2 Insurance Claims

CA NITIN GOEL INSURANCE CLAIM
CH
INSURANCE CLAIM 2
“Don’t be pushed around by the Fears in your Mind. Be led by the Dreams
in your Heart.”
WEIGHTAGE IN PAST YEAR EXAMS
10 10 10 10 10 10 10
5
MAY 18 NOV 18 MAY 19 NOV 19 NOV 20 JAN 21 JULY 21 DEC 21
INSURANCE
❖ It’s a contract between the two parties that if first party suffers any loss, the
second party will make such loss good. Thus, the risk of one is assumed by the
other.
❖ The party which transfers such risk is called insured and the other party which
assumes such risk is called insurer.
❖ Insured pays the amount of premium to insurer in consideration of risk being
undertaken by the insurer and in the event of mishappening, the insurer provides
the lump sum amount to insured in the name of claim.
Page 2.1
LOSS OF STOCK
→ Meaning & Nature:
❖ Business enterprises gets insured against the loss of stock on the happening of
certain events such as fire, flood, theft, earthquake etc. Stock destroyed by fire is
an abnormal loss.
❖ If goods are insured against fire, proper accounts must be maintained for such
stocks, otherwise, it will be very difficult to assess the real value of stock at the
date of fire i.e., a proper “Stock- Book” must be maintained.
❖ The insurance company will compensate only the value of stock which was held
immediately before the fire. In the absence of such “Stock-Book”, value of stock is
to be ascertained on the basis of estimated values.
❖ Whatever method of valuation of stock is followed, accurate value of stock
immediately before the date of fire must be ascertained correctly, since the
insurance company will consider only the actual loss of stock which was
destroyed by fire. Actual loss of stock can be determined after deducting the
salvage value of stock from the total value of stock destroyed at the date of fire.
→ Extent of Insurance Claim:

Total If the goods are totally destroyed, the amount of claim is equal to the actual
Loss loss, provided the goods are fully insured.
However, in case of under insurance (i.e. insurable value of stock insured >
the sum insured), the amount of claim is restricted to the policy amount.
Partial If the goods are partially destroyed, amount of claim is equal to actual loss
Loss provided the goods are fully insured. However, in case of under insurance,
the amount of claim will depend upon the nature of insurance policy
Without Claim is lower of actual loss or the sum insured.
Average
clause
With Claim for loss of stock is proportionately reduced,
Average considering the ratio of policy amount (i.e. insured amount) to
Clause the value of stock as on the date of fire (i.e. insurable
amount)
→ Significance of Average Clause:

❖ Insurance companies tend to discourage under-insurance by including the
average clause.
❖ The effect of the clause is that if the insured value of the subject matter concerned
is less than the total cost, then loss will be limited to that proportion of the loss
as the insured value bears to the total cost.
❖ Thus, the loss will be borne by the insurance company and the insured
proportionately.
❖ The insured will bear to the extent of the stock which were not insured and the
insurance company will bear/compensate the insured portion of stocks.The actual
claim amount would therefore be determined by the following formula:
𝑨𝒎𝒐𝒖𝒏𝒕 of policy
x Actual loss
Value of stock on the date of fire
Page 2.2
Page 2.3
→ STEPS :
1. Computation of Stock on the Date of Fire
Prepare Memorandum Trading Account for current year upto the date of fire. In such
Trading Account, Gross Profit should be calculated based on % of sales. Balancing
figure is called closing stock i.e. stock on date of fire
Memorandum Trading A/c
Amount Particulars Amount
To Opening Stock xx By Sales xx
To Purchases xx By Closing Stock
Less: Returns (xx) (Bal. figure) xx
Less: Samples (xx)
Less: Drawings (xx) xx
To Direct Expenses xx
To Gross Profit (% of Sales) xx
XXX XXX
Note: Gross Profit Ratio is either given or the same is calculated by preparing
previous year/s Trading Account.
2. Computation of Claim
Stock on date of fire XX
Less: Stock Salvaged/ Saved* (XX)
Add: Fire Fighting Expenses XX
TOTAL LOSS XX
Apply average clause if applicable.
*Salvaged stock can be made saleable after it is reconditioned. In that case, the cost of
such stock must be credited to the Trading Account and debited to a salvaged stock
account. The expenses on reconditioning must be debited and the sales credited to this
account, the final balance being transferred to the Profit & Loss Account.
NOTES:
1) Wherever possible, stock will be shown at cost price only to calculate GP ratio &
claim of stock loss.
2) Trading Account should be free from errors.
3) Sales means where goods have been delivered & Purchases means where goods
have been received.
4) If salvage has been delivered to insurance company, then it will be considered as
stock lost.
5) Average clause should not increase amount of claim.
Page 2.4
EXAMPLE:
A fire occurred in the premises of Mr. X on 7th June 2021. Determine the claim to be
lodged with the insurance company in the following cases:
CASE-1
Stock on 1.4.2021 99,000
Purchases from 1.4.2021 to 07.06.2021 5,00,000
Sales from 1.4.2021 to 07.06.2021 6,00,000
GP Ratio is 20% of sales.
CASE-2
Stock on 1.4.2021 99,000
Sales from 1.4.2021 to 07.06.2021 6,00,000
GP Ratio is 20% of sales. Stock on 1st April 2021 is valued at 10% above cost.
CASE-3
Same as Case-2. Mr. X has taken policy for ₹ 3 lakhs.
CASE-4
Same as Case-2. Mr. X has taken policy for ₹ 1 lakh.
Page 2.5
CASE-5
Same as Case-2. Mr. X has taken policy for ₹ 3 lakhs. Stock salvaged ₹ 26,000.
CASE-6
Same as Case-2. Mr. X has taken policy for ₹ 1 lakh. Stock salvaged ₹ 26,000.
CASE-7
Stock on 1.4.2021 99,000
Sales from 1.4.2021 to 07.06.2021 6,00,000
GP Ratio is 20% of sales.
Goods given away as free samples ₹ 2,000, as charity ₹ 3,000 and withdrew for
personal use ₹ 4,000. Also cashier had misappropriated cash sales of ₹ 40,000.
Page 2.6
→ ABNORMAL STOCK/ ABNORMAL ITEM
Trading Account [Last Year]

Particulars Amount Particulars Amount
To Opening Stock xx By Sales (net of Returns) xx
To Purchases By Closing Stock
(net of Returns) xx Actual Value shown in books xx
Add: Amount written off xx xx
To Gross Profit xx
(Bal. Figure)
XX XX
Memorandum Trading A/c

Particulars Normal Ab- Total Particulars Normal Ab- Total
normal normal
To Opening By Sales
Stock
To Purchases By Loss on
sale
To Direct By Loss on
Expenses revaluation
To Gross Profit By Closing
(% of Normal Stock
sales) (Bal. figure)
Treatment of Abnormal Items of Stock

1) If any abnormal items of stock is given in question, then amount which has been
written off from this stock shall be 1st of all added in closing stock while preparing last
year Trading A/c.
2) Total value of this closing stock shall be written in Total column in Memo Trading A/c,
the original cost of abnormal items shall be written in abnormal column & the balance
stock shall be written in normal column.
3) For loss of stock on date of fire, closing stock includes both normal & abnormal stocks.
4) Unless otherwise stated, estimated value of stock on date of fire consists of book value
of normal items & book value of abnormal items. Sometimes specific valuation of
abnormal items is given for purpose of claim, then instead of book value such valuation
should be taken.
Page 2.7
ASSIGNMENT QUESTIONS
TOPIC 1: LOSS OF STOCK: BASIC CONCEPTUAL QUESTIONS
Question 1 Pg no._____
A fire broke out in the godown of a business house on 8th July, 2021. Goods costing ₹
2,03,000 in a small sub-godown remain unaffected 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, 2021 was ₹15,72,000. Purchases for
the period from 1st April, 2021 to 8th July, 2021 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. Compute the amount of claim of loss by fire.
Calculate the amount of Insurance claim to be lodged, based on the following information:
Value of stock destroyed by fire ₹90,000
Insurance policy amount (subject to average clause) ₹65,000
Value of stock salvaged from fire ₹40,000
A fire broke out in the warehouse of Amitabh Traders Ltd. on 30th September, 2021. The
company desires to file a claim with the insurance company for loss of stock and gives
you the following information to enable you to calculate the amount to be claimed:
Sundry debtors on 31.12.2020 3,20,000
Sundry debtors on 30.9.2021 2,40,000
Cash received from debtors 11,52,000
Stock on 31.12.2020 1,20,000
Rate of gross profit to cost of sales 25%
Fire occurred in the premises of Bad Luck Ltd. on 20th February, 2021. The company has
taken out a fire insurance policy of ₹1,00,000 covering its stock in trade and policy was
subject to average clause. Ascertain the claim to be lodged.
Particulars ₹
Stock on 1st January, 2020 90,000
Purchases during the year 2020 3,65,000
Purchases returns during the year 2020 5,000
Stock on 31st December, 2020 1,26,000
Sales for the year 2020 4,10,000
Sales returns during the year 2020 10,000
Purchases from 1.1.2021 to date of fire 84,000
Sales from 1.1.2021 to date of fire 1,03,000
Sales returns from 1.1.2021 to date of fire 4,000
Value of stock saved 19,800
It was the practice of the concern to value the stocks at cost less 10%.
Page 2.8
(a) The premises of X Ltd. caught fire on 22nd January, 2021 and the stock was damaged.
The value of goods salvaged was negligible. The firm made up accounts to 31st March
each year. On 31st March, 2020 the stock at cost was ₹13,27,200 as against ₹ 9,62,200
on 31st March 2019.
Purchases from 1st April, 2020 to the date of fire were ₹ 34,82,700 as against ₹
45,25,000 for the full year 2019-2020 and the corresponding sales figures were ₹
49,17,000 and ₹ 52,00,000 respectively.
You are given the following further information:
(i) In July, 2020, goods costing ₹ 1,00,000 were given away for advertising purposes,
no entries being made in the books.
(ii) The rate of gross profit is constant. X Ltd. had taken an insurance policy of ₹
5,50,000 which was subject to the average clause.
From the above information, you are required to make an estimate of the stock in hand
on the date of fire and compute the amount of the claim to be lodged to the insurance
company
(b) Assume other things remaining same, clerk misappropriated unrecorded cash sales.
It is assumed that defalcation average ₹ 2,000 per week from 1st April, 2020 until clerk
was dismissed on 18th August, 2020.
The premises and stock of Param Chand Stores were totally destroyed by fire on 30th
January, 2021. From the account books and other records that were saved, the following
information is available. The stock on hand has always been valued at 10% less than cost.
Particulars 2018 2019 2020 2021
₹ ₹ ₹ ₹
Opening stock as valued 27,090 32,400 36,000 36,900
Purchases less returns 74,900 80,000 81,000 6,000
Sales less returns 1,20,000 1,32,000 1,40,000 12,000
Wages 17,400 16,400 23,600 2,000
Closing stock as valued 32,400 36,000 36,900
Calculate the amount of claim to be lodged to the Insurance Company.
Question 7 (RTP Nov 2019) ICAI Study Material (Similar) / RTP Nov 2021 (Similar) Pg no._____
On 2.6.2021 the stock of Mr. Black was destroyed by fire. However, following particulars
were furnished from the records saved:
Stock at cost on 1.4.2020 1,35,000
Stock at 90% of cost on 31.3.2021 1,62,000
Purchases for the year ended 31.3.2021 6,45,000
Sales for the year ended 31.3.2021 9,00,000
Sales from 1.4.2021 to 2.6.2021 4,80,000
Sales upto 2.6.2021 includes ₹75,000 being the goods not dispatched to the customers.
The sales invoice price is ₹75,000.
Purchases upto 2.6.2021 includes a machinery acquired for ₹15,000.
Purchases upto 2.6.2021 does not 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.
Page 2.9
Value of stock salvaged from fire ₹22,500 and this has been handed over to the insurance
company. The insurance policy is for ₹1,20,000 and it is subject to average clause.
Ascertain the amount of claim for loss of stock.
Question 8 (ICAI Study Material) Pg no._____

