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Joint Life Policy (Jlp)

A partnership firm may decide to take a joint life insurance on the lives of all the partners. The firm pays the premium to the insurance company, which is in turn payable to the firm on the death or maturity of the policy holder, whichever is earlier, incase of retirement. Hence, the firm is liable to receive the surrender value incase of retirement. The objective is to minimize financial hardships during the payment of a large sum of capital on the death or retirement of a partner.

 

Note: Surrender value refers to sum of money an insurance company will pay to the policyholder or annuity holder in the event his or her policy is voluntarily terminated before its maturity or the insured event occurs.

 

The accounting treatment for the premium paid & the joint life policy may be in any of the following ways:
 

When premium paid is treated as an expense

In such a case, there will be no Joint life policy account in the books of the firm. Annual premium paid is treated as an expense and debited to Profit and Loss account. In case when firm receives the amount from insurance co., the partners’ capital account is credited with amount received.
 


When premium paid is treated as an asset

In this case, insurance premium paid is debited to Joint life policy account and credited to bank account. At the end of the year, the amount in excess of surrender value is treated as a loss and is transferred to Profit and Loss A/c and the surrender value is shown in balance sheet every year. In this case, the amount received in excess of the surrender value results in gain and is transferred to Capital accounts of the partners in their profit sharing ratio.



When joint life policy is treated as an asset and the Joint life policy reserve account is maintained

In this case, insurance premium paid is debited to Joint life policy account and credited to Bank account. At the end of the year, the amount in excess of surrender value is treated as a loss and is transferred to Profit and Loss A/c and the surrender value is shown in balance sheet every year.
 

In addition to this, a amount equivalent to surrender value is transferred from Profit and Loss appropriation A/c to Policy reserve A/c. Thus, in this method, Policy A/c appears on the assets side and Policy Reserve A/c appears on the liabilities side of the Balance Sheet until it is realized.
 

When the amount received in excess of the surrender value, it results in gain and is transferred to Capital accounts of the partners in their profit sharing ratio and the policy reserve is credited to partners’ capital A/c.
 

Illustration – 10

 

X, Y and Z shared profits and losses in the ratio of 5: 3: 2. They took out a joint life policy in 2010 for ₹ 1,00,000, a premium of ₹ 6,000 being paid annually on 31st May. The surrender values of policy on 31st December of various years were as follows: 2010 – nil; 2011 - ₹ 1,800; 2012 – ₹ 4,000; 2013–₹ 7,200. Z retires on 15thMarch, 2014. Prepare necessary ledger accounts assuming:

  1. No JLP A/c is maintained
  2. JLP A/c is maintained on surrender value basis
  3. JLP reserve A/c is maintained\

Solution:

 

(a) No JLP A/c is maintained and premium paid is treated as an expense






(b) JLP A/c is maintained on surrender value basis

 


 


c) JLP reserve A/c is maintained

 








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