CA Intermediate Exam > CA Intermediate Notes > Accounting for CA Intermediate (Old Scheme) > Important Question & Answer: Profit or Loss Pre & Post Incorporation
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Page 1
Profit or Loss Pre and Post Incorporation
Q-1 The partners of C&G decided to convert their existing partnership business into a private limited ca lled
CG trading Pvt. Ltd. with effect from 1.7.2018.
The same books of accounts were continued by the company which closed its accounts for the first
term on 31.3.2019. The summarized profit & loss account for the year ended 31.3.2019 is below:
Particulars ` in lakhs ` in lakhs
Turnover 245.00
Interest on investments 6.00 251.00
Less: Cost of goods sold 124.32
Advertisement 3.50
Sales Commission 7.00
Salaries 18.00
Managing Director’s Remuneration 6.00
Interest on Debenture 2.(XV
Rent 5.50
Bad debt 1.15
Underwriting Commission 1.00
Audit fees 3.00
Loss on sale of Investments 1.00
Depreciation 4.00 176.47
74.53
The following additional information was provided :
(i) The average monthly sales doubled from 1.7.2018, GP ratio was constant.
(ii) All investments were sold on 31.5.2018.
(iii) Average monthly salaries doubled from 1.10.2018.
(iv) The company occupied additional space from 1.7.2018 for which rent of ` 20,000 per month was
incurred.
(v) Bad debts recovered amounting to ` 60,000 for a sale madern 2016-17 has been deducted from
bad debts mentioned above.
(vi) Audit fees pertains to the company.
Prepare a statement apportioning the expenses between pre and post incorporation periods and
calculate the profit / loss for such periods.
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Page 2
Profit or Loss Pre and Post Incorporation
Q-1 The partners of C&G decided to convert their existing partnership business into a private limited ca lled
CG trading Pvt. Ltd. with effect from 1.7.2018.
The same books of accounts were continued by the company which closed its accounts for the first
term on 31.3.2019. The summarized profit & loss account for the year ended 31.3.2019 is below:
Particulars ` in lakhs ` in lakhs
Turnover 245.00
Interest on investments 6.00 251.00
Less: Cost of goods sold 124.32
Advertisement 3.50
Sales Commission 7.00
Salaries 18.00
Managing Director’s Remuneration 6.00
Interest on Debenture 2.(XV
Rent 5.50
Bad debt 1.15
Underwriting Commission 1.00
Audit fees 3.00
Loss on sale of Investments 1.00
Depreciation 4.00 176.47
74.53
The following additional information was provided :
(i) The average monthly sales doubled from 1.7.2018, GP ratio was constant.
(ii) All investments were sold on 31.5.2018.
(iii) Average monthly salaries doubled from 1.10.2018.
(iv) The company occupied additional space from 1.7.2018 for which rent of ` 20,000 per month was
incurred.
(v) Bad debts recovered amounting to ` 60,000 for a sale madern 2016-17 has been deducted from
bad debts mentioned above.
(vi) Audit fees pertains to the company.
Prepare a statement apportioning the expenses between pre and post incorporation periods and
calculate the profit / loss for such periods.
