Profit (Loss) Prior to Incorporation

(Business Acquisition)
Write a Short Note on Profits or Loss Prior to Incorporation.
When a running business is taken over by the promoters of a company, from a date before the company
which is to manage and own the business for the period prior to the date the company came into
existence is referred to as pre-incorporation profits or losses. Such profits or losses, though belonging to
the company or payable by it, are of capital nature, it is necessary to disclose them separately as trading
profits or losses.
The general practice in this regard is that if there is a loss, it is either written off by debit to the Profit
and Loss Account or to a special account described as Loss Prior to Incorporation and show as an
asset in the Balance Sheet; in the alternative, it is debited to the Goodwill Account. On the other hand,
if a profit has been earned by business prior to the same being taken over and the same is not fully
absorbed by any interest payable for the period, it is credited to Capital Reserve Account. The Profit
will not be available for distribution as a dividend among the members of the company.
Apportionment of Expenses in Pre/Post Incorporation:
Items
Basis of Apportionment
Fixed Expense, Depreciation, Interest, Salaries, Office Time Ratio
Expenses etc.
Cost of Goods Sold, Gross Profit, Bad Debts, Advertisement, Gross Profit Ratio
Commission, Freight Outward
Director Fees, Interest on Debentures, Preliminary expenses Post Incorporation
written off, Goodwill written off
Bad Debts Recovered
According to Information
Question
Answer

Profit Prior to Incorporation

Question 1: - V K Ltd. was incorporated on the 1st March, 2003 and received its certificate for commencement of business on
1dst April 2003. The company bought the business of M/s. Sharad Singh Brothers with effect from 1 st November 2002.
From the following figures relating to the year ending October 31, 2003 find out the profits available for dividends.
(i)
Sales for the year Rs. 6,00,000 out of which sales up to 1 st March were Rs. 2,50,000 and up to 1st April Rs.
3,00,000.
(ii)
Gross Profit for the year was Rs 1,80,000.
(iii) The expenses debited to the Profit and Loss Account were:
Rent
9,000
Salaries
15,000
Directors fees
4,800
Interest on Debenture
5,000
Audit fees
1,500
Discount on Sales
3,600
Depreciation
24,000
General expenses
4,800
Advertising
18,000
Stationery & Printing
3,600
Commission on Sales
6,000
Bad debts
1,500
Interest to vendor on purchase co
Consideration up to 1st May, 2003
3,000
Question 2: - A company was incorporated on 1st May 2004 to take over a business a going concern from 1 st Jan. of the same
year. The total turnover for the year ended 31st Dec. was Rs. 2,00,000 namely Rs. 60,000 for the first period upto 1st
May and Rs. 1,40,000 for the following period. The gross profit is Rs. 70,000 and the Profit and loss A/c is given
below. Ascertain profits prior to incorporation.
Profit & Loss Account
For the year ended 31st Dec. 2004
Particulars
Rs
Particulars
Rs
Rents & Rates
3,240
Gross Profit b/d
70,000

Pre & Post Incorporation Profit

Accounts- IPCC Gr 1

Insurance
Lighting & heating
Salaries
Directors fees
Sales commission
Sales discounts
General office Expenses
Carriage outwards
Bank charges
Repairs & Renewals
Bad debts
Loan interest
Net Profit

720
2,040
7,800
2,000
10,000
5,000
2,400
3,000
420
1,380
600
1,200
30,000
70,000

70,000

Question 3: - Neeraj Ltd. was incorporated as a private limited company, on 1 st August, 2003 to take over a business as a going
concern as from 1st February, 2003. The purchase price of the business for such acquisition was fixed on the basis of
the Balance sheet of the firm as at 31st January, 2003 but the agreement provided that the vendors would get 80% of the
profits earned prior to 1st August, 2003 as compensation. Companys accounts were made up to 31 st January each year
and the summarized Trading and Profit and Loss Accounts for the year ended 31 st January, 2004 disclosed the
following results:
Rs.
Rs
To Material Consumed
1,86,000
By Net Sales
2,60,000
Manufacturing Wages
48,500
Stock :
Misc. Expenses of Manufacture
18,600
Finished Goods
49,000
Carriage Inwards
6,300
Incomplete Goods
6,000
Gross Profit
55,600
3,15,000
3,15,000
To Salaries and establishment charges
18,300
By Gross Profit b/d
55,600
Office Expenses
2,750
Directors Fees
1,800
Bad debts
2,300
Debenture Interest
1,250
Commission and Discounts
7,800
Carriage Outwards
1,600
Depreciation
10,300
Net profit for the year
9,500
55,600
55,600
Further information available was that sales made by the company amounted to Rs. 1,16,000 and bad debts amounting
to Rs. 1,100 were written off prior to 1st August 2003.
Prepare a statement showing the profits earned prior and after incorporation, state also the amount of profit prior
to 1st August 2003 payable to the vendors.
How should the company deal with its share of profits in the year ending 31st January, 2004.
Question 4: - X Ltd. was incorporated on 1st May 2004 to acquire a business as on 1st January, 2004. The first accounts were
closed on 30th September, 2004.
The gross profit for the period was
Rs. 42,000
Details of other expenses:
General expenses
Rs. 7,200
Directors Remuneration
Rs. 12,000
Preliminary Expenses
Rs 2,000
Rent upto 30th June was Rs. 6,000 per annum after which it was increased by 40%.
Salary of the manager, who on formation of the company had become a whole time director and whose remuneration
has been given above, was Rs. 5,100 per annum.

