Last Updated on: 27th August 2024, 12:02 pm
Company Pre Incorporation Profit & Loss Account
Company Pre Incorporation Profit & Loss
When a running business is taken over by a company, with effect from the date prior to the date of incorporation of the company, the profit or loss of such a business before its incorporation date is referred as pre-incorporation profit or losses.
- pre-incorporation profits / losses are of capital nature. So it can not be distributed as dividend.
- pre-incorporation profits/ losses should be separately disclosed as trading profits or losses.
Ex. A company taking over a business of a Firm with effect from 1st June was however incorporated on 1st October. The date of 1st October will be referred as incorporation date, and 1st June will be referred as take over date. The period between 1st June – 1st October is taken as the Period Prior to Incorporation and the profit / loss during this period will be referred as Pre- Incorporation Profit / Loss.
Treatment of Pre- Incorporation Profit/ Loss
Pre- Incorporation Profits / Losses should be treated as under :
- Pre-incorporation profit: It should be transferred to Capital Reserve. Such amount may used for writing off Goodwill on acquisition or capital losses (such as preliminary expenses, discount on issue of shares or debentures or underwriting commission), if any.
- Pre- Incorporation Loss: It may be debited to Goodwill Account or written off by debiting to P & L Account. It can be shown as “Loss Prior to Incorporation” on the Assets Side of the Balance Sheet.
Computation of Pre- Incorporation Profit / Loss
The Pre Incorporation Profit / Loss may be computed in the following 2 methods:
- Separate Trading and P&L Accounts for two periods : Under this method, a separate Trading and Profit and Loss account is opened upto the incorporation date. All accounts are balanced, closing stock as on the previous date to incorporation is taken and Trial Balance is prepared for determining profit or loss of pre-incorporation period.
- Apportioning from Trading and P & L Accounts for the whole year : Under this method, books of accounts are balanced at the end of the financial year as usual and a Trading and Profit and Loss Account is prepared for the whole year. “Pre-Incorporation profit /Loss” and “Post-Incorporation profits / Loss” is calculated on a suitable basis like :
- Apportioning on the basis of Time: Under this approach it is assumed that profits have been earned evenly throughout the year. Therefore, net profit / loss for the year is divided between pre and post incorporation periods in the ratio of time.
- Apportioning on the basis of Sales : Under this approach it is assumed that profits have been earned evenly throughout the year. Therefore, net profit / loss for the year is divided between pre and post incorporation periods in the ratio of time.
- Apportioning on Equitable basis : Under this method, income and expenditure items are allocated on any other suitable basis between Pre and Post incorporation periods. Fixed expenses are normally allocated in the time ratio and variable expenses related to sales are allocated in the turnover ratio.
The appropriate method for allocation of expenses will be adopted on logical basis. So, different method may be adopted for each type of expenses /income
Change in Ratios
There may be change in certain ratios like, Gross Profit Ratio, Cost per Unit Ratio and Sales Price Ratio. Change in such ratios affects the profits, sales value, sales volume and apportionment of expenses (the apportionment of which are based on such ratios) of the company in pre-incorporation and post-incorporation periods.
- Change in Gross Profit Ratio : Gross profit is allocated between the pre and post-incorporation periods in the ratio of sales (Turnover), on the assumption that G. P. Ratio during the period is uniform. If G. P. ratio has changed, gross profit will be calculated considering the change in G. P. ratio.
- Change in Cost per Unit : If cost per unit changes without any change in sales price, the ratio of sale value and sales volume (quantity) will be same during the period. In such case, weighted ratio of cost of sales is calculated and deducted from respective figures of sales for pre and post-incorporation periods. As the ratio of sales value and sales volume remains same, all expenses directly varying with sales will be allocated in the ratio of sales.
- Change in Sales Price : If Sales Price changes, sale value and sales volume ratio will be different. Therefore, so, expenses that vary with sales value (e.g. commission, discount etc.) and expenses varying with sales quantity (e.g. carriage outward) will be divided in the ratio of sales value and sales quantity respectively between the two periods.
Statutory Report
Company limited by share or a Company limited by guarantee and having a share capital shall hold a Statutory meeting. The statutory report includes the following particulars:
- Details of Shares allotted: Nominal value and cash received against each category of shares will be shown separately. For shares allotted for a consideration other than cash, should be shown separately. Details regarding partly paid up shares should also be separately disclosed.
- Abstract of Receipt and Payment: This abstract will include details of receipts and payments made upto a date within seven days of the date of Statutory Report and will include receipts from share holders and others receipts. Similarly payment on account of preliminary expenses, underwriting commission, purchase of assets and other payments are to be shown in the abstract.
