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Past papers/ Taxation/ May 2015
Paper 20 Qs
Suggested Answers · May 2015

CA Inter Taxation

This page contains all 20 questions from the CA Inter Taxation Suggested Answers for the May 2015 attempt cycle, sourced from VSI Jaipur.

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Q.1(a) 05 marks medium Cost-Volume-Profit Analysis ⚡ Try this Q →
ABC Limited started in the year 2013 with a total capacity of 2,00,000 units. Following information for its operating data is given: Year 2013: Sales (units) 80,000; Total Cost ₹34,40,000. Year 2014: Sales (units) 1,20,000; Total Cost ₹45,60,000. There has been no change in the cost structure and selling price and it is anticipated that it will remain unchanged in the year 2015 also. Selling price is ₹40 per unit.
CTTP

Worked Solution

✓ Verified

Step 1: Segregation of Costs using High-Low Method

Using the two years' data to separate fixed and variable costs:

Change in Cost = ₹45,60,000 − ₹34,40,000 = ₹11,20,000
Change in Units = 1,20,000 − 80,000 = 40,000 units

(i) Variable Cost per unit = ₹11,20,000 ÷ 40,000 = ₹28 per unit

Fixed Cost (using Year 2013 data) = ₹34,40,000 − (28 × 80,000) = ₹34,40,000 − ₹22,40,000 = ₹12,00,000

Verification (Year 2014): ₹12,00,000 + (28 × 1,20,000) = ₹45,60,000 ✓

Contribution per unit = Selling Price − Variable Cost = ₹40 − ₹28 = ₹12 per unit

(ii) Profit Volume (P/V) Ratio = (Contribution per unit ÷ Selling Price) × 100 = (₹12 ÷ ₹40) × 100 = 30%

(iii) Break-Even Point (in units) = Fixed Cost ÷ Contribution per unit = ₹12,00,000 ÷ ₹12 = 1,00,000 units

(iv) Profit at 75% Capacity:

75% of 2,00,000 = 1,50,000 units

Contribution = 1,50,000 × ₹12 = ₹18,00,000
Less: Fixed Cost = ₹12,00,000
Profit = ₹6,00,000

PLAN

Write it like this

Time target 9 min

1The skeleton

- Label your first line 'High-Low Method' — examiners are trained to tick this heading; without it your cost segregation looks like a random subtraction.
- Show Change in Cost ÷ Change in Units as a named formula step — write 'Variable Cost per unit = ΔCost ÷ ΔUnits' explicitly so the method is unmistakable and you pocket the method mark even if arithmetic slips.
- Plug back to find Fixed Cost using ONE year's data, then verify with the other — that one-line verification '✓' signals examiner-level rigour and protects you if FC looks odd.
- State Contribution per unit as its own line before computing P/V Ratio — don't embed it silently inside the ratio formula; examiners award a separate tick for this.
- For the 75% capacity sub-part, convert percentage to units first on its own line — writing '75% × 2,00,000 = 1,50,000 units' before any arithmetic stops you from accidentally using ₹ figures in a units slot.
- End each sub-answer with a boxed/bold result and unit label — '₹6,00,000 profit', '1,00,000 units', '30%'; examiners scan right margin for final answers, so naked numbers without labels lose presentation marks.

2Examiner-rewarded phrases

“Using the High-Low Method, Variable Cost per unit = Change in Total Cost / Change in Units”“P/V Ratio = (Contribution per unit / Selling Price per unit) × 100”“Break-Even Point (in units) = Fixed Cost / Contribution per unit”

3Common trap

Don't fall for this

The sneaky mistake here is jumping straight to P/V Ratio or BEP without first explicitly segregating fixed and variable costs — you'll likely use wrong numbers AND lose the High-Low method step mark. Also watch out: the question says 75% of *total capacity* (2,00,000), not 75% of actual sales — confusing these two wipes out the entire last sub-part.

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Q.1(b) 05 marks medium Budgeting and Production Planning ⚡ Try this Q →
XYZ Limited is drawing a production plan for its two products - Product 'xml' and Product 'yml' for the year 2015-16. The company's policy is to maintain closing stock of finished goods at 25% of the anticipated volume of sales of the succeeding month. Budgeted Production: xml 2,00,000 units, yml 1,50,000 units. Direct Material: xml ₹220, yml ₹280 per unit. Direct Labour: xml ₹130, yml ₹120 per unit. Direct Manufacturing Expenses: xml ₹4,00,000, yml ₹5,00,000. Estimated units to be sold in the first four months of 2015-16: April (xml 8,000, yml 6,000), May (xml 10,000, yml 8,000), June (xml 12,000, yml 9,000), July (xml 16,000, yml 14,000).
CTTP

Worked Solution

✓ Verified

(i) Production Budget (Month-wise) — April to June 2015-16

Formula: Production = Sales + Closing Stock − Opening Stock
Policy: Closing Stock = 25% of next month's sales; therefore Opening Stock of any month = 25% of that month's own sales.

