Profit or Loss Pre and Post Incorporation – CA Inter Accounts Question Bank

Profit or Loss Pre and Post Incorporation – CA Inter Accounts Question Bank is designed strictly as per the latest syllabus and exam pattern.

Profit or Loss Pre and Post Incorporation – CA Inter Accounts Question Bank

Question 1.
Rama Udyog Limited was incorporated on August 1, 2008. It had acquired a running business of Rama & Co. with effect from April 1, 2008. During the year 2008-09, the total Sales were ₹ 36,00,000. The Sales per month in the first half year were one-half of what they were in the later half year. The net Profit of the company, ₹ 2,00,000 was worked out after charging the following expenses
(i) Depreciation ₹ 1,08,000,
(ii) Audit fees ₹ 15,000,
(iii) Directors’ fees ₹ 50,000,
(iv) Preliminary expenses ₹ 12,000,
(v) Office expenses ₹ 78,000,
(vi) Selling expenses ₹ 72,000 and
(vii) Interest to vendors upto August 31, 2008 ₹ 5,000.
Please ascertain pre-incorporation and post-incorporation profit for the year ended 31st March, 2009. (6 marks)
Answer:
Statement showing pre and post incorporation profit for the year ended 31st March, 2009
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 1

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 ₹ 1 then it should be 50 paise per month in the first half year. So sales for the first four months (i.e. from 1st April, 2008 to 31st July, 2008) will be 4 × 0.50 = ₹ 2 and for the last eight months (i.e. from 1st August, 2008 to 31st March, 2009) will be (2 × 0.50 + 6 × 1) = ₹ 7. Thus sales ratio is 2:7.
2. Time Ratio
1st April, 2008 to 31st July, 2008 : 1st August, 2008 to 31st March, 2009 = 4 month : 8 month = 1:2
Thus, time ratio is 1:2.
3. Gross Profit
Gross profit = Net profit + All expenses
= ₹ 2,00,000 + ₹ (1,08,000 +15,000 + 50,000 +12,000 +78,000 +72,000 + 5,000)
= ₹ 2,00,000 + ₹ 3,40,000
= ₹ 5,40,000

Question 2.
The promoters of M/s. 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 upto 31st March, 2013 which revealed that the sales for the whole year totaled
₹ 1,600 lakh out of which sales till 31st July, 2012 were for ₹ 400 lakhs.
Gross profit ratio was 25%.
The expenses from 1st April 2012, till 31st March, 2013 were as follows:
: (₹ in lakhs)
Salaries : 69
Rent, Rates and Insurance : 24
Sundry Office Expenses : 66
Travellers’ Commission : 16
Discounts 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. (May 2013, 8 marks)
Answer:
Statement showing the calculation of Profits for the pre-incorporation and post- incorporation periods
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 2

Working Notes:

1. Sales Ratio
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 3

2. Time Ratio
1st April, 2012 to 31 st July, 2012: 1 st August, 2012 to 31st March, 2013 = 4 months: 8 months = 1:2 Thus, time ratio is 1:2

Audit fee has been assumed to be related with tax audit and therefore apportioned into pre and post-incorporation periods on the basis of Sales.

Cash Flow Statement - CA Inter Accounts Question Bank

Question 3.
Sneha Ltd. was incorporated on 1st July, 2013 to acquire a running business of Atul Sons with effect from 1st April, 2013. During the year 2013-14, the total sales were ₹ 24,00,000 of which ₹ 4,80,000 were for the first six months. The Gross profit of the company ₹ 3,90,800. The expenses debited to the Profit & Loss Account included:
(i) Director’s fees ₹ 30,000
(ii) Bad debts ₹ 7,200
(iii) Advertising ₹ 24,000 (under a contract amounting to ₹ 2,000 per month)
(iv) Salaries and General Expenses ₹ 1,28,000
(v) Preliminary Expenses written off ₹ 10,000
(vi) Donation to a political party given by the company ₹ 10,000.
Prepare a statement showing pre-incorporation and post-incorporation profit for the year ended 31st March, 2014. (May 2014, 8 marks)
Answer:
Note : Sale of 1st 6 months = 4,80,000
It seems that it should be sale of 1st 3 months. Anyways we are solving, assuming that question is correct and sale of 4,80,000 is evenly spread even the 6 months.