- Details of due or arrears: Arrear calls due from directors, any commission or brokerage paid Directors & manager will be disclosed separately.
Pre and Post Incorporation expenses and profits Apportionment – Practical Problem
Ex. Saroda Company Ltd. was formed to take over a running business with effect from 1st April, 2008. The company was incorporated on 1st August 2008, and the certificate of commencement of business was received on 1st October, 2008. The following profit and loss account has been prepared for the year ended on 31st March, 2009.
Profit and loss Account for the year ended 31st March 2009.
The following additional information is given to you:
- Total sales for the year, which amounted to Rs.96,00,000 arose evenly upto the date of the certificate of commencement of business, where after they spurted to record an increase of two-thirds during the rest of the year.
- Rent of office building was paid @ Rs.10,000 per month upto September, 2008 and thereafter it was increased by Rs.2,000 per month.
- Traveling expenses include Rs.24,000 towards sales promotion.
- Depreciation includes Rs.5,000 for assets acquired in the post-incorporation period.
- Consideration was discharged by the company on 30th September, 2008 by issuing equity shares of Rs.10 each.
Prepare the Profit and Loss Account in columnar form showing distinctly the allocation of profits between pre-incorporation and post-incorporation periods, indicating the basis of allocation regarding each item.
Solution: Steps involved in solving the above problem
Step 1 : Calculation of Time Ratio.
Step 2 : Calculation of Sales Ratio.
Step 3 : Computation of Expenses on Actual Basis in the respective period.
The following expenses are allocated on actual basis and not apportioned in any ratio.
- Calculation of rent in post- incorporation period.
- Calculation of traveling expenses.
- Calculation of depreciation on Fixed Assets.
Step 4 : Preparing Profit and Loss A/c for each period separately.
Working Details
- Time Ratio = 4 months : 8 months = 1: 2
Calculate the Time ratio for preparation of P&L Account of both pre-incorporation period (i.e., 4 months, from April, 2008 to July, 2008) as well as post-incorporation period (i.e 8 months, from August, 2008 to March, 2009), to allocate different expenses in the respective periods.
- Sales Ratio:
Suppose the sales upto the date of the certificate of commencement of business i.e. from 1.4.2008-30.09.2008 i.e. up to 6 months = X. After that it increases by 2/3rd during the rest of the year.
In equation term, the sales is (x + 2/3x) = 5/3x for rest 6 months (1.10.08 – 31.03.09)
Hence, x + 5/3x = 96,00,000, Or, 8/3x= 96,00,000, Or, x = 96,00,000 x 3/8 = 36,00,000
Hence, Sales ratio is 24:72 or 1:3
Compute Sales Ratio for pre-incorporation period & post – incorporation period. The sales ratio is used to allot the gross profit and certain expenses related to sales. Hence, the total sales have been segregated into the sales in pre-incorporation period and post-incorporation period.
3) Computation of Expenses on Actual Basis in the respective period
Compute rent for post-incorporation period. This is computed by determining the Rent for pre-incorporation period (Rs.10,000 p.m x 4= Rs.40,000). The amount of rent for post- incorporation period is computed (Rs.1,41,000 – Rs.40,000 =1,01,000) after subtracting this amount from total rent (Rs.1,41,000).
Traveling Exp. (for sales promotion) and Traveling Exp. (for other purposes) are to be computed separately, as their basis of apportionments are different. Traveling Exp. (for other purposes) is determined by subtracting Traveling Exp. (for sales promotion) from total Traveling Exp. (given in P&L A/c).
The post incorporation period depreciation (Rs.5,000) is deducted from total amount of depreciation (Rs.50,000) to compute the depreciation of pre-incorporation period.
- Profit and loss Account for the year ended 31st March 2009
*Note: Audit fee may alternatively be charged on the basis of time ratio (i.e., 1:2), allocating to pre and post incorporation period.
P&L A/c is prepared separately for pre-incorporation and post-incorporation period to get the net profit for each of these two periods.
Pre and Post Incorporation Accounts – Practical Problems
Ex. Sona Private Limited was incorporated on 1st October, 2008 to take over a business as a going concern as from 1st April, 2008. The purchase price of the business for such acquisition was fixed on the basis of the Balance Sheet of the firm as at 31st March, 2008 but the agreement provided that the vendors would get 80 per cent of the profits earned prior to 1st October, 2008 as compensation. The company’s accounts were made up to 31st March each year. The summarised form of Trading and Profit & Loss Accounts for the year ended 31st March, 2009 disclose the following results:
Trading and Profit and Loss Accounts for the year ended 31st March, 2009
Further information available was that sales made by company amounted to Rs.1,16,000. Bad debts amounting to Rs.1,100 were written off prior to 1st October, 2008.
