Dissolution of Firm: Accounting Treatment of Joint Life Policy
What is Joint Life Policy?
Joint Life Policy is a life policy that gives coverage against the death of the policyholder, under which the coverage is of a minimum of two persons and the pay-out is on a first-death basis. Since the Partnership firm is a business run by at least two people, the partners may hold the Joint Life Policy in order to reduce the burden of paying a considerably large amount in the event of retirement or death of the partner or Dissolution of the partnership. If any partner dies before the maturity date of the policy, the other partners are eligible to receive the policy amount (Full Claim).
Accounting Treatment:
Case 1: If Joint Life Policy appears in the balance sheet:
When a Joint Life Policy appears in the Balance Sheet, it is transferred to the Realisation Account’s debit side, like any other asset at its book value.
Illustration:
Sankara, Rama, and Krishna were partners for 5:3:2 in a firm. Their Balance Sheet on 31st March 2022 stood as:
Balance Sheet
as on 31st March 2022
Liabilities | Amount (₹) | Assets | Amount (₹) |
---|---|---|---|
General Reserve | 20,000 |
Debtors 50,000 Provision for Bad Debts (2,000) |
48,000 |
Creditors | 30,000 | ||
Sankara’s Loan A/c | 32,000 | Investment | 16,000 |
Capital Accounts: Sankara 1,20,000 Rama 80,000 Krishna 50,000 |
2,50,000 | Joint Life Policy | 30,000 |
Cash at Bank | 26,000 | ||
Plant | 1,50,000 | ||
Stock | 62,000 | ||
3,32,000 | 3,32,000 |
The partners decide to dissolve the firm on the same date under the followings conditions:
- The Investments are taken over by Rama at ₹ 15,000.
- Joint Life Policy was surrendered for ₹ 20,000.
- The plant was sold for ₹ 1,27,200.
- The stock was sold for ₹ 84,000.
- Krishna took over debtors worth ₹ 24,000 for 20,000. The remaining debtors were realised at 60% of the book value.
- Sankara’s Loan was cleared by paying ₹ 30,200 in full settlement.
- Dissolution expenses cost ₹ 1,600.
Pass necessary Journal Entries and prepare necessary accounts to close the books of the firm.
Solution:
Journal Entries
Date | Particulars | L.F. | Amount (₹) | Amount (₹) |
---|---|---|---|---|
2022
|
Realisation A/c Dr. To Debtor’s A/c To Stock A/c To Plant A/c To Joint Life policy A/c To Investment A/c (Being all the assets except cash transferred to Realisation A/c at Book Value) |
| 3,08,000
| 50,000 62,000 1,50,000 30,000 16,000 |
March 31
|
Creditor’s A/c Dr. Provision for Doubtful Debts A/c Dr. To Realisation A/c (Being Liabilities and Reserves transferred to Realisation account at Book Value) | 30,000 2,000
|
32,000 | |
March 31
|
General Reserve A/c Dr. To Sankara’s Capital A/c To Ram’s Capital A/c To Krishna’s Capital A/c (Being General Reserve distributed among the partners in their profit sharing ratio) | 20,000
| 10,000 6,000 4,000 | |
March 31
|
Bank A/c (WN1) Dr. To Realisation A/c (Being Assets realised) | 2,46,800
| 2,46,800 | |
March 31
|
Rama’s Capital A/c Dr. Krishna’s Capital A/c Dr. To Realisation A/c (Being assets taken over by partners) | 15,000 20,000
|
35,000 | |
March 31
|
Realisation A/c Dr. To Bank A/c (Being liability paid off) | 30,000
| 30,000 | |
March 31
|
Realisation A/c Dr. To Bank A/c (Being dissolution expense paid off) | 1,600
| 1,600 | |
March 31
|
Sankara’s Loan A/c Dr. To Bank A/c To Realisation A/c (Sankara’s Laon paid off at ₹ 30,200 in full settlement) | 32,000
| 30,200 1,800 | |
March 31
|
Sankara’s Capital A/c Dr. Rama’s Capital A/c Dr. Krishna’s Capital A/c Dr. To Realisation A/c (Being Realisation Loss transferred to capital account) | 12,000 7,200 4,800
|
24,000 | |
March 31
|
Sankara’s Capital A/c Dr. Rama’s Capital A/c Dr. Krishna’s Capital A/c Dr. To Bank A/c (Being final payment made to the partners) | 1,18.000 63,800 29,200
|
2,11,000 |
Dr. Realisation Account Cr.
