Partnership Accounts Joint Life Policy (JLP)

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1 Partnership Accounts Joint Life Policy (JLP) CPT Section A Fundamentals of Accountancy Chapter 8 Unit-4&5 Prof. Deepak Jaggi

2 Learning Objectives (1) Understand the meaning of JLP (2) Understand the Implication of Excess Money Received on Death of a Partner from JLP (3) Understand the meaning of Surrender Value (4) To Lay a foundation of accounting treatment of various Methods

3 Joint Life Policy (JLP) Joint Life Policy is a policy taken in the joint names of all the partners The premium of this policy is paid by the firm Contd.

4 Joint Life Policy (JLP) Whenever any of the partner dies, the policy comes to an end and amount is received by the firm Policy amount including the bonus, if any belongs to the entire firm and not only to the deceased partner

5 Methods of Accounting Method 1 :- When Premium paid is treated as an expenses Method 2: When premium paid is treated as an asset Method 3: When premium paid is treated as an asset and JLP reserve created

6 Method Method I: Full Premium paid = Expense = Debited to P&L A/c 1) For Payment of Premium JLP Premium A/c.. Dr. To Cash / Bank A/c 2) For Transfer Profit and Loss A/c.. Dr. To JLP Premium A/c Contd..

7 Method 1 Conti.. 3) On Maturity of policy / Death of Partner Cash / Bank A/c Dr. To Joint Life Policy A/c 4) For transfer of Balance in Joint Life Policy A/c Joint Life Policy A/c.. Dr. To All partners Capital A/c (Old Profit Sharing Ratio)

8 Method - II Premium Paid = Expense but after considering the Surrender Value 1) For the payment of Premium Joint Life Policy A/c. Dr. To Cash / Bank A/c 2) For Transfer Profit and Loss A/c. Dr. To JLP A/c (Diff. between Premium and Surrender Value) Contd

9 Method II Conti.. 3). At time of Maturity: Bank A/c Dr. To Joint Life Policy A/c 4. For Transfer of Balance in Joint Life Policy A/c. Joint Life Policy A/c. Dr. To All partner s Capital A/c ( Old Profit Sharing Ratio) Contd

10 Method III Surrender Value Considered and Premium Paid = JLP Reserve Created At the end of every year, an amount equal to the premium paid is transferred from the Profit and Loss appropriation A/c to JLP Reserve A/c. JLP is brought down every year to its surrender value by transferring the difference to JLP Reserve A/c This ensure that at the end of every year, the surrender value of policy appears on the asset side and the same amount appeas on the liability side in JLP Reserve A/c Contd

11 Method III Conti.. 1) On Payment of Premium Joint Life Policy A/c Dr. To Cash /Bank A/c 2) For Creation of reserve Profit and Loss Appropriation A/c. Dr. To Joint Life Policy Reserve A/c 3) For amount in excess of surrender value Joint Life Policy Reserve A/c.. Dr. To Joint Life Policy A/c Note: In the balance sheet JLP will appear on the Asset and JLP Reserve will appear on the liability side at surrender value. Contd

12 Method III Conti.. 4) At the time of maurity Bank A/c Dr. To Joint Life Policy A/c 5) For transfer of balance in reserve A/c to Policy A/c Joint Life Policy Reserve A/c. Dr. To Joint Life Policy A/c Note: Alternatively JLP Reserve can be directly transferred to Partner s Capital A/c and JLP policy also. 6) For transfer of Balance of Joint Life Policy Joint Life Policy A/c Dr. To Partner s Capital A/c Contd

13 Multi Choice Questions (M.C.Q) Q.1. Joint Life Policy is taken by the firm on the life(s) of a) All the partners jointly (b) All the partners severely c) On the life of all the partners and employees of the firm. d) (a) and (b) Ans. d) (a) and (b)

14 MCQ s

15 MCQ.1 Q.1. X, Y and Z takes a Joint Life Policy after five years Y retires from the firm. Old profit sharing ratio is 2:2:1. After retirement X and Z decides to share profits equally. They had taken a JLP of 2,50,000 with the surrender value 50,000, what will be the treatment in the partner s capital account on receiving the JLP amount if joint life premium is fully charged to revenue as & when paid? a) 50,000 credited to all the partners in old ratio (b) 2,50,000 credited to all the partners in old ratio c) 2,00,000 credited to all the partners in old ratio d) No treatment is required Ans. a) 50,000 credited to all the partners in old ratio

16 Ans. d) Distributed JLP Reserve Account in old profit sharing ratio. MCQ.2 Q.2. X, Y and z takes a Joint Life Policy, after 5 years Y retires from the firm. Old profit sharing ratio is 2:2:1. After retirement X and Z decides to share profits equally. They had taken a JLP of 2,50,000 with the surrender value 50,000. What will be the treatment in the partner s capital account on receiving the JLP amount, if the JLP is maintained at the surrender alongwith the reserve? a) 50,000 credited to all the partners in old ratio (b) 2,50,000 credited to all the partners in old ratio c) 2,00,000 credited to all the partners in old ratio d) Distributed JLP Reserve Account in old profit sharing ratio.