On 30th March, 2021 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 2021.
1. Stock as per Balance Sheet at 31st December, 2020, ₹ 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.
On 13th September, 2021 fire occurred in the premises of M/s DEF & Co. Most of the stocks
were destroyed. Cost of stock salvaged being ₹ 40,000. In addition some stock was
salvaged in damaged condition and its value in that condition agreed at ₹ 20,000.
From the salvaged accounting records, the following information is available:
Stock of goods @ 10% lower than cost as on 31st March, 2021 8,64,000
Purchases (1.4.21 to 13.09.21) 35,29,900
Sales (1.4.21 to 13.09.2021) 46,93,200
Additional information:
1) Sales upto 13th September, 2021, includes ₹ 70,000 for which goods had not been
dispatched and ₹ 25,000 of goods sent on approval basis but approval for which not
received.
2) Purchases upto 13th September, 2021 did not include ₹ 60,000 for which purchase
invoices had not been received from suppliers, though goods have been received in
Godown. Further purchases include purchase of machinery costing ₹ 40,000.
3) Past records show the gross profit rate of 25%.
4) M/s DEF & Co. has insured their stock for ₹ 9,00,000.
Find out the value of loss of stock by applying the above points.

A fire occurred in the premises of M/s. Kailash & Co. on 30th September 2021. From the
following particulars relating to the period from 1st April 2021 to 30th September 2021,
you are required to ascertain the amount of claim to be filed with 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 (₹)
Opening Stock 1,20,000
Purchase made 2,40,000
Wages paid (including wages for the installation of a machine ₹5,000) 75,000
Page 2.10
Sales 3,10,000
Goods taken by the Proprietor (Sale Value) 25,000
Cost of goods sent to Consignee on 20th September 2021, lying unsold 18,000
with them
Free Samples distributed – Cost 2,500

On 29th August, 2021, 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:
Cost of stock on 1st April, 2020 7,10,500
Cost of stock on 31st March, 2021 7,90,100
Purchases during the year ended 31st March, 2021 56,79,600
Purchases from 1st April, 2021 to the date of fire 33,10,700
Cost of goods distributed as samples for advertising from 1st April, 41,000
2021 to the date of fire
Cost of goods withdrawn by trader for personal use from 1st April, 2,000
2021 to the date of fire
Sales for the year ended 31st March, 2021 80,00,000
Sales from 1st April, 2021 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.
Question 12 (RTP May 2019) Pg no._____

A fire engulfed the premises of a business of M/s Preet on the morning of 1st July 2021.
The building, equipment and stock were destroyed, and salvage recorded the following:
Building – ₹ 4,000; Equipment – ₹ 2,500; Stock – ₹ 20,000. The following other information
was obtained from the records saved for the period from 1st January to 30th June 2021:
Particulars ₹
Sales 11,50,000
Sales Returns 40,000
Purchases 9,50,000
Purchases Returns 12,500
Cartage inward 17,500
Wages 7,500
Stock in hand on 31st December, 2020 1,50,000
Building (value on 31st December, 2020) 3,75,000
Equipment (value on 31st December, 2020) 75,000
Depreciation provision till 31st December, 2020 on:
: Building 1,25,000
: Equipment 22,500
No depreciation has been provided since December 31st 2020. The latest rate of
depreciation is 5% p.a. on building and 15% p.a. on equipment by straight line method.
Normally business makes a profit of 25% on net sales.
If claim was also settled for ₹ 5,25,000. Prepare statement of claim & then give necessary
journal entries in this regard.
Page 2.11
TOPIC 2: LOSS OF STOCK: ABNORMAL STOCK

On 19th May, 2021, the premises of Shri Garib Das were destroyed by fire, but sufficient
records were saved, wherefrom the following particulars were ascertained:
Particulars ₹
Stock at cost on 1.1.2020 36,750
Stock at cost on 31.12.2020 39,800
Purchases less returns during 2020 1,99,000
Sales less returned during 2020 2,43,500
Purchases less returns during 1.1.2021 to 19.5.2021 81,000
Sales less returns during 1.1.2021 to 19.5.2021 1,15,600
In valuing the stock for the balance Sheet as at 31st December, 2020, ₹ 1,150 had been
written off on certain stock which was a poor selling line having the cost ₹ 3,450. A
portion of these goods were sold in March, 2021 at a loss of ₹ 125 on original cost of ₹
1,725. The remainder of this stock was now estimated to be worth the original cost.
Subject to the above exceptions, gross profit has remained at a uniform rate throughout.
The stock salvaged was ₹ 2,900.
Show the amount of the claim of stock destroyed by fire. Memorandum Trading Account
to be prepared for the period from 1-1-2021 to 19-5-2021 for normal and abnormal items.
On 1st April, 2021, the godown of Rekha Limited was destroyed by fire. From the books of
account, the following particulars are gathered:
Particulars ₹
Stock at cost on 1st January, 2020 27,570
Stock as per Balance sheet on 31st December, 2020 51,120
Purchases during 2020 2,71,350
Purchases from 1st January, 2021 to 31st March,2021 75,000
Sales during 2020 3,51,000
Sales from 1st January, 2021 to 31st March, 2021 91,500
Value of goods salvaged 6,300
Goods of which original cost was ₹3,600 had been valued at ₹1,500 on 31st Dec, 2020.
These were sold in March, 2021 for ₹2,700. Except this transaction, rate of gross profit
has remained constant. On 31st March, 2021 goods worth ₹15,000 had been received by
the godown keeper, but had not been entered in the purchases account.
Calculate the value of goods destroyed by fire.
On 30.09.2021 the stock of Harshvardhan was lost in a fire accident. Calculate claim
amount.
Particulars ₹
Stock at cost on 31.3.2021 1,04,000
Purchases less returns for the year ended 31.3.2021 5,07,500
Sales less returns for the year ended 31.3.2021 6,30,000
Purchase less returns up to 30.09.2021 2,90,000
Sales less returns up to 30.09.2021 3,68,100
Page 2.12
In valuing the stock on 31.03.2021 due to obsolescence 50% of the value of the stock which
originally cost ₹12,000 had been written-off. In May 2021, 3/4th of these stocks had been
sold at 90% of original cost and it is now expected that the balance of the obsolete stock
would also realize the same price, subject to the above, G.P had remained uniform
throughout stock to the value of ₹ 14,400 was salvaged.

