One of the godowns of the company was destroyed in the earthquake in respect of which a claim of Rs. 4 lakhs was received from the insurance company including claim for the stock destroyed, the book value whereof was Rs. 1,50,000. The cost of rebuilding the godown amounted to Rs. 5 lakhs. It has been debited to Building Repairs Account.comment as a auditor

Answer
Since the insurance company has paid a claim of Rs. 4,00,00/- out of which Rs. 1,50,000/- can be assumed to be for stock destroyed, the amount recoverable against the godown would be Rs. 2,50,000/-. The cost of re-building the godown being Rs. 5,00,000/- (against which Rs. 2,50,000/- has been recovered from the insurance company), Rs. 2,50,000/- only needs to be debited to Building Repairs Account. If it is assumed that the excess amount spent is for extension of the godown; this amount should be capitalized.

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