Profit or Loss Prior to Incorporation

Question No. 1

A Company was incorporated on 30th April to acquire a business of a private firm as from 1st January. The Company closes its account books on 31st December. The Gross Profit for the whole period was found out to be $120,000.

The sales for the month of August were 3 times of the average, it was twice for January and July, it was 1.5 times for October and December and it was 1/2 of the average sales for November.

Estimate the Gross Profit earned prior to incorporation.

Answer

Let the average monthly sales be = 1

Therefore sales for

August3
January2
July2
October1.5
December1.5
November0.5
Total sales for 6 months10.5

Total sales of remaining 6 months: Feb., March, April, May, June, and Sept. = 12 – 10.5 = 1.5

Therefore average sales for the six months = 1.5 / 6 = 0.25 i.e., 1/4 of average

Hence sales for January to April = 2 + 1/4 + 1/4 + 1/4 = 2, 3/4

Therefore Sales Ratio = 2 3/4 : 9 1/4 or 11/4 : 37/4 or 11:37

Gross Profit prior to incorporation = 120,000 x 11/48 = $27,500

Gross Profit for post-incorporation = 120,000 x 37/48 = $92,500

Question No. 2

A company incorporated on 1st April to acquire the running business of partnership firm from 1st January. Accounting year ends on 31st December. Find out the Sales Ratio of pre-incorporation and post-incorporation periods from the following information:

  1. Sales for the whole year (Jan. to Dec.) $720,000
  2. Sales for January, June and July twice the average.
  3. Sales for August 1.5 times of the average.
  4. Sales for March and September 1/2 of the average.

Answer

Question-no-2-incorporation-of-profits

Prior-profit-incorporation-problems

Post-incorporation period sales = $720,000 – 185,000 = $535,000

Therefore, Sales Ratio of pre-incorporation period and post-incorporation period = 185,000 : 535,000 or 37 : 107.

Question No. 3

Flat Limited was incorporated on 1st July 2019 to take over the running business of Mr. Round with effect from 1st April 2019. The following profit and Loss Account for the year ended 31st March 2020 was drawn up:

prior-profit-incorporation-question-and-answers

The following details are available:

  1. The average monthly turnover from July 2019 onwards was double than that of the previous months.
  2. Rent for the first 3 months was paid @ $200 p.m. and thereafter at a rate increased by $50 p.m.
  3. Bad Debts $350 related to sales effected after 1st September 2019 and the realisation of bad debts was in respect of debts written off during 2017.
  4. Advertisement expenses were directly proportionate to the sale.

You are required to find out the prior to incorporation and state the treatment thereof in the books of Company.

Solution

Profit-and-Loss-Account-for-the-profit-incorporation

Workings:

Working-Note-Question-4

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