HOME WORK

Q-11 On 1st April, 2008 the stock of Shri Ramesh was destroyed by fire but sufficient records were saved
from which following particulars were ascertained:

Stock at cost-1st January, 2007 73,500

Stock at cost-31st December, 2007 79,600
Purchases-year ended 31st December, 2007 3,98,000
Sales-year ended 31st December, 2007 4,87,000
Purchases-1-1-2008 to 31-3-2008 1,62,000
Sales-1-1-2008 to 31-3-2008 2,31,200
In valuing the stock for the Balance Sheet at 31st December, 2007 2,300 had been written off on
certain stock which was a poor selling line having the cost 6,900. A portion of these goods were sold
in March, 2008 at loss of 250 on original cost of 3450. The remainder of this stock was now estimated
to be worth its original cost. Subject to the above exception, gross profit had remained at a uniform
rate throughout the year.
The value of stock salvaged was 5,800. The policy was for 50,000 and was subject to the average
clause. Work out the amount of the claim of loss by fire.
Solution
Shri Ramesh
Trading Account for 2007
(to determine the rate of gross profit)
Dr. Cr.

To Opening Stock 73,500 By Sales A/c 4,87,000

To Purchases 3,98,000 By Closing Stock :
To Gross Profit 97,400 As valued 79,600
Add : Amount written off) to
_______ restore stock to full cost 2,300 81,900
5,68,900 5,68,900

97, 400
The (normal) rate of gross profit to sales is = x 100 = 20%
4, 87, 000

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 Memorandum Trading Account upto March 31, 2008
Dr. Cr.
Normal Abnormal Total Normal Abnormal Total
items items items items

To Opening
Stock 75,000 6,900 * 81,900 By Sales 2,28,000 3,200 2,31,200
To Purchases 1,62,000 — 1,62,000 By Loss — 250 250
To Gross Profit By Closing
(20% on Stock
2,28,000) 45,600 — 45,600 (bal.fig.) 54,600 3,450 58,050
2,82,600 6,900 2,89,500 2,82,600 6,900 2,89,500
* at cost, book value is 4,600
Calculation of Insurance Claim

Value of Stock on March 31, 2008 58,050

Less : Salvage 5,800
Loss of stock 52,250
Claim subject to average clause :

Amount of Policy 50, 000

= x Actual Loss of Stock = x 52, 250 = 45, 004
Value of Stock 58, 050
Q-12 A fire occurred in the business premises of M/S Poonawalla on 15th October 2005. From the following
particulars ascertain the loss of stock and claim for insurance.

Stock as on 1-1-2004 30,600

Purchases from 1-1-2004 to 31-12-2004 1,22,000
Sales from 1-1-2004 to 3 1-12-2004 1,80,000
Stock as on 3 1-12-2004 27,000
Purchases from 1-1-2005 to 14-10-2005 1,47,000
Sales from 1-1-2005 to 14 -10-2005 1,50,000
The stock were always valued at 90 percent of cost. The stock saved from fire was worth 18,000. The
amount of policy was 63,000. There was average clause in policy.
Solution
Trading Account for the year ended 31st Dec., 2004
Particulars Particulars
To Opening Stock (30,600 x 100/90) 34,000 By Sales 1,80,000
To Purchases 1,22,000 By Closing Stock
To Gross Profit 54,000 (27,000 x 100/90) 30,000
2,10,000 2,10,000

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 54, 000 x 100
Rate of Gross Profit = = 30%
1, 80, 000
Trading Account for the period from 1st Jan, 2005 to 14th Oct., 2005
Particulars Particulars
To Opening Stock 30,000 By Sales 1,50,000
To Purchases 1,47,000 By Closing Stock
To Gross Profit (@ 30%) 45,000 (Balancing figure) 72,000
2,22,000 2,22,000
Loss of stock: Stock on the date of fire 72,000
Less: Salvaged 18,000
Actual loss 54,000
As value of total stock is more than amount of policy. Average clause will be applicable.
63, 000 x 54, 000
Insurance claim = = 47, 250.
72, 000
Q-13 The Premises of M/s New and Company were gutted by fire on 31st Aug. 2004 and some stock was found
badly damaged. The accounts of the firm are closed on 31st Dec. each year. On 31st Dec. 2003 stock was
valued at cost at 26,544 against 19,228 as on 31st Dec. 2002. Purchases and sales were as follows:
Full year 2003 Period upto 31.8.2004
Purchases 90,516 69,654
Sales 1,04,000 98,340
In addition to above you collect the following information:
(1) Some time in May 2004 goods costing 10,000 were distributed as a part of advertisement campaign
in support thereof no entry appears to have been passed in the books.
(2) During 2004 cash sales of 1,190 were misappropriated and these were not recorded in the
books. Ascertain the estimated value of stock at the date of fire assuming that the rate of gross
profit was constant.
Solution
Trading account for the ear ended 31st Dec., 2003
Particulars Particulars
To Opening Stock 19,228 By Sales 1,04,000
To Purchases 90,516 By Closing Stock 26,544
To Gross Profit 20,800 _______
1,30,544 1,30,544
20,800
Rate of Gross Profit = 1,04,000 x 100 = 20%
Trading Account from Jan 2004 to 31st Aug., 2004
Particulars Particulars
To Opening Stock 26,544 By Sales 98,340
To Purchases 69,654 By Cash Sale (Misappropriated) 1,190
Less: distributed By Closing stock
for advertisement 10,000 59,654 (Balancing figure) 6,574
To Gross Profit @ 20% 19,906 _______
1,06,104 1,06,104
Since amount of policy is not given the amount of claim is 6,574.
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Q-14 From the following particulars you are required to prepare a statement of claim for X, Y, whose business
premises were partly destroyed by fire on 30th September, 2006. He prepares account on 30th June
each year.