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Ans. C G Trading Private Limited
Statement showing calculation of Profit/Loss for Pre and Post Incorporation Periods
` In lakhs
Ratio Total Pre Post
Incorporation Incorporation
Sales 1:6 245.00 35.00 210.00
Interest on Investments Pre 6.00 6.00 -
Bad debts recovered Pre 0.60 0.60 -
(i) 251.6 41.60 210.00
Cost of goods sold 1:6 124.32 17.76 106.56
Advertisement 1:6 3.50 0.50 3.00
Sales commission 1:6 7.00 1.00 6.00
Salary (W.N.3) 1:5 18.00 3.00 15.00
Managing director’s remuneration Post 6.00 - 6.00
Interest on Debentures Post 2.00 - 2.00
Rent (W.N.4) 5.50 0.93 4.57
Bad debts (1.15 + 0.6) 1:6 1.75 0.25 1.50
Underwriting commission Post 1.00 - 1.00
Audit fees Post 3.00 - 3.00
Loss on sale of Investment Pre 1.00 1.00 -
Depreciation 1:3 4.00 1.00 3.00
(ii) 177.07 25.44 151.63
Net Profit [(i)-(ii) 74.53 16.16 58.37
Working Notes:
1. Calculation of Sales Ratio
Let the average sales per month be x
Total sales from 01.04.2018 to 30.06.2018 will be 3x
Average sales per month from 01.07.2018 to 31.03.2019 will be 2x
Total sales from 01.07.2018 to 31.03.2019 will be 2x X 9 =18x
Ratio of Sales will be 3x: 18x i.e. 3:18 or 1:6
2. Calculation of time Ratio
3 Months: 9 Months i.e. 1:3
3. Apportionment of Salary
Let the salary per month from 01.04.2018 to 30.09.2018 is x
Salary per month from 01.10.2018 to 31.03.2019 will be 2x
Hence, pre incorporation salary (01.04.2018 to 30.06.2018) = 3x
Post incorporation salary from 01.07.2018 to 31.03.2019 = (3x + 12x) i.e.15x
Ratio for division 3x: 15x or 1: 5
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Page 3
Profit or Loss Pre and Post Incorporation
Q-1 The partners of C&G decided to convert their existing partnership business into a private limited ca lled
CG trading Pvt. Ltd. with effect from 1.7.2018.
The same books of accounts were continued by the company which closed its accounts for the first
term on 31.3.2019. The summarized profit & loss account for the year ended 31.3.2019 is below:
Particulars ` in lakhs ` in lakhs
Turnover 245.00
Interest on investments 6.00 251.00
Less: Cost of goods sold 124.32
Advertisement 3.50
Sales Commission 7.00
Salaries 18.00
Managing Director’s Remuneration 6.00
Interest on Debenture 2.(XV
Rent 5.50
Bad debt 1.15
Underwriting Commission 1.00
Audit fees 3.00
Loss on sale of Investments 1.00
Depreciation 4.00 176.47
74.53
The following additional information was provided :
(i) The average monthly sales doubled from 1.7.2018, GP ratio was constant.
(ii) All investments were sold on 31.5.2018.
(iii) Average monthly salaries doubled from 1.10.2018.
(iv) The company occupied additional space from 1.7.2018 for which rent of ` 20,000 per month was
incurred.
(v) Bad debts recovered amounting to ` 60,000 for a sale madern 2016-17 has been deducted from
bad debts mentioned above.
(vi) Audit fees pertains to the company.
Prepare a statement apportioning the expenses between pre and post incorporation periods and
calculate the profit / loss for such periods.
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Ans. C G Trading Private Limited
Statement showing calculation of Profit/Loss for Pre and Post Incorporation Periods
` In lakhs
Ratio Total Pre Post
Incorporation Incorporation
Sales 1:6 245.00 35.00 210.00
Interest on Investments Pre 6.00 6.00 -
Bad debts recovered Pre 0.60 0.60 -
(i) 251.6 41.60 210.00
Cost of goods sold 1:6 124.32 17.76 106.56
Advertisement 1:6 3.50 0.50 3.00
Sales commission 1:6 7.00 1.00 6.00
Salary (W.N.3) 1:5 18.00 3.00 15.00
Managing director’s remuneration Post 6.00 - 6.00
Interest on Debentures Post 2.00 - 2.00
Rent (W.N.4) 5.50 0.93 4.57
Bad debts (1.15 + 0.6) 1:6 1.75 0.25 1.50
Underwriting commission Post 1.00 - 1.00
Audit fees Post 3.00 - 3.00
Loss on sale of Investment Pre 1.00 1.00 -
Depreciation 1:3 4.00 1.00 3.00
(ii) 177.07 25.44 151.63
Net Profit [(i)-(ii) 74.53 16.16 58.37
Working Notes:
1. Calculation of Sales Ratio
Let the average sales per month be x
Total sales from 01.04.2018 to 30.06.2018 will be 3x
Average sales per month from 01.07.2018 to 31.03.2019 will be 2x
Total sales from 01.07.2018 to 31.03.2019 will be 2x X 9 =18x
Ratio of Sales will be 3x: 18x i.e. 3:18 or 1:6
2. Calculation of time Ratio
3 Months: 9 Months i.e. 1:3
3. Apportionment of Salary
Let the salary per month from 01.04.2018 to 30.09.2018 is x
Salary per month from 01.10.2018 to 31.03.2019 will be 2x
Hence, pre incorporation salary (01.04.2018 to 30.06.2018) = 3x
Post incorporation salary from 01.07.2018 to 31.03.2019 = (3x + 12x) i.e.15x
Ratio for division 3x: 15x or 1: 5
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4. Apportionment of Rent ` In Lakhs
Total Rent 5.50
Less: additional rent from 1.7.2018 to 31.3.2019 1.80
Rent of old premises for 12 months 3.70
Pre Post
Apportionment in time ratio 0.93 2.77
Add: Rent for new space - 1.80
Total 0.93 4.57
Q-2 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 ` 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
(1) Prepare a statement showing pre-incorporation and post incorporation profit for the year ended
31st March, 2019.
