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CMA Intermediate · Financial Accounting · Insurance Claim for Loss of Stock and Loss of Profit

A fire destroyed part of the stock of Gupta Brothers. Opening stock was Rs 3,00,000 and purchases up to the fire date were Rs 7,00,000. Sales up to that date were Rs 8,00,000, and the firm earns a gross profit of 25% on cost. Salvage was valued at Rs 40,000. The stock was insured for Rs 2,70,000 under a policy with an average clause. What is the insurance claim?

The claim is Rs 2,40,000. Cost of sales is Rs 6,40,000 (sales divided by 1.25), so stock at fire is Rs 3,60,000. After salvage of Rs 40,000 the loss is Rs 3,20,000, which is reduced by the average clause ratio of 2,70,000 to 3,60,000, giving Rs 2,40,000.

  1. ARs 2,70,000
  2. BRs 2,43,000
  3. CRs 2,40,000Correct
  4. DRs 3,20,000

Explanation

Cost of goods sold = 8,00,000 x 100/125 = 6,40,000. Stock at fire = 3,00,000 + 7,00,000 - 6,40,000 = 3,60,000. Loss = 3,60,000 - 40,000 = 3,20,000. Average clause: 3,20,000 x 2,70,000/3,60,000 = 2,40,000. Rs 2,43,000 results from wrongly taking gross profit as 25% of sales.

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