ACCOUNTANCY ANDSyllabus Accountancy and Financial Management Paper - IV Modules at Glance Sr. No. Modules No. of Lectures 1 Fire Insurance Claims 15 2 Redemption of Preference Shares

ACCOUNTANCY ANDFINANCIAL

MANAGEMENT PAPER - IV(As Per the Revised Syllabus of Mumbai University for

S.Y. B.Com., 2013-14, Semester IV)

Rajiv S. MishraM.Com., MBA, M.Phil., NET,

Lecturer at N.E.S. Ratnam College of Arts, Science and Commerce for BBI &Co-ordinator for M.Com.,

Bhandup (W), Mumbai-400 078.Visiting Faculty at N.G. Acharya, D.K Marathe, V.K. Menon College, Pragati College,

Dnyansadhana College and Vikas College for M.Com., BBI, BMS, BFM and BAF.

CMA (Dr.) Kinnari ThakkarM.Com., ACMA, CS., Ph.D.,

MBA (Finance),Principal, SIES College ofCommerce & Economics,

Sion (E), Mumbai.

Asif BaigM.Com., B.Ed., M.Phil., MBA, NETHOD, Accounts at Gurukul College,

Ghatkopar.

Pratima SinghM.Com., M.Phil., B.Ed.,Vice Principal & HOD,Account Department,

Chandrabhan Sharma College.

Nutan LokhandeM.Com., NET,

Lecturer, N.E.S. Ratnam College ofArts, Science and Commerce.

Hemal VoraM.Com., B.Ed., MBA, M.Phil., NET.

Assistant Professor atGurukul College of Commerce.

H.G. PradhanM.Com., M.Phil., UGC NET,

Assistant Professor at Western College,Sanpada and Vikas College, Vikhroli.

Rajendra B. VareM.Com., M.A., MBA, M.Phil., B.Ed.,

I/c Principal, Shivaji ShikshanSanstha College (Night), Mumbai.

MUMBAI NEW DELHI NAGPUR BENGALURU HYDERABAD CHENNAI PUNE LUCKNOW AHMEDABAD ERNAKULAM BHUBANESWAR INDORE KOLKATA GUWAHATI

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Preface

It is a matter of great pleasure to present this new edition of the book on Accountancy andFinancial Management Paper - IV to the students and teachers of S.Y. B.Com., Semester IV,University of Mumbai. This book is written on lines of syllabus instituted by the University. The bookpresents the subject matter in a simple and convincing language.

I owe a great many thanks to a great many people who helped and supported me during thewriting of this book which includes Principal, Coordinator, and Students of K.M. College, DAV,Ratnam College, K.J. Somaiya, Vivekananda Education Society, Vikas College, R.J. College of theB.Com., BBI, BMS, BAF and BFM section.

My deepest thanks to Mr. Manoj Sharma of the Nitin Godiwala College who was the strength tome always.

I would also thank all of them who have been a part of this book and helped me knowingly orunknowingly. I also extend my heartfelt thanks to my family S.N. Mishra (Father), Sunita S. Mishra(Mother), Sanjiv S. Mishra (Brother), Rupa R. Mishra (Wife), Yash R. Mishra (Son) and well-wisherswould have been a distant reality.

Special Thanks/Acknowledgements(1) Prof. Mrs. Rina Saha Principal – N.E.S. Ratnam College(2) Prof. Manoj Sharma Principal – Nitin Godiwala College(3) Prof. Ajay Bhamre Principal – RADAV College(4) Prof. Probol Gupta Vice-principal – RADAV College(5) Prof. R.K. Patra Sr. Vice-principal – Vikas College(6) Prof. Vinayak Mulay Vice-principal – Vikas College(7) Dr. Kinnary Thakkar Reader Commerce – Mumbai University(8) CA Rajiv Khurana HOD Accountancy – RADAV College(9) Prof. Riya Rupani BMS and BBI Coordinator – N.E.S. Ratnam College

(10) Prof. Sandip Gupta BMS Coordinator – K.J. Somaiya College(11) Prof. Jyotsna Shilpi BMS Coordinator – Vikas College(12) Prof. Selvi BMS Coordinator – R. Jhunjhunwala College(13) Prof. Mukesh Kanojia BMS Coordinator – R.D. National College(14) Prof. Bhupinder Saini BMS Coordinator – RADAV College(15) Prof. Bhavdas C.M. Sr. Lecturer – V.E.S. College(16) Prof. Nitin Agarwal Lecturer – Gurukul College(17) Prof. Kursheed Shaikh Lecturer – Narayan Guru College(18) Prof. Mrunmayee Thatte Lecturer – Joshi Bedekar College(19) Prof. Jia Makhija Lecturer – N.E.S. Ratnam College(20) Prof. Kedar Pandey Lecturer – Nitin Godiwala College

Authors

Syllabus

Accountancy and Financial Management Paper - IV

Modules at Glance

Sr. No. Modules No. ofLectures

1 Fire Insurance Claims 152 Redemption of Preference Shares 153 Redemption of Debentures 154 Accounting with the Use of Accounting Software 15

Total 60

Sr. No. Modules/Units1 Fire Insurance Claims

Computation of loss of stock by fireAscertainment of claim as per the insurance policyExcluding loss of profit and consequential loss

2 Redemption of Preference SharesCompany Law/Legal Provisions for redemption of preference shares in Companies ActSources of redemption including divisible profits and proceeds of fresh issue of sharesPremium on redemption from security premium and profits of companyCapital Redemption Reserve Account – creation and use

