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FA4

Unit IVAscertainment and Treatment of profit prior to Incorporation Q1) How income statement is prepared at the end of the year and then the profit and loss is allocated between the two periods?A1) The income statement is prepared at the end of the year and then the profit and loss is allocated between the two periods.(I) from the date of purchase to the date of establishment (pre-establishment period) and(II) From the date of establishment to the end of the fiscal year (period after establishment).Accounting method:

Particulars

Basis of Apportioment

  1. Gross Profit and Loss
  2. Expenses of fixed nature, such as, Salaries, Rent, Taxes, Insurance, Depreciation, Office Expenses, Printing and Stationery, Administrative Expenses, Postage ,  Audit Fees, Repairs, etc.
  3. Expenses of variable type, such as, Carriage Out, Packaging, Commission,  Advertisement, Discount, Bad Debts, Selling expenses, Salesmen salary, all type of expenses directly varying with turnover etc.
  4. All expenses relating to Pre-incorporation period, such as , interest to vendor, paid before incorporation and all the other expense during the period, i.e. Prior  to incorporation.

 

5.     All expenses relating to Post-incorporation period, such as, Preliminary Expenses, Director Fee, Interest on Debentures, under-writing Commissions, Subscription to Political parties, Donations given by company etc.

 

Sales and Ratio

Time Ratio

 

Sales Ratio

 

 

No allocation, The complete expenditures relating to pre-incorporation period.

No allocation, Wholly to post-incorporation period.

To find profits or losses before and after establishment: 1. Set up one trading account for the entire period. Do not consider the date of establishment. Therefore, you will reach one figure of gross profit for the entire period. 2. Gross profit is distributed to two periods, pre-establishment and post-establishment, based on sales in the two periods. 3. The various costs shown on the income statement should be divided into pre-establishment and post-establishment periods on a logical and appropriate basis.   Q2) Give a brief summary of Pre-establishment profit / loss.A2) Pre-establishment profit / loss summary:If you take over the business from a date before the establishment / start, the profits earned by the establishment / start date (established for a private company, started for a public company) are called “Profit before establishment”The same is treated as capital gains, as these are the profits earned before the company was founded. In short, profits earned after the date of purchase of a business are called "profit after incorporation or acquisition", and profits earned before the date of purchase of a business are called "profit before incorporation". ..For example, X Ltd. was founded on April 1, 2006, acquired the operating business Y Ltd. from January 1, 2006, and closed its account on December 31, 2006. Currently X Ltd. Is Y Ltd from April 1st to December 31st, 2006, Y Ltd. from January 1, 2006 to March 31, 2006, as well as profits / losses due to Profit / loss .Therefore, profits and losses generated before establishment are called "profit (loss) before establishment", are treated as capital gains, and cannot be distributed as business profits. Therefore, it cannot be distributed as a dividend.The same can be transferred to capital reserves or adjusted for goodwill. "Pre-establishment loss" is treated as a capital loss, so the same thing appears under the "Other Expenditures" heading on the asset side of the balance sheet.  Q3) How to calculate profit / loss before establishment?A3) You need to prepare an income statement on the date of establishment to confirm the profit before the establishment. But in reality, the same books are maintained throughout the fiscal year.The income statement is prepared at the end of the year, after which profits (or losses) are allocated between the two periods.
  • From the date of purchase to the date of establishment or the period before establishment.
  •  From the date of establishment to the end of the fiscal year or the period after establishment.
  • Accounting method for profit and loss before establishment:Procedures may be suggested to identify profits or losses prior to establishment.Step I:In order to calculate the gross profit amount, you must first create a trading account for the entire term, from the purchase date to the last account date.Step II:Calculate the following two ratios.
  • Sales ratio Sales must be calculated for the pre-establishment and post-establishment periods.
  • Time ratio: It is calculated considering the period. That is, you need to calculate the period from the date of purchase to the date of establishment and the period from the date of establishment to the date of presentation of the final account.
  • Step III:You need to make a statement to calculate the net income before and after the establishment individually based on the following principles.
  • Gross profit must be allocated to the two periods based on the sales ratio that represents the gross profit for the two separate periods. Before and after incorporation of company.
  • Fixed or time-based costs, such as rent, salary, depreciation, and interest, must be allocated in two periods based on a time ratio.
  • Variable or sales-related expenses must be distributed over two periods based on the sales ratio.
  • Certain costs, such as partner salaries, director salaries, reserves, and corporate bond interest, are not allocated as they are related to a particular period. For example, partner salaries are billed for pre-acquisition profits, and director compensation, corporate bond interest, etc. are billed for post-acquisition profits.
  • List of Expenses: Assigned based on sales / sales:(A)  Gross profit(B)   Selling expenses(C) Advertising(D)  Outward transportation(E)   Warehouse rent(F)   Discounts are allowed(G) Salesman salary(H)  Commission to salesman(I)     Sales promotion expenses(J)     Distribution cost (variable part)(K)   Free sample provided(L)   Costs for after-sales service, etc.(M)  The cost of the delivery van.List of Expenses: Allotted based on time:(A) Administrative and administrative expenses(B)  Salary to office staff(C)  Rent, charges, taxes(D) Depreciation of fixed assets(E)  Printing and stationery(F)   Insurance(G) Audit fee(H)  Miscellaneous expenses(I)     Distribution costs (fixed part)(J)     Travel expenses (general)(K)  Interest on corporate bonds(L)   General expensesList of Expenses: Allotted based on time:(A) Administrative and administrative expenses(B)  Selling expenses(C) Advertising(D) Outward transportation(E)  Warehouse rent(F)   Insurance(G) Audit fee(H) Miscellaneous expenses(I)     Distribution costs (fixed part)(J)     Travel expenses (general)(K)  Interest on corporate bonds(L)   General expenses(M)Fixed costs in nature.Pre-establishment profit / loss application / accounting: (A) Profit before establishment: Since "pre-establishment profit" is a capital gain, the same must be amortized for: 
  • Reserve expense account
  • Formation cost account
  • Clearing expense account
  •  If the fixed asset is worth it, write it down
  • Goodwill account
  •  If there is a balance, it will be transferred to the capital reserve.
  •  (B) Loss before establishment: The same is adjusted because "pre-establishment loss" is a capital loss. 
  • Capital gains
  •  Debit the goodwill account
  • Depreciation of fictitious assets
  • Capital reserve.
  •   Q4) S. Ltd was registered on January 1, 2000 to acquire the business of M / s P. Ltd. on October 1, 2008, and has a certificate of start of business on February 1, 2009. I got.The company's accounting for the period ended September 30, 2009 disclosed the following facts: 
  • Sales for the entire period reached rupees. 3,000,000 rupees 50,000 related to the period from October 1, 2008 to February 1, 2009.
  • The trading account showed gross profit of Rs. 1, 20,000.
  • The following items are displayed in the income statement.
  •  