From the following information, ascertain the value of stock as on 31st March, 2021:
Particulars ₹
Stock as on 01-04-2020 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 31st March, 2020, a sum of ₹ 3,500 was written off on
a particular item, 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.
On 25th June, 2021 a fire broke out in the premises of Unlucky Co. All the stocks were
destroyed except some which were partly damaged and sold subsequently for ₹7,900.
Calculate claim amount assuming that the policy was for ₹20,000.
Particulars ₹
Stock as on 1st January, 2021 24,400
Purchases upto the date of the fire 73,000
Sales upto the date of the fire 97,000
Purchases during the year 2020 1,53,500
Sales during the year 2020 1,96,500
Stock as on 1st January, 2020 18,500
The stock as on 1st January, 2020 included a special item valued ₹5,600 which was sold
at a profit of 20% on sales. A part of this item was sold in 2020 while the balance was
sold on 3rd May, 2021 for ₹ 2,500. Except for this item, gross profit on all other items was
at a uniform rate throughout the period.
A fire occurred in the premises of a timber merchant on the night on 31st December, 2021.
Goods worth ₹ 25,200 only could be salvaged. Following further information is available:
a) The accounting year ends on 31st March every year.
b) The closing stock on 31st March 2021 was valued at ₹ 1,10,000. This was 10% above cost.
c) The purchases during the period from 1st April 2021 to 31st December 2021 accounted
to ₹ 5,50,000 as per the purchase register. However, goods worth ₹ 30,000 were
received on 3rd January, 2022.
d) The sales during the period from 1st April 2021 to 31st December, 2021 amounted to ₹
6,45,000 and included goods sold on approval basis for which the period of approval
was not yet over on 31st December, 2021. The goods so sold on approval basis had been
invoiced at ₹ 30,000 which was 50% above the cost.
Page 2.13
e) On 30th December, 2021, goods worth ₹ 60,000 had been sent to a commission agent
on consignment basis.
f) The wages paid during the period from 1st April, 2021 to 31st December, 2021 amounted
to ₹ 40,000 and included ₹10,000 paid to workers engaged in construction work.
g) The amount spent on carriage inward during the period from 1st April, 2021 to 31st
December, 2021 was ₹ 25,000.
h) It was agreed to take gross profit ratio as weighted average of the gross profit ratios
of the preceding 4 years. For this purpose, greater weight was to be given to later
years, also an item purchased in July 2021 for ₹ 20,000 & sold in Aug 2021 at a loss of
₹ 5,000 was to be considered separately.
i) The gross profit and sales of the preceding four years were:
Year Gross Profit (₹) Sales (₹)
2017 – 18 1,04,000 4,00,000
2018 – 19 90,000 4,50,000
2019 – 20 1,15,200 4,80,000
2020 – 21 1,52,800 5,10,000
The merchant had obtained a policy of ₹ 1,00,000 to cover the loss of stock by fire and the
policy contained the average clause. You are required to determine the amount of claim
to be lodged with the insurance company for the stock destroyed by fire.
On 30th June, 2021 accidental fire destroyed a major part of the stocks in the godown of
Jay Associates. Stocks costing ₹ 30,000 could be salvaged but not their stores ledgers.
A fire insurance policy was in force under which sum insured was ₹3,50,000. From
records, following information was received:
1. Total of sales invoices during the period April to June amounted to ₹30,20,000. An
analysis showed that goods of the value of ₹3,00,000 had been returned by the
customers before the date of fire.
2. Opening stock on 1.4.2021 was ₹2,20,000 including stocks of value of ₹20,000 being
lower of cost and net value subsequently realized.
3. Purchases between 1.4.2021 and 30.6.2021 were ₹21,00,000.
4. Normal gross profit rate was 3313 % on sales.
5. A sum of ₹30,000 was incurred by way of firefighting expenses on the date of fire.
Prepare a statement showing the insurance claim recoverable.
A fire occurred in the premises of M/s Fireprone Co. on 30th May 2021. From the following
particulars, relating to the period from 1.1.2021, you are required to ascertain the amount
of claim to be filed with the insurance company for the loss of stock.
Particulars ₹
Stock as per Balance Sheet as at 31st December, 2020 99,000
Purchases (including purchase of Machinery costing ₹ 30,000) 1,70,000
Wages (including wages for the installation of Machinery ₹ 3,000) 50,000
Sales (including goods sold on approval basis amounting to ₹ 49,500. 2,75,000
No confirmation has been received in respect of 2/3 rd of such goods sold
on approval basis.)
Sales value of goods drawn by partners 15,000
Cost of goods sent to consignee on 15th May 2021, lying unsold with them 16,500
Sales value of goods distributed as free samples 1,500
Page 2.14
The average rate of gross profit had been 20% in the past. The selling price had been
increased by 20% with effect from 1.1.2021.
For valuing the stocks for the Balance Sheet as at 31st Dec. 2020, ₹ 1,000 had been
written-off in respect of a slow-moving item, the cost of which was ₹ 5,000. A portion of
those goods were sold at a loss of ₹ 500 on the original cost of ₹ 2,500. The remainder
of the stock was now estimated to be worth the original cost.
Subject to the above exceptions, the gross profit had 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.
From the following figures, calculate the amount of claim to be lodged with the insurance
company for loss of stock:
Particulars ₹
Purchases during 2020 4,00,000
Purchases from 1st January, 2021 to 30th September, 2021 6,00,000
Sales during 2020 6,00,000
Sales from 1st January, 2021 to 30th September, 2021 8,80,000
Fire occurred on 30th September 2021 & apply FIFO method.
You are informed that:
1. In 2021 the cost of purchases have risen by 20% above the level prevailing in 2020;
2. In 2021 the selling prices have gone up by 10% over the levels prevailing in 2020;
Salvage value is ₹5,000.
Unfortunate Ltd. has a godown, a shop and a manufacturing unit. Godown is used to store
goods purchased for manufacture as well as to store finished goods. Goods are
transferred from godown everyday in the morning to manufacturing unit and shop.
Inventory in godown is insured for ₹ 20 lakhs, that of manufacturing unit for ₹ 30 lakhs
and of the shop for ₹ 5 lakhs. As on 31.12.20 inventory in godown at cost was ₹ 26 lakhs,
inventory in manufacturing unit at cost was ₹ 12 lakhs and inventory in shop at cost was
₹ 5 lakhs. Following transactions took place during the period mentioned:
(₹ In Lakhs)
Particulars Jan 21 Feb 21 March 21 1st Apr to
28th Apr
Purchases 20 15 16 8
Returns to suppliers - - 4 -
Stock transfer to shop 26 20 25 10
Returns from shop 1 - 1 1
Sales in shop @ Gross Profit
10% 10 12 8 4
12% 18 12 15 5
Fire occurred in shop in the midnight of 27th April-28th April, 2021 and the entire stock
was engulfed in fire. Good costing ₹ 40,000 could be salvaged intact and balance goods
were recovered in damaged condition.
Goods recovered in damaged condition could be sold @ 40% of cost. The insurance policy
had average clause. Compute the claim to be lodged with Insurance Co.
Page 2.15
PRACTICE QUESTIONS
TOPIC 1: LOSS OF STOCK: BASIC CONCEPTUAL QUESTIONS
A fire occurred on 25th April, 2021 in the premises of a company. Ascertain the amount
of claim to be lodged in case of the loss of stock which was insured.
Stock on 1.1.2021 2,50,000
Purchases from 1.1.2021 to date of fire 10,00,000
Wages 2,00,000
Manufacturing expenses 1,00,000
Sales from 1.1.2021 to the date of fire 15,00,000
The gross profit ratio is 15%. The stock salvaged was estimated at ₹ 57,500.
(Ans: Claim 2,17,500)
Sachin has taken out a fire policy of ₹ 1,60,000 covering its stock. A fire occurred on 31st
March, 2021. The following particulars are available:
Stock as on 31.12.2020 60,000
Purchases to the date of fire 2,60,000
Sales to the date of fire 1,80,000
Carriage Inwards 1,600
Commission on purchase to be paid 2%
Gross Profit Ratio @ 50% on cost. You are asked to ascertain
(i) total loss of stock;
(ii) amount of claim to be made against the Insurance Company assuming that the policy
was subject to average clause. Stock salvage amounted to ₹ 41,360.
(Ans: Claim 1,28,000)
On 15th December, 2021, 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, 2021 was valued at ₹9,40,000.
(ii) Purchases from 01-04-2021 to 15-12-2021 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.
(Ans: Claim 3,12,500)
On 12th June, 2021 fire occurred in the premises of N.R. Patel, a paper merchant. Most of
the stocks were destroyed, cost of stock salvaged being ₹ 11,200. In addition, some stock
was salvaged in a damaged condition and its value in that condition was agreed at ₹
10,500. From the books of account, the following particulars were available.
Page 2.16
His stock at the close of account on December 31, 2020 was valued at ₹ 83,500.
His purchases from 1-1-2021 to 12-6-2021 amounted to ₹ 1,12,000 and his sales during that
period amounted to ₹ 1,54,000.
On the basis of his accounts for the past three years it appears that he earns on an
average a gross profit of 30% of sales. Patel has insured his stock for ₹ 60,000. Compute
the amount of the claim.
(Ans: Claim 45,154)
The premises of Anmol Ltd. caught fire on 22nd January 2021, and the stock was damaged.
The firm makes account up to 31st March each year. On 31st March, 2020 the stock at cost
was ₹ 6,63,600 as against ₹ 4,81,100 on 31st March, 2019. Purchases from 1st April, 2020
to the date of fire were ₹ 17,41,350 as against ₹ 22,62,500 for the full year 2019-20 and the
corresponding sales figures were
₹ 24,58,500 and ₹ 26,00,000 respectively.
You are given the following further information:
(i) In July, 2020, goods costing ₹ 50,000 were given away for advertising purposes, no
entries being made in the books.
(ii) During 2020-21, a clerk had misappropriated unrecorded cash sales. It is estimated
that the defalcation averaged ₹ 1,000 per week from 1st April, 2020 until the clerk
was dismissed on 18th August, 2020.
(iii) The rate of gross profit is constant.
From the above information calculate the stock in hand on the date of fire.
(Ans: Stock on date of Fire 3,72,150)
Mr. A prepares accounts on 30th September each year, but on 31st December, 2021 fire
destroyed the greater part of his stock. Following information was collected from his
book:
Stock as on 1.10.2021 29,700
Purchases from 1.10.2021 to 31.12.2021 75,000
Wages from 1.10.2021 to 31.12.2021 33,000
Sales from 1.10.2021 to 31.12.2021 1,40,000
The rate of gross profit is 33.33% on cost. Stock to the value of ₹ 3,000 was salvaged.
Insurance policy was for ₹ 25,000 and claim was subject to average clause.
a) Stock at the beginning was calculated at 10% less than cost.
b) A plant was installed by firm’s own worker. He was paid ₹ 500, which was included in
wages.
c) Purchases include the purchase of the plant for ₹ 5,000
You are required to calculate the claim for the loss of stock.
(Ans: Claim 22,541)
On 20th October, 2021, 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, 2021 ₹ 2,16,000
Purchases less returns (1.4.21 to 20.10.21) ₹ 2,80,000
Sales less returns (1.4.21 to 20.10.21) ₹ 6,20,000
Page 2.17
1) Sales upto 20th October, 2021 includes ₹ 80,000 for which goods had not been
dispatched.
2) Purchases upto 20th October, 2021 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.
(Ans: Claim 80,000)
Question 8 (Inter May 2018) (10 Marks) Pg no._____
On 30th March, 2021 fire occurred in the premises of M/s Alok & Co. The concern had
taken an insurance policy of ₹ 1,20,000 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, 2021:
(i) Stock as per Balance Sheet at 31st December, 2020 1,91,200
(ii) Purchases (including purchase of machinery costing ₹ 60,000) 3,40,000
(iii) Wages (including wages ₹ 6,000 for installation of machinery) 1,00,000
(iv) Sales (including goods sold on approval basis amounting to ₹ 99,000) 5,50,000
No approval has been received in respect of 2/3rd of the goods sold
on approval.
(v) The average rate of gross profit is 20% of sales.
(vi) The value of the salvaged goods was ₹ 24,600
Compute the amount of the claim to be lodged to the Insurance Company.
(Ans: Claim 96,422)
Question 9 (Inter Nov 2018) (10 Marks) Pg no._____
A fire engulfed the premises of a business of M/S Kite Ltd. in the morning, of 1st October,
2021. The entire stock was destroyed except, stock salvaged of ₹ 50,000. Insurance Policy
was for ₹ 5,00,000 with average clause. The following information was obtained from
the records saved for the period from 1st April to 30th September, 2021:
Sales 27,75,000
Purchases 18,75,000
Carriage inward 35,000
Carriage outward 20,000
Wages 40,000
Salaries 50,000
Stock in hand on 31st March, 2021 3,50,000
Additional Information:
(1) Sales upto 30th Sep, 2021, includes ₹ 75,000 for which goods had not been dispatched.
(2) On 1st June, 2021, goods worth ₹ 1,98,000 sold to Hari on approval basis which was
included in sales but no approval has been received in respect of 2/3rd of goods sold
to him till 30th September, 2021.
(3) Purchases upto 30th Sep, 2021 did not include ₹ 1,00,000 for which purchase invoices
had not been received from suppliers, though goods have been received in godown.
(4) Past records show the gross profit rate of 25% on sales.
You are required to prepare the statement of claim for loss of stock for submission to
the Insurance Company. (Ans: Claim 3,25,000)
Page 2.18
Question 10 (Inter Jan 2021) (10 Marks) Pg no._____

