8 Other Non-Current Financial Assets

<* Learning Outcomes

After reading this chapter, you should be able to:

(a) identify and account for other non-current financial assets, such as long-term
fimds,advances,deposits and cash surrender value oflife insurance; and
(c) acquire proficiency and accuracy in answering theoretical questions and
solving problenu relating to other non-current financial assets.

*> Other Non-Current Financial Assets

> Long-term funds such as plant expansion fiind,^ bond sinking fiind, preference
share redemption fund and employees'retirement fund
> Security deposit paid by the lessee to the lessor
> Long-term advances to ofhcers and employees
> Cash surrender value oflife insurance policy

❖ 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 ofmaturing bonds,redemption ofpreference shares and
retirement of employees under pension plan. The accumulation of.fimds is
made by an entity resulting from a contract (such as sinking fiind for bond
retirement) or a voluntary action by management (such as plant expansion
fiind).

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

> Proforma entries:

Deposit made to fund the account:

Fund XXX
Cash XXX

Interest earned:
Fund XXX
Interest Revenue xxx

Fund application:
Bonds Payable/Property,Plant and Equipment xxx
Fund XXX
Chapter 8 Chapter 8
Other Non-current Financial Assets Other Non-current Financial Assets

Cash Surrender Value of Life Insurance The difference between the cash paid as security deposit and its present value
is treated as prepaid lease expense, amortized on a straight-line basis,over the
>. This is the amount expected to be collected from the insurance company in the lease term.
event of surrender of life insurance policy. The cash surrender value of life
. insurance is recognized in the books ofthe entity when it pays for the premium > Proforma entries: ,
on the life insurance ofits officer/s, believing that,the loss of their officer/s will
Pa5mient ofsecurity deposit:
significantly affect the entity's operations. In addition, the beneficiary named
.Security Lease Deposit XXX
in the insurance policy is the entity. If the named beneficiary is other than the
Prepaid Lease Expense XXX
corporation, the premium being paid by the entity is treated as an additional
Cash XXX
benefit or compensation to the officer insured. Thus, no.cash surrender value
. oflife insurance,accrues in the entity's books. ■ Amortization of prepaid lease:
Lease Expense XXX
> Premiums on the life insurance being paid by the entity are charges to life
Prepaid Lease Expense XXX
insurance expense.
Periodic interest:
> The cash surrender value of life insurance accrues to the entity and should be
Security Lease Deposit XXX
reported as an asset of the entity at the ertd of each reporting {period. The Interest Revenue XXX
. increase in cash surrender value during a reporting period, as well as the
dividends received or receivable (if any) are adjustments to the life insurance
expense. Long-Term Advances

> In the event ofdeath ofthe insured officer,the life insurance expense is adjusted > Classified as loans and receivables and measured in the statement offinancial
on the date of death. The claim against the insurance company is established position at amortized cost using the eiffective interest method.
and the cash surrender value of life insurance is derecognized. The difference
,between the amountreceivable from the insurance company and the total ofthe > Initially discounted at present value using the market rate with interest revenue
^ adjusted prepaid insurance and cash surrender value of life insurance balance recognized at each reporting peridd. ' • ^
, is recorded as a gain on insurance settlement ■
> Proforma entries:
>' Proforma entries: '
Release of advances:
Paymdnt of premiums: Advances to Officers XXX
Life Insurance Expense XXX Prepaid Compensation Expense XXX

Cash XXX Cash XXX

Recognition ofthe cash surrendervalue ofthe policy: Periodic interest:

Cash Surrender Value ofLife Insurance JRolicy XXX Advance to Officers XXX

Life Insurance Expense XXX Interest Revenue XXX

Application and grant oflife insurance policy: Amortization of prepaid compensation expense over the term of the loan:
Receivablefrom the Insurance Company XXX Compensation Expense xxx
Cash Surrender Value ofLife Insurance XXX Prepaid Compensation Expense xxx
Gain on Insurance Settlement XXX
Collection of advances:
Cash XXX
❖ Security Deposit Advances to Officers xxx

> Refundable security deposit paid by the lessee to the lessor at the inception of
the lease is initially recognized as an asset(Security Lease Deposit or Receivable
from the Lessee) at its presentvalue. •

> Accretion of interest on the security deposit is periodically recorded based on

the effective interest method.

