commission, but before adjustment of unrealized profit are as under:

Rs.
Department Blue 36,000
Department Black 27,000
Department Pink 18,000
Stocks lying at different departments at the end of the year are as under:
Dept. Blue Dept. Black Dept. Pink
Rs. Rs. Rs.
Transfer from Department Blue — 15,000 11,000
Transfer from Department Black 14,000 — 12,000
Transfer from Department Pink 6,000 5,000 —
Required: Correct departmental Profits after charging Managers‘ commission.

Nepal Accounting Standards (NAS)

21. a. Shree Ganesh Ltd. is a manufacturing company produces durable consumer goods with an
annual turnover of Rs. 100 crores. The company receives orders from its commission agents
all over the country, but goods are dispatched directly to the customers. The documents
including transport bills are sent through the bank for collection. At the end of the 6 th year, it
is found that documents covering the dispatch of goods worth Rs. 10 crores were still lying
with the banks not cleared by the customers even though the normal collection period of 15
days from the date of dispatch has expired. Should revenue be recognized in the above case?
b. When the construction of a qualifying asset is performed by a third party, are borrowing
costs capitalised on the prepayments made to the third party for the acquisition of the asset?
State on the basis of relevant NAS.

c. A company is in a dispute involving allegation of infringement of patents by a competitor

company who is seeking damages of a huge sum of Rs. 20 million. The directors are of the
opinion that the claim can be successfully resisted by the company. How would you deal
with the same in the annual accounts of the company?

d. An earthquake destroyed a major warehouse of ABC Ltd. on 30.4.2072. The accounting

year of the company ended on 31.3.2072. The accounts were approved on 30.6.2072. The
loss from earthquake is estimated at Rs. 25 lakhs. State with reasons, whether the loss due to
earthquake is an adjusting or non-adjusting event and how the fact of loss is to be disclosed
by the company.

e. Discuss on ‘Other comprehensive income’ as outlined in Nepal Accounting Standard.

f. A company capitalizes interest cost of holding investments and adds to cost of investment
every year, thereby understating interest cost in profit and loss account. Comment on the
accounting treatment done by the company in context of the relevant NAS.
Write Short Notes
22. (a). Contingent Assets
(b). Watch List in Loan loss provisioning
(c). Leases
(d). Government Accounting System in Nepal
(e). Debt Service Coverage Ratio
(f). Advantages of Customized Accounting Packages
(g). Non Banking Assets
(h). Re-Insurance
 SUGGESTED ANSWERS

Cash Flow Statement

Answer:
Cash Flow Statement for the year ended on 31st December 2016

Particular Rs. Rs.

1. CCash Flow from Operating Activities
a Net profit before tax 28,800
s Adjustments:
hDepreciation 3,050
Increase in provision for doubtful debt 200
F 2,000
l Decrease in stock (3,370)
oDecrease in creditor (230)
wIncrease in Debtor (18,000)
Income Tax Paid
SNet Cash from Operating Activities 12,450
2. t Cash Flow from Investing Activities
a Investment Purchased (6,250)
t 4,800
Sale of Investment
e (5,000)
mPlant Purchased
e Net Cash Flow from Investing Activities (6,450)
3. nCash Flow from Financing Activities
t Payment of Interim Dividend (5,000)
Net increase in cash equivalent 1,000
Add: Opening Cash Balance 8,000
Closing Cash Balance 9,000

Adjusted Profit and Loss Account

Particulars Rs. Particulars Rs.
To Provision for Tax 20,000 By Profit 28,800
To General Reserve 3,600
To Loss on Sale of Investment 200
To Interim Dividend 5,000

28,800 28,800

Provision for Tax Account

Particulars Rs. Particulars Rs.
To Bank (Tax Paid) 18,000 By Balance b/d 19,000
To Balance c/d 21,000 By P & L A/C (Provision) 20,000

39,000 39,000

Insurance Claim
Answer No 2:

Memorandum Trading Account from 1st Shrawan to 8th Shrawan 2074

 To Opening stock 1,572,000 By Sales 5,260,000
To Purchases 3,710,000 By Closing Stock 1,600,000
To Gross Profit (30% of Sales) 1,578,000 (Balancing Figure)

Total 6,860,000 6,860,000

Calculation of Amount of Insurance Claim

Value of Stock on 8th Shrawan (as above) 1,600,000

Less:
Value of Stock remaining unaffected by fire 203,000
Agreed Value of damaged goods 197,000 400,000

Loss of Stock 2,000,000

Applying Average Clause:

Amount of Claim = Amount of Policy x Loss of Stock
Stock on the date of Fire
= Rs 1,000,000 x1,200,000
Rs 1,600,000
=Rs 750,000
Answer No 3:
Memorandum Trading Account
for the period from 1.4.2073 to 30.8.2073
Particulars Normal Abnormal Particulars Normal Abnormal
Rs. Rs. Rs. Rs.
Opening Stock (W.N.1) 95,000 5,000 Sales (W.N. 2&1) 240,000 2,000
Stock lying with
customers on
Purchases 170,000 approval (W.N.3) 22,000
Less Machinery Goods sent to
purchase 30,000 140,000 consignee 16,500
Goods drawn by
Wages 50,000 proprietor 10,000
Less: wages for instl. Free samples (W.N.
of machinery 3,000 47,000 5) 1,000
Gross Profit (33.33% of
sales)
(W.N. 4) 80,000 Loss (W.N.) 500
Stock on the date of
_________ _________ fire 72,500 2,500
362,000 5,000 362,000 5,000

Working Notes
(1) Abnormal items: Rs.
Original cost of slow moving items 5,000
cost of slow moving item sold 2,500
Balance of slow moving items in stock 2,500
Original cost of slow moving items sold 2,500
 Loss incurred on such sale 500
Sale proceeds of slow moving items 2,000

(2) Sales as given 275,000

Less: goods sold on approval basis 49,500
225,500
Add: sales confirmed with respect to goods sold on approval basis
(1/3 x 49,500) 16,500
Total sales for the period 242,000
Less: sale of abnormal items 2,000
Normal sales 240,000

(3) Goods sold on approval basis 49,500

Less: sales confirmed 16,500

Goods with customers on approval basis

-sales not being confirmed 33,000
Less: profit element 1/3 of Rs. 33,000 11,000
Goods on approval at cost 22,000

(4) Previous year G.P. margin on sales = 20%

Cost 100-20 = 80
Selling price in the current year 100+20 120
G.P Margin in current year 40/120 x 100 33.33%

(5) Sales value of free samples distributed 1,500

Less: Profit on such sale value @ 33.33% 500
Cost of sample distribution 1000

Statement of Claim Rs.

