7. Ascertainment of stock on the date of fire
Ascertainment of net loss of stock
Value of stock on the date of fire 66,000
Less; salvaged value 2,000
Claim to be lodged 64,000
Particulars Based
on last
year rate
actuals particulars Based on
last year
rate
actuals
To, 0,stock
‘purchases
‘gross profit
30,000
80,000
50,000
30,000
88,000
53,000
By sales
‘closing stock
1,00,000
66,000
1,05,000
60,000
1,60,000 1,71,000 1,60,000
8. Poor selling goods
Sometimes stock of a business may include
some goods which are shope-soiled*,
outdated, etc. which are called as poor selling
goods.
These goods are generally valued at below cost and
in effect, gross profit is reduced. On determining the
normal rate of gross profit, the stock and sales
proceeds of these goods are to be eliminated from the
stock and total sales.
Trading Account in such cases, is prepared in
columnar form to show separately the normal and
abnormal items.
*Slightly dirty, damaged
9.
10. Wn.1 Memorandum Trading a/c as on 31.12.2015
Particulars Amount particulars Amount
To, Opening Stock
Net purchase
Gross Profit c/d
(balancing figure)
27,570
2,71,350
1,05,300
Sales
Closing stock
Normal item
(51,120- 1,500 )
Abnormal item
3,51,000
49,620
3,600
4,04,220 4,04,220
Gross profit rate= GP/Net
salesx100
=
1,05,300/3,51,000X10
0
=30%
11. Memorandum Trading a/c 1.1.16 to 31.3.16
Particulars normal abnorm
al
particulars normal abnorm
al
To, Opening
Stock
Net purchase
Gross Profit
c/d ( % of sales)
49,620
90,000
26,640
3,600
xxx
Sales
loss
Closing
stock
(balancing
fig)
88,800
77,460
2,700
9,00
1,66,260 3,600 1,66,260 3,600
Wn 2,purchases 75,000+
goods
received
but not
recorded
75,000+
15,000
= 90,000 Gp=88,800
x30/100
26640
12. Wn 3.
Actual sales 91,500- abnormal sales (2,700)= normal
sales =88,800
Statement of claim to be lodged
Book value of stock on the date of fire
=77,460
Less: salvaged stock 6,300
Loss of stock 71,160
13. Loss of profit insurance policy / consequential
loss policy
“A loss of profit policy is a policy attached to the
fire insurance policy, where the insured will be
compensated also for loss in profit due to
interruption in business activities due to fire in
addition to loss of stock. ’’
This policy is taken to cover the loss of
profit occurred due to the interruption of fire in a
business.
Ex: dislocation, inconvenience
14. A fire insurance policy differs from a loss of profit policy on
the following grounds:
(1) While a fire insurance policy covers loss of or
damage to insured property such as Building,
stock etc., a loss of profit policy covers loss of
gross profit sustained inconsequent of a business
interruption.
(ii) The subject matter of fire insurance is tangible
and covers material property. In the case of loss of
profits insurance, it is intangible and covers the
earning capacity of the business.
15. Loss of profits insurance covers the following
risks consequent upon fire.
1.Loss of net profits due to stoppage of business.
2.Payment of standing charges such as salaries,
rent, rates and taxes, director's fees, lighting and
heating. repairs and maintenance, depreciation,
postage and stationery. etc. which the insured is
obliged to incur in spite of stoppage of business.
The insured has to specify the standing charges
which he would like to insure.
3. Increased working expenses incurred by the
insured during the indemnity period in order to
maintain normal business activity.
16. Explanation of certain terms
Gross profit:
It is the sum obtained on adding the amount of
the insured standing charges to the net profit.
Gross profit = Net profit + Insured standing
charges
If there is net loss, gross profit is the amount
of insured standing charges less such a
proportion of any net trading loss as the
amount of the insured standard charges bear to
all the standing charges (insured + uninsured)
of the business.
