Insurance Claim:Loss On Stocks Claims

July 25th, 2007 Comments off
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How to compute Loss On Stock Claims
1.       Draw up an estimated Trading Account for the period2.      The average gross profit % on turnover for the past years will be ascertained and this rate is use to calculate the estimated gross profit on the sales for the period under review.3.      The balance on the Trading Account will represent the stock that has been lost. 

4.       Where books of accounts have been destroyed, customers and suppliers are being circularized to obtain the sales and purchases respectively

5.       For opening stock value, this can be obtained from copies of last Balance Sheet available from auditor or Inland Revenue.

 

6.      Any salvaged stock is valued and deduct from the estimated total stock value to give the amount of insurance claim 7.      Where the insurance policy has an average clause attached, this average clause will be used to reduce the amount of claim.  

 

 Illustrated: 

Closing stock = $10,000;

Value of stock salvaged =$2,000; Insurance cover is $6,000;Under the average clause condition, the claimant can only be paid for($10,000-$2,000) x $6,000/$10,000 =$4,800 only

 

Illustration for Loss Of Stock Claim

Question:On 1 June 2006, the stock of A Limited was destroyed by fire. The books of account showed the following:

        $
Sales for the year to 31/12/2005                               

200,000

Stock per Balance Sheet @ 31/12/05

20,000

Purchases between 1/1 to 1/6/2006

25,000

Sales between 1/1 to 1/6/2006

50,000

Stock at cost on 1/1/2005

15,000

Purchases for year ended 31/12/2005

165,000

 

Stock salvaged realized $2,500 and the current gross profit ratio in recent years has been constant.Compute the amount of insurance claim for stock.

 

Solution:

First  construct the Trading Account for year ended 31/12/2005 to ascertain what is the gross profit %.

Trading Account For Year Ended 31/12/2005

  $   $
Opening Stock

15,000

Sales

200,000

Purchases

165,000

   
 

180,000

   
Closing stock

20,000

   
Cost of sales

160,000

   
Gross Profit( balancing figure)

  40,000

   
 

200,000

  200,000

 

Therefore, Gross Profit % = $40,000/$200,000=20% 

 

(2)    Next, construct the ESTIMATED Trading Account for the five months period ended 31/5/2006 to ascertain what is value of the stock loss by filling in the balancing figure using the GP% of 20% earlier obtained from step (1) 

Trading Account For Year Ended 31/12/2005

  $   $
Opening Stock

20,000

Sales 50,000
Purchases

25,000

   
 

45,000

   
Closing stock (???)

5,000

   
Cost of sales

40,000

   
Gross Profit ( per step 1 =20% x$50,000 (sales))

  10,000

   
 

50,000

  50,000

       

(3) Finally, compute the insurance claim:  

    From item 2, estimated closing stock = $ 5,000 

 

    Less: Salvage value of stock realized = ($2,500)      Therefore Insurance Claim            =     $2,500

 

 Accounting Entries for Insurance Claims: 

  DR CR
Insurance Claim Account XXX  
Trading A/c with computed value of stock lost   XXX
     
Insurance Claim Account XXX  
Bank Account with expenses in respect of the claim and of repairing damaged stock   XXX
     
Bank Account XXX  
Insurance Claim Account with proceeds of claims received   XXX
     
Profit and Loss Account XXX  
Insurance Claim Account with loss on insurance claim (if any)   XXX

 

 

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Financial Accounting

 
 

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