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Accounting Treatment of Individual Life Policy in case of Death of a Partner

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The firm may insure the life of the partners individually instead of taking a Joint Life Insurance. When the premium of the Individual Life Policy is charged against the Profit and Loss Account of the firm, then the Insured Amount is treated as the gain for the partners. So, the Representative of the deceased partner is eligible to receive the share in the claim paid by the insurance company in case of the matured policy and the share in the surrender value of the unmatured policy of the other partners.    

Accounting Treatment of Individual Life Policy:

A. When the surrender value of the Individual Life Policy already appears in the book of the firm:

Under such circumstances, the insured amount in excess of the surrender value is distributed among all the partners in the profit-sharing ratio.

Journal Entries:

 

Illustration:

Rahul, Tina, and Anjali were partners sharing profit in a ratio of 3:2:1. Each partner’s life is insured individually by the firm, and the surrender value of each such insurance as per the Balance Sheet stood at ₹ 15,000, ₹ 10,000, and ₹ 5,000, respectively. The sum assured by the insurance company is double the surrender value amount in each case. Rahul died on 30 June, 2022. Pass necessary Journal entries. 

Solution:

 

B. When the surrender value of the Individual Life Policy doesn’t appear in the book of the firm:

Under such circumstances:

  • Firstly, the insured amount against the life policy of the deceased partner is claimed and distributed among all the partners in their profit-sharing ratio.
  • Secondly, the share of the deceased partner in the surrender value of the unmatured policies of the other partners is adjusted through the capital account of the gaining partners in their gaining ratio. 

Journal Entries:

 

Illustration:

Vivek, Suman, and Raman were partners sharing profit in a ratio of 5:3:2 respectively. Vivek, Suman, and Raman’s life are insured individually by the firm for ₹2,00,000, ₹1,50,000, and ₹1,00,000 respectively. The surrender value in each case is 50% of the insured amount. Vivek died on 31st March, 2022 and the remaining partners decide to share profits equally in the future. Pass necessary Journal entries. 

Solution:

 

Working Notes:

1. Calculation of Gaining Ratio:

Gaining Ratio=New Ratio-Old Ratio

Gaining~Ratio~of~Suman=\frac{1}{2}-\frac{3}{10}=\frac{2}{10}

Gaining~Ratio~of~Raman=\frac{1}{2}-\frac{2}{10}=\frac{3}{10}

Gaining Ratio=2:3

2. Calculation of share of Vivek in the surrender value of unmatured life policies:

The surrender value of Suman’s life policy = ₹75,000

The surrender value of Raman’s life policy = ₹50,000

Vivek's~share~in~the~surrender~value=[75,000+50,000]\times\frac{5}{10}=₹62,500

Illustration:

Wasim, Rakib, and Nasim were partners sharing profit in a ratio of 5:3:2. They Insured their lives individually for ₹4,00,000 each. The surrender value was 50% of the insured amount. Nasim died on 30 June 2022. A Partnership Deed stated that an executor of the deceased partner shall be entitled to the following:

1. Capital Balance on the day of death.

2. Interest on Capital @ 5% p.a.

3. His share in the profit of the firm till the date of death.

The net profit till 30 June, 2022 was ₹ 3,00,000. The Capital Account of Nasim showed a value of ₹ 8,00,000 on the same date.

Pass necessary Journal Entries and prepare Capital account of Nasim.  

Solution:

 

 



Last Updated : 05 Apr, 2023
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