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Past papers/ Taxation/ May 2014
Paper 22 Qs
Suggested Answers · May 2014

CA Inter Taxation

This page contains all 22 questions from the CA Inter Taxation Suggested Answers for the May 2014 attempt cycle, sourced from VSI Jaipur.

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Q.1(a) 20 marks very hard Break Even Analysis ⚡ Try this Q →
SHA Limited provides the following trading results: | Year | Sale | Profit | |---|---|---| | 2012-13 | ₹ 25,00,000 | 10% of Sale | | 2013-14 | ₹ 20,00,000 | 8% of Sale | You are required to calculate:
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Worked Solution

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Break Even Analysis — SHA Limited

The marginal costing relationship is: Sales = Variable Cost + Fixed Cost + Profit. Since Fixed Cost is assumed constant across both years, we use the two years' data to derive the P/V Ratio and Fixed Cost.

Step 1 — P/V Ratio:
Using the change in contribution method:
Change in Profit = ₹2,50,000 − ₹1,60,000 = ₹90,000
Change in Sales = ₹25,00,000 − ₹20,00,000 = ₹5,00,000
P/V Ratio = 90,000 ÷ 5,00,000 = 18%

(i) Fixed Cost:
Using 2012-13: Contribution = 25,00,000 × 18% = ₹4,50,000
Fixed Cost = Contribution − Profit = 4,50,000 − 2,50,000 = ₹2,00,000
Verification (2013-14): Contribution = 20,00,000 × 18% = 3,60,000; Profit = 3,60,000 − 2,00,000 = ₹1,60,000 ✓

(ii) Break Even Point (BEP):
BEP (in Sales) = Fixed Cost ÷ P/V Ratio = 2,00,000 ÷ 0.18 = ₹11,11,111 (approx.)

(iii) Profit when Sales = ₹30,00,000:
Contribution = 30,00,000 × 18% = ₹5,40,000
Profit = 5,40,000 − 2,00,000 = ₹3,40,000

(iv) Sales to earn desired profit of ₹4,75,000:
Required Sales = (Fixed Cost + Desired Profit) ÷ P/V Ratio
= (2,00,000 + 4,75,000) ÷ 0.18 = 6,75,000 ÷ 0.18 = ₹37,50,000

(v) Margin of Safety at profit of ₹2,70,000:
Margin of Safety (₹) = Profit ÷ P/V Ratio = 2,70,000 ÷ 0.18 = ₹15,00,000
Actual Sales at this profit = (2,00,000 + 2,70,000) ÷ 0.18 = ₹26,11,111
MOS as % of Sales = 15,00,000 ÷ 26,11,111 × 100 = 57.47% (approx.)

Marginal Costing principles under ICAI Study Material — Paper 3 Cost and Management Accounting
PLAN

Write it like this

Time target 36 min

1The skeleton

- Start by writing the P/V Ratio derivation using the 'change' formula — examiners look for this as your opening move because it shows you know fixed cost is constant; don't jump straight to BEP without proving your P/V Ratio first.
- Show the Change in Profit and Change in Sales as separate lines before dividing — writing ₹90,000 ÷ ₹5,00,000 = 18% without labelling the numerator/denominator drops easy presentation marks even if the number is right.
- Use one year to calculate Fixed Cost, then verify with the other year — that one-line verification tick (✓) is a signal to the examiner you know what you're doing and it protects you if your P/V Ratio is slightly off.
- For each sub-part (i–v), write the formula first, then substitute values — examiners award method marks separately from answer marks; no formula = no method mark even if the final figure is correct.
- For Margin of Safety, compute both the ₹ figure AND the % of sales — the question often asks for both and students leave the % blank; MOS = Profit ÷ P/V Ratio is the shortcut that saves 30 seconds here.
- Round and label every answer clearly (₹ and 'approx.' where needed) — ₹11,11,111 without 'approx.' looks like a transcription error to a tired examiner; the label removes all doubt.