Stock on the date of fire
Normal items 72,500
Slow moving items 2,500
75,000
Less Salvage 25,000
50,000
Claim (applying average clause
Value of Policy/Stock on the fire date x loss of stock
= 60,000/75,000 x 50,000 =Rs. 40,000

Contract Accounting
Answer No 4:
In the books of M/s Santi Constriction
Contract Account
For the period ended 31.3.2074
Date Particulars Amount Date Particulars Amount
To Materials sent to site 160,000 By Unused materials at site 21,620
To Wages 101,200 By Machines A/c (WDV as on 140,600
Add: Outstanding 37,520 138,720 31stAshad 2074)
To Machines (Cost) 148,000 By Work in Progress:
To Direct Charges 7,500 Certified 350,000
Add: Outstanding 600 8,100 Uncertified 18,000 368,000
To Establishment charges 6,400
To Profit and Loss A/c (Transfer 36,800
of Profit)
To Balance c/d 32,200
 530,220 530,220
To Materials at site 21,620
To Machines 140,600
(Refer Working Note No.1)
By Work in Progress:
Certified 350,000
Uncertified 18,000
368,000
Less: Balance b/d 32,200 335,800

Balance Sheet as on 31stAshad 2074 (Relevant Portion only)

Capital and Liabilities Rs. Assets Rs.
Outstanding expenses Machines 148,000
Wages 37,520 Less: Depreciation 7,400 140,600
Direct Charges 600 38,120 Work in Progress:
Capital Account Certified 350,000
Profit on Contract Uncertified 18,000
(Refer Working Note No.2) 36,800 368,000
Less: Profit in Reserve 32,200
Less: Amount Received 280,000 55,800
Unused materials at site 21,620

Working Note
1. Calculation of Written Down Value of Machines on 31stAshad 2074
Cost of Machine on 1stBaisakh 2074 148,000
Less: Depreciation on Rs.148,000 for 3 months @ 20% per annum
=148,000X20/100X3/12 7,400
Net Written Down Value of Machine 140,600
2. Calculation of amount to be transferred from Contract A/c to Profit and Loss A/c
Total surplus in Contract Account as on 31stAshad 2074:
=Rs.21,620+Rs.140,600+Rs.368,000-Rs.160,000-Rs.138,720-Rs.148,000-Rs.8,100-
Rs.6,400
=Rs.69,000
Thus Profit to be credited to Profit and Loss Account:
=Rs. 69,000X2/3X280,000/350,000
=Rs.36,800

Hire Purchase Transactions

Answer No 5:
Amount Rs.
(i) Agreed value of the plant taken back by the hire vendor:
Price of two plants Rs. 100,000 X 2 = 200,000
Less: Depreciation for the first year @30% - 60,000
140,000
Less: Depreciation for second year @ 30% on Rs. 140,000 - 42,000
Agreed value of the plant taken back by the hire vendor 98,000

(ii) Book value of the plant left with the hire vendor:
Price of one plant Rs. 100,000 X 1 = 100,000
Less: Depreciation for the first year @20% - 20,000
 80,000
Less: Depreciation for second year @ 20% on Rs. 80,000 - 16,000
Agreed value of the plant taken back by the hire vendor 64,000

(iii) Profit or Loss to Hire Purchaser:

Book value of one plant as calculated in (ii) 64,000
Book value of two plants taken back = Rs. 64,000 X2 = 128,000

Agreed Value of two plants (i) 98,000

Hence Loss = Rs. 128,000- Rs. 98,000= Rs. 30,000.

(iv) Profit on Resale:

Sales proceeds of plants reprocessed 160,000
Less: Value at which plants were taken back= Rs 98,000
Overhauling Charges Rs 40,000 -138,000
Profit on resale 22,000
Issue of Shares and Debentures

Answer No 6:
Journal Entries
In the books of Kitkit Ltd.
NRs. NRs.
Date Particulars Dr. Cr.

1.5.2016 Bank A/c Dr. 15,000,000

To Debenture Application A/c 15,000,000
(Application money received on 150,000 debentures @ NRs. 100 each)

1.6.2016 Debenture Application A/c Dr. 15,000,000

Underwriters A/c Dr. 5,000,000
To 15% Debentures A/c 20,000,000
(Allotment of 150,000 debentures to applicants and 50,000 debentures to
underwriters)

1.6.2016 Underwriting Commission A/c Dr. 400,000

To Underwriters A/c 400,000
(Commission payable to underwriters @ 2% on NRs. 20,000,000)

1.6.2016 Bank A/c Dr. 4,600,000

To Underwriters A/c 4,600,000
(Amount received from underwriters in settlement of account)

30.9.2016 Debenture Interest A/c Dr. 1,000,000

To Bank A/c 1,000,000
(Interest paid on debentures for 4 months @ 15% on NRs. 20,000,000)

30.10.2016 15% Debentures A/c Dr. 12,000,000

To Equity Share Capital A/c 2,000,000
To Securities Premium A/c 10,000,0000
(Conversion of 60% of debentures into shares of NRs. 60 each with a face value of
NRs. 10)
31.3.2017 Debenture Interest A/c Dr. 750,000
To Bank A/c 750,000
(Interest paid on debentures for the half year)
Working Note:
Calculation of Debenture Interest for the half year ended 31st March, 2017
On NRs. 8,000,000 for 6 months @ 15% = NRs. 600,000
On NRs. 12,000,000 for 1 months @ 15% = NRs. 150,000
NRs. 750,000

Answer No 7:
Books of M/s Yeti Ltd.
Journal Entries
S.N. Particulars Debit Credit
1. Bank Account Dr. 12,000,000
To Share Application A/c 12,000,000
(Being Share application money received for 800,000
share at Rs. 15 per Share))

2. Share Application A/c Dr. 12,000,000

To Share Capital A/c 6,000,000
To Share Allotment A/c 6,000,000
(Being Share Application money transferred to share
capital account & excess money received transferred to
share allotment account)

3. Share Allotment A/c Dr. 10,000,000

To Share Capital A/c 8,000,000
To Share Premium A/c 2,000,000
(Being allotment of 400,000 number of shares made at
Rs. 25 per Share)

4. Bank Account Dr. 3,996,000

Calls in Arrears A/c Dr. 4,000
To Share Allotment A/c 4,000,000
(Being Share Allotment money received except one
shareholder holding 400 shares who failed to pay the
allotment money)
5.
Share First & Final Call A/c Dr. 6,000,000
To Share Capital A/c 6,000,000
(Being first and final call made on share issued)
6.
Bank Account Dr. 5,992,500
Calls in Arrears A/c Dr. 7,500
To Share First & Final Call A/c 6,000,000
(Being share first & final call money received except
400 shares held by Mr. Amit and 100 shares held by
Rajina who failed to pay call money)
7. 25,000
Share Capital A/c Dr. 2,000
Share Premium A/c Dr. 15,500
To Share Forfeiture A/c 11,500
To Calls in Arrears A/c
(Being 400 shares held by Amit who failed to pay the
allotment and first and final call and 100 Shares held by
Rojina who failed to pay the call money forfeited )
8. 16,000
Bank Account Dr. 6,000
Share Forfeiture A/c Dr. 20,000
 To Share Capital A/c 2,000
To Share Premium A/c
(Being Shares forfeited from Amit issued at Rs. 40
including premium of NRs.5 to Tanka)
9. 6,000
Bank Account Dr. 5,000
To Share Capital A/c 1,000
To Share Premium A/c
(Being Shares forfeited from Rojina reissued at Rs. 60
to Suchitra)
10. 9,500
Share Forfeiture A/c Dr. 9,500
To Capital Reserve A/c
(Being credit balanced on share forfeited account
transferred to Capital Reserve A/c)
11. 12,000
Deferred Revenue Expenditure A/c Dr. 12,000
To Bank Account
(Being Rs.12,000 paid for share issue accounted under
Deferred Revenue Expenditure account)

Working Note;
a. Calculation of Calls in Arrears of Amit Rs.
Amount paid at the time of application = 800×15 = 12,000
Amount utilized in application = 400×15 = 6,000
Excess amount = 12,000 – 6,000 = 6,000
Calls in arrear at the time of Allotment = 400×25 – 6,000 = 4,000
Calls in arrear at the time of First & Final Call = 400×15 = 6,000

b. Calculation of Calls in arrears of Rojina Rs.

