CA.
Nitin Goel
Educator: CA Inter Accounts
& Advanced Accounts
3 years experience with ITC Ltd.
> 7 Years teaching experience
All India Rankholder
(CPT-9, Inter- 7, Final-9)
Gold Medalist
Use Code: CANITIN
to get 10% Discount
Profit or Loss Pre & Post Incorporation
Meaning ❖ Usually, in the case of a newly formed company; an existing business is taken
over as going concern at date, prior to date of incorporation of Company.
❖ Thus; the profit (loss) earned (incurred) from the date of purchase to the date
of incorporation of company is called the “Profit/(Loss) Prior to Incorporation.”
it is necessary to disclose them separately from trading profits or losses.
Example ‘X Ltd. is incorporated on 1st August 2020 to take over the running business of
M/s. Y as From 1st April, 2020.
Thus, the profit earned by X Ltd. from 1st April 2020 till 1st August 2020 is called “
Profits Prior to Incorporation”.
*Alternatively, it can be w/off as debit to P&L or transferred to Special A/c named as ‘Loss Prior to
Incoporation’ & shown as Asset in Balance Sheet
→ Purpose for which such Profit & Losses can be utilized:
Pre-incorporation Profits can be used for: Pre-incorporation Losses can be used for:
➢ writing off Goodwill on acquisition ➢ setting off against Post-Incorporation Profit
➢ writing off Preliminary Expenses ➢ addition to Goodwill on acquisition
➢ writing down over-valued assets ➢ writing off Capital Profit
➢ issuing of bonus shares
➢ paying up partly paid shares.
Calculation of Sales Ratio
Date of taking over Business 1.4.2020
Date of Incorporation 1.8.2020
Total Sales during 2020-21 9,60,000
Required: Calculate the Sales Ratio in each of the following alternative cases:-
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No part of these notes may be reproduced in any manner without his prior permission in writing.
Case (a)
80% sales upto 1.12.2020 and the balance for the remaining period
Case (b)
The monthly average of turnover during the first 6 months of 2020-21 was half the corresponding figure
for remaining period.
Case (c)
The monthly sales in April, Feb. and March are double the monthly sales for the remaining months of
the year.
The copyright of these notes is with C.A. Nitin Goel
No part of these notes may be reproduced in any manner without his prior permission in writing.
Case (d)
The turnover was evenly upto 01.10.2020, where after the same spurted to record an increase of two-
thirds during rest of year.
→ Determination of Profit/(Loss)
● Statement is to be prepared for determining Pre-Incorporation & Post Incorporation profit/(loss).
S.No. Item Example Basis of Apportionment
1. Gross Profit or - • Sales Ratio or
Gross Loss • Cost of Goods Sold ratio
(If information about sales
ratio is not given)
• Time Ratio
(if information about sales
& COGS Ratio not given)
2. Expenses Related • Carriage Outward Sales ratio
with the turnover • Cartage Outward
• Selling & Distribution Expenses
• Commission (brokerage) to Selling Agent
• Advertisement Expenses
• Discount Allowed
• Traveller’s Commission
• Sales Promotion
• Bad Debts (if actual Bad Debts for two
periods are not given)
• Tax Audit Fees
3. Expenses Related • Salaries Time Ratio
with Time • Administration Expenses
• Office Expenses
• Rates & Taxes
• Rent
• Printing & Stationery
• Depreciation
• Telephone Expenses
• Travelling Expenses
• Electricity Charges
• Insurance
The copyright of these notes is with C.A. Nitin Goel
No part of these notes may be reproduced in any manner without his prior permission in writing.