Prepare a statement showing the profits earned prior to and after incorporation. State also the amount of profits prior to 1st October, 2008 payable to the vendors.
How should the company deal with its share of profits in the year ending 31st March, 2009.
Working Details:
- Calculation of Sales Ratio:-
Total sales = Rs.2, 60,000
Sales after incorporation = Rs.1, 16,000
Sales before incorporation = Rs.(2,60,000 – 1,16,000) = Rs.1,44,000
Ratio of sales = 1, 44,000: 1, 16,000 = 144: 116
Compute ratio of sales in pre-incorporation and post-incorporation period. Determine pre-incorporation Sales by deducting the amount of post incorporation of company (i.e., Rs.1,16,000) from total sales for the Accounting year .The sales ratio is used to allocate the gross profit and certain expenses related to sales, into pre-incorporation & post – incorporation period.
2. Calculation of Time Ratio:-
Time before incorporation = from 1st April 2008 to 30th Sep. 2008 = 6 months
Time of incorporation = from 1st Oct 2008 to 31st Mar. 2009 = 6 months
Ratio of time = 6: 6 i.e. 1:1.
Time Ratio is computed to divide certain expenses (like, Office Exp., Depreciation, Salaries & Establishment Charges) in pre-incorporation (6 months – from 1st Apr. ’08 to 30th Sep. ’08) and post-incorporation period (6 months – from 1st Oct. ’08 to 31st Mar. ’09).
3. Statement showing profits prior to and after incorporation
This statement is prepared to compute profit in pre-incorporation and post- incorporation period, by allocating the expenses to the relevant period on suitable basis.
- Payment to vendors: 80% of Rs.11,232 or Rs.8,986.
The company should treat its own share of profits prior to incorporation as a capital reserve.
Note: The company has incurred post incorporation loss.
The amount to be paid to vendors for pre-incorporation period is calculated (vendors are entitled to 80% of pre-incorporation profit).
Pre Incorporation Expenses Apportionment – Practical Problems
Ex. Citizen Private Ltd. was incorporated on 1.2.2008. It took over the proprietary business of Citizen, with effect from 1.1.2008. The Balance Sheet of Citizen as at 31st December, 2007 is as follows:-
| Liabilities | Rs. | Assets | Rs. |
| Capital | 4,30,000 | Sundry Debtors | 25,700 |
| Trade Creditors | 17,000 | Building | 1,10,000 |
| Loans | 8,500 | Machinery | 3,00,000 |
| Creditors for Expenses | 4,000 | Loss | 23,800 |
| 4,59,500 | 4,59,500 |
It was agreed to pay Rs.4,50,000 in equity shares to Citizen. The company decided to close its first year’s accounts as at 31st December, 2008. The following are the further details furnished: –
Depreciation may be provided at 10% on assets including additions.
The company requests you to prepare:
- The Journal entries for the takeover.
- M/s Citizen’s Account
- Profit and Loss Account showing separately pre-incorporation and post-incorporation profits for the year ending 31st December, 2008.
Working Details
- Time Ratio:
Company was incorporated on 1.2.2008 and account will be closed on 31.12.08. Therefore, the ratio will be = 1: 11
Calculate time ratio to divide different expenses of a year into pre-incorporation period (i.e 1 month – from 1st Jan. ’08 to 31st Jan. ’08) and post-incorporation period (i.e 11 months –from 1st Feb. ’08 to 31st Dec. ’08).
2. Information regarding turnover is not given. So, Gross profit should be apportioned in the time ratio (i.e. 1:11)
Gross profit is to be apportioned according to a rational basis. Suitable basis for apportionment of gross profit are shown.
3. Computation of Goodwill
Compute the value of goodwill by subtracting the value of assets taken over by the company from the value of liabilities taken over.
4. Journal Entries
In the books of Citizen (Pvt.) Ltd.
Journal entries regarding incorporation and payment in the books of Citizen Pvt. Ltd are shown.
5) M/s Citizen’s Account
| Particulars | Rs. | |
| Dr. | Cr. | |
| To Equity Share Capital | 4,50,000 | |
| By Sundries (Equity shares of Rs.4,50,000 paid and Net assets taken over) | 4,50,000 | |
| 4,50,000 | 4,50,000 | |
M/S Citizen’s Account regarding incorporation of business is shown in the books of Citizen Pvt. Ltd.
6. Computation of Gross Profit for the year ending 31st December 2008
Gross Profit is computed for the entire financial year (ignoring pre & post-incorporation period).
7. Calculation of Depreciation on Building and Machinery
Depreciation on Building and Machinery is computed for each asset, to be charged to P&L A/c.