A Fire occurred in the premises of M/S MJ & Co., on 31st December, 2021. From the
following particulars related to the period from 1st April 2021 to 31st December 2021, 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 ₹ 1,00,000 which is subject to average
clause. The value of goods salvaged was estimated at ₹ 31,000. The average rate of gross
profit was 20% throughout the period:
Particulars Amount
Opening stock as on 1st April, 2021 1,50,000
Purchases during the year 4,20,000
Goods withdrawn by the proprietor for his self-use at Sales Value 10,000
Goods distributed as charity at cost 4,000
Purchases include ₹ 5,000 of Tools purchased, these Tools should
have been capitalized.
Wages (include wages paid for the installation of machinery ₹ 6,000) 90,000
Sales during the year 6,10,000
Cost of goods sent to consignee on 1st November, 2021, lying unsold 25,000
with the consignee.
Sales Return 10,000
(Ans: Claim 76,515)
Question 11 (RTP Nov 2020) / (RTP May 2021) (Similar) Pg no._____
Ram trader’s godown caught fire on 29th August, 2021, and a large part of the stock of
goods was destroyed. However, goods costing ₹ 54,000 could be salvaged. The trader
provides you the following additional information:
Cost of stock on 1st April, 2020 3,55,250
Cost of stock on 31st March, 2021 3,95,050
Purchases during the year ended 31st March, 2021 28,39,800
Purchases from 1st April, 2021 to the date of fire 16,55,350
Cost of goods distributed as samples for advertising from 1st April, 2021 20,500
to the date of fire
Cost of goods withdrawn by trader for personal use from 1st April, 2021 1,000
to the date of fire
Sales for the year ended 31st March, 2021 40,00,000
Sales from 1st April, 2021 to the date of fire 22,68,000
The trader had taken the fire insurance policy for ₹ 2,50,000 with an average clause.
Calculate the amount of the claim that will be admitted by the insurance company.
(Ans: Claim 2,19,409)
A fire occurred in the premises of Sri. G. Venkatesh on 1.4.2021 and a considerable part
of the stock was destroyed. The stock salvaged was ₹ 28,000.
Sri Venkatesh had taken a fire insurance policy for ₹ 17,10,000 to cover the loss of stock
by fire.
Ascertain the insurance claim which the company should claim from the insurance
company for the loss of stock by fire. The following particulars are available:
Page 2.19
Particulars ₹
Purchases for the year 2020 93,80,000
Sales for the year 2020 1,16,00,000
Sales from 1.1.21-1.4.21 24,00,000
Stock on 1.1.20 14,40,000
Stock on 31.12.2020 24,20,000
Wages paid during 2020 10,00,000
Wages paid 1.1.21-1.4.21 1,80,000
Sri Venkatesh had in June 2020 consigned goods worth ₹ 5,00,000, which unfortunately
were lost in an accident. Since there was no insurance cover taken, the loss had to be
borne by him full. Stocks at the end of each year for and till the end of calendar year 2019
had been valued at cost less 10%. From 2020, however there was a change in valuation
of closing stock which was ascertained by adding 10% to its costs.
(Ans: Claim 16,89,000)
TOPIC 2: LOSS OF STOCK: ABNORMAL STOCK

On 1st April, 2021, the stock of Shri Ramesh was destroyed by fire, but sufficient records
were saved, wherefrom the following particulars were ascertained:
Particulars ₹
Stock at cost on 31.12.2020 79,600
Purchases less returns during 2020 3,98,000
Sales less returned during 2020 4,87,000
Purchases less returns during 1.1.2021 to 31.03.2021 1,62,000
Sales less returns during 1.1.2021 to 31.03.2021 2,31,200
In valuing the stock for the balance Sheet as at 31st December, 2020, ₹ 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, 2021 at a loss of ₹ 250 on original cost of ₹
3,450. The remainder of this stock was now estimated to be worth the original cost.
Subject to the above exceptions, gross profit has remained at a uniform rate throughout.
The stock salvaged was ₹ 5,800. The policy was for ₹ 50,000 & was subject to the average
clause. Work out the amount of claim of loss by fire.
(Ans: Claim 45,004)
A fire occurred in the premises of M/s. Raxby & Co. on 30-06-2021. From the salvaged
accounting records, the following particulars were ascertained
Particulars ₹
Stock at cost as on 01-04-2020 1,20,000
Stock at cost as on 31-03-2021 1,30,000
Purchases less return during 2020-21 5,25,000
Sales less return during 2020-21 6,00,000
Purchases from 01-04-2021 to 30-06-2021 97,000
Page 2.20
Purchases upto 30-06-2021 did not include ₹ 35,000 for

which purchase invoices had not been received from
suppliers, though goods have been received in godown.
Sales from 1.4.2021 to 30.6.2021 1,66,000
In valuing the stock for the Balance Sheet at 31st March, 2021, ₹ 5,000 had been written
off on certain stock which was a poor selling line having the cost of ₹ 8,000. A portion of
these goods were sold in May, 2021 at a loss of ₹ 1,000 on original cost of ₹ 7,000. The
remainder of the stock was now estimated to be worth its original cost. Subject to that
exception, gross profit had remained at a uniform rate throughout the year.
The value of the salvaged stock was ₹ 10,000. M/s. Raxby & Co. had insured their stock
for ₹ 1,00,000 subject to average clause. Compute the amount of claim to be lodged to the
insurance company.
(Ans: Claim 91,935)
On 11.11.2021 premises of Rocky Ltd. was destroyed by fire. Following information is made
available
Particulars ₹
Stock as on 1.4.2020 3,75,000
Sales from 1.4.2020 to 31.3.2021 8,55,000
Stock as on 31.3.2021 2,00,000
Sales from 1.4.2021 to 11.11.2021 4,35,500
In valuing the stock on 31.3.2021, due to damage 50% of the value of the stock which
originally cost ₹22,000 was written off. In June, 2021 about 50% of this stock was sold
for ₹ 5,500 and the balance of obsolete stock is expected to realize 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.
(Ans: Claim 1,80,000)
Question 16 (Inter July 2021) (5 Marks) Pg no._____
On 13th Jan, 2021 fire occurred in the premises of Mr. X, a cloth merchant. The Goods were
totally destroyed. From the books of account, for the period 01 -04-2020 to the date of
fire the following particulars were available
Particulars ₹
Stock as on 01-04-2020 57,000
Purchases 3,05,000
Manufacturing Expenses 60,000
Selling Expenses 24,200
Sales 4,98,000
At the time of valuing stock as on 31st March, 2020, a sum of ₹ 7,000 was written off on
a particular item, which was originally purchased for ₹ 20,000 and was sold during the
year for ₹ 18,000.
Barring the transaction relating to this item, the gross profit earned during the period
was 25% on sales. Mr. X has insured his stock for ₹ 40,000.
Compute the amount of the claim.
(Ans: Claim 40,000)
Page 2.21
On 1st July, 2021 a fire took place in the Godown of Aamir Khan which destroyed all stocks.
Calculate the amount of insurance claim for stock from the following details:
Particulars ₹
Sales in 2019 2,00,000
Gross Profit in 2019 60,000
Sales in 2020 3,00,000
Gross Profit in 2020 60,000
Stock as on 1.1.2021 2,70,000
Sales from 1.1.2021 to 30.6.2021 7,20,000
Stock as on 31st December, 2020 had been undervalued by 10 per cent.
A stock taking conducted in March, 2021 had revealed that stocks costing ₹80,000 were
lying in a damaged condition. 50 per cent of these stocks had been sold in May, 2021 at
50 per cent of cost and the balance were expected to be sold at 40 per cent of cost.
(Ans: Claim 1,46,000)
A fire occurred in the premises of M/s. Fireproof Co. on 31st August, 2021. From the
following particulars relating to the period from 1st April, 2021 to 31st August, 2021, you
are requested to 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 an average clause.
Particulars ₹
Stock as per Balance Sheet at 31-03-2021 99,000
Purchases 1,70,000
Wages (including wages for the installation of a machine ₹ 3,000) 50,000
Sales 2,42,000
Sale value of goods drawn by partners 15,000
Cost of goods sent to consignee on 16th Aug, 21, lying unsold with them 16,500
Cost of goods distributed as free samples 1,500
While valuing the stock at 31st March, 2021, ₹ 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. The value of goods salvaged was estimated at ₹ 20,000. The
average rate of gross profit was 20% throughout.
(Ans: Claim 47,027)
A Fire occurred in the premises of M/s B & Co. on 30th September, 2021. The firm had
taken an insurance policy for ₹ 1,20,000 which was subject to an average clause.
Following particulars were ascertained from the available records for the period from
1st April, 2020 to 30th September, 2021:
Amount
Stock at cost on 01-04-2020 2,11,000
Stock at cost on 31-03-2021 2,52,000
Purchases during 2020-21 6,55,000
Wages during 2020-21 82,000
Page 2.22
Sales during 2020-21 8,60,000

