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STUDENT HANDOUTS
FINANCIAL ACCOUNTING AND REPORTING CABARLES/SAGOT/CAYETANO
FAR.212—OTHER INVESTMENTS OCTOBER 2021 CPALE REVIEW

LEARNING OBJECTIVES

1. Account for various types of long-term funds. 3. Account for cash surrender value (CSV) of life insurance.
2. Calculate time value of money.

REVIEW NOTES

Funds [LO 1] flow occurs at the end of

the first period)
Fund is a pool of cash, securities or other assets set aside for a
specific purpose, which may be current or noncurrent. PV of annuity due PVF of Equal
(advance) ordinary (regular interval each
Current funds include: annuity period; the last cash flow
1. Petty cash fund; x occurs at the beginning
2. Payroll fund; (1 + i) of the first period)
3. Interest fund;
4. Dividend fund; and Future Value Factors (FVF) Summary
5. Tax fund. Type Derivation Cash flow(s)
FV of 1 (1 + i)n Single or unequal
Noncurrent funds include: FV of ordinary 1-(1 + i)n Equal (regular interval
1. Sinking fund; annuity (arrears) I each period; the last cash
2. Preference share redemption fund; flow occurs at the end of
3. Replacement fund; the last period)
4. Plant expansion fund; FV of annuity due FVF of Equal
5. Contingency fund; and (advance) ordinary (regular interval each
6. Insurance fund. annuity period; the last cash flow
x occurs at the beginning
The accounting for fund depends on whether or not there is an (1 + i) of the last period)
independent trustee. That is,
• If there is no independent trustee, an entity itself records Cash Surrender Value (CSV) of Life Insurance [LO 3]
the fund transactions as they occur and describes the nature CSV refers to the excess in the life insurance premium paid over
of the fund whether in the form of cash, securities, or other the cost of insurance with accumulated interest that is
assets. returnable in the event that the policy is surrendered or
• If there is an independent trustee, an entity only updates the canceled.
fund balance upon receipt of a report from the trustee. As a
result, the composition of the fund is no longer described, CSV arises if the following requisites are present:
but lumped together in the ‘sinking fund-trustee’ account. a. The policy is a life policy. Non-life insurance policies do not
have CSV.
Time Value of Money [LO 2] b. Premiums for three full years must have been paid.
c. The policy is surrendered at the end of the third year or
Present value refers to the value today (now) of a given future anytime thereafter.
sum discounted at compound interest.
Future value refers to value at a later date (future) of a given sum The accounting for life insurance premium and CSV depends on
that is invested at compound interest. whether or not the beneficiary of the policy is the entity. That is:

Annuity is a series of cash flows that occur at equal intervals of 1. Beneficiary is other than the entity
time. Types of annuities: ordinary annuity and annuity due. • CSV – not recognized
• Premiums paid – Expense
Present Value Factors (PVF) Summary
2. Beneficiary is the entity
Type Derivation Cash flow(s)
PV of 1 (1 + i)-n Single or unequal • CSV – Recognized as a noncurrent investment
PV of ordinary 1-(1 + i)-n Equal (regular interval • Premiums paid – Expense as adjusted for the increase
annuity (arrears) I each period; the first cash in CSV and dividends received