17 MCQ.3 Q.3. X, Y and Z were partners sharing profits and losses in the ratio of 3:2:1. X retired and firm received the joint life policy as 7,500 appearing in the balance sheet at 10,000. Joint Life Policy is credited and cash debited with 7,500, what will be the treatment for the balance in Joint Life Policy? a) Credited to partner s current account in profit sharing ratio. (b) Debited to revaluation account. c) Debited to partner s capital account in profit sharing ratio. d) Either (b) or (c). Ans. d) Either (b) or (c)

18 MCQ.4 Q.4 X, Y and Z are partners sharing profits and losses in the ratio 9:4:3. They took joint life policy of 25,000 for X, 20,000 for Y and 51,000 for Z. What is the share of Z in the Joint Life Policy amount? a) 18,000 (b) 25,000 c) 51,000 d) 20,000 Ans. a) 18,000

19 MCQ.5 Q.5. X, Y and Z are the partners sharing profits and losses in the ratio 2:1:1. Firm has a joint life policy of 1,20,000 and in the balance sheet it is appearing at the surrender value i.e. 20,000. On the death of X, how this Joint Life Policy will be shared among the partners. a) 50,000 : 25,000 : 25,000 (b) 60,000 : 30,000 : 30,000 c) 40,000 : 35,000 : 25,000 d) Whole of 1,20,000 will be paid to X. Ans. a) 50,000 : 25,000 : 25,000

20 MCQ.6 Q.6. To provide funds to pay to the retiring partner or to the representatives of a deceased partner, generally partners : a) Created a Sinking Fund (b) Create Joint Life Policy c) Create Reserve Fund d) Create a separate Bank Account Ans. b) Create Joint Life Policy

21 Ans. d) Surrender value distributed among the partners in the profit sharing ratio. MCQ.7 Q.7. All the following except one is the method of recording join life policy. a) Premium paid charged to revenue (b) Joint Life Policy Account maintained at the surrender value. c) Joint Life Policy Account maintained at the surrender value along with the Reserve. d) Surrender value distributed among the partners in the profit sharing ratio.

22 MCQ.8 Q.8. X, Y and Z takes a Joint Life Policy, their profit sharing ratio 2:2:1. On death of Y, X and Z decides to share profits equally. They had taken a Joint Life Policy of 2,50,000 with the surrender value 50,000. What will be the treatment in the partner s capital account on receiving the JLP amount if joint life policy is maintained at the surrender value? a) 50,000 credited to all the partners in old ratio (b) 2,50,000 credited to all the partners in old ratio c) 2,00,000 credited to all the partners in old ratio d) No treatment is required. Ans. c) 2,00,000 credited to all the partners in old ratio

23 MCQ.9 Q.9. Balances of M/s. Rahul, Ankit and Ankur sharing profits and losses in proportionate to their capitals, stood as follows : Capital Accounts : Rahul 3,00,000, Ankit 2,00,000 and Ankur 1,00,000. Rahul desired to retire from the firm and the remaining partners decided to carry on, Joint Life Policy f the partners surrendered and cash obtained 60,000. What will be the treatment for JLP? a) 60,000 credited to Revaluation Account (b) 60,000 credited to Joint Life Policy Account. c) 30,000 debited to Rahul s Capital Account d) Either (a) or (b) Ans. b) 60,000 credited to Joint Life Policy Account

24 Lesson Summary Insurance Policy Taken Out Jointly and Severely Method I Full Premium Paid = Expense Method II Premium Paid = Expense, but after considering the Surrender Value Method III Along with Surrender Value also a JLP Reserve is Created for the Premium Amount Paid. JLP can Save Dissolution of Partnership Firm

25 Thank You

Death of a Partner. The deceased partner's share of profit is to be determined either on the basis of time or turnover.

Death of a Partner. The deceased partner's share of profit is to be determined either on the basis of time or turnover. Death of a Partner The accounting treatment at the time of death of a partner is same as at the time of retirement. Main difference between the two is that of closing of the account of business. Deceased