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  • 8/7/2019 SA PCC-Group-II June 2009

    1/81(Set up by an Act of Parliament)

    Board of Studies

    Volume 5

    10

    Group IIJune, 2009

    Professional CompetenceExamination

    Suggested Answers

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    S UGGESTED ANSWERS TO QUESTIONS S ET AT THE

    P ROFESSIONAL COMPETENCE EXAMINATION

    GROUP II

    JUNE, 2009

    BOARD OF STUDIES

    THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

    (Set up by an Act of Parliament)

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    The suggested Answers published in this volume do not constitute the basis for evaluation of thestudents answers in the examination. The answers are prepared by the Faculty of the Board of Studies with a view to assist the students in their education. While due care is taken in preparationof the answers, if any errors or omissions are noticed, the same may be brought to the attention of the Director of Studies. The Council of the Institute is not in anyway responsible for thecorrectness or otherwise of the answers published herein.

    THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

    All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior permission, in writing, form the publisher.

    Website : www.icai.org

    Department/Committee : Board of Studies

    E-mail : [email protected]

    Price : Rs.40/-

    ISBN No. : 978-81-8441-280-2

    Published by : The Publication Department on behalf of The Institute of Chartered Accountants of India, ICAI Bhawan, Post Box No. 7100,Indraprastha Marg, New Delhi- 110 002, India

    Typeset and designed at Board of Studies.

    Printed by : Sahitya Bhawan Publications, Hospital Road, Agra 282 003

    September / 2009 / 25,000 Copies

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    Contents

    Page Nos.

    Paper 4. Cost Accounting and Financial Management................................................1 26Paper 5. Taxation ......................................................................................................27 44Paper 6. Information Technology and Strategic Management...................................45 60

    Summary of Examiners comments on the performance of the candidates

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    PAPER 4 : COST ACCOUNTING AND FINANCIAL MANAGEMENT

    All questions are compulsory.

    Working notes should form part of the answer.

    Question 1

    Answer any five of the following:

    (i) Two workmen, A and B, produce the same product using the same material. A is paid bonus according to Halsey plan, while B is paid bonus according to Rowan plan. Thetime allowed to manufacture the product is 100 hours. A has taken 60 hours and B hastaken 80 hours to complete the product. The normal hourly rate of wages of workman Ais Rs.24 per hour. The total earnings of both the workers are same. Calculate normal hourly rate of wages of workman B.

    (ii) Distinguish between product cost and period cost.

    (iii) A lorry starts with a load of 24 tonnes of goods from station A. It unloads 10 tonnes at station B and rest of goods at station C. It reaches back directly to station A after gettingreloaded with 18 tonnes of goods at station C. The distance between A to B, B to C and then from C to A are 270 kms, 150 kms and 325 kms respectively. Compute Absolutetonnes kms and Commercial tones-kms.

    (iv) Following details relating to product X during the month of April, 2009 are available:

    Standard cost per unit of X :

    Materials : 50 kg @ Rs.40/kg

    Actual production : 100 units

    Actual material cost : Rs.42/kg

    Material price variance : Rs.9,800 (Adverse)

    Material usage variance : Rs.4,000 (Favourable)

    Calculate the actual quantity of material used during the month April, 2009.

    (v) Discuss the components of budgetary control system.(vi) Following information is available for the first and second quarter of the year 2008-09 of

    ABC Limited:

    Production (in units) Semi-variable cost (Rs.)

    Quarter I 36,000 2,80,000

    Quarter II 42,000 3,10,000

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    PROFESSIONAL COMPETENCE EXAMINATION : JUNE, 2009

    2

    You are required to segregate the semi-variable cost and calculate :

    (a) Variable cost per unit; and

    (b) Total fixed cost. (5 2 = 10 Marks)

    Answer

    (i)

    A BTime Allowed (Hrs.) 100 100Time Taken (Hrs.) 60 80

    Time Saved (Hrs.) 40 20Let the rate of wages of the worker B is Rs.x per hour Normal Wages 1440 80x(Time taken Hourly rate of wages) (6024)Bonus 480 16x

    (1/2 40 24) )x80(10020

    1920 96x According to the problem,

    Total earnings of A = Total earnings of B

    1920 = 96x

    x =96

    1920= Rs.20

    Hourly rate of wages of the worker is Rs.20 per hour.

    Alternative Solution:

    In case of worker B, in place of x, it can be written as 80x hourly rate.

    Hence final equation will be

    96x hourly rate = 1920

    Hourly rate of B =96

    1920= Rs. 20

    (ii) Product Cost vis--vis Period cost

    Product costs are associated with the purchase and sale of goods. In the productionscenario, such costs are associated with the acquisition and conversion of materials and

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    PAPER 4 : COST ACCOUNTING AND FINANCIAL MANAGEMENT

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    all other manufacturing inputs into finished product for sale. Hence under absorption cost,total manufacturing costs constitute inventoriable or product cost.

    Periods costs are the costs, which are not assigned to the products but are charged asexpense against revenue of the period in which they are incurred. General Administration,marketing, sales and distributor overheads are recognized as period costs.

    (iii) Absolute tonnes kms

    = tonnes (unit of weight) Km (Unit of distance)

    = 24 tonnes 270 kms

    + 14 tonnes 150 kms+ 18 tonnes 325 kms

    = 6480 + 2100 + 5850

    = 14430 tonnes kms

    Commercial Tonnes kms

    = Average load total kms travelled

    =

    ++

    3181424

    tonnes 745 kms

    = 13906.67 Tonnes km

    (iv) Standard cost of materials for actual output Rs.

    [(100 units 50 kg) Rs.40 per kg] = 2,00,000

    Material Usage Variance 4,000 (F)

    1,96,000

    Material Price Variance 9,800 (A)

    Actual cost of materials used 2,05,800

    Actual material cost = Rs.42 per kg.

    Actual quantity of materials used during the month =42

    800,05,2.Rs= 4,900 kg.

    Alternative solution

    Material price variance = Rs. 9800 (A)

    Actual price per kg. = Rs. 42

    Actual quantity of material used = Rs. 9800/(42-40) = 4900 kg

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    PROFESSIONAL COMPETENCE EXAMINATION : JUNE, 2009

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    (v) Components of budgetary control system

    The policy of a business for a defined period is represented by the master budget thedetails of which are given in a number of individual budgets called functional budgets.The functional budgets are broadly grouped under the following heads:

    (a) Physical Budgets Sales Qty, Product Qty., Inventory, Manpower budget.

    (b) Cost Budgets Manufacturing Cost, Administration Cost, sales & distribution cost,R & D Cost.

    (c) Profit Budget

    (vi)

    Production (Units) Semi Variable Cost (Rs.)Quarter I 36,000 2,80,000Quarter II 42,000 3,10,000Difference 6,000 30,000

    Variable Cost per Unit =oductionPr inChange

    CostVariableSemiinChange

    =units000,6000,30.Rs

    = Rs.5 per units

    Total Fixed Cost = Semi Veriable Cost (Production x Variable Cost per Unit)

    Total fixed cost in Quarter I :

    = 2,80,000 (36,000 5)

    = 2,80,000 1,80,000

    = 1,00,000

    Total fixed cost in Quarter II :

    = 3,10,000 (42,000 5)= 3,10,000 2,10,000

    = 1,00,000

    Question 2

    Following is the sales budget for the first six months of the year 2009 in respect of PQR Ltd. :

    Month : Jan. Feb. March April May June

    Sales (units) : 10,000 12,000 14,000 15,000 15,000 16,000

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    PAPER 4 : COST ACCOUNTING AND FINANCIAL MANAGEMENT

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    Finished goods inventory at the end of each month is expected to be 20% of budgeted salesquantity for the following month. Finished goods inventory was 2,700 units on January 1,2009. There would be no work-in-progress at the end of any month.

    Each unit of finished product requires two types of materials as detailed below:

    Material X : 4 kgs @ Rs.10/kg

    Material Y : 6 kgs @ Rs.15/kg

    Material on hand on January 1, 2009 was 19,000 kgs of material X and 29,000 kgs of material Y. Monthly closing stock of material is budgeted to be equal to half of the requirements of next months production.

    Budgeted direct labour hour per unit of finished product is hour.

    Budgeted direct labour cost for the first quarter of the year 2009 is Rs.10,89,000.

    Actual data for the quarter one, ended on March 31, 2009 is as under:

    Actual production quantity : 40,000 units

    Direct material cost

    (Purchase cost based on materials actually issued to production)

    Material X : 1,65,000 kgs @ Rs.10.20/kg

    Material Y : 2,38,000 kgs @ Rs.15.10/kg

    Actual direct labour hours worked : 32,000 hours

    Actual direct labour cost : Rs.13,12,000 Required :

    (a) Prepare the following budgets:

    (i) Monthly production quantity for the quarter one.

    (ii) Monthly raw material consumption quantity budget from January, 2009 to April,2009.

    (iii) Materials purchase quantity budget for the quarter one.

    (b) Compute the following variances :(i) Material cost variance

    (ii) Material price variance

    (iii) Material usage variance

    (iv) Direct labour cost variance

    (v) Direct labour rate variance

    (vi) Direct labour efficiency variance (6 +9 = 15 Marks)

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    PROFESSIONAL COMPETENCE EXAMINATION : JUNE, 2009

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    Answer

    (a) (i) Production Budget for January to March 2009

    (Quantitative)

    Jan Feb Mar April

    Budgeted Sales 10,000 12,000 14,000 15,000

    Add : Budgeted Closing Stock 2,400 2,800 3,000 3,000

    (20% of sales of next month)

    12,400 14,800 17,000 18,000

    Less: Opening Stock 2,700 2,400 2,800 3,000

    Budgeted Output 9,700 12,400 14,200 15,000

    Total Budgeted Output for the Quarter ended March 31, 2009

    = (9,700 + 12,400 + 14,200)

    = 36,300 units.

