On 6/12/16 Roscoe Corp. had a warehouse burn to the ground. The original cost of

Question

On 6/12/16 Roscoe Corp. had a warehouse burn to the ground. The original cost of the warehouse was $850,000 on 2/18/2015. The company assigns a 25-year life to all buildings and uses 125% declining balance depreciation with no salvage value. The building has a replacement cost (FMV) of $1,260,000. Because of the amount of risk insurability, no single insurance company would insure the building, so Roscoe Corp. has three separate insurance policies covering the building. Policy A, which has an 80% coinsurance requirement provides a face policy of $450,000. Policy B, has a 75% coinsurance requirement has written a policy with face value of $420,000. Finally,Policy C has a coinsurance requirement of 90% has written a policy with a face value of $245,000. The fire caused a loss of 73% of the old building. The portion of the building not destroyed was un-usable until the reconstruction work was completed on 11/9/16 at $1,654,000 and a estimated remaining life of 19 years. Calculate the amount of proceeds received from each policy and prepare the journal entry to record the partial elimination of the old building on 6/12/16 as well as the cost of the reconstruction work and 12/31/16 depreciation. Assume Policy A pays cash immediately and the other two policies will delay payment for a month. Remember to bring the building up to date on the date of the fire since this is treated as a disposal of the 73% burned.

Explanation / Answer

Amount of proceeds received from each policy:

Policy A = 450000 x 80% = $360000

Policy B = 420000 x 75% = $315000

Policy C = 245000 x 90% = $220500

Note 1: Original cost = $850000

Depreciation upto the date of fire = 850000/25 x 125% x 4/12 = $14167

Date Particulars Debit Credit 2015 June 12 Depreciation on Building 14167           Building (Note 1) 14167 June 12 Loss in fire (850000 - 14167) x 73% 610158          Building 610158 June 12 Insurance claim receivable 895500          Difference 285342          Loss in fire 610158 June 12 Cash 360000          Insurance claim receivable 360000 July 12 Cash 535500          Insurance claim receivable 535500 Nov 9 Building 1368658 Difference 285342          Cash 1654000

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