MASTER MINDS
No.1 for CA/CWA & MEC/CEC
4. PROFIT OR LOSS PRIOR TO INCORPORATION
SOLUTIONS TO ASSIGNMENT PROBLEMS
Problem No. 1
Trading A/c and Profit and loss a/c for the year ending 31.3.2002
Particulars
Pre
post
Particulars
Pre
To cost of goods sold (WN 2)
2,10,000
5,67,000
30,000
1,53,000
2,40,000
7,20,000
To rent (WN 3)
7,000
33,000
To salaries (WN 4)
4,200
16,800
To sales promotion expenses
(WN 5)
600
1,800
To travelling expenses(WN 5)
2,000
4,000
To deprecation (WN 6)
1,500
3,300
To carriage out ward (1:3)
100
300
To printing and stationary
(1:2)
800
1,600
To advertisements(1:3)
2,000
6,000
To miscellaneous
expenditures (1:2)
4,200
8,400
To directors fee (post)
-
600
To managing directors
remuneration (post)
-
4,100
400
1,200
2,000
6,000
-
3,000
1,400
700
To interest on debentures
(post)
-
1,500
To selling and distribution
expenses(1:3)
3,000
9,000
To preliminary expenditure
(post)
-
500
To underwriting commission
(post)
-
300
800
-
-
50,900
30,000
1,53,000
To gross profit c/d
To bad debts (1:3)
To commission and brokerage
(1:3)
To audit fee (post)
To interest paid to vendors
(2:1)
To capital reserve
To net profit
By sales (WN 1)
By gross profit b/d
post
2,40,000
7,20,000
2,40,000
7,20,000
30,000
1,53,000
30,000
1,53,000
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Working Notes :
1. Computation of sales ratio :
Let the average monthly sales be ‘x’
Pre
Post
April -X
Aug-X
May-X
sep –X
June -X
Oct, Nov, Dec, Jan, Feb, Mar. X +
2
5X
X=
× 6 =10X
3
3
July-X
4X
2X+10X =12X
4
12
1
3
Sales Ratio = 1:3
2. Computation of cost of goods ratio :
Pre
Post
Cost per unit X
X – 0.1X = 0.9X
No. of units 1
3
X
2.7X
10
27
Cost of goods Ratio =
10:27
3.
40,000
Original Space
13,000
Additional Space
27,000 (3,000 X 9m)
Pre
Post
Rs. 4,000
Rs. 9,000
Pre - July 3,000
Post - Aug. to
March 24,000
Pre
Post
April
–X
August
–X
May
–X
September
-X
June
-X
October
-X
July
-X
November to March = 1.2x X 5 = 6X
4X
3X + 6X = 9X
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MASTER MINDS
No.1 for CA/CWA & MEC/CEC
Rent Ratio = 4:9
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Rent for pre
= 4,000+3,000 =7,000
Rent for post
= 9,000+24,000 =33,000
To
MASTER MINDS, Guntur
4. Computation of salaries ratio :
Pre
April
–X
May
-X
June
-X
July
– 3X
Post
August to March = 3x X 8 = 24x
6X
Salaries Ratio = 6:24 = 1:4
5. Travelling expenses :
Travelling Expenses – 8,400
Selling 2,400 (1:3)
600 Pre
6,000 (1:2)
2,000 Pre
1,800 Post
4,000 Post
6.
Depreciation
300 (Post)
4,500 (1:2)
1,500 (pre)
3,000 post
7. Interest paid to vendors:
6M
Apr. to July 4M
Aug. to Sept 2M
4:2 = 2:1
8. Audit fees assumed to be belongs to company audit, hence charged to post period.
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Problem No. 2
Pre-incorporation period is for four months, from 1st January, 2010 to 30th April, 2010. 8 months’ period
(from 1st May, 2010 to 31st December, 2010) is post-incorporation period.
Statement showing calculation of profit/losses for pre and post incorporation periods
Particulars
Gross Profit (9:19)
Pre
Post
3,42,000
7,22,000
36,000
-
7,000
-
3,85,000
7,22,000
30,000
60,000
Manager’s salary (WN g)
23,000
62,000
Other salaries (WN g)
82,000
1,64,000
Printing and stationery (1:2)
6,000
12,000
-
45,000
Carriage outwards (9:19)
4,500
9,500
Sales commission (9:19)
9,900
20,900
Interest on Investments
Bad debts Recovery
Less : Rent and Taxes(1:2)
Salaries :
Audit fees (post)
Bad Debts (91,000 + 7,000) (9:19)
31,500
66,500
Interest on Debentures (finance costs)
-
25,000
Underwriting Commission (post)
-
26,000
Preliminary expenses (post)
-
28,000
11,200
−
1,86,900*
2,03,100
Loss on sale of investments (pre)
Net Profit
* Pre-incorporation profit is a capital profit and will be transferred to Capital Reserve.
Working Notes:
a. Calculation of ratio of Sales
Let average monthly sales be x.
Pre
Jan
– 1.5X
Post
May, June, July, Aug & Sep – 5X
Feb
-X
Mar
-X
Nov
- X
April
– 3X
Dec
- 2X
4.5X
Oct
- 1.5X
