HIGHER FINANCIAL ACCOUNTING

Prepared By
Ms.Jissy.C
Assistant professor
1Ms.Jissy.C,Assistant Professor

 Unit IV
Insolvency of Individuals and firms-Fire
Claims : Normal Loss- Abnormal Loss
Ms.Jissy.C,Assistant Professor 2

 Insolvency Accounts
Even the Indian Sale of goods Act in Sec 2(8)says “A
person is said to be Insolvent who has ceased to pay
his debts his debts as they become due whether he has
committed an act of insolvency or not.”
Legally a person can be called insolvent only when an
order of adjudication is passed against him by a
competent court of law

 Relevant Acts: There are two Acts dealing with
insolvency affairs in India which were modeled on the
English Bankruputcy Act. They apply to the insolvency
of Individuals ,Partnership firms and Hindu undivided
families
1.The Presidency Towns Insolvency Act 1909 which
applies to persons residing in presidency towns of
Mumbai , Calcutta and Chennai.
2.The Provincial Insolvency Act 1920 which applies to
people residing in rest of India.

 Form of Statement of Affairs
1.Unsecured Creditors as per list A
2.Fully Secured creditors as per list B
3.Partly Secured creditors as per list C
4.Preferential Creditors as per list D
5.Property as per List E
6.Book debts as per list F
7.Bill of Exchange as per List G
8.Deficiency As per List H

 4.Preferential Creditors as per list D
Creditors Presidency Towns
Insolvency Act 1909
Provincial Insolvency Act
1920.
Amount due to
Govt,State,Central,Local
Fully Preferential Fully Preferential
Wages 4 Months salary or Rs.100
whichever is less for each
person is preferential
Rs20 Flat for each person
is preferential
Salaries 4 Months salary or Rs.300
whichever is less for each
person is preferential
Rs20 Flat for each person
is preferential
Rent payable to landlord One Month rent whatever
is the amount is
Preferential
-

 Calculation of Preferential Creditors
1.who are preferential creditors in the following
liabilities of insolvent Bhupesh according to presidency
towns insolvency act and Provincial insolvency Act
 3 Month s Salary for 10 Clerk Rs3600
 One month wages of 12 laborer’s Rs1600
 Sales Tax Rs400
 3 Month rent of landlord Rs600
 Income tax Rs1000
 Wages of four servants Rs1400
 Salaries Rs1000
 Municipal Tax Rs400
 Wages Rs6000

Amount Particulars Under provincial
Insolvency Act
Under Presidency
Towns Insolvency
Act
3600 Salary of 10 Clerks 200(10 x20) 3000(300
x10)
1600 Wage of 12 labourers 240(12 x 20) 1200(12
x100)
400 Sales Tax 400 400
600 Rent to landlord for 3 months Nil 200(600/3)
1000 Income Tax 1000 1000
1400 Wages of 4 servents 80(4 x 20) 400(4 x
100)
400 Muncipal Tax 400 400

6000 Wages 6000 6000
1000 Salaries 1000 1000
16000 TOTAL 9320 13600

 2.Mr.Deepak Filed petition for insolvency on 31.12.1994.The
details of outstanding expenses are as follows:
 Salaries of 8 Clerk @Rs 150 per month for each clerk for 3
months.
 Wages of a laborer for the month of September 1994 @ Rs
120
 Wages of 8 laborers for the month of September 1994
@Rs110 per laborer
 Rent of landlord for the month of November & December
1994 Rs800
 Amount due to the Municipality for Rs1000 to the income
tax department Rs2000 & to the sales tax department
Rs2000
 Salaries of two clerks for the month of July 1993 Rs500 each
 You are required to find out the amount of preferential and
non preferential creditors according to Presidency Towns
Insolvency Act

 Solution
Particulars Total Amt Due Preferential
Creditors
Non-
Preferential Crs
Amoutn due to the govt or any
local authority:-
i)Income tax dept
ii)Sales tax Dept
iii)Muncipal dues
2000
2000
1000
2000
2000
1000
---
---
---
Salaries or wages due to
Clerck or labourer
i)Salaries of 8 clerk for 3
month @ Rs 150 pm
ii)Wage of 8 Labourers for the
month of Aug
iii)Wages of a 8 labourer for
the month of sept 1994 Rs110
per labour
3600
120
880
2400(8 x 300)
100
800(8 x 100)
1200(3600-
2400)
20(120-
100)
80(880-
800)