8. Profit & Loss Accounts of Pre-incorporation & Post-incorporation Period
for the year ending 31.12.2008
Note:
As no further information is available Gross profit and expenses have been allotted in the time ratio i.e., 1:11.
P&L A/c is prepared showing figures for pre-incorporation and post-incorporation period separately.
Pre Incorporation period Apportionment on Time & Turnover Ratio
[Apportionment of expenses in Time Ratio and Turnover Ratio in P&L A/c and Preparation of Balance Sheet]
Ex. The assistant of M/s. ABC Co. (P) Ltd. has been unable to prepare Accounts. The following has been prepared by him:
Profit and Loss Account as on 31st March 2009
| Rs. | Rs. | ||
| Stock as on 31st March 2009 | 2,00,000 | Sales | 10,00,000 |
| Purchases | 4,50,000 | Stock as on April 2008 | 1,00,000 |
| Manufacturing wages | 1,50,000 | ||
| Administrative expenses | 2,70,000 | ||
| Net Profit | 30,000 | ||
| 11,00,000 | 11,00,000 |
Balance Sheet for the year ended 31st March 2009
| Liabilities | Rs. | Rs. | Assets | Rs. | Rs. |
| Laltu | 2,00,000 | Plant | 5,00,000 | ||
| Nantu | 1,00,000 | Investment in firm capital | 2,00,000 | ||
| Bantu | 1,00,000 | 4,00,000 | Share of Income received | 75,000 | 2,75,000 |
| Reserve | 50,000 | Debtors | 75,000 | ||
| Creditors | 2,00,000 | ||||
| Deposits | 25,000 | ||||
| Profits | 30,000 | ||||
| Suspense | 1,45,000 | ||||
| 8,50,000 | 8,50,000 |
The assistant is unable to agree the Books and the difference is shown as Suspense in the Balance sheet.
You ascertain that a firm consisting of Mr. Laltu, Mr. Nantu and Mr. Bantu converted their business into the above Private Limited Company on 1st Jun, 2008. The following further information is furnished:-
- The company was incorporated on 1st June 2008. The partners become the directors of the company.
- It was agreed that the Goodwill of the firm be Rs.50,000 and Plant was considered worth Rs.6,00,000. No adjustments were made in the books of the Company. The books maintained by the partners are continued.
- The partners share the profits in the ratio of 2:2:1 and they desire that their rights towards profits of the company should remain unchanged.
- The reserve in the above statements represents ‘reserves’ of the partners.
- The sales for the pre-incorporation period were Rs.1,00,000 and for the post incorporation period Rs.9,00,000
- The details of the administrative expenses are as under:-
| Rs. | |
| Salary to works Manager | 72,000 |
| Salary to directors | 50,000 |
| Rent for the premises | 24,000 |
| Selling expenses | 54,000 |
| Salary to staff | 60,000 |
| Traveling | 12,000 |
| Audit fees (Company) | 3,000 |
| 2,75,000 |
- The company invested Rs.2,00,000 in a firm on 15th June 2008 and received income of 75,000 thereon.
- Charge Depreciation on Plant @ 10% on the Closing Balance and make provision for taxation at 50% of the profits.
- The directors desire to make following appropriation:
- To transfer to General Reserve 10% of the profits after tax.
- To recommend dividend of 10% on the company.
- The capital of the company is to be Rs.5, 00,000 in shares of Rs.100 each to be issued to the partners in their profit sharing ratio as purchases consideration.
- You are required to prepare –
- Continued Trading Account for the period ended 31st March 2009.
- Profit and Loss account for the pre-incorporation and post-incorporation period and the Balance sheet at 31st March 2009.
Working Details
- Calculation of Time Ratio:-
| Period before incorporation = 2 months (i.e. April to May ‘08 ) |
| Period after incorporation = 10 months (i.e. June ‘08 to Mar ‘09) |
| Therefore, Time Ratio = 2:10 = 1:5 |
Time ratio for allocation of amount is computed as per into pre incorporation (2 months, i.e., Apr.’08 – May’08) & post incorporation period (i.e 10 months – from 1st Jun. ‘08 to 31st Mar. ‘09).
| Calculation of Turnover Ratio:- | ||
| Pre-incorporation period sales | 1, 00,000 | |
| Post incorporation period sales | 9, 00,000 | |
| Ratio = 1, 00,000: 9, 00,000 | 1: 9 |
Turnover ratio is computed as ratio of sales between pre-incorporation and post-incorporation period. It is used to allocate different expenses in the two periods.
| Calculation of Depreciation of Plant :- | ||
| Depreciation on plant @ 10% on Rs.6,00,000 | Rs.60,000 |
Depreciation on plant is calculated and charged to P & L A/c to compute the net profit.
| Calculation of Proposed Dividend:- | ||
| 10% of Capital of the company = 10% of Rs.5,00,000 | Rs.50,000 |
Compute the proposed dividend. This is shown in P&L A/c and Balance Sheet of the company.