    (ii) Raw Material Consumption Budget (in quantity)

    Month Budgeted Output(Units)

    Material X @ 4 kgper unit (Kg)

    Material Y @ 6 kgper unit (Kg)

    Jan 9,700 38,800 58,200Feb 12,400 49,600 74,400Mar 14,200 56,800 85,200 Apr 15,000 60,000 90,000Total 2,05,200 3,07,800

    (iii) Raw Materials Purchase Budget (in quantity)

    for the Quarter ended (March 31,2009)

    Material X (kg) Material Y (kg)

    Raw material required for production 1,45,200 2,17,800 Add : Closing Stock of raw material 30,000 45,000

    1,75,200 2,62,800Less: Opening Stock of raw material 19,000 29,000Material to be purchased 1,56,200 2,33,800

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    PAPER 4 : COST ACCOUNTING AND FINANCIAL MANAGEMENT

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    Alternative Solution

    (iii) Raw Materials Purchase Budget (in quantity)

    for the Quarter ended (March 31,2009)

    Material X

    Jan Feb Mar Total

    Raw material required for production(x) 38800 49600 56800 145200

    Add : Closing stock of raw material 24800 28400 30000 83200

    63600 78000 86800 228400

    Less: Opening stock of raw material X 19000 24800 28400 72200

    Materials to be purchased X 44600 53200 58400 156200

    Raw Materials Purchase Budget (in quantity)

    for the Quarter ended (March 31,2009)

    Material Y

    Jan Feb Mar Total

    Raw material required for production(Y) 58200 74400 85200 217800

    Add : Closing stock of raw material 37200 42600 45000 124800

    95400 117000 130200 342600

    Less: Opening stock of raw material Y 29000 37200 42600 108800

    Materials to be purchased Y 66400 79800 87600 233800

    (b) Calculation of Material Cost Variance

    (a) (b)

    Std Price Std Mix Std Qty for actual output Std. Price Std. Mix Actual Qty.X 10 4 40,000 = 16,00,000

    X 10 104

    4, 03,000 = 16,12,000

    Y 15 6 40,000 = 36,00,000Y 15

    106

    4,03,000 = 36,27,000

    52,00,00052,39,000

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    PROFESSIONAL COMPETENCE EXAMINATION : JUNE, 2009

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    (c) (d)Std Price Actual Mix Actual Qty Actual Price Actual Mix Actual Qty.

    X 10 1,65,000 = 16,50,000 X 10.20 1,65,000 = 16,83,000Y 15 2,38,000 = 35,70,000 Y 15.10 2,38,000 35,93,800

    52,20,000 52,76,800Direct Material Usage Variance = (a c)

    X 16,00,000 16,50,000 = 50,000 (A)

    Y 36,00,000 35,70,000 = 30,000 (F)

    52,00,000 52,20,000 = 20,000 (A)Direct Material Price Variance = (c d)

    X 16,50,000 16,83,000 = 33,000 (A)

    Y 35,70,000 35,93,800 = 23,800 (A)

    52,20,000 52,76,800 = 56,800 (A)

    Direct Material Cost Variance = (a d)

    X 16,00,000 16,83,000 = 83,000 (A)

    Y 36,00,000 35,93,800 = 6,200 (F)

    52,00,000 52,76,800 = 76,800 (A)

    Verification:

    Direct Material Cost Variance = Direct Material Usage Variance + Direct Material PriceVariance

    = 20,000 (A) + 56,800 (A)

    = 76,800 (A)

    Alternative Solution (Total basis)

    Direct Material Cost Variance = 52, 00,000 52, 76,800 =76,800 (A)Direct Material Price Variance = 52, 20,000 52, 76,800 = 56,800 (A)

    Direct Material Usage Variance = 52, 20,000 -52, 00,000 = 20,000 (A)

    Calculation of Labour Cost Variances:

    Budgeted output for the quarter = 36,300 units

    Budgeted direct labour hours = 36,300 hrs.

    = 27,225 hours

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    PROFESSIONAL COMPETENCE EXAMINATION : JUNE, 2009

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    Rs.

    (i) Factory overheads underabsorbed 5,000

    (ii) Administration overheads overabsorbed 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 accounts 7,000

    Prepare a Memorandum Reconciliation Account. (7 Marks)

    (b) Describe briefly, how joint costs upto the point of separation may be apportioned amongst the joint products under the following methods:

    (i) Average unit cost method

    (ii) Contribution margin method

    (iii) Market value at the point of separation

    (iv) Market value after further processing

    (v) Net realizable value method. (9 Marks)

    Answer

    (a) Memorandum Reconciliation Account

    Particulars Rs. Particulars Rs.

    To Net loss as per costingbooks

    2,13,000 By Administrative overheadover absorbed in costs

    3,000

    To Factory overheadsunder absorbed

    5,000 By Depreciation over chargedin cost books (80,000 70,000)

    10,000

    To Income tax not providedin cost books

    65,000 By Interest on investments notincluded in cost books

    20,000

    To Preliminary expenseswritten off in financialbooks

    3,000 By Transfer fees notconsidered in cost books

    2,000

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    To Over-valuation of Closing Stock of finished goods in costbooks

    7,000 By Net loss as per financialbooks

    2,58,000

    2,93,000 2,93,000

    (b) Methods of apportioning joint cost among the joint products:

    (i) Average Unit Cost Method: under this method, total process cost (upto the pointof separation) is divided by total units of joint products produced. On divisionaverage cost per unit of production is obtained. The effect of application of thismethod is that all joint products will have uniform cost per unit.

    (ii) Contribution Margin Method : under this method joint costs are segregated intotwo parts variable and fixed. The variable costs are apportioned over the jointproducts on the basis of units produced (average method) or physical quantities. If the products are further processed, then all variable cost incurred be added to thevariable cost determined earlier. Then contribution is calculated by deductingvariable cost from their respective sales values. The fixed costs are thenapportioned over the joint products on the basis of contribution ratios.

    (iii) Market Value at the Time of Separation : This method is used for apportioning joint costs to joint products upto the split off point. It is difficult to apply if the marketvalue of the products at the point of separation are not available. The joint cost may

    be apportioned in the ratio of sales values of different joint products.(iv) Market Value after further Processing : Here the basis of apportionment of joint

    costs is the total sales value of finished products at the further processing. The useof this method is unfair where further processing costs after the point of separationare disproportionate or when all the joint products are not subjected to further processing.

    (v) Net Realisable Value Method : Here joint costs is apportioned on the basis of netrealisable value of the joint products,

    Net Realisable Value = Sale value of joint products (at finished stage)

    (-) estimated profit margin

    (-) selling & distribution expenses, if any(-) post split off cost

    Question 4

    Answer any three of the following:

    (i) Discuss accounting treatment of spoilage and defectives in cost accounting.

    (ii) Discuss accounting treatment of idle capacity costs in cost accounting.

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    PROFESSIONAL COMPETENCE EXAMINATION : JUNE, 2009

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    (iii) A contract is estimated to be 80% complete in its first year of construction as certified.The contractee pays 75% of value of work certified, as and when certified and makes thefinal payment on the completion of contract. Following information is available for the first year:

    Rs.Cost of work-in-progress uncertified 8,000 Profit transferred to Profit & Loss A/c at the end of year I on incompletecontract

    60,000

    Cost of work to date 88,000 Calculate the value of work- in-progress certified and amount of contract price.

    (iv) Product Z has a profit-volume ratio of 28%. Fixed operating costs directly attributable to product Z during the quarter II of the financial year2009-10 will be Rs.2,80,000.

    Calculate the sales revenue required to achieve a quarterly profit of Rs. 70,000.

    (3 x 3 = 9 Marks)

    Answer

    (i) Accounting of Spoilage and Defectives:

    Spoilage is the tem used for materials which are badly damaged in manufacturingoperations, and it cannot rectified economically and hence taken out of the process to be

    disposed of in some manner without further processing.Normal spoilage costs are included in costs either charging it to production order or bycharging it to production overheads so that it is spread over all products. Any valuerealized from spoilage is credited to production order or production overhead account asthe case may be.

    Cost of abnormal spoilage is charged to costing P/L A/c.

    Defectives: Signifies those units or portions of production which can be rectified andturned cut as good units by application of additional material, labour or other service.Defectives are charged to general overheads or department overheads depending upontheir traceability. They are charged to good production, when second have a normalvalue and defective rectified into second or first are normal.

    Costing P/L A/c in case of abnormal nature .

    (ii) Treatment of Idle Capacity Cost

    (a) If idle capacity is due to unavoidable reasons such as repairs & maintenance,change over of job etc., a supplementary overhead rate may be used to recover theidle capacity cost. In this case, the costs are charged to production capacity utilized.

    (b) If idle capacity cost is due to avoidable reasons such as faulty planning, power failure etc, the cost should be charged to P/L A/c.

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    (c) If idle capacity is due to seasonal factors, then the cost should be charged to cost of production by inflating overhead rates.

    (iii) As the contract is 80% complete, so 2/3rd of the notional profit on cash basis has beentransferred to Profit & Loss A/c in the first year of contract.