4. Expenses Relating • Vendor’s Salary ● Charge to Pre
Exclusively to Pre- • Interest on Vendor’s Capital Incorporation Period
Incorporation
Period
5. Expenses Relating • Director’s Fees Charge to Post –
Exclusively to • Debenture Interest Incorporation Period
Post-Incorporation • Director’s Remuneration
Period • Preliminary Expenses
• Goodwill written off
• Share Issue Expenses
• Underwriting Commission
• Discount on Issue of Debentures
• Formation Expenses
• Audit Fees relating to company
6. Interest on From Date of Purchase - Date of Charge to Pre –
Purchase Incorporation Incorporation Period
Consideration to From Date of Incorporation -Date of Charge to Post-
Vendor Payment Incorporation Period
Question 1 IPCC May 2014 (8 Marks)/RTP May 2019 (Sim)/ ICAI Study Material
Sneha Ltd. was incorporated on 1st July, 2021 to acquire a running business of Atul Sons with effect
from 1st April, 2021. During the year 2021-22, the total sales were ₹ 24,00,000 of which ₹ 4,80,000 were
for the first six months. The Gross profit of the company ₹ 3,90,800.
The expenses debited to the Profit & Loss Account included:
a) Director's fees ₹ 30,000
b) Bad debts ₹ 7,200
c) Advertising ₹ 24,000 (under a contract amounting to ₹ 2,000 per month)
d) Salaries and General Expenses ₹ 1,28,000
e) Preliminary Expenses written off ₹ 10,000.
f) Donation to a political party given by the company ₹ 10,000.
Prepare a statement showing pre & post-incorporation profit for the year ended 31st March, 2022.
Question 2 ICAI Study Material
The promoters of Glorious Ltd. took over on behalf of the company a running business with effect from
1st April, 2021. The company got incorporated on 1st August, 2021.
The annual accounts were made up to 31st March, 2022 which revealed that the sales for the whole year
totalled ₹ 1,600 lakhs out of which sales till 31st July, 2021 were for ₹ 400 lakhs.
Gross profit ratio was 25%
The expenses from 1st April 2021, till 31st March, 2022 were as follows:
₹ (In Lakhs)
Salaries 69
Rent, Rates and Insurance 24
Sundry Office Expenses 66
Travellers' Commission 16
Discount Allowed 12
Bad Debts 4
Directors' Fee 25
Tax Audit Fee 9
Depreciation on Tangible Assets 12
Debenture Interest 11
Prepare statement showing calculation of Profits for the pre-incorporation & post- incorporation periods
The copyright of these notes is with C.A. Nitin Goel
No part of these notes may be reproduced in any manner without his prior permission in writing.
Question 3 ICAI Study Material
Naresh Limited was incorporated on August 1, 2021. It had acquired a running business of Naresh &
Co. with effect from April 1, 2021. During the year 2021-22, 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, ₹ 2,00,000 was worked out after charging the following expenses:
(i) Depreciation ₹ 1,23,000, (ii) Directors’ fees ₹ 50,000, (iii) Preliminary expenses ₹ 12,000, (iv) Office
expenses ₹ 78,000, (v) Selling expenses ₹ 72,000 and (vi) Interest to vendors upto August 31, 2021
₹ 5,000.
Prepare statement showing pre-incorporation and post-incorporation profit for the year ended 31st
March, 2022.
Question 4 RTP Nov 2015 / ICAI Study Material
The partnership of Maitri Agencies decided to convert the partnership into Private Limited Company
named MA (P) Ltd. with effect from 1st January, 2021. The consideration was agreed at ₹ 1,17,00,000
based on firm’s Balance Sheet as on 31st December, 2020. However, due to some procedural difficulties,
the company could be incorporated only on 1st April, 2021. Meanwhile, the business was continued on
behalf of the company and the consideration was settled on that day with interest at 12% p.a.
The same books of accounts were continued by the company, which closed its accounts for first time on
31st March, 2022 and prepared the following summarized Profit & Loss A/c
₹ ₹
To Cost of goods sold 1,63,80,000 By Sales 2,34,00,000
To Salaries 11,70,000
To Depreciation 1,80,000
To Advertisement 7,02,000
To Discount 11,70,000
To Managing Director’s remuneration 90,000
To Miscellaneous office expenses 1,20,000
To Office cum showroom rent 7,20,000
To Interest 9,51,000
To Profit 19,17,000
2,34,00,000 2,34,00,000
The company’s only borrowing was a loan of ₹ 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 monthly
average sales of the firm from 1st April, 2021, but the salaries trebled from the date. It had to occupy
additional space from 1st July, 2021 for which rent was ₹ 30,000 per month.
