CMA Intermediate · Financial Accounting · Treatment of Joint Life Policy
In a partnership firm, a Joint Life Policy (JLP) is taken mainly to:
A Joint Life Policy is taken to ensure the firm receives cash on the death of a partner, so that the deceased partner's share can be paid to the legal representatives without straining the firm's working funds or forcing asset sales.
- AProvide funds to pay the amount due to a deceased partner's legal representatives without disturbing firm's liquidityCorrect
- BIncrease the firm's profit by earning bonus on the policy every year
- CGuarantee that partners will not retire from the firm
- DReduce the firm's income tax liability on the capital of partners
Explanation
A JLP covers the lives of all partners jointly and is payable on the death of any one of them. The money received helps settle the deceased partner's dues. The other options describe objectives that a JLP does not serve.
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