5) ABC Co. (P) Ltd.
Trading A/c for the year ending 31st March 2004
| Particular | Rs | |
| Dr. | Cr. | |
| To Opening Stock | 1,00,000 | |
| To Purchase | 4,50,000 | |
| To Manufacturing Wages | 1,50,000 | |
| By Sales | 10,00,000 | |
| By Closing Stock | 2,00,000 | |
| To Gross Profit | 5,00,000 | |
| 12,00,000 | 12,00,000 | |
Trading A/c is prepared to compute the value of Gross Profit separately in pre-incorporation and post-incorporation period of the company.
Profit & Loss Account for the year ended on 31st March 2009
| Total Rs. | Basis of allotment Rs. | Pre Incorporation (Rs.) | Post Incorporation (Rs.) | |||
| Dr. | Cr. | Dr. | Cr. | |||
| By Gross Profit | 5,00,000 | Turnover (1:9) | 50,000 | 4,50,000 | ||
| To Rent | 24,000 | Time (1:5) | 4,000 | 20,000 | ||
| To works Manager’s Salary (Note)1 | 72,000 | Time (1:5) | 12,000 | 60,000 | ||
| To Salary to Staff (Note)2 | 60,000 | Time (1:5) | 10,000 | 50,000 | ||
| To Depreciation (Note)3 | 60,000 | Post-incorp. | 60,000 | |||
| To Selling Expenses | 54,000 | Turnover (1:9) | 5,400 | 48,600 | ||
| To Traveling expenses | 12,000 | Time (1:5) | 2,000 | 10,000 | ||
| To Audit fee | 3,000 | Post-incorp. | 3,000 | |||
| To Salary to Directors | 50,000 | Post-incorp. | 50,000 | |||
| By Income from the firm | 75,000 | Post-incorp. | 75,000 | |||
| To Net Profit c/d | 2,40,000 | 16,600 | 2,23,400 | |||
| 50,000 | 50,000 | 5,25,000 | 5,25,000 | |||
| By Balance b/d | 16,600 | 2,23,400 | ||||
| To Provision for taxation @ 50% (W.N.6) | 1,11,700 | Post-incorp. | 1,11,700 | |||
| To Net Profit transferred to capital of Laltu (2/5) Nantu (2/5) Bantu (1/5) | 6,640 6,640 3,320 | |||||
| To General reserve @ 10% of profits | 11,170 | Post-incorp. | 11,170 | |||
| To Proposed Dividend (W.N.4) | 50,000 | Post-incorp. | 50,000 | |||
| To Net Profit c/d | 50,530 | |||||
| 16,600 | 16,600 | 2,23,400 | 2,23,400 | |||
Note: –
- Working Manger’s salary is apportioned on time basis.
- Salary to Staff is also apportioned on time basis.
- There is no depreciation on plant in the pre-incorporation period due to revaluation.
Profit & Loss A/c is prepared to compute the value of Net Profit separately in pre-incorporation and post-incorporation period of the company.
6)Calculation of Provision for Taxation :-
50% of Net profit = 50% x Rs.2,23,400=Rs.1,11,700
Provision for taxation is computed on Net Profit and shown in P & L A/c (below the line) and in the Balance Sheet of the company (under the head Provision).
7)Partner’s Capital Accounts
| Particulars | Laltu Rs. | Nantu Rs. | Bantu Rs. | |||
| Dr. | Cr. | Dr. | Cr. | Dr. | Cr. | |
| By Balance b/d | 2,00,000 | 1,00,000 | 1,00,000 | |||
| To Share Capital A/c | 2,00,000 | 2,00,000 | 1,00,000 | |||
| To Security Premium | 46,640 | 46,640 | 23,320 | |||
| By Reserve | 20,000 | 20,000 | 10,000 | |||
| By Goodwill | 20,000 | 20,000 | 10,000 | |||
| By Plant (increase in value) | 40,000 | 40,000 | 20,000 | |||
| By Net Profit (up to 1st June) | 6,640 | 6,640 | 3,320 | |||
| By Balance c/d | 60,000 | |||||
| To Balance c/d | 40,000 | – | 20,000 | |||
| 2,86,640 | 2,86,640 | 2,46,640 | 2,46,640 | 1,43,320 | 1,43,320 | |
Partners Capital A/c is prepared to compute the net liability of each partner of the company.
8) Balance Sheet of M/s. ABC (P) Ltd. as at March 31st ,2009
Notes: The total amount due to the three partners is Rs.6,16,600 against which shares of the nominal value of Rs.5,00,000 have been issued. Hence Share Premium of Rs.1,16,600.
