountants Act, 2053.

Page 23 of 42
Answer
a) As per Nepal Standards on Quality Control (NSQC) 1, it is necessary for the firms that perform
audits and review of historical financial information and other services to design appropriate quality
control system to ensure quality of services they provide. The relevance of quality control issue in
auditing services is equally important like in other services. If quality control could not be done in
auditing work, quality services could not be provided to client which may result in negative
consequences both for auditor and client including in overall economy. Hence, every auditor should
carry out the audit work based on formal quality control policy and procedures. The objective
statement of quality control policies and procedures would be:
i. Professional Requirements
Personnel in the firm should adhere to the principles of independence, integrity, objectivity,
confidentiality and professional behaviour. Particular procedures may be framed to achieve this
objective. For example, a firm may require all its personnel to make a written statement every
year as to whether they hold any shares or any other interest in the entity being audited by the
firm.
ii. Skills and Competence
The firm should be staffed with personnel who have attained the professional qualification and
maintain and enhance the knowledge and skill attained earlier. For example, a firm can achieve
this objective through proper recruitment procedures, periodic staff evaluation and a system of
training whereby latest information relating to current development in professional standards,
law, etc. is regularly communicated to audit staff.
iii. Assignment
Audit work should be assigned to such personnel who have the knowledge and experience
required in the circumstances.
iv. Delegation
There should be sufficient direction, supervision and review of work at all levels to provide
reasonable assurance that the work performed meets appropriate quality standards. For
example, a firm may establish guidelines relating to the form and content of working papers;
use of standardized forms, etc. similarly, the audit plans may identify the staffing requirements
and timing of various phases of audit to facilitate delegation of audit.
v. Consultation
Where ever necessary, persons having appropriate expertise, within or outside the firm, should
be consulted.
vi. Acceptance and Retention of Clients
Before accepting an audit, the firm should evaluate its independence and ability to serve the
prospective client properly. A similar review should be made, on-going basis, of association
with the existing clients.
vii. Monitoring
The continued adequacy and operational effectiveness of the quality control policies and
procedures should be developed and applied constantly.
b) As per NSA 705, Modification to the Opinion in the Independent Auditor's Report, the auditor shall
express a qualified opinion when:
i) The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements,
individually or in the aggregate, are material, but not pervasive, to the financial statements; or

Page 24 of 42
 ii) The auditor is unable to obtain sufficient appropriate audit evidence on which to base the
opinion, but the auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be material but not pervasive.
Rs 1 lakh expenses for a company which earns net profit of Rs 1 Arab and having net assets base
of Rs 10 Arab seems to be immaterial/insignificant because omission or misstatement of expenses
by Rs 1 lakh in this case is unlikely to affect the decision of the users due to this
omission/misstatement. Since the auditor does not have any other issue on faithful preparation and
presentation of the financial statements, qualifying audit opinion for immaterial impact does not
seem to be appropriate. The auditor should however communicate the finding through management
letter with the recommendation to strengthen the system of proper maintenance and retention of
supporting evidence.
c) As per NSA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in
accordance with Nepal Standards on Auditing, in the case of an audit engagement which is of
public interest requires by the code of ethics that the auditor should be independent of the entity
subject to audit. The code describes independence as comprising both independence of mind and
in appearance. The auditor's independence from the entity safeguards the auditor's ability to form
an audit opinion without being affected by influences that might compromise the opinion.
Independence enhances the auditor’s ability to act with integrity, to be objective and to maintain
an attitude of professional skepticism.
In the instant case, Mr. Small has his office and residence in the building owned by Big Ltd. who
are subject to audit by Mr. Small. Giving 10% concession in rent may be due to some other reasons
other than holding auditor-ship of Big Ltd. It may be due to being very old tenant or due to occupy
of large space in same building or Mr. Small might have carried out major renovation and so on.
Thus, in the instant case, unless and until there is direct proof, giving 10% concession in rent does
not affect independence of the auditor in expressing his opinion on the audit of Big Ltd. However,
the auditor should always be alert on his/her independence and fundamental ethical principles and
make appropriate safeguard needed.
d) Section 41 of Nepal Chartered Accountants Act, 2053 has made different levels of punishment for
different levels of culpability. Here in case of R Pandey, If a person, who has not obtained a
Certificate of Practice is proved to have signed any document in capacity of the member holding
Certificate of Practice, shall be liable to punishment with a penalty up to two thousand rupees or
imprisonment for a period of up to three months or both.
In case of H Pahari, if a member, who commits any act contrary to the provisions of this Act or
Regulations framed under this Act other than the provisions of this section, shall be suspended for
a maximum period of five years and shall be liable of punishment with a maximum penalty of two
thousand rupees or imprisonment for a maximum period of three months or both.
So, R Pandey and H Pahari are to be punished accordingly.
3. Answer the following: (3 5=15 marks)
a) While planning the audit of S Ltd., you want to apply sampling techniques. What are the risk factors
you should keep in mind?
b) What are the elements that an auditor has to consider while evaluating the design of the entity’s
control environment?
c) Is it not necessary to sign audit engagement letter every year in case of recurring audits?
Answer
a) Risk Factors while applying Sampling Techniques: As per NSA 530, Audit Sampling, sampling
risk is the risk that the auditor’s conclusion based on a sample may be different from the conclusion
if the entire population were subjected to the same audit procedure. Sampling risk can lead to two
types of erroneous conclusions-

Page 25 of 42
  In the case of a test of controls, that controls are more effective than they actually are, or in the
case of tests of details, that a material misstatement does not exists when in fact it does. The
auditor is primarily concerned with this type of erroneous conclusion because it affects audit
effectiveness and is more likely to lead to an inappropriate audit opinion.
 In the case of test of controls, the controls are less effective than they actually are, or in the
case of tests of details, that a material misstatement exists when in fact it does not. This type of
erroneous conclusion affects audit efficiency as it would usually lead to additional work to
establish that initial conclusions were incorrect.
The auditor should also consider about appropriate design, size and selection of items for testing.
b) As per NSA 315, Identifying and Assessing the Risk of Material Misstatement through
Understanding the Entity and Its Environment, the auditor should obtain an understanding of the
control environment. The control environment includes the governance and management functions
and the attitudes, awareness, and actions of those charged with governance and management
concerning the entity’s internal control and its importance in the entity. The control environment
sets the tone of an organization, influencing the control consciousness of its people. It is the
foundation for effective internal control, providing discipline and structure.
The primary responsibility for the prevention and detection of fraud and error rests with both those
charged with governance and the management of an entity. In evaluating the design of the control
environment and determining whether it has been implemented, the auditor understands how
management, with the oversight of those charged with governance, has created and maintained a
culture of honesty and ethical behavior, and established appropriate controls to prevent and detect
fraud and error within the entity.
In evaluating the design of the entity’s control environment, the auditor considers the following
elements and how they have been incorporated into the entity’s processes:
i. Communication and enforcement of integrity and ethical values – essential elements which
influence the effectiveness of the design, administration and monitoring of controls.
ii. Commitment to competence – management’s consideration of the competence levels for
particular jobs and how those levels translate into requisite skills and knowledge.
iii. Participation by those charged with governance – independence from management, their
experience and stature, the extent of their involvement and scrutiny of activities, the
information they receive, the degree to which difficult questions are raised and pursued with
management and their interaction with internal and external auditors.
iv. Management’s philosophy and operating style – management’s approach to taking and
managing business risks, and management’s attitudes and actions toward financial reporting,
information processing and accounting functions and personnel.
v. Organizational structure – the framework within which an entity’s activities for achieving its
objectives are planned, executed, controlled and reviewed.
vi. Assignment of authority and responsibility – how authority and responsibility for operating
activities are assigned and how reporting relationships and authorization hierarchies are
established.
vii. Human resource policies and practices – recruitment, orientation, training, evaluating,
counselling, promoting, compensating and remedial actions.
c) Audit Engagement Letter in Recurring Audit: As per NSA 210, Agreeing the Terms of Audit
Engagement, on recurring audits, the auditor shall assess whether circumstances require the terms
of the audit engagement to be revised and whether there is a need to remind the entity of the existing
terms of the audit engagement. The auditor may decide not to send a new audit engagement letter
or other written agreement each period.

Page 26 of 42
 However, the following factors may make it appropriate to revise the terms of the audit engagement
or to remind the entity of existing terms:
i. Any indication that the entity misunderstands the objective and scope of the audit.
ii. Any revised or special terms of the audit engagement.
iii. A recent change of senior management.
iv. A significant change in ownership.
v. A significant change in nature or size of the entity’s business.
vi. A change in legal or regulatory requirements.
vii. A change in the financial reporting framework adopted in the preparation of the financial
statements.
viii. A change in other reporting requirements.
4. Answer/Comment on the following: (3  5=15 marks)
a) Mr. Dipen, a chartered accountant prepared a project report for one of his clients to obtain bank
finance (long-term) of Rs. 90 lakhs from a commercial bank. Consequent to the sanction of the loan
by the bank, Mr. Dipen charged 1% fee on the figures of loan sanctioned.
b) What are the threats that professional accountants face in performing their engagement? Further,
define Advocacy and Familiarity threats.
c) What are the various penalties prescribed under section 14 of Nepal Chartered Accountants Act,
2053, which may be imposed on recommendation of Disciplinary Committee, by Council against a
member?
Answer
a) As per the ICAN's Handbook of the Code of Ethics for Professional Accountants, 2018,
Professional fees should be a fair reflection of the value of the professional services performed for
the client, taking into account:
i. The skill and knowledge required for the type of professional services involved.
ii. The level of training and experience of the persons necessarily engaged in performing the
professional services.
iii. The time necessarily occupied by each person engaged in performing the professional services.
iv. The degree of responsibility that performing those services entails.
Professional fees should normally be computed on the basis of appropriate rates per hour or per
day for the time of each person engaged in performing professional services. These rates should be
based on the fundamental premise that the organization and conduct of the professional accountant
in public practice and the services provided to clients are well planned, controlled and managed. It
is for each professional accountant in public practice to determine the appropriate rates.
A professional accountant in public practice should not make a representation that specific
professional services in current or future periods will be performed for either a stated fee, estimated
fee, or fee range if it is likely at the time of the representation that such fees will be substantially
increased and the prospective client is not advised of that likelihood.
When performing professional services for a client it may be necessary or expedient to charge a
pre-arranged fee, in which event the professional accountant in public practice should estimate a
fee taking into account the referred matters.
Section 34(10) of Nepal Chartered Accountants Act, 2053 states that members holding Certificate
of Practice shall not base their remuneration as a percentage on the profit or on any other uncertain
results.

Page 27 of 42
 Entering into a contingent fee arrangement relating to an assurance engagement is an example of
self-interest threat. In the present case, fee is contingent upon the approval or sanction of loan by
the bank. So, this is against the legal provision and also the situation of self-interest threat to the
auditor and hence it is advisable for the auditor not to accept the engagement under such fee
arrangement.
b) Section 100 (12) of ICAN's Handbook of the Code of Ethics for Professional Accountants, 2018
defines that threats may be created by a broad range of relationships and circumstances. When a
relationship or circumstance creates a threat, such a threat could compromise, or could be perceived
to compromise, a professional accountant’s compliance with the fundamental principles. A
circumstance or relationship may create more than one threat, and a threat may affect compliance
with more than one fundamental principle. Such threats include self-interest threat, self-review
threat, advocacy threat, familiarity threat and intimidation threat.
Advocacy threat is the threat that a professional accountant will promote a client’s or employer’s
position to the point that the professional accountant’s objectivity is compromised.
Familiarity threat is the threat that due to a long or close relationship with a client or employer, a
professional accountant will be too sympathetic to their interests or too accepting of their work.
c) According to section 14 Nepal Chartered Accountants Act, 2053, the Disciplinary committee shall
be formed to inquire into a complaint and recommend the Council for necessary action, where any
one lodges a complaint in the Institute that any member has done any act or action contrary to the
Nepal Chartered Accountants Act or the Rules or code of ethics framed under this Act or where the
Institute itself receives such information.
Further, as per section 14(5) of Nepal Chartered Accountants Act, 2053, the disciplinary committee
shall make recommendation, along with its opinion and finding, to the Council for taking necessary
action against a member if found guilty from its investigation and in view of such recommendation
the council may, impose any of the following penalties on the concerned member, according to the
gravity of the offence:
a) Reprimanding;
b) Removing from the membership for a period not exceeding 5 years;
c) Prohibiting from carrying on the accounting profession for any specific period;
d) Canceling the professional certificate or membership.
5. Answer/Comment on the following: (2  5=10 marks)
a) Describe the process for appointing auditor of a company by the Registrar of Company.
b) Discuss about the provision relating to removal of appointed auditor under Company Act, 2063.
Answer
a) According to section 113 of the Company Act, 2063 on request of the Board of Directors, the Office
of the Company Registrar may appoint auditor in following cases:
i. If the auditor is not appointed in Annual General Meeting of a company, or Annual General
Meeting could not be held, or
ii. The auditor appointed under the Company Act cannot continue due to whatever reason,
In view of above, if any of the situations prevails, Board of Directors may request to appoint an
auditor to the Office of the Company Registrar. The Office of the Company Registrar may appoint
an auditor on receiving such request.
b) As per section 119 of company Act 2063, no auditor appointed pursuant to provision in the Act
shall be removed pending the completion of audit of accounts of any financial year for which he/she
was appointed as the auditor.

Page 28 of 42
 However, if any auditor breaches the code of conduct of auditors or does any act against the interest
of the company which has appointed him as the auditor or commits any act contrary to the
prevailing law, such auditor may be removed through the same process whereby he/she was
appointed as auditor, by giving prior information to the Institute of Chartered Accountants of Nepal,
and with the approval of the regulatory authority, if any authorized by the prevailing law for the
regulation of business of the company concerned , and failing such authority, with the approval of
the Office.
While removing an auditor pursuant to Sub-section (2), the auditor shall be provided with a
reasonable opportunity to defend him/herself.
6. Write short notes on the following: (42.5=10 marks)
a) Key Audit Matters
b) Key Management Personnel
c) Audit Strategy
d) Cost Audit
Answer
a) Those matters that, in auditor's professional judgment, are of most significant in the audit of
financial statements of the current period are referred as key audit matters. Such key audit matters
are selected from matters communicated with those charged with governance. The auditor is
required to communicate such matters to those charged with governance and include in audit report
in the Key Audit Matters Section.
The purpose of communicating key audit matters is to enhance the communicative value of
auditor's report by providing greater transparency about the audit that was performed.
Communicating key audit matters provides additional information to intended users of the financial
statements to assist them in understanding those matters which are of most significance in the audit
of the financial statements. Communicating key audit matters is not a substitute for disclosure in
the financial statements or the substitute for the auditor expressing a modified opinion. In
determining key audit matters, auditor may take into account the areas of higher assessed risks and
areas requiring significant management judgment.
b) Key management personnel are those persons who have the authority and responsibility for
planning, directing and controlling the activities of the reporting entity.
It may be noted here that non-executive directors of a company will not be considered as key
management personnel under NAS 24 by virtue of merely their being directors, unless they have
the authority and responsibility for planning, directing and controlling the activities of the reporting
entity.
Further, the requirements of NAS 24 should not be applied in respect of a non-executive director
even if he participates in the financial and/or operating policy decision of the enterprise unless he
falls in any of the categories discussed in other NASs.
c) Audit strategy is concerned with designing optimized audit approaches that seek to achieve the
necessary audit assurances at the lowest cost within the constraints of the information available.
Audit procedures should be relevant to the important assertions, and as cost effective as possible to
perform. Audit strategy generally involves the following steps:
i. Obtaining knowledge of business.
ii. Performing analytical procedures at initial stages.
iii. Evaluating inherent risks.
iv. Evaluating internal control system for strategy purpose.
v. Formulating the strategy.

Page 29 of 42
d) 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.
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.
7. Distinguish between: (2 5=10 marks)
a) Verification and Valuation
b) Internal Audit and External Audit
Answer
a) Distinction between verification and valuation:
1. Meaning: verification establishes existence, ownership and acquisition of assets and liability
whereas valuation certifies correctness of the value of assets and liabilities.
2. Time: Verification is done at the end of the year whereas valuation is done during the year.
3. Personnel: Verification is done by auditor whereas valuation is done by the proprietor himself
or by the professional valuators.
4. Evidence: The title deeds, receipts of payments constitute documentary evidence for
verification whereas certificate given by the proprietor or valuator is the documentary evidence
for valuation.
5. Basis: Verification can rely on valuation to some extent but valuation does not rely on
verification.
6. Expertise: Valuation requires technical expertise beyond accounting.
b)
Bases Internal Audit External Audit
Appointing Management of the entity Owner of the entity (shareholder)
authority
Approach To ensure adherence to To collect sufficient appropriate audit
management, safeguard of assets, evidence as to express, “true and fair”
completeness and accuracy of view on financial statement
accounting records
Independence Less independent Complete independent
Reporting To management or to Audit To shareholder, or appointing authority
responsibility committee
Conducted by Employee or outsourced consultant Member holding Certificate of practice
Coverage All categories of risk, their Financial reports, financial reporting
management, including reporting on risks.
them

Page 30 of 42
Paper 3: Corporate and Other Laws
Attempt all questions.
1. Answer the following questions: (5×5=25 marks)
a) The board of directors of Nepal Cement Private Ltd., wants to know whether their company could
be converted itself into a public limited company. Advise Nepal Cement Private Ltd. how a private
company could be converted into public company as per the Companies Act, 2063.
b) PQ Ltd. want to issue share and inquire you whether a company can issue shares at premium as
per the provisions of the Companies Act, 2063? Mention the conditions on which a company may
issue shares at premium and utilization of premium amount. Answer referring the provisions of the
Companies Act, 2063.
c) The board of directors of Investment Bank passed a resolution to purchase ATM machines from
Asus Tech. Accordingly, a deed of contract drafted and duly signed with advance money. Some of
the shareholders of the bank questioned the validity of the contract as four out of seven directors
found disqualified. Give your opinion as to the validity of the contract.
d) ABC Limited changed its objective clause in Memorandum of Association. Mr. Prakash, a
substantial shareholder, is not satisfied with the change being made. He wants to make amendment
to declare null and void. How court entertains his decent ideas? Suggest the process as provided
in the Companies Act, 2063.
e) The object clause of Memorandum of Association of ABC Pvt. Ltd. authorized the company to carry
on the business of trading in fruits and vegetables. The directors of the company in recently
concluded board meeting decided to carry fish trading and accordingly, the company ordered fish
for the purpose of trading. FSH Limited supplied fish to ABC Pvt. Ltd. worth Rs. 30 Lakhs. The
members of the company convened an extraordinary general meeting and negated the proposal of
the board of directors on the ground of ultra vires acts. FSH Limited being aggrieved of the said
decision of ABC Pvt. Ltd. seeks your advice. Advise them.
Answer:
a) Section 13 of the Companies Act, 2063 contains the following provisions for conversion of a
private company into a public company.
A private company may decide to convert the company into a public company by adopting a special
resolution in the general meeting. However, no private company shall be capable of being
converted into a public company unless and until it fulfills the requirements to be fulfilled pursuant
Companies Act for being a public company.
Then the concerned private company shall, for being converted into a public company, make as
application as prescribed, accompanied by a copy of the resolution and by the fees as prescribed,
to the Company Registrar’s Office within thirty days after the date of such resolution.
On receipt of an application the Office shall, if the concerned private company has fulfilled the
necessary requirements for carrying on transactions as a public company, will mention in the
Register of Company as conversion of such company into a public company and give a company
conversion certificate as prescribed within 60 days.
b) Section 29 of the Companies Act, 2063 has specified the conditions for issuing shares at premium.
As per the said section, any company fulfilling the following conditions may, with the prior
approval of the office of the company registrar, issue shares at premium:
 A public company desiring to issue securities to the public shall fulfil the terms and conditions
as prescribed by the prevailing law on securities. However, for private companies and other
public companies with no provision to issue securities to the public as per the prevailing law
on securities, total assets should exceed its total liabilities,

