Chapter 03

Profit or Loss to Prior

Incorporation

BASIC QUESTIONS

QUESTION 1 (STUDY MATERIAL)

Calculate Sales Ratio, if
Date of Business Purchase 01.06.2014
Date of Incorporation 01.08.2014
Year ending 31.03.2015

Case–1 Sales of June, Sep. and Jan is double Ans. 3:10

Case–2 Sales of July & Oct is double, but sales of Nov. & Feb is one & half Ans. 3:10

Case–3 Sales of Oct. Nov & Jan is one half as compare to other month Ans. 4:13

Case–4 Nothing is given Ans. 1:4

Case–5 Total Sales Rs. 30,00,000, Sale made by company Rs. 25,00,000 Ans. 1:5

Case–6 Sales increased by 2/3 from Dec. Ans. 3:16

Case–7 Sales increased by 50% from Jan. Ans. 4:19

Case–8 Sales increase by 25% from Oct. Ans. 4:19

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QUESTION 2 (STUDY MATERIAL)

Find out Expenses of Pre & Post incorporation period.
Date of Business 01.05.2014
Date of Incorporation 01.08.2014
Year ending 31.03.2015

Case–1 Salary (Total) Rs. 1,19,000. Salary increase by 30% from Jan.- Ans. Rs. 30,000 : 89,000

Case–2 Salary (Total) Rs. 4,75,000 Salary trebled from Dec. 2014 – Ans. 75.000 : 4,00,000

Case–3 Total Rent Rs. 6,70,000. Company acquired a new premises from Jan 2015 at a rent of
Rs. 40,000 p.m. – Ans. 15,000:5,20,000

Case–4 Total Rent Rs. 1,13,000. Company acquired new premises from rent from 1 Jan. 2014 @
Rs. 5,000. - Ans. Rs. 24,000:89,000

Case–5 Total Dep. Rs. 1,30,000. Company acquired a new fixed assets of 8,00,000 on 1 Jan.
2015 Rate of Dep, 10% p.a. – Ans. 30,000 ; 1,00,000

Case–6 Total Dep. Rs. 25,5000. Company acquired a new fixed assets of Rs. 30,000 on 1 Sept
2014. Rate of Dep. 20% p.a. – Ans. 6,000 : 19,500

Case–7 Interest on Purchase consideration is Rs. 6,00,000. Company paid purchase Consideration
on 31st Aug. 2014. Ans-4,50,000:1,50,000

Case–8 Purchase Consideration of Rs. 6,00,000 was paid by Company on 30 Sept. 2014 together
with interest @ 12% p.a.- Ans Rs. 1,80,000 : 1,20,000

Case–9 Audit fees Rs. 4,00,000. Sales Ratio is 1:2 (Audit fees includes company audit fees of Rs.
1,30,000 – Ans. 90,000 : 3,10,000.

QUESTION 3
Date of Business purchase 1.5.2014
Dated of Incorporation 1.8.2014
Year of ending 31.3.2015
Company acquired a new office on rent @ 12,000 per month 1.11.2014.
Total Rent 3,90,000

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QUESTION 4
Date of Business purchase 1.4.2014
Dated of Incorporation 1.8.2014
Year of ending 31.3.2015
Company Purchase a Fixed Assets of Rs. 3,00,000 on 1st Feb. 2015
Total Dep. 2,50,000
Rate of Dep. 20%

QUESTION 5 (STUDY MATERIAL)

Date of Business purchase 1.4.2014
Dated of Incorporation 1.7.2014
Year of ending 31.3.2015
Purchase Consideration was paid on 1.8.2014 together with interest Rs. 60,000
Purchase Consideration 8,00,000

QUESTION 6
From the following information, calculate the Ratio of Sales in each case separately.
Case (a)
(i) Date of acquisition – 1st April, 2015; date of incorporation – 1st July, 2015 and date of closing the
books of accounts – 31st March, every year.
(ii) The sales for the year ending on 31st March, 2016 were Rs. 24,00,000 of which Rs. 4,80,000 goods
were sold during the first six months of the accounting period.
Case (b)
(i) The accounts were made up to 31st December, 2015. The company was incorporated on 1st May,
2015 to take over a business from the preceding 1st January.
(ii) Total sales for the year were Rs. 12,00,000. It is ascertained that the sales for November and
December are one and half times the average of those for the year, whilst those for February and
April are only half the average.
Case (c)
(i) Fema Ltd. was incorporated on 1st July, 2015 to take the existing business of X from 1stApril, 2015.
Date of closing the books of account – 31st March, 2016.
(ii) Monthly sales in April 2015, February 2016 and March 2016 are double the average monthly sales
for remaining months of the year.