     

    Director’s Fee

    Auditor’s fees

    Rent, Rate and Taxes etc.

    Bad Debts (of which Rs 1,000 related to Book debts  created before 1st February 2009)

    Salaries

    Advertising

    Travelling Expenses and Salaries

    Commission on Sales

    General Expenses
    Debenture Interest

    Preliminary Expenses

    Depreciation on Plant

    Printing and Stationery

    Interest to Vendors @ 12% on Rs 50,000 from 1.10.2008 to 31.5.2009

    Rs

    2,000

    1,000

    5,400

    3,000

    18,000

    6,000

    9,000

    1,200

    2,100

    4,000

    2,000

    1,200

    1,500

    4,000

    Prepare a statement the amount of Profit made before incorporation and after incorporation.A4)In the Books of S. Ltd.Statement of Profit Pre-and  Post-incorporation

    Particulars

    Amount

    Basis of Apportion

    Profit for pre-incorporation period

    Profit for post-incorporation period

     

     

     

     

     

    Gross Profit

    Less: Expense and Losses

    Director’s Fee

    Auditor’s Fee

    Rent, Rate and Taxes etc.

    Bad Debts

    Salaries

    Advertising

    Travelling Expenses

    Commission on Sales

    General Expenses
    Debenture Interest

    Preliminary Expenses

    Depreciation on Plant

    Printing and Stationery

    Interest to vendors

    Net Profit Transferred to:

    -Capital Reserve

    -P & L Appropriate

     

    Rs

    1,20,000

     

    2,000

    1,000

    5,400

    3,000

    18,000

    6,000

    9,000

    1,200

    2,100

    4,000

    2,000

    1,200

    1,500

    4,000

     

    Turnover (1:5)

     

    Actual

    Time (1:2)

    Actual

    Time (1:2)

    Turnover(1:5)

      

      

    Time (1:2)

    Actual

    Time(1:2)

    Time(1:2)

    Time(1:1)

    Rs

     

     

    -

    -

    1,800

    1,000

    6,000

    1,000

    1,500

    200

    700

    -

    -

    400

    500

    2,000

     

    4,900

    -

    Rs

    20,000

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Rs

     

     

    2,000

    1,000

    3,600

    2,000

    12,000

    5,000

    7,500

    1,000

    1,400

    400

    2,000

    8,000

    1,000

    2,000

     

    -

    54,700

    Rs

    1,00,000

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    20,000

    20,000

    1,00,000

    1,00,000

     Note: 1. Sales-related costs are allocated based on sales (that is, 1: 5). 2. Other costs will be allocated based on time only (i.e. 1: 2). 3. From the profit before establishment, you can also charge a reserve cost for the capital reserve.   Q5) Moon Ltd was established on June 1, 2009.  He has taken over the business of N, which is the ownership of Rs, from January 1, 2009. All profits earned after January 1, 2009 are 100,000, provided they belong to the company. The following is the income statement data for the year ended December 31, 2009. Gross profit Rs. 2,00,000; salary and bonus Rs. 15,000; Rent Rs. 1,000; Bad debt Rs. 5,000; Reserve Rs. 9,000; Committee of Sales Rs. 12,000; Interest paid on or against the purchase price Rs. 1,000; Board membership fee Rs. 3,000; Managing Director Reward Rs. 14,600; Establishment cost Rs. 21,000; Depreciation Rs. 10,000; and advertising Rs. 27,000. (A) Sales for the first 6 months were rupees. 10, 00,000; Gross profit margin is 12% of sales. Gross profit margin was 8% in the second half. The sales commission was 6% throughout the year. Inventory and work in process issues do not occur in business.(B) Until March 1, 2009, N was operating on its premises with only cash sales and no depreciable assets.(C) The ads for the first 6 months were at Rs rates. 4,000 per month. Create pre-incorporation and post-incorporation period profit accounts in a column format that provides the basis for separation for each item. How much was the profit before the establishment? It takes calendar months of the same length limit to the given data only.How it works:Therefore, the profit before the establishment reached rupees. 57,082. Gross profit reached rupees 2, 00,000 or 12 months. Profit for the first 6 months reached rupees. At 1,20,000 (Rs. 10,00,000 x 12/100), the profit for the next 6 months remains, that is, Rs. 80,000 (Rs. 2,00,000 – Rs. 1,20,000) is 8% of sales. Sales Rs for the next 6 month, assume 10, 00,000 (Rs. 80,000 x 100/8), sales evenly distributed by month. The sales ratio for the two periods is 5: 7. Sales commissions will be allocated accordingly.A5)In the Books of Moon Ltd.Statement of ProfitPre and Post-incorporation

