6

Profits Prior to Incorporation

Companies may absorb or acquire the business of other companies in case if a company acquires the business of another business concern (sole proprietorship or partnership firm), it is referred to as “acquisition” of business. In such cases, the question of determining profit or loss prior to incorporation arises. This question arises due to the fact that the date of acquisition may differ from the date of incorporation. In this chapter, such tricky problem of ascertaining profit or loss prior to incorporation is explained in detail.

6.1 MEANING

A company, generally, is floated by promoters. Sometimes, a running business may be acquired by another company. A new company may also be formed by acquiring the running business of a sole trader or partnership firms. A public limited company has to get (1) Certificate of Incorporation and (2) Certificate of Commencement of Business. So, it is natural that some momentary transactions will occur resulting in profit/loss even before the company attains the legal status. Only after getting the Certificate of Incorporation that the company comes into existence. But it should be noted here that a public limited company cannot commence its business till the Certificate of Commencement of Business is obtained. Under such circumstances, the new company is entitled to all profits earned after the purchase or conversion of business till the date of incorporation. Such profit is referred to as “profit prior to incorporation”.

Such profit is not to be taken as “normal trading profit” or “revenue profit”. All profits/losses before the commencement of business are treated as “capital” item, which will increase/decrease the “net assets” of the company. For all practical accounting purposes, “Profit prior to incorporation denotes the profits earned up to the date of incorporation and not up to the date of commencement of business”. Though the requirement of Certificate of Commencement of Business is a legal necessity, the profits are ascertained up to the date of incorporation. This is due to the reason that a company has got inherent powers to carry on a business “relates back” to the date of incorporation, once the certificate to commence business is obtained.

6.2 ACCOUNTING TREATMENT OF PROFITS/LOSSES PRIOR TO INCORPORATION IN THE BOOKS OF THE COMPANY

6.2.1 Profits Prior to Incorporation

1. Such profit should not be taken to profit and loss account of the company, the reason being capital in nature.
2. (i) Such profit should be credited to “Capital Reserve Account”. (This is utilized to write off: (a) capital losses, (b) preliminary expenses, (c) discount on issue of debentures and (d) undertaking commission) (ii) Unutilized part of capital reserve is to be shown on the liabilities side of the balance sheet under the head, “Reserves & Surpluses”.

6.2.2 Losses Prior to Incorporation

1. Such loss should not be taken to profit and loss account because it is a capital loss and not revenue loss.
2. This may be treated in one of the following ways:
   1. This may be debited to “Loss prior to incorporation account” as a separate account.

      This should be shown on the assets side of the balance sheet under the head “Miscellaneous Expenditure.”

       

      (OR)

       

   2. The loss may be treated as goodwill and debited to goodwill account.

       

      (OR)

       

   3. Such loss may be treated as “Deferred Revenue Expenditure” to be written off out of the profits of the company over a number of accounting years.

6.3 METHODS OF ASCERTAINING PROFIT OR LOSS PRIOR TO INCORPORATION

6.3.1 Method 1: Period: Up to the Date of Incorporation

Desired Account: Trial balance and profit and loss account. Under this method, first a trial balance is to be prepared up to the date of incorporation of the company. On that date, closing stock is to be valued. Then in usual way, trading and P&L A/c is to be prepared to ascertain profit or loss. Again, at the end of the year, P&L A/c is to be prepared to ascertain profit/loss for the post-incorporation period. Although an accurate way of ascertaining the net result, this method is not in practice as it affects the normal course of business operations.

6.3.2 Method 2: Period: For the Whole Year up to the End of an Accounting Year

Desired Account: Trading and profit and loss account. Under this method, only at the end of the accounting period, trading and profit and loss account is prepared in the usual manner.

A separate statement (depicting pre- and post-incorporation profit) is to be prepared in which the expenses incurred are apportioned between the pre- and post-incorporation periods.

The profit or loss (post-incorporation period) is to be incorporated in the P&L A/c and the profit (prior to incorporation) is to be shown as Capital Reserve A/c in the balance sheet. The loss prior to incorporation may either be separately shown in the balance sheet or debited to goodwill account.

6.3.3 Method 3: Period: For the Whole Year up to the End of the Accounting Year

Under this method, Trial balance and trading account are prepared.

Here, profit and loss account is prepared in columnar form, with columns for pre- and post-incorporation periods. All expenses and gross profit are to be apportioned on a suitable basis for pre- and post-incorporation periods.

6.4 BASIS OF APPORTIONMENT OF EXPENSES

6.4.1 Sales Ratio

Sales ratio is the ratio of sales of the company prior to incorporation and post-incorporation.

To illustrate: sales before incorporation are 2,00,000 and sales after incorporation are 3,00,000, sales ratio is 2,00,000:3,00,000 (or) 2:3.

All expenses associated with sales are to be allocated in the ratio of the sales. For example, carriage outwards, discount allowed, commission to salesman, sales promotion expenses, bad debts, etc.

Gross profit is to be allocated on the basis of sales ratio.

6.4.2 Weighted Sales Ratio

In case sales are not uniform throughout the accounting year, weightage should be given to the trends observed in the sales. Adjustments have to be made based on the charge in trend. The resultant is due to weighted sales ratio.

6.4.3 Time Ratio

Time ratio is the ratio of periods (months or days) prior incorporation and post-incorporation in an accounting period.

To illustrate: A company was acquired on 1 April 2010, incorporated on 1 June 2010 and accounts closed on 31 March 2011, the time ratio is:

 

1 April 2010 to 1 June 2010:	2 months
(Prior incorporation)
1 July 2010 to 31 March 2011:	10 months
(Post-incorporation)
The time ratio is	2:10 or 1:5

Expenses incurred with respect to time are to be allocated on the basis of the time ratio, e.g., salaries, rent, interest, depreciation, bank charges, stationery postage, etc.

6.4.4 Weighted Time Ratio

In case of any changes made to the number of employees, weightage should be give to such changes by arriving at the time ratio. Also, when some expenses are incurred specifically pertaining to a part of the accounting period, separate ratio has to be ascertained.

6.4.5 Specific Expenses and Specific Allocation

Some specific expenses which are related to the respective period (pre- or post-incorporation) may be allocated to the respective period. For example, preliminary expenses written off, debenture interest, director’s fees and the like are associated only with post-incorporation period and hence should be allocated only to post-incorporation period. Similarly, interest or purchase price is to be allocated entirely to the pre-incorporation period.

