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CMA Intermediate · Financial Accounting · Treatment of Joint Life Policy

A firm pays premium on a Joint Life Policy and debits it to the Profit and Loss Account each year, with the policy not shown in the Balance Sheet. On a partner's death, the policy money received of ₹5,00,000 should be:

Where premiums were fully written off and no asset shown, the entire amount received on a partner's death is a gain. It is credited to the partners' capital accounts, including the deceased partner's, in the profit-sharing ratio.

  1. ACredited to Profit and Loss Account and distributed among all partners including the deceased in the profit-sharing ratioCorrect
  2. BCredited to the deceased partner's capital account alone
  3. CTreated as a liability payable to surviving partners
  4. DCredited to the Goodwill account

Explanation

When premium is fully expensed, the policy is not an asset, so the whole claim is a gain to the firm. It is distributed among all partners, including the deceased, in the profit-sharing ratio, as the policy benefited everyone. Crediting only the deceased partner is wrong.

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