3 Redemption of DebenturesRedemption of debentures by payment from sources including out of capital and/or out ofprofitsDebenture redemption reserve and debenture redemption sinking fund excludinginsurance policyRedemption of debentures by conversion into new class of shares or debentures withoptions – including at par, premium and discount

4 Accounting with the Use of Accounting SoftwareAdvance accounting and Inventory Vouchers: Purchase and Sales Order, Reorder,Delivery Notes, Budgeting and ControlsInvoice – Product Invoice and Service InvoiceShortcut Keys: Special key Combination, Special Functional Key CombinationManagement Information System (MIS)

Paper Pattern

Question Paper Pattern for Periodical Class Test for Courses at UG ProgrammesWritten Class Test 20 Marks

Sr. No. Particulars Marks

1 Match the Column/Fill in the Blanks/Multiple Choice Questions(½ Mark each)

05 Marks

2 Answer in One or Two Lines (Concept-based Questions)(1 Mark each)

05 Marks

3 Answer in Brief (Attempt any two of the three) (5 Marks each) 10 Marks

Semester End ExaminationDuration: 2½ Hrs. Maximum Marks: 75All questions are compulsory carrying 15 Marks each. Questions to be Set: 05

Sr. No. Particulars Marks

Q.1 Objective Questions 15 Marks

(a) Sub-questions to be asked 10 and to be answered any 08(b) Sub-questions to be asked 10 and to be answered any 07(*Multiple Choice/True or False/Match the Column, Fill in the Blanks)

Q.2

Q.2

Full Length Practical QuestionORFull Length Practical Question

15 Marks

15 Marks

Q.3

Q.3


15 Marks

15 Marks

Q.4

Q.4


15 Marks

15 Marks

Q.5

Q.5

(a) Theory Questions(b) Theory QuestionsORShort NotesTo be asked 05To be answered 03

08 Marks07 Marks

15 Marks

Note: Full length question of 15 marks may be divided into two sub-questions of 08 and 07 marks.

Contents

Sr. No. Units Page No.

1 Fire Insurance Claims 1 – 21

2 Redemption of Preference Shares 22 – 69

3 Redemption of Debentures 70 – 115

4 Accounting with the Use of Accounting Software 116 – 136

(1)

FIRE INSURANCEA trader faces the risk of loss of his property by fire. He can cover this risk by paying a small

amount of premium to Insurance Company for taking out a fire insurance policy. The insurancecompany in turn, agrees to bear the loss of property by fire. If the trader actually suffers a loss, he canmake an claim on the insurance company for compensation.

CLAIM FOR LOSS OF STOCKA fire insurance policy may cover loss of fixed assets or loss of stock or loss of profit, etc.

When there is a loss of stock by fire, the trader must submit a claim to the insurance company. Theclaim must give details regarding the value of stock on the date of fire the value of stock saved(salvage), the ratio of loss to the value of policy and so on.

The amount of claim is calculated in different ways:(1) When the Stock records are available.(2) When Stock records are not available.

(1) When stock records are availableIf proper stock records are available. The calculations are easy, the claim is calculated in two steps:

(a) Computing loss and (b) Computing insurance claim.(a) Computing Loss: A trader can claim compensation only for his actual loss. He cannot get

from the insurance company an amount higher than his actual loss. This means that:(i) Only the actual physical stock destroyed by fire must be considered. (ii) The stock mustbe valued only at cost. (iii) Only the net loss (stock less salvage) must be considered.(i) Actual stock destroyed: The stock records will show the entire stock belonging to the

trader as on the date of the fire. This is the book stock. However, the book stock mustbe adjusted as shown below to arrive at the actual physical Stock destroyed.

A A(A) Book Stock on date of fire xxx(B) Add: Goods received, but not included in purchases xxx xx(C) Less: Goods delivered but not including sales xxx(D) Less: Goods lying with others (on approval) xxx xxx(E) Stock destroyed by fire (A + B + C) xx

FIRE INSURANCECLAIMS

1

2 Accountancy and Financial Management Paper - IV

(ii) Valued at Cost: While computing loss, the stock must be valued at cost only. If the stock isundervalued or overvalued, we must adjust the value and arrive at the cost of stock.

(iii) Net Loss: While computing loss, only the net loss (after deducting the value of salvage, ifany) must be considered. The loss is calculated by the formula:Cost of Stock on date of fire xxxLess: Value of salvage xxxLoss xxx

Illustration 1:The cost of the Stock on date of fire is A 52,000 (the market value is A 55,000) and Stockworth A 2,000 was saved (salvaged). Compute the amount of loss:Solution:Cost of Stock on date of fire 52,000Less: value of salvage 2,000Loss 50,000

(b) Computing Claim: The loss is compensated in proportion to the amount of stock insured.If the entire stock is insured, the entire loss is compensated; if, say, only half the loss is compensated.This is known as the average clause in the insurance policy. Under this clause, the claim is calculatedby the formula:

Claim = LossStockPolicy

(It should be noted that: (1) Average clause and the above formula applies only in case ofunder-insurance. It does not apply in case of over insurance. (2) Average clause should beapplied after deducting the salvage.)

Illustration 2:(a) If Total Stock of A 50000 is insured fully, i.e., the value of policy is also A 50,000 and

the entire stock is lost, the claim will be for the full amount of A 50,000.(b) If the Total Stock of A 50,000 is not insured fully, e.g., the value of policy is only

A 25,000 and the entire stock is lost, the claim will be only for A 25,000, calculated asfollows:


= 000,50000,50000,25 = A 25,000

(c) If Total Stock of A 50,000 is not insured fully, e.g., the value of policy is only A 25,000and stock A 20,000 is lost, the claim will be only for A 10,000 calculated as follows:


= 000,20000,50000,25 = A 10,000

(d) If the Stock of A 50,000 is over-insured, i.e., the value is, say A 70,000 and the entirestock is lost, the claim will still be only for A 50,000.