Product xml:

MonthOpening StockSalesClosing StockProduction
April25% × 8,000 = 2,0008,00025% × 10,000 = 2,5008,500
May2,50010,00025% × 12,000 = 3,00010,500
June3,00012,00025% × 16,000 = 4,00013,000
Q1 Total30,00032,000

Product yml:

MonthOpening StockSalesClosing StockProduction
April25% × 6,000 = 1,5006,00025% × 8,000 = 2,0006,500
May2,0008,00025% × 9,000 = 2,2508,250
June2,2509,00025% × 14,000 = 3,50010,250
Q1 Total23,00025,000

---

(ii) Production Cost Budget — First Quarter (April to June 2015-16)

Direct Manufacturing Expenses are given as annual totals; per-unit rates are derived using annual budgeted production (xml: 2,00,000 units; yml: 1,50,000 units).

xml: DME per unit = ₹4,00,000 ÷ 2,00,000 = ₹2 per unit
yml: DME per unit = ₹5,00,000 ÷ 1,50,000 = ₹3.33 per unit

Particularsxml (32,000 units) ₹yml (25,000 units) ₹Total ₹
Direct Material32,000 × 220 = 70,40,00025,000 × 280 = 70,00,0001,40,40,000
Direct Labour32,000 × 130 = 41,60,00025,000 × 120 = 30,00,00071,60,000
Direct Mfg Expenses32,000 × 2 = 64,00025,000 × 3.33 = 83,3331,47,333
Total Production Cost1,12,64,0001,00,83,3332,13,47,333

Total Production Cost for Q1 = ₹2,13,47,333

PLAN

Write it like this

Time target 9 min

1The skeleton

- Start with the Production Budget table first, not the cost budget — examiners follow a two-part structure and if you jump straight to costs you lose the logical flow marks even if numbers are right.
- State the stock policy formula explicitly before the table — write 'Closing Stock = 25% of next month's sales; Opening Stock = Closing Stock of previous month' as a single line; this earns the formula mark and signals to the examiner you understand the mechanic.
- Use the column order: Opening Stock → Sales → Closing Stock → Production — this mirrors the ICAI model answer layout and makes your working self-explanatory without a separate note.
- Derive DME per unit explicitly before the cost table — write '₹4,00,000 ÷ 2,00,000 units = ₹2 per unit' as a standalone line; if you hide this inside the table cell you lose the working mark even if the final number is correct.
- Use Q1 production units (not annual units) as the base for the cost budget — box or bold the Q1 totals (32,000 xml, 25,000 yml) so the examiner can trace them directly from part (i) to part (ii); this linkage shows structured thinking.
- Close with a single 'Total Production Cost for Q1 = ₹X' line — examiners scan the bottom of the cost table for this; if it's buried mid-table you may not get the conclusion mark.

2Examiner-rewarded phrases

“Production = Sales + Closing Stock − Opening Stock”“Closing stock is maintained at 25% of the anticipated sales of the succeeding month”“Direct Manufacturing Expenses per unit = Total Annual DME ÷ Budgeted Annual Production”

3Common trap

Don't fall for this

Most students compute Opening Stock of April as zero because 'there's no prior month given' — dead wrong. The policy applies continuously, so Opening Stock of April = 25% of April's own sales (i.e., the March closing stock). Missing this flips every production figure and kills 2-3 marks in one shot.

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Q.1(c) 05 marks medium Credit Policy and Working Capital Management ⚡ Try this Q →
A new customer has approached a firm to establish new business connection. The customer requires 1.5 month of credit. If the proposal is accepted, the sales of the firm will go up by ₹2,40,000 per annum. The new customer is being considered as a member of 10% risk of non-payment group. The cost of sales amounts to 80% of sales. The tax rate is 30% and the desired rate of return is 40% (after tax). Should the firm accept the offer? Give your opinion on the basis of calculations.
CTTP

Worked Solution

✓ Verified

Evaluation of Credit Proposal — New Customer

Incremental Sales and Profitability

The new customer will generate incremental annual sales of ₹2,40,000. At 80% cost of sales, the incremental gross contribution is 20% × ₹2,40,000 = ₹48,000.

Since the customer falls in the 10% risk of non-payment group, the expected bad debt loss = 10% × ₹2,40,000 = ₹24,000.