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CLASS WORK

QUESTION 1
Inder and Vishnu, working in partnership registered a joint stock company under the name of Fellow
Travellers Ltd. on May 31, 2000 to take over their existing business. It was agreed that they would take
over the assets of the partnership for a sum of Rs. 3,00,000 as from January 1st, 2000 and that until the
amount was discharged they would pay interest on the amount at the rate of 6% per annum. The
amount was paid on June 30, 2000. To discharge the purchase consideration, the company issued
20,000 equity shares of Rs. 10 each at a premium of Rs. 1 each and allotted 7% Debentures of the face
value of Rs. 1,50,000 to the vendors at par.
The Profit and Loss Account of the ''Fellow Travellers Ltd.'' for the year ended 31st December, 2000 was
as follows:
Rs. Rs.
Purchase, including stock 1,40,000 Sales :
Freight and carriage 5,000 1st January to 31st May, 2000 60,000
Gross Profit c/d 60,000 1st June to 31st Dec., 2000 1,20,000
Stock in hand 25,000
2,05,000 2,05,000
Salaries and Wages 10,000 Gross Profit b/d 60,000
Debenture Interest 5,250
Depreciation 1,000
Interest on Purchase
Consideration (upto 30-6-2000) 9,000
Selling Commission 9,000
Director's Fees 600
Preliminary Expenses 900
Provision for taxes 6,000
Dividend on Equity Shares @ 5% 5,000
Balance c/d 13,250
60,000 60,000
Prepare statement apportioning the balance between the 'post' and 'pre-incorporation' periods and also
show how these figures would appear in the Balance Sheet of the company.

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QUESTION 2
The partners of Maitri Agencies decided to convert the partnership into a private limited company called
MA (P) Ltd. with effect from 1st January 1998. The consideration was agreed at Rs. 1,17,00,000 based on
the firm's Balance Sheet as at 31st December 1997. However, due to some procedural difficulties, the
company could be incorporated only on 1st April, 1998. Meanwhile the business was continued on
behalf of the company and the consideration was settled on that day with interest at 12% per annum.
The same books of account were continued by the Company which closed its account for the first time
on 31st March, 1999 and prepared the following summarized profit and loss account.
Rs. Rs.
Sales 2,34,00,000
Cost of goods sold : 1,63,80,000
Salaries 11,70,000
Depreciation 1,80,000
Advertisement 7,02,000
Discounts 11,70,000
Managing Director's remuneration 90,000
Miscellaneous office expenses 1,20,000
Office-com-show room rent 7,20,000
Interest 9,51,000 2,14,83,000
Profit 19,17,000
The company's only borrowing was a loan of Rs. 50,00,000 at 12% p.a. to pay the purchase
consideration due to the firm and for working capital requirements.
The company was able to double the average monthly sales of the firm, from 1st April 1998 but the
salaries trebled from that date. It had to occupy additional space from 1st July 1998 for which rent was
Rs. 30,000 per month.
Prepare a profit and loss account in a columnar form apportioning cost and revenue between pre-
incorporation and post-incorporation period. Also, suggest how the pre-incorporation profits are to be
dealt with.

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QUESTION 3
Green Company Ltd. was formed to take over a running business with effect from 1st April, 1996. The
company was incorporated on 1st August, 1996 and the certificate of commencement of business was
received on 1st October, 1996.
The following profit and loss account has been prepared for the year ended 31st March, 1997.
Profit and Loss Account for the year ended 31st March, 1997
Rs. Rs.
To Salaries 24,000 By Gross Profit b/f 1,60,000
To Printing and stationery 2,400
To Traveling expenses 8,400
To Advertisement 8,000
To Miscellaneous trade Expenses 18,900
To Rent (office building) 13,200
To Electricity charges 2,100
To Director's fees 5,600
To Bad debts 1,600
To Commission to selling agents 8,000
To Audit fees 3,000
To Debenture interest 1,500
To Interest paid to vendors 2,100
To Selling expenses 12,600
To Depreciation on fixed assets 4,800
To Net profit c/f 43,800
1,60,000 1,60,000
The following additional information is provided to you :
(i) Total sales for the year, which amounted to Rs. 9,60,000 arose evenly up to the date of the
certificate of commencement, where after they spurted to record an increase of two-third during the
rest of the year.
(ii) Rent of office building was paid @ Rs. 1,000 per month upto September 1996, and thereafter it was
increased by Rs. 200 per month.
(iii) Travelling expenses include Rs. 2,400 towards sales promotion.
(iv) Depreciation include Rs. 300 for assets acquired in the post-incorporation period.
(v) Purchase consideration was discharged by the company on 30th September 1996 by issuing equity
shares of Rs. 10 each.
Prepare the profit and loss account in columnar form showing distinctly the allocation of profits between
pre-incorporation and post-incorporation periods, indicating the basis of allocation regarding each item.