Fire Insurance Claims 3

(2) When stock records are not availableSometimes, the stock records may not be kept or the records may themselves be damaged in the

fire. In this case, the claim is calculated by taking the following steps: (A) Compute Value of Stock ondate of fire, (B) Compute Loss, and (C) Compute Amount of claim.

In this case, the value of stock as on the date of fire is not readily available. The value must beestimated. This is done by preparing a memorandum trading account as shown below:

Memorandum Trading Account(From 1st day of A/c year to date of fire)

Particulars Amt Particulars AmtTo Opening Stock xxx By Sales xxxTo Purchases xxx By Closing Stock

(balancing figure)xxx

To Direct expenses xxxTo Gross Profit (estimated) xxx

xxx xxxThe following points should be noted:1. Period: The Memorandum Trading A/c as in Single Entry is made from the 1st day of the

accounting year to the date of fire.2. Details: For preparing the Memorandum Trading Account, we have to find out the details

of all the above items, i.e., sales, purchases, etc. during the concerned period.3. Opening Stock: The value of Opening Stock will be available from last year’s balance

sheet. The opening stock must be shown at cost in the Memorandum trading account, evenif it is valued at some other rate in the books.

4. Cash Sales/Purchases/Expenses: The amounts of cash sales, cash purchases and expensescan be found out from the cash book/bank book.

5. Credit Sales: The amount of credit sales can be calculated by preparing a Total DebtorsAccount (as in Single Entry) as follows:

Total Debtors Account(From 1st day of year to date of fire)

Particulars Amt Particulars AmtTo Opening balance b/d xxx By Amounts received xxxTo Cheque dishonoured xxx By Discount allowed xxxTo Credit sales (balancing figure) xxx By Sales returns xxx

By Bad debts xxxBy Closing balance c/d xxx

xxx xxx6. Credit Purchases: The amount of credit purchases can be calculated by preparing a Total

Creditors Account (as in single entry) as follows:


Total Creditors Account(From 1st day of A/c year to date of fire)

Particular’s Amt Particular’s AmtTo Amounts paid xxx By Opening balance b/d xxxTo Discount received xxx By Cheque dishonored xxxTo Purchase returns xxx By Credit purchases(bal fig) xxxTo Closing balance c/d xxx

xxx xxx7. Gross Profit (GPR): Gross profit on sales/cost: The GPR is always calculated on the

sales. If the rate of profits on cost is given the sum, it should be converted into rate on sales.Illustration 1: A fire occurred at the premises of a trader at 31st May 2014 destroying a greater part ofhis stock on 1st January 2014 appeared in his books at A 60,000 value of the goods saved worthA 13,500. The gross profit on sales was 30% and sales amount is A 1,53,000 from January till the dateof the fire, for the same period purchases worth A 1,03,500. Prepare a statement of claim forsubmission to the insurance company.Solution: In the books of trader (1/1/2014 to 31/5/2014)

Particulars Amt Particulars AmtTo Opening Stock 60,000 By Sales 1,53,000To Purchases 1,03,500 By Stock on the date of fireTo Gross profit (bal. fig.) 56,400(30% on 1,53,000) 45,900

2,09,400 2,09,400 Computation of loss

Stock on the date of fire 56,400Less: Salvaged 13,500Loss 42,900

Computation of lossThe loss amounted to A 42,900 is the net claim amount which is to be claimed to the insurance

company of A 42,900.Illustration 2: Baptist prepared books of accounts on 30th June 2013 every year on 30th September2013 fire destroyed the greater part of his stock. Following information is collected from his books.Stock on 30th June 2013 was A 2,92,500. Purchases from 1st July 2013 to 30th September wereA 2,27,500. Sales from 1st July to 30th September was A 10,00,000. Average % of gross profit to cost33.35%. Stock of the value of A 70,000 was salvaged policy worth A 2,50,000 and claim was subjectto average clause. Following are the information.

(a) Stock in the beginning was calculated 10% less than cost.(b) Purchases include the purchase of plant worth A 50,000.(c) Installation of plant which was owned and spent on their own workers amounted to A 2,500

which was included in wages.Calculate the amount of claim for corporation to the insurance company.


Solution:Working notes:1. Calculation of Opening Stock

Assume cost 100Less: 10% 10

90

2,92,500 ×90

100 = 3,25,000

In the Books of BaptistMemorandum Trading Account

(From 1st July 2013 to 30th September 2013)Particulars Amt Amt Particulars Amt Amt

To Opening Stock 3,25,000 By Sales 10,00,000To Purchase 6,00,000Less: Plant installation 50,000 5,50,000 By Closing Stock 3,50,000To Wages 2,27,500Less: Payment to workers 2,500 2,25,000To Gross profit(25% on 10,00,000) 2,50,000

13,50,000 13,50,0002. Calculation for the amount of loss

Stock on date of fire 3,50,000Less: Salvaged 70,000Loss 2,80,000

3. Calculation of the claim

100Stock Closingpolicy of Value

= 000,80,2000,50,3000,50,2 = A 2,00,000

Illustration 3: X Ltd on 4th May 2015 all the stock with the exception of A 13,000 were destroyed byfire from the following ascertain the loss suffered by the company.

