Asok Nadhani-Accountancy-Partnership Accounts-Death of Partner

Death of Partner

By Asok Nadhani

24.1 Consequences of Death of Partner

i)    Business of a partnership firm may not come to an end due to death of a partner if other partners agree to continue to run the business of the firm like retirement on death of a partner.

ii)   On death of a partner, Assets and Liabilities have to be revalued and the resultant Profit or Loss has to be transferred to the Capital Accounts of all partners including the deceased partner in the old profit sharing ratio.

iii)  Similarly Goodwill is also dealt in same manner like retirement.

iv)  In case of death of a partner, the firm would get the joint policy value (if any).

v)   In the absence of agreement, the representatives of the deceased partner can receive, at their option, interest at the rate of 6% per annum or the share of profits earned for the amount due to the deceased partner.

24.2 Provisions regarding Death of a Partner

a)   A partnership firm does not dissolve on the death of a partner.

b)  The legal representative of the deceased partner is entitled from the firm amounts due on account of the following:-

i.      Capital standing on the credit on the date of death of the deceased partner.

ii.     Share of Goodwill.

iii.    Share out of the proceeds of the Joint Life Insurance Policy.

Note: If the firm has undertaken the insurance policy severally on the life of each partner, the executor of deceased partner is entitled to get not only a share out of the proceeds of the policy but also a share out of the surrender values of the policies on the lives of other partners. However the later part is applicable only when the entire premium paid is charged to Profit & Loss A/c and the policy are not appearing in the Books.

iv.    Share of reserves and other undistributed profit.

v.     Share in profit of the firm from beginning till the death date of his death.

vi.    Interest on Capital from beginning till his death date.

vii.   The Capital Account of deceased partner will be charged with his share of the following amounts:-

a)     Drawings and interest thereon from beginning of the Accounting Year till his death date.

b)    Loss on Revaluation of Assets and Liabilities.

c)     Loss in business from the beginning of the Accounting Year till the date of his death.

24.3 Special transaction’s in case of death of a partner

After the death of a partner, the following accounting entries are passed-

i)    Joint Life Policy.

ii)   Payment of Deceased Partner’s Share.

24.3.1 Joint Life Policy:

a)     Joint Life Policy is an insurance policy undertaken on the lives of all the partners. The firm pays the premium and the amount of policy is payable to the firm on the death of a Partner or on the maturity of the policy (whichever is earlier).

b)    If Joint Life Policy appears in the Balance Sheet at surrender value, then the firm will gain on the death of a partner.

c)     Surrender Value: It is the amount which an insurance company is prepared to return to the policy holder if the policy is surrendered.

d)    The accounting treatment for the premium paid and the Joint Life Policy may be on any of the following ways:

-      Without taking surrender value into account.

-      Taking surrender value into account.

24.3.1.1 Without Taking Surrender Value into Account

Under this method, premiums paid are charged to Profit and Loss A/c. No Joint Life policy is opened in the books and nothing is shown in the Balance Sheet.

Accounting Entry:

Insurance Premium A/c	Dr.	(On payment of premium)
To Bank
Profit and Loss A/c	Dr.	(Amount of premium transferred to P/L A/c.)
To Insurance Premium A/c
Insurance Company/ Bank A/c	Dr.	(On amount received and distributed in their old psr )
To All Partners’ Capital A/c

24.3.1.2 Taking Surrender value into Account

There are two methods

(a) Joint Life Policy Method

(b) Joint Life Policy Reserve method.

24.3.1.2.1 Joint Life Policy Method: Under this method, A Joint Life Policy Account is opened in the books. The premium is debited to Joint Life Policy Account as and when paid. At the end of each year, the book value of the policy is adjusted to its surrender value by transferring the difference between the premium paid and the increase in the surrender value to Profit and Loss Account. The policy will appear in the Balance Sheet at its Surrender Value on the assets side.  