Prepare a statement showing apportionment of costs and revenue between pre-incorporation and post-
incorporation periods.
Question 5 RTP May 2021
The Business carried on by Kamal under the name "K" was taken over as a running business with effect
from 1st April, 2021 by Sanjana Ltd., which was incorporated on 1st July, 2021. The same set of books
was continued since there was no change in the type of business and the following particulars of profits
for the year ended 31st March, 2022 were available:
₹
Sales: Company period (01.07.21 to 31.03.22) 40,000
Prior Period (01.04.21 to 30.06.21) 10,000 50,000
Less: Selling Expenses 3,500
Preliminary Expenses written off 1,200
Salaries 3,600
Directors' Fees 1,200
Interest on Capital (Upto 30.6.2021) 700
Depreciation 2,800
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Rent 4,800
Purchases : Company Period (01.07.21 to 31.03.22) 21,875
Prior Period (01.04.21 to 30.06.21) 3,125
Carriage Inwards 1,000
43,800
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.
Question 6 IPCC May 2018 (8 Marks) / ICAI Study Material
A partnership firm M/s. Nice Sons was carrying on business from 1st May, 2021. The partners of the
firm decided to convert the partnership firm into a private company called Zenith (P) Ltd. with effect
from 1st September, 2021. The annual accounts were drawn upto 31st March, 2022. The summarised
Profit and Loss Account from 1st May, 2021 to 31st March, 2022 is as follows:
Particulars Amount
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
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 ₹ 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, 2021.
(2) The company occupied additional space from 1st September, 2021 for which rent of ₹ 8,000 per
month was incurred.
(3) Audit fee pertains to the company.
(4) Bad debts recovered amounting to ₹ 36,000 for a sale made in June 2021, has been deducted from
bad debts mentioned above.
(5) All investments were sold in August 2021.
(6) Zenith (P) Ltd. initiated an advertising campaign on 1st September, 2021, which resulted increase in
monthly average sales by 40%.
(7) The salary of Manager was increased by ₹ 3,000 p.m. from 1st July, 2021.
Prepare a statement showing pre-incorporation and post-incorporation profit for the year ended 31st
March 2022
The copyright of these notes is with C.A. Nitin Goel
No part of these notes may be reproduced in any manner without his prior permission in writing.
Practice Questions
Question 1 RTP Nov 2016 / ICAI Study Material
Lotus Ltd. was incorporated on 1st July, 2021 to acquire a running business of Feel goods with effect
from 1st April, 2021. During the year 2021-22, 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:
a. Director's fees ₹ 60,000 and Bad debts ₹ 14,400
b. Advertising ₹ 48,000 (under a contract amounting to ₹ 4,000 per month)
c. Salaries & General Expenses ₹ 2,56,000 and Preliminary Expenses written off ₹ 20,000.
d. Donation to a political party given by the company ₹ 20,000.
Prepare a statement showing pre and post-incorporation profit for the year ended 31st March, 2022.
Question 2 Inter May 2019 (5 Marks)
Tarun Ltd. was incorporated on 1st July, 2021 to acquire a running business of Vinay Sons with effect
from 1st April, 2021. During the year 2021-22, 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
(ii) Bad Debts ₹ 6,500
(iii) Advertising ₹ 18,000 (under a contract amounting to ₹ 1,500 per month)
(iv) Company Audit Fees ₹ 15,000
(v) Tax Audit Fees ₹ 10,000
(1) Prepare a statement showing pre-incorporation and post incorporation profit for the year ended 31st
March, 2022.