    Amount transferred to Profit & Loss A/c =32

    Notional Profit % of cost received

    or , 60,000 =32

    Notional Profit 10075

    or, Notional Profit = 7521003000,60

    = Rs.1,20,000

    Computation of Value of Work Certified

    Cost of work to date = Rs. 88,000

    Add : Notional Profit = Rs.1,20,000

    Rs.2,08,000

    Less: Cost of Work Uncertified = 8,000

    Value of Work Certified = Rs.2,00,000Since the Value of Work Certified is 80% of the Contract Price, therefore

    Contract Price =%80

    CertifiedWorkof Value

    =%80

    000,00,2.Rs

    = Rs.2,50,000

    (iv) P/V ratio = 28%

    Quarterly fixed Cost = Rs.2,80,000Desired Profit = Rs.70,000

    Sales revenue required to achieve desired profit

    =ratioV/P

    ofitPr DesiredCostFixed +

    =%28

    000,70000,80,2 += Rs.12,50,000

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    PROFESSIONAL COMPETENCE EXAMINATION : JUNE, 2009

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    Question 5

    Answer any five of the following:

    (i) Write a short note on functions of Treasury department.

    (ii) Discuss the concept of American Depository Receipts.

    (iii) How is Debt service coverage ratio calculated? What is its significance?

    (iv) Discuss conflict in profit versus wealth maximization objective.

    (v) Discuss the concept of Debt-Equity or EBIT-EPS indifference point, while determining thecapital structure of a company.

    (vi) Discuss the benefits to the originator of Debt Securitization. (5 x 2 = 10 Marks)

    Answer

    (i) Functions of Treasury Department

    (a) Cash Management: The efficient collection and payment of cash both inside theorganization and to third parties is the function of treasury department. Treasurynormally manages surplus funds in an investment portfolio.

    (b) Currency Management: The treasury department manages the foreign currencyrisk exposure of the company. It advises on the currency to be used when invoicingoverseas sales. It also manages any net exchange exposures in accordance withthe company policy.

    (c) Fund Management: Treasury department is responsible for planning and sourcingof companys short, medium, and long - term cash needs. It also participates in thedecision on capital structure and forecasts future interest and foreign currencyrates.

    (d) Banking: Since short-term finance can come in the form of bank loans or throughthe sale of commercial paper in the money market, therefore, treasury departmentcarries out negotiations with bankers and acts as the initial point of contact withthem.

    (e) Corporate Finance: Treasury department is involved with both acquisition anddivestment activities within the group. In addition, it is often responsible for investor relations.

    (ii) Concept of American Depository Receipts

    American Depository Receipts (ADRs) are securities offered by non- US companies whowant to list on any of the US exchanges. It is a derivative instrument. It represents acertain number of companys shares. These are used by depository bank against a feeincome. ADRs allow US investors to buy shares of these companies without the cost of

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    investing directly in a foreign stock exchange. ADRs are listed on either NYSE or NASDAQ. It facilitates integration of global capital markets. The company can use the ADR route either to get international listing or to raise money in international capitalmarket.

    (iii) Calculation of Debt Service Coverage Ratio (DSCR) and its Significance

    The debt service coverage ratio can be calculated as under:

    tsInstallmenInterestservicedebtfor availableEarnings

    RatioCoverageServiceDebt+

    =

    Or , Debt Service Coverage Ratio =cT1

    DueRepaymentPrincipalInterest

    EBITDA

    +

    Debt service coverage ratio indicates the capacity of a firm to service a particular level of debt i.e. repayment of principal and interest. High credit rating firms target DSCR to begreater than 2 in its entire loan life. High DSCR facilitates the firm to borrow at the mostcompetitive rates.

    (iv) Conflict in Profit versus Wealth Maximization Objective

    Profit maximisation is a shortterm objective and cannot be the sole objective of acompany. It is at best a limited objective. If profit is given undue importance, a number of problems can arise like the term profit is vague, profit maximisation has to be attemptedwith a realisation of risks involved, it does not take into account the time pattern of returns and as an objective it is too narrow.

    Whereas, on the other hand, wealth maximisation, is a long-term objective and meansthat the company is using its resources in a good manner. If the share value is to stayhigh, the company has to reduce its costs and use the resources properly. If thecompany follows the goal of wealth maximisation, it means that the company will promoteonly those policies that will lead to an efficient allocation of resources.

    (v) Concept of Debt-Equity or EBIT-EPS Indifference Point while Determining theCapital Structure of a Company

    The determination of optimum level of debt in the capital structure of a company is aformidable task and is a major policy decision. It ensures that the firm is able to serviceits debt as well as contain its interest cost. Determination of optimum level of debtinvolves equalizing between return and risk.

    EBIT EPS analysis is a widely used tool to determine level of debt in a firm. Throughthis analysis, a comparison can be drawn for various methods of financing by obtainingindifference point. It is a point to the EBIT level at which EPS remains unchanged

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    irrespective of debt-equity mix. The indifference point for the capital mix (equity sharecapital and debt) can be determined as follows:

    1

    1

    E)T1()IEBIT(

    =

    2

    2

    E)T1)(IEBIT(

    (vi) Benefits to the Originator of Debt Securitization

    The benefits to the originator of debt securitization are as follows:

    (a) The assets are shifted off the balance sheet, thus giving the originator recourse tooff balance sheet funding.

    (b) It converts illiquid assets to liquid portfolio.(c) It facilitates better balance sheet management as assets are transferred off

    balance sheet facilitating satisfaction of capital adequacy norms.

    (d) The originator's credit rating enhances.

    Question 6

    Balance Sheets of RST Limited as on March 31, 2008 and March 31, 2009 are as under:

    Liabilities 31.3.2008

    Rs.

    31.3.2009

    Rs.

    Assets 31.3.2008

    Rs.

    31.3.2009

    Rs.

    Equity ShareCapital (Rs.10 face value per share)

    10,00,000 12,00,000

    Land &Building 6,00,000 7,00,000

    General Reserve

    3,50,000 2,00,000 Plant &Machinery

    9,00,000 11,00,000

    9%PreferenceShare Capital

    3,00,000 5,00,000

    Investments(Long-term)

    2,50,000 2,50,000

    SharePremium A/c

    25,000 4,000 Stock 3,60,000 3,50,000

    Profit & Loss A/c

    2,00,000 3,00,000 Debtors 3,00,000 3,90,000

    8%Debentures

    3,00,000 1,00,000 Cash & Bank 1,00,000 95,000

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    Creditors 2,05,000 3,00,000 Prepaid Expenses

    15,000 20,000

    Bills Payable 45,000 81,000 Advance Tax Payment

    80,000 1,05,000

    Provision for Tax

    70,000 1,00,000 Preliminary Expenses

    40,000 35,000

    Proposed Dividend 1,50,000 2,60,000 __________ _________

    26,45,000 30,45,000 26,45,000 30,45,000

    Additional information:

    (i) Depreciation charged on building and plant and machinery during the year 2008-09 wereRs. 50,000 and Rs. 1,20,000 respectively.

    (ii) During the year an old machine costing Rs. 1,50,000 was sold for Rs. 32,000. Its writtendown value was Rs. 40,000 on date of sale.

    (iii) During the year, income tax for the year 2007-08 was assessed at Rs. 76,000. A chequeof Rs. 4,000 was received along with the assessment order towards refund of income tax paid in excess, by way of advance tax in earlier years.

    (iv) Proposed dividend for 2007-08 was paid during the year 2008-09.(v) 9% Preference shares of Rs. 3,00,000, which were due for redemption, were redeemed

    during the year 2008-09 at a premium of 5%, out of the proceeds of fresh issue of 9%Preference shares.

    (vi) Bonus shares were issued to the existing equity shareholders at the rate of one share for every five shares held on 31.3.2008 out of general reserves.

    (vii) Debentures were redeemed at the beginning of the year at a premium of 3%.

    (viii) Interim dividend paid during the year 2008-09 was Rs. 50,000.

    Required:

    (a) Schedule of Changes in Working Capital; and

    (b) Fund Flow Statement for the year ended March 31, 2009. (5 + 10 = 15 Marks)

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    Answer

    (a) Schedule of Changes in Working Capital

    Effect on WorkingCapital

    Particulars 31.3.08

    31.3.09

    Increase DecreaseRs. Rs. Rs. Rs.

    Current Assets:Stock 3,60,000 3,50,000 - 10,000Debtors 3,00,000 3,90,000 90,000 -Cash and Bank 1,00,000 95,000 - 5,000Prepaid Expenses 15,000 20,000 5,000 -Total (A) 7,75,000 8,55,000Current Liabilities: Creditors 2,05,000 3,00,000 - 95,000Bills Payable 45,000 81,000 - 36,000

    Total (B) 2,50,000 3,81,000Net Working Capital (A-B) 5,25,000 4,74,000 -Net Decrease in Working Capital - 51,000 51,000 -

    5,25,000 5,25,000 1,46,000 1,46,000

    (b) Funds Flow Statement for the year ended 31 st March, 2009

    Sources of Fund Rs.

    Funds from Operation 7,49,000

    Issue of 9% Preference Shares 5,00,000

    Sales of Plant & Machinery 32,000

    Refund of Income Tax 4,000

    Financial Resources Provided (A) 12,85,000

    Applications of Fund Rs.