Stock on 30th June, 2006 34,017

Purchases from 1st July, 2006 to 30th September, 2006 80,000
Wages from 1st July, 2006 to 30th September, 2006 30,500
Sales from 1St July, 2006 to 30th September, 2006 1,50,000
Average percentage of gross profit to cost is 16 2/3 %. Stock to the value of 10,000 was salvaged policy
was for 8,000. Claim was subject to average clause.
Following additional information is available :—
(i) Purchases include purchase of plant of 8,000.
(ii) Plant was installed in August and firm’s own men had spent time amounting to 500 which was
included in wages.
(iii) Stock in the beginning was calculated at 15% less than cost. you are required to calculate the claim
for the loss of stock.
Solution
Trading Account for the period ending 30th September, 2006
Particulars Particulars
To Stock 100 x 34,017 40,020 By Sales 1,50,000
85 By Stock on the date of fire 13,449
To Purchases 80,000 (Balancing figure)
Less: Cost of Plant 8,000 72,000
To Wages 30,500
Less: Wages paid for the
installation Plant 500 30,000
To Gross Profit as
16-2/3 % on Cost = 1/7 of sales 21,429 _______
1,63,449 1,63,449
Estimated Stock ‘on the Date of fire 13,449
Less: Stock salvaged 10,000
Loss of Stock 3,449

Policy
Claim on average basis= x Actual loss of stock
Total Stock

8, 000
= x3, 449 = 2, 052.
13, 449

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Q-15 On 1st July 2006 a fire took place in the godown of Ram Kumar which destroyed all Stocks. Calculate the
amount of insurance claim for the stock from the following details:

Sales in 2004 2,00,000

Gross profit in 2004 60,000
Sales in 2005 3,00,000
Gross profit 2005 60,000
Stock as on 1-1-2006 2,70,000
Purchases from 1-1-2006 to 30-6- 2006 4,00,000
Sales from 1-1-2006 to 30-6-2006 7,20,000
The following are also to be taken in to consideration:
(1) Stock as on 31st Dec. 2005 had been undervalued by 10%.
(2) Stock taking conducted in March 2006 had revealed that stocks costing 80,000 were lying in
damaged condition. 50% of these stocks had been sold in May 2006 at 50% of cost and the balance
were expected to be sold at 40% of cost.
(3) Amount of policy 1,50,000.
Solution

60, 000
Gross Profit ratio of 2004: x 100 = 30%
2, 00, 000
Gross Profit ratio of 2005 : Closing Stock as on 31st Dec. 2005 is undervalued by 10%. Therefore cost of
2, 70, 000 x 100
stock on 31st Dec. 2005 will be = 3,00,000
90
This will increase gross profit of 2005 by 30,000. Therefore gross profit rate will be:

60, 000 + 30, 000

x 100 30%
3, 00, 000
Average gross profit ratio of previous two years 30%.
Trading Account for period from 1.1.2006 to 30.6.2006
Normal Abnormal Total Normal Abnormal Total

To Opening Stock 3,00,000 3,00,000 By Sales 7,00,000 20,000 7,20,000

To Purchases 3,20,000 80,000 4,00,000 By Closing Stock 1,30,000 16,000 1,46,000
To Gross profit 2,10,000 — 2,10,000 By Loss — 44,000 44,000
8,30,000 80,000 9,10,000 8,30,000 80,000 9,10,000
Since amount of policy is more than total value of stock, average clause will not apply. Hence amount
of claim is 1,46,000.

