1

Index
No Particulars Page
1 Why to Join CA ANAND R BHANGARIYA for CA Inter Accounts? 1-6
2 Past Paper Analysis Chart 7-8
3 Profit Prior to Incorporation Notes 9-39

Why to Join CA ANAND R BHANGARIYA for CA Inter

Accounts?

The only faculty who provides SUPPORT from the FIRST DAY OF
YOUR CLASSES TILL YOUR EXAM DAYS !!!

Support from Anand Bhangariya at 3 Level

Level 1 Level 2 Level 3

During the tenure of During Exam During Exam
Live Batch Preparation Leave Period

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• Keynotes for exam days

Classes Ends
Classes Begins Preparatory Leave Begins Exam Begins

• Class Work, Scanner and Test

Series
• Planner
• Chapter Level Test Series • Revision Notes
(evaluation from qualified CAs) • Video Lectures Backup
• Online Attendance and Feedback • Marathon Lectures
System

LEVEL I – DURING THE TENURE OF LIVE BATCH

1) Class Notes
i) Class Work
• Step by step progress via Concept Questions
• 100% ICAI Study Material and Exam Questions Covered.

ii) Scanner (MCMR)

• Additional questions along with solutions for practice

iii) Test Series

• The in-built test series at the end of each chapter for self-analysis.

2) CAVidya Test Series

Chapter Level Online Test Series has been introduced to each and every
student which will be evaluated by qualified Chartered Accountant.

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SAMPLE TEST SERIES EVALUATION

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3) CAVIDYA Mobile App

• Answer to Homework questions
• Answer to Test Series which is inbuilt in every chapter.

4) Attendance & Feedback System

• Student can give real time feedback in the class.
• If student doesn’t understand any concept, he can give his feedback on
real time basis to the teacher.

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LEVEL II – DURING EXAM PREPARATION LEAVE

1. PLANNER
It is an organized schedule that students create which helps you to plan your studies
and incorporate them into your daily life.

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2. REVISION NOTES
• At least one question each on all Concepts
• Helpful to revise the complete syllabus in short span of time.

3. VIDEO LECTURES SUPPORT AT ZERO COST

• All live batch lectures are recorded and made available to students.
• We provide access of all video lectures to all the students of live batch for limited
period

4. MARATHON LECTURES
• Marathon Lectures targets to revise the whole syllabus in one day with all concepts.

LEVEL III – DURING EXAM PERIOD

1. Keynotes
• 100% concepts covered
• Revision Notes for the day of
Exam

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PAST PAPER ANALYSIS CHART

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May 2018 Nov 2018 May 2019 Nov 2019 Dec 2020 Jan 2021
Q No Chapter Marks Q No Chapter Marks Q No Chapter Marks Q No Chapter Marks Chapter Marks Chapter Marks
1 (a) AS 12 5 1 (a) AS 10 5 1 (a) AS 16 5 1 (a) AS 3 5 1 (a) AS 10 5 1 (a) AS 10 5
1 (b) AS 11 5 1 (b) AS 11 5 1 (b) AS 13 5 1 (b) AS 11 5 1 (b) AS 12 5 1 (b) AS 13 5
1 (c) AS 22 5 1 (c) AS 1 5 1 (c) AS (Mix) 5 1 (c) AS 2 5 1 (c) AS 13 5 1 (c) AS 2 5
1 (d) AS 5 5 1 (d) AS 4 5 1 (d) AS 4 5 1 (d) AS 22 5 1 (d) AS 16 5 1 (d) AS 11 5
Investment Investment Dissolution of Departmental
2 (a) Accounts 10 2 (a) Accounts 10 2 (a) Hire Purchase 10 2 (a) Firm 15 2 (a) Branch Accounts 10 2 (a) Accounts 10
Dissolution of
2 (b) Insurance Claims 10 2 (b) Insurance Claims 10 2 (b) Insurance Claims 10 2 (b) Firm 5 2 (b) Single Entry 10 2 (b) Single Entry 10
Departmental Investment Investment Investment
3(a) Accounts 10 3(a) Single Entry 15 3(a) Single Entry 12 3(a) Accounts 10 3(a) Accounts 10 3(a) Accounts 10
Departmental
3(b) Branch Accounts 10 3(b) Accounts 5 3(b) Branch Accounts 8 3(b) Insurance Claims 10 3(b) Insurance Claims 10 3(b) Insurance Claims 10
Amalgamation Dissolution of Amalgamation Departmental Cash Flow Redemption of
4 (a) and sale of Firm 15 4 Firm 20 4 and sale of Firm 20 4 (a) Accounts 10 4 (a) Statements 10 4 (a) Debentures 8
Dissolution of Redemption of Cash Flow
4 (b) Firm 5 4 (b) Single Entry 10 4 (b) Debentures 10 4 (b) Statements 12
Redemption of Redemption of
Profit Prior to Profit Prior to Preference Company Final Preference
5(a) Incorporation 10 5(a) Incorporation 12 5(a) Shares 10 5(a) Accounts 10 5(a) Hire Purchase 12 5(a) Shares 12
Redemption of Redemption of
Preference Redemption of Cash Flow Amalgamation Preference
5(b) Shares 10 5(b) Debentures 8 5(b) Statement 10 5(b) and sale of Firm 10 5(b) Shares 8 5(b) Hire Purchase 8
Company Final Company Final Departmental
6 (a) Accounts 5 6 (a) AS 5 6 (a) AS 22 5 6 (a) Accounts 5 6 (a) Accounts 5 6 (a) Framework 5
AS
(Characteristics of Company Final Company Final
6 (b) Bonus Shares 5 6 (b) FS) 5 6 (b) Accounts 5 6 (b) Bonus Shares 5 6 (b) Framework 5 6 (b) Accounts 5
Redemption of Profit Prior to Company Final
6 (c) Debentures 5 6 (c) AS 11 5 6 (c) Incorporation 5 6 (c) AS 17 5 6 (c) Accounts 5 6 (c) Branch Accounts 5
Redemption of
Preference Dissolution of Dissolution of
6 (d) AS 17 5 6 (d) Shares 5 6 (d) Firm 5 6 (d) Firm 5 6 (d) Framework 5 6 (d) Introduction to AS 5
Cash Flow Dissolution of Redemption of Profit Prior to
6 (e) Statements 5 6 (e) Firm 5 6 (e) AS 2 5 6 (e) Debentures 5 6 (e) Incorporation 5 6 (e) Bonus Shares 5
125 125 125 125 125 125

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WHAT YOU WANT TO BECOME?