    Purchase of Land and Building 1,50,000

    Purchase of Plant and Machinery 3,60,000

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    Redemption of Debentures 2,06,000

    Redemption of Preference Shares 3,15,000

    Payment of Tax 1,05,000

    Payment of Interim Dividend 50,000

    Payment of Dividend (2007-08) 1,50,000

    Financial Resources Applied (B) 13,36,000

    Net Decrease in Working Capital (A - B) 51,000

    Working Notes:

    Estimation of Funds from Operation Rs.Profit and Loss A/c Balance on 31.3.2009 3,00,000 Add:Depreciation on Land and Building 50,000

    Depreciation on Plant and Machinery 1,20,000Loss on Sale of Plant and Machinery

    ( 40,000 32,000)8,000

    Preliminary Expenses written off (40,000 35,000)

    5,000

    Transfer to General Reserve 50,000Proposed Dividend 2,60,000Provision for Taxation 1,06,000Interim Dividend paid 50,000

    6,49,0009,49,000

    Less: Profit and Loss A/c balance on 31.3.08 2,00,000Funds from Operation 7,49,000

    Plant & Machinery A/c

    Rs. Rs. To Balance b/d 9,00,000 By Depreciation 1,20,000

    By Bank (Sale) 32,000To Bank (Purchase(Bal. Fig.)

    3,60,000By P/L A/c (Loss on Sale) 8,000

    _______ By Balance c/d 11,00,00012,60,000 12,60,000

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    Provision for Taxation A/c Rs. Rs.

    To Advance taxpayment A/c

    76,000 By Balance b/d 70,000

    To Balance c/d 1,00,000 By P/L A/c (additionalprovision for 2007-08)

    6,000

    _______ By P/L A/c (Provision for 08-09) 1,00,000

    1,76,000 1,76,000 Advance Tax Payment A/c

    Rs. Rs.

    To Balance b/d 80,000 By Provision for taxation A/c 76,000

    To Bank (paid for 08-09) 1,05,000 By Bank (Refund of tax) 4,000

    _______ By Balance c/d 1,05,000

    1,85000 1,85,000

    8% Debentures A/c

    Rs. Rs.

    To Bank ( 2,00,000 x103%) (redemption)

    2,06,000 By Balance b/d 3,00,000

    To Balance c/d 1,00,000

    By Premium on redemptionof Debentures A/c 6,000

    3,06,000 3,06,000

    9% Preference Share Capital A/c

    Rs. Rs.

    To Bank A/c ( 3,00,000 x105%) (redemption)

    3,15,000 By Balance b/d 3,00,000

    To Balance c/d 5,00,000 By Premium onredemption of Preferenceshares A/c

    15,000

    _______ By Bank (Issue) 5,00,000

    8,15,000 8,15,000

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    Securities Premium A/c

    Rs. Rs.

    To Premium onredemption of debentures A/c

    6,000 By Balance b/d 25,000

    To Premium onredemption of preferenceshares A/c

    15,000

    To Balance c/d 4,000 _____

    25,000 25,000

    General Reserve A/c

    Rs. Rs.

    To Bonus toShareholders A/c

    2,00,000 By Balance b/d 3,50,000

    To Balance c/d 2,00,000 By P/L A/c (transfer) b/f 50,000

    4,00,000 4,00,000

    Land and Building A/c

    Rs. Rs.

    To Balance b/d 6,00,000 By Depreciation 50,000

    To Bank (Purchase) (Bal. Fig.) 1,50,000 By Balance c/d 7,00,000

    7,50,000 7,50,000

    Question 7

    (a) The capital structure of MNP Ltd. is as under:

    9% Debenture Rs. 2,75,000

    11% Preference shares Rs. 2,25,000

    Equity shares (face value : Rs. 10 per share) Rs. 5,00,000

    Rs. 10,00,000

    Additional information:

    (i) Rs. 100 per debenture redeemable at par has 2% floatation cost and 10 years of maturity. The market price per debenture is Rs. 105.

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    (ii) Rs. 100 per preference share redeemable at par has 3% floatation cost and 10 years of maturity. The market price per preference share is Rs. 106.

    (iii) Equity share has Rs. 4 floatation cost and market price per share of Rs. 24. Thenext year expected dividend is Rs. 2 per share with annual growth of 5%. The firmhas a practice of paying all earnings in the form of dividends.

    (iv) Corporate Income-tax rate is 35%.

    Required :

    Calculate Weighted Average Cost of Capital (WACC) using market value weights.

    (b) A company is required to choose between two machines A and B. The two machines are

    designed differently, but have identical capacity and do exactly the same job. Machine Acosts Rs. 6,00,000 and will last for 3 years. It costs Rs. 1,20,000 per year to run.

    Machine B is an economy model costing Rs. 4,00,000 but will last only for two years,and costs Rs. 1,80,000 per year to run. These are real cash flows. The costs areforecasted in rupees of constant purchasing power. Opportunity cost of capital is 10%.Which machine company should buy? Ignore tax.

    PVIF 0.10, 1 = 0.9091, PVIF 0. 10, 2 = 0.8264, PVIF 0. 10, 3 = 0.7513. (9 + 7 = 16 Marks)

    Answer

    (a) Computation of Weighted Average Cost of Capital using Market Value Weights

    Cost of Equity (ke)

    Ke =PoD1 + g

    =4.Rs24.Rs

    2.Rs

    + 5%

    = 15%

    Cost of Debt (kd)

    Kd = 2/)NPRV(N/)NPRV()T1(I

    +

    +

    =2/)98100(

    10/)98100()35.01(9+

    +

    =99

    20.085.5 += 6.11%

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    Cost of Preference Shares (k p)

    Kp =2/)NPRV(

    N/)NPRV(PD+

    +

    =2/)97100(

    10/)97100(11+

    +

    =5.98

    30.11= 11.47%

    Calculation of WACC using Market Value Weights

    Source of Capital Market Value (Rs.)

    Weights toTotal Capital

    Specific Cost

    Total Cost

    Debentures (Rs. 105 per debenture)

    2,88,750 0.1672 0.0611 0.0102

    Preference Shares (Rs. 106 per preference share)

    2,38,500 0.1381 0.1147 0.0158

    Equity Shares (Rs. 24 per share) 12,00,000 0.6947 0.1500 0.1042

    17,27,250 1.00 0.1302

    WACC using market value weights = 13.02%(b) Advise to the Management Regarding Buying of Machines

    Statement Showing Evaluation of Two Machines

    Machines A B

    Purchase cost (Rs.): (i) 6,00,000 4,00,000

    Life of machines (years) 3 2

    Running cost of machine per year (Rs.): (ii) 1,20,000 1,80,000

    Cumulative present value factor for 1-3 years @ 10%: (iii) 2.4868 -

    Cumulative present value factor for 1-2 years @ 10%: (iv) - 1.7355Present value of running cost of machines (Rs.): (v) 2,98,416 3,12,390

    [(ii) (iii)] [(ii) (iv)]

    Cash outflow of machines (Rs.): (vi)=(i) +(v) 8,98,416 7,12,390

    Equivalent present value of annual cash outflow 3,61,273.93 4,10,481.13

    [(vi)(iii)] [(vi) (iv)]

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    Recommendation: The Company should buy Machine A since its equivalent cashoutflow is less than Machine B.

    Question 8

    Answer any three of the following:

    (i) A firm maintains a separate account for cash disbursement. Total disbursements are Rs.2,62,500 per month. Administrative and transaction cost of transferring cash todisbursement account is Rs. 25 per transfer. Marketable securities yield is 7.5% per annum.

    Determine the optimum cash balance according to William J Baumol model.

    (ii) A firm has a total sales of Rs. 12,00,000 and its average collection period is 90 days. The past experience indicates that bad debt losses are 1.5% on sales. The expenditureincurred by the firm in administering receivable collection efforts are Rs. 50,000. A factor is prepared to buy the firms receivables by charging 2% commission. The factor will pay advance on receivables to the firm at an interest rate of 16% p.a. after withholding 10%as reserve. Calculate effective cost of factoring to the firm. Assume 360 days in a year.

    (iii) Explain the concept of discounted payback period.

    (iv) Discuss the composition of Return on Equity (ROE) using the DuPont model.

    (3 x 3 = 9 Marks)

    Answer

    (i) Determination of Optimal Cash Balance according to William J. Baumol Model

    The formula for determining optimum cash balance is:

    SPU2

    C

    =

    C =075.0

    2512500,62,22

    =075.0

    000,00,75,15

    = 000,00,00,10,2

    Optimum Cash Balance, C, = Rs. 45,826

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    (ii) Computation of Effective Cost of Factoring

    Average level of Receivables = 12,00,000 90/360 3,00,000

    Factoring Commission = 3,00,000 2/100 6,000

    Factoring Reserve = 3,00,000 10/100 30,000

    Amount Available for Advance = Rs. 3,00,000-(6,000+30,000) 2,64,000

    Factor will deduct his interest @ 16% :-

    10036090162,64,000.Rs

    Interest

    = = Rs. 10,560

    Advance to be paid = Rs. 2,64,000 Rs. 10,560 = Rs. 2,53,440

    Annual Cost of Factoring to the Firm: Rs.

    Factoring Commission (Rs. 6,000 360/90) 24,000

    Interest Charges (Rs. 10,560 360/90) 42,240

    Total 66,240

    Firms Savings on taking Factoring Service: Rs.

    Cost of Administration Saved 50,000

    Cost of Bad Debts (Rs. 12,00,000 x 1.5/100) avoided 18,000

    Total 68,000

    Net Benefit to the Firm (Rs. 68,000 Rs. 66,240) 1,760

    Effective Cost of Factoring =440,53,2

    100240,66 .Rs

    26.136%

    Effective Cost of Factoring = 26.136%

    (iii) Concept of Discounted Payback Period

    Payback period is time taken to recover the original investment from project cash flows. Itis also termed as break even period. The focus of the analysis is on liquidity aspect and itsuffers from the limitation of ignoring time value of money and profitability. Discountedpayback period considers present value of cash flows, discounted at companys cost of

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    The Suggested Answers for Part I of Paper 5: Taxation are based on the provisionsapplicable for A.Y.2009-10, which is the assessment year relevant for June 2009 examination.