(2) Explain how profits are to be treated.
Ans. Statement showing the calculation of Profits for the pre-incorporation and post-incorporation periods
For the year ended 31st March, 2019
Particulars Total Basis of Pre- Post
Amount Allocation incorporation incorporation
Gross Profit 4,15,000 Sales (1:9) 41,500 3,73,500
Less: Directors’ fee 25,000 Post 25,000
Bad debts 6,500 Sales (1:9) 650 5,850
Advertising 18,000 Time (1:3) 4,500 13,500
Company Audit Fees 15,000 Post 15,000
Tax Audit Fee 10,000 Sales (1:9) 1,000 9,000
Net Profit 3,40,500 35,350 3,05,150
Pre-incorporation profits to be transferred to capital reserve and post -incorporation profit to be
transferred to profit & Loss A/c.
Working Notes:
(i) Sales ratio
Particulars `
Sales for period up to 30.06.2018 (2,40,000 x 3/ 6) 1,20,000
Sales for period from 01.07.2018 to 31.03.2019 (12,00,000 –1,20,000) 10,80,000
Thus, Sales Ratio = 1 : 9 (1,20,000 : 10,80,000)
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Page 4
Profit or Loss Pre and Post Incorporation
Q-1 The partners of C&G decided to convert their existing partnership business into a private limited ca lled
CG trading Pvt. Ltd. with effect from 1.7.2018.
The same books of accounts were continued by the company which closed its accounts for the first
term on 31.3.2019. The summarized profit & loss account for the year ended 31.3.2019 is below:
Particulars ` in lakhs ` in lakhs
Turnover 245.00
Interest on investments 6.00 251.00
Less: Cost of goods sold 124.32
Advertisement 3.50
Sales Commission 7.00
Salaries 18.00
Managing Director’s Remuneration 6.00
Interest on Debenture 2.(XV
Rent 5.50
Bad debt 1.15
Underwriting Commission 1.00
Audit fees 3.00
Loss on sale of Investments 1.00
Depreciation 4.00 176.47
74.53
The following additional information was provided :
(i) The average monthly sales doubled from 1.7.2018, GP ratio was constant.
(ii) All investments were sold on 31.5.2018.
(iii) Average monthly salaries doubled from 1.10.2018.
(iv) The company occupied additional space from 1.7.2018 for which rent of ` 20,000 per month was
incurred.
(v) Bad debts recovered amounting to ` 60,000 for a sale madern 2016-17 has been deducted from
bad debts mentioned above.
(vi) Audit fees pertains to the company.
Prepare a statement apportioning the expenses between pre and post incorporation periods and
calculate the profit / loss for such periods.
