2 Insurance F PDF

Problems on Loss of Stock
Problem .1
On 12th June, 2007 Fire occurred in the premise of Patel .
Cost of stock salvaged being `11,200. In addition, some stock was salved in a damaged condition and its value
was agreed at ` 10,500. From the books of A/c, the following particulars are available:-
1. Stock on 31-12-2006 was ` 83,500.
Purchases from 1-1-07 to 12-6-07 amounted to `1,12,000 and sales during that period was `1,54,000.
On the basis of his A/cs from the past three years it appears that he earns on an average a gross profit of 30% 0n
sales. Patel has insured his stock for ` 60,000. Compute the amount of the claim.
Solution
Step –I
GP Ratio = 30%
Step -II
MemorandumTrading A/c
Particulars Amount Particulars Amount
To Opening Stock 83,500 By Sales 1,54,000
To Purchase 1,12,000 By Closing Stock (b/f) 87,700
To G.P.(154000×30%) 46,200
2,41,700 2,41,700
Step -III
Statement of Loss by Fire

Particulars Amount
Closing stock immediatelybeforefire 87,700
Less :- Salvage 21,700
Loss by fire 66,000
Note: sum insured is = 60000
Value of stock immediately before fire = 87700
Since sum insured is less than value of stock immediately before fire, therefore average clause will apply.
Step -IV
Average Clause
sum insured
Claim = loss by fire ×
Value of stock in godown immediatel y before fire
60,000
 66,000   45,154
87,700
Topper’s Insurance Claim 2.2
Problem 2.
On 31st May 2015, the premises and stock of a firm were totally destroyed by fire. The books of A/cs were,
however, saved. In order to make a claim on their fire policy, they asked for your advice and you are able to
obtain the following information. The stock on hand has always been valued at 5 per cent below cost.
2012 2013 2014 2015
Particulars (`) (`) (`) (` )
Opening Stock as Valued 22,800 30,400 36,100 39,900
Purchases Less Returns 91,000 1, 10,000 1, 20,000 41,000
Sales Less Returns 1, 40,000 1, 70,000 1, 86,000 75,000
Wages 28,400 31,200 34,200 12,000
Closing Stock 30,400 36,100 39,900 —
Prepare a statement of resubmission to the insurance company in support of your claim for loss of stock.
Solution
Step –I
Trading Account of the year ended 31 stMarch
Particulars 1992 1993 1994 1992 1993 1994
(`) (`) (` ) (`) (`) (` )
To Opening Stock 24,000 32,000 38,000 By Sales 1,40,000 1,70,000 1,86,000
To Purchases 91,000 1,10,000 1,20,00 By Closing Stock 32,000 38,000 42,000
To Wages 28,400 31,200 34,200
To Gross Profit 28,600 34,800 35,800

1,72,000 2,08,000 2,28,000 1,72,000 2,08,000 2,28,000
Total sales for three years ` 4,96,000 Average Gross profit ratio = 20%
Total Gross profit for three years ` 99,200
Step –II
Memorandum Trading Account for the period from 1.4.94 to 31.8.94
Particulars (` ) Particulars (` )
To Opening Stock 42,000
By Sales 75,000
To Purchases 41,000
By Stock on the date of
To Wages 12,000
fire (balancing figure) 35,000
To Gross Profit 15,000
1,10,000 1,10,000
Step III
Statement of Loss by Fire
Amount
Closing stock immediately Before fire 35,000
Less :- Salvage -
Loss by fire 35,000
Step IV Average Clause
sum insured
Claim  loss by fire 
Value of stock in godown immediatel y before fire
Claim = 35,000
Problem 3.
The factory premises of Toy Company were engaged in fire on 31st March 1983 as a result of which a major
part of stock was burnt to ashes. The stock was covered by policy for ` 1,00,000 subject to average clause. The
records at the office revealed following information:
1. (a) The company sold goods to dealers on one month credit at dealers’ price which is catalogue
priced less 15%. A cash discount is allowed @ 5% for immediate payment.
(b) The goods are also sold to Agents at catalogue price less 10% against cash payment.
(c) Goods are sent to branches at catalogue price
(d) Catalogue price is cost + 100%.
2. The Sales/Dispatch during period up to date of fire is;
(a) Sale to dealer (without cash discount) ` 3,40,000. (c) Sale to agents ` 90.000.
(b) Sale to dealer (net of cash discount) ` 3,23,000. (d) Dispatch to branches ` 3,00,000.
3. Stock on 1st January 1985 was ` 2,50,000 at catalogue price.
4. Purchases at cost from 1st January 1985 to 31st March ` 6,25,000.
5. Salvages stock valued at ` 45,000.
Compute the amount of claim to be lodged.
Solution
Step I
Calculation of different types of G.P.Ratio

Let suppose cost = ` 100, Then,
1. Catalogue price (cost + ` 100) = ` 200.
Analysis table of different G.P. Ratio
Dealer Dealer (Cash Agent Branch

Without cash Dis.)
discount
Catalogue Price 200 200 200 200
Less: Trade Discount
200×15% 30 30
200×10% 20
170
Less: Cash Dis. 170 × 5% 8.5
Net sales Price 170 161.5 180 200
Cost: 100 100 100 100
GP: 70 61.5 80 100
G.P. 41.17% 38.08% 44.44% 50%
GP Ratio=   100 70/170×100 61.5/161.5×100 80/180×100 100/200×100
Sales
Step II Memorandum Trading Account (At Cost)
To Opening Stock(250000×100/200 1,25,000 By Sales

To Purchases A/c 6,25,0000 (i) Dealers 3,40,000
(ii) Dealers With Dis. 3,23,000
(iii) Agents 90,000
To GP 4,53,000 (iv) Branches 3,00,000 10,53,000
By Closing Stock 1,50,000
12,03,000 12,03,000
Step III Statement of Loss by Fire
Amount
Closing stock immediatelyBeforefire 150000
Less :- Salvage (45,000)
Loss by fire 105000
Net claim = Loss of stock × Policy Value / Value of Stock on the date of fire
1,00,000
105000   70,000
1,50,000
The insurance policy was taken for ` 1,00,000; but the value of stock on the date of fire was ` 1,50,000.
Therefore, the average clause is applicable.
Working Notes:
Calculation of Gross Profit

Types Amount G.P. Ratio = G.P.
Dealer without C.D. 3,40,000 70
× = 1,40,000
170
Dealer with C.D. 3,23,000 61.5
× = 1,23,000
161.5
80
Sales to Agent 90,000 × = 40,000
180
Branch 100 = 1,50,000
3,00,000 ×
200
10,53,000 4,53,000
Problem 4.
A fire occurred in the workshop of Mr. A on 31st March, 2006 where a large part of the stock was destroyed.
Scrap realised` 7,500. Mr. A gives you the following information for the period of 1st January to 31st March,
2006 :
(` )
(i) Purchases 42,500
(ii) Sales 45,000
(iii) Goods costing ` 1,000 were taken by Mr. A for personal use.
(iv) Cost price of stock on 1st January, 2006 was ` 20,000.
(v) Over the past few years, Mr. A has been selling goods at a consistent gross profit
margin of 30%.
(vi) The Insurance policy was for ` 25,000. It included an average clause. Prepare a statement of
claim to be made on the Company by Mr. A .
[May – 2006, 6 Marks]
Solution
Step I
GP Ratio = 30%
Step II
Dr. Memorandum Trading A/c upto 31 st march, 2006 Cr.
To Opening Stock A/c 20,000 By Sales A/c 45,000
To Purchase A/c 42,500 By Goods for personal use 1,000
To G.P.(45000×30%) 13,500 By Closing Stock A/c 30,000
76,000 76,000
Step III Statement of loss by fire

Particulars (` )
Value of closing stock 30,000
Less :- Salvage (7,500)
Loss by fire 22,500
Step IV
Average Clause
Amount of policy
Claim =  Actual loss of stock
Value of stock
 22,500 = 18,750
25,000

30,000
Problem 5.
On 2.6.2007 the stock of Mr. Black was destroyed by fire. However, following particulars were
furnished from the records saved:
(` )
Stock at cost on 1.4.2006 1,35,000
Stock at 90% of cost on 31.3.2007 1,62,000
Purchases for the year ended 31.3.2007 6,45,000
Sales for the year ended 31.3.2007 9,00,000
Purchases from 1.4.2007 to 2.6.2007 2,25,000
Sales from 1.4.2007 to 2.6.2007 4,80,000
Sales upto 2.6.2007 includes `75,000 being the goods not dispatched to the customers. The sales invoice price
is `75,000.
Purchases upto 2.6.2007 includes a machinery acquired for ` 15,000. Purchases upto 2.6.2007 doesnot include
goods worth ` 30,000 received from suppliers, as invoice not received upto the date of fire. These goods have
remained in the godown at the time of fire.
Value of stock salvaged from fire ` 22,500 and this has been handed over to the insurance company.
The insurance policy is for `l,20,000 and it is subject to average clause. Ascertain the amount of claim for loss
of stock. [May – 2007, 8 Marks]
Solution
Step -I In the books of Mr. Black
Dr. Trading A/c up to 31 st March, 2006 Cr.
To Opening Stock A/c 1,35,000 By Sales A/c 9,00,000
To Purchase A/c 6,45,000 By Closing Stock A/c 1,80,000
To G.P.(Bal. Fig.) 3,00,000 (1,62,000 × 100/90)
10,08,000 10,80,000
3,00,000 1
GP Ratio =  100  33 1 % or
9,00,000 3 3
Step -II
Memorandum Trading A/c