2Examiner-rewarded phrases

“P/V Ratio = Change in Profit ÷ Change in Sales”“Fixed Cost = Contribution − Profit (assuming Fixed Cost remains constant)”“Required Sales = (Fixed Cost + Desired Profit) ÷ P/V Ratio”

3Common trap

Don't fall for this

Heads up — the classic trap here is calculating profit percentage on sales (10% of ₹25L = ₹2.5L) and then directly assuming that IS the contribution. It's not — contribution includes fixed cost too. Your P/V Ratio must come from the change method, not from one year's profit margin alone, or your Fixed Cost will be wrong and every subsequent sub-part cascades into error.

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Q.1(b) 00 marks easy Reconciliation of Cost and Financial Accounts ⚡ Try this Q →
A manufacturing company has disclosed net loss of ₹ 48,700 as per their cost accounting records for the year ended 31st March, 2014. However their financial accounting records disclosed net profit of ₹ 35,400 for the same period. A scrutiny of data of both the sets of books of accounts revealed the following informations: (i) Factory overheads under absorbed: ₹ 30,500 (ii) Administrative overheads over absorbed: ₹ 65,000 (iii) Depreciation charged in financial accounts: ₹ 2,25,000 (iv) Depreciation charged in cost accounts: ₹ 2,70,000 (v) Income-tax provision: ₹ 52,400 (vi) Transfer fee (credited in financial accounts): ₹ 10,200 (vii) Obsolescence loss charged in financial accounts: ₹ 20,700 (viii) Notional rent of own premises charged in cost accounts: ₹ 54,000 (ix) Value of opening stock: in cost accounts ₹ 1,38,000; in financial accounts ₹ 1,15,000 (x) Value of closing stock: in cost accounts ₹ 1,22,000; in financial accounts ₹ 1,12,500 Prepare a Memorandum Reconciliation Account by taking costing loss as base.
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Worked Solution

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Memorandum Reconciliation Account (Taking Costing Net Loss as Base)

The purpose of this account is to reconcile the Net Loss of ₹48,700 as per Cost Accounts with the Net Profit of ₹35,400 as per Financial Accounts. Items that inflate cost accounts (increase loss/reduce profit in cost books) appear on the Dr side; items that inflate financial accounts (increase profit in financial books) appear on the Cr side.

Dr Side₹Cr Side₹
Net Loss as per Cost Accounts48,700Administrative overheads over-absorbed (charged more in cost than actual)65,000
Factory overheads under-absorbed (charged less in cost; financial bears full actual cost — reduces financial profit)30,500Excess depreciation in cost accounts over financial accounts (₹2,70,000 − ₹2,25,000)45,000
Income-tax provision (in financial accounts only — reduces financial profit)52,400Transfer fee credited in financial accounts (income only in financial books)10,200
Obsolescence loss charged in financial accounts (not in cost accounts — reduces financial profit)20,700Notional rent of own premises charged in cost accounts only (inflates cost — reduces cost profit)54,000
Excess of closing stock in cost accounts over financial accounts (₹1,22,000 − ₹1,12,500) — higher closing stock in cost books means lower COGS → higher cost profit; financial profit relatively lower9,500Excess of opening stock in cost accounts over financial accounts (₹1,38,000 − ₹1,15,000) — higher opening stock in cost books means higher COGS → lower cost profit; financial profit relatively higher23,000
Net Profit as per Financial Accounts (balancing figure)35,400
Total1,97,200Total1,97,200

Conclusion: The Memorandum Reconciliation Account balances at ₹1,97,200 on both sides, confirming that the Net Profit as per Financial Accounts is ₹35,400, which reconciles with the Net Loss of ₹48,700 as per Cost Accounts.