Date | Particulars | Amount(₹) | Date | Particulars | Amount(₹) |
---|---|---|---|---|---|
2022 | To Debtors A/c | 50,000 | 2022 | By Creditor’s A/c | 30,000 |
March 31 | To Stock A/c | 62,000 | March 31 | By Provision for Bad Debts | 2,000 |
March 31 | To Investment A/c | 16,000 | March 31 | By Bank A/c (Assets realised) | 2,46,800 |
March 31 | To Joint Life Policy A/c | 30,000 | March 31 | By Rama’s Capital A/c (Investment) | 15,000 |
March 31 | To Plant A/c | 1,50,000 | March 31 | By Krishna’s Capital A/c (Debtors) | 20,000 |
March 31 | To Bank A/c (Creditors) | 30,000 | March 31 | By Sankara’s Loan A/c | 1,800 |
March 31 | To Bank A/c (Realisation Expense) | 1,600 | March 31
|
By Realisation Loss A/c: Sankara’s Capital A/c 12,000 Rama’s Capital A/c 7,200 Krishna’s Capital A/c 4,800 |
24,000 |
| |||||
| |||||
| |||||
3,39,600 | 3,39,600 |
Dr. Sankara’s Loan Account Cr.
Date | Particulars | Amount(₹) | Date | Particulars | Amount(₹) |
---|---|---|---|---|---|
2022 | To Bank A/c | 30,200 | 2022 | By Balance b/d | 32,000 |
March 31 | To Realisation A/c | 1,800 |
|
| |
32,000 | 32,000 |
Dr. Partner’s Capital Account Cr.
Date | Particulars | Sankara(₹) | Rama(₹) | Krishna(₹) | Date | Particulars | Sankara(₹) | Rama(₹) | Krishna(₹) |
---|---|---|---|---|---|---|---|---|---|
2022 | To Realisation A/c (Assets taken over) | – | 15,000 | 20,000 | 2022 | By Balance b/d | 1,20,000 | 80,000 | 50,000 |
Mar 31 | To Realiastion Loss A/c | 12,000 | 7,200 | 4,800 | Mar 31 | By General Reserve A/c | 10,000 | 6,000 | 4,000 |
Mar 31 | To Bank A/c (Final Payment) | 1,18,000 | 63,800 | 29,200 |
|
|
| ||
1,30,000 | 86,000 | 54,000 | 1,30,000 | 86,000 | 54,000 |
Dr. Bank Account Cr.
Date | Receipts | Amount (₹) | Date | Payments | Amount (₹) |
---|---|---|---|---|---|
2022 | To Balance b/d | 26,000 | 2022 | By Realisation A/c (Realisation Expense) | 1,600 |
March 31 | To Realisation A/c (Asset realised) | 2,46,800 | March 31 | By Realisation A/c (Creditors) | 30,000 |
|
| March 31 | By Sankara’s Loan A/c | 30,200 | |
| March 31 | By Sankara’s Capital A/c (Final Payment) | 1,18,000 | ||
| March 31 | By Rama’s Capital A/c (Final Payment) | 63,800 | ||
| March 31 | Krishna’s Capital A/c (Final Payment) | 29,200 | ||
2,72,800 | 2,72,800 |
Working Note:
1. Value of Asset Realised:
Joint Life Policy – 20,000
Stock – 84,000
Plant – 1,27,200
Debtors -[Tex] (50,000-24,000)\times\frac{60}{100}= 15,600[/Tex]
Total – 2,46,800
Case 2: If Joint Life Policy reserves also appear in the balance sheet:
Under this case, the Joint Life Policy reserves are transferred to the credit side of the Realisation Account.