    PAPER 5: TAXATION

    Answer all questions

    Question 1

    Answer any five out of the following six sub-divisions, with reference to the provisions of theIncome-tax Act, 1961 for the assessment year 2009-2010:

    (a) Whether the income derived from saplings or seedlings grown in a nursery is taxableunder the Income- Act, 1961?

    (b) When will tax not required to be deducted at source on interest payable to a resident onany bond or security issued by a company though the aggregate amount of interest exceeds Rs.2,500, the basic exemption limit under section 193 of the Act?

    (c) When is a charitable trust required to file its audit report alongwith return of income?

    State with reason, whether the following statements are True or False:

    (d) A notice under section 143(2) of the Act for scrutiny/regular assessment shall not beissued on an assessee after the expiry of six months from the end of the financial year inwhich the return is furnished.

    (e) Mr. X, Karta of HUF, claims that the HUF is non-resident as the business of HUF istransacted from UK and all the policy decisions are taken there.

    (f) Mr. P, a shareholder of a closely held company, holding 16% shares, received advancesfrom that company which is to be deemed as dividend from an Indian Company, henceexempted under section 10(34) of the Income-tax Act, 1961. (5 x 2 =10 Marks)

    Answer

    (a) As per Explanation 3 to section 2(1A) of the Act, income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income and exempt fromtax, whether or not the basic operations were carried out on land.

    (b) As per section 193 of the Act, no tax is required to be deducted at source on any interest

    payable to a resident on any bond or security issued by a company, where the followingconditions are satisfied -

    (i) where such security is in dematerialised form and

    (ii) is listed on a recognised stock exchange in India.

    (c) A charitable trust is required to get its accounts audited by a Chartered Accountant andfile the audit report in the prescribed form, duly signed and verified by such accountant,along with its return of income when the total income of the trust before giving effect tosection 11 and 12 exceeds the maximum amount not chargeable to tax i.e. Rs.1,50,000.

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    (d) True, the time limit for issuance of notice under section 143(2) has been revised w.e.f.1.4.2008. Accordingly, notice under section 143(2) cannot be issued after the expiry of six months from the end of the financial year in which the return of income is furnished.

    (e) True, A HUF is considered to be a non-resident where the control and management of itsaffairs are situated wholly outside India. In the given case, since all the policy decisionsof HUF are taken from UK, the HUF is a non-resident.

    (f) False, as per section 10(34) of the Act, only income by way of dividend referred to insection 115-O shall be exempt in the hands of shareholders. Corporate dividend tax isnot leviable on deemed dividend under section 2(22)(e) and hence, such deemeddividend is not exempt under section 10(34).

    Question 2

    Mr. X is a resident individual. His Profit and Loss account for the year ending 31st March, 2009 isgiven below:

    To Amount By Amount General charges 35,650 Gross Profit 5,25,860 Insurance 3,550 Commission 6,800 Staff Salary 1,12,560 Rent received 37,500 Donation to political party 1,000 Interest on debentures (Net amount

    Rs.22,450 plus TDS Rs. 2,550) 25,000 Fringe benefit tax 2,400 Agricultural income 45,000 Depreciation 1,25,656 Short term capital gain on sale of

    investment 29,000 Administrative expenses 42,500 Dividend from Indian Company 16,000 Advance tax 17,000 Net Profit 3,44,894

    6,85,160 6,85,160

    (i) Depreciation has been calculated as per the Income Tax Rules at Rs. 75,000

    (ii) He has deposited Rs. 35,000 in a notified scheme under Post Office Time Deposit Rules,1981 for five year time.

    (iii) He had bought 200 shares of AB Co. Ltd. on 5.12.2007 @ Rs. 75 each, 150 shares of PQ Co. Ltd. on 3.8.2008 @ Rs. 112 each and 150 shares of AB Co. Ltd. on 05.09.2008 @ Rs. 60 each. He sold all the shares of AB Co. Ltd. on 15.12.2008 @ Rs. 98 each and sold the shares of PQ CO. Ltd. on 10.3.2009 @ Rs. 102 each. All shares were sold inNational Stock Exchange through a registered broker.

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    (iv) One of his life insurance policies was matured on 14.6.2008. The sum assured was Rs.1,00,000 and amount received on maturity was Rs. 1,62,850.

    (v) Donation to the political party represented the contribution made to a political party registered under section 29A of the Representation of the People Act, 1951.

    (vi) Income tax department refunds Rs. 42,580 (including interest of Rs. 1,470) which wasdirectly credited in his personal savings account.

    (vii) He incurred expenditure of Rs. 40,000 on treatment of his dependent father who wassuffering from specified disease as defined in rule 11DD of Income Tax Rules, 1962. The payment of medical expenses was made by cheque and an amount of Rs. 7,500 was

    reimbursed to him by an insurance company.(vii) Bad debt of a business which was discontinued in earlier years, recovered during the

    year Rs. 15,000.

    Compute total income and tax payable thereon by Mr. X for the assessment year 2009 -2010. (20 Marks)

    Answer

    Computation of taxable income and tax payable by Mr. X for the Assessment year 2009-10

    Particulars Rs. Rs. Rs.

    1. Income from House Property ( Note 1) 26,2502. Profits and gain of business or profession (Note 2) 2,78,4503. Capital gains (Note 3) 33,2004. Income from other sources (Note 4) 26,470

    Gross Total income 3,64,370Less : Deductions under Chapter VIA (i) Deduction under section 80C (Note 5) 35,000(ii) Deduction under section 80DDB in respect of

    expenditure on medical treatment incurred ontreatment of his father

    40,000

    Less: Expenditure reimbursed by insurancecompany 7,500

    32,500

    (iii) Deduction under section 80GGC in respect of contribution to the Political Party (Note 11) 1,000 68,500

    Total income 2,95,870

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    Components of total incomeSpecial IncomeShort-term capital gains from sale of shares (chargeable at a special rate of 15% u/s 111A)

    4,200

    Normal income 2,91,670

    2,95,870

    Computation of tax

    Tax on short-term capital gains from sale of shares @ 15% of Rs.4,200 630

    Tax on agricultural income plus non-agricultural income aggregating to Rs.3,36,670First 1,50,000 NIL 0Next 1,50,000 10% 15,000Balance 36,670 20% 7,334

    3,36,670 22,334 22,334

    22,964Less: Tax on agriculturalincome plus basic exemptionlimit aggregating toRs.1,95,000First 1,50,000 Nil 0Next 45,000 10% 4,500

    1,95,000 4,500 4,500

    Income tax payable 18,464 Add : Education cess @ 2% 369

    Secondary and higher education cess @ 1% 185

    Total tax 19,018Less : Tax deducted at source 2,550

    16,468Less: Advance tax paid 17,000

    Tax refundable 532

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    Notes:1. Computation of Income from House Property

    Gross Annual Value (GAV)Rent received is taken as the GAV in the absence of other information

    37,500

    Less: Municipal taxes paid NilNet Annual Value (NAV) 37,500Less: Deduction under section 24 @ 30% of NAV 11,250Income from House Property 26,250

    2. Computation of Profits and gains of business or profession

    Net profit as per Profit & Loss account 3,44,894 Add : Inadmissible expensesDepreciation charges 1,25,656 Advance tax (Note 9) 17,000Fringe Benefit tax (Note 9) 2,400Donation to political party 1,000

    1,46,056 Add : Recovery of bad debt (Note 8) 15,000

    5,05,950Less : Income chargeable under any other head / exempt

    incomeRent received 37,500Interest on debentures (gross) 25,000 Agricultural income (Note 10) 45,000Short term capital gain on sale of investment 29,000Dividend from Indian Company (Note 10) 16,000 1,52,500

    3,53,450Less: Depreciation as per Income-tax Act 75,000

    Profits and gains of business or profession 2,78,450

    3. Computation of Capital GainsShort term capital gains on sale of investment 29,000Short term capital gains on sale of sharesShares of AB Co. Ltd.Sale consideration 150 shares @ Rs.98 each 14,700Less: Cost of 150 shares @ Rs.60 each 9,000 5,700

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    Shares of PQ Co. Ltd.Sale consideration 150 shares @ Rs.102 each 15,300Less: Cost of 150 shares @ Rs.112 each 16,800 (1500) 4,200

    33,200Long term capital gains on sale of shares Long-term capital gains on sale of 200 shares of AB Co. Ltd. is exemptunder section 10(38).Since the holding period of 200 shares of AB Ltd. is more than twelvemonths, the capital gain on sale of such shares is a long-term capital gainand hence, exempt from income-tax.

    Nil

    Capital Gains 33,200

    4. Computation of Income from other sourcesInterest on debentures 25,000Interest on refund from IT authority (Note 7) 1,470

    Income from other sources 26,470

    5. The Finance Act, 2008 has amended section 80C to include within its fold, five year timedeposit in an account under Post Office Time Deposit Rules, 1981.

    6. The maturity proceeds of the life insurance policy are exempt under section 10(10D)assuming that the policy does not fall under the exceptions stated under that section.

    7. Refund of income tax is not taxable. However, interest on refund is chargeable to taxunder the head Income from other sources.

    8. Recovery of bad debts, assumed to be allowed in full in an earlier year, is taxable under section 41(4), whether or not the business or profession in respect of which the deductionhas been allowed is in existence at the time when it is recovered.