Calls in arrear at the time of First & Final Call = 100×15 = 1,500

Underwriting of Shares and Debentures

Answer No 8:
(a) Statement showing the underwriters’ liability (No. of shares)
A & Co. B & Co. C & Co.
Gross Liability 120,000 120,000 120,000
Less: Firm underwriting 10,000 10,000 10,000
110,000 110,000 110,000
Less: Marked applications 72,500 84,000 131,000
37,500 26,000 (21,000)
Less: Unmarked applications distributed to A &
Co. and B & Co. in equal ratio (11,250) (11,250) Nil
26,250 14,750 (21,000)
Less: Surplus of C & Co. distributed to A & Co.
and B & Co. in equal ratio (10,500) (10,500) 21,000
Net liability (excluding firm underwriting) 15,750 4,250 Nil
Add: Firm underwriting 10,000 10,000 10,000
Total liability (No. of shares) 25,750 14,250 10,000

(b) Computation of amounts payable by underwriters

Liability towards shares to be subscribed @ 120 per 3,090,000 1,710,000 1,200,000
share
Less: Commission (5% on 1.2 lakhs shares @ 100
each) 600,000 600,000 600,000
 Net amount to be paid by the underwriters 2,490,000 1,110,000 600,000

(c) In the Books of Nepal Capital Ltd.

Journal Entries
Particulars Dr. Cr.
Rs. Rs.
Underwriting commission A/c Dr. 1,800,000
To A & Co. A/c 600,000
To B & Co. A/c 600,000
To C & Co. A/c 600,000
(Being underwriting commission on the shares underwritten)
A & Co. A/c Dr. 3,090,000
B & Co. A/c Dr. 1,710,000
C & Co. A/c Dr. 1,200,000
To Equity share capital A/c 5,000,000
To Share premium A/c 1,000,000
(Being shares including firm underwritten shares allotted to
underwriters)
Bank A/c Dr. 4,200,000
To A & Co. A/c 2,490,000
To B & Co. A/c 1,110,000
To C & Co. A/c 600,000
(Being the amount received towards shares allotted to underwriters
less underwriting commission due to them)

Incomplete Records
Answer No 9:
Projected Balance Sheet
as on 31st Ashadh, 2073
Liabilities Rs. Assets Rs.
Capital 1,000,000 Fixed Assets 400,000
Profit & Loss Account as on Additions 100,000
st
1 Shrawan, 2072 60,000 500,000
Add: Profit for the year 374,000 434,000 Less: Depreciation (50,000) 450,000
Creditors (Trade) 110,000 Stock in trade 336,000
Sundry Debtors 200,000
Cash & Bank Balances 558,000
1,544,000 1,544,000
Working Notes:
Projected Trading and Profit and Loss Account
for the year ended 31st Ashadh, 2073
Rs. Rs.
To Opening Stock 300,000 By Sales 2,120,000
To Purchases 1,520,000 By Closing Stock (balancing figure) 336,000
To Gross Profit (30% on sales) 636,000
2,456,000 2,456,000
To Sundry Expenses (10% on sales) 212,000 By Gross Profit b/d 636,000
To Depreciation 50,000
To Net Profit 374,000
636,000 636,000
 Cash and Bank Account for the period
1st Shrawan, 2072 to 31st Ashadh, 2073
Rs. Rs.
To Balance b/d 350,000 By Sundry Creditors 1,550,000
To Sundry Debtors 2,070,000 (Rs. 140,000 + Rs. 1,410,000)
(Rs. 150,000 + Rs. 1,920,000) By Expenses 212,000
By Fixed Assets 100,000
By Balance c/d 558,000
2,420,000 2,420,000
Note: It is assumed that the entire sales and purchases are on credit basis.

Ratio Analysis
Answer No 10:
Balance Sheet of Nyatapola Enterprises

Liabilities Rs. Assets Rs.

Capital 500,000 Fixed Assets 200,000
Creditors 186,000 Stock 90,000
Debtors 83,333
Bank Balance (balancing figure) 312,667
686,000 686,000
Working Note
(i) Gross profit= Rs. 100,000
Gross profit margin= 10%
Hence, Sales= Rs. 100,000 x 100/10= Rs. 1,000,000
Cost of goods sold = Sales – Gross profit
= Rs.( 1000,000-100,000)
= Rs. 900,000
Purchase = Cost of goods sold + Increase in stock
= Rs. ( 900,000+30,000) = Rs. 930,000
Average stock= Cost of goods sold/stock velocity
= Rs. 900,000/12=75000
(ii) Capital:
Capital turnover ratio = 2
Sales/Capital=2
Hence, Capital= Rs. 1,000,000/2 = Rs. 500,000
(iii) Creditors:
Creditors payment period = 73 days
Hence, Creditors= Purchases x 73/365 =Rs. 930,000 x 1/5 = Rs. 186,000

(iv) Fixed assets:

Fixed assets turnover ratio = 5
Hence, Fixed Assets = Sales/5= Rs. 1,000,000/5= Rs. 200,000
(v) Closing stock:
Closing stock is Rs. 30,000 more than opening stock; it is Rs. 15000 more than average
stock.
 Hence, closing stock= Average stock + Rs. 15000
= Rs. 75,000+Rs.15,000= Rs. 90,000
(vi) Debtors:
Debt collection period = 1 month
Hence, debtors= Sales x 1/12 = Rs. 1,000,000 x 1/12 = Rs. 83,333.33
It is assumed that there is no change in capital during the period.

Business Combination
Answer No 11:
Books of Blue Star Limited
Realization Account
Rs. Rs.
To Building 3,40,000 By Creditors 3,20,000
To Machinery 6,40,000 By B Ltd. 12,10,000
To Stock 2,20,000 By Equity Shareholders A/c (Loss) 60,000
To Debtors 2,60,000
To Goodwill 1,30,000
1,590,000 1,590,000

Bank Account
To Balance b/d 136,000 By 10% debentures 400,000
To Big Star Ltd. 600,000 By Loan from A 160,000
By Equity shareholders A/c 176,000
736,000 736,000

Big Star Ltd. Account

To Realisation A/c 1,210,000 By Bank A/c 600,000
By Equity Share holders A/c
(4,880 shares at Rs.125 each in Big Star
Ltd.) 610,000
1,210,000 1,210,000

Equity Shareholders Account

To Realisation A/c 60,000 By Equity Share Capital 800,000
To Deferred Revenue Exp. 34,000 By General Reserve 80,000
To Equity shares in Big Star Ltd. 610,000
To Bank A/c 176,000
880,000 880,000

Big Star Ltd.