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QUESTION 4 (STUDY MATERIAL)

business with effect from 1st April, 2013 by Sanjana Ltd., which was incorporated on 1 July, 2013. The
st

same set of books was continued since there was no change in the type of business and the following
particulars of profits for the year ended 31st March, 2014 were available.
Rs. Rs.
Sales: Company period 40,000
Prior period 10,000 50,000
Selling Expenses 3,500
Preliminary Expenses written off 1,200
Salaries 3,600
Directors' Fees 1,200
Interest on Capital (Upto 30.6.2013) 700
Depreciation 2,800
Rent 4,800
Purchases 25,000
Carriage Inwards 1,019 43,819
Net Profit 6,181
The purchase price (including carriage inwards) for the post-incorporation period had increased by 10
percent as compared to pre-incorporation period. No stocks were carried either at the beginning or at
the end.
You are required to draw up a statement showing the amount of pre and post in corporation period
profits stating the basis of allocation of expenses.

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QUESTION 5
ABC Ltd. was incorporated on 1.5.20X1 to take over the business of DEF and Co. from 1.1.20X1. The
summarised Profit and Loss Account as given by ABC Ltd. for the year ending 31.12.20X1 is as under:
Summarised Profit and Loss Account
To Rent and Taxes 90,000 By Gross Profit 10,64,000
To Salaries including manager’s By Interest on Investment 36,000
salary of Rs. 85,000 3,31,000
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
11,00,000 11,00,000
Prepare a Statement showing allocation of expenses and calculations of preincorporation and post-
incorporation profits after considering the following information:
(i) G.P. ratio was constant throughout the year.
(ii) Sales for January and October were 1½ times the average monthly sales while sales for December
were twice the average monthly sales.
(iii) Bad Debts are shown after adjusting a recovery of Rs. 7,000 of Bad Debt for a sale made in July,
20X0.
(iv) Manager’s salary was increased by Rs. 2,000 p.m. from 1.5.20X1.
(v) All investments were sold in April, 20X1.
(vi) The entire audit fees relates to the company.

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QUESTION 6 (STUDY MATERIAL)

SALE Limited was incorporated on 01.08.20X1 to take-over the business of a partnership firm w.e.f.
01.04.20X1. The following is the extract of Profit and Loss Account for the year ended 31.03.20X2:
Particulars Amount (Rs.) Particulars Amount (Rs.)
To Salaries 1,20,000 By Gross Profit 6,00,000
To Rent, Rates & Taxes 80,000
To Commission on Sales 21,000
To Depreciation 25,000
To Interest on Debentures 32,000
To Director Fees 12,000
To Advertisement 36,000
To Net Profit for the Year 2,74,000
6,00,000 6,00,000
(i) SALE Limited initiated an advertising campaign which resulted increase in monthly average sales by
25% post incorporation.
(ii) The Gross profit ratio post incorporation increased to 30% from 25%.
You are required to apportion the profit for the year between pre-incorporation and post-incorporation,
also explain how pre-incorporation profit is treated in the accounts.