P/L A/c for the year(2013-2014)
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 4

Working Notes:
1.
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 5
Sales Ratio = 24:216 = i.e. 1:9
2. Paid by Co. hence full amount is post incorporation period.
3. In sales Ratio (24:216) Pre = 7,200 × \(\frac{24}{240}\) = 720
Post = 7,200 × \(\frac{216}{240}\) = 6,480
4. Since it is monthly basis hence distributed on time basis
Pre = 3 × 2,000 = 6,000
Post = 9 × 2,000 = 18,000
5. On time Basis : Pre = 1,28,000 × 3/12 = 32,000
Post = 1,28,000 × 9/12 = 96,000
6. Full Preliminary Expense should be in the post incorporation period.
7. Donation is given by the Company, Hence full amount is changed to post incorporation period.

Question 4.
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 1-7-2014.
The same books of accounts were continued by the company which closed its account for first term on 31-3-2015.
The summarized Profit and Loss Account for the year ended 31-3-2015 is below:
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 6
The following additional information was provided
(i) The average monthly sales doubled from 1 -7-2014. GP ratio was constant.
(ii) All investments were sold on 31-5-2014.
(iii) Average monthly salary doubled from 1 -10-2014.
(iv) The company occupied additional space from 1-7-2014 for which rent of ₹ 20,000 per month was incurred.
(v) Bad debts recovered amounting to ₹ 50,000 for a sale made in 2012, 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.
Also suggest how the pre-incorporation profits are to be dealt with. (May 2015, 10 marks)
Answer:
K V Trading Private Limited
Statement showing calculations of profit/loss for pre and post incorporation periods
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 7
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 8

*Note: ₹ 18.79 lakhs, pre-incorporation profit is a capital profit and will be transferred to Capital Reserve.
Working Notes:
1. Calculation of Sales Ratio
Let the average sales per month be x
Total sales from 01.04.2014 to 30.06.2014 will be 3x
Average sales per month from 01.07.2014 to 31.03.2015 will be 2x
Total sales from 01.07.2014 to 31.03.2015 will be 2x × 9 = 18x
Ratio for division 3x: 18x or 1 : 6

2. Apportionment of Salary
Let the salary per month from 01.04.2014 to 30.09.2014 is x
Salary per month from 01.10.2014 to 31.03.2015 will be 2x
Hence, pre incorporation salary (01.04.2014 to 30.06.2014) = 3x
Post incorporation salary from 01.07.2014 to 31.03.2015 = (3x + 12x) i.e.15x
Ratio for division 3x: 15x or 1 : 5

3. Apportionment of Rent
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 9

4. Calculation of time Ratio
3 Months : 9 Months i.e. 1 : 3

Cash Flow Statement - CA Inter Accounts Question Bank

Question 5.
SALE Limited was incorporated on 01.08.2014 to take-over the business of a partnership firm w.e.f.01.04.2014. The following is the extract of Profit and Loss Account for the year ended 31.03.2015:
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 10
(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. (Nov 2015, 8 marks)
Answer:
In the books of Sale Ltd. Profit & Loss A/c
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 11
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 12

Working Notes:

1. Gross profit ratio
From 1.4.2014 to 31.7.2014 gross profit is 25% of sales
Then, 25% of 4x = 1x
Gross profit for next 8 months (i.e. from 1.8.2014 to 31.3.2015) is 30%
Then, 30% of 10x = 3x
Therefore gross profit ratio will be 1: 3

2. Time ratio
1st April, 2014 to 31st July, 2014 : 1st August, 2014 to 31st March, 2015 = 4 months : 8 months = 1:2
Thus, time ratio is 1: 2.

3. Sales ratio
Let the monthly sales for first 4 months (i.e. from 1.4.2014 to 31.7.2014) be = x
Then, sales for 4 months = 4x
Monthly sales for next 8 months (i.e. from 1.8.2014 to 31.3.2015)
= x + 25% of x = 1.25x
Then, sales for next 8 months = 1.25x x 8 = 10x
Total sales for the year = 4x + 10x = 14x
Sales Ratio = 4x : 10x i.e. 2:5.

