Page 282 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Unit 11: Profit and Loss Prior to Incorporation

11.7 Review Questions Notes

1. What do you mean by Profit or Loss pre-incorporation?
2. Why is it necessary to compute profit or loss pre and post-incorporation?

3. How are the different expenses allocated between pre- and post-incorporation periods?
Explain.
4. Which items are distributed between pre- and post-incorporation period on the basis of
time ratio?
5. Which items distributed between pre- and post-incorporation period on the basis of
turnover ratio?

6. Describe the method of finding out profit or loss prior and after incorporation.
7. How are “Profits prior to incorporation” dealt with? How will you ascertain such profit?
8. Why is it necessary to find out profit prior and after incorporation? Explain it in detail.

9. Why and how are pre- and post-incorporation profits and losses calculated?
Practical Questions:
A. Pre-incorporation profits
th
1. Sethi Ltd. was incorporated on 30 June, 2010 to acquire the business of Mr. X as from 1 st
st
January, 2010. The accounts for the year ended 31 December, 2010 disclosed the following:
(i) There was a gross profit of 4,80,000.
(ii) The sales for the year amounted to 24,00,000 of which 10,80,000 were for the first
six months.
(iii) The expense debits to Profit and Loss Account included Director’s fees 30,000, Bad
Debts 7,200, Advertising 24,000 (under a contract amounting to 2,000 per month),
Salaries and General Expenses 1,28,000, Preliminary expenses written off 10,000.
Donation to political parties given by the company 10,000.

Prepare a statement showing the amount of profit made before and after incorporation
in the books of Sethi Ltd.
Ans: Profit pre-incorporation period 1,36,760.

Profit after incorporation period 1,34,040.
B. Division of profit on monthly basis
st
st
2. A company acquires a business on 1 January, 2010; it is being incorporated on 1 May,
th
2010. The first accounts are drawn upto 30 September 2010. The gross profit for the period
is 56,000.
The General Expenses are 14,220, Director’s fees 12,000 per annum, formation expenses
1,500.
th
Rent to 30 June was 1,200 per annum after which it was increased to 3,000 per annum.
The salary of the manager who upto incorporation of the company, was made a director,
was 6000 per annum (since incorporation included in the director’s fees above).

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