Chapter-12 Other-long-term-investments-intermediate-acounting PDF

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Chapter 12 Other Long-term InvestmentsChapter 12PROBLEMSPROBLEM 1: TRUE OR FALSETRUE 1. The income earned by a sinking fund forms part of the sinking fund balance.TRUE 2. A long-term fund is always established in relation to the origination of a long-term liability.FALSE 3. Appropriation of retained...

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Chapter 12 Other Long-term Investments

Chapter 12 PROBLEMS PROBLEM 1: TRUE OR FALSE TRUE

1. The income earned by a sinking fund forms part of the sinking fund balance.

TRUE 2. A long-term fund is always established in relation to the origination of a long-term liability. FALSE 3. Appropriation of retained earnings is made only in conjunction to a legal requirement. FALSE 4. The increase in cash surrender value is accounted for as income. TRUE 5. Cash dividends received on a life insurance, on which the accounting for cash surrender applies, are accounted for as reduction in the investment account rather than income.

PROBLEM 2: FOR CLASSROOM DISCUSSION Other long-term investments 1. Which of the following is not considered an "other long-term investment?" a. Sinking fund b. Preference share redemption fund c. Contingency fund d. Tax fund Accounting for Cash surrender value 2. On January 1, 20x1, ABC Co. insured the life of one of its key management personnel for P5,000,000. ABC Co. is the beneficiary. The insurance policy requires annual payments of P50,000 at the start of each year. Information on cash surrender value is shown below

Policy year Dec. 31, 20x1

Cash surrender value -

Dec 31, 20x2

-

Dec. 31, 20x3

90,000

Dec 31, 20x4

110,000

Dec 31, 20x5

130,000

Additional information:

● .ABC Co. received P3,000 cash dividend from the life insurance on September 1, 20x4. ● The key employee died on July 1, 20x5. Requirements: Provide the journal entries on the following dates (Use the asset method of recording disbursements.) a. January 1, 20x1 and December 31, 20x1 (adjusting entry) b. December 31, 20x3 (cash surrender value) c. September 1, 20x4 (dividends) d. December 31, 20x4 (cash surrender value) e. January 1, 20x5 (payment of insurance premium) f. July 1, 20x5 (assume the policy is also collected on this date)

a. Jan. 1 20x1 Life insurance expense Cash Dec. 31, 20x1 Life insurance expense Cash

b. Dec. 31, 20x3 Cash surrender value Life insurance expense (90,000 x 1/3) Retained earnings (90,000 x 2/3) c. Sept. 1, 20x4 Cash

50,000 50,000

90,000 30,000 60,000

3,000 Life insurance expense

d. Dec. 31, 20x4

50,000 50,000

3,000

Cash surrender value (110,000 – 90,000) Life insurance expense

20,000 20,000

e. Jan. 1 20x1 Life insurance expense Cash

50,000 50,000

f. Cash surrender value - December 31, 20x5 Cash surrender value - December 31, 20x4 Total increase in cash surrender value in 20x5 Multiply by: Increase in cash surrender value up to April 1, 20x5 Add back: Cash surrender value - December 31, 20x4 Adjusted cash surrender value - April 1, 20x5

130,000 (110,000) 20,000 3/12 5,000 110,000 115,000

The unexpired portion of the annual premium as of the date of death is computed as follows: Annual premium paid for 20x5 50,000 Unexpired period (April 1 to December 31, 20x5) 9/12 Unexpired portion of insurance premium paid 37,500 PROBLEM 3: EXERCISE 1. On January 1, 20x1, ABC Co. insured the life of one of its key management personnel for P1,000,000. ABC Co. is the beneficiary. The insurance policy requires annual payments of P50.000 at the start of each year. Information on the cash surrender value is shown below:

Policy year Dec. 31, 20x1 Dec 31, 20x2 Dec. 31, 20x3 Dec 31, 20x4 Dec 31, 20x5

Cash surrender value 18,000 21,000 32,000

Additional information:

● ABC Co. received P4,000 cash dividend from the life insurance on April 1, 20x4. ● The key employee died on October 1, 20x5.

Requirements: Provide the journal entries on the following dates (Use the 'asset method' of recording disbursements.) a. January 1, 20x1 and December 31, 20x1 (adjusting b. December 31, 20x3 (cash surrender value) c. April 1, 20x4 (dividends) d. December 31, 20x4 (cash surrender value) e. January 1, 20x5 (payment of insurance premium) f. March 31, 20x5 (assume the policy is also collected on this date) a. Jan. 1 20x1 Life insurance expense 50,000 Cash 50,000 Dec. 31, 20x1 Life insurance expense 50,000 Cash 50,000

b. Dec. 31, 20x3 Cash surrender value Life insurance expense (18,000 x 1/3) Retained earnings (18,000 x 2/3) c. April 1, 20x4 Cash

18,000

6,000 12,000

4,000 Life insurance expense

4,000

d. Dec. 31, 20x4 Cash surrender value (21,000 – 18,000) Life insurance expense

3,000 3,000

e. Jan. 1 20x1 Life insurance expense Cash

50,000 50,000

f. Cash surrender value - December 31, 20x5 32,500 Cash surrender value - December 31, 20x4 (21,000) Total increase in cash surrender value in 20x5 11,500 Multiply by: 3/12 Increase in cash surrender value up to March 31, 20x5 2,875 Add back: Cash surrender value - December 31, 20x4 21,000 Adjusted cash surrender value - April 1, 20x5 23,875 The unexpired portion of the annual premium as of the date of death is computed as follows: Annual premium paid for 20x5 50,000 Unexpired period (March 31 to December 31, 20x5) 9/12

