Inventory valued at 800 is destroyed by fire, and the insurance company agrees to a claim of 600. The necessary adjustment involves
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Answer: D. Debit of 600 and 200 to insurance company and Profit and Loss Account respectively and
Explanation
The agreed insurance claim is debited directly to the insurance company account. The uninsured portion of inventory loss is debited to the profit and loss account. Both debits correspond to a total credit reflecting the destroyed inventory. Insurance claims compensate businesses for partial losses of assets and inventory. Uninsured losses represent unexpected expenses reducing net business income. Accounting for fires requires adjusting trading stock and recognizing casualty losses.
Disaster recovery procedures require accurate accounting adjustments for insurance payouts. Management reviews loss reports to evaluate adequacy of corporate insurance coverage. Proper documentation ensures smooth settlement processing with insurance adjusters. Option A is incorrect because it misses the profit and loss debit for uninsured loss. Option B is wrong since closing stock adjustments alone do not handle insurance claims. Option C is incorrect because crediting the insurance company is incomplete.
- Subject
- Accounting and Finance
- Category
- Accounting
- Topic
- —
- Difficulty
- medium
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