6.4.6 Actual Expenses With Respect To Items

In case of availability of details on how much was spent on each item or activity in pre- or post-incorporation period specifically, then that actual expense should be directly allotted to that particular period.

6.4.7 Various Items and Their Bases of Apportionment

Various items and their bases for apportionment are shown in the following:

Item	Basis for Apportionment
1. Gross profit/loss	Sales ratio/weighted sales ration
2. Variable expenses that vary in direct proportion to sales	Sales ratio/weighed sales ratio
3. All fixed expenses	Time ratio/weighted time ratio
4. Expenses specifically related to pre-incorporation period	Allocation to the pre-incorporation period only
5. All expenses specifically related to post-incorporation period	Allocation to post-incorporation period only
6. Actual expenses that are explicitly and specifically related to pre- or post-incorporation period	Allocation to respective periods only

Illustration 6.1

Model: Time ratio basis of apportionment

Niwas, an industrialist (SME category), decided to convert his firm into a limited company from 1 July 2010. He obtained the Certificate of Incorporation on 1 October 2010 and the Certificate of Commencement of Business on 1 December 2010. His accounts were to be closed on 31 March 2011.

Compute the time ratio to ascertain pre-incorporation profit.

Solution

 

Step 1:	First, Calculate the Pre-incorporation Period as:
	Pre-incorporation Period
	(from 1 July 2010 to 1 October 2010)	= 3 months
Step 2:	Calculate Post-incorporation Period as:
	Post-incorporation Period
	(from 1 October 2010 to 31 March 2011)	= 6 months
Step 3:	Time ratio = Pre-incorporation period:Post-incorporation period
	= 3 months:6 months
	= 3:6 (or) 1:2

Illustration 6.2

Model: Weighted time ratio

Based on the same figures as in Illustration 6.1, there were 20 employees in the firm on 1 July 2010 and 10 more employees were appointed on 1 October 2010.

You are required to ascertain the weighted time ratio for allocating salaries of employees between pre- and post-incorporation period.

Solution

 

Step 1:	Time Ratio is to be Ascertained as in Illustration No.1
Step 2:	Now, this time ratio has to be adjusted or the weightage has to be given on the number of employees as:
	(i) Number of employees in pre-incorporation period of 3 months}:	20
	(ii) Number of employees in the post-incorporation period of 6 months}:	20 + 10 = 30
Step 3:	Weighted Time Ratio
	Time Ratio = 3:6

 

Weighted Time Ratio	= 3 × 20	6 × 30
	(Number of Employees in Pre-incorporation Period)	(Number of Employees in Post-incorporation Period)
	= 60:180 (or) 1:3

 

Step 4:

Salaries of employees for the accounting year, i.e. 2010–11, has to be divided on the basis of 1:3

Illustration 6.3

Model: Weighted sales ratio (Uniform sales)

Mr. X and Mr. Y, partners of a business firm, agreed to sell the firm to a limited company on 1 April 2010. It was incorporated on 1 June 2010. It got Certificate of Commencement of Business on 1 August 2010. Final accounts were prepared on 31 March 2011. It was found that the sales were uniform up to the date of incorporation but went up by 50% on an average thereafter.

Compute the weighted sales ratio.

Solution

 

Step 1:	Assume and give weightage of “1” to each month before incorporation
Step 2:	Sales went up by 50% on an average after incorporation. So weightage will
	increase by 50% for each month 1 + 50% = 1 + 0.5 = 1.5
Step 3:	Pre-incorporation Period:	2 months
	From 1 April to 1 June
Step 4:	Post-incorporation Period:	10 months
	From 1 June to 31 March
Step 5:	Weighted Sales Ratio = (2 months × 1):(10 months × 1.5)
	(Pre-incorporation Period × Weightage):[(Post-incorporation Period × Weightage)]
	= 2:15

Illustration 6.4

Model: Weighted sales ratio (Sales are not uniform)

Devi Ltd. was formed on 1 October 2010 to acquire the business of Raju & Co. with effect from 1 April 2010. When the company’s first accounts were prepared on 31 March 2011, the following were noted:

1. Sales for the year: 3,60,000.
2. Sales in April, May, July and August were only 50% of the annual average.
3. Sales in November, December and March were twice the annual average.

You are required to compute the weighted sales ratio.

Solution

 

Step 1:	Calculation of Average Sales Per Months:
		= 30,000
Step 2:	Sales for April, May, July and August
	50% of annual average
		= 60,000
	(Step 1)
Step 3:	Sales for November, December and March
	Twice the annual average
	2 × 30,000 × 3 months	= 1,80,000
Step 4:	Total Sales for 7 months
	(Step 2 + Step 3)	= 2,40,000
Step 5:	Sales for Remaining 5 Months
	Sales for the year – Sales for 7 months
	(Given)     (Step 4)
	3,60,000 – 2,40,000	= 1,20,000
Step 6:	Average Sales for the Remaining 5 Months
	1,20,000 ÷ 5	= 24,000
Step 7:	Pre-incorporation Period
	1 April 2010 to 1 October 2010
	1. Pre-incorporation Sales for the months of April, May, July and August (Ref: Step: 2)	= 60,000
	2. Remaining months during pre-incorporation period are June and September: 2 months sales for these two months at average sales (Ref: Step 6) – 48,000
	∵ 24,000 × 2	= 48,000
Step 8:	Total Pre-incorporation Sales	= 1,08,000
Step 9:	Post-incorporation Sales:
	Yearly Sale – Pre-incorporation Sale
	3,60,000 − 1,08,000	= 2,52,000
	(Given)     (Step 8)

Step 10:

 

Weighted Sales Ratio	=	Step 8:Step 9
	=	1,08,000: 2,52,000 (or) 18:42 (or) = 3:7

Illustration 6.5

Model: Pre- and post-incorporation profits (statement method) time and sales ratios and allocation

Thambu Ltd. was registered on 1 October 2009 to acquire the running business of Shetty & Co. with effect from 1 April 2009. The following was the profit and loss account of the company as on 31 March 2010:

You are required to prepare a statement showing profit earned by the company in the pre- and post-incorporation periods. The total sales for the year took place in the ratio of 1:2 before and after incorporation, respectively.

 

[Madras University Modified]

Solution

Statement showing pre- and post-incorporation profits for the year ended 31 March 2010.