(2) Explain how profits are to be treated
Question 3 Inter May 2018 (10 Marks)
The promotors of Shiva Ltd. took over on behalf of the company a running business with effect from 1st
April 2021. The company got incorporated on 1st August 2021. The annual accounts were made up to
31st March, 2022 which revealed that the sales for the whole year totalled ₹ 2400 lakhs out of which sales
till 31st July, 2021 were for ₹ 600 lakhs. Gross profit ratio was 20%.
The expenses from 1st April 2021, till 31st March, 2022 were as follows:
Particulars (in Lakhs)
Salaries 75
Rent, Rates and Insurance 30
Sundry Office Expenses 72
Traveller's Commission 20
Discount allowed 16
Bad Debts 8
Directors' Fee 30
Tax Audit Fee 16
Depreciation on Tangible Assets 15
Debenture Interest 14
Prepare statement showing the calculation of profits for pre-incorporation and Post incorporation periods
Question 4 RTP May 2017 / RTP May 2020
The partners of Shri Enterprises decided to convert the partnership firm into a Private Limited Company
Shreya (P) Ltd. with effect from 1st January, 2021. However, company could be incorporated only on 1st
June, 2021. 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 @
The copyright of these notes is with C.A. Nitin Goel
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10% per annum on 1st June, 2021 to pay purchase consideration and for working capital. The company
closed its accounts for the first time on 31st March, 2022 and presents you the following summarized
profit and loss account:
₹
Sales 19,80,000
Less: 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 15,000 18,07,200
(to be written off in first year itself)
Profit 1,72,800
Sales from June, 2021 to December, 2021 were 2 1/2 times of the average sales, which further increased
to 3 1/2 times in January to March quarter, 2022. The company recruited additional work force to
expand the business. The salaries from July, 2021 doubled. The company also acquired additional
showroom at monthly rent of ₹ 10,000 from July, 2021.
Prepare a statement showing pre & post-incorporation profits. Suggest how pre–incorporation profits to
be dealt with.
Question 5 Inter Nov 2019 (10 Marks)
The partners of C&G decided to convert their existing partnership business into a private limited called
CG trading Pvt. Ltd. with effect from 1.7.2021. The same books of accounts were continued by the
company which closed its accounts for the first term on 31.3.2022.
The summarized profit & loss account for the year ended 31.3.2022 is below:
Particulars ₹ in lakhs ₹ in lakhs
Turnover 245.00
Interest on investments 6.00 251.00
Less: Cost of goods sold 124.32
Advertisement 3.50
Sales Commission 7.00
Salaries 18.00
Managing Director’s Remuneration 6.00
Interest on Debentures 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:
a) The average monthly sales doubled from 1.7.2021, GP ratio was constant.
b) All investments were sold on 31.5.2021.
c) Average monthly salaries doubled from 1.10.2021.
d) The company occupied additional space from 1.7.2021 for which rent of ₹20,000 per month was
incurred.
e) Bad debts recovered amounting to ₹60,000 for a sale made in 2019-20 has been deducted from bad
debts mentioned above.
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f) 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.
Question 6 Inter Nov 2020 (5 Marks)
Moon Ltd. was incorporated on 1st August, 2021 to take over the running business of a partnership firm
w.e.f. 1st April, 2021. The summarized Profit & Loss Account for the year ended 31st March, 2022 is as
under:
Particulars Amount Amount
Gross Profit 6,30,000
Less: Salaries 1,56,000
Rent, Rates & Taxes 72,000
Commission on sales 40,600
Depreciation 60,000
Interest on Debentures 36,000
Director's fees 24,000
Advertisement 48,000 4,36,600
Net Profit for the year 1,93,400
Moon Ltd. initiated an advertising campaign which resulted in increase of monthly sales by 25% post
incorporation. You are required to prepare a statement showing the profit for the year between pre-
incorporation and post-incorporation. Also, explain how these profits are to be treated in the accounts?