    Particulars

    Amount

    Basis of Apportion

    Profit

     

    Pre-incorporation period  1.11.2009 to 31.05.2009

    Post-incorporation period 1.6.2009 to 31.12.2009

     

    Gross Profit1

    Less: Expenses and Losses

    Salaries and Bonus

    Rent

    Bad Debts

    Preliminary Expenses

    Commission on Sales1

    Interest on Purchase

    Consideration

    Director’s Fees

    Managing Directors

    Remuneration

    Establishment

    Charges

    Depreciation

    Advertisement

    Net Profit transferred to

    -Capital Reserve

    -P & L App. A/c

    Rs

    2,00,000

     

    15,000

    1,000

    5,0000

    9,000

    12,000

     

    1,000

    3,000

     

    14,600

    21,000

     

    10,000

    27,000

     

     

     

     

    Actual

     

    Time(5:7)

    Time(5:7)

    Sales (5:7)

    Actual

    Time(5:7)

     

    Time(5:7)

    Actual

     

    Actual

    Time(5:7)

     

    Actual

    Actual

    Rs

     

     

    6,250

    416

    2,084

    -

    5,000

     

    417

    -

    -

     

    8,750

     

    -

    20,000

    42,918

    57,082

    -

    Rs

    1,00,000

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    -

    Rs

     

     

    8,750

    583

    2,916

    9,000

    7,000

     

    583

    3,000

     

    14,600

    12,250

     

    10,000

    7,000

    75,682

    -

    24,318

    Rs

    1,00,000

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    -

    1,00,000

    1,00,000

    1,00,000

    1,00,000

        Q6) Mr. X founded a limited company under the name and style of Exe. Pvt. It will take over the existing business from April 1, 2006, but was not established until January 7, 2006. There was no mention of the business transfer in the books that continued until March 31, 2007. As of March 31, 2007, the following balances have been extracted from the books.You too: (A) Shares on March 31, 2007 reached Rupees. 44,000.(B) The gross profit margin is constant, and monthly sales in April 2006, February 2007, and March 2007 are twice the average monthly sales for the year.(C) It was agreed that the purchase price would be met by the issuance of shares of Rs 3,000. 100 each(D) Reserve costs are amortized.(E) Outbound shipping and traveler fees must be assumed to change in direct proportion to sales. You need to prepare a trading account and a profit and loss account for the fiscal year ending March 31, 2007, to allocate the profit and loss for the period before and after the establishment. Depreciation shall be provided at an annual rate of 25% about fixed assets.

    Heads of Account

    Debit

    Credit

     

    Opening Stock

    Purchase

    Carriage Outwars

    Sales

    Traveller’s Commission

    Office Salaries

    Administration Expenses

    Rent and Rates

    Director’s Fees

    X’s Capital on 1.4.2006

    Fixed Assets

    Current Assets (other than stock)

    Preliminary Expenses

    Current Liabilities

    Rs

    43,000

    1,89,000

    3,00

     

    7,500

    21,000

    19,900

    12,000

    18,000

     

    1,00,000

    34,000

    5,200

    Rs

     

     

     

    2,78,000

     

     

     

     

     

    2,30,000

     

     

     

    37,000

     Following information is given:(A) Shares on March 31, 2007 reached Rupees. 44,000.(B) The gross profit margin is constant, and monthly sales in April 2006, February 2007, and March 2007 are twice the average monthly sales for the year.(C) It was agreed that the purchase price would be met by the issuance of shares of Rs 3,000 100 each.(D) Reserve costs are amortized.(E) Outbound shipping and traveler fees must be assumed to change in direct proportion to sales.You need to prepare a trading account and a profit and loss account for the fiscal year ending March 31, 2007, to allocate the profit and loss for the period before and after the establishment. Depreciation shall be provided at an annual rate of 25% about fixed assets.A6)In the Books of Exe. Pvt. Ltd.Trading AccountFor the year ended 31st March 2007                              Dr.                                                                                                                 Cr.

     

    To Opening Stock

       Purchase

       Gross Profit (bal.fig)

    Rs

    43,000

    1,89,000

    90,000

    3,22,000

     

    By Sales

        Closing Stock

    Rs

    2,78,000

    44,000

     

    3,22,000

     Profit & Loss AccountFor the year ended 31st March 2007  Dr.                                                                                                                                                                        Cr.

     

    Basis of

    Allocation

    Pre-incor-

    Poration

    {1.4.06 to

    31.3.07)

    Post

    Incor-

    Poration

    {1.7.06 to 31.3.07}

     

    Basis of

    Allocation

    Pre-incor-

    Poration

    {1.4.06 to

    31.3.07)

    Post

    Incor-

    Poration

    {1.7.06 to 31.3.07

     

    To Carriage Outwards

     

    * Travellers Commission

     

    *Office Salaries Final

    *Rent & Rates

    *Depreciation

    *Adm. Expenses

    Expenses fully App to.