Illustration:
Lal and Bahadur were partners sharing profit in the ratio of 3:2. On 31st March 2020 they decided to end the partnership and proceed towards dissolution. On the same date, their Balance Sheet stood as:
Balance Sheet
as on 31st March 2020
Liabilities | Amount (₹) | Assets | Amount (₹) |
---|---|---|---|
Workmen Compensation Reserve | 10,000 | Land | 1,00,000 |
Creditors | 15,000 | Investment | 10,000 |
Lal’s Loan A/c | 30,000 | Stock | 33,000 |
Joint Life Policy Reserve | 8,000 | Bank Balance | 20,000 |
Capital Accounts: Lal 60,000 Bahadur 40,000 |
1,00,000 | ||
1,63,000 |
| 1,63,000 |
Additional Information:
- The land is sold at 20% profit.
- Investment is realised at book value.
- Stock is realised at ₹ 30,000.
- All the liabilities including the partner loan are paid off.
- Dissolution Expenses amounted to ₹ 800.
Pass necessary Journal Entries and prepare necessary accounts to close the books of the firm.
Solution:
Journal Entries
Date | Particulars | L.F. | Amount (₹) | Amount (₹) |
---|---|---|---|---|
2020
|
Realisation A/c Dr. To Land A/c To Stock A/c To Investment A/c (Being all the assets except cash transferred to Realisation A/c at Book Value) |
| 1,43,000
| 1,00,000 10,000 33,000 |
March 31
|
Creditor’s A/c Dr. Joint Life Policy Reserve A/c Dr. To Realisation A/c (Being Liabilities and Reserves transferred to Realisation account at Book Value) | 15,000 8,000
|
23,000 | |
March 31
|
Workmen Compensation Reserve A/c Dr. To Lal’s Capital A/c To Bahadur’s Capital A/c (Being Workmen Compensation Reserve distributed among the partners in their p/s ratio) | 10,000
| 6,000 4,000 | |
March 31
|
Bank A/c Dr. To Realisation A/c (Being Assets realised) | 1,60,000
| 1,60,000 | |
March 31
|
Realisation A/c Dr. To Bank A/c (Being Liability paid off) | 15,000
| 15,000 | |
March 31
|
Realisation A/c Dr. To Bank A/c (Being dissolution expense paid off) | 800
| 800 | |
March 31
|
Lal’s Loan A/c Dr. To Bank A/c (Lal’s Loan paid off ) | 30,000
| 30,000 | |
March 31
|
Lal’s Capital A/c Dr. Bahadur’s Capital A/c Dr. To Realisation A/c (Being Realisation Loss transferred to capital account) | 14,520 9,680
|
24,200 | |
March 31 |
Lal’s Capital A/c Dr. Bahadur’s Capital A/c Dr. To Bank A/c (Being final payment made to the partners) | 80,520 53,680
|
1,34,200 |
Dr. Realisation Account Cr.
Date | Particulars | Amount(₹) | Date | Particulars | Amount(₹) |
---|---|---|---|---|---|
2020 March 31 | To Land A/c | 1,00,000 |
2020 March 31 | By Creditors A/c | 15,000 |
March 31 | To Stock A/c | 33,000 | March 31 | By Joint Life Policy Reserve A/c | 8,000 |
March 31 | To Investment A/c | 10,000 | March 31 | By Bank A/c (Asset Realised) | 1,60,000 |
March 31 | To Bank A/c (creditors) | 15,000 |
| ||
March 31 | To Bank A/c (Dissolution expenses) | 800 |
| ||
To Realisation Profit A/c: |
|
| |||
Lal’s Capital 14,520 |
|
| |||
Bahadur’s Capital 9,680 | 24,200 |
| |||
1,83,000 | 1,83,000 |
Dr. Lal’s Loan Account Cr.
Date | Particulars | Amount(₹) | Date | Particulars | Amount(₹) |
---|---|---|---|---|---|
2020 | To Bank A/c | 30,000 | 2020 | By Balance b/d | 30,000 |
| 30,000 |
| 30,000 |
Dr. Partner’s Capital Account Cr.