Page 31 of 42
  The Company's general meeting has decided to issue shares at a premium.
The premium thus collected shall be deposited in a premium account to be opened to that effect.
The money deposited in premium account can be utilized for following purpose:
 Paying up unissued share capital to be issued to the shareholders as fully paid bonus shares,
 Providing for the premium payable on the redemption of any redeemable preference shares,
 Writing off the preliminary expenses made by the company.
 Bearing or reimbursing the expenses of or the commission paid or discount allowed on, any
issue of shares of the company.
c) Company being a legal person its business and affairs are carried on by its directors who are
considered as the representatives of the shareholders. Section 89(1) of the Companies Act, 2063
has listed the various circumstances where a person becomes disqualified to be a director. In
general, the act done by disqualified board of directors cannot get validity and binding to the
company.
Section 106 of the Companies Act, 2063 provided that if it is afterwards discovered that any
provision under this Act has not been complied with in respect of the appointment of any director,
acts already done by such director him /her before the discovery of such fact shall not be rendered
invalid by that fact. Therefore, the resolution passed by the directors though disqualified and
contract with Asus Tech is also valid and binding
d) Any Company has its objectives mentioned in the Memorandum of Association. It is reasonable to
make amendment in the objective clause for its new regime and speed. However, any person being
a shareholder, may take own decent opinion and proceed for null and void the amendments. The
companies Act, 2063 has made such provision to apply the amendment provision. Section 21 has
provided the amendment provision for the sake of test of sustainability of the amendments in the
object clause. Sub section 4 of section 21 has provided requires the following terms and condition
to be fulfilled:
If a shareholder of a public company who is not satisfied with an amendment made to the objectives
of the company may, on fulfilling the following requirements, file a petition, setting out the reasons
therefore, in the court to have that amendment declared null and void:
(a) A shareholder or shareholders holding at least five percent shares of the paid-up capital of the
company, except the shareholders who consent to or vote for the amendment or alteration, has
to make a petition,
(b) A petition has to be filed within twenty one days after the adoption of the resolution to amend
the objectives of the company,
(c) Where any one is to file a petition on behalf of one or more than one shareholder entitled to
make petition, the petition has to be filed by a person who is authorized in writing for that
purpose.
Court may entertain his decent opinion from the application submitted pursuant to sub section
4 of section 21. On a petition as submitted above, the court may issue an appropriate order,
specifying the following terms and conditions:
(a) Declaring the amendment made to the objectives of the company to be fully or partly valid or
void,
(b) Requiring the company to subscribe for a reasonable value, the shares and other rights held
by the shareholders making a petition under Subsection (4), upon being disagreed with the
making as alteration in the main objectives of the company,
(c) The shares have to be subscribed under Clause (b) from the moneys as referred to in Sub-
section(2) of Section 61; and in the case of a company which has no such moneys, issuing an

Page 32 of 42
 order to decrease the capital of the company as if the share capital were decreased to the extent
of such subscription by adopting a special resolution by the company; and where such order
is issued, the company shall amend its memorandum of association and articles of association,
subject to the provisions of this Act.
e) The question is related to the doctrine of ultra vires. The meaning of the term ultra vires is simply,
beyond (their) powers. The legal phrase “ultra vires” is applicable only to acts done in excess of
the legal powers of the doers. This presupposes that the powers in their nature are limited. It is a
fundamental rule of Company Law that the objects of a company as stated in its memorandum can
be departed from only to the extent permitted by the Act, thus far and no further.
In consequence, any act done or a contract made by the company which travels beyond the powers
not only of the directors but also of the company is wholly void and inoperative in law and is
therefore not binding on the company.
On this account, a company can be restrained from employing its fund for purposes other than those
sanctioned by the memorandum. Likewise, it can be restrained from carrying on a trade different
from the one it is authorized to carry on.
The impact of the doctrine of ultra vires is that a company can neither be sued on an ultra vires
transaction, nor can it sue on it.
Since the memorandum is a “public document”, it is open to public inspection. Therefore, when
one deals with a company one is deemed to know about the powers of the company. If in spite of
this you enter into a transaction which is ultra vires the company, you cannot enforce it against the
company.
Therefore, the resolution passed by the Board of Director ABC Pvt. Limited for an ultra vires
transaction is invalid. As a result of this, the transaction entered into the supply of fish with FSH
Limited is not legal and is void.
2. Answer the following questions: (3 × 5=15 marks)
a) Ram Janaki Bank Ltd. had earned the profit in FY 2076/77 and board of directors want to
recommend dividend in coming AGM. As this is the first time to recommend dividend they want to
know if there is any restriction to distribute dividend by bank as per the Bank and Financial
Institution Act, 2073.
b) Tilak Das was appointed as a director of Nepal Rastra Bank for the term of 4 years. An application
filed to the Ministry of Finance to remove the director as he was expelled from the post of CEO of
Janak Bikas Bank 5 years back in a charge of over valuation of security that resulted huge loss to
the bank. The ministry wants your opinion to the following matters:
i) The conditions when the director can be removed.
ii) Can he be removed on the above ground?
c) Pukar Singh has been elected in the general meeting as a board of director of Kamana Bank Ltd.
You, as an employee of the bank, have to prepare a document including the matters to be submitted
by a board of director after his appointment. List out the matters that you have to collect from him
for the disclosure to be made by the director as per the Bank and Financial Institution Act, 2073.
Answer
a) As per Section 47 of the Bank and Financial Institutions Act, 2073 before declaration of dividend
by bank and financial institutions following conditions need to be fulfilled:
1. A bank or financial institution shall obtain approval of Nepal Rastra Bank, before declaring
and distributing dividends.
2. No bank or financial institution shall be allowed to declare or distribute or distribute dividends
until it
i) Recovered all of its preliminary expenses;

Page 33 of 42
 ii) Recovered all of its losses sustained by it until the previous year;
iii) Capital fund is maintained;
iv) Amount shall have to set aside provision for possible loan loss;
v) Amount shall have to set aside for general reserve fund;
vi) Shares set aside for public issue are issued and fully paid up,
b)
i) Pursuant to Section 22(1) of the Nepal Rastra Bank Act, 2058 the Government of Nepal, the
Council of Ministers shall remove the Governor, Deputy Governor and Director on conditions
stipulated under Section 22(5) which provides that the Governor, Deputy Governor and
Director shall be removed from the office on any of the following grounds:-
1. If one is disqualified to become a Director pursuant to section 21.
2. The lack of capability to implement or cause to implement the functions which the Bank
has to carry out in order to achieve the objectives of the Bank under this Act.
3. If one has committed any act causing loss and damage to the banking and financial system
of the country.
4. If one is found to have acted dishonestly or with mala-fide intention in any transaction
related to the business of the Bank.
5. If professional license is revoked or prohibited from carrying out any profession rendering
disqualified to be engaged in any trade or profession on the ground of gross misconduct.
6. If one is absent for more than three consecutive meeting of Board without a genuine
reason.
ii) As the act of over valuation of security and punishment thereof is not a ground to remove the
Governor, Deputy Governor and Director as per Section 22(5) as mentioned above, the
Government of Nepal cannot remove Mr. Tilak Das from his post. The removal shall be treated
as unlawful.
c) It is mandatory under Sub-section (1) of Section 25 of the Bank and Financial Institution Act, 2073
that every director shall have to submit the details referred to in Sub-Section (1) of Section 24 to
the bank or financial institution within seven days of his/her appointment. When the details have
to be provided by the directors, the bank or financial institution shall have to separately maintain
records of such details. Under Section 24 of the Bank and Financial Institution Act, 2073, a bank
or financial institution shall collect the following details of a director: -
 Full Name, address, academic qualifications, profession and experience of the director,
 Details as to designation and responsibility if he/she has worked earlier as Director, official or
employee of any other agency,
 Details as to name and address of family of the Director and relevant person's details and
financial interests of himself/herself or his/her family in bank or financial institution or other
agencies, share ownership in his/her name and names of the family of said institution,
 Details of the shares and debentures subscribed by the Director or his/her family members in
the bank or financial institution or its holding or subsidiary company,
 Details of the family members is working as official or employee in the concerned bank or
financial institution, if any,
 Details as to whether the concerned bank or financial institution has, or is going to have, any
type of agreement with himself/herself or his/her family member,
 Details as to whether any type of interests or concerns with regard to appointment of Chief
Executive, Company Secretary and Auditor,

Page 34 of 42
  Written authority given to the Rastra Bank to allow it to conduct an inquiry or to cause to be
conducted the inquiry as to the financial and professional background of the Director,
 Self-declaration that he/she is qualified to be the Director pursuant to this Act,
 Any other details as specified by Rastra Bank from time to time to be furnished before the
Rastra Bank and the Board of Directors.
3. Answer the following questions: (2 × 5=10 marks)
a) Mr. YU, owner of an estate with grasslands, sold the grass to RANA Buffalo Park Pvt. Ltd. He has
also paid share in the company. He further has got insurance of grass in his own name not the
company. One week later, the grass is destroyed by the fire. Mr. YU filed a petition to recover of
loss occurred from fire. However, insurance company refused to provide loss to him. Identify and
describe the reason for refusing of insurance company to provide loss of grass. Describe the
principle of insurable interest with referring a relevant case.
b) Securities Act, 2063 has made legal provision for power to refuse to issue a license to carry on
securities business. State, the legal grounds of refusal to issue license.
Answer:
a) Insurable interest exists when an insured person derives a financial or other kind of benefit from
the continuous existence, without impairment or damage, of the insured object (or in the case of a
person, their continued survival). A person has an insurable interest in something when loss of or
damage to that thing would cause the person to suffer a financial or other kind of loss.
Typically, insurable interest is established by ownership, possession, or direct relationship. For
example, people have insurable interests in their own homes and vehicles, but not in their neighbors'
homes and vehicles, and certainly not those of strangers.
The "factual expectancy test" and "legal interest test" are the two major concepts of insurable
interest.
A company may have an insurable interest in a President/CEO or other employee with special
knowledge and skills. A creditor has an insurable interest in the life of a debtor, up to the amount
of the loan. A person who is financially dependent on a second person has an insurable interest in
the life of that second person.
In Macaura v Northern Assurance Co Ltd case, insurance claim had refused to Mr. Macaura,
the policy holder and seller of timber, as to the same fact of above case. In this case, insured object
is timber that had already sold to other company. Insurer had refused to give insurance amount
being Mr. Macaura has not insurable interest over the timber. In this case, it is concluded that the
appellant had no insurable interest in the timber described. It was not his. It belonged to the Irish
Canadian Sawmills Ltd, of Skibbereen, co Cork. He had no lien or security over it and, though it
lay on his land by his permission, he had no responsibility to its owner for its safety, nor was it
there under any contract that enabled him to hold it for his debt. He stood in no "legal or equitable
relation to" the timber at all. He had no "concern in" the subject insured. His relation was to the
company, not to its goods, and after the fire he was directly prejudiced by the paucity of the
company's assets, not by the fire.
In above case, Mr. YU has same status as explained in the Macaura case. Due to the lack of
insurable interest, he has no right to claim over the insurer on claimant of insurance amount.
b) Section 60 of the Securities Act, 2063 states, Power to refuse to issue a license to carry on securities
business. However, the Board may refuse to issue a license to carry on securities business to any
company or body on the following circumstances:
i) if it is proven that such company or body has been insolvent due to its inability to repay
creditors,

Page 35 of 42
 ii) if the application for such a license is not accompanied by the documents and details required
to be accompanied under this Act or the Rules framed under this Act, or any other matter as
the Board may specify,
iii) if, upon considering the matters set forth in subsection (2) of Section 58, it is not appropriate
to issue a license to carry on securities business.
4. Answer the following questions: (2 × 5 = 10 marks)
a) Simara Steel Ltd. is going to distribute bonus of FY 2076/77. In this year some of the employees
were involved in riots and in disciplinary acts. Company is in dilemma and confusion how bonus
is to be distributed to such employees? Suggest in following query in accordance with the Bonus
Act, 2030.
i) What are the eligibility criteria for distributing bonus?
ii) Is there any restriction to have or to distribute bonus?
b) State the provisions of establishment and function, duties and powers of the One Stop Service
Centre under the Industrial Enterprises Act, 2076.
Answer:
a) Bonus Act, 2030, section 6, has mentioned the eligibility criteria of bonus as follows:
(1) An employee who has worked for the half period to be worked in a fiscal year, shall be entitled
to obtain bonus under to this Act.
Provided that, no employee shall be entitled to obtain Bonus who has worked casually or in a
shift basis.
(2) For the purpose of 1 above, the following periods shall also be computed as a period where an
employee has worked.
(i) A period kept on reserve
(ii) A period under which an employee is on any leave with salary.
(iii) A period of disablement caused by accident arising in course of business of the
enterprise.
There are restriction provisions to have or to distribute bonus in the Bonus Act, 2030. Section 8 has
prescribed the restriction provision that an employee shall not be entitled to obtain bonus under this
Act, if he/she is punished or dismissed from service for committing any act as follows:
(i) Theft of the property of the enterprise or any damage to such property.
(ii) Illegal strike or abetment to other for such strike,
(iii) Riots or breaching of discipline.
Above condition shall not be deemed to be prejudiced to obtain in the case of the bonus for a period
before committing such a punishable act.
b) The Industrial Enterprises Act, 2076 has prescribed the provision regarding the establishment of
One Stop service Centre to provide smooth services related to the establishment of industrial firms
and operation through one door system. The Centre is established for the purpose of providing the
incentives, exemptions, facilities or concessions easily to those industries or investors entitled
under this Act and other prevailing laws and performing the functions to be discharged by various
bodies of the Government of Nepal through one place in a timely manner and delivering industry
administration related services from the permission to establish, registration, expansion and
liquidation of industries. Different services as to registration, environment compliance, foreign
currency exchange, visa matters, infrastructure, land administration customs and revenue and
administration and law are provided through the same Centre at the same place.

Page 36 of 42
 The Government of Nepal may establish and run One Stop Service Centre by publishing a notice
in the Nepal Gazette. While publishing the notice, apart from other matters, it shall provide the
place of Centre, service provided by it, its units and service operation committee.
Function, duties and powers of one stop service Centre
One stop service center shall be established to provide smooth services to investors as well as make
available the incentives and concessions to be enjoyed by any industry from a single place. Pursuant
to Sub-section (1) of Section 36 of the Act, the one stop service committee shall exercise the
following function, duties and powers:-
 To implement or cause to implement the decision to provide exemptions, concessions and
facilities available to the industries as per this Act.
 To perform acts delegated by the Board under its function, duties and powers.
 To decide and implement for the timely arrangement of infrastructure service, like, electricity,
water supply, communication equipment, land and road to the industries.
 To do other works as prescribed.
5. Answer the following questions: (2 × 5=10 marks)
a) A complaint for breach of code of conduct of The Institute of Chartered Accountants of Nepal has
been lodged against Mr. XY Sharma who is Council Member as well as member of Disciplinary
Committee of the Institute. How will the investigation and if applicable, punishment be given to
Mr. XY Sharma as per the provisions of the Nepal Chartered Accountants Act, 2053?
b) State the function, duties and powers of the Accounting Standard Board under the Nepal Chartered
Accountants Act, 2053.
Answer:
a) Sub-section (2) of Section 14 of the Nepal Chartered Accountants Act, 1997 prescribes for the
procedure of investigation for any complain against Chairman or any member of the Disciplinary
Committee for their actions contrary to the Act or the Regulations, Bye-laws or code of conduct
framed under the Act. The provisions of this sub-section clearly spells out that such Chairman or
member shall not be allowed to attend the meeting that hears the complaint against them.
Similarly, sub-section (6), provides that any Council member against whom the Disciplinary
Committee, after investigating upon the complaint of his action contrary to the Act or Regulations,
Bye-laws 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.
In the given case where complain is lodged against Mr. XY Sharma who is the member of both
Disciplinary Committee and the Council. In this case, according to the above provisions of the Act,
he shall not be allowed to take part in the hearing and investigation process in the Disciplinary
Committee, also he shall not be allowed to be present in the meeting of the Council when it hears
the recommendation of the Disciplinary Committee.
b) The fundamental function, rights and duties of the board is to develop accounting standards in order
to govern and regulate the financial reporting and accounting profession. Section 15B of the Nepal
Chartered Accountants Act, 2053 has provided the rights and duties of Accounting Standards Board
be as follows:
 To develop accounting standards, on the basis of relevant International Accounting Standards,
in order to govern and regulate financial reporting and accounting profession.
 To evolve appropriate process of development of accounting standards and publish material
related to accounting standards.
 To redraft, improvise and revise standards.

Page 37 of 42
  To interpret the standards.
 To undertake other related tasks related to accounting standards.
6. Answer the following questions: (5 × 4 = 20 marks)
a) Under what circumstances the negotiable instrument deemed to be dishonored and no presentment
is necessary for its payment as per the Negotiable Instruments Act, 2034?
b) What includes by the employment period under the Labour Act, 2074?
c) 'K' entered into a contract with 'P' for the purchase of 1000 bags of rice at the rate of Rs. 1,000 per
bag. 'P' has not supplied the goods within the due date and due to this 'K' suffered a loss of Rs.
100,000 as he has to purchase these bags at the rate of Rs. 1,100 per bag from the market to deliver
the same to its customers. Decide how much compensation can be claimed by 'K' from 'P'.
d) Explain "Sick Industry" under the Industrial Enterprises Act, 2073.
e) What special programs may be operated by the Government of Nepal relating to the social welfare
as per The Social Welfare Act, 2049?
Answer:
a) Situation in the Negotiable Instruments shall be deemed to be dishonored and no presentment is
necessary for its payment:-
(a) If the maker, acceptor or drawee deliberately prevents the presentment of the Negotiable
Instrument, or
(b) If the instrument being payable at the specified place, neither the payer or his Agent to pay it
attends at such place during the business hours on a business day, or
(c) If the payer closes his/her office during the business hours on a business day, or
(d) If the Negotiable Instrument not being payable at any specified place, the concerned party
cannot be found for the presentment after due search.
b) Section 2 (o) of the Labour Act, 2074 has defined the term employment period which means the
period of employment with the employer. It also includes the following period:
 The period remained in reserve.
 The period stayed with remuneration leave.
 The period of maternity or maternity care leave.
 The period stayed in sick leave because of accident during the course of employment
c) The given problem is related to compensation for loss or damage caused by breach of contract
covered under section 537 of the National Civil Code, 2074.
According to the provision, when a contract has been broken, the party who suffers by such breach
is entitled to receive, from the party who has broken the contract, compensation for any loss or
damage caused to him thereby, which naturally arose in the usual course of things from such breach,
or which the parties knew, when they made the contract, to be likely to result from the breach of it.
In estimating the loss or damage arising from a breach of contract, the means which existed of
remedying the inconvenience caused by the non-performance of the contract must be taken into
account.
Given facts state that 'K' entered into contract with 'P' for purchase of 1000 bags of rice at the rate
of Rs. 1,000 per bag. 'P' breaks his promise as to supply of goods within the due date. This act of P
resulted loss to 'K' of Rs. 1,00,000 as he has to purchase these bags of Rs. 1,100 per bag from
market to deliver it further to its customers.
Accordingly, as per the provision in the given situation, 'K' is entitled to receive from 'P' by way of
compensation, the sum, by which the contract price falls short of the price (i.e., 100 per bag) from

Page 38 of 42
 the market price on the day of default. The number of damages will be Rs. 1,00,000 (i.e., 1000 of
rice bags x 100).
d) Section 37 of the Industrial Enterprises Act 2073, prescribes the provision about the Sick Industry.
If any industry is being operated at least five years and in loss for a consecutive period of last 3
years due to operate in thirty percent or below of the total production capacity due to condition out
of control and not being due to negligence or weakness of management, following the procedure
mentioned under prescribed guidelines, Government of Nepal may identify as sick industry.
On the basis of contribution made by the industry before being sick industry on generation of
employment, import substitution or earn foreign exchange by export promotion and can be re-
operated if provided fixed concession, facility or rebate, Nepal Government may take necessary
action to restructure, reformation and management of such industry.
e) Pursuant to Section 3 of the Social Welfare Act 2049, the Government of Nepal, by means of
different activities relating to the social welfare work, to support the overall development of the
country may operate the social welfare Program through the concerned Ministry and Social
organizations and institutions.
Similarly, as per Section 4, the Government of Nepal may operate special Programs, relating to the
social welfare activity and social service, in the following matters:
a) To serve interest and render welfare to the children, old age, helpless or disabled people.
b) To foster participation in development and to promote and protect the welfare, rights and
interest of the women.
c) To rehabilitate and help to lead a life of dignity to the victims of social mischief's and also to
juvenile delinquency, drug addicts and similar people involved in other kind of addictions.
d) To help to lead a life with dignity to the jobless, poor and illiterate people.
e) To manage religious places and the activities of the trust Guthi institutions.
f) To take effective management and actions for the welfare of the backward communities and
classes.
7. Write short notes: (2 × 5 = 10 marks)
a) Disqualifications of insurance agents, surveyor and brokers.
b) Various leave and holidays facilities prescribed by the Labour Act, 2074.
Answer:
a) As per the Section 32 of the Insurance Act, 2049 no person shall become an Insurance Agents,
Surveyor or Broker in following conditions:
i) If he/she has not attained age of sixteen years,
ii) If he/she is of unsound mind,
iii) If he/she is an insolvent,
iv) If he/she has been convicted and sentenced to punishment by a court in an offence involving
any type of theft, fraud, misappropriation or embezzlement of property entrusted to him, or
v) If he/she has done anything in the course of work regarding to the insurance business causing
loss or damage to the Insurer or insurance policy holder.
b) Labour Act, 2074 under sections 40 to 48 has provided the leave and holidays facilities as follows.
 Weekly holiday- 1 day every week
 Public Holiday- 13 days including May Day and additional 1 day to female employees
including International Women's Day.