Question 6.
Roshani & Reshma working in partnership, registered a joint stock company under the name of Happy Ltd. on May 31st 2016 to take over their existing business. The summarized Profit & Loss A/c as given by Happy Ltd. for the year ending 31st March, 2017 is as under:

Happy Ltd.
Profit & Loss A/c for the year ending March 31, 2017
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 13
Prepare a Statement showing allocation of expenses & calculation of pre-incorporation & post-incorporation profits after considering the following information:
(i) GP ratio was constant throughout the year.
(ii) Depreciation includes ₹ 1,250 for assets acquired in post incorporation period.
(iii) Bad debts recovered amounting to ₹ 14,000 for a sale made in 2013-14 has been deducted from bad debts mentioned above.
(iv) Total sales were ₹ 18,00,000 of which ₹ 6,00,000 were for April to September.
(v) Happy Ltd. had to occupy additional space from 1st Oct. 2016 for which rent was ₹ 2,400 per month. (May 2017, 8 marks)
Answer:
A statement showing calculation of pre & post incorporation profit
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 14

Working Notes:
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 15
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 16

Question 7.
The promotors of Shiva Ltd. took over on behalf of the company a running business with effect from 1st April 2017. The company got incorporated on 1st August 2017. The annual accounts were made up to 31st March, 2018 which revealed that the sales for the whole year totalled ₹ 2400 lakhs out of which sales till 31st July, 2017 were for ₹ 600 lakhs. Gross profit ratio was 20%.
The expenses from 1st April 2017, till 31st March, 2018 were as follows:

Particulars : ₹ in Lakhs
Salaries : 75
Rent, Rates and Insurance : 30
Sundry Office Expenses : 72
Traveller’s Commission : 20
Discount allowed : 16
Bad Debts : 8
Directors Fee : 30
Tax Audit Fee : 16
Depreciation on Tangible Assets : 15
Debenture Interest : 14
Prepare a statement showing the calculation of profits for the pre-incorporation and Post incorporation periods. (May 2018, 10 marks)
Answer:
Statement showing the calculation of Profits for the Pre-incorporation and Post-incorporation periods:
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 17

Working Notes :

1. Sales Ratio:

(₹ in lakh)
Sales for the whole year
Sales up to 31st July, 2017
2,400
600
Therefore, sales for the period from 1st August, 2017 to 31st March,’ 2018 1,800

Thus, Sales Ratio = 600 : 1800 = 1 : 3

2. Time Ratio:
1st April, 2017 to 31st July, 2017 : 1st August, 2017 to 31st March, 2018 = 4 months : 8 months = 1 : 2
Thus, time ratio is 1 : 2

Cash Flow Statement - CA Inter Accounts Question Bank

Question 8.
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) Directors 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. (May 2019, 5 marks)
Answer:
Statement showing the calculation of Profits for the pre-incorporation and post-incorporation periods for the year ended 31st March 2019:
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 18

Working Notes:

1. Sales Ratio

Particulars ₹
Sales for period upto 30/06/18 (₹ 2,40,000 × 3/6)

Sales from 1/7/18 to 31/3/19 (₹ 12,00,000 – ₹ 1,20,000)

1,20,000

10,80,000

Thus sales Ratio = 1 : 9

2. Time Ratio:
1st April, 2018 to 30th June 2016: 1st July 2018 to 31st March 2019
= 3 months = 9 months = 1: 3
Thus, Time Ratio = 1 : 3

Question 9.
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:
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 19
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 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. (Nov 2019, 10 marks)
Answer:
CG Trading Pvt. Ltd.
Statement showing calculation of Profit / Loss for Pre and Post Incorporation Period.
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 20

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 × 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 Salaries :
Let the Salary per month from 01/04/2018 to 30/09/2019 is x salary per month from 01/10/2018* to 31/03/2019 will be 2x. Hence, pre incorporation salary (1/4/2018 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

4. Apportionment of Rent:
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 21

Question 10.
Moon Ltd. was incorporated on 1st August, 2019 to take over the running business of a partnership firm w.e.f 1st April, 2019. The summarized Profit & Loss Account for the year ended 31st March, 2020 is as under:
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 22
Net profit for the year
Moon Ltd. initiated an advertising campaign which resulted in increase of monthly sales by 25% post incorporation.
You are required to prepare a statement showing the profit for the year between pre-incorporation and post-incorporation. Also, explain how profits are to be treated in the accounts? (Nov 2020, 5 marks)