17. Explanation of certain terms
Net Profit:
It is the net trading profit resulting
from the business of the insured at the
premises after due provision has been
made for all standing and other charges
including depreciation but before the
deduction of any taxation chargeable on
profits
18. Explanation of certain terms
Insured Standing Charges:
The insured standing charges are those charges specified in
the policy which the insured desires to recover in the case of
an accident. It may include the following:
i. Rent, rates and taxes (not related with the profit of the
business):
ii. Interest on debentures and loans;
iii. Salaries of permanent staff:
iv. Wages of skilled workers;
v. Directors' fees
vi. Auditor's fees;
vii. Advertising:
viii. Travelling and
ix. Unspecified standing charges (not exceeding 5% of the
amount of specified standing charges)
19. Explanation of certain terms
Turnover: The money paid or payable to the
insured for goods sold and delivered and for
services rendered. In other words it is the
total sales effected in a trading concern
during the period.
Annual Turnover: It is the turnover during
the twelve months immediately preceding
the date of the damage or fire.
Indemnity Period: It is the period beginning
with the occurrence of the damage and
ending not later than 12 months thereafter
during which the results of the business
shall be affected as a consequence of
damage by fire.
20. Date of fire 1st sept 2020
Turn over .. 1.4.2019 to 31.3.2020
Annual turnover 1.9.2019 to 31.8.2020
Indemnity period 1.9.2020 to 30.11.2020 , 3 months
Stand turn over= turn over /sales during 1.9.2019 to
30.11.2019 , (1,00,000)
Actual turn over = turn over during current indemnity
period (1.9.2020 to 30.11 .2020)(20,000)
Short sales= standard turnover – actual turn over
=1,00,000-20,000=80,000
21. Explanation of certain terms
Standard Turnover:
It is the turnover during that period in the
twelve months immediately before the date
of damage which corresponds with the
indemnity period.
It means that if the indemnity period is 4
months (Ist August to 30th November of
2020). the standard turn over will also be
for 4 months (I st August to 30th
November 2019).
Rate of Gross Profit: It is the rate of gross
profit earned on the turnover during the
financial year immediately before the date
of the damage
22. Procedure or Steps in calculating the
amount of loss in profit
1. Calculation of rate of gross profit:
Rate of Gross Profit =
Net Profit + Insured standing charges x100
Sales of the FY preceding the year of fire
2. Calculation of short sales: Short sales is the
shortage in sales during the indemnity period
because of dislocation in business due to fire. It is the
difference between standard sales and actual sales of
dislocated (indemnity) period. Standard sales is one
after adjustment for necessary trend or business and
for variation in the business either before or after
the damage or which would have affected the
business had the damage not occurred.
23. Procedure or Steps in calculating the
amount of loss in profit
3.Calculation of gross profit on short sales =
Short sales X Gross profit rate
4. Calculation of the amount of admissible
additional expenses as follows:
The least of the following shall be taken as
admissible additional expenses.
(i) Actual expenses incurred
(ii) Gross profit on additional sales
(iii)additional exp X
GP on annual turnover
GP on annual turnover + uninsured standing
charges
24. Procedure or Steps in calculating the
amount of loss in profit
Additional expenses X NP+Insured standing
charges
Net profit+ All standing charges
5. Calculation of amount of gross claim:
Amount of claim = Gross profit on short sales
+ Admissible additional expenses - any
savings in insured standing charges during the
period of indemnity.
6. Application of average clause:
Net claim = Gross claim X Policy value
GP on annual Turnover
25.
26.
27. 1) rate of gross profit= net profit + standing
charges/sales
= 3,50,000+3,63,000x 100=15%
47,50,000
2) Short sales= standard –actual sales
=15,00,000-2,00,000=13,00,000
3) Loss of profit=GP on short sales
=13,00,000x15%=1,95,000
4) Admissible additional expenses =16,000
5) Gross claim= loss of profit + admissible expenses-
savings in insured standing charges
=1,95,000+16,000-8,000=2,03,000
6) Net claim = gross claim x policy value
GP on Annual TO
=2,03,000X 6,00,000/15% of 50,00,000
= 1,62,400
28.
