Additional rent for 9 months (From 1st July to 31st March, 2005) Rent for old premises for 15 months or Rs. 30,000 p.m. 2.70,000 4,50,000 C19 Pre-inc Post-inc Old Premises 90,000 3,60,000 Addl." 2.70,000 90,000 6,30,000 Note on treatment Since the profits prior to incorporation are in the negative, they would: (a) either be considered as a reduction from any capital reserve accruing in relation to the transaction, or (b) be treated as goodwill Illustration 4 ABC Ltd. was incorporated on 1.5.2006 to take over the business of DEF and Co. from 1.1.2006. The Profit and Loss Account as given by ABC Ltd. for the year ending 31.12.2005 is as under: Profit and Loss Account Gross Profit Interest on Investments Rs. 10,64,000 36,000 To Rent and Taxes To Salaries including manager's salary of Rs. 85,000 To Carriage Outwards To Printing and Stationery To Interest on Debentures Sales Commission TO Bad Debts (related to sales) To Underwriting Commission To Preliminary Expenses R$ 90,000 By 3,31,000 14,000 18,000 25,000 30,800 91,000 26,000 28,000 To Audit Fees To Loss on Sale of Investments To Net Profit 45,000 11,200 3,90,000 11,00,000 11,00,000 Prepare Statement showing allocation of pre-incorporation and post-incorporation profits after considering the following informations: (i) G.P. ratio was constant throughout the year. (ii) Sales for January and October were 15 times the average monthly sales while sales for December were twice the average monthly sales. (ii) Bad Debts are shown after adjusting a recovery of Rs. 7,000 of Bad Debt for a sale made in July, 2003 (iv) Manager's salary was increased by Rs. 2,000 p.m. from 1.5.2006 (v) All investments were sold in April, 2006