FAR EASTERN UNIVERSITY - MAKATI

FINANCIAL ACCOUNTING AND REPORTING R.R. OCAMPO

FAR.04-Other Investments 1st SEM 2018-2019

DISCUSSION PROBLEMS
1. Nueva Vizcaya Company has the following accounts 4. How should the sinking fund be reported in the
included in its December 31 trial balance: company’s balance sheet at December 31, 2018?
FA@FVTPL P1,000,000 a. The cash in the sinking fund should appear as a
FA@FVTOCI 2,000,000 current asset.
FA@AC 3,000,000 b. Only the accumulated deposits should appear as a
Investment in associate 4,000,000 noncurrent asset.
Interest rate swap receivable 100,000 c. The entire balance in the sinking fund account
Forward contract receivable 200,000 should appear as a current asset.
Futures contract receivable 250,000 d. The entire balance in the sinking fund account
Call option 150,000 should appear as a noncurrent asset.
Petty cash fund 50,000
Payroll cash fund 500,000 5. Following are selected transactions in chronological
Dividend cash fund 200,000 order of Bayombong Company and its trustee in
Interest fund 150,000 connection with a sinking fund.
Sinking fund 1,100,000 a. Cash contribution to the sinking fund, P1,000,000.
Plant expansion fund 2,000,000 b. Acquisition of securities at par by the trustee,
Stock redemption fund 1,800,000 P700,000.
Contingency fund 1,000,000 c. The trustee receives interest on the securities,
Insurance fund 1,000,000 P60,000.
Investment property 4,000,000 d. The trustee pays expenses of P30,000.
Prepaid rent 200,000 e. The trustee sells the securities for P800,000 plus
Cash surrender value of life insurance 100,000 accrued interest of P10,000.
f. The trustee pays bonds payable of P1,000,000 and
How much is the total amount normally considered as
interest of P100,000.
noncurrent investments?
g. The trustee remits the remaining cash to
a. P20,000,000 c. P17,900,000
Bayombong Company.
b. P18,000,000 d. P14,000,000
How much was remitted by the trustee to Bayombong
Company?
2. Which statement is incorrect regarding fund a. P150,000 c. P50,000
accounting? b. P140,000 d. P40,000
a. In essence, the fund is accounted for as an
individual set of books.
b. Fund refers to cash and other assets set aside to Use the following 8% interest factors for questions 6 to 13.
accomplish specific objectives.
FV of PV of
c. The purpose for which fund was established may
ordinary ordinary
be current or noncurrent.
annuity annuity
d. Funds that relate directly to current operations are
Periods FV of 1 PV of 1 of 1 of 1
ordinarily shown in the long-term investments
1 1.0800 0.9259 1.0000 0.9259
section of the statement of financial position or in a
2 1.1664 0.8573 2.0800 1.7833
separate section if relatively large in amount.
3 1.2597 0.7938 3.2464 2.5771
4 1.3605 0.7350 ? 3.3121
5 1.4693 0.6806 5.8666 3.9927
Use the following information for the next two questions.
7 1.7138 0.5835 8.9228 5.2064
The following information is available concerning the Mauro 8 1.8509 0.5403 10.6366 5.7466
Corporation's sinking fund transactions in 2018. There is 9 1.9990 0.5002 12.4876 6.2469
no trustee.
Jan. 1 Established a sinking fund to retire an 6. What amount should be deposited in a bank account
outstanding bond issue by contributing today to grow to P3,000,000 three years from today?
P425,000. a. P3,779,100 c. P9,739,200
Jan. 15 Purchased securities for P400,000. b. P2,381,400 d. P7,731,300
Jul. 30 Sold securities originally costing P48,000
for P45,000. 7. If P1,000,000 is put in a savings account today, what
Dec. 31 Collected dividends and interest on the amount will be available three years from today?
remaining securities in the amount of a. P1,259,700 c. P3,246,400
P49,000; the securities had a market b. P 793,800 d. P2,577,100
value of P360,000 at this time.
8. If P900,000 is put in a savings account today, what
3. The sinking fund balance on December 31, 2018 is amount will be available six years from now?
a. P479,000 c. P471,000 a. P900,000 x 0.6302
b. P474,000 d. P442,000 b. P900,000 x 1.08 x 1.4693
c. P900,000 x 0.6806 x 0.9259
d. P900,000 x (1.08 + 1.4693)