9.5X
Thus Sales from January to April are 4½ x and sales from May to December are 9½ x. Sales are in
the ratio of 9/2x : 19/2x or 9 : 19.
b. Gross profit, carriage outwards, sales commission and bad debts written off have been allocated in
pre and post incorporation periods in the ratio of Sales i.e. 9 : 19.
c. Rent, salaries, printing and stationery, audit fees are allocated on time basis.
d. Interest on debentures, underwriting commission and preliminary expenses are allocated in post
incorporation period.
IPCC_34e_Accounts_Group.I_Profit or Loss Prior to Incorporation_Assignment Solutions ___4
MASTER MINDS
No.1 for CA/CWA & MEC/CEC
e. Interest on investments, loss on sale of investments and bad debt recovery are allocated in preincorporation period.
f.
Audit fees assumed to be relating to company audit, hence charged to post period. Hence charged
to post period.
g. Total salaries paid
Rs.3,31,000
Total Salaries Paid Rs. 3,31,000
Managers Salary Rs.85,000
23,000 (pre)
Others Salary Rs.2,46,000
82,000 (pre)
62,000 (post)
1,64,000 (post)
Problem No.3
Time ratio:
Pre incorporation period (01.04.2009 to 01.08.2009)
= 4 months
Post incorporation period (01.08.2009 to 31.03.2010)
= 8 months
Time Ratio
= 4 : 8 or 1 : 2
Sales ratio: Average monthly sales before incorporation was twice the average sale per month of the
post incorporation period. If weightage for each post-incorporation month is x, then
Weighted sales ratio
=
4 X 2x : 8 X 1x
=
8x : 8x or 1 : 1
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Problem No.4
MASTER MINDS, Guntur
Statement showing calculation of profits for pre and post incorporation periods for the year
ended 31.3.2010
Pre-incorporation
Post-incorporation
Particulars
period (Rs.)
period (Rs.)
Gross profit (1:3)
80,000
2,40,000
Less: Salaries (1:2)
16,000
32,000
Stationery (1:2)
1,600
3,200
Advertisement (1:3)
4,000
12,000
Travelling expenses (W.N.3)
4,000
8,000
Sales promotion expenses (W.N.3)
1,200
3,600
Misc. trade expenses (1:2)
12,600
25,200
Rent (office building) (W.N.2)
8,000
18,400
Electricity charges (1:2)
1,400
2,800
-
11,200
800
2,400
Director’s fee (post)
Bad debts (1:3)
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Selling agents commission (1:3)
4,000
12,000
Audit fee (1:3)(note 6)
1,500
4,500
-
3,000
Interest paid to vendor (2:1) (W.N.4)
2,800
1,400
Selling expenses (1:3)
6,300
18,900
Depreciation on fixed assets (W.N.5)
3,000
6,600
12,800
-
-
74,800
Debenture interest (post)
Capital reserve (bal. Fig.)
Net profit (Bal.Fig.)
Working Notes:
st
st
Pre incorporation period = 1 April , 2009 to 31 July, 2009
i.e. 4 months
1. Time Ratio = 4 months : 8 months i.e. 1 : 2
2. Sales ratio:
Let the monthly sales for first 6 months (i. e. from 1.4..2009 to 30.9.09) be = x
Then, sales for 6 months = 6x
2
5
Monthly sales for next 6 months (i.e. from 1.10.09 to 31.3.2010) = x + x = x
3
3
5
x X6 = 10 x
3
Total sales for the year = 6x + 10x = 16x
Then, sales for next 6 months =
Monthly sales in the pre incorporation period
= Rs.19,20,000 / 16
= Rs.1,20,000
Total sales for pre-incorporation period
= Rs.1,20,000 X 4
= Rs.4,80,000
Total sales for post incorporation period
= Rs.19,20,000 – Rs.4,80,000
= Rs.14,40,000
Sales Ratio = 4,80,000 : 14,40,000 = 1 : 3
3. Rent:
Particulars
Rs.
Rs.
Rent for pre-incorporation period (Rs. 2,000 X 4)
8,000
(pre)
Rent for post incorporation period
August, 2009 & September, 2009 (Rs.2,000 X 2)
October, 2009 to March, 2010 (Rs.2,400 X 6)
4,000
14,400
18,400
(post)
4. Travelling expenses and sales promotion expenses:
Particulars
Pre (Rs.)
Post (Rs.)
Traveling expenses Rs.12,000 (i.e. Rs.16,800 – Rs.4,800)
distributed in 1:2 ratio
4,000
8,000
Sales promotion expenses Rs.4,800 distributed in 1:3
ratio
1,200
3,600
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MASTER MINDS
No.1 for CA/CWA & MEC/CEC
th
5. Interest paid to vendor till 30 September, 2009:
Particulars
Interest for pre-incorporation period
Pre (Rs.)
 Rs.4,200