Net profit before tax = ₹48,000 − ₹24,000 = ₹24,000

Tax @ 30% = ₹7,200

Net profit after tax = ₹16,800

Investment in Debtors (Opportunity Cost Base)

Investment in debtors is measured at cost of sales (cash actually tied up):

Investment = (Cost of Sales / 12) × Credit Period = (₹1,92,000 / 12) × 1.5 = ₹24,000

Required Return on Investment

Desired rate of return (after tax) = 40%

Required return = 40% × ₹24,000 = ₹9,600

Decision

Since Net Profit after tax (₹16,800) > Required Return (₹9,600), the incremental profitability exceeds the opportunity cost of funds blocked in debtors.

The firm should ACCEPT the offer. The proposal generates an excess return of ₹7,200 (₹16,800 − ₹9,600) after meeting the required rate of return, making it financially viable despite the 10% bad debt risk.

PLAN

Write it like this

Time target 9 min

1The skeleton

- Start with a labeled table or 3-line statement: Incremental Sales → Contribution → Bad Debt → Net PAT — examiners scan for this flow in the first 5 lines; if they don't see it, they assume you don't know the structure even if your final number is correct.
- Always compute contribution as (1 − Cost%) × Incremental Sales, not as 'profit' — writing 'profit = 20%' without explicitly saying 'contribution margin' loses the step mark because the examiner needs to see you distinguish contribution from net income.
- Deduct bad debt BEFORE tax, not after — the sequence is Contribution → minus Bad Debt → equals PBT → minus Tax → PAT; swapping bad debt to post-tax is the single most penalised arithmetic error in this question type.
- Calculate Investment in Debtors at Cost of Sales, not at Sales value — write the formula explicitly: (Annual Cost of Sales ÷ 12) × Credit Period in months; stating the formula earns the method mark even if you slip on arithmetic.
- Compare PAT vs Required Return in one boxed line and state the decision boldly — 'Since ₹16,800 > ₹9,600, the proposal should be ACCEPTED' is the closer examiners want to see; a vague 'it seems viable' will not earn the conclusion mark.

2Examiner-rewarded phrases

“incremental investment in debtors”“desired/required rate of return on investment in debtors”“net benefit/(loss) after tax from accepting the proposal”

3Common trap

Don't fall for this

Heads up — most students apply the 40% desired return directly on Sales (₹2,40,000) instead of on the Investment in Debtors (₹24,000), which inflates the required return to ₹96,000 and flips the decision to 'Reject'. The required return is an opportunity cost on funds blocked, so it always goes on cost-based debtor investment, not on revenue.