FOR THAT
TO DO NOT TO DO

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CA Inter Accounts | Profit/ (Loss) Prior To Incorporation 10.A

PROFIT/ (LOSS) PRIOR TO INCORPORATION

Q. No. R1 R2 R3 Special Point
Class Work
1 Additional Question
2 Additional Question
3 Additional Question
4 ICAI Illustration 5
5 ICAI Illustration 7
6 ICAI Illustration 4
7 RTP Nov 18
8 Exam Nov 18
9 Exam May 18
10 Exam May 18 (Old Syllabus)
/ ICAI Practical Question 4
11 Exam May 19
12 RTP May 19 / ICAI Illustration
2 / Mock Test Oct 21 Series 1
13 Exam Nov 19
14 RTP Nov 19
Test In Time
1 ICAI Illustration 3
2 ICAI Practical Question 2
MCMR
1 ICAI Illustration 1
2 ICAI Illustration 5 (OLD)
3 Practical Question 1
4 Practical Question 3
5 Additional Question
6 RTP May 20 /
Oct 20 Mock Test Paper
7 RTP Nov 20
8 Exam Dec 21

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CA Inter Accounts | Profit/ (Loss) Prior To Incorporation 10.B

9 Exam July 21
10 RTP May 21
11 RTP May 21 /
Mock Test Oct 21 series 2
12 RTP Nov 21
13 ICAI Illustration 6

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PROFIT/(LOSS) PRIOR TO INCORPORATION

Let’s Brush-up our concepts
1. What is Drawings?
2. How did you pay your class fees?
3. Can you withdraw unlimited from business?

1. INTRODUCTION
In many cases, a new company is formed exclusively to acquire an existing business unit and
take it over as a Going concern, from a date prior to its own incorporation.
In such cases, the business unit is purchased first, and the registration of the acquiring
company takes place later.
For example, Sarvottam Pvt. Ltd. is incorporated on 1st April, 2008 to take over the running
business of Uttam Bros. from 1stJanuary, 2008. The profit earned (or loss suffered) during the
pre-incorporation period (in our example: 1st January to 3 1st March 2008) is called profit
(loss) prior to incorporation. Legally, this profit is not available for distribution as dividend,
since a company cannot earn profit before it comes into existence. However, profit earned
after incorporation is available for distribution as dividend. Profit earned before
incorporation is a capital profit and profit earned after incorporation is a
revenue profit.

2. ALLOCATION OF PROFITS
Division of Profit in two periods

Prior-incorporation period Post-incorporation period

from the date of takeover of business to from the date of incorporation to

the date of incorporation the year ending date

Example: Moon Pvt. Ltd. was incorporated on 1st August,2008 to acquire a running business
with effect from 1st March, 2008. The books of accounts were closed on 31st March, 2009.
Pre-incorporation period- 1st March, 2008 to 31st july, 2008 i.e., 5 months.
Post-incorporation period- 1st August, 2008 to 31st March, 2009, i.e., 8 months.

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Pre Incorporation Period Post Incorporation Period

1stMarch 2008 1stAugust 2008 31stMarch 2009

(Acquisition) (Incorporation) (End of Financial year)

3. ACCOUNTING TREATMENT OF PROFITS

Accounting Treatment of Profit

Profit prior to Incorporation Loss prior to Incorporation

• It’s a capital profit hence credited to • Treated as a part of Business

capital Reserve. Acquisition Cost (Goodwill)
• Can be used for • Can be used for
• writing off Goodwill on acquisition • Setting off against Post
• writing off Preliminary Expenses incorporation Profit
• writing down over-valued assets • Addition to Goodwill on
• issuing bonus shares acquisition

• paying up partly paid shares • Writing off Capital Profit

4. BASIS OF APPORTIONMENT

Item Basis of Apportionment between pre and Post

incorporation period
Gross Profit or Gross Loss Sales Ratio - On the basis of turnover in the
respective periods. (first preference) Or
On the basis of cost of goods sold in the respective
periods in the absence of any information regarding
turnover. (Second preference) Or
Time Ratio - On the basis of time in the respective
periods in the absence of any information regarding
turnover and cost of goods sold (third preference).
Variable expenses linked with Sales Ratio - On the basis of Turnover in the pre
Turnover [e.g. Carriage/Cartage and post incorporation.
outward, Selling and distribution
expenses, Commission to selling
agents/travelling agents,
advertisement expenses, Bad

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debts (if actual bad debts for the

two periods are not given),
Brokerage, Sales Promotion.]
Fixed Common charges [e.g. Time Ratio - On the basis of Time in the pre and
Salaries, Office and Administration post incorporation periods.
Expenses, Rent, Rates and Taxes,
Printing and Stationery, Telephone,
Telegram and Postage,
Depreciation, Miscellaneous
Expenses]
Expenses exclusively relating to Charge to pre-incorporation period but if the
pre- Incorporation period [e.g. purchase consideration is not paid on taking over of
Interest on Vendor’s Capital] business, interest for the subsequent period is
charged to post incorporation period.
Expenses exclusively relating to Charge to Post-incorporation period
post- incorporation period [e.g.
Formation expenses, interest on
debentures, director’s fees,
Directors’ remuneration, Preliminary
Expenses, share issue Expenses,
Underwriting commission, Discount
on issue of securities.]
Audit Fees
• For Company’s Audit under • Charge to Post-incorporation period
the Companies Act, 2013.
• For Tax Audit under section • On the basis of turnover in the respective
44AB of the Income tax Act, periods.
1961
Interest on purchase
consideration to vendor:
• For the period from the date of • Charge to Pre-incorporation period
acquisition of business to date
of incorporation.
• For the period from the date of
incorporation. • Charge to Post-incorporation period

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Let’s Get Started….With Class Work

1 Flat Private Limited was incorporated on 1st July, 2010 to take over the running business of Mr.
Round with effect from 1st April, 2010. The following Profit and Loss Account for the year ended
31st March, 2011 was drawn up.
Particulars Rs. Particulars Rs.
To commission 2,625 By Gross Profit 98,000
To advertisement 5,250 By bad debts realised 500
To managing director’s remuneration 9,000
To depreciation 2,800
To salaries 18,000
To insurance 600
To preliminary expenses 700
To rent and rates 3,000
To discount 350
To bad debts 1,250
To net profit 54,925
Total 98,500 Total 98,500
The following details are available –
1 The average monthly turnover from July, 2010 onwards was double than that of previous
months.
2 Rent for the first three months was paid @ Rs. 200 per month and thereafter at a rate
increased by Rs. 50 per month.
3 Bad debts Rs. 350 related to sales effected after 1st September, 2010 and the realisation of
bad debts was in respect of debts written off during the year 2007.
4 Advertisement expenses were directly proportionate to the sales
You are required to find out the profit prior to and after incorporation and to state the
treatment thereof in the books of the Company.