Unexpired portion of insurance premium paid

37,500

PROBLEM 4: CLASSROOM ACTIVITY 1. On January 1, 20x1, ABC Co. insured the life of one of its key management personnel for P10,000,000. ABC Co. is the beneficiary. The insurance policy requires annual payments of P280,000 at the start of each year. Information on the cash surrender value is shown below: Policy year

Cash surrender value

Dec. 31, 20x1 Dec 31, 20x2 Dec. 31, 20x3 Dec 31, 20x4 Dec 31, 20x5

180,000 216,000 260,000

Additional Information ● ABC Co. received P4,000 cash dividend from the life insurance on April 1, 20x4. ● The key employee died on October 1, 20x5. Requirements: a. Compute for the insurance expense in each of the years 20x1 through 20x5. b. Compute for the gain on the settlement of the insurance. a. Jan. 1 20x1 Prepaid Insurance Cash

280,000

Prepaid Insurance Cash

280,000

Prepaid Insurance Cash

280,000

280,000

Jan. 1 20x2 280,000

Jan. 1 20x3

Dec. 31, 20x3 Cash surrender value

280,000

180,000

Life insurance expense Retained earnings

60,000 120,00

Jan. 1 20x4 Prepaid Insurance Cash April 1, 20x4 Cash surrender value Life insurance expense

280,000 280,000 4,000 4,000

Dec. 31, 20x4 Cash surrender value Life insurance expense

36,000 36,000

Jan. 1 20x5 Prepaid Insurance Cash

Cash surrender value – Dec. 31,20x5 Cash surrender value – Dec. 31,20x4 Total increase in cash surrender value in 20x5 Multiply by: Increase in cash surrender value up to April 1,20x5 Add back: cash surrender value – Dec. 31, 20x4 Adjusted cash surrender value – October 1,2015 Annual premium paid for 20x5 Unexpired period (October 1 to Dec. 31, 20x5) Unexpired portion of insurance premium paid

280,000 280,000

260,000 (216,000) 44,000 9/12 33,000 216,000 249,000 280,000 3/12 70,000

b. October 1,20x5 Cash Cash surrender value Prepaid Insurance Gain on Life insurance

PROBLEM 5: MULTIPLE CHOICE- THEORY

10,000,000 249,000 70,000 9,681,000

1. Which of the following may be reported as part of other term investments? a. petty cash fund b. held for trading securities c. insurance fund d. tax fund 2 The appropriation of retained earnings in conjunction with the issuance of bonds is a. mandatory. b. discretionary. c either a or b d. neither a nor b 3.ABC Co. sets aside funds to be used in opening a new branch. in ABC's statement of financial position, the fund is most likely to be presented under which of the following captions? a. Held for trading securities b. Financial assets measured at amortized cost c. Financial assets designated at FVPL d. Other long-term investments 4. When cash surrender value is initially recognized, which of the following statements is correct? a. Cash surrender value is credited b. Retained earnings is debited c. Insurance expense is credited d. All of these 5. What is the effect of a subsequent increase in cash surrender value? a. Decrease in insurance expense b. Increase in total assets c. Increase in profit d. All of these long

PROBLEM 6: MULTIPLE CHOICE - COMPUTATIONAL 1. The following information relates to noncurrent investments that Fall Corp. placed in trust as required by the underwriter of its bonds: Bond sinking fund balance, 12/31/x3

450,000

20x4 additional investment

90,000

Dividends on investments

15,000

Interest revenue Administration costs

30,000 5,000

Carrying amount of bonds payable

1,025,000

1. What amount should Fall report in its December 31, 20x4 balance sheet related to its noncurrent investment for bond sinking fund requirements?SS a. 585,000 b. 580,000 c. 575,000 d. 540,000 (AICPA)

2. On March 15, 20x3, Ashe Corp. adopted a plan to accumulate P1,000,000 by September 1, 20x7. Ashe plans to make four equal annual deposits to a fund that will eam interest at 10% compounded annually. Ashe made the first deposit on September 1, 20x3. Future value and future amount factors are as follows: Future value of 1 at 10% for 4 periods Future amount of ordinary annuity of 1 at 10% for 4 periods Future amount of annuity in advance of 1 at 10% for 4 periods

1.46 4.64 5.11

a. 250,000 b. 215,500 с. 195,700 d. 146,000

3. In 20X0, Chain, Inc. purchased a P1,000,000 life insurance policy on its president, of which Chain is the beneficiary. Information regarding the policy for the year ended December 31, 20X5 follows: Cash surrender value, 1/1/X5 Cash surrender value, 12/31/X5 Annual advance premium paid 1/1/X5

87,000 108,000 40,000

During 20X5, dividends of P6,000 were applied to increase the cash surrender value of the policy. What amount should Chain report as life insurance expense for 20X5?

a. 40,000 b. 25,000 с. 19,000 d. 13,000 (AICPA)

4. On January 2, 20x3, Jann Co. purchased a P150,000 whole-life insurance policy on its president. The annual premium is P4,000. The company is both the owner and the beneficiary. Jann charged officers' life insurance expense as follows: 20X3

4,000

20X4

3,600

20X5

3,000

20X6

2,200

Total

12,800

In its December 31, 20x6 balance sheet, what amount should Jann report as investment in cash surrender value of officers' life insurance? (Assume Jann Co. did not allocate the initial amount of the cash surrender value over the required holding period.) a. 0 b. 3,200 c. 12,800 d. 16,000 5. At May 31, 20x1, Quay owned a P10,000 whole life insurance policy with a cash surrender value of P4,500. The cash surrender value is used as a collateral security for an outstanding loan of P2,500. In Quay's May 31, 20x1 statement of financial position, what amount should be reported as investment in life insurance? a. 4,500 b. 7,000 c. 7,500 d. 10,000...