Particulars AmtStock on 1/1/2014 36,000Stock on 31/12/2014 66,000Purchases during 2014 4,80,000Sales 6,00,000Purchases during 2009 upto the date of the fire 2,30,000Sales during 2009 upto the date of fire 3,00,000

On 20th December 2014 also, there was a fire which destroyed a genuine cost worth A 10,000.The opening stock at cost less than 10% of the year 2014. Stock on 31st December 2014 at cost plus20%. The value of the policy of A 40,000. Claim was subject to average clause. Compute the amountof net claim.


Solution:Working notes:1. Calculation for Opening Stock

Assume cost 100Less: 10% 10

90

90100000,36 = 40000

2. Calculation for Closing StockAssume cost 100Add: 20% 20

120

120100000,66 = 55,000

In the Books of X Ltd.Particulars Amt Particulars Amt

To Opening Stock (WN1) 40,000 By Closing Stock (WN2) 55,000To Purchases 4,80,000 By Sales 6,00,000

By Goods destroyed by fire 10,000To Gross profit 1,45,000

6,65,000 6,65,000Memorandum Trading Account

(from 1st January 2009 till 4th May 2009)Particulars Amt Particulars Amt

To Opening Stock (WN1) 55,000 By Sales 3,00,000To Purchases 2,30,000 By Stock on the date of fire 57,000To Gross profit 72,000(300000 × 24%)

3,57,000 3,57,0003. Calculation for gross profit (percentage)

100SalesNet Profit Gross = 100

6,00,0001,45,000 = 24%

4. Calculation for the amount lossStock on the date of fire 57,000Less: Salvaged 13,000Loss 44,000


5. Calculation for claim amount

LossStock ClosingPolicy of Value = 000,44

57,00040,000 = A 30,877

Therefore, net claim amounted to A 30,877 as compensation was submitted to the insurancecompany.Illustration 4: From the following particulars, find out the value of stock on the date of the fire.

Particulars 2007 2014 2009 Upto date of fireOpening Stock 15,000 ? ? ?PurchasesLess: Return 50,000 75,000 90,000 60,000SalesLess: Return 60,000 80,000 1,30,000 84,000Factory Expenses 3,000 5,000 6,000 4,000Closing Stock 20,000 40,000 50,000 ?

Salvaged is valued at A 11,000. It was practiced by the firm to insure the goods at 90% costwith respect to loss of the goodsSolution: In The Books of……..

Particulars 2007 2014 2009 Particulars 2007 2014 2009To Opening Stock 15,000 20,000 40,000 By Sales 60,000 80,000 1,30,000To Purchases 50,000 75,000 90,000To Factory expenses 3,000 5,000 6,000 By Closing Stock 20,000 40,000 50,000To Gross profit 12,000 20,000 44,000

80,000 12,000 1,80,000 80,000 12,000 1,80,000

Working notes:1. Calculation for gross profit (%)

2007 100SalesNet Profit Gross 100

60,00012,000 = 20%


80,00020,000 = 25%


1,30,00044,000 = 34%

Therefore, till date of fire =3

34% 25% 20% = 26%


Memorandum Trading Account(From 1st date of the year till the date of the fire)

Particulars Amt Particulars AmtTo Opening Stock 50,000 By Sales 84,000To Purchases 60,000 By Stock on the date of fire 51,840To Factory expenses 4,000To Gross profit(84000 × 26%) 21,840

1,35,840 1,35,840

2. Compensation of lossStock on date of fire 51,840Less: Salvaged 11,000Loss 40,840

3. Calculation for policy amount

10090840,40 = 36,756

4. Calculation for net claim

100Stock of ValuePolicy of Valule

= 10051,84036,756 = 28,957

Illustration 5: on the 30th June, 2014 accidental fire destroyed a major part of the stock in thegodown of Jay Associates. Stocks costing A 30,000 could be salvaged but not their Stock ledger. Afire insurance policy was in force under which the sum insured was A 3,50,000.

You are given the following date from available records:(a) Total sales invoices during the period April to June amounted to A 30,20,000. An analysis

showed that goods of the value of A 3,00,000 had been returned by the customers before thedate of fire.

(b) Opening Stock on 1st April, 2014 was 2,20,000 including stock of value of A 20,000 beinglower of cost and net value subsequently realized.

(c) Purchases between 1st April, 2014 and 30th June 2014 were A 21,00,000.(d) Normal gross profit ratio was 331/3%.(e) A sum of A 30,000 was incurred by way of fire fighting expenses on the day of the fire.Prepare a statement of insurance claim


Solution:A. Computing Stock:

Memorandum Trading AccountsParticulars Amt Amt Particulars Amt Amt

To Opening Stock 2,20,000 By Sales 30,20,000Less: Abnormal Item 20,000 2,00,000 Less: Abnormal Item 20,000To Purchases 21,00,000 30,00,000To Gross Profit (33.33%) 9,00,000 Less: Return 3,00,000 27,00,000

By Closing Stock 5,00,00032,00,000 32,00,000

B. Computation of loss:

Stock on the date of the fire 5,00,000Less: Salvage value 30,000

4,70,000Add: Fire Fighting expenses 30,000Actual loss 5,00,000

C. Computing Claim:

Claim = 100StockPolicy

= 000,00,55,00,0003,50,000 = A 3,50,000

Illustration 6: A fire occurred in the premises of Agni on 25th August, 2013 when a large part of thestock was destroyed. Salvage was A 15,000. Agni gives you the following information for the periodJanuary 1, 2013 to August 25th 2013:

Purchases A 85,000Sales A 90,000Goods costing A 5,000 were taken by Agni for personal use.Cost price of Stock on January 1, 2013 was A 40,000Over the past few years, Agni has been selling goods at a consistent gross profit margin of 331/3%.The Insurance Policy was for A 50,000. It included an average clause. Agni asks you to prepare

a statement of claim to be made on the insurance company.Solution:

A. Computation of Stock:Memorandum Trading Accounts

Particulars Amt Amt Particulars Amt AmtTo Opening Stock 40,000 By Sales 90,000To Purchase 85,000 By Closing Stock 60,000Less: Drawings 5,000 80,000To Gross Profit (33.33%) 30,000

1,50,000 1,50,000


B. Computing LossClosing Stock 25th Aug, 2013 60,000Less: Salvage 15,000Loss 45,000

C. Computing claim:Value of Stock on hand 60,000Amount of policy 50,000

Claim = Loss StockPolicy

= 000,4560,00050,000 = 37,500

Illustration 7: David prepares accounts on 30th June each year. On 30th September, 2013, firedestroyed the greater part of his stock. Following information was collected from his books:

Stock on 30th June, 2013 2,92,500Purchases from 1-7-2013 to 30-9-2013 6,00,000Wages from 1-7-2013 to 30-9-2013 2,27,500Sales from 1-7-2013 to 30-9-2013 10,00,000

Average percentage of gross profit to cost is 331/3%. Stock of value of A 70,000 was salvaged.Policy was for A 2,50,000. Claim was subject to average clause. Following further information isavailable.

(a) Stock in the beginning was calculated at 10% less than cost.(b) Purchases include purchases of plant A 50,000.(c) Plant was installed in August and firm’s own men had spent time amounting to A 2,500

which was included in wages.You are required to calculate the amount of claim.

Solution:A. Computing Stock

Memorandum Trading AccountParticulars Amt Amt Particulars Amt Amt

To Opening Stock 325,000 By Sales 10,00,000To Purchase (600000 - 50000) 550000 By Closing Stock 3,50,000To Wages (227500 - 2500) 225,000To Gross Profit (25% on sales) 250,000

13,50,000 13,50,000B. Computing Loss

Closing Stock 25th August, 2013 350,000Less: Salvage 70,000Loss 280,000


C. Computing Claim:


= 000,80,23,50,0002,50,000 = 2,00,000

Illustration 8: Mr. P prepares accounts on 30th September each year, but on 31st December, 2013 firedestroyed the greatest part of stock. Following information was collected from the books:

Stock on 1 October, 2013 29,700Purchases from 1-10-2013 to 31-12-2013 75,000Wages from 1-10-2013 to 31-12-2013 33,000Sales from 1-10-2013 to 31-12-2013 1,40,000

The rate of gross profit 331/3% on cost. Stock to the value of A 3,000 was salvaged. Insurancepolicy was for A 25,000 and claim was subject to average clause.

Additional information:(a) Stock in the beginning was calculated at 10% less than cost.(b) A plant was installed by firm’s own worker. He was paid A 500, which was included in wages.(c) Purchases include the purchases of the plant for A 5,000.You are required to calculate the claim for the loss of stock.1

Solution:A. Computing Stock

Memorandum trading account can be prepared from 1-10-2013 to 31-12-2013 to computethe value of stock on 31-12-2013.


To Opening Stock 33,000 By Sales 1,40,000(29,700 × 100/90) By Closing Stock 30,500To Purchases 75,000Less: Cost of Plant 5,000 70,000To Wages 33,000Less: Wages paid for plant 500 32,500To Gross profit 35,000

1,70,500 1,70,500B. Computing Loss:

Stock on date of fire, i.e., 31-12-2013 30,500Less: Salvaged Stock 3,000Loss of Stock 27,500

C. Computing Claim:


= 500,2730,50025,000 = 22,541


Illustration 9: Bonfire enterprises close their accounts on 30th June every year. On 30th September2012, a major fire destroyed most of their stock. Following information could be gathered from theirbooks:

Stock on 1 October, 2013 29,700Purchases from 1-10-2013 to 31-12-2013 75,000Wages from 1-10-2013 to 31-12-2013 33,000Sales from 1-10-2013 to 31-12-2013 1,40,000Carriage inward for the above period 10,000Carriage inward for the above period 15,000

Average percentage of GP to cost is 331/3%. Stock of the value of A 75,000 could be salvaged.Policy was for A 2,50,000. Claim was subject to average clause.

Following further information is available:(a) Stock in the beginning was calculated at 10% less than cost.(b) Purchases include purchase of furniture A 25,000.(c) Amount spent for bringing and setting up the furniture in the office was A 5,000 which was

included in carriage inward.You are required to calculate the amount of claim.

Solution:A. Computation of Stock:


To Opening Stock 3,60,000 By Sales 10,00,000Add: Undervalued 40,000 4,00,000 By Closing Stock 4,60,000To Purchases 6,00,000Less: Cost of Plant 25,000 5,75,000To Wages 2,30,000To Carriage inward 10,000Less: For furniture 5,000 5,000To GP (1/4 of 10,00,000) 2,50,000

14,60,000 14,60,000B. Computation of Loss:

Closing Stock 4,60,000Less: Salvaged Stock 75,000Loss of Stock 3,85,000

C. Computation of Claim:


= 3,85,0004,60,0002,50,000 = 2,09,239


Illustration 10: On 13th July 2014, a fire occurred and partly destroyed the stock of goods of BhavikCorporation Stocks having a cost of A 1,000 were salvaged. The insurance policy was for A 15,000.The following particulars were obtained from the books and records saved:

A. Balances as per last balances sheet as on 31st March, 2014:Stock at cost A 12,000Creditors for goods A 1,000

B. Transaction between 1st April, 2014 and 13th July, 2014:Payment to Creditors for goods A 6,200Returns outwards A 200Return inwards A 650Sales A 11,000