Cash Flow Statement - CA Inter Accounts Question Bank

Question 11.
ABC Ltd. was incorporated on 01.08.2017 to take over the running business of XYZ Bros. with assets from 01.04.2017. The accounts of the company were closed on 31.03.2018. The average monthly Sales during the first four months of the year (2017 — 2018) were twice the Average Monthly Sales during each of the remaining 8 months. Calculate Time Ratio and Sales Ratio.
Answer:
Computation of Time Ratio and Sales Ratio

Particulars Per-Incorporation Period Post- Incorporation Period Total
(a) No. of Months = Time Ratio 01.04.2017 to 31.07.2017 = 4 months 01.08.2017 to 31.03.2018 = 8 months 4:8 = 1:2
(b) Sales per Month Ratio (given)
Overall Sales Ratio
₹ 2 (twice that of later period)
4 month × ₹ 2
Base = Say, ₹ 1 per month
8 months × ₹ 1
8:8 = 1:1

Question 12.
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 ₹ 48,00000 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 and 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-incorporahon and post-incorporation profit for the year ended 31st March, 2018.
Answer:
Statement showing the calculation of Profits for the pre-incorporation and post- Incorporation periods
For the year ended 31st March, 2018
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 23
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 24

Working Notes:

1. Sales Ratio
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 25
Thus, Sales Ratio = 1 : 9

2. Time Ratio
1st April, 2017 to 30 June, 2017: 1st July, 2017 to 31st March, 2018
= 3 months: 9 months = 1: 3
Thus, Time Ratio is 1: 3

Question 13.
The Partners of ABC & Co. decided to convert the partnership into a Private Limited Company called ABCD (P) Ltd. with effect from 1st January. The consideration was agreed at ₹ 11,70,000 based on the Firm’s Balance Sheet as on that date.
However, due to some procedural difficulties, the Company could be incorporated only on 1st April. Meanwhile, the business was continued on behalf of the Company, and the consideration was settled on that day with interest at 12% p.a.
The same books of account were continued by the company, which closed its account for the first time on 31st March of the next year and prepared the following summarized Profit and Loss Account.
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 26
The Company’s only borrowal was a Loan ₹ 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, but the Salaries trebled from that date. It had to obtain additional space from 1st July, for which rent was ₹ 30,000 per month.
Prepare a Profit and Loss Account in columnar form apportioning costs and revenue between pre – incorporation and post-incorporation periods. Also, suggest how the pre-incorporation profits are to be dealt with.
Answer:
1. Computation of Ratios for apportionment purposes
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 27

Note:
1. Expenses apportioned on Sales Ratio Basis:
(a) Cost of Goods Sold,
(b) Advertisement, and
(c) Discounts.
2. Expenses apportioned on Time Ratio Basis :
(a) Depreciation,
(b) Miscellaneous Office Expenses.

2. Statement showing calculation of Profit/Losses for Pre and Post incorporation Periods
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 28

Note: Treatment of Negative Profit Prior to Incorporation:

  1. The Loss may be considered as a reduction from any Capital Reserve arising on acquisition.
  2. Alternatively, such loss may be treated as Goodwill and shown under Non-Current Assets.

Question 14.
The partners of Shri Enterprises decided to convert the partnership firm into a Private Limited Company Shreya (P) Ltd. with effect from 1st January, 2008. However, company could be incorporated only on 1st June, 2008. The business was continued on behalf of the company and the consideration of ₹ 6,00,000 was settled on that day along with interest @ 12% per annum. The company availed loan of ₹ 9,00,000 @ 10% per annum on 1st June, 2008 to pay purchase consideration and for working capital. The company closed its accounts for the first time on 31st March, 2009 and presents you the following summarized profit and loss account:
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 29
Sales from June, 2008 to December, 2008 were 2 1/2 times of the average sales, which further increased to 3 1/2 times in January to March quarter, 2009. The company recruited additional work force to expand the business. The salaries from July, 2008 doubled. The company also acquired additional showroom at monthly rent of ₹ 10,000 from July, 2008.
You are required to prepare a Profit and Loss Account showing apportionment of cost and revenue between pre-incorporation and post- incorporation periods. Also suggest how the pre-incorporation profits/losses are to be dealt with. (Nov 2010, 10 marks)
Answer:
Shreya (P) Limited
Profit and Loss Account
(for 15 months ended 31st March, 2009)
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 30

Treatment of pre-incorporation loss : Pre-incorporation loss may, either be considered as a reduction from any capital reserve accruing in relation to the transaction or be treated as goodwill.