Pre & Post Incorporation Profit

Accounts- IPCC Gr 1

The company earned a uniform gross profit. The sales upto 30th September 2004 were Rs. 98,000. The monthly
average of sales for the first four months of the year was one half of the remaining period.
Show the Profit and Loss Account and indicate how you would deal with the pre incorporation results.
Question 5: - Ashish Limited was incorporated on 1st July, 2003 to take over the running business of Mr. Raghunath Keswani
with effect from 1st April, 2003. The following Profit & Loss Account for the year ended 31 st March, 2004 was drawn
up:
Rs.
Rs
To Commission
2,625
By Gross Profit
98,000
To Advertisement
5,250
By Bad debts realised
500
To Managing Directors remuneration
9,000
To Depreciation
2,800
To Salaries
18,000
To Insurance
600
To Preliminary Expenses
700
To Rent and Taxes
3,000
To Discount
350
To Bad debts
1,250
To Net Profit
54,925
98,500
98,500
The following details are available
The average monthly turnover from July 2003 onwards was double than that of the previous months.
Rent for the first three months was paid at Rs. 200 p.m. and thereafter at a rate increased by Rs. 50 p.m.
Bad debts Rs. 350 related to sales effected after 1st September, 2003 and the realization of bad debts was in
respect of debts written off during 2002 03.
(iv)
Advertisement expenses were directly proportionate to the sales.
You are required to find out the profit prior to incorporation and the state the treatment thereof in the books of the
company.
Question 6: - Mr. X formed a Private Limited Company under the name and style of Exe Private Limited to take over his
existing business as from 1st April, 2000, but the company was not incorporated until 1 st July, 2000. No entries relating
to transfer of the business were entered in the books, which were carried on without a break until 31 st March, 2001.
The following balance were extracted from the books as on 31 st March, 2001.
Dr. (Rs.)
Cr. (Rs.)
Opening Stock
43,000
Purchases
1,89,000
Carriage outwards
3,300
Traveling Commission
7,500
Office Salaries
21,000
Administration expenses
19,900
Rent and Rates
12,000
Directors fees
18,000
Fixed Assets
1,00,000
Current Assets excluding stock
34,000
Preliminary Expenses
5,200
Sales
2,78,000
Mr. Xs Capital A/c on 1.4.2000
2,30,000
Current Liabilities
37,000
You are also given that
(a) Stock on 31st March, 2001 Rs. 44,000
(b) The gross profit ratio is constant and monthly sales in April 2000, February 2001 and March 2001 are double the
average monthly sales for the remaining months of the year.
(c) The purchase consideration was agreed to be satisfied by the issue of 3,000 equity shares of Rs. 100 each.
(d) The preliminary expenses are to be written off.
(e) You are to assume that carriage outwards and travelers commission vary in direct proportion to sales.
(i)
(ii)
(iii)

