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CMA Intermediate · Financial Accounting · Death of Partner

Messrs Rao, Sen and Tiwari share profits equally and hold a joint life policy of Rs 5,00,000 on their lives. The policy appears in the Balance Sheet at its surrender value of Rs 60,000, and there is no Joint Life Policy Reserve. Tiwari dies and the insurer pays the full amount to the firm. What total amount is credited to the partners' capital accounts (including Tiwari's) in the old ratio?

Rs 4,40,000 is credited to the partners' capitals. The firm receives Rs 5,00,000 but already carries the policy as an asset at Rs 60,000, so only the excess of Rs 4,40,000 is a gain, shared by all partners in the old ratio.

  1. ARs 5,00,000
  2. BRs 4,40,000Correct
  3. CRs 60,000
  4. DRs 5,60,000

Explanation

Bank is debited with Rs 5,00,000 and the policy account, carried at Rs 60,000, is credited. The balancing figure of Rs 4,40,000 is the gain, and it is credited to all partners' capital accounts in the old profit-sharing ratio. Crediting Rs 5,00,000 ignores the asset already in the books and would double count the surrender value.

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