OTHER NON-CURRENT FINANCIAL

ASSETS

EMPV
 FUNDS FOR FUTURE USE

These are funds in the form of cash or highly liquid financial instruments which the enterprise holds for specific
purpose.

CATEGORIES OF FUNDS:

1. Funds that are set aside to be use in current operations – immediately available for use for payment of
current operating expenses ,currently maturing obligations or resources that are current assets and this funds are
classified as current asset in the balance sheet. This was already discussed in our topic regarding a cash and cash
equivalents.

Example : Working funds ( Petty cash fund, change fund, payroll funds and etc.)

II. Funds that are set aside to be use for specific purpose in the future– This funds are normally restricted
for a specific purpose. These funds are classified as non-current assets in the balance sheet. This is going to be the
focus our topic.

Examples : Equipment acquisition fund, plant expansion fund, sinking fund ,preference share redemption fund and
employees retirement fund.
 LONG-TERM FUNDS

• Represents cash and highly liquid financial instruments which the entity holds and designates for some specific
purposes such as plant expansion, equipment acquisition, retirement of maturing bonds, redemption of preference
shares and retirement of employees under pension plan.

• The accumulation of the funds is made by an entity resulting from a contract ( such as sinking fund for bond
retirement) or a voluntary action by the management ( such fund, was plant expansion fund).

• The entity determines the amount that it has to deposit or transfer to the fund, with an expected yield so that it
would have accumulated enough amount required in the fund.

• If the fund accumulated has an excess amount , this amount shall be reverted to the general cash account :
CASH XX
LONG-TERM FUNDS XX

• There are instances wherein the cash in the fund is invested temporarily in other financial instruments that will
provide additional income in the form of cash and cash equivalents. Any returns are taken in the profit or loss
section ( example: interest income, dividend income )
 ILLUSTRATIVE PROBLEM:

On January 1,2019, ABC Company issued a P 10,000,000 bonds that will mature in 5 years. The management decided
to set up a separate fund for the retirement of these bonds (payment). 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,
starting June 30,2019 up to December 31,2023. The company expects to earn an average interest of 10%, net of tax,
on this investment.

With this problem, the required periodic deposit would be computed by the face value of the bond by the Future Value
Factor of an Ordinary Annuity. Here, we are not going to use the present value factors because we are not finding the
value of bond today or currently. To compute for the Future value factor of an ordinary annuity for this problem, it will
be (1.05xx========= -1) /0.05. From here you’ll get a FV factor of ordinary annuity for 10 periods at 12.5778925….
You can also check this FV factor in the table at the back of you book. This FV factor will be then used as a divisor to
get the periodic deposit to accumulate the P 10,000,000 on December 31,2023.

Required periodic deposit every June 30 and December 31 = 10,000,000 / 12.5778925…….

= 795,045.75
TABLE FOR ACCUMULATION OF
FUND

Balance,end (Previous balance,end + interest

Interest (5%) ( 5% of the
Date Deposit earned during the current period + current
previous balance,end)
periodic deposit)
6/30/19 795,045.75 795,045.75
12/31/19 795,045.75 39,752.29 1,629,843.79
6/30/20 795,045.75 81,492.19 2,506,381.73
12/31/20 795,045.75 125,319.09 3,426,746.56
6/30/21 795,045.75 171,337.33 4,393,129.64
12/31/21 795,045.75 219,656.48 5,407,831.87
6/30/22 795,045.75 270,391.59 6,473,269.22
12/31/22 795,045.75 323,663.46 7,591,978.43
6/30/23 795,045.75 379,598.92 8,766,623.10
12/31/23 795,045.75 438,331.15 10,000,000.00
 ENTRIES IN THE BOOKS OF
ABC:
2019 2022
June 30 Bond Sinking Fund P 795,045.75 June 30 Bond Sinking Fund 1,065,437.34
Cash P 795,045.75 Cash 795,045.75
Interest Income 270,391.59
Dec. 31 Bond Sinking Fund 834,798.04
Cash 795,045.75 Dec. 31 Bond Sinking Fund 1,118,709.21
Interest Income 39,752.29 Cash 795,045.75
2020 Interest Income 323,663.46
June 30 Bond Sinking Fund 834,798.04
Cash 795,045.75 2023
Interest Income 81,492.19 June 30 Bond Sinking Fund 1,174,644.67
Dec. 31 Bond Sinking Fund Cash 795,045.75

