Intermediate Accounting Activity 7

Multiple Choice (Based on IFRS and IAS)

1. Which is not a current fund?

a. petty cash fund

b. payroll fund

c. sinking fund

d. tax fund

2. Which is not a current fund?

a. insurance fund

b. dividend fund

c. plant expansion fund

d. preferred stock redemption fund

3. It is set aside in anticipating of future acquisition of additional property, plant and equipment.

a. replacement fund

b. insurance fund

c. contingency fund

d. plant expansion fund

4. Investments in long term funds shall be carried at the

a. amount of cash

b. amount of cash plus cost of securities and other assets in the fund

c. amount of securities and other assets in the fund

d. amount of cash plus the cost of securities adjusted for any discount or premium amortization and

other assets in the fund

5. Interest in life insurance contract shall be carried at

a. NIL

b. Face of policy

c. Total amount of insurance premiums paid

d. Cash surrender value

6. Cash surrender value is classified as

a. Noncurrent asset

b. Property, plants and equipment

c. Current asset

d. Intangible asset

7. An increase in the cash surrender value of a life insurance policy owned by an entity would be recorded by

a. Increasing annual insurance expense

b. Increasing investment income

c. Memorandum entry only

d. Decreasing annual insurance expense

8. Upon the death of an officer, an entity received the proceeds of a life insurance policy held by the entity on the officer. The policy's cash surrender value had been recorded by the entity at the time of payment.

What amount of revenue is should the entity report in the income statement?

a. Proceeds received

b. Proceeds received less cash surrender value. Proceeds received plus cash surrender value

d. Zero

9. If a sinking fund is used to purchase securities, the sinking funds

a. Increases when revenue is earned on the securities

b. Decreases when the securities are purchased

c. Decreases when revenue is earned on the securities

d. Is not affected by revenue earned on the securities

10. An independent trustee holds cash in the sinking fund account representing the annual deposits to the fund and interest earned on these deposit. How should the sinking fund be classified in the statement of financial position?

a. The entire balance in the sinking fund is classified as current asset

b. The entire balance in the sinking fund is classified as noncurrent asset

c. The cash in the sinking fund is classified a current asset.

d. The accumulated deposits only care are shown as noncurrent investment

11. Which of the following may be classified as "other long-term investments?"

a. Shares of stocks purchased as long-term investment.

b. Bonds acquired to be held as a long-term investment.

c. Treasury shares acquired at a deep discount and expected to be reissued at a future date that exceeds

12 months from the reporting date.

d. Shares of stocks and bonds purchased using funds earmarked for the retirement of a bond issuance

12. Witt Corp. has outstanding at December 31, 2004, two long-term borrowings with annual sinking fund

requirements and maturities as follows:

Sinking Fund Requirements Maturities

2003 1,000,000 -

2004 1,500,000 2,000,000

2005 1,500,000 2,000,000

2006 2,000,000 2,500,000

2007 2,000,000 3,000,000

total 8,000,000 9,500,000

In the notes to its December 31, 2004 balance sheet, how should Witt report the above data?

a. No disclosure is required.

b. Only sinking fund payments totaling 8,000,000 for the next five years detailed by year need be disclosed.

c. Only maturities totaling 9,500,000 for the next five years detailed by year need to be disclosed.

d. The combined aggregate of 17,500,000 of maturities and sinking fund requirements detailed by year should be disclosed.

13. On March 1, 2001, a company established a sinking fund in connection with an issue of bonds due in

2013. At December 31, 2003, the independent trustee held cash in the sinking fund account representing the annual deposits to the fund and the interest earned on those deposits. How should the sinking fund be reported in the company's balance sheet at December 31, 2003?

a. The cash in the sinking fund should appear as a current asset.

b. Only the accumulated deposits should appear as a noncurrent asset.

c. The entire balance in the sinking fund account should appear as a current asset.d. The entire balance in the sinking fund account should appear as a noncurrent asset.

14. An issuer of bonds uses a sinking fund for the retirement of the bonds. Cash was transferred to the sinking fund and subsequently used to purchase investments. The sinking fund

I. is increased by the income earned on the investments.

II. is not affected by the income earned on the investments.

III. decreased when the investments are purchased.

a. I only.

b. I and III.

c. II and III. d. III only.

15. An increase in the cash surrender value is accounted for as

a. income recognized in profit or loss.

b. income recognized in other comprehensive income.

c. reduction to insurance expense.

d. none of these

Problem Solving

Problem 1. The following are sinking fund transactions. The entity records the transaction currently and maintains a

balance in the retained earnings appropriated for sinking fund account equal to the sinking fund. These is no trustee.

2019

Jan. 1 Transferred P400,000 cash to the sinking fund

Apr. 1 Invested the sinking fund cash in P400,000 face value 12% bonds. The purchase price is P384, 000. Interest is payable semiannually April 1 and October 1. The discount is to be amortized over 4 years

Oct. 1 Received interest on the sinking fund securities.