C. Unpaid Creditors for goods on 13-7-2014 A 800All the sales were made at a profit of 331/3% on selling price. There were no other purchases or

sales. You are required to draw a Statement of Claim for loss of stock on the basis of the above facts.Solution:

A. Computation Stock:Memorandum Trading Account

Particulars Amt Amt Particulars Amt AmtTo Opening Stock 12,000 By Sales 11,000To Purchases 6,200 Less: Returns 650 10,350Less: Return 200 6,000 By Closing Stock 11,100To Gross Profit (33 1/3% on sales) 3,450

21,450 21,450A. Computation of Loss:

Closing Stock 11,100Less: Salvaged Stock 1,000Loss of Stock 10,100

B. Computation Claim:Since, the entire stock is insured, the claim will be made for the entire amount of loss, i.e.,A 10,100.

EXERCISE1. Bad Kismat Ltd. has a shop and a godown. Goods are transferred from the godown to the shop

every day in the morning. The inventory in the godown is insured for A 25,00,000 while that ofshop is insured for A 5,00,000. On 31st December, 2013, the inventory in the godown at costwas A 24,00,000 while the inventory in the ship at cost was worth A6,00,000.


The following transactions took place during the period mentioned:

Particulars Jan. 2014 Feb. 2014 Mar. 2014April 1st to

April 16th, 04A A A A

Purchases 15,000,000 18,000,000 14,000,000 500,000Returns to Suppliers 200,000 Transfer to Shop 1,700,000 2,000,000 2,500,000 700,000Return from Shop 75,000 100,000 25,000 50,000Sale in Shop @ Gross Profit of:

12% 800,000 900,000 1,000,000 400,0008% 1,000,000 1,200,000 1,400,000 400,000

Fire occurred in the shop at midnight of 16th April to 17th April, 2014 and the entire stock wasengulfed. Goods costing A 10,000 could be salvaged intact and the balance goods in spoiltcondition. Expenses of fire fighting operation/salvage amounted to A 5,000. Goods retrieved inspoilt condition could be sold @ 30% of cost. Compute the claim to be lodged with insurancecompany.

2. On 30th June, 2014, accidental fire destroyed a major part of the stocks in the godown of JayaAssociates. Stocks costing A 30,000 could be salvaged but not their Stock ledger. A fireinsurance policy was in force under which the sum insured was A 3,50,000.You are given the following date from available records:(a) Total of Sales invoices during the period April to June amounted to A 30,20,000. An

analysis showed that goods of the value of A 3,00,000 had been returned by the customersbefore the date of fire.

(b) Opening Stock on 1st April, 2014 was A 2,20,000 including stock of value of A 20,000being lower of cost and net value subsequently realized.

(c) Purchases between 1st April, 2014 and 30th June 2014 were A 21,00,000.(d) Normal gross profit ratio was 331/3%(e) A sum of A 30,000 was incurred by way of fire fighting expenses on the day of the fire.(f) Prepare a statement of insurance claim.

3. A fire occurred in the premises of Agni on 25th August, 2013 when a large part of the stock wasdestroyed. Salvage was A 15,000. Agni gives you the following information for the periodJanuary 1, 2013 to August 25th, 2013.(a) Purchase A 85,000(b) Sales A 90,000(c) Goods worth A 5,000 were taken by Agni for personal use.(d) Cost of Stock o January 1st 2013 was A 40,000Over the past few years, Agni has been selling goods at a consistent gross profit margin of331/3 %. The insurance policy was A 50,000. It included an average clause.Agni asks you to prepare a statement of claim to be made on the insurance company.


4. Mr. A prepare accounts on 30th Sept. each year, but on 31st December, 2013 fire destroyed thegreater part of stock. Following information was collected from the books:

Particulars AmountStock as on 1-10-2013 29,700Purchases from 1-10-2013 to 31-12-2013 75,000Wages from 1-10-2013 to 31-12-2013 33,000Sales from 1-10-2013 to 31-12-2013 1,40,000

The rate of gross profit is 331/3% on cost. Stock to the value of A 3,000 was salvaged. Insurancepolicy was for A 25,000 and claim was subject to average cause.Additional Information:(a) Stock in the beginning was calculated at 10% less than cost(b) A plant was installed by firm’s own worker. He was paid A 500, which was included in

wages.(c) Purchases include the purchases of the plant for A 5,000.You are required to calculate the claim for the loss of stock.

5. Bonfire Enterprises close their accounts on 30th June every year. On 30th Sept. 2012, a majorfire destroyed most of their stock. Following information could be gathered from their books:

Particulars AmountStock on 30th June 2012 3,60,000Purchases 1st July 2012 to 30th Sept. 2012 6,00,000Wages 1st July 2012 to 30th Sept. 2012 2,30,000Sales 1st July 2012 to 30th Sept. 2012 10,00,000Carriage inward for the above period 10,000Carriage outward for the above period 1,50,000

Average % GP to cost is 331/3%. Stock of the value A 75,000 could be salvaged. Policy wasA 2,50,000. Claim was subject to average clause.Following further information is available:(a) Stock in the beginning was calculated at 10% less than cost.(b) Purchase include purchase of furniture A 25,000.(c) Amount spent for bringing and setting up the furniture in the office was A 5,000 which was

included in carriage inward.You are required to calculate the amount of claim.

6. On 13th March 2013, a fire occurred and partly damaged the stock of goods of Mona Traders.Stock having cost of A 2,000 being salvaged. The stocks were insured against fire to the extentof A 15,000.


