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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 Kapoor Traders. The insurance company admitted the claim and the amount was settled but not yet received. Which entry correctly records the admitted claim in Kapoor Traders' books?

The admitted claim is recorded by debiting Insurance Claim Receivable and crediting the Abnormal Loss account for stock destroyed by fire. This reduces the abnormal loss by the amount recoverable from the insurer, and the balance of the loss account is then written off to Profit and Loss.

  1. ADebit Insurance Claim Receivable A/c, Credit Profit and Loss A/c
  2. BDebit Insurance Claim Receivable A/c, Credit Abnormal Loss A/c (Stock Destroyed by Fire)Correct
  3. CDebit Abnormal Loss A/c, Credit Insurance Claim Receivable A/c
  4. DDebit Insurance Claim Receivable A/c, Credit Purchases A/c

Explanation

The loss of stock by fire is first transferred to an abnormal loss account at cost. When the insurer admits the claim, the amount is a receivable, so Insurance Claim Receivable is debited and the abnormal loss account is credited, reducing the net loss. Crediting P&L directly would bypass the loss account and misstate the abnormal loss.

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