Illustration 6.6

Model: Statement method. (Time and sales ratios; allocation and actual)

Shiva Co. Ltd. was incorporated on 31 July 2009 to acquire the business of Bhagya & Co. as on 1 April 2009. The books of accounts disclosed the following on 31 March 2010:

1. Sales for the year were 24,20,000 (From 1 April 2009 to 31 July 2009 6,05,000; from 1 August 2009 to 31 March 2010 18,15,000)
2. Gross profit for the year 2009–10: 4,00,000
3. Preliminary expenses written off: 12,000; Managing director’s salary: 20,000; Company secretary’s salary: 60,000
4. Bad debts written off: 12,520 (Prior to 31 July 3,020; after 31 July 9,500)
5. Depreciation: 18,000; General expenses: 42,000; Advertising: 6,000; Interest on debentures: 20,000

   You are required to prepare a statement apportioning properly the net profit of the company as between

   1. Profits available for distribution
   2. Profits prior to incorporation

[Madras University Adapted]

Solution

 

Step 1:	Computation of Time Ratio:
	Pre-incorporation Period from 1 April 2009 to 31 July 2009	= 4 months
	Post-incorporation Period from 31 July 2009 to 31 March 2010 :	= 8 months
	∴ Time Ratio = 4 months : 8 months
	= 4 : 8 (or) 1 : 2
Step 2:	Computation of Sales Ratio:	6,05,000
	Sales in Pre-incorporation Period:	18,15,000
	Sales in Post-incorporation Period:	6,05,000 : 18,15,000
	Sales Ratio =	6,05,000 : 18,15,000
		(or)
		1:3
Step 3:	Classification

1. Gross profit and advertising are to be apportioned on the basis of sales ratio
2. Depreciation and general expenses are to be apportioned on the basis of time ratio
3. Bad debts → Actual apportioned as mentioned in question
4. All other expenses → Direct allocation to post-incorporation period

Step 4:

Statement showing pre- and post-incorporation profits for the year ending 31 March 2010

6.5 ADVANCED PROBLEMS—PROFESSIONAL COURSE LEVEL

Illustration 6.7

Model: Statement method and weighted sales ratio)

A company was incorporated on 18 May 2010 to take over a business from the proceeding 1 January. The accounts were made up to 31 December 2010 as usual and the trading and profit and loss account gave the following results:

It is ascertained that the sales for November and December are one and half times the average of those for the year, whilst those for February and April are only half the average, all the remaining months having average sales.

Apportion the year’s profit between pre- and post-incorporation periods.

 

[C.S. Modified]

Solution

 

Step 1:	Calculation of Time Ratio
	Pre-incorporation period from 1 January 2010 to 1 May 2010	= 4 months
	Post-incorporation period from 1 May 2010 to 31 December 2010	= 8 months
	Time ratio	= 4:8 (or) 1:2

Step 2:	Computation of Sales Ratio (Weighted Average):
	(i) Total Sales for the year (Given)	= 12,00,000
	(ii) Average Sales per month	= 1,00,000
	(12,00,000 − 12)
	(iii) Sales in Pre-incorporation Period:
	January – Average Sale – 1,00,000
	February – Half the Average – 50,000
	March – Average Sale – 1,00,000
	April – Half the Average – 50,000
	Total Sales in pre-incorporation period:	= 3,00,000
	(iv) Sales in Post-incorporation Period:
	May to October: 6 months at an average sale of 1,00,000	= 6,00,000
	November and December at times the average	= 3,00,000
	1.5 × 1,00,000 × 2 months
	Total Sales in Post-incorporation Period	= 9,00,000
	(v) Sales Ratio (Weighted)	= 3,00,000 : 9,00,000
		= 3:9 or 1:3

Step 3:    Classification—Basis of Apportionment:

1. Gross profit, traveller’s commission, discounts and bad debts are to be apportioned on the basis of sales ratio 1: 3
2. Rent, salaries, office expenses and depreciation are to be apportioned on the basis of time ratio 1:2.
3. Director’s fees and debenture are to be allocated to post-incorporation period straightaway.
4. Audit fee is to be apportioned on the basis of time ratio, here. But some accountants prefer to allocate, i.e., charge fully, to post-incorporation period.

Step 4:	Preparation of statement showing pre- and post-incorporation profits:
	Statement showing pre- and post-incorporation profits for the year ended 31 December 2010

Illustration 6.8

Model: Profits prior to and post-incorporation—Weighted sales ratio and actual basis apportionment and account closed less than a year

A company was incorporated on 1 August 2010 acquiring the business of a sole trader with effect from 1 April 2010. The accounts of the company were closed for the first time on 31 December 2010, disclosing a profit of 2,10,000. The establishment expenses were 54,000; director’s fees: 4,000 per month; preliminary expenses written off: 5,000; rent up to September 2010 was 500 per month which was thereafter increased to 1,000 per month. Salary to the manager was at 3,000 per month who was appointed a director at the time of incorporation of the company.

You are required to prepare a statement showing profits prior and subsequent to incorporation, assuming that the net sales were 32,40,000, the monthly average of which for the first 4 months was half of that of the remaining period.

 

[Madras University Modified]

Solution

 

Step 1:	Calculation of Time Ratio
	(i) Pre-incorporation Period from 1 April 2010 to 1 August 2010	= 4 months
	(ii) Post-incorporation Period from 1 August 2010 to 31 December 2010	= 5 months
	(iii) Time Ratio	= 4 : 5
Step 2:	Computation of Sales Ratio (Weighted):
	(i) Given in the question: Monthly average sales for the first 4 months was half of that of the remaining 5 months	1
	(ii) Assume that the average sales for the remaining 5 months (Post-incorporation period) and the weightage may be given
	(iii) Hence, for the first 4 months, the weightage will be “half” of that in (ii)	=
	(iv) (Weighted) Sales Ratio = 4 × : 5 × 1	= 2 : 5
Step 3:	Calculation of rent: (Specific amount for specific period → actual)
	(i) Rent → Prior to incorporation = 4 months × 500	= 2,000
	(ii) Rent → Post-incorporation = 5 months × 1,000	= 5,000
Step 4:	Allocation → Manager’s salary to pre-incorporation period and director’s fees and preliminary expenses written off are to be allocated straight to post-incorporation period.
Step 5:	Preparation of Statement
	Statement showing profits prior and subsequent to incorporation during 9 months ended 31 December 2010

