Question

Balances of A, B & C sharing profits & losses in proportion to their capitals, stood as:
A = $Rs.2,00,000$
B = $Rs.3,00,000$
C = $Rs.2,00,000$
Joint Life Policy Reserve A/c $Rs.80,000$ and Joint Life Policy A/c is shown in the balance sheet $Rs.80,000$. A desired to retire from the firm and the remaining partners decided to carry on in equal ratio, joint life policy of the partners surrendered and cash obtained $Rs.80,000$. What will be the treatment for Joint Life Policy Reserve A/c?

• A. Cash received credited to Revaluation A/c.
• B. JLP Reserve balance credited to Partner's Capital A/c in old profit sharing ratio.
• C. JLP Reserve balance credited to Partner's Capital A/c in new profit sharing ratio.
• D. Cash received credited to Partners' Capital A/c in old profit sharing ratio.

Answer 1

The correct option is B JLP Reserve balance credited to Partner's Capital A/c 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.