Cash 920,364.84 795,045.75 Interest Income 379,598.92

Interest Income 125,319.09
2021 Dec. 31 Bond Sinking Fund 1,233,376.90
June 30 Bond Sinking Fund 966,383.08
Cash 795,045.75
Cash 795,045.75
Interest Income 171,337.33 Interest Income 438,331.15

Dec. 31 Bond Sinking Fund 1,014,702.23 Bonds payable 10,000,000

Cash 795,045.75 Bond Sinking Fund 10,000,000
Payment of the bonds at maturity date
Interest Income 219,656.48
 FREQUENTLY ASKED QUESTIONS:

2019 2020 2021

1. Howmuch is the balance of the fund as 1,629,843.79 3,426,746.56 5,407,831.87
of December 31
2. Interest income for the year? 39,752.29 206,811.28 390,993.81
 WHAT IF C ASH IN THE FUND WAS INVESTED WHILE IT
WAS ACCUMULATING?

Assuming on January 1,2019, ABC Company decided to segregate a fund for acquisition of an equipment
on December 31,2021. It was decided by the management that they will transfer semi-annually P
300,000 from the general account starting on June 1,2019 until December 31,2022 to accumulate the
funds for acquisition of an equipment. On October 1,2019 , equity securities are purchased using the
equipment acquisition fund at P 100,000. On December 31,2019, cash dividends of P 35,000 were
received from the equity securities purchased coming from the equipment acquisition fund last October
1,2019. On December 31,2020, cash dividends were received again from the equity securities in the fund
of P 50,000. On November 1, 2021, the equity securities purchased last October 1,2019 were sold at P
150,000. On December 31,2022, the equipment was purchased at a cost of P 1,810,000.
 ENTRIES IN THE BOOKS OF
ABC:
2021
June 30 Equipment Acquisition Fund P 300,000
Cash P 300,000

Oct .1 Equipment Acquisition Fund Securities 100,000

Equipment Acquisition Fund 100,000

Dec. 31 Equipment Acquisition Fund 35,000

Equipment Acquisition Fund Income 35,000

Equipment Acquisition Fund P 300,000

Cash P 300,000
2020
June 30 Equipment Acquisition Fund P 300,000
Cash P 300,000

Dec. 31 Equipment Acquisition Fund 50,000

Equipment Acquisition Fund Income 50,000

Equipment Acquisition Fund P 300,000

Cash P 300,000
ENTRIES IN THE BOOKS OF
ABC:
2021
June 30 Equipment Acquisition Fund P 300,000
Cash P 300,000

November 1 Equipment Acquisition Fund 150,000

Equipment Acquisition Fund Securities 100,000
Equipment Acquisition Fund Income 50,000

Dec. 31 Equipment Acquisition Fund 300,000

Cash P 300,000

Equipment 1,810,000
Equipment Acquisition Fund 1,810,000

Cash 225,000
Equipment Acquisition Fund 225,000
Excess amount is reverted back to the general cash
account
 LONG-TERM ADVANCES /DEPOSITS

• long term advances and deposits are categorized as loans and receivables , which are carried at the balance sheet at
amortized cost using the effective interest method. These advances and deposits are recorded at its present value at
the time the cash were advanced based on the market rate of interest at initial recognition.

• After the initial recognition until the date of settlement, interest income is recognized in the books.
• Topic on security deposits will be discussed in your topic regarding leases.

ILLUSTRATIVE PROBLEM:

On January 1,2019, ABC Company approved a non-interest bearing note from its president amounting
to P 4,000,000.The advance is to be settled by the president on December 31,2021. On January 1,2019,
the market rate of interest for similar obligations is 12%.

So to record the advance given to the president, the present value of the note must first be computed. Because the
note is to be repaid on December 31,2021, the PV of single payment for 3 period at 12% will be used.