    P & T incorporate

    *Director’s Fee

    *Preliminary Expenses

    *Net Profit trans. To

    -Capital Reserve

     

     

    Sales

    (4:11)

    (4:11)

    Final

     

    (1:3)

    *

    *

    *

     

    Rs

    880

     

    2,000

     

     

    5,250

    3,000

    6,250

    4,975

     

     

    -

    -

     

    1,645

    Rs

    2,4203

     

    5,500

     

     

    15,7504

    9,000

    18,750

    14,925

     

     

    18,0005

    5,200

     

    -

     

    By Gross Profit

     

        Net Loss transferred to

     

    P & L App. A/c

     

    Sales

    (4:11)

     

    Rs

    24,000

     

     

     

     

    -

     

     

     

     

     

     

     

     

     

    Rs

    66,0002

     

     

     

     

    23,545

     

     

     

     

     

     

     

     

     

    24,000

    89,545

     

     

    24,000

    89,545

     Workings(1)  Time RatioPre-incorporation Period: From 1.4.1996 to 30.6.1996 = 3mothsPost0incorporation Period = From 1.7.1996 to 31.3.1997 = 9monthsTherefore, Time Ratio between Pre- and Post-incorporation is 3 : 9 or 1 : 3(2)  Gross Profit = Sales + Closing Stock – Opening Stock – Purchase                      =  Rs 2,78,000 + Rs 44,000 – Rs 43,000 – Rs 1,89,000                      = Rs 90,000Gross Profit will be apportioned on the basis of sales ratio which is calculated as:(3)  Sales RatioIf any other month’s sales is Re. 1, monthly sales of April 2006 and Feb. & March 2007 are Rs. 2(i.e., doubled)So, the Pre-incorporation Sales = 2 + 1 + 1 = 4Similarly, Post-incorporation Sales = 1 + 1 +1 +1 +1 +1 +1 + 2 + 2 = 11   Therefore, the sales ratio before and after establishment is 4:11 (4) Outward transportation and Travellers’ Com. = Sales ratio, that is, 4:11.(5) Other time-based costs:Salary; Administration costs; Rent, fees, depreciation costs (Rs. 25,000, or Rs. 1, 00,000 x 25/100)(6) The remaining costs will be charged for the profit after the acquisition.  Q7) New Ventures Ltd. was founded on January 1, 2008 and has authorized capital of Rs 5,000. R. Bros since October 1, 2007 10 each to take over the operating business of Bros. The following is a summary of the income statement for the fiscal year ended September 30, 2008.

     

    Cost of Sales for the year

    Administrative Expenses

    Selling Commission

    Goodwill written-off

    Interest paid to vendors

    (Loan repaid on 1st Feb.)

    Distribution Expenses

    (60% variable)

    Preliminary Expenses

    Debentures Interest

    Depreciation
    Director’s Fees

    Net Profit

    Rs

    16,000

    1,768

    875

    200

     

    3,73

    1,250

     

    330

    320

    444

    100

    3,340

     

    Sales

    1st Oct.2007 to 31st Dec. 2007        6,000

    1st Jan. 2008 to 30th Sept. 2008      19,000

     

     

     

    Rs

     

     

     

    25,000

     

     

     

     

     

     

     

     

     

    25,000

    25,000

      The company handles one type of product. When compared to the pre-establishment period, the unit sales price for the post-establishment period decreased by 10%. Between the pre-establishment and post-establishment periods, the amount of net income that provides the basis for the apportionment must be apportioned.A7) Income statement before and after establishmentIn the Books of New Ventures Ltd.Statement of ProfitPre- and Post-incorporation

    Particulars

    Total

    Basis of Apportion

    Profit

     

     

     

    Pre-incorporation period: from 1st Oct. 2007 to 31st Dec.2007

    Post-incorporation period: from 1st Jan.2008 to 30th Sept. 2008

     

     

    Sales

    Less: Costs, Expenses and Losses

    Cost of Sales

    Admin Expenses

    Selling Commission

     

    Rs

    25,000

     

     

    16,000

    1,768

    875

     

     

    Actual

     

     

    (See note)2

    Time (1:3)

    Sales (6:19)

    Dr.

    Rs.

    -

     

     

    4,156

    442

    210

    Cr.

    Rs

    6,000

    Dr.

    Rs

    -

     

     

    11,844

    1,326

    665

    Cr.

    Rs.

    19,000

       Q8) Jalajga Ltd. was established as a privately held company on March 1, 1995 to take over the business as a going concern from January 1, 2005. Vendors will receive 75% of the profits earned before March 1, 2015. The trading and P & L accounts for the year ended December 31, 2015 are as follows:

     

    To Material Consumed

        Manufacturing Wages

       Manufacturing Expenses

       Carriage Inwards

       Gross Profit c/d

     

    To Salaries and Establishment

      Office Expenses

      Director’s Fees

      Bad Debts

      Debenture Interest

      Com. & Discount

      Cariiage Outwards

      Depreciation

      Net Profit for the year

    Rs

    1,80,000

    48,000

    12,200

    7,000

    52,800

     

    By Sales

      Closing Stock

     

     

     

     

    By Gross Profit b/d

    Rs

    2,60,000

    40,000

     

     

     

    3,00,000

    3,00,000

    15,000

    6,000

    1,800

    2,300

    1,150

    8,000

    1,600

    10,200

    6,750

    52,800

     

     

     

     

     

     

     

     

    52,800

    52,800

     Sales in March and April are 1.5 times higher, with average monthly sales. Sales in September and October are twice the average monthly sales. Bad debt of 1,110 rs cases were amortized in June. Make statements showing pre- and post-establishment benefits. It also indicates the disposal of such profits.A8)In the Books of Jalajoga Ltd.Statement of ProfitPre- and Post-incorporation

    Particulars

    Basis of Apportion

    Amount

    Profit

     

     

     

    Pre-incorporation period

    Post-incorporation period

     

     

    Gross Profit

    Less: Expenses:

    Wages & Salaries

     

     

    Sales (9 : 7)1

     

    Time(2 : 1)

    Rs

     

    52,800

     

    15,000

    Dr.