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Chapter 8 Chapter 8
Other Non-current Financial Assets Other Non-current Financial Assets

TRUE OR FALSE QUESTIONS FINANCIAL ACCOUNTING THEORY QUESTIONS

1. The establishment ofa sinking fund may be mandatory or voluntary. 1. If an entity is the owner and designated benehciary of a life insurance policy
covering the company's officer, any increase in cash surrender value is
2. Appropriation of retained earnings is required upon the establishment of the a. credited to life insurance expense.
sinking fiind. b. credited to an other income account.
c. debited to life insurance expense.
3. The classification of the sinking fund could either be current or noncurrent d. ignored.
depending on the classification ofthe related obligation.
2. A fund composed of small amount of bills and coins set aside to facilitate
4. The cash surrender value represents the amount ofcash to be received from the collection from customers.
insurance company in cdse Uie life insurance is canceled before the insured key a. Fish Fund
employee dies. b. Change Fund
c. Petty Cash Fund
5. Cash dividends received froni the insurance are not recognized as income but d. Cash Collection Fund
rather as deduction from the insurance expense recognized during the period.
3. Cash surrender value oflife insurance is recognized in the entit3r's books when
6. Other non-current financial assets include funds used in current operations the entity pays the insurance premiums ofits officers and
such as change fund, pa3a'oll fund,tax fund and interest fund. a. the entity is the named beneficiary.
b. the named beneficiary is other than the entity.
7. A cash fund set aside for acquisition of noncurrent asset should be classified as c. the officer remains with the entity for at least 10 years.
noncurrent regardless ofthe year of disbursement. d. the life insurance policy is expected to be surrendered after 10 years.

8. When as security deposit is made by the lessee to the lessor at the inception of 4. In a life insurance policy where the officer or the officer's heirs are the
the lease,the deposit shall be initially recognized as a receivable by the lessee designated beneficiary,the cash surrender value is •
at face value. a. not accounted for.
b. recorded as an income.
9. Appropriation of retained earnings is normally required for preference share c. credited to life insurance expense.
redemption funds. d. presented as non-current financial asset in the balance sheet.
10. A plant expansion fund may be in the form of cash and securities intended for 5. Which of the following are possible reasons for the accumulation of long-term
the acquisition ofland and building in the future. funds for an intended future use?
I. It is required by a contract.
II. It is decided upon by management as part of its financing plan.
III. It is decided upon by management as part of its investing plan.
IV. It is decided upon by management to be used in current operations.

a. 1,11 and III

b. 1, 111 and IV ' ^
c. II, III and IV
d. 1, 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 ofthe entity.

194 195
Chapter 8 Chapter8
Other Non-current Financial Assets Other Non-current Financial Assets

7. The appropriation ofretained earnings in relation to the issuance of bpnds is 12. Which of the following is not claissified as part of other non-current financial
a. mandatoiy. asset?
b.. at the option ofthe issuer of bonds. a. Contingency fund
c. either mandatory or discretionary. b. Plant expansion fund
d. mandatory for non-stock non-profit organizations. c. Pa3n"oll fimd
d. Sinking fund
8. The following funds are found in the December 31, 2021 trial balance of
Maharlika Enterprise: 13. Which of the following accounts is credited upon the initial recognition of the
I. Petty cash fund cash surrender value?
II. .Pa3a*olI fund a. Cash Surrender Value of Life Insurance Policy.
III. Funds for acquisition ofland b. Cash
IV. Preference share redemption fund c. Life Insurance Expense
d. Prepaid Life Insurance
Which ofthe following statements is incorrect?
a. I and II are presented as part of cash and cash equivalents. 14. The difference between the present value of the security lease deposit and the
b. IV-should be presented as part of non-current assets. actual cash paid is debited to '
c. . Ill will be presented as part of non-current assets. a. Compensation Expense
d. All statements are correct
b. Prepaid Lease Expense
c. Interest Receivable
9. Which of the following statements is Incorrect related to life insurance policy d. Lease Bonus Payable
where the company is the designated beneficiary?
a. Dividend received or receivable on account of the policy is recognized as 15. Masagana Trading plans on establishing a branch in Muntinlupa with the
income. related fund set aside for this purpose. How will this fund be presented in the
. b. Any premiums paid on the life insurance are recorded as life insurance statement of financial position?
expense. a. Financial assets at FVOCI
c. Any increase in cash surrender value is treated as a reduction to life b. Other Non-Current Financial Asset
insurance expense. , c. Trading investment
d. The proceeds minus the balance of the cash surrender value is taken to d. Financial asset at amortized cost
profit or loss upon accru^ ofthe 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 .Decre^e
d. Increase Decrease Decrease

11. " Which ofthe following statement is correct?