Illustration 6.9

Model: Time ratio, adjusted time ratio, weighted sales ratio and preparation of statement

Kapur Ltd. was incorporated on 1 May 2009 to take over the running business of Sunil & Bros. with effect from 1 January 2009. From the following details for the year ended 31 December 2009, you are required to prepare a statement showing profit or loss made during the pre- and post-incorporation periods:

 

(i)	Gross Profit	5,00,000
(ii)	Salaries	90,000
(iii)	Advertising	9,000
(iv)	Commission to Partners	12,000
(v)	Carriage Outward	15,000
(vi)	Depreciation	21,000
(vii)	Provision for Doubtful Debts	6,000
(viii)	Undertaking Commission	30,000
(ix)	Insurance Premium paid for the year ending 31 March 2010	18,000
(x)	Interest on Loan taken (Including 6,000 on Loan taken after Incorporation)	24,000

Additional data:

1. Average monthly sales during the first 4 months of the year were twice the average monthly sales during each of the remaining 8 months.
2. 30% of the underwriting commission is to be written off
3. Commission to partners was paid for their work before incorporation
4. Salaries include salary paid to a director of a company 12,000.

[Delhi University Modified]

Solution

 

Step 1:	Calculation of Time Ratio:
	(i) Pre-incorporation Period	= 4 months
	from 1 January 2009 to 1 May 2009
	(ii) Post-incorporation Period	= 8 months
	from 1 May 2009 to 31 December 2009
	(iii) Time Ratio	= 4 : 8 (or) 1 : 2
Step 2:	(i) Let average sale per month of the post-incorporation period be taken as 1 weightage for each month	= 1
	(ii) As per the direction in the problem, pre-incorporation average monthly sale is twice the post-corporation.	= 1 × 2 = 2
	Hence the weightage per month will be	= (8 × 1) : (4 × 2)
	(iii) (Weighted) Sales Ratio	= 8 : 8
		= 1 : 1
Step 3:	Treatment for Insurance:
	(a) Insurance Premium (Given):	= 18,000
	This is for 12 months ending on 31 March 2010, starting from 1 April 2009. But the accounting year ends on 31 December 2009. Hence, expenses on insurance premium should be confined to current accounting year only.
	Expense on insurance premium to be taken into account for 2009	= 18,000 ×
		= 13,500 only
	(b) Adjusted Time Ratio for Insurance Premium:
	(i) As worked out in the above Step 3 (a), the number of months in the current year	= 9 months
	(ii) of those, pre-incorporation period is April only	= 1 months
	(iii) Post-incorporation period from 1 May 2009 to 31 December 2009 (or) 9 − 1 = 8 months)	= 8 months
	(iv) Adjusted time ratio
	(v) Insurance premium 13,500 has to be apportion) on 1:8 (adjusted time ratio basis)	= 1:8
Step 4:	(a) Gross profit, advertising, carriage outwards, provision for doubtful debts have to be apportioned on the basis of sales ratio
	(b) Other salaries and depreciation have to be made on time ratio basis and insurance premium on adjusted time ration basis.
	(c) Other expenses are to be allocated straightaway
Step 5:	Preparation of Statement of Profit/loss:
	Statement showing pre- and post-incorporation profits for the year ended 31 December 2009

Illustration 6.10

Model: Comprehensive

Bright Ltd. was incorporated on 1 July 2009 with on authorized capital consisting of 1,00,000 equity shares of 10 each to take over the running business from White Bros. from 1 April 2009. The following is the summarized profit and loss account for the year 3 ended 31 March 2010:

 

The company deals in one type of product. The unit cost of sales was reduced by 10% in post-incorporation period as compared to the pre-incorporation period in the year.

You are required to apportion the net profit amount between pre-incorporation and post-incorporation periods showing the basis of apportionment.

How will pre-incorporation profit be dealt with in the books of account of the company?

 

[C.S. (Inter). Modified]

Solution

 

Step 1:	Calculation of Time Ratio:
	(i) Pre-incorporation period from 1 April to 1 July	= 3 months
	(ii) Post-incorporation period from 1 July to 31 March 2010	= 9 months
	(iii) Time Ratio	= 3 : 9 (or) 1 : 3
Step 2:	Time Ratio for Interest to Vendors:
	Interest paid on 1 February as loan was settled
	So, post-incorporation period from 1 July 2009 to 1 February 2010	= 7 months
	Hence, time ratio	= 3 : 7
Step 3:	Computation of Sales Ratio:	(in ’000s)
	Sales during pre-incorporation period:	= 80,000
	Sales during post-incorporation period:	= 3,20,000
	Hence, sales ratio	= 8 : 32 (or) 1 : 4
Step 4:	Preparation of Statement of Profit
	Statement showing profit for the pre- and post-incorporation periods for the year ended 31 March 2010

Pre-incorporation profit 18,150 (in ‘000s) is a capital profit.

Hence, it has to be credited to capital reserve account.

Illustration 6.11

Model: Computation of pre- and post-incorporation profit through columnar P&L A/c

Mr. Raj formed a private limited company under the name and style of Raj Pvt. Ltd. to take over his existing business as from 1 April 2009, but the company was not incorporated until 1 July 2009. No entries relating to transfer of the business are entered in the books. This was carried on without a break until 31 March 2010.

The following balances were extracted from the books on 31 March 2010:

Particulars	Dr.	Cr.
Opening Stock	25,000	—
Purchases	1,75,000	—
Carriage Outwards	4,000	—
Travelling Commission	7,000	—
Office Salaries	30,000	—
Administrative Expenses	25,000	—
Rent and Rates	15,000	—
Director’s Fees	25,000	—
Fixed Assets	1,50,000	—
Current Assets Excluding Stock	40,000	—
Preliminary Expenses	6,000	—
Sales	—	3,00,000
Mr. Raj’s Capital A/c on 1 April 2009	—	2,70,000
Current Liabilities	—	40,000

You are also given that:

1. Stock on 31 March 2010 was 20,000.
2. The gross profit ratio is constant and monthly sales in April 2009, February 2010 and March 2010 are double the average monthly sales for the remaining months of the year.
3. The purchase consideration was agreed to be satisfied by the issue of 50,000 equity shares of 10 each.
4. The preliminary expenses are to be written off.
5. You are to assume that carriage outwards and traveller’s commission vary in direct proportion to sales.

   You are required to prepare P&L A/c for the year ended 31 March 2010 apportioning the profit or loss of the periods before and after incorporation. Depreciation is to be provided @ 20% p.a. on fixed assets.