Accounting Entry:

Joint Life Policy A/c	Dr.	(On payment of premium)
To Bank
Profit and Loss A/c	Dr.	(Adjustment of book value of policy with its surrender value transferred to P/L A/c.)
To Joint Life Policy A/c
Insurance Company/ Bank A/c	Dr.	(On amount received)
To All Partners’ Capital A/c

24.3.1.2.2 Joint Life Policy Reserve Method: Under this method a joint Life Policy Account is opened in the books, to which the premium are debited as and when paid. At the end of the year, an amount equal to annual premium is debited to Profit and Loss Appropriation Account and credited to Joint Life Policy Reserve Account. The book value of the policy is adjusted to its surrender value by a transfer from Joint Life Policy Reserve Account. After adjustment, the Joint Life Policy will appear on the assets side of the Balance Sheet at surrender value and Joint Life Policy Reserve will appear in the Balance Sheet, on the liabilities side. 

Accounting Entry:

Joint Life Policy A/c.	Dr.	(On Payment of premium)
To Bank A/c.
Profit and Loss A/c.	Dr.	(Reserved created with the amount of premium)
To Joint Life Policy Reserve A/c.
Joint Policy Reserve	Dr.	(Excess of premium paid and over surrender value or difference between the premiums paid and surrenders value).
To Joint Life Policy A/c
Insurance Company/ Bank A/c	Dr.	(On maturity of the policy)
To All Partners’ Capital A/c

So, JLP account and JLP Reserve account will stand in the books at surrender value. On termination of policy, JLP Reserve account will be transferred to JLP account or it may be credited to partners’ capital accounts in profits sharing ratio.

Example:

P, Q and R are in partnership sharing profits and losses at the ratio of 3:2:1. They took a Joint Life Policy of Rs.60,000 which is appearing in the Balance Sheet at Rs.6,000 the surrender value. Now, if P dies, the firm will receive Rs.60,000 from the insurance company. The Journal entries will appear as follows:

Date	Particulars		Amounts (Rs.)	Amounts (Rs.)
	Bank A/c	Dr.	60,000
	To joint Life Policy A/c			60,000
	(Policy value received from the insurance company on P’s death.)
	Joint Life Policy A/c	Dr.	54,000
	To P’s Capital A/c [Rs.54,000 x 3/6]			27,000
	To Q’s Capital A/c [Rs.54,000 x 2/6]			18,000
	To R’s Capital A/c [Rs.54,000 x1/6]			9,000
	(Excess of Policy value of Rs.60,000 over surrender value of Rs.6,000 transferred to Partner’s Capital A/cs in profit sharing ratio.)
However, it Joint Life Policy does not appear in the Balance Sheet, then entry (b) is to be passed for Rs.60,000 and it would appear as follows:
	Joint Life Policy A/c	Dr.	60,000
	To P’s Capital A/c [Rs.60,000 x 3/6]			30,000
	To Q’s Capital A/c[Rs.60,000 x 2/6]			20,000
	To R’s Capital A/c [Rs.60,000 x 1/6]			10,000

24.3.2 Payment of Deceased Partner’s Share

On death of a partner, payment of share of profit up to the date of death is made to the executor of the deceased partner.

Example:

X, Y and Z are in partnership in XYZ sharing Profits and Losses at the ratio 5:3:2. X died on 15^th May, 2009. The firm closes its books of account as on 31^st December every year. So the executor of X is entitled for 5 ½ months profit. If X’s share is immediately paid off then profit for 2005 can be taken as base for calculating 5 ½ th months profits in 2009. If XYZ earned Rs.1,20,000 in year 2008, then 5 ½ th months profit is (1,20,000 x 11/2)= Rs.55,000. X’s share comes to Rs.55,000 x (3/10)= Rs.27,500.

Journal entry:-

Date	Particulars		Amounts (Rs.)	Amounts (Rs.)
	Profit and Loss Suspense A/c	Dr.	27,500
	To X’s Capital A/c.			27,500
	(Share of X 5 ½ th months profit in 2008 transferred to his Capital Account on death.)

At the end of the year 2009, the Profit and Loss Suspense A/c will be transferred to Profit and Loss A/c.

