CHAPTER 10

SOLUTION 2010
Book value of building
Cancelled premium
Expenses

1,083,000
40,000
15,000

Fire Loss
Salvaged materials
Insurance claim

12,000
500,000

Fire Loss debit balance of P626,400

Accumulated depreciation (1,200,000 x 3%)= 36,000 x 3.25 years
Book value (1,200,000-117,000)
Cancelled premiums ( 5,000 per month x 8 months from 10/31 to 6/30)
Insurance claim P500,000 or P750,000 whichever is lower
Entries:
6/30/09 Prepaid Insurance
Cash
Insurance paid.
12/31

P 117,000
1,083,000
40,000
750,000

60,000
60,000

Insurance Expense
Prepaid Insurance
Expired from 1/1 to 12/31

60,000

Depreciation Expense
Accumulated Depreciation
Update depreciation 1,200,000 x 3%

36,000

60,000

36,000

6/30/10 Prepaid Insurance

Cash

60,000

10/31/10 Insurance Expense (5,000 x 10)

Prepaid Insurance
Update depreciation 1/1 to 10/31

50,000

Fire Loss
Prepaid Insurance
To cancel prepaid insurance from
10/31 to 6/30(5,000 x 8))

40,000

Depreciation
Accumulated Depreciation
To update depreciation 1/1 to 10/31.

30,000

Fire Loss
Accumulated Depreciation
Building
To cancel building at book value
destroyed.

1,083,000
117,000

60,000
50,000

40,000

30,000

1,200,000

Cash
Fire Loss
Receipt from salvaged materials

12,000

Fire Loss
Cash

15,000

Cash
Fire Loss
Receipt of insurance claim.

500,000

12,000

15,000
500,000

2. If building is only 30% destroyed:

Book value of building
Cancelled premium
Expenses

324,900
18,000
15,000

Fire Loss
Salvaged materials
Insurance claim

12,000
240,000

Fire Loss debit balance of P

Destroyed by fire (1,083,000 x 30%)
Cancelled premiums (40,000 x 225,000/500,000)
Insurance claim (750,000 x 30%) = 225,000 or 500,000 whichever is lower
Entries:
6/30/09 Prepaid Insurance
Cash
Insurance paid.
12/31/09 Insurance Expense
Prepaid Insurance
Expired from 1/1 to 12/31
Depreciation Expense
Accumulated Depreciation
Update depreciation 1,200,000 x 3%

60,000
60,000
60,000
60,000
36,000
36,000

6/30/10 Prepaid Insurance

Cash

60,000

10/31/10 Insurance Expense (5,000 x 10)

Prepaid Insurance
Update insurance 1/1 to 10/31

50,000

60,000
50,000

Fire Loss
Prepaid Insurance
To cancel prepaid insurance from
10/31 to 6/30(5,000 x 8 x 225/500)

18,000

Depreciation (1,200,000 x 3% x 10/12)

Accumulated Depreciation
To update depreciation 1/1 to 10/31.

30,000*

18,000

30,000

324,900
18,000
225,000

Fire Loss
Accumulated Depreciation (117,000 x .3)
Building (1,200,000 x .3)
To cancel building at 30% of book
value.

324,900
35,100

Cash
Fire Loss
Receipt from salvaged materials

12,000

Cash
Fire Loss
Expenses for putting out fire.

15,000

Cash
Fire Loss
Receipt of insurance claim.
12/31/10 Insurance Expense (40,000-18,000 x 2/8)
Prepaid Insurance
Depreciation Expense
Accumulated Depreciation
1,200,000-360,000 x 3% x 2/12)

360,000

12,000

15,000
225,000
225,000
5,500
5,500
4,200*
4,200

Or 1,200,000-360,000 x 3%= 25,200

360,000 x 3% x 10/12=
9,000
Total depreciation
34,200*
3.
3/1/09 Prepaid Insurance
Cash
12/31

Depreciation
Accumulated Depreciation
(3,800,000-20,000)/10
Insurance Expense
Prepaid Insurance

75,000
75,000
360,000
360,000
75,000
75,000

3/1/10 Prepaid Insurance

Cash

75,000

4/30/10 Depreciation Expense

Accumulated Depreciation
360,000 x 4/12 from 12/31 to 4/30

120,000

Insurance Expense
Prepaid Insurance
6,250 x 4 months from 1/1 to 4/30

25,000

Fire Loss
Prepaid Insurance
Cancel balance of unexpired:

62,500

75,000
120,000

25,000

62,500

6,250 x 10 from 4/30 to 8/1

Fire Loss
Accumulated Depn
Building
Cancel book value
Cash
Fire Loss
Salvaged materials
Insurance Claim
Fire Loss
Ins claim (800/2,200 x 1,760,000)

3,320,000
480,000
3,800,000
60,000
60,000
640,000*
640,000

There is a remaining book value which may be further depreciated depending on whether the
building at the 20% remaining book value will still be used by company. Otherwise replacement
Will entail GAAP under financial accounting.
4. If 40% destroyed
lding
4/30/10 Depreciation Expense
Accumulated Depreciation
360,000 x 4/12 from 12/31 to 4/30

120,000
120,000

Insurance Expense
Prepaid Insurance
6,250 x 4 months from 1/1 to 4/30

25,000

Fire Loss
Prepaid Insurance
Cancel balance of unexpired:
6,250 x 10 from 4/30 to 3/1 x 40%

25,000

25,000

25,000

Fire Loss
Accumulated Depn
Building
Cancel book value.