The following particulars could be obtained from the books and records saved:Particulars Amount

Balance as per balance sheet as on 31-12-2012:Stock at costDebtors for goodsCreditors for goodsTransaction between 1-1-2013 to 13-3-2013:Cash received from DebtorsCash discount allowed to DebtorsGoods returned by DebtorsCash paid to CreditorsCash discount from CreditorsGoods returned to CreditorsCash salesGoods given to famine relief fund (at cost)Debtors for goods as on 13-3-2013Creditors for goods as on 13-3-2013

10,0002,5001,500

20,000500200

37,000400100

21,200500

5,8003,000

All sales are made at a profit of 25% on the cost price.Draw up a statement of claim for loss of stock. Expenses of fire fighting operation amounted toA 2,000.

7. On 13th July 2014, a fire occurred and partly destroyed the stock of goods of BhasmaCorporation. Stocks having a cost of A 1,000 were salvaged. The insurance policy was A 15,000.The following particulars were obtained from the books and records saved.

(a) Balance as per last balance sheet as on 13th July 2014: A

1. Stock at cost 12,0002. Creditors for goods 1,000

(b) Transactions between 1st April 2014 and 13th July 2014: A

1. Payment to creditor for goods 6,2002. Return outward 2003. Return inwards 6504. Sales 11,000

(c) Unpaid creditors for goods on 13-7-2014 800All the sales were made at a profit of 331/3% on selling price. There were no other purchases orsales. You are required to draw up a statement of claim for loss on the basis of the above facts.

8. Fire occurred in the premises of ABC and Co. on 1st September, 2000 and stock of the value ofA 1,01,000 was salvaged and the business books and records were salvaged. The followinginformation was obtained.


Particulars APurchases for the year ended 31-3-2000 7,00,000Sales for the year ended 31-3-2000 11,00,000Purchases from 1-3-2000 to 1-9-2000 (evenly spread during period) 2,40,000Sales from 1-3-2000 to 1-9-2000 (evenly spread during period) 3,60,000Stock on 31st March 1999 3,00,000Stock on 31st March 2000 3,40,000

Further information is also given that the Stock on 31-3-2000 was overvalued by A 20,000/-Calculate the amount of the claim to be represented to the Insurance Company in respect oflosses.Rate of Gross Profit based on the year ended 31-3-2000.

9. The premises of Emarbee Limited were engulfed by fire on 16th November 2013, wherebysubstantial stock was severely destroyed. The records available with the company yield thefollowing information:(a) For year ended 31st March, 2013:

Particulars A Particulars ATo Stocks 1,50,000 By Sales 30,00,000To Purchases 12,30,000 By Stock 1,80,000To Freight and Direct Expenses 3,00,000To Wages 6,00,000To Gross Profit 9,00,000

31,80,000 31,80,000

(b) For half year ended 30th September, 2013 A

Sales 18,00,000Purchases 8,40,000

(c) For period from 1st October to date of fire sales and purchases were at same monthly rate asfor period 1st April, 2013 to 30th September, 2013.

(d) The Freight, Wages and Direct Expenses during period 1st April 2013 to date of fire were atthe same rate per month as in the last year.

(e) Salvage value is 10% of Cost of Stocks.(f) The sum insured is A 2,00,000 and policy contains Average Clause.Compute the amount of Claim.

10. A fire occurred in the premises of Agni & Co. on 1st September 2014. Stock of the value ofA 1,01,000 was salvaged and the business records were saved.


Particulars A

Purchases for the year ended 31-3-2014 7,00,000Sales for the year ended 31-3-2014 11,00,000Purchases from 1-3-2014 to 1-9-2014 2,40,000Sales from 1-3-2014 to 1-9-2014 3,60,000Stock on 31-3-2013 3,00,000Stock on 31-3-2014 3,60,000Stock on 31-3-2014 was overvalued by A 20,000. The sales and purchases occur at an even rateover the months. Calculate the amount of claim to be presented to the Insurance company. Rateof gross profit is constant.

OBJECTIVEI. State whether the following statements are True or False:

1. Under a contract of fire insurance, the insurer may indemnify either by paying cash or byreplacing or reinstating the subject-matter insured.

2. When stock in trade is destroyed by fire for the same quantity of goods, a retailer can claimmore amount than a manufacturer.

3. A Standard fire policy also covers loss by theft during or after the occurrence of fire.4. Where the property insured is of a value greater that the sum insured, then the insured is

considered as being his own insurer for the difference and in the event of any loss, mustshare a proportionate loss.

5 The object of both fire and profits insurance is to indemnify the revenue losses arising dueto fire.

6. Annual turnover is the turnover during the twelve months immediately before the damage.7. Under a profits insurance policy, loss of profits is measured with reference to budgeted

profit.8. Whatever be the amount of the policy, the loss incurred is to be totally indemnified by the

insurer.Ans.: True: 1, 2, 3, 4, 6. False: 5, 7, 8.

II. Fill in the blanks:1. The Average Clause in a Loss of Stock Policy discourages ______________.2. The Average Clause in case of a Loss of Stock Policy is applied when the value of stock on

the date of fire is more than the _______________.3. Claim to be lodged = Value of Stock destroyed × Value of Policy/______________.4. Memorandum Trading Account is prepared to find out the value of ______________ on the

date of fire.5. The difference between standard turnover and actual turnover during the indemnity period

is ______________________.