Purchases from 01-04-2021 to 30-09-2021 (including purchase of 4,48,000
machinery costing ₹ 58,000)
Wages from 01-04-2021 to 30-09-2021 (including wages for 85,000
installation of machinery costing ₹ 7,000)
Sales from 01-04-2021 to 30-09-2021 6,02,000
Sale value of goods drawn by partners (01-04-21 to 30-09-21) 52,000
Cost of Goods sent to consignee on 18th September, 2021 lying 44,800
unsold with them
Cost of Goods distributed as free samples (01-04-21 to 30-09-21) 8,500
While valuing the Stock at 31st March, 2021, ₹ 8,000 were written off in respect of a slow
moving item, cost of which was ₹ 12,000. A portion of these goods were sold at a loss of
₹ 4,000 on the original cost of ₹ 9,000. The remainder of the stock is estimated to be
worth the original cost. The value of Goods salvaged was estimated at ₹ 35,000.
You are required to ascertain the amount of claim to be lodged with the Insurance
Company for the loss of stock.
(Ans: Claim 91,331)
Question 20 (RTP Nov 2018) Pg no._____
On 27th July, 2021, a fire occurred in the godown of M/s. Vijay Exports and most of the
stocks were destroyed. However, goods costing ₹ 5,000 could be salvaged. Their
firefighting expenses were amounting to ₹ 1,300.
From the salvaged accounting records, the following information is available relating to
the period from 1.4.2021 to 27.7.2021:
Particulars ₹
Stock as per Balance Sheet at 31-03-2021 63,000
Purchases (including purchase of machinery costing ₹ 10,000) 2,92,000
Wages (including wages for the installation of a machine ₹ 3,000) 53,000
Sales (including goods sold on approval basis amounting to ₹ 40,000). 4,12,300
No approval has been received in respect of 1/4th of the goods sold on
approval.
Cost of goods distributed as free samples 2,000
Other Information:
(i) While valuing the stock on 31.3.2021, ₹ 1,000 had been written off in respect of certain
slow-moving items costing ₹ 4,000. A portion of these goods were sold in June, 2021
at a loss of ₹ 700 on original cost of ₹ 3,000. The remainder of these stocks is now
estimated to be worth its original cost.
(ii) Past record shows the normal gross profit rate is 20%.
(iii) The insurance company also admitted fire-fighting expenses. The Company had
taken the fire insurance policy of ₹ 55,000 with the average clause.
Compute the amount of claim of stock destroyed by fire, to be lodged to the Insurance
Company. Also prepare Memorandum Trading Account to be for the period 1.4.2021 to
27.7.2021 for normal and abnormal items.
(Ans: Claim 51,770)
Question 21 (Inter Dec 2021) (10 Marks) Pg no._____
The Godown of X Ltd. caught fire on 01.06.2021, records saved from fire shows the
following particulars
Page 2.23
Stock at cost as on 01.01.2020 50,000

Stock at cost as on 31.12.2020 80,000
Purchases for the year 2020 4,75,000
Purchase returns for the year 2020 5,000
Carriage inward for the year 2020 20,000
Sales for the year 2020 5,60,000
Sale returns for the year 2020 10,000
Following information is given for the period of 1st January 2021 to 1st June 2021.
• Credit sales of ₹2,50,000, which constituted 25% of total sales.
• Sales return ₹9,500, Goods used for personal purpose costing ₹5,000, Goods
distributed as free sample costing ₹2,700, wages ₹25,000.
• Sales include good sold on approval basis amounting to ₹81,000, No confirmation has
been received in respect of 50% of such good sold on approval basis.
• Stock on 31st December, 2020 was calculated at 20% less than cost.
• Purchases for the period 1st January, 2021 to 1st June, 2021 is ₹6,75,000, purchase
returns ₹10,000.
• Selling price was increased by 20% with effect from 01.01.2021.
• Company had taken an insurance policy of ₹70,000 which was subject to an average
close. The value of salvage goods was ₹ 21,967.
You are required to compute the amount of claim.
(Ans: Claim 57,393)
Page 2.24
LOSS OF PROFIT POLICY

→ Meaning & Nature
❖ When a fire occurs, apart from the direct loss on account of stock or other assets
destroyed, the business is disorganized or has to be discontinued and fire may
stop partially or totally the business activities for some period which leads to
trading losses.
❖ Such losses are not protected by the fire policy but by “loss of profit insurance
policy” or “consequential loss insurance”.
→ Coverage
❖ Such policy covers the following risks as a result of fire:
• Loss of Net Profit
• Payments made for standing (fixed) overhead charges, e.g., Salaries, Rent,
Depreciation etc.
• Increased cost of working
→ Conditions to Raise the Claim
❖ A claim for loss of profits can be established only if:
• insured’s premises, or property are destroyed by the risk defined in policy; and
• insured’s business carried on premises is interrupted as result of such damage.
→ Indemnity Period
❖ It is the period which begins with the date of damage and ends at the time when
the business begins its normal operational activities.
❖ It may vary from three months to a period of year (12 months).
❖ This is the maximum period in respect of which the insurers are liable.
❖ The period is selected by the proposer and should be sufficient to extend over
the full period of any likely interruption.
STEPS
Step 1: Calculate GP Ratio of Last/Previous Year:
It is calculated as per Insurance Rules & has nothing to do with GP ratios in accounts.
a) GP (%) = NP + Insured standing charges X 100
Sales
b) Effective GP (%)
GP (%) xxx
+ Increase in Trend xxx
- Decrease in Trend (xxx)
Effective GP(%) xxx
c) In case of Net Loss, there are 2 steps
1) Adjust Net Loss= Net Loss X Insured Standing Charges
All Standing charges
2) GP Ratio = Insured Standing charges - Adjusted Net Loss X 100
Net Sales
Note: Insured standing charges means fixed charges which has been insured. Example-
Finance expenses like Interest on Debentures, Mortgage Loans and Bank Overdrafts,
fixed selling expenses, rent, salaries of permanent staff and Wages to Skilled Employees,
Boarding and Lodging of resident Directors and/or Manager, Directors’ Fees etc.
Page 2.25
Step 2: Calculate Short Sales

Turnover in corresponding period of Previous Year/ Standard xxx
Turnover [After adjusting trend, if any]
Less: Actual Turnover in dislocated/effected period (xxx)
Short Sales xxx
Note:
Trend will be given or calculated as below:
Sales in Current Year (Non-Affected Period) xxx

Sales in Previous Year (Non-Affected Period) xxx
Increase/Decrease in Turnover xxx
Trend= Increase/Decrease in Turnover X 100
Turnover in Previous Year
Step 3: Loss of Profit = Short Sales X GP ( %)

i.e. (Step 2 X Step 1)
Step 4:
a) Adjusted Annual turnover= Turnover during 12 months immediately the
preceding date of fire [After adjusting trend, if any]
b) Insurable Amount = Adjusted Annual Turnover X GP (%)
Step 5: Additional Expenses (Lower of the following to be considered)

a) Actual Additional expenses
b) Actual Additional Expenses X Insurable Amount .
Insurable Amount +Uninsured standing charges
c) Turnover achieved due to additional expenses X GP Ratio
(If not given then take Turnover in dislocated period)
Step 6: Calculate Total Loss

Loss of Profit (Step 3) xx
Add: Additional Expenses (Step 5) xx
Less: Saving in insured standing charges (xx)
Total Loss xx
Step 7: Applicability of Average Clause

It is applied if Insurable Amount > Insured Amount
Claim to be Lodged= Total Loss (Step 6) X Insured Amount