1,328,000
192,000

Cash
Fire Loss
Salvaged materials

60,000

Cash
Fire Loss
Ins claim (800/2,200)x(.4x2,200,000)

1,520,000

60,000
320,000
320,000

5.
Case A
P18,000

Case B
P42,000

(40,000/60,000 x 18,000)
= P12,000

P42,000

30,000/75,000 x 37,500
=P15,000

(40,000/48,000 x 18,000)
=P15,000

(30,000/60,000 x P37,500)
=P18,750

P40,000

P42,000
P42,000

P30,000

P45,000

a)
b)
c)
d)
6.6.

P18,000

Case C
P30,000

Case D
P45,000
45/50 x 45,000
P45,000

Case A

Makati
Manila
Mabini

P40,000
60,000
50,000
P150,000

Case B
(40,000/150,000 x 120,000*)
(60,000/150,000 x 120,000)
(50,000/150,000 x 120,000)

P32,000
48,000
40,000
P120,000

* 200,000 x 60%
Case C
Case D
Makati (40/200 x 140,000*) P28,000 Makati (40,000/150,000*x150,000) 40,000
Manila (60/200 x 140,000)
42,000
Manila (60,000/160,000**x150,000)56,250
Mabini (50/200 x 140,000)
35,000
Mabini (50,000/150,000*x150,000) 50,000
P105,000
146,250
Agreed loss is 200,000 x 75%=P150,000
*200,000 x 70%=140,000 vs 150,000
**200,000 x 80%=160,000 vs 150,000
7. a)
Matampuhin
(30/150 x 90,000*)
Mahiyain
(50/150 x 90,000)
Maawain
(20/150 x 90,000)

P 18,000
30,000
12,000
P 60,000

*150,000 x 60%
b)
(360/12= 30 x 6)
(600/12= 50 x 8)
(300/12= 25 x 7)

Unexpired
8/1 to 1/31
8/1 to 4/1
8/1 to 3/1

*If policy is not yet totally cancelled

8.
Merchandise, Jan 1
Purchases
Total
Cost of sales 360,000/1.2
Inventory before fire
80% destroyed
Against policy amount of
P100,000, claim is P64,000.

80,000
300,000
380,000
300,000
80,000
64,000

Cancelled
P 180 x18/30=108
400 x30/50=240
175 x12/20=105
P755
P453*

9. a)
Merchandise, Jan 1
Purchases
Freight
Total
Cost of sales 450,000/1.5
Goods destroyed

75,000
313,000
12,000
400,000
300,000
100,000

b)
Accumulated depn (288,000 + 18,000*)
Book value (720,000-306,000)
75% charged to fire loss for the destroyed portion

306,000
414,000
310,500

*Update Depreciation (1/1/08 to 10/1/08) 720,000/30= P240,000 x 9/12= P18,000

c)
Monthly Premium
600/12= 50
480/12= 40
780/12= 65

Cancelled Premium
(10/1 to 3/1= 5 mos) P250.00
(10/1 to 7/1= 9 mos)
360.00
(10/1 to 11/1= 1 mo)
65.00
P675.00

d) Insurance claim:
ABC
200,000/600,000 x 550,000+
XYZ
150,000/630,000* x 550,000
LMN
250,000/600,000 x 550,000

P183,333
130,952
229,167
P543,452

+75% of 700,000 (600,000 + 100,000)

* whichever is higher: total policies or co-insurance requirement
90% of sound value of 700,000= 630,000 against total policies of 600,000
85% of sound value of 700,000=595,000 against total policies of 600,000
a)
b)
c)

Fire Loss
100,000.00 d)
543,452
310,500.00
675.00

10. a) Building P1,050,000/20= P52,500 annual depn x 5 years & 2 mos = accum depn P271,250
Book value of building (1,050,000-271,250)= P778,750
Fire loss (778,750 x 80%)= P623,000
b) Inventory, Jan 1
Purchases
Total Available
Cost of Sales:
Sales
P1,076,250
Sales Returns
26,250
Net sales
P1,050,000
Cost ratio
.70
Inventory on hand at date of fire
Goods in transit
Recovery on fire loss

P105,000
787,500
P892,500

735,000
P157,500
17,500
P140,000

Multiple Choice:
1.
Insurance requirement is 85% of 500,000 or P425,000
Since face of policy is P450,000, then co-insurance requirement is complied with
Claim is P450,000 or 50% of P500,000 whichever is lower.
P250,000 Answer A
22.2.Merchandise, Jan 1
60,000
Purchases
108,000
Cost of sales 195,000/.7
(136,500)
On hand at fire date
31,500
Less salvaged materials
(8,000)
Fire loss
P23,500
Answer C
Answer C
3.
Accum Depn (6,000,000/30=200,000 x 5.33 yrs)
P1,066,000
Book value of warehouse (6,000,000 1,067,000)
4,933,000
Actual loss (4,933,000-2,000,000)
2,933,000 nearest Answer A 2,950,000
Estimated loss based on FMV
3,500,000 Answer C
4.
Merchandise, Jan 1
600,000
Purchases
3400,000
Cost of sales 600,000 x .55
(3300,000)
On hand at fire date
700,000
Less salvaged materials
(120,000)
Fire loss
P580,000
Answer D
Insurance recoverable from Equipment P800,000 vs P1,000,000 Answer D
5.
Accum depreciation(7500,000/30=250,000x4.5)
P1,125,000
Book value (7500,000-1125,000)
6375,000
Destroyed by fire (6,375,000 x 60%)
3,825,000
Co insurance requirement (5,000,000 x 80%)
4,000,000
Claim (3,500/4,000 x P3,000,000)
2,625,000
Answer C
Merchandise, Jan 1
1,250,000
Purchases
1,840,000
Cost of sales (2750,000x .6)
(1,650,000)
Fire loss
P1,440,000
Insurance claim P1,440,000 against P1,200,000 Answer B
Insurance Claim 1,440,000- 1,200= 1,438,800 vs P1,200,000 Answer B