Question

A, B and C takes a Joint Life 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 profits equally. They had taken a Joint 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 joint life policy A/C is maintained at surrender value along with the reserve for JLP?

• A. Rs. 30,000 credited to all 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. Distribute JLP Reserve Account in old profit sharing ratio.

Answer 1

Answer: (D)

Distribute JLP Reserve Account in old profit sharing ratio.

Creation of Joint Life Policy Reserve Account - Under this method, premium paid is debited to policy account and credited to bank A/c. At the end of the year, amount equal to premium is transferred from profit and loss appropriation A/c to policy reserve A/c. After this, policy A/c is brought down to its surrender value by debiting the life policy reserve A/c with amount which exceeds the surrender value of policy. Thus, in this method, policy account appears on the assets side and policy reserve account appears on the liabilities side of the balance sheet until it is realised. Both these accounts appear in the balance sheet at the surrender value of policy.

On death or retirement of a partner joint Life Policy Reserve Account is transferred to joint Life Policy Account and then the balance is transferred to Partner's Capital Account in old profit sharing ratio.