Working Notes :

1. Computation of sales ratio :
Let the average sales per month in pre-incorporation period be a Average Sales (Pre-incorporation) = a × 5 = 5a
Sales (Post incorporation) from June to December,
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 31
Sales ratio of pre-incorporation & post incorporation is 5a : 28a

2. Computation of ratio for salaries:
Let the average salary be a Pre-
incorporation salary = a × 5 = 5a
Post incorporation salary
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 32
Ratio is 5 : 19

3. Computation of Rent:
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 33

4. Computation of interest:
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 34

Question 15.
A firm M/s. Alag, which was carrying on business from 1st July, 2010 gets itself incorporated as a company on 1st November, 2010. The first accounts are drawn upto March 31, 2011. The gross profit for the period is ₹ 56,000. The general expenses are ₹ 14,220; Director’s fees ₹ 12,000 p.a.; incorporation expenses ₹ 1,500. Rent upto 31st December was ₹ 1,200 p.a., after which it is increased to ₹ 3,000 p.a. Salary of the manager, who upon incorporation of the company was made a director, is ₹ 6,000 p.a. His remuneration thereafter is included in the above figure of fees to the directors.
Give Profit and Loss Account showing pre and post incorporation profit. The net sales are ₹ 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. (Nov 2011, 6 marks)
Answer:
Profit & Loss Account
(For 9 months ended on 31st March, 2011)
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 35

Working Notes :
1. Calculation of sales ratio
Let the average monthly sales of first four months.= 100 and next five months = 200
Total sales of first four months = 100 × 4 = 400 and total sales of next
five months = 200 × 5 = 1,000
The ratio of sales = 400 : 1,000 = 2:5

2. Time Ratio Pre: Post
= 1st July to 31st Oct: 1st Nov to 31st March
= 4 months : 5 months
Thus, Time ratio = 4:5

3. Rent
Till 31st December, 2010, rent was ₹ 1,200 p.a. i.e. ₹ 100 p.m.
So, Pre-incorporation rent = ₹ 100 × 4 months = ₹ 400 Post-incorporation rent = (₹ 100 × 2 months) + (₹ 250 × 3 months) = ₹ 950

Cash Flow Statement - CA Inter Accounts Question Bank

Question 16.
ABC Company limited was incorporated on 1st July to take over as from 1st April in the same year the existing business of XYZ Brothers. Under the takeover agreement, all profits made from 1st April belong to the company. The Purchase Consideration was ₹ 7,00,000. The Vendors received half of it in cash on 1st Oct, in the same year together with interest at 10% per annum. For other half of the Purchase Consideration, they were allotted 3,500 fully paid up Shares of ₹ 100 each in the Company. The following balances appeared in the Company’s Ledger as at 31st March (year-end):
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 36
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 37
1. Stock -in-Trade as at 31st March amounted to ₹ 4,80,000.
2. Depreciation has to be written off on Building at 5%, Furniture and Fixtures at 10% and Transport Vehicles at 20%.
3. Bad Debts amounting to ₹ 1,000 out of which ₹ 500 related to Book Debts taken over by the Company, have to be written off and a provision of ₹ 5,000 to be made for Doubtful Debtors as at 31st March.
Prepare:
1. Profit and Loss Account for the period from 1st April to 31st March, and compute the Profit Prior to Incorporation,
2. Balance Sheet as on 31st March.
Answer:
1. Computat on of Time Ratio and Sales Ratio
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 38

2. Trading Account for the year ending 31st March
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 39

3. Statement showing appropriation of Profit/Losses for Pre and Post Incorporation Periods
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 40

Notes:

  1. Preliminary Expenses can also be written off against Capital Reserve arising out of Pre-Incorporatlon Profit.
  2. Interest to Vendors = ₹ 7,00,000 × 10% × 3/12, for each of Pro and Post Incorporation Periods.

