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PROFIT/(LOSS) PRIOR TO INCORPORATION

Class Work Question No 5
ABC Ltd. was incorporated on 1.5.2013 to take over the business of DEC and Co. from 1.1.2013.
The Profit and Loss Account as given by ABC Ltd. for the year ending 31.12.2013 is as under :
Profit and Loss Account
Particulars Rs. Particulars Rs.
To Rent and Taxes 90,000 By Gross Profit 10,64,000
To Salaries including Manager’s 3,31,000 By Interest on Investments 36,000
salary of Rs. 85,000
To Carriage Outwards 14,000
To Printing and Stationery 18,000
To Interest on Debentures 25,000
To Sales Commission 30,800
To Bad Debts (related to sales) 91,000
To Underwriting Commission 26,000
To Preliminary Expenses 28,000
To Audit Fees 45,000
To Loss on Sale of Investments 11,200
To Net Profit 3,90,000
Total 11,00,000 Total 11,00,000
Prepare a statement showing allocation of pre-incorporation and post-incorporation profits
after considering the following informations :
a. G.P. ratio was constant throughout the year.
b. Sales for January and October were 1 ½ times the average monthly sales while sales for
December were twice the average monthly sales.
c. Bad Debts are shown after adjusting a recovery of Rs. 7,000 of Bad Debt for a sale made
in July, 2010.
d. Manager’s salary was increased by Rs. 2,000 p.m. from 1.5.2013.
e. All investments were sold in April, 2013.

Class Work Question No 11 (QP May 2019)

Tarun Ltd. was incorporated on 1st July, 2018 to acquire a running business of Vinay Sons with
effect from 1st April, 2018. During the year 2018-19, the total sales were ` 12,00,000 of which

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` 2,40,000 were for the first six months. The Gross Profit for the year is ` 4,15,000. The expenses
debited to the Profit and Loss account included:
(i) Director’s fees ` 25,000
(ii)Bad Debts ` 6,500
(iii)Advertising ` 18,000 (under a contract amounting to ` 1,500 per month)
(iv)Company Audit Fees ` 15,000
(v) Tax Audit Fees ` 10,000
Prepare a statement showing pre-incorporation and post-incorporation profit for the year
ended 31st March, 2019. And also explain how profits are to be treated.

Class Work Question No 12 (RTP May 2019 )

Lotus Ltd. was incorporated on 1st July, 2017 to acquire a running business of Feel goods with
effect from 1st April, 2017. During the year 2017-18, the total sales were ` 48,00,000 of which
` 9,60,000 were for the first six months. The Gross profit of the company ` 7,81,600. The
expenses debited to the Profit & Loss Account included:
(i) Director's fees ` 60,000
(ii) Bad debts ` 14,400
(iii) Advertising ` 48,000 (under a contract amounting to ` 4,000 per month)
(iv) Salaries and General Expenses ` 2,56,000
(v) Preliminary Expenses written off ` 20,000
(vi) Donation to a political party given by the company ` 20,000.
Prepare a statement showing pre-incorporation and post-incorporation profit for the year
ended 31st March, 2018.

MCMR Question No 1
ICAI Module Illustration No. 1 Easy
Rama Udyog Limited was incorporated on August 1 2013. It had acquired a running business of Rama
& Co. with effect from April 1 2013. During the year 2013-14 the total sales were 36,00,000.The sales
per month in the first half year were half of what they were in the later half year. The net profit of
the company 200000 was worked out after charging the following expenses:

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i) Depreciation Rs.123000
ii) Directors’ fees Rs.50000
iii) Preliminary expenses Rs. 12000
iv) Office expenses 78000
v) Selling expenses Rs.72000 and
vi) Interest to vendors upto August 31 2013, Rs.5000.
Please ascertain pre-incorporation and post-incorporation profit for the year ended 31st March 2014.
Answer:
Calculation of pre and post incorporation periods
Particulars Basis Pre. Post Total
Gross profit (sales ratio) 2:7 120000 420000 540000
Less
Depreciation (time ratio) 1:2 41000 82000 123000
Directors fees Post - 50000 50000
Preliminary expenses Post - 12000 12000
Office expenses (time ratio) 1:2 26000 52000 78000
Selling expenses (sales ratio) 2:7 16000 56000 72000
Interest to vendors (5 months) - 4000 1000 5000
Capital reserve (bal.) 33000 -
Net profit (bal.) - 167000
# Calculation of
gross profit = net profit + indirect expenses
= 200000 + 123000 + 50000 + 12000 + 78000 + 72000 + 5000 = 540000
# Let the sale of first half year be x , hence the sale of later half year will be 2x
Total sales = x + 2x
3600000 = 3x
therefore, x = 1200000
Sale per month in first half year = 1200000/6 = 200000
# Sale for April to July (pre inc. period) = 200000 x 4 = 800000
Sale of post inc. period = 3600000 – 800000 = 2800000
Sales ratio = 8 : 28 = 2 : 7
# Time ratio (pre 4 months):(post 8 months) = 1 : 2

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