No.

1 for CA/CWA & MEC/CEC MASTER MINDS

4. PROFIT OR LOSS PRIOR TO INCORPORATION

SOLUTIONS TO ASSIGNMENT PROBLEMS
Problem No. 1
Trading A/c and Profit and loss a/c for the year ending 31.3.2002
Particulars Pre post Particulars Pre post
To cost of goods sold (WN 2) 2,10,000 5,67,000 By sales (WN 1) 2,40,000 7,20,000
To gross profit c/d 30,000 1,53,000
2,40,000 7,20,000 2,40,000 7,20,000

To rent (WN 3) 7,000 33,000 By gross profit b/d 30,000 1,53,000

To salaries (WN 4) 4,200 16,800
To sales promotion expenses 600 1,800
(WN 5)
To travelling expenses(WN 5) 2,000 4,000
To deprecation (WN 6) 1,500 3,300
To carriage out ward (1:3) 100 300
To printing and stationary 800 1,600
(1:2)
To advertisements(1:3) 2,000 6,000
To miscellaneous 4,200 8,400
expenditures (1:2)
To directors fee (post) - 600
To managing directors - 4,100
remuneration (post)
To bad debts (1:3) 400 1,200
To commission and brokerage 2,000 6,000
(1:3)
To audit fee (post) - 3,000
To interest paid to vendors 1,400 700
(2:1)
To interest on debentures - 1,500
(post)
To selling and distribution 3,000 9,000
expenses(1:3)
To preliminary expenditure - 500
(post)
To underwriting commission - 300
(post)
To capital reserve 800 -
To net profit - 50,900
30,000 1,53,000 30,000 1,53,000

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Working Notes :

1. Computation of sales ratio :

Let the average monthly sales be ‘x’

Pre Post
April -X Aug-X
May-X sep –X
June -X 2 5X
Oct, Nov, Dec, Jan, Feb, Mar. X + X= × 6 =10X
3 3
July-X
4X 2X+10X =12X
4 12
1 3

Sales Ratio = 1:3

2. Computation of cost of goods ratio :

Pre Post
Cost per unit X X – 0.1X = 0.9X
No. of units 1 3
X 2.7X
10 27

Cost of goods Ratio = 10:27

3.

40,000

Original Space Additional Space

13,000 27,000 (3,000 X 9m)

Pre Post
Pre - July 3,000 Post - Aug. to
Rs. 4,000 Rs. 9,000
March 24,000

Pre Post
April –X August –X
May –X September -X
June -X October -X
July -X November to March = 1.2x X 5 = 6X
4X 3X + 6X = 9X

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 No.1 for CA/CWA & MEC/CEC MASTER MINDS
Rent Ratio = 4:9
Copy Rights Reserved
Rent for pre = 4,000+3,000 =7,000
Rent for post = 9,000+24,000 =33,000
To MASTER MINDS, Guntur
4. Computation of salaries ratio :

Pre Post
April –X
May -X
June -X August to March = 3x X 8 = 24x
July – 3X
6X

Salaries Ratio = 6:24 = 1:4

5. Travelling expenses :
Travelling Expenses – 8,400

Selling 2,400 (1:3) 6,000 (1:2)

600 Pre 1,800 Post 2,000 Pre 4,000 Post

6.

Depreciation

300 (Post) 4,500 (1:2)

1,500 (pre) 3,000 post

7. Interest paid to vendors:

6M

Apr. to July 4M Aug. to Sept 2M

4:2 = 2:1

8. Audit fees assumed to be belongs to company audit, hence charged to post period.

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Problem No. 2
Pre-incorporation period is for four months, from 1st January, 2010 to 30th April, 2010. 8 months’ period
(from 1st May, 2010 to 31st December, 2010) is post-incorporation period.