2 Subhash Limited was incorporated on 1st March, 2010 and received its certificate for
commencement of business on 1st April, 2010. The company brought the business of M/s. Small
& Co. with effect from 1st November, 2009. From the following figures related to the year

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ending 31st October, 2010, find out the profits available for dividends;
a. Sales for the year were Rs. 6,00,000 out of which sales upto 1st March 2010 were Rs. 2,50,000
b. Gross profit for the year was Rs. 1,80,000
c. The expenses debited to the Profit and Loss Account were –
Particulars Rs.
Rent 9,000
Salaries 15,000
Directors fees 4,800
Interest on debentures 5,000
Audit fess 1,500
Discount of sales 3,600
Depreciation 24,000
General expenses 4,800
Advertising 18,000
Stationery and printing 3,600
Commission on sales 6,000
Bad debts (Rs. 500 relates to debts created prior to incorporation) 1,500
Interest to vendor on purchase consideration up to 1st May, 2010 3,000

3 The business carried by Khushilal under the name “Lost Horizon” was taken over as a running
business with effect 1st July, 2010 by North Horizon limited which was incorporation on 1st
October, 2010. The same set of books was continued since there was no change in the type of
business and the following particulars of profit for the year ended 30th June, 2011 were
available –
Particulars Rs. Rs.
Sales –
Company period 40,000
Prior period 10,000 50,000
Selling expenses 2,000
Preliminary expenses (written off) 1,200
Salaries 3,600
Director’s fees 1,200
Interest on capital (upto 30.9.2010) 700
Variable expenses 1,500

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Depreciation 2,800
Rent 4,800
Purchases 25,000
Carriage inward 1,019 43,819
Net profit 6,181
The purchase price (including carriage inward) for the company 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 incorporation
profits stating the basis of allocation of expenses. (RTP May 2018)

4 The partners of Maitri agencies decided to convert the partnership into a private limited
company called M A (P) Ltd., with effect from 1st January, 2010. The consideration was agreed
at Rs. 11,70,000 based on the firm’s Balance Sheet as at 31st December, 2009. However, due to
some procedural difficulties, the company could be incorporated only on 1st April, 2010.
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 accounts were
continued by the company which closed its accounts for the first time on 31st March, 2011 and
prepared the following summarized profit and loss account –
Particulars Rs. Rs.
Sales 2,34,00,000
Cost of goods sold 1,63,80,000
Salaries 11,70,000
Advertisements 7,02,000
Discounts 11,70,000
Managing director’s remuneration 90,000
Miscellaneous office expenses 1,20,000
Office-cum-show room rent 7,20,000
Interest 9,51,000
Depreciation 1,80,000 2,14,83,000
Net profit 19,17,000
The company’s only borrowal 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 2010 but
the salaries trebled from that date. It had to occupy an additional space from 1st July, 2010

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for which rent was Rs. 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.

5 ABC Ltd. was incorporated on 1.5.2013 to take over the business of DEC and Co. from 1.1.2013.
The Profit and Loss Account as given by ABC Ltd. for the year ending 31.12.2013 is as under :
Profit and Loss Account
Particulars Rs. Particulars Rs.
To Rent and Taxes 90,000 By Gross Profit 10,64,000
To Salaries including Manager’s 3,31,000 By Interest on Investments 36,000
salary of Rs. 85,000
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
Total 11,00,000 Total 11,00,000
Prepare a statement showing allocation of pre-incorporation and post-incorporation profits
after considering the following informations :
a. G.P. ratio was constant throughout the year.
b. Sales for January and October were 1 ½ times the average monthly sales while sales for
December were twice the average monthly sales.
c. Bad Debts are shown after adjusting a recovery of Rs. 7,000 of Bad Debt for a sale made
in July, 2010.
d. Manager’s salary was increased by Rs. 2,000 p.m. from 1.5.2013.
e. All investments were sold in April, 2013.

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6 Inder and Vishnu working in partnership registered a joint stock company under the name of
Fellow Travellers Ltd. on May 31 2014 to take over their existing business. It was agreed that
they would take over the assets of the partnership for a sum of Rs.300000 as from January 1st
2014 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 2014.To discharge the purchase
consideration the company issued 20000 equity shares of Rs.10 each at a premium of Rs.1 each
and allotted 7% Debentures of the face value of Rs.150000 to the vendors at par.
The summarized Profit and Loss Account of the “Fellow Travellers Ltd.” for the year ended 31st
December 2014 was as follows:
Particulars Rs. Particulars Rs.
To Purchase including Inventory 140000 By Sales:
To Freight and carriage 5000 1st January to 31st May 2014 60000
To Gross Profit c/d 60000 1st June to 31st Dec.2014 120000
By Inventory in hand 25000
Total 205000 Total 205000
To Salaries and Wages 10000 By Gross profit b/d 60000
To Debenture Interest 5250
To Depreciation 1000
To Interest on purchase
Consideration (up to 30-6-2014) 9000
To Selling commission 9000
To Directors’ Fee 600
To Preliminary expenses 900
To Provision for taxes (entirely 6000
related with company)
To Dividend on equity shares @5% 5000
To Balance c/d 13250
Total 60000 Total 60000
Prepare statement apportioning the expenses and calculate profits / losses for 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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7 RTP Nov 2018

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
Particulars Amount (Rs.) Particulars Amount (Rs.)
To Salary 1,44,000 By Gross Profit 4,50,000
To Interest on Debenture 36,000
To Sales Commission 18,000
To Bad Debts 49,000
To Depreciation 19,250
To Rent 38,400
To Audit fees (Company Audit) 12,000

To Net Profit 1,33,350

Total 4,50,000 Total 4,50,000
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:
1. GP ratio was constant throughout the year.
2. Depreciation includes Rs. 1,250 for assets acquired in post incorporation period.
3. Bad debts recovered amounting to Rs. 14,000 for a sale made in 2014-15 has been
deducted from bad debts mentioned above.
4. Total sales were Rs. 18,00,000 of which Rs. 6,00,000 were for April to September.
5. Happy Ltd. had to occupy additional space from 1 st Oct. 2017 for which rent was Rs.
2,400 per month.

8 ICAI Nov 2018 Exam

Sun Limited took over the running business of a partnership firm M/s A & N Brothers with
effect from 1st April, 2017. The company was incorporated on 1st September, 2017. The following
profit and loss account has been prepared for the year ended 31% March, 2018.

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Particulars Rs. Particulars Rs.

To salaries 1,33,000 By Gross Profit b/d 7,50,000
To rent 96,000
To carriage outward 75,000
To audit fees 12,000
To travelling expenses 66,000
To commission on sales 48,000
To printing and stationery 24,000
To electricity charges 30,000
To depreciation 80,000
To advertising expenses 24,000
To preliminary expenses 9,000
To managing director’s remuneration 8,000
To Net Profit c/d 1,45,000
7,50,000 7,50,000
Additional Information:
i. Trend of sales during April, 2017 to March 2018 was as under:
April, May Rs. 85,000 per month
June, July Rs. 1,05,000 per month
August, September Rs. 1,20,000 per month
October, November Rs. 1,40,000 per month
December onwards Rs. 1,50,000 per month
ii. Sun Limited took over a machine worth Rs. 7,20,000 from A&N Brothers and purchased a
new machine on 1st February, 2018 for Rs. 4,80,000. The company decides to provide
depreciation @ 10% p.a.
iii. The company occupied additional space from 1st October, 2017 rent of Rs. 6,000 per month.
iv. Out of travelling expenses, Rs. 30,000 were incurred by office staff while remaining expenses
were incurred by salesmen.
v. Audit fees pertains to the company.
vi. Salaries were doubled from the date of incorporation.
You are required to prepare a statement apportioning the expenses between pre and post
incorporation periods and calculate the profit/(loss) for such periods.