Pre & Post Incorporation Profit

Accounts- IPCC Gr 1

You are required to prepare Profit and Loss Account for the year ended on 31 st March, 2001 apportioning the
profit or loss of the periods before and after incorporation. Depreciation shall be provided at 25% p.a. on Fixed Assets.
Question 7: - Rathi Ltd. was incorporated on 1st Jan. 2003 with an authorised capital consisting of 5,000 equity shares of Rs. 10
each to take over the running business of Kesarwani Brothers as from 1 st Oct. 2002. The following is the summarised
Profit and Loss A/c for the year ended 30th Sep. 2003:
Rs.
Rs
Cost of Sales for the year
16,000 Sales
Administrative expenses
1,768
1st Oct. 2002 to
st
Selling Commission
875
31 Dec. 2002
6,000
Goodwill written off
200
1st January, 2003 to
Interest paid to vendors (Loan repaid
30th September, 2003
19,000
25,000
st
on 1 February, 2003)
373
Distribution expenses (60% variable)
1,250
Preliminary expenses written off
330
Debenture interest
320
Depreciation
444
Directors fees
100
Net Profit
3,340
25,000
25,000
The company deals in one type of product. The unit cost of sales was reduced by 10% in the post-incorporation
period as compared to the pre incorporation period in the year. You are required to apportion the net profit amount
between pre incorporation and post incorporation periods showing the basis of apportionment.
Question 8: - Chaitanya Industries Private Ltd. was incorporated on 1.2.2003. It took over the proprietary business of Chaitanya,
with effect from 1.1.2003. The Balance Sheet of Chaitanya as at 31st December, 2002 is as follows: Balance Sheet as at 31st December, 2002
Liabilities
Rs.
Assets
Rs.
Capital
4,31,500
Sundry Debtors
25,700
Trade Creditors
17,000
Building
1,10,000
Loans
8,500
Machinery
3,00,000
Creditors for Expenses
2,500
Loss
23,800
4,59,500
4,59,500
It was agreed to pay Rs. 4,50,000 in equity shares to Chaitanya. The company decided to close its first years
accounts as at 31st December, 2003. The following are the further details, furnished to you: Rs.
Sales
3,00,000
Purchases
1,40,000
Salaries and wages
40,000
General Expenses
32,000
Freight
4,700
Interest Paid
8,000
Stock in Trade
22,000
Additions to building
38,000
Depreciation may be provided at 10% on assets including additions.
The company requests you to prepare:
(i)
The Journal entries for the takeover:
(ii)
Chaitanyas account
(iii)
Profit and Loss Account showing separately pre incorporation and post incorporation profits for
the year ending 31st December, 2003.
Question 9: - An unqualified assistant of M/s. Narayan & Co. (P) Ltd. prepared the following statements:
Profit and Loss Account as on 31st March 2004
Rs.
Stock as on 31st March 2004
2,00,000
Sales

Pre & Post Incorporation Profit

Rs.
10,00,000

Accounts- IPCC Gr 1

4,00,000
Stock as on 1st April 2003
2,00,000
2,70,000
30,000
11,00,000
Balance Sheet for the year ended 31st March 2004
Rs.
Rs.
Assets
2,00,000
Plant
1,00,000
Investment in firm Capital
1,00,000
4,00,000 Share of Income received
50,000
Debtors
2,00,000
25,000
30,000
1,45,000
8,50,000 Total

Purchases
Manufacturing wages
Administrative expenses
Net Profit

Liabilities
Keshav
Madhav
Govind
Reserve
Creditors
Deposits
Profits
Suspense
Total

1,00,000

11,00,000
Rs.
5,00,000
2,00,000
75,000

Rs.

2,75,000
75,000

8,50,000

The assistant is unable to agree the Books and the difference is shown as Suspense in the Balance Sheet.
You ascertain that a firm consisting of Mr. Keshav, Mr. Madhav and Mr. Govind converted their business into
the above Private Limited Company on 1st June, 2003. The following further information is furnished: (a) The company was incorporated on 1st June 2003. The partners became the directors of the company.
(b) It was agreed that the Goodwill of the firm be Rs. 50,000 and Plant was considered worth Rs. 6,00,000. No
adjustments were made in the books of the Company. The books maintained by the partners are continued.
(c) The partners shared the profits in the ratio of 2:2:1 and they desire that their rights towards profits of the company
should remain unchanged.
(d) The Reserve in the above statements represents Reserves of the partners.
(e) The sales for the pre incorporation period were Rs. 1,00,000 and for the post incorporation period Rs. 9,00,000.
(f) The details of the Administrative expenses are as under: Rs.
Salary to Works Manager
72,000
Salary to Directors
50,000
Rent for the premises
24,000
Selling expenses
54,000
Salary to staff
60,000
Traveling
12,000
Audit fees (company)
3,000
2,75,000
(g) The company invested Rs. 2,00,000 in a firm on 15th June 2003 and received income of Rs. 75,000 thereon.
(h) Charge Depreciation on Plant @ 10% on the Closing Balance and make provision for taxation at 50% of the
profits.
(i) The directors desire to make following appropriations: (a) To transfer to General Reserve 10% of the profits after tax.
(b) To recommend dividend of 10% on the capital of company.
(j) The capital of the company is to be Rs. 5,00,000 in shares of Rs. 100 each to be issued to the partners in their
profit sharing ratio as purchase consideration.
(k) You are required to prepare
(1) Continued Trading Account for the period ended 31st March 2004.
(2) Profit and loss account for the pre incorporation and post incorporation periods and the Balance Sheet
as at 31st March 2004.
Question 10: - Kalyan Kumar formed a private limited company under the name of Kalyan Private Limited to take over his
existing business as from April 1, 2001, but the company was not incorporated until July 1, 2001. No entries relating to
transfer of the business were entered in the books, which were carried on without a break until March 31, 2002.
The following Trial Balance was extracted from the books as on March 31. 2002: Dr. (Rs.)
Cr. (Rs.)
Stock, April 1, 2001
4,300
Sales
27,800
Purchases
18,900

