4. PROFIT OR LOSS PRIOR TO INCORPORATION

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1 4. PROFIT OR LOSS PRIOR TO INCORPORATION SOLUTIONS TO ASSIGNMENT PROBLEMS Problem No. 1 Trading A/c and Profit and loss a/c for the year ending post post To cost of goods sold (WN 2) 2,10,000 5,67,000 By sales (WN 1) 2,40,000 7,20,000 To gross profit c/d 30,000 1,53,000 2,40,000 7,20,000 2,40,000 7,20,000 To rent (WN 3) 7,000 33,000 By gross profit b/d 30,000 1,53,000 To salaries (WN 4) 4,200 16,800 To sales promotion expenses (WN 5) 600 1,800 To travelling expenses(wn 5) 2,000 4,000 To deprecation (WN 6) 1,500 3,300 To carriage out ward (1:3) To printing and stationary (1:2) 800 1,600 To advertisements(1:3) 2,000 6,000 To miscellaneous expenditures (1:2) 4,200 8,400 To directors fee (post) To managing directors remuneration (post) - 4,100 To bad debts (1:3) 400 1,200 To commission and brokerage (1:3) 2,000 6,000 To audit fee (post) - 3,000 To interest paid to vendors (2:1) To interest on debentures (post) To selling and distribution expenses(1:3) To preliminary expenditure (post) To underwriting commission (post) 1, ,500 3,000 9, To capital reserve To net profit - 50,900 30,000 1,53,000 30,000 1,53,000 IPCC_34e_Accounts_Group.I_Profit or Loss Prior to Incorporation_Assignment Solutions 1

2 Ph: /26 Working Notes : 1. Computation of sales ratio : Let the average monthly sales be x April -X Aug-X May-X sep X June -X 2 5X Oct, Nov, Dec, Jan, Feb, Mar. X + X = 6 =10X 3 3 July-X 4X 2X+10X =X Sales Ratio = 1:3 2. Computation of cost of goods ratio : Cost per unit X X 0.1X = 0.9X No. of units 1 3 X 2.7X Cost of goods Ratio = 10: ,000 Original Space 13,000 Additional Space 27,000 (3,000 X 9m) W Z d ddd W Z e ddd - July 3,000 - Aug. to March 24,000 April X August X May X September -X June -X October -X July -X November to March = 1.2x X 5 = 6X 4X 3X + 6X = 9X IPCC_34e_Accounts_Group.I_Profit or Loss Prior to Incorporation_Assignment Solutions 2

3 Rent Ratio = 4:9 Rent for pre = 4,000+3,000 =7,000 Rent for post = 9,000+24,000 =33,000 Copy Rights Reserved To, Guntur 4. Computation of salaries ratio : April May June July X - X - X 3X 6X August to March = 3x X 8 = 24x Salaries Ratio = 6:24 = 1:4 5. Travelling expenses : Travelling Expenses 8,400 Selling 2,400 (1:3) 6,000 (1:2) 600 1,800 2,000 4, Depreciation 300 () 4,500 (1:2) 1,500 (pre) 3,000 post 7. Interest paid to vendors: 6M Apr. to July 4M Aug. to Sept 2M 4:2 = 2:1 8. Audit fees assumed to be belongs to company audit, hence charged to post period. IPCC_34e_Accounts_Group.I_Profit or Loss Prior to Incorporation_Assignment Solutions 3

4 Ph: /26 Problem No. 2 -incorporation period is for four months, from 1st January, 2010 to 30th April, months period (from 1st May, 2010 to 31st December, 2010) is post-incorporation period. Statement showing calculation of profit/losses for pre and post incorporation periods Gross Profit (9:19) 3,42,000 7,22,000 Interest on Investments 36,000 - Bad debts Recovery 7,000-3,85,000 7,22,000 Less : Rent and Taxes(1:2) 30,000 60,000 Salaries : Manager s salary (WN g) 23,000 62,000 Other salaries (WN g) 82,000 1,64,000 Printing and stationery (1:2) 6,000,000 Audit fees (post) - 45,000 Carriage outwards (9:19) 4,500 9,500 Sales commission (9:19) 9,900 20,900 Bad Debts (91, ,000) (9:19) 31,500 66,500 Interest on Debentures (finance costs) - 25,000 Underwriting Commission (post) - 26,000 liminary expenses (post) - 28,000 Loss on sale of investments (pre) 11,200 r Net Profit 1,86,900* 2,03,100 * -incorporation profit is a capital profit and will be transferred to Capital Reserve. Working Notes: a. Calculation of ratio of Sales Let average monthly sales be x. Jan 1.5X May, June, July, Aug & Sep 5X Feb - X Oct - 1.5X Mar - X Nov - X April 3X Dec - 2X 4.5X 9.5X Thus Sales from January to April are 4½ x and sales from May to December are 9½ x. Sales are in the ratio of 9/2x : 19/2x or 9 : 19. b. Gross profit, carriage outwards, sales commission and bad debts written off have been allocated in pre and post incorporation periods in the ratio of Sales i.e. 9 : 19. c. Rent, salaries, printing and stationery, audit fees are allocated on time basis. d. Interest on debentures, underwriting commission and preliminary expenses are allocated in post incorporation period. IPCC_34e_Accounts_Group.I_Profit or Loss Prior to Incorporation_Assignment Solutions 4