9 ICAI May 2018 Exam

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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 expenses from 1st April 2017, till 31st March, 2018 were as follows: the whole year totalled
Rs. 2400 lakhs out of which sales till 31st July, 2017 were for Rs. 600 lakhs. Gross profit ratio
was 20%.
Particulars Rs. 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.

10 ICAI Exam May 2018 Old Syllabus

A partnership firm M/s. Nice Sons was carrying on business from 1st May, 2017. The partners
of the firm decided to convert the partnership firm into a private company called Zenith (P)
Ltd. with effect from 1st September, 2017. The annual accounts were drawn upto 31st March,
2018. The summarised Profit and Loss Account from 1st May, 2017 to 31st March, 2018 is as
follows
Particulars Rs. Rs.
Turnover 55,20,000
Interest on Investment 60,000
Profit on sale of Investment 42,000
56,22,000
Less:
Cost of goods sold 34,50,000
Printing & Stationery 77,000

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Manager's Salary 82,000

Audit Fees 41,000
Rent 1,33,000
Bad Debts 33,000
Underwriting Commission 56,000
Depreciation 71,500
Interest on Debentures 8,900
Advertising campaign expenses 69,800
Sundry office expenses 1,06,700
Interest on borrowings 1,25,000 42,53,900
Net Profit 13,68,100
Additional Information Provided:
(1) The company's only borrowing was a loan of Rs. 15,00,000 at 9% p.a., to pay the purchase
consideration due to the firm and for working capital requirements. The loan was taken
on 1st September, 2017.
(2) The company occupied additional space from 1st September, 2017 for which rent of Rs.
8,000 per month was incurred.
(3) Audit fee pertains to the company.
(4) Bad debts recovered amounting to Rs. 36,000 for a sale made in June 2017, has been
deducted from bad debts mentioned above
(5) All investments were sold in August 2017.
(6) Zenith (P) Ltd. initiated an advertising campaign on 1st September, 2017, which resulted
increase in monthly average sales by 40%.
(7) The salary of Manager was increased by Rs. 3,000 p.m. from 1st July, 2017.
Prepare a statement showing pre-incorporation and post-incorporation profit for the year
ended 31st March 2018

11 QP 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 ` 12,00,000 of which
` 2,40,000 were for the first six months. The Gross Profit for the year is ` 4,15,000. The expenses
debited to the Profit and Loss account included:
(i) Director’s fees ` 25,000

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(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
Prepare a statement showing pre-incorporation and post-incorporation profit for the year
ended 31st March, 2019. And also explain how profits are to be treated.

12 RTP May 2019

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 ` 48,00,000 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 & 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-incorporation and post-incorporation profit for the year
ended 31st March, 2018.

13 QP Nov 19
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 summarised profit & loss account for the year ended 31.3.2019 is below.
Particulars ` in lakhs ` in lakhs
Turnover 245.00
Interest on investments 6.00 251.00

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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
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 jn 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 ncorporation periods and
calculate the profit / loss for such periods.

14 RTP Nov 19
Roshani & Reshma working in partnership, registered a joint stock company under the name
of Happy Ltd. on May 31st 2018 to take over their existing business. The summarized Profit &
Loss A/c as given by Happy Ltd. for the year ending 31st March, 2019 is as under:
Happy Ltd.
Profit & Loss A/c for the year ending March 31, 2019

Particulars Amount (`)

Amount (`) Particulars
To Salary 1,44,000 By Gross Profit 4,50,000
To Interest on Debenture 36,000
To Sales Commission 18,000

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To Bad Debts 49,000

To Depreciation 19,250
To Rent 38,400
To Company Audit fees 12,000
To Net Profit 1,33,350
Total 4,50,000 Total 4,50,000
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 2015-16 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. 2018 for which rent was `
2,400 per month.

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Nazar Hati Durghatna Ghati…

Test In Time…Pass In Time

1. 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 1stAugust 2012.The annual
accounts were made up to 31st March 2013 which revealed that the sales for the whole year
totaled 1600 lakhs out of which sale still 31st July 20I2 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
Traveler's 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.

2. The partners Kamal and Vimal decided to convert their existing partnership business in to 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:
Rs. in lakhs Rs. in lakhs
Turnover 240
Interest on investments 6
246
Less: Cost of goods sold 102
Advertisement 3
Sales Commission 6
Salary 18

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Managing directors remuneration 6

Interest on Debentures 2
Rent 5.5
Bad Debts 1
Underwriting Commission 2
Audit fees 2
Loss on sale of investment 1
Depreciation 4 152.5
93.5
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 20000 per month
was incurred.
(v) Bad debts recovered amounting to 50000 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.

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‘My Career My Responsibility’

Career requires Action, Responsibility, and Ownership from you. You are the most
important factor in whether you experience career growth and development. The most
important issue about your career is taking responsibility for your own career.

1. ICAI Module Illustration No. 1 Easy

Rama Udyog Limited was incorporated on August 1 2013. It had acquired a running business of Rama
& Co. with effect from April 1 2013. During the year 2013-14 the total sales were 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 200000 was worked out after charging the following expenses:
i) Depreciation Rs.123000
ii) Directors’ fees Rs.50000
iii) Preliminary expenses Rs. 12000
iv) Office expenses 78000
v) Selling expenses Rs.72000 and
vi) Interest to vendors upto August 31 2013, Rs.5000.
Please ascertain pre-incorporation and post-incorporation profit for the year ended 31st March 2014.
Answer:
Calculation of pre and post incorporation periods
Particulars Basis Pre. Post Total
Gross profit (sales ratio) 2:7 120000 420000 540000
Less
Depreciation (time ratio) 1:2 41000 82000 123000
Directors fees Post - 50000 50000
Preliminary expenses Post - 12000 12000
Office expenses (time ratio) 1:2 26000 52000 78000
Selling expenses (sales ratio) 2:7 16000 56000 72000
Interest to vendors (5 months) - 4000 1000 5000
Capital reserve (bal.) 33000 -
Net profit (bal.) - 167000
# Calculation of
gross profit = net profit + indirect expenses
= 200000 + 123000 + 50000 + 12000 + 78000 + 72000 + 5000 = 540000
# Let the sale of first half year be x , hence the sale of later half year will be 2x
Total sales = x + 2x
3600000 = 3x
therefore, x = 1200000
Sale per month in first half year = 1200000/6 = 200000

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# Sale for April to July (pre inc. period) = 200000 x 4 = 800000

Sale of post inc. period = 3600000 – 800000 = 2800000
Sales ratio = 8 : 28 = 2 : 7
# Time ratio (pre 4 months):(post 8 months) = 1 : 2