Question 7 Inter Nov 2018 (12 Marks)
Sun Limited took over the running business of a partnership firm M/s A & N Brothers with effect from
1st April, 2021. The company was incorporated on 1st September, 2021. The following profit and loss
account has been prepared for the year ended 31st March, 2022.
Particulars Amount Particulars Amount
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 8,000
remuneration
To Net Profit c/d 1,45,000
7,50,000 7,50,000
Additional Information:
1. Trend of sales during April, 2021 to March, 2022 was as under:
April, May ₹ 85,000 per month
June, July ₹ 1,05,000 per month
August, September ₹ 1,20,000 per month
October, November ₹ 1,40,000 per month
December onwards ₹ 1,50,000 per month
2. Sun Limited took over a machine worth ₹ 7,20,000 from A&N Brothers &purchased a new machine
on 1st February, 2022 for ₹ 4,80,000. The company decides to provide depreciation @ 10% p.a.
3. The company occupied additional space from 1st October, 2021 @ rent of ₹ 6,000 per month.
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4. Out of travelling expenses, ₹ 30,000 were incurred by office staff while remaining expenses were
incurred by salesmen.
5. Audit fees pertains to the company.
6. 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.
Question 8 RTP Nov 2020 (Similar) / ICAI Study Material
XYZ Ltd. took over a running business with effect from 1st April, 2021. The company was incorporated
on 1st August, 2021. The following summarized P&L A/c has been prepared for year ended 31.3.2022:
₹ ₹
To Salaries 48,000 By Gross Profit 3,20,000
To Stationery 4,800
To Travelling expenses 16,800
To Advertisement 16,000
To Miscellaneous trade expenses 37,800
To Rent (office buildings) 26,400
To Electricity charges 4,200
To Director’s fee 11,200
To Bad debts 3,200
To Commission to selling agents 16,000
To Tax Audit fee 6,000
To Debenture interest 3,000
To Interest paid to vendor 4,200
To Selling expenses 25,200
To Depreciation on fixed assets 9,600
To Net profit 87,600
3,20,000 3,20,000
Additional information:
a) Total sales for the year, which amounted to ₹ 19,20,000 arose evenly upto the date of 30.9.2021.
Thereafter they spurted to record an increase of two-third during the rest of the year.
b) Rent of office building was paid @ ₹ 2,000 per month upto September, 2021 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, 2021 by issuing equity
shares of ₹ 10 each.
Prepare Statement showing calculation of profits and allocation of expenses between pre and post
incorporation periods.
Question 9 IPCC May 2017 (8 Marks) / RTP Nov 2018 / RTP Nov 2019
Roshani & Reshma working in partnership, registered a joint stock company under the name of Happy
Ltd. on May 31st 2021 to take over their existing business. The summarized Profit & Loss A/c as given
by Happy Ltd. for the year ending 31 st March, 2022 is as under:
Happy Ltd.
Profit & Loss A/c. for the year ending March 31, 2022
₹ ₹
To Salaries 1,44,000 By Gross Profit 4,50,000
To Interest on Debentures 36,000
To Commission on Sales 18,000
To Bad Debts 49,000
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To Depreciation 19,250
To Rent 38,400
To Company Audit Fees 12,000
To Net Profit 1,33,350
4,50,000 4,50,000
Prepare a Statement showing allocation of expenses & calculation of pre-incorporation & post-
incorporation profits after considering the following information:
a) GP ratio was constant throughout the year.
b) Depreciation includes ₹ 1,250 for assets acquired in post incorporation period.
c) Bad debts recovered amounting to ₹ 14,000 for a sale made in 2018-19 has been deducted from bad
debts mentioned above.
d) Total sales were ₹ 18,00,000 of which ₹ 6,00,000 were for April to September.
e) Happy Ltd. had to occupy additional space from 1st Oct. 2021 for which rent was ₹ 2,400 per month.
The copyright of these notes is with C.A. Nitin Goel
No part of these notes may be reproduced in any manner without his prior permission in writing.
