Multiple choice

P, Q and R are partners sharing profits and losses in the ratio of 3 : 2 : 1. R retires. Future profit sharing ratio is 2 : 1. There was a joint life policy of Rs. 6,00,000 with a surrender value of Rs. 80,000. What will be the treatment in the partners' capital a/c's, if JLP is maintained at surrender value along with reserve?

  1. Rs. 6,00,000 to be distributed to all the partners in old ratio

  2. Rs. 5,20,000 to be distributed to all the partners in old ratio

  3. Rs. 80,000 to be distributed to all the partners in old ratio

  4. Distribute JLP reserve account in old profit sharing ratio
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

When a partner retires, the JLP reserve represents accumulated profits. It should be distributed among all partners in their old profit-sharing ratio to adjust the capital accounts.

AI explanation

When a joint life policy is maintained at its surrender value, the surrender value and any related reserve are already recorded in the books. The correct accounting treatment for the retiring partner is to write off the policy by distributing the existing Joint Life Policy Reserve account among all partners in their old profit sharing ratio. Therefore, the reserve is distributed in the ratio of 3 : 2 : 1.

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