Page 39 of 42
 Home Leave- 1 day for every 20 worked days.
 Sick Leave- up to 12 days fully paid annually.
 Mourning Leave- 13 days in case of death of persons.
 Leave in lieu- For the laborers put in work on public holiday or weekly off will be provided
accordingly.
 Maternity Leave- 98 days. Fully paid up to 60 days either before or after the delivery.
 Paternity Leave- 15 days. Fully paid.

Page 40 of 42
Examiner’s Commentary on Students' Performance in June 2021
Examinations
This commentary has been written to accompany the published questions and answers and is written
based on the observations of evaluators. The aim is to provide constructive guidance for future
candidates, giving insight into what the evaluating team is looking for, and flagging difficulties
encountered by candidates who attempted these questions.
Subject: Advanced Accounting
Question No. 1
Overall Satisfactory
Question No. 2
Concept and preparation lacking in calculation of profit during year
Question No. 3
Average performance; most of the students have not answered 3(b) correctly.
Question No. 4
Generally good
Question No. 5
Satisfactory: provision of concerned Standard is not mentioned by many students
Question No. 6
Satisfactory performance
Subject: Audit and Assurance
Question No. 1
Average performance; most of the students referred NAS-10 instead of NAS 8.
Question No. 2
Average Performance; most of the students did not mention exact punishment in answer.
Question No. 3
Average performance; most of the students were not conceptually clear on control environment.
Question No. 4
Poor Performance; misconception about CAs that they are only auditors.
Question No. 5
Most of the students have not answered well about audit strategy.
Question No. 6
Satisfactory performance
Question No. 7
Average performance; repetitive points

Subject: Corporate & Other Laws

Question No. 1

Page 41 of 42
Satisfactory performance
Question No. 2
Average performance. Students need to be more focused on Bonus Act and BAFIA Provision.
Question No. 3
Satisfactory Performance
Question No. 4
Satisfactory Performance
Question No. 5
Satisfactory Performance
Question No. 6
Average performance; 6(a) is not answered well.
Question No. 7
Satisfactory Performance

Page 42 of 42
SUGGESTED ANSWERS TO
THE QUESTIONS SET AT

CHARTERED ACCOUNTANCY PROFESSIONAL (CAP)-II LEVEL

JUNE 2021 EXAMINATIONS

Group-II

The Institute of Chartered Accountants of Nepal

(ICAN)
Satdobato, Lalitpur
© The Institute of Chartered Accountants of Nepal
All exam questions and solutions are the copyright of ICAN and can only be used for classroom and
student use in preparation for their CA exams. They cannot be published in any form (paper or soft
copy), or sold for profit in any way, without first gaining the express permission of ICAN. Nor can they
be used as examinations, in whole or in part, by other institutions or awarding bodies.

Year and month of Publication: 2021 December

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 Secretariat of the Board of Studies 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 Secretariat of the Board of Studies. The Council
or the Board of Studies of the Institute is not any way responsible for the correctness or otherwise of
the answers published herewith.

Page 2 of 61
Table of Contents

Paper 4: Financial Management .............................................................................................................. 4

Paper 5: Cost and Management Accounting ......................................................................................... 19
Paper 6: Business Communication and Marketing ............................................................................... 34
Paper 7: Income Tax and VAT ............................................................................................................. 44
Examiner’s Commentary on Students' Performance in June 2021 Examinations ....................... 60

Page 3 of 61
Paper 4: Financial Management
Attempt all questions.

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

1. Nepal Pharmaceutical is considering two mutually exclusive projects out of which one it should
undertake. The Finance Director thinks that the project with the higher NPV should be chosen
whereas the Managing Director thinks the one with higher IRR should be undertaken especially as
both projects have the same initial outlay and length of life. The company anticipates a cost of
capital of 10% and the net after tax cash flows of the projects are as follows:
Year 0 1 2 3 4 5
(cash flows figs. 000)
Project X (200) 35 80 90 75 20
Project Y (200) 218 10 10 4 3

Required: (8+3.5+3.5+5=20 marks)

a) Calculate the NPV and IRR of each project.
b) State with reasons which project you would recommend.
c) Explain the inconsistency in the ranking of the two projects.
d) Mention the assumptions of the Capital Assets Pricing Model (CAPM)
The discount factors are given as under:
Year 0 1 2 3 4 5
Discount Factors
(10%) 1 0.91 0.83 0.75 0.68 0.62
(20%) 1 0.83 0.69 0.58 0.48 0.41

Answer:
a) Here, NPV is calculated using cost of capital as discounting factor.
P.V.
Particulars Time F. Cash flow Present Value
X Y X Y
Initial Outflow 0 1 (200) (200) (200) (200)
198.3
Inflows 1 0.91 35 218 31.85 8
2 0.83 80 10 66.4 8.3
3 0.75 90 10 67.5 7.5
4 0.68 75 4 51 2.72
5 0.62 20 3 12.4 1.86
NPV 29.15 18.76

Page 4 of 61
 Using 20% discount rate
P.V.
Particulars Time F. Cash flow Present Value
X Y X Y
Initial Outflow 0 1 (200) (200) (200) (200)
180.9
Inflows 1 0.83 35 218 29.05 4
2 0.69 80 10 55.2 6.9
3 0.58 90 10 52.2 5.8
4 0.48 75 4 36 1.92
5 0.41 20 3 8.2 1.23
NPV (19.35) (3.21)

NPV at Low Rate

× Difference in
IRR = Low Rate + (NPV at Low Rate - NPV at High Rates
Rate)
29.15
X = 10 + × (20-10)
(29.15) - (-19.35)
= 16.01%
18.76
Y = 10 + × (20-10)
(18.76) - (-3.21)
= 18.54%

Summary NPV Rank IRR Rank

Amount (000) %
Project X 29.15 I 16.01 II
Project Y 18.76 II 18.54 I

b) The ranks based on NPV & IRR are different. NPV means present value of surplus left after meeting
all cost of fund. It can be used to know the addition in ousting wealth (In absolute amount) whereas
IRR (available rate of return) informs average available rate of return over profit life.
Secondly, the calculation of NPV used cost of capital as discount rate. It is the rate of return in
general. The calculation of IRR was the project specific rate of return as discount rate. It assumes
that the cash inflow over the project life generals this same rate of return. It is not always true hence
NPV is considered best selection criteria for mutually exclusive project. In this case Project X with
high NPV is selected (although it has low rate).
c) Reason for inconsistency in Ranking
i) Difference in amount of total inflows
Project X = 35+80+90+75+20 = 300

Page 5 of 61
 Project Y = 218+10+10+4+3 = 245
In this case the project which has higher total inflows but same initial outflows provide
better NPV hence NPV for project X is more.
ii) Difference in pattern of Inflows: -
A project which provides high inflows during initial period and low inflow later on has
better IRR. Project Y has quite high inflows during initial period hence is has high IRR.
iii) Difference assumption for calculation of NPV/IRR: - NPV is calculated using cost of
capital discount rate. This calculation assumes that the inflows from project over
product life when reinvested for balance period they generate rate of return equal to
cost of capital. It is true.
The calculation of IRR assumes that the cash flows can be reinvested at IRR rate for remaining
life of project. It is not always true.
d) The most important assumptions underlying the CAPM model are as follows;
i) All investors aim to maximize their expected utility of wealth.
ii) All investors operate on a common single period planning horizon.
iii) All investors select from alternative investment opportunities by looking at expected returns
and risk.
iv) All investors are rational risk averters.
v) All investors can lend and borrow unlimited amounts at a common rate of interest.
vi) There are no transaction costs entailed in trading securities.
vii) No investor can influence the market price by the scale of his own transactions.
viii) All securities are highly divisible i.e. can be traded in small units.
2.
a) Peace Limited is thinking to change its credit policy which is expected to increase the average
collection period from one month to two months. The relaxation of credit terms is expected to
produce an increase in sales volume by 25%. Following are other relevant data:
Sales price per unit Rs. 10
Profit per unit Rs. 1.5
Current sales revenue per annum Rs. 2,400,000
Required rate of return on investment 20%
Assume that 25% increase in sales would result in additional stock of Rs. 100,000 and additional
creditors of Rs. 20,000.
Required: (4+4+2=10 marks)
Advise the company whether the credit terms should be revised in following circumstances:
i) If all the customers take longer terms of 2 months
ii) If current customers do not opt for revised credit terms and only new customers opt the revised
credit terms
b) Prepare a Cash Budget for Shrawan to Poush from the following information 5 marks
 The estimated sales and expenses are as follows:
Particulars Jestha Ashadh Shrawan Bhadra Ashwin Kartik Mangsir Poush
Sales 200,000 220,000 120,000 100,000 150,000 240,000 200,000 200,000

Page 6 of 61
 Salaries 30,000 30,000 24,000 24,000 24,000 30,000 27,000 27,000
Misc. 27,000 27,000 21,000 30,000 24,000 27,000 27,000 27,000
expenses
 Cash sales are 75% less than the credit sales
 The firm has gross margin of 25% on sales
 50% of the credit sales are collected in the month following the sales, 60% of the remaining
in the second month and balance in third month.
 Material for the sale of each month is purchased one month advance on a credit for two
months.
 The time lag in the payment of salaries is one third of month and miscellaneous expenses
one month.
 12% debentures Rs. 40,000 were issued on 1st January. (Half yearly interest due on end of
Ashadh and end of Poush.
 The firm maintains a minimum cash balance of Rs. 40,000. Funds can be borrowed @ 12%
p.a. in the multiple of Rs. 1,000. Interest is payable on monthly basis.
 Cash balance at the end of Ashadh is Rs. 60,000.
Answer:
a) The revision of credit terms is justifiable if the rate of return on the additional investment in working
capital exceeds 20%.
Extra profit from the revision
Profit Margin (1.5/10) = 15%
Increase in sales revenue = 2,400,000x25% = Rs. 600,000
Increase in profit = 600,000x15% = Rs. 90,000
Total sales revenue after revision = (2,400,000+600,000) = Rs. 3,000,000
Now, we need to calculate return on extra investment in working capital so as to assess whether the
revision of credit terms is justifiable. This is generally done by taking the figure of debtors on the
basis of cost of sales and sometimes on the basis of sales. Computations have been done below by
following both the basis.
(i) If all Debtors take two months Credit:
Particulars Cost of Sales
Sales Basis Rs. Basis Rs.
Average Debtors after the Sales Increase 425,000 500,000
Cost of sales basis = (2/12 x Rs. 3,000,000 x 85%)
Sales basis = (2/12 x Rs. 3,000,000)
Current Average Debtors 170,000 200,000
Cost of sales basis = (1/12 x Rs 2,400,000 x 85%)
Sales basis = (1/12 x Rs 2,400,000)
Increase in Debtors 255,000 300,000
Increase in Stocks 100,000 100,000
355,000 400,000

Page 7 of 61
 Increase in Creditors (20,000) (20,000)
Net Increase in Working Capital Investment 335,000 380,000
Return on Extra Investment (Cost of Sales Basis) = 90,000/335,000 = 26.87%
Return on Extra Investment (Sales Basis) = 90,000/380,000 = 23.7%
(ii) If only the New Debtors take Two Months' Credit:
Particulars Cost of Sales
Sales Basis Rs. Basis Rs.
Increase in Debtors: 85,000 100,000
Cost of sales basis = (2/12 x Rs. 600,000 x 85%)
Sales basis = (2/12 x Rs. 600,000)
Increase in Stocks 100,000 100,000
Increase in Creditors (20,000) (20,000)
Net Increase in Working Capital Investment 165,000 180,000
Return on Extra Investment (Cost of Sales Basis) = 90,000/165,000 = 54.55%
Return on Extra Investment (Sales Basis) = 90,000/180,000 = 50%
Recommendation:
In both the cases (i) and (ii), the new credit policy appears to be worthwhile under both the
basis. Furthermore, the most of the product can also support extra sales. If the firm has high
fixed costs but low variable costs, the extra production and sales could provide a substantial
contribution at little extra cost.
b)
CASH BUDGET FOR SHRAWAN TO POUSH
Particulars Shrawan Bhadra Ashwin Kartik Mangsir Poush
A. Total Cash Available
Cash in Hand 60,000 42,000 59,800 64,800 51,500 40,500
Cash Sales 24,000 20,000 30,000 48,000 40,000 40,000
Collection from Debtors 136,000 132,800 104,000 103,200 148,000 161,600
Issue of Debentures 40,000 - - - - -
260,000 194,800 193,800 216,000 239,500 242,100
B. Total Cash Payments
Creditors Payment 165,000 90,000 75,000 112,500 180,000 150,000
Salaries 26,000 24,000 24,000 28,000 28,000 27,000
Misc. Expenses 27,000 21,000 30,000 24,000 27,000 27,000
Interest on Debentures - - - - - 2,400
218,000 135,000 129,000 164,500 235,000 206,400
C. Surplus (Deficit) [A-B] 42,000 59,800 64,800 51,500 4,500 35,700
Financing:

Page 8 of 61
 D. Borrowing to Maintain NPR
40,000 - - - - 36,000 5,000
E. Payment of Interest S 12% p.a. - - - - - 360
F. Closing Cash Balance (C+D-E) 42,000 59,800 64,800 51,500 40,500 40,340
Working Notes:
(I) COLLECTION FROM DEBTORS (NPR IN '000)
Shrawa
Particulars Jestha Ashadh n Bhadra Ashwin Kartik Mangsir Poush

Sales 200 220 120 100 150 240 200 200

Cash Sales (20%) 40 44 24 20 30 48 40 40
Credit Sales (80%) 160 176 96 80 120 192 160 160
Collection from Debtors
50% in the Next Month 80 88 48 40 60 96 80
30% in the Second Month 48 53 29 24 36 58
20% in Third Month 32 35 19 16 24
80 136 132.8 104 103.2 148 161.6
(II) PAYMENT TO CREDITORS (NPR IN '000)
Shrawa
Particulars Jestha Ashadh n Bhadra Ashwin Kartik Mangsir Poush

75% of Sales 150 165 90 75 112.5 180 150 150

Purchase one month in
Advance 165 90 75 112.5 180 150 150 150
Payment to Suppliers on 2
months' Credit 165 90 75 112.5 180 150
(III) PAYMENT OF SALARIES (NPR IN '000)
Shrawa
Particulars Jestha Ashadh n Bhadra Ashwin Kartik Mangsir Poush

Due for the Month 30 30 24 24 24 30 27 27

1/3 of Last month 0 10 10 8 8 8 10 9
2/3 of Current Month 20 20 16 16 16 20 18 18
Total Payment 20 30 26 24 24 28 28 27
(IV) Assumptions
a. Purchases for the month of Poush is assumed as in Mangsir in the absence of sales figures for
Magh
b. In the absence of information about sales of Baishakh, Nil collection for that month is assumed.
3.
a) Shivam Ltd. listed on the Nepse has 100,000 shares in issue. The dividend just paid was Rs. 15 per
share. In the current investment level, dividends are expected at this level for the next 3 years, but
will then demonstrate perpetual growth of 10 % p. a. The company is currently all equity financed
and the required rate of return of the equity investors is estimated to be 18%.

