Question

A, B and C take a Joint Policy. After five years B retires from the firm. Old profit sharing ratio is 2 :2 :1. After retirement A and C decide to share profit equally. They had taken a Joint Life Policy of Rs. 2,00,000 with the surrender value Rs. 30,000 what will be the treatment in the partner's capital account on receiving the JLP amount if life premium is fully charged to revenue as and when paid?

• A. $Rs.30,000$ credited to all the partners in old ratio.
• B. $Rs.2,00,000$ credited to all the partners in old ratio.
• C. $Rs.1,70,000$ credited to all the partners in old ratio.
• D. No treatment is required.

Answer 1

The correct option is A $Rs.30,000$ credited to all the partners in old ratio.

When premium paid is treated as an expense - When premium is treated as an expense then it is closed every year by transferring to profit and loss account. In this case complete amount received from the insurance company either on a surrender of policy or on the death of the partner becomes a gain.

Accounting entries are :

1. On payment of premium

Joint Life Policy Insurance A/c Dr.

To Bank A/c

2. On charging to profit and loss A/c

Profit and loss A/c Dr.

To Joint Life Policy Insurance premium A/c

3. On maturity of the policy

Insurance company A/c Dr.

To Partners' capital A/c (individually)

(Including the account of the representative of the deceased partner in old ratio)

Therefore, Surrender value i.e., Rs. 30000 is credited to all the partners in old ratio.