Balance Sheet as on 1 st Shrawan, 2073 (An extract)
Liabilities Rs. Assets Rs.
4880 Equity shares of Rs.100 each 488,000 Goodwill 232,000
(Shares have been issued for Building 306,000
consideration other than cash)
Securities Premium 122,000 Machine 576,000
Profit and Loss A/c ….
Less: unrealized profit 15,000 …..
Creditors (320,000 - 40,000) 280,000 Stock (198,000 -15,000) 183,000
Bank Overdraft 616,000 Debtors (260,000 – 40,000) 220,000
 Less: Provision for bad debts 26,000 194,000

Working Notes:
1. Valuation of Goodwill Rs.
Average profit 124,400
Less: 8% of Rs. 880,000 70,400
Super profit 54,000
Value of Goodwill = 54,000 x 4 216,000

2. Net Assets for purchase consideration

Goodwill as valued in W.N.1 216,000
Building 306,000
Machinery 576,000
Stock 198,000
Debtors 260,000
Total Assets 1,556,000
Less: Creditors 320,000
Provision for bad debts 26,000 346,000
Net Assets 1,210,000

Out of this Rs. 600,000 is to be paid in cash and remaining i.e., (1,210,000–600,000) Rs.
610,000 in shares of Rs. 125/-. Thus, the number of shares to be allotted 610,000/125 = 4,880
shares.
3. Unrealized Profit on Stock Rs.
The stock of Blue Star Ltd. includes goods worth Rs. 100,000 which was sold
by Big Star Ltd. on profit. Unrealized profit on this stock will be
40,000 25,000
1,00,000
1,60,000
As Big Star Ltd. purchased assets of Blue Star Ltd. at a price 10% less than (10,000)
the book value, 10% need to be adjusted from the stock i.e., 10% of
Rs.100,000.
Amount of unrealized profit 15,000

4. Liquidation expenses borne by the Big Star Ltd. so that should be debited to Goodwill Account.

Answer No 12
Books of Hill Ltd.
Realisation Account

Particulars Amount Rs. Particulars Amount Rs.

To Good will 1,00,000 By Current Liabilities 2,00,000
To Fixed Assets 3,00,000 By Himal Ltd. 10,87,500
To Current Assets 13,00,000 By Share Capital 2,50,000
By Equity Shareholders a/c ( 1,62,500
17,00,000 loss) 17,00,000

Equity Shareholders (outside) Account

 Particulars Amount Rs. Particulars Amount Rs.
To Realisation 2,50,000 By Share Capital 10,00,000
To Realisation Loss 1,62,500 By General reserve 5,00,000
To Shares in Himal Ltd 10,87,500
15,00,000 15,00,000
Balance Sheet of Himal Ltd.
(After completion of absorption)
Capital & Liabilities Amount Rs. Assets Amount Rs.
Share Capital 30,87,500 Fixed Assets 18,00,000
30875 shares @ Rs. 100 fully Himal Ltd. 15,00,000
paid Hill Ltd. 3,00,000

Reserve & Surplus 16,25,000 Investment 50,000

General reserve 15,25,000
Capital reserve 1,00,000 Current Assets 45,47,500

Current Liabilities 16,85,000

63,97,500 63,97,500

Workings:
Adjusted Balance Sheet of Hill Ltd.
Capital & Liabilities Amount Rs Assets Amount Rs.
Share Capital 10,00,000 Fixed assets 3,00,000
General Reserve 5,00,000 Goodwill 1,00,000
Current Liabilities 2,00,000 Current assets 13,00,000*
17,00,000 17,00,000

Hill Ltd retains Rs. 100,000 in cash for dividend (10%) ( 1,400,000-100,000)
1. Total Purchase consideration (based on net worth of Hill Ltd.) is Rs. 1,450,000.
2. Himal Ltd. holds 2,500 shares in Hill Ltd. The percentage of holding is 25%
3. The net purchase consideration to pay Rs. 1,450,000 * ¾ = 1,087,500
4. Calculation of Current Assets
Current assets of Himal Ltd. 3,250,000
Add Dividend 25,000
3,275,000
Less: intercompany amount 15,000
3,260,000
Current Assets of Hill Ltd. 1,300,000
Less unrealized profit 12,500
(Rs. 50,000-37,500) 1,287,500
Total Current Assets 4,547,500

5. Calculation of Current Liabilities

Himal Ltd. 1,500,000
Hill Ltd. (200,000-15,000) 185,000
1,685,000

6. Calculation of Capital Reserve

Assets taken over from Hill Ltd:
Fixed assets 300,000
Current assets (1,300,000-12,500) 1,287,500
1,587,500
Liabilities:
Investment in Hill Ltd. 200,000
Current Liabilities 200,000
Purchase consideration 1,087,500 1,487,500
 Capital Reserve 100,000

Internal Reconstruction
Answer No 13
Journal Entries
in the books of Pokhara Light Ltd.
Rs.
Rs.
(i) Equity Share Capital (Rs.100) A/c 1,00,00,000
Dr.
To Equity Share Capital (Rs.40) A/c 40,00,000
To Reconstruction A/c 60,00,000
(Being conversion of equity share capital of Rs.100 each into
Rs.40 each as per reconstruction scheme)
(ii) 12% Cumulative Preference Share capital (Rs.100) A/c Dr. 50,00,000
To 12% Cumulative Preference Share Capital (Rs.60) A/c 30,00,000
To Reconstruction A/c 20,00,000
(Being conversion of 12% cumulative preference share capital of
Rs.100 each into Rs.60 each as per reconstruction scheme)
(iii) 10% Debentures A/c Dr. 40,00,000
To 12% Debentures A/c 28,00,000
To Reconstruction A/c 12,00,000
(Being 12% debentures issued to 10% debenture-holders for
70% of their claims. The balance transferred to capital reduction
account as per reconstruction scheme)
(iv) Sundry Creditors A/c Dr. 20,00,000
To Equity Share Capital A/c 12,00,000
To Reconstruction A/c 8,00,000
(Being a creditor of Rs.20,00,000 agreed to surrender his claim
by 40% and was allotted 30,000 equity shares of Rs.40 each in
full settlement of his dues as per reconstruction scheme)
(v) Provision for Taxation A/c Dr. 1,00,000
Reconstruction A/c Dr. 50,000
To Current Assets (Bank A/c) 1,50,000
(Being conversion of the provision for taxation into liability for
taxation for settlement of the amount due)
(vi) Reconstruction A/c Dr. 99,50,000
To P & L A/c 4,00,000
To Preliminary Expenses A/c 2,00,000
To Fixed Assets A/c 37,50,000
To Current Assets A/c 55,00,000
To Investments A/c 50,000
To Capital Reserve A/c 50,000
(Being amount of Reconstruction utilized in writing off P & L
A/c (Dr.) Balance, Preliminary Expenses, Fixed Assets, Current
Assets, Investments and the Balance transferred to Capital
 Reserve)