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Ans. C G Trading Private Limited
Statement showing calculation of Profit/Loss for Pre and Post Incorporation Periods
` In lakhs
Ratio Total Pre Post
Incorporation Incorporation
Sales 1:6 245.00 35.00 210.00
Interest on Investments Pre 6.00 6.00 -
Bad debts recovered Pre 0.60 0.60 -
(i) 251.6 41.60 210.00
Cost of goods sold 1:6 124.32 17.76 106.56
Advertisement 1:6 3.50 0.50 3.00
Sales commission 1:6 7.00 1.00 6.00
Salary (W.N.3) 1:5 18.00 3.00 15.00
Managing director’s remuneration Post 6.00 - 6.00
Interest on Debentures Post 2.00 - 2.00
Rent (W.N.4) 5.50 0.93 4.57
Bad debts (1.15 + 0.6) 1:6 1.75 0.25 1.50
Underwriting commission Post 1.00 - 1.00
Audit fees Post 3.00 - 3.00
Loss on sale of Investment Pre 1.00 1.00 -
Depreciation 1:3 4.00 1.00 3.00
(ii) 177.07 25.44 151.63
Net Profit [(i)-(ii) 74.53 16.16 58.37
Working Notes:
1. Calculation of Sales Ratio
Let the average sales per month be x
Total sales from 01.04.2018 to 30.06.2018 will be 3x
Average sales per month from 01.07.2018 to 31.03.2019 will be 2x
Total sales from 01.07.2018 to 31.03.2019 will be 2x X 9 =18x
Ratio of Sales will be 3x: 18x i.e. 3:18 or 1:6
2. Calculation of time Ratio
3 Months: 9 Months i.e. 1:3
3. Apportionment of Salary
Let the salary per month from 01.04.2018 to 30.09.2018 is x
Salary per month from 01.10.2018 to 31.03.2019 will be 2x
Hence, pre incorporation salary (01.04.2018 to 30.06.2018) = 3x
Post incorporation salary from 01.07.2018 to 31.03.2019 = (3x + 12x) i.e.15x
Ratio for division 3x: 15x or 1: 5
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4. Apportionment of Rent ` In Lakhs
Total Rent 5.50
Less: additional rent from 1.7.2018 to 31.3.2019 1.80
Rent of old premises for 12 months 3.70
Pre Post
Apportionment in time ratio 0.93 2.77
Add: Rent for new space - 1.80
Total 0.93 4.57
Q-2 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 ` 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
(1) Prepare a statement showing pre-incorporation and post incorporation profit for the year ended
31st March, 2019.
(2) Explain how profits are to be treated.
Ans. Statement showing the calculation of Profits for the pre-incorporation and post-incorporation periods
For the year ended 31st March, 2019
Particulars Total Basis of Pre- Post
Amount Allocation incorporation incorporation
Gross Profit 4,15,000 Sales (1:9) 41,500 3,73,500
Less: Directors’ fee 25,000 Post 25,000
Bad debts 6,500 Sales (1:9) 650 5,850
Advertising 18,000 Time (1:3) 4,500 13,500
Company Audit Fees 15,000 Post 15,000
Tax Audit Fee 10,000 Sales (1:9) 1,000 9,000
Net Profit 3,40,500 35,350 3,05,150
Pre-incorporation profits to be transferred to capital reserve and post -incorporation profit to be
transferred to profit & Loss A/c.
Working Notes:
(i) Sales ratio
Particulars `
Sales for period up to 30.06.2018 (2,40,000 x 3/ 6) 1,20,000
Sales for period from 01.07.2018 to 31.03.2019 (12,00,000 –1,20,000) 10,80,000
Thus, Sales Ratio = 1 : 9 (1,20,000 : 10,80,000)
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(ii) Time ratio
1st April, 2018 to 30 June, 2018: 1st July, 2018 to 31st March, 2019
= 3 months: 9 months = 1: 3
Thus, T ime Ratio is 1: 3
Q-3 Sun Limited took over the running business of a partnership firm M/s A & N Brothers with effect from
1st April, 2017. The company was incorporated on 1st September, 2017. The following profit and loss
account has been prepared for the year ended 31st March, 2018.