 Co
iv) Salaries of two clerks for july
1993
1000 - 1000
Rent due to landlord (for two
month)
800 400(800/2) 400(800-
400)
11400 8700 27000

3. Mr.Umesh of Madurai consults you for preparing a
statement of affairs .How will the following items
appear in the various lists?
 Pvt Liabilities Rs20000
 Unsecured Loans Rs400000
 Loans from Guru Rs120000 secured by plant &
machinery .The estimated value of P&MN is
Rs110000(Book value Rs116000)
 Bills discounted Rs 16000 out of which bills of Rs 10000
are expected to be dishonored
 Loans from pawar secured by first mortgage on life
insurance policy Rs80000.Surrender value of life
insurance policy Rs100000.
 Landlord rent for 4 month @Rs150 per month due.

 Loan from ram Rs70000 secured by second charge of life
insurance policy mentioned above.
 Rates &taxes Rs800.
 Bank OD Rs60000 secured by personal guarantee of a
friend of the insolvent
 Loan from wife Rs30000 out of which she received
Rs16000 from her father
 Wages @ Rs30 per month per servant for 6 months For 3
servants
 Salaries @Rs200 per month clerk for 7 month for 4
Clerks
 Bills payable Rs8000.

 Solution: Unsecured Creditors
Gross Amount Liablities Expected to Rank
400000 Unsecured Loans 400000
20000 Private Liabilities 20000
16000 Bills discounted 10000
600 Rent of landlord (for 4 month
unsecured)
600
60000 Bank OD 60000
30000 Loan from wife 16000
480 Wages(30 X 6X3=540)(540-20 X3)
480
480

 c
5520 Salaries(200 X 7X 4)=5600 (5600-20 X
4)=5520
5520
8000 Bills Payable 8000
540600 520600

 Fully secured crs as per list B
Rs Expected tp
rank
80000 Loan From pawar 80000
Les Estimated value of securities 100000
Surplus carried to List C 20000

 Partly secured creditors as per list C
190000 Loan from Guru 120000
Loan From Ramu 70000
Total 190000
Less Estimated value of P& M 110000
Surplus from List B 20000 130000
60000

 Preferential crs as per list D
Gross Expected tp
rank
800 Rates & taxes 800
60 Wages(20 X3X60) 60
80 Salaries(20 X4) 80

 3.From the following particulars ,prepare the statement
of affairs and deficiency account of mohan who is an
insolvent debtor
Unsecured Creditors Rs30100; Creditors partly secured
Rs 38160 (Holding security of the value of Rs36200
which is estimated to realize only Rs12000),
Preferential creditors Rs1000; Bills Receivable
discounted Rs4120 (upon which it is estimated that
there will be liability of Rs 560);
Stock in trade Rs20020 (Estimated to realize Rs16000);
Book debts: Good Rs15720; Doubtful and Bad Rs1300
(estimated to realize rs356)Land and building Rs
16000(Estimated to realize Rs10000)Plant &Machinery
Rs25000(Estimated to realize Rs11000), Cash in hand
Rs4.

He started business Five year ago with capital of Rs
50000;The trading, after charging interest on capital at
Rs2000 per year resulted in a profit of Rs 1204 for the
first year losses of Rs 740,RS 900 ,Rs1000 and Rs 1400 for
the subsequent years. His drawing were at the rate of Rs
1800 a year and there and there was a speculation loss of
Rs 3180 during the whole period of five years

 Statement of affairs of Mr.Mohan as on 31.12.93
GL Liabilities Expected
to rank
Assets Book
Value
Expected to
product
34220 Unsecured crs list A 30660
- Fully Secure crs List B -
1000 Preferential crs list D
1000
Deducted as per
Contr 1000
Nil
38160 Partly secured crs
list C 38160
(-)Estimated value of
securities 12000
26160
73380 56820
Property as per list E
Cash in hand
4 4
Stock in trade 20020 16000
P &M 25000 11000
L & B 16000 10000
Book Debts as per list F
Good
Doubtful & Bad
15720
1300
15720
356
Bill Of Exchnage list G - -
78040 53080
Preferential crs as per
contra
- 1000
52080
Deficiency as per list H - 4746
56820