PLAN

Write it like this

Time target 14 min 24 sec

1The skeleton

- Write the account title exactly as 'Memorandum Reconciliation Account (Taking Costing Net Loss as Base)' — examiners look for this header first; missing or wrong base costs you presentation marks before you've written a single number.
- Put Net Loss as per Cost Accounts on the Dr side as your opening line — this is your base, and placing it here signals to the examiner you understand the direction of reconciliation from the start.
- For each item, ask yourself: does this inflate cost accounts or financial accounts? — items that inflate cost books (under-absorbed OH, notional rent, excess opening stock in cost) go Dr; items that inflate financial books (over-absorbed OH, transfer fee, excess depreciation in cost) go Cr. Writing this logic even briefly in your rough work prevents side-mix errors.
- Handle stock differences with the net figure AND a brief bracket note — write '₹1,22,000 − ₹1,12,500' in the particulars column; examiners award method marks even if your final total is off, so show the workings inline.
- Drop purely financial items (income-tax provision, obsolescence loss) on the Dr side — these reduce financial profit but are absent from cost accounts, so they widen the gap from the cost side; a one-line bracket explanation like '(not in cost accounts)' picks up the reasoning mark.
- Let Net Profit as per Financial Accounts be the balancing figure on the Dr side — never plug it in first; compute both column totals, insert the balancing figure last, then write 'Total ₹X = ₹X' to close the account cleanly.

2Examiner-rewarded phrases

“under-absorbed / over-absorbed (factory/administration overheads)”“charged in cost accounts only / appearing in financial accounts only”“Net Profit as per Financial Accounts (Balancing Figure)”

3Common trap

Don't fall for this

The single killer mistake is flipping the side for stock differences — most students put higher closing stock in cost on the Cr side because 'higher stock = more profit' without thinking about the base. Remember: you're starting from costing loss, so higher closing stock in cost books means cost COGS is lower → cost profit is higher → it actually narrows the gap, so it goes Cr, not Dr. Get the opening stock direction wrong too and you'll be off by ₹32,500 in one shot.

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Q.2(b) 00 marks easy Financial Analysis - Leverage and EPS ⚡ Try this Q →
Calculate the following and comment: (i) Earnings Per Share (ii) Operating Leverage (iii) Financial Leverage (iv) Combined Leverage
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Worked Solution

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Note: No financial data was provided with this question. The solution below presents the standard formulas, concepts, and an illustrative worked example for all four sub-parts, which covers the full examination requirement.

(i) Earnings Per Share (EPS)

EPS measures the profit attributable to each equity share.

Formula: EPS = (Net Profit after Tax – Preference Dividend) / Number of Equity Shares

EPS indicates the return earned on each equity share and is a key indicator of a company's profitability from an equity shareholder's perspective.

(ii) Operating Leverage (OL)

Operating Leverage measures the sensitivity of EBIT (Earnings Before Interest and Tax) to a change in sales/output. It arises due to the presence of fixed operating costs.

Formula: Operating Leverage = Contribution / EBIT

Where: Contribution = Sales – Variable Costs; EBIT = Contribution – Fixed Operating Costs

A higher OL indicates greater business risk — a small change in sales produces a proportionately larger change in EBIT.

(iii) Financial Leverage (FL)

Financial Leverage measures the sensitivity of EBT (Earnings Before Tax) / EPS to a change in EBIT. It arises due to the presence of fixed financial charges (interest on debt, preference dividend grossed up).

Formula: Financial Leverage = EBIT / (EBIT – Interest – Preference Dividend before tax)

Or equivalently: FL = EBIT / EBT (when there are no preference dividends)

A higher FL indicates greater financial risk — fixed interest obligations amplify the effect of EBIT changes on EPS.

(iv) Combined Leverage (CL)

Combined Leverage (also called Total Leverage or Composite Leverage) measures the overall effect of a change in sales on EPS, combining both operating and financial risk.

Formula: Combined Leverage = Operating Leverage × Financial Leverage

Alternatively: CL = Contribution / (EBIT – Interest – Preference Dividend before tax)

Comment on Leverage:
- Higher OL implies higher fixed operating cost structure — a double-edged sword (magnifies gains and losses).
- Higher FL implies heavy reliance on debt/preference capital — increases financial risk but can enhance returns when EBIT > cost of debt (trading on equity).
- Higher CL implies the company is exposed to both business and financial risk; even a modest decline in sales can severely impact EPS.
- An ideal structure balances leverage to maximise EPS while keeping risk within acceptable limits.

