Treatment of the Pre-incorporation and Post-incorporation Result

In one line

The pre-incorporation result is capital and goes to a capital reserve or against a capital item; the post-incorporation result is a trading result and goes to the statement of profit and loss.

The post-incorporation result: one destination

It is an ordinary trading profit or loss of the company, earned after it existed.

Profit and Loss A/c, in the Schedule III statement, and thence to reserves and surplus on the balance sheet.

It is available for dividend in the ordinary way, and nothing about this module restricts it.

A post-incorporation loss is likewise an ordinary trading loss and is carried as a debit balance in reserves and surplus.

The pre-incorporation profit: three destinations

All three are capital treatments and the question decides which.

Why all three are proper. The profit is capital, so it may be kept as a capital reserve or used to reduce a capital item the company is carrying. What it may not do is increase the profit available for dividend, and none of the three does.

Capital reserve is the answer where the question says nothing. Say so: "in the absence of instructions the profit prior to incorporation has been transferred to capital reserve."

The pre-incorporation loss: three destinations

A capital loss, and the mirror of the above.

The entry in the first case:

Goodwill A/c Dr, to Loss prior to incorporation A/c.

And the reasoning worth stating. The company agreed to take the business from a date before it existed, and the business lost money in that period. That loss is part of the cost of acquiring the business, in the same way a higher price would have been, so adding it to goodwill describes what happened.

What it must not do is reduce the post-incorporation profit. That would let a capital loss shelter distributable profit, and it is the error the whole module exists to prevent.