Page 270 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Unit 11: Profit and Loss Prior to Incorporation

Notes
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Caution RBI has also directed its own training centres and NABARD training centres to
conduct training programmes for RRBs staff in keeping with the requirements of the day.

Self Assessment

Fill in the blanks:
1. Nature of pre-incorporation profits is ……………….
2. Post-incorporation profits are ready for the distribution of……………….
3. Director’s fees relates to …………… incorporation period.

4. Underwriting commission relates to …………… period.
5. Depreciation is allocated on the basis of …………….
6. Sales commission is allocated on the basis of ……………
7. Pre-incorporation profit is transferred to ………… account.

Illustration 4 (Interest on Purchase Price and Profit & Loss Account for More Than 12 Months)
The partners of Maitri Agencies decided to convert the partnership into a Private Limited
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Company called M.A. (P) Ltd. with effect from 1 January, 2010. The consideration was agreed at
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1,17,000 based on the firm’s balance sheet as on 31 December, 2009. However, due to some
procedural difficulties, the company could be incorporated only on 1 April, 2010. Meanwhile,
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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 31 March, 2011 and prepared the following
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summarized Profit and Loss Account:
Particulars
Sales 2,34,00,000
Cost of goods sold 1,63,80,000
Salaries 11,70,000
Depreciation 1,80,000
Advertisement 7,02,000
Discount 11,70,000
Managing Directors’ remuneration 90,000
Miscellaneous expenses 1,20,000
Office-cum-Show-Room rent 7,20,000
Interest 9,51,000
2,14,83,000
Profit 19,17,000

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.
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The company was able to double the average monthly sales of the firm, from 1 April, 2010 but
the salaries trebled from that date. It had to occupy additional space from 1 July, 2010 for which
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rent was 30,000 per month.

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