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CS Executive · Corporate Accounting and Financial Management · Related Aspects of Company Accounts

A company incorporated on 1 October 2025 took over a business from 1 April 2025; accounts are drawn up to 31 March 2026. Sales for the year were Rs 20,00,000, of which Rs 8,00,000 were before incorporation. Gross profit was Rs 5,00,000 (apportioned by sales ratio). Salaries of Rs 1,20,000 are apportioned by time. Selling expenses of Rs 1,00,000 are apportioned by sales. Directors' fees of Rs 30,000 relate only to the period after incorporation. What is the pre-incorporation profit?

The pre-incorporation profit is Rs 1,00,000. Gross profit of Rs 2,00,000 (sales ratio 2:3) is reduced by salaries of Rs 60,000 (time ratio 1:1) and selling expenses of Rs 40,000 (sales ratio). Directors' fees are charged wholly to the post-incorporation period.

  1. ARs 1,00,000Correct
  2. BRs 90,000
  3. CRs 1,40,000
  4. DRs 1,50,000

Explanation

The sales ratio is 2:3, so pre-incorporation gross profit is 5,00,000 x 2/5 = 2,00,000. The time ratio is 6:6, so salaries are 60,000 pre. Selling expenses by sales ratio are 40,000 pre. Pre-incorporation profit = 2,00,000 - 60,000 - 40,000 = Rs 1,00,000. Apportioning selling expenses by time gives the wrong figure of Rs 90,000. Check: post-incorporation profit is 3,00,000 - 60,000 - 60,000 - 30,000 = 1,50,000, and the two total 2,50,000.

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