Full Text Transcript
3
P L P I
ROFIT OR OSS RIOR TO NCORPORATION
BASIC CONCEPTS
(cid:190) Profit or loss of a business for the period prior to the date the company came into existence is
referred to as Pre-Incorporation Profits or Losses.
(cid:190) Generally there are two methods of computing Profit & Loss prior to Incorporation
• One is to close of old books and open new books with the assets and liabilities as they
existed at the date of incorporation. In this way, automatically the result to that date will
be adjusted.
• Other is to split up the profit of the year of the transfer of the business to the company
between ‘pre’ and ‘post’ incorporation periods. This is done either on the time basis or
on the turnover basis or by a method which combines the two.
(cid:190) A company taking over a running business may also agree to collect its debts as an agent for
the vendor and may further undertake to pay the creditor on behalf of the vendors. In such a
case, the debtors and creditors of the vendors will be included in the accounts for the
company by debit or credit to separate total accounts in the General Ledger to distinguish
them from the debtors and creditors of the business and contra entries will be made in
corresponding Suspense Accounts. Also details of debtors and creditors balance will be kept
in separate ledger.
(cid:190) The vendor is treated as a creditor for the cash received by the purchasing company in
respect of the debts due to the vendor, just as if he has himself collected cash from his
debtors and remitted the proceeds to the purchasing company.
(cid:190) The vendor is considered a debtor in respect of cash paid to his creditors by the purchasing
company. The balance of the cash collected, less paid, will represent the amount due to or
by the vendor, arising from debtors and creditors balances which have been taken over,
subject to any collection expenses.
(cid:190) The balance in the suspense accounts will be always equal to the amount of debtors and
creditors taken over remaining unadjusted at any time.
© The Institute of Chartered Accountants of India
Accounting
Question 1
X Ltd. was incorporated on 1.8.2009 to take over the running business of M/s Kumar Bros.
with assets from 1.4.2009. The accounts of the company were closed on 31.3.2010.
The average monthly sales during the first four months of the year (2009-10) was twice the
average monthly sales during each of the remaining eight months.
Calculate time ratio and sales ratio. (May,2010)
Answer
Time ratio:
Pre-incorporation period (1.4.2009 to 1.8.2009) = 4 months
Post incorporation period (1.8.2009 to 31.3.2010) = 8 months
Time ratio = 4 : 8 or 1 : 2
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 = 4 × 2x : 8 × 1x
= 8x : 8x or 1 : 1
Question 2
ABC Ltd. took over a running business with effect from 1st April, 2009. The company was
incorporated on 1st August, 2009. The following Profit and Loss Account has been prepared
for the year ended 31.3.2010:
Rs. Rs.
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 Audit fee 6,000
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3.2
Profit or Loss Prior to Incorporation
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 Rs.19,20,000 arose evenly upto the date of
30.9.2009. Thereafter they spurted to record an increase of two-third during the rest of
the year.
(b) Rent of office building was paid @ Rs.2,000 per month upto September, 2009 and
thereafter it was increased by Rs.400 per month.
(c) Travelling expenses include Rs.4,800 towards sales promotion.
(d) Depreciation include Rs.600 for assets acquired in the post incorporation period.
(e) Purchase consideration was discharged by the company on 30th September, 2009 by
issuing equity shares of Rs.10 each.
Prepare the Profit and Loss Account in columnar form showing distinctly the allocation of
expenses between pre and post incorporation periods. (May, 2010)
Answer
Profit and Loss Account of ABC Ltd.
for the year ended 31.3.2010
Particulars Pre- Post- Particulars Pre- Post-
incorpo- incorpo- incorpo- incorpo-
ration ration ration ration
period period period period
Rs. Rs. Rs. Rs.
To Salaries (1:2) 16,000 32,000 By Gross 80,000 2,40,000
profit (1:3)
To Stationery (1:2) 1,600 3,200
To Advertisement (1:3) 4,000 12,000
To Travelling expenses (W.N.3) 4,000 8,000
To Sales promotion expenses 1,200 3,600
(W.N.3)
© The Institute of Chartered Accountants of India
3.3
Accounting
To Misc. trade expenses (1:2) 12,600 25,200
To Rent (office building) (W.N.2) 8,000 18,400
To Electricity charges (1:2) 1,400 2,800
To Director’s fee - 11,200
To Bad debts (1:3) 800 2,400
To Selling agents commission 4,000 12,000
(1:3)
To Audit fee (1:2) 2,000 4,000
To Debenture interest - 3,000
To Interest paid to vendor (2:1) 2,800 1,400
(W.N.4)
To Selling expenses (1:3) 6,300 18,900
To Depreciation on fixed assets 3,000 6,600
(W.N.5)
To Capital reserve (Bal.Fig.) 12,300 -
To Net profit (Bal.Fig.) - 75,300
80,000 2,40,000 80,000 2,40,000
Working Notes:
Pre incorporation period = 1st April, 2009 to 31st July, 2009
i.e. 4 months
1. Sales ratio
Let the monthly sales for first 6 months (i.e. from 1.4.2009 to 30.09.09) be = x
Then, sales for 6 months = 6x
2 5
Monthly sales for next 6 months (i.e. from 1.10.09 to 31.3.2010) = x + x= x
3 3
5
Then, sales for next 6 months = x X 6 = 10x
3
Total sales for the year = 6x + 10x = 16x
Monthly sales in the pre incorporation period = Rs.19,20,000/16 = Rs.1,20,000
Total sales for pre-incorporation period = Rs.1,20,000 x 4 = Rs.4,80,000
Total sales for post incorporation period = Rs.19,20,000 – Rs.4,80,000 = Rs.14,40,000
Sales Ratio = 4,80,000 : 14,40,000
= 1 : 3
© The Institute of Chartered Accountants of India
3.4
Profit or Loss Prior to Incorporation
2. Rent
Rs.