PV of note = P 4,000,000 X 0.711780…. = P 2,847,120.00

 AMORTIZATION TABLE

DATE INTEREST INCOME CARRYING VALUE

1/1/19 2,847,120.99
12/31/19 341,654.52 3,188,775.51
12/31/20 382,653.06 3,571,428.57
12/31/21 428,571.43 4,000,000.00
 ENTRIES IN THE BOOKS OF ABC:

2019
Jan 1 Advances to Officers 2,847,120.99
Prepaid compensation Expense 1,152,879.01
Cash 4,000,000*
Normally because a related party to the company was given advances, the assumption here is that they are
not charged with interest because normally this advances are used for business purposes and will be later
reimbursed by the officer. But due to the application of time value of money, the amount advanced is
recognized in the books at its present value. So at the date of initial recognition the difference between the
present value and the face value of the note is recognized as prepaid compensation expense and this prepaid
compensation expense is spread uniformly on the term of the loan. With the application of time value of
money, interest accruing to the note will be recognized as interest income and there will be an increase in the
advances to officers account to bring it to its maturity value at maturity date. Alternatively, if the company
granted the officer by disbursing the the cash equivalent to the present value of the note ( 2,847,120.00), it
means that company charges an interest to the officer (normally this happens when an officer borrows money
from the company other than business purpose, the accounting of this case is the same like the accounting for
a non-interest bearing note receivable. The entry would be as follows:

Advances to Officers 4,000,000

Discount on Officer Advances 1,152,879.01
Cash 2,847,120.99

But for this topic, we’ll not use the alternative.

Dec 31 Advances to Officers 341,654.52
Interest Income 341,654.52
See amortization table
Compensation Expense 384,293
Prepaid Compensation Expense 384,293
1,152,879.01/3
2021
Dec 31 Advances to Officers 428,571.43
Interest Income 428,571.43
See amortization table
Compensation Expense 384,293
Prepaid Compensation Expense 384,293
1,152,879.01/3

Cash 4,000,000
Advances to Officers 4,000,000
 C ASH SURRENDER VALUE OF LIFE
INSURANCE
• This is the amount expected to be collected from the insurance company in the event of surrender of life insurance policy.

• The cash surrender value of life insurance is recognized only in the books of the entity when it pays for the
premium on the life insurance of its officer/s, believing that the loss of their officer/s will significantly affect the
entity’s operations. In addition, the beneficiary named in the insurance policy is the entity/corporation. If the named
beneficiary is other than the corporation, the premium being paid by the entity is treated as an additional benefit or compensation to the
officer insured.Thus, no cash surrender value of the life insurance accrues in the entity’s books.

• Premiums on the life insurance being paid by the entity are charges to the life insurance expense and is taken in the profit
or loss section of the statement of comprehensive income (SCI)

• The cash surrender value of life insurance accrues to the entity and should be reported as a non-current asset of
the entity at the end of each reporting period. The increase in cash surrender value during a reporting period, as well as dividends
received or receivable (if any) are adjustments to the life insurance expense.

• In the event of the death of the insured officer, the life insurance expense is adjusted on the date of death. The claim
against the insurance company is established and the cash surrender value of life insurance is derecognized. The difference
between the amount receivable from the insurance company and the total of the adjusted prepaid insurance and
cash surrender value if life insurance is recorded as a gain on insurance settlement and is also taken in the profit
or loss section of (SCI).
 ILLUSTRATIVE PROBLEM:

On January 1,2019, ABC Company insured the life of its president for P 8,000,000, the corporation being the
beneficiary of an ordinary life policy. The premium is P 200,000 payable at the beginning of each year. The policy is
dated January 1,2019. The cash surrender value on its anniversary dates: December 31, 2021, 2022 and 2023 are P
60,000 , P 80,000 and P 120,000, respectively. ABC follows the calendar year as its reporting period. Dividends of P
10,000 was received on life insurance policy on July 2,2021.The president died on October 1, 2023.

