Let’s Check

Activity 1. (ULO e) Now that you know the most essential terms in the study of fund and other
investments, let us try to check your understanding of these terms and how it is accounted for.
In the space provided, write the letter of your choice.

Identification: On the space provided for, write the correct answer to the questions below.

1. Cash Surrender Value It is the amount which the insurance firm will pay upon the
surrender and cancelation of the life insurance policy.
2. __Fund____ This term refers to cash and other assets set aside for specific purpose which
can be current or non-current purpose.
3. Life insurance policy Is in connection with a company insuring its officers and names itself
as beneficiary to compensate for the loss of service from an untimely death.
4. Retained Earnings account The recognition of cash surrender value on the third year
involves charging or crediting the life insurance expense to amount concerning the current
year, while the amount concerning to prior years is charged through this account.
5. Prepaid insurance The payment of insurance premiums involves a debit to life insurance
expense and a credit to cash. When at the end of the year, a portion of the payment has
not yet expired, this is the account to be debited for an adjusting entry.
6. Bond Sinking Fund It is oftentimes called redemption fund, the purpose of which is for
liquidating long term debts.
7. Funder under the administration of the entity This fund requires distinction whether the
fund is in the form of cash, securities and other assets
8. Insurance Expense If the beneficiary is the officer insured or anyone but not the company,
the entry for the payment of the premium is simply to credit cash and a debit to this account.
9. Gain on life insurance settlement Upon receipt of the cash surrender value due to the
death of the company president, this is the amount credited for the difference between the
face of Policy and the cash surrender value and unexpired premium.
10. Preference Share redemption fund This type of fund is set up for the redemption of the
preference share.

True or False: On the space provided for, write the true if the statement is correct and false if
the statement is wrong.

______1. Interest in life insurance contract shall be carried at Cash surrender value.

False__2. An increase in the cash surrender value is recorded by increasing annual insurance
expense.

False 3. Upon the death of an officer, an entity received the proceeds of a life policy held by the
entity on the officer. The amount of revenue should be reported at proceeds received less cash
surrender value.

False_4. If a sinking fund is used to purchase securities, the fund is not affected by revenue
earned on the securities. The fund is affected upon receipt of interest on the securities
and sale of the securities
True_5. A trustee holds cash in the sinking fund representing annual deposits to the fund and
interest earned. The sinking fund should be classified as noncurrent assets.

False_6. When the sinking fund contribution is a one - time contribution, the fund to be
accumulated is divided by present value factor of 1 at a certain percent for that number of
years. Future Value is used.

Contingency fund 7. A fund that is set aside for meeting obligations arising from contingencies
such as an unfavourable outcome of a lawsuit is called Contingency Fund.

Let’s Analyze
Activity 1. Getting acquainted with the essential terms in the study of accounting for fund and
other investments, what also matters is you should be able to solve and journalize transactions
on a problem situation. Now, I will require you to prepare journal entries on the following
problems and also answer questions being asked.

Exercise 1. (ULO f) (Adapted Valix 2017 981)

On January 1, 2017, Hannah company established a sinking fund for the retirement of a bond
issue.
2017
Jan. 1, 2017 Established a sinking fund with 3,510,000 cash.
18 Purchased equity securities for 3,250,000.
July 5 Paid fund expenses of 130,000.
Sept. 9 Sold equity securities having an original cost of 780,000 for 689,000.
Dec. 20 Received dividends of 195,000 on equity securities.
2018
Feb. 12 Invested 500,000 in money market instruments.
Dec. 31 Received interest and dividends for 270,000.
Dec. 31 Sold all securities in the fund for 2,250,000 and retired an outstanding bond issue
of 3,000,000.
The remaining fund balance was transferred back to the general cash account.
Required: Prepare journal entries to record the transactions for 2017 and 2018.

ANSWER:
Jan. 1, 2017 Sinking Fund Cash 3,510,000
Cash 3,510,000

Jan. 18, 2017 Sinking Fund Securities 3,250,000

Sinking Fund Cash 3,250,000

July 5, 2017 Sinking fund expense 130,000

Sinking fund Cash 130,000

Sept. 9, 2017 Sinking Fund Cash 689,000

Loss on sale of SF securities 91,000
Sinking Fund securities 780,000

Dec. 20, 2017 Sinking Fund Cash 195,000

Sinking Fund Income 195,000
Feb. 12, 2018 No entry

December 31, 2018 Sinking Fund Cash 270,000

Sinking Fund Income. 270,000

Sinking Fund Cash 2,250,000

Loss on sale 220,000
Sinking Fund Securities 2,470,000

Bonds payable 3,000,000

Sinking Fund cash 3,000,000

Cash 534,000
Sinking Fund Cash 534,000

Exercise 2. (ULO f) (Adapted Valix 2017 page 983) Donato Company and the trustee
provided the following transactions in chronological order in connection with a sinking fund:
1. Cash contribution to the sinking fund, 1,600,000.
2. Acquisition of securities at par by the trustee, 1,120,000.
3. The trustee received interest on the securities, 96,000.
4. The trustee paid expenses of 48,000.
5. The trustee sold the securities for 1,280,000 plus accrued interest, 16,000.
6. The trustee rendered a report to the entity.
7. The trustee paid bonds payable of 1,600,000 and interest of 160,000.
8. The trustee remitted the remaining cash to the entity.