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EXCEL PROFESSIONAL SERVICES, INC.
9. What amount will be in a bank account three years
from now if P500,000 is invested each year for four
years with the first investment to be made today?
a. P1,656,050 c. P2,433,300
b. P1,788,534 d. P2,253,050
10. What amount should an individual have in a bank
account today before withdrawal if P200,000 is needed
each year for four years with the first withdrawal to be
made today and each subsequent withdrawal at one-
year intervals? (The balance in the bank account
should be zero after the fourth withdrawal.)
a. P613,140 c. P715,400
b. P662,420 d. P901,220
11. What will be the balance on September 1, 2025 in a
fund which is accumulated by making P100,000 annual
deposits each September 1 beginning in 2018, with the
last deposit being made on September 1, 2025? The
fund pays interest at 8% compounded annually.
a. P1,063,660 c. P574,660
b. P1,148,750 d. P620,630
12. If P10,000 is deposited annually starting on January 1,
2018 and it earns 8%, what will the balance be on
December 31, 2025?
a. P106,366 c. P57,466
b. P114,875 d. P62,063
13. If a company wishes to accumulate P20,000,000 by
May 1, 2026 by making 8 equal annual deposits
beginning May 1, 2018 to a fund paying 8% interest
compounded annually. What is the required amount of
each deposit?
a. P1,880,300 c. P3,480,319
b. P1,741,023 d. P3,222,532
14. On January 1, 2018, CDO Corporation created a special
building fund by depositing a single sum of P100,000
with an independent trustee. The purpose of the fund
is to provide resources to build an addition to the older
office building during the latter part of 2022. The
company anticipates a total construction cost of
P500,000 and completion by January 1, 2023. The
company plans to make equal annual deposit from
December 31, 2018 through 2022, to accumulate the
P500,000. The independent trustee will increase the
fund each December 31 at an interest rate of 10%.
The accounting periods of the company and the fund
end on December 31.
How much is the fund balance as of December 31,
2018? (Round off future value factors to five decimal
places)
a. P165,519 c. P110,000
b. P155,519 d. P100,000
15. Which statement is correct regarding time value of
money concepts?
a. When interest is compounded, the stated rate of
interest exceeds the effective rate of interest.
b. The calculation of future value requires the
removal of interest.
c. With an ordinary annuity, a payment is made or
received on the date the agreement begins.
d. Compound interest includes interest earned on
interest.
16. Which statement is incorrect regarding time value of
money concepts?
a. The calculation of present value eliminates interest
from future cash flows.
b. An annuity is a series of equal periodic payments.
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c. In the future value of an ordinary annuity, the last
cash payment will not earn any interest.
d. Other things being equal, the present value of an
annuity due will be less than the present value of
an ordinary annuity.
17. Cash surrender value normally arises under the
following circumstances:
a. The policy is a life policy.
b. Premiums for three full years must have been paid.
c. The policy is surrendered at the end of the third
year or anytime thereafter.
d. All of the above.
18. Which statement is incorrect regarding cash surrender
value of life insurance policy?
a. It is the amount of a life insurance premium that
exceeds basic insurance charges and is returnable
in the event that the policy is surrendered or
canceled.
b. It is not recognized if the beneficiary is other than
the company and the premiums paid are treated as
an expense.
c. It is considered to be an investment if the
beneficiary is the company itself.
d. It is reported as a current asset on the statement
of financial position.
19. On January 1, 2013, Ball, Inc. purchased a P1,000,000
ordinary life insurance policy on its president. The
policy year and Ball’s accounting year coincide.
Additional data are available for the year ended
December 31, 2018:
Annual premium paid on 1/1/2018 P20,000
Dividend received 7/1/2018 3,000
Cash surrender value, 1/1/2018 43,500
Cash surrender value, 12/31/2018 54,000
Ball, Inc., is the beneficiary under the life insurance
policy. How much should Ball report as life insurance
expense for 2018?
a. P6,500 c. P17,000
b. P9,500 d. P20,000
20. Candle Park has life insurance policies on its officer's
lives. Annual premiums amount to P5,000. At the end
of 2018, cash surrender value of the policies totaled
P18,200. Dividends received by Candle from the
insurance company amounted to P500. The insurance
expense recognized by Candle Park in 2018 was
P3,500. What was the amount of cash surrender value
of these policies on January 1, 2018?
a. P14,200 c. P16,200
b. P17,200 d. P10,200
21. Villaverde Company insures the life of its president for
P8,000,000, the corporation being the beneficiary of an
ordinary life policy. The premium is P200,000. The
cash surrender value on December 31, 2017 and 2018
are P60,000 and P80,000 respectively. The
corporation follows the calendar year as its fiscal
period. The president dies on October 1, 2018 and the
policy is collected on December 31, 2018. What is the
gain on life insurance settlement?
a. P7,875,000 c. P7,870,000
b. P7,890,000 d. P7,800,000
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FAR.04