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ANSWERS OF MODEL TEST PAPER 5 
INTERMEDIATE COURSE; GROUP I 
PAAPER 1 ADVANCED ACCOUNTING 
1. (i) (d) 
(ii) (c) 
(iii) (b) 
(iv) (a) 
2. (i) (b) 
(ii) (d) 
(iii) (c) 
(iv) (c) 
3. (i) (b) 
(ii) (a) 
(iii) (d) 
(iv) (a) 
4. (a) 
5. (b) 
6. (c) 
Part II- Descriptive questions (70 marks) 
1. (a) (i) Computation of borrowing cost to be capitalized for specific
borrowings and general borrowings based on weighted average 
accumulated expenses 
Date of 
incurrence of 
expenditure 
Amount 
spent 
Financed 
through 
Calculation `
1
st
 April 2023 4,00,000 Specific 
borrowing 
4,00,000 x 12% x 
10/12 
40,000 
1
st
 August 2023 
10,00,00 0
Specific 
borrowing 
10,00,000 x 12% x 
10/12 
1,00,000 
1
st
 December 
2023 
25,00,00 0 General 
borrowing 
25,00,000 x 10.8% 
x 2/12 45,000 
31
st
 January 2024 5,00,000 General 
borrowing 
5,00,000 x 10.8% x 
0/12 
Nil 
1,85,000 
Less: interest income on borrowing (15,000) 
Total amount borrowing cost to be capitalized 1,70,000 
340
Page 2


ANSWERS OF MODEL TEST PAPER 5 
INTERMEDIATE COURSE; GROUP I 
PAAPER 1 ADVANCED ACCOUNTING 
1. (i) (d) 
(ii) (c) 
(iii) (b) 
(iv) (a) 
2. (i) (b) 
(ii) (d) 
(iii) (c) 
(iv) (c) 
3. (i) (b) 
(ii) (a) 
(iii) (d) 
(iv) (a) 
4. (a) 
5. (b) 
6. (c) 
Part II- Descriptive questions (70 marks) 
1. (a) (i) Computation of borrowing cost to be capitalized for specific
borrowings and general borrowings based on weighted average 
accumulated expenses 
Date of 
incurrence of 
expenditure 
Amount 
spent 
Financed 
through 
Calculation `
1
st
 April 2023 4,00,000 Specific 
borrowing 
4,00,000 x 12% x 
10/12 
40,000 
1
st
 August 2023 
10,00,00 0
Specific 
borrowing 
10,00,000 x 12% x 
10/12 
1,00,000 
1
st
 December 
2023 
25,00,00 0 General 
borrowing 
25,00,000 x 10.8% 
x 2/12 45,000 
31
st
 January 2024 5,00,000 General 
borrowing 
5,00,000 x 10.8% x 
0/12 
Nil 
1,85,000 
Less: interest income on borrowing (15,000) 
Total amount borrowing cost to be capitalized 1,70,000 
340
(ii)     Journal Entry 
Date Particulars `   `   
31.1.2024 Building account         Dr. 45,70,000  
  To Bank account 
 To Interest payable  
  (borrowing cost) 
(Being expenditure incurred 
on construction of building 
and borrowing cost thereon 
capitalized) 
 44,00,000 
  1,70,000 
   
Note: In the above journal entry, it is assumed that interest amount will 
be paid at the year end.  Hence, entry for interest payable has been 
passed on 31.1.2024. 
(b) As per AS 2 ‘Valuation of Inventories’, most by-products as well as scrap 
or waste materials by their nature, are immaterial. They are often 
measured at net realizable value and this value is deducted from the cost 
of the main product.  
 Determination of value of closing inventory of Polyester and Nylon 
 Polyester Nylon 
Closing inventory in units 1,600 units 400 units 
Cost per unit ` 31.14 ` 18.68 
Value of closing inventory ` 49,824 ` 7,472 
Working Notes 
1. Calculation of net realizable value of by-product, Fiber 
  ` 
Selling price of by-product Fiber (3,200 units x ` 40 
per unit) 
1,28,000 
Less: Separate processing 
 charges of by-product  
 Fiber 
  