Dr. (For the period from 1.4.2007 to 2.6.2007) Cr.
To Opening Stock at cost 1,80,000 By Sales A/c 4,80,000
To Purchase A/c 2,25,000 Less: Goods not (75,000) 4,05,000
Add: Goods received 30,000 Dispatched
but inv not receive By Closing Stock A/c (b/f) 1,50,000
Less: Machinery (15,000) 2,40,000
To G.P. (W.N.)(405000×1/3) 1,35,000
5,55,000 5,55,000
Since sum insured ` 1,20,000 is less than value of stock immediately before fir, therefore average
clause will apply.
Particulars (` )
Value of immediatelybeforefire 1,50,000
Less :- Salvage Nil
Loss by fire 1,50,000
Step IV
Average Clause
Amount of policy
Value of stock
1,20,000
=  1,50,000  1,20,000
1,50,000
Note: Salvaged stock amounting ` 22,500 handed over to the insurance company is also treated as loss to Mr.
black.
Problem 6.
A fire broke out in the godown of a business house on 8th July, 2009. Goods costing ` 2,03,000 in a small sub-
godown remain un-affected by fire. The goods retrieved in a damaged condition from the main godown were
valued at ` 1,97,000.
The following particulars were available from the books of accounts:
Stock on the last Balance Sheet date at 31st March, 2009 was ` 15,72,000. Purchases for the period from 1st
April, 2009 to 8th July, 2009 were ` 37,10,000 and sales during the same period amounted to ` 52,60.000. The
average gross profit margin was 30% on sales.
The business house has a fire insurance policy for ` 10,00,000 in respect of its entire stock. Assist accountant of
the business house in computing amount of claim of loss by fire.
[Nov- 2009, 8 Marks]
Solution
Step I
GP Ratio 30% of sales = 52,60,000 × 30% = 15,78,000
Step II
Memorandum Trading Account for the period from 1 st April, 2009 to 8 th July, 2009
To Opening Stock 15,72,000 By Sales 52,60,000
To Purchases 37,10,000 By Closing Stock 1,60,000
To Gross profit (30% of sales) 15,78,000
68,60,000 68,60,000
Step III
Statement of loss by fire
Calculation of amount of claim (` )
Value of stock as on 8th July, 2009 16,00,000
Less: Value of stock remaining unaffected by fire 2,03,000
Agreed value of damaged goods 1,97,000 4,00,000
Loss of stock 12,00,000
Step IV Applying average clause:

Amount of policy
Amount of claim =  Loss of stock
Stock on the date of fire
10,00,000
  12,00,000  7,50,000
16,00,000
Problem 7.
On 1st April, 1990 the stock of Sri Vyas was destroyed by fire but sufficient records were saved from which
following particulars were ascertained:
`
Stock at cost 1st January, 1989 73,500
Stock at cost 31st December, 1989 79,600
Purchase for the year ended 31st December 1989 3,98,000
Sales – year ended 31 December, 1989 4,87,000
purchases 1.1.90 to 31.3. 90 1,62, 000
Sales 1.1.90 to 31.3. 90 2,31,200
In valuing the stock at 31st December, 1989 ` 2,300 had been written off certain stock which was a poor selling
line, having cost ` 6,900. A portion of these goods were sold in March 1990 at a loss of ` 250 on original cost
of ` 3,450. The remainder of this stock was now estimated to be worth its original cost. Subject to the above
exception gross profit had remained at uniform rate throughout the year. The value of stock salvaged was
`5,800. The policy was ` 50,000 and was subject to the average clause. Show the amount of the claim for loss
by fire.
Solution
Step I
Trading Account for the year ended 31 st Decembers, 1989
To Purchases 3,98,000 By Closing Stock:
7,9600
To Gross Profit(Normal)(b.f.) 97,400 2,300 81,900
-
5,68,900 5,68,900
(1) Rate of Gross Profit = 97,400/487000×100 = 20%
(2) Cost of abnormal items was ` 6,900. These were valued on 31st December 1988 after writing off `
2,300 i.e., at ` 6,900 – ` 2,300 = ` 4,600.
Note: Always find out previous year normal G.P. Ratio
Because only normal G.P. Ratio can be expected to continue in current year.
For this any abnormality has to be removed
 From purchase
 From opening stock
 From sales
 From closing stock
Step II
Memorandum Trading Account for the period 1st January to 31 st March, 1990 (at cost)
Particulars Normal Abnormal Total Particulars Normal Abnormal Total
Item 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 45,600 - 45,600 By Closing Stock 54,600 3,450 58,050

(228000×20%) At cost
2,82,600 6,900 2,89,500 2,82,600 6,900 2,89,500

Step III
Particulars (` )
Add: Abnormal goods at cost or NRV whichever is less 3,450
58,050
Less: Salvage 5,800
Loss of stock 52,250
Step IV
Average Clause
Amount of policy
Value of stock
50,000
  52,250  45,004
58,050
Working Note
Cost 6,900
Less: w/o 2,300
Valued at 4,600
Working Note
Abnormal cost 6,900
Sale Remaining
Cost 3,450 Cost = 3,450

Valued at
Less: Loss 250
Cost = 3,450
S.P. 3,200
Problem 8.
On 11.11.2007 the premises of Rocky Ltd. was destroyed by fire. The following information is made
available:
(` )
Stock as on 1.4.2006 3,75,000
Purchases from 1.4.2006 to 31.3.2007 5,20,000
Sales from 1.4.2006 to 31.3.2007 8,55,000
Stock as on 31.3.2007 2,00,000
Purchase from 1.4.2007 to 11.11.2007 3,41,000
Sales from 1.4.2007 to 11.11.2007 4,35,500
In valuing the stock on 31.3.2007, due to damage 50% of the value of the stock
Which originally cost ` 22,000 was written off. In June, 2007 about 50% of this stock was sold for ` 5,500 and
the balance of obsolete stock is expected to realise the same price (i.e. 50% of the original cost).
The gross profit ratio is to be assumed as uniform in respect of other sales. Stock salvaged from fire amounts to
` 11,500.
Compute the value of stock lost in fire. [May – 2008, 8 Marks]
Solution
Step I
Find out normal G.P. Ratio of previous year.
Trading A/c For the year ending 31.3.2007
To Gross profit (30% of sales) 1,71,000 Add: w/o 11,000 2,11,000
10,66,000 10,66,000
Step IInd
(upto the date of fire) (At Cost) (11.11.07)
Particulars N A Total Particulars N A Total

To Op. Stock By Sales 4,30,000 5,500 4,35,500
(at cost) 1,89,000 22,000 2,11,000 By G. Loss 5,500
To Purchase 3,41,000 3,41,000 By C. Loss 1,86,000 11,000 1,97,000
To G.P. 86,000 (at cost)
(4,30,000 × 20%) (B.fig)
6,16,000 22,000 5,52,000 6,16,000 22,000 5,52,000
Step III
Particulars (` )
Value of closing stock immediately before fire(normal goods at cost) 1,86,000
Add: value of abnormal items (At cost or NRV whichever is lower) 5,500
Total value of stock 1,91,500
(-) Salvage (11,500)

Claim = Loss by fire = 1,80,000
Note: Any w/o is added back to find out normal G.P.
Normal G.P. Ratio = 171000/855000×100 = 20%.
Working Note
Absolute stock Cost = 22,000
Sale
50% × 22,000 C. Stock
Cost = 11,000
50% × 22,000
Valuation
50% × Cost
S.P. 5,500 = 11,000
50% × 11,000
Loss on sale = 5,500
at cost 5,500
Problem 9.
A fire occurred in the premises of M/s. Fireproof Co. on 31st August, 2010. From the following particulars
relating to the period from 1st April, 2010 to 31st August, 2010 you are requested ascertain the amount of claim
to be filed with the insurance company for the loss of stock. The concern had taken an insurance policy for `
60,000 which is subject to average clause.
(`)
(i) Stock as per Balance Sheet at 31.3.2010 99,000
(ii) Purchases 1,70,000
(iii) Wages (including wages for the installation of a 50,000
Machine ` 3,000)
(iv) Sales 2,42,000
(v) Sale value of goods drawn by partners 15,000
(vi) Cost of goods sent to consigness on 16th August, 16,500
2010, lying unsold with them
(vii) Cost of goods distributed as free samples 1,500
While valuing the stock at 31 March, 2010, ` 1,000 were written off in respect of a slow moving item. The
st
cost of which was ` 5,000. A portion of these goods were sold at a loss of ` 500 on the original cost of ` 2,500.
The remainder of the stock is now estimated to be worth the original cost. The value of goods salvaged was
estimated at ` 20,000. The average rate of gross profit was 20% throughout.
[Nov-2011]
Solution
Step I
GP Ratio 20%
(upto the date of fire) (At Cost) (1.4.10 to 31.8.2010)
Particulars N A Total Particulars N A Total