Particular ` Particular `
To salaries 1,33,000 By Gross Profit b/d 7,50,000
To rent 96,000
To carriage outward 75,000
To audit fees 12,000
To travelling expenses 66,000
To commission on sales 48,000
To printing and stationery 24,000
To electricity charges 30,000
To depreciation 80,000
To advertising expenses 24,000
To preliminary expenses 9,000
To Managing Director's remuneration 8,000
To Net Profit c/d 1,45,000 _______
7,50,000 7,50,000
Additional Information :
1. Trend of sales during April, 2017 to March, 2018 was as under:
April, May ` 85,000 per month
June, July ` 1,05,000 per month
August, September ` 1,20,000 per month
October, November ` 1,40,000 per month
December onward ` 1,50,000 per month
2. Sun Limited took over a machine worth ` 7,20,000 from A&N Brothers and purchased a new machine on
1st February, 2018 for ` 4,80,000. The company decides to provide depreciation @ 10% p.a.
3. The company occupied additional space from 1st October, 2017 @ rent of ` 6,000 per month.
4. Out of travelling expenses, ` 30,000 were incurred by office staff while remaining expenses were
incurred by salesmen.
5. Audit fees pertains to the company.
6. Salaries were doubled from the date of incorporation.
You are required to prepare a statement apportioning the expenses between pre and post in corporation
periods and calculate the profit/(loss) for such periods.
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Page 5
Profit or Loss Pre and Post Incorporation
Q-1 The partners of C&G decided to convert their existing partnership business into a private limited ca lled
CG trading Pvt. Ltd. with effect from 1.7.2018.
The same books of accounts were continued by the company which closed its accounts for the first
term on 31.3.2019. The summarized profit & loss account for the year ended 31.3.2019 is below:
Particulars ` in lakhs ` in lakhs
Turnover 245.00
Interest on investments 6.00 251.00
Less: Cost of goods sold 124.32
Advertisement 3.50
Sales Commission 7.00
Salaries 18.00
Managing Director’s Remuneration 6.00
Interest on Debenture 2.(XV
Rent 5.50
Bad debt 1.15
Underwriting Commission 1.00
Audit fees 3.00
Loss on sale of Investments 1.00
Depreciation 4.00 176.47
74.53
The following additional information was provided :
(i) The average monthly sales doubled from 1.7.2018, GP ratio was constant.
(ii) All investments were sold on 31.5.2018.
(iii) Average monthly salaries doubled from 1.10.2018.
(iv) The company occupied additional space from 1.7.2018 for which rent of ` 20,000 per month was
incurred.
(v) Bad debts recovered amounting to ` 60,000 for a sale madern 2016-17 has been deducted from
bad debts mentioned above.
(vi) Audit fees pertains to the company.
Prepare a statement apportioning the expenses between pre and post incorporation periods and
calculate the profit / loss for such periods.
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Ans. C G Trading Private Limited
Statement showing calculation of Profit/Loss for Pre and Post Incorporation Periods
` In lakhs
Ratio Total Pre Post
Incorporation Incorporation
Sales 1:6 245.00 35.00 210.00
Interest on Investments Pre 6.00 6.00 -
Bad debts recovered Pre 0.60 0.60 -
(i) 251.6 41.60 210.00
Cost of goods sold 1:6 124.32 17.76 106.56
Advertisement 1:6 3.50 0.50 3.00
Sales commission 1:6 7.00 1.00 6.00
Salary (W.N.3) 1:5 18.00 3.00 15.00
Managing director’s remuneration Post 6.00 - 6.00
Interest on Debentures Post 2.00 - 2.00
Rent (W.N.4) 5.50 0.93 4.57
Bad debts (1.15 + 0.6) 1:6 1.75 0.25 1.50
Underwriting commission Post 1.00 - 1.00
Audit fees Post 3.00 - 3.00
Loss on sale of Investment Pre 1.00 1.00 -
Depreciation 1:3 4.00 1.00 3.00
(ii) 177.07 25.44 151.63
Net Profit [(i)-(ii) 74.53 16.16 58.37
Working Notes:
1. Calculation of Sales Ratio
Let the average sales per month be x
Total sales from 01.04.2018 to 30.06.2018 will be 3x
Average sales per month from 01.07.2018 to 31.03.2019 will be 2x
Total sales from 01.07.2018 to 31.03.2019 will be 2x X 9 =18x
Ratio of Sales will be 3x: 18x i.e. 3:18 or 1:6
2. Calculation of time Ratio
3 Months: 9 Months i.e. 1:3
3. Apportionment of Salary
Let the salary per month from 01.04.2018 to 30.09.2018 is x
Salary per month from 01.10.2018 to 31.03.2019 will be 2x
Hence, pre incorporation salary (01.04.2018 to 30.06.2018) = 3x
Post incorporation salary from 01.07.2018 to 31.03.2019 = (3x + 12x) i.e.15x
Ratio for division 3x: 15x or 1: 5
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4. Apportionment of Rent ` In Lakhs
Total Rent 5.50
Less: additional rent from 1.7.2018 to 31.3.2019 1.80
Rent of old premises for 12 months 3.70
Pre Post
Apportionment in time ratio 0.93 2.77
Add: Rent for new space - 1.80
Total 0.93 4.57
Q-2 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 ` 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
(1) Prepare a statement showing pre-incorporation and post incorporation profit for the year ended
31st March, 2019.