 Deficiency list H
Particulars Rs Particulars Rs
Excess of assets over liablities ie,
Capital 50000
Profit (I st yr) 1204
Interest on capital(2000 X 5) 10000
Deficiency (as per statement of
affairs)
4740
Losses from
business(1400+1000+740+900)
4040
Drawing (1800 X 5) 9000
Bad debts 1300-356 944
Other losses:
Stock (20020-16000) 4020
P&M 14000
L& B 6000
Bills dishor &dicount 560
Security (partly s crs)
(36200-12000) 24200
Loss in speculation 3180
51960
65944 65944

 Fire Insurance Claims
Fire , In business premises of any firm , can damage a
number of assets like stock ,Furniture etc . In addition
, the normal working of a firm is affected for a number
of days or month ,resulting in loss of sales and loss of
profit
All prudent business firms insure their stock and also
other assets against the risk of fire.They take
appropriate Insurance Policy from a recognized
company by paying required premium . This enables
the business to lodge claim against insurance company
& Receive sufficient funds to replace the lost assets.

 Format of Memorandum Trading Account
To Opening Stock XXX By Sales XXX
To Purchase XXX By Stock on date of fire(B/F) XXX
To Gross Profit c/d
(sales X GP Ratio)
XXX
XXX XXX

 Fire Insurance Claims:
Important Formula:
A)Gross profit Ratio : Gross Profit/Sales X 100
B)Actual loss of stock =Stock on date of fire- Salvage
Value
c)Claim to lodge=Insured stock
X Actual loss of Stock
Stock on date
of fire

 1.A fire occurred at the premises of a trader on
31.5.94. Destroying as great part of his goods. His stock
at 1.1.94 was Rs60000.The value of stock salvaged was
Rs13500.The gross profit on sales was 30% &Sales
amounted to Rs153000 from January to date of fire,
while for the same period the purchases amounted to
Rs103500.Prepare a statement of claim.

 Memorandum Trading a/c for the period ended 31.5.94
Particulars Amount Particulars Amount
To Opening Stock 60000
To Purchqase 103500
To Gross Profit c/d
(Sales X GP ratio)
153000 X30% 45900
By Sales 153000
By Stock on date of fire
(b/f)
56400
209400 209400

 Statement of Claim
Stock on date of fire 56400
(-)Stock Salvaged 13500
Claim to be lodged 42900
or loss of stock

 2.A fire occurred in the premises of Mr. on 15th August
1995.A large part of the stock was destroyed &Rs7500
was realized for the salvage. For the period from 1st
Jan 1995 to 15th Aug 1995, the following information is
available
 i) Purchases amounted to Rs 42500
 ii)Sales amounted to Rs 45000
 Stock on hand1.1.95 was Rs20000 at cost price
 Goods costing Rs2500 were taken by D for his persona;
use.
 The previous accounts revel that the rate of gross
profit was 33 1/3% on sale. The insurance policy was
For Rs25000 & included an average clause.
 Prepare the statement of claim to be made on the
insurance policy

 Memorandum Trading account for the pending 15.8.1995
To Purchase 42500
- Drawing 2500 40000
To Gross Profit
45000 X 33.333% 15000
By Sales 45000
By Stock on date of
fire(bf)
30000
75000 75000

 Calculation of actual loss of stock
less Salvaged value 7500
Loss of Stock 22500
 Amount of claim = 25000/30000 X 22500=Rs18750

3.A trader asks for your help in preparing an insurance claim
in respect of stock in trade destroyed by fire in his
warehouse on june 1.1996.
 His books of accounts give the following information
concerning trading account transactions for the period, Jan
1 to June 1 1996.
 Balance of stock 1.1.96 at cost Rs26000.
 Debtors on 1.1.96 Rs50000
 Debtors on 1.6.96 Rs80000
 Cash received from debtors Rs60000
 Discount allowed to debtors Rs10000
 Cash purchase Rs10000
 Cash paid to suppliers Rs67000
 Creditors 1.1.96 Rs16000
 Creditors 1.6.96 Rs18500
 The rate of gross profit on cost is 25%.
 Calculate the amount of claim taking into account that
goods salvaged from the fire were worth Rs3000

