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CMA Intermediate · Financial Accounting · Treatment of Joint Life Policy

Under the policy that a joint life policy is kept as an asset at surrender value with an equal reserve, which of the following best describes the effect of the death of a partner on the final amount shown as payable to his estate, assuming the claim exceeds the surrender value?

The excess of the claim over the surrender value is a gain of the firm up to the date of death. It is shared by all partners, including the deceased, in the old profit-sharing ratio, and the deceased's portion is added to the amount payable to his executors.

  1. AThe excess of claim over surrender value is shared by all partners in the profit-sharing ratio, and the deceased's share is added to his capitalCorrect
  2. BThe excess of claim over surrender value is shared only among the surviving partners
  3. CThe full claim is credited to the deceased partner's capital
  4. DThe claim is ignored in settlement because the policy belongs to the firm

Explanation

The surplus over surrender value is a firm gain arising up to the date of death, so it is distributed among all partners in the old profit-sharing ratio. The deceased's share forms part of the amount due to his executors. Sharing among survivors only ignores his entitlement.

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