2. ICAI Module Illustration No. 5

ABC Ltd. took over a running business with effect from 1 st 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 Rs. Particulars Rs.
To Salaries 48000 By Gross profit 320000
To Stationery 4800
To Travelling expenses 16800
To Advertisement 16000
To Miscellaneous trade expenses 37800
To Rent (office buildings) 26400
To Electricity charges 4200
To Director’s fee 11200
To Bad debts 3200
To Commission to selling agents 16000
To Tax Audit fee 6000
To Debenture interest 3000
To Interest paid to vendor 4200
To Selling expenses 25200
To Depreciation on fixed assets 9600
To Net profit 87600
Total 320000 Total 320000
Additional information:
(a) Total sales for the year which amounted to 1920000 arose evenly upto the date of 30.9.2013. There
after they spurted to record an increase of two- third during the rest of the year.
(b) Rent of office building was paid @ 2000 per month upto September 2013 and thereafter it was
increased by 400 per month.
(c) Travelling expenses include 4800 towards sales promotion.
(d) Depreciation includes 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 10 each.
Prepare Statement showing calculation of profits and allocation of expenses between pre and post
incorporation periods.
Answer:

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Calculation of pre and post incorporation periods

Particulars Basis Pre. Post Total
Gross profit (sales ratio) 1:3 80000 240000 320000
Less:
Salaries (time ratio) 1:2 16000 32000 48000
Stationery (time ratio) 1:2 1600 3200 4800
Advertisement (sales ratio) 1:3 4000 12000 16000
Misc. Trade expense (time ratio) 1:2 12600 25200 37800
Electricity charges (time ratio) 1:2 1400 2800 4200
Directors fee (post) - - 11200 11200
Bad debts (sales ratio) 1:3 800 2400 3200
Commission to selling agents (sales ratio) 1:3 4000 12000 16000
Tax audit fee (sales ratio) 1:3 1500 4500 6000
Debenture interest (post) - - 3000 3000
Selling expenses (sales ratio) 1:3 6300 18900 25200
Travelling expenses(16800-4800=12000) (time ratio) 1:2 4000 8000 12000
Sales promotion (4800) (sales ratio) 1:3 1200 3600 4800
Interest paid to vendor (working) - 2800 1400 4200
Rent (working) - 8000 18400 26400
Depreciation on asset used for whole year (9600-600) 1:2 3000 6000 9000
Depreciation on asset acquired in post Inc. period - - 600 600
Capital reserve (bal.) 12800 -
Net profit (bal.) - 74800
# Total sales of the year = 1920000, Let the normal monthly sale be x
2 3x+2x 5x
Hence increased monthly sale will be = x + x= =
3 3 3
Normal sales = April to September = 6 months
Increased sale = October to march = 6 months
Total sales = normal sale + increased sale
5x
1920000 = 6x + 6 x = 6x + 10x = 16x
3
Therefore 16x = 1920000
hence x = 120000
# Sales from April to July (pre Inc. period sales) = 4x = 480000
Post Inc. sales = 1920000 – 480000 = 1440000
Sales ratio = 48000 : 144000 = 1 : 3
# Calculation of time ratio
Pre inc. period = 4 months
post inc. period = 8 months
Therefore Time ratio = 4 : 8 = 1 : 2
# Interest paid to vendor is for 6 months after that company issued Equity shares and discharged
purchase consideration
Pre inc. period interest (4 months) = 4200 x 4/6 = 2800

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Post inc. period interest = 4200 – 2800 = 1400

# Rent for pre inc. period = 2000 x 4 = 8000
post inc. period = 26400 – 8000 = 18400

3. ICAI Module Practical Question No. 1

Sneha Ltd. was incorporated on 1 st 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 2400000 of which 480000 were for
the first six months. The Gross profit of the company Rs. 390800. The expenses debited to the Profit
& Loss Account included:
(i) Director's fees 30000
(ii) Bad debts 7200
(iii) Advertising 24000 (under a contract amounting to 2000 per month)
(iv) Salaries and General Expenses 128000
(v) Preliminary Expenses written off 10000
(vi) Donation to a political party given by the company 10000.
Prepare a statement showing pre-incorporation and post-incorporation profit for the year ended 31st
March 2014.
Answer:
Calculation of pre and post incorporation periods
Particulars Basis Pre. Post Total

Gross profit 1:9 39080 351720 390800

Less
Directors fees Post - 30000 30000
Bad debts 1:9 720 6480 7200
Advertising 1:3 6000 18000 24000
Salaries & general expenses 1:3 32000 96000 128000
Preliminary expenses Post - 10000 10000
Donation to political party Post - 10000 10000
Capital reserve 360 -
Net profit - 181240
# sales for April to June (pre inc. period)= 480000 x 3/6 = 240000
Post inc. Period sales = 2400000 – 240000 = 2160000
Sales ratio = 240000 : 2160000 = 1 : 9
# Time ratio (pre 3 months):(post 9 months) = 3 : 9 = 1 : 3

4. ICAI Module Practical Question No. 3

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:
Particulars Amount (`) Particulars Amount
(`)

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To Salaries 120000 By Gross Profit 600000

To Rent Rates & Taxes 80000
To Commission on Sales 21000
To Depreciation 25000
To Interest on Debentures 32000
To Director Fees 12000
To Advertisement 36000
To Net Profit for the Year 274000
600000 600000
(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
Answer:
Particulars Basis Pre. Post Total
Gross profit(working) 1:3 150000 450000 600000
Less
Salaries (time ratio) 1:2 40000 80000 120000
Rent, rates, & taxes (time ratio) 1:2 26667 53333 80000
Commission on sales (sales ratio) 2:5 6000 15000 21000
Depreciation (time ratio) 1:2 8333 16667 25000
Interest on debentures Post - 32000 32000
Director fees Post - 12000 12000
Advertisement Post - 36000 36000
Capital reserve 69000 -
Net profit - 205000
# Here it is assumed that advertising expenses include only expense on advertising campaign. Hence
whole expense is of post inc. period
# Calculation of time ratio
Pre inc. period = 4 months
post inc. period = 8 months
Therefore Time ratio = 4 : 8 = 1 : 2
# Let the monthly sales be x
Pre inc. period sales(April to July) = 4x
Post inc. period sales (August to March) = 8x + 25% = 10x
Sales ratio = 4 : 10 = 2 : 5
# GP for Pre inc. period sales = 25% of 4x = x
GP for Post inc. period sales = 30% of 10x = 3x
Gross profit distribution ratio = 1 : 3

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5. Additional Question
A firm M/s. Alag which was carrying on business from 1stJuly 2013 gets itself incorporated as a
company on 1st November 2013.The first accounts are drawn up to 31st March 2014. The gross profit
for the period is 56000.The general expenses are 14220;Director's fee
12000 p.a.; Incorporation expenses 1500.Rent up to 31st December was 1200 p.a. after which it is
increased to 3000 p.a. Salary of the manager who upon incorporation of the company was made a
director is 6000 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 820000 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:
Calculation of pre and post incorporation periods
Particulars Basis Pre. Post Total
Gross profit 2:5 16000 40000 56000
Less
General expenses 4:5 6320 7900 14220
Directors fees (12000 x 5/12)(Nov-Mar) Post - 5000 5000
Incorporation expenses Post - 1500 1500
Rent Working 400 950 1350
Managers salary (6000 x 4/12) Pre 2000 - 2000
Capital reserve 7280 -
Net profit - 24650
# Time ratio Pre = July to October (4 months)post = November to march (5 months)
Time ratio = 4 : 5
# Let the monthly sale of first four months be x,
hence monthly sale of next five months will be 2x
Pre inc. period sale = 4x
post inc. sale = 5 X 2x = 10x
Sales ratio = 4 : 10 = 2 : 5
# rent
pre inc. period rent = 1200 x 4/12 = 400
Post inc. period rent = (1200 x 2/12) + (3000 x 3/12) = 200 + 750 = 950