    Rs

     

     

    10,000

    Cr.

    Rs.

    29,700

     

     

    Dr,

    Rs.

     

     

    5,000

    Cr.

    Rs

    23,100

     

     

    Office Expenses

    Depreciation

    Commission and Disc.

    Carriage Outwards

    Bad Debts
    Exp. Totally for Post incorporation period:

    Directors Fees

    Debenture Interest

     

    Net Profit:

    Less: Vendors Share @ 75% trans. To Capital Reserve

     

     

     

     

    Trans, to P & L A/c

    Time(2 : 1)

    Sales(9 : &)

    Actual

     

    Post

    Post

    6,000

    10,200

    8,000

    1,600

    2,300

     

    1,800

    1,150

    4,000

    6,800

    4,500

    900

    1,100

     

    -

    -

     

     

     

     

     

     

     

     

    27,300

    2,000

    3,400

    3,500

    700

    1,200

     

    1,800

    1,150

     

    -

    -

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    18,750

     

    2,400

    1,800

    600

     

     

     

    4,350

     Workings
  • Calculation of Sales Ratio
  • Pre-incorporation Period (from 1.1.2005 to 31.8.2005) = 8 monthsPost-incorporation Period (1.9.2005 to 31.12.2005) = 4 monthsTherefore, The Ratio is 8 months    :   4 months                               Or    2                     :    1Let us assume the average monthly sale is xSo, Sales for 12months will be x × 12 = 12xSales for March and April  =   (x × 3/2) + (x × 3/2)                                               =  (3/2 x) + (3/2 x)                                               =   3xSales for Sept. and Oct.     =  2x + 2X = 4xThus, sales for the remaning 8 months = 12x – (3x + 4x) = 5xTherefore, Average monthly sales for 8 months  5x/8Sales for the Post-incorporation period   54x/8Sales for the Post-incorporation Period   42x/8 Therefore, The Ratio is  54x/8 : 42x/8                       Or,                    9 : 72.     Time Ratio between Pre- and Post-incorporation is 2 : 1, i.e., 8 months : 4 months To sum up:(A) Gross profit must be distributed between pre-establishment and post-establishment periods based on the ratio of sales. If you're not given gross profit, you can do the same by creating a trading account.(B) It is necessary to calculate the time ratio between the period before establishment and the period after establishment. Fixed costs are usually allocated based on a time ratio. Rent, taxes, insurance, depreciation, interest, salaries to clerical staff, etc.(C) The ratio of sales must be known before and after the establishment, and selling, or variable costs are usually allocated based on the ratio of sales. Advertising, warehousing rent, storage and discount permits, freight costs, salesman salaries and commissions, etc.(D) The costs excluding the period after establishment are as follows.
  • Board membership fees, corporate bond interest, reserve funds, tax reserves, dividend proposals, etc.
  • (E) The costs excluding the period before establishment are as follows.
  • Interest on the partner's capital, partner salary, etc.
  • (F) Expenses related to both pre-establishment and post-establishment must be billed for both periods on an hourly basis. Audit fees, interest paid to vendors, etc.  Q9) The owners of a major retailer wanted to see the net income of the X, Y, and Z divisions individually for the three months ended March 31, 2006. It is not realistic to actually acquire the shares on that day, but the proper system accounting of the department is used, and the normal gross profit margin of the three departments involved is the sales before the direct cost is charged at 40%, 30%, and 20% respectively. Overhead is billed in proportion to the department's sales.Below are the numbers for the department.

     

    X

    Rs

    Y

    Rs

    Z

    Rs

    Opening stock (1-1-2006)

    Purchase

    Sales

    Direct expenses

    10,000

    12,000

    20,000

    2,000

    14,000

    13,500

    18,000

    1,500

    7,000

    9,700

    16,000

    700

       The total overhead costs during the period (including those related to other departments) were rupees. The total sale of Rs is 5,400 1, 08,000. Create a statement showing approximate net income with a 10% stock reserve for each sector against the March 31, 2006 estimateA9)Department Trading & Profit & Loss A/c for three months ended 31st March 2006

     

    X

    Y

    Z

     

    X

    Y

    Z

     

    To Opening Stock

    To Purchase

    To Gross profit c/d

    To Direct expenses

    To Indirect expenses

    To Stock reserve @ 10%

    To Net profit (bal. fig)

    Rs

    10,000

    12,000

    8,000

    Rs

    14,000

    13,500

    5,400

    Rs

    7,000

    9,700

    3,200

     

    By Sales

    By Closing stock (bal. fig)

    By Gross profit

    Rs

    20,000

    10,000

    30,000

    8,000

     

     

     

     

    Rs

    18,000

    14,900

    32,900

    5,400

     

     

     

     

    Rs

    16,000

    3,900

    19,900

    3,200

     

     

     

     

    30,000

    32,900

    19,900

    2,000

    1,000

    1,000

    4,000

    1,500

    900

    1,490

    1,510

    700

    800

    390

    1,310

    8,000

    5,400

    3,200

    8,000

    5,400

    3,200

     Note:   (1) Indirect expenses applicable to the three departments.54,000 /1,08,000 × 5,400 = Rs 2,700 to be apportioned in the ratio of 10 : 9 : 8     (Rs. 1,000 : 900 : 800)(2) Direct expenses are not shown in Trading A/c because rates of gross profit given are before charging the direct expenses.  Q10) From the details below, you need to prepare a trading and P & L account for the year ended December 31, 2005, showing the gross and net income of each sector. Allocate general business expenses based on sales. You will also create a balance sheet. Stock in-hand inventory on December 31, 2005 Division A Rs 30.000 and B Rs 20,500.The total sales are 1.20.000 rupees, that is, department A is 80.000 rupees and B is 40.000 rupees. Percentage of general or indirect expenses charged to A2 / 3 and B1 / 3. (B.Com. Madurai. MS. Bharathiar)A10)Tradingand Profit and Loss Accountfor the year ended 31st Dec. 2005Dr.                                                                                                                                       Cr.