Q-16 Ashish and Co. Ltd. suffered loss of stock due to fire on May 15 2003. From the following information
prepare a statement showing the claim to be lodged:

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 Stock on 1st January, 2002 45,400
Purchases during 2002 3,16,800
Sales during 2002 4,03,900
Closing stock on 31St December 2002 36,800
Purchases from 1st January 2003 to May 15,2003 81,000
Sales from 1st January 2003 May 15, 2003 92,100
An item of stock purchased in 2001 at a cost of 15,000 was valued at 9,000 on 31st December, 2001.
Half of this stock was sold in 2002 for 3,900, the remaining was valued at
3,600 on 31st December, 2002. One fourth of the ori iginal stock was sold in March 2003 for 2,100.
The remaining stock was considered to be worth 50% of the original cost. Salvaged stock was 15,000.
The amount of the policy was 40,000. There was an average clause in the policy.
Solution
Trading Account for the ‘ear ended 31st Dec., 2002
Normal Abnormal Total Normal Abnormal Total
Amount Amount Amount Amount Amount Amount
To Stock (at Cost) 36,400 15,000 51,400 By Sales 400,000 3,900 4,03,900
To Purchases 3,16,800 — 3,16,800 By Stock (at Cost) 33,200 7,500 40,700
To Gross Profit 80,000 80,000 By Loss — 3,600 3,600
4,33,200 15,000 4,48,200 4,33,200 15,000 4,48,200

80, 000
G.P. Rate = x 100 = 20%
4, 00, 000
Trading Account for the period ended 15th May, 2003
Normal Abnormal Total Normal Abnormal Total
Amount Amount Amount Amount Amount Amount
To Stock (at cost) 33,200 7,500 40,700 By Sales 90,000 2,100 92,100
To Purchases 81,000 — 81,000 By Stock
To Gross Profit @ (on 15-5-1993) 42,200 1,875 44,075
20% 18,000 — 18,000 By Loss 3,525 3,525
1,32,200 7,500 1,39,700 1,32,200 7,500 139,700
Value of Stock on 15-5-2003 44,075
Less: Stock Salvaged 15,000
29,075
Value of Stock lost
Applying Average Clause;

29, 075 x 40, 000

Amount of Claim = = 26.387
44, 075

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Q-17 The premises of a company were destroyed by fire on 15th June 2004. The records, however were saved
where from the following particulars were available.

Stock at Cost on 1.1.2003 30,000

Stock at cost on December 31, 2003 40,000
Purchases less return for the year ended December 31, 2003 2,00,000
Sales less return for the year ended December 31, 2003 2,50,000
Purchases less return from 1.1.2004 to 15.6.2004 85,000
Sales less return from 1.1.2004 to 15.6.2004 1,20,000
2,500 had been written off a certain stock which was poor selling line. While valuing the stock for the
balance sheet as at Dec. 31, 2003, the cost of such stock was 4,000. A portion of this stock was sold in
March 2004 at a loss of 500 on the original cost of 2,000. The balance of this stock is now estimated
to be worth the original cost. Excepting the above the gross profit had remained at a uniform rate
throughout.
Stock saved was 5,000. You are required to ascertain the amount of loss of stock which was to be
claimed from the insurance company. Amount of policy was 30,000.
Solution
Trading Account for the year ended 31st Dec., 2003
Particulars Particulars
To Opening Stock 30,000 By Sales 2,50,000
To Purchases 2,00,000 By Closing Stock 40,000
To Gross Profit 62,500 Add: Amount Written off 2,500 42,500
2,92,500 2,92,500

62,500
Rate of Gross Profit = 2,50,000 x 100 = 25%

Trading Account from 1st Jan to 15th June 2004

Normal Abnormal Total Normal Abnormal Total

To Opening Stock 38,500 4,000 42,500 By Sales 1,18,500 1,500 1,20,000

To Purchases 85,000 — 85,000 By Closing Stock 34,625 2,000 36,625
To Gross Profit 29,625 29,625 By Loss — 500 500
1,53,125 4,000 1,57,125 1,53,125 4,000 1,57,125
Total Stock on the date of fire 36,625
Less: Stock salvaged 5,000
Stock lost 31,625
Amount of policy is only 30,000 which is less than the total value of stock of 36,625. Hence average
clause will be applicable.
30,000
Amount of claim 36,625 x 31, 625 = 25,904.

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Q-18 Fire occurred in the premises of A & Co. on 1st September 2005 and stock of the value of 1,01,000 was
salvaged and the business books and records were saved. The following information was obtained.

Purchases for the year ended 31st March, 2005 6,80,000

Sales for the year ended 31st March, 2005 11,00,000
Purchases from April, 2005 to 1st Sept. 2005 2,50,000
Sales from 1st April 2005 to 1st Sept 2005 3,60,000
Stock on 31st March 2004 3,00,000
Stock on 31st March 2005 3,40,000
Further information is that the stock on 31st March 2005 was over - valued by 20,000. Calculate the
claim to be presented to the Insurance Company in respect of the loss. In April 2005 selling price was
lowered by 10%.
Solution
Trading Account for the year ended 31st March 2005
Particulars Particulars
To Opening Stock 3,00,000 By Sales 11,00,000
To Purchases 6,80,000 By Closing Stock
To Gross Profit 4,40,000 (Excluding over valuation) 3,20,000
14,20,000 14,20,000
4,40,000
Gross profit ratio for 2004-05 = 11,00,000 x 100 = 40%