    9. Advance tax and Fringe Benefit Tax are not allowable as deduction.

    10. Agricultural income is exempt under section 10(1) and dividend from an Indian company isexempt from tax under section 10(34).

    11. Contribution to a Political Party registered under section 29A of the Representation of thePeople Act, 1951 is deductible under section 80GGC.

    Question 3

    (a) Mr. Ashok Kumar, an employee of a PSU, furnishes the following particulars for the previous year ending 31.3.2009:

    Rs.i. Salary income for the year 5,25,000 ii. Salary for Financial Year 2006-07 received during the year 40,000

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    Secondary and higher education cess @1% 745Total (A) 76,735

    Total Income excluding arrears 5,25,000Tax on Rs.5,25,000

    First Rs.1,50,000 Nil 0Next Rs.1,50,000 10% 15,000Next Rs.2,00,000 20% 40,000Balance __25,000 30% 7,500

    5,25,000 62,500

    Add : Education cess @ 2% 1,250Secondary and higher education cess @ 1% 625

    Total (B) 64,375

    Difference between A & B I 12,360Assessment Year 2007-08Total Income assessed 1,40,000 Add : Arrears relating to Financial year 2006-07 40,000Total income (including arrears) 1,80,000Tax on Rs.1,80,000 11,000

    Add : Education Cess @ 2% 220Total (C) 11,220Total Income excluding arrears 1,40,000Tax on Rs.1,40,000 4,000 Add : Education Cess @ 2% 80

    Total (D) 4,080Difference between C & D II 7,140

    Relief under section 89 (I II) 5,220

    (b) Computation of total income and tax liability of Mr. Kumar for the A.Y.2009-10

    Particulars Rs. Rs.

    Capital Gains:Sale price of the residential house 24,00,000Valuation as per Stamp Valuation authority 35,00,000(Value to be taken is the higher of actual sale price or valuationadopted for stamp duty purpose as per section 50C)

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    Therefore, Consideration for the purpose of Capital Gains 35,00,000Less: Indexed Cost of Acquisition = 50,00,000 x 582 / 223 1,30,49,327

    Long-term Capital Loss (to be carried forward to thesucceeding year for set-off against only long-term capital gains -can be carried forward for a maximum of 8 years)

    (95,49,327)

    Income from other sources:Interest on bank deposits 32,000

    Gross Total Income 32,000Less: Deduction under Chapter VI-A

    Section 80C Investment in PPF 12,000Total Income 20,000

    Tax liability (There is no tax liability since the total income isless than the basic exemption limit)

    Nil

    Question 4

    (a) (i) Mr. Abhik, an individual, made payment of health insurance premium to GIC in anapproved scheme. Premium paid on his health is Rs. 10,000 and his spouseshealth is Rs. 15,000 during the year 2008-09. He also paid health insurance premium of Rs. 25,000 on his fathers health who is a senior citizen and not dependent on him. The payments have not been made by cash. Compute theamount of deduction under Chapter VI - A of the Act, available to Mr. Abhik from hisgross total income for the assessment year 2009-10. (3 Marks)

    (ii) Mr. Abhik's father, who is a senior citizen had pledged his residential house to abank under a notified reverse mortgage scheme. He was getting loan from bank inmonthly installments. Mr. Abhik's father did not repay the loan on maturity and gave possession of the house to the bank to discharge his loan. How will the treatment of long-term capital gain be made on such reverse mortgage transaction? (3 Marks)

    (b) Ms. Geeta, a resident individual, provides the following details of her income / losses for the year ended 31.3.2009:

    (i) Salary received as a partner from a partnership firm Rs. 7,50,000.

    (ii) Loss on sale of shares listed in BSE Rs. 3,00,000. Shares were held for 15 monthsand STT paid on sale.

    (iii) Long-term capital gain on sale of land Rs. 5,00,000.

    (iv) Rs. 51,000 received in cash from friends in party.

    (v) Rs. 55,000, received towards dividend on listed equity shares of domestic companies.

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    (vi) Brought forward business loss of assessment year 2007- 08 Rs. 12,50,000.The return for assessment year 2007-08 was filed in time.

    Compute gross total income of Ms. Geeta for the assessment year 2009 -10 and ascertain the amount of loss that can be carried forward. (8 Marks)

    Answer

    (a) (i) Mr. Abhik will be eligible to claim deduction under section 80D on payment of healthinsurance premium to GIC in a medical insurance scheme approved by the CentralGovernment. The premium is paid otherwise than by way of cash and hencequalifies for deduction under section 80D. Therefore, the amount of deductionunder section 80D would be

    Particulars Amount(Rs.)

    On health insurance premium paid on the health of himself and hisspouse (Rs.10,000 + Rs.15,000 = Rs.25,000, but restricted toRs.15,000)

    15,000

    On health insurance premium paid on the health of his father,Rs.25,000 but restricted to Rs.20,000 in the case of a parent, whois a senior citizen (whether dependent or not) 20,000

    Total deduction under section 80D 35,000

    (ii) The Finance Act, 2008 has inserted clause (xvi) in section 47 to provide that anytransfer of a capital asset in a transaction of reverse mortgage under a schememade and notified by the Central Government shall not be considered as a transfer for the purpose of capital gain.

    Accordingly, the transaction made by Mr. Abhik's father will not be regarded as atransfer. Therefore, no capital gain will be charged on such transaction.

    Further, section 10(43) provides that the amount received by the senior citizen as aloan, either in lump sum or in installment, in a transaction of reverse mortgagewould be exempt from income-tax.

    However, capital gains tax liability would be attracted at the stage of alienation of the mortgaged property by the bank for the purposes of recovering the loan.

    (b) Computation of Gross Total Income of Ms. Geeta for the Assessment Year 2009-10

    Particulars Rs.

    Profits and gains of business and profession

    Salary received as a partner from a partnership firm is taxable under the head Profits and gains of business and profession

    7,50,000

    Less: brought forward business loss of assessment year 2007-08 to be 7,50,000

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    set-off against business incomeNil

    Capital Gains

    Long term capital gain on sale of land (See Note 2) 5,00,000

    Income from other sources

    Cash gift received from friends - since the value of cash giftexceeds Rs.50,000, the entire sum is taxable

    51,000

    Dividend received from a domestic company is exemptunder section 10(34) Nil

    51,000

    Gross Total Income 5,51,000

    Notes

    1. Balance brought forward business loss of assessment year 2007-08 of Rs.5,00,000has to be carried forward to the next year.

    2. Long-term capital loss on sale of shares cannot be set-off against long-term capitalgain on sale of land since loss from an exempt source cannot be set-off againstprofit from a taxable source. Further, long-term capital gain on sale of listed shareson which STT is paid is exempt under section 10(38), loss on sale of listed shares isa loss from an exempt source. So it cannot be set-off against long-term capital gainon sale of land, which is a profit from a taxable source.

    Question 5

    Answer any four of the following five sub-divisions with regard to the provisions of the Income-tax Act, 1961:

    (a) Explain "Previous year" for undisclosed sources of income.

    (b) Define the meaning of "Infrastructure Capital Fund" as per section 2(26B) of the Income-tax Act, 1961.

    (c) Explain the meaning of expression "advancement of any other object of general public

    utility" in the context of "Charitable Purpose" defined under section 2(15) of the Act.(d) What is the meaning of Incorrect claim apparent from any information in the return of

    income which needs prima face adjustment under section 143(1) of the Act?

    (e) Enlist the installments of advance tax and due dates thereon in case of companies.

    (4 x 4 = 16 Marks)

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    Answer

    (a) Previous Year

    There are many occasions when the Assessing Officer detects cash credits, unexplainedinvestments, unexplained expenditure etc., the source for which is not satisfactorilyexplained by the assessee to the Assessing Officer. The income from these undisclosedsources of income would be deemed to be the income of that financial year for whichassessee failed to explain the nature or source of income.

    (i) Cash credit - previous year is that previous year for which Assessing Officer findsany credit in the books of the assessee.

    (ii) Unexplained Investments - previous year is that financial year in which theassessee has made investments which are not recorded in the books of account.

    (iii) Unexplained money etc. - previous year is that financial year in which the assesseeis found to be owner of any money, bullion, jewellery or other valuable article whichare not recorded in the books of account.

    (iv) Amount of investments etc. not fully disclosed in the books of account - previousyear is that financial year in which the assessee is found to be the owner of anymoney, bullion, jewellery or other valuable article the value of which exceeds theamount recorded in the books of account.

    (v) Unexplained expenditure previous year is that financial year in which theassessee incurs unexplained expenditure.

    (vi) Amount borrowed or repaid on hundi previous year is that financial year in whichthe assessee has borrowed any amount on a hundi or repaid any amount duethereon other than through account-payee cheque drawn on a bank.

    Note - Students may mention any two out of six examples given above.

    (b) Infrastructure Capital Fund

    As per section 2(26B) of the Act, "Infrastructure Capital Fund" means such fundoperating under a trust deed registered under the provisions of the Registration Act, 1908

    established to raise monies by the trustees for investment by way of acquiring shares or providing long term finance to -

    (i) any enterprise or undertaking wholly engaged in the business referred to in section80-IA(4) or section 80-IAB(1) or

    (ii) an undertaking developing and building a housing project referred to in section 80-IB(10) or

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    (iii) a project for constructing a hotel of not less than three-star category as classified bythe Central Government or

    (iv) a project for constructing a hospital with atleast 100 beds for patients.