Illustrative Example (assuming the following data):

Sales: ₹10,00,000 | Variable Costs: ₹6,00,000 | Fixed Operating Costs: ₹2,00,000 | Interest: ₹50,000 | Tax Rate: 30% | Equity Shares: 10,000 | Preference Dividend: Nil

Contribution = ₹4,00,000 | EBIT = ₹2,00,000 | EBT = ₹1,50,000 | Tax = ₹45,000 | EAT = ₹1,05,000

EPS = ₹1,05,000 / 10,000 = ₹10.50 per share

OL = 4,00,000 / 2,00,000 = 2 times

FL = 2,00,000 / 1,50,000 = 1.33 times

CL = 2 × 1.33 = 2.67 times (or 4,00,000 / 1,50,000 = 2.67 times)

Please provide the actual financial data so that the precise figures can be computed for your specific question.

PLAN

Write it like this

Time target 14 min 24 sec

1The skeleton

- Build your income statement ladder first — write Sales → Variable Cost → Contribution → Fixed Cost → EBIT → Interest → EBT → Tax → EAT in one clean column before touching any formula, because examiners follow this trail to award step marks even if your final answer is wrong.
- State each formula explicitly before substituting numbers — write 'Operating Leverage = Contribution / EBIT' as a standalone line, THEN plug in values; skipping straight to numbers costs you formula marks which are awarded separately.
- For EPS, show the preference dividend deduction clearly — write 'EAT – Preference Dividend = Earnings available to equity shareholders' as an explicit step, because many papers have ₹0 preference dividend and you still need the line to signal you know the complete formula.
- For Financial Leverage, gross up preference dividend before deducting — if preference dividend exists, write 'PD / (1 – tax rate)' explicitly; this one step separates average answers from high-scoring ones.
- Show Combined Leverage twice — first as OL × FL (multiplicative), then verify using Contribution / (EBIT – Interest – Grossed-up PD); examiners love the cross-check and it protects your marks if one route has an arithmetic slip.
- End with a 2-3 line comment block — link each leverage number to risk: high OL = high business risk, high FL = high financial risk, high CL = both risks compounded; this 'comment' line is explicitly asked and is free marks most students skip.

2Examiner-rewarded phrases

“Operating Leverage = Contribution / EBIT; Financial Leverage = EBIT / EBT; Combined Leverage = OL × FL”“Combined Leverage measures the sensitivity of EPS to a change in Sales and is a product of Operating Leverage and Financial Leverage”“Financial leverage arises on account of the presence of fixed financial charges such as interest on debt and preference dividend”

3Common trap

Don't fall for this

The single biggest mark-killer is treating preference dividend like any other expense — you MUST gross it up to pre-tax equivalent (PD ÷ (1 – tax rate)) in the FL denominator, otherwise your FL and CL are both wrong and you lose marks on the comment too. Also, don't confuse Contribution (Sales – Variable Costs) with Gross Profit (Sales – COGS) — they're not the same, and using gross profit in the OL formula is an instant error.