Balance Sheet of Pokhara Light Ltd. (and reduced)

as on 31.3.2073
Liabilities Rs. Assets Rs.
Issued, subscribed and paid up capital: Fixed Assets 87,50,000
1,30,000 equity shares of Rs.40 each 52,00,000 (1,25,00,000 – 37,50,000)
12% Cumulative Preference Shares of Rs. Investments 9,50,000
60 each 30,00,000 (10,00,000 – 50,000)
Reserves & Surplus: Current Assets 43,50,000
Capital Reserve 50,000 (45,00,000 – 1,50,000)
Secured Loan:
12% Debentures 28,00,000
Current Liabilities and Provisions:
Sundry Creditors: 30,00,000
(50,00,000 – 20,00,000)
1,40,50,000 1,40,50,000

Working Note:
Reconstruction Account
Rs. Rs.
To Liability for taxation A/c 50,000 By Equity share capital 60,00,000
To P & L A/c 4,00,000 By 12% Cum. preference share 20,00,000
To Preliminary expenses 2,00,000 By 10% Debentures 12,00,000
To Fixed assets 37,50,000 By Sundry creditors 8,00,000
To Current assets 55,00,000
To Investment 50,000
To Capital Reserve 50,000
(balancing figure) _________ _________
1,00,00,000 1,00,00,000

Profit or Loss Pre and Post Incorporation

Answer No 14:
Statement showing calculation of profits for pre and post incorporation periods
For the year ended 31.3.2072 (15 months)
Gross profit Total Ratio Pre Post
Gross Profit 140,40,000 1:8 1560,000 124,80,000
Less: Salaries 2340,000 1:12 180,000 2160,000
Depreciation 360,000 1:4 72,000 288,000
Advertisement 1404,000 1:8 156,000 1248,000
Discount 2340,000 1:8 260,000 2080,000
Managing Director‘s Salary 180,000 Post - 180,000
Office/showroom rent 1440,000 Actual 180,000 1260,000
Miscellaneous office 240,000 1:4 48,000 192,000
expenses
Interest paid 1902,000 Actual 702,000 1200,000
Goodwill (loss) 38,000 -
Net Profit - 3,872,000
Working note:
Pre post
st
1. calculation of time ratio = 1:4 1 Baisakh to 31.3.2071 1.4.2071 to 31.3.2072
3 months 12 months
2. Calculation of sales ratio = 1:8 3x1 = 3 12 x 2 = 24
3. Calculation of staff salary ratio = 3x1 = 3 12 x 3 = 36
1:12
4. calculation of interest 234,00,000 x 12% for 3 100,00,000 x 12% for 1 year
months Rs. 1200,000
Rs. 702,000
5. Calculation of Rent
(i) additional rent 60,000x9 = 540,000
(ii) regular rent = (1440,000- 900,0000X3/15 = 180,000 900,0000X12/15 = 720,000
540000)
= 900,000
6. Calculation of gross profit = sales – cost of goods sold = 468,00,000-327,60,000 = 140,40,000

Liquidator’s Final Statement

Answer No 15:
Liquidator’s Final Statement
Receipts Rs. Rs. Payments Rs.
Rs.
Cash at Bank 60,000 Liquidation expenses 4,600
Assets realised:
Sundry Debtors 160,000 Liquidator‘s remuneration (W.N. 1) 30,400
Stock 120,000 Debenture holders:
Plant & Machinery 360,000 640,000 10% debentures 200,000
Surplus from Land & Interest accrued (W.N.2) 15,000 215,000
Buildings: Preferential creditors 30.000
Amount realised 340,000 Unsecured creditors 370,000
Less: Secured Preference shareholders:
Creditors 100,000 240,000 10% Preference Share
Capital 200,000
Arrear dividend 40,000 240,000
Equity Shareholders
(W.N. 3) :
Rs. 17.50 per share
on 2,000 shares 35,000
Rs. 2.50 per share
on 6,000 shares 15,000 50,000
940,000 940,000
Working Notes:
(1) Liquidator’s remuneration: Rs.
3% on Assets realised (3% of Rs. 980,000) 29,400
2% of the amounts distributed among Equity Shareholders
(2/102 × Rs. 51,000) 1,000
30,400
(2) Interest accrued on 10% debentures
Interest accrued as on 31.3.2073 10,000
Interest accrued upto the date of payment
(upto 31st Ashwin, 2073) 5,000
 15,000
(3) Amount payable to Equity Shareholders
Equity Share Capital 510,000
Less: Surplus available for Equity Shareholders 50,000
Loss to be borne by them 460,000
Loss per Equity share (Rs. 460,000/8,000) 57.50
Amount payable to Equity shareholders:
Each Equity share of Rs. 75 paid up 17.50
Each Equity share of Rs. 60 paid up 2.50

Accounting for Partnership

Answer No 16:
Dr. Profit & Loss Account
Cr.
Date Particulars Amount Date Particulars Amount
2074 NPR 2074 NPR
Ashad To Loss for the year 25,000 Ashad By Loss transferred to
31 To Interest on Capitals 31 Amar's Capital 22,000
Amar's Capital 14,000 Bishnu's Capital 11,000
Bishnu's Capital 14,000 Chetan's Capital 22,000 55,000
Chetan's Capital 2,000 30,000

55,000 55,000

Dr. Realization Account

Cr.
Date Particulars Amount Date Particulars Amount
2074 NPR 2074 NPR
Ashad To Patents & Trade Marks 24,000 Ashad By Amar's Capital-
31 To Sundry Debtors 115,000 31 Debtors at Dhankuta 67,500
To Furniture 21,000 Furniture at Dhanluta 10,000
To Stock 133,000 Stock at Dhankuta 46,000
To Cash (Expenses) 4,000 Total 123,500
Less : 10% 12,350 111,150
By Bishnu's Capital
Debtors at Pokhara 32,500
Furniture at Pokhara 5,000
Stock at Pokhara 34,000
Total 71,500
Less : 10% 7,150 64,350

By Shares in New Company Ltd 60,000

By Loss transferred to:

Amar's Capital 24,600
Bishnu's Capital 12,300
Chetan's Capital 24,600 61,500

297,000 297,000

Dr. Sundry Creditor Account

Cr.
Date Particulars Amount Date Particulars Amount
2074 NPR 2074 NPR
Ashad To Cash 69,800 Ashad By Balance b/d 69,800
31 31
69,800 69,800

Dr. Cash Account

Cr.
Date Particulars Amount Date Particulars Amount
2074 NPR 2074 NPR
Ashad To Amar's Capital A/C 46,533 Ashad By Realization A/c (Expenses) 4,000
31 31 By Sundry Creditors 69,800
To Bishnu's Capital A/C 23,267
(Cash advance to pay creditors)
To Amar's Capital A/C
(Cash paid for expenses) 4,000

73,800 73,800

Dr. Shares in New Company Ltd.