4. Balance Sheet of as on 31st March…..
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 41

Note 1: Share Capital
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 42

Note 2 : Reserves and Surplus
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 43

Note 3 : Short Term Borrowings
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 44

Note 4 : Tangible Assets
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 45

Note 5 : Trade Receivables
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 46

Question 17.
On 1st June, AB and Co. sold their business to ABC Private Ltd. as of 1st April for a total consideration of ₹ 1,00,000 – for Goodwill – ₹ 30,000, Building – ₹ 30,000, Machinery – ₹ 15,000 and Stock – ₹ 25,000.
ABC Private Ltd. was incorporated on 1st June, and the Purchase Consideration was met by issue of Shares. The business was carried on by the Vendors on behalf of the Company from 1st April, and the same set of account books was maintained till 30th June, when the following Trial Balance was prepared –
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 47
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 48
Stocks on Hand on 30th June were ₹ 18,000.
On 30th June, ABC & Co. paid ₹ 10,000 for additional Shares and out of this amount, the Company incurred Preliminary Expenses of ₹ 6,000 and purchased a Typewriter for ₹ 3,000. Debtors and Creditors prior to 1st June were to be taken over by ABC & Co.
Prepare the Profit and Loss A/c of ABC Private Ltd. for the 3 months ended 30th June, and a Balance Sheet (Extract) as at that date.
Answer:
1. Profit & Loss Account (Extract) of ABC Pvt. Ltd. for the period from 1st April to 30th June
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 49

2. Statement showing Apportionment of Net Profit
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 50

3. Journal Entries in the books of AB pvt. Ltd.
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Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 52

4. ABC Pvt. Ltd. Bank Account
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 53
Note: ABC & Co. Firm’s Bank A/c is retained by the Firm only, not taken over by the Company. Refer Journal Entry 3.

5. AB & Co. (Vendors) A/c
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6. Capital Reserve
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7. Balance Sheet of ABC Private Ltd. (Extract) as at 30th June
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Note 1: Share Capital
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Note 2 : Tangible Assets
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Note 3 : Trade Receivables
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Cash Flow Statement - CA Inter Accounts Question Bank

Question 18.
ABC Ltd. was incorporated on 1st July, to take over the business of XYZ as and from 1st April XYZ’s Balance Sheet as at that date was as under:
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Debtors and Bank Balances are to be retained by the Vendor, and Creditors are to be paid off by him. Realisation of Debtors will be made by the Company on a commission of 5% on cash collected. ABC Ltd. is to issue XYZ with 10,000 Equity Shares of ₹ 10 each, ₹ 8 per Share paid up, and cash of ₹ 56,000.
ABC Ltd. issued to the public for Cash, 20,000 Equity Shares of ₹ 10 each, on which ₹ 8 per Share was called and paid up, except in the case of 1,000 Shares on which the third call of ₹ 2 per Share had not been realized as at the end of the financial year. Also, on 2,000 Shares, the Company had received the full amount of ₹ 10 each. The Shares issued was underwritten for 2% Commission, payable in Shares fully paid up.
In addition to the balances arising out of the above, the following were shown by the books of accounts.of ABC Ltd. as at the end of the relevant financial year:
Particulars : ₹
Discount (including ₹ 1,000 allowed on Vendor’s Debtors) : 6,000
Preliminary Expenses : ₹ 10,000
Directors Fees : ₹ 12,000
Salaries : ₹ 48,000
Debtors (including Vendor’s Debtors) : ₹ 1,60,000
Creditors : ₹ 48,000
Purchases : ₹ 3,20,000
Sales : ₹ 4,60,000

Stock at year end (31st March) was ₹ 52,000. Depreciation at 10% on Furniture and Fittings and at 5% on Building is to be provided. Collections from Debtors belonging to the Vendor were ₹ 60,000 in the period.
Prepare the Trading and Profit and Loss Account for the period ended 31st March of ABC Limited, and its Balance Sheet as at that date. Make suitable assumptions wherever necessary.
Answer:
1. Computation of Time Ratio
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 61

2. Computation of Goodwill on Acquisition
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3. Underwriters Commission:
Commission payable to Underwriters is 2% on Face Value of ₹ 2,00,000 i.e. ₹ 4,000. Such Commission becomes due on completion of the job relating to Shares underwritten. It is assumed that the job relating to Public Issue was finished at the end of the year (31st March), and Shares were allotted to the Underwriter in discharge of his claim for Commission.

4. Cash Inflows from Public Issue of Equity Shares
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5. Total Debtors Account
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Note: Closing Balance of Company’s Debtors = Total Murali’s Debtors 29,000 = ₹ 1,31,000.

