Skip to content

CMA Intermediate · Financial Accounting · Retirement of Partner

X, Y and Z share profits 3:2:1. The Balance Sheet shows Joint Life Policy Rs 90,000 and Joint Life Policy Reserve Rs 90,000. The surrender value of the policy is Rs 90,000. Z retires. What is the effect of the policy on the partners' capital accounts at retirement?

No effect arises on the partners' capitals. The Joint Life Policy Reserve of Rs 90,000 equals both the policy asset and its surrender value, so the two are closed against each other and no profit or loss is shared.

  1. ACredit Rs 90,000 to partners' capitals in the old ratio
  2. BDebit Rs 90,000 to partners' capitals in the old ratio
  3. CTransfer the reserve to Z's capital only
  4. DNo effect on capital accounts; the asset and reserve are simply closed against each otherCorrect

Explanation

The policy asset equals the reserve equal to the surrender value. Since the reserve exactly offsets the asset, transferring both against each other leaves no gain or loss for partners. Distributing the reserve while keeping the asset would wrongly inflate capitals.

Did you get it right without looking?

One question tells you little. A timed set on Retirement of Partner shows your real accuracy, how long you take and where you lose marks.

Practise Retirement of PartnerFree diagnostic mock

More Retirement of Partner questions