6. (May 20 RTP, Oct 20 MTP)

The partners of Shri Enterprises decided to convert the partnership firm into a Private Limited Company
Shreya (P) Ltd. with effect from 1st January, 2018. However, company could be incorporated only on
1st June, 2018. 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, 2018 to pay purchase consideration and for working capital.
The company closed its accounts for the first time on 31st March, 2019 and presents you the following
summarized profit and loss account:

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Particulars ` `
Sales 19,80,000
Cost of goods sold 11,88,000
Discount to dealers 46,200
Directors’ remuneration 60,000
Salaries 90,000
Rent 1,35,000
Interest 1,05,000
Depreciation 30,000
Office expenses 1,05,000
Sales promotion expenses 33,000
Preliminary expenses (to be written off in first year itself) 15,000 18,07,200
Profit 1,72,800

Sales from June, 2018 to December, 2018 were 2½ times of the average sales, which further increased to
3½ times in January to March quarter, 2019. The company recruited additional work force to expand the
business. The salaries from July, 2018 doubled. The company also acquired additional showroom at
monthly rent of ` 10,000 from July, 2018.

You are required to prepare a Profit and Loss Account showing apportionment of cost and revenue between
pre-incorporation and post-incorporation periods.
Answer
Shreya (P) Limited
Profit and Loss Account

for 15 months ended 31st March, 2019

Pre. inc. (5 Post inc. (10 Pre. inc. (5 Post inc. (10
months) months) months) months)
(`) (`) (`) (`)
To Cost of sales 1,80,000 10,08,000 By Sales 3,00,000 16,80,000
To Gross profit 1,20,000 6,72,000 (W.N.1)
3,00,000 16,80,000 3,00,000 16,80,000
To Discount to dealers 7,000 39,200 By Gross 1,20,000 6,72,000
profit
To Directors’ - 60,000 By Loss 750
remuneration
To Salaries (W.N.2) 18,750 71,250
To Rent (W.N.3) 15,000 1,20,000
To Interest (W.N.4) 30,000 75,000
To Depreciation 10,000 20,000
To Office expenses 35,000 70,000

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To Preliminary expenses - 15,000

To Sales promotion 5,000 28,000

expenses
To Net profit - 1,73,550
1,20,750 6,72,000 1,20,750 6,72,000

Working Notes:
1. Calculation of sales ratio:

Let the average sales per month in pre-incorporation period be x

Average Sales (Pre-incorporation) = x X 5 = 5x

Sales (Post incorporation) from June to December, 2018 = 2½ x X 7 = 17.5x

From January to March, 2019 = 3½ x X 3 = .......... 10.5x

Total Sales ..................................................................................................................... 28.0x

Sales ratio of pre-incorporation & post incorporation is 5x : 28x

2. Calculation of ratio for salaries

Let the average salary be x

Pre-incorporation salary = x X 5= 5x

Post incorporation salary

June, 2018 = x

July 18 to March, 2019 = x X 9 X 2 = 18x

19x

Ratio is 5 : 19

3. Calculation of Rent `

Total rent 1,35,000

Less: Additional rent for 9 months @ ` 10,000 p.m. 90,000

Rent of old premises apportioned in time 45,000

Apportionment Pre Inc. Post Inc.

Old premises rent 15,000 30,000

Additional Rent 90,000

15,000 1,20,000

4. Calculation of Interest `

Pre-incorporation period from January, 2018 to May, 2018

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6,00,000 𝑋 12 𝑋 5
= 𝑅𝑠. 30,000
100 𝑋 12
Post incorporation period from June, 2018 to March, 2019
9,00,000 𝑋 10 𝑋 10
= 𝑅𝑠. 75,000
100 𝑋 12
𝑅𝑠. 1,05,000

7. (Nov 20 RTP)
Green Ltd. took over a running business with effect from 1st April, 2019. The company was incorporated
on 1st August, 2019. The following summarized Profit and Loss Account has been prepared for the year
ended 31.3.2020:
Particulars ` Particulars `
To Salaries 72,000 By Gross profit 4,80,000
To Stationery 7,200
To Travelling expenses 25,200
To Advertisement 24,000
To Miscellaneous trade expenses 56,700
To Rent (office buildings) 39,600
To Electricity charges 6,300
To Director’s fee 16,800
To Bad debts 4,800
To Commission to selling agents 33,000
To Debenture interest 4,500
To Interest paid to vendor 6,300
To Selling expenses 37,800
To Depreciation on fixed assets 14,400
To Net profit 1,31,400
4,80,000 4,80,000

Additional information:

(a) Sales ratio between pre and post incorporation periods was 1:3.

(b) Rent of office building was paid @ ` 3,000 per month up to September, 2019 and thereafter it was
increased by ` 600 per month.

(c) Travelling expenses include ` 7,200 towards sales promotion. Travelling expenses are to be allocated
between pre and post incorporation periods on time basis.

(d) Depreciation include ` 900 for assets acquired in the post incorporation period.

(e) Purchase consideration was discharged by the company on 30 th September, 2019 by issuing equity
shares of ` 10 each.

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You are required to prepare Statement showing calculation of profits and allocation of expenses between
pre and post incorporation periods.

Answer
Statement showing calculation of profits for pre and post incorporation periods
for the year ended 31.3.2020
Particulars Pre-incorporation period Post- incorporation period
` `
A. Gross profit (1:3) 1,20,000 3,60,000
Less: Salaries (1:2) 24,000 48,000
Stationery (1:2) 2,400 4,800
Advertisement (1:3) 6,000 18,000
Travelling expenses (W.N.3) 6,000 12,000
Sales promotion expenses (W.N.3) 1,800 5,400
Misc. trade expenses (1:2) 18,900 37,800
Rent (office building) (W.N.2) 12,000 27,600
Electricity charges (1:2) 2,100 4,200
Director’s fee 16,800
Bad debts (1:3) 1,200 3,600
Selling agents commission (1:3) 8,250 24,750
Debenture interest 4,500
Interest paid to vendor (2:1) (W.N.4) 4,200 2,100
Selling expenses (1:3) 9,450 28,350
Depreciation on fixed assets (W.N.5) 4,500 9,900
B. 1,00,800 2,47,800
Pre-incorporation profit (A less B) 19,200
Post-incorporation profit (A less B) 1,12,200

Working Notes:

1. Time Ratio

Pre incorporation period = 1st April, 2019 to 31st July, 2019 i.e. 4 months
Post incorporation period is 8 months; Time ratio is 1: 2.