(10,000) 
 Packing charges  (9,000) 
Net realizable value of by-
product Fiber 
 1,09,000 
2. Calculation of cost of conversion for allocation between joint 
products Polyester and Nylon 
 ` ` 
Raw material  3,50,000 
Wages  1,60,000 
Fixed overhead  1,20,000 
341
Page 3


ANSWERS OF MODEL TEST PAPER 5 
INTERMEDIATE COURSE; GROUP I 
PAAPER 1 ADVANCED ACCOUNTING 
1. (i) (d) 
(ii) (c) 
(iii) (b) 
(iv) (a) 
2. (i) (b) 
(ii) (d) 
(iii) (c) 
(iv) (c) 
3. (i) (b) 
(ii) (a) 
(iii) (d) 
(iv) (a) 
4. (a) 
5. (b) 
6. (c) 
Part II- Descriptive questions (70 marks) 
1. (a) (i) Computation of borrowing cost to be capitalized for specific
borrowings and general borrowings based on weighted average 
accumulated expenses 
Date of 
incurrence of 
expenditure 
Amount 
spent 
Financed 
through 
Calculation `
1
st
 April 2023 4,00,000 Specific 
borrowing 
4,00,000 x 12% x 
10/12 
40,000 
1
st
 August 2023 
10,00,00 0
Specific 
borrowing 
10,00,000 x 12% x 
10/12 
1,00,000 
1
st
 December 
2023 
25,00,00 0 General 
borrowing 
25,00,000 x 10.8% 
x 2/12 45,000 
31
st
 January 2024 5,00,000 General 
borrowing 
5,00,000 x 10.8% x 
0/12 
Nil 
1,85,000 
Less: interest income on borrowing (15,000) 
Total amount borrowing cost to be capitalized 1,70,000 
340
(ii)     Journal Entry 
Date Particulars `   `   
31.1.2024 Building account         Dr. 45,70,000  
  To Bank account 
 To Interest payable  
  (borrowing cost) 
(Being expenditure incurred 
on construction of building 
and borrowing cost thereon 
capitalized) 
 44,00,000 
  1,70,000 
   
Note: In the above journal entry, it is assumed that interest amount will 
be paid at the year end.  Hence, entry for interest payable has been 
passed on 31.1.2024. 
(b) As per AS 2 ‘Valuation of Inventories’, most by-products as well as scrap 
or waste materials by their nature, are immaterial. They are often 
measured at net realizable value and this value is deducted from the cost 
of the main product.  
 Determination of value of closing inventory of Polyester and Nylon 
 Polyester Nylon 
Closing inventory in units 1,600 units 400 units 
Cost per unit ` 31.14 ` 18.68 
Value of closing inventory ` 49,824 ` 7,472 
Working Notes 
1. Calculation of net realizable value of by-product, Fiber 
  ` 
Selling price of by-product Fiber (3,200 units x ` 40 
per unit) 
1,28,000 
Less: Separate processing 
 charges of by-product  
 Fiber 
  
(10,000) 
 Packing charges  (9,000) 
Net realizable value of by-
product Fiber 
 1,09,000 
2. Calculation of cost of conversion for allocation between joint 
products Polyester and Nylon 
 ` ` 
Raw material  3,50,000 
Wages  1,60,000 
Fixed overhead  1,20,000 
341
Variable overhead      60,000 
  6,90,000 
Less: NRV of by-product Fiber (W.N. 1) (1,09,000)  
 Sale value of scrap (5,000) (1,14,000) 
Joint cost to be allocated between 
Polyester and Nylon 
 5,76,000 
 Determination of “basis for allocation” and allocation of joint 
cost to Polyester and Nylon 
 Polyester Nylon 
Output in units (a) 12,500 units 10,000 units 
Sales price per unit (b) ` 100 ` 60 
Sales value (a x b) ` 12,50,000 ` 6,00,000 
Total value (12,50,000 + 6,00,000)  
= 18,50,000 
  
