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CMA Foundation · Fundamentals of Financial and Cost Accounting · Capital and Revenue Transactions

A firm receives Rs 25,000 from an insurance company as compensation for stock of goods destroyed by fire. How is this receipt classified?

The Rs 25,000 is a revenue receipt because it compensates for loss of stock-in-trade, which is a revenue item. The nature follows the item compensated, not the fact that the event is unusual. Compensation for a fixed asset would instead be a capital receipt.

  1. ACapital receipt, because it is non-recurring
  2. BRevenue receipt, because it replaces stock-in-trade, a revenue itemCorrect
  3. CCapital receipt, because insurance is a financing source
  4. DNot a receipt of the business, as it is a loss recovery

Explanation

Compensation for destroyed stock replaces a trading item, so it is credited against the loss of stock and treated as revenue in nature. Being non-recurring does not make it capital. Compensation for a destroyed fixed asset would be capital.

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