     

    Dept. A

    Rs

    Dept. B

    Rs

    Total

    Rs

     

    Dept. A

    Rs

    Dept. B

    Rs

    Total

    Rs

    To Opening Stock

    To Purchase (net)

    To Wages

    To Dept. Expenses

    To Gross Profit

     

    To Rent, Rates

    To Salaries & Commissions

    To Advertising

    To Dis & Interest

    To Subdry Expenses

    To Depreciation

    To Net profit

    25,000

    45,320

    11,600

    7,530

    20,550

    19,000

    21,350

    5,260

    3,230

    11,560

    44,000

    66,670

    16,960

    10,760

    32,110

    By Sales

    By Stock: Closing

     

     

     

    By Gross Profit

    80,000

    30,000

     

     

     

    1,10,000

    20,550

     

     

     

     

     

     

     

    40,000

    20,500

     

     

     

    60,500

    11,560

     

     

     

     

     

     

     

    1,20,000

    50,500

     

     

     

    1,70,500

    32,110

     

     

     

     

     

     

     

    1,10,00

    60,500

    1,70,500

     

    2,500

    6,300

    2,500

    1,360

    1,020

    500

    6,370

     

    1,250

    3,150

    1,250

    680

    510

    250

    4,470

     

    3,750

    9,450

    3,750

    2,040

    1,530

    750

    10,840

    20,550

    11,560

    32,110

    20,550

    11,560

    32,110

     Balance Sheet as on 31st December 2005    

    Liabilities

    Rs

    Assets

    Rs

    Sundry Creditors

    Capital                          65,000

    Add: Profit                   10,840   

    6,570

     

    75,840

     

     

     

     

    Cash at ank

    Sundry Debtors

    Stock:

    Dept A                     30,000

    Dept.B                     20,500

    Plant                       15,750

    Less: Depre.                   750

    4,380

    12,530

     

     

    50,500

     

    15,500

     

    82,140

    82,410

       Q11) The following purchases were made by a business house having three Departments:                      Department A – 1,000 units                      Department B – 2,000 units                                       [ at a total cost of Rs 1,00,000 ]                      Department C – 2,400 unitsStocks on 1st January were:                     Department A – 120 units                    Department B – 80 units                    Department C – 152 unitsThe Sales were:              Department A – 1,020 units @ Rs 20 each              Department B – 1,920 units @ Rs 22.50 eachDepartment C – 2,496 units @ 25 rupees eachThe gross profit margin is the same in both cases. Set up a department trading account.A11) Department Trading Accountfor the year ended…Dr.                                                                                                                       Cr.

     

    Dept A

    Dept B

    Dept C

     

    Dept A

    Dept B

    Dept C

     

    To Stock

    To Purchase

    To Gross Pfrofit c/d

    Rs

    1,920

    16,000

    4,080

    Rs

    1,440

    36,000

    8,640

    Rs

    3,040

    48,000

    12,480

     

    By Sales

    By Stock

    Rs

    20,400

    1,600

     

    Rs

    43,200

    2,880

     

    Rs

    62,400

    1,120

     

    22,000

    63,520

    63,520

    22,000

    46,080

    63,520

    Workings:Closing Stock (in units)

     

     

    Opening Stock

    Add: Purchase

     

    Less: Sales

    Closing Stock

    Dept. A

    Units

    120

    1,000

    Dept. B

    Units

    80

    2,000

    Dept. C

    Units

    152

    2,400

    1,120

    1,020

    2,080

    1,920

    2,552

    2,496

    100

    160

    56

     We know that the total purchase price of the following units:Department A – 1,000 unitsDepartment B – 2,000 units                            [ Cost comes to Rs. 1,00,000 ]Department C – 2,400 unitsIf the purchased units would have been sold at a given rate, then the total selling price of the above (complete) units:Department A – 1,000 units @ Rs. 20  =    Rs 20,000Departmnt B – 2,000 units @ Rs. 22.50  = Rs. 45,000Department C – 2,400 units @ Rs 25 =      Rs 60,000                                                                            1,25,000Thus, the total profit is 25% of cost price or 20% of selling price.Rate of Gross Profit is the same in each case. So, we can find out the cost price:

     

     

    Department A 20% of

    Department  B 20% of

    Department C 20% of

    Selling Price

    Rs

    20.00

    22.50

    25.00

    Profit

    Rs

    4.00

    4.50

    5.00

    Cost Price

    Rs

    16.00

    18.00

    20.00

     Proof:Department A – 1,000 units @ Rs  16 = 16,000Departmetn B – 2,000 units @ Rs 18 = 36,000Department C – 2,400 units @ Rs 20 = 48,000                                                                     1,00,000  Q12) The company has two divisions: piece goods and ready-made dresses. All merchandise purchased by the ready-made department from the Peace Merchandise Department will be billed at normal selling prices.From the details below, create a departmental transaction and income statement for the year ended December 31, 2005.