Expected G.P. ratio in 2005-06 when during selling price is reduced by 10%.
Selling price Cost G.P.
2004-05 100 60 40
2005-06 90 60 30
30 x 100 1
Hence, G.P. Rate in 2005-06 = × 33 %
90 3
Trading Account for the period from 1st April to 1st September 2005
Particulars Particulars
To Opening Stock 3,20,000 By Sales 3,60,000
To Purchases 2,50,000 By Stock (Balancing figure) 3,30,000
1
To Gross Profit 33 % on saless 1,20,000 _______
3
6,90,000 6,90,000
Q-19 A fire occurred in the shop of M/s. Jambheshawar & Co. on August 20, 2004 From the following particulars,
calculate claim to be made by the trader:

(a) Stock on December 31, 2002

(Including stock purchased during the year at 4,000 valued at
2,000 because of poor selling price) 50,000
(b) Wages paid 2003 15,000

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 (Including, wages paid for the construction of a show room for which workers
of the factory worked 1,000. Manufacturing wages 750 were outstanding)
(c) Freight inwards 2003 2,050
(d) Purchases 2003 60,000
(Including purchases of furniture of 750 wrongly passed through the invoice book)
(e) Sales 2003 1,23,400
(Including sale of 1/4 of the stock at 400 which had a poor selling
line and which was valued at 2,000 on Dec. 31,2002)
(f) Stock on December 31, 2003 21,000
(Including remaining stock which had a poor selling line at the half value)
(g) Purchases upto August 20, 2004 71,400
(h) Sales up to August 20, 2004 71,450
(Including sale of the 1/3 remaining stock which had a poor selling line at 450)
The remaining stock which had a poor selling line, was considered at 60% of the original cost for the
purpose of claim. The salvage was 23,700. The firm had taken the policy of 20,000. There was an
average clause in the policy.
Solution
Trading Account for the year ended 31st Dec. 2003
Particulars Normal Abnormal Total Particulars Normal Abnormal Total

To Stock (at cost) 48,000 4,000 52,000 By Sales 1,23,000 400 1,23,400
To Purchases 59,250 — 59,250 By Stock 19,500 3,000 22,500
(60,000 750) (At cost)
To Wages By Loss — 600 600
(15,000 - 1,000+ 750)
To Freight 14,750 — 14,750
To Gross Profit 2,050 — 2,050
18,450 — 18,450 _______ _____ ______
1,42,500 4,000 1,46,500 1,42,500 4,000 1,46,500
18,450
Rate of Gross Profit = 1,23,000 x 100 = 15%

Trading Account for the period ended 20th August, 2004

Particulars Normal Abnormal Total Particulars Normal Abnormal Total

To Stock (at cost) 19,500 3,000 22,500 By Sales 71,000 450 71,450
To Purchases 71,400 — 71,400 By Loss - 550 550
To Gross Profit (Balancing figure) 30,550 2,000 32,550
(71,000 x 15)/100 10,650 ____ 10,650 clg. stock _______ _____ _______
1,01,550 3,000 1,04,550 1,01,550 3,000 1,04,550

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 Value of stock on 20th August, 2004 (30,550 + 60% of 2,000)
31,750
Less: Stock salvaged 23,700
Value of stock lost 8,050

8, 050 x 20, 00
Applying Average Clause : Amount of Claim = = 5,071
31, 750
Q-20 A fire occurred on 1st February, 2008, in the premises of Pioneer Ltd., a retail store and business was
partially disorganised upto 30th June, 2008. The company was insured under a loss of profits for
1,25,000 with a six months period indemnity. From the following information, compute the amount of
claim under the loss of profit policy.

Actual turnover from 1st February to 30th June, 2008 80,000

Turnover from 1st February to 30th June, 2007 2,00,000
Turnover from 1st February, 2007 to 31st January, 2008 4,50,000
Net Profit for last financial year 70,000
Insured standing charges for last financial year 56,000
Total standing charges for last financial year 64,000
Turnover for the last financial year 4,20,000
The company incurred additional expenses amounting to 6,700 which reduced the loss in turnover.
There was also a saving during the indemnity period of 2,450 in the insured standing charges as a
result of the fire.
There had been a considerable increase in trade since the date of the last annual accounts and it has
been agreed that an adjustment of 15% be made in respect of the upward trend in turnover.
Solution
Computation of the amount of claim for the loss of profit
Reduction in turnover
Turnover from 1st Feb. 2007 to 30th June, 2007 2,00,000
Add: 15% expected increase 30,000
2,30,000
Less: Actual Turnover from 1st Feb., 2008 to 30th June, 2008 80,000
Short Sales 1,50,000
Gross Profit on reduction in turnover @ 30% on 1,50,000 (see working note 1) 45,000
Add: Additional Expenses

