undefined | unit 4 ascertainment and treatment of profit prior to incorporation

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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

Gross Profit and Loss
Expenses of fixed nature, such as, Salaries, Rent, Taxes, Insurance, Depreciation, Office Expenses, Printing and Stationery, Administrative Expenses, Postage , Audit Fees, Repairs, etc.
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.
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

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

43,000

1,89,000

3,00

7,500

21,000

19,900

12,000

18,000

1,00,000

34,000

5,200

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)

43,000

1,89,000

90,000

3,22,000

By Sales

“ Closing Stock

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)

Final

(1:3)

880

2,000

5,250

3,000

6,250

4,975

1,645

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)

24,000

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

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

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

25,000

16,000

1,768

875

Actual

(See note)2

Time (1:3)

Sales (6:19)

Dr.

Rs.

4,156

442

210

Cr.

6,000

Dr.

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

1,80,000

48,000

12,200

7,000

52,800

By Sales

“ Closing Stock

By Gross Profit b/d

2,60,000

40,000

3,00,000

15,000

6,000

1,800

2,300

1,150

8,000

1,600

10,200

6,750

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)

52,800

15,000

Dr.

10,000

Cr.

Rs.

29,700

Dr,

Rs.

5,000

Cr.

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

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.

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

Dept. B

Total

Dept. A

Dept. B

Total

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

Assets

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

1,920

16,000

4,080

1,440

36,000

8,640

3,040

48,000

12,480

By Sales

By Stock

20,400

1,600

43,200

2,880

62,400

1,120

22,000

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

2,000

Dept. C

Units

152

2,400

1,120

1,020

2,080

1,920

2,552

2,496

100

160

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

20.00

22.50

25.00

Profit

4.00

4.50

5.00

Cost Price

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

1,00,000

10,00,000

11,00,000

1,50,000

10,000

1,00,000

Readymade

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.

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

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

3,000

70,000

30,000

1,10,000

4,000

1,30,000

20,000

1,92,000

7,000

2,00,000

50,000

3,02,000

By Sales

By Transfer

By Closing Stock

1,80,000

20,000

13,000

2,90,000

30,000

26,000

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

1,40,000

875

7,350

1,53,775

By Gross Profit

Dept. A

Dept. B

1,10,000

1,92,000

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

20,000

2,20,000

600

4,800

38,600

2,43,000

1,000

Nil

10,000

60,000

6,400

1,200

14,000

1,36,000

600

1200

Further information:

Salaries (General)

Capital

Debtors

Creditors

Drawings

Cash at Bank

Cash in Hand

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

20,000

2,20,000

600

1,01,000

3,41,600

4,800

10,800

1,000

6,000

78,400

10,000

60,000

6,400

73,600

1,50,00

1,200

7,200

600

4,000

12,00

59,400

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

2,43,000

60,000

38,600

1,36,000

14,000

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

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

Assets

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

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