Page 9 of 61
 The company has got an investment opportunity available which will involve a capital outlay in
each of the next 2 years and which will produce benefits during the following 3 years. A summary
of the financial implications of this investment is given below:
Year 1 2 3 4 5
Cash Flow in Rs. ‘000 -1,000 -1,000 500 1,500 2,500
The company has a long established policy of not using any debt finance and because of the current
depressed state of the stock market, could not, in the near future, issue new equity. The only possible
way of financing the investment is, therefore, to reduce the dividend payments in the next 2 years.
Cash received from the new investment will all be distributed in the form of dividend. Growth in
old dividends at the rate of 10% will also be maintained because of other operations.
Required: (3+5=8 marks)
i) Calculate the current value of share of Shivam Ltd. at current investment level.
ii) Calculate the share value after the investment opportunity has been accepted using dividend
valuation model, assuming that the market knows of the dividend changes that will result from
the investment.
b) Three companies A, B and C are in the same type of business and hence have similar operating
risks. However, the capital structure of each of them is different and the following are the details:

A B C
Equity Share Capital (Rs.) 400,000 250,000 500,000
[Face value Rs. 10 per share]
Debentures (Rs) - 100,000 250,000
[Face value per debenture Rs. 100]
Market value per share (Rs.) 15 20 12
Market value per debenture (Rs.) - 125 80
Dividend per share (Rs.) 2.70 4 2.88
Interest Rate - 10% 8%
Assume that the current levels of dividends are generally expected to continue indefinitely and the
income-tax rate at 50%.
Required:
Compute the weighted average cost of capital of each company. 7 marks
Answer:
a. As per the dividend discount model, value of a share = Present value of all dividends
Present value of dividend for next 3 years
= Rs. 15×PVIFA (18%, 3) = 15×2.174 = Rs. 32.61
Terminal value of dividend perpetuity at the end of year 3
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑎𝑡 𝑦𝑒𝑎𝑟 3 ×(1+𝑔𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒)
=
𝐾𝑒−𝑔𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒
15×(1+0.10)
= 0.18−0.10
= Rs. 206.25

Present value of terminal value = 206.25×PVIF (18%, 3) = 206.25×0.609 = Rs. 125.61

Page 10 of 61
 So, current value of share of Shivam Ltd. = Rs. (32.61+125.61) = Rs. 158.22
Calculation of present value of DPS of Shivam Ltd. till 5 years
Year Normal DPS Change in DPS Net DPS PFIF @18% PV
1 15 (10) 5 0.847 4.24
2 15 (10) 5 0.718 3.59
3 15 5 20 0.609 12.18
4 (15+10% of 16)=16.6 15 31.60 0.516 16.31
5 (16.6+10% of 16.6)=18.26 25 43.26 0.437 18.90
55.22
18.26×(1+0.10)
And terminal value of dividends at the end of year 5 = 0.18−0.10
= Rs. 251.08
Present value of terminal value = Rs. 251.08×PFIF (18%, 5)
= Rs. 251.08×0.437 = Rs. 109.72
So, value of shares of Shivam Ltd. on acceptance of investment = Rs. 55.22+109.72
= Rs. 164.94
b.
Calculation of Weighted Average Cost of Capital (WACC)
Particulars Amount Weights After tax cost Weighted cost
(Rs.)
i) Cost of Capital of Shares at Market Value
A (400000×15/10) 6,00,000 1.00 (2.70/15) = 18% 18%
B (250000×20/10) 5,00,000 0.80 (4/20) = 20% 16%
C (500000×12/10) 6,00,000 0.75 (2.88/12) = 24% 18%
ii) Cost of capital of Debenture at Market Value
A - - - -
B (100000×125/100) 1,25,000 0.20 (10/125) (1-0.5) = 4% 0.80%
C (250000×80/100) 2,00,000 0.25 (8/80) (1-0.5) = 5% 1.25%
Weighted average cost of capital
A = 18% + 0% = 18%
B = 16% + 0.80% = 16.8%
C = 18% +1.25% = 19.25%
Working Notes:
Weight of Share capital = MV of Share/ (MV of Share + MV Debenture)
Weight of Debenture = MV of Debenture / (MV of Share + MV Debenture)
4.
a) Calculate i) Revenue from Operations ii) Cost of Revenue from Operations iii) Closing Inventory,
iv) Working Capital v) Current Liabilities vi) Current Assets from the following figures: 7 marks
Debtors Turnover Ratio 4 times,
Inventory Turnover Ratio 8 times,

Page 11 of 61
 Quick Ratio 1.5,
Average Trade Receivable is Rs. 180,000,
Working Capital Turnover Ratio 8 times,
Prepaid Expenses Rs. 5,000,
Cash Revenue from operations 25% of the total revenue from operations,
1
Gross Profit Ratio 333%,
Closing Inventory was Rs. 10,000 excess of Opening Inventory.
b) A company is planning to set up a new production facility which is estimated to cost Rs. 5 million
and is expected to produce EBIT of Rs. 0.5 million. The financing of investments required will be
done via taking bank loan and right issue of equity shares. The rate of interest expected on bank
loan are as follows:

Amount of bank loan Rate of interest

Up to Rs. 1 million 9%
For next up to Rs. 1 million 10%
For next up to Rs. 1 million 11%
You are required to advise best financing alternative for shareholder’s wealth maximization and
explain the effect of leverage on the result based on RoCE. 8 marks
Answer:
a)
i) Revenue from operations
Debtors Turnover ratio=Credit Revenue from operation/Average Trade Receivables
4 times=credit revenue from operation/NPR 180,000
Credit revenue from operations=180,000×4=720,000
Let Total Revenue from Operation be X
Total Revenue from operations = Cash Revenue from operation+ Credit Revenue from
operation
X = 25% of X + 720,000
X= 720,000/0.75
=960,000
ii) Cost of Revenue from operations = Revenue from operations - Gross Profit
= 960,000=33-1/3% of 960,000
=640,000
iii) Closing Inventory
Inventory Turnover Ratio = Cost of Revenue from operations/Average Inventory

8 times = Average Inventory/640,000

Average Inventory = 640,000/8

Page 12 of 61
 = 80,000
(OS+CS)/2=80,000
OS+CS = 80,000 × 2 = NPR 160,000............. Eq (1)
CS-OS=10,000.................................................................... Eq (2)
Adding both the equations
2CS= 170,000
CS = 85,000
iv) Working Capital
Working Capital Turnover Ratio = Revenue from operations/Working capital
8 times=960,000/Net Working Capital
Net Working capital= 960,000/8 = NPR 120,000
v) Current Liabilities
CA-CL=120,000...............................................................................Eq (I)
Quick Ratio = QA/CL
= (CA-Inventories & Prepaid Expenses)/CL
1.5 = CA-(85,000+5,000)/CL
CA-1.5CL = NPR 90,000 ...............................................................Eq (II)
Subtracting Eq (II) from Eq (I)
0.5CL =30,000
CL=30,000/0.5 = 60,000
vi) Current Assets (CA) = 120,000+60,000= 180,000
b)
Calculation of EPS under different alternatives:
Particulars Alternate I Alternate II Alternate III
Capital required 5,000,000 5,000,000 5,000,000
Less: Bank loan 1,000,000 2,000,000 3,000,000
Equity share (1) 4,000,000 3,000,000 2,000,000
EBIT 500,000 500,000 500,000
Less: Interest expenses 90,000 190,000 300,000
At 9% for upto 1 million 90,000 90,000 90,000
At 10% for next upto 1 million 100,000 100,000
At 11% for next upto 1 million 110,000
EBT 410,000 310,000 200,000
Less: Income tax @ 25% 102,500 77,500 50,000
Net profit (2) 307,500 232,500 150,000
Number of shares (3=1/100) 40,000 30,000 20,000
Earnings Per Share (2/3) 7.69 7.75 7.50

Page 13 of 61
 Advice: The Company is advised to go for alternative II of financing since it results in highest
amount of EPS.
Calculation of RoCE and explanation
Return on capital employed in all cases = EBIT/Capital employed = 500,000/5,000,000 = 10%
Additional amount of bank loan taken is beneficial only up to the situation when RoCE > rate of
interest on bank loans taken, hence the company should limit its bank financing to Rs. 2 million
only. After that the effect of leverage is unfavorable since higher cost of bank loan reduces the
overall RoCE and therefore EPS has declined to Rs. 7.50 from Rs. 7.75.
5.
a) The following information is given regarding a portfolio:

Investments Initial Price Cash Closing Beta

Dividend Price
ABC shares 140 10 170 0.80
MNO shares 150 15 160 0.90
XYZ shares 200 20 250 1.10
IJK debentures 1,100 100 1,200 0.60
Rate of interest on government bond is 6%.
Calculate expected rate of returns of investments by using CAPM 5 marks
b) Discuss about sensitivity analysis in capital budgeting. 5 marks
c) Asia Bank offers a Fixed Deposit Scheme whereby Rs. 10,000 matures to Rs. 12,544 after 2 years
on yearly compounding basis. The bank is facing deposit crisis because for its growth. What will
be the revised maturity value if the bank wishes to amend the scheme by compounding interest on:
5 marks
i) Half yearly basis
ii) Quarterly Basis
iii) Monthly Basis
Answer:
a) Calculation of market rate of return:
Investments Initial Price Cash Dividend Closing Price
ABC shares 140 10 170
MNO shares 150 15 160
XYZ shares 200 20 250
IJK debentures 1100 100 1200
Total 1590 145 1780
𝑅𝑒𝑡𝑢𝑟𝑛+𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒−𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒
Market return (Rm) = 𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒
145+1780−1590
= = 0.2107 = 21.07%
1590
Calculation of expected rate of returns of investments:
Now, since under CAPM expected return = Rf + β*(Rm-Rf)

Page 14 of 61
 Taking rate of interest on government bond of 6% as risk free rate of return i.e. Rf,
For ABC shares 21.07+0.80*(21.07-6) = 33.13%
For MNO shares 21.07+0.90*(21.07-6) = 34.63%
For XYZ shares 21.07+1.10*(21.07-6) = 37.65%
For IJK debentures 21.07+0.95*(21.07-6) = 30.11%
b) The net present value or Internal Rate of Return of a project is determined by analyzing the after-
tax cash flows arrived at by combining forecasts of various variables like Sales volume, unit selling
price, unit variable cost, fixed cost etc. It is difficult to arrive at an accurate and unbiased forecast
of each variable. It can't be certain about the outcome of any of these variables. The reliability of
the NPV or IRR of the project will depend on the reliability of the forecasts of variables underlying
the estimates of net cash flows. To determine the reliability of the project's NPV or IRR, we can
work out how much difference it makes if any of these forecasts go wrong. We can change each of
the forecasts, one at a time, to at least three values: Pessimistic, expected and optimistic. The NPV
of a project is recalculated under these different assumptions. The method of recalculating NPV or
IRR by changing each forecast is called Sensitivity Analysis.
Sensitivity Analysis is a way of analyzing change in the project's NPV or IRR for a given change
in one of the variables. It indicates how sensitive a project's NPV or IRR is to changes in particular
variables. It basically examines the sensitivity of the variables underlying the computation of NPV
or IRR rather than attempting to quantify risk. It can be applied to any variable which is an input
for the after-tax cash flows. It can be conducted with regard to volume, price, costs etc.
c) Calculation of Compound Interest Rate
Step 1: Calculation of Compound Interest Rate
Maturity Value= Present value (1+r) t
NPR 12544=NPR 1000 (1+r) 2
1+r = 12544/10000
1+r = 1.12
r = 0.12 i.e. 12%
Step 2: Calculation of Revised Maturity Value
MV=PV (1+r) T
i) On half yearly basis
MV=10,000 × (1+0.12/2)4
=10,000×1.12625
=12,625
ii) On quarterly basis
MV=10,000 × (1+0.12/4)8
=10,000×1.12668
=12,668
i) On monthly basis
MV=10,000 × (1+0.12/12)24
=10,000×1.12697
=12,697

Page 15 of 61
6. Write short note/ answer on: (4×2.5 =10 marks)
a) Debt securitization
b) Various kinds of float
c) Black-Scholes model
d) Private equity
Answer:
a) Debt Securitization: It is a method of recycling of funds. It is especially beneficial to financial
intermediaries to support the lending volumes. Assets generating steady cash flows are packaged
together and against this asset pool, market securities can be issued, e.g. housing finance, auto
loans, and credit card receivables. Process of Debt Securitization
 The origination function - A borrower seeks a loan from a finance company, bank. The credit
worthiness of borrower is evaluated and contract is entered into with repayment schedule
structured over the life of the loan.
 The pooling function – Similar loans on receivables are clubbed together to create an
underlying pool of assets. The pool is transferred in favour of special Purpose Vehicle (SPV),
which acts as a trustee for investors.
 The securitization function – SPV will structure and issue securities on the basis of asset pool.
The securities carry a coupon and expected maturity which can be asset - based/mortgage
based. These are generally sold to investors through merchant bankers. Investors are – pension
funds, mutual funds, insurance funds
b) The following are various kinds of float:
1. Billing Float
Billing float refers to the time between the sale and mailing the invoice to the customer
2. Mail Float
Mail float refers to the gap between the time a customer sends the cheque and the time the
cheque is received by the firm.
3. Cheque Processing Float
Cheque processing float refers to the gap between the time the cheque is received by the firm
and the time the cheque is deposited into the bank.
4. Banking Processing Float
Banking Processing float refers to the gap between the time the cheque is deposited into the
bank and the time the cheque is credited to firm's bank account.
c) The Black-Scholes model is used to calculate a theoretical price (ignoring dividend paid during the
life of the option) using the five key determinants of an option's price viz; stock price, strike price,
volatility, time to expiration and short-term risk-free interest rate.
The model, though used by option traders, has a number of limitations, including:
o it takes no account of dividends payable on the shares during the life of the option (though there
is modified version to take these into account)
o it may only be used on European options (a fixed exercise date)
o it assumes a constant risk-free rate throughout the life of the option
o it assumes that the share price follows a random walk, and the possible share prices at the end
of any given period are based upon a normal distribution
o there are no transaction costs or tax effects relating to share or derivative deals

Page 16 of 61
 o it is possible to borrow at the risk-free rate to fund the underlying shares
o the difficulty in estimating standard deviation, to which the model is very sensitive, and the use
of this historic measure to estimate future movements.
d) Private equity is a mode of financing provided by private equity funds to a company for its
expansion, restructuring, refinancing or growth. Private equity fund provide needed capital in the
form of equity, debt or hybrid capital instruments for a particular period of time. Private equity
financed is recovered by private equity fund through structured repayments, another private equity
financing or public issue of equity shares. Private equity is an important source of financing for
companies where traditional sources of finance is not available, hence is also termed as risk capital
for the entrepreneurs. Many private equity funds also provide management consultancy along with
capital thereby helping company’s growth.
7. Distinguish between: (4×2.5 =10 marks)
a) Capital market and money market
b) Discretionary Portfolio management services and Non-Discretionary Portfolio management
services
c) Horizontal Analysis and Vertical Analysis
d) Permanent and Temporary Working Capital
Answer:
a) Capital market and money market are two basic components of financial system. Capital market
deals with long term and medium term instruments of financing such as shares, debentures, mutual
funds etc. Accordingly, capital market has bearing on investment and capital structure decisions.
Capital market is further divided into primary market and secondary market. Typical participants
of capital market are retail and institutional investors, bank and financial institutions, corporate
houses etc.
Money market deals with short term instruments such as interbank deposit, treasury bills,
commercial paper etc. Accordingly, money market has bearing on liquidity management. There is
no subdivision of money market. Typical participants of money market are government, central
bank, banks and financial institutions etc.
b) In Discretionary portfolio management services, an individual authorizes a portfolio
manager to take care of his financial needs on his behalf. The individual issues money to
the portfolio manager who in turn takes care of all his investment needs, paperwork,
documentation, filing and so on. In discretionary portfolio management, the portfolio
manager has full rights to take decisions on his client‘s behalf.
Non-Discretionary Portfolio management services:
In non-discretionary portfolio management services, the portfolio manager can merely advise the
client what is good and bad for him, but the client reserves full right to take his own decisions
c) Horizontal analysis: This technique is also known as comparative analysis. It is conducted by
setting consecutive balance sheet, income statement of statement of cash flow side by side and
reviewing changes in individual categories on year-to-year or multiyear basis. The most important
item revealed by comparative financial statement analysis is trend. The horizontal financial
statements analysis is done by restating amount of each item or group of items as a percentage.
Vertical analysis: Vertical/ Cross-sectional/ Common size statements came from the problems in
comparing the financial statements of firms that differ in size. The vertical analysis represents the
relationship of different items of a financial statement with some common item by expressing each
item as a percentage of the common item.

Page 17 of 61
 In the balance sheet, for example, the assets as well as the liabilities and equity are each expressed
as a 100% and each item in these categories is expressed as a percentage of the respective totals.
In the common size income statement, turnover is expressed as 100% and every item in the income
statement is expressed as a percentage of turnover.
d) Permanent Working Capital
It refers to a certain level of current assets, which is essential for the firm to carry on its business
irrespective of the level of operations. This is the irreducible minimum amount necessary for
maintaining the circulation of the current assets. This minimum level of investment in current assets
is permanently locked up in business and is, therefore, referred as permanent or fixed or handsome
working capital. It is permanent in the same way as investment in firm's fixed assets is. This amount
of working capital should be financed with long-term funds.
Temporary Working Capital
It refers to the amount of working capital over and above the fixed minimum amount of working
capital which is required to meet seasonal and other temporary requirements. It may keep on
fluctuating from period to period depending upon several factors. It is also called fluctuating or
variable or seasonal working capital.

Page 18 of 61
Paper 5: Cost and Management Accounting
All questions are compulsory. Working notes should form part of the answer.
Make assumptions wherever necessary.
1. G Ltd. is manufacturer of office cabinets. During the FY 2076/77, it sold 12,000 units of cabinets
at the price of Rs.15,000 per unit. At the beginning of the year there were 1,500 units of finished
goods in stock which was 800 units at the end of the year. Similarly there was work in progress of
400 units in the beginning of the year and 700 units at the end of the year. Opening WIP was 100%
complete in respect of materials and 40% complete in respect of labour and overhead. Closing
WIP was 100% complete in respect of materials and 50% complete in respect of labour and
overhead.
During the year following expenses were incurred:
Expenses Amount in Rs.
Direct Material 81,200,000
Direct Labour 13,788,000
Variable Overhead 11,490,000
Fixed Overhead 22,980,000
In comparison to last year, the cost per unit have increased as follows:
Direct Material 11%
Direct Labour 7%
Variable Overhead 5%
Fixed Overhead 44%
Selling Administration cost of Rs. 1,500 per unit sold is incurred by G Ltd. and it incurs fixed selling
and administration cost of Rs. 700,000 per year.
Required: 20 marks
a) Profitability Statement as per Absorption Costing
b) Profitability Statement as per Marginal Costing
c) Statement showing element wise cost per unit assuming FIFO basis
Answer
a)
Profitability Statement- Absorption Costing
Sales 180,000,000.00
COGS 131,858,172.16
Opening Stock- WIP 3,076,564.95
Opening Stock- FG 14,653,607.21
Production Cost 129,458,000.00
Closing Stock FG (8,960,000.00)
Closing Stock- WIP (6,370,000.00)
Gross Profit 48,141,827.84
Less: Selling and Admin Cost 18,700,000.00
Selling Cost- Variable 18,000,000.00

Page 19 of 61
 Selling Cost- Fixed 700,000.00

Net Profit 29,441,827.84

b) Profitability Statement- Marginal Costing

Sales 180,000,000.00
COGS- Only Marginal Cost (108,872,616.61)
Opening Stock- WIP 2,854,342.73
Opening Stock- FG 12,570,273.88
Production Cost 106,478,000.00
Closing Stock FG (7,360,000.00)
Closing Stock- WIP (5,670,000.00)
Selling & Admin Cost- Variable (18,000,000.00)
Contribution 53,127,383.39

Fixed Cost
Production Cost (22,980,000.00)
Selling Cost (700,000.00)
Net Profit 29,447,383.39
c)

Total
Equivalent Var
Units Material Labour VOH Cost Fixed OH Total
Completed
Units
12000+800-
1500 11,300.00 11,300.00 11,300.00 11,300.00
Opening WIP (400.00) (160.00) (160.00) (160.00)
Closing WIP 700.00 350.00 350.00 350.00
Total
Equivalent
Units 11,600.00 11,490.00 11,490.00 11,490.00
Total Cost in
Rs. 81,200,000.00 13,788,000.00 11,490,000.00 2,980,000.00 129,458,000.00
Cost Per eqv
unit 7,000.00 1,200.00 1,000.00 9,200.00 2,000.00 11,200.00

Total
Value of Opening Variable Fixed
Stock Material Labour VOH Cost OH Total
Eqv Units 400.00 160.00 160.00 160.00

Page 20 of 61
 Cost per Eqv
Units- Current 7,000.00 1,200.00 1,000.00 9,200.00 2,000.00 11,200.00
Year price
At price of
6,306.31 1,121.50 952.38 8,380.18 1,388.89 9,769.07
previous year
Value of OS current
2,800,000.00 192,000.00 160,000.00 3,152,000.00 320,000.00 3,472,000.00
price
At price of
2,522,522.52 179,439.25 152,380.95 2,854,342.73 222,222.22 3,076,564.95
previous year

Marginal Costing
Opening Stock of F G Absorption Costing
Units 1,500
1,500
Current Year Price 11,200
9,200
Value 9,769.0714
8,380.18
Total Stock of FG Rs. 14,653,607.21
12,570,273.88
800×11,200=Rs.
Closing Stock of FG 8,960.000 (Abs)

Value of Closing Stock

800×9200=Rs7,360,000

Eqv Units 700.00 350.00 350.00 350.00

Cost per Eqv
Units- Current 7,000.00 1,200.00 1,000.00 9,200.00 2,000.00 11,200.00
Year price
Value of CS 4,900,000.00 420,000.00 350,000.00 5,670,000.00 700,000.00 6,370,000.00
2.
a) Components for an assembly are produced under the control of the production manager. These are
assembled and sold under the supervision of the sales manager. The production manager is entitled
for a bonus payment for himself at 1/8th and the workers at 7/8th of the difference between the
notional value and cost of production of the delivered components. The notional value is assessed
at Rs. 518,500 for the components issued to assembly. The sales manager is entitled to a bonus of
1 1
2 % of the profits for himself and 12 % is distributed among his sales staff. The sales during a
2 2
period amount to Rs. 65,000. From the under mentioned particulars, detail the calculations
involved in arriving at the bonus for both managers and the staff. Also, find the impact of such
bonus as a percentage of sales. 10 marks
Rs.
Raw materials at the beginning of the period 22,800
Raw materials at the end of the period 16,400
Purchases during the period 248,600
Wages – Production 46,200
Wages – Assembly 18,100
Overheads – Production 212,500

Page 21 of 61
 Overheads – Sales 45,200
Credit for scrap realized pertaining to components 8,700
Work-in-progress of production at the beginning 12,500
Work-in-progress of production at the end 18,200
Completed assemblies at the beginning 36,000
Completed assemblies at the end 24,030
Net realization on assemblies sold 650,000
b) Nepal Lever Ltd. has three production departments ‘P’, ‘Q’ and ‘R’ and two service departments
‘X’ and ‘Y’. Details pertaining to which are as under:
P Q R X Y
Direct Wages (Rs.) 5,000 1,500 4,500 2,000 800
Working Hours 13,191 7,598 14,995 - -
Value of Machine (Rs.) 100,000 80,000 100,000 20,000 50,000
H.P of Machines 100 80 100 20 50
Light points (Nos.) 20 10 15 5 10
Floor Space (sq. ft.) 2,000 2,500 3,500 1,000 1,000
The expenses are as follows:
Particulars Amount Rs.
Rent and Rates 10,000
General Lighting 600
Indirect Wages 3,450
Power 3,500
Depreciation on Machines 70,000
Sundries (apportionment on the basis of direct wages) 13,800
The expenses of Service Departments are allocated as under:

P Q R X Y
X 45% 15% 30% - 10%
Y 35% 25% 30% 10% -
Product ‘A’ is processed for manufacture in Departments P, Q and R for 6, 5 and 2 hours
respectively.
Direct costs of Product A are:
Direct material cost is Rs. 65 per unit and direct labour cost is Rs. 40 per unit.
You are required to: 10 marks
(i) Prepare a statement showing distribution of overheads among the production and service
departments.
(ii) Calculate recovery rate per hour of each production department after redistributing the
service departments' costs.