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Q.2a 08 marks hard Economic Order Quantity, Inventory Management ⚡ Try this Q →
A company manufactures a product from a raw material, which is purchased at ₹ 80 per kg. The company incurs a handling cost of ₹ 370 plus freight of ₹ 380 per order. The incremental carrying cost of inventory of raw material is ₹ 0.25 per kg per month. In addition, the cost of working capital finance on the investment in inventory of raw material is ₹ 12 per kg per annum. The annual production of the product is 1,00,000 units and 2.5 units are obtained from one kg. of raw material. Assume 360 days in a year.
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Q.2b 08 marks hard Financial Analysis, Leverage, Return on Capital ⚡ Try this Q →
Case: Balance Sheet Analysis with additional financial information
A company had the following Balance Sheet as on 31st March, 2014: Liabilities [Equity Share Capital (50 lakh shares of ₹ 10 each) ₹ 5 crores; Reserves and Surplus ₹ 1 crore; 15% Debentures ₹ 10 crores; Current Liabilities ₹ 4 crores]; Assets [Fixed Assets (Net) ₹ 12.5 crores; Current Assets ₹ 7.5 crores]. Additional information: Fixed cost per annum (excluding interest) ₹ 4 crores; Variable operating cost ratio 65%; Total assets turnover ratio 2.5; Income Tax rate 30%.
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Q.3 08 marks hard Process Costing ⚡ Try this Q →
M. Vets Pvt. Ltd. manufactures 'SKY' through two processes: Process - A and Process - B. The following details are for the year ended 31 March 2014:
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Q.3(a) 08 marks hard Process Costing ⚡ Try this Q →
M J Pvt. Ltd. produces a product "SKY" which passes through two processes, viz. Process-A and Process-B. The details for the year ending 31st March, 2014 are as follows: 40,000 Units introduced at a cost of ₹3,60,000 (Process-A only) Material Consumed: Process-A ₹2,42,000, Process-B ₹2,25,000 Direct Wages: Process-A ₹2,58,000, Process-B ₹1,90,000 Manufacturing Expenses: Process-A ₹1,96,000, Process-B ₹1,23,720 Output in Units: Process-A 37,000, Process-B 27,000 Normal Wastage of Input: Process-A 5%, Process-B 10% Scrap Value (per unit): Process-A ₹15, Process-B ₹20 Selling Price (per unit): Process-A ₹37, Process-B ₹61 Additional Information: (a) 80% of the output of Process-A was passed on to the next process and the balance was sold. The entire output of Process-B was sold. (b) Indirect expenses for the year was ₹4,48,080. (c) It is assumed that Process-A and Process-B are not responsibility centre. Required: (i) Prepare Process-A and Process-B Account. (ii) Prepare Profit & Loss Account showing the net profit / net loss for the year.
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Q.3(b) 08 marks hard Capital Budgeting - NPV and Profitability Index ⚡ Try this Q →
FH Hospital is considering to purchase a CT-Scan machine. Presently the hospital is outsourcing the CT-Scan Machine and is earning commission of ₹15,000 per month (net of tax). The following details are given regarding the machine: Cost of CT-Scan machine: ₹15,00,000 Operating cost per annum (excluding Depreciation): ₹2,25,000 Expected revenue per annum: ₹7,90,000 Salvage value of the machine (after 5 years): ₹3,00,000 Expected life of the machine: 5 years Assuming tax rate @ 30%, whether it would be profitable for the hospital to purchase the machine? Give your recommendation under: (i) Net Present Value Method (ii) Profitability Index Method PV factors at 12% are given: Year 1: 0.893, Year 2: 0.797, Year 3: 0.712, Year 4: 0.636, Year 5: 0.567
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Q.3(b) 08 marks hard Depreciation and Asset Valuation ⚡ Try this Q →
An assessee purchased a CT-Scheme machine on a specific date. During the current time period, the assessee purchased another CT-Scheme machine with outgoing amount ₹15,000 (depreciation rate). The assessee raises the following doubts:
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Q.3c 00 marks easy Trading Account, Profit & Loss Account, Financial Ratios ⚡ Try this Q →
Case: NOOR Limited
NOOR Limited provides the following information for the year ending 31st March, 2014: Equity Share Capital ₹ 25,00,000; Closing Stock ₹ 6,00,000; Stock Turnover Ratio 5 times; Gross Profit Ratio 25%; Net Profit / Sale 20%; Net Profit / Capital 1/4. You are required to prepare: Trading and Profit & Loss Account for the year ending 31st March, 2014.
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Q.3d 00 marks easy Weighted Average Cost of Capital (WACC) ⚡ Try this Q →
Case: GPS Limited
The following details are provided by the GPS Limited: Equity Share Capital ₹ 65,00,000; 12% Preference Share Capital ₹ 12,00,000; 15% Redeemable Debentures ₹ 20,00,000; 10% Convertible Debentures ₹ 8,00,000. The cost of equity capital for the company is 16.30% and Income Tax rate for the company is 30%. You are required to calculate the Weighted Average Cost of Capital (WACC) of the company.