To Op. Stock 95,000 5,000 1,00,000 By Sales 2,40,000 2,000 2,42,000
(99+1) By Loss 500
To Purchase 1,70,000 1,70,000 By drawing of goods
To Wages 47,000 47,000 at cost 12,000
To G.P. 48,000 15,000 × 80%
(24,000 × 20%) By Cost of goods sent
to consigned 16,500
By Free sample 1,500
By C. Loss 90,000 2,500 92,500
3,60,000 5,000 3,34,500 3,60,000 5,000 3,34,500
Step III
Particulars (`)
Value of closing stock Normal 90,000
Abnormal 2,500 92,500
Less: Salvage (20,000)
Loss by fire 72,500
Sum insured = 60,000

Average clause will apply
Step IV
Average Clause
Amount of policy
Value of stock
60,000
=  72,500  47,027
92,500
Working Note:
Slow moving goods cost = 5,000
Sale Remaining
Cost 2500
Less: Loss 500 Cost at =
Valued 3,450
S.P. 2000 Cost = 2500
Valuation at cost = 2500
Problem 10.
On 30th March, 2011 fire occurred in the premises of M/s Suraj Brothers. The concern had taken an
insurance policy of ` 60,000 which was subject to the average clause. From the books of accounts, the
following particulars are available relating to the period 1st January to 30th March, 2011.
(1) Stock as per Balance Sheet as on 31st December,2010, ` 95,600
(2) Purchases (including purchase of machinery costing ` 30,000) ` 1,70,000
(3) Wages (including wages ` 3,000 for installation of machinery) ` 50,000.
(4) Sales (including goods sold on approval basis amounting to ` 49,500) ` 2,75,000. No approval has been
received in respect of 2/3rd of the goods sold on approval.
(5) The average rate of gross profit is 20% of sales.
(6) The value of the salvaged goods was ` 12,300
You are required to compute the amount of the claim to be lodged to the insurance company.
[May- 2011] 5 Marks
Solution
Step I
GP Ratio 20%
Step II Memorandum Trading A/c

To Opening Stock 95,600 By Sales – normal 2,25,500
To Purchase (170-30) 1,40,000 -on approval 16,500 2,42,000
To Wages (50000-3000) 47,000 By goods send on approval not yet 26,400
sold (at cost)
To Gross Profit 48,400
(225500+16500)×20% By closing stock
62,600
3,31,000 3,31,000
Working Note:
Total Sales
2,75,000
On approval received 49500 Normal 2,25,500
= 49,500 = 2,25,500
Approval received Approval not received

1 2
 49,500 = 16,500  49,500 = 33,000
3 3
Valued at cost
33,000 × 80%= 26,400
Step III
Particulars (`)
Value of closing stock immediately before fire 62,600
Loss by fire 50,300
Step IV
Average Clause
Amount of policy
Claim =  lossbyfire
Value of stockimmediatelybefo refire
60,000
=  50,300  48,211
62,600
Problem 11.
A fire accrued in the premises of M/s. Fireprone Co. on 30th May 1992. From the following particulars, relating
to the period from 1st January 1992 to 30th May 1992, you are required to ascertain the amount of claim to be
filled with the insurance company for the loss of stocks; (all figures in rupees)
(1) Stock as per Balance Sheet at 31st December 1991 is 99,000
(2) Purchases (including purchase of a machinery costing ` 30,000)`1,70,000
(3) Wages (including wages for the installation of machinery `3,000) 50,00
(4) Sales (including goods sold on approval basis amounting to ` 49,500, No confirmation had been
received in respect of two-thirds of such goods sold on approval basis), ` 2,75,000.
(5) Sales value of goods drawn by partners, ` 15,000
(6) Cost of goods sent to consignees on 15th May 1992, lying unsold with them, ` 16,500
(7) Sales value of goods distributed as free samples, ` 1,500.
The average rate of gross profit was 20% in the past. The selling price was increased by 20% with
effect from 1st January 1992.
For valuing the stock for the Balance Sheet as at 31st December 1991 ` 1,000 were written-off in respect of a
slow moving item, the cost of which was ` 5,000. A portion of these goods were sold at a loss of ` 500 on the
original cost of `2,500. The remainder of the stock is now estimated to be worth the original cost.
Subject to the above exceptions, the gross profit remained at a uniform rate throughout. The value of goods
salvaged was estimated at ` 25,000. The concern had taken an insurance policy for ` 60,000 which was subject
to the average clause.
Solution
Step I
Since there is change in S.P. therefore current year G.P. ratio will be received
Past Yr. Current Yr.
Sale price 100 120
Cost 80 80
G.P. 20 40
G.P. Ratio 20 40
 100  100
100 120
= 20% = 33.33 or 1/3
Step II
Memorandum Trading Account for the period 1 st January to 31st May, 1992
Particulars Normal Abnorm Total Particulars Normal Abnormal Total
items al (` ) items items (` )
items
To Opening Stock 95,000 5,000 1,00,000 By Sales
To Purchases At shop 2,23,500 2000 225500
On approval 16,500
1,70,000
500
(-) (30,000) By goods loss
(figure includes 1,40,000 1,40,000 By free sample 1,000
` 30,000 for By cost with 22,000
machinery) customer
10,000
To Wages By goods drawing
(3,000 for (15000×2/3)
installation of By goods sent to 16,500
machinery) consignee
To Gross Profit 47,000 47,000 By closing stock at 72,500 2,500 75,000
(33 1/3% on sales) cost
(223500+16500)×
1/3
80,000 80,000
3,62,000 5,000 3,67,000 3,62,000 5,000 3,67,000

Particulars (`)
Add: Abnormal 2,500
75,000
(-) Salvage 25,000
Loss by fire 50,000
Step IV
Average Clause
Amount of policy
Value of stock
60,000
=  50,000  40,000
75,000
Working Note:
Total Sales
2,75,000
On approval received At shop
= 49,500 = 2,25,500
Approval received Not Approved Normal Abnormal

16,500 2,23,500
2 2,000
Loss=500
 49,500 = 33,000
3
At cost
2 × = 22,000
33,000 
3
Problem 12.
A fire occurred on 1st October, 1991 in the premises of X Co. Ltd. From the following figures, calculate the
amount of claim to be lodged with the insurance company for loss of stock: (all figures in rupees)
Stock at cost on 1.1.1990 90,000 Purchases from 1.1. 1991 to 30.9.1991 6,00,000
Stock at cost on 1.1.1991 70,000 Sales during 1990 6,00,000
Purchases during 1990 4,00,000 Sales from 1.1. 1991 to 30.9.199 8. 8, 80,000
You are informed that: (a) In 1991 the cost of purchases has risen by 20% over the levels prevailing in 1990; (b)
In 1991 the selling prices have gone up by 10% over the levels prevailing in 1990; and (c) Salvaged value is `
5,000.
Solution
Step I P/Y Trading A/c (1990)
To Purchase 4,00,000 By Closing Stock 70,000
To Actual G.P. (b/f) 1,80,000
6,70,000 6,70,000
1,80,000
P/y G.P Ratio =  100  30%
6,00,000
Working Note.2
Revision of G.P. Ratio
Particulars P/Y c/y sales
Pur. in c/y Opening stock
S.P. 100 110 110
Less : PurchaseCost 70 84 70
G.P. 30 26 40
÷G.P. Ratio 30/100×100=30% 26/110×100 = 40/110×100 =
23.63% 36.36%
Step IInd
Particulars Op. Stock C.y. pur. Total Particulars Op. Stock C.y. pur. Total
To Opening stock 70,000 - 70,000 By Sales(WN) 1,10,000 7,70,000 8,80,000
To Purchase - 6,00,000 6,00,000 By C. stock Nil 12,000 12,000
To G.P. 40,000 1,82,000 2,22,000
1,10,000 7,82,000 8,92,000 1,10,000 7,82,000 8,92,000

Particulars (`)
Value of stock on date of fire 12,000
(-) Salvage (5,000)
Loss by fire 7,000
Since no sum insured is given,
Claim = loss by fire = 7,000
Working Note :-
Assuming FIFO basis of stock Price is used (at last)

1. Sales of opening stock will be firstly
2. Then c/y purchase will be sold
Sales = 8,80,000
Sale of Opening Stock Cost = 70,000 sale of c.ypurchased

