Tag: accounting of sum payable to a partner on retirement or death

Questions Related to accounting of sum payable to a partner on retirement or death

When the Joint Life Insurance Policy premium is treated as expenses,the amount reserved on death of the partner is transferred to _________. 

book keeping and accountancy reconstitution of partnership (retirement of partner) accounting for retirement and death of partner accounting of sum payable to a partner on retirement or death accounting treatment in case of retirement of a partner

  1. partners capital A/c.

  2. cash A/c.

  3. profit and loss appropriation A/c.

  4. general reserve A/c.

Show answer
Correct Option: A
Explanation:

When Joint Life Policy premium is treated as an expense, then it is closed every year by transferring it to profit and loss A/c and the amount reserved on the death of the partner is transferred to partner's capital A/c.

Following are the journal entries :
1. On Payment of premium
            Joint Life Policy A/c               Dr. 
                     To Bank A/c 
2. On charging to profit and loss A/c
            Profit and Loss A/c                Dr.      
                      To Joint life Policy insurance premium A/c 
3. On maturity/ Death of a policy
            Insurance company / Bank A/c   Dr.
                       To Partner's capital A/c (individually)

Which of these statements is true?

book keeping and accountancy reconstitution of partnership (retirement of partner) accounting for retirement and death of partner accounting of sum payable to a partner on retirement or death accounting treatment in case of retirement of a partner

  1. Joint life policy is taken by the partners in order to provide funds at the time of retirement /death of any partner.

  2. Joint life policy reserve account is created to bring down the policy account to surrender value.

  3. Indian Partnership Act prohibits payment of any share of profit to a retiring partner if account are not settled.

  4. Retiring partner pays for his share of goodwill to the remaining partner.

Show answer
Correct Option: A
Explanation:

Joint life policy is taken by the partners in order to provide funds at the time of retirement /death of any partner - True

A Joint Life Policy (JLP) is an insurance policy which is taken out by the partnership firm on the joint lives of all partners. The amount of policy is payable by the insurance company either on the death or maturity of policy, whichever is earlier. The firm pays annual premium to the insurer against the policy. Joint Life Policy is taken by the partners so that to avoid the financial hardship they may face at time of payment to retiring or deceased partner.

R, J & D are the partners sharing profits in the ratio $7 : 5 : 5$ D died on $30$th June $2015$. It was decided to value the good will on the basis of $3$ year's purchase of last $5$ years average profits. If the profits are $Rs.29,600$; $Rs.28,700$; $Rs.28,900$; $Rs.24,000$ & $Rs.26,800$. What will be D's share of good will?

book keeping and accountancy accounting for retirement and death of partner reconstitution of partnership (retirement of partner) accounting of sum payable to a partner on retirement or death accounting treatment in case of retirement of a partner

  1. $Rs.20,700$.

  2. $Rs.27,600$.

  3. $Rs.82,800$.

  4. $Rs.27,000$.

Show answer
Correct Option: A
Explanation:

Old ratio (R, J and D) = 7 : 5 : 4

Calculation of goodwill :
1. Average profit = (29600 + 28700 + 28900 + 24000 + 26800) /5
                            = 138000/5
                            = 27600
2. Goodwill = Average profit * No. of year's purchase
                    = 27600 * 3
                    = 82800
D's share of goodwill = Total goodwill * D's share
                                    = 82800 * (4/16) 
                                    = 20700

On the death of a partner, his executor is paid the share of profits of the died partner for the relevant period. This payment is recorded in Profit & Loss _______ A/c

book keeping and accountancy reconstitution of partnership (retirement of partner) accounting for retirement and death of partner accounting of sum payable to a partner on retirement or death accounting treatment in case of retirement of a partner

  1. Adjustment

  2. Appropriation

  3. Suspense

  4. Reserve

Show answer
Correct Option: C
Explanation:
A P&L suspense account is used to record some fictitious profits for the purpose of settlement of share of profits to a deceased partner. Later, such errors are identified and rectified and accordingly adjusted in the books of accounts so that the balance of the P&L suspense a/c is zero.
In case of a death of a partner, share of deceased partner in the profit or losses of the firm (till the death of his/her death) is paid through profit and loss suspense account. At the time of the death of the partner, profit and loss account will not be debit or credit because, it is not possible for the firm to alter the books during the year, thus on the date of a death of a partner profit and loss account is debited or credited.