ENTRIES IN THE BOOKS OF ABC(Assuming ABC Company uses the expense method to account its prepaid insurance) :
2019
Jan 1 Life Insurance Expense P 200,000
Cash P 200,000

2020
Jan 1 Life Insurance Expense 200,000
Cash 200,000

2021
Jan 1 Life Insurance Expense 200,000
Cash 200,000
July 1 Cash 10,000
Life Insurance Expense 10,000

Dec 31 Cash surrender value on Life Insurance 60,000

Life insurance Expense 60,000
2022
Jan 1 Life Insurance Expense 200,000
Cash 200,000

Dec 31 Cash surrender value on LIP 20,000

Life insurance Expense 20,000

CSV, 12/31/2022 – 80,000
CSV, 12/31/2021 – 60,000
Increase in CSV 20,000
2023
Jan 1 Life Insurance Expense 200,000
Cash 200,000

Oct 1 Prepaid Life Insurance 50,000 Receivable from Insurance Co. 8,000,000
Life Insurance Expense 50,000 Prepaid life Insurance 50,000
Adjustment of life Cash surrender Value of LIP 80,000
insurance expense not yet Gain on insurance settlement 7,870,000
expired:
Annual premium x unexpired
portion-
P 200,000 X 3/12* = 50,000
*Oct 1 –Dec 31
(the company uses expense
method to account for its life
insurance premium payments.
You can also account the life
insurance using the asset
method)
 FREQUENTLY ASKED QUESTIONS:

2019 2020 2021 2022 2023

1. How much cash surrender
value on life insurance policy 0 0 60,000 80,000 0
must be reported on Dec. 31?
2. How much is the life 200,000 200,000 130,000 180,000 150,000
insurance expense to be
reported on the profit or loss
section of SCI?
3. How much is the gain on 0 0 0 0 7,870,000
settlement of insurance policy?
 WHAT IF ABC COMPANY INSURED ITS
PRESIDENT DURING THE YEAR?
Assuming instead of January 1,2019,ABC Company insured the life of its president on April 1,2019.
Also, on its anniversary dates, the cash surrender values are also the same based on the previous
problem.

2019
Apr 1 • DU
Life Insurance Expense P 200,000
Cash P 200,000
Dec.31
Prepaid Life Insurance 50,000
Life Insurance Expense 50,000

2020
Apr 1 Life Insurance Expense 200,000
Cash 200,000
2021
Apr 1 Life Insurance Expense 200,000
Cash 200,000

Cash surrender value on Life Insurance 60,000

Life insurance Expense 60,000
July 1 Cash 10,000
Life Insurance Expense 10,000
2022
Apr 1 Life Insurance Expense 200,000
Cash 200,000

Cash surrender value on LIP 20,000

Life insurance Expense 20,000
CSV, 4/1/2022 – 80,000
CSV, 4/1/2021 – 60,000
Increase in CSV 20,000
2023
Apr 1 Life Insurance Expense 200,000 Oct 1 Prepaid Life Insurance 50,000
Cash 200,000 Life Insurance Expense 50,000

Cash surrender value on LIP 40,000 Adjustment of life

Life insurance Expense
CSV, 4/1/2023 – 120,000
CSV, 4/1/2022 – 80,000
Increase in CSV 40,000
insurance expense not yet
40,000 expired:
Annual premium x unexpired
portion-
P 200,000 X 3/12* = 50,000
*Oct 1 –Dec 31
(the company uses expense
method to account for its life
insurance premium payments.
You can also account the life
insurance using the asset
method)

Receivable from Insurance Co. 8,000,000

Prepaid life Insurance 100,000
Cash surrender Value of LIP 120,000
Gain on insurance settlement 7,780,000
 FREQUENTLY ASKED QUESTIONS:

2019 2020 2021 2022 2023

1. How much cash surrender
value on life insurance policy 0 0 60,000 80,000 0
must be reported on Dec. 31?
2. How much is the life 150,000 200,000 130,000 180,000 110,000
insurance expense to be
reported on the profit or loss
section of SCI?
3. How much is the gain on 0 0 0 0 7,780,000
settlement of insurance policy?
 EXERCISES

Kindly answer the following :

3-11
3-12
3-13
3-14