Statement showing calculation of profit/losses for pre and post incorporation periods

Particulars Pre Post

Gross Profit (9:19) 3,42,000 7,22,000
Interest on Investments 36,000 -
Bad debts Recovery 7,000 -
3,85,000 7,22,000
Less : Rent and Taxes(1:2) 30,000 60,000
Salaries :
Manager’s salary (WN g) 23,000 62,000
Other salaries (WN g) 82,000 1,64,000
Printing and stationery (1:2) 6,000 12,000
Audit fees (post) - 45,000
Carriage outwards (9:19) 4,500 9,500
Sales commission (9:19) 9,900 20,900
Bad Debts (91,000 + 7,000) (9:19) 31,500 66,500
Interest on Debentures (finance costs) - 25,000
Underwriting Commission (post) - 26,000
Preliminary expenses (post) - 28,000
Loss on sale of investments (pre) 11,200 −
Net Profit 1,86,900* 2,03,100

* Pre-incorporation profit is a capital profit and will be transferred to Capital Reserve.

Working Notes:
a. Calculation of ratio of Sales
Let average monthly sales be x.

Pre Post
Jan – 1.5X May, June, July, Aug & Sep – 5X
Feb -X Oct - 1.5X
Mar -X Nov - X
April – 3X Dec - 2X
4.5X 9.5X
Thus Sales from January to April are 4½ x and sales from May to December are 9½ x. Sales are in
the ratio of 9/2x : 19/2x or 9 : 19.
b. Gross profit, carriage outwards, sales commission and bad debts written off have been allocated in
pre and post incorporation periods in the ratio of Sales i.e. 9 : 19.
c. Rent, salaries, printing and stationery, audit fees are allocated on time basis.
d. Interest on debentures, underwriting commission and preliminary expenses are allocated in post
incorporation period.

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 No.1 for CA/CWA & MEC/CEC MASTER MINDS
e. Interest on investments, loss on sale of investments and bad debt recovery are allocated in pre-
incorporation period.
f. Audit fees assumed to be relating to company audit, hence charged to post period. Hence charged
to post period.
g. Total salaries paid Rs.3,31,000

Total Salaries Paid Rs. 3,31,000

Managers Salary Rs.85,000 Others Salary Rs.2,46,000

23,000 (pre) 62,000 (post) 82,000 (pre) 1,64,000 (post)

Problem No.3
Time ratio:
Pre incorporation period (01.04.2009 to 01.08.2009) = 4 months
Post incorporation period (01.08.2009 to 31.03.2010) = 8 months
Time Ratio = 4 : 8 or 1 : 2

Sales ratio: Average monthly sales before incorporation was twice the average sale per month of the
post incorporation period. If weightage for each post-incorporation month is x, then
Weighted sales ratio = 4 X 2x : 8 X 1x
= 8x : 8x or 1 : 1 Copy Rights Reserved
To MASTER MINDS, Guntur
Problem No.4

Statement showing calculation of profits for pre and post incorporation periods for the year
ended 31.3.2010
Pre-incorporation Post-incorporation
Particulars
period (Rs.) period (Rs.)
Gross profit (1:3) 80,000 2,40,000
Less: Salaries (1:2) 16,000 32,000
Stationery (1:2) 1,600 3,200
Advertisement (1:3) 4,000 12,000
Travelling expenses (W.N.3) 4,000 8,000
Sales promotion expenses (W.N.3) 1,200 3,600
Misc. trade expenses (1:2) 12,600 25,200
Rent (office building) (W.N.2) 8,000 18,400
Electricity charges (1:2) 1,400 2,800
Director’s fee (post) - 11,200
Bad debts (1:3) 800 2,400

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Selling agents commission (1:3) 4,000 12,000
Audit fee (1:3)(note 6) 1,500 4,500
Debenture interest (post) - 3,000
Interest paid to vendor (2:1) (W.N.4) 2,800 1,400
Selling expenses (1:3) 6,300 18,900
Depreciation on fixed assets (W.N.5) 3,000 6,600
Capital reserve (bal. Fig.) 12,800 -
Net profit (Bal.Fig.) - 74,800