S.P= 8,80,000 -1,10,000=7,70,000
Gross Profit = 70,000 × 40/70 = 40,000 G.P. = 770000×26/110 = 182000
Sales = 1,10,000
Problem 13.
On 15th December, 2012, a fire occurred in the premises of M/s. OM Exports. Most of the stocks were
destroyed. Cost of stock salvaged being ` 1,40,000. From the books of account, the following particulars were
available:
(i) Stock at the close of account on 31st March, 2012 was valued at ` 9,40,000.
(ii) Purchases from 01-04-2012 to 15-12-2012 amounted to ` 13,20,000 and the sales during that
period amounted to ` 20,25,000.
On the basis of his accounts for the past three years, it appears that average gross profit ratio is 20% on
sales.
Compute the amount of the claim, if the stock were insured for ` 4,00,000.
[May-2013, 5 Marks]
Solution
1. Past year G.P. ratio = 20% on sales
2. Memorandum Trading A/c for the period 1.4.2012 to 15.12.2012
Particulars (`) Particulars (`)
To Purchase 13,20,000 By Closing stock (Balance figure) 6,40,000
To Gross profit 4,05,000
(20,25,000 × 20%)
26,65,000 26,65,000
3. Statement of Loss by fire

Particulars (`)
Value of stock immediately before fire 6,40,000
Less:- Salvage 1,40,000
Loss of fire 5,00,000
4. Since sum insured ` 4,00,000 is less than value for stock on date of fire, therefore Average clause will
apply.
Sum Insured
Claim = Loss by fire 
Value of Stock on date of fire
4,00,000
= 5,00,000 
6,40,000
= ` 3,12,500
Problem 14.
On 29th August, 2012 the godown of a trader caught fire and a large part of the stock of goods was destroyed.
However, goods costing ` 1,08,000 could be salvaged incurring fire fighting expenses amounting to ` 4,700.
The trader provides you the following additional information:

Particulars (` )
Cost of stock on 1st April, 2011 7,10,500
Cost of stock on 31st March, 2012 7,90,100
Purchases during the year ended 31st March, 2012 56,79,600
Purchases from 18th April, 2012 to the date of fire 33,10,700
Cost of goods distributed as samples for advertising from
1st April, 2012 to the date of fire 41,000
Cost of goods withdrawn by trader for personal use from
1st April, 2012 to the date of fire 2,000
Sales for the year ended 31st March, 2012 80,00,000
Sales from 1st April, 2012 to the date of fire 45,36,000
The, insurance company also admitted firefighting expenses. The trader had taken the fire insurance policy for `
9,00,000 with an average clause.
Calculate the amount of the claim that will be admitted by the insurance company.
[Nov.-2012, 8 Marks]
Solution
24,00,000
Gross profit Ratio =  30%
80,00,000
Trading A/c
For the year ended 31-3-2012
Particular (` ) Particular (` )
To Purchase 56,79,600 By Closing Stock 7,90,100
To Gross Profit (B/f) 24,00,000
87,90,100 87,90,100
Memorandum Trading A/c from 1-4-12 to Date of fire
Particular (`) Particular `
To Purchase 33,10,700
(-) Sample (41,000) By Stock on the Date of Fire 8,82,600
(-) Drawing (2,000) 32,67,700 (B/f)
To Gross Profit 13,60,800
(45,36,000 × 30%)
54,18,600 54,18,600
Calculation of Insurance Claim

Stock on the Date of fire 8,82,600
Less: Salvage stock 1,08,000
Loss of stock due to fire 7,74,600
Add: Fire fighting Expense 4,700
7,79,300
Note: Fire fighting Expenses will be added in Gross Loss by fire then Average clause will apply.
Since, Policy Amount ` 9,00,000, full claim will be admitted by Insurance Company.
Problem 15.
A fire occurred in the premises of M/s Kailash & Co. on 30th September 2013. From the following particulars
relating to the period from 1st April 2013 to 30th September 2013, you are required to ascertain the amount of
claim to be filed with the Insurance Company for the loss of stock. The company has taken an Insurance policy
for ` 75,000 which is subject to average clause. The value of goods salvaged was estimated at ` 27,000. The
average rate of Gross Profit was 20% throughout the period.
Particulars Amount in `
(i) Opening Stock 1,20,000
(ii) Purchases made 2,40,000
(iii) Wages paid (including wages for the installation of a machine ` 5,000) 75,000
(iv) Sales 3,10,000
(v) Goods taken by the proprietor (Sale Value) 25,000
(vi) Cost of goods sent to Consignee on 20th September 2013, lying unsold 18,000
with them
(vii) Free Samples distributed - Cost 2,500
[Nov.-2014, 8 Marks]
Solution
(i) Average rate of gross profit = 20%
Memorandum Trading A/c for the year ended on 30 th September 2013
Particulars ` Particulars `
To opening stock 1,20,000 By sales 3,10,000
To purchase 2,40,000 By cost of goods drawn 20,000
To wages 70,000 (25000×80%) 18,000
To Gross profit (310000×20%) 62,000 By cost goods sent to consignee 2,500
Bt free samples 1,41,500
By closing stock (balancing figure)
4,92,000 4,92,000

Particulars `
Value of stock immediately before fire 1,41,500
Less: Salvage 27,000
Claim = loss by fire × sum insured/ value of stock
= 1,14,500 × 75,000/1,41,500 60,689
Problem 16.
On 20th October, 2009, the godown and business premises of Aman Ltd. were affected by fire. From the
salvaged accounting records, the following information is available:
`
Stock of goods @ 10% lower than cost as on 31st March, 09 2,16,000
Purchases less returns (1.4.09 to 20.10.09) 2,80,000
Sales less returns (1.4.09 to 20.10.09) 6,20,000
Additional information:
(1) Sales upto 20th October, 09 includes Rs.80,000 for which goods had not been dispatched.
(2) Purchases upto 20th October, 09 did not include ` 40,000 for which purchase invoices had
not been received from suppliers, though goods have been received in Godown.
(3) Past records show the gross profit rate of 25%.
(4) The value of goods salvaged from fire ` 31,000.
(5) Aman Ltd. has insured their stock for ` 1,00,000.
Compute the amount of claim to be lodged to the insurance company.
[P.M. Page – 13.4]
Problem 17.
On 1st April, 2016 the stock of Mr. Hariprasad was destroyed by fire but sufficient records were saved from
which following particulars were ascertained:
Stock at cost 1 Jan. 2015 1,47,000
Stock at cost 31 Dec. 2015 1,59,200
Purchases year ended 31 Dec.2015 7,96,000
Sales year ended 31 Dec. 2015 9,74,000
Purchases 1-1-2016 to 31-3-2016 3,24,000
Sales 1-1-2016 to 31-3-2016 4,62,400
In valuing the stock for the Balance Sheet at 31st Dec. 2015 ` 4,600 had been written off on certain stock which
was a poor selling line having the cost ` 13,800. A portion of these goods were sold in March2016 at a loss of `
500 oil original cost of ` 6,900. 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 ` 11,600. The policy was for ` 1,00,000 and was subject to average clause.
Work out the amount of the claim of loss by fire.
[Nov-2016, 8 Marks]
Solution Trading Account for 2015
(to determine the rate of gross profit)
` ` `
To Opening Stock 1,47,000 By Sales A/c 9,74,000
To Purchase 7,96,000 By Closing Stock:
To Gross Profit 1,94,800 As valued 1,59,200
Add: Amount written off to
restore stock to full cost 4,600 1,63,800
11,37,800 11,37,800
1,94,800
The (normal) rate of gross profit to sale is =  100% = 20%
9,74,000
Memorandum Trading Account upto March 31, 2016
Normal Abnormal Total Normal Abnormal Total

Items Items Items Items Items
` ` ` ` ` `
To Opening Stock 1,50,000 13,800* 1,63,800 By Sales 4,56,000 6,400 4,62,400
(1,59,200 + 4,600 By Loss - 500 500
– 13,800)
To Purchases 3,24,000 - 3,24,000 By Closing Stock
To Gross Profit (20% (bal. fig.) 1,09,200 6,900 1,16,100
on ` 4,56,000) 91,200 91,200
5,65,200 13,800 5,79,000 5,65,200 13,800 5,79,000
* at cost, book value is ` 9,200

Calculation Of Insurance Claim
`
Value of Stock on April, 1, 2016 1,16,100
Claim subject to average clause:
Amount of Policy
  Actual loss of Stock
Value of Stock
1,00,000
 1,04,500
1,16,100
 Rs. 90,008.60 (or rounded off to 90,009)
Alternative solution
Trading account for the year ended 31.12.2015
` ` `
To Opening Stock 1,47,000 By Sales A/c 9,74,000
To Purchases 7,96,000 By Closing Stock:
Less: Abnormal Item 13,800 7,82,200 As Valued 1,59,200
Less: Abnormal Item 9,200 1,50,000
11,24,000 11,24,000
1,94,800
The (normal) rate of gross profit to sale is =  100% = 20%
9,74,000
Trading Account for the period from 1.1.2016 to 31.3.2016
Normal Abnormal Normal Abnormal

