Accounting Treatment Of Joint Life Policy Upon Death Of A Partner

by John Mcgill   |   0 Comments  |   754 Views    |   5/5 Rating   |   Print This Article
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Apr 17th, 2012
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(A) When premium is treated as business expenditure

Under the first method the premium paid for the policy is treated as a business expense and is written off to the profit and loss account. The effect of this method is that the cost of insurance premium is charged to the partners in the proportions in which they share profits and losses. The method suffers from the drawback that the premium paid under the system cannot be considered as a business expense incurred in the ordinary course of its business. Moreover, the policy account does not appear in the books and hence is not shown in the balance sheet of the concern. The value of the policy, however, represents a secret reserve which belongs to the partners in the profit sharing ratio.

(B) When premium is treated as on asset

Under the second method, a joint life policy account is opened in the books and the premium as and when they are paid are debited to this account. The book value of the policy is adjusted to its surrender value by transfer of the excess to the profit and loss account. Thus, the joint life policy account appears in the books of the concern at realizable value and is shown as an asset in the balance sheet on the death of a partner the policy amount along with the bonus received from the insurance company will be credited to the joint life policy account. The account is now closed by transfer to the capital accounts of the partners including the deceased partner in their profit sharing ratio.

(C) When premium is treated as asset and joint life policy account is maintained

Under the third method, the premium paid is debited to the joint life policy account. At the end of each year, a sum equal to the amount of annual premium paid is debited to the profit and loss account and credited to the joint life policy reserve account. The book value of the policy is adjusted to Its surrender value by a transfer of the excess amount over the surrender value from the joint life policy account to the joint life policy reserve account. On the death of a partner, the sum received under the policy will be credited to the joint life policy account. The existing balance in the joint life policy reserve account will be closed by transfer to the joint life policy account. The latter account will now be closed by transfer to the capital accounts of the partners in their profits sharing ratio. This method has the advantages of disclosing the existence of the assets at its realizable value and also of avoiding the danger of depleting working capital of the firm.

INDIVIDUAL LIFE POLICIES

Firm may adopt a policy of getting separate insurance cover on the life of each of the partners. However, in this case also the premium on the life of each partner’s policy share be paid by the firm. On the death of any partner only one policy mature and full amount insured on that policy shall be recovered from the insurance company. But other policies’ surrender value shall be taken into account while calculating amount due to the executors of deceased partner

Thus the executors of deceased partners shall be entitled to his share in (i) his policy and (ii) surrender value of other policies.

Article Source: http://www.informationbible.com/article-accounting-treatment-of-joint-life-policy-upon-death-of-a-partner-190185.html

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