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Chapter 12
Other Long-term Investments
PROBLEM 1: TRUE OR FALSE
1. TRUE
2. FALSE
3. FALSE
4. FALSE
5. FALSE

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. C
2. C
3. D
4. C
5. D

PROBLEM 3: EXERCISE
1. Solution:
(a) 1/1/x1
Prepaid Insurance 50,000
Cash 50,000

Insurance expense 50,000

Prepaid Insurance 50,000

(b) 12/31/x3
Cash surrender value 18,000
Insurance expense 6,000
Retained earnings 12,000

(c) 4/1/x4
Cash 4,000
Insurance expense 4,000
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(d) 12/31/x4
Cash surrender value 3,000
Insurance expense 3,000

(e) 1/1/x5
Prepaid Insurance 50,000
Cash 50,000

(f) 4/15/x5
Cash 1,000,000
Cash surrender value 23,750*
Prepaid Insurance (50K x 9/12) 37,500
Gain on settlement of life insurance 938,750

*21,000 + [(32,000 – 21,000) x 3/12] = 23,750

PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

1. B (450,000 + 90,000 + 15,000 + 30,000 – 5,000) = 580,000

2. C (1,000,000 ÷ 5.11) = 195,700

3. C [40,000 – (108,000 – 87,000) increase in cash surrender value

taking into account the dividends received] = 19,000

4. B
Solution:
Total annual premiums paid (4,000 x 4 yrs.) 16,000
Total life insurance expense (12,800)
Investment in cash surrender value 3,200

5. A
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PROBLEM 5: FOR CLASSROOM DISCUSSION

1. Solution:

Jan. 1, 20x1
Prepaid insurance 50,000
Cash 50,000

Dec. 31, 20x1

Insurance expense 50,000
Prepaid insurance 50,000

December 31, 20x3

Cash surrender value 90,000
Insurance expense 30,000
Retained earnings 60,000

September 1, 20x4
Cash 3,000
Insurance expense 3,000

December 31, 20x4

Cash surrender value 20,000
Insurance expense 20,000

Jan. 1, 20x5
Prepaid insurance 50,000
Cash 50,000

Aug. 1, 20x5
Cash 5,000,000
Prepaid insurance (50K x 6/12) 25,000
Cash surrender value 120,000
{110K + [(130K – 110K) x 6/12]}
Gain on life insurance 4,855,000
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