, a. A long-term fimd is necessary to be established for long-term liabilities
incurred.
b. Cash dividends are periodically received based on the cash surrender value
ofthe life insurance. ,
c. Long-term advances and deposits fall under the category offinancial assets
atPVPLorOCI.
d.. Any income earned from a bond sinking fund is taken to profit or loss in the
period earned.

196
197
Chapter 8
Chapter8
Other Non-current Financial Assets
Other Non-current Financial Assets

PRACTICAL FINANCIAL ACCOUNTING

On January 1, 2021, Patrice Company issued PIO million bonds that will mature
in five years. The bond indenture requires Patrice to establish a sinking fund for
A, On January 1,2021,Falcon Corporation issued PIG million bonds that will mature
the retirement of these bonds, with annual deposit every January 1, starting
in five years. The management decided to set up a separate fund for the
January 1,2021 up to January 1, 2026,in time for the maturity of the bonds.
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
The fund is to be placed in a separate account to be maintained in the company's
decided that deposits ofequal amounts will be made every June 30 and December
31,starting June 30,2021 up to December 31,2025. The company expects to earn depository bank. Using an average annual interest rate of 10% (net of tax)
an average interest of 10%,net of tax, on this investment. expected to be earned on this investment, the company determined that the
required annual deposit to be able to accumulate a total of PIO million is
(1) How much is the required semi-annual deposit that will accumulate PI,489,070.20.
P10,000,000 at the end offive years?
a. Pl.637,975 (5) How much is the bond sinking fund balance at December 31, 2021, after
making the requiredyear-end adjustment in thefund?
b. Pf295,052
a. Pl,489,070.20
c. Pl.000,000
d. P795,045 b. PI,637,977.22
c. Pl,629,842.80
d. P3,127,047.42 ' •
B. On July 1, 2021, Philgrant grants a 5-year, P5,000,000, non-interest bearing
advance to its president The rate ofinterest for similar obligations is 12%.
On January 1, 2021, Azkals Company adopted a plan to accumulate funds for a
(2) At what amount should the receivable from the president be taken up by new building to be erected beginning January 1, 2021 at an estimated cost of
Philgrant on July 1,2021? P21,000,000. Azkals intends to make three equal annual deposits in a fund
a. P2,837,000 beginning December 31, 2021 that will earn interest at 10% compounded
b. P2,873,000 annually. Future amount factors at 10% for three periods are:
c. P4,400,000
d. P5,000,000 Future value of 1 1.33
Future value of an ordinary annuity of 1 3.31
(3) How ^'^chisjhe interest revenue recognized by Philgrantfor the year 2021? Future value of an annuity of 1 in advance 3.64

b. P340,440 (6) How much is the annual deposit to thefund?

c. P300,000 a. P7,894,740
d. PI70,220 b. P7.000.000
c. P6,344,410
d. P5,769,230

matJrrfn'^f.v;lllls PIO million bonds that will

establish a sinking hind for th™ etlrt"ent of thel"L''T"^ '"l The following information relates to non-current investment that Gilas Pilipinas
deposit every June 30 and Derpmhof "31 "®se bonds, with semi-annual Company placed in trust as required by the underwriter of its bonds.
3t 2025 irZLe
separate account to be maintained in the comnanv'^ h
f ^7""^
^ Bond sinking fund,January 1,2021 P5,000,000
1,000,000
average annual interest rate of 10% fnet of t^vi »tory bank. Using an Additional investment in 2021
Dividend on investment 510,000
investment,
able the company
to accumulate a totaldetermined thatisthe^ennf^H
of PIG million P795 ® deposit to be Interest revenue 1,520,000
Administration costs 800,000
Carrying amount ofthe bonds payable 12,000,000

