Examination About Investment 18
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BLACKPINKLisaRoseJisooJennieExamination About Investment 18
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BLACKPINKLisaRoseJisooJennieEXAMINATION about INVESTMENT 18
General Rule: Read the following carefully and answer it wisely. All solutions are needed, so put it in the last
page. (10 Points)
1. Fundador Corporation insures the life of its president for P4,000,000, the corporation being the beneficiary of an
ordinary life policy. The monthly premium is P6,000 payable every first day of the month. The policy is dated
January 1, 2006, and carried the following cash surrender values:
End of Policy Year Cash Surrender Value
2006 -
2007 -
2008 25,200
2009 30,000
2010 39,600
2011 50,400
The corporation follows the calendar year as its fiscal period. The president dies on October 31, 2011 and the policy is
collected on December 1, 2011. What is the gain on Life insurance settlement?
a. P3,913,600 c. P3,939,400
b. P3,951,400 d. P4,000,000
Answer: B
Proceeds of life insurance P4,000,000
Less: Carrying value of CSF (sch 1) P 48,600
Gain on life insurance P3,951,400
Cash surrender value – Jan 1, 2011 P39,600
Add: Increase during 2011 (sch 2) P 9,000
Cash surrender value – Oct 31, 2011 P48,600
Cash surrender value – 12.31.11 P50,400
Cash surrender value – Jan 1, 2011 P39,600
Increase during the year P10,800
x mos in a year (Oct 31) 10/12
Increase during 2011 P 9,000
2. Fodder Corporation insures the life of its president for P6,000,000, the corporation being the beneficiary of an
ordinary life policy. The annual premium of P144,000 is payable every January 2 nd of the year. The policy is
dated January 2, 2006 and carries the following cash surrender values:
End of Policy Year Cash Surrender Value
2006 -
2007 -
2008 50,400
2009 60,000
2010 79,200
2011 100,800
The corporation follows the calendar year as its fiscal period. The president dies on September 30, 2011 and the policy is
collected on December 2, 2011. What is the gain on life insurance settlement?
a. P5,768,600 c. P5,868,600
b. P5,904,600 d. P6,000,000
Answer: C
Proceeds of life insurance P6,000,000
Less: Carrying value of CSF (sch 1) P 131,400
Gain on life insurance P5,868,600
Cash surrender value (Sch 2) P 95,400
Unexpired insurance (Sch 3) P 36,000
BV of assets surrender P131,400
Jan 1, 2011 P79,200
Add: Increase during 2011 to time of death:
Dec 31, 2011 balance P100,800
Jan 01, 2011 balance P 79,200
Increase during the yr. P 21,600
x mos in a year (Sep 30) 9/12 P16,200
Carrying value of CSV P95,400
Annual premium P144,000
÷ No of mos in a year 12 mos
Monthly premium P 12,000
x unexpired mos (oct 1– Dec 31) 3 mos
Unexpired premiums P 36,000
3. On January 1, 2008, Chivas Company purchased a P4,000,000 ordinary life insurance policy on its president.
Additional data for the year 2011 are: Cash surrender value, January 1, P200,000 cash surrender value, December
31, P220,000; annual insurance premium paid on January 1, 2011, P80,000; Dividend received on August 1,
P10,000. Chivas Company is the beneficiary under the life insurance policy. Chives should report life insurance
expense for 2011 of
a. P50,000 c. P60,000
b. P70,000 d. P80,000
Answer: A
Periodic insurance premium P80,000
Add/Deduct:
Increase in CSV
Ending balance P220,000
Beginning balance P200,000 (20,000)
Dividends received (10,000)
Life Insurance expense P50,000
Derivatives
4. On November 3, 2011, Simmer Company invests P2,000,000 in a convertible debt instrument issued by Princess
Company that pays fixed interest of 7% and that can be converted into 10,000 shares in Princess Company in five
years at Simmer’s option. Otherwise the debt will pay P2,000,000 at maturity. At the time of acquisition the
conversion option has a fair value of P260,000. On December 31, 2011 the debt instrument has a fair value of
P1,750,000 and the conversion option has a determinable fair value of P300,000.
Question 1: What amount of derivative asset to be reported separately in the December 31,2011 statement of financial
position assuming the host contract (debt instrument) was classified as trading securities as initial recognition?
a. None c. P260,000
b. P250,000 d. P300,000
Answer: A
Note: Since the host contract is classified as at FV through P/L, the embedded derivative is not bifurcated/separeated,
hence the derivative asset is not reported separately in the FS.
Question 2: What amount of derivative asset to be reported separately in the December 31,2011 statement of financial
position assuming the host contract (debt instrument) was classified as available for sale at initial recognition?
a. None c. P260,000
b. P250,000 d. P300,000
Answer: D
Note: When the host contract is not carried at FV through P/L and the embedded derivative is a derivative when it was
freestanding and also it is not clearly and closely related to the host contract, the embedded derivative is bifurcated.
Therefore, at initial recognition the derivative asset is recognized and measured at its FV of P260,000 and re-measured at
P300,000 on Dec 31, 2011 balance sheet and the resulting increase is reported in the current year profit or loss.
5. On January 2, 2010, S Company issues its P5,000,000 face value at par value a term of 5 years. The debt is also
redeemable at par. However, the loan agreement provides that during the term of the loan S Company will either
receive or pay an amount based on the changes in the share price of B Company, an unrelated listed entity. The
reference point being the market price of B Company at the date of issue of the debt instrument. At the time of
issue the fair value of the payment linked variable is P70,000, its fair value on December 31, 2010, is P95,000 and
P120,000 on December 2011. What amount of derivative asset/liability should be accounted for separately on
January 2, 2010?
a. None c. P 95,000
b. P70,000 d. P120,000
Answer: B