6

Post (Rs.)
2,800

X 4

Interest for post incorporation period i.e. for August, 2009
 Rs.4,200

& September, 2009 = 
X 2
6


1,400
6. Depreciation:
Particulars
Pre
(Rs.)
Rs.
Total depreciation
Less: Depreciation exclusively for post incorporation period

Depreciation for pre-incorporation period 9,000 X


4
12 
Depreciation for post incorporation period 9,000 X

8
12 
Post
(Rs.)
9,600
-
-
600
-
600
9,000
-
-
-
3,000
-
-
-
6,000
-
3,000
6,600
Audit fees is assumed to be Tax audit fees, hence allocated on Sales ratio. i.e. 1 : 3
Problem No.5
st
Statement showing pre and post incorporation profit for the year ended 31 March, 2012
Particulars
Total
Amount
(Rs.)
Gross Profit(Wn 3)
5,40,000
Less: Depreciation
Basis of
Allocation
PostIncorporation
Rs.
Pre
incorporation
Rs.
2:7
1,20,000
4,20,000
1,08,000
1:2
36,000
72,000
Director’s Fees
50,000
Post
-
50,000
Preliminary Expenses
12,000
Post-
-
12,000
Office Expenses
78,000
1:2
26,000
52,000
5,000
Actual
4,000
1,000
54,000
2,33,000
Interest to vendors
Net Profit (Rs.54,000 being
pre incorporation profit is
transferred to capital reserve
Account)
2,87,000
Working Notes:
1. Sales ratio: The sales per month in the first half year were half of what they were in the later half
year. If in the later half year, sales per month is Re.1 then it should be 50 paise per month in the
st
st
first half year. So sales for the first four months (i.e. from 1 April, 2011 to 31 July, 2011) will be 4
X .50 = Rs.2. Thus sales ratio is 2:7. Post period sales Aug. to Sep=1x , Oct to mar=6x , Total=7x.
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2. Time ratio:
st
st
st
st
1 April, 2011 to 31 July, 2011:1 August, 2011 to 31 March, 2012
= 4 months : 8 months = 1:2
Thus, time ratio is 1:2
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3. Gross profit:
MASTER MINDS, Guntur
Gross profit = Net profit + All expenses
= Rs.2,00,000 + Rs.(1,08,000 + 15,000 + 50,000 + 12,000 + 78,000 + 72,000 + 5,000)
= Rs.2,00,000 + Rs.3,40,000 = Rs.5,40,000
4.
Particulars
Dividend
Basis
Pre (Rs.)
Post (Rs.)
sales ratio
5,40,000 X 2 / 9
1,20,000
5,40,000X 7/9
4,20,000
5.
Particulars
Audit fees
Basis
Pre (Rs.)
Post (Rs.)
Time ratio
5,000
5,000
6.
Particulars
Selling expenses
Basis
Pre (Rs.)
Post (Rs.)
sales ratio
16,000
56,000
Problem No.6
(a) Sales of first 6 months = Rs.4,80,000. Average sale of first 6 months = Rs.4,80,000/6 = Rs.80,000