6. Total Creditors Account
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 65

7. XYZ’s (Vendor) Account
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 66

Note: The balance in Vendor’s A/c and Vendors’ Debtors A/c will be set off while preparing the Co.’s Balance Sheet.

8. Trading Account for the year ended 31st March
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 67

9. Statement showing appropriation of Profit/Losses for Pre and Post incorporation periods
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10. Cash/Bank Account
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11. Capital Reserve Account
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12. Balance Sheet of ABC Ltd. as on 31st March
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Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 73

Note 1 : Share Capital
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Note 2 : Tangible Assets
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Note: In the absence of information, the other columns are not filled up in the above table.

Question 19.
V.I.P. Industries (P) Ltd. was incorporated on 1st May. It took over the proprietary business of ABC with effect from 1st April. The Balance Sheet of ABC as on that date is as follows:
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 76
It was agreed to pay ₹ 4,50,000 in Equity Shares to ABC. The Company decided to close its first year’s accounts as at 31st March of the next year. The following are the further details furnished to you:
Depreciation may be provided at 10% on assets including additions. The Company requests you to prepare:
1. Journal Entries for the takeover.
2. ABC Account.
3. P and L A/c, showing separately Pre-Incorporation and Post- Incorporation Profits for the year ending 31st March.
Answer:
1. Journal Entries for the takeover in the books of VIP Industries (P) Ltd.
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Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 78

2. ABC (Vendor) Account
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3. Trading Account for the year ending 31st March
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 80

4. Statement showing computation of Profit/Loss for Pre and post Incorporation periods
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 81
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 82

Note:

1. In the absence of information, Gross Profit and Expenses have been apportioned in the Time Ratio i.e. 1:11. Otherwise, the Net Profit for the entire period can be calculated and then apportioned in Time Ratio, i.e. 1:11 since the ratio of apportionment of Gross Profit and each expense item, is the same.

2. Pre-Incorporation Profit of ₹ 4,375 is transferred to Capital Reserve A/c. Alternatively, this amount may be set off against the Goodwill of ₹ 42,300 arising on acquisition of business. (Refer Journal Entry 1).

Cash Flow Statement - CA Inter Accounts Question Bank

Question 20.
Roshani & Reshma working in partnership, registered a joint stock company under the name of Happy Ltd. on May 31st 2017 to take over their existing business. The summarized Profit & Loss A/c as given by Happy Ltd. for the year ending 31st March, 2018 is as under:
Happy Ltd.
Profit & Loss Account for the year ending March 31, 2018
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Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 84
You are required to prepare a Statement showing allocation of expenses and calculation of pre-incorporation and post- incorporation profits after considering the following information:
(i) GP ratio was constant throughout the year.
(ii) Depreciation includes ₹ 1,250 for assets acquired in post incorporation period.
(iii) Bad debts recovered amounting to ₹ 14,000 for a sale made in 2014-15 has been deducted from bad debts mentioned above.
(iv) Total sales were ₹ 18,00,000 of which ₹ 6,00,000 were for April to September.
(v) Happy Ltd. had to occupy additional space from 1st Oct. 2017 for which rent was ₹ 2,400 per month.
Answer:
Pre-incorporation period is for two months, from 1st April, 2017 to 31st May, 2017. 10 months’ period (from 1st June, 2017 to 31st March, 2018) is post-incorporation period.
Statement showing calculation of profit/losses for pre and post Incorporation periods
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Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 86

Working Notes:
(i) Calculation of ratio of Sales
Sales from April to September = 6,00,000 (1,00,000 p.m. on average basis)
Oct. to March = ₹ 12,00,000 (2,00,000 p.m. on average basis) Thus, sales for pre-incorporation period = ₹ 2,00,000 post-incorporation period = ₹ 16,00,000
Sales are in the ratio of 1:8

(ii) Gross profit, sales commission and bad debts written off have been allocated in pre and post incorporation periods in the ratio of Sales.

(iii) Rent, salary are allocated on time basis.

(iv) Interest on debentures is allocated in post incorporation period.

(v) Audit fees charged to post incorporation period as relating to company audit.

(vi) Depreciation of ₹ 18,000 divided in the ratio of 1:5 (time basis) and ₹ 1,250 charged to post incorporation period.

(vii) Bad debt recovery of ₹ 14,000/- is allocated jn pre-incorporation

(viii) Rent
Profit or Loss Pre and Post Incorporation - CA Inter Accounts Question Bank 87

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