Insurable Amount
Page 2.26
ASSIGNMENT QUESTIONS
TOPIC 1: LOSS OF PROFIT: BASIC CONCEPTUAL QUESTIONS
Modi Ltd. has a “loss of profit” insurance policy of ₹ 21,00,000. The period of indemnity is
three months. A fire occurred on 31st March, 2021. The following information is available:
Particulars ₹
Sales:
For the year ended 31st December, 2020 70,00,000
For the period from 1 April,2020 to 31 March, 2021
st st
80,00,000
For the period from 1st April,2020 to 30th June, 2020 18,00,000
For the period from 1 April, 2021 to 30 June, 2021
st th
1,20,000
Standing charges for 2020 16,00,000
Profits for 2020 5,00,000
Saving in standing charges because of fire 50,000
Additional expenses to reduce the loss of turnover 1,00,000
Compute the claim to be made on the insurance company.
a) Indemnity period 12 months

b) Sum insured ₹ 2,00,000
c) Turnover, last financial year ended Dec. 31, 2020 ₹ 12,00,000.
d) Gross Profit (Net profit plus insured standing charges) ₹ 2,40,000 giving a gross profit
rate of 20%.
e) Net profit plus all standing charges is ₹ 2,90,000 i.e., 50,000 of the standing charges
are not insured.
f) Fire occurs on 31st March, 2021, and affects business for 6 months.
g) Turnover for 12 months ended 31st March, 2021, ₹11,70,000.
h) Turnover: 1-4-2020 to 30-9-2020 ₹ 5,00,000
i. 1-4-2021 to 30-9-2021 ₹ 3,00,000
ii. Reduction in turnover ₹ 2,00,000
i) Increase in cost of working, ₹ 30,000 otherwise of which turnover during 1-4-2021 to
30-9-2021 would reduce hereinafter by ₹ 1,60,000.
j) Saving in insured charges ₹ 10,000.
A fire occurred in the premises of a businessman on 30th June, 2021. From the following
data, compute a consequential loss claim. Financial year ends on 31st December.
1. Turnover ₹2,00,000.
2. Net Profit ₹18,000.
3. Standing charges ₹ 42,000 out of which ₹10,000 have not been insured.
4. Indemnity period 6 months.
5. Period of interruption – 1st July to 31st October
6. Sum assured ₹50,000.
7. Standard turnover ₹65,000.
Page 2.27
8. Turnover in the period of interruption ₹25,000 out of which ₹6,000 was from a
place rented at ₹600 per month.
9. Saving in standing charges ₹ 4,725 per annum.
10. Annual turnover preceding the date of fire ₹2,40,000.
11. It was agreed between the insurer and the insured that the business trends would
lead to an increase of 10% in the turnover.
The premises of XY Limited were partially destroyed by fire on 1st March, 2021 and as a
result, the business was practically disorganized upto 31st August, 2021.
The company is insured under a loss of profits policy for ₹ 1,65,000 having an indemnity
period of 6 months. From the following information, prepare a claim under the policy:
Particulars ₹
Actual turnover during the period of dislocation (1-3-2021 to 31-8-2021) 80,000
Turnover for the corresponding period (dislocation) in the 12 months 2,40,000
immediately before the fire (1-3-2020 to 31-8-2020)
Turnover for the 12 months immediately preceding the fire 6,00,000
(1-3-2020 to 28-2-2021)
Net profit for the last financial year 90,000
Insured standing charges for the last financial year 60,000
Uninsured standing charges 5,000
Turnover for the last financial year 5,00,000
Due to substantial increase in trade, before and up to 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.
On account of a fire on 15th June, 2021 in the business house of a company, the working
remained disturbed upto 15th December, 2021 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 the 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.
Particulars ₹
Actual sales from 15th June, 2021 to 15th Dec, 2021 70,000
Sales from 15th June 2020 to 15th Dec 2020 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 one year: 16th June 2020 to 15th June 2021 5,60,000
Page 2.28
X Ltd. has insured itself under a loss of profit policy for ₹3,63,000. The indemnity period
under the policy is six months. On 1st September, 2020 a fire occurred in the factory of X
Ltd. and the normal business was affected upto 1st March, 2021.
The following information is compiled for the year ended on 31st March, 2020:
Particulars ₹
Sales 20,00,000
Insured standing charges 2,40,000
Net profit 1,20,000
Following further details of turnover are furnished.
(a) Turnover during the period of 12 months ending on the date of fire was ₹22,00,000.
(b) Turnover during the period of interruption was ₹ 2,25,000.
(c) Actual turnover during the period from 1.9.2019 to 1.3.2020 during the preceding year
corresponding to the indemnity period was ₹7,50,000.
X Ltd. spent an amount of ₹40,000 as additional cost of working during the indemnity
period. On account of this additional expenditure:
a) There was a saving of₹15,000 in insured standing charges during the period of
indemnity.
b) Reduced turnover avoided was ₹1,00,000. i.e. but for this expenditure, the turnover
after the date of fire would have been only ₹1,25,000.
A special clause in the policy stipulates that owing to the reasons acceptable to the
insurer under the special circumstances the following increases are to be made:
(a) Increase of turnover standard and annual by 10%.
(b) Increase in rate of gross profit by 2% from previous year’s level.
X Ltd. asks you to compute the claim for loss of profit. All calculations should be to the
nearest rupee.
From the following information find the claim under a “loss of profits” policy.
Particulars ₹
Sales in 2017 1,00,000
Sales in 2018 1,20,000
Sales in 2019 1,44,000
Sales in 2020 1,72,800
Net profit in 2020 10,000
Standing charges in 2020 (All insured) 7,280
Sales from 1.1.2020 to 31.3.2020 43,200
Sales from 1.1.2021 to 31.3.2021 11,840
Policy value 50,000
Indemnity period 9 months
Date of dislocation by fire 1.1.2021
Period of dislocation 3 months
There was no reduction in standing charges during dislocation period nor were there any
additional costs
Page 2.29
There was serious fire in the premises of M/s Fortunate on 1st September, 2021. Their
business activities were interrupted until 31st December, 2021, when normal trading
conditions were re-established. M/s Fortunate are insured under loss of profit policy for
₹ 42,000, the period of indemnity being 6 months.
You are able to ascertain the following information:
1. The net profit for the year ended 31st December, 2020 was ₹20,000.
2. The annual insurable standing charges amounted to ₹30,000 of which ₹2,000 were
not included in the definition of insured standing charges under the policy.
3. The additional cost of working in order to mitigate the damage caused by the fire
amounted to ₹600, and but for this expenditure, the business would have had to
shut down.
4. The saving in insured charges in consequence of the fire amounted to ₹1,500.
5. The turnover for the period of 4 months ended April 30, August 31 & December 31,
for each of the years 2020 and 2021 was as under:
Particulars ₹ ₹ ₹
2020 65,000 80,000 95,000
2021 70,000 80,000 15,000
You are required to compute the relevant claim under the terms of loss of profit policy.
Gulam Ahmed has a loss of profit policy for ₹12,00,000. Fire occurred on 15 March, 2021.
Indemnity period was for three months. Net profit of the year ended 31 December, 2020
was ₹8,40,000.
Standing charges (all insured) amounted to ₹7,44,000. Determine the insurance claim
from the following details:
Sales 2018 2019 2020 2021
₹ ₹ ₹ ₹
1 January – 31 March 18,00,000 19,50,000 21,30,000 19,50,000
1 April – 30 June 12,00,000 13,50,000 15,00,000 6,00,000
1 July – 30 September 15,00,000 16,50,000 18,00,000 15,00,000
1 October – 31 December
st
20,45,000 22,50,000 24,90,000 24,00,000
65,45,000 72,00,000 79,20,000 64,50,000
16 March 2020 – 31 March 2020 ₹ 4,20,000
16 March 2021 - 31 March 2021 ₹ Nil
16 June 2020 – 30 June 2020 ₹ 3,60,000
16 June 2021 - 30 June 2021 ₹ 90,000
Ignore decimals while computing trend of sale.
TOPIC 2: LOSS OF STOCK & LOSS OF PROFIT : MISC. QUESTIONS
A fire occurred in the premises of a businessman on 31st Jan., 2021, which destroyed most
of the building. However stock worth ₹ 5,940 was salvaged.
The company’s insurance policy covers the following:
Page 2.30
Particulars ₹
Stock 4,50,000
Building 6,00,000
Loss of Profit (including standing charges) 1,87,500
Period of indemnity- six months
The summarized Profit & Loss account for year ended 31st December, 2020 is as follow:
Particulars ₹ ₹
Turnover 15,00,000
Closing Stock 3,93,750
18,93,750
Opening Stock 3,09,375
Purchases 13,59,375
Standing Charges (Insured) 1,25,625
Variable Expenses 60,000 18,54,375
Net Profit 39,375
The transactions for the month of January, 2021 were as under:
Particulars ₹
Turnover 75,000
Payment to Creditors 80,010
Trade Creditors:
Balance as on 1.1.2021 1,13,000
Balance as on 31.1.2021 1,15,490
The company’s business was disrupted until 31.5.2021 during which period the reduction
in turnover amounted to ₹1,35,000 as compared with the turnover of period
corresponding to the previous year.
Building was worth ₹7,50,000 on the date of fire and three quarters of its value was lost
by fire. You are required to submit the claim for insurance for loss of stock, loss of
building and loss of profit.
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,
2021 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 31st March, 2021 is
given below:
Particulars ₹ Particulars ₹
To Opening stock 96,000 By Sales 12,00,000
To Purchases 7,56,000 By Closing stock 1,85,000
To Wages 1,58,000
To Manufacturing expenses 75,000
To Gross profit 3,00,000
13,85,000 13,85,000
To Administrative expenses 83,600 By Gross Profit 3,00,000
To Selling expenses (fixed) 72,400
To Commission on sales 34,200
To Carriage Outward 49,800
To Net profit 60,000
3,00,000 3,00,000
Page 2.31
Further data is as follows:

(a) Sales, Purchases, Wages and Manufacturing Expenses for the period 1.04.2021 to
30.06.2021 were ₹ 3,36,000, ₹ 2,14,000, ₹ 51,000 and ₹ 12,000 respectively.
(b) Other Sales figure were as follows
From 01.04.2020 to 30.06.2020 3,00,000
From 01.07.2020 to 30.09.2020 3,20,000
From 01.07.2021 to 30.09.2021 48,000
(c) Due to decrease in material cost, Gross Profit during 2021-22 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.

