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:
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
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
(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:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||