   

Example

(Capital Accounts and Balance Sheet after Death of a Partner)

X, Y and Z are partners in a firm sharing profits and losses in the ratio of 4:3:2 respectively. The Balance Sheet of XYZ on 31^st December, 2009 was as follows:-

Liabilities	Amount (Rs.)	Assets	Amount (Rs.)
Creditors	3,000	Cash	2,000
Capitals:-		Debtors	10,000
X’s Capital	15,000	Stock	3,000
Y’s Capital	12,000	X’s Loan	5,000
Z’s Capital	10,000	Freehold Property	20,000
	40,000		40,000

X died on 1^st January, 2010. Firm had a Joint Life Insurance Policy of Rs.18,000. Its money was realized on 1^st February, 2010. Goodwill is to be valued at 2 year’s purchase of the average of last 3 year’s profit. The amount of capital and goodwill, etc., due to the deceased partner was paid on 1^st March, 2010. Deficiency of cash was made good by taking loan from the bank. The profits for the last 3 years, 2007, 2008 and 2009 were Rs.7,000, Rs.9,000 and Rs.11,000 respectively. Prepare Capital Accounts of the partners and Balance Sheet of Y and Z after making payment to the executors of X.

Solution:

The above problem can be solved in two ways.

A.     Only deceased partner’s share of goodwill may be raised in the books or

B.     Full value of goodwill can be raised in the books.

Working Note:

1.     Calculation of value of Goodwill:

3 years’ average profit	=	Rs.[7,000 + 9,000 + 11,000] /3
	=	Rs.9,000
So, Value of Goodwill	=	Rs.9,000 x 2	=	Rs.18,000

2.     Calculation of Bank loan to be raised-

Cash Account.

Dr.			Cr.
Particulars	Rs.	Particulars	Rs.
To Balance b/d	2,000	By X’s Executors A/c (amt. to be paid)	26,000
To Joint Life Policy A/c	18,000	(15,000 + 8,000 + 8,000 -5,000)
To Bank Loan A/c(Balancing figure)	6,000
	26,000		26,000

(A.) if only deceased partner’s share of goodwill may be raised in the books

Journal entries in the books of the firm

				Dr.	Cr.
Date	Particulars		L.F.	Amount (Rs.)	Amount (Rs.)
2010	Bank A/c	Dr.		18,000
Feb.1	To Joint Life Policy A/c				18,000
	(The JLP money realized on death of X.)
Feb.1	Joint Life Policy A/c	Dr.		18,000
	To X’s Capital A/c (Rs.18,000 x 4/9)				8,000
	To Y’s Capital A/c(Rs.18,000 x 3/9)				6,000
	To Z’s Capital A/c(Rs.18,000 x 2/9)				4,000
	(The Joint Life Policy A/c transferred to Partners Capital A/c in old profit sharing ratio.)
Feb.1	Goodwill A/c. [Rs.18,000 x 4/9th]	Dr.		8,000
	To X’s Capital A/c.				8,000
	(Only the share of Goodwill of X raised in the books and transferred to his Capital A/c.)
March.1	X’s Capital A/c	Dr.		5,000
	To X’s Loan A/c.				5,000
	(X’s Loan A/c transferred to his Capital A/c.)

Partners Capital Account

Dr.												Cr.
Date	Particulars	X	Y	Z	Date	Particulars	X		Y		Z
		Rs.	Rs.	Rs.			Rs.		Rs.		Rs.
1.3.10	To X’s Loan A/c	5,000	-	-	1.3.10	By Balance b/d	15,000		12,000		10,000
1.3.10	To X’s Executors A/c [Wn. 2]	26,000	-	-	1.2.10	By Joint Life Policy A/c	8,000		6,000		4,000
	To Balance c/d	-	18,000	14,000	1.2.10	By Goodwill A/c	8,000		-		-
		31,000	18,000	14,000			31,000		18,000		14,000

Balance Sheet

As on 1^st March, 2010

Liabilities	Amount	Amount	Assets	Amount	Amount
	Rs.	Rs.		Rs.	Rs.
Creditors.		3,000	Goodwill		8,000
Bank Loan [W.N.2]		6,000	Freehold Property		20,000
Partners’ Capital:-			Stock		3,000
Y -	18,000		Sundry Debtors		10,000
Z -	14,000
		32,000
		41,000			41,000

(B.) Full value of goodwill can be raised in the books.