per month. Pre-incorporation period consist of 3 months (i.e., April, May and June). The sales of
those 3 months = Rs.80,000 x 3 = Rs.2,40,000. Sales of remaining 9 months = Rs.24,00,000 –
Rs.2,40,000 = Rs.21,60,000.
Therefore, the ratio of sales = Rs.2,40,000 : Rs.21,60,000 or 1: 9.
(b) Let the average of monthly sales = X. The sales of different months can be shown as follows:
Month
Jan
Feb
Mar.
April
May
June
July
Aug
Sept
Oct
Nov
Dec
Sales
1x
0.5x
1x
0.5x
1x
1x
1x
1x
1x
1x
1.5x
1.5x
Date of incorporation is May, 2013
Pre incorporation period is from January to April i.e. 3 x
Post - incorporation period is from May to December i.e 9x
The ratio of Sales = 3x : 9x or 1:3.
(c) Let the average monthly sales be x. The sales of different months can be shown as follows:
Month
April
May
June
July
Aug
Sept
Oct
Sales
2x
1x
1x
1x
1x
1x
1x
Date of incorporation is 1 July, 2013
Pre incorporation period is from April to June i.e. 4 x
Post - incorporation period is from July to March i.e. 11x
Nov
Dec
Jan
Feb
Mar.
1x
1x
1x
2x
2x
The ratio of Sales = 4x : 11x or 4:11
IPCC_34e_Accounts_Group.I_Profit or Loss Prior to Incorporation_Assignment Solutions ___8
MASTER MINDS
No.1 for CA/CWA & MEC/CEC
Problem No.7
Statement showing the calculation of Profits for the pre-incorporation and post incorporation
Periods:
Total
Basis of
PrePostParticulars
Amount
Allocation incorporation incorporation
300
100
Sales
400
Gross Profit (25% of Rs.1,600)
Less: Salaries
46
23
Time
69
16
8
Time
24
Rent, rates and Insurance
44
22
Time
66
Sundry office expenses
12
4
Sales
16
Travellers’ commission
9
3
Sales
12
Discount allowed
3
1
Sales
4
Bad debts
25
Post
25
Directors’ fee
6.75
2.25
Sales*
9
Audit Fees
8
4
Time
12
Depreciation on tangible assets
11
Post
11
Debenture interest
Net Profit
152
32.75
119.25
Working Notes:
1. Sales ratio
Particulars
Sales for the whole year
st
Sales upto 31 July, 2012
st
st
Therefore, sales for the period from 1 August, 2012 to 31 March, 2013
(Rs.in lakh)
1,600
400
1,200
Thus, sale ratio
= 400:1200 = 1:3
2. Time ratio
st
st
st
st
1 April, 2012 to 31 July, 2012 : 1 August, 2012 to 31 March, 2013
= 4 months: 8 months = 1:2 , Thus, time ratio is 1:2.
Verified By: Amaranth Garu
Executed By: Mr. Uday
THE END
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MASTER MINDS, Guntur
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