Cr.
Date Particulars Amount Date Particulars Amount
2074 NPR 2074 NPR
Ashad To Realization A/c 60,000 Ashad By Bishnu's Capital A/c 60,000
31 31
60,000 60,000

Dr. Partners’ Capital

Cr.
Particulars Amar Bishnu Chetan Particulars Amar Bishnu Chetan

To Drawings 22,720 19,920 9,160 By Balance b/d 140,000 140,000 20,000

To Profit & Loss A/c 22,000 11,000 22,000 By Interest on Capital 14,000 14,000 2,000
To Balance c/d 109,280 123,080 - By Balance c/d - - 9,160

154,000 154,000 31,160 154,000 154,000 31,160

To Balance b/d 9,160 By Balance b/d 109,280 123,080
To Realization A/c 111,150 64,350 By Cash 46,533 23,267
(Assets taken over) 24,600 12,300 24,600 By Cash Expenses 4,000
To Realization (loss) By Amar's Capital A/c 15,880
To Chetan's Capital A/c 15,880 17,880 By Bishnu Capital A/c 17,880
To Shares in New Co. Ltd. 60,000 By Bishnu's Capital A/c 8,183
To Amar's Capital ( Cash (Cash paid to Amar)
received from Bishnu) 8,183
159,813 154,530 33,760 159,813 154,530 33,760
Note: Chetan's loss has been divided between Amar and Bishnu in the ratio of 109,280 : 123,080
respectively.

Accounting for Non-profit making organization

Answer No 17:

Balance Sheet of Himalayan Sports Club

As on 31.3.2073
 Liabilities Amount Rs. Assets Amount Rs.
Outstanding Rent 6,000 Building 60,000
Advance Subscription 6,000 Stock of Sports Materials 5,000
Capital Fund 271,000 Prepaid Insurance 3,000
(Balancing figure) Subscription receivable 12,000
12% Investment – General Fund 200,000
Cash balance 1,000
Bank balance 2,000
283,000 283,000

Balance Sheet of Himalayan Sports Club

As on 31.3.2074
Liabilities Amount Rs. Assets Amount Rs.
Outstanding Rent 3,000 Building (less depreciation) 54,000
Advance Subscription 4,000 Furniture (less depreciation) 18,000
Advance Locker Rent 2,000 Stock of Sports Materials 2,000
Bank Overdraft 2,000 Prepaid Insurance 6,000
Subscription receivable 8,000
Capital Fund Locker Rent receivable 6,000
Opening 12% Investment – General Fund 200,000
271,000 Accrued interest 4,000
Add: Entrance fee (40%) Cash balance 64,000
8,000 351,000
Add: Life M. Fee (60%)
12,000
Add: Surplus
60,000

362,000 362,000

Accounting for Banks

Answer No 18.
As per the provision of the NRB Directives, a bank can provide credit up to 25% of its core
capital to a single party. This limit is called the single obligor limit (SOL). While calculating
the SOL, core capital of previous quarter shall be taken as base. In case any excess credit than
SOL, additional 100% provision shall be made for such excess credit amount.
Before calculating the provision amount, SOL of the bank shall be tested upon.

Computation of SOL and credit amount in excess of SOL

Particulars Amount
Core Capital
Paid up Equity Share Capital 171,010
General reserve 155,432
Retained earnings 87,886
Un-audited current year cumulative profit 31,991
Less: Deferred Revenue expenses (2,884)
Total Core capital 443,435
Single obligor limit ( 25% of the core capital) 110,859
Loan to single party 125,000
Loan in excess of SOL 14,141
Computation of loan loss provision amount as per NRB Directive

Computation of Loan Loss Provision amount

 Categories Loan Amt Provision Provision
Rate Amount
Not due or <=3 months Pass 1,673,000 1% 16,730
>3 months <= 6 mths Sub-standard 13,612 25% 3,403
>6 months <= 12 mths Doubtful 782 50% 391
>12 months Loss 2,198 100% 2,198
Total 1,689,592 22,722
Additional provision for loan in excess of SOL 14,141
Total Provision amount 36,863

Mechi Bank Ltd

Movement in Provision Amount
For Third Quarter of Fiscal Year 2074/75
Amount in NPR
Particulars Amount
Opening Provision amount 16,983
Closing Provision amount 36,863
Movement in provision amount (addition during the quarter) 19,880

19. Answer:
a. Calculation of Total Risk Weighted Assets = 213,546 + 4,235 + 1,618 = 219,399

b. Calculation of Core Capital

Particular Amount
Paid up Capital 20,000
General Reserve Fund 377
Retained Earnings 308
Profit for current year 1,945
Less: Loan Given to Relatives of Staffs (37)
Total core capital 22,593

c. Supplementary Capital
Particular Amount
General Loan Loss Provision 1,215
Investment Adjustment Reserve 22
Total Supplementary Capital 1,237

d. Core Capital Ratio = 22,593 X 100/ 219,399 = 10.29%

e. Total Capital Adequacy Ratio = (22,593 + 1,237) X 100/ 219,399 = 10.86%
f. Compliance with NRB Directives
Particular NRB Actual
Requirement
Core Capital Ratio 6% 10.29%
Total Capital Adequacy Ratio 10% 10.86%

Accounting for Departments

20. Answer:
Calculation of Correct Profit
Dept. Dept. Dept.
Blue Black Pink
 Rs. Rs. Rs.
Profit after charging managers‘ commission 36,000 27,000 18,000
Add back: Managers‘ commission (1/9) 4,000 3,000 2,000
40,000 30,000 20,000
Less: Unrealized profit on stock
(Working Note) 4,000 4,500 2,000
Profit before Manager‘s commission 36,000 25,500 18,000
Less: Commission for Department
Manager @10% 3,600 2,550 1,800
32,400 22,950 16,200
Working Note:
Stock lying with
Dept. Blue Dept. Black Dept. Pink Total
Rs. Rs. Rs. Rs.
Unrealized Profit of:
Department Blue 1/5×15,000 =3,000 1/11×11,000 =1,000 4,000
Department Black 0.15×14,000 =2,100 0.20×12,000 =2,400 4,500
Department Pink 1/6×6,000 =1,000 1/5×5,000 =1,000 2,000

Nepal Accounting Standards

21. Answers:

a) According to NAS - 18 on Revenue, revenue from the sale of goods shall be recognized
when
 the seller of goods has transferred to the buyer the significant risks and rewards of
ownership of the goods;
 the seller retains neither continuing managerial involvement to the degree usually
associated with ownership nor effective control over the goods sold;
 the amount of revenue can be measured reliably.
 It is probable that the economic benefits associated with the transaction will flow to the
entity; and
 The costs incurred or to be incurred in respect of the transaction can be measured
reliably.

Since the transport bills were sent through the bank for collection, it may be said that the
seller entity has retained effective control over the ownership of goods. Further since the
documents were not cleared by the customer even after the expiry of the normal period of
collection, there is an uncertainty in the realization of sale proceeds. Hence, revenue should
not be recognized in this case.

(b). The borrowing costs incurred by an entity to finance prepayments on a qualifying asset are
capitalised on the same basis as the borrowing costs incurred on assets constructed by the
entity.
The capitalisation starts when all three conditions are met: expenditures are incurred,
borrowing costs are incurred, and the activities necessary to prepare the asset for its
intended use or sale are in progress.
Expenditures on the asset are incurred when the prepayments are made (payments of the
instalments). Borrowing costs are incurred when borrowing is obtained. The last condition
 – the activities necessary to prepare the asset for its intended use or sale are in progress –
can vary depending on facts and circumstances. When the construction process by the third
party does not start at the prepayment date, management assesses whether it is appropriate
to start capitalisation from this date or whether it should be deferred to a later date.

