Chapter #8
Interim Financial Reporting
TRUE OR FALSE
1. The establishment of a sinking fund may be mandatory or voluntary. True
2. Appropriation of retained earnings is required upon the establishment of the sinking fund. False
3. The Classification of the sinking fund could either be current or noncurrent depending on the
classification of the related obligation. True
4. The cash surrender value represents the amount of cash to be received from the insurance company
in case the life insurance is canceled before the insured key employee dies. True
5. Cash dividends received from the insurance are not recognized as income but rather as deduction
from the insurance expense recognize during the period. True
6. Other non-current financial assets include funds used in current operations such as change fund,
payroll fund, tax fund and interest fund. False
7. A cash fund set aside for acquisition of noncurrent asset should be classified as noncurrent
regardless of the year of the disbursement. True
8. When as security deposit is made by the lessee to the lessor at the inception of the lease, the deposit
shall be initially recognized as a receivable by the lessee at face value. False
9. Appropriation of retained earnings is normally required for preference share redemption funds.
True
10. A plant expansion fund may be in the form of cash and securities intended for the acquisition of land
and building in the future. True
MULTIPLE CHOICE QUESTIONS
1. If an entity is the owner and designated beneficiary of a life insurance policy covering the company’s
officer, any increase in cash surrender value is
A. Credited to life insurance expense.
B. Credited to another income account.
C. Debited to life insurance expense.
D. Ignored.
2. A fund composed of small amount of bills and coins set aside to facilitate collection from customers.
A. Fish Fund.
B. Change Fund.
C. Petty Cash Fund.
D. Cash Collection Fund.
3. Cash surrender value of life insurance is recognized in the entity’s books when the entity pas the
insurance premium of its officers and
A. The entity is named beneficiary.
B. The named beneficiary is other than the entity.
C. The officer remains with the entity for at least 10 years.
D. The life insurance policy is expected to be surrendered after 10 years.
4. In a life insurance policy where the officer’s heirs are the designated beneficiary, the cash surrender
value is.
A. Not accounted for.
B. Recorded as an income.
C. Credited to life insurance expense.
D. Presented as non-current financial asset in the balance sheet.
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5. Which of the following are possibke reasons for the accumulatio of long- term funds for an intended
future use?
I. It is required by a contract.
II. It is decided upon by management as part of its financial plan.
III. It is decided upon by management as part of its investing plan.
IV. It is decided upon by management to be sued in current operations.
A. I, II and III
B. I,III and IV
C. II, III and IV
D. I, II and IV
6. Long term deposits and advances are measured at each reporting period at
A. Fair value
B. Face value
C. Amortized cost using the effective interest method
D. Amortized cost or fair value at the option of the entity
7. The appropriation of retained earnings in relation to the issuance of bonds is
A. Mandatory.
B. At the option of the issuer of bonds.
C. Either mandatory or discretionary.
D. Mandatory for non-stock non -profit organizations.
8. The following funds are found in December 31, 2021 trial balance of Maharlica Enterprises
I. Petty cash fund
II. Payroll fund
III. Funds for acquisition of land
IV. Preference shares redemption fund
Which of the following statements is incorrect?
A. I and II are presented as part of cash and cash equivalents.
B. IV should be presented as part of non-current assets.
C. III will be presented as part of non-current assets.
D. All statements are correct.
9. Which of the following statements is incorrect related to life insurance policy where the company is
the designated beneficiary?
A. Dividend received or receivable on account of the policy is recognized as income
B. Any premiums paid on the life insurance are recorded as life insurance expense
C. Any increase in cash surrender value is treated as a reduction to life insurance expense.
D. The proceeds minus the balance of the cash surrender value is taken to profit or loss upon
accrual of the insurance policy claim.
10. How will the subsequent increase in the cash surrender value affect the following:
Total Assets Insurance Expense Profit
A. Increase Decrease Increase
B. Increase Increase Increase
C. Decrease Decrease Decrease
D. Increase Decrease Decrease
11. Which of the following statement is correct?
A. A long-term fund is necessary to be establish for long-term liabilities incurred
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B. Cash dividends are periodically received based on the cash surrender balie of the life insurance
C. Long-term advances and deposits fall under the category of financial assets at FVPL or OCI.
D. Any income earned from a bind sinking fund is taken to profit or loss in the period earned.
12. Which of the following is not classified as part of other non-current financial asset?
A. Contingency Fund
B. Plant expansion Fund
C. Payroll Fund
D. Sinking Fund
13. Which of the following accounts are credited upon the initial recognition of the cash surrender value?
A. Cash surrender value of life insurance policy
B. Cash
C. Life insurance expense
D. Prepaid life insurance
14. The difference between the present value of the security lease deposit and the actual cash paid is
debited to
A. Compensation expense
B. Prepaid lease expense
C. Interest receivable
D. Leases bonus payable
15. Masagana Trading plans on establishing a branch in Muntinlupa with the related fund set aside for
this purpose. How will this fund be presented in the statement of financial position?