What amountshould Gilas Pilipinas Company report in its December 31,2021

a. P795,045.27 ^PJna. statement offinancial position related to its sinkingfund?
b. P834,797.53 a. P5,230,000
c. P1629,842.80 b. P7,230,000 '
d. Pl,669,595.00 c. P8,030,000
d. P8,970,000
 Chapter 8
Chapter 8
Other Non-current Financial Assets
Other Non-current Financial Assets

G. On January 1, 2015, Shell Company established a sinking fund to retire bonds

(11) What was the amount ofcash surrender value on January 1, 2021?
payable due in 2025. A bank was appointed as an independent trustee to manage
a. PI 72,000
the fund's investment On December 31, 2021,the trustee held P3,900,000 cash
b. P162,000
and PI,600,000 of securities in the sinking fund account The cash amount of
c. P142,000
P3,900,000 represents P3,700j000 in annual deposits to the fund and P200,000 d. PI02,000
of investment income earned on 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. 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
(8) How much should Shell Company's sinkingfund be included in the statement year. The company is the designated beneficiary and has the right to cancel the
offinancial position among its non-current assets on December31,2021? policy at its own option.
a. P5,580.000
b. P5,380,000 The cash surrender value of the policy at the end of each policy year are as follows:
c. P3,900,000 Cash surrender value
d. P3,700,000 2017 PO
2018 PO
2019 P36,000
H. Silver Company purchased a P2,000,000 ordinary life insurance policy on its 2020 P49,000
president and the company is the named beneficiary. Additional data are 2021 P62,000
available for the year ended December 31, 2021.
The president of Pep died on September 30,2021.
Cash surrender value: January 1 - P87,000; December 31 - P108,000
Annual premium paid in advance on January 1 - P40,0p0 (12) How much is the life insurance expensefor theyear ended December31, 2021?
Dividend received on July 1 - P6,000 a. P120,000
■. }
b. P107.000
(9) How much is Silver Company's life insurance expensefor 2021? c. P90,000
a. P40,000
d. P80,250
b. P34,000
c. P19,000
(13) How much is the gain from life insurance settlement upon death of the officer?
d. P13,000
a. P3,908,000
b. P3,921,000
I. Western Foods,Inc. purchased a P4,000,000 life insurance policy on the company c. P3,938,000
president. The annual premium that was paid on January 1, 2021,the beginning d. P4,000,000
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 arnounted to Pl,500. 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
(10) What was the amount ofthe life insurance expensefor 20217 are available for theyear ended December 31, 2021.
a. P87,500
Cash surrender value of life insurance, December 31, 2021 - P117,000
b. P89,000
Annual premium paid in advance on January 1, 2021 - P50,000
c. P90,500
Life insurance expense recognized in the statement of comprehensive
d. PIOISOO
income for theyear ended December 31, 2021 - P38,000

J. Candle Park Company has life insurance policies on its officers' lives. Annual (14) How much must have been the cash surrender value of life insurance at Iris's
premium amount to P50,000. At the end of 2021, cash surrender value of the December 31, 2020financial statements?
a. P 12,000
. policies amounted to P182,000. Dividends received by Candle Park Company ' b. P105,000
from the insurance company amounted to P5,000 in 2021. The insurance
c. Pll 7,000
expense recognized by Candle Park Company in 2021 was P35,000. d. P129,000

200
201
Chapter 8
Other Non-current Financial Assets

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 Inventories
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 Learning Outcomes
proceeds was collected on December 31; 2021. No premium was refunded on the
insurance settlement After reading this chapter, you should be able to:
(15) What is the gain on life insurance settlement? (a) understand the definition and nature of inventories;
a. PZ800,000 (b) determine the measurement basis, classification and presentation of
b. P7,870,000 inventories in the statement of financial position;
c. P7,875,000 (c) differentiate the perpetual and periodic inventory systems;
d. P7,890,000 (d) understand the inventory cost allocation methods and solve relevant
problems;
(e) understand the valuation of inventories at the lower of cost and net realizable
N. On January 2, 2021, Anne Company entered into a lease contract with