    (c) Advancement of any other object of general public utility

    The proviso to section 2(15) of the Act provides that advancement of any other object of general public utility" shall not be a charitable purpose, if it involves carrying on of:

    (i) any activity in the nature of trade, commerce or business, or

    (ii) any activity of rendering of any service in relation to any trade, commerce or business,

    for a cess or fee or any other consideration, irrespective of the nature of use or application of the income from such activity or the retention of such income, by theconcerned entity.

    The expression "advancement of any other object of general public utility" includes anyobject which will be beneficial even to a segment of society and not necessarily to thewhole mankind. However, the object should not be for the benefit of specified individuals.

    (d) An incorrect claim apparent from any information in the return of income shall mean thefollowing claims, on the basis of an entry, in the return, -

    (i) claim of an item, which is inconsistent with another entry of the same or some other

    item in the return of income;(ii) claim in respect of which the information required to be furnished under the Act to

    substantiate the entry has not been so furnished; or

    (iii) claim in respect of deduction, where such deduction exceeds the specified statutorylimit expressed as monetary amount or percentage or ratio or fraction.

    (e) Advance tax shall be payable by companies as per the following schedule of installments:

    Companies - four installments

    Due date of installment Amount payable

    On or before the 15th June Not less than 15% of advance tax liabilityOn or before the 15th September Not less than 45% of advance tax liability, as

    reduced by the amount, if any, paid in theearlier installment

    On before the 15th December Not less than 75% of advance tax liability, asreduced by the amount or amounts, if any, paidin the earlier installment or installments

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    On before the 15th March The whole amount of advance tax liability, asreduced by the amount or amounts, if any, paidin the earlier installment or installments

    Question 6

    Answer any five of the following:

    (a) Mr. X, a service provider who pays service tax regularly, was of the opinion that a particular service was not liable for service tax. He, therefore, did not charge service tax in his bill. He received the bill amount without service tax. How will service tax liability of Mr. X be determined in such case?

    (b) Whether service tax return can be furnished after the due date?(c) How can the excess payment of service tax be adjusted?

    (d) Discuss the accountability of an input service distributor who may not be liable to pay service tax.

    (e) Discuss the word transparency in the context of VAT system.

    (f) When does a small service provider require to register under the Finance Act, 1994, but not liable to collect and pay service tax? (5 x 2 = 10 Marks)

    Answer

    (a) The liability of a service provider or person liable to pay service tax under rule 2(1)(d) of the Service Tax Rules, 1994, to pay service tax is not contingent upon the serviceprovider realizing or charging the service tax at the prevailing rate. The statutory liabilitydoes not get extinguished if the service provider fails to charge or realize the service taxfrom the service receiver. In this case, the amount received from the service receiver willbe taken to be inclusive of service tax. Accordingly, service tax payable by the serviceprovider shall be ascertained by making back calculations in the following manner:-

    ( )ratetaxService100ratetaxServicereceived Amount

    payabletaxService+

    =

    (b) A delayed return can be furnished by paying the prescribed late fee. Section 70(1) of the Finance Act, 1994 as amendedinter aliaprovides for filing of periodical return after the due date with the prescribed late fee of not more than Rs. 2,000/-.

    (c) Where an assessee has paid to the credit of Central Government any amount in excessof the amount required to be paid towards service tax liability for a month or quarter, asthe case may be, the assessee may adjust such excess amount paid by him against hisservice tax liability for the succeeding month or quarter, as the case may be. However,such an adjustment would be subject to the following conditions mentioned below:

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    (i) Self-adjustment of excess credit would not be allowed in case of reasons involvinginterpretation of law, taxability, classification, valuation or applicability of anyexemption notification.

    (ii) Excess amount paid and proposed to be adjusted should not exceed Rs.1,00,000for the relevant month or quarter except in case of assessees opting for centralizedregistration.

    (iii) Adjustment can be made only in the succeeding month or quarter.

    (iv) The details of self-adjustment should be intimated to the Superintendent of CentralExcise within a period of 15 days from the date of such adjustment.

    (d) As per Notification No. 27/2005 dated 07.06.2005 , Central Government has notified thatan input service distributor is required to make an application for registration even thoughhe may not be liable to pay service tax.

    (e) Out of total consideration paid for purchase of material, the buyer knows the taxcomponent under a VAT system. Thus, the system ensures transparency. Thistransparency enables the State Government to know as to what is the exact amount of tax coming at each stage. Thus, it is a great aid to the Government while takingdecisions with regards to rate of tax etc.

    (f) When the gross receipts of a small service provider do not exceed Rs. 10 lakh in thepreceding financial year, he is not liable to pay service tax in the current financial year till

    the aggregate value of taxable service does not exceed Rs. 10 lakh during the period.However, he is liable to get registered when the gross receipts in any financial year exceeds Rs. 9 lakh within a period of 30 days from the date of exceeding the thresholdlimit of Rs. 9 lakh.

    Therefore, when in preceding financial year the aggregate value of taxable servicesexceeds Rs. 9 lakh, but does not exceed Rs. 10 lakh, the small service provider shall berequired to get registered, but he shall not be liable to collect and pay service tax till theaggregate value of taxable services is less than Rs. 10 lakh in current financial year.

    Question 7

    (a) Compute the VAT amount payable by Mr. A who purchases goods from a manufacturer on payment of Rs. 2,25,000 (including VAT) and earns 10% profit on sale to retailers.VAT rate on purchase and sale is 12.5%. (3 Marks)

    (b) An unregistered service provider provides following details in respect of taxableservices provided during the financial year 2008-09:

    Date Particulars Amount (Rs.)

    30.6.2008 Advance received from a customer 1,00,000

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    30.9.2008 Part payment received against a bill of Rs.9,50,000 raised on a customer

    5,00,000

    31.12.2008 Money received against taxable services provided during December, 08

    3,00,000

    31.1.2009 Taxable services rendered during January, 09 1,00,000 31.3.2009 Taxable services rendered during March, 09 2,00,000

    The service tax provider complies with the provisions of registration and collection of service tax as per service tax laws. He gets registered during the year. He received themoney against the bills raised during the month of January and March 2009. Compute

    the service tax liability of service provider for the year 2008-09 considering service tax @12.36%. (3 Marks)

    Answer

    (a) Computation of VAT payable by Mr. A:-

    Amount (Rs.)Payment made to manufacturer 2,25,000Less: VAT paid (2,25,000 x 12.5)/112.5 25,000

    Purchase price 2,00,000 Add : Profit margin (10% of Cost Price) 20,000

    Sale price before VAT 2,20,000 Add : VAT @ 12.5% on Rs. 2,20,000 27,500

    Invoice value after 10% profit margin 2,47,500

    VAT charged in invoice 27,500Less: VAT input credit (2,25,000 x 12.5)/112.5 25,000

    VAT payable by Mr. A 2,500

    (b) As per Notification No. 27/2005 dated 07.06.2005, Central Government has notified thatany service provider whose aggregate value of taxable service in a financial year exceeds Rs. 9 lakh is required to make an application for registration within a period of 30 days from the date of exceeding the threshold limit of Rs. 9 lakh.

    Further, Notification No. 6/2005-ST dated 01.03.2005 as amended provides that a smallservice provider is eligible to avail exemption from service tax on aggregate value of taxable services not exceeding Rs. 10 lakh in any financial year subject to the conditionthat during the preceding financial year, the aggregate value of all taxable servicesprovided by him did not exceed Rs. 10 lakh.

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    consideration. However, the total of such money and non-money value of the considerationhas to be treated as inclusive of the service tax payable thereon.

    For instance, Mr. A, a Chartered Accountant provided taxable professional service to oneof his clients. For rendering services, Mr. A charges Rs. 20,000 from his client and alsoasks his client to give him a law book worth Rs. 2,472. The total consideration in thiscase will be Rs. 22,472 and the value of the taxable service shall be Rs. 20,000 (Rs.22,472 100/100+12.36) and Rs. 2,472 shall be the service tax payable.

    (b) There is no independent statute on service tax as yet. However, the sources of servicetax law are:-

    i. Finance Act, 1994

    ii. Rules on service tax

    iii. Notifications on service tax

    iv. Circulars or Office Letters (Instructions) on service tax

    v. Orders on service tax and

    vi. Trade notices on service tax

    (c) Under the VAT system, trust has been reposed on tax payers, as there will be no regular assessment of all VAT returns, but only a few VAT returns will be taken up for scrutinyassessment. In other cases, the return filed by the trader will be accepted. It will not bealso seen whether proper records have been maintained by the trader.

    As a consequence, a check on compliance becomes essential. Chartered Accountantscan ensure tax compliance by:-

    (i) helping the client in systematic record keeping;

    (ii) helping the client in interpretation of the provisions of VAT law, and

    (iii) performing audit of VAT accounts.

    (iv) reporting the under-assessment, if any, made by the dealer requiring additionalpayment or

    (v) reporting any excess payment of tax warranting refund to the tax payers.

    (d) Under the subtraction method, the tax is charged only on the value added at each stageof the sale of the goods. Since, the total value of goods sold is not taken into account,the question of grant of claim for set-off or tax credit does not arise.

    This method is normally applied where the tax is not charged separately. Under thismethod for imposing tax, value added is simply taken as the difference between salesand purchases.

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    PAPER 6 : INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT

    SectionA: Information Technology

    Attempt all questions.