Finally the Balance Sheet is prepared showing all the assets and liabilities of the company separately.
Pre and Post Incorporation Sales Ratio – Practical Problems
Ex. Ravi formed a private limited company under the name of Ravi Private limited to take over his existing business as from April 1, 2008 but the company was not incorporated until July 1, 2008. No entries relating to transfer of the business were entered in the books, which were carried on without a break until March 31, 2009.
The following Trial Balance was extracted from the books as on March 31, 2009:-
| Dr.(Rs.) | Cr.(Rs) | |
| Stock, April 1, 2008 | 5,000 | |
| Sales | 28,000 | |
| Purchases | 18,200 | |
| Carriage Outwards | 200 | |
| Traveller’s Commission | 800 | |
| Office salaries and Expenses | 2,200 | |
| Rent and Rates | 1,200 | |
| Ravi’s Capital Account on April 1, 2008 | 23,000 | |
| Director’s Fees | 1,800 | |
| Fixed Assets | 13,400 | |
| Current Liabilities | 3,500 | |
| Current Assets (other than stock) | 11,200 | |
| Preliminary Expenses | 500 | |
| 54,500 | 54,500 |
You are also given the following information:-
- Stock, March 31, 2009 Rs.5,100.
- The purchase consideration was agreed at Rs.30,000 to be satisfied by the issue of 300 equity shares of Rs.10 each.
- The gross profit margin is constant and the monthly sales in April, 2008, February 2009 and March, 2009 are double the monthly sales for the remaining months, of the year.
- The preliminary expenses are to be written off.
- You are to assume that carriage outwards and traveler’s commission vary in direct proportion to sales.
You are required to prepare Trading and Profit and Loss Account for the year ended March 31st, 2009 apportioning the periods before and after incorporation and a Balance Sheet as on that date. Ignore depreciation.
Working Details
- Calculation of Ratio for apportioning Gross Profit:
Suppose sales for the months of April 08, Feb, 09 and March 09 are 2 and for other months 1 per month respectively as per above assumption Then
Sales for April, May & Jun = 4 [i.e. 2+1+1=4]
Sales for July 08 to March 09 = 11[1+1+1+1+1+1+1+2+2]
So, the ratio of 4: 11 has been used for apportioning gross profit and expenses related to sales.
The ratio for apportionment of gross profit into pre-incorporation and post-incorporation period is computed on the basis of monthly average sales. For the month of April ’08, Feb.’09 and Mar.’09, double weightage is given.
2. Calculation of Time Ratio:
3 : 9 or 1 : 3 (i.e. April 08 to June 08 : July 08 to March 09)
The time ratio has been calculated for pre-incorporation period (i.e 3 months from 1st Apr. ‘08 to 30th Jun. ‘08) as well as post-incorporation period (i.e 9 months -from 1st Jul. ‘08 to 31st Mar. ‘09).
3. Computation of Goodwill:
Goodwill is the difference between the amount of purchase consideration of Rs.30,000 and the balance of Ravi’s capital of Rs.23,000 on 1st April 2008, i.e, Rs.7,000.
Value of goodwill of Ravi’s existing business is computed and shown as an asset in the Balance Sheet of the newly formed company, i.e., Ravi Pvt. Ltd.
(4) Ravi Pvt. Ltd.
Trading and Profit & Loss Account for the year ending 31st March, 2009
| Dr. | Cr. | ||||
| Particulars | Rs. | Rs. | Particulars | Rs. | Rs. |
| To Opening Stock | 5,000 | By Sales | 28,000 | ||
| To Purchase | 18,200 | By Closing Stock | 5,100 | ||
| To Gross Profit c/d (Balancing figure) [April – June (4/15) July – March (11/15)] | 2,640 7,260 | 9,900 | |||
| 33,100 | 33,100 | ||||
| April– June Rs. | July – March Rs. | April– June Rs. | July–March Rs. | ||
| To Office salaries & Expenses (Time basis) | 550 | 1,650 | By Gross Profit b/d | 2,400 | 6,600 |
| To Rent & Taxes (Time basis) | 300 | 900 | |||
| To Carriage out wards (sales basis) | 53 | 147 | |||
| To Travelers Commission (Sales basis) | 213 | 587 | |||
| To Preliminary Expenses | 500 | ||||
| To Director’s fees | 1,800 | ||||
| To Capital Profit (Transferred to Capital reserve) | 1,524 | ||||
| To Balance c/d | 1,676 | ||||
| 2,640 | 7,260 | 2,640 | 7,260 |
Finally, the Trading & P&L A/c of Ravi Pvt. Ltd. is prepared showing the gross profit and net profit of pre-incorporation and post-incorporation period separately.