     

     

    Stock 1.1.2005

    Purchases

    Sales

    Transfer to Readymade

    Expenses:

    Manufacturing

    Selling

    Stock on 31.12.2005

    Piecegoods

    Rs

    1,00,000

    10,00,000

    11,00,000

    1,50,000

     

     

    10,000

    1,00,000

    Readymade

    RS

    25,000

    7,500

    2,25,000

     

     

    30,000

    3,000

    30,000

     Peace goods and ready-madeThe ready-made department inventory is considered to consist of 75% cloth supplied by the Peace Goods department. And 25% cost and cloth from the outside. The Peace Goods division made gross profits in 2004 at the same rate as in 2005. The general cost of the entire business in 2005 was Rs 45,000.A12)Departmental Trading and Profit and Loss AccountFor the year ended 31st Dec. 2005Dr.                                                                                                                       Cr.

     

    Piece-goods

    Ready-made

    Total

     

    Piece-goods

    Ready-made

    Total

     

    Stock Opening

    Purchase

    Transfer from Piece-goods

    Rs

    1,00,000

    10,00,000

    Rs

    25,000

    7,500

     

    1,50,000

    Rs

    1,25,000

    10,07,000

     

    1,50,000

     

    Sales

    Transfer to Ready made

    Stock: Closing

    Rs

    11,00,000

     

    1,50,000

    1,00,000

    Rs

    2,25,000

     

    -

    30,000

    Rs

    13,25,000

     

    1,50,000

    1,30,000

    Manufacturing Expenses

    Gross Profit c/d

     

    Selling Expenses

    Net Profit

     

    -

    2,50,000

     

    30,000

    42,500

     

    30,000

    2,92,500

     

     

     

     

    Gross Profit b/d

     

     

     

     

     

    13,50,000

    2,55,000

    16,05,000

    13,50,000

    2,55,000

    16,05,000

    10,000

    2,40,000

    3,000

    39,500

    13,000

    2,79,500

    2,50,000

    42,500

    2,92,500

    2,50,000

    42,500

    2,92,500

    2,50,000

    42,500

    2,92,500

     Rate of Gross Profit on Sale (Piecegoods) = Gross Profit x 100 / (Sales + Transfer)                                                                            = 25,000 x 100 / (12,50,000) = 20%75% of Rs 30,000 (closing) is from Piecegoods = Rs 22,500             Therefore unrealised profit                           = 22,500 x 20 / 100 = Rs 4,500Less: Existing Provision on Opening Stock:                                                (Piecegoods) = 25,000 x 75 / 100 x 20/100 =  Rs 3,750                                                                                                                                   750*  Q13) From the following balances extracted from the company's books, create a department transaction and general profit and loss account for the year ended December 31, 2005, and a balance sheet for that day after adjusting for unrealized department profits.

     

    Rs

     

    Rs

    Land and Buildings

    Furniture

    Opeing Stock:   Dept. A

                                  Dept. B

    Purchase:            Dept. A

                                  Dept. B

    General Expenses

    Debtors

    Drawings

    Cash at Bank

     

    12,500

    2,500

    3,000

    4,000

    1,00,000

    1,50,000

    1,40,000

    20,000

    28,000

    1,00,000

    Capital

    Sales:                 Dept. A

                                Dept. B

    Creditors

    30,000

    2,00,000

    3,20,000

    10,000

     

     

     

     

     

     

    5,60,000

    5,60,000

      Additional Information:1. Close inventory in department A – Rs 13,000 including Rs 4,000 products at costs from department B to department A.2. Final inventory of department B – Rs26,000-Includes goods from department AR 9,000 to department B.3. Sales department A includes the transfer of goods worth 20,000 rupees to department B, and sales of department B include the transfer of goods worth 30,000 rupees to department A at the market price included.4. The starting inventory of department A and department B includes goods from department B and department A worth Rs 1,000 and Rs 1,500 respectively at cost to the transfer department.5. Depreciate land and buildings by 5% and depreciate furniture by 10% annually.A13)Departmental Trading Accountfor the year ended 31st December 2005Dr.                                                                                                                       Cr.

     

    Dept A

    Dept B

    Dept C

     

    Dept A

    Dept B

    Dept C

     

    To Stock

    To Purchase

    To Transfer

    To Gross Pfrofit

    Rs

    3,000

    70,000

    30,000

    1,10,000

    Rs

    4,000

    1,30,000

    20,000

    1,92,000

    Rs

    7,000

    2,00,000

    50,000

    3,02,000

     

    By Sales

    By Transfer

    By Closing Stock

    Rs

    1,80,000

    20,000

    13,000

    Rs

    2,90,000

    30,000

    26,000

    Rs

    4,70,000

    50,000

    39,000

    2,13,000

    3,46,000

    5,59,000

    2,13,000

    3,46,000

    5,59,000

     General Profit and Loss Accountfor the year ended 31st Dec. 2005         Dr.                                                                                                                       Cr.