` ` ` `
To Opening stock 1,50,000 9,200 By Sales 4,56,000 6,400
To Purchases 3,24,000 - By Closing Stock 1,09,200 6,900

To Gross Profit 91,200 4,100
5,65,200 13,300 5,65,200 13,300
Stock as on 1.4.2016
Normal Stock 1,09,200
Abnormal Stock
Considered as normal now 6,900
Total Stock 1,16,100
Less: Salvage Stock 11,600
Claim of insurance 1,04,500 / 1,16,100 × 1,00,000
` 90,008.60 or ` 90,009
Note: Stock Value is more than the amount of policy taken. Hence, the average clause shall be applied while
making the claim of insurance.
Problems on Loss of Profit Policy

Problem 18.
Form the following data, compute a consequential loss claim:
1. Financial year ends on 31st December, Turnover ` 2,00,000
2. Indemnity period 6 months, Period of interruption 1st July to 31st October.,
3. Net profit ` 18,000.
4. Standing charges ` 42,000 out of which ` 10,000 have not been insured .
5. Sum assured ` 50,000 .
6. Standard turnover ` 65,000
7. Turnover in the period of interruption ` 25,000 out of which ` 6,000 was from a rented place at ` 600 per
month.
8. Annual turnover ` 2,40,000. Saving in standing charges ` 4,725 per annum.
Date of fire night of 30th June. It was agreed between the insured that the business trends would lead to an
increase of 10% in the turnover.
Solution
Period of claim 4 months
Standard turnover 65,000
Add: Trends in sales (65000×10%) 6,500
Adjusted turnover 71,500
Less: Actual turnover 25,000
Short Sales (a) 46,500
Gross profit Ratio (b) (w.n 1) 25%
Loss of profit a×b (46500×25%) 11,625
Add: Allowed additional Exp. (w.n 2) 1,500
4,725 (1,575)
Less: Reduction in standing charges During the period of claim 4
12
Total Loss 11,550
Insurance Claim = Total loss × Sum insured/ GP on A.A.T
50,000
 11,550  8,750
66,000
Working Note 1:
GP Ratio= NP + Insured Standing charges/Previous year turnover × 100
= 18,000 + 32,000/2,00,000 × 100
= 25%
Working Note 2: Allowed Additional Exps. Minimum of the following three

(i) Actual Additional Exps. = 600 × 4 month = 2,400
(ii) GP on additional sales generated due to such additional expenses
= 6,000 × 25% = 1,500
G.P.onAAT
(iii) Additional Actual Exp.×
(G.P.onAAT  uninsured S tan ding Ch arg es )
66000
= 2,400   2084
60000  10000
Working Note 3:
Adjusted annual turnover `
Annual turnover 2,40,000
+ Trends in sales 10% 2,400
Adjusted annual turnover (AAT) 2,64,000
GP Ratio = 25%  GP on AAT (264000×25%) 66,000
Sum Insured 50,000
If Sum insured is less than GP on AAT then average clause will apply
Problem 19.
The premises of X Y Ltd. were partially destroyed by fire on. 1.3.1992 and as a result, the business was
partially disorganized upto 31.8.1992. The company is insured under a loss of profit policy for `1,65,000
having an indemnity period of 6 months.
From the following information, prepare a claim under the policy. `
(i) Actual turnover during the period of dislocation (1.3.1992 to 31.8.1992) 80,000
(ii) Turnover for the corresponding period (dislocation) (1.3.1991 to 31.8.1991) 2,40,000
(iii) Turnover for 12 months immediately preceding the fire (1.3.1991 to 28.2.1992) 6,00,000
(iv) Net Profit for the last financial year 90,000
(v) Insured standing charges for the last financial year 60,000
(vi) Uninsured standing charges 5,000
(vii) Turnover for the last financial year 5,00,000
Due to substantial increase in trade, before and upto the time of the fire, it was agreed that an adjustment of
10% should be made in respect of the upward trend in turnover. The company incurred additional expenses
amounting to ` 9,300 immediately after the fire and but for this expenditure, the turnover during the period of
dislocation would have been only ` 55,000. There was also a saving during the indemnity period of ` 2,700 in
insured standing charges as a result of the fire.
Solution Annual Turn = 6,00,000
1.1.92 1.3.92 31.8.92
P.Y.T=5,00,000 Actual
T= 80,000
Particulars Amount
Standard turnover 2,40,000
Add: Trends in sales (2,40,000 × 10%) 24,000
Adjusted turnover 2,64,000
Less: Actual turnover (80,000)
Short Sales (a) 1,84,000
Loss of profit a×b (184000×30%) 55,200
Less: Reduction in standing charges During the period of claim (2,700)
Total Loss 60,000
1,65,000
60,000   50,000 50,000
1,98,000
Working Note 1:
GP = NP + Insured Standing charges/Previous year turnover × 100
90,000  60,000
= ×100  30%
5,00,000

(i) Actual Additional Exps. = 9,300

(80,000 – 55,000) = 25,000 × 30% = 7,500
G.P.onAAT
198000
= 9,300   9,071
198000  5000
Working Note 3:
GP Ratio = 30%  GP on AAT 1,98,000
Sum Assured = 1,65,000
Problem 20.
On account of a fire on 15thJune, 2002 in the business house of a company, the working remained disturbed up
to 15 Dec., 2002 as a result of which, it was not possible to affect any sales. The company had taken out an
insurance policy with an average clause against consequential losses for ` 1,40,000 and a period of 7 months
has been agreed upon as indemnity period. An increase of 25% was marked in the current year's sales as
compared to last year. The company incurred an additional expenditure of ` 12,000 to make sales possible and
made a saving of ` 2,000 in the insured standing charges.
Ascertain the claim under the consequential loss policy keeping following additional information in view:
(` )
Actual sales from 15th June, 2002 to 15 Dec., 2002 70,000
Sales from 15th June, 2001 to 15 Dec., 2001 2,40,000
Net profit for last Financial year 80,000
Insured standing charges for the last Financial year 70,000
Total standing charges for the last Financial year 1,20,000
Turnover for the last Financial year 6,00,000
Turnover for one year: 16 June, 2001 to 15 June, 2002 5,60,000
[Nov – 2003, 9 Marks]
Solution
Particulars Amount
Add: Trends in sales 60,000
Less: Actual turnover (70,000)
(2,30,000 × 25%) 57,500
Loss of profit a×b
Less: Reduction in standing charges During the period of claim (2,000)
Total Loss 64,833
1,40,000
64,833   51,866
1,75,000
Working Note 1:
GP = NP + Insured Standing charges/Previous year turnover × 100
80,000  70,000
 100  25%
6,00,000
(i) Actual Additional Exps.= 12,000

70,000 × 25% = 17,500
G.P.onAAT
175000
12,000   9,333
175000  50000
Note: If nothing specified always assume total actual sales in additional sales.
Working Note 3:

+ Trends in sales (25%×560000) 1,40,000
GP Ratio = 25%  GP on AAT (700000×25%) 1,75,000
Problem 21.
From the following details, calculate consequential Loss of claim:
1. Date of fire: 1st September following;
2. Indemnity period: 6 months;
3. Period of disruption: 1st September to 1st February;
4. Sum insured: ` 1,08,900;
5. Sales were ` 6,00,000 for preceding financial year ended on 31st March.
6. Net profit for preceding financial year ` 36,000 plus insured standing charges ` 72,000;
7. Rate of Gross profit 18%;
8. Uninsured standing charges ` 6,000;
9. Turnover during the disruption period ` 67,500;
10. Annual turnover for 12 months immediately preceding the date of fire ` 6,60,000;
11. Standard turnover i.e. for corresponding months (1stSeptember to 1st February) in the year
preceding the date of fire ` 2,25,000;
12. Increase in the cost of Working ` 12,000 with a saving in insured standing charges ` 4,500 during
the disruption period;
13. Reduction in turnover avoided through increase in working cost `30,000;
14. Special clause stipulated:
(a) Increase in rate of G. P. 2%
(b) Increase in turnover (Standard and Annual) 10%. [Nov – 2008, 8 Marks]
Solution Annual turnover = 6,60,000

Particulars Amount
Add: Trends in sales (10%×2,25,000) 22,500
Gross profit Ratio (b) (W.N 1) 20%
Loss of profit (1,80,000 × 20%) 36,000
Add: Allowed additional expense 6,000
(4,500)
Total Loss 37,500
1,08,900 28,125
37,500 
1,45,200
Working Note 1:
N .P.  Insured S tan ding Ch arg es
GP   100
Pr evious Year turnover
36,000  72,000
  100  18%
6,00,000
Add: Increase in Rate of G.P. = 2%
20%
Working Note. 2 Allowed Additional Expense, minimum of the following three
(i) Actual Additional Expense= 12,000
(ii) G.P. on additional sales generated due to such additional expenses

