plz show me accounting treatment of joint life policy and different methods of treating jlp at the time of retirement and death.

  Joint Life Policy
 
For the purpose of ensuring liquidity in the firm to settle the claim of the retiring/
deceased partner an assurance policy is taken up by the partners on their lives
collectively. The insurance company agrees to pay the sum assured (i.e., the
amount for which the policy has been taken) to the firm on the maturity date.
Maturity date is the date of death of any of the partners or the date on which the
term of the policy expires, whichever is earlier. The firm in turn agrees to pay to
the insurance company the amount of premium periodically. The amount of
premium payable will be same in each of the years.
Surrender Value (SV) is the  amount payable by an insurance company on
the surrender/discontinuation of joint life policy before the date of maturity.
However, the surrender value keeps on increasing with the successive payment
of premium.
 Accounting treatment for joint life policy
Joint Life Policy transactions by the firm can be dealt with any of the following
ways :
 
1. Treated as an expense of firm
It implies that premium paid is treated as a business expense, it is chargeable
to the profit and loss account, thus reducing the distributable profits of the
partners. Year after year, the expense on account of premium on joint life
policy in recorded as an expense. In the event of death of a partner firm will
realise the sum assured and bonus, if any which will be distributed among the
partners. Consequently it obviates the need to exhibit insurance policy in the
Balance Sheet.
Following are the entries to record these transaction in the first and
subsequent years :
Year of obtaining and continuance of policy
 For payment of premium:
Joint life policy premium Dr.
Bank a/c
 For transfer of premium paid to profit and loss account at the end of the year :
Profit and loss a/c Dr.
Joint life policy premium
 
On the maturity of the policy
 
If the death takes place before the due date of the premium, the premium will
not be paid in the year of death. This would imply that entry for payment of
premium would not be recorded. On maturity, the insurance policy will be
surrendered to register the claim with the insurance company and sum assured
will be collected.
For this following entries are to be recorded :
 
(i) On the death of partner, for making claim with the insurance company
Insurance Company/Insurance claim receivable a/c Dr.
Joint Life Policy
 
(ii) For Claim duly received from Insurance Co. on the date of receipt
       Bank a/c Dr.
Insurance Co./Insurance claim receivable  a/c
 
(iii) Claim due will be distributed among existing partners (including outgoing)
Joint life policy Dr.
All partner's capital a/c (individually)
2. When premium paid is treated as an asset at an amount equal to the
surrender value of joint life policy.
Here, joint life policy is shown at its surrender value in the Balance Sheet
of that date. Following accounting entries are to be recorded in this case :
 
(i) First Year : On the date when policy is taken and premium is paid.
Joint Life Policy Dr.
Bank a/c
 
(ii) At the end of first year, the joint life policy account will show the balance which
is equal to its surrender value. The difference between the premium paid and
surrender value will be transferred to profit and loss account.
Profit and  loss a/c Dr.
Joint Life Policy
(Amount = surrender value in the previous year + premium paid during the current
year – surrender value in the current year).
Second year and onwards, the entries (i) and (ii) shall be repeated until the last
year.
In the last year, i.e., the year of death, entry no. (i) will be recorded only if death
takes place after the due date of premium and entry no. (ii) will not be recorded
at all.
 
(iii) On maturity of policy or in the event of death, entry for making the insurance
claim will be :
Insurance company a/c Dr.
Joint Life Policy
 
(iv) On the date of receipt when insurance company pays the insurance claim due :
Bank a/c Dr.
Insurance Company
 
(v) Balance standing in Joint Life Policy account is distributed among all partners in
profit sharing ratio. Balance in Joint Life Policy account   = [Total claim due –
(Surrender value of the policy in the previous year + premium paid during the
current year).
 
 Individual Life Policies
The firm may decide to take the insurance policy separately for each of the
partners on their lives. For such insurance policies, if premium is paid by the
firm, being a transaction of business, it becomes an asset of the firm. Whenever
death of any partner occurs, policy matures, the firm make a claim to the
insurance company and claim so received is distributed among all the partners
in the profit sharing ratio. The heir of deceased partner will be entitled to the
proportionate share in the policy of deceased. Further, surrender values of the
policies of other partners will be distributed among all the partners(including
heir of deseased) in their profit sharing ratio. The Joint Life Policy will be
shown in the Balance Sheet at its surrender value.

  • 5
What are you looking for?