CHAPTER 10

SOLUTION 2010 Fire Loss

Book value of building 1,083,000 Salvaged materials 12,000
Cancelled premium 40,000 Insurance claim 500,000
Expenses 15,000

Fire Loss debit balance of P626,400

Accumulated depreciation (1,200,000 x 3%)= 36,000 x 3.25 years P 117,000

Book value (1,200,000-117,000) 1,083,000
Cancelled premiums ( 5,000 per month x 8 months from 10/31 to 6/30) 40,000
Insurance claim P500,000 or P750,000 whichever is lower 750,000

Entries:
6/30/09 Prepaid Insurance 60,000
Cash 60,000
Insurance paid.

12/31 Insurance Expense 60,000

Prepaid Insurance 60,000
Expired from 1/1 to 12/31

Depreciation Expense 36,000

Accumulated Depreciation 36,000
Update depreciation 1,200,000 x 3%

6/30/10 Prepaid Insurance 60,000

Cash 60,000

10/31/10 Insurance Expense (5,000 x 10) 50,000

Prepaid Insurance 50,000
Update depreciation 1/1 to 10/31

Fire Loss 40,000

Prepaid Insurance 40,000
To cancel prepaid insurance from
10/31 to 6/30(5,000 x 8))

Depreciation 30,000
Accumulated Depreciation 30,000
To update depreciation 1/1 to 10/31.

Fire Loss 1,083,000

Accumulated Depreciation 117,000
Building 1,200,000
To cancel building at book value
destroyed.
 Cash 12,000
Fire Loss 12,000
Receipt from salvaged materials

Fire Loss 15,000

Cash 15,000

Cash 500,000
Fire Loss 500,000
Receipt of insurance claim.

2. If building is only 30% destroyed:

Fire Loss
Book value of building 324,900 Salvaged materials 12,000
Cancelled premium 18,000 Insurance claim 240,000
Expenses 15,000

Fire Loss debit balance of P

Destroyed by fire (1,083,000 x 30%) 324,900

Cancelled premiums(40,000 x 225,000/500,000) 18,000
Insurance claim (750,000 x 30%) = 225,000 or 500,000 whichever is lower 225,000

Entries:
6/30/09 Prepaid Insurance 60,000
Cash 60,000
Insurance paid.

12/31/09 Insurance Expense 60,000

Prepaid Insurance 60,000
Expired from 1/1 to 12/31

Depreciation Expense 36,000

Accumulated Depreciation 36,000
Update depreciation 1,200,000 x 3%

6/30/10 Prepaid Insurance 60,000

Cash 60,000
10/31/10 Insurance Expense (5,000 x 10) 50,000
Prepaid Insurance 50,000
Update insurance 1/1 to 10/31
Fire Loss 18,000
Prepaid Insurance 18,000
To cancel prepaid insurance from
10/31 to 6/30(5,000 x 8 x 225/500)
Depreciation (1,200,000 x 3% x 10/12) 30,000*
Accumulated Depreciation 30,000
To update depreciation 1/1 to 10/31.
 Fire Loss 324,900
Accumulated Depreciation (117,000 x .3) 35,100
Building (1,200,000 x .3) 360,000
To cancel building at 30% of book
value.
Cash 12,000
Fire Loss 12,000
Receipt from salvaged materials
Cash 15,000
Fire Loss 15,000
Expenses for putting out fire.
Cash 225,000
Fire Loss 225,000
Receipt of insurance claim.
12/31/10 Insurance Expense (40,000-18,000 x 2/8) 5,500
Prepaid Insurance 5,500

Depreciation Expense 4,200*

Accumulated Depreciation 4,200
1,200,000-360,000 x 3% x 2/12)

Or 1,200,000-360,000 x 3%= 25,200

360,000 x 3% x 10/12= 9,000
Total depreciation 34,200*
3.
3/1/09 Prepaid Insurance 75,000
Cash 75,000

12/31 Depreciation 360,000

Accumulated Depreciation 360,000
(3,800,000-20,000)/10

Insurance Expense 75,000

Prepaid Insurance 75,000

3/1/10 Prepaid Insurance 75,000

Cash 75,000

4/30/10 Depreciation Expense 120,000

Accumulated Depreciation 120,000
360,000 x 4/12 from 12/31 to 4/30

Insurance Expense 25,000

Prepaid Insurance 25,000
6,250 x 4 months from 1/1 to 4/30

Fire Loss 62,500

Prepaid Insurance 62,500
Cancel balance of unexpired:
 6,250 x 10 from 4/30 to 8/1

Fire Loss 3,320,000

Accumulated Depn 480,000
Building 3,800,000
Cancel book value

Cash 60,000
Fire Loss 60,000
Salvaged materials

Insurance Claim 640,000*

Fire Loss 640,000
Ins claim (800/2,200 x 1,760,000)

There is a remaining book value which may be further depreciated depending on whether the
building at the 20% remaining book value will still be used by company. Otherwise replacement
Will entail GAAP under financial accounting.

4. If 40% destroyed
lding
4/30/10 Depreciation Expense 120,000
Accumulated Depreciation 120,000
360,000 x 4/12 from 12/31 to 4/30

Insurance Expense 25,000

Prepaid Insurance 25,000
6,250 x 4 months from 1/1 to 4/30

Fire Loss 25,000

Prepaid Insurance 25,000
Cancel balance of unexpired:
6,250 x 10 from 4/30 to 3/1 x 40%

Fire Loss 1,328,000

Accumulated Depn 192,000
Building 1,520,000
Cancel book value.