Joint cost of ` 5,76,000 allocated in 
the ratio of 12,50,000 : 6,00,000 
` 3,89,189 ` 1,86,811 
Cost per unit [c/a] ` 31.14 ` 18.68 
2.   (1)      Journal Entries  
  In the Books of Z Ltd. as on 1
st
 April 2024 
 Particulars  Dr.  Cr.  
01.04.2024  Amount 
(`) 
Amount 
(`) 
1. Equity share capital A/c  (` 100) Dr. 60,00,000  
  To Equity share capital A/c (` 10)   60,00,000 
 (Being sub-division of one share of  
` 100 each into 10 shares of ` 10 each) 
   
2. Equity share capital A/c (` 10) Dr. 24,00,000  
  To Capital reduction A/c   24,00,000 
 (Being reduction of Equity capital by 
40%) 
   
3. Capital reduction A/c Dr. 1,68,000  
  To Bank A/c   1,68,000 
 (Being payment in cash of 25% of 
arrear of preference dividend) 
[21,00,000x8%] x 4 years 
   
4. Bank A/c Dr. 2,35,200  
  To Own debentures A/c 
 (5,76,000/6,00,000) x 2,40,000 
  2,30,400 
  To Capital reduction A/c    4,800 
 (Being profit on sale of own debentures 
of ` 2,40,000 transferred to capital 
reduction A/c) 
   
342
Page 4


ANSWERS OF MODEL TEST PAPER 5 
INTERMEDIATE COURSE; GROUP I 
PAAPER 1 ADVANCED ACCOUNTING 
1. (i) (d) 
(ii) (c) 
(iii) (b) 
(iv) (a) 
2. (i) (b) 
(ii) (d) 
(iii) (c) 
(iv) (c) 
3. (i) (b) 
(ii) (a) 
(iii) (d) 
(iv) (a) 
4. (a) 
5. (b) 
6. (c) 
Part II- Descriptive questions (70 marks) 
1. (a) (i) Computation of borrowing cost to be capitalized for specific
borrowings and general borrowings based on weighted average 
accumulated expenses 
Date of 
incurrence of 
expenditure 
Amount 
spent 
Financed 
through 
Calculation `
1
st
 April 2023 4,00,000 Specific 
borrowing 
4,00,000 x 12% x 
10/12 
40,000 
1
st
 August 2023 
10,00,00 0
Specific 
borrowing 
10,00,000 x 12% x 
10/12 
1,00,000 
1
st
 December 
2023 
25,00,00 0 General 
borrowing 
25,00,000 x 10.8% 
x 2/12 45,000 
31
st
 January 2024 5,00,000 General 
borrowing 
5,00,000 x 10.8% x 
0/12 
Nil 
1,85,000 
Less: interest income on borrowing (15,000) 
Total amount borrowing cost to be capitalized 1,70,000 
340
(ii)     Journal Entry 
Date Particulars `   `   
31.1.2024 Building account         Dr. 45,70,000  
  To Bank account 
 To Interest payable  
  (borrowing cost) 
(Being expenditure incurred 
on construction of building 
and borrowing cost thereon 
capitalized) 
 44,00,000 
  1,70,000 
   
Note: In the above journal entry, it is assumed that interest amount will 
be paid at the year end.  Hence, entry for interest payable has been 
passed on 31.1.2024. 
(b) As per AS 2 ‘Valuation of Inventories’, most by-products as well as scrap 
or waste materials by their nature, are immaterial. They are often 
measured at net realizable value and this value is deducted from the cost 
of the main product.  
 Determination of value of closing inventory of Polyester and Nylon 
 Polyester Nylon 
Closing inventory in units 1,600 units 400 units 
Cost per unit ` 31.14 ` 18.68 
Value of closing inventory ` 49,824 ` 7,472 
Working Notes 
1. Calculation of net realizable value of by-product, Fiber 
  ` 
Selling price of by-product Fiber (3,200 units x ` 40 
per unit) 
1,28,000 
Less: Separate processing 
 charges of by-product  
 Fiber 
  
