PROF.

BHAMBWANI’S
RELIABLE CLASSES

I.P.C.C. Accounts – (Gr. I)

Insurance Claim of Loss of Profit

Sr No Lecture No Content of lecture Duration In Minutes

1 1 Theory 45
2 2 Theory 31
3 3 Problem
4 4 Problem
5 5 Problem
6 6 Problem
7 7 Problem
8 8 Problem
9 9 Problem
10 10 Theory
11 11 Problem

LEC 1: (45 Minutes)

Theory

LEC 2: (31 Minutes)

Theory

LEC 3: (23 Minutes)

A fire occurred in the premises of a businessman on 30th June 1994. From the
following data, compute a consequential loss claim;
Financial year ends on 31st December. Indemnity period 6 months
Turnover Rs. 2,00,000
Period of interruption – 1st July to 31st October, Date of fire – 30 June
Net profit – Rs. 18,000
Standing charges: Rs. 42,000 out of which Rs. 10,000 have not been insured.
Sum assured – Rs. 50,000 Standard turnover – Rs. 65,000
Turnover in the period of interruption – Rs. 25,000 out of which Rs. 6,000 was from a
place rented at Rs. 600 a month.
Annual turnover – Rs. 2,40,000. Savings in standing charges – Rs. 4,725 p.a.
It was agreed between the insurer and the insured that the business trends would lead to
an increase of 10% to in the turnover. (ICWA June 1995)

LEC 4: (28 Minutes)

The premises of a company were partly destroyed by fire which took place on 1 st March,
1992 and as a result if which the business was disorganized from 1 st March to 31st July
1992. accounts are closed on 31st Dec every year. The company is insured under a Loss of
profits policy for Rs. 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:

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 Rs.

Turnover for the year1991 40,00,000

Net profits for the year 1991 2,40,000

Insured standing charges 4,80,000

Uninsured standing charges 80,000

Turnover during the period of dislocation i.e. from 1.3.92 to 31.7.1992

8,00,000

Standard turnover from 1.3.91 to 31.7.91 20,00,000

Annual turn over from 1.3.91 to 29.2.1992 44,00,000

Increased cost of working 1,50,000

Savings in insured standing charges 30,000

Reduction in turnover avoided due to 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%. (C.A.INTER, MAY 1983 )

LEC 5: (25 Minutes)

A fire occurred on 1st July 1990, in the premises of Arolite Ltd and business was practically
disorganized upto 30th Nov. 1990. From the books of account, the following information
was Extracted:

1. Actual turnover from 1st July 1990 to 30th Nov 1990 60,000
2. Turnover from 1.7.89 to 30.11.1989 2,00,000
3. Net profit for the last financial year 90,000
4. Insured Standing Charges for the last financial year 60,000
5. Turnover for the last financial year 5,00,000
6. Turnover for the year ending 30th June 1990 5,50,000
7. Total Standing Charges for the year 72,000
The company incurred additional expenses amounting to Rs. 9,000 which reduced the loss
in turnover. There was also a saving during the indemnity period of Rs. 2,486. The
company holds a “Loss of Profit” Policy for Rs. 1,65,000 having an indemnity period for 6
months. There has been a considerable increase in trade and it had been agreed that an
adjustment of 20% be made in respect of upward trend in turnover. Compute claim under
“Loss of Profit Insurance”. (C.A.INTER NS, NOV 1981)

LEC 6: (26 Minutes)

A loss of profit policy was taken for Rs. 80,000. Fire occurred on 15 th March 1989.
indemnity period was for 3 months. Net profit for 1998 year ending on 31st Dec was Rs
56,000 and standing charges (all insured) amounted to Rs 49,600. Determine insurance
claims form the following:
Sales(Rs.) 1986 1987 1988 1989
From 1st Jan. to 31st March 1,20,000 1,30,000 1,42,000 1,30,000
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 From 1st April to 30th June 80,000 90,000 1,00,000 40,000
From 1st July to 30th Sept. 1,00,000 1,10,000 1,20,000 1,00,000
From 1st Oct. to 31st Dec. 1,36,000 1,50,000 1,66,000 1,60,000
Sales from 16.3.1988 to 31.3.1988 were 28,000
Sales from 16.3.1989 to 31.3.1989 were NIL
Sales from 16.6.1988 to 30.6.1988 were 24,000
Sales from 16.6.1989 to 30.6.1989 were 6,000
(C.A.INTER NOV. 90)

LEC 7: (1 hrs and 12 Minutes)

WYE Ltd. Had taken out a loss of profit policy, for Rs. 3,00,000, being Rs. 1,30,000 profit
and Rs. 1,70,000 for fixed expenses. Expenses to the extent of Rs. 30,000 were not
insured. During 1984 the company earned a profit of Rs. 90,000 after charging Rs.
2,00,000, standing charges on a sale of Rs. 32,50,000. On 1st June, 1985 there was a fire
as a result of which sales suffered a great deal for a period of six months.