= 30,000 × 20% = 6,000
G.P. on AAT
(Uninsured s tan ding ch arg es )  G.P. on AAT
1,45,200
= 12,000   11,524
1,45,200  6,000
Working Note. 3
+ Trends in sales (10%) 66,000
GP Ratio = 20%  GP on AAT 1,45,200
Problem 22.
A “loss of profit” policy was taken for ` 80,000. Fire occurred on 15th March, 1989. Indemnity period was for
three months. Net profit for 1988 year ending on 31st December was ` 56,000 and standing charges (all
insured) amounted to ` 49,600. Determine insurance claims from the following details available from quarterly
sales tax returns:
Sales 1986 (`) 1987 (`) 1988 (`) 1989 (`)
Fro m 1st January to 31st March 1,20,000 1,30,000 1,42,000 1,30,000
Fro m 1st April to 30th June 80,000 90,000 1,00,000 40,000
Fro m 1st July to 30th September 1,00,000 1,10,000 1,20,000 1,00,000
Fro m 1st October to 31st December 1,36,000 1,50,000 1,66,000 1,60,000
Sales from 16.3.1988 to 31.3.1988 were ` 28,000

Sales from 16.3.1989 to 31.3.1989 were ` Nil
Sales from 16.6.1988 to 30.6.1988 were ` 24,000 and
Sales from 16.6.1989 to 30.6.1989 were ` 6,000.
Solution Statement Showing Loss of Profit

Particulars (` )
Period of claim 3 Months
(a) Standard Sales 1,04,000
Add : Increase in trend 10% 10,400
Adjusted Standard Sales 1,14,400
(b) Actual Sales of the indemnity period, 34,000
Short Sales (a -b) 80,400
Loss of Profit = Short Sales × Gross Profit ratio = ( ` 80,400 × 20%) 16,080
Add : Allowed Additional expenses Nil
Less : Saving in insured standing Charges Nil
Total Loss 16,080
Net Claim = Gross Claim × = ` 16,080 × 80,000/1,19,680 = ` 10,749
(i) Actual turnover (15.3.89 to 15.6.89)

Turnover from 1.4.89 to 30.6.89 40,000
+ 16.3.89 to 31.3.89 Nil
- 16.6.89 to 30.6.89 (6,000)
34,000
(ii) Standard turnover (15.3.88 to 15.6.88)
Turnover from 1.4.88 to 30.6.88 1,00,000
+ 16.3.88 to 31.3.88 28,000
- 16.6.88 to 30.6.88 (24,000)
1,04,000
(iii) Trends in Sales
Compare some part year sales
86 87 88
4,36,000 4,80,000 5,28,000
44,000 48,000
10.09% 10%
Average = 10.045% or 10%

Working Note.1
N .P  Insured S tan ding Ch arg es

1. G.P. rate = 100
Pr evious year turnover
56,000  49,600
= 100 = 20%
5,28,000
Working Note.2
Annual turnover (16.3.89 to 15.3.89)

Turnover 1.4.88 to 31.3.89 (1,00,000 + 1,20,000+1,66,000+1,30,000) 5,16,000
+ 16.3.88 to 31.3.88 28,000
- 16.6.88 to 30.6.88 Nil
5,44,000
Working Note. 3
GP Ratio = 20% GP 1,19,680
Sum Assured = 80,000
Since Sum insured is less than GP on AAT then average clause will apply
Problems on Combine Question of Loss of Stock and

Loss of Profit
Problem 23.
S and M Ltd. give the following Trading and Profit and Loss Account for the year ended 31st Dec.
1984.
To Purchase 3,00,000 By Closing Stock 70,000
To Wages (` 20,000 for skilled workers) 1,60,000
To Manufacturing Expenses 1,20,000
8,70,000 8,70,000
To Office Administration Expenses 60,000 By Gross Profit 2,40,000
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. Fire occurred on 1st May 1985 and as a result of which sales were seriously affected for
the period of 4 months. You are given the following further information:
(a) Purchases, wages and other manufacturing expenses for the first 4 months of 1985 were
` 1,00,000; 50,000 and ` 36,000 respectively.
(b) Sales for the same period were ` 2,40,000.
(c) Others sales figure were as follows:
From 1.1.1984 to 30.4.1984 3,00,000
From 1.5.1984 to 31.8.1984 3,60,000
From 1.5.1985 to 31.8.1985 60,000
(d) Due to rise in wages net profit during 1985 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.
Solution
A. Claim for Loss of stock
Dr. Memorandum Trading Account for the period from 1 st Jan. to 1st May 1985 Cr.
To Purchases 1,00,000 By Closing Stock (bal. fig.) 83,200
To Wages 50,000
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 ` 80,000 (i.e., the amount of policy and not more).
* G. P. of 1984 = 30% - 2% decrease = 28%
B. Loss Of Profit policy
1.5.84 = 3,00,000
31.8.89 = 3,60,000 60,000

Decline by 20%
1.5.85 = 2,40,000
31.8.85 = 6,00,000
60,000
Trend in Sales =  100 = 20% decline
3,00,000
Working Notes.1
NP  Insured S tan ding Ch arg es

GP =  100
Pr evious year turnover
56,000  1,20,000
=  100 = 22%- 2% = 20% AGR
8,00,000
Particulars Amount
Less: Dec. in trend (20% × 3,60,000) 72,000
Gross profit Ratio (b) (W/N 1) 20%
Loss of profit (a × b) = (2,28,000 × 20%) 45,600
Add: Allowed additional expense (W/N – 2) 12,000
Less: Reduction in standing charges during period of claim Nil
Total Loss 57,600
Insurance Claim = Total loss 57,600
Working Notes.2
Allowed additional exps. Minimum of the following three:-

(i) Actual additional expense = 1,40,000
(ii) G.P. on additional sales generated due to such addition expense
= 60,000 × 20% = 12,000
G.P. on AAT
(iii) Additional expense 
(Uninsured s tan ding ch arg es  G.P. on AAT )
1,18,400
= 1,40,000  = 1,19,769
1,18,400  20,000
Working Note. 3
+ Trends in sales (7,40,000 × 20%) 1,48,000
GP Ratio (20%) GP on AAT 1,18,400
Since, sum insured is more than GP on AAT, average clause will not apply
Working Note.4
Annual turnover 1.5.84 to 30.4.84

P.yr. Turnover 1.4.84 to 31.3.84 8,00,000
+ 1.1.85 to 30.4.85 2,40,000
- 1.1.84 to 30.4.84 (3,00,000)
7,40,000
Problem 24.
Sony Ltd. Trading and Profit and Loss Account for the year ended 31st Dec. 1993 is as follows :
Trading and Profit and Loss Account for the year ended 31 st December 1993
To Purchases 6,50,000 By Closing Stock 90,000
To Manufacturing Exp. 1,70,000
10,90,000 10,90,000
To Administrative Expenses 80,000 By Gross Profit 2,50,000
To Selling Expenses 20,000
To Finance Charges 1,00,000
2,50,000 2,50,000
The company had taken out a fire policy for ` 3,00,000 and a loss of profit policy for `1,00,000 having an
indemnity period of 6 months. A fire occurred on 1.4.1994 at the premises and the entire stock were gutted with
nil salvage value. The net quarter sale i.e., 1.4.1994 to 30.6.1994 was severely affected. The following are the
other information :
` `
Sales during the period 1.1.94 to 31.3.94 2, 50,000 Purchase during the period 1.1.94 to 31.3.94 3,00,000
Manufacturing Expenses 1.1.94 to 31.394 70,000 Sales during the period 1.4.94 to 30.6.94 87,500
Standing charges insured 50,000 Actual expenses incurred after fire 60,000
The general trend of the industry shows an increase in sales by 15% and decrease in G. P. by 5% due to
increased costs.
Ascertain the claims for loss of stock and loss of profits. [C. A. (Inter), Nov. 1994]
Solution
Dr. In the books of Sony Ltd. Trading Account (from 1.1.1994 to 31.3. 1994) Cr.
To Purchases 3,00,000 By Closing Stock (bal. fig.) 2,60,000
To Gross Profit(25%-5% =20% on Sales) 50,000
5,10,000 5,10,000
* Amount of claim for stock lost by fire is ` 2,60,000.
B. 2,17,391
10,00,000 = 1.4.93 100
31.6.93 = 2,50,000 
31.12 =
115
2,50,000
1.4.94 =
30.6.94 = AT = 87,500
Working Note.1
P.yr. Turnover for 12 Months 10,00,000

Less: Turnover for first quarter
100
2,50,000  2,17,391
115
Turnover from 1.4.93 to 31.12.93 7,82,609
(9 Month)
Turnover for 3 Months from
1.4.93 to 30.6.93 2,60,870
(Standard turnover)
Statement of claim
Particulars Amount
Standard turnover(W/N.1) 2,60,870
+ Trend in Sales 15% 39,130
Adjusted Standard turnover 3,00,000
Short Sales 2,12,500
Adjusted G.P. Ratio 5%
Loss of profit (2,12,500 × 5%) 10,625
Allowed additional expense 4,375
Less: Saving in Insured Standing Charges Nil
Total Loss 15,000
Claim = Total loss 15,000
Working Notes.2
N .P.  Insured S tan ding Ch arg es