[C.A. Modified]

Solution

 

Step 1:	Calculation of Time Ratio:
	(i) Pre-incorporation Period From 1 April 2009 to 1 July 2009	= 3 months
	(ii) Post-incorporation Period From 1 July 2009 to 31 March 2010	= 9 months
	(iii) Time Ratio	= 3:9 (or) 1:3
Step 2:	Calculation of Sales Ratio:
	Assume and give weightage for average sales as 1.
	Then Pre-incorporation Sales =

                            April = 2

                            May = 1

                            June = 1                    4

 

	Post-incorporation sales:
	July to January: 7 months = 7 × 1 (weightage)	= 7
	February and March: 2 months = 2 × 2	= 4	11
	∴ Sales ratio	= 4:11

Step 3:	Computation of Gross Profit:
	Sales (Given):	3,00, 000
	Add: Closing Stock	20,000
		3,20,000
	Less: Opening Stock:	25,000
		2,95,000
	Less: Purchases:	1,75,000
	Gross Profit:	1,20,000
Step 4:	Preparation of P&L A/c

 

Illustration 6.12

Model: Trading A/c; P&L A/c and balance sheet preparations

The following trial balance was extracted from the books of M/s Subbu Pvt. Ltd. formed by Mr. Vivek on 1 April 2009, but was incorporated on 1 July 2009. No entries relating to the transfer of the business were entered in the books. This was carried on until 31 March 2010.

Trial balance as on 31 March 2010.

Further information:

1. Stock on 31 March 2010 30,000
2. Purchase consideration 3,00,000 to be paid by the issue of 3,000 equity shares of 100 each
3. Gross profit percentage is fixed, turnover is double in April, November and December
4. Preliminary expenses are to be written off
5. Carriage outward and travelling commission vary in direct proportion to sales

You are required to prepare trading and profit and loss account for the year ended 31 March 2010 appropriating between pre- and post-incorporation periods and a balance sheet as on 31 March 2010.

 

[C.S. Modified]

Solution

 

Step 1:	Calculation of Time Ratio:
	(i) Pre-incorporation Period From 1 April 2009 to 1 July 2009	= 3 months
	(ii) Post-incorporation Period From 1 July 2009 to 1 March 2010	= 9 months
	(iii) Time Ratio	= 3:9 (or) 1:3
Step 2:	Calculation of Weighted Sales Ratio
	Let us assume and assign weightage 1 to normal turnover months (turnover uniform in 9 months) Turnover is given as double for three specific months and hence the weightage will be 1 × 2 = 2
	Pre-incorporation Period:

                                2009 April = 2

                                2009 May = 1

                                2009 June = 1                4

 

	Post-incorporation Period:
	July to October 2009: 4 normal months	= 4 × 1 = 4
	November to December 2009: 2 special months	= 2 × 2 = 4
	January to March 2009: 3 normal months	= 3 × 1 = 3	11
	∴ (Weighted) Sales Ratio		= 4:11

Step 3:     Treatment for Goodwill:

1. Computation:Goodwill = Purchase Consideration – Capital

                                   = 3,00,000 − 2,00,000

                                   = 1,00,000

    

2. Profit prior to incorporation is to be adjusted with this in the balance sheet.

Step 4:     Preparation of Trading A/c:

 

Step 5:     Preparation of Balance Sheet

 

6.6 ACCOUNTING STANDARD AS-5 REVISED

6.6.1 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies

The AS-5 (Revised) ensures uniform classification and disclosure of certain items, so that profit and loss statements are prepared on uniform basis. The statement deals with the classification and disclosure of prior period and extraordinary items and also the disclosure of certain items within profit or loss from ordinary activities.

The net profit or loss for the period comprises the following components, each of which should be disclosed on the face of the statement of profit and loss:

1. Profit or loss from ordinary activities
2. Extraordinary items

AS-5 defines extraordinary items as income or expenses which arise from events or transactions that are clearly distinct from the ordinary activities of the enterprise. They are not expected to recur frequently or regularly.

Example:

1. Losses due to natural calamities, disasters
2. The expropriation of assets by state
3. A change in the basis of taxation or government fiscal policy.

As per AS-5 (Revised), extraordinary items should be disclosed in the statement of profit and loss in such a manner that its impact on current profit or loss can be perceived at ease. Such amount should form a part of the net profit or loss period.

AS-5 requires separate disclosure of certain items separately. They are ordinary activities. As explained by it, ordinary activities are any activities which are undertaken by an enterprise as part of its business and such related activities in which the enterprise engages in furtherance of, incidental to or arising from their activities.

The items which may require separate disclosure are:

1. Disposals of items of fixed assets
2. Disposals of long-term investments
3. Reversal of any provisions
4. Legislative changes having retrospective applications
5. Litigation, settlements

AS-5 requires separate disclosure of the nature and amount of prior period items in the statement of profit or loss in a manner that their impact on the current profit or loss can be perceived at ease.

Prior period items are normally included in the determination of net profit or loss for the current period.

An alternative approach is to show such items in the statement of profit and loss after determination of current net profit or loss.

Here one important difference between “an estimate” and “an error” must be understood.

The revision due to estimates does not come under the purview of extraordinary item or prior period item as per the standard.

However, when income or expenses arise in the current period as a result of errors or omissions in the preparation of financial statements of one or more periods, the said income or expenses have to be classified as prior period items. The errors may occur as a result of mathematical mistakes, mistakes in applying accounting policies, misrepresentation of acts or oversight.

Any change in accounting policies should be disclosed.

Profit prior to incorporation is capital profit, which has to be credited to “Capital Reserve A/C”. This may be utilized to write off capital losses and certain expenses. The balance, if any, is to be shown on the liabilities side of the balance sheet under “Reserve & Surpluse”.

Loss prior to incorporation is capital loss, which has to be debited to “Loss prior to incorporation A/c”. This is to be shown on the assets side of the balance sheet under “Miscellaneous Expenditure”.

Methods of ascertaining profit/loss prior to incorporation:

1. Preparation of Trading and Profit & Loss A/c for the period upto the date of incorporation.
2. Preparation of Trading and Profit & Loss A/c for the whole accounting period and apportionment of the profit/loss between pre- and post-incorporation periods.
3. Preparation of Common Trading and Profit & Loss A/c in “Columnar Form”.