(c). As per NAS 37 ‗Provisions, contingent liabilities and contingent assets‘ a provision should
be recognised when;
(a) an enterprise has a present obligation as a result of a past event.
(b) it is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; and
(c) a reliable estimate can be made of the amount of the obligation. If these conditions are
not met, no provision should be recognised.
In the given situation the directors of the company are of the opinion that the claim can be
successfully resisted by the company, therefore there will be no out flow of the resources.
The company will disclose the same as contingent liability by way of the following notes:
‗Ligation is in process against the company relating to a dispute with a competitor who
alleges that the company has infringed patents and is seeking damages of Rs. 20 millions.
However, the directors are of the opinion that the claim can be successfully resisted by the
company.‘
(d). Nepal Accounting Standard (NAS) 10 ‗Events after the reporting period‘, states that
adjustments to assets and liabilities are not appropriate for events occurring after the
balance sheet date, if such events do not relate to conditions existing at the balance sheet
date. The destruction of warehouse due to earthquake did not exist on the balance sheet
date i.e. 31.3.2072. Therefore, loss occurred due to earthquake is not to be recognized in
the financial year 2071-72.
However, unusual changes affecting the existence or substratum of the enterprise after the
balance sheet date may indicate a need to consider the use of fundamental accounting
assumption of going concern in the preparation of the financial statements. As per the
information given in the question, the earthquake has caused major destruction; therefore
fundamental accounting assumption of going concern is called upon.
Hence, the fact of earthquake together with an estimated loss of Rs. 25 lakhs should be
disclosed in the report of the directors for the financial year 2071-72.
(e). ‗Other Comprehensive Income’s per NAS
Other comprehensive income comprises items of income and expenses (including
reclassification adjustments) that are not recognized in profit and loss as required or
permitted by other NFRSs.
The components of other comprehensive income include;
1. changes in revaluation surplus
2. re-measurements of defined benefit plans
3. gains and losses arising from translating the financial statements of a foreign operation
4. gains and losses from investments in equity instruments measured at fair value through
other comprehensive income in accordance NFRS related with financial instruments
5. the effective portion of gains and losses on hedging instruments in a cash flow hedge
6. for particular liabilities designed as at fair value through profit or loss, the amount of
the change in the fair value that is attributable to changes in the liability‘s credit risk.
(f). The investments other than investment in properties are not qualifying assets as per NAS-
23 Borrowing Costs. Therefore, interest cost of holding such investments cannot be
capitalized. Further, even interest in respect of investment properties can only be
 capitalized if such properties meet the definition of qualifying asset, namely, that it
necessarily takes a substantial period of time to get ready for its intended use or sale. Also,
where the investment properties meet the definition of ‗qualifying asset‘, for the
capitalization of borrowing costs, the other requirements of the standard such as that
borrowing costs should be directly attributable to the acquisition or construction of the
investment property and suspension of capitalization as per NAS-23 have to be complied
with.

Write Short Notes

22. Answers:
(a). Contingent Assets
An entity shall not recognize a contingent asset.
1. Contingent assets usually arise from unplanned or other unexpected events that
give rise to the possibility of an inflow of economic benefits to the entity. An
example is a claim that an entity is pursuing through legal processes, where the
outcome is uncertain.
2. Contingent assets are not recognized in financial statements since this may result
in the recognition of income that may never be realized. However, when the
realization of income is virtually certain, then the related asset is not a contingent
asset and its recognition is appropriate.
3. A contingent asset is disclosed, as required by paragraph 89, where an inflow of
economic benefits is probable.
4. Contingent assets are assessed continually to ensure that developments are
appropriately reflected in the financial statements. If it has become virtually certain
that an inflow of economic benefits will arise, the asset and the related income are
recognized in the financial statements of the period in which the change occurs. If
an inflow of economic benefits has become probable, an entity discloses the
contingent asset.

(b). Watch list in Loan loss provisioning

Nepal Rastra Bank has formulated a new category of loan for provisioning purposes. As
per the Central Bank‘s Rule, all loans are required to be classified into 5 different
categories including Watch List whereby 5% of the total loan is required to be kept as
provisioning though the provision can be reversed when the loan becomes performing
later. Provision made for watch list loans is a general loan loss provision. As per the
circular issued by Central Bank, the loans having the following characteristics are to be
classified as Watch List loans:
1. If interest and principal repayments are outstanding for more than a month.
2. Short term/Working Capital Loans that are not renewed on time and are renewed on
temporary basis.
3. Loans and advances to customers/ group of customers who have been categorized as
non performing by other banks and financial institutions.
4. Firms/Companies/Organizations having negative net worth or net loss though
interest and principal are served on regular basis.
5. Specifically specified by NRB after due inspection.
(c). Leases
A lease is a contract calling for the lessee (user) to pay the lessor (owner) for use of the
property. A rental agreement is a lease in which the asset is tangible property. Leases for
intangible property can include use of a computer program (similar to a license, but with
different provisions), or use of a radio frequency (such as a contract with a cell-phone
provider). It is a written agreement under which a property owner allows a tenant to use
the property for a specified period of time and rent. The lease will either provide specific
provisions regarding the responsibilities and rights of the lessee and lessor, or there will be
automatic provisions as a result of local law. In general, by paying the negotiated fee to the
lessor, the lessee (also called a tenant) has possession and use (the rental) of the leased
property to the exclusion of the lessor and all others except with the invitation of the tenant

(d). Government Accounting System in Nepal

Government Accounting System in Nepal is generally on Cash Basis. It has set chart of
accounts under which revenue and expenditure are accounted for. It follows double entry
system; however, do not follow the mercantile system of accounting. Government
accounting system broadly classifies expenditure into administrative and development
expenses. Accounting system followed by the government differentiates Capital
expenditures and revenue expenditure in its subsidiary records. Office of the Financial
Comptroller General specifies the chart of accounts under which all the government
revenue and expenditure are to be accounted for.
(e). Debt Service Coverage Ratio
The ratio is a key financial ratio for the lenders.
 Debt servicing means timely payment of principal amount of instalments plus
interest.
 Borrower should be able to service the debt out of the profits. Profit means the
profit available for debt servicing.
 This ratio is calculated as:
Profit available for Debt Servicing
Loan instalments +Interest

 This ratio normally should be 1.33 but a higher coverage is of advantage

to the business as it improves its strength to service the debts promptly

(f). Advantages of customized Accounting packages

Following are the advantages of the customized accounting packages:
 The input screens can be tailor made to match the input documents for ease of
data entry.
 The reports can be prepared as per the specification of the organization. Many
additional MIS reports can be included in the list of reports.
 Bar-code scanners can be used as input devices suitable for the specific needs of
and individual organization.
 The system can suitably match with the organizational structure of the company.