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HOME WORK

QUESTION 1
Date of purchase of business 1st Jan. 1993; Date of incorporation 1st April, 1993; Date of closing the
books of accounts 31st Dec. 1993.
Monthly average sales for the first six months were half of the sales for next six months. Calculate ratio
of sales for pre and post-incorporation periods.
(Answer: Ratio- 3 : 15 or 1 : 5)

QUESTION 2
Total sales for the year was Rs. 5,40,000. Date of purchase of business 1st April, 1993. Date of
incorporation of Company 1st Aug. 1993. Date of closing the books of account 31st March 1994.
Sales during the period of 9 months from 1st July to 31st March were half of the annual sales. But
monthly average sales was equal during the period of nine months. Similarly, average sale per month
was equal during the period of 3 months also i.e. from 1st April to 30th June.
Calculate sales ratio for pre and post incorporation period.
(Answer: Ratio- 5: 4)

QUESTION 3
A firm M/s. Alag, which was carrying on business from 1st July, 2011 gets itself incorporated as a company
on 1st November, 2011. The first accounts are drawn upto 31st March 2012. The gross profit for the
period is Rs. 56,000. The general expenses are Rs. 14,220; Director’s fee Rs. 12,000 p.a. Incorporation
expenses Rs. 1,500. Rent upto 31st December was Rs. 1,200 p.a. after which it is increased to Rs. 3,000
p.a. Salary of the manager, who upon incorporation of the company was made a director, is Rs. 6,000
p.a. His remuneration thereafter is included in the above figure of fee to the directors.
Give Statement showing pre and post incorporation profit. The net sales are Rs. 8,20,000, the monthly
average of which for the first four months is one-half of that of the remaining period. The company
earned a uniform profit. Interest and tax may be ignored.
(Answer: Profit transfer to Capital Reserve - Rs. 7,280, Profit transfer to P&L A/c - Rs. 24,650 and Sales
Ratio-2:5)

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QUESTION 4
Rama Udyog Limited was incorporated on August 1, 2011. It had acquired a running business of Rama &
Co. with effect from April 1, 2011. During the year 2011-12, the total sales were Rs. 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, Rs. 2,00,000 was worked out after charging the following expenses:
(i) Depreciation Rs. 1,23,000,
(ii) Directors’ fees Rs. 50,000,
(iii) Preliminary expenses Rs. 12,000,
(iv) Office expenses Rs. 7 8,000,
(v) Selling expenses Rs. 72,000 and
(vi) Interest to vendors upto August 31, 201 1 Rs. 5,000.
Please ascertain pre-incorporation and post-incorporation profit for the year ended 31st March 2012.
(Answer: Pre-Incor Profit- Rs. 33,000, Post Incorporation Profit - Rs. 1,67,000 & Sales Ratio- 2:7)
QUESTION 5
Cookme Ltd. was incorporated on 1st March, 1991 to acquire a spice a powder merchant's business as
from 1st Jan. 1991. The purchase consideration was agreed at Rs. 6,000 to be satisfied by the issue of :
3,000 Equity Shares of Re. 1 each, fully paid, and Rs. 3,000 6% Debentures.
The following Trading and P&L A/c for the year ended 31st December, 1991 is presented to you :
Rs. Rs.
Purchases (after Adjusting stocks) 7,740 Sales 15,000
Gross Profit 7,260
15,000 15,000
Management Salaries 3,000 Gross Profit 7,260
Office Expenses 250
Selling Expenses 820
Carriage Outwards 170
Rent and Rates 200
Debenture Interest 135
Dividend 300
Directors' Fees 200
Preliminary Expenses 287
Interest on purchase
Consideration 90
Balance 1,808
7,260 7,260
You obtain the following additional information:
(i) Sales made by the Company amounted to Rs. 13,000.
(ii) The shares and debentures were issued to the vendor on 1st April, 1991.
(iii) Interest at 6% per annum was paid on the purchase consideration from 1st January, 1991 to the date
of payment.
You are required to prepare a statement in a columnar form apportioning the balance of the profit and
loss account for the year ended 31st December 1991 between the periods before and after incorporation.
(Answer: Pre-Incorporation Profit- Rs. 201, Post Incorporation Profit - Rs. 2,194 and Sales Ratio- 2:13)

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QUESTION 6
Simplex Pvt. Ltd. was incorporated on 1st July, 1992, to take over the running business of Mr. Sadananda
with effect from 1st April, 1992. The following Profit and Loss Account for the year ended 31st March,
1993 was drawn up:
Liabilities Rs. Assets Rs.
To Commission 2,625 By Gross Profit 98,000
Advertisement 5,250
Managing Director’s
Remuneration 9,000
Depreciation 2,800
Salaries 18,000
Insurance 600
Preliminary Expenses 700
Rent and Taxes 3,000
Discount 350
Bad Debts 1,250
Net Profit 54,425
98,000 98,000
The following details are available:
(1) The average monthly turnover from July, 1992 onwards was double than that of the previous
months.
(2) Rent for the first three months was paid @ Rs. 200 p.m. and thereafter at a rate increased by Rs. 50
p.m.
(3) Bad Debts Rs. 350 related to Sales effected after 1st September, 1992.
(4) Advertisement expenses were directly proportionate to the sales.
Ascertain the profits earned prior to and after incorporation of the company.
(Answer: Pre-Incorporation Profit- Rs. 6,451, Post Incorporation Profit - Rs.47,974 and Sales Ratio- 1:6)

