FINANCIAL ACCOUNTING
INSURANCE CLAIMS
LOSS OF STOCK POLICY
Part A: Discussion of basic theories and Steps to determine the amount of insurance claims for loss of stock by fire
Part B: Five Illustrations with Solutions
Part A
AVERAGE CLAUSE
Generally, fire insurance
policies contain an “average clause” to discourage under-insurance. Because of
the presence of this clause in the insurance policies the Insurance Company is
liable to pay only that proportion of the total loss which the sum insured
bears to the value of the property. “Average Clause”
is applicable if the value of stock on the date of fire is more than the policy
value.
STEPS FOR ESTIMATING
THE VALUE OF STOCK LOST BY FIRE
Step: 1 – Calculation of G. P. Ratio
Calculate G.P. Ratio from
the latest available Final Accounts after necessary adjustments with respect to
some special and abnormal items as follows:
1.
Slow moving goods / poor selling goods;
2.
Goods distributed as free sample;
3.
Goods taken by the proprietor / partners for
personal use; and
4.
Over-valuation or under-valuation of stock.
Step: 2 – Stock on the date of fire
Prepare Memorandum Trading
Account for the accounting period from the last balance sheet date to the date
of fire. Calculate Gross Profit for the same period applying the G.P. Ratio as
calculated above. The balancing figure of the Memorandum Trading Account will
be the value of stock on the date of fire.
Step: 3 – Stock lost by fire
Deduct the value of goods
salvaged (if any) from the estimated value of stock on the date of fire as above.
This will give the value of stock lost by fire.
INSURANCE CLAIM TO BE MADE
(i)
If the Policy Value < the value
of stock on the date of fire –
|
Insurance Claim = |
|
Value of Stock Lost by Fire x (Policy Value ÷ Value of Stock
on the Date of Fire) |
(ii)
If the Policy Value ≥ the value of
stock on the date of fire –
|
Insurance Claim = |
|
Value of Stock Lost by Fire |
Part B
FINANCIAL ACCOUNTING
Insurance Claims – Loss of Stock
Selected Problems
Illustration: 1
A fire occurred on
15th September, 2013 in the premises of Sen & Co. From the
following figures calculate the amount of claim to be lodged with the insurance
company for loss of stock.
|
Particulars |
Rs |
|
Stock at cost on
1.1.2012 |
40,000 |
|
Stock at cost on
1.1.2013 |
60,000 |
|
Purchases in 2012 |
80,000 |
|
Purchase from
1.1.2013 to 15.9.2013 |
1,76,000 |
|
Sales in 2012 |
1,20,000 |
|
Sales from
1.1.2013 to 15.9.2013 |
2,10,000 |
During the current
year cost of purchase has risen by 10% above last years’ level. Selling prices
have gone up by 5%. Salvage value of stock after fire was Rs 4,000.
Click here for Solution: 1 in PDF
Illustration:
2
Mr. X’s godown was destroyed by fire on 1.6.2013 when the goods in stock were insured for Rs 60,000. The following particulars are given:
Balance Sheet (Extract)
As at 31st December 2012
|
Liabilities |
Rs |
Asset |
Rs |
|
Creditor for goods |
20,000 |
Stock (including goods held by agent Rs 2,000) |
36,000 |
|
|
|
Debtors |
70,000 |
Transactions up to 31st May,
2013 include:
|
Particulars |
Rs |
Particulars |
Rs |
|
Cash Received
from Debtors |
3,40,000 |
Cash paid to
Creditors |
2,20,000 |
|
Bad Debts written
off |
3,500 |
Discount Received |
1,000 |
|
Balance on 31.5.2013: |
|
|
Debtors |
Rs 70,000 |
|
Creditors |
Rs 30,000 |
Additional
information
1.
Debtors on 31.5.2013 included an amount
owing from the agent from sales to date Rs 4,000 less 10% commission and his
expenses amounting to Rs 100. On 31.5.2013, the agent still held the goods
valued at Rs 3,600 (at selling price).