Date | Particulars | Lal(₹) | Bahadur(₹) | Date | Particulars | Lal(₹) | Bahadur(₹) |
---|---|---|---|---|---|---|---|
2020 | To Bank A/c (Final Payment) | 80,520 | 53,680 | 2020 | By Balance b/d | 60,000 | 40,000 |
|
|
| March 31 | By Workmen Compensation Reserve A/c | 6,000 | 4,000 | |
|
| March 31 | By Realisation Profit A/c | 14,520 | 9,680 | ||
80,520 | 53,680 | 80,520 | 53,680 |
Dr. Bank Account Cr.
Date | Receipts | Amount(₹) | Date | Payments | Amoun(₹) |
---|---|---|---|---|---|
2020 | To Balance b/d | 20,000 | 2020 | By Realisation A/c (Realisation Expense) | 800 |
March 31 | To Realisation A/c (Asset realised) | 1,60,000 | March 31 | By Realisation A/c (Creditors) | 15,000 |
|
| March 31 | By Lal’s Loan A/c | 30,000 | |
| March 31 | By Lal’s Capital A/c (Final Payment) | 80,520 | ||
| March 31 | By Bahadur’s Capital A/c (Final Payment) | 53,680 | ||
1,80,000 |
|
| 1,80,000 |
Case 3: Amount received from the Insurance Company on surrender of the policy:
Under this situation, whatever amount is received from the Insurance Company on the surrender of the policy, is credited to the Realisation Account.
Illustration:
The Balance Sheet of Rahul, Ravi and Raman on 31st March, 2018 stood as:
Liabilities | Amount (₹) | Assets | Amount (₹) |
---|---|---|---|
Creditors | 30,000 | Bank | 12,000 |
Bill Payable | 6,000 | Debtors | 18,000 |
Short-term Loan | 7,200 | Stock | 12,000 |
Ravi’s Loan | 4,800 | Furniture | 9,000 |
Workmen Compensation Reserve | 12,000 | Land and Building | 1,47,000 |
Capital Accounts: Rahul 60,000 Raman 90,000 |
1,50,000 | Ravi’s Capital | 12,000 |
| |||
| |||
2,10,000 | 2,10,000 |
Additional Information:
- Debtors realised at ₹ 16,800 and Creditors and Bill Payable were paid at a discount of 10%. Short-term Loan paid.
- Stock was taken over by Raman for ₹ 9,000 and furniture was sold for ₹ 7,200.
- Land and Building was sold for ₹ 1,68,000.
- Unrecorded asset of worth ₹ 12,000 was realised at ₹ 8,400.
- The firm had a Joint Life Policy of ₹ 3,00,000 with a surrender value of ₹ 51,600. The policy was surrender at the same value.
Pass necessary Journal Entries and prepare necessary accounts to close the books of the firm.
Solution:
Journal Entries
Date | Particulars | L.F. | Amount (₹) | Amount (₹) |
---|---|---|---|---|
2018
|
Realisation A/c Dr. To Land and Building A/c To Debtors A/c To Stock A/c To Furniture A/c (Being all the assets except Bank transferred to Realisation A/c at Book Value) | 1,86,000
| 1,47,000 18,000 12,000 9,000 | |
March 31
|
Creditors A/c Dr. Bill Payable A/c Dr. Short-term Loan A/c Dr. To Realisation A/c (Being Liabilities transferred to Realisation account at Book Value) | 30,000 6,000 7,200
|
43,200 | |
March 31 |
Workmen Compensation Reserve A/c Dr. To Rahul’s Capital A/c To Ravi’s Capital A/c To Raman’s Capital A/c (Being Workmen Compensation Reserve distributed among the partners in their p/s ratio) | 12,000
| 4,000 4,000 4,000 | |
March 31 |
Bank A/c (WN1) Dr. To Realisation A/c (Being Assets realised) | 2,52,000
| 2,52,000 | |
March 31 |
Raman’s Capital A/c Dr. To Realisation A/c (Being stock taken over by Raman) | 9,000
| 9,000 | |
March 31 |
Realisation A/c (WN2) Dr. To Bank A/c (Being Liability paid off) | 39,600
| 39,600 | |
March 31 |
Ravi’s loan A/c Dr. To Bank A/c (Being Ravi’s Loan paid off) | 4,800
| 4,800 | |
March 31 |
Realisation A/c Dr. To Rahul’s Capital A/c To Ravi’s Capital A/c To Raman’s Capital A/c (Being Realisation Profit transferred to capital account) | 78,600
| 26,200 26,200 26,200 | |
March 31 |
Rahul’s Capital A/c Dr. Ravi’s Capital A/c Dr. Raman’s Capital A/c Dr. To Bank A/c (Being final payment made to the partners) | 90,200 18,200 1,11,200
|
2,19,600 |
Dr. Realisation Account Cr.