5 e. Interest on investments, loss on sale of investments and bad debt recovery are allocated in preincorporation period. f. Audit fees assumed to be relating to company audit, hence charged to post period. Hence charged to post period. g. Total salaries paid Rs.3,31,000 Total Salaries Paid Rs. 3,31,000 Managers Salary Rs.85,000 Others Salary Rs.2,46,000 23,000 (pre) 62,000 (post) 82,000 (pre) 1,64,000 (post) Problem No.3 Time ratio: incorporation period ( to ) = 4 months incorporation period ( to ) = 8 months Time Ratio = 4 : 8 or 1 : 2 Sales ratio: Average monthly sales 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 X 2x : 8 X 1x = 8x : 8x or 1 : 1 Copy Rights Reserved To, Guntur Problem No.4 Statement showing calculation of profits for pre and post incorporation periods for the year ended incorporation period (Rs.) -incorporation period (Rs.) 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) 4,000,000 Travelling expenses (W.N.3) 4,000 8,000 Sales promotion expenses (W.N.3) 1,200 3,600 Misc. trade expenses (1:2),600 25,200 Rent (office building) (W.N.2) 8,000 18,400 Electricity charges (1:2) 1,400 2,800 Director s fee (post) - 11,200 Bad debts (1:3) 800 2,400 IPCC_34e_Accounts_Group.I_Profit or Loss Prior to Incorporation_Assignment Solutions 5

6 Ph: /26 Selling agents commission (1:3) 4,000,000 Audit fee (1:3)(note 6) 1,500 4,500 Debenture interest (post) - 3,000 Interest paid to vendor (2:1) (W.N.4) 2,800 1,400 Selling expenses (1:3) 6,300 18,900 Depreciation on fixed assets (W.N.5) 3,000 6,600 Capital reserve (bal. Fig.),800 - Net profit (Bal.Fig.) - 74,800 Working Notes: incorporation period = 1 st April, 2009 to 31 st July, 2009 i.e. 4 months 1. Time Ratio = 4 months : 8 months i.e. 1 : 2 2. Sales ratio: Let the monthly sales for first 6 months (i. e. from to ) be = x Then, sales for 6 months = 6x 2 5 Monthly sales for next 6 months (i.e. from to ) = x + x = x Then, sales for next 6 months = x X6 = 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 3. Rent: Rs. 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) 4. Travelling expenses and sales promotion expenses: (Rs.) (Rs.) Traveling expenses Rs.,000 (i.e. Rs.16,800 Rs.4,800) 4,000 8,000 distributed in 1:2 ratio Sales promotion expenses Rs.4,800 distributed in 1:3 ratio 1,200 3,600 IPCC_34e_Accounts_Group.I_Profit or Loss Prior to Incorporation_Assignment Solutions 6