Working Notes:
st st
Pre incorporation period = 1 April , 2009 to 31 July, 2009
i.e. 4 months

1. Time Ratio = 4 months : 8 months i.e. 1 : 2

2. Sales ratio:
Let the monthly sales for first 6 months (i. e. from 1.4..2009 to 30.9.09) be = x
Then, sales for 6 months = 6x
2 5
Monthly sales for next 6 months (i.e. from 1.10.09 to 31.3.2010) = x + x = x
3 3
5
Then, sales for next 6 months = x X6 = 10 x
3
Total sales for the year = 6x + 10x = 16x
Monthly sales in the pre incorporation period = Rs.19,20,000 / 16 = Rs.1,20,000
Total sales for pre-incorporation period = Rs.1,20,000 X 4 = Rs.4,80,000
Total sales for post incorporation period = Rs.19,20,000 – Rs.4,80,000 = Rs.14,40,000
Sales Ratio = 4,80,000 : 14,40,000 = 1 : 3

3. Rent:

Particulars Rs. Rs.

Rent for pre-incorporation period (Rs. 2,000 X 4) 8,000
(pre)
Rent for post incorporation period
August, 2009 & September, 2009 (Rs.2,000 X 2) 4,000
October, 2009 to March, 2010 (Rs.2,400 X 6) 14,400 18,400
(post)

4. Travelling expenses and sales promotion expenses:

Particulars Pre (Rs.) Post (Rs.)

Traveling expenses Rs.12,000 (i.e. Rs.16,800 – Rs.4,800) 4,000 8,000
distributed in 1:2 ratio
Sales promotion expenses Rs.4,800 distributed in 1:3 1,200 3,600
ratio

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 No.1 for CA/CWA & MEC/CEC MASTER MINDS
th
5. Interest paid to vendor till 30 September, 2009:

Particulars Pre (Rs.) Post (Rs.)

 Rs.4,200  2,800
Interest for pre-incorporation period  X 4
 6 

Interest for post incorporation period i.e. for August, 2009 1,400
 Rs.4,200 
& September, 2009 =  X 2
 6 

6. Depreciation:

Pre Post
Particulars Rs.
(Rs.) (Rs.)
Total depreciation 9,600 - -
Less: Depreciation exclusively for post incorporation period 600 - 600
9,000 - -
 4 - 3,000 -
Depreciation for pre-incorporation period 9,000 X
 12 

 8 - - 6,000
Depreciation for post incorporation period 9,000 X
 12 
- 3,000 6,600

Audit fees is assumed to be Tax audit fees, hence allocated on Sales ratio. i.e. 1 : 3

Problem No.5
st
Statement showing pre and post incorporation profit for the year ended 31 March, 2012

Total Pre Post-

Basis of
Particulars Amount incorporation Incorporation
Allocation
(Rs.) Rs. Rs.
Gross Profit(Wn 3) 5,40,000 2:7 1,20,000 4,20,000
Less: Depreciation 1,08,000 1:2 36,000 72,000
Director’s Fees 50,000 Post - 50,000
Preliminary Expenses 12,000 Post- - 12,000
Office Expenses 78,000 1:2 26,000 52,000
Interest to vendors 5,000 Actual 4,000 1,000
Net Profit (Rs.54,000 being 2,87,000 54,000 2,33,000
pre incorporation profit is
transferred to capital reserve
Account)

Working Notes:

1. Sales ratio: The sales per month in the first half year were half of what they were in the later half
year. If in the later half year, sales per month is Re.1 then it should be 50 paise per month in the
st st
first half year. So sales for the first four months (i.e. from 1 April, 2011 to 31 July, 2011) will be 4
X .50 = Rs.2. Thus sales ratio is 2:7. Post period sales Aug. to Sep=1x , Oct to mar=6x , Total=7x.