Pre & Post Incorporation Profit

Accounts- IPCC Gr 1

Carriage outwards
Travelers commission
Office Salaries and Expenses
Rent and Rates
Kalyan Kumars Capital Account, April 1, 2001
Directors Fees
Fixed Assets
Current Liabilities
Current Assets (other than stock)
Preliminary Expenses

(a)
(b)
(c)
(d)
(e)

330
750
2,100
1,200
23,000
1,800
13,400
3,700
11,200
520
54,500

54,500
You are also given the following information: Stock, March 31, 2002, Rs. 4,400.
The purchase consideration was agreed at Rs. 30,000 to be satisfied by the issued of 3,000 Equity Shares of Rs. 10
each.
The gross profit margin is constant and the monthly sales in April, 2001 February, 2002 and March, 2002 are
double the monthly sales for the remaining months of the year.
The preliminary expenses are to be written off.
You are to assume that carriage outwards and travelers commission vary in direct proportion to sales.

You are required to prepare Trading and Profit and Loss Account for the year ended March 31, 2002 apportioning the
periods before and after incorporation and a Balance Sheet as on that date. Ignore depreciation.
Question 11:Accounting Period
-Calendar year
Date of taking over of Business
-1.1.201
Date of Incorporation
-1.5 201
Date Commencement of Business
-1.7.201
Total Sales during 201
-Rs 9,60,000
Required: Calculate the Sales Ratio in each of the following alternative cases:-Case (a) Sales were uniform throughout the period.
Case (b) 80% Sales upto 1.9.201 and the balance for the remaining period
Case (c) Sales were as under:(i)
For January twice the average sales
(ii)
For February Equal to average Sale
(iii) From May to August one forth of the average Sale in each month.
(iv)
For October & November Three times the average Sale in each month
Case (d) The monthly average of turnover during the first four months of 201 was half the corresponding figure for remaining
period.
Case (e) The monthly average of turnover during the first eight month of 201 was twice the corresponding figure for the
remaining period.
Case (f) The monthly sales in Jan, Nov and Dec. are double the monthly sales for the remaining months of the year.
Case (g) The turnover was evenly upto the date of the certificate of commencement, where after the same spurted to record an
increase of two-thirds during the rest of the year.
Question 12:Date of Taking over Business
-1.1.201
Date of Incorporation
-1.5.201
Date of Commencement of Business
-1.7.201
Accounting Period
-Calender year
Total wages incurred during 201
-Rs 72,000
Required: Calculate the wage ratio in each of the following alternative cases:Case (a) Wages were paid uniformly during the period
Case (b) 50% of wages pertain to the first 8 months and the balance for the remaining period.
Case (c) No. of workers employed during the First 4 months 4
No. of workers employed during remaining period 8

Pre & Post Incorporation Profit

Accounts- IPCC Gr 1

Case (d) Rate of wages during first 4 month was half of the corresponding figure for the remaining period
Case (e) No. of workers during first four month was twice the corresponding figure for the remaining period & the rate of wages
during the first four months was half the corresponding figure for the remaining period.
Case (f) No. of workers & rate of wages during first six months was half the corresponding figure for the remaining period.
Case (g) The rates of wages tripled from 1st April 201.
Question 13:Date of acquisition of business 1st April 20X1, Date of incorporation of Public Ltd. Company 1 st Aug. 20X1, Date of Certificate
to Commence business 1st Oct. 20X1, Sales from 1st April 20X1 to 31st July 20X1 Rs 2,40,000 and sales from 1st Aug. 20X1 to
31st March 20X2 Rs 7,20,000. The company deals in one type of product. The unit cost of sales was reduced by 10% since 1 st
Aug 20X1 as compared to pre-incorporation period. The cost of goods sold from 1 st April 20X1 to 31st Mar. 20X2 amounted to
Rs 7,77,000. Calculate the Gross Profit for pre-incorporation and post-incorporation period.
Solution:
Let cost of good sold in the pre-incoperation period be Rs 100. Then, Cost of goods sold in the post-incorporation period = Rs 90
Sales Ratio = 2,40,000 : 7,20,000 = 1:3
Thus, Cost of good sold Ratio = 100 1 : 90 3 = 100 : 270 = 10 : 27
Pre incorporation
Post incorporation
A
Sales
Rs 2,40,000
Rs 7,20,000
B
Less: Cost of Good sold (10:27)
Rs 2,10,000
Rs 5,67,000
C
Gross Profit (A B)
Rs 30,000 .
Rs 1,53,000

Pre & Post Incorporation Profit

Accounts- IPCC Gr 1