Date | Particulars | Amount(₹) | Date | Particulars | Amount(₹) |
---|---|---|---|---|---|
2018 | To Debtors A/c | 18,000 | 2018 | By Creditors A/c | 30,000 |
March 31 | To Stock A/c | 12,000 | March 31 | By Bills Payable A/c | 6,000 |
March 31 | To Furniture A/c | 9,000 | March 31 | By Short-term Loan A/c | 7,200 |
March 31 | To Land and Building A/c | 1,47,000 | March 31 | By Bank A/c (Assets Realised) (WN1) | 2,52,000 |
March 31 | To Bank A/c (Creditors) | 27,000 | March 31 | By Raman’s Capital A/c (Stock) | 9,000 |
March 31 | To Bank A/c (Bills Payable) | 5,400 |
|
| |
March 31 | To Bank A/c (Short-term Loan) | 7,200 |
| ||
March 31
|
To Profit: Rahul’s Capital A/c 26,200 Ravi’s Capital A/c 26,200 Raman’s Capital A/c 26,200 |
78,600 |
| ||
| |||||
| |||||
| |||||
3,04,200 | 3,04,200 |
Dr. Ravi’s Loan Account Cr.
Date | Particulars | Amount(₹) | Date | Particulars | Amount(₹) |
---|---|---|---|---|---|
2018 | To Bank A/c | 4,800 | 2018 | By Balance b/d | 4,800 |
4,800 |
| 4,800 |
Dr. Partner’s Capital Account Cr.
Date | Particulars | Rahul(₹) | Ravi(₹) | Raman(₹) | Date | Particulars | Rahul(₹) | Ravi(₹) | Raman(₹) |
---|---|---|---|---|---|---|---|---|---|
2018 | To Balance b/d | – | 12,000 | – | 2018 | By Balance b/d | 60,000 | – | 90,000 |
Mar 31 | To Realisation A/c | – | – | 9,000 | Mar 31 | By Work. Compensation Reserve A/c | 4,000 | 4,000 | 4,000 |
Mar 31 | To Bank A/c (Final Payment) | 90,200 | 18,200 | 1,11,200 | Mar 31 | By Realisation Profit A/c | 26,200 | 26,200 | 26,200 |
90,200 | 30,200 | 1,20,200 |
| 90,200 | 30,200 | 1,20,200 |
Dr. Bank Account Cr.
Date | Receipts | Amount (₹) | Date | Payments | Amount (₹) |
---|---|---|---|---|---|
2018 | To Balance b/d | 12,000 | 2018 | By Realisation A/c (Creditors) | 27,000 |
March 31 | To Realisation A/c (Asset realised) | 2,52,000 | March 31 | By Realisation A/c (Bills Payable) | 5,400 |
| March 31 | By Realisation A/c (Short-term Loan) | 7,200 | ||
| March 31 | By Ravi’s Loan A/c | 4,800 | ||
| March 31 | By Rahul’s Capital A/c | 90,200 | ||
| March 31 | By Ravi’s Capital A/c | 18,200 | ||
| March 31 | By Raman’s Capital A/c | 1,11,200 | ||
2,64,000 | 2,64,000 |
Working Note:
1. Value of Asset Realised:
Joint Life Policy – 51,600
Land and Building – 1,68,000
Debtors – 16,800
Furniture – 7,200
Unrecorded Asset – 8,400
Total – 2,52,200
2. Value of Liablities Paid off:
Creditors – [Tex]30,000-(30,000\times\frac{10}{100})~=~₹27,000[/Tex]
Bills payable – [Tex]6,000-(6,000\times\frac{10}{100})~=~₹5,400[/Tex]
Short-term Loan – 7,200
Total – 39,600