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2. Time ratio:
st st st st
1 April, 2011 to 31 July, 2011:1 August, 2011 to 31 March, 2012
= 4 months : 8 months = 1:2
Thus, time ratio is 1:2 Copy Rights Reserved
To MASTER MINDS, Guntur
3. Gross profit:
Gross profit = Net profit + All expenses
= Rs.2,00,000 + Rs.(1,08,000 + 15,000 + 50,000 + 12,000 + 78,000 + 72,000 + 5,000)
= Rs.2,00,000 + Rs.3,40,000 = Rs.5,40,000

4.
Particulars Basis Pre (Rs.) Post (Rs.)
Dividend sales ratio 5,40,000 X 2 / 9 5,40,000X 7/9
1,20,000 4,20,000

5.
Particulars Basis Pre (Rs.) Post (Rs.)
Audit fees Time ratio 5,000 5,000

6.
Particulars Basis Pre (Rs.) Post (Rs.)
Selling expenses sales ratio 16,000 56,000

Problem No.6

(a) Sales of first 6 months = Rs.4,80,000. Average sale of first 6 months = Rs.4,80,000/6 = Rs.80,000
per month. Pre-incorporation period consist of 3 months (i.e., April, May and June). The sales of
those 3 months = Rs.80,000 x 3 = Rs.2,40,000. Sales of remaining 9 months = Rs.24,00,000 –
Rs.2,40,000 = Rs.21,60,000.
Therefore, the ratio of sales = Rs.2,40,000 : Rs.21,60,000 or 1: 9.

(b) Let the average of monthly sales = X. The sales of different months can be shown as follows:
Month Jan Feb Mar. April May June July Aug Sept Oct Nov Dec
Sales 1x 0.5x 1x 0.5x 1x 1x 1x 1x 1x 1x 1.5x 1.5x

Date of incorporation is May, 2013

Pre incorporation period is from January to April i.e. 3 x
Post - incorporation period is from May to December i.e 9x
The ratio of Sales = 3x : 9x or 1:3.

(c) Let the average monthly sales be x. The sales of different months can be shown as follows:
Month April May June July Aug Sept Oct Nov Dec Jan Feb Mar.
Sales 2x 1x 1x 1x 1x 1x 1x 1x 1x 1x 2x 2x
Date of incorporation is 1 July, 2013
Pre incorporation period is from April to June i.e. 4 x
Post - incorporation period is from July to March i.e. 11x
The ratio of Sales = 4x : 11x or 4:11

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 No.1 for CA/CWA & MEC/CEC MASTER MINDS
Problem No.7

Statement showing the calculation of Profits for the pre-incorporation and post incorporation
Periods:
Total Basis of Pre- Post-
Particulars
Amount Allocation incorporation incorporation
Gross Profit (25% of Rs.1,600) 400 Sales 100 300
Less: Salaries 69 Time 23 46
Rent, rates and Insurance 24 Time 8 16
Sundry office expenses 66 Time 22 44
Travellers’ commission 16 Sales 4 12
Discount allowed 12 Sales 3 9
Bad debts 4 Sales 1 3
Directors’ fee 25 Post - 25
Audit Fees 9 Sales* 2.25 6.75
Depreciation on tangible assets 12 Time 4 8
Debenture interest 11 Post - 11
Net Profit 152 32.75 119.25

Working Notes:
1. Sales ratio
Particulars (Rs.in lakh)
Sales for the whole year 1,600
st
Sales upto 31 July, 2012 400
st st
Therefore, sales for the period from 1 August, 2012 to 31 March, 2013 1,200

Thus, sale ratio = 400:1200 = 1:3

2. Time ratio
st st st st
1 April, 2012 to 31 July, 2012 : 1 August, 2012 to 31 March, 2013
= 4 months: 8 months = 1:2 , Thus, time ratio is 1:2.
Verified By: Amaranth Garu
Executed By: Mr. Uday

THE END

Copy Rights Reserved

To MASTER MINDS, Guntur

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