Lower of (i) Actual 6,700

G.P. on Auunal Turnover

(ii) Additional Exp.x
G.P. on Annual Turnover + Uninsured Standing Charges

1, 55, 250
6,700 x = 6,372
1, 63, 250

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 (iii) G.P. on sales generated by additional expenses — 80,000 x 3% 24,000
Total loss
Loss of Profit = 45,000
+ Adn. exp = 6372
Allowable 51372
- Saving in insured 2450
Standing exp. 48922
Application of Average Clause:
Amount of Policy
x Amount of Claim
G.P. on Annual Turnover

1, 25, 000
48, 922
1, 55, 250
Amount of claim under the policy = 39,390
Working Notes :
(i) Rate of Gross Profit for last Financial Year:
Gross Profit:
Net Profit 70,000
Add: Insured Standing Charges 56,000
1,26,000
Turnover for the last financial year 4,20,000

1, 26, 000
Rate of Gross Profit = x 100 = 30%
4, 20, 000
(ii) Annual Turnover:
Turnover from 1st Feb., 2007 to 31st January, 2008 4,50,000
Add: 15% expected increase 67,500
5,17,500
Gross Profit on 5,17,500 @ 30% 1,55,250
Standing charges not Insured 8,000
Gross Profit plus non-insured standing charges 1,63,250

Q-21 S & M Ltd. give the following Trading and Profit and Loss Account for year ended 31st December, 2007:
Trading and Profit and Loss Account for the year ended 31st December, 2007

To Opening Stock 50,000 By Sales 8,00,000

To Purchases 3,00,000 By Closing Stock 70,000
To Wages ( 20,000 for
skilled labour) 1,60,000
To Manufacturing Expenses 1,20,000
To Gross Profit 2,40,000 _______
8,70,000 8,70,000

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 To Office Administrative By Gross Profit 2,40,000
Expenses 60,000
To Advertising 20,000
To Selling Expenses (Fixed) 40,000
To Commission on Sales 48,000
To Carriage Outward 16,000
To Net Profit 56,000 _______
2,40,000 2,40,000
The company had taken out policies both against loss of stock and against loss of profit, the amounts
being 80,000 and 1,72,000. A fire occurred on 1st May, 2008 and as a result of which sales were
seriously affected for a period of 4 months. You are given the following further information:
(a) Purchases, wages and other manufacturing expenses for the first 4 months of 2008 were 1,00,000,
50,000 and 36,000 respectively.
(b) Sales for the same period were 2,40,000.
(c) Other sales figures were as follows :

From 1st January 2007 to 30th April, 2007 3,00,000

From 1st May 2007 to 31st August, 2007 3,60,000
From 1st May, 2008 to 31st August, 2008 60,000
(d) Due to rise in wages, gross profit during 2008 was expected to decline by 2% on sales.
(e) Additional expenses incurred during the period after fire amounted to 1,40,000. The amount of
the policy included 1,20,000 for expenses leaving 20,000 uncovered.
Ascertain the claim for stock and for loss of profit.
All workings should form part of your answers.
Solution
Claim for loss of stock:
Memorandum Trading Account for the period 1st January to 1st May, 2008

To Opening Stock 70,000 By Sales 2,40,000

To Purchases 1,00,000 By Closing stock
To Wages 50,000 (Balancing figure) 83,200
To Manufacturing expenses 36,000
To Gross Profit @ 28% on sales 67,200 _______
3,23,200 3,23,200
Claim for loss of Stock will be limited to 80,000 which is the amount of Insurance policy.
Working Notes:
(1) Rate of Gross Profit in 2007

In 2008 Gross Profit had declined by 2% as a result of rise in wages, hence the rate of Gross Profit for loss
of stock is taken at 28%.

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 Loss of Profit
(a) Short Sales :
Sales from 1st May, 2007 to 31st August, 2007 3,60,000
Less: 20% decline observed in 2008 over 2007
(Jan - April 2,40,000 instead of 3,00,000) 72,000
2,88,000
Less: Sales from 1st May, 2008 to 31st August, 2008 60,000
Short-Sales 2,28,000
(b) Gross profit ratio

22%

Less: Expected decrease due to increase in wages 2% 20%

(c) Loss of Gross Profit:
20% on short sales 2,28,000 = 45,600
(d) Annual turnover: (12 months to 1st May, 2008) :

Sales for Jan-Dec., 2007 8,00,000

Less: From 1-1-2007 to 30-4-2007 3,00,000
5,00,000
Less: 20% downward trend 1,00,000
4,00,000
Add: From 1-1-2008 to 30-4-2008 2,40,000
6,40,000
Gross Profit on annual turnover @ 20% 1,28,000
(e) Amount allowable in respect of additional expenses
Least of the following:
(i) Actual expenses 1,40,000
(ii) Gross Profit on sales during indemnity period 20% of
60,000 12,000
(iii) Gross profit as above Uninsured charges × Additional Expenses
Gross profit on annual (adjusted) turnover

1,21,081

Least i.e. 12,000 is admissible.

