[jajae]

Hello, thank you for taking the time to reply and explain:)

Summary of what I think you’re explaining:

1. The inventory loss would be adjusted and recorded at $5,000 because it is probable to receive $15,000 insurance in the future. So, the actual loss suffered is only $5,000.

(“The making of the claim provides additional evidence that as at the reporting date, the cost to the company of the lost inventory is only $5,000”)

DR Inventory write off $5,000
CR Inventory $5,000

2. The insurance would be an adjusting event on the basis that the company has an “unconditional right” to receive the compensation because

– they have an insurance contract (“Pursuant to the company’s insurance policy…” stated in the question)
– the loss event creates a right for the company to receive the insurance (“Pursuant to the company’s insurance policy, they will receive…”)

So, the company was insured at the time of the loss (at the y/e).

DR Account receivable $15,000
CR Insurance compensation $15,000

My question:
In regards to point number 1:

I understand that we should only record the “actual loss” suffered, which is $5,000 in the financial statement (?). But the inventory damaged was $20,000. So, wouldn’t recording only $5,000 would make our inventory overstated?

Thank you

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