(g). Non Banking Assets

Bank can sale the property which has taken as collateral security, against loan and
advances given to the borrower in case of default, to recover outstanding principal and
interest amount. If such properties couldn‘t be sold through auction then the bank can
assume the properties in its own name. Such assumed property is called ‗Non Banking
 Asset (NBA)‘. Recognition of the NBA should be done at lower of total outstanding
amount (principal plus accrued interest thereon as on the date of assume) and prevailing
market value of the properties. The difference between the two should be recorded as an
expense in the year of assume. As per the requirement of the Unified Directives of Nepal
Rastra Bank (NRB), 100% provision should be provided to total value of NBA from the
year of assume. It means institution shouldn‘t hold NBA.

(h). Re-insurance
In general insurance there are risks which, because of their magnitude or nature, one
insurance company cannot afford to cover, e.g., aviation insurance. Generally, in such
cases, an insurance company insures the whole risk itself and lays off the amount it has
accepted to other insurance of reinsurance companies, retaining only that much risk which
it can absorb.
A reinsurance transaction may thus be defined as an agreement between a 'ceding company'
and a 're-insurer' whereby the former agrees to 'cede' and the later agrees to accept a certain
specified share of risk or liability upon terms as set out in the agreement.
Paper 2: Audit and Assurance
 Questions

Question No 1:
Explain audit risk and the components of audit risk.

Question No 2
Define a ‗test of control‘ and provide an example of a test of control in relation to the audit
of wages and salaries;

Question No 3
Define a ‗substantive procedure‘ and provide an example of a substantive procedure in
relation to the audit of wages and salaries.

Question No 4
NSA 500 Audit Evidence requires auditors to obtain sufficient and appropriate audit
evidence. Appropriateness is a measure of the quality of audit evidence; that is, its relevance
and its reliability. Identify and explain the factors which influence the reliability of audit
evidence

Question No 5
Auditors are required to perform an overall review of the financial statements before they
provide their audit opinion. Explain the procedures an auditor should perform in conducting
their overall review of the financial statements

Question No 6
You are a member of the recently formed internal audit department of Nepal Food
Company Ltd The company manufactures tinned fruit and vegetables which are supplied to
large and small food retailers. Management and those charged with governance of Nepal
Food Company Ltd have concerns about the effectiveness of their sales and dispatch system
and have asked internal audit to document and review the system. In the Sales and dispatch
system , Sales orders are mainly placed through company‘s website but some are made via
telephone. Online orders are automatically checked against inventory records for
availability; telephone orders, however, are checked manually by order clerks after the call.
A follow-up call is usually made to customers if there is insufficient inventory. When taking
telephone orders, clerks note down the details on plain paper and afterwards they complete a
three part pre-printed order form. These order forms are not sequentially numbered and are
sent manually to both dispatch and the accounts department. As the company is expanding,
customers are able to place online orders which will exceed their agreed credit limit by
10%. Online orders are automatically forwarded to the dispatch and accounts department. A
daily pick list is printed by the dispatch department and this is used by the warehouse team
to dispatch goods. The goods are accompanied by a dispatch note and all customers are
required to sign a copy of this. On return, the signed dispatch notes are given to the
warehouse team to file. The sales quantities are entered from the dispatch notes and the
authorized sales prices are generated by the invoicing system. If a discount has been given,
this has to be manually entered by the sales clerk onto the invoice. Due to the expansion of
the company, and as there is a large number of sale invoices, extra accounts staff have been
asked to help out temporarily with producing the sales invoices. Normally it is only two
sales clerks who produce the sales invoices.
Identify and explain the deficiencies in Nepal Food Company Ltd Co‘s sales and dispatch
system and provide a recommendation to address each of these deficiencies.
Question No 7
Explain the relationship between the planning, executing, and reporting stages of an audit.
Why is risk identification in the first stage?

Question No 8
When gaining an understanding of a client, an auditor will be interested in an entity‘s
relationships with both its suppliers and customers. What aspects of these relationships will
the auditor be interested in and how would they affect the assessment of audit risk?

Question No 9
What does it mean a business is a ―going concern‖ or, alternatively, has ―going concern
issues‖? Why must an auditor specifically consider evidence about the going concern
assessment for each client? What are mitigating factors in the context of the going concern
assessment? Give some examples of mitigating factors for a loss-making client.

Question No 10
Why does an auditor need to understand a client‘s IT system? Explain how IT affects the
financial statements

Question No 11
Give an example of a client closing procedure. Using your example, explain the accounts
that would be affected if the closing procedure is performed inadequately.

Question no 12
Forming an Opinion and Reporting on Financial Statements requires auditors to produce an
audit report. This report should contain a number of consistent elements so that users are
able to understand what the audit report means. Required: Describe the elements of an
unmodified auditor‘s report and for each explain why they are included.

Question No 13
ILife Insurance Co (ILife) has been trading for 15 years selling insurance and has recently
become a listed company. In accordance with corporate governance principles ILife
maintains a internal audit department of two staff. The directors feel that the internal audit
department needs to increase in size and specialist skills are required, but they are unsure
whether to recruit more internal auditors, or to outsource the whole function to the JRH &
associates(CA).
Required: (a) Explain the advantages and disadvantages for each of ILife Enterprises Co
AND JRN & associate of outsourcing the internal audit department.

Question No 14
For the audit of the inventory cycle and year-end inventory balance of Nepal Glass Co Ltd:
(i) Describe the audit procedures that could be carried out using computer-assisted audit
techniques (CAATS);
(ii) Explain the potential advantages of using CAATs; and
(iii) Explain the potential disadvantages of using CAATs.

Question No 15
Explain the purpose of, and procedures for, obtaining written representations

Question No 16
List the sources of information that would be of use in gaining an understanding of Client
business, and for each source describe what you would expect to obtain.
Question No 17
Explain the audit assertion used by the auditor in obtaining the audit evidence?

Question No 18
Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate evidence in relation to purchases and other expenses.

Question No 19
Describe substantive procedures the auditor should perform to verify each of the following
assertions in relation to receivables:
(i) Accuracy, valuation and allocation;
(ii) Completeness; and
(iii) Rights and obligations.

Question No 20
Describe substantive procedures the auditor should perform to confirm the redundancy
provision at the year end.

Question No 21
Non statistical sampling is an audit sampling technique in which the risk of sampling error
is estimated by the auditors using professional judgment rather than by the laws of
probability. Statistical sampling involves the quantification of the risk of sampling error
through the use of mathematics and laws of probability. Explain Statistical sampling and
methods of Statistical sampling
Question No 23
How do you vouch the Patents right obtained by the company?
Question No 24
How do you vouch refund of General Insurance Premium paid?
Question No 25
Nepal Brick Manufacture Pvt. Ltd. has submitted the financial statements for the year
ended 31.03.2073 for audit. The audit assistant observes and brings to your notice that
the company's records show following dues:
Demand for Environment Hazard relating to financial Year 2070-71 R s 36 lacs -
Appeal is pending before District Court since 30-9-72.
As an auditor, how would you bring this fact to the members?
Question No 26
Director of Mega Trend Ltd. draws an advance of Rs 280 per day in connection with the
foreign trip undertaken on behalf of the company. On his return ,he submit the hotel bill
of Rs170 and for remaining amount he files a declaration stating that amount was spend
on local market and local travelling for which no bill was provided. Mega Trend Ltd.
books the balance expenses on the basis of such declaration. As the auditor of Mega
Trend Ltd. how do you deal with this?