DEATH OF PARTNER
A partnership
will come to end immediately whenever a partner dies, although the firm may
continue with the remaining partners by taking the share of the deceased
partner. The matters which require consideration in case of death of a partner
and their accounting treatment are the same as in case of retirement of a
partner. This decrease partners' share in the firm is calculated in the same
made effective from the beginning or closing dates of an accounting year but
death of a partner may occur anytime without notice during the year. This is
fundamental difference between two situations. Similarly, the payment of
retiring partner's share will be received by himself/herself but the payment of
deceased partner's share will be received by his/her legal successor.
Adjustment at the Time of Death of partner
The following
adjustments are made after the death of a partner:
a.
Calculation of new profit sharing ratio and
gaining ratio of remaining partners.
b.
Adjustment of goodwill and its treatment.
c.
Revaluation of assets and liabilities.
d.
Adjustment of undistributed profit or losses.
e.
Ascertainment of profit or loss up to the date
of death of the partner.
f.
Accounting treatment of joint life policy after
the death of a partner.
g.
Adjustment of capital after the death.
h.
Mode of payment of decreased partner's capital
to his/her successor.
i.
New balance sheet of the firm after the death of
a partner.
Adjustments
(1) to (4) are the same as on the retirement of a partner which have already
discussed in the previous chapter.
Ascertainment of profit or loss at the timeof death of a partner
A retirement
is usually arranged to be take place at the beginning or end of an accounting
year, while death may and possible will take place on any date. If a partner
dies in the middle of the accounting period, then the profit or loss from last
balance sheet to the date of death is calculated and share of deceased partner
is transferred to his/her capital account. Share of accounting profit or loss
up the death of a partner is calculated as under:
a.
On the basis of last year's profit or loss
b.
On the basis of average profit or loss
On the basis of last year's profit or loss:
under this method, he profit or loss the last year is given in the
question. The profit or loss the period in between the date of preparing last
final account to the of death is determined and the share of decreased partner
is calculated on the basis of last year's profit or loss.
On the basis of average profit or loss: sometimes,
partners may agree to calculate decreased partner's share of profit or loss on
the basis of average profit or loss. For this, first of all, total profits of
the required numbers of past year are taken and then after, average profit is
calculated. After that, profit for the period up to date of death is determined
and the share decreased partners is found out.
After
determining share of profit or loss of deceased partner by using above
mentioned two bases, it should be recorded:
By opening profit and loss suspense account
By not opening profit and loss suspense
account
a. By opening profit and loss suspenseaccount: if deceased partner's share of profit or loss is given by opening
profit and loss suspense account, then following entries will be made:
Profit and
loss suspense account is also shown in the new balance sheet.
By not opening profit and loss suspense
account: under this method, a separate profit and loss appropriation
account is not open. Deceased partner's share of profit or loss is adjusted in
remaining partner's capital accounts. In this situation, the following entries
are made:
Accounting for Joint Life Policy and
Accounting for Insurance Premium
Sometimes, the
decrease partner's executor has to be paid in cash immediately. In such a case,
the firm may have to face a financial problem. To meet such a situation, a
joint Life insurance policy on the joint lives of all partners is taken up by
the firm. The firm pays of periodical premium and in turn the insurance Company
agree pay the amount of the policy on the death of any of the partners or the
date on which of the policy expenses. Which ever is earlier.
a.
Without taking surrender value into account
b.
With taking surrender value into account
Without taking surrender value into
account: under this method, the premium is treated like other expenses and
is debited to profit and loss account but no mention is made in the balance
sheet. On its maturity or the death of a partner, the surrender value is
received from the insurance company and this amount is distributed among all
the partners including, decreased partner in their profit sharing ratio. The
following entries are passed for this purpose:
With
taking surrender value into account: under this, two methods are used to
record joint life policy:
a.
Joint life policy method
b.
Joint life reserve method
Joint life policy method: under this
method, the premium paid is treated as an investment in joint life policy,
first it is debited to joint life policy account. But this joint life policy
appears in the balance sheet as an asset at its surrender value. Surrender
value is the amount payable by the insurance company on the surrender of policy
by the firm before the date of maturity. In other words, at the end of
accounting period, joint life policy account and surrounded value is compared
and the difference amount is transferred to profit and loss account. But joint
life policy equal to surrender value is shown on the assets side of the balance
sheet. On the death of a partner, when amount is received, them it is credited
to joint life policy account. In this situation, any balance on joint life
policy account should be transferred to all partners' capital account including
deceased partner in their old profit sharing ratio. The following entries are
made in this situation.
Joint life policy reserve method: under
this method, and at the same time, joint life policy reserve created out of the
profit is also maintained. Joint life policy appears on the assets side and
joint life policy reserve appears on the liabilities side of the balance sheet
at the surrender value. In other words. First of all premiums for the
liabilities side of the balance sheet at the surrender account. Then after,
appropriation for reserve is paid by debiting profit and loss appropriation
account and crediting joint life policy reserve account. After this, balance in
excess of surrender value is treasured by debiting joint life policy reserve
account and by crediting joint life policy account. On death of a partner,
amount of claim is received from insurance company. In this situation, the
balance of joint life policy reserve of joint life plicy account is transferred
to all partners' capital account including deceased partner in their old profit
sharing ratio. The various journal entries required to be passed under this
method are give below:
Adjustment of capital after death
On death of a
partner, all adjustments should be made all partners' capital accounts. Such
adjustments can be done by the following entries:
Mode of payment of decreased partners'
capital to his/her successor
On the death
of a partner, his/her accounts in the books of the firm are maintained in the
same way as on the retirement of a partner. But the only different is that the
amount due to a decrease partner shown by his/her capital account is
transferred to his/her executor's account.
New balance sheet after the death of a
partner
After the
death of a partner, new balance sheet is prepared in the same way as after the
retirement of a partner.
Review of Theoretical Concept
Write the method of valuation of interim profit or loss on death of a
partner?
A retirement is usually arranged
to be take place at the beginning or end of an accounting year, while death may
and very possible will take place on any date. If a partner dies in the middle
of the accounting period, them the profit or loss from last balance sheet to
the date of death is calculated and share of deceased partner is transferred to
his/her capital account. Share of accounting profit or loss up to the death of
a partner is calculated as under:
On the basis of last year's profit or loss: under this method, the
profit or loss for the last year is given in the question. The profit or loss
of the period in between the date of preparing last final accounts to the date
of death is determined and the share of decrease partner is calculated on the
basis of last year's profit or loss.
On the basis of average profit or loss: sometimes, partners may
agree to calculate decreased partner's share of profit or loss on the basis of
average profit or loss. For this, first of all, total profits of the required
numbers of past year are taken and then after, average profit is calculated.
After that, profit for the period up to date of death is determined and the share
decreased partner is found out.
Define joint life policy. Define method of accounting joint life
policy.
Sometimes, the deceased partner's
executor has to be paid in cash immediately. In such a case, the firm may have
to face a financial problem. To meet such a situation, a joint life insurance
policy on the joint lives of all this partners is taken up by firm. The firm
pays of periodical premium and in turn the insurances company agree to pay the
amount of the date on which the period of the policy expenses. Whichever is
earlier.
a. Without
taking surrender value into account
b. With
taking surrender value into account
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