 Calculation of credit sales: Total Debtors
Calculation of credit sales: Total Creditors
To Balance b/d 50000 By Cash 60000
To Sales – Credit(b/f) 100000 By Discount Allowed 10000
By Balance c/d 80000
150000 150000
ToCash 67000 BY Balance b/d 16000
To Balance c/d 18500 By Purchase – Credit b/f 69500
85500 85500

 Calculation of stock on the date of fire:
Memorandum Trading account for the period ending 1.6.96
Calculation of Amount of Claims:
Stock on Date of Fire 25500
Less Stock salvaged 3000
Claim 22500
PAarticulars Amount Particulars Amount
TO Opening Stock 26000 By Sales 100000
TO Purchase:
Cash 10000
Credit 69500
79500
By Stock On date of fire
b/f
255000
TO Gross Profit
(Sales X GP Ratio)
100000 X25%
20000
125500 125500

4.A fire occurred in the premises of X ltd on 10.10.91. All
stocks were destroyed excepted to the extent of
Rs6200.From the following figures, ascertain the loss of
stock suffered by the company
 Stock on 1.1.90 Rs40000
 Purchasing during 1990 Rs145000
 Sales during 1990 Rs200000
 Stock on 31.12.90 Rs25000
 Purchasing during 1991 up to date of fire Rs152200
 Sales during 1991 up to date of fire 189,000

ICalculation Of GP Ratio
Gross Profit Ratio: Gp/Sales X100 =40000/200000 X100 =20%
II)Calculation of Stock on the date of Fire
Statement of Claim
Stock on date of Fire 26000
Less Stock Saved 6200
Claim 19800
To Opening Stock 40000 By Sales 200000
To Purchase 145000 By Closing Stock 25000
To Gross Profit (b/f) 40000
225000 225000
To Purchase 152200 By Stock on date of fire b/f 26000
To Gross Profit (189000 X20%) 37800
215000 215000

5.A fire occurred in the premises of P on 10th may 1996 .In order to make a
claim on their fire policies in respect of the stock, they ask your advice
and you are able to obtain the following information
The stock salvage was Rs3800. Compute the amount of claim.
Particulars 1993 1994 1995 1996
Opening stock 16000 15000 16000 18000
Purchases 41000 47200 56600 78000
Sales 60000 66000 78000 99000
Closing stock 15000 16000 18000 ?

 Trading account
Particulars 1993 1994 1995 Particulars 1993 1994 1995
To Opening
Stock
16000 15000 16000
To Gross
Profit (b/f)
18000 19800 23400
By Sales 60000 66000 78000
To Purchase 41000 47200 56600 By Closing
stock
15000 16000 18000
75000 82000 96000 75000 82000 96000

 Calculation of Gross Profit Ratio
 Gross Profit Ratio =Gross profit/Sales X100
Gross profit Ratio for 1993=18000/60000 X 100 =30%

 Memorandum Trading Account for the ended 1996
 Calculation of amount of Claim
(-)Salvage Value 3800
Claim 22900
To Opening Stock 18000 BY Sales 99000
To Purchase 78000 By Stock on date
of Fire (b/f) 26700
To Gross Profit
99000 X30%
29700
125700 125700

6.A fire occurred on the premises of Mr.P on 30.6.1996 destroying the
greater part of his stock .No stock records have been maintained .The
following information ascertained from the books which were not
involved in the fire
 Value of stock on 1.1.96 Rs75000
 Purchases from 1.1.96 to 30.6.96 Rs260000
 Value of stock Salvaged Rs10000
 Prepare a statement showing the amounted to be claim from the
insurance company.
Accounting year sales Gross profit
1993 1250000 375000
1994 800000 160000
1995 950000 95000
1996 283000 ?