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DISCUSSION QUESTIONS

Funds [LO 1] 6. Assuming the deposit earns 8% interest compounded

1. Umbridge Company reported the following accounts at the annually, what amount should an individual have in a bank
end of reporting period: account today before withdrawal if P100,000 is needed
Petty cash fund P 20,000 each year for four years with the first withdrawal to be
Payroll fund 3,000,000 made today and each subsequent withdrawal at one-year
Tax fund 500,000 intervals? (The balance in the bank account should be zero
Dividend fund 1,000,000 after the fourth withdrawal.)
Equity investments held for trading 1,000,000 a. P450,610 c. P331,210
Equity investments at FVOCI 1,500,000 b. P357,710 d. P306,570
Debt investments at amortized cost 2,000,000 7. Assume ABC Company deposits P25,000 with First National
Investments in associates 2,500,000 Bank in an account earning interest at 6% per annum,
Derivative assets 500,000 compounded semi-annually. How much will ABC have in the
Sinking fund cash 1,000,000 account after five years if interest is reinvested?
Sinking fund securities 1,200,000 a. P33,598. c. P32,500.
Accrued interest – sinking fund securities 30,000 b. P33,456. d. P25,000.
Plant expansion fund 80,000
8. Spencer Corporation will invest P10,000 every December
Cash surrender value 50,000 31st for the next six years (2015 – 2020). If Spencer will
Contingency fund 1,000,000 earn 12% on the investment, what amount will be in the
Investment property 4,000,000 investment fund on December 31, 2020?
What total amount should be reported as noncurrent a. P90,890. c. P46,048.
investments at the end of reporting period? b. P81,152. d. P41,114.
a. P13,860,000 c. P13,330,000 9. Lucy and Fred want to begin saving for their baby's college
b. P13,360,000 c. P13,280,000 education. They estimate that they will need P250,000 in
eighteen years. If they are able to earn 6% per annum, how
2. On December 31, 2019, Potter Corporation established a much must be deposited at the beginning of each of the next
bond sinking fund, which it manages the fund directly, of eighteen years to fund the education?
P2,000,000. The fund is intended to retire bonds payable a. P13,889. c. P7,631.
with P10,000,000 face value. The information below relates b. P8,089. d. P7,405.
to bond sinking fund transactions for 2020:
Jan. 10 Acquisition of securities for P1,200,000. 10. Dubois Inc. wishes to accumulate P1,300,000 by December
June 30 Sale of securities with a cost of P800,000 for 2030, to retire bonds outstanding. The company deposits
P790,000. P200,000 on December 31, 2020, which will earn interest at
Dec. 31 The remaining securities had a market value 10% compounded quarterly, to help in the retirement of
of P420,000. this debt. How much should the company deposit at the end
Additional investment of P500,000. of each quarter for 10 years to ensure that P1,300,000 is
available at the end of 2020?
During 2020, Potter collected interests and dividends on a. P69,020 c. P16,320
securities amounting to P140,000. Administration expenses b. P49,021 d. P11,320
of P60,000 were incurred relating to the sinking fund
management. What amount should Potter report in its Cash Surrender Value (CSV) of Life Insurance [LO 3]
December 31, 2020 statement of financial position related 11. On January 1, 2017, Astro Corporation purchase a
to its noncurrent investment for bond sinking fund? P1,600,000 ordinary life insurance policy on its president.
a. P2,600,000 c. P2,580,000 Astro is the beneficiary of the policy. Annual premium on
b. P2,590,000 d. P2,570,000 the policy amounts to P32,000. As of January 1, 2020, the
cash surrender value had a balance of P80,000. On
Time Value of Money [LO 2] December 31, 2020, the balance of cash surrender value
3. Present value is increased to P88,000. Astro received dividend amounting to
a. the value now of a future amount. P4,000 on July 1, 2020. Astro should report life insurance
b. the amount that must be invested now to produce a expense in 2020 amounting to
known future value. a. P32,000 c. P24,000
c. always smaller than the future value. b. P28,000 d. P20,000
d. all of these.
12. Andrew Corporation insures the life of its president for
4. A series of equal receipts at equal intervals of time when P2,400,000. Andrew is the beneficiary of the life insurance
each receipt is received at the beginning of each time period policy. The annual premium of P57,600 is payable every
is called an January 1. The policy is dated January 1, 2015. Cash
a. ordinary annuity. c. annuity due. surrender value amounted to P31,680 and P40,320 as of
b. annuity in arrears. d. unearned receipt. December 31, 2019 and 2020, respectively. Andrew follows
calendar year as its reporting period. The president dies on
5. John won a lottery that will pay him P100,000 at the end of September 30, 2020, and the policy is collected on
each of the next twenty years. Assuming an appropriate December 31, 2020. What is the gain on life insurance
interest rate is 8% compounded annually, what is the settlement in 2020?
present value of this amount? a. P2,400,000 c. P2,347,440
a. P4,576,196. c. P981,815. b. P2,361,840 d. P2,307,440
b. P1,060,360. d. P21,455.