The details were as under:

1984 1985 1984 1985

January 2,00,000 2,20,000 July 4,50,000 50,000

February 2,00,000 2,20,000 August 3,40,000 60,000

March 2,50,000 2,75,000 September 2,50,000 80,000

April 2,50,000 2,75,000 October 2,50,000 1,10,000

May 3,00,000 3,30,000 November 2,50,000 1,50,000

June 3,60,000 50,000 December 1,50,000 1,80,000

The indemnity period according to the policy was 4 months, Rs. 2,000 was spent on
putting the fire out and additional expenses as a consequence of fire were Rs. 16,028 but
a saving of Rs. 3,000 was affected. Towards the end of 1984 a machine was installed
which would have resulted in a net saving equal to 2% of sales.

Ascertain the claim for loss of profits.

LEC 7: (27 Minutes)(part -2)

LEC 8: (27 Minutes)

The following is the Profit and Loss Account of Zed Ltd. For 1988:-

Profit and Loss Account

To Opening Stock 25,000 By sales 4,00,000

To Purchase 1,56,000 By Interest on Securities 7,000

To Wages (including By Closing Stock

Rs.15,000 to skilled 35,000

workers) -

To Manufacturing 87,000

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 Expenses 60,000

To Office Administration

Expenses 37,000

To Advertising 4,000

To Selling Expenses(fixed) 23,000

To Commissions on sales 14,000

To Carriage 11,000

To Net Profit 25,000

4,42,200 4,42,000

Subsequently it was discovered that:

i. Advertising materials purchased for Rs. 6,000 and used up in 1998 were included in
purchase amount.
ii. Plant was installed in December, 1998, installation expenses of Rs. 7,000 were
debited to Wages Account. The Plant was expected to bring about net saving in
costs equal to 3% of sales.
company had taken out various types of policies (all with average clauses); the
one for loss for Rs. 1,30,000. On 1st April, 1989 a fire occurred as result of which
sales remained below normal for 4 months. Stock salvaged was valued at Rs.
7,500. The following other information supplied to you:-
Financial Data from 1/1/89 to 31/3/89:
Sales : 1,50,000
Purchase : 60,000
Wages : 24,000
Manufacturing Exp.: 18,000
Relevant Sales figures were: Rs.
January 1, 1988 to March 31, 1988 1,20,000
April 1, 1988 to July 31, 1988 1,80,000
April 1, 1989 to July 31,1989 30,000

iii. Expenses on putting the fire out were Rs. 1,000.

Ascertain the claims for loss of stock and Loss of Profits.
LEC 9: (28 Minutes)
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

Rs.
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 expected in
subsequent year. Increase in turnover expected 25%

To achieve additional sales, trader has to incur additional expenditure of Rs.31,250

(N- 10)

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LEC 10: (22 Minutes)
On account of a fire on 15 June, 2002 in the business house of a company, the working
remained disturbed upto 15 Dec., 2002 as a result of which, it was not possible to affect
any sales. The company had taken out an insurance policy with an average clause
against consequential losses for Rs.1,40,000 and a period of 7 months has been
agreed upon as indemnity period. An increase of 25% was marked in the current
year’s sales as compared to last year. The company incurred an additional expenditure of
Rs.12,000 to make sales possible and made a saving of Rs.2,000 in the insured standing
charges.

Ascertain the claim under the consequential loss policy keeping the following additional
information in view:

Rs.

Actual sales from 15 June, 2002 to 15 Dec., 2002 70,000

Sales from 15 June, 2001 to 15 Dec., 2001 2,40,000

Net profit for last financial year 80,000

Insured standing charges for the last financial year 70,000

Total standing charges for the last financial year 1,20,000

Turnover for the last financial year 6,00,000

Turnover for one year: 16 June, 2001 to 15 June 2002 5,60,000

LEC 11: (24 Minutes)

From the following details, calculate consequential loss claim:
1. Date of fire: 1st September following;
2. Indemnity period : 6 months;
3. Period of disruption: 1st September to 1st February;
4. Sum insured: Rs. 1,08,900;
5. Sales were Rs.6,00,000 for preceding financial year ended on 31 st March.
6. Net profit for preceding financial year Rs.36,000 plus insured standing charges Rs.72,000;
7. Rate of Gross profit 18%.
8. Uninsured standing charges Rs.6,000;
9. Turnover during the disruption period Rs.67,500;
10. Annual turnover for 12 months immediately preceding the date of fire Rs.6,60,000;
11. Standard turnover i.e. for corresponding months (1 st September to 1st February) in the
year preceding the date of fire Rs.2,25,000;
12. Increase in the cost of Working capital Rs.12,000 with a saving of insured standing
charges Rs.4,500 during the disruption period;
13. Reduced turnover avoided through increase in Working capital Rs.30,000;
14. Special clause stipulated;
(a) Increase in rate of G.P. 20%
(b) Increase in turnover (Standard and Annual) 10% (Nov 2008)\0