N.B.: On the amount of final claim, the average clause will not apply since the amount of the policy
1,72,000 is higher than Gross Profit on annual turnover 1,28,000.

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Q-22 Financial year ends on 31st December, 2002 with turnover of 2,00,000. Fire takes place on June 1,2003,
Period of interruption being 5 months (from 1st June, 2003 to Nov. 2003), Period of indemnity according
to policy-6 months.
Net profit for 2002 12,000 and insured standing charges 24,000. Sum insured 42,240. Uninsured
standing charges 2000; Standard turnover i.e. for corresponding months of interruption (from 1st
June to 1st Nov.) in the year preceeding the fire. 75,000.
Turnover in the period of interruption 22,500. Annual turnover (for 1st June 2002 to 31st May, 2003
2,20,000.)
Additional expenses 4,000 with a saving of insured standing charges 1,500. But for this additional
expenditure, the turnover after the fire would have been only 12,500. The expenses on putting the
fire out were 500. During 2003 increase in turnover (both standard and annual) is expected to be 20%
and increase in G.P. rate is expected by 2%. Calculate amount of claim for loss of profit.
Solution

(Net Profit + Insured Standard Charges)

(1) G.P.Ratio × 100
Sales

12,000 + 24,000 36,000

= x 100 = × 100
2,00,000 2,00,000

G.P. Rate in 2002 = 18%

Add. Expected increase = 2%
G.P. Rate for 2003 = 20%

(2) Short Sales: Standard Turnover 75,000

Add. Expected increase in 2003 @ 20% 15,000
90,000
Less: Turnover during the period of interruption 22,500
Short Sales 67,500
67,500 x 20
(3) Loss of Profit: Short Sales x G.P. Ratio = 100
= 13,500

(4) Additional Expenses: Minimum of the following amount:

(a) Actual Expenditure 4,000
(b) G.P. on sales generated through additional expenses (10,000 x 20/100)
2,000
Additional Expenses x (Net Profit + Insured Standing Charges)
(c) (Net Profit +All Standing Charges)

4,000 ×(12,000 + 24,000) 4,000 x 36,000

= = 3, 790
12,000 + 26,000 38,000

Additional Expenses x Coverage Required

or (Corverage Required +Uninsured Standing Charges)

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 4,000 x 52,800
= = 3, 854
(52,800+2,000)
Minimum of the above three amount i.e. 2,000 shall be added to the amount of claim.
(5) Coverage Required: (Adjusted) Annual Turnover G.P. Ratio
Annual Turnover 2,20,000
Add: Expected increase @ 20% 44,000
Adjusted Annual Turnover 2,64,000
Coverage Required =2,64,000 x 20 /100 = 52,800
Since amount of policy is less than the amount of coverage required average clause shall be
applicable.

(6) Amount of Claim : Loss of Profit (as per 3) 13,500

Add: Additional Expenses (As per 4) 2,000
15,500
Less: Saving in Expenses 1,500
14,000
Applying Average Clause:

Amount of Policy
Loss of Profit x
Coverage Required

42,240
= 14,000 x 52,800 = 11,200

Add: Expenses on putting the fire out 500

Amount of Claim 11,700
Q-23 On 1st August, 2000, a fire occurred in the premises of ABC Ltd. The company has a loss of profit policy
for 12,00,000. Sales from 1st August, 1999 to 31st July, 2000 were 1 crore; the sales from 1st August,
1999 to 30th November 1999 being 30,00,000. During the indemnity period, which lasted four months,
sales amounted to 4,00,000 only. The company closes its books of account every year on 31st March.
The profit and loss account for the year ended 3 March, 2000 is given below:
Profit and Loss Account

To Opening stock 10,00,000 By Sales 95,00,000

To Purchases 60,00,000 By Closing stock 5,00,000
To Manufacturing expenses 6,70,000
To Variable selling expenses 9,05,000
To Fixed expenses 7,25,000
To Net profit 7,00,000 _________
1,00,00,000 1,00,00,000
As compared with the sales for the first four months of the accounting year 1999-2000, the sales for the
first four months of the accounting year 2000-200 1 were found to be up by 20%.
Calculate the amount of claim for loss of profit assuming that the policy has an ‘average clause’.

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Solution
( in lakh)
Calculation of short sales:
Sales from 1st August 1999 to 30th November,1999 30
Add: 20% increase, 20% of 30 lakh 36
Less: Sales from 1st August ,2000 to 30th November, 2000 4
Short Sales 32

Calculation of gross profit ratio :

Net profit + Standing charges for 1999- 2000
Gross profit ratio = Sales for 1999- 2000
7, 00, 000 + 7, 25, 000
= x 100 = 15%
95, 00, 000
Loss of profit = 15% of 32 lakh = 4,80,000
Calculation of Adjusted Annual Turnover :
Annual turnover i.e. sales for 12 months 100
(From 1.8. 1999 to 31.7. 2000)
Add: 20% annual turnover 20
Adjusted annual turnover 120
Application of average clause :
Coverage Required = Gross profit on 1,20,00,000 @ 15% = 18 lakh
But the policy has been taken for 12 lakh only
Hence, average clause will apply
12,00,000
Therefore, amount of the claim = 4,80,000 x 18,000 = 3,20,000.