Journal entries in the books of the firm

				Dr.	Cr.
Date	Particulars		L.F.	Amount (Rs.)	Amount (Rs.)
2010	Bank A/c	Dr.		18,000
Feb.1	To Joint Life Policy A/c.				18,000
	(The JLP money realized on death of X.)
Feb.1	Joint Life Policy A/c.	Dr.		18,000
	To X’s Capital A/c.				8,000
	To Y’s Capital A/c.				6,000
	To Z’s Capital A/c.				4,000
	(The Joint Life Policy A/c transferred to Partners Capital A/c in old profit sharing ratio.)
Feb.1	Goodwill A/c. [W.N. – 1]	Dr.		18,000
	To X’s Capital A/c (Rs.18,000 x 4/9)				8,000
	To Y’s Capital A/c(Rs.18,000 x 3/9)				6,000
	To Z’s Capital A/c(Rs.18,000 x 2/9)				4,000
	(The full value of Goodwill raised in the books and transferred to particulars Capital A/c on the death of X.)
	X’s Capital A/c	Dr.		5,000
	To X’s Loan A/c.				5,000
	(X’s Loan transferred to X’s Capital A/c.)

Partners Capital Account

Dr.												Cr.
Date	Particulars	X	Y	Z	Date	Particulars	X		Y		Z
		Rs.	Rs.	Rs.			Rs.		Rs.		Rs.
1.3.10	To X’s Loan A/c	5,000	-	-	1.3.10	By Balance b/d	15,000		12,000		10,000
1.3.10	To X’s Executors A/c [Wn. 2]	26,000	-	-	1.2.10	By Joint Life Policy A/c	8,000		6,000		4,000
	To Balance c/d	-	24,000	18,000	1.2.10	By Goodwill A/c	8,000		6,000		4,000
		31,000	24,000	18,000			31,000		24,000		18,000

Balance Sheet

As on 1^st March, 2010.

Liabilities	Amount	Amount	Assets	Amount	Amount
	Rs.	Rs.		Rs.	Rs.
Creditors.		3,000	Goodwill		18,000
Bank Loan [W.N. – 2]		6,000	Freehold Property		20,000
Partners’ Capital			Stock		3,000
X -	24,000		Sundry Debtors		10,000
Y -	18,000
		42,000
		51,000			51,000

Example

(Joint Life Insurance Policy Account in Cash of a Partner)

P and Q share profits in the ratio of 5:3. They took a Joint Life insurance policy of Rs.50,000 on Jan. 1, 2006 for 10 years and paid Premium @ Rs.5,000 per year. On March. 15, 2009 Q died but policy was received on April. 30, 2009. Following were the surrender values:

2006 – Nil

2007 – Rs.1,500

2008 – Rs.3,000

Show journal entries and Joint Life Insurance Policy Account and Joint Life Insurance Policy Reserve Account.

Solution:

