CMA Intermediate · Financial Accounting · Treatment of Joint Life Policy
A firm pays an annual premium of ₹20,000 on a Joint Life Policy and treats the policy as an asset at its surrender value, writing off the excess of premium over the increase in surrender value. At the start of the year surrender value was ₹60,000, and at the end it is ₹75,000. What amount is charged to Profit and Loss Account for the year?
The charge to profit and loss is ₹5,000. The premium of ₹20,000 is partly absorbed by the rise in surrender value from ₹60,000 to ₹75,000, which is ₹15,000 and remains an asset, so only the remaining ₹5,000 is expensed.
- A₹20,000
- B₹5,000Correct
- C₹15,000
- D₹35,000
Explanation
Premium paid is ₹20,000. Increase in surrender value is 75,000 − 60,000 = ₹15,000, which stays as asset. Charge to P&L = 20,000 − 15,000 = ₹5,000. Charging the full premium ignores the asset treatment; ₹15,000 is the asset increase, not the expense.
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