2. Rent
Particulars `
Rent for pre-incorporation period (` 3,000 x 4) 12,000 (pre)
Rent for post incorporation period
August,2019 & September, 2019 (` 3,000 x 2) 6,000
October,2019 to March,2020 (` 3,600 x 6) 21,600 27,600 (post)

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3. Travelling expenses and sales promotion expenses

Particulars Pre Post
` `
Traveling expenses ` 18,000 (i.e. ` 25200 -
` 7200) distributed in 1:2 ratio 6,000 12,000

Sales promotion expenses ` 7,200 distributed in 1:3 ratio 1,800 5,400

4. Interest paid to vendor till 30th September, 2019

Particulars Pre Post
` `
Interest for pre-incorporation period ` 6,300x 4/6 4,200

Interest for post incorporation period i.e. for

August, 2019 & September, 2019 = ` 6,300x 2/6 2,100

5. Depreciation
Particulars Pre Post
` `
Total depreciation 14,400
Less: Depreciation exclusively for post incorporation period 900 900
13,500
Depreciation for pre-incorporation period (13,500x4/12) 4,500
Depreciation for post incorporation period (13,500x8/12) ____ 9,000
4,500 9,900

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8. QP DEC 21
Peek Ltd. was incorporated on 01.07.2020 to take over the existing business of Rich & Co. With
effect from 01.04.2020. Date of closing books of accounts is 31.03.2021.
Total sales were ` 75,00,000, Rate of gross profit is 10% on sales.

The expenses charged to profit and loss statement includes;

Salesmen’s Commission ` 30,000

Discount Allowed ` 15,000
Carriage outward ` 45,000
Free sample ` 60,000
After Sales service charge ` 90,000
Directors’ fees ` 1,50,000
Audit Fees (Statutory audit of company) ` 70,000
Tax audit fees ton Chartered Accountant ` 15,000
Salary general Staff ` 16,000
Formation Expenses ` 30,000
Rent (office Building) ` 27,000
Generation Expenses ` 48,000
Donation to political party ` 51,000
General travelling Expenses ` 60,000
The sales per month in the first half year were half of what they were in the later half year.

Rent of office building was paid @ ` 2000 p. m upto 30th September, 2020 and thereafter it
was increased by ` 500 p. m

Prepare a statement showing incorporation & post incorporation profit for the year ended
31.03.2021 and also compute the amount to be transferred ton capital reserve account.

9. QP JULY 21
S. Ltd. was incorporated on 30th November 2020 to take over the running Business of proprietorship firm
of Mr. S. The various expenses debited to the profit and loss Account for the year 2020-21 included:
i) Directors fees
ii) Preliminary expenses written off

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iii) Salaries and general expenses

iv) Statutory Audit fees
v) Tax Audit fees u/s 44 AB of the Income Tax Act, 1961
vi) Commission to travelling agents
vii) Sale promotion expenses
viii) Advertisement expenses
ix) Rent expenses
x) Bad debts
You are required to determine the basis of apportionment of above expenses between pre incorporation
and post incorporation periods.

Solution:
No. Particulars Basis of apportionment
(i) Directors Fees Charge to Post incorporation period
(ii) Preliminary Expenses written off Charge to Post incorporation period
(iii) Salaries and general expenses Time ratio
(iv) Statutory Audit Fees Charge to Post incorporation period
(v) Tax Audit Fees u/s 44 AB of the Income Tax On the basis of sales /turnover ratio in the respective periods
Act, 1961
(vi) Commission to travel agents On the basis of sales / turnover ratio in the respective periods
(vii) Sales Promotion expenses On the basis of sales / turnover ratio in the respective periods
(viii) Advertisement Expenses On the basis of sales / turnover ratio in the respective periods
(ix) Rent Expenses Time Ratio
(x) Bad Debts On the basis of sales / turnover ratio in the respective periods

10. RTP MAY 21

Megha Ltd. was incorporated on 1.7.2020 to take over the running business of M/s Happy from
1.4.2020. The accounts of the company were closed on 31.3.2021.
The average monthly sales during the first three months of the year (2020-21) was twice the
average monthly sales during each of the remaining nine months.
You are required to compute time ratio and sales ratio for pre and post incorporation periods.

Solution:

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Time ratio:
Pre-incorporation period (1.4.2020 to 1.7.2020) = 3 months
Post incorporation period (1.7.2020 to 31.3.2021) = 9 months
Time ratio = 3 : 9 or 1 : 3
Sales ratio:
Average monthly sale 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 = 3 x 2x : 9 x 1x = 6x : 9x or 2 : 3

11. RTP MAY 21 / Mock Test Oct 21 Series 2 (similar)

The Business carried on by Kamal under the name "K" was taken over as a running business with
effect from 1st April, 2020 by Sanjana Ltd., which was incorporated on 1st July, 2020. The same
set of books was continued since there was no change in the type of business and the following
particulars for the year ended 31st March, 2021 were available:
` `
Sales: Company period (1.7.20 to 31.3.21) 40,000
Prior period (1.4.20 to 30.6.20) 10,000 50,000
Selling Expenses 3,500
Preliminary Expenses written off 1,200
Salaries paid 3,600
Directors' Fees 1,200
Interest on Capital (Upto 30.6.2020) 700
Depreciation 2,800
Rent expense 4,800
Purchases: Company period (1.7.20 to 31.3.21) 21,875
Prior period (1.4.20 to 30.6.20) 3,125
Carriage Inwards 1,000 43,800
Net Profit 6,200
You are required to prepare a statement showing the amount of pre and post incorporation period
profits stating the basis of allocation of expenses.

Solution:
Statement showing the calculation of profits/losses for pre incorporation and Post incorporation
period profits of Sanjana Ltd.
for the year ended 31st March, 2021

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Particulars Basis Pre Post

` `
Sales (given) 10,000 40,000
Less: Purchases (given) 3,125 21,875
Carriage Inwards 1:7 125 875
Gross Profit (i) 6,750 17,250
Less: Selling Expenses 1:4 700 2,800
Preliminary Expenses 1,200
Salaries 1:3 900 2,700
Director Fees 1,200
Interest on capital 700
Depreciation 1:3 700 2,100
Rent 1:3 1,200 3,600
Total of Expenses(ii) 4,200 13,600
Pre-incorporation/Net Profit (i-ii) 2,550 3,650
Working Notes:
1: Sales Ratio = 10,000 : 40,000 = 1 :4
2: Time Ratio = 3:9 = 1:3

12. RTP NOV 21

New Limited was incorporated on 01.08.2020 to take-over the business of a partnership firm w.e.f.
01.04.2020. It provides you the following information for the year ended 31.03.2021:
`
Gross profit 9,00,000
Expenses:
Salaries 1,80,000
Rent, Rates & Taxes 1,20,000
Depreciation 37,500
Commission on Sales 31,500
Interest on Debentures 48,000
Director’s Fees 18,000
Advertisement 54,000
Net Profit for the Year 4,11,000
(i) New 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 periods.

