(a) A Limited invited applications for 160000 shares of ₹ 10 each at a premium of ₹ 2.50 per share payable as follows :

On Application—₹ 3 per share
On Allotment—₹ 4.50 per share (including premium)
On 1st Call—₹ 2 per share
On 2nd and Final Call—₹

Question

(a) A Limited invited applications for 160000 shares of ₹ 10 each at a premium of ₹ 2.50 per share payable as follows :

On Application—₹ 3 per share
On Allotment—₹ 4.50 per share (including premium)
On 1st Call—₹ 2 per share
On 2nd and Final Call—₹ 3 per share

Applications were received for 340000 shares, out of which applications for 20000 shares were rejected and money refunded to them. The allotment was made pro rata to the remaining applicants. Money overpaid on application was used against allotment money due.

Kapil to whom 4000 shares were allotted failed to pay the allotment money and on his subsequent failure to pay the first call, his shares were forfeited.

Ramu, the holder of 2400 shares, failed to pay the two calls and his shares were forfeited after the final call.

Of the forfeited shares, 4800 shares were re-issued at the rate of ₹ 8 per share credited as fully paid, including the whole of Kapil's forfeited shares.

You are required to give the necessary Journal Entries. (20 marks)

(b) Discuss the concept of a division as an independent profit centre. Compare the Rate of Return Method with the Residual Income Method of performance evaluation of a division. (15 marks)

(c) Explain the following as per the Indian Income-tax Act, 1961 :
(i) Gratuity
(ii) Leave encashment at the time of retirement (9+6=15 marks)

UPSC Answer Check · Accepted Answer

Begin with part (a) requiring precise journal entries for share issue, forfeiture and re-issue—allocate ~40% time given 20 marks; follow with part (b) discussing profit centre concept and comparing ROI vs Residual Income methods (~30% time, 15 marks); conclude with part (c) explaining gratuity and leave encashment provisions under Income-tax Act, 1961 (~30% time, 15 marks). Use tabular format for journal entries, structured comparison for (b), and section-wise legal provisions for (c).
- Part (a): Correct calculation of pro-rata allotment ratio (160000/320000 = 1:2), application money adjustment against allotment, forfeiture of Kapil's shares (4000 shares) and Ramu's shares (2400 shares), re-issue of 4800 shares at ₹8 including Kapil's entire forfeiture, and proper treatment of share premium, calls-in-arrears and capital reserve
- Part (b): Clear definition of profit centre with autonomy features; systematic comparison of Rate of Return Method (percentage return on investment) versus Residual Income Method (absolute rupee excess over minimum required return); discussion of sub-optimization problem under ROI and how RI overcomes it
- Part (c)(i): Gratuity—eligibility criteria (5 years continuous service), calculation formula (15 days wages × completed years), statutory ceiling (₹20 lakhs as per 2017 amendment), tax exemption under Section 10(10) for government employees and least of three limits for non-government employees
- Part (c)(ii): Leave encashment—taxability under Section 10(10AA), distinction between government and non-government employees, calculation of exempt amount (least of 10 months salary, cash equivalent of unavailed leave, ₹25 lakh ceiling, or actual amount received), and treatment of accumulated leave
- Proper journal entry narration, clear headings for each part, and accurate legal section citations (Section 10(10), 10(10AA), Payment of Gratuity Act 1972 provisions)

Dimension	Weight	Max marks	Excellent	Average	Poor
Demand-directive understanding	15%	7.5	For (a), recognizes 'solve' demands precise double-entry bookkeeping with proper narration; for (b), understands 'discuss' and 'compare' require conceptual exposition plus systematic contrast; for (c), grasps 'explain' requires legal interpretation with section numbers and conditions—no mixing of directives across parts	Attempts all parts but treats (a) as rough calculation, (b) as mere listing without comparison, or (c) as general description without specific sections; some directive confusion evident	Fundamental misreading—tries to 'discuss' journal entries or 'solve' the profit centre concept; ignores specific demands of any sub-part
Content depth & accuracy	30%	15	Part (a): All journal entries mathematically correct including pro-rata calculations (excess application money ₹1,60,000 adjusted), forfeiture entries distinguishing Kapil (allotment default) and Ramu (call default), and capital reserve computation; Part (b): Nuanced analysis of ROI's sub-optimization vs RI's goal congruence; Part (c): Exact Section 10(10) and 10(10AA) provisions with current ₹20 lakh/₹25 lakh ceilings	Part (a): Minor calculation errors in pro-rata or forfeiture amounts; Part (b): Basic definitions without critical comparison; Part (c): Outdated exemption limits or confused eligibility criteria	Part (a): Major errors in journal entry logic (wrong accounts debited/credited, ignoring premium); Part (b): No understanding of RI method; Part (c): Complete absence of statutory provisions or wrong Act cited
Structure & flow	20%	10	Clear three-part demarcation with visible headings; Part (a) shows chronological journal sequence (application→allotment→calls→forfeiture→reissue); Part (b) uses two-column comparison table for ROI vs RI; Part (c) uses sub-headings for each component (eligibility, calculation, exemption)	All parts attempted but poor visual separation; running prose in (b) without comparison structure; (c) mixes gratuity and leave encashment; some chronological confusion in (a)	No part identification; random order of entries in (a); (b) and (c) merged without distinction; illegible or illogical sequencing throughout
Examples / case-law / data	20%	10	Part (a): Working notes showing step-by-step calculations (pro-rata ratio, amount due from each defaulter, capital reserve on re-issue); Part (b): Numerical illustration demonstrating ROI sub-optimization versus RI consistency; Part (c): Hypothetical computation of taxable gratuity and leave encashment with actual figures	Part (a): Some working notes but incomplete; Part (b): No numerical illustration; Part (c): Mentions exemption limits without applying to example	No workings in (a)—direct entries without logic; (b) purely theoretical; (c) no figures or examples cited; no evidence of contemporary amendments (2017/2023)
Conclusion & analytical edge	15%	7.5	Part (b) concludes with situational appropriateness—when ROI suffices (comparable divisions) vs when RI is superior (different risk/size profiles); Part (c) notes recent judicial trends on gratuity portability; Part (a) summarizes capital reserve transfer and balance sheet impact; demonstrates integrated understanding across financial accounting, management control and tax law	Brief concluding line in (b) without justification; no synthesis across parts; standard textbook endings without original insight	Abrupt ending after last journal entry; no conclusion in (b) or (c); fails to connect profit centre concept with divisional performance metrics or tax planning implications

(a) A Limited invited applications for 160000 shares of ₹ 10 each at a premium of ₹ 2.50 per share payable as follows : On…

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