Q-24 Raghwan Ltd. gives you the following. Trading and Profit and Loss Account for the year ending December
31, 2004:
Particulars Particulars
To Opening Stock 25,000 By Sales 4,00,000
To Purchases 1,50,000 By Closing Stock 35,000
To Wages ( 10.000 for
skilled labour) 80,000
To Manufacturing Exp. 60,000
To Gross Profit 1,20,000 _______
4,35,000 4,35,000
To Office Expenses 30,000 By Gross Profit 1,20,000
To Advertising 8,000 By Interest on Securities 2,000
To Selling Exp. (fixed) 20,000
To Commission on sales 26,000
To Carriage outward 8,000
To Net Profit 30,000 _______
1,22,000 1,22,000
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 The Company had taken out a consequential loss policy for 1,00,000. Fire occurred on 1st May 2005 as
a result of which sales were seriously affected for a period of 4 months. You are given following further
information :—
(a) Sales figures were as follows: From 1st January 2004 to 30th April 2004 1,50,000; From 1st May 2004
to 31st Aug, 2004 1,80,000; From 1st May 2005 to 31st Aug. 2005 30,000; From 1st January, 2005 to 30th
April 2005 1,20,000; (b) Due to rise in material prices, net profit during 2005 was expected to decline
by 2% on sales (c) Standing charges to the extent of 4,000 were not insured.
Ascertain the claim for loss of profits.
Solution
Net Profit + Insured Standing Charges
(1) G.P. Ratio = 100
Sales

(30,000 20,000 8,000 30,000 10,000 4,000 2,000)

= 100
4,00,000

92,000 x 100
= 4,00,000 = = 23 %

Less : Expected decline in 2005 = 2%

G.P. Ratio of 2005 = 21%

(2) Short Sales: Standard sales (from 1.5 2004 to 31.8.2004) 1,80,000
Less: Decline in the trend of sales @ 20% 36,000
Adjusted Standard Sales 1,44,000
Less: Sales during indemnity Sales 30,000
Short Sales 1,14,000
Note: Decline in the trend of sales has been calculated as follows:
Sales from 1.1.2004 to 30.4.2004 1,50,000
Sales from 1.1.2005 to 30.4.2005 1,20,000
Decline in sales during first four months in 2005 30,000
Percentage decline in sales in 2005 as compared with sales in 2004 for
30,000
corresponding period = 1,50,000 = 20%

(3) Loss of Profits = Short Sales x G.P. Ratio = 1,14,000 x 21/100 = 23,940
(4) Coverage Required
Turnover form 1-5-2004 to 31-12-2004 (4,00,000 - 1,50,000) 2,50,000
Less: Decline in trend @ 20% 50,000
2,00,000
Add : Turnover from 1-1-2003 to 30-4-2005 1,20,000
3,20,000
Coverage required = 3,20,000 x 21/100 = 67,200
Since amount of policy is more than the amount of coverage required, average clause shall not be
applicable. Hence amount of claim = 23,940.

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Q-25 In the dislocation period (4 months) covered by the consequential loss policy ( 1,25,000), sales of
1,00,000 was obtained out of which 40,000 sale was received from another premises hired for this
period at a rent of 1,000 per month on the temporary basis. However, there was saving in insured
standing charges during this period @ 6,000 p.a.
Sales in the same period of last year amounted to 3,00,000 and an upward trend of 10% in the
business was expected in the current year. Sale for the period of 12 months immediately preceding the
date of fire was 10,00,000.
The following information is available from the last years profit and loss account:
Sales 9,00,000
Net Profit 1,00,000
Standing charges (out of which 20,000 uninsured) 1,00,000
You are require to calculate the amount of claim.
Solution
Computation of the amount of claim:
(1) Loss of turnover in the dislocation period
Standard turnover in the same period of last year 3,00,000
Add: 10% upward trend 30,000
Adjusted standard turnover 3,30,000
Less: Actual turnover in the dislocation period 1,00,000
Loss of turnover in the dislocation period 2,30,000
(2) Gross Profit Ratio based on the trading result of the last accounting year:

