A Complete Computation, Worked
Chapter Thirty-Four
Syllabus topic 3, "Computation of Pre and Post Incorporation Profit/ Loss"
Pages 102 to 103 of 168
The question
Meera Traders Ltd was incorporated on 1 August 2026 to take over the business of a firm with effect from 1 April 2026. The accounts for the year ended 31 March 2027 showed a gross profit of Rs 4,80,000 and the following expenses:
| Rs | |
|---|---|
| Salaries | 96,000 |
| Rent, rates and taxes | 72,000 |
| Printing and stationery | 18,000 |
| General expenses | 24,000 |
| Advertising | 60,000 |
| Carriage outward | 24,000 |
| Commission on sales | 36,000 |
| Bad debts | 12,000 |
| Directors' fees | 30,000 |
| Preliminary expenses written off | 10,000 |
| Debenture interest | 16,000 |
| Total | 3,98,000 |
Sales for the year were Rs 12,00,000, of which Rs 3,00,000 arose in the four months to 31 July 2026.
Compute the profit prior to and after incorporation.
Working note one: the time ratio
| From | To | Months | |
|---|---|---|---|
| Pre-incorporation | 1 April 2026 | 31 July 2026 | 4 |
| Post-incorporation | 1 August 2026 | 31 March 2027 | 8 |
| Total | 12 |
Time ratio 1:2.
Working note two: the sales ratio
| Rs | |
|---|---|
| Sales, pre-incorporation | 3,00,000 |
| Sales, post-incorporation | 9,00,000 |
| Total | 12,00,000 |
Sales ratio 1:3.
Note that they differ. Four months of the year produced only a quarter of the sales, so the gross profit divides more sharply than the time.
The statement
| Particulars | Total, Rs | Basis | Pre, Rs | Post, Rs |
|---|---|---|---|---|
| Gross profit | 4,80,000 | Sales 1:3 | 1,20,000 | 3,60,000 |
| Less: expenses on time | ||||
| Salaries | 96,000 | Time 1:2 | 32,000 | 64,000 |
| Rent, rates and taxes | 72,000 | Time 1:2 | 24,000 | 48,000 |
| Printing and stationery | 18,000 | Time 1:2 | 6,000 | 12,000 |
| General expenses | 24,000 | Time 1:2 | 8,000 | 16,000 |
| Less: expenses on sales | ||||
| Advertising | 60,000 | Sales 1:3 | 15,000 | 45,000 |
| Carriage outward | 24,000 | Sales 1:3 | 6,000 | 18,000 |
| Commission on sales | 36,000 | Sales 1:3 | 9,000 | 27,000 |
| Bad debts | 12,000 | Sales 1:3 | 3,000 | 9,000 |
| Less: wholly post-incorporation | ||||
| Directors' fees | 30,000 | Post | nil | 30,000 |
| Preliminary expenses written off | 10,000 | Post | nil | 10,000 |
| Debenture interest | 16,000 | Post | nil | 16,000 |
| Total expenses | 3,98,000 | 1,03,000 | 2,95,000 |
| Total, Rs | Pre, Rs | Post, Rs | |
|---|---|---|---|
| Gross profit | 4,80,000 | 1,20,000 | 3,60,000 |
| Less: total expenses | 3,98,000 | 1,03,000 | 2,95,000 |
| Net profit | 82,000 | 17,000 | 65,000 |
The three checks, run
One: does each line add across?
Take salaries: Rs 32,000 plus Rs 64,000 is Rs 96,000. Every line does the same, and checking as you go is quicker than rebuilding.
Two: do the expense columns agree with the total?
| Rs | |
|---|---|
| Expenses, pre-incorporation | 1,03,000 |
| Expenses, post-incorporation | 2,95,000 |
| Total | 3,98,000 |
Which is the trial balance figure.
Three: do the results add back to the year's profit?
| Rs | |
|---|---|
| Profit prior to incorporation | 17,000 |
| Profit after incorporation | 65,000 |
| Profit for the year | 82,000 |
| Rs | |
|---|---|
| Gross profit | 4,80,000 |
| Less: total expenses | 3,98,000 |
| Profit for the year | 82,000 |
The two agree, so the statement is proved.
What the answer must say at the end
Profit prior to incorporation Rs 17,000, being capital in the company's hands and to be credited to capital reserve. Profit after incorporation Rs 65,000, being a trading profit available for distribution.
A Complete Computation, Worked
Two labelled figures with their character stated. The next chapter gives the entries.
Where marks are lost in this question
| The error | The consequence |
|---|---|
| Gross profit on time instead of sales | Pre becomes Rs 1,60,000; the answer is wrong by Rs 40,000 and everything downstream moves |
| Directors' fees apportioned | Rs 10,000 wrongly charged to a period in which there were no directors |
| Preliminary expenses apportioned | The same error, for a cost of forming the company |
| Advertising on time | A defensible view, but it must be argued; unstated it reads as a slip |
| One net profit shown | The question asked for two |
In short
- Time ratio 1:2 from four months and eight; sales ratio 1:3 from Rs 3,00,000 and Rs 9,00,000.
- Gross profit on sales: Rs 1,20,000 and Rs 3,60,000.
- Four expenses on time, four on sales, three wholly post.
- Results: Rs 17,000 prior to incorporation and Rs 65,000 after, adding to the year's Rs 82,000.
- State the character of each result, not just the figure.
Answer in one sentence
Compute the profit prior to and after incorporation. Establish the two ratios first, four months to eight giving a time ratio of 1:2 and sales of Rs 3,00,000 to Rs 9,00,000 giving a sales ratio of 1:3, and note that they differ; then set out a four-column statement in which the gross profit of Rs 4,80,000 is divided on sales as Rs 1,20,000 and Rs 3,60,000, the salaries, rent, printing and general expenses are divided on time, the advertising, carriage outward, commission and bad debts on sales, and the directors' fees, preliminary expenses and debenture interest charged wholly to the post-incorporation period because a company must exist to incur them; the expenses then total Rs 1,03,000 and Rs 2,95,000 against the trial balance figure of Rs 3,98,000, and the results are a profit prior to incorporation of Rs 17,000, which is capital and goes to capital reserve, and a profit after incorporation of Rs 65,000, which is a trading profit available for distribution, the two together being the year's profit of Rs 82,000.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.