Dec. 1 Transferred another P400,000 cash to the fund.

2020

Apr. 1 Received semiannual interest on the sinking fund securities.

Apr. 1 Paid the fund custodian fee, P12,000

Oct. 1 Received semiannual interest on the sinking fund securities.

Oct. 1 Sold the sinking fund securities at 106.

Dec. 1 Transferred another P400,000 cash to be fund.

2021

July 1 Retired bonds payable of P1,000,000 plus accrued interest of P100,000

July 1 Returned the residual value sinking fund cash to the general cash.

Required:

What are the indicated entries for 2019, 2020, and 2021 in connection with the sinking fund.

Problem 2. The transactions given below relate to a sinking fund for retirement of long term bonds of Red Company.

1. In accordance with the terms of bond indenture, cash in the amount of P2,000,000 is transferred at the end of the first year, from the regular cash account to the sinking fund. The entity administer the fund.

2. The sinking fund cash is used to acquired AB Company 12% bonds of P500,000 face value, maturing in five years, for P450,000.

3. The sinking fund cash is used to acquired 10% P100 par value CD 5,000 preference share, at P80 per share

4. Annual interest is received on the AB bonds. The discount on the bonds is amortized accordingly using straight line method

Required: Prepare journal entries to record transaction.

Problem 3. Following are selected transaction in chronological order of ABC Company and its trustee in connection with a sinking fund.

1. Cash contribution to the sinking fund, P1,000,000

2. Acquisition of securities at par by trustee, P700,000.

3. The trustee receives interest on the securities, P60,000.

4. The trustee pays expenses of P30,000.

5. The trustee sells the securities for P800,000 plus accrued interest, P10,000.

6. The trustee renders a report to the entity.

7. The trustee pays bonds payable of P1,000,000 and interest of P100,000

8. The trustee remits the remaining cash to ABC Company.

Required: Prepare journal entries on the books of ABC Company to record the transactions

Problem 4. The bond indenture requires an accumulation of fund of P5,000,000 in 5 years. The first annual contribution to the fund is made on December 31, 2020 and every December 31 thereafter. The interest cost is 10%. The table of present value and the future amount shows following factors:

Present value of an ordinary annuity of 1 at 10% for 5 periods 3.7908

Future amount of an ordinary annuity of 1 at 10% for 5 periods 6.1051

Required:

1. Compute the annual contribution to the fund.

2. Make a schedule of the fund accumulation.

Problem 5. On January 1, 2020, Carr company adopted a plan to accumulate fund for environmental improvement beginning July 1, 2020 at an estimated cost of P2,000,000. Carr company plans to make for equal annual deposit in a fund that will earn interest an 10% compounded on annually. The first deposit is made on July 1, 2020 and every July thereafter. Future amount factors are as follows:

Future amount of ordinary annuity of 1 at 10% for 4 periods 4.6410

Future amount of annuity in advance of 1 ar 10% for 4 periods 5.1051

Required:

1. Compute the annual deposit to the fund.

2. Schedule of fund accumulation

Problem 6. XYZ Company insures the life of its president for P2,000,000 the entity being the beneficiary of an ordinary

life policy. The annual premium is P60,000. The policy is dated January 1, 2020 and carries the following

cash surrender value.

End of policy year Cash surrender value

2020 -

2021 -

2022 60,000

2023 84,000

2024 116,000

The entity follows the calendar year as its accounting period. The president dies on June 30, 2024 and policy is collected on July 31, 2024.

Required: Prepared all indicated entries from January 1, 2020 to July 31, 2024.

Problem 7. Midas Company took out a P5,000,000 insurance policy on the life of its president on January 1, 2020. The entity's accounting period is the calendar year, the annual premium on the policy is P80,000. Data regarding dividends and cash surrender value are given below:

2021 2022 2023

Dividends received on December 31 - 5,000 6,000

Cash surrender value - 42,000 47,000

Required: Prepared all indicated entries for 2021, 2022 to 2023.

Problem 8. The following accounts are found under current assets in the December 31, 2020 statement on financial position of Elysse Company:

Cash surrender value 90,000

Less: policy loan from insurance company 50,000 40,000

Dividends receivable from insurance company 2,000

The above accounts are the only ones in the statement of financial position which pertain to the insurance policy or the loan. Upon investigation, the following data are gathered; a. The cash surrender value reported in the statement of financial position is for June 30, 2021. The cash surrender value was P80,000 on June 30, 2020

b. On June 30, 2020 the entity paid the annual premium of P30,000 minus the dividend declared of P2,000

c. The loan from the insurance company is a one-year note dated April 1, 2020. The 12% interest is payable on the date of maturity.

d. The loan from the insurance company was recorded by debiting dividend receivable and crediting dividend income

Required:

1. Prepared the journal entries to correct the accounts on December 31, 2020.

2. Indicate the financial statement classification of the accounts to the insurance related to the insurance to the insurance policy and the loan