Practice Questions: Profit Prior to Incorporation

How to use this chapter

Do three things before writing a line. Count the months and write the time ratio. Compute the sales ratio and write it beside. Then read every expense once and mark it T, S, Post or Pre in the margin. The statement then writes itself.

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Question 1 (15 marks)

Sharada Ltd was incorporated on 1 September 2026 to take over the business of a partnership firm with effect from 1 April 2026. The accounts for the year ended 31 March 2027 showed a gross profit of Rs 2,88,000 and the following expenses:

Sales for the year were Rs 9,60,000, of which Rs 2,40,000 arose in the five months to 31 August 2026. Goodwill of Rs 50,000 arose on the purchase.

Compute the profit or loss prior to and after incorporation, and state how each is to be treated.

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Question 2 (8 + 7 marks)

(a) Explain why the profit of the period prior to incorporation is treated as capital, and set out the ways in which a pre-incorporation profit and a pre-incorporation loss may respectively be dealt with. (8)

(b) A company was incorporated on 1 August and took over a business from 1 April, paying the vendor interest at 12 per cent per annum on the consideration of Rs 5,00,000 from the date of acquisition until it was discharged on 30 November. Compute the interest and apportion it, explaining why the general time ratio does not apply. (7)

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Question 3 (15 marks)

(a) State the basis of apportionment of each of the following, with a reason: (10)

1. Gross profit
2. Rent, rates and taxes
3. Directors' fees
4. Commission on sales
5. Depreciation on a machine bought two months after incorporation
6. Partners' salaries
7. Bad debts
8. Preliminary expenses written off
9. Audit fee described as the statutory audit fee of the company
10. Insurance

(b) Answer in one sentence each: (5)

1. Which period does the month of incorporation fall in?
2. What do you do where the question says nothing about the incidence of sales?
3. Where is a pre-incorporation loss usually debited?
4. May a pre-incorporation loss be set against the post-incorporation profit?
5. What check proves the whole columnar statement?

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Answers

Answer 1

Working note one: the time ratio.

Time ratio 5:7.

Working note two: the sales ratio.

Sales ratio 1:3.

The statement.