Chapter 12

Other Long-term Investments

PROBLEM 1: TRUE OR FALSE

1. TRUE
2. FALSE
3. FALSE
4. FALSE
5. FALSE

PROBLEM 2: FOR CLASSROOM DISCUSSION

1. D

2. Solution:

Jan. 1, 20x1
Prepaid insurance 50,000
Cash 50,000

Dec. 31, 20x1

Insurance expense 50,000
Prepaid insurance 50,000

December 31, 20x3

Cash surrender value 90,000
Insurance expense 30,000
Retained earnings 60,000

September 1, 20x4
Cash 3,000
Insurance expense 3,000

December 31, 20x4

Cash surrender value 20,000
Insurance expense 20,000

Jan. 1, 20x5
Prepaid insurance 50,000
Cash 50,000

July 1, 20x5
Insurance expense 25,000
Prepaid insurance (50K x 6/12) 25,000
Cash 5,000,000
Prepaid insurance (50K x 6/12) 25,000
Cash surrender value 120,000
{110K + [(130K – 110K) x 6/12]}
Gain on life insurance 4,855,000

PROBLEM 3: EXERCISE
Solution:
(a) 1/1/x1
Prepaid Insurance 50,000
Cash 50,000

Insurance expense 50,000

Prepaid Insurance 50,000

(b) 12/31/x3
Cash surrender value 18,000
Insurance expense 6,000
Retained earnings 12,000

(c) 4/1/x4
Cash 4,000
Insurance expense 4,000

(d) 12/31/x4
Cash surrender value 3,000
Insurance expense 3,000

(e) 1/1/x5
Prepaid Insurance 50,000
Cash 50,000

(f) 3/31/x5
Insurance expense (50,000 x 3/12) 12,500
Prepaid insurance 12,500

Cash 1,000,000
Cash surrender value 23,750*
Prepaid Insurance (50K x 9/12) 37,500
Gain on settlement of life insurance 938,750

*21,000 + [(32,000 – 21,000) x 3/12] = 23,750

PROBLEM 4: CLASSROOM ACTIVITY
1. Solutions:

Requirement (a):

Year Insurance expense

20x1 280,000
20x2 280,000
20x3 [280K - (180K ÷ 3)] 220,000
20x4 [280K - 4K - (216K - 180K)] 240,000
20x5 (280K x 9/12) 210,000
Requirement (b):

Cash 10,000,000
Cash surrender value 249,000*
Insurance expense (280K x 3/12) 70,000
Gain on settlement of life insurance 9,681,000

*216,000 + [(260,000 – 216,000) x 9/12] = 249,000

PROBLEM 5: MULTIPLE CHOICE - THEORY
1. C
2. C
3. D
4. C
5. D
PROBLEM 6: MULTIPLE CHOICE - COMPUTATIONAL
1. B (450,000 + 90,000 + 15,000 + 30,000 – 5,000) = 580,000

2. C (1,000,000 ÷ 5.11) = 195,700

3. C [40,000 – (108,000 – 87,000) increase in cash surrender value

taking into account the dividends received] = 19,000

4. B
Solution:
Total annual premiums paid (4,000 x 4 yrs.) 16,000
Total life insurance expense (12,800)
Investment in cash surrender value 3,200

5. A