    Question 1

    (a) Describe briefly the following terms:

    (i) VPDN

    (ii) Folder

    (iii) DDL Compiler

    (iv) Shareware

    (v) Clock Speed (5x1 = 5 Marks)

    (b) Explain each of the following:

    (i) Real Time Data Warehouse

    (ii) MMX

    (iii) Online Backup

    (iv) Index Field

    (v) Operating System (5x1 = 5 Marks)

    Answers

    (a) (i) VPDN: VPDN (Virtual Private Dial-Up Network) is a user to LAN connection usedby a company that has employees who need to connect to the private network fromvarious remote locations.

    (ii) Folder: Folder, also called a Directory, is a tool for organizing files on a disk.Folders can contain files or other folders, so it is possible to set up a hierarchicalsystem of folders on the computer.

    (iii) DDL Compiler: DDL Compiler converts data definition statements into a set of tables. Tables contain meta-data (data about the data) concerning the database. Itgives rise to a format that can be used by other components of the database.

    (iv) Shareware: Shareware is a software developed by individual and small companiesthat cannot afford to market their software world wide or by a company that wants torelease a demonstration version of its commercial product.

    (v) Clock Speed: The clock speed is the speed at which the processor executesinstructions. It is measured in megahertz (MHz) e.g. a 450 MHz processor performs450 million instructions per second.

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    (b) (i) Real time Data Warehouse: A Real time data warehouse is updated on atransaction or event basis, every time an operational system performs a transactionsuch as an order or a delivery or a booking etc.

    (ii) MMX:MMX stands for Multimedia Extensionsa set of instructions built in to theCPU, specifically intended for improving the performance of multimedia or graphicapplicationsmainly games.

    (iii) Online Backup: Data base back-up can be performed while the database is beingactively accessed (online). It is performed by executing the command-line or fromthe 'Backup Database' utility. When this process begins, the database engineexternalizes all cached data pages kept in memory to the database file(s) on disk.This process is called a checkpoint. The database engine continues recordingactivity in the transaction log file while the database is backed up. The log file isbacked up after the backup utility finishes backing up the database.

    (iv) Index Field: Index fields are used to store relevant information along with adocument. The data input to an Index Field is used to find those documents whenneeded. The program provides up to 25 user-definable Index Fields in an Index Set.

    (v) Operating System: Operating System is defined as an integrated system of pro-grams which supervises the operation of the CPU, controls the input/outputfunctions of the computer system, translates the programming languages into themachine languages and provides various support services.

    Question 2

    Answer the following questions:

    (a) Define an Expert system. Describe the components of an Expert system. (7 Marks)

    OR

    (b) Describe the ways a computer network can help business. (7 Marks)

    (c) What are the challenges faced by the management of a data center. (3 Marks)

    Answers

    (a) Expert System: An expert system (ES) is a computerized information system that allowsnon-experts to make decisions comparable to those of an expert. Expert systems areused for complex or ill-structured tasks that require experience and specializedknowledge in narrow, specific subject areas.

    Components of an Expert system are : (shown in figure below)

    (i) Knowledge base: This includes the data, knowledge, relationships, rules of thumb(heuristics), and decision rules used by experts to solve a particular type of problem.

    (ii) Inference engine: This program contains the logic and reasoning mechanisms thatsimulate the expert logic process and deliver advice. It uses data obtained from

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    both the knowledge base and the user to make associations and inferences, form itsconclusions, and recommend a course of action.

    Fig. Major components of an Expert System

    (iii) User interface: This program allows the user to design, create, update, use, andcommunicate with the expert system.

    (iv) Explanation facility: This facility provides the user with an explanation of the logicthe ES used to arrive at its conclusion.

    (v) Knowledge acquisition facility: Building a knowledge base, referred to asknowledge engineering, involves both a human expert and a knowledge engineer.

    The knowledge engineer is responsible for extracting an individuals expertise andusing the knowledge acquisition facility to enter it into the knowledge base.

    (b) A computer network can help the business in following ways:

    (i) File Sharing: File sharing is the most common function provided by networks andconsists of grouping all data files together on a server or servers. When all data filesin an organization are concentrated in one place, it is much easier for staff to sharedocuments and other data.

    Knowledge engineer at a PC

    Expert

    Knowledgeacquisition facility

    Inferenceengine

    Explanation facility

    Userinterface User at a PC

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    (ii) Print Sharing: When printers are made available over the network, multiple userscan print to the same printer. This facility can reduce the number of printers theorganization must purchase, maintain and supply.

    (iii) E-Mail:Internal or "group" email enables the staff of an office to communicate witheach other quickly and effectively. Group email applications also provide capabilitiesfor contact management, scheduling and task assignment.

    (iv) Fax Sharing: Through the use of a shared modem(s) connected directly to thenetwork server, fax sharing permits users to fax documents directly from their computers without ever having to print them out on paper.

    (v) Remote Access: Staff often require access to their email, documents or other data

    from locations outside the office. A highly desirable network function, remote accessallows users to dial in to an organization's network via telephone and access all thenetwork resources that they can access when they're in the office.

    (vi) Shared Databases: Shared databases are an important subset of file sharing. If theorganization maintains an extensive database, a network is the only effective way tomake the database available to multiple users at the same time.

    (vii) Fault Tolerance: This is the process of making sure that there are several lines of defense against accidental data loss. Tape backups, servers attached to anuninterruptible power supply and redundant hardware are examples of such defenselines.

    (viii) Internet Access and Security: When computers are connected via a network, theycan share a common, network connection to the Internet. This facilitates email,document transfer and access to the resources available on the World Wide Web.

    (ix) Communication and collaboration: A network allows employees to share files,view other people's work, and exchange ideas more efficiently.

    (x) Organization: A variety of network scheduling software is available that makes itpossible to arrange meetings without constantly checking everyone's schedules.

    (c) Challenges faced by the management of a data center are as follows:

    (i) Maintaining a skilled staff and high infrastructure needed for daily data center operations: A company needs to have staff which is expert at network management

    and has software/operating system skills and hardware skills. A company has toemploy a large number of such people.

    (ii) Maximizing uptime and performance: While establishing sufficient redundancyand maintaining watertight security, data centers have to maintain maximum uptimeand system performance.

    (iii) Technology Selection: The other challenges that enterprise data centers face istechnology selection, which is crucial to the operations of the facility keepingbusiness objectives in mind.

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    (iv) Resource balancing: The enterprise chief technical officer today needs to strike aworking balance between reduced operational budgets, increased demands onexisting infrastructure, maximizing availability, ensuring round-the-clock monitoringand management, and the periodic upgrades that todays technology demands.

    Question 3

    (a) Describe in brief the various components of Client Server Architecture. (4 Marks)

    (b) What are the various views taken into account, while designing the architecture of aDatabase. Which view is user dependent and which one is user independent? Whichview is storage device oriented? (3+2+1=6 Marks)

    OR

    (c) Why documentation is required? List any 4 types of documentations required to be prepared prior to delivery of customized software to a customer.

    Answers

    (a) The various components of Client-Server Architecture are as follows:

    (i) Client: Clients, which are typically PCs, are the users of the services offered bythe servers. There are basically three types of clients:

    Non-Graphical User Interface (GUI) Clients: These require a minimum amountof human interaction e.g. ATMs, cell phones, fax machines, and robots.

    GUI-Clients: These are human interaction models usually involvingobject/action models like the pull-down menus in Windows 3-X.

    Object-Oriented User Interface (OOUI) Clients: These take GUI-Clients evenfurther with expanded visual formats, multiple workplaces, and objectinteraction rather than application interaction. Windows 95 is a common OOUIClient.

    (ii) Server: Servers await request from the client and regulate access to sharedresources and perform action based on client request. File servers make it possibleto share files across a network by maintaining a shared library of documents, data,and images. Database servers, transaction servers and web servers are some of the servers used in client server architecture.

    (iii) Middleware: The network system implemented within the client/server technology istermed as Middleware. It is all the distributed software needed to allow clients andservers to interact. General middleware allows for communication, directoryservices, queuing, distributed file sharing, and printing.

    (iv) Fat-client or Fat-server: Fat-client allows more of the processing to take place onthe client, like with a file server or database server. Fat-servers place moreemphasis on the server and try to minimize the processing done by clients.Transactions, GroupWare, and web servers are examples of Fat Servers. FatClients are also referred to as 2-Tier systems and Fat-servers as 3-Tier systems.

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    (b) The following three views are taken into account, while designing the architecture of adatabase.(i) External view (User View)(ii) Conceptual (Global view)(iii) Internal View (Physical view)

    External view (User View) encircles the following:

    It is at the highest level of the database abstraction. It includes only those portions of database or application programs which are

    of concern to the users. It is described by means of a scheme, called the external schema. It is defined by the users or written by the programmers.Conceptual (Global view) which is viewed by the Data Base Administrator,encompasses the following

    All database entities and relationships among them are included. Single view represents the entire database. It is defined by the conceptual schema. It describes all records, relationships and constraints or boundaries. Data description to render it independent of the physical representation.Internal View (Physical view) contains the following: It is at the lowest level of database abstraction. It is closest to the physical storage method. It indicates how data will be stored. It describes data structure. It describes access methods. It is expressed by internal schema.

    External view is user-dependent as external view is also referred as User View.Conceptual and Internal views are user-independent.Internal view is storage device oriented.

    (c) The documentation is an important aspect of Software Development Life Cycle whichprovides a method to understand the various issues related with software developmentand provide a method to access details related to system study, system development,system testing, system operational details, details related to preventive maintenance anddetails associated with further modification aspects of the software.Four important documentations required to be prepared prior to delivery of customizedsoftware to customer are as follows:(i) Strategic and Application Plans.(ii) Application Systems and Program Documentation.

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