2.
Sales (total) for the periods include Rs
1,600 for goods which have the selling price reduced by 50% and also Rs 6,000
reduced by 25%.
3.
The normal mark up is 50% on cost and
except the above all sales can be assumed to be at the full selling price.
4.
All the goods were destroyed and there
was no salvage value of the goods.
Calculate the amount of claim.
Click here for Solution: 2 in PDF
Illustration:
3
On 1.4.2013, godown
of Y Ltd. was destroyed by fire. The records of the company revealed the
following particulars:
|
|
Rs |
|
Stock on 1.1.2012 |
75,000 |
|
Stock on
31.12.2012 |
80,000 |
|
Purchases during
2012 |
3,10,000 |
|
Sales during 2012 |
4,00,000 |
|
Purchase from
1.1.2013 to the date of
fire |
75,000 |
|
Sales from
1.1.2013 to the date of
fire |
1,00,000 |
In valuing Closing
Stock of 2012, Rs 5,000 was written off whose cost was Rs 4,800. Part of this
stock was sold in 2013 at a loss of Rs 400 the cost of which was Rs 2,400.
Stock salvaged was Rs 5,000. The godown and the stock were fully insured.
Indicate from above
amount of claim to be made against the insurance company.
Click here for Solution: 3 in PDF
Illustration:
4
On 30.09.2013 the
stock of Harsha Mukherjee was lost in a fire accident. From the available
records the following information is made available to you to enable you to prepare
a statement showing the amount of insurance claim.
|
|
Rs |
|
Stock at cost on
1.4.2012 |
75,000 |
|
Stock at cost on
31.3.2013 |
1,04,000 |
|
Purchases less
returns for the year
ended 31.3.2013 |
5,07,500 |
|
Sales less
returns for the year
ended 31.3.2013 |
6,30,000 |
|
Purchase less
returns up to 30.09.2013 |
2,90,000 |
|
Sales less
returns up to 30.09.2013 |
3,68,100 |
In valuing the
stock on 31.03.2013 due to obsolescence 50% of the value of the stock which
originally cost Rs 12,000 had been written-off. In May 2013, 3/4th of
these stocks had been sold at 90% of original cost and it is now expected that
the balance of the obsolete stock would also realize the same price.
Subject to the
above, Gross Profit Ratio had remained uniform throughout the accounting period.
Stock to the value of Rs 14,400 was salvaged.
Click here for Solution: 4 in PDF
Illustration:
5
On 15th December,
2014 the premises of Nagar Ltd. were destroyed by fire, but sufficient records
were saved from which the following particulars were ascertained:
|
|
Rs |
|
Stock at cost on
1st April, 2013 |
2,20,500 |
|
Stock at cost on
31st March, 2014 |
2,38,800 |
|
Purchases less
returns for the year
ended 31st March, 2014 |
11,94,000 |
|
Sales less
returns for the year
ended 31st March, 2014 |
14,61,000 |
|
Purchases less
returns for the period 1.4.2014
to 15.12.2014 |
10,15,000 |
|
Sales less
returns for the period 1.4.2014
to 15.12.2014 |
11,62,000 |
In valuing stock
for Balance Sheet as at 31st March, 2014 Rs 6,900 had been written
off from certain stock which was a poor selling line, having cost of Rs 20,700.
A portion of these goods were sold in June, 2014 at a loss of Rs 750 on the
original cost of Rs 10,350. The remainder of this stock was now estimated to be
worth the original cost. Subject to the above exception, gross profit ratio had
remained at a uniform rate throughout the accounting period. The stock salvaged
was Rs 17,500. The stock was insured for Rs 2, 50,000.
Required:
Calculate the
amount of claim to be lodged with the Insurance Company for Loss of Stock.
Click here for Solution: 5 in PDF
It was very helpful to understand and exam prep. I would like to have more such articles from this blog. Thanks
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