Basis of apportionment of different items is explained in detail in the text.

Accounting Treatment: Various stages involved in the determination of pre- and post-incorporation profit/loss and explained in steps. Refer the illustrations No. 1 to 12.

Acquisition: Acquiring a running business of a sole trader or partnership firm by a company.

Profit Prior to Incorporation: Profits earned up to the date of incorporation of business.

Time Ratio: Ratio of period (months or days) before and after incorporation during an accounting period.

Sales Ratio: Ratio of sales or turnover of the company before and after incorporation.

Weighted Sales Ratio: Sales ratio adjusted for the change in trend in sales.

Allocation: Expenses that are fully charged to either pre- or post-incorporation period. (need not get apportioned on any other basis).

QUESTION BANK

 

I: State whether the following statements are True or False

1. Profit prior to incorporation forms part of P & L A/c.
2. Capital profit is not utilized for payment of dividend to shareholders.
3. Unutilized part of capital reserve appears on the assets side of the balance sheet.
4. Capital loss should be shown on the assets side of the balance sheet.
5. Capital loss may also be treated as Goodwill.
6. The date of Certificate of Commencement of business is not taken into account for ascertaining prior incorporation profit.
7. Basis of apportionment of stationery expenses is sales ratio.
8. Gross profit is apportioned on the basis of sales ratio.
9. Basis of apportionment of “bad debts” is time ratio.
10. Director’s remuneration is not at all connected with pre-incorporation period.
11. Basis of apportionment of “insurance premium” is sales ratio.
12. Vendor’s salary is to be apportioned on the basis of adjusted time ratio.
13. Debenture interest is wholly allocated to post-incorporation period.
14. Formation expenses written off shall be allocated only to pre-incorporation period.
15. Profit prior to incorporation is always to be adjusted against Goodwill.

Answers:

1. False
2. True
3. False
4. True
5. True
6. True
7. False
8. True
9. False
10. True
11. False
12. False
13. True
14. False
15. True

II: Fill in the blanks with suitable word(s)

1. For ascertaining pre-incorporation profits, the important ratios used are ______and _______ .
2. The profit made from the date of business purchase till the date of incorporation is termed as ______ .
3. Pre-incorporation profit is treated as ______.
4. Post-incorporation profit is treated as______ .
5. Profit/loss prior to incorporation is ascertained on the basis of transactions between the date of purchase of business and the date of obtaining the certificate ______.
6. Capital profit is generally credited to______A/c.
7. Unutilized part of capital reserve is to be shown in the balance sheet under the heading ______.
8. Capital loss appears in the balance sheet under the head ______.
9. ______is the ratio of the period before and after incorporation during the accounting period.
10. ______is the ratio of turnover of the company before and after incorporation.
11. When sales are not uniform during an accounting period,______ ratio is used for apportioning expenses.
12. All variable expenses directly varying with turnover are to be apportioned on the basis of________.
13. ____________is the basis of apportionment for fixed expenses.
14. Basis of apportionment of all expenses relating to pre-incorporation period is ______.
15. Gross profit is to be divided between pre- and post-incorporation periods in ______ratio.

Answers:

1. time ratio; sales ratio
2. profit prior to incorporation
3. capital profit
4. revenue profit
5. of incorporation
6. capital reserve
7. reserve & surplus
8. miscellaneous expenditure
9. Time ratio
10. Sales ratio
11. weighted sales
12. sales ratio
13. Time ratio
14. allocation
15. sales

III: Multiple choice questions—Choose the correct answer

1. Profit prior to incorporation belongs to:
   1. the vendor
   2. the newly formed company
   3. both (a) & (b)
   4. none of these
2. The relevant date for ascertaining capital profit is the date of
   1. acquisition of business
   2. incorporation
   3. obtaining certificate to commence business
   4. entering into preliminary contract
3. When sales are not uniform in an accounting period, the ratio that should be used is
   1. time ratio
   2. sales ratio
   3. weighted sales ratio
   4. adjusted time ratio
4. Profit prior to incorporation is
   1. debited to P&L A/c
   2. credited to goodwill A/c
   3. credited to capital reserve A/c
   4. shown directly in the balance sheet.
5. Loss prior to incorporation is
   1. debited to P&L A/c
   2. debited to goodwill A/c
   3. debited to capital reserve A/c
   4. shown directly in the balance sheet.
6. Salesmen’s remuneration is to be apportioned on the basis of
   1. time ratio
   2. adjusted time ratio
   3. allocation to post-incorporation period
   4. sales ratio
7. Basis of apportionment of salary will be
   1. time ratio
   2. sales ratio
   3. allocation to pre-incorporation period
   4. allocation to post-incorporation period
8. Audit fees is to be apportioned on the basis of
   1. time ratio
   2. allocated fully to post-incorporation period
   3. (a) and (b)
   4. (a) or (b)
9. Capital reserve A/c may used
   1. for payment of dividend
   2. to write off capital losses
   3. to acquire fixed assets
   4. as deferred revenue expenditure
10. If specific details are available with respect to any item of expenditure or time spent, then
    1. no apportionment is necessary, may be allocated accordingly
    2. to be apportioned on time ratio
    3. weighted sales ratio basis is suitable
    4. adjusted time ratio is to be used.

Answers:

 

1. (a)	2. (b)	3. (b)	4. (c)
5. (b)	6. (d)	7. (a)	8. (d)
9. (b)	10. (a)

1. What is meant by “acquisition” of business?
2. Explain the term “profit prior to incorporation”.
3. What will be effect of capital profit or loss on the net assets acquired by the company?
4. How would you treat capital profit?
5. How would you treat capital loss?
6. “Date of certificate to commence business is immaterial for ascertainment of profit prior to incorporation”—Why?
7. What is time ratio? Give any four items of expenses that are to be apportioned on the basis of time ratio.
8. What do you mean by “weighted” or “adjusted” time ratio?
9. Explain “sales ratio”. Give any four items of expenses which are to be apportioned on the basis of sales ratio.
10. Give any four items of expenses that are to be allocated fully to pre-incorporation period.
11. How “audit fees” will be apportioned?
12. How would you treat “actual expenditure”?
13. How “weightage” is assigned while computing weighted sales ratio?
14. How do you treat profit prior to incorporation against goodwill?
15. Purchase consideration and capital are given in the question. How will you compute “goodwill”?