G.P. ratio =  100
p. y.Turnover
50,000  50,000
= 100 = 10%
10,00,000
Less: Decrease in G.P. Ratio 10%
Adjusted G.P. Ratio 5%
5%
Working Note.3
Allowed additional expenses, minimum of following three:-
(i) Actual additional expense = 60,000
(ii) G.P. Ratio × Additional sales generated due to additional expense
= 5% × 87,500 = 4,375
G.P. on AAT
(iii) Additional expense ×
(Unisured S tan ding Ch arg es  G.P. on AAT )
59,375
 60,000   60,000
59,375  0
Working Note.4
Annual turnover (1.4.93 to 31.3.94)

Turnover from1.4.93 to 31.12.93 7,82,609
Turnover from1.1.94 to 31.3.94 2,50,000
+ Trend in Sales (15% × 10,32,609) 1,54,891
AAT 11,87,500
A.G.P. Ratio 5%
G.P on AAT 59,375
Sum Insured 1,00,000
Since Sum insured is more than G.P. on AAT, Average clause will not apply.
Problem 25.
Ramda & Sons had taken out policies (without Average Clause) both against loss of stock and loss of profit, for
` 2,10,000 and ` 3,20,000 respectively. A fire occurred on 1st July, 2011 and as a result of which sales were
seriously affected for a period of 3 months.
Trading and Profit & Loss A/c of Ramda & Sons for the year ended on 31 st March, 2011 is given
below.
To Wages 1,58,000
To Gross Profit c/d 3,00,000 ________
Total 13,85,000 Total 13,85,000
To Administrative Expenses 83,600 By Gross Profit b/d 3,00,000
To Selling Expenses (Fixed) 72,400
To Commission on Sales 34,200
To Carriage Outward 49,800
Total 3,00,000 Total 3,00,000
Further details provided is as below:

(a) Sales, Purchases, Wages and Manufacturing Expenses for the period from 01.04.2011 to
30.06.2011 were ` 3,36,000, ` 2,14,000, ` 51,000 and ` 12,000 respectively.
(b) Other Sales figure were as follows: (`)
From 01.04.2010 to 30.06.2010 3,00,000
From 01.07.2010 to 30.09.2010 3,20,000
From 01.07.2011 to 30.09.2011 48,000
(c) Due to decrease in the material cost, Gross Profit during 2011-12 was expected to increase by 5%
on sales.
(d) ` 1,98,000 were additionally incurred during the period after fire. The amount of policy included `
1,56,000 for expenses leaving ` 42,000 uncovered.
Compute the claim for stock, loss of profit and additional expenses. [May-2012]
Solution
(a) Loss of Stock
(i) Memorandum Stock Account
To Purchases 2,14,000
To Wages 51,000 By Stock Lost (b/f) 2,26,800
To Manufacturing Exp. 12,000
To Gross Profit [ 3,36,000 × 30%] 1,00,800
5,62,800 5,62,800
(ii) Calculation of GP Ratio

GP Ratio = 3,00,000 100 25%
12,00,000
(+) Increase 5%
30%
(iii) Claim for loss of stock = 2,26,800  2,10,000  2,10,000
2,26,800
(b) Loss of Profit Policy

(i) Calculation of trend [1.4.2010 to 30.6.2010 and 1.4.2011 to 30.6.2011] =
36,000
100  12%
3,00,000
(ii) Calculation of Short Sales

Standard Sales [1.7.2010 – 30.9.2010] 3,20,000
(+) Trend @ 12% 38,400
Total 3,58,400
(-) Actual Sales (48,000)
Short Sales 3,10,400
(iii) Calculation of GP Ratio

60,000  1,56,000
GP Ratio =  100 18%
12,00,000
(+) Trend 5%
23%
(iv) Loss of Profit [3,10,400 × 23%] = 71,392
(v) Additional Exp.

(i) Actual = 1,98,000
1,98,000  3,09,120
(ii) Formula =  1,74,316
3,09,120  42,000
(iii) Turnover avoided × GP Ratio = 48,000 × 23% = 11,040.
Minimum of three limit is allowed as expenses i.e. 11,040.
(vi) Statement on Net Loss
Loss of Profit 71,392
(+) Additional Exp. 11,040
82,432
Working Note:
Calculation of GP on AAT
Sales from 1.7.2010 – 31.3.2011 [12,00,000 – 3,00,000] 9,00,000
(+) Trend @ 12% 1,08,000
(+) Sales from 1.4.2011 – 30.6.2011 3,36,000
Total 13,44,000
GP @ 23% 3,09,120
Problems on Insurance Policy Amount

Problem 26.
In January, 2010 a firm took an insurance policy for ` 60 lakhs to insure goods in its godown against fire
subject to average clause. On 7th March, 2010 a fire broke out destroying goods costing ` 44 lakhs. Stock in the
godown was estimated at ` 80 lakhs. Compute the amount of insurance claim.
[May- 2010, 2 Marks]
Solution
When average clause will apply, then
Policy Amount
Insurance claim = Loss of Stock 
Value of Stock in the godown
60,00,000
= 44,00,000   33,00,0000
80,00,000
Problem 27.
CCL wants to take up a Loss of Profit Policy. Turnover during the current year is expected to increase by 20%.
The company will avail overdraft facilities from its bank @ 15% interest to boost up the sales. The average
daily overdraft balance will be around ` 3 lakh. All other fixed expenses will remain same. The following
further details are also available from the previous year's account:
(` )
Total variable expenses 24,00,000
Fixed expenses:
Salaries 3,30,000
Rent, Rates and Taxes 30,000
Traveling expenses 50,000
Postage, Telegram, Telephone 60,000
Director's fees 10,000
Audit fees 20,000
Miscellaneous income 70,000
Net profit 4,20,000
Determine the amount to be taken for the current year. [Nov – 2001, 4 Marks]
Solution
P.Y. Net Profit 4,20,000
Less: M/s. Income 70,000
P.Y. Net profit on Opening Income 3,50,000
+ Standing Charges 5,00,000
P.Y. G.P. 8,50,000
+ Increase due to increase in Sales =(8,50,000 × 20%) 1,70,000
Next year expected G.P. 10,20,000
Additional Fixed Cost

Interest on BOD
(3,00,000 × 15%) 45,000
Total Gross Profit 10,65,000
For full insurance, policy amount should be 10,65,000
Working Notes: Profit and Loss Account for the previous Year
To Variable Expenses A/c 24,00,000 By Sales A/c 32,50,000
To Fixed expenses* 5,00,000 By Misc. Income 70,000
To Net Profit 4,20,000
33,20,000 33,20,000
* Fixed Expenses = ` 3,30,000 + ` 30,000 + ` 50,000 + ` 60,000 + ` 10,000 + ` 20,000 = ` 5,00,000.
Problem 28.
M/s Platinum jewelers want to take up a “Loss of Profit Policy” for the year 2015. The extract of the profit &
Loss Account of the previous year ended 31.12.2014 provided below:
Variable Expenses
Cost of Material 18,60,000

Fixed Expenses
Wages for skilled craftsmen 1,60,000
Salaries 2,80,000
Audit fees 40,000
Rent 64,000
Bank Charges 18,000
Interest Income 44,000
Net Profit 6,72,000
Turnover is expected to grow by 25% next year. To meet the growing working capital needs the partners have
decided to avail overdraft facilities form their Bankers @ 12% p.a. interest. The average daily overdraft balance
will be around ` 2 lakhs. The wages for the skilled craftsmen will increase by 20% and salaries by 10% in the
current year. All the expenses will remain same. Determine the amount of Policy to be taken up for the current
year by M/S Platinum Jewelers.
[May-2015, 6 Marks]
Solution
1. Trading and Profit and Loss Account for Previous year
To Variable Expenses 18,60,000 By Sales (balancing figure) 30,50,000
To Fixed Expenses 5,62,000 By Miscellaneous Income 44,000
To Net profit 6,72,000
30,94,000 30,94,000
Note: Total Fixed Expenses = ` 1,60,000 +` 2,80,000 +` 40,000 + ` 64,000 + ` 18,000 =` 5,62,000
2. Computation of Insurance policy to be taken
Particulars `
Gross profit (sales `30,50,000 Less variable expenses ` 18,60,000) 11,90,000
Add: Additional GP at 25% of above 2,97,500
Add: Increase Standing Charges
Wages @ 20% of 1,60,000 32,000
Salaries @ 10% of 2,80,000 28,000
Interest on overdraft @ 12% of 2,00,000 24,000 84,000
Policy to be taken for current year 15,71,500
Problem 29.
A firm has decided to take out a loss of profit policy for the year 2016 and given the following information for
the last accounting year 2015. Variable manufacturing expenses ` 14,20,000, Standing charges ` 1,50,000, Net
profits ` 80,000, Non-operating income ` 2,500, Sales ` 18,00,000.
Compute the sum to be insured in each of the following alternative cases showing the anticipation for the year
2016:
(i) If sales will increase by 15%.
(ii) If sales will increase by 15% and only 50% of the present standing charges are to be insured.
(iii) If sales and variable expenses will increase by 15% and standing charges will increase by 10%.
(iv) If sales will increase by 15% and variable expenses will decrease by 5%.
(v) If sales will increase by 10% and standing charges will increase by 15%.
(vi) If the turnover and standing charges will increase by 15% and variable expenses will decrease by 10%
but only 50% of the present standing charges are to be insured.
Solution
1. GP of last year for policy purposes = Net Profit + Standing Charges (-) Non-Operating Income
= 80,000 + 1,50,000 (-) 2,500 = ,2,27,500
2. Computation of Insurance Policy to be taken in various situations Situation
Situation (i): 15% increase in sale `