(2) Explain how profits are to be treated.
Ans. Statement showing the calculation of Profits for the pre-incorporation and post-incorporation periods
For the year ended 31st March, 2019
Particulars Total Basis of Pre- Post
Amount Allocation incorporation incorporation
Gross Profit 4,15,000 Sales (1:9) 41,500 3,73,500
Less: Directors’ fee 25,000 Post 25,000
Bad debts 6,500 Sales (1:9) 650 5,850
Advertising 18,000 Time (1:3) 4,500 13,500
Company Audit Fees 15,000 Post 15,000
Tax Audit Fee 10,000 Sales (1:9) 1,000 9,000
Net Profit 3,40,500 35,350 3,05,150
Pre-incorporation profits to be transferred to capital reserve and post -incorporation profit to be
transferred to profit & Loss A/c.
Working Notes:
(i) Sales ratio
Particulars `
Sales for period up to 30.06.2018 (2,40,000 x 3/ 6) 1,20,000
Sales for period from 01.07.2018 to 31.03.2019 (12,00,000 –1,20,000) 10,80,000
Thus, Sales Ratio = 1 : 9 (1,20,000 : 10,80,000)
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(ii) Time ratio
1st April, 2018 to 30 June, 2018: 1st July, 2018 to 31st March, 2019
= 3 months: 9 months = 1: 3
Thus, T ime Ratio is 1: 3
Q-3 Sun Limited took over the running business of a partnership firm M/s A & N Brothers with effect from
1st April, 2017. The company was incorporated on 1st September, 2017. The following profit and loss
account has been prepared for the year ended 31st March, 2018.
Particular ` Particular `
To salaries 1,33,000 By Gross Profit b/d 7,50,000
To rent 96,000
To carriage outward 75,000
To audit fees 12,000
To travelling expenses 66,000
To commission on sales 48,000
To printing and stationery 24,000
To electricity charges 30,000
To depreciation 80,000
To advertising expenses 24,000
To preliminary expenses 9,000
To Managing Director's remuneration 8,000
To Net Profit c/d 1,45,000 _______
7,50,000 7,50,000
Additional Information :
1. Trend of sales during April, 2017 to March, 2018 was as under:
April, May ` 85,000 per month
June, July ` 1,05,000 per month
August, September ` 1,20,000 per month
October, November ` 1,40,000 per month
December onward ` 1,50,000 per month
2. Sun Limited took over a machine worth ` 7,20,000 from A&N Brothers and purchased a new machine on
1st February, 2018 for ` 4,80,000. The company decides to provide depreciation @ 10% p.a.
3. The company occupied additional space from 1st October, 2017 @ rent of ` 6,000 per month.
4. Out of travelling expenses, ` 30,000 were incurred by office staff while remaining expenses were
incurred by salesmen.
5. Audit fees pertains to the company.
6. Salaries were doubled from the date of incorporation.
You are required to prepare a statement apportioning the expenses between pre and post in corporation
periods and calculate the profit/(loss) for such periods.