     

    TO General Expense

    TO Depreciation

    Land & Building                  625

    Furniture                           250

    To Provision for unrealised Profit:

    Dept. A                                    2,400

    Dept. B                                 4,950

    To Net Profit

    Rs

    1,40,000

     

     

    875

     

     

    7,350

    1,53,775

     

    By Gross Profit

    Dept. A

    Dept. B

    Rs

     

    1,10,000

    1,92,000

     

     

     

     

     

     

    3,02,000

     

    3,02,000

     Workings:Calculations of provisions for unrealised profit on stock:Dept.  A: Rate of Gross Profit = 1,10,000 / 2,00,000 x 100 = 55%Dept. B: Rate of Gross Profit = 1,92,000 / 3,20,000 x 100 = 60%Provision required on closing stock:Dept.  A : 60% of Rs 4,000 = Rs 2,400Dept. B: 55% of Rs 9,000 = Rs 4,950  No adjustment of opening inventory, including N.B. inter-departmental transfers, is required. This is because the goods are valued at cost to the transfer department rather than the transferee department.  Q14) The company has two departments. Peace goods and tailoring. All merchandise purchased by the tailoring department from the piece goods department will be sold at the same normal market price as the price charged to external customers.From the details below, create a department transaction and income statement and balance sheet as of March 31, 2005.

     

    Piecegoods

    Dept.

    Tailoring

    Dept.

     

    Opening Stock

    Purchases

    Goods from Piecegoods dept.

    Wages

    Salaries (Departments)

    Closing Stock (at cost to the Dept.)
    Sales

    Printing and Stationery

    Machinery

    Rs

    20,000

    2,20,000

    -

    600

    4,800

    38,600

    2,43,000

    1,000

    -

    Rs

    Nil

    10,000

    60,000

    6,400

    1,200

    14,000

    1,36,000

    600

    1200

       Further information:

     

    Advertisement

    Salaries (General)

    Capital

    Debtors

    Creditors

    Drawings

    Cash at Bank

    Cash in Hand

    Rs

    10,000

    18,000

    1,20,000

    54,000

    7,000

    1,00,000

    41,000

    6,400

     Depreciate the machine by 10%. Typical unallocated costs are allocated in a ratio of piece merchandise-3 to tailoring-2.A14)Departmental Trading and Profit and Loss Accountfor the year ended 31st March, 2005         Dr.                                                                                                                       Cr.

     

    Piecegoods Dept

    Tailoring Dept

    Total

     

    Piecegoods Dept

    Tailoring Dept

    Total

     

    To Opening Stock

    To Purchase

    To Goods from

    piecegoods

    To Wages

    To Gross Profit

     

    To Salaries (Departmetnal)

    To Salaries (General)

    (3 : 2)

    To Printing & Stationery

    To Advertisement

    ( 3: 2)

    To Depreciation

    To Net Profit

    Rs

    20,000

    2,20,000

     

    -

    600

    1,01,000

    3,41,600

    4,800

     

    10,800

     

    1,000

     

    6,000

    -

    78,400

    Rs

    -

    10,000

     

    60,000

    6,400

    73,600

    1,50,00

    1,200

     

    7,200

     

    600

     

    4,000

    12,00

    59,400

    Rs

    20,000

    2,30,000

     

    60,000

    7,000

    1,74,600

    4,91,600

    6,000

     

    18,000

     

    1,600

     

    10,000

    1,200

    1,37,800

     

    By Sales

    By Goods to

    tailoring

    By Closing Stock

     

     

     

    By Gross Profit

    RS

    2,43,000

    60,000

     

    38,600

    Rs

    1,36,000

    -

     

    14,000

    Rs

    3,79,000

    60,000

     

    52,600

    3,41,600

     

    1,50,00

     

    4,91,600

     

    1,01,000

     

     

     

     

     

     

     

     

     

    73,600

     

     

     

     

     

     

     

     

     

    1,74,600

     

     

     

     

     

     

     

     

     

    1,01,000

    73,600

     

    1,74,600

    1,01,000

    73,600

    1,74,600

    To Provision for  unrealised   Profit

     To Net Profit Transferred to Capital

     

    4,000

    1,33,800

    By Net Profit:

    Piecegoods

    Tailoring

     

    78,400

    59,400

     

     

     

    1,37,800

     

    1,37,800

     

    1,37,800

     Note: The rate of Gross Profit of Piecegoods Department is calculated as follows:                   Gross Profit × 100 / Sale to Outside + Sales to Tailoring Dept.                = Rs 1,01,000 x 100 / Rs 2,43,000 + 60,000 = 33 1/3% Calculation of reserve for unrealized gains:The composition of the tailoring department's closing stock is not shown. The tailoring department owns a stake of Rs 14,000. There is no doubt that the inventory consists of piece products and external products. You can assume that your inventory consists of both piece goods and external types of goods.Therefore, the value of the goods in the piece merchandise department in the final inventory of the tailoring department can be calculated as follows:Value of Purchase from Piece goods Dept / Value of Total Purchase × Total Closing Stock of          .                                                                                                                                                        Tailoring Dept.= Rs 60,000 / Rs 70,000 x 14,000 = Rs 12,000So, unrealised profit thereof = 33 1/3% of Rs 12,000 = Rs 4,000 Balance Sheet as on 31st March 2005

    Liabilities

     

    Rs

    Assets

     

    Rs

    Capital

    Add: Profit

     

    Less: Drawings

    Creditors

    1,20,000

    1,33,800

    2,53,800

    1,00,000

     

     

     

    1,53,800

    7,000

     

     

     

     

     

     

    Machinery

    Less; Depreciation

    Closing Stock

    Piecegoods

    Tailoring

     

    Less: Provision for unrealised Profit

    Sundry Debtors

    Cash at Bank

    Cash in Hand

    12,000

    1,200

     

    38,600

    14,000

    52,600

     

    4,000

     

    10,800

     

     

     

     

     

    48,600

    54,000

    41,000

    6,400

    1,60,800

    1,60,800