Sony Ltd.’s. Trading and Profit & loss account for the year ended 31st December, 2020
were as follows:
To Opening stock 20,000 By Sales 10,00,000
To Purchases 6,50,000 By Closing stock 90,000
To Manufacturing expenses 1,70,000
To Gross profit 2,50,000
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
To Net profit 50,000
2,50,000 2,50,000
The company had taken out a fire policy for ₹ 3,00,000 and a loss of profits policy for ₹
1,00,000 having an indemnity period of 6 months. A fire occurred on 1.4.2021 at the
premises and the entire stock were gutted with nil salvage value. The net quarter sales
i.e. 1.4.2021 to 30.6.2021 was severely affected. The following are the other information:
Sales during the period 1.1.21 to 31.3.21 2,50,000
Purchases during the period 1.1.21 to 31.3.21 3,00,000
Manufacturing expenses 1.1.21 to 31.3.21 70,000
Sales during the period 1.4.21 to 30.6.21 87,500
Standing charges insured 50,000
Actual expenses incurred after fire 60,000
The general trend of the industry shows an increase of sales by 15% and decrease in GP
by 5% due to increased cost. Ascertain the claim for stock and loss of profit.
From the following particulars, you are required to calculate the amount of claim for
Buildwell Ltd., whose business premises was partly destroyed by fire:
Sum insured (from 31st December, 2020) ₹ 4,00,000
Period of indemnity 12 Months
Date of damage 1 January 2021
st
Date on which disruption of business ceased 31st October 2021

The subject matter of the policy was gross profit, but only net profit and certain standing
charges are included. The books of account revealed:
Page 2.32
a) The gross profit for the financial year 2020 was ₹ 3,60,000.
b) The actual turnover for financial year 2020 was ₹12,00,000 which was also the turnover
in this case.
c) The turnover for the period 1st January to 31st October, in the year preceding loss, was
₹10,00,000.
During dislocation of the position, it was learnt that in November-December 2020, there
has been an upward trend in business done (compare with the figure of the previous
years) and it was stated that has the loss not occurred, the trading results for 2021 would
have been better than those of previous years.
The Insurance company official appointed to assess the loss accepted this view and
adjustments were made to the pre-damaged figures to bring them up to the estimated
amounts which would have resulted in 2021.
The pre-damaged figures together with agreed adjustments were: Turnover for 2020
Period Pre damaged Adjustment to be Adjusted Standard
Figures (₹) added (₹) Turnover (₹)
January 90,000 10,000 1,00,000
Feb – Oct 9,10,000 50,000 9,60,000
Nov – Dec 2,00,000 10,000 2,10,000
12,00,000 70,000 12,70,000
Gross Profit 3,60,000 46,400 4,06,400
Rate of Gross Profit 30% (Actual for 2020), 32% (adjusted for 2021).
Increased cost of working amounted to ₹ 1,80,000.
There was a clause in the policy relating to savings in insured standard charges during
the indemnity period and this amounted to ₹ 28,000.
Standing Charges not covered by insurance amounted to ₹ 20,000 p.a. The annual
turnover for January was Nil and for the period February to October 2021 ₹ 8,00,000.
TOPIC 3: COMPUTATION OF POLICY AMOUNT

A trader intends to take a loss of profits policy with indemnity period of 6 months,
however he was unable to ascertain the amount of policy. From the above details,
suggest the policy amount.
Turnover in last financial year: ₹ 4,50,000
Standing Charges in last financial year: ₹ 90,000
Net profit earned in last year was 10% of turnover and the same trend is expected in
subsequent year. Expected increase in turnover 25%.
To achieve additional sales, trader has to incur additional expenditure of ₹ 31,250.
Mr. Anshuman gives you the following information:
Turnover in last financial year 6,00,000
Standing charges in last financial year 1,20,000
Net profit earned in last year was 15% of turnover and the same trend expected in
subsequent year. Increase in turnover is expected at the rate of 30%. To achieve additional
sales, Mr. Anshuman will have to incur additional expenditure of ₹ 77,000.
He intends to take a loss of profit policy with indemnity period of 6 months. Advise him
the policy amount which will be necessary to cover loss of profits.
Page 2.33
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 lakhs. All
other fixed expenses will remain same.
The following further details are also available from the previous year’s account.
Particulars ₹
Total variable expenses 24,00,000
Fixed Expenses
Salaries 3,30,000
Rent, Rates, and Taxes 30,000
Travelling 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 of policy to be taken for the current year.
M/s. Platinum Jewellers wants to take up a "Loss of Profit Policy" for the year 2021. The
extract of the Profit and Loss Account of the previous year ended 31-12-2020 provided
below:
Variable Expenses
Cost of Materials 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 from 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 l0% in the
current year. All other expenses will remain the same.
Determine the amount of policy to be taken up for the current year by M/s. Platinum
Jewellers
Shamsher Ltd. has decided to take out a Loss of Profit Policy for the year 2021 and given
the following information for the last Accounting Year 2020.
Page 2.34
Variable Manufacturing Expenses ₹ 32,80,000, Standing Charges ₹ 4,80,000, Net Profits

₹ 2,45,000, Non–Operating Income ₹ 5,000, Sales ₹ 40,00,000.
Compute the sum to be insured in each of the following alternative cases:
a) If Sales will increase by 10%
b) If Sales will increase by 10% and only 50% of the present Standing Charges are to be
insured.
c) If Sales and Standing Charges will increase by 10%.
d) If Sales and Variable Expenses will increase by 10%
e) If Sales will increase by 10% and Variable Expenses will decrease by 10%.
f) If the Turnover and Standing Charges will increase by 10% and Variable Expenses will
decrease by 10% but only 50% of the present Standing Charges are to be insured.
Page 2.35
PRACTICE QUESTIONS
TOPIC 1: LOSS OF PROFIT: BASIC CONCEPTUAL QUESTIONS
Calculate the amount of claim for consequential loss from the following information:
1. The policy is for ₹ 4,90,000 with a six months period of indemnity.
2. On 1st July, 2021 fire broke out and sales of 3 months were affected.
3. Sales for 12 months ended 30th June, 2021 amounted to ₹5,00,000.
4. A sum of ₹1,000 was spent as additional expenses to mitigate the effect of loss.
5. After debiting insured standing charges of ₹ 25,000, net profit for the year 2020
was ₹ 2,00,000.
6. Sales for the year 2020 amounted to ₹4,50,000.
7. Accounts are closed each year on 31st December.
8. Sales for 3 months ending 30th September, 2020 were ₹1,00,000.
9. Sales for 3 months ending 30th September, 2021 were ₹40,000.
(Ans: Claim 31,000)
From the following particulars prepare a claim for loss of profits under the Consequential
Loss Policy. Date of Fire: June 30, 2021 Period of indemnity: Six Months
Particulars ₹
Sum Insured 25,000
Turnover for the year ended June 30, 2021 1,00,000
Net Profit for the accounting year ending March 31, 2021 6,250
Standing charges for the accounting year ending March 31, 2021 14,250
Turnover for the year ending March 31, 2021 99,000
Turnover for the indemnity period from 01.07.21 – 31.12.21 28,000
Turnover for the period from 01.07.20 – 31.12.20 55,000
The turnover of the year 2020-21 had shown a tendency of increase of 10% over the
turnover of the preceding year.
(Ans: Claim 6,728)
A fire occurred on 1st February, 2021, in the premises of Pioneer Ltd., a retail store and
business was partially disorganized upto 30th June, 2021. 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.
Particulars ₹
Actual turnover from 1st February to 30th June, 2021 80,000
Turnover from 1st February to 30th June, 2020 2,00,000
Turnover from 1st February 2020 to 31st January, 2021 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
Page 2.36
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.
(Ans: Claim 39,390)
Question 4 (Inter May 2019) (10 Marks) Pg no._____
A fire occurred in the premises of M/s Bright on 25th May, 2021. As a result of fire, sales
adversely affected up to 30th September, 2021. The firm had taken Loss of profit policy
(with an average clause) for ₹ 3,50,000 having indemnity period of 5 months. There is an
upward trend of 10% in sales.
The firm incurred an additional expenditure of ₹ 30,000 to maintain the sales. There was
a saving of ₹ 5,000 in the insured standing charges.
Actual turnover from 25th May, 2021 to 30th September, 2021 ₹ 1,75,000
Turnover from 25th May, 2020 to 30th September 2020 ₹ 6,00,000
Net profit for last financial year ₹ 2,00,000
Insured standing charges for the last financial year ₹ 1,75,000
Total standing charges for the last financial year ₹ 3,00,000
Turnover for the last financial year ₹ 15,00,000
Turnover for one year from 25th May, 2020 to 24th May, 2021 ₹ 14,00,000
You are required to calculate the loss of profit claim amount, assuming that entire sales
during the interrupted period was due to additional expenses.
(Ans: Claim 1,26,270)
The premise of Green Limited was partially destroyed by fire on March 01, 2021 and as a
result, the business was practically disorganized up to August 31, 2021.
The company is insured under a loss of profits policy for ₹ 6,60,000, having an indemnity
period of 6 months.
From the information given below, find out claim under the policy:
Particulars ₹
Actual Turnover from March 01, 2021 to August 31, 2021 3,20,000
Turnover from March 01, 2020 to August 31, 2020 9,60,000
Turnover from March 01, 2020 to February 28, 2021 24,00,000
Net Profit for last Financial Year 3,60,000
Insured Standing Charges for last Financial Year 2,40,000
Uninsured Standing Charges for last Financial Year 20,000
Turnover for the last Financial Year 20,00,000
The company incurred additional expenses amounting to ₹ 40,000 immediately after fire,
which reduced the loss in turnover. Otherwise turnover during the period of dislocation
would have been only amounting to ₹ 2,20,000. The saving in Insured Standing Charges
in consequences of the fire amounted to ₹ 10,800.
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 10% be made in respect of the
upward trend in turnover. Assume that, trend adjustment is required on total amount of
annual turnover.
(Ans: Claim 2,00,000)
Page 2.37
The premises of a company were partly destroyed by the fire which took place on 1st
March, 2021 and as a result of which the business was disorganized from 1st March to
31st July, 2021. Accounts are closed on 31st December, every year. The company is
insured under a loss of profit policy for ₹7,50,000. The period of indemnity specified in
the policy is 6 months. From the following information you are required to compute the
amount of claim under the Loss of Profits policy:
Particulars ₹
Turnover for the year 2020 40,00,000
Net profit for the year 2020 2,40,000
Insured standing charges 4,80,000
Turnover during the period of dislocation, i.e., from 1.3.2021 to 31.7.2021 8,00,000
Standard turnover for the corresponding period in the preceding year, 20,00,000
i.e., from 1.3.2020 to 31.7.2020
Annual turnover for the year immediately preceding the fire i.e., from 44,00,000
1.3.2020 to 28.2.2021
Increased cost of working 1,50,000
Savings in insured standing charges 30,000
Reduction in turnover avoided through increase in working cost 4,00,000
Owing to reasons acceptable to the insurer, the “special circumstances clause” stipulates
for:
(a) Increase of turnover (Standard and annual) by 10% and
(b) Increase of rate of gross profit by 2%.
(Ans: Claim 2,55,682)
A Loss of Profit Policy was taken for ₹ 80,000. Fire occurred on 15th March 2021.
Indemnity period was for three months. Net profit for 2020 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:
Particulars 2018 2019 2020 2021
From 1st Jan to 31st March 1,20,000 1,30,000 1,42,000 1,30,000
From 1st April to 30th June 80,000 90,000 1,00,000 40,000
From 1st July to 30th 1,00,000 1,10,000 1,20,000 1,00,000
September
From 1st October to 31st Dec. 1,36,000 1,50,000 1,66,000 1,60,000
Sales from 16.03.2020 to 31.03.2020 were ₹ 28,000
Sales from 16.03.2021 to 31.03.2021 were ₹ Nil
Sales from 16.06.2020 to 30.06.2020 were ₹ 24,000
Sales from 16.06.2021 to 30.06.2021 were ₹6,000
(Ans: Claim 10,987)
A fire occurred in the premises of M/s Kirti & Co. on 15th December, 2020. The working
remained disturbed upto 15th March, 2021 as a result of which sales adversely affected.
The firm had taken out an insurance policy with an average clause against consequential
losses for ₹ 2,50,000.
Following details are available from the quarterly sales tax return filed/GST return filed:
Page 2.38
Sales 2017-18 2018-19 2019-20 2020-21