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QUESTION 7
The Sai Deep Ltd., was Incorporated on 1st August, 1996 to take over the running business of Krishna
Bros. with effect from 1st April, 1996. The company received the certificate for commencement of
business on 1st October, 1996. The following Profit & Loss A/c was prepared for the year ended 31st
March, 1997.
Profit & Loss Account for the year ended 31st March, 1996
Particulars Rs. Particulars Rs.
To Office Salaries 21,000 By Gross Profit b/d 80,000
To Partner's Salaries 6,000 By Share Transfer Fees 1,000
To Advertisement 4,400
To Printing & Stationery 1,500
To Travelling Exp. 4,000
To Office Rent 9,600
To Electricity Charges 900
To Auditors Charges 600
To Directors Charges 1,000
To Bad Debts 1,200
To Commission on Sales 4,000
To Preliminary Exps. 700
To Debenture Interest 1,600
To Interest on Capital 1,800
To Depreciation 2,100
To Net Profit 20,600
81,000 81,000
Additional Information:
(1) Total Sales for the year, which amounted to Rs. 8,00,000 arose evenly upto the date of certificate
of commencement, where after they recorded an increase of 2/3 during the year. Gross Profit was at
an uniform rate of 10% of selling price throughout the year and a commission of 0.5% was paid on
sales.
(2) Office Rent was paid @ Rs. 8,400 p.a. upto 30th September 1996. and thereafter it was paid @ Rs.
10,800 p.a.,
(3) Travelling Expenses include Rs. 1,600 towards sales promotion.
(4) Bad debts written off.
(a) A debt of Rs. 400 belongs to Pre Incorporation period.
(b) A debt of Rs. 800 in respect of goods sold in September, 1996.
Depreciation included Rs. 600 for assets acquired in the post incorporation period, being out profit prior
to incorporation and post incorporation period.
(Answer: Pre-Incorporation Loss- Rs. 2,800, Post Incorporation Profit - Rs. 23,400 and Sales Ratio- 1:3)

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QUESTION 8 (MAY-2016)
ABC Ltd. took over a running business with effect from 1st April, 2013. The company was incorporated
on 1st August, 2013. The following summarized Profit and Loss Account has been prepared for the year
ended 31.3.2014:
Particulars Amount Particulars Amount
To Salaries 48,000 By Gross profit 3,20,000
To Stationery 4,800
To Travelling expenses 16,800
To Advertisement 16,000
To Miscellaneous trade expenses 37,800
To Rent (office buildings) 26,400
To Electricity charges 4,200
To Director’s fee 11,200
To Bad debts 3,200
To Commission to selling agents 16,000
To Tax Audit fee 6,000
To Debenture interest 3,000
To Interest paid to vendor 4,200
To Selling expenses 25,200
To Depreciation on fixed assets 9,600
To Net profit 87,600
3,20,000 3,20,000
Additional information:
(a) Total sales for the year, which amounted to Rs. 19,20,000 arose evenly upto the date of 30.9.2013.
Thereafter they spurted to record an increase of two-third during the rest of the year.
(b) Rent of office building was paid @ Rs. 2,000 per month upto September, 2013 and thereafter it was
increased by Rs. 400 per month.
(c) Traveling expenses include Rs. 4,800 towards sales promotion.
(d) Depreciation include Rs. 600 for assets acquired in the post incorporation period.
(e) Purchase consideration was discharged by the company on 30th September, 2013 by issuing equity
shares of Rs. 10 each.
Prepare Statement showing calculation of profits and allocation of expenses between pre and post
incorporation periods.
(Answer: Pre incorporation Profit Rs. 12.800 and Post Profit Rs. 74,800)