Cash 60,000
Fire Loss 60,000
Salvaged materials

Cash 320,000
Fire Loss 320,000
Ins claim (800/2,200)x(.4x2,200,000)
 5.
Case A Case B Case C Case D
a) P18,000 P42,000 P30,000 P45,000

b) (40,000/60,000 x 18,000) 30,000/75,000 x 37,500 45/50 x 45,000

= P12,000 P42,000 =P15,000 P45,000

c) (40,000/48,000 x 18,000) (30,000/60,000 x P37,500) P40,000

=P15,000 P42,000 =P18,750

d) P18,000 P42,000 P30,000 P45,000

6.6. Case A Case B

Makati P40,000 (40,000/150,000 x 120,000*) P32,000
Manila 60,000 (60,000/150,000 x 120,000) 48,000
Mabini 50,000 (50,000/150,000 x 120,000) 40,000
P150,000 P120,000
* 200,000 x 60%
Case C Case D
Makati (40/200 x 140,000*) P28,000 Makati (40,000/150,000*x150,000) 40,000
Manila (60/200 x 140,000) 42,000 Manila (60,000/160,000**x150,000)56,250
Mabini (50/200 x 140,000) 35,000 Mabini (50,000/150,000*x150,000) 50,000
P105,000 146,250
Agreed loss is 200,000 x 75%=P150,000

*200,000 x 70%=140,000 vs 150,000

**200,000 x 80%=160,000 vs 150,000
7. a)
Matampuhin (30/150 x 90,000*) P 18,000
Mahiyain (50/150 x 90,000) 30,000
Maawain (20/150 x 90,000) 12,000
P 60,000
*150,000 x 60%

b) Unexpired Cancelled
(360/12= 30 x 6) 8/1 to 1/31 P 180 x18/30=108
(600/12= 50 x 8) 8/1 to 4/1 400 x30/50=240
(300/12= 25 x 7) 8/1 to 3/1 175 x12/20=105
P755 P453*
*If policy is not yet totally cancelled
8.
Merchandise, Jan 1 80,000
Purchases 300,000
Total 380,000
Cost of sales 360,000/1.2 300,000
Inventory before fire 80,000
80% destroyed 64,000
Against policy amount of
P100,000, claim is P64,000.
9. a)
Merchandise, Jan 1 75,000
Purchases 313,000
Freight 12,000
Total 400,000
Cost of sales 450,000/1.5 300,000
Goods destroyed 100,000

b)
Accumulated depn (288,000 + 18,000*) 306,000
Book value (720,000-306,000) 414,000
75% charged to fire loss for the destroyed portion 310,500

*Update Depreciation (1/1/08 to 10/1/08) 720,000/30= P240,000 x 9/12= P18,000

c)
Monthly Premium Cancelled Premium
600/12= 50 (10/1 to 3/1= 5 mos) P250.00
480/12= 40 (10/1 to 7/1= 9 mos) 360.00
780/12= 65 (10/1 to 11/1= 1 mo) 65.00
P675.00
d) Insurance claim:
ABC 200,000/600,000 x 550,000+ P183,333
XYZ 150,000/630,000* x 550,000 130,952
LMN 250,000/600,000 x 550,000 229,167
P543,452
+75% of 700,000 (600,000 + 100,000)

* whichever is higher: total policies or co-insurance requirement

90% of sound value of 700,000= 630,000 against total policies of 600,000
85% of sound value of 700,000=595,000 against total policies of 600,000
Fire Loss
a) 100,000.00 d) 543,452
b) 310,500.00
c) 675.00
10. a) Building P1,050,000/20= P52,500 annual depn x 5 years & 2 mos = accum depn P271,250
Book value of building (1,050,000-271,250)= P778,750
Fire loss (778,750 x 80%)= P623,000

b) Inventory, Jan 1 P105,000

Purchases 787,500
Total Available P892,500
Cost of Sales:
Sales P1,076,250
Sales Returns 26,250
Net sales P1,050,000
Cost ratio .70 735,000
Inventory on hand at date of fire P157,500
Goods in transit 17,500
Recovery on fire loss P140,000
 Multiple Choice:
1. Insurance requirement is 85% of 500,000 or P425,000
Since face of policy is P450,000, then co-insurance requirement is complied with
Claim is P450,000 or 50% of P500,000 whichever is lower.
P250,000 Answer A
22.2.Merchandise, Jan 1 60,000
Purchases 108,000
Cost of sales 195,000/.7 (136,500)
On hand at fire date 31,500
Less salvaged materials (8,000)
Fire loss P23,500
Answer C
Answer C
3.
Accum Depn (6,000,000/30=200,000 x 5.33 yrs) P1,066,000
Book value of warehouse (6,000,000 1,067,000) 4,933,000
Actual loss (4,933,000-2,000,000) 2,933,000 nearest Answer A 2,950,000
Estimated loss based on FMV 3,500,000 Answer C
4.
Merchandise, Jan 1 600,000
Purchases 3400,000
Cost of sales 600,000 x .55 (3300,000)
On hand at fire date 700,000
Less salvaged materials (120,000)
Fire loss P580,000
Answer D
Insurance recoverable from Equipment P800,000 vs P1,000,000 Answer D
5.
Accum depreciation(7500,000/30=250,000x4.5) P1,125,000
Book value (7500,000-1125,000) 6375,000
Destroyed by fire (6,375,000 x 60%) 3,825,000
Co insurance requirement (5,000,000 x 80%) 4,000,000
Claim (3,500/4,000 x P3,000,000) 2,625,000
Answer C

Merchandise, Jan 1 1,250,000

Purchases 1,840,000
Cost of sales (2750,000x .6) (1,650,000)
Fire loss P1,440,000
Insurance claim P1,440,000 against P1,200,000 Answer B

Insurance Claim 1,440,000- 1,200= 1,438,800 vs P1,200,000 Answer B