Page 22 of 61
 (iii) Find out the total cost of Product ‘A’.
Answer
a) Cost of Production of the Components:
Rs.
Work-in-progress (Opening) 12,500
Raw materials consumed (Opening stock + Purchases – Closing stock) 255,000
Wages – Production 46,200
Overhead – Production 212,500
Total 526,200
Less: Credit for scrap realized 8,700
517,500
Less: Work-in-progress (closing) 18,200
Cost of production excluding bonus (a) 499,300
Notional value 518,500
Difference between notional value and cost of production 19,200
Bonus of Production Manager (19,200 x 1/8) 2,400
Bonus to workers (19,200 x 7/8) 16,800
Total bonus (b) 19,200
Cost of the components delivered (a + b) 518,500
Cost of sales of the Components:
Cost of the components delivered 518,500
Wages – Assembly 18,100
Overheads – Sales 45,200
Completed assembly (opening) 36,000
Total 617,800
Less: Completed assembly (closing) 24,030
Cost of sales excluding bonus (a) 593,770
Selling price 650,000
Profit (before bonus) 56,230
Bonus to sales manager (56,230 x 2.5/100) 1,406
Bonus to sales staff (56,230 x 12.5/100) 7,029
Total bonus (sales) (b) 8,435
Cost of sales including bonus (a + b) 602,205
Profit (net) 47,795
Selling price 650,000
Impact of Bonus on Sales:
Bonus – Production 19,200

Page 23 of 61
 Bonus – Sales 8,435
Total bonus 27,635
Bonus as a % of sales (27,635/ 650,000 x 100) = 4.25%

b) Statement showing distribution of Overheads

Primary Distribution Summary
Item of Cost Basis of Total Rs. P Q R X Y
apportionment
Rs. Rs. Rs. Rs. Rs.
Direct Wages Actual 2,800 - - - 2,000 800
Rent and Rates Floor area 10,000 2,000 2,500 3,500 1,000 1,000
(4:5:7:2:2)
General Light points 600 200 100 150 50 100
Lighting
(4:2:3:1:2)
Indirect Wages Direct wages 3,450 1,250 375 1,125 500 200
(50:15:45:20:8)
Power Horse power of 3,500 1,000 800 1,000 200 500
machines used
(10:8:10:2:5)
Depreciation of Value of 70,000 20,000 16,000 20.000 4,000 10,000
Machinery machinery
(10:8:10:2:5)
Sundries Direct wages 13,800 5,000 1,500 4,500 2,000 800
(50:15:45:20:8)
Total 104,150 29,450 21,275 30,275 9,750 13,400
Secondary Distribution using simultaneous equation method:
Overheads of service cost centres
Let, X be the overhead of service cost center X
Y be the overhead of service cost center Y
X=9,750+0.10Y
Y=13,400+0.10X
Substituting the value of Y in X we get
X= 9,750+0.10 (13,400+0.10X)
X= 9,750+1,340+0.01X
0.99X=11,090
X= Rs. 11,202
Y= 13,400+0.10*11,202
= Rs. 14,520.20
Secondary Distribution Summary
Particulars Total Rs. P Rs. Q Rs. R Rs.

Page 24 of 61
 Allocated and 29,450.00 21,275.00 30,275.00
apportioned over-heads
as per primary
distribution
X 11,202.00 5,040.90 1,680.30 3,360.60
Y 14,520.20 5,082.07 3,630.05 4,356.06
39,572.97 26,585.35 37,991.66
Calculation of Overhead recovery rate per hour
Particulars P Rs. Q Rs. R Rs.
Total Overheads Cost 39,572.97 26,585.35 37,991.66
Working hours 13,191 7,598 14,995
Rate per hour Rs. 3 3.5 2.53
c) Cost of Product A
Particulars Rs.
Direct Material 65
Direct Labour 40
Prime Cost 105
Production Overheads
P 6 hours* Rs. 3 = Rs.18
Q 5 hours* Rs. 3.5 = Rs. 17.5
R 2 hours* Rs. 2.53= Rs. 5.06 40.56
Total Cost 145.56
Note: Secondary Distribution can also be done using repeated distribution Method.
3.
a) A One Contraction Ltd undertook a contract for Rs 500,000 on 1st Shrawan 2075.On Ashadh 31st
of 2076, when the account were closed, the following details about the contract were
gathered. Rs. Rs.

Material Purchased 100,000 Wage accrued 31st Ashadh 5,000

2076
Wage paid 45,000 Work certified 200,000
General Expenses 10,000 Cash received 150,000
Plant Purchased 50,000 Work uncertified 15,000
st
Material on Hand 31 25,000 Depreciation of plant 5,000
Ashadh 2076
The above contract contained an escalation clause "In the event of price of materials and rate of
wage increase by more than 5%, the contract price would increase accordingly by 25% of the rise
in the cost of materials and wages beyond 5% in each case".
It was found that since the date of signing the agreement the price of materials and wages rate
increased by 25%. The value of work certified does not take into account the effect of the above
clause.

Page 25 of 61
 Prepare the contract account. Working should form part of answer. 8 marks
b) PRG Company manufactures infant milk supplement. The shelf life of the supplement is 6 months
and it follows suitable inventory policy as per shelf life. PRG has an opening stock of 10,000
packets as on 1st Shrawan 2077 and expects to produce 75,000 packets which is same as that
produced in previous year. Variable cost of the opening stock is Rs. 20 per packet. For the FY
2077/78, PRG expects to sale 75,000 packets of the supplement.
Costing department of PRG has worked out escalation in cost by 25% on variable cost and 10%
on fixed cost for the FY 2077/78. The estimated fixed costs is Rs. 1,500,000. Based on the
estimation of cost, sales price of Rs. 50 per packet of supplement is announced for FY2077/78.
Required: 8 marks
i. Break even volume for FY 2077/78, and
ii. Estimate of profit that would be realized in FY 2077/78
c) What are the advantages of Perpetual Inventory System? 4 marks
Answer
a) CONTRACT ACCOUNT Rs.
To Materials 100,000 By Work-In-progress:
To Wages (45,000+5,000) 50,000 Work certified 200,000
To General expenses 10,000 Work uncertified 15,000
To Depreciation of Plant 5,000 By contract escalation 5,000
(working Note 1)
To Profit (working note 2) 20,000 By Materials in Hand 25,000
To WIP(Reserve) 60,000
245,000 245,000
Working Note (1) Escalation charges
Total Increase Up to 5% Beyond
Materials 75,000*(25/125) 75,000*(5/125) 12,000
=15,000 =3,000
Wages 50,000*(25/125) 50,000*(5/125) 8,000
=10,000 =2,000
Total Increase Rs. 25,000 Rs. 5,000 Rs. 20,000
Increase in Contract Price =20,000*25/100 = Rs. 5,000
Working Note (2) Computation of Profit transfer to P/L account
=80,000*1/3*1, 50,000/2, 00,000 = Rs. 20,000
b) As shelf life of products is less than 6 months, FIFO policy is followed. Hence, at first opening
stock shall be sold.
(i) Break Even Volume

From Opening Stock From Production

Sales Qty 10,000.00 65,000.00
Sales Value 500,000.00 3,250,000.00

Page 26 of 61
 Variable Cost
From Opening Stock From Production
Units 10,000.00 65,000.00
Per Unit VC 20 25
Variable cost of stock 200,000.00 1,625,000.00
Contribution 300,000.00 1,625,000.00
Contribution per unit 30 25
Total Fixed Cost 1,500,000.00 1,200,000.00
Contribution from Opening Stock (300,000.00) 0
Remaining fixed Cost 1,200,000.00 1,200,000.00
Contribution per unit 25
Units to be sold from current year production to cover remaining fixed
cost 48,000.00
Breakeven Volume (Sold opening stock
+ Units sold from current production) 10000+48000
Breakeven Volume 58,000.00

(ii) Estimation of Profit that would be realised during FY2077/78

From Opening From
Stock Production
Sales price pu 50 50.00
Variable Cost 20 25
Fixed Cost 18.18 20.00
Profit per unit 11.82 5
Unit Sold 10,000.00 65,000.00
Profit Realised 118,181.82 325,000.00
Total Profit Realised 443,181.82

Fixed cost per unit

Total Fixed Cost 1,500,000.00
Total Production 75,000.00
Fixed cost per unit 18.18 20.00
Fixed cost has escalated so effect of escalation has been nullified
to determine Fixed Cost unit for Opening Stock
c) Advantages of Perpetual Inventory System
1. 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.
2. Interim financial accounts can be prepared with regular convenience because the long and
costly work of actual stock taking is avoided.

Page 27 of 61
 3. Over -investment in stock can be avoided because quantity and value of materials in stock is
always known.
4. In case of destruction of stock by fire, the system helps in settling the insurance claim as correct
stock figures can be readily obtained.
5. Loss of stock due to pilferage or obsolescence etc., is detected at an early stage and suitable
steps can be taken to prevent its recurrence.
6. 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.
4.
a) A manufacturing company has disclosed a net loss of Rs. 213,000 as per their cost accounting
records for the year ended March 31, 2020. However, their financial accounting records disclosed
a net loss of Rs. 258,000 for the same period. A scrutiny of data of both the sets of books of accounts
revealed the following information:
Rs.
i) Factory overheads under-absorbed 5,000
ii) Administration overheads over-absorbed 3,000
iii) Depreciation charged in financial accounts 70,000
iv) Depreciation charged in cost accounts 80,000
v) Interest on investments not included in cost accounts 20,000
vi) Income-tax provided in financial accounts 65,000
vii) Transfer fees (credit in financial accounts) 2,000
viii) Preliminary expenses written off 3,000
ix) Over-valuation of closing stock of finished goods in cost 7,000
Accounts
Prepare a Memorandum Reconciliation Account. 5 marks
b) PAKHSI Ltd. produces two products, C and D using same raw materials i.e. Cream and Flour.
One unit of C uses 3 liters of Cream and 4 Kg of Flour. One unit of D uses 5 liters of Cream and 2
Kg of Flour. Cream and Flour can be purchased at unit price of Rs. 800 and Rs 60 respectively.
Budgeted Sales for FY 2077/78 are 8,300 units of C and 5,800 units of D. As on 1/4/2077 there is
a stock of 400 units of C, 300 units of D, 600 liters of Cream and 280 Kg of flour. Considering the
market demand, the PAKHSI plans to maintain stock of 600 units of C, 600 units of D, 5,000 liters
of Cream and 3,500 Kg of flour at the end of the year. Owing to the experience in handling stores,
store manager cum purchase manager estimates that following provision is required for damage
of raw materials and produce of the company:
C 40 Units
D 20 Units
Cream 800 Liter
Flour 500 Kg
Prepare material purchase budget. 5 marks
c) From the following information, calculate employee turnover rate using- (i) Separation Method,
(ii) Replacement Method, (iii) New Recruitment Method, and (iv) Flux Method:
No. of workers as on 01.01.2020 = 3,600
No. of workers as on 31.12.2020 = 3,790

Page 28 of 61
 During the year, 40 workers left while 120 workers were discharged. 350 workers were recruited
during the year, of these 150 workers were recruited because of exits and the rest were recruited
in accordance with expansion plans. 5 marks
Answer
a) Memorandum Reconciliation Account
Particulars Rs. Particulars Rs.
To Net loss as per costing 213,000 By Administrative overhead 3,000
Books over absorbed in costs
By Depreciation over charged
To Factory overheads under 5,000 10,000
in cost books (80,000 –
Absorbed
70,000)
To Income tax not provided in 65,000 By Interest on investments 20,000
cost books not included in cost books
By Transfer fees not
To Preliminary expenses 3,000 considered in cost books 2,000
written off in financial Books

By Net loss as per financial

To Over-valuation of Closing 7,000
books
Stock of finished goods in cost
258,000
books

293,000 293,000

b)
Production Budget
C D
Sales 8,300.00 5,800.00
Opening Stock (400.00) (300.00)
Closing Stock 600.00 600.00
Provision required 40.00 20.00
Production required 8,540.00 6,120.00

Material Purchase Budget

Cream Flour
Qty required for production- C 25,620.00 34,160.00
Qty required for production- D 30,600.00 12,240.00
Opening Stock (600.00) (280.00)
Closing Stock 5,000.00 3,500.00
Provision for obsolesce 800.00 500.00
Material to be purchased in qty 61,420.00 50,120.00
Purchase price Per unit 800.00 60.00
Material Purchase in R. 49,136,000.00 3,007,200.00

Page 29 of 61
c) Employee turnover rate using:
(i) Separation Method:
= (No. of workers left + No. of workers discharged)*100/Average number of workers
= (40+120)*100/ (3,600+3,790)/2
=160*100/3,695 = 4.33%
(ii) Replacement Method:
= No. of workers replaced* 100/Average number of workers
= 150*100/3,695 = 4.06%
(iii) New Recruitment Method
= No. of workers newly recruited*100/Average number of workers
= (No. Recruitments- No. of replacements)*100/Average number of workers
= (350-150)*100/3695= 5.41%
(iv) Flux Method:
= (No. of separations + No. of accessions)*100/Average number of workers
= (160+350)*100/3,695 = 13.80%
5.
a) An automobile company purchases 27,000 spare parts for its annual requirements. The cost per
order is Rs. 240 and the annual carrying cost of average inventory is 12.5%. Each spare part costs
Rs. 50.
At present, the order size is 3,000 spare parts.
(Assume that number of days in a year = 360 days)
Find out: 7 marks
i) How much cost of the company would be saved by opting the EOQ model?
ii) The reorder point under EOQ model, if lead time is 12 days.
iii) How frequently should orders for procurement be placed under EOQ model?
b) Outline the circumstances under which a Cost Audit ordered. 4 marks
c) Discuss the treatment of by-product cost in Cost Accounting. 4 marks
Answer
a) Working Notes:
Annual requirement (A) = 27,000 units
Cost per order (O) = Rs. 240
Inventory carrying cost (i) = 12.5%
Cost per unit of spare (c) = Rs. 50
Carrying cost per unit (i x c) = Rs. 50 X 12.5% = Rs. 6.25
𝐴𝑂
Economic Order Quantity (EOQ) = √𝑖𝑥𝑐

2×27,000×240
=√ 6.25

Page 30 of 61
 = 1,440 Units
(i) Calculating of saving by opting EOQ
Particulars Existing order policy EOQ model
No. of orders 9 (27,000/3,000) 18.75 or 19 (27,000/1,440)
A. Ordering Cost Rs. 2,160 (Rs. 240X9) 4,560 (Rs. 240X19)
B. Carrying Cost Rs. 9,375 (3,000X6.25/2) 4,500 (1,440X6.25/2)
Total Cost (A+B) Rs. 11,535 9,060
Savings of cost by opting EOQ Model = Rs. 11,535- Rs. 9,060 = Rs. 2,475
(ii) Re-order point under EOQ:
Re-order point/Re-order level= Maximum consumption x Maximum lead time
Consumption per day = 27,000 units/360 days = 75 units
Re-order point/Re-order level = 75 units X 12 days = 900 units
(iii) Frequency of Orders (in days): 360 days/No. of orders a year = 360 days/19 = 18.95 or 19 days
b) The following are the circumstances under which a Cost Audit ordered:
i. Price fixation of product by management or government
ii. Finding the reason of cost variation within the industry
iii. Measurement the efficient of management for further action
iv. Tax assessment
v. Solve the trade disputes between partners and party
c) By- product cost can be dealt in cost accounting in the following ways:
(i) When they are of small total value: When the by-products are of small total value, the amount
realized from their sale may be dealt in any one of the following two ways:
a) The sales value of the by- products may be credited to the costing Profit and loss account
and no credit be given in the cost accounts. The credit to the Costing Profit and Loss
Account here is treated either as miscellaneous income or as additional sales revenue.
b) The sale proceeds of the by-product may be treated as deductions from the total costs. The
sale proceeds in fact should be deducted either from the production cost or from the cost
of sales.
(ii) When the by-products are of considerable total value: When by-products are of considerable
total value, they may be regarded as joint products rather than as by-products. To determine
exact cost of by-products the costs incurred up to the point of separation, should be apportioned
over by-products and joint products by using a logical basis. In this case, the joint costs may
be divided over joint products and by-products by using relative market values; physical output
method (at the point of split off) or ultimate selling prices (if sold).
(iii) 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 the
realizable value of by-products.
If total sales value of by-products at split off point is small, it may be treated as per the provisions
discussed over under (i).
In the contrary case, the amount realized from the sale of by-products will be considerable and
thus it may be treated as discussed under (ii).

Page 31 of 61
6. Write short notes: (4×2.5=10 marks)
a) Imputed cost
b) Responsibility accounting
c) Cost reduction
d) Operating costing
Answer
a) These are the notional costs which do not involve cash outlay. These costs are similar to opportunity
costs. They are not included in cost accounts but are important for taking into consideration while
making management decisions. For example, interest on capital is ignored in cost accounts though
it is considered in financial accounts. In case two projects require unequal outlays of cash,
management should take into considerations the capital to judge the relative profitability of the
projects. Rent of owned building and Interest on owned capital are the examples of Imputed Costs.
b) Responsibility accounting uses budgets, variances and reports which are tailored to areas of
responsibility, called cost centres, profit centres or investment centres, and which provide managers
with the information necessary for planning and control. So that this system can work well, a
company must be organised with clearly defined lines of authority, ensuring that each manager
knows exactly what is expected of him. The costs of revenues are assigned to the individuals in
charge of responsibility centre. Responsibility Accounting is a management control system.
Management would have to plan and control the responsibility centres. For this purpose the
following steps would be necessary:—
(i) Fixation of targets.
(ii) Evaluation of performance by comparing actuals with Budgets.
(iii) Analysis of variances under the heads of controllable and uncontrollable heads.
(iv) To take corrective steps.
In Responsibility Accounting a Manager would be held responsible for activities which are
controlled by him for this proper Organisational Chart with line of responsibility should be there.
c) Cost reduction may be defined as the achievement of real and permanent reduction in the unit cost
of goods manufactured or services rendered without impairing their suitability for the use intended
or diminution in the quality of the product. Cost reduction, therefore, should not be confused with
cost saving and cost control. Cost saving should be a temporary affair and may be at the cost of
quality. Cost reduction implies the retention of essential characteristics and quality of the product
and thus it must be confined to permanent and genuine savings in the costs of manufacture,
administration, distribution and selling, brought about by elimination of wasteful and inessential
elements from the design of the product and from the techniques and practices carried out in
connection therewith. In other words, the essential characteristics and quality of the products are
retained through improved methods and techniques used and thereby a permanent reduction in unit
cost is achieved. The definition of cost reduction does not, however, include reduction in
expenditure arising from reduction or similar government action or the effect of price agreements.
The three-fold assumption involved in the definition of cost reduction may be summarized as under:
i) There is saving in unit cost.
ii) Such saving is of permanent nature.
iii) The quality and utility of goods and services remain unaffected, if not improved.
d) Operating Costing is a method of ascertaining costs of providing or operating a service. This
method of costing is applied by those undertakings which provide services rather than
production of commodities. This costing method is usually made use of by transport
companies, gas and water works departments, electricity supply companies, canteens,
hospitals, theatres, schools etc.

