OTHER INVESTMENTS
Bond sinking fund
Bond sinking fund is a pool of assets (primarily financial investments) that was established to be used
later on in paying the maturing long-term liabilities of an entity (usually a bond payable). Its
establishment can either be voluntary or involuntary (required by law or contractual provisions).
Determining the projected balance in bond sinking fund
The future balance of the bond sinking fund can be projected using the future value concept.
Remember that under the present value concept, the current value is unknown but the future value is
known. Under the future value concept, the current value is known but the future value is unknown.
Different future value factors
Similar to the PV factors, FV factors can be classified into the following:
a. FV factor of single payment
b. FV factor of ordinary annuity
c. FV factor of annuity due
Determining the amounts to be invested in the bond sinking fund:
Manner of contribution Computation of amount of contribution/s
Initial one-time contribution Target future amount / FV of single payment
Periodic at the end of each Target future amount / FV of ordinary annuity
period
Period at the start of each period Target future amount / FV of annuity due
Reporting of bond sinking fund:
Related liability is current Related liability is noncurrent
Establishment of the fund is mandatory – sinking
fund is part of other current assets Bond sinking fund is classified as part of
Establishment of the fund is voluntary – sinking noncurrent assets, whether it is mandatory or
fund may be part of cash and cash equivalents voluntarily established.
(current assets)
Establish of the fund is mandatory if it is required in the bond or loan agreement; otherwise, its
establishment is considered voluntary. Mandatorily established sinking funds are usually in the
custody of another entity (i.e., a trustee) and its use is highly restricted, thus disqualifying it to become
part of cash and cash equivalents. In the absence of additional information, sinking funds are assumed
to be mandatorily established.
1) On January 1, 2023, an entity decided to establish a bond sinking fund. In connection with this, it inquired
with a bank on possible contribution plans that will result to the balance in the bond sinking fund equal to
the bonds’ ₱7,000,000 face amount after 6 years, assuming an 8% fixed annual return. Under each of the
following scenarios, determine the amount/s of contribution/s assuming:
a) The entity plans to have a one-time initial contribution on January 1, 2023.
Target future amount (bonds’ face amount) 7,000,000
Divide by: FV factor of single payment for 6 periods at 1.586874
8%
One-time initial contribution to be made on 1/1/23 4,411,188
b) The entity plans to have annual contributions starting on December 31, 2023.
Target future amount (bonds’ face amount) 7,000,000
Divide by: FV factor of ordinary annuity for 6 periods at 7.335929
8%
Annual contribution every December 31 of each year 954,208
c) The entity plans to have annual contributions starting on January 1, 2023.
Target future amount (bonds’ face amount) 7,000,000
Divide by: FV factor of annuity due for 6 periods at 7.922803
8%
Annual contribution every January 1 of each year 883,526
2) Few years ago, ABC Company insured the life of its president for annual premiums of ₱300,000. The
face amount of the insurance policy is ₱8,000,000. As of January 1, 2023, the related cash surrender value
amounted to ₱200,000. From 2023 to 2025, ABC had the following information:
2023 2024 2025
Cash surrender value, ₱240,000 ₱290,000 ₱350,000
12/31
Dividends 45,000 25,000 55,000
Accounting for cash surrender value
Entities usually acquire life insurance policies covering the life of its key employees to compensate
itself in case of the sudden loss of the said employees. The concepts discussed in BA 114.1 is on the
perspective of the insured entity (i.e., policyholder). Accounting procedures in the perspective of the
insurance company are to be discussed in BA 118.1.
Cash surrender value
Cash surrender value represents the amount of cash that the insurance company agrees to pay to the
entity in case the entity surrendered or otherwise terminated its rights over the insurance policy. In
addition, the entity can also borrow from the insurance company up to the amount of the cash
surrender value. The amount of cash surrender value is usually determined by the extent of premiums
paid by the entity. The higher the total premiums paid, the higher the amount of cash surrender
value. Nonetheless, the amount of cash surrender value is much smaller than the amount of total
premiums paid.
Determine the amount of net insurance expense for each year.
2023 2024 2025
Gross insurance expense 300,000 300,000 300,000
Less: Dividends (45,000 (25,000) (55,000)
)
Less: Increase in CSV (40,000 (50,000) (60,000)
)
Net insurance expense 215,000 225,000 185,000
Increase in CSV for 2023 = 240,000 – 200,000
Increase in CSV for 2024 = 290,000 – 240,000
Increase in CSV for 2025 = 350,000 – 290,000
3) On January 1, 2023, an entity paid ₱480,000 annual insurance premiums related to the ₱5,000,000 face
amount life insurance policy covering the life of its chief financial officer (CFO). Cash surrender value as of
this date amounted to ₱150,000. Unfortunately, on August 1, 2023, the CFO died and that the ₱5,000,000
face amount was received. Assuming that the CFO did not die, related cash surrender value will have a
balance of ₱180,000 on December 31, 2023. Determine the journal entries in 2023 related to the insurance
policy.
On January 1, 2023, the payment of insurance premiums shall be recorded as:
Prepaid 480,000
insurance
Cash 480,000
On August 1, 2023, on the date of death, record the expired portion of the prepaid insurance from
January 1, 2023 to August 1, 2023 (i.e., 7 months):
Insurance expense (480,000 x 7/12) 280,00
0
Prepaid insurance 280,000
After this entry, prepaid insurance account will have a balance of 480,000 – 200,000 = 200,000.
On August 1, 2023, the proportional increase in the CSV shall be determined as follows:
7 months x [(180,000 – 150,000) / 12] = 17,500
This proportional increase shall be recorded on August 1, 2023 as follows:
Cash surrender value 17,500
Insurance expense 17,500
After this entry, CSV will have a balance of 150,000 + 17,500 = 167,500. To record the receipt of face
amount of the insurance and the recognition of gain or loss on settlement:
Cash (equal to face amount) 5,000,000
Cash surrender value 167,500
Prepaid insurance 200,000
Gain on insurance settlement – P/L 4,632,500
Both the cash surrender value and prepaid insurance were derecognized since the entity will have to
give up its rights to them when receiving the face amount of the insurance policy. In addition, net
insurance expense for 2023 is 280,000 – 17,500 = 262,500.