29. Solution to practical problem 13
1) rate of gross profit
= net profit +insured standing charges
net sales
= 16,00,000+4,00,000 x100= 25%
80,00,000
2) Calculation of short sales = standard- actual sales
36,00,000-6,00,000=30,00,000
3) Loss of profit/ GP on short sales = short sales x GP
Rate =30,00,000x 25% =7,50,000
30. Solution to practical problem 13
4) admissible additional expenses = 14,000
5) calculation of gross claim=
loss of profit/GP on Short sales + admissible
expenses – salvaged value in insured standing charges
= 750,000+14,000 – 4,000 =7,60,000
6) Net claim= gross claim x policy value
GP on annual turn over
= 7,60,000 x 16,00,000/(25% 0f 88,00,000)
=5,52,727
31.
32. Solution to illustration 12
WN:1 CALCULATION OF AMOUNT RECEIVED FROM DEBTORS
BANK ACCOUNT
Particulars Amount Particulars Amount
To, balance b/d
; debtors
(balancing fig.)
60,000
2,58,000
By, creditors
‘Wages
(12,000X2)
‘Sundry expenses
(6000X2)
‘Balance c/d
2,40,000
24,000
12,000
42,000
3,18,000 3,18,000
33. Solution to illustration 12
TOTAL DEBTORS ACCOUNT
Particulars Amount Particulars Amount
To, balance b/d
Sales (bal. fig.)
2,00,000
3,08,000
By, Bank
‘’’ balance c/d
2,58,000
2,50,000
5,08,000 5,08,000
Particulars Amount Particulars Amount
To, bank
To, balance c/d
(1,80,000)
2,40,000
1,80,000
By, balance B/d
‘” Purchases
(balancing fig,)
1,80,000
2,40,000
4,20,000 4,20,000
TOTAL CREDITORS ACCOUNT
34. Solution to illustration 12
Ascertainment of stock on the date of fire
memorandum trading account
for the period from 1.4.2017 to 15.5.2017
Particulars Amount Particular
s
Amount
To, opening stock
“ purchases 2,40,000
+ invoice not received 20,000
’’ Wages (12,000x2)
“gross profit
(25% of sales)
(3,08,000x25%)
50,000
2,60,000
24,000
77,000
By, Sales
‘closing
stock
(Balancing
fig.)
3,08,000
1,03,000
4,11,000 4,11,000
Statement of claim for loss of stock as on 15th MAY 2017
Book value of stock on the date of fire (closing stock) - 1,03,000
Less : salvaged stock - xxxxx
Loss of stock - 1,03,000
36. Solution to practical problem 8
WN:1 CALCULATION OF AMOUNT OF CREDIT PURCHASES
TOTAL CREDITORS ACCOUNT
Particulars Amount Particulars Amount
To, Cash (98,016-562)
To, Bills receivable
To, goods returned
To, balancing c/d
97,454
562
6,390
22,112
By, Balance b/d
“ credit purchases
(Balancing figure)
24,608
1,01,910
1,26,518 1,26,518
37. Solution to practical problem 8
Ascertainment of stock on the date of fire
memorandum trading account
Particulars Amount Particulars Amount
To, opening stock
“ purchases 1,01,910
- Drawings 2,000
- Free samples 8,000
- goods returned 6,390
“ Gross profit
(15% of sales ie,1,09,200)
58,820
8,55,20
16,380
By, Sales
“Closing stock
(Balancing fig.)
1,09,200
51,520
1,60,720 1,60,720
Statement of claim for loss of stock as on 31st December 2017
Book value of stock on the date of fire (closing stock) - 51,520
Less : salvaged stock - 1,520
Loss of stock 50,000