7 5. Interest paid to vendor till 30 th September, 2009: (Rs.) (Rs.) Interest for pre-incorporation period Rs.4,200 X 4 2,800 6 Interest for post incorporation period i.e. for August, 2009 Rs.4,200 & September, 2009 = X Depreciation: Rs. (Rs.) 1,400 (Rs.) Total depreciation 9, Less: Depreciation exclusively for post incorporation period Depreciation for pre-incorporation period Depreciation for post incorporation period 9 4,000 X 9 8,000 X 9, Audit fees is assumed to be Tax audit fees, hence allocated on Sales ratio. i.e. 1 : 3 Problem No.5-3, ,000-3,000 6,600 Statement showing pre and post incorporation profit for the year ended 31 st March, 20 Total Amount (Rs.) Basis of Allocation incorporation Rs. - Incorporation Rs. Gross Profit(Wn 3) 5,40,000 2:7 1,20,000 4,20,000 Less: Depreciation 1,08,000 1:2 36,000 72,000 Director s Fees 50,000-50,000 liminary Expenses, ,000 Office Expenses 78,000 1:2 26,000 52,000 Interest to vendors 5,000 Actual 4,000 1,000 Net Profit (Rs.54,000 being 2,87,000 54,000 2,33,000 pre incorporation profit is transferred to capital reserve Account) 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 1 st April, 2011 to 31 st July, 2011) will be 4 X.50 = Rs.2. Thus sales ratio is 2:7. period sales Aug. to Sep=1x, Oct to mar=6x, Total=7x. IPCC_34e_Accounts_Group.I_Profit or Loss Prior to Incorporation_Assignment Solutions 7

8 Ph: / Time ratio: 1 st April, 2011 to 31 st July, 2011:1 st August, 2011 to 31 st March, 20 = 4 months : 8 months = 1:2 Thus, time ratio is 1:2 3. Gross profit: Gross profit = Net profit + All expenses Copy Rights Reserved To, Guntur = Rs.2,00,000 + Rs.(1,08, , ,000 +, , , ,000) = Rs.2,00,000 + Rs.3,40,000 = Rs.5,40, Basis (Rs.) (Rs.) Dividend sales ratio 5,40,000 X 2 / 9 1,20,000 5,40,000X 7/9 4,20, Basis (Rs.) (Rs.) Audit fees Time ratio 5,000 5, Basis (Rs.) (Rs.) Selling expenses sales ratio 16,000 56,000 Problem No.6 (a) Sales of first 6 months = Rs.4,80,000. Average sale of first 6 months = Rs.4,80,000/6 = Rs.80,000 per month. -incorporation period consist of 3 months (i.e., April, May and June). The sales of those 3 months = Rs.80,000 x 3 = Rs.2,40,000. Sales of remaining 9 months = Rs.24,00,000 Rs.2,40,000 = Rs.21,60,000. Therefore, the ratio of sales = Rs.2,40,000 : Rs.21,60,000 or 1: 9. (b) Let the average of monthly sales = X. The sales of different months can be shown as follows: Month Jan Feb Mar. April May June July Aug Sept Oct Nov Dec Sales 1x 0.5x 1x 0.5x 1x 1x 1x 1x 1x 1x 1.5x 1.5x Date of incorporation is May, 2013 incorporation period is from January to April i.e. 3 x - incorporation period is from May to December i.e 9x The ratio of Sales = 3x : 9x or 1:3. (c) Let the average monthly sales be x. The sales of different months can be shown as follows: Month April May June July Aug Sept Oct Nov Dec Jan Feb Mar. Sales 2x 1x 1x 1x 1x 1x 1x 1x 1x 1x 2x 2x Date of incorporation is 1 July, 2013 incorporation period is from April to June i.e. 4 x - incorporation period is from July to March i.e. 11x The ratio of Sales = 4x : 11x or 4:11 IPCC_34e_Accounts_Group.I_Profit or Loss Prior to Incorporation_Assignment Solutions 8

9 Problem No.7 Statement showing the calculation of Profits for the pre-incorporation and post incorporation Periods: Total Basis of incorporatioincorporation - Amount Allocation Gross Profit (25% of Rs.1,600) Less: Salaries Rent, rates and Insurance Sundry office expenses Travellers commission Discount allowed Bad debts Directors fee Audit Fees Depreciation on tangible assets Debenture interest Sales Time Time Time Sales Sales Sales Sales* Time Net Profit Working Notes: 1. Sales ratio Sales for the whole year Sales upto 31 st July, 20 Therefore, sales for the period from 1 st August, 20 to 31 st March, 2013 (Rs.in lakh) 1, ,200 Thus, sale ratio = 400:00 = 1:3 2. Time ratio 1 st April, 20 to 31 st July, 20 : 1 st August, 20 to 31 st March, 2013 = 4 months: 8 months = 1:2, Thus, time ratio is 1:2. Verified By: Amaranth Garu Executed By: Mr. Uday THE END Copy Rights Reserved To, Guntur IPCC_34e_Accounts_Group.I_Profit or Loss Prior to Incorporation_Assignment Solutions 9