Calculation of Gross Profit Ratio
For 1993=375000/1250000 X100=30%
For 1994=160000/800000 X100=20%
For 1995=95000/950000 X100=10%
Since the GP has declined year after year,a still lower
ratio,say 5% should be assumed for the year 1996

Memorandum Trading Account for the period ending 30.6.96
Calculation of amount of Claim
Stock on date of Fire 66150
(-) Stock salvaged 10000
Claim 56150
To Purchases 260000 By Stock on date of
Fire(b/f)
66150
To Gross Profit
283000 X5%
14150
349150 349150

7. On 15.6.90 the premises of a concern were destroyed by
fire; but sufficient records were saved from which the
following the following particulars were obtained
 Stock at Cost1.1.89 Rs36750
 Stock at Cost31.12.89 Rs39800
 Purchases for 1989 Rs199000
 Sales for 1989 Rs243500
 Purchases from 1.1.90 to 15.6.90 Rs81000
 Sales from 1.1.90 to 15.6.90 Rs115600
 In valuing stock on 31.12.89 Rs1150 had been written off
certain stock which was a poor selling line, having cost
Rs3450. A portion of these goods was sold in March 1990 at a
loss of Rs100 on their original cost of Rs1725.The reminder of
this stock was now estimated to be worth 80% of the original
cost. Subject to the above explanation, gross profit had
remained at a uniform rate throughout.
 The stock salvaged was Rs2900.Show the amount of the claim.

Calculation of gross profit ratio
Trading a/c for the year ended 31.12.89
Gross Profit= Gross profit/Sales X 100
48700/243500 X 100 =20%
To Purchase 199000 By Closing Stock as valued
39800
(+)Stock written off 1150 40950
To Gross profit (b/f) 48700
284450 284450

Calculation of stock on date of Fire
Statement of claim
Stock on date of fire :28700
Claim 25800
Particulars Normal
(1)
Abnormal
(2)
Total
(3)
Particulars Normal
(1)
Abnormal
(2)
Total
3)
(3-2)
3450 40950 By Sales 113975
(3-2)
1625(1725-
100)
115600
TO purchase 81000 - 81000 By Gross loss - 445 445
To Gross Profit
113975 X20%
22795 - 22795 By Stock on
date of
fire(b/f)
1725X80%
27320 1380 28700
141295 3450 144745 141295 3450 144745

8.The premises of a company have been Destroyed on 15 th june 1984.The
records ,however were saved wherefrom the following particulars are
available.
 Stock at cost on 1/1/83 30000
 Stock at cost on 31/12/83 40000
 Purchase less returns for the year ended 31/12/83 200000
 Sale less returns for the year ended 31/12/83 250000
 Purchases less returns from 1/1/84 to 15/6/84 85000
 Sales less returns from1/1/84to 15/6/84 120000
Rs 2500 have written off certain stock ,which was a poor selling line, while
valuing the stock for the balance sheet as at 31/12/83.The cost of such
stock was Rs4000.A portion of this stock was sold in march 1984 at a loss of
Rs500 ,on the original cot of Rs 2000. The balance of this stock was now
estimated to be worth the original cost .Excepting the above ,the gross
profit had remained at an uniform rate throughout .The stock saved was
Rs5000 .You are required to ascertain the claim for loss of stock.

Calculation of gross profit ratio
Trading a/c for the year ended 31.12.83
Gross Profit= Gross profit/Sales X 100
62500/250000X 100= 25%
To Purchase 200000 By Closing stock 40000
+ Stock writtenoff 2500 42500
To Gross profit
(b/f)
62500

Calculation of stock on date of Fire
Statement of claim
Stock on date of fire : 36625
Claim 31625
Particulars Normal
(1)
Abnor
mal (2)
Total
(3)
Particulars Normal
(1)
Abnorm
al
(2)
Total
3)
(3-2)
4000 42500 By Sales 118500
(3-2)
1500(20
00-500)
120000
TO purchase 85000 - 85000 By Gross loss - 500 500
To Gross Profit
118500 X25%
29625 - 29625 By Stock on date of
fire(b/f)
34625 2000 36625
153125 4000 157125 153125 4000 157125

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