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Ans. Statement showing calculation of profit for per and post incorporation periods For the year ended 31-
3-2018
Particulars Pre-incorporation Post- incorporation
period period
` `
Gross profit (1:2) 2,50,000 5,00,000
Less; Salaries (5:14) 35,000 98,000
Carriage outward (1:2) 25,000 50,000
Audit fee - 12,000
Travelling expenses (W.N.3) 24,500 41,500
Commission on sales (1:2) 16,000 32,000
Printing & stationary (5:7) 10,000 14,000
Rent (office building) (W.N.4) 25,000 71,000
Electricity charges (5:7) 12,500 17,500
Depreciation 30,000 50,000
Advertisement (1:2) 8,000 16,000
Preliminary expenses - 9,000
MD remuneration - 8,000
Pre-incorporation profit - ts/f to Capital reserve (Bal. Fig.) 64,000 -
Net profit (Bal. Fig.) - 81,000
Working Notes:
1. Time Ratio
Pre incorporation period = 1st April, 2017 to 31st August, 2017 i.e. 5 months
Post incorporation period is 7 months
Time ratio is 5: 7.
2. Sales ratio
April 85,000
May 85,000
June 1,05,000
July 1,05,000
August 1,20,000
5,00,000
September 1,20,000
Oct & Nov. 2,80,000
Dec. to March (1,50,000 x4) 6,00,000
10,00,000
5,00,000 : 10,00,000 = 1.2
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FAQs on Profit or Loss Pre & Post Incorporation Important Question & Answer - Accounting for CA Intermediate (Old Scheme)
| 1. What is the difference between profit and loss in the context of pre and post incorporation? |  |
Ans. In the context of pre-incorporation, profit refers to the income earned before a company is officially formed and registered. It includes revenue generated from business activities or investments made during this period. On the other hand, loss in pre-incorporation refers to the expenses incurred or the reduction in the value of assets during this period.
In the context of post-incorporation, profit refers to the excess of revenue over expenses during the operation of the company. It represents the financial gain or positive outcome of the company's business activities. Loss in post-incorporation refers to the excess of expenses over revenue, indicating a negative financial outcome.
| 2. How is profit or loss calculated in pre-incorporation? | |
Ans. In pre-incorporation, profit is calculated by subtracting the total expenses from the total revenue generated during this period. Revenue can come from various sources such as sales, investments, or other business activities. Expenses include costs incurred in the process of setting up the company, such as legal fees, registration charges, and initial marketing expenses.
Loss in pre-incorporation is calculated by subtracting the total revenue generated from the total expenses incurred during this period. If the expenses exceed the revenue, it indicates a loss.
| 3. How is profit or loss calculated in post-incorporation? | |
Ans. In post-incorporation, profit is calculated by subtracting the total expenses from the total revenue generated during the company's operation. Revenue can come from various sources such as sales, services, or investments. Expenses include costs incurred in the regular operation of the business, such as salaries, rent, utilities, and raw material costs.
Loss in post-incorporation is calculated by subtracting the total revenue generated from the total expenses incurred during the company's operation. If the expenses exceed the revenue, it indicates a loss.
| 4. How are profits or losses treated in the financial statements of a company? | |
Ans. Profits are reflected as income in the financial statements of a company. They are recorded on the income statement, which shows the revenue, expenses, and resulting profit or loss for a specific period. Profits are also transferred to the retained earnings section of the balance sheet, increasing the company's overall net worth.
Losses, on the other hand, are recorded as an expense in the income statement. They reduce the company's overall profit or result in a net loss. Losses are also reflected in the retained earnings section of the balance sheet, reducing the company's net worth.
| 5. How do pre and post-incorporation profit or loss impact the taxation of a company? | |
Ans. Pre-incorporation profit or loss is not subject to taxation as the company is not officially formed or registered during this period. However, any expenses incurred during this period may be carried forward and deducted from future profits post-incorporation.
Post-incorporation profit is subject to taxation based on the applicable tax laws and regulations of the country. The company is required to calculate its taxable income by subtracting allowable expenses from the total revenue. The resulting profit is then subject to the applicable tax rates. Losses can be carried forward to offset future profits and reduce the tax liability.
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