Answer
1. Sinking fund trustee 1,600,000
Cash 1,600,000

2. Sinking Fund expense 48,000

Sinking Fund Trustee 224,000
Sinking Fund income 112,000
Gain 160,000
Entry from 3-5

3. Bonds payable 1,600,000

Interest expense 160,000
Sinking Fund trustee 1,760,000
Entry for # 7.

4. Cash 64,000
Sinking fund trustee 64,000
Entry for no. 8

Exercise 3. (ULO F) On July 1, 20A, Jojo company wants to accumulate fund of 2,800,000 at
the end of year 4.

The entity plans to make four equal annual deposits in a fund that will earn interest at 10%
compounded annually.
The following are the relevant factors at 10%:
Future amount of ordinary annuity of 1 at 10% for 4 periods 4.6410
Future amount of annuity in advance of 1 at 10% for 4 periods 5.1051
Future Value of 1 at 10% for 4 periods ?

Required: In each cases, a. Compute the annual deposit to the fund; and b. Prepare a schedule
of fund accumulation.
Case a. The first annual contribution is made on July 1, 20A. (In advance)
Case b. The first annual contribution is made on June 30, 20B. (At the end)
Case c. The one time contribution is made on July 1, 20A.

Answer
Case a 2,800,000/5.1051 = 548,471 (a)
(b) Schedule of accumulation
Date Annual contribution Interest Fund Balance
July 1/20A 548,471 548,471
Jul 1/20B 548,471 54,847 1,151,789
Jul 1/20C 548,471 115,179 1,815,439
Jul 1/ 20D 548,471 181,544 2,545,454
June 30/ 20E 254,546 2,800,000

Case b 2,800,000/4.640 = 603,448 (a)

(b) Schedule of accumulation
Date Annual Contribution(end) Interest Fund balance
June 30, 20B 603,448 603,448
June 30, 20C 603,448 60,345 1,267,241
June 30, 20D 603,448 126,724 1,997,413
June 30, 20E 603,448 199,139 2,800,000

Case c 2,800,000/1.4641 = 1,912,438

(b) Schedule of accumulation
Date Annual Contribution Interest Fund balance
July 1, 20A 1,912,438
June 30, 20B 191,244 2,103,682
June 30, 20C 210,368 2,314,050
June 30, 20D 231,405 2,545,455
June 30, 20 E 254,545 2,800,000

Exercise 4. (ULO f) Contingency fund, Preference share redemption fund.

Marlon Company had the following funds for different purposes established on January 1 of the
current year:
Preference share redemption fund 1,500,000
Contingency Fund 750,000
Insurance fund 9,000,000
The contingency fund was set because the company was contingently liable for damages by
virtue of a breach of contract.

On July 1 of the current year, a building costing 7,500,000 with accumulated depreciation of
3,000,000 is destroyed due to fire.

The construction of a new building cost the Marlon company 12,000,000. The insurance fund
was spent for this purpose.

On Dec. 15 of the same year, Marlon company lost against the complainant for breach of
contract and able to pay the damages from its contingency fund.

At the end of the year, the company redeemed 25,000 preference shares with par value of P50
at P53 per share.
Required: Prepare the necessary entries for the following transactions above.

Answer:
July 1, Loss on Fire 4,500,000
Accumulated Depreciation 3,000,000
Building 7,500,000

Building 12,000,000
Insurance Fund 9,000,000
Cash 3,000,000

Loss on lawsuit 750,000

Contingency Fund 750,000

Preference shares(25,000*50) 1,250,000

Retained Earnings 75,000
Preference share redemption fund 1,325,000

Exercise 5. ( ULO g) (Adapted Valix 2017 page 984) Louie company insured the life of the
president for 2,000,000, the entity being named as the beneficiary. The annual premium is
72,000. The policy was dated April 1, 20A and carried the following cash surrender value:
End of policy year Cash surrender value
April 1, 20B -
April 1, 20C -
April 1, 20D 72,000
April 1, 20E 100,800
April 1, 20F 139,200
The entity followed the calendar year as the accounting period. The president died on July 1,
20E and the face of the policy was collected on July 31, 20E.
Required: Prepare journal entries from April 1, 20A to July 31, 20E.

Answer:
April 1, 20B Life insurance expense 72,000
Cash 72,000
December 31, 20B Prepaid insurance 18,000
Life insurance 18,000

January 1, 20C Life insurance expense 18,000

Prepaid insurance 18,000

April 1, 20C Life insurance expense 72,000

Cash 72,000

December 31, 20C Prepaid life insurance 18,000

Life Insurance expense 18,000

January 1, 20D Life insurance expense 18,000

Prepaid life insurance 18,000

April 1, 20D Life insurance expense 72,000

Cash 72,000

December 31, 20D Prepaid life insurance 18,000

Life insurance expense 18,000

Jan. 1, 20E Life insurance expense 18,000

Prepaid life insurance 18,000

April 1, 20E Life insurance expense 72,000

Cash 72,000

Cash Surrender value 72,000

Life insurance expense 6,000
Retained earnings 66,000

July 1, 20E Cash Surrender Value 7,200

Life insurance expensee 7,200
72,000-100,800=28,800*3/12=7,200

July 31, 20E Cash 2,000,000

Cash surrender value 79,200
Life insurance expense 54,000 72,000*9/12
Gain on life insurance settlement 1,866,800

In a Nutshell
In minimum of 50 words, explain the importance and usefulness of putting up of a fund in the
viewpoint of the business and also in your own personal life or as an advice to your friends,
parents or even to your classmates.
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