(10,000) 
 Packing charges  (9,000) 
Net realizable value of by-
product Fiber 
 1,09,000 
2. Calculation of cost of conversion for allocation between joint 
products Polyester and Nylon 
 ` ` 
Raw material  3,50,000 
Wages  1,60,000 
Fixed overhead  1,20,000 
341
Variable overhead      60,000 
  6,90,000 
Less: NRV of by-product Fiber (W.N. 1) (1,09,000)  
 Sale value of scrap (5,000) (1,14,000) 
Joint cost to be allocated between 
Polyester and Nylon 
 5,76,000 
 Determination of “basis for allocation” and allocation of joint 
cost to Polyester and Nylon 
 Polyester Nylon 
Output in units (a) 12,500 units 10,000 units 
Sales price per unit (b) ` 100 ` 60 
Sales value (a x b) ` 12,50,000 ` 6,00,000 
Total value (12,50,000 + 6,00,000)  
= 18,50,000 
  
Joint cost of ` 5,76,000 allocated in 
the ratio of 12,50,000 : 6,00,000 
` 3,89,189 ` 1,86,811 
Cost per unit [c/a] ` 31.14 ` 18.68 
2.   (1)      Journal Entries  
  In the Books of Z Ltd. as on 1
st
 April 2024 
 Particulars  Dr.  Cr.  
01.04.2024  Amount 
(`) 
Amount 
(`) 
1. Equity share capital A/c  (` 100) Dr. 60,00,000  
  To Equity share capital A/c (` 10)   60,00,000 
 (Being sub-division of one share of  
` 100 each into 10 shares of ` 10 each) 
   
2. Equity share capital A/c (` 10) Dr. 24,00,000  
  To Capital reduction A/c   24,00,000 
 (Being reduction of Equity capital by 
40%) 
   
3. Capital reduction A/c Dr. 1,68,000  
  To Bank A/c   1,68,000 
 (Being payment in cash of 25% of 
arrear of preference dividend) 
[21,00,000x8%] x 4 years 
   
4. Bank A/c Dr. 2,35,200  
  To Own debentures A/c 
 (5,76,000/6,00,000) x 2,40,000 
  2,30,400 
  To Capital reduction A/c    4,800 
 (Being profit on sale of own debentures 
of ` 2,40,000 transferred to capital 
reduction A/c) 
   
342
5. 10% Debentures A/c  
(6,00,000 -2,40,000) 
Dr. 3,60,000  
  To Own debentures A/c   3,45,600 
  To Capital reduction A/c   14,400 
 (Being profit on cancellation of own 
debentures transferred to capital 
reduction A/c)  
   
6. 10% Debentures A/c Dr. 6,00,000  
 Capital reduction A/c Dr. 3,00,000  
  To Machinery or PPE A/c   9,00,000 
 (Being machinery taken up by 
debenture holders for ` 6,00,000) 
   
7. Capital reduction A/c (balancing figure) Dr. 3,00,000  
  To PPE A/c  
      (72,00,000 - 9,00,000 - 60,00,000) 
  3,00,000 
 (Being PPE revalued)    
8. Trade payables A/c  
(16,80,000 -15,00,000) 
Dr. 1,80,000  
  To Trade receivables A/c 
    (13,75,000-13,00,000) 
  75,000 
  To Inventory A/c  
       (9,80,000-9,44,000) 
  36,000 
  To Capital Reduction A/c   69,000 
 (Being assets and liabilities revalued)    
9. Capital reduction A/c Dr. 13,16,000  
  To Goodwill A/c   81,000 
  To Profit and Loss A/c   12,35,000 
 (Being the above assets written off)    
10. Capital reduction A/c Dr. 60,000  
  To Bank A/c   60,000 
 (Being penalty paid for avoidance of 
capital commitments) 
   
11. Capital reduction A/c Dr. 3,44,200  
  To Capital reserve A/c   3,44,200 
 (Being the credit balance in Capital 
Reduction A/c transferred to Capital 
Reserve)  
   
 
  