1. Explain “profit prior to incorporation”. Explain in detail how will you treat profit or loss prior to incorporation in the books of accounts of a company.
2. Discuss the possible methods of ascertaining profit or loss prior to incorporation
3. Enlist the various “ratios” used in ascertaining profit prior to incorporation and describe each of them in detail.
4. Mention the important items of expenses and explain the proper basis of apportionment of such items.
5. Describe the important steps used in computation of weighted sales ratio with an imaginary figure.

 

 

1. You are required to compute time ratio for the pre- and post-incorporation periods from the following data:

1. Date of incorporation: 1 June 2009
2. Period of financial accounts: April 2009 to March 2010
3. Total wages: 24,000
4. Number of workers: Pre-incorporation period = 5

Post-incorporation period = 25

Also, divide the total wages between pre- and post-incorporation periods.

[Ans: 1: Time ratio: 1:5; Weighted time ratio: 1:25; Wages: Pre-incorporation: 925; Post-Incorporation: 23,075]

2. Kamala Ltd. was incorporated on 1 April 2010 to take over the business of Vikas Brothers from 1 January 2010. From the following information, calculate sales ratio and gross profit:

1. Sales during the period January to December 2010 amounted to 3,60,000.

   The trend of the sales was as follows:

   January and February: half the average sales in each month

   May, June and July: average sales in each month

   October: average sale

   November and December: half the average sales in each month

2. Cost of goods sold: 90,000.

[Ans: Sales ratio: 5:19; Gross profit: 2,70,000]

3. A company was incorporated on 1 August 2010 in order to purchase a running business from 1 April 2010. The following particulars are available from its records:

 

(i) Total sales for 2010–11:	2,40,000
(ii) Sales from 1 April 2010 to 31 July 2010	60,000
(iii) Gross profit for the whole year	90,000
(iv) Total expenses of 2010–11 (including director’s fees 3,000)	75,000
(v) Company’s share capital	2,25,000

You are required to calculate profit prior to incorporation and after incorporation by preparing profit and loss account.

[Ans: Loss prior to incorporation: 7,500; Profit after incorporation: 22,500]

4. Lalli Ltd. was incorporated on 1 July 2010 which took over a running concern with effect from 1 January 2010. The sales for the period up to 1 July 2010 was 10,80,000 and the sales from 1 July 2010 to 31 December 2010 amounted to 13,20,000.

The expenses debited to profit and loss account included:

 

(i) Director’s fees	60,000
(ii) Bad debts	7,200
(iii) Advertisement (2,000 per month)	24,000
(iv) Salaries and general expenses	1,28,000
(v) Preliminary expenses written off	12,000
The gross profit for the period from 1 January 2010 to 31 December 2010	9,60,000

You are required to compute profit prior to incorporation.

[Ans: Profit prior to incorporation: 3,52,760]

5. A company was incorporated on 30 June 2010 to acquire the business of Veer Singh as from 1 January 2010. The accounts for the year ended 31 December 2010 disclosed the following:

1. There was a gross profit of 14,40,000
2. The sales for the year amounted to 72,00,000, of which 32,40,000 were for the first 6 months.
3. The expenses debited to profit and loss account included:

Director’s fees	90,000
Bad Debts	21,600
Advertising (Under a monthly Contract of 6,000)	72,000
Salaries	3,84,000
Preliminary Expenses Written off	30,000
Donation to Political Parties by Company	30,000

You are required to prepare a statement showing profit made before and after incorporation.

[Ans: Profit before incorporation: 4,10,280; Profit after incorporation: 4,02,120]

6. X Ltd. was registered on 1 January 2010 to buy the business of M/s Y Brothers as on 1 October 2009 and the Certificate of Commencement of Business on 1 February 2010. The accounts of the company for the period of 12 months ended 30 September 2010 disclosed the net profit of 1,25,000 after having charged the following amounts:

Salary: 30,000 (There were four employees in the pre-incorporation period and seven in the post-incorporation period)

Wages: 10,920 (There were four workers in the pre-incorporation period and five in the post-incorporation period and the rate of wages were 160 and 200 per month per worker in the pre- and post-incorporation periods, respectively)

Sales: 4,80,000 of which 80,000 relates to pre-incorporation period.

Director’s fees: 16,000

You are required to calculate profit for pre- and post-incorporation periods separately.

[Madras University]

[Ans: Profit prior to incorporation: 23,600;

Profit after incorporation: 1,01,400;

Adjusted time ratio for salaries: 4:21;

Wages: Pre-incorporation: 1,920;

Post-incorporation: 9,000;

Gross profit before charging wages:

1,81,920;

Sales ratio: 1:5]

7. Riddhima Co. Ltd. was incorporated on 30 September 2009 to take over the business of M/s Parul & Co. as from 1 April 2009. The financial accounts of the business for the year ended 31 March 2010 disclosed the following information:

Particulars
Sales:
April to September	3,60,000
October to March	5,40,000	9,00,000
Less: Purchases:
April to September	2,25,000
October to March	3,60,000	5,85,000
Gross Profit		3,15,000
Less:
Salaries	45,000
Selling Expenses	9,000
Depreciation	4,500
Director’s Remuneration	2,250
Debenture Interest	270
Administration expenses (Rent, Rates, etc.)}	13,500	74,520
Profit for the year 2009–10		2,40,480

You are required to prepare a statement apportioning the balance of profit between the periods prior to and after incorporation and show the profit and loss appropriation account for the year ended 31 March 2010.

[Ans: Profit prior to incorporation: 99,900;

Profit after incorporation: 1,40,580]

8. Thomas Co. Ltd. purchased a business on 1 April 2009. The company obtained Certificate of Incorporation on 31 July 2009. From the following particulars for the year ending 31 March 2010, ascertain profit prior to incorporation and divisible profits:

1. Total sales up to 31 March 2010 30,00,000; Sales from 1 April 2009 to 31 July 2009 7,50,000.
2. Gross profit for the year 6,36,000
3. Expenses debited to profit and loss account were as under:

[Ans: Adjusted time ratio for interest paid to vendors: 4:1; Profit prior to incorporation: 47,550; Divisible profit: 2,11,950]

9. Byhagya Ltd. was incorporated on 1 March 2010 and received the Certificate of Commencement of Business on 1 April 2010. The company acquired the business of Viswas with effect from 1 November 2009. From the following figures relating to the year ending October 2010, find out the profits available for dividend.