Rent for pre-incorporation period (Rs.2,000 x 4) 8,000 (pre)
Rent for post incorporation period
August,2009 & September, 2009 (Rs.2,000 x 2) 4,000
October,2009 to March,2010 (Rs.2,400 x 6) 14,400 18,400 (post)
3. Travelling expenses and sales promotion expenses
Pre Post
Rs. Rs.
Traveling expenses Rs.12,000 (i.e. Rs.16,800- Rs.4,800)
distributed in 1:2 ratio 4,000 8,000
Sales promotion expenses Rs.4,800 distributed in 1:3 ratio 1,200 3,600
4. Interest paid to vendor till 30th September, 2009
Pre Post
Rs. Rs.
⎛Rs.4,200 ⎞ 2,800
Interest for pre-incorporation period ×4
⎜ ⎟
⎝ 6 ⎠
Interest for post incorporation period i.e. for
⎛Rs.4,200 ⎞ 1,400
August, 2009 & September, 2009 = ×2
⎜ ⎟
⎝ 6 ⎠
5. Depreciation
Pre Post
Rs. Rs.
Total depreciation
9,600
Less: Depreciation exclusively for post incorporation period 600 600
9,000
⎡ 4 ⎤
Depreciation for pre-incorporation period 9,000×
⎢ ⎥ 3,000
⎣ 12⎦
⎡ 8 ⎤
Depreciation for post incorporation period 9,000×
⎢ ⎥ 6,000
⎣ 12⎦
3,000 6,600
© The Institute of Chartered Accountants of India
3.5
Accounting
Question 3
Pre–incorporation expenses.
Answer
Pre–incorporation expenses denote expenses incurred by the promoters for the purposes of the
company before its incorporation.
Broadly, these include expenses in connection with:
(a) preliminary analysis of the conceived idea,
(b) detailed investigation in terms of technical feasibility and commercial viability to establish the
soundness of the proposition,
(c) preparation of ‘project report’ or ‘feasibility report’ and its verification through independent
appraisal authority (before giving final approval to the proposition) and
(d) organisation of funds, property and managerial ability and assembling of other business
elements.
These expenses should be properly capitalised and shown in the balance sheet under the heading
“Miscellaneous Expenditure”. There is no legal requirement to write–off these expenses to profit
and loss account within any specified period of time nor is there any rigid accounting convention in
regard to this matter. However, good corporate practice recognises the need to write off these
expenses to profit and loss account within a period of 3 to 5 years.
Question 4
Rama Udyog Limited was incorporated on August 1, 2008. It had acquired a running business
of Rama & Co. with effect from April 1, 2008. During the year 2008-09, the total sales were
Rs.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, Rs.2,00,000 was worked out after charging the
following expenses:
(i) Depreciation Rs.1,08,000, (ii) Audit fees Rs.15,000, (iii) Directors’ fees Rs.50,000, (iv)
Preliminary expenses Rs.12,000, (v) Office expenses Rs.78,000, (vi) Selling expenses
Rs.72,000 and (vii) Interest to vendors upto August 31, 2008 Rs.5,000.
Please ascertain pre-incorporation and post-incorporation profit for the year ended 31st March,
2009. (November, 2009)
© The Institute of Chartered Accountants of India
3.6
Profit or Loss Prior to Incorporation
Answer
Statement showing pre and post incorporation profit for the year ended 31st March, 2009
Particulars Total Basis of Pre- Post-
Amount Allocation incorporation Incorporation
Rs. Rs, Rs.
Gross Profit 5,40,000 2:7 1,20,000 4,20,000
Less: Depreciation 1,08,000 1:2 36,000 72,000
Audit Fees 15,000 1:2 5,000 10,000
Director’s Fees 50,000 Post - 50,000
Preliminary Expenses 12,000 Post - 12,000
Office Expenses 78,000 1:2 26,000 52,000
Selling Expenses 72,000 2:7 16,000 56,000
Interest to vendors 5,000 Actual 4,000 1,000
Net Profit (Rs.33,000 being
pre-incorporation profit is
transferred to capital reserve
Account) 2,00,000 33,000 1,67,000
Working Notes:
1. Sales ratio
The sales per month in the first half year were half of what they were in the later half
year. If in the later half year, sales per month is Re.1 then it should be 50 paise per
month in the first half year. So sales for the first four months (i.e. from 1st April,
2008 to 31st July, 2008) will be 4 × .50 = Rs.2 and for the last eight months (i.e.
from 1st August, 2008 to 31st March, 2009) will be (2 × .50 + 6 × 1) = Rs.7. Thus
sales ratio is 2:7.
2. Time ratio
1st April, 2008 to 31st July, 2008 : 1st August, 2008 to 31st March, 2009
= 4 months : 8 months = 1:2
Thus, time ratio is 1:2.
3. Gross profit
Gross profit = Net profit + All expenses
= Rs.2,00,000 + Rs.( 1,08,000+15,000+50,000+12,000+78,000+72,000+5,000)
= Rs.2,00,000 +Rs.3,40,000 = Rs.5,40,000.
© The Institute of Chartered Accountants of India
3.7