343
Page 5


ANSWERS OF MODEL TEST PAPER 5 
INTERMEDIATE COURSE; GROUP I 
PAAPER 1 ADVANCED ACCOUNTING 
1. (i) (d) 
(ii) (c) 
(iii) (b) 
(iv) (a) 
2. (i) (b) 
(ii) (d) 
(iii) (c) 
(iv) (c) 
3. (i) (b) 
(ii) (a) 
(iii) (d) 
(iv) (a) 
4. (a) 
5. (b) 
6. (c) 
Part II- Descriptive questions (70 marks) 
1. (a) (i) Computation of borrowing cost to be capitalized for specific
borrowings and general borrowings based on weighted average 
accumulated expenses 
Date of 
incurrence of 
expenditure 
Amount 
spent 
Financed 
through 
Calculation `
1
st
 April 2023 4,00,000 Specific 
borrowing 
4,00,000 x 12% x 
10/12 
40,000 
1
st
 August 2023 
10,00,00 0
Specific 
borrowing 
10,00,000 x 12% x 
10/12 
1,00,000 
1
st
 December 
2023 
25,00,00 0 General 
borrowing 
25,00,000 x 10.8% 
x 2/12 45,000 
31
st
 January 2024 5,00,000 General 
borrowing 
5,00,000 x 10.8% x 
0/12 
Nil 
1,85,000 
Less: interest income on borrowing (15,000) 
Total amount borrowing cost to be capitalized 1,70,000 
340
(ii)     Journal Entry 
Date Particulars `   `   
31.1.2024 Building account         Dr. 45,70,000  
  To Bank account 
 To Interest payable  
  (borrowing cost) 
(Being expenditure incurred 
on construction of building 
and borrowing cost thereon 
capitalized) 
 44,00,000 
  1,70,000 
   
Note: In the above journal entry, it is assumed that interest amount will 
be paid at the year end.  Hence, entry for interest payable has been 
passed on 31.1.2024. 
(b) As per AS 2 ‘Valuation of Inventories’, most by-products as well as scrap 
or waste materials by their nature, are immaterial. They are often 
measured at net realizable value and this value is deducted from the cost 
of the main product.  
 Determination of value of closing inventory of Polyester and Nylon 
 Polyester Nylon 
Closing inventory in units 1,600 units 400 units 
Cost per unit ` 31.14 ` 18.68 
Value of closing inventory ` 49,824 ` 7,472 
Working Notes 
1. Calculation of net realizable value of by-product, Fiber 
  ` 
Selling price of by-product Fiber (3,200 units x ` 40 
per unit) 
1,28,000 
Less: Separate processing 
 charges of by-product  
 Fiber 
  
(10,000) 
 Packing charges  (9,000) 
Net realizable value of by-
product Fiber 
 1,09,000 
2. Calculation of cost of conversion for allocation between joint 
products Polyester and Nylon 
 ` ` 
Raw material  3,50,000 
Wages  1,60,000 
Fixed overhead  1,20,000 
341
Variable overhead      60,000 
  6,90,000 
Less: NRV of by-product Fiber (W.N. 1) (1,09,000)  
 Sale value of scrap (5,000) (1,14,000) 
Joint cost to be allocated between 
Polyester and Nylon 
 5,76,000 
 Determination of “basis for allocation” and allocation of joint 
cost to Polyester and Nylon 
 Polyester Nylon 
Output in units (a) 12,500 units 10,000 units 
Sales price per unit (b) ` 100 ` 60 
Sales value (a x b) ` 12,50,000 ` 6,00,000 
Total value (12,50,000 + 6,00,000)  
= 18,50,000 
  
Joint cost of ` 5,76,000 allocated in 
the ratio of 12,50,000 : 6,00,000 
` 3,89,189 ` 1,86,811 
Cost per unit [c/a] ` 31.14 ` 18.68 
2.   (1)      Journal Entries  
  In the Books of Z Ltd. as on 1
st
 April 2024 
 Particulars  Dr.  Cr.  
01.04.2024  Amount 
(`) 
Amount 
(`) 
1. Equity share capital A/c  (` 100) Dr. 60,00,000  
  To Equity share capital A/c (` 10)   60,00,000 
 (Being sub-division of one share of  
` 100 each into 10 shares of ` 10 each) 
   
2. Equity share capital A/c (` 10) Dr. 24,00,000  
  To Capital reduction A/c   24,00,000 
 (Being reduction of Equity capital by 
40%) 
   