A, B & C takes a joint life policy, after 5 years, B retires from the firm. Old profit sharing ratio is 2:2:1. After retirement A & C decides to share profits equally. They had taken a joint life policy of Rs. 2,50,000 with the surrender value Rs. 50,000. What will be the treatment in the partners' capital account on receiving the JLP amount if joint life policy is maintained at the surrender value? 

book keeping and accountancy reconstitution of partnership (retirement of partner) accounting for retirement and death of partner accounting of sum payable to a partner on retirement or death accounting treatment in case of retirement of a partner

  1. Rs. 50,000 credited to all the partners in old ratio.

  2. Rs. 2,50,000 credited to all the partners in old ratio.

  3. Rs. 2,00,000 credited to all the partners in old ratio.

  4. No treatment is required.

Show answer
Correct Option: D

A, B & C takes a joint life policy, after five years B retires from the firm. Old profit sharing ratio is 2:2:1. After retirement A & C decides to share profits equally. They had taken a joint life policy of Rs. 2,50,000 with the surrender value Rs. 50,000. What will be the treatment in the partner's capital account on receiving the JLP amount if joint life policy is maintained at surrender value along with the reserve?

book keeping and accountancy reconstitution of partnership (retirement of partner) accounting for retirement and death of partner accounting of sum payable to a partner on retirement or death accounting treatment in case of retirement of a partner

  1. Rs. 50,000 credited to all the partners in old ratio.

  2. Rs. 2,50,000 credited to all the partners in old ratio.

  3. Rs. 2,00,000 credited to all the partners in old ratio.

  4. Distribute JLP Reserve A/c in old profit sharing ratio.

Show answer
Correct Option: D

Balances of R,H & M sharing profits & losses in the ratio 2:3:2 stood as Rs. 10,00,000; H - Rs. 15,00,000; M - Rs. 10,00,000; Joint Life Policy Rs. 3,50,000. H desired to retire from the firm and the remaining partners decided to carry on with the future profit sharing ratio of 3:2. Joint life policy of the partners surrendered and cash obtained Rs. 3,50,000. What would be the treatment for JLP A/c?

book keeping and accountancy reconstitution of partnership (retirement of partner) accounting for retirement and death of partner accounting of sum payable to a partner on retirement or death accounting treatment in case of retirement of a partner

  1. Rs. 3,50,000 credited to partner's capital account in new ratio.

  2. Rs. 3,50,000 credited to partner's capital account in old ratio.

  3. Rs. 3,50,000 credited to partner's capital account in capital ratio.

  4. Rs. 3,50,000 credited to JLP account.

Show answer
Correct Option: D

A, B & C were partners sharing profits and losses in the ratio of 3:2:1. A retired and firm received the joint life policy as Rs. 7,500 appearing in the balance sheet at Rs. 10,000. JLP is credited and cash debited with Rs. 7,500, what will be the treatment for the balance in Joint Life Policy?

book keeping and accountancy reconstitution of partnership (retirement of partner) accounting for retirement and death of partner accounting of sum payable to a partner on retirement or death accounting treatment in case of retirement of a partner

  1. Credited to partner's current account in profit sharing ratio.

  2. Debited to revaluation account.

  3. Debited to partner's capital account in profit sharing ratio.

  4. Either (B) or (C).

Show answer
Correct Option: D

Balances of $R _{1}, R _{2}$ & $R _{3}$ sharing profits & losses in proportion to their capitals, stood as:
$R _{1} = Rs. 3,00,000$
$R _{2} = Rs. 2,00,000$
$R _{3} = Rs. 1,00,000$
$R _{1}$ desired to retire from the firm and the remaining partners decided to carry on, joint life policy of the partners surrendered and cash obtained Rs. 60,000. What will be the treatment for Joint Life Policy A/c? 

book keeping and accountancy reconstitution of partnership (retirement of partner) accounting for retirement and death of partner accounting of sum payable to a partner on retirement or death accounting treatment in case of retirement of a partner

  1. $Rs.60,000$ credited to Revaluation A/c.

  2. $Rs.60,000$ credited to Joint Life Policy A/c.

  3. $Rs.30,000$ debited to Ram's Capital A/c.

  4. Either (A) or (B).

Show answer
Correct Option: B
Explanation:

Readjustments takes place in case of retirement of a partner. Whenever the partner retires, the continuing partners makes gain in terms of profit sharing ratio. Therefore, the remaining partners arrange for the amount to be paid to discharge the claims of the retiring partners. Assets and liabilities are revalued, value of goodwill is raised and surrender value of joint life policy, if any, is taken into account. Revaluation profit and reserve are transferred to capital or current accounts of partners. Lastly, final amount due to retiring partner is determined and discharged.

From the above provision, it can be concluded that At the the time of retirement of partner the surrender value of joint life policy is taken into account. 
Therefore, in the given question Rs.60000 is credited to joint life policy A/c.

If one of the partner of a partnership firm comprising 2 partners dies, then _________.

book keeping and accountancy reconstitution of partnership (retirement of partner) accounting for retirement and death of partner accounting of sum payable to a partner on retirement or death accounting treatment in case of retirement of a partner

  1. firm will dissolve

  2. partnership profits will change, no effect on firm

  3. both (A) & (B)

  4. none of these

Show answer
Correct Option: A
Explanation:
When a partnership firm ceases to exist, the partnership firm is said to be dissolved. "The dissolution of partnership between all partners of a firm is called the dissolution of the firm." There is a difference between dissolution of partnership and dissolution of firm. dissolution of partnership involves a change in a relationship of partners. When one or more partners cease to be the partners of the firm because of one or the other reason and other partner continue the partnership business, it is nothing but the dissolution of partnership and not of the firm. But if there are only two partners in a partnership and one of the partner dies, firm will dissolve as the subject matter of partnership i.e., basic requirement of partnership of having at least 2 members does not exist.