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CMA Intermediate · Financial Accounting · Treatment of Joint Life Policy

Under the method where the Joint Life Policy appears as an asset, a firm's policy has a surrender value of Rs 1,20,000 at the end of year 3 and Rs 80,000 at the end of year 2. The policy A/c is carried at the surrender value of each year-end. What is the adjusting entry at the end of year 3 (premium expense already charged to P&L)?

Debit Joint Life Policy A/c and credit Profit and Loss A/c with Rs 40,000. The policy must be raised from the previous surrender value of Rs 80,000 to Rs 1,20,000, and the increase is credited to profit as a gain.

  1. ADebit Policy A/c Rs 40,000, Credit Profit and Loss A/c Rs 40,000Correct
  2. BDebit Policy A/c Rs 1,20,000, Credit Profit and Loss A/c Rs 1,20,000
  3. CDebit Profit and Loss A/c Rs 40,000, Credit Policy A/c Rs 40,000
  4. DDebit Partners' Capital A/c Rs 40,000, Credit Policy A/c Rs 40,000

Explanation

The policy is raised to the new surrender value. Increase = 1,20,000 - 80,000 = Rs 40,000, so Policy A/c is debited and P&L is credited as a gain. Option 2 uses the full surrender value and ignores the opening balance already carried.

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