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FAR | FAR.212—OTHER INVESTMENTS ARC – ACCOUNTANCY REVIEW CENTER

PRACTICE EXAM

1. If you invest P50,000 to earn 8% interest, which of the Use the following 8% interest factors for the next three
following compounding approaches would return the questions.
lowest amount after one year?
Present Value of Future Value of
a. Daily.
Ordinary Annuity Ordinary Annuity
b. Monthly.
c. Quarterly. 7 periods 5.2064 8.92280
d. Annually. 8 periods 5.7466 10.63663
9 periods 6.2469 12.48756
2. Which statement is false? 6. What will be the balance on September 1, 2018 in a fund
a. The factor for the future value of an annuity due is which is accumulated by making P8,000 annual deposits
found by multiplying the ordinary annuity table value each September 1 beginning in 2011, with the last deposit
by one plus the interest rate. being made on September 1, 2018? The fund pays interest
b. The factor for the present value of an annuity due is at 8% compounded annually.
found by multiplying the ordinary annuity table value a. P85,093 c. P60,480
by one minus the interest rate. b. P71,383 d. P45,973
c. The factor for the future value of an annuity due is
found by subtracting 1.00000 from the ordinary 7. If P5,000 is deposited annually starting on January 1, 2012
annuity table value for one more period. and it earns 8%, what will the balance be on December 31,
d. The factor for the present value of an annuity due is 2019?
found by adding 1.00000 to the ordinary annuity table a. P57,438 c. P48,183
value for one less period. b. P53,183 d. P44,614

3. For which of the following transactions would the use of the 8. Korman Company wishes to accumulate P300,000 by May
present value of an annuity due concept be appropriate in 1, 2019 by making 8 equal annual deposits beginning May
calculating the present value of the asset obtained or 1, 2011 to a fund paying 8% interest compounded annually.
liability owed at the date of incurrence? What is the required amount of each deposit?
a. A capital lease is entered into with the initial lease a. P52,205 c. P28,204
payment due one month subsequent to the signing of b. P30,234 d. P26,115
the lease agreement.
b. A capital lease is entered into with the initial lease 9. What would you pay for an investment that pays you
payment due upon the signing of the lease agreement. P10,000 at the end of each year for the next ten years and
c. A ten-year 8% bond is issued on January 2 with interest then returns a maturity value of P150,000 after ten years?
payable semiannually on July 1 and January 1 yielding Assume that the relevant interest rate for this type of
7%. investment is 8%.
d. A ten-year 8% bond is issued on January 2 with interest a. P136,579. c. P69,479.
payable semiannually on July 1 and January 1 yielding b. P72,468. d. P67,101.
9%.
10. Armada Corporation purchase a P2,500,000 life insurance
4. Tipson Corporation will invest P10,000 every January 1st policy on its president. Armada is the beneficiary. The
for the next six years (2012 – 2017). If Linton will earn 12% following information relates to the policy for 2020:
on the investment, what amount will be in the investment Annual premium paid on January 1 P100,000
fund on December 31, 2017? Cash surrender value, January 1 217,500
a. P90,890. c. P46,048. Cash surrender value, December 31 270,000
b. P81,152. d. P41,114 Dividend applied to cash surrender value 15,000
What amount should be reported as life insurance expense
5. Lucy and Fred want to begin saving for their baby's college
for 2020?
education. They estimate that they will need P350,000 in
a. P100,000 c. P47,500
eighteen years. If they are able to earn 5% per annum, how
b. P62,500 d. P32,500
much must be deposited at the end of each of the next
eighteen years to fund the education?
a. P29,941. c. P13,554.
b. P28,960. d. P12,441.

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