In the books of the firm

Journal Entries

Date	Particulars		Amounts (Rs.)	Amounts (Rs.)
2006	Joint Life Policy A/c	Dr.	5,000
Jan.1	To Bank A/c			5,000
	(Insurance premium paid.)
Dec.31	Profit & Loss A/c	Dr.	5,000
	To Joint Life Policy Reserve A/c			5,000
	(Reserve created against premium.)
Dec.31	Joint Life Policy Reserve A/c	Dr.	5,000
	To Joint Life Policy A/c			5,000
	(The adjustment made.)
2007	Joint Life Policy A/c	Dr.	5,000
Jan.1	To Bank A/c			5,000
	(Insurance premium paid.)
Dec.31	Profit & Loss A/c	Dr.	5,000
	To Joint Life Policy Reserve A/c			5,000
	(Reserve created against premium.)
Dec.31	Joint Life Policy Reserve A/c	Dr.	3,500
	To Joint Life Policy A/c Rs.(5,000 -1,500)			3,500
	(The adjustment of excess of joint life policy over surrender value.)
2008	Joint Life Policy A/c	Dr.	5,000
Jan.1	To Bank A/c			5,000
	(Insurance premium paid.)
Dec.31	Profit & Loss A/c	Dr.	5,000
	To Joint Life Policy Reserve A/c			5,000
	(Reserve created against premium.)
Dec.31	Joint Life Policy Reserve A/c	Dr.	3,500
	To Joint Life Policy A/c Rs.(5,000 +1,500 – 3,000)			3,500
	(The adjustment of excess of joint life policy over surrender value.)
2009	Joint Life Policy A/c	Dr.	5,000
Jan.1	To Bank A/c			5,000
	(Insurance premium paid.)
Apr.30	Bank A/c	Dr.	50,000
	To Joint Life Policy A/c			50,000
	(Joint Life Policy amount received on death of Q)
Apr.30	Joint Life Policy Reserve A/c	Dr.	3,000
	To Joint Life Policy A/c [Note 2]			3,000
	(Balance of Joint Life Policy Reserve transferred to Joint Life Policy A/c.)
Apr.30	Joint Life Policy A/c [Note 1]	Dr.	45,000
	To P’s Capital A/c (Rs.45,000 x 5/8)			28,125
	To Q’s Capital A/c (Rs.45,000 x 3/8)			16,875
	(Closing Balance of Joint Life Policy A/c is transferred to Partners’ Capital A/c in their old psr.)

Joint Life Insurance Policy Account

Dr.					Cr.
Date	Particulars	Amount (Rs.)	Date	Particulars	Amount (Rs.)
2006			2006
Jan. 1	To Bank A/c	5,000	Dec. 31	By JLIP Reserve A/c	5,000
		5,000			5,000
2007			2007
Jan. 1	To Bank A/c	5,000	Dec. 31	By JLIP Reserve A/c(5,000-1,500)	3,500
			Dec. 31	By Balance c/d	1,500
		5,000			5,000
2008			2008
Jan. 1	To Balance b/d	1,500	Dec. 31	By JLIP Reserve A/c(6,500-3,000)	3,500
Jan. 1	To Bank A/c	5,000	Dec. 31	By Balance c/d	3,000
		6,500			6,500
2009			2009
Jan. 1	To Balance b/d	3,000	Apr. 30	By Bank A/c (policy amt. received)	50,000
Jan. 1	To Bank A/c	5,000	Apr. 30	By JLIP Reserve A/c (transferred amount)	3,000
Apr. 30	To P’s Capital A/c.[Note 1]	28,125
Apr. 30	To Q’s Capital A/c.	16,875
		53,000			53,000

Note 1:

		Rs.
Insurance policy received		50,000
transferred  from JLIP Reserve		3,000
		53,000
Less: Opening bal. of JLI Policy	3,000
Premium paid for 2009	5,000
		8,000
It will be shared in the ratio of 5:3		45,000
P = (45,000 x 5/8) =		28,125
Q = (45,000 x 3/8) =		16,875

Joint Life Insurance Policy Reserve Account

Dr.					Cr.
Date	Particulars	Amount (Rs.)	Date	Particulars	Amount (Rs.)
2006			2006
Dec. 31	To Joint Life Insurance Policy A/c	5,000	Dec. 31	By Profit & Loss A/c	5,000
		5,000			5,000
2007			2007
Dec. 31	To Joint Life Insurance Policy A/c	3,500	Dec. 31	By Profit & Loss A/c	5,000
Dec. 31	To Balance c/d	1,500
		5,000			5,000
2008			2008
Dec. 31	To Joint Life Insurance Policy A/c	3,500	Dec. 31	By Balance b/d	1,500
Dec. 31	To Balance c/d	3,000	Dec. 31	By Profit & Loss A/c	5,000
		6,500			6,500
2009			2009
Apr. 30	To Joint Life Insurance Policy A/c	3,000	Jan. 1	By Balance b/d	3,000
	(Transfer of Closing Balance.) [Note 2]
		3,000			3,000

Note 2: At the time of realization of Joint Life Policy on the death of Q, the JLIP Reserve A/c has been closed by transferring its closing balance to JLI Policy A/c for the purpose of distribution to the partners in their old profit sharing ratio.