Ravi Pvt. Ltd.
Balance Sheet as on 31st March, 2009
Note: Purchase consideration satisfied on issue of 3,000 equity shares
Pre and Post Incorporation Profit computation- Change in Cost of Sales – Practical Problems / H2
Ex. Santu Ltd. was incorporated on 1st Jan. 2008 with an authorised capital consisting of 5,000 equity shares of Rs.10 each to take over the running business of Rakesh Brothers as from 1st Oct. 2007. The following is the summarized Profit & Loss A/c for the year ended 30th Sept 2008.
| Rs. | Rs. | |||
| Cost of Sales for the year | 16,000 | Sales | ||
| Administrative expenses | 1,768 | 1st October, 2007 to 31st Dec.2007 | 6,000 | |
| Selling Commission | 875 | |||
| Goodwill written off | 200 | |||
| Interest paid to vendors (Loan repaid on 1st February, 2008) | 373 | 1st January, 2008 to 30th September, 2008 | 19,000 | 25,000 |
| Distribution expenses (60% variable) | 1,250 | |||
| Preliminary expenses written off | 130 | |||
| Debenture interest | 420 | |||
| Depreciation | 444 | |||
| Director’s fees | 200 | |||
| Net Profit | 3,340 | |||
| 25,000 | 25,000 |
The company deals in one type of product. The unit cost of sales was reduced by 10% in the post-incorporation period as compared to the pre-incorporation period in the year. You are required to apportion the net profit amount between pre-incorporation and post-incorporation period showing the basis of apportionment.
Working Details:
1) Calculation of Gross Profit:
The cost of sales has reduced by 10% in post-incorporation period. If cost in pre-incorporation period is Rs.100, then cost in post-incorporation period will be Rs.90. Values of sales for the two periods will be used as weights. Hence, weights will be 6,000: 19,000 or 6:19.
Therefore weighted ratio of cost is:
(100 x 6) : (90 x 19) or 600 : 1,710 or 60 : 171. Cost of sales Rs.16, 000 will be divided in this ratio.
| Pre-Inc. Rs. | Post-Inc. Rs. | |
| Sales | 6,000 | 19,000 |
| Less: Cost of Sales Rs.16,000 in the ratio of 60 : 171 | 4,156 | 11,844 |
| Gross Profit | 1,844 | 7,156 |
Ratio of sales and ratio of cost of sales in respect of pre-incorporation and post-incorporation period is computed. These are used to determine the amount of gross profit.
2) Computation of Time Ratio:
Time Ratio = 3 months (1.10.07 – 31.12.07) : 9 months (1.01.08 – 30.09.08) = 1:3
Time ratio is computed for pre-incorporation period (i.e 3 months from 1.10.07 to 31.12.07) and post-incorporation period (i.e 9 months from 1.01.08 to 30.09.08). It is used for allocation of different expenses for the respective those two periods.
3) Statement of Pre & Post Incorporation Profit of Santu Ltd.
| Particulars | Basis | Pre Incorporation | Post Incorporation | ||
| Dr. (Rs.) | Cr. (Rs.) | Dr. (Rs.) | Cr. (Rs.) | ||
| Sales | Actual | 6,000 | 19,000 | ||
| Cost of Sales (W.N.1) | 4,156 | 11,844 | |||
| Administrative exp. | Time Ratio (1:3) | 442 | 1,326 | ||
| Selling Commission | Sales Ratio (6:19) | 210 | 665 | ||
| Goodwill | 200 | ||||
| Interest to vendors | Time Ratio (1:3) | 93 | 280 | ||
| Distribution Expenses | 40% Fixed [Time Ratio (1:3)] | 125 | 375 | ||
| 60% Variable [Sales Ratio (6:19)] | 180 | 570 | |||
| Preliminary exp. | 130 | ||||
| Debenture interest | – | 420 | |||
| Depreciation | Time | 111 | 333 | ||
| Director’s fee | – | 200 | |||
| Profit | 683 | 2,657 | |||
| 6,000 | 6,000 | 19,000 | 19,000 | ||
Note: Pre-incorporation profit will be treated as capital profit and it will be transferred to Capital Reserve Account. The ratio is 3:9 i.e. 1:3.
The amount of pre-incorporation profit and post-incorporation profit is computed by subtracting all the expenses from amount of sales for the respective period.
Receipts and Payments details in Pre Incorporation Statutory Report
Ex. Megabyte Ltd. was incorporated on 1st April, 1999 to take over the running business of Mr.X.
The purchase consideration was satisfied by allotment of:
- 20,000 equity shares of Rs.10 each at par.