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Q.1(d) 05 marks medium Leverage Analysis ⚡ Try this Q →
Following information are related to four firms of the same industry: Firm P: Change in Revenue 27%, Change in Operating Income 30%, Change in Earning per Share 21%. Firm Q: Change in Revenue 25%, Change in Operating Income 21%, Change in Earning per Share 23%. Firm R: Change in Revenue 23%, Change in Operating Income 36%, Change in Earning per Share 23%. Firm S: Change in Revenue 21%, Change in Operating Income 40%, Change in Earning per Share 23%.
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Q.2(a) 00 marks easy Overhead Variances ⚡ Try this Q →
QS Limited has furnished the following information: Standard overhead absorption rate per unit ₹20; Standard rate per hour ₹4; Budgeted production 12,000 units; Actual production 15,560 units; Actual working hours 7,100; Actual overheads amounted to ₹2,95,000, out of which ₹62,500 fixed. Overheads are based on the following flexible budget: At 8,000 units Total Overheads ₹1,80,000; At 10,000 units Total Overheads ₹2,10,000; At 14,000 units Total Overheads ₹2,70,000.
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Q.2(b) 00 marks easy Financial Analysis and Balance Sheet Preparation ⚡ Try this Q →
SSR Ltd. has furnished the following ratios and information relating to the year ended 31st March, 2015: Sales ₹60 Lacs; Return on Net worth 25%; Rate of Income tax 50%; Share Capital to Reserves 7:3; Current Ratio 2:1; Net-Profit to Sales (after tax) 6.25%; Inventory Turnover 12 (Based on cost of goods sold and closing stock); Cost of goods sold ₹18 Lacs; Interest on Debentures (@ 15%) ₹60,000; Sundry Debtors ₹2 Lacs; Sundry Creditors ₹2 Lacs.
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Q.3(a) 00 marks easy Cost Analysis and Pricing ⚡ Try this Q →
A mini-bus, having a capacity of 32 passengers, operates between places 'A' and 'B'. The distance between the places is 30 km. The bus makes 10 round trips in a day for 25 days in a month. On an average the occupancy ratio is 70% and is expected throughout the year. Expenses: Insurance ₹15,600 per annum; Garage Rent ₹2,200 per quarter; Road Tax ₹5,000 per annum; Repair ₹4,800 per quarter; Salary of operating staff ₹7,200 per month; Tyres and Tubes ₹3,600 per quarter; Diesel: one litre is consumed for every 5 km at ₹22 per litre; Oil and sundries ₹80 per 100 km run; Depreciation ₹68,000 per annum. Passenger tax @ 22% on total taking is to be levied and bus operator requires a profit of 25% on total taking.
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Q.3(b) 00 marks easy Capital Budgeting and Investment Appraisal ⚡ Try this Q →
Given below are the data on a capital project 'M': Annual cash inflows ₹60,000; Useful life 4 years; Internal rate of return 15%; Profitability index 1.06; Salvage value 0.
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Q.4(a) 00 marks easy Joint Product Costing ⚡ Try this Q →
A company manufactures one main product (M1) and two by-products B1 and B2. For the month of January 2015, following details are available: Total cost upto separation point ₹2,12,400. M1: Cost after separation ₹35,000, Units produced 4,000, Selling Price per unit ₹100, Estimated net profit 20% of Sales Value, Estimated selling expenses 20% of Sales Value. B1: Cost after separation ₹24,000, Units produced 1,800, Estimated net profit 30% of Sales Value, Estimated selling expenses 15% of Sales Value. B2: Units produced 3,000, Selling Price per unit ₹40, Estimated net profit 30% of Sales Value, Estimated selling expenses 15% of Sales Value.
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Q.4(b) 00 marks easy Cost of Capital and Financing Decisions ⚡ Try this Q →
A Ltd. wishes to raise additional finance of ₹30 lakhs for meeting investment plans. The company has ₹6,00,000 in the form of retained earnings available for investment purposes. Debt equity ratio - 30:70; Cost of debt - 11% (before tax) upto ₹3,00,000 and 14% (before tax) beyond that; Earnings Per share - ₹15; Dividend payout - 70% of earnings; Expected growth rate in dividend - 10%; Current market price per share - ₹90; Company's tax rate is 30% and shareholder's personal tax rate is 20%.
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Q.5(a) 04 marks medium Cost Concepts ⚡ Try this Q →
Explain 'Sunk Cost' and 'Opportunity Cost'.
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Q.5(c) 04 marks medium Financing Arrangements ⚡ Try this Q →
Explain 'Sales and Lease Back'.
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Q.5(d) 04 marks medium Cash Management Models ⚡ Try this Q →
Explain 'Miller-Orr Cash Management model'.
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Q.6(a) 00 marks easy Machine Hour Rate Calculation ⚡ Try this Q →
A machine shop cost centre contains three machines of equal capacities. Three operators are employed on each machine, payable ₹20 per hour each. The factory works for 48 hours a week which includes 4 hours set up time. The work is jointly done by operators. The operators are paid fully for the 48 hours. In addition, they are also paid a bonus of 10% of productive time. Costs are reported for this company on the basis of thirteen, four-weekly periods. Factory overheads applicable to the cost centre: Original Cost of each machine ₹52,000; Depreciation on original cost 10% per annum; Maintenance & Repair ₹60 per week per machine; Consumable Stores ₹75 per week per machine; Power 20 units per hour per machine at ₹0.80 per unit; Apportionment to cost centre: Rent ₹5,400 per annum; Heat and Light ₹9,120 per annum; Foreman's Salary ₹12,960 per annum.
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Q.6(b) 00 marks easy Working Capital Management ⚡ Try this Q →
The following information is provided by the DVP Ltd. for the year ending 31st March, 2015: Raw Material storage period 50 days; Work in progress conversion period 18 days; Finished Goods storage period 22 days; Debt Collection period 45 days; Creditors' payment period 55 days; Annual Operating Cost ₹21 Lacs (Including depreciation of ₹2,10,000). (1 year = 360 days).
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Q.7(a) 04 marks medium Cost Centre Definition and Classification ⚡ Try this Q →
Define 'Cost Centre' and state its types.
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Q.7(b) 04 marks medium Integrated Accounting System ⚡ Try this Q →
State benefits of Integrated Accounting.
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Q.7(c) 04 marks medium Working Capital Financing Methods ⚡ Try this Q →
Differentiate between 'Factoring' and 'Bill discounting'.
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Q.7(d) 04 marks medium Financial Management Objectives ⚡ Try this Q →
Discuss the conflicts in Profit versus Wealth maximization principle of the firm.
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Q.7(e) 04 marks medium Time Value of Money Concepts ⚡ Try this Q →
Define 'Present Value' and 'Perpetuity'.
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