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Q.4 08 marks hard Financial Analysis ⚡ Try this Q →
XYZ Ltd. provides the following comparative information:
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Q.4(a) 08 marks hard Standard Costing - Overhead Variances ⚡ Try this Q →
XYZ Co. Ltd. provides the following information: Production: Standard 4,000 Units, Actual 3,800 Units Working Days: Standard 20, Actual 21 Fixed Overhead: Standard ₹40,000, Actual ₹39,000 Variable Overhead: Standard ₹12,000, Actual ₹12,000 You are required to calculate following overhead variances: (a) Variable Overhead Variance (b) Fixed Overhead Variances: (i) Expenditure Variance (ii) Volume Variance
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Q.5(a) 04 marks medium Cost Control and Cost Reduction ⚡ Try this Q →
Distinguish between cost control and cost reduction.
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Q.5(c) 04 marks medium Role of CFO ⚡ Try this Q →
Discuss emerging issues affecting the future role of Chief Financial Officer (CFO).
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Q.5(d) 04 marks medium Depositary Receipts ⚡ Try this Q →
State the main features of Global Depositary Receipts (GDRs) and American Depositary Receipts (ADRs).
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Q.6 00 marks easy Working Capital Management ⚡ Try this Q →
Case: Additional Information: (i) Average raw material in stock - 3 weeks; (ii) Average work-in-progress - 2 weeks (% of completion with respect to Material - 75%, Labour & Overhead - 70%); (iii) Finished goods in stock - 4 weeks; (iv) Credit allowed to debtors - 2½ weeks; (v) Credit allowed by creditors - 3½ weeks; (vi) Time lag in payments of labour - 2 weeks; (vii) Time lag in payments of factory overheads - 1½ weeks; (viii) Company sells 25% of the output against cash; (ix) Cash in hand and bank is desired to be maintained ₹ 2,25,000; (x) Provision for contingencies is required @ 4% of working c…
You are required to prepare a statement showing estimate of working capital needed to finance a budgeted activity level of 104000 units of production. Finished stock, debtors and overhead are taken at cash cost.
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Q.6(a) 08 marks very hard Contract Accounting, WIP, Profit Recognition ⚡ Try this Q →
M/s ABID Constructions undertook a contract at a price of ₹171.00 lacs. The relevant data for the year ended 31st March, 2014 are: Material issued at site ₹7,700,000; Direct Wages paid ₹3,300,000; Site office cost ₹550,000; Material return to store ₹175,000; Work certified ₹12,650,000; Work uncertified ₹225,000; Progress Payment Received ₹10,120,000; Prepaid site office cost as on 31-03-2014 ₹50,000; Direct wages outstanding as on 31-03-2014 ₹100,000; Material at site as on 31-03-2014 ₹110,000. Additional Information: A plant was purchased for the contract at ₹8,00,000 on 01-12-2013. Depreciation @ 15% per annum is to be charged. Material which cost ₹1,30,000 was destroyed by fire.
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Q.6(b) 08 marks hard Cost Accounting, Cost Sheet, Absorption Costing ⚡ Try this Q →
Black Limited has furnished the following cost sheet: Raw Material ₹98 per unit; Direct Labour ₹53 per unit; Factory Overhead ₹88 per unit (includes depreciation of ₹15 per unit at budgeted level of activity); Total Cost ₹239 per unit; Profit ₹43 per unit; Selling Price ₹282 per unit.
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Q.7 16 marks very hard Cost Accounting, Financial Management, Treasury Management ⚡ Try this Q →
Answer any four of the following:
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Q.7 16 marks very hard Cost Accounting - Cost Allocation, Budgeting, International ⚡ Try this Q →
निम्नलिखित में से किन्हीं चार के उत्तर दीजिए :
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Q.7(b) 08 marks hard Cash Flow Statement Preparation ⚡ Try this Q →
The Balance Sheets of 7 Ltd. as on 31st March, 2013 and 31st March, 2014 are provided with the following balance sheet data. Additional Information: (i) Depreciation charged on Plant and Land & Buildings during the year was ₹50,000 and ₹1,00,000 respectively. (ii) Income-Tax ₹1,75,000 was paid during the year 2013-14. (iii) An Interim Dividend of ₹1,00,000 has been paid in 2013-14. Prepare Cash Flow Statement.
Keep reading free — every worked solution + bare-Act citation for Cash Flow Statement Preparation
✓ 42-line worked answer · ✓ 4 bare-Act citations · ✓ 3 examiner-rewarded phrases · ✓ Common-trap warning · ✓ How-to-write skeleton
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