3. Capital reduction A/c Dr. 1,68,000  
  To Bank A/c   1,68,000 
 (Being payment in cash of 25% of 
arrear of preference dividend) 
[21,00,000x8%] x 4 years 
   
4. Bank A/c Dr. 2,35,200  
  To Own debentures A/c 
 (5,76,000/6,00,000) x 2,40,000 
  2,30,400 
  To Capital reduction A/c    4,800 
 (Being profit on sale of own debentures 
of ` 2,40,000 transferred to capital 
reduction A/c) 
   
342
5. 10% Debentures A/c  
(6,00,000 -2,40,000) 
Dr. 3,60,000  
  To Own debentures A/c   3,45,600 
  To Capital reduction A/c   14,400 
 (Being profit on cancellation of own 
debentures transferred to capital 
reduction A/c)  
   
6. 10% Debentures A/c Dr. 6,00,000  
 Capital reduction A/c Dr. 3,00,000  
  To Machinery or PPE A/c   9,00,000 
 (Being machinery taken up by 
debenture holders for ` 6,00,000) 
   
7. Capital reduction A/c (balancing figure) Dr. 3,00,000  
  To PPE A/c  
      (72,00,000 - 9,00,000 - 60,00,000) 
  3,00,000 
 (Being PPE revalued)    
8. Trade payables A/c  
(16,80,000 -15,00,000) 
Dr. 1,80,000  
  To Trade receivables A/c 
    (13,75,000-13,00,000) 
  75,000 
  To Inventory A/c  
       (9,80,000-9,44,000) 
  36,000 
  To Capital Reduction A/c   69,000 
 (Being assets and liabilities revalued)    
9. Capital reduction A/c Dr. 13,16,000  
  To Goodwill A/c   81,000 
  To Profit and Loss A/c   12,35,000 
 (Being the above assets written off)    
10. Capital reduction A/c Dr. 60,000  
  To Bank A/c   60,000 
 (Being penalty paid for avoidance of 
capital commitments) 
   
11. Capital reduction A/c Dr. 3,44,200  
  To Capital reserve A/c   3,44,200 
 (Being the credit balance in Capital 
Reduction A/c transferred to Capital 
Reserve)  
   
 
  
343
2.    Capital Reduction Account 
  (`)   (`) 
To  Bank 1,68,000 By Equity Share Capital 24,00,000 
To  Property, Plant & 
Equipment 
3,00,000 By Trade Payable 1,80,000 
To  Property, Plant & 
Equipment 
3,00,000 By Bank A/c (Profit on 
Sale) 
4,800 
To Trade Receivables 75,000 By 10% debentures A/c 
(Profit on cancellation) 
14,400 
To  Inventory 36,000    
To  Goodwill 81,000    
To  Profit and Loss A/c 12,35,000    
To  Cash/Bank A/c 60,000    
To  Capital Reserve 3,44,200                  
  25,99,200   25,99,200 
3.     Bank Account 
  `    `  
To To balance b/d 1,33,000 By Capital Reduction 1,68,000 
To Own Debenture 2,35,200 By Capital Reduction A/c 60,000 
 (2,30,400 +4,800)                By balance c/d      1,40,200 
  3,68,200   3,68,200 
3. (a) (i)  Stage of completion = Costs incurred to date / Total estimated 
costs 
 Year 1: 98.8 crore / 375 crore = 26.35% 
 Year 2: 202.4 crore / 375 crore = 53.97% 
 Year 3: (310 crore – 3 crore) / (375+7) crore = 80.37% 
 Year 4: 382 crore / 382 crore = 100% 
(ii) Profit to be recognized each year has been calculated as 
follows: 
 Year 1 Year 2 Year 3 Year 4 
Contract 
Revenue 
(1) 
105.40 
crore 
110.48 crore 113.64 crore 80.48 crore 
 (400 crore x 
26.35%) 
(400 crore x 
53.97% - 
105.40 crore) 
(410 crore x 
80.37% 
- 105.40 crore -
110.48 crore) 
(410 crore x 
100% - 105.40 
crore - 110.48 
crore - 113.64 
crore) 
Contract 
Cost (2) 
98.8 crore 103.60 crore 104.60 crore 75 crore 
344
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