15% increase in sales (2,27,500 + 15%) 2,61625
Situation (ii): 15% Sales increase + 50% reduction in Standing Charges `
GP with 15% increase = ` 2,27,500 + 15% 2,61,625
Less: 50% of Standing Charges (75,000)
1,86,625
Situation (iii): 15% increase in Sales & Variable Expenses, 10% increase in `
Standing Charges
Sales (18,00,000 × 115%) 20,70,000
Less: Variable Expenses (14,20,000 ×115%) (16,33,000)
Less: Fixed Expenses (as per last year) (1,52,500)
Add: 10% Increase in Standing Charges 15,000
2,99,500
Situation (iv): Sales Increase 15%, Variable Expenses decrease 5%: `
Sales (18,00,000 × 115%) 20,70,000
Less: Variable Expenses (14,20,000 × 95%) (13,49,000)
Less: Fixed Expenses (1,52,500)
5,68,500
Situation (v): Sales Increase 10%, Standing Charges Increase 15%: `
GP with 10% increase = , 2,27,500 + 10% 2,50,250
Add: 15% increase in Standing Charges 22,500
2,72,750
Situation (vi): Turnover & Standing Charges 15% Increase, Variable Expenses `
decrease by 10%, 50% of Standing Charges to be insured:
Sales (18,00,000 × 115%) 20,70,000
Less: Variable Expenses (14,20,000 × 90%) (12,78,000)
Less: Fixed Expenses (as per last year) (1,52,500)
Add: 15% increase in of Standing Charges 22,500
Total of above 6,62,000
Less: 50% of present Standing Charges (75,000)
5,87,000
Problem 30.
A Trader intends to take a Loss of Profit Policy with indemnity period of 6 months, however, he could not
decide the policy amount. From the following details suggest the Policy Amount:
Turnover in the last financial year ` 6,75,000

Standing Charges in the last financial year ` 1,14,750
Net Profit earned in last year was 10% of Turnover and the same trend expected in subsequent year.
Increase in Turnover expected 30%. To achieve additional sales, the Trader has to incur additional
expenditure of ` 42,500.
[Nov-2015, 8 Marks]
Solution
1. Profit and Loss Account for Previous Year
To Variable Expenses (Balancing By Sales 6,75,000
Figure) 4,92,750
To Standing Charges 1,14,750
To Net Profit (10% on sales) 67,500
Total 6,75,000 Total 6,75,000
2. Computation of Insurance Policy to be taken
Particulars `
Gross Profit (Sales ` 6,75,000 Less Variable Expenses ` 4,92,750) as per Previous Year 1,82,250
Add: Additional GP for 30% increase in Turnover (` 1,82,250 × 30%) 54,675
Add: Additional Expenditure to achieve Additional Sales 42,500
Policy to be Taken for Current Year 2,79,425
Extra Problems
Problem 31.
A company lodged a claim to insurance company for ` 5,00,000 in September,2006. The claim was settled in
February,2007 for ` 3,50,000. How will you record the short fall in claim settlement in the books of the
company. [Nov-2007, 2 Marks]
Solution
Journal Entries
Date Particulars Dr. Cr.

Sept. 06 Insurance Company A/c……………………………….Dr. 5,00,000
To insurance claim A/c 5,00,000
Bank A/c…………………………………………………Dr 3,50,000
P/L A/c…………………………………………………..Dr 1,50,000
To insurance claim A/c 5,00,000
Problem 32.
From the following information, ascertain the value of stock as on 31st March, 2012:
Particulars `
Stock as on 01-04-2011 28,500
Purchases 1,52,500
Manufacturing Expenses 30,000
Selling Expenses 12,100
Administration Expenses 6,000
Financial Expenses 4,300
Sales 2,49,000
At the time of valuing stock as on 31 March, 2011, a sum of ` 3,500 was written off on a particular item,
st
which was originally purchased for ` 10,000 and was sold during the year for ` 9,000. Barring the transaction
relating to this item, the gross profit earned during the year was 20% on sales.
Solution Statement showing valuation of stock as on 31.3.2012
Particulars ` `
Stock as on 01-04-2011 28,500
Less: Book value of abnormal stock(` 10,000 – ` 3,500) 6,500 22,000
Add: Purchases 1,52,500
Manufacturing Expenses 30,000
2,04,500
Less: Cost of Sales:
Sales as per Books 2,49,000
Less: Sales of Abnormal item (9,000)
2,40,000
Less: Gross Profit @ 20% (48,000) (1,92,000)
Value of Stock as on 31st March, 2012 12,500
Problem 33.
What is Consequential loss policy and what items are generally covered by such policy?
[May-2017, 4 Marks]
Solution
Business Enterprises get insured against the loss of stock on the happening of certain events such as fire, flood,
theft, earthquake etc. Insurance being a contract of indemnity the claim for loss is restricted to the actual loss of
assets. Sometimes an enterprise also get itself insured against consequential loss of profit due to decreased
turnover, increased expenses etc.
If loss of profits consequent to the event or mis -happening (Fire, flood, theft etc.) is also insured, the
policy is known as loss of profit or consequential loss policy.
The Loss of Profit Policy normally covers the following items:
(1) Loss of net profit
(2) Standing charges.
(3) Any increased cost of working e.g., renting of temporary premises

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Problems on Loss of Stock

Statement of Loss by Fire

To Gross Profit 28,600 34,800 35,800

Calculation of different types of G.P.Ratio

Dealer Dealer (Cash Agent Branch

To Opening Stock(250000×100/200 1,25,000 By Sales

Calculation of Gross Profit

Step III Statement of loss by fire

Memorandum Trading A/c

Step III Statement of loss by fire

Step IV Applying average clause:

To Gross Profit 45,600 - 45,600 By Closing Stock 54,600 3,450 58,050

2,82,600 6,900 2,89,500 2,82,600 6,900 2,89,500

Cost 3,450 Cost = 3,450

Particulars N A Total Particulars N A Total

Value of closing stock immediately before fire(normal goods at cost) 1,86,000

Total value of stock 1,91,500

(-) Salvage (11,500)

Loss by fire 1,80,000

Note: Any w/o is added back to find out normal G.P.

Normal G.P. Ratio = 171000/855000×100 = 20%.

Particulars N A Total Particulars N A Total

Sum insured = 60,000

Step II Memorandum Trading A/c

On approval received 49500 Normal 2,25,500

Approval received Approval not received

Step III Statement of loss by fire

On approval received At shop

Approval received Not Approved Normal Abnormal

Step III Statement of loss by fire

Since no sum insured is given,

Claim = loss by fire = 7,000

Assuming FIFO basis of stock Price is used (at last)

Sale of Opening Stock Cost = 70,000 sale of c.ypurchased

3. Statement of Loss by fire

The trader provides you the following additional information:

Calculation of Insurance Claim

Statement of loss by fire

Memorandum Trading Account upto March 31, 2016

Normal Abnormal Total Normal Abnormal Total

* at cost, book value is ` 9,200

Claim subject to average clause:

Trading Account for the period from 1.1.2016 to 31.3.2016

Normal Abnormal Normal Abnormal

To Purchases 3,24,000 - By Closing Stock 1,09,200 6,900

Problems on Loss of Profit Policy

Working Note 2: Allowed Additional Exps. Minimum of the following three

Solution Annual Turn = 6,00,000

1.1.92 1.3.92 31.8.92

Working Note 2: Allowed Additional Exps. Minimum of the following three

(ii) GP on additional sales generated due to such additional expenses

Working Note 2: Allowed Additional Exps. Minimum of the following three

(i) Actual Additional Exps.= 12,000

(ii) GP on additional sales generated due to such additional expenses

Adjusted annual turnover `

Solution Annual turnover = 6,60,000

Working Note. 2 Allowed Additional Expense, minimum of the following three

(i) Actual Additional Expense= 12,000