A. Financial assets at FVOCI
B. Other Non-Current Financial Asset
C. Trading Investment
D. Financial asset at amortized cost
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PRACTICAL FINANCIAL ACCOUNTING
A. On January 1,2021, Falcon Company issued P10 million bonds that will mature in five years. The
management decided to set up a separate fund for the retirement of these bonds. The fund is to be
placed in a separate account to be maintained in the company's depository bank in a board
resolution it was decided that deposits of equal amounts will be made every June 30 and December
31, so starting June 30, 2021, up to December 31, 2025. The company expects to earn an average
interest of 10% net of tax, on this investment.
1. How much is the required semi-annual deposit that will accumulate P10,000,000 at the end of
five years?
A. P1,637,975
B. P1,295,052
C. P1,000,000
D. P795,045
B. On July 1,2021, Philgrant grants a 5-year, P5,000,000 non-interest bearing Advance to its president.
The rate of interest for similar obligations is 12%.
2. At what amount should be the receivable from the president be taken up by Philgrant on July 1,
2021?
A. P2,837,000
B. P2,873,000
C. P4,400,000
D. P5,000,000
3. How much is the interest revenue recognized by Philgrant for the year 2021?
A. P600,000
B. P340,440
C. P300,000
D. P170,220
C. On January 1, 2021, Patrick corporation issued 10 million bonds that will mature in five years. The
bond indenture requires Patrick Corp to establish a sinking fund for the retirement of this bonds ,
with semi-annual deposit every June 30 and December 31, starting June 30, 2021 up to December 31,
2025 in time for the maturity of the bonds. The fund is to be placed in z separate account to be
maintained in the company’s depository bank. Using an average annual interest rate of 10% (net of
tax) expected to be earned on this investment, the company determined that the required semi-
annual deposit to be able to accumulate a total of P10 million is P795,045.27.
4. How much is the bond sinking fund balance at December 31, 2021, after making the required
semi-annual deposit in the fund?
A. P795,045.27
B. P834,797.53
C. P1,629,842.80
D. P1,669,595.00
D. On January 1, 2021, Patrice Company issued P10 million bonds that will mature in five years. The
bond indentures requires Patrice to establish a sinking fund for the retirement of these bonds, with
annual deposit every January 1, starting Jannuraty 1, 221 up to January 1, 2026, in time for the
maturity of the bonds.
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The fund is to be placed in a separate account to be maintained in the company’s depositor bank.
Using an average annual interest rate of 10% (net of tax) expected to be earned on this investment,
the company determined that the required annual deposit to be able to accumulate a total of P10
million is P1,483,070.20.
5. How much is the bond sinking fund balance at December 31,2021, after making the required
year-end adjustment in the fund?
A. P1,489,070.20
B. P1,637,977.22
C. P1,629,842.80
D. P3,127,047.42
E. On January 1, 2021, Azkals Company adopted a plan to accumulate funds for a new building to be
erected beginning January 1, 2021 at an estimated cost of P21,000,000. Azkals intend to make three
equal annual deposits in a fund beginning December 31, 2021 that will earn interest at 10%
compounded annually. Future amount factors at 10% for three periods are:
Future value of 1 1.33
Future value of an ordinary annuity of 1 3.31
Future value of an annuity due of 1 in advance 3.64
6. How much is the annual deposit of the fund?
A. P7,894,740
B. P7,000,000
C. P6,344,410
D. P5,749,230
F. The following information relates to non-current investment that Gilas Pilipinas company placed in
trust as required by the underwriter of its bonds.
Bond sinking fund, January 1, 2021 P5,000,000
Additional investment in 2021 1,000,000
Dividend on investment 510,000
Interest Revenue 1,520,000
Administration costs 800,000
Carrying amount of the bonds payable 12,000,000
7. What amount should Gilas Pilipinas Company report in its December 31, 2021 statement of
financial position related to its sinking fund?
A. P5,230,000
B. P7,230,000
C. P8,030,000
D. P8,970,000
G. On January 1, 2015, Shell Company established a sinking fund to retire bonds payable due in 2025. A
bank was appointed as an independent trustee to manage the fund investment. On December 31,
2021, the trustee held P3,900,000 cash and P1,600,000 of securities in the sinking fund account. The
cash amount of P3,900,000 represents P3,700,000 in annual deposits to the fund and P200,000 of
investment income earned in those deposits prior to 2021. A bank representative informed shell that
P80,000 of interest and dividends has been earned in 2021; however, this amount will be received in
the first month of 2022.
8. How much should Shell Company’s sinking fund be included in the statement of financial position
among its non-current assets on December 31,2021?