- 10,000 10% Redeemable Preference shares of Rs.10 each at par, redeemable on 31.3.2006.
- Rs.50,000 paid in cash.
The company issued a prospectus for raising capital by issue of 30,000 equity shares of Rs.10 each, at par and 15,000 10% Redeemable Preference shares of Rs.10 each at par. The entire amount in respect of the issue was received by 30th June, 1999 except final call of Rs.2.50 per share on 1,000 shares issued to Mr.Y, a director. Underwriting commission @ 2% on equity share and @ 3% on preference shares were paid to a merchant banker.
The preliminary expenses were estimated at Rs.50,000 in the prospectus but the actual expenses incurred were as under:
| Rs. | |
| Solicitor’s fee | 10,000 |
| Printing of memorandum | 15,000 (of which Rs.5,000 remained unpaid) |
| Stamping and registration | 20,000 |
| Advertisement expenses | 30,000 |
The company purchased a plot of land for Rs.75,000. Further, it advanced Rs.1,00,000 for construction of office building and Rs.1,50,000 to a supplier, being 40% of contract price for supply of machinery. A part of the investments taken over from Mr.X was sold for Rs.50,000 (Rs.5,000 in excess of their book value).
Prepare a Receipts and Payments Account and other relevant financial information to be included in the Statutory Report pursuant to section 165 of the Companies Act, 1956 in respect of Megabyte Ltd. made upto 30th June, 1999.
Working Details
- Receipts from Eq. Shares:-
| Rs. | |
| Total Amount to be received (30,000 x Rs.10) | 3,00,000 |
| Less: Calls-in-arrear (Rs.2.5 x 1,000) | 2,500 |
| 2,97,500 |
As final call was not paid on some shares, the amount actually received from equity shareholders on issue of shares is computed, which is shown in Receipts and Payment A/c.
- Underwriters Commission:-
i) 2% on Eq. shares i.e. 2% x Rs.3,00,000 = Rs.6,000
ii) 3% on pref shares i.e. 3% x Rs.1,50,000 = Rs.4,500
Underwriters are paid with a commission on number of shares (equity / preference) issued. The underwriting commission is computed and the payment is shown in Receipts and Payments A/c.
- Extract from the Statutory Report of Megabyte Ltd.(Pursuant to section 165)
Receipts and Payments Account upto 30th June, 1999
| Receipts | Rs. | Payments | Rs. | |
| Shares: | Vendor (Mr. X) | 50,000 | ||
| Equity shares (W.N.1) | 2,97,500 | Preliminary expenses: | ||
| 10% Redeemable Preference shares (15,000 x Rs.10) | 1,50,000 | Underwriting commission Equity shares (W.N.-2) 6,000 | ||
| Investments | 50,000 | |||
| Pref. shares 4,500 | 10,500 | |||
| Solicitor’s fees | 10,000 | |||
| Printing of memorandum | 10,000 | |||
| Stamping and Registration | 20,000 | |||
| Advertisement | 30,000 | 80,500 | ||
| Capital expenditure: | ||||
| Land | 75,000 | |||
| Building (advance) | 1,00,000 | |||
| Machinery (advance) | 1,50,000 | |||
| Balance | 42,000 | |||
| 4,97,500 | 4,97,500 |
The Receipts and Payment A/c is prepared to determine the surplus or deficit.
4) Financial information for inclusion in the Statutory Report
(i) Shares allotted
(a) Allotted subject to payment there of in cash:
| No. of shares | Nominal value of each share | Amount received up to 30.6.1999 | |
| Equity Shares | 30,000 | 10 | 2,97,500 |
| 10% Redeemable preference shares | 15,000 | 10 | 1,50,000 |
(b) Allotted as fully paid-up otherwise than in cash (to vendor, Mr. for purchase of running business)
| No. of shares | Nominal value of each share | Amount received up to 31.6.1999 | |
| Equity Shares | 20,000 | 10 | 2,00,000 |
| 10% Redeemable preference shares | 10,000 | 10 | 1,00,000 |
(ii) Preliminary expenses actually incurred up to 30.6.1999
| Rs. | |
| Solicitor’s fee | 10,000 |
| Printing of memorandum | 15,000 |
| Stamping and registration | 20,000 |
| Advertising expenses | 30,000 |
| 75,000 |
(iii) Particulars of contracts
The company has paid in advance of Rs.1,00,000 for construction of office building.
The company has entered into a contract for supply of machinery costing Rs.3,75,000 against which a sum of Rs.1,50,000 has been advanced, being 40% of contract price.
(iv) The arrears due on call from Director Mr.Y Rs. 2,500
Statutory Report is prepared showing the detail information about shares allotted, preliminary expenses and Particulars of contract.
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