Net Profit + Insured Standing Charges

Gross Profit Ratio = 100
Turnover

1, 00, 000 + 80, 000

= x 100 = 20%
90, 00, 000
(3) Loss of Profit during the dislocation period:
Loss of Profit = Loss of turnover x Gross profit Ratio
= 2,30,000 x 20/100 = 46,000
(4) Increased Working Cost:
Increased Working Cost = 1,000 x 4 = 4,000.
Amount of claim is restricated to the minimum of the following two amounts:
Increased working Cost x (Net Profit + Insured Standing Charges)
(a) Proportionate Working Cost = (Net Profit +All Insurable Standing Charges
= 4,000 x 1,00,000+80,000
1,00,000 + 1,00,000

1, 80, 000
= 4,000 x = 3,600
2, 00, 000
Amount of increased cost of working as per alternative formula:

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 Increased Working Cost x Coverage Required
(coverage Required + Uninsured Standing Charges

4,000 x 2,20,000 4,000 x 2,20,000

2,20,000 + 20,000 = 2,40,000 = 3,667

(b) Maximum Saving of liability of the insurer:

Amount of reduction in turnover avoided through increased
working cost x Gross profit ratio.
i.e. 40,000 x 20/1 00 = 8,000
(5) Saving in insured standing charges:
Saving for four months (period of dislocation) @ 6,000 p.a.
6,000x4 =2,000
12
Statement of Gross Claim:
Claim for loss of profit as per (3) above 46,000
Add: Claim for loss on account of increased working cost 3,600
49,600
Less: Saving in increased standing charges 2,000
Amount of Gross Claim 47,600
(6) Application of Average Clause:
Annual turnover preceeding the date of fire 10,00,000
Add: expected increase 10% 1,00,000
Adjusted annual Turnover 11,00,000
Gross Profit on adjusted annual turnover
11, 00, 000
(Coverage required) = x 20 = 2,20,000
100
But the amount of policy is only 1,25,000.
Therefore applying average clause, Amount of Claim:

Gross Claim x Amount of Policy 47, 600 x 1, 25, 000

= = 27, 045
Coverage Required 2, 20, 000
Q-26 A fire occurred in the premises of a business on 31st January. 2002, which destroyed -stock. However,
stock worth 5,940 was salvaged. The company’s insurance policy covers the following:

Stock 6,00,000
Loss of Profit (including standing charges) 3,75,000
Period of indemnity Six months
The summarised Profit and Loss Account for the year ended 31st December. 2001 is as follows:

Turnover 30,00,000
Closing Stock 7,87,500
37,87,500

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 Opening Stock 6,18,750
Purchases 27,18,750
Standing Charges 2,51,250
Variable Charges 1,20,000 37,08,750
Net Profit 78,750
The transactions for the month of January 2002 were as under:
Turnover 1,50,000
Payments to Creditors 1,60,020
Trade Creditors:
1-1-2002 2,26,000
31-1-2002 2,30,980
The company’s business was disrupted until 30-4-2002 during which period the reduction in the turnover
amounted to 2,70,000 as compared with the turnover of same period corresponding in the previous
year.
You are required to submit the claim for insurance for loss of stock and loss of profit.
Solution
(A) Loss of Stock:
Trading Account for the month ending 31st Jan., 2002
Particulars Particulars
To Opening Stock 7,87,500 By Sales 1,50,000
To Purchases 1,65,000 By Closing Stock
To Gross Profit @ 15% on sales 22,500 (Balancing figure) 8,25,000
9,75,000 9,75,000
Claim for Loss of Stock:

Stock on 31st Jan. 2002 8,25,000

Less: Salvaged __5,940
Stock destroyed 8,19,060
Application of average clause
Amount of Policy
Amount of claim x
Value of stock on date of fire

6,00,000
8,19,060 x 8,25,000 = 5,95,680

(B) Claim for loss of Profit:

Short sales 2,70,000
Gross Profit rate [working note (2)] 11%
Amount of claim @ 11 % on 2,70,000 29,700
Note: Amount of the policy. 3,75,000 is more than 11% on 29,00,000, i.e. sales for 12 months,
immediately before the date of fire i.e. coverage required. Hence the average clause will not be
applicable.

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Working Notes:
1. Rate of Gross profit for the year ending 31st Dec. 2001 is 15% as calculated below:
Trading account for the year ending 31st Dec., 2001
Particulars Particulars
To Opening Stock 6,18,750 By Sales 30,00,000
To Purchases 27,18,750 By Closing stock 7,87,500
To Gross Profit (4,50,000/30,00,000)
x 100= 15% 4,50,000 ________
37,87,500 37,87,500
2. Calculation of Gross Profit for loss of profit claim
Sales for the year 2001 30,00,000
Net profit for 2001 78,750
Add: Insured standing charges 2,51250 1250
3,30,000
Gross Profit Ratio (working out to be 11% on sales) i.e (NP + Insured standing charges) x 100/Sales.
3. Total Creditors A/c
Date Particulars Date Particulars
2002 2002
Jan.31 To Bank 1,60,020 Jan.1 By Balance b/d 2,26,000
To Balance c/d 2,30,980 By Purchases (Bal. figure) 1,65,000
3,91,000 3,91,000

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