A. P5,580,000
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B. P5,380,000
C. P3,900,000
D. P3,700,000
H. Siilver company purchased a P2,000,000 ordinary life insurance policy on ts president and the
company is the named beneficiary. Additional date are available for the year ended December 31,
2021.
Cash surrender value: January 1- P87,000; December 31- P108,000
Annual Premium Paid in advance on January 1- P40,000
Dividend Received on July 1- P6,000
9. How much is the Silver Company’s life insurance expense for 2021?
A. P40,000
B. P34,000
C. P19,000
D. P13,000
I. Western Foods, Inc. purchased a P4,000,000 life insurance policy on the company president. The
annual premium that was paid on January 1, 2021, the beginning of the third policy year, amounted
to P96,000. In 2021, cash surrender value increased by P7,000 and dividends from the insurance
company credited against the premiums due for the year amounted to P1,500.
10. What was the amount of the life insurance expense for 2021?
A. P87,500
B. P89,000
C. P90,500
D. P101,500
J. Candle Park Company has life insurance policies on its officer’s lives. Annual premium amount to
P50,000. At the end of 2021, cash surrender value of the policies amounted to P182,000. Dividends
received by Candle Park Company from the insurance company amounted to P5,000 in 2021. The
insurance expense recognized by Candle Park Company in 2021 was P35,000.
11. What was the amount of 4cash surrender value on January 1,2021?
A. P172,000
B. P162,000
C. P142,000
D. P102,000
K. On January 1, 2017, pep company insured the life of its president for P4,000,000 with an annual
premium of P120,000 payable in advance at the beginning of each year the company is the
designated beneficiary and has the right to cancel the policy at its own option.
The cash surrender value of the policy at the end of each policy year are as follows:
Cash surrender value
2017 P0
2018 P0
2019 P36,000
2020 P49,000
2021 P62,000
The president of Pep died on September 30,2021.
12. How much is the life insurance expense for the year ended December 31, 2021?
A. P120,000
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B. P107,000
C. P90,000
D. P80,250
13. How much is the gain from life insurance settlement upon death of the officer?
A. P3,908,000
B. P3,921,000
C. P3,938,000
D. P4,000,000
L. Several years ago, Iris company purchased a P3,000,000 ordinary life insurance policy on its
president and the company is the named beneficiary. Additional data are available for the year ended
December 31, 2021.
Cash surrender value of life insurance, December 31,2021- P117,000
Annual premium paid in advance on January 1, 2021- P50,000
Life insurance expense recognized in the statement of comprehensive income for the year ended
December 31, 2021- P38,000
14. How much must have been the cash surrender value of life insurance at Iris’s December 31,
2020, financial statements?
A. P12,000
B. P105,000
C. P117,000
D. P129,000
M. Brad Corporation insures the life of its president for P8,000,000, the corporation being the
beneficiary of an ordinary life policy. The premium is P200,000. The policy is dated January 1, 2017.
The cash surrender value on December 31, 2020, and 2021 are P60,000 and P80,000, respectively.
Brad follows the calendar year as its fiscal period. The president died on October 1, 2021, and the
insurance proceeds was collected on December 31, 2021. No premiums were refunded on the
insurance settlement.
15. What is the gain on life insurance settlement?
A. P7,800,000
B. P7,870,000
C. P7,875,000
D. P7,890,000
N. On January 2, 2021, anne company entered into a lease contract with Curtis company for a term of
three years until December 31, 2021. The lease fee is P100,000 per moth under an agreement for an
increase annua;;y at the rate of 5%. Curtis also requires a refundable deposit of P300,000 to be paid
by Anne Company in advance upon occupancy. The effective interest rate at that time is 10% and
present value of P1 at 10% for three periods is 0.7513.
16. At how much will security deposit be initially recorded on January 2, 2021?
A. P300,000
B. P225,390
C. P105,000
D. P247,929
17. How much is the accretion on the security deposit for the year 2021 and the security deposit
balance at December 31, 2021, respectively?
A. P22,539 and P247,929
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B. P0 and P300,000
C. P24,793 and P272,722
D. Cannot be determined
O. In December 31,2021 trial balance of Bea Incorporated, the following accounts are available
Cash Surrender Value- P37,500; Investment in Subsidiary- P500,000; Investment Property-
P750,000; Plant Expansion Fund- P150,000; Tax Fund- P2,500; Sinking Fund Cash- P125,000;
Accrued Interest Receivable on sinking fund securities- P12,500; Change Fund – P25,000; Sinking
Fund Securities- P250,000; Advances to Related Party- P50,000.
18. How much should be reported as non-current investment at the December 31,2021 statement of
financial position of Bea Incorporated?
A. P575,000
B. P1,125,000
C. P1,862,500
D. P1,875,000
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