1. Sales for the year were 30,00,000; Out of which sales up to 1 March 2010 were 12,50,000.
2. Gross profit for the year was 9,00,000.
3. The expenses debited to profit and loss account were:

Rent	45,000
Salaries	75,000
Directors’s fees	22,000
Interest on debentures	25,000
Audit fees	7,500
Discount on sales	18,000
Depreciation	1,20,000
General expenses	22,000
Advertising	90,000
Printing & Stationery	18,000
Commission on sales	30,000
Bad debts ( 2,500 relates to
prior incorporation period)	7,500
Interest to vendors on purchase
consideration up to 1 May 2010	15,000

[Ans: Profit available for dividend: 1,92,500; Profit prior to incorporation: 2,08,500]

10.X Ltd. was incorporated on 1 April 2010 with an authorized capital of 20,000 equity shares of 100 each to take over the running business of Y Ltd. from 1 January 2010.

The following is the summarized profit and loss account for the year ended 31 December 2010.

Particulars
Sales: 1 January 2010 to 31 March 2010	24,000
1 April 2010 to 31 December 2010	76,000	1,00,000
Cost of Sales	64,000
Administrative Expenses	7,072
Selling Commission	3,500
Goodwill Written off	800
Interest Paid to Vendors (Loan Repaid on 1 May 2010)	1,492
Distribution Expenses (60% Variable)	5,000
Preliminary Expenses Written off	1,320
Debenture Interest	1,280
Depreciation	1,776
Director’s Fees	400	86,640
Profit		13,360

The company deals with one type of product. The unit cost of sales was reduced by 10% in the post-incorporation period as compared to the pre-incorporation period. Apportion the net profit between pre-incorporation and post-incorporation periods showing the basis of apportionment.

[Ans: Cost of sales ratio: 60:171; Time ratio: 1:3; Sales ratio: 6:19; Adjusted time ratio: 3:1;

Pre-incorporation profit: 1,984

Post-incorporation profit: 11,376]

 

 

11. A company was incorporated on 1 August 2009 to take over a business from the preceding 1 April. The accounts were made up to March 2010 as usual and the trading and profit and loss account gave the following result:

It is ascertained that the sales for February 2010 and March 2010 are one and half times the average for the year. Apportion the year’s profit between the pre-incorporation and post-incorporation period.

[C.S. (Inter). Modified]

[Ans: Time ratio: 1:2; Sales ratio: 1:3

Profit prior to incorporation: 13,75,000;

Profit after incorporation: 91,25,000]

12. Jasemine Company Ltd. was formed to take over a running business with effect from 1 April 2009. The company was incorporated on 1 August 2009, and the Certificate of Commencement of Business was received on 1 October 2009. The following profit and loss account has been prepared for the year ended 31 March 2010.

 

Additional information:

1. Total sales for the year, which amounted to 48,00,000 arose evenly up to the date of the Certificate of Commencement of Business, where after they spurted to record an increase of two-thirds during the rest of the year.
2. Rent of office building was paid @ 5,000 per month up to September 2009 and thereafter it was increased by 1,000 per month.
3. Travelling expenses include 12,000 towards sales promotion.
4. Depreciation includes 1,500 for assets acquired in the post-incorporation period.
5. Consideration was discharged by the company on 30 September 2009, by issuing equity shares of 10 each.

You are required to prepare the profit and loss account in columnar form showing distinctly the allocation of profits between pre-incorporation and post- incorporation periods, indicating the basis of allocation regarding each item.

[C.S. (Inter). Modified]

[Ans: Time ratio: 1:2; Sales ratio: 1:3

Pre-incorporation profit: 30,750;

Post- incorporation profit: 1,88,250]

13. A public limited was incorporated on 1 October 2009 to take over a business as a going concern as from 1 April 2009. The purchase price of the business for such acquisition was fixed on the basis of the balance sheet of the firm as at 31 March 2009 but the agreement provided that the vendors would get 80% of the profits earned prior to 1 October 2009 as compensation. The company’s accounts were made up to 31 March each year and the summarized trading and profit and loss accounts for the year ended 31 March 2010, disclosed the following results:

Further information available was that sales made by the company amounted to 2,32,000. Bad debts amounting to 2,200 were written off prior to 1 October 2009.

Prepare a statement showing the profits earned prior to and after incorporation. State also the amount of profits prior to 1 October 2009 payable to the vendors.

How should the company deal with its share of profits in the year ending 31 March 2010.

[C.A. (Inter). Modified]

[Ans: Profit prior to incorporation 17,626 before paying the vendor]

14. Ramkumar Industries Pvt. Ltd. was incorporated on 1 May 2009. It took over Ramkumar’s sole proprietary business with effect from 1 April 2009. Ramkumar’s balance sheet as at 31 March 2010 is as follows:

It was agreed to pay 22,50,000 in the form of equity shares of the company. The company decided to close its books of account for the first time as at 31 March 2010. The following further details are furnished to you:

Sales for full year	15,00,000
Purchases	7,00,000
Salaries & Wages	2,00,000
General Expenses	1,60,000
Carriage Inwards	23,500
Interest Paid	40,000
Stocks as at 31 March 2010	1,10,000
Additions to Building	1,90,000

Depreciation is to be provided @ 10% on assets including additions.

Make a provision for income tax @ 35%

The company requests you to:

1. pass journal entries for the take over
2. prepare P&L A/c showing separately pre-incorporation and post-incorporation profits

[C.A. (Inter). Modified]

[Ans: Goodwill on acquisition: 2,11,500;

Pre-incorporation profit: 1,56,406;

Post-incorporation profit: 14,218]

15. The promoters of proposed Prosperity Ltd. purchased a running business on 1 April 2009 from Mr. Alphonse and was incorporated on 1 August 2009. The combined P&L A/c of the company prior to and after the date of incorporation is as under:

 

Further information:

1. Sales up to 31 July 2009 were 9,00,000 out of total sales of 45,00,000 of the year.
2. Purchases up to 31 July 2009 were 9,00,000 out of the total purchases of 27,00,000.
3. Interest paid to vendors on 1 February 2010 (@12% p.a. on 3,00,000 being purchase consideration).

From the above information, prepare P&L A/c for the year ended 31 March 2010, showing the profit earned prior to and after incorporation and also show the transfer of the same to the appropriate accounts.

[I.C.W.A. (Inter). Modified]

[Ans: Pre-incorporation profit: 68,700;

Post-incorporation profit: 2,91,300]