Page 32 of 61
Computation of composite units: When two units are merged into one it is called Composite
units. It is explained with example as follows.Composite units i.e. tonnes-kms, quintal-kms.
etc., may be computed in two ways.
(i) Absolute (weighted average) tonnes-kms.
Absolute tonnes-kms., are the sum total of tonnes-kms., arrived at by multiplying various
distances by respective load quantities carried.
(ii) Commercial (simple average) tonnes-kms.
Commercial tonnes-kms., are arrived at by multiplying total distance kms., by average load
quantity.

Page 33 of 61
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. (4×5=20 marks)
Mr.Vaidhya is a 77-year-old man who was admitted to the ICU, 12 days ago after surgery for a
perforated ulcer. Within 48 hours of surgery, he developed some infection and remained ventilator
dependent. His surgical wound is not healing well. In the last several days, his creatinine has been
rising and urine output falling. The surgeon visits daily before 7 AM but has not spoken directly to
the family since day one, when he reported that the surgery went well. The admitting intensivist
(now off service) spoke briefly to the family – the patient’s wife of 60 years, and his adult son - on
Day 3 of the ICU stay about the patient’s condition. A nephrologist who saw the patient yesterday
told the wife that he had been consulted to provide dialysis. At today’s ICU rounds, the current
ICU attending predicted that the patient may die in the hospital, but this was not discussed with the
family. The wife has asked several times for reassurance that her husband will ultimately be able
to return home with her. The son, who often accompanies his mother during visiting hours, seems
angry with the physician’s treatment to his father. An ICU family meeting attended by the ICU
attending physician, the patient’s designated nurse, the wife and the son, is held to discuss goals
of the care. The family has been insisting that everything should be done.
Questions:
a) Discuss the case from the viewpoint of communication. What do you think the problem is?
b) If you were asked to convene the meeting with the family, what would be your communication
strategies? What would you suggest to the ICU people and to the family? Discuss.
c) Do you think the way the family members are reacting is ok? What is your view on this?
d) Most of the people worldwide are not happy with the way doctors and nurses communicate to
the patients and their relatives. What may be the reasons behind that?
Answer:
a) Family members of the patient have every right to get information on timely basis. Hospital staff
should take a great care in breaking the news. They must be informed about all possibilities and
challenges regarding the patients’ health. But in this case, the doctors are not speaking directly to
the family members. Family members are getting few information from junior staff, sometimes
through informal gossips. It is very painful for the patients’ family members. In such a critical
situation, hospitals must develop a very strategic communication strategy that must be highly
sensible to the concerned party.
b) If I were asked to convene a meeting with the family, first I would collect the information about
the patient thoroughly. I would assess the situation and discuss with doctors and nurses about all
the possibilities to help the patient to recover. If the health of the patient is critical and it seems
almost impossible to save the patient, its our ethical responsibility to inform the caretakers honestly
on time. Hence, it is objectionable to break the news of the deteriorating condition of the patient’s
health that most probably leads to the death in the last hour after many day’s treatment. In fact, they
should have been updated from time to time from the very first day. In this present case, hospital
has already made a mistake.
At this critical juncture, I would have arranged a meeting with the patients’ family members, along
with the doctors and nurses involved in treating the patient. Taking a great care of the message
sensitivity, I would have informed the family members about the severity of the patient’s health. I
would have requested them to accept the fate, telling them that life and death are not always at
doctors’ command.
c) Yes, I think the way they are reacting is ok because they are the victims now. The Hospital should

Page 34 of 61
 have provided them necessary information regarding the health status of the patient on a timely
basis.
They have been told, after many days, that they will probably lose their family member. They have
not got even that information from the doctors who had been treating the patient. They are at a great
distress. They are asking for the right information about the patient and they have every right to ask
for that information.
d) Yes, it is true that in most of the cases the hospital staff don’t communicate responsibly and honestly
to the caretakers about the patient’s condition. The hospital staff mostly seen apathetic to the
patients and their family members.
It has been already proven by many researches that if doctors and the hospital staff communicate
with the patients and the concerned family properly, the patient’s health improves much faster.
Doctors and nurses need proper communication training worldwide. Only medicines do not heal.
Healing is much more than just recovering from the disease and in this healing process,
communication may act like a soothing balm.
2. What importance does ethical communication have in business? Discuss some of the ways of
maintaining ethical standards in business. 10 marks
Answer:
As a business communicator, you should understand basic ethical principles so that you can make
logical decisions when faced with dilemmas in the workplace. Professionals in any field must deal
with moral dilemmas on the job. However, just being a moral person and having sound personal
ethics may not be sufficient to handle the ethical issues that you may face in the workplace. On the
job you will face many dilemmas, and you will want to react ethically.
Taking ethics into consideration can be painful in the short term. But in the long term ethical
behavior makes sense and pays off. Dealing honestly with colleagues and customers develops trust
and builds stronger relationships. Many businesses today recognize that ethical practices make
good business sense. Ethical companies endure less litigation, less resentment, and less government
regulation. The following guidelines can help you set specific ethical goals and maintain a high
ethical standard.
Abiding by the Law. Know the laws in your field and follow them. Particularly important for
business communicators are issues of copyright law. Don't assume that Internet items are in the
"public domain" and free to be used. Internet items are also covered by copyright laws.
Telling the Truth. Ethical business communicators do not intentionally make statements that are
untrue or deceptive. We become aware of dishonesty in business when violators break laws, notably
in advertising, packaging, and marketing. Half-truths, exaggerations, and deceptions constitute
unethical communication. But conflicting loyalties in the workplace sometimes blur the line
between right and wrong.
Labeling Opinions. Sensitive communicators know the difference between facts and opinions.
Facts are verifiable and often are quantifiable; opinions are beliefs held with confidence but without
substantiation. Stating opinions as if they were facts is unethical.
Being Objective. Ethical business communicators recognize their own biases and strive to keep
them from distorting a message. Honest reporting means presenting the whole picture and relating
all facts fairly.
Using Inclusive Language. Strive to use language that includes rather than excludes. Do not use
expressions that discriminate against individuals or groups on the basis of their gender, ethnicity,
disability, or age. Language is discriminatory when it stereotypes, insults, or excludes people.

Page 35 of 61
 Giving Credit. Ethical communicators give credit for ideas by (1) referring to originators names
within the text, (2) using quotation marks, and (3) documenting sources with endnotes, footnotes,
or internal references. In school or on the job, stealing ideas or words from others is unethical.
3. Answer these questions. (2×5=10 marks)
a) What does the term ‘circular’ mean? How is a circular significant for an effective business
meeting?
b) Mention some of the ways of improving nonverbal communication skills.
Answer:
a) A circular refers to a formal note sent to the participants of a meeting informing and inviting them
about the meeting. It is a form of a letter or an e-mail which is usually written by the secretary of
the board or committee. It involves details of the meeting.
Business meetings are organized in the organizations to make the discussions and decisions
regarding different issues and matters. The success of any meeting may depend on essential
preparatory work. Part of this work involves circulating the notice and agenda about the meeting
to all the members or participants of the meeting. The agenda are also required in many contexts
of effective business meetings to be discussed and negotiated among the members. Such agenda
are sent to the members along with the circulars focusing on date, time, venue, etc. of the meeting.
If such circulars are not sent to the participants of a meeting, that meeting may not be effective at
all. The members can be prepared themselves about the topic of discussion, and they can contribute
more effectively if they get circular in time. They can also become punctual at the meeting place
because of the circular sent to them prior to the meeting.
b) Communicators may improve their nonverbal communication skills by maintaining eye contact,
looking alert, eliminating physical barriers that separate them from their listeners, and improving
their comprehension of nonverbal signals. Besides, following specific activities might prove
valuable in improving nonverbal skill.
 Self-monitor your actions and tones. When you start to notice a habits or oddities that occur
while you speak, write them down. This will help correct yourself when it comes down to it.
 Be aware of how people see you. We all see ourselves one way, but others can see us in a
different manner. Notice how people react to you while you speak.
 Ask friends to help you determine where you're going wrong. They will know if you are
sending any conflicting signals. If you feel comfortable, ask your colleagues as well. They see
another side of you that your friends normally don't.
 Videotape yourself while you speak. Make sure you are able to see at least your upper half.
Notice any gestures, facial expressions, or tones that can conflict with the message you are
giving with your words.
 Adapt with the roles you have in your life. You act differently as a student and as a mother,
for example. Be sure that your words, tones, actions, and gestures correlate with the
environment and role that you are in at that time.
4. Write short notes on: (4×2.5=10 marks)
a) Writing routine business request
b) Negotiation in business communication
c) Corporate social responsibility (CSR)
d) Letter of authorization in a report
Answer:
a) Writing routine business request

Page 36 of 61
 When writing a routine request, open by stating specific request. Use the body to justify request and
explain its importance. Close routine requests by asking for specific action (including a deadline, if
appropriate) and expressing goodwill. A courteous close contains three important elements: (1) a
specific request, (2) information about how you can be reached (if it isn’t obvious), and (3) an
expression of appreciation or goodwill.
b) Negotiation is one of the very useful and effective processes of conflict resolution. It helps people
to eliminate the basis for conflicts through bilateral discussions, dialogues and compromise. It is
the most preliminary stage in the process for the conflict resolution. The two conflicting parties are
required to go through the situation with certain critical reflections, and they are kept together face-
to-face with a kind of realization about the situation. They are ready to reach the solution and get
involved in the negotiation process. They have open discussion with the motive of negotiation.
They try to make ‘give and take’ results on one hand, and on the other they try to compromise upon
certain bottom line of their views and positions. They reach the ‘win-win’ situation. The role of the
third party is quite subtle unlike in the processes such as mediation and arbitration.
c) Corporate social responsibility (CSR) is an essential component of an ethical and responsible
business organization. It is a business movement in which commercial organizations address the
social issues identified through different sources, and run the programs for social welfare. They
invest certain amount of money so that their business as well as the society where they have to
survive can grow together. Different infrastructural activities, educational programs, public health
programs, sports events etc. are conducted by the business organizations as their responsibility to
the society.
d) Generally, we don’t write a report to store in our own drawer. Unless the report is self-initiated,
someone has asked us to produce a report. Hence, our opening words in the transmittal document
refer to that request. We must remember that much time may have passed since the initial request
and that even the requester may have forgotten the details. Some report writers include in the
appendix the actual report request as supplementary information. Including all these information,
we write a letter of authorization and place it in the prefatory part of a report.

Section -'B'
5. Read the following case carefully and answer the questions given below: (4×5=20 marks)
Traders of readymade garments (RMG) imported goods worth Rs 4 billion targeting the summer
season this year. However, the imported goods are currently stuck in their godowns, as traders are
unable to sell the clothes due to the lockdown. The prohibitory order aimed at controlling the
spread of coronavirus has severely affected the sales of readymade garments.
Meanwhile, the traders are frustrated as the second wave of Covid-19, and the subsequent
lockdown has affected their business in the peak season, forcing them to hold the imported goods
in their godowns. April is the peak time for selling RMGs. Last year too, readymade garments
worth Rs 3 to 4 billion were stuck in the warehouses of traders, as the summer season was about
to start.
Dil Sundar Shrestha, a central member of the Federation of Nepalese Chambers of Commerce and
Industry, said that the traders are witnessing the same situation this year. "Last year's stock of
clothes could not be sold. This year too, we have a stock of goods worth Rs 4 billion," he said.
Rajeshman Shrestha, a retailer of readymade garments in Asan, had imported goods worth around
Rs 1.5 million for the summer season as the coronavirus pandemic seemed to be declining. But he
has not been able to sell clothes more than Rs 500,000.
"I don't know how long the lockdown will last. So I am worried that the investment in the business
will sink,” he said. On the one hand, bank loans, interest, rental charge are quite high. As the
lockdown continues, the readymade garments stuck in traders' godowns cannot be sold in the

Page 37 of 61
 winter. Therefore, traders say that the current investment is unlikely to return until the summer of
next year.
Nepali traders import readymade garments worth Rs 30-40 billion from neighboring India and
China every year during summer, winter, and during the Dashain-Tihar festivals. (Business Age,
2021)
a) Discuss the general marketing environment.
b) Explain why buyers’ behaviour needs to be understood.
c) What could be the role of MIS during COVID-19 in Nepalese business?
d) How do you build relationship with customer?
Answer:
a) To make the right strategy to face COVID-19 crisis environmental analysis must be done carefully.
Environment can be divided into Internal environment (company environment), external
environment (task environment and general environment). Internal environment consist of factors
inside the company, those are mission, vision, policies, financial resources, human resources,
physical resource, information resource, organizational culture, organizational structure, company
departments like management (decisions, strategies, plans, policies, mission of the company),
financing (funding marketing plan), research development (for safe & attractive product),
purchasing, operations (producing & distributing), accounting (measuring revenue & costs).
External factor consists of task environment and general environment. Task environment consists
of factors that affect the daily operations of the company. Task environment consists of suppliers,
facilitating institutions (research agency, consultant agency, advertising agency, transportation
company, bank, insurance company, security agency for the company), wholesales, retailer,
dealers, distributors, agents, customers, competitors, publics (general public, local public, citizen
groups, minority groups, employees, media, related government officials). Every company have its
own unique task environment therefore task environment is also known as specific (not general)
environment. General environment is big environmental factors which affect every company of
that state. General environmental factors are political environment, legal environment, economic
environment, natural environment, global environment, social environment, demographic
environment, cultural environment, technological environment.
Kotler (2006) has divided environment into macro environment and micro environment. Kotler has
put internal environment and task environment into micro environment. He has explained macro
environment as general environment. Micro factors are small and controllable to an extent but
macro factors are big and beyond the control of the company. Company must adopt into macro
environment as it changes. Very few companies are successful in manipulating macro factors
through proactive marketing. Micro environmental factors analysis help realise strengths and
weakness of the company. Macro environmental factors analysis help realize opportunities and
treats to the company.
b) Due to COVID crisis there is change in behaviour of buyers. Buyers’ behaviour must be understood
to fulfil following objectives.
1. Satisfy customer needs: Consumer needs satisfaction is the importance of understanding buyer
behaviour. According to the behaviour of consumers/buyers, organization should offer a
marketing mix in the organizations that satisfy the needs of the target consumers/buyers.
Consumer tastes and preferences are ever changing. Study of consumers' behavior gives the
needy information regarding color, design, size etc. which they want.
2. Help development of marketing mix: Development of marketing mix strategy is another
importance of understanding buyer behaviour. Consumers' response helps to develop
marketing mix strategy as per the changing environment. Understanding of buyers/consumers
behaviour is the key factor that influences the organizations so that they can develop
appropriate marketing mix in the organizations.

Page 38 of 61
 3. Identify new market opportunities: By understanding buyers/consumers behaviour, the
marketers can find out the unsatisfied needs which motivate them to produce the products
accordingly. This unsatisfied needs helps to locate new market opportunities which are
importance of understanding buyers' behaviour in the organizations.
4. Help target market selection: Behaviour is an important variable for market segmentation.
By understanding buyers/consumers behaviour, organizations can effectively segment the
market. For effective market segmentation and target marketing, it is essential to have an
understanding of consumers and their behavior.
5. Help efficient use of resource: By understanding buyers/consumers behaviour, organization
can make efficient use of marketing resources. They can focus on their marketing efforts in
meaningful group of marketing. It is useful in developing ways for the more efficient utilization
of resources of marketing. It also helps in solving marketing management problems in more
effective way.
6. Realize what positioning will be appealing to target customer. After studying buyers
behavior marketer can learn what motivate customers to buy the product. When buyers
behavior is analyzed marketer will come to know some are motivated to buy because of price,
some are motivated to buy because of safety, some are motivated to buy because of after sales
services, some are motivated to buy because of hygiene, some are motivated to buy because of
made in Nepal. What motivate the target group to buy the product same should be put in
advertisement message to appeal that target group.
c) During COVID company must make special strategies. To make plan according to situation and
implement it successfully marketing information system must be effective. Because of following
reasons, market information is important to the company.
1. For situation analysis: Situation analysis need information on environment, market
characteristics, consumer behaviour. Information is needed to determine SWOT (Strengths,
Weaknesses, Opportunities, and Threats). Every decision is based on situation analysis.
2. For planning: Planning is determining right future course. Information is must in evaluating
alternative courses. Strategy is long term plan to achieve the objective. Strategy is set based on
situation, competitors' positions. Market segmentation, targeting and product positioning is
major strategies in marketing. The marketers cannot make the planning without information.
For planning, the marketers should collect the various information from different sources. This
information helps to know the business environment, marketing opportunities and threats, and
position of competitors. Information help in planning, help in SWOT analysis, to target the
right group, to position the product in customer mind accordingly with customer motives of
buying. To set the right marketing programs (7Ps) up-to-date information are required.
4. For implementation: For implementation company must create departments, assign task to
people, allocate resources, and supervise/monitor. To analyze and select right person, right
time/schedule, right place, right procedures, right controlling tool information are needed.
Information help in implementation by help know the potentials of the people then chose right
person for the job, decide the appropriate time, right procedures, understand competitors’
moves and help implement marketing mix.
5. For control: Controlling is comparing plan to performance and realizing the deviation and
giving treatment to make sure performance match the plan. Controlling decisions are made
based on marketing audit, market share analysis, marketing cost analysis, credit analysis, price
cuts analysis, budgetary analysis, ratio analysis, contribution margin analysis like marketing
information inputs and warning signals. Information system provide the reports on company's
performance and company's predetermined plans, this help measure differences among plan
and performance so company can take the right steps for control. MIS facilitates continuous
monitoring of marketing performance of the organizations to match the set plan. Right
treatment/remedy for deviation from plan to performance is also identified by information
analysis.

