Loan taken by a partner on the security of joint life policy

A/c entries 756 views 2 replies

Shamil

28 Points Joined April 2016

Read, write and Add are partners. P&L Sharing Ratio: 4:2:3

In their Balance sheet, there is Joint Life Policy in Asset Side and
Joint Life Policy Reserve in the Liability Side.

In additional info:

a. Add had taken a loan from insurers for Rs5,000 on the security of Joint Life Policy.

The policy was surrendered and insurers paid a sum of Rs10,200 after deducting Rs5,000 for. Add's loan and Rs300 as interest thereon.

What is the accounting treatment in respect of the above details.
[From CA IPCC Adv Accounts Practise Manual Page no.3.7 Question no.3]

Replies (2)

What we usually do, in case of surrender of JLP, we distribute the amount of jlp reserve (e.g.rs12400) in the partners' profit sharing ratio (psr), as benefit of rs2600(15000-12400) had already been given to partners.
In this case, as the amount of rs500 (10200+5000+300-15000) is received more than what was appearing in the balance sheet (i.e.15000). Now the total benefit of rs12900 (i.e. 12400+500) will be distributable among the partners in their psr. Rs5300 will be treated as the partner's Add drawings and will be debited to his capital account.

Usually, the entries in this case will be:
1)Bank a/c dr. 10200
Add's Drawings a/c dr. 5300
To jlp a/c 15500

2) jlp reserve a/c dr. 12400
Jlp a/c dr. 500
To partners'capital a/c (in their psr) 12900

3) Add's capital dr. 5300
To Add's drawings a/c 5300

However, in response to your question (IPC G2 PM), the amount of rs 12900 will be first credited to realisation account and thereafter the profit of realisation will be distributed among partners in their old psr.