From 1st April to 30th June 3,80,000 3,15,000 4,11,900 3,24,000
From 1st July to 30th September 1,86,000 3,92,000 3,86,000 4,42,000
From 1st October to 31st December 3,86,000 4,00,000 4,62,000 3,50,000
From 1st January to 31st March 2,88,000 3,19,000 3,80,000 2,96,000
Total 12,40,000 14,26,000 16,39,900 14,12,000
A period of 3 months (i.e. from 16-12-2020 to 15-3-2021) has been agreed upon as
indemnity period.
Sales from 16-12-2019 to 31-12-2019 68,000
Sales from 16-12-2020 to 31-12-2020 Nil
Sales from 16-03-2020 to 31-03-2020 1,20,000
Sales from 16-03-2021 to 31-03-2021 40,000
Net profit was ₹ 2,50,000 and standing charges (all insured) amounted to ₹ 77,980 for the
year ending 31st March, 2020. You are required to calculate loss of profit claim amount.
(Ans: Claim 18,575)
TOPIC 2: LOSS OF STOCK & LOSS OF PROFIT : MISC. QUESTIONS
SM Ltd. give the following Trading and Profit and Loss Account for the year ended 31st
December, 2020.
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 1,60,000
skilled workers)
To Manufacturing Expenses 1,20,000
To Gross Profit 2,40,000
8,70,000 8,70,000
To Other Administration 60,000 By Gross Profit 2,40,000
Expenses
To Advertising 20,000
To Selling Expenses (fixed) 40,000
To Commission on Sales 48,000
To Carriage Outwards 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 2021 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 2021
were ₹ 1,00,000; ₹ 50,000 and ₹ 36,000, respectively.
(b) Sales for the same period were ₹ 2,40,000
(c) Other sales figure were as follows:
From 01.01.2020 to 30.04.2020 ₹ 3,00,000
From 01.05.2020 to 31.08.2020 ₹ 3,60,000
From 01.05.2021 to 31.08.2021 ₹ 60,000
Page 2.39
(d) Due to rise in wages gross profit during 2021 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.
(Ans: Claim: Loss of Stock 80,000 and Loss of Profit 57,600)
TOPIC 3: COMPUTATION OF POLICY AMOUNT

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 last financial year ₹ 36,00,000
Standing charges in last financial year ₹ 7,20,000
subsequent year.
Increase in turnover expected 25%.
(Ans: Policy Amount 14,00,000)
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 last financial year ₹ 6,75,000
Standing charges in the last financial year ₹ 1,14,750
subsequent year.
Increase in turnover expected 30%.
A firm has decided to arrange for a loss of profits insurance and you are required to
finalize the sum to be insured on a full insurance basis from the following figure for the
last financial year; it is anticipated that for the current financial year, turnover will
increased by 10% and that all standing (fixed) expenses will remain unchanged.
Particulars ₹ ₹
Total variable expenses 21,00,000
Fixed Expenses:
Wages and salaries to skilled employees and
salaries to administration staff 3,00,000
Depreciation of all fixed assets 1,00,000
Insurance premium 10,000
Audit Fees 4,000
Directors Fees 4,000
Traveller’s Expenses (including Motor Car Expenses) 40,000
Postage, Cables and Telephones 3,000
Page 2.40
Trade subscriptions 1,000

Rent, Rates and Taxes 30,000 4,92,000
Non-operating Income 50,000
Net Profit 4,08,000
A Firm has decided to take out a Loss of Profit Policy for the year 2021 and given the
following information for the last Accounting Year 2018.
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 2021:
a) If Sales will increase by 15%
b) If Sales will increase by 15% and only 50% of the present Standing Charges are to be
insured.
c) If Sales and Variable Expenses will increase by 15% and Standing Charges will Increase
by 10%
d) If Sales will increase by 15% and Variable Expenses will decrease by 5%.
e) If Sales will increase by 10% and Standing Charges will increase by 15%.
f) 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.
(Ans: Policy Amount 4,37,000; 3,62,000; 2,07,050; 5,18,650; 4,40,500; 5,36,550)
Page 2.41

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CA NITIN GOEL INSURANCE CLAIM

WEIGHTAGE IN PAST YEAR EXAMS

→ Extent of Insurance Claim:

→ Significance of Average Clause:

→ ABNORMAL STOCK/ ABNORMAL ITEM

Trading Account [Last Year]

Memorandum Trading A/c

Treatment of Abnormal Items of Stock

TOPIC 1: LOSS OF STOCK: BASIC CONCEPTUAL QUESTIONS

Question 8 (ICAI Study Material) Pg no._____

Question 10 (ICAI Study Material) Pg no._____

Question 11 (ICAI Study Material) Pg no._____

Question 12 (RTP May 2019) Pg no._____

TOPIC 2: LOSS OF STOCK: ABNORMAL STOCK

Question 13 (ICAI Study Material) Pg no._____

Question 16 (ICAI Study Material) Pg no._____

TOPIC 1: LOSS OF STOCK: BASIC CONCEPTUAL QUESTIONS

Question 10 (Inter Jan 2021) (10 Marks) Pg no._____

TOPIC 2: LOSS OF STOCK: ABNORMAL STOCK

Question 13 (ICAI Study Material) Pg no._____

Purchases upto 30-06-2021 did not include ₹ 35,000 for

Sales during 2020-21 8,60,000

Stock at cost as on 01.01.2020 50,000

LOSS OF PROFIT POLICY

Step 2: Calculate Short Sales

Sales in Current Year (Non-Affected Period) xxx

Step 3: Loss of Profit = Short Sales X GP ( %)

Step 5: Additional Expenses (Lower of the following to be considered)

Step 6: Calculate Total Loss

Step 7: Applicability of Average Clause

Claim to be Lodged= Total Loss (Step 6) X Insured Amount

TOPIC 1: LOSS OF PROFIT: BASIC CONCEPTUAL QUESTIONS

Question 2 (ICAI Study Material) Pg no._____

a) Indemnity period 12 months

Question 4 (ICAI Study Material) Pg no._____

Question 5 (ICAI Study Material) Pg no._____

TOPIC 2: LOSS OF STOCK & LOSS OF PROFIT : MISC. QUESTIONS

Further data is as follows:

Question 12 (ICAI Study Material) Pg no._____

Date on which disruption of business ceased 31st October 2021

TOPIC 3: COMPUTATION OF POLICY AMOUNT

Question 14 (ICAI Study Material) Pg no._____

Variable Manufacturing Expenses ₹ 32,80,000, Standing Charges ₹ 4,80,000, Net Profits

TOPIC 1: LOSS OF PROFIT: BASIC CONCEPTUAL QUESTIONS

Sales 2017-18 2018-19 2019-20 2020-21

TOPIC 2: LOSS OF STOCK & LOSS OF PROFIT : MISC. QUESTIONS

TOPIC 3: COMPUTATION OF POLICY AMOUNT

Question 10 (RTP May 2020) Pg no._____

Trade subscriptions 1,000

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