6. The subject matter of fire insurance is tangible and covers __________7. Fire insurance protects the insured against losses of material property whereas “Loss of

Profits Insurance” gives protection against ___________.8. For the preparation of claim for loss of Stock, the difference between the value of Stock on

the date of fire and _______ is considered.9. Annual turnover is the turnover during the twelve months immediately ______the date of

damage.10. ____________________is defined as the “turnover during that period in the twelve months

immediately before the date of the damage which corresponds with the indemnity period.”11. Fire Insurance covers _______________ losses and Loss of Profit Insurance Covers

________________losses.Ans.: 1. Under-insurance of stock; 2. amount of policy taken; 3. Value of Stock on the date offire; 4. Stock; 5. Short Sales; 6. material property; 7. trading losses arising due to partial orcomplete cessation of business activity; 8. Stock salvaged; 9. Before; 10. Standard Turnover;11. Capital/Revenue.

III. Select the correct answer:1. The loss of profit policy covers loss of profit due to: __________.

(a) Loss of sales(b) Non-recovery of standing charges(c) Loss of sales as well as loss of insured standing charges

2. The objective of inserting average clause in Loss of Stock Policy is to: __________.(a) Discourage under-insurance(b) Discourage full insurance of stock(c) Encourage full insurance of stock

3. A building worth A 10,00,000 is insured for A6,00,000. It is completely destroyed by fire.The loss to be admitted by the insurance company will be __________.(a) A 10,00,000 (b) A 6,00,000 (c) A 5,00,000 (d) None of these

4. Consequential Loss Policy indemnifies __________.(a) Capital Losses (b) Revenue Losses (c) Budgeted losses

5. Fire insurance provides cover for __________.(a) Tangible assets (b) Intangible assets (c) Fictitious asset

6. The Average Clause in a loss of profits policy protects the __________.(a) Insured (b) Insurer (c) Workers

7. A fire policy is taken up to indemnify: __________(a) Capital losses to tangible property (b) Revenue losses to tangible property(c) Capital losses to intangible property

Ans.: 1. (c); 2. (a); 3. (d); 4. (b); 5. (a); 6. (b); 7.(a).


IV. Exercise:1. Loss of Stock by fire A 2,00,000.; Amount of Policy A 1,72,000; Total value of stock

A 2,28,000. Calculate the amount of fire claim by applying Average Clause.2. Amount of Insurance Policy is A 50,000. Stock in hand on the date of fire is A 70,000. Of

this, the stock destroyed is estimated to be A 35,000. Calculate the claim admitted by theInsurance Company in case of Average Clause.

3. With the opening stock at A 13,500, purchase at A 82,500, sales at A 1,20,000 and stocksalvaged at A 1,260, the rate of gross profit being 50% on cost, the Stock destroyed by firewill be:(a) A 14,740 (b) A 24,740 (c) A 36,000

4. If indemnity period is 6 months, standard turnover A 20,000, annual turnover A 50,000,turnover during indemnity period A 8,000, short sales will amount to ________.(a) A 30,000 (b) A 12,000 (c) A 42,000

5. Sales A 4,20,000; Rate of gross profit on cost is 20%; the cost of goods sold is A________.6. If a property worth A 1,00,000 is insured for A 80,000 and the actual property destroyed is

A 60,000, calculate the amount of claim, if there is average clause.7. Calculate Purchases: Cost of goods sold A 4,00,000, Opening Stock A 50,000 and Closing

Stock A 60,000.8. Find the value of Opening Stock with the following particulars: Purchases made during the

year A 2,80,00; Sales during the year – Credit Sales A 2,50,000 and Cash Sales A 1,70,000;Wages and Freight A 7,000; Closing Stock A 28,000; Rate of gross profit on sales – 20%.

9. Calculate Credit Purchases if opening creditors is A 20,000, cash paid to creditors and BillsPayable is A 10,000 and Closing Creditors A 35,000.

10. If the percentage discount on Marked Price is 331/3% and the discount is A 1,200, find theSelling Price.

11. If the Marked Price of an article is A 180 and the percentage discount is 20, find the SellingPrice and the discount.

12. The gross profit for the financial year ending 31/3/06 was 40% of sales. The selling pricewas raised by 10% for the year ending 31/3/07. Calculate the estimated Gross Profit for theyear ending 31/03/07, assuming all other things do not change.

13. The stock affected by fire on 1/7/06 was A 50,000 and Stock worth A 10,000 was salvaged.The amount of policy taken was A 30,000 and there is an Average Clause in the FireInsurance Policy. The amount of the Fire Claim is: ________.(a) A 50,000 (b) A 40,000 (c) A 24,000 (d) A 30,000(e) None of the above

14. A trader had taken a Fire Insurance Policy for A 3,42,000 with an average clause. TheStock on date of fire is A 4,56,000 and the Stock salvaged was A 56,000.


The amount of the Insurance Claim sanctioned by the Insurance Company would be : ______.(a) A 4,00,000 (b) A 3,42,000 (c) A 3,00,000 (d) A 4,56,000(e) None of the above

15. The Gross Profit for the year ending 31/3/06 was 40% of sales. The selling price has beenreduced by 10% in order to increase sales from 1/4/06. What would be the expected GrossProfit percentage?

Ans.: 1. A 1,50,000; 2. A 25,000; 3. A 14,740; 4. A 12,000; 5. A 3,50,000; 6. A 48,000; 7. A 4,10,000;8. A 77,000; 9. A 25,000; 10. A 3600, A 2,400; 11. A 144, A 36; 12. 45.45% (500/11%); 13. (c);14. (c); 15. 331/3%.

Documents

ACCOUNTANCY ANDSyllabus Accountancy and Financial Management Paper - IV Modules at Glance Sr. No. Modules No. of Lectures 1 Fire Insurance Claims 15 2 Redemption of Preference Shares