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QUESTION 9 (NOV.2015)
The promoters of Glorious Ltd. took over on behalf of the company a running business with effect from
1st April, 2012. The company got incorporated on 1st August, 2012. The annual accounts were made up
to 31st March, 2013 which revealed that the sales for the whole year totalled Rs. 1,600 lakhs out of
which sales till 31st July, 20I2 were for Rs. 400 lakhs. Gross profit ratio was 25%. The expenses from 1st
April 2012, till 31st March, 2013 were as follows:
(Rs. in lakhs)
Salaries 69
Rent, Rates and Insurance 24
Sundry Office Expenses 66
Travellers' Commission 16
Discount Allowed 12
Bad Debts 4
Directors' Fee 25
Audit Fee 9
Depreciation on Tangible Assets 12
Debenture Interest 11
Prepare a statement showing the calculation of Profits for the pre-incorporation and post incorporation
periods.
(Answer: Pre Incorporation 32.75 and Post Incorporation 119.25.)

QUESTION 10 (SIMILAR TO Q ASKED IN MAY 2019)

Sneha Ltd. was incorporated on 1st July, 20X1 to acquire a running business of Atul Sons with effect from
1st April, 20X1. During the year 20X1-X2, the total sales were Rs. 24,00,000 of which Rs. 4,80,000 were
for the first six months. The Gross profit of the company Rs. 3,90,800. The expenses debited to the
Profit & Loss Account included:
(i) Director’s fees Rs. 30,000
(ii) Bad debts Rs. 7,200
(iii) Advertising Rs. 24,000 (under a contract amounting to Rs. 2,000 per month)
(iv) Salaries and General Expenses Rs. 1,28,000
(v) Preliminary Expenses written off Rs. 10,000
(vi) Donation to a political party given by the company Rs. 10,000.
Prepare a statement showing pre-incorporation and post-incorporation profit for the year ended 31st
March, 20X2.
(Answer- Pre-incorporation profit transfer to Capital Reserve 360, Sales Ratio = 1 : 9 and Time Ratio is 1
: 3)

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QUESTION 11 (SIMILAR TO Q ASKED IN NOV.2019) AND (STUDY MATERIAL)

The partners Kamal and Vimal decided to convert their existing partnership business into a Private
Limited Company called M/s. KV Trading Private Ltd. with effect from 1-7-20X2.
The same books of accounts were continued by the company which closed its account for first term on
31-3-20X3.
The summarised Profit and Loss Account for the year ended 31-3-20X3 is below:
(Rs.) in lakhs (Rs.) in lakhs
Turnover 240.00
Interest on investments 6.00
246.00
Less: Cost of goods sold 102.00
Advertisement 3.00
Sales Commission 6.00
Salary 18.00
Managing director’s remuneration 6.00
Interest on Debentures 2.00
Rent 5.50
Bad Debts 1.00
Underwriting Commission 2.00
Audit fees 2.00
Loss on sale of investment 1.00
Depreciation 4.00 152.50
93.50
The following additional information was provided:
(i) The average monthly sales doubled from 1-7-20X2. GP ratio was constant.
(ii) All investments were sold on 31-5-20X2.
(iii)Average monthly salary doubled from 1-10-20X2.
(iv) The company occupied additional space from 1-7-20X2 for which rent of Rs. 20,000 per month was
incurred.
(v) Bad debts recovered amounting to Rs. 50,000 for a sale made in 20X0, 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.
(Answer- Pre-incorporation profit 18.79 and Post-incorporation profit 74.71, Sales Ration is 1:6 and Time
Ratio is 1 : 3)

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QUESTION 12 (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 Rs. 12,00,000 of which Rs. 2,40,000
were for the first six months. The Gross Profit for the year is Rs. 4,15,000. The expenses debited to the
Profit and Loss account included:
(i) Director's fees Rs. 25,000
(ii) Bad Debts Rs. 6,500
(iii) Advertising Rs. 18,000 (under a contract amounting to Rs. 1,500 per month)
(iv) Company Audit Fees Rs. 15,000
(v) Tax Audit Fees Rs. 10,000
Prepare a statement -
(1) Showing pre-incorporation and post incorporation profit for the year ended 31st March, 2019.
(2) Explain how profits are to be treated.

QUESTION 13 (NOV.2019)
The partners of C&G decided to convert their existing partnership business into a private limited called
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 Rs. in lakhs Rs. 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 2.00
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

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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 Rs. 20,000 per month was
incurred.
(v) Bad debts recovered amounting to Rs. 60,000 for a sale made in 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.

58 | Nahata Professional Academy