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Solution:
Statement showing the calculation of Profits for the pre-incorporation and post- incorporation
periods
Particulars Total Basis of Pre- Post-
Amount Allocation incorporation incorporation
` ` `
Gross Profit 9,00,000 1:3 2,25,000 6,75,000
Less: Salaries 1,80,000 Time 60,000 1,20,000
Rent, rates and taxes 1,20,000 Time 40,000 80,000
Commission on sales 31,500 Sales(2:5) 9,000 22,500
Depreciation 37,500 Time 12,500 25,000
Interest on debentures 48,000 Post 48,000
Directors’ fee 18,000 Post 18,000
Advertisement 54,000 post 54,000
Net profit 4,11,000 1,03,500 3,07,500
Working Notes:
1. Sales ratio
Let the monthly sales for first 4 months (i.e. from 1.4.2020 to 31.7.2020) be = x
Then, sales for 4 months = 4x
Monthly sales for next 8 months (i.e. from 1.8.20 to 31.3.2021) = 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 = 4 x :10x i.e. 2:5
2. Gross profit ratio
From 1.4.2020 to 31.7.2020 gross profit is 25% of sales
Then, 25% of 4x= 1x
gross profit for next 8 months (i.e. from 1.8.20 to 31.3.2021) is 30%
Then, 30% of 10x = 3x
Therefore gross profit ratio will be 1:3
3. Time ratio
1st April, 2020 to 31st July, 2020 : 1st August, 2020 to 31st March, 2021
= 4 months: 8 months = 1:2 Thus, time ratio is 1:2.

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13. ICAI ILLUSTRATION 6

ABC Ltd. took over a running business with effect from 1st April, 20X1. The company was
incorporated on 1st August, 20X1. The following information for the year ended 31.3.20X2 is given:
`
Gross profit 3,20,000
Expenses:
Salaries 48,000
Stationery 4,800
Travelling expenses 16,800
Advertisement 16,000
Miscellaneous trade expenses 37,800
Rent (office buildings) 26,400
Electricity charges 4,200
Director’s fee 11,200
Bad debts 3,200
Commission to selling agents 16,000
Tax Audit fee 6,000
Debenture interest 3,000
Interest paid to vendor 4,200
Selling expenses 25,200
Depreciation on fixed assets 9,600
Net profit 87,600
Additional information:
(a) Total sales for the year, which amounted to ` 19,20,000 arose evenly up to the date of
30.9.20X1. Thereafter they recorded an increase of two-third during the rest of the year.
(b) Rent of office building was paid @ ` 2,000 per month up to September, 20X1 and thereafter
it was increased by ` 400 per month.
(c) Travelling expenses include ` 4,800 towards sales promotion.
(d) Depreciation include ` 600 for assets acquired in the post incorporation period.
(e) Purchase consideration was discharged by the company on 30th September, 20X1 by issuing
equity shares of ` 10 each.
Prepare Statement showing calculation of profits and allocation of expenses between pre and post
incorporation periods.

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Solution:
Statement showing calculation of profits for pre and post incorporation
periods for the year ended 31.3.20X2
Particulars Pre-incorpo- Post- incorpo-
ration period ration period
` `
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.4) 4,000 8,000
Sales promotion expenses (W.N.4) 1,200 3,600
Misc. trade expenses (1:2) 12,600 25,200
Rent (office building) (W.N.3) 8,000 18,400
Electricity charges (1:2) 1,400 2,800
Director’s fee (post-incorporation) - 11,200
Bad debts (1:3) 800 2,400
Selling agents commission (1:3) 4,000 12,000
Tax audit fee (1:3) 1,500 4,500
Debenture interest (post-incorporation) - 3,000
Interest paid to vendor (2:1) (W.N.5) 2,800 1,400
Selling expenses (1:3) 6,300 18,900
Depreciation on fixed assets (W.N.6) 3,000 6,600
Net profit (Bal.Fig.) 12,800 74,800

Working Notes:
1. Time Ratio
Pre incorporation period = 1st April, 20X1 to 31st July, 20X1
i.e. 4 months
Post incorporation period is 8 months
Time ratio is 1: 2.
2. Sales ratio
Let the monthly sales for first 6 months (i.e. from 1.4.20X1 to 30.09. 20X1) be x
Then, sales for 6 months = 6x
Monthly sales for next 6 months (i.e. from 1.10.X1 to 31.3.20X2) = x +(2/3) x = (5/3) x
Then, sales for next 6 months = (5/3) x X 6 = 10x
Total sales for the year = 6x + 10x = 16x
Monthly sales in the pre incorporation period = ` 19,20,000/16 = ` 1,20,000

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Total sales for pre-incorporation period = ` 1,20,000 x 4 = ` 4,80,000

Total sales for post incorporation period = ` 19,20,000 – ` 4,80,000 = ` 14,40,000
Sales Ratio = 4,80,000 : 14,40,000 = 1 : 3
3. Rent
`
Rent for pre-incorporation period (` 2,000 x 4) 8,000 (pre)
Rent for post incorporation period
August,20X1 & September, 20X1 (` 2,000 x 2) 4,000
October,20X1 to March,20X2 (` 2,400 x 6) 14,400 18,400 (post)

4. Travelling expenses and sales promotion expenses

Pre Post
` `
Traveling expenses ` 12,000 (i.e. ` 16,800-
` 4,800) distributed in Time ratio (1:2) 4,000 8,000

Sales promotion expenses ` 4,800 distributed in Sales ratio 1,200 3,600

(1:3)

5. Interest paid to vendor till 30th September, 20X1

Pre Post
` `

Interest for pre-incorporation period (`4200 / 6 ) x 4 2,800

Interest for post incorporation period i.e. for

1,400
August, 20X1 & September, 20X1= (`4200 / 6) x 2

6. Depreciation
Pre Post
` `
Total depreciation 9,600
Less: Depreciation exclusively for post 600
incorporation period 600
Remaining (for pre and post incorporation period) 9,000

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Depreciation for pre-incorporation period 3,000

9,000 x (4/12)
Depreciation for post incorporation period
9,000 x (8/12) 6,000
* Time ratio = 1 : 2 3,000 6,600

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कोशिि करने वालोों की कभी हार नही ों होती

लहर ों से डर कर नौका पार नह ों ह त ,

क शिि करने वाल ों क कभ हार नह ों ह त ।

नन् ों च टों जब दाना लेकर चलत है,

चढ़त द वार ों पर, सौ बार शिसलत है ।
मन का शवश्वास रग ों में साहस भरता है,
चढ़कर शगरना, शगरकर चढ़ना न अखरता है ।
आश़िर उसक मेहनत बेकार नह ों ह त ,
क शिि करने वाल ों क कभ हार नह ों ह त ।

डु बशकयाों शसोंधु में ग ताख र लगाता है ,

जा जा कर खाल हाथ लौटकर आता है ।
शमलते नह ों सहज ह म त गहरे पान में,
बढ़ता दु गना उत्साह इस है रान में।
मुट्ठ उसक खाल हर बार नह ों ह त ,
क शिि करने वाल ों क कभ हार नह ों ह त ।

असिलता एक चुनौत है , इसे स्व कार कर ,

क्या कम रह गई, दे ख और सुधार कर ।
जब तक न सिल ह , न द
ों चैन क त्याग तुम,
सोंघर्ष का मैदान छ ड़ कर मत भाग तुम।
कुछ शकये शबना ह जय जय कार नह ों ह त ,
क शिि करने वाल ों क कभ हार नह ों ह त ।