Death of a Partner: Joint Life Policy Claim and Settlement

Understand Death of a Partner: Policy Claim and Settlement

Key rules to remember

Claim received entry

Bank A/c Dr (full claim) To Joint Life Policy A/c (amount shown in books)

The full sum assured comes in. Use the policy account balance at the date of death. Any excess of the claim over this book value is the gain to be shared.

Gain on claim

Gain = Claim received − Book value of policy (as shown in Joint Life Policy A/c)

If the policy was shown at surrender value, use that value. This gain is shared among all partners in the old profit sharing ratio.

Transfer of gain and reserve (reserve method)

Bank A/c Dr (full claim) To Joint Life Policy A/c (book value) To Partners' Capital A/cs (excess, old ratio); then Joint Life Policy Reserve A/c Dr To Partners' Capital A/cs (old ratio)

The policy account is closed by the credit of its book value, so it has no balance left to transfer. The excess of the claim and the reserve are both credited to all partners, including the deceased, in the old ratio.

Reserve method balancing check

Total credited to partners = (Claim − Policy book value) + Joint Life Policy Reserve

Use this to check your entries. The excess of the claim over book value and the reserve are both credited to capital accounts. If there is no reserve, only the excess is credited.

Amount due to the deceased partner

Amount due = Capital + Share of reserves and profits + Share of gain on policy + Goodwill share − Drawings − Share of losses and interest on drawings, up to the date of death

Adjust for revaluation and goodwill as per the question. The result goes to the executors.

How to solve Death of a Partner: Policy Claim and Settlement questions

1. 1Read the data. Note the sum assured, the book value of the policy, any reserve, the date of death and the old ratio.
2. 2Check how the policy was recorded. It may be shown at surrender value, at premium paid with a reserve, or it may be fully written off.
3. 3Record the claim: Bank A/c Dr (full amount) To Joint Life Policy A/c (book value) To Partners' Capital A/cs (excess, old ratio). If the claim is lower than book value, the shortfall is a loss shared in the old ratio.
4. 4Transfer any Joint Life Policy Reserve to the capital accounts of all partners, including the deceased, in the old ratio.
5. 5Complete the other adjustments: goodwill, revaluation, profit up to death, drawings and interest.
6. 6Prepare the deceased partner's capital account and find the final balance.
7. 7Show the payment to the executors, or transfer the balance to the Executor's Loan A/c if it is not paid at once.
8. 8Prepare the updated Balance Sheet if asked, and check that it tallies.

Quickest way: Claim minus book value, plus reserve, then share

Common mistakes in Death of a Partner: Policy Claim and Settlement

• Crediting only the book value of the policy and ignoring the excess claim.

  Students think only the amount invested is received.

  Fix: The firm receives the full sum assured. Debit Bank with the full claim and share the excess among all partners.

• Sharing the reserve or gain in the new ratio or only among surviving partners.

  Students confuse death with admission or retirement logic.

  Fix: The reserve and the gain belong to all partners including the deceased. Always use the old ratio.

• Crediting the full claim to capital as a gain, and also crediting the reserve.

  Students forget that the policy account is credited with its book value, so only the excess is a gain.

  Fix: Credit the policy account with its book value. Credit the excess of the claim over book value, plus the reserve, to partners' capital in the old ratio.

• Paying the deceased's share in cash even when the firm has not enough funds.

  Students forget that the firm may keep the amount payable.

  Fix: If the question says payment is deferred, transfer the balance to the Executor's Loan A/c.

• Ignoring the policy when the premium was already charged to Profit and Loss and the policy is not in the books.

  Students assume that no asset means no claim entry.

  Fix: The claim is then entirely a gain. Debit Bank and credit Partners' Capital A/cs in the old ratio.

Worked examples