The document defines various types of funds including sinking funds, preference share redemption funds, and contingency funds. It explains how funds are measured and classified as current or non-current assets depending on their purpose. The document also discusses sinking fund contributions, cash surrender values of life insurance policies, and the accounting treatment for funds under an entity's administration versus a trustee.
The document defines various types of funds including sinking funds, preference share redemption funds, and contingency funds. It explains how funds are measured and classified as current or non-current assets depending on their purpose. The document also discusses sinking fund contributions, cash surrender values of life insurance policies, and the accounting treatment for funds under an entity's administration versus a trustee.
The document defines various types of funds including sinking funds, preference share redemption funds, and contingency funds. It explains how funds are measured and classified as current or non-current assets depending on their purpose. The document also discusses sinking fund contributions, cash surrender values of life insurance policies, and the accounting treatment for funds under an entity's administration versus a trustee.
Dean, College of Business Education Definition of Fund • Cash and other assets set aside for a specific purpose either by reason of the action of management or by virtue of a contract or legal requirement • Fund may be in the form of cash, securities and other assets • Funds for current purposes include petty cash fund, payroll fund, interest fund, dividend fund, and tax fund and classified as current assets • Funds for noncurrent purposes include sinking fund, preference share redemption fund, replacement fund, plant expansion fund, contingency fund and insurance fund and classified as noncurrent investment Measurement of Fund • Long term fund shall be carried at the amount of cash plus the cost of securities adjusted for discount or premium amortization, and other assets in the fund Sinking Fund • Sinking fund or redemption fund is a fund set aside for the liquidation of long-term debt, more particularly long-term bonds payable • The accounting for sinking fund depends on whether the fund is under the administration of the entity or under the charge of a trustee • When the fund is under the administration of the entity, the entity records the fund transactions currently and thus makes a distinction whether the fund is in the form of cash, securities and other assets. • If the fund is under the administration of a trustee, fund transactions are not currently recorded by the entity. The account “sinking fund-trustee” is used. Sinking Fund Contribution • The amount of periodic contribution to the sinking fund may be voluntary or mandatory. • It is voluntary if the sinking fund contribution is the result of a discretionary action of management. • It is mandatory if the sinking fund contribution is required by contract, usually with bondholders Classification of Sinking Fund • As a rule sinking fund is classified as noncurrent asset • However, if bond payable for which the sinking fund was set aside becomes due within twelve months after the end of reporting period, the sinking fund is reclassified as current asset • The classification of a fund shall parallel the classification of the related liability Preference share Redemption Fund • The terms of the preference share issue may provide that preference share may be called in for redemption by the issuing entity • The issuing entity may set up a fund to insure the eventual redemption of the preference share Fund for Acquisition of Property • The future acquisition of property, plant, and equipment may involve the setting aside of a certain amount of cash • Such fund may be called “replacement fund” or “plant expansion fund” • A replacement funs is a cash set aside in anticipation of future replacement of depreciable asset • On the other hand, a plant expansion fund is cash set aside in anticipation of future acquisition of additional property because of expanded or increased volume of operations Contingency Fund • A contingency fund is cash set aside for the purpose of meeting obligations that may arise from contingencies like pending lawsuits or taxes in dispute Insurance Fund • An insurance fund is cash set aside for the purpose of meeting obligations that may arise from certain risks not insured against, such as fire, typhoon, explosion and other similar casualties. • The establishment of an insurance fund is the result of a policy of self-insurance which is actually a policy of “no insurance” • An entity may decide to self-insure on the philosophy that in the long run the cost of self-insurance would be less than the cost of purchased insurance. Cash surrender value • The entity may insure the life of its officers and name itself as beneficiary • The purpose of this arrangement is to compensate the entity for the loss of services arising from the untimely death of important members of management. • The accounting for the payment of the insurance premiums will depend on whether the beneficiary is the entity itself or the officer insured Cash Surrender Value • If the beneficiary is the officer insured or any person other than the entity like the wife of the officer, no accounting problem is encountered because the payment of the premium is simply, charged to insurance expense • An accounting problem will arise when the beneficiary is the entity itself. • Cash surrender value is the amount which the insurance firm will pay upon the surrender and cancellation of the life insurance policy Cash surrender value • Cash surrender value arises if the following requisites are present: – The policy is a life policy. There is no cash surrender value in fire, accident and other nonlife policies – Premiums for three full years must have been paid – The policy is surrendered at the end of the thrid year or anytime thereafter. • The cash surrender value is classified as noncurrent investment Theory on the cash surrender value • The cash surrender value of a life policy arises from the fact that the fixed annual premium is much in excess of the annual risk during the earlier years of the policy • The excess is necessary in order to balance the deficiency of the same premium to meet the annual risk during the later years of the policy • Such excess in the premium paid over the annual cost of insurance, with accumulated interest, constitutes the cash surrender value