ABC Co. Ltd. which operates a wholesale warehouse, had a fire on its premises on 30th April, 2016 which destroyed most of the building and stock worth of ₹10,160 was salvaged. The company has a Fire Insurance Policy (wit

The application of average clause is triggered at the time of a claim settlement, if the Insurance Company observes that a property is under insured. In other words, where the full value of a property is not insured it implies that, the full indemnity of the loss is not available, due to inadequacy of sum insured. In the given case, ABC Co. Ltd. did not insure building at its full value. It has under insured. While the building was valued at ₹10 lacs on the date of loss the sum insured available was only ₹9 lacs. Hence ABC Co. Ltd will compensate on this basis only. The various loss claim under the policy are shown below: Gross Profit % for last year Gross Profit as per Profit & Loss (Net Profit + Other Expenses + Insured Standing Charges) (₹2,35,000 + ₹65,500 + ₹1,15,500) = ₹4,16,000 Less: Other Income = ₹11,000 Gross Profit from Operation = ₹4,05,000 Gross Profit % for last year = (₹4,05,000 x 100) / ₹22,50,000 = 18% Calculation of Purchases Payment to Creditors = ₹1,15,500 Increase of creditors = ₹4,500 Purchases during the period = ₹1,20,000 Memorandum Trading Account for the period ended dated of fire Particulars Amount (₹) Particulars Amount (₹) To Opening Stock 6,45,000 By Sales 1,50,000 To purchase 1,20,000 By Closing Stock 42,000 To Gross Profit (balancing figure) (18% of sales) 27,000 Total 7,92,000 Total 7,92,000 Computation of Loss of Stock Estimated Closing Stock as at the date of fire = ₹6,42,000 Less Stock Salvaged = ₹10,160 Loss of Stock = ₹6,31,840 Loss of building Value of Building = ₹10,00,000 65% of the value of building = ₹6,50,000 Since the insurance cover was less than the value of the asset average clause will apply: Claim of loss of Building = (₹9,00,000 x ₹6,50,000) / ₹10,00,000 = ₹5,85,000 Claim for Building loss = ₹5,85,000 Loss of Profit Indemnity Period = 3 Months Gross Profit Ratio for the year: Net Profit + Insured Standing Charges = (₹2,35,000 + ₹1,15,500) / ₹22,50,000 = 15.57% Short Turnover = ₹2,20,000 Loss of Profit = ₹2,20,000 * 15.57% = ₹34,254