Page 39 of 61
d) Relationship marketing will help retain present customers and spread good word of mouth which
help grow the business. Social bonding in relationship marketing will keep the present customers
in regular contact even during crisis like COVID-19 which will maintain the business. Relationship
development strategies must go sequentially as following.
1. Targeting the right customers: Service companies today are beginning to recognize, that not
all customers are worth attracting and keeping. Rather than marketing to all customers in a
similar manner, the company now puts its efforts into the good customers.
2. Create Core Service Provision: Before developing the relationship company must make sure
that company is providing core services and benefits customers are seeking.
3. Create Switching Barriers (customer inertia, switching costs): Company must create the
environment so that customer can take unique benefits so customer does not like to switch to
the other company. The way of life, the habits, friends he has to change in switching the
company is the big cost for the customer that customer is unable to bear. Setup costs, search
cost, learning cost, contractual cost (fines customer has to bear for terminating the service
receiving contract before maturity) etc. all create the barriers for customer to switch to the other
company.
4. Develop sequential Relationship bonds. Starting with financial bonds, then social bond, then
customization bond, finally all developing into structural bond. Bonding starts with financial
incentives to customers. Secondly, socializing with customers will bond customers emotionally
with the seller. Thirdly, delivering customized goods and services will oblige customers to
maintain their patronage toward the company. Changing the structure of the company to make
customization permanent will create permanent bond. In this way customer evolve from
suspect to prospect to customer to client to advocate to finally customer becomes a partner to
the company through relationship marketing.
Relationship marketing will help maintain business even in crisis like COVID-19.
6. What is marketing? Describe the holistic marketing concept in your own words. (3+7=10 marks)
Answer:
Most people think that marketing is only about the advertising and selling of goods and services.
Advertising and selling, however, are just two of the many marketing activities. In other words, selling
and advertising are only the tip of the marketing iceberg. Although they are important, they are only
two of many marketing functions and are only two of many marketing functions and are often not the
most important ones.
Today, marketing must be understood not in the old sense of making a sale- “telling and selling”- but
in the new sense of satisfying customer needs. If a marketer does good job of understanding customer
needs; develops products that provide superior value; and prices, distributes and promotes them
effectively, these products will sell very easily. Thus selling and advertising are only part of a marketing
mix.
In general, marketing activities are all those all those associated with identifying the particular wants
and needs of a target market of customers, and then going about satisfying those customers better than
the competitors. This involves doing marketing research on customers, analyzing their needs and then
making strategic decisions about product design, pricing, promotion, and distribution. Thus, marketing
deals with identifying and meeting human and social needs.
According to Philip Kotler & Kevin Lane Keller, “Marketing is a societal process by which individuals
and groups obtain what they need and want through creating, offering, and freely exchanging products
and services of value with others.”
From the above definition what we can say is customers’ wants must be recognized and satisfied. Entire
system of business activities should be customer oriented. Marketing should start with an idea about a
want-satisfying product and should not end until the customers’ wants are completely satisfied, which
may be some time after the exchange is made.

Page 40 of 61
Thus, in conclusion, marketing is meeting needs profitably.
The Holistic Marketing Concept
A whole set of forces that appeared in the last decade call for new marketing and business practices.
Companies have new capabilities that can transform the way they have been doing marketing; they also
need a more complete, cohesive approach that goes beyond traditional applications of the marketing
concept.
The holistic marketing concept is based on the development, design, and implementation of marketing
programs, processes, and activities that recognizes their breadth and interdependencies. Holistic
Marketing recognizes that “everything matters” with marketing – that a broad, integrated perspective
is often necessary. Four components of holistic marketing are relationship marketing, integrated
marketing, internal marketing and social responsibility marketing.
Holistic marketing is thus an approach to marketing that attempts to recognize and reconcile the scope
and complexities of marketing activities. This concept includes relationship marketing, integrated
marketing, internal marketing and social responsibility marketing.
7.
a) What are the components of marketing information system? Explain. 5 marks
b) Describe the reasons for developing new product in Nepal. 5 marks
Answer:
a) Components of marketing information system are: Internal record system, marketing intelligence,
marketing research and marketing decision support system which are explained as follows:
i. Internal Record System
Internal record system 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.
ii. Marketing Intelligence System
Whereas the internal records system supplies results data, the marketing intelligence system
supplies happenings data.
Marketing intelligence is systematic collection and analysis of publicly available information
about competitors and developments in the marketing environment. It is a set of procedures
and sources managers use to obtain everyday information about developments in the marketing
environment.
Marketing managers collect marketing intelligence by reading books, newspapers, and trade
publications, talking to customers, suppliers, and distributors, checking internet sources and
meeting with other company managers.
iii. Marketing Decision Support System
Marketing decision support system (MDSS) is a coordinated collection of data, systems, tools,
and techniques with supporting software and hardware by which and organization gathers and
interprets information from business and the environment and turns it into a basis for marketing
action. It is a procedure that allows a manager to interact with data and methods of analysis to
gather, analyze, and interpret information.

Page 41 of 61
 A marketing decision support system may include statistical tools, mathematical tools as well
as financial and managerial tool and models.
iv. Marketing Research
Marketing managers often commission formal marketing studies of specific problems and
opportunities, such as a market survey, a product-preference test, a sales forecast by region or
an advertising evaluation. Marketing research is the systematic design, collection, analysis and
reporting of data and findings that are relevant to a specific marketing situation facing the
company.
A company can obtain marketing research in a number of ways. Most large companies have
their own marketing research departments. Some small companies can hire the services of a
marketing research firm or conduct research in creative and affordable ways. They can engage
students or professors to design and carry out projects, they can use the Internet, and they can
visit their competitors.
b) Reasons for developing new products are as follows:
1. Technology innovations: New technological developments make exiting products obsolete.
Marketing must innovate products to replace old technology with new technology.
2. Market leadership: Organizations develop and introduce innovative products to maintain
market leadership. They invest significant amount of money for research and development.
3. Competitive response: This is the age of intense competition. Marketing must anticipate the
innovative actions of its competitors. Product innovation is needed to gain competitive
advantage by being First in the market.
4. Changing customer preferences: This is mainly due to changing needs, tastes and preferences
of customers. Product innovations are needed to meet changing customer preferences.
5. Environment adoption: Environmental forces related to politics, law, economics, culture and
society keep on changing. Product innovations are needed to adapt to environment changes.
6. Failure of new products: Marketing is faced with high failure rate of new products. Products
innovations are needed to stay in the market.
8. Write short notes on: (5×2=10 marks)
a) Needs
b) Personality
c) Marketing Environment
d) Market Segmentation
e) Public relations
Answer:
a) A need is a basic requirement that an individual wishes to satisfy. The most basic concept
underlying marketing is that of human needs. Human needs are state of felt deprivation. They
include basic physical needs for food, clothing, warmth, and safety; social needs for belonging and
affection; and individual needs for knowledge and self-expression. These needs were not invented
by marketers; they are a basic part of the human makeup.
b) One of the psychological determinants of consumer buying behaviour is personality refers to the
unique psychological characteristics that lead to relatively consistent and lasting responses to one’s
own environment. Personality is usually described in terms of traits such as self-confidence,
dominance, sociability, autonomy, defensiveness, adaptability, and aggressiveness

Page 42 of 61
c) Marketing environment can be broadly classified into two groups – micro environment and macro
environment. Micro environment consists of forces that are very close to the company. The macro
environment consists of the larger forces that affect the elements of micro environment.
d) Market segmentation is the process of defining and subdividing a large homogenous market into
clearly identifiable segments having similar needs, wants, or demand characteristics. Its objective
is to design a marketing mix that precisely matches the expectations of customers in the targeted
segment.
e) Public relations is creating favourable attitude of public toward company. Tools of Public Relations
are media relations, group relations, lobbying, blogging, social media marketing, sponsorship of
social events, corporate social responsibility, information updating, and corporate advertising.

Page 43 of 61
Paper 7: Income Tax and VAT
Attempt all questions. Working note should form part of the answer.
1. Kamala Cement Ltd. is a company situated at Biratnagar and listed in Nepal Stock Exchange and
engaged in manufacturing and sale of premium grade cement in Domestic Market as well as
Foreign Market. Following is the provisional Income Statement of Kamala Cement Ltd., for the
year ended Ashadh 31, 2077.
Particulars Amount (Rs.)
Income
Export Sales 60,00,000
Domestic Sales 40,00,000
Dividend Received (Net of Tax) 1,50,000
Rent Income (Related with Business) 50,000
Total Income 1,02,00,000

Expenditure
Cost of Materials Consumed a 30,00,000
Manufacturing Expenses d g 5,00,000
Employee Cost g 10,00,000
Selling and Administrative Expenses e g 15,00,000
Interest and Bank Charges 5,00,000
Exchange Loss b 2,50,000
Depreciation c 5,00,000
Bad Debt Written Off 70,000
Loss on Sale of Assets 3,00,000
Total Expenditure 76,20,000

Operating Profit 25,80,000

Add: Provision for Doubtful Receivables Written Back 7,20,000
Less: Provision for Bonus f 3,00,000
Profit Before Tax 30,00,000
Additional information:
a) Cost of material consumed
For export sales : Rs. 18,00,000
For local sales : Rs. 12,00,000
b) Exchange loss includes Rs. 1,00,000 against revaluation of creditors at the yearend date.
c) Asset detail for income tax purpose is as below:

Particulars Building Plant and Computer, Vehicles

Page 44 of 61
 Office
Machinery
Equipment
& Furniture
Opening Depreciation Base 11,00,000 1,00,00,000 15,00,000 29,50,000
Addition up to Poush End - - 2,00,000 -
Addition Magh to Chaitra end 6,00,000 - 1,50,000 -
Addition Baishakh to Ashadh - - - 9,00,000
End
Sales Proceed - 15,00,000

d) Manufacturing expenses includes repair and maintenance expenses as below:

Building Repair and Maintenance : Rs. 1,50,000
Office Equipment Repair and Maintenance : Rs. 50,000
Vehicle Repair and Maintenance : Rs. 20,000
e) Selling and Distribution Expenses includes Rs. 7,00,000 donations given to Prime Minister
COVID Relief Fund and Rs. 3,00,000 given for construction of private school.
f) Bonus of Rs. 2,00,000 only distributed to the employees till the time of filing of income tax
return. It has been decided by the management not to pay the undistributed portion.
g) Following expenses are of below nature:
i) Rs. 50,000 included in employee cost for staff welfare is for personal use of directors.
ii) Manufacturing expenses includes Rs. 30,000 for electricity bill of previous years.
iii) Selling and administrative expenses includes Rs. 10,000 without having PAN/VAT bill.
h) Company employed 1,300 Nepali employees during the whole year out of which 50 employees
are foreign employee.
Calculate the income tax liability of Kamala Cement Limited for the income year 2077/78.
20 marks
Answer
Statement of Assessable income from Business
Sec. Export Other
Particulars Working Notes
Ref Income Income
Inclusions:
Export Sales 7 (2) 6,000,000
Domestic Sales 7 (2) 4,000,000
Rent Income - 50,000 Assumed Rent is gross
Dividend Income 92 - Assuming dividend received
from resident entity and is final
withholding income.
Total Inclusions 6,000,000 4,050,000
Deductions
Interest Expenses 14 300,000 200,000 In proportion to Cost of

Page 45 of 61
 Sec. Export Other
Particulars Working Notes
Ref Income Income
Material Consumed (i.e. 3:2)
Cost of Trading Stock 15 1,950,000 1,300,000 Refer W.N. 1
Depreciation for the Year 19 1,900,000 1,266,667 Refer W.N. 3
Repair and Improvement 16 105,000 70,000 Refer W.N. 3
Cost
Exchange Loss - Revaluation loss is not
deductible u/s 28
Employee Cost 13 570,000 380,000 Rs. 50,000 is not deductible as
it is personal expense.
Remaining amount is
distributed in proportion to
Cost of Material Consumed
Selling and Administrative 13 294,000 196,000 Refer W.N. 2
Expenses
Bonus provision for the year is
deductible as it is fixed
Employee Bonus Provision 180,000 120,000
obligation
for the Year
Any amount undistributed shall
be added back to income in the
next income year
Bad Debt written off Assumed that conditions of
Sec. 40 (3) (ga) not met
Loss on Sale of Assets Is considered while computing
depreciation allowances
Total Deductions 5,299,000 3,532,667
Assessable Income from 701,000 517,333
Business

Statement of Taxable income and tax liability

Assessable Income from 5,299,000 3,532,667
Business
Total Assessable Income 701,000 517,333
Less:
Reductions u/s 12 -
Reductions u/s 12Ka -
Reductions u/s 12Kha- 420,000 280,000 In Cost of Material Consumed
National Reconstruction Fund ratio, as the question suggests
of GON
Taxable Income 281,000 237,333
Tax Rate 12% 14%

Page 46 of 61
 Tax Liability 33,720 33,227
Working Notes
1. Cost of Trading Stock for the Year
Cost of Materials consumed 3,000,000
Manufacturing Expenses 500,000
Less: Repair and Maintenance expenses (220,000)
Less: Prior period expenses (30,000)
Total Cost 3,250,000
Towards Export Sales (in Cost of Material Consumed ratio) 1,950,000
Towards Domestic Sales 1,300,000
2. Selling and Administrative Expense
Given 1,500,000
Less:
Donation to PM Relief Fund (700,000)
Donation for Construction of School (300,000)
Business promotion, without having PAN/VAT Bill (10,000) 490,000
Allocated to Export sales (in Cost of Material Consumed ratio) 294,000
Allocated to Domestic Sales 196,000
3. Computation of Depreciation Allowances
Calculation of Depreciation and Repair and Improvement Cost
Particulars Block A Block B Block C Block D Total
Opening Depreciation 1,100,000 1,500,000 2,950,000 10,000,000
Base
Add: Absorbed
additions
Up to Poush 200,000
(100% of cost)
From Magh to 400,000 100,000
Chaitra (2/3rd of
Cost)
From Baishakh to 300,000
Ashadh (1/3rd of
Cost)
Less: Disposal Proceeds (1,500,000)
of Assets (Sales of
Vehicle)
Depreciable Basis 1,500,000 1,800,000 1,750,000 10,000,000
Depreciation Rate 5% 25% 20% 15%
Depreciation Amount 75,000 450,000 350,000 1,500,000 2,375,000
(Normal)

Page 47 of 61
 Particulars Block A Block B Block C Block D Total
One-third additional (as 25,000 150,000 116,667 500,000 791,667
it is special industry)
Total Depreciation for 100,000 600,000 466,667 2,000,000 3,166,667
the year

7% of Depreciable Basis 105,000 126,000 122,500 700,000

Actual Repair and 150,000 50,000 20,000 -
Improvement Expense
Allowable Repair and 105,000 50,000 20,000 - 175,000
Improvement Cost
(Minimum of 7% of
Depreciation Base or
Actual)
* Donation for construction of private school is not allowed for deductible expenses u/s 12
of Income Tax Act 2058. Private school is not a tax exempt entity.
* Provision for doubtful receivable is assumed to be disallowed in the year of provision,
hence, it is not included in taxable income during the year of written back.
4. Identification of Tax Rate
Particulars Details Export Domestic Ref. Sec.
Applicable Tax Rate 25% 25%
Reduction to special industry 20% Sec. 11 (2Kha)
(Kha)
Reduced Tax Rate 20% 20%
Additional Reduction due to 30% Sec. 11 (3) (ka)
employment
Effective Rate due to effect of 14% 14%
employment
Reduction due to export 20% 16% Sec. 11 (3Nga)
(Kha)
Additional Reduction to manufacturing 25% 12% Sec. 11 (3Nga)
exporter (Ga)
Lower Rate 12% 14%
As per Sec. 11 (3) (ka), where a special industry provides employment to 1,000 or more Nepali
nationals, the tax rate is 70% of reduced tax rate, i.e. 14%.
Application of Sec. 11 (3Nga) jointly read with Sec. 11 (3Kha) will give tax rate of 12% in
case of export oriented manufacturing special industry.
As such, tax rate of 14% is applicable in case of domestic sales income and that of 12% is
applicable in case of export income, as a rational taxpayer opts for beneficial options.
2. Calculate the income tax liability of Mrs. Jullee Sharma for IY 2077/78 on the basis of below detail.
10 marks
a) Basic Salary: Rs. 3,05,000 per month.

Page 48 of 61
 b) As per requirement of Contributed Social Security Act, 20% of basic salary is contributed by
the employer and 11% deducted from her salary and total of 31% deposited to Social Security
Fund.
c) One month basic salary is provided as festival allowance.
d) 5% of basic salary is provided as performance based allowance per month.
e) Employer has provided her one i-PAD worth Rs. 1,25,000 for her outstanding performance.
f) Residence Allowance : Rs. 24,500 per month
g) Medical Allowance : 2% of her basic salary per month
h) Residence has one employee arranged by the employer for her domestic help with cost of Rs.
4,500 per month.
i) Being in core management team, she has attended 21 meetings during the year and received
Rs. 4,000 per meeting.
j) The cost of education for her son and daughter costing Rs. 24,000 per month paid by her
employer.
k) The cost of life insurance policy per year is Rs. 1,10,000, 50% reimbursed by the employer.
l) The cost of Toyota car provided to her official & personal use is Rs. 85 lacs.
m) She has donated Rs. 1,05,000 to Sahara Nepal, which is a tax exempted entity.
Answer
Calculation of Tax Liability of Mrs. Jullee Sharma for FY 2077.78
Particulars Amount Unit Total Amount
(Rs.)
Basic Salary 305,000 12 3,660,000.00
Contribution to Social Security Fund 61,000 12 732,000.00
(20% of basic salary contributed by
employer)
Festival Allowance 305,000 1 305,000.00
Performance Allowance (5% of basic 15,250 12 183,000.00
salary each month)
Gift from Employer 125,000 1 125,000.00
Residential Allowance 24,500 12 294,000.00
Medical Allowance (2% of basic 6,100 12 73,200.00
salary)
Cost of Domestic Helper 8,000 12 96,000.00
Meeting Allowance (Final -
Withholding, not included in assessable
income)
Cost of Education of Children paid by 24,000 12 288,000.00
employer
Cost of life policy reimbursement by 55,000 1 55,000.00
employer

Page 49 of 61
 Quantification of Vehicle Facility 42,500 1 42,500.00
(0.5% of 8,500,000)
Assessable income 5,853,700.00
Reduction
Donation (Min below three conditions) 75,000.00
5% of AI (5% of 5883700) 292,685
Rs. 100,000 100,000 100,000.00
Re. 105,000 actual payment 105,000
Life Policy (Minimum of below two -
condition)
Rs. 25,000 25,000 25,000.00
Actual paid for her and her child 55,000
(55000)
Approved Retirement Fund 300,000.00
(Management of below three
conditions) (Social Security Fund is
ARF)
Rs. 300,000.00 300,000 300,000.00
1/3rd of AI 1,951,233.33
Actual Payment (Rs. 305000*31%*12) 1,134,600
Taxable Income 5,478,700.00
Assuming She claims as Couple
No social security tax for 450,000 -
10% for Next 100,000 10,000.00
20% for Next 200,000 40,000.00
30% for Next 4,728,700 1,418,610.00
20% Surcharge for more than 20 lakh 208,722.00
(3478700*30%&20%)
Total Tax 1,692,332.00
Less: 10% rebate for female 169,233.00
Net Tax 1,523,098.00
3.
a) Mr. Ram Shrestha is retired from a government company during Chaitra 2077. He is yet to receive
his retirement benefits. At the time of retirement, he is entitled to either
i) monthly pension for rest of his life from date of retirement, or
ii) lump sum pension of 10 years at the time of retirement and monthly pension for life
after 10 years.
Advise Mr. Ram Shrestha of tax implications on both the cases. 5 marks

Page 50 of 61
b) Mr. Ramesh had purchased land and private building on 2070/5/6 for Rs. 2.8 million. He sold such
property for Rs. 5.2 million on 2077/9/10. Calculate the total tax liability of Mr. Ramesh on above
transaction. Can Ramesh claim such tax as advance tax? 5 marks
Answer
a)
i) Pension facility is taxable as per section 8 of ITA, 2058. However if monthly pension is availed,
deduction as per schedule 1(1) can be availed which is equal to 25% of basic slab limit. Section 3
of the ITA, 2058 states that tax shall be levied in each income year on the taxable of income of
such person.
ii) In case of lumpsum payment also, tax needs to be deducted as a retirement payment @15% at the
time of payment, and monthly pension will be taxed as per law at the time of payment.
b) Incomings from disposal of NBCA= Rs.5.2 Million and Outgoings of the NBCA = Rs.2.8 Million
Gain on Disposal of NBCA = Incomings – Outgoings = Rs. 2.4 Million
The tax rate @ 2.5% shall be levied on gain from NBCA under section of schedule 1 relating to
section 4 of Income Tax Act 2058 as the NBCA has been sold after holding more than 5 years of
ownership. Hence, the tax amount shall be Rs. 60,000.00
There is no such concept of capital gain and capital gain tax in Income Tax law, since the gain on
disposal is treated part of investment income.
As per Sec. 95Ka, the gain on disposal of land and building is subject to collection of advance tax
by Land Revenue Office (Malpot Karyalaya) at the rate 2.5% of gain, if the ownership of such
land and building is 5 years or more. In the given case, the collection of advance tax by Land
Revenue Office (Malpot Karyalaya) is Rs. 60,000.
The amount can be claimed as advance tax.
4.
a) Discussing the relevant provisions of Income Tax Act, 2058, and Rules 2059, mention the
Circumstances under which PAN can be suspended. 5 marks
b) Discussing the relevant provisions of Income Tax Act, 2058, and Rules 2059, advise whether the
following transactions attract withholding of tax or not? If yes, mention the withholding tax rates
and whether it is final or adjustable. 5 marks
i) Commission paid by the resident employment company to non-resident person.
ii) Stall charge paid to Trade Fair India by Nepal Craft Paper Ltd. to participate in Indian
National Trade Fair 2020.
iii) Payment for carriage service to vehicle provider in rent for carriage service.
iv) Interest paid by bank to tax exempt NGO.
v) Premium paid by resident person to non-resident insurance company for life insurance.
c) Mr. Udit, a resident natural person, is a musician deriving income from concerts performed from
various countries outside Nepal. During financial year 2077/78, he performed concerts in India.
Details of his assessable income and tax paid in the country as aforesaid where the concerts were
given are:
Income Tax
India Rs. 10,00,000 Rs. 300,000
Also, he earned Rs. 5,00,000 in Nepal during the financial year 2077/78.
Assuming that he has chosen to be couple, find his tax liability on his total income and amount for
foreign tax credit available to him under section 71(1) for the income year 2077/78. 5 marks

Page 51 of 61
d) Discussing the relevant provisions of setoff and carry forward of losses as per Income Tax Act,
2058, advise regarding setoff and carry forward of losses in following cases for the income year
2077/78 of a domestic Company: 5 marks
Domestic business Foreign Foreign
i
loss 25,000 business gain 10,000 investment gain 2,000
Foreign Foreign
ii Domestic business business loss business gain
gain 25,000 in Country A 25,000 in Country B 2,000
Answer
a) As per section 78(a) of ITA, 2058, the Department can suspend PAN in following cases
i) Stops carrying transaction
ii) In case of entity, closure, sales or transfer of the entity or other similar activities which results
in extinguishment of its existence
iii) In case of personal ownership, death of the person having such ownership
iv) In case the registration is done by mistake
Moreover, Regulation 23a, mentions the process through which PAN is suspended:
1) The person or entity desirous of suspending their PAN as per section 78a of the Act, have to
submit an application to the Department within 30 days from the date in which the cause for
such suspension has arisen.
2) Income tax return should have been filed and tax deposition should have been done at the time
of filing of application under sub-rule (1
3) After inquiry, on the application filed under sub-rule (1), the Department should inform about
the cancellation of the PAN or the fact that the PAN cannot be cancelled.
b)
i. Advance tax withholding at the rate of 5% is required for the commission paid by the resident
employment company to non-resident person and this is final withholding.
ii. No tax withholding required for payment made to book stall in foreign trade fairs. (IRD
advance ruling to Laxmi Bank Limited dated 2072.06.28)
iii. Tax withholding at the rate of 1.5% if the payment is against VAT invoice otherwise 2.5%.
Final withholding to natural person and adjustable to others.
iv. At the rate of 15% which is final withholding.
v. At the rate of 1.5% which is final withholding.
c)
Assuming there is no employment income
Step 1: Calculation of Tax Liability before Foreign Tax Credit
Assessable Income from Nepal 500,000
Assessable Income from India 1,000,000
Total Assessable Income
(Taxable/Balance Taxable Income) 1,500,000
Tax Liability
1st Rs. 450,000 0% -

Page 52 of 61
 Next Rs. 100,000 10% 10,000
Next Rs. 200,000 20% 40,000
Next Rs. 750,000 30% 225,000
Tax Liability before FTC 275,000
Step 2: Calculation of Average Tax rate in Nepal
Tax Liability before Foreign Tax Credit (A) 275,000
Taxable Income in Nepal (B) 1,500,000
Average Tax Rate in Nepal [A/B * 100] 18.33%
Step 3: Calculation of Eligible Foreign Tax Credit and excess, if any
India
A Foreign Assessable Income 1,000,000
B Average Rate of Tax in Nepal 18.33%
C Average Tax liabilities in Nepal (A * B) 183,333.33
D Actual Tax Paid in Foreign Country 300,000
E Excess Taxes of Previous Income Year (s) -
F Sum of D & E 300000
G Eligible Amount [Lower of "C" or "F"] 183,333.33
H Excess to be carried forward [F- G] 116,666.67
Step 4: Calculation of Tax Liability after Tax Credit
Tax Liability before Foreign Tax Credit 275,000
Less: Eligible Credit from Step 3 (183,333)
Tax Liability after Foreign Tax Credit 91,667
d)
i) Unrelieved domestic business loss of a person can be set-off with any domestic or foreign
business or investment income.
ii) Unrelieved foreign business loss (of a country) can be set-off with foreign business income and
foreign investment income (of the same country) only.
iii) Unrelieved domestic investment loss can be se- off with any investment income
iv) Unrelieved foreign investment loss (of a country) can be set-off with foreign investment
income (of the same country) only.
Loss from business or investment of a tax-exempt entity shall not be allowed to be carried forward
for Set-off of loss
loss shall be carried forward for 7
i) Taxable loss (17,000.00) years
ii) Business gain 25,000.00
loss shall be carried forward for 7
Foreign business loss in Country A (25,000.00) years
Foreign business gain in Country B 2,000.00
5. Write short notes of the following with reference to Income Tax Act, 2058. (5×2=10 marks)

Page 53 of 61
a) Public Circular
b) Assessable income
c) Valuation of closing stock
d) Permanent Establishment
e) Long Term Contract
Answer
a) In order to bring about uniformity in the implementation of Income Tax Act & VAT Act and
simplify tax administration and give guidelines to the officers of the Inland Revenue Department
as well as the persons affected by the Acts, the Department may issue written public circulars,
accompanied by explanations, on the provisions made in this Act.
The Department shall make available the circular issued in the Department or in any other places
as per necessity or through any other means. The Department shall be compelled to take action
according to the circular issued unless and until such circular is revoked."
b) As per Section 6 of Income Tax Act 2058, subject to the Act, the following incomes earned by any
person for any employment or business or investment or windfall gains in any income year shall
be considered assessable income:
(a) Income earned by any resident person from his employment or business or investment or
windfall gains in that income year irrespective of the place of his source of income, and
(b) Income earned in that income year by any non-resident person from employment or business
or investment or windfall gains having income source in Nepal.
Provided that, the assessable income shall not include any income exempted from tax pursuant to
section 11 or 64 or both.
c) Valuation of closing stock of a business for income year is done at a lower of the following:
i) Cost of closing stock that remains at the end of year or
ii) Market price of the closing stock at the end of year;
Where identification of each items stock is not possible IT Act permit first in first out (FIFO) OR
weighted average method for valuation of closing stock. Once a method has been chosen then same
has to be followed in the subsequent years. Person is required to obtain prior approval of IRD to
change the method of valuation.
d) Permanent establishment means a place where any person carries on a business fully or partly, and
the term includes the following place:
(1) A place where any person carries on a business fully or partly, through any agent except a
general agent who acts independently in the ordinary course of carrying on business,
(2) A place where any person's main equipment or main machinery is situated or used or installed,
(3) One or more than one place in any country where any person has delivered technical,
professional or consultancy service through an employee or in any other manner for more
than ninety days at one or several times in a period of any twelve months, or
(4) A place where any person is involved in a construction, installation or establishment project
and has carried out supervisory works of that project for a period of ninety days or more.
e) "Long-Term Contract” means a contract as referred to in Section 26 with term more than 12 months.
For the purpose of Section 26, “long-term contract” means a contract of following
conditions:
a) the term of which exceeds 12 months, and
b) that is either a contract for manufacture, installation, or construction, or, in relation to each, the

Page 54 of 61
 performance of related services; or a contract with a deferred return that is not an excluded
contract.
6. Manjushree Pvt. Ltd. deals with cosmetic products. In previous month the export sales was 65% of
total sales. The company anticipates increase in export sales demand from following month
quantified as 20% of previous month's total sales. To increase the capacity to meet anticipated
increase in demand, the company imports a machinery from Singapore. Other details of transaction
of the company related to Baishakh 2078 are as follows: 10 marks
a. While importing a machinery from Singapore, Manjushree Pvt. Ltd. paid Rs. 848,000 as custom
duty and Rs. 245,000 value added tax (VAT) at custom point of Tribhuvan International
Airport.
b. Raw materials purchased during current month from local farmers not registered with VAT
Rs. 5,300,000.
c. Consumables purchased from local vendors registered with VAT amounted to Rs. 1,000,000
without VAT.
d. Purchased a car for office use amounted to Rs. 4,000,000 without VAT.
e. The company uses labors supplied by labor contractor and the amount of labor cost payable
to labor contractor is Rs. 1,356,000 including VAT.
f. The company incurred overseas marketing expenses to boost up export sales through
advertising agency based on Hong Kong and paid Rs. 900,000 for the service and applicable
reverse VAT was assessed and paid while remitting the amount to the agency.
g. As at the end of previous month, the company had opening balance of Rs.180,000 VAT credit
and out of which company had claimed vat refund of Rs. 120,000.
h. During the month of Baishakh, 2078 there as Domestic sales of Rs. 41,00,000 and Export sales
of Rs. 41,00,000 without VAT on both sales.
Required:
a) Compute net VAT receivable/payable of Manjushree Pvt. Ltd. for the month of Baishakh, 2078.
b) Is Manjushree Pvt. Ltd. eligible to claim refund immediately after filling vat return of Baishakh,
2078?
Answer
a)
Statement showing computation of Net VAT receivables/(payable)
of Manjushree Pvt. Ltd. for the month of Baishakh, 2078
VAT
Particulars
Taxable Receivables Remarks
A. VAT Receivable:
Rs. 180,000-Rs.
Opening VAT credit 60,000 120,000
Reverse Vat as
Vat paid on Import of Machinery 245,000 per question
Domestic-Purchase Raw materials
from farmers 5,300,000 - No vat credit
Full Credit
Domestic-Purchase consumables 1,000,000 130,000 available

Page 55 of 61
 Full Credit
Labour 1,200,000 156,000 available
(Rs. 40 Lakh
*0.13) x 40%
Vat paid on car 4,000,000 208,000 partial cr.
Rs. 900,000
Vat paid on advertisement 900,000 117,000 *13%
Total VAT Receivables (A) 916,000

B. VAT Payable:
Particulars Taxable VAT Payable
Sales- Domestic 4,100,000 533,000 @ Normal rate
Sales – Export 4,100,000 - @ Zero rate
Total VAT Payable on Sales (B) - 533,000
Net Vat receivables/(Payable) (A-B) 383,000
b) The export sales is 50% of total sales of Baishakh, 2078. Yes, Manjushree Pvt. Ltd. is eligible to
claim refund immediately after filling vat return of Baishakh, 2078 as its export turnover was more
than 40% of total sales of Baishakh, 2078 as per the provision of section 24(4) of Vat Act, 2052.
7.
a) Kathmandu Food Ltd. has the following amounts of sales and purchases excluding VAT. Can VAT
refund be claimed in Baishakh return? 5 marks
Month Sales Purchase % of export sales to total sales
Kartik 500,000.00 700,000.00 43%
Mangsir 800,000.00 800,000.00 65%
Poush 700,000.00 900,000.00 36%
Magh 800,000.00 900,000.00 42%
Falgun 300,000.00 900,000.00 60%
Chaitra 700,000.00 900,000.00 42%
Baishakh 600,000.00 900,000.00 20%
b) Birat Trading Limited a company dealing in import and export of machineries imported a
Machinery on 5th Magh 2077 and paid value added tax (VAT) Rs. 745,000 and others applicable
taxes at the time of Import in Nepal. The company do not find any buyer for the imported Machinery
in Nepal, The company sold the same imported Machinery on 5th of Baishakh 2078 to a foreign
buyer located at Hong Kong. Birat Trading Limited received price of Machinery in US $ on 10 th
Baishakh 2078.
Required: 5 marks
The management of Birat Trading limited seek your advice as tax professional on:
i) Whether the Birat Trading Limited is eligible to get refund of VAT paid (Rs.745,000) on
purchase of Machinery at the time of import in Nepal as per the provision of value added tax
act, 2052?

Page 56 of 61
 ii) Is there any period of limitation for claiming refund of VAT as per the provision of value added
tax act, 2052?
Answer
a)
% of VAT
export Payable /
Month
sales to Export Domesti VAT VAT (Receiva
Sales total sales Sales c Sales Payable Purchase Receivable ble)
Kartik 500,000 43% 215,000 285,000 37,050 700,000 91,000 -53,950
Mangsir 800,000 65% 520,000 280,000 36,400 800,000 104,000 -67,600
Poush 700,000 36% 252,000 448,000 58,240 900,000 117,000 -58,760
Magh 800,000 42% 336,000 464,000 60,320 900,000 117,000 -56,680
Falgun 300,000 60% 180,000 120,000 15,600 900,000 117,000 -101,400
Chaitra 700,000 42% 294,000 406,000 52,780 900,000 117,000 -64,220
Baishakh 600,000 20% 120,000 480,000 62,400 900,000 117,000 -54,600
As per Rule 39(5), if in any month, the export sales of a registered taxpayer is greater than 40% of
total sales, then the taxpayer can claim for refund of vat credit that could not be set off for that
particular month in the format prescribed in Schedule-10.
Since, the portion of export to total sales is more that 40% in the month of Kartik, Mangsir, Magh,
Falgun and Chaitra, the tax payer can claim refund in along with the returns.
The excess input VAT over output VAT for the month of Poush and Baishakh is carried forward
for set off in next four months. If the same cannot be consumed by any payable VAT in succeeding
four months, it may file an application for refund after the elapse of such four months. Section
24(3).
b) As a tax professional, my advice to the management of Birat Trading Limited are as follows:
i.) As per section 25(GA) of Vat Act, 2052, If any goods are re-exported and sales consideration
thereof has been received in advance in foreign convertible currency then VAT paid on
purchase of such re-exported goods has to be refunded to the concerned person.
Birat Trading Limited paid Value added tax (VAT) Rs. 745,000 on Machinery at the time of
Import in Nepal. The company do not find any buyer for the imported Machinery in Nepal
hence sold to a foreign buyer and re-exported to Hong Kong on 5th of Baishakh 2078. However,
sale consideration in US $ was only received on 10th Baishakh 2078. Though the sales
consideration was received in foreign convertible currency but not before export (i.e. not in
advance) hence, the ABC Limited could not apply for VAT (Rs. 745,000) refund on VAT paid
on purchase (import) of such Machinery.
ii.) As per section 25(GHA) of Vat Act, 2052, Notwithstanding anything contained elsewhere in
the provision of the Act , the amount of refund shall not be provided unless application for
refund is not made within the period of three years from the end of relevant tax period.
8. Write short notes on the basis of VAT Act, 2052: (4×2.5=10 marks)
a) Registration of joint venture
b) Confidentiality of taxpayers documents
c) Advance Ruling
d) Valuation at market price by tax officer
e) Reverse Charge

Page 57 of 61
Answer
a) If two or more than two persons establish a joint venture for operating taxable transaction for a
certain period, such persons shall file an application for registration of the joint venture to the Tax
Officer of one of the Tax Office among the Tax Offices wherein such persons establishing the joint
venture are registered.
The Tax Officer shall issue registration certificate in a prescribed format upon receiving
application. Joint venture thus registered shall have to deregister the registration upon expiry of the
time prescribed in the agreement entered into for establishing the joint venture.
Persons who are parties in the joint venture shall be jointly or severally liable for the purpose of
payment of tax liability of the joint venture they are party to.
b) Tax related documents or other information received from any person shall not be disclosed or
published except in the following cases:
(i) To inform the officer collecting revenue in the course of protecting the revenue of Government
of Nepal,
(ii) To produce as evidence in the court pursuant to the laws relating to revenue in the course of
proving the liabilities of the taxpayer
(iii) To maintain as a part of public record in the course of proceedings at the Revenue Tribunal or
a court of law"
c) As per section 32 (Ka) of VAT Act, if any person makes an application in writing to the department
for the clarification on any of the confusion related to any provision of the act for effective the
application of this act, the department may issue their opinion in writing to the person seeking such
advance ruling. Notwithstanding anything contained in section 32(1), department may issue
advance ruling except on such matters which are pending before the courts for decision or matters
already decided by courts.
d) In the following transactions tax officer may be reassessed the value of goods or services at market
value:
i) If tax is not levied on market value by tax payers themselves as per under section 20
and Rule 29.
ii) In case of under invoicing as per Section 12(6), 20 and Rule 29.
iii) In case the stocks appearing in the books cannot be shown physically at the time of
inspection by tax officer Rule 40.
e) Reverse Charge
Generally, VAT is collected and paid by the seller of goods. However, in some cases Act has cast
responsibility upon the purchaser of goods to pay VAT. This responsibility of paying VAT on
purchaser is termed as ‘Reverse VAT’. Section 8(2) and 8(3) of Value Added Tax Act, 2052 has
provided for below provisions for reverse VAT –
i. VAT for Service Received from Foreign Party:
As per section 8(2) of Value Added Tax Act, 2052, any person whether registered or not in
Nepal receiving services from a person who is not registered and is outside Nepal shall have to
assess and collect tax at the taxable value at the time of payment in accordance with this Act
and the Rules framed under this Act.
ii. VAT from Housing Developers:
Similarly as per section 8(3) of Value Added Tax Act, 2052, If a construction of commercial
purpose building or apartment or shopping complex or similar other structure as specified by
the Department, of which value is more than Five Million Rupees, has been made from a person
who is not registered, it shall be deemed as it has been constructed from registered person and

Page 58 of 61
shall deposit the tax. In case tax is not deposited, it shall be assessed and collected from the
owner of such structure.

Page 59 of 61
Examiner’s Commentary on Students' Performance in June 2021
Examinations
This commentary has been written to accompany the published questions and answers and is written
based on the observations of evaluators. The aim is to provide constructive guidance for future
candidates, giving insight into what the evaluating team is looking for, and flagging difficulties
encountered by candidates who attempted these questions.
Subject: Financial Management
Question No. 1
Satisfactory performance
Question No. 2
Poor performance on part B
Question No. 3
Satisfactory performance
Question No. 4
Satisfactory performance
Question No. 5
Answer to 5 (b) is quite poor. Lack of conceptual knowledge. Others are satisfactory.
Question No. 6
Average performance; lack of conceptual clarity
Question No. 7
Average performance; lack of conceptual clarity
Subject: Cost & Management Accounting
Question No. 1
Average Performance; lack of conceptual knowledge
Question No. 2
Average performance; most of the students are confused in bonus calculation part
Question No. 3
Average performance; concept of costing is lacking
Question No. 4
Satisfactory performance
Question No. 5
Average performance; lack of conceptual knowledge
Question No. 6
Satisfactory performance
Subject: Business Communication
Question No. 1
Satisfactory answers

Page 60 of 61
Question No. 2
Satisfactory answers
Question No. 3
Satisfactory answers
Question No. 4
Poor performance; Sub questions (a) and (b) are not answered properly.
Subject: Marketing
Question No. 5
Satisfactory answers
Question No. 6
Satisfactory answers
Question No. 7
Satisfactory answers
Question No. 8
Poor performance; Sub questions (a) and (b) are not answered properly.
Subject: Income Tax & VAT
Question No. 1
Average Performance
Question No. 2
Satisfactory Performance
Question No. 3
Poor Performance; Lack of knowledge
Question No. 4
Poor Performance; question is not understood by students
Question No. 5
Weak performance; theoretical concept is poor
Question No. 6
Satisfactory performance
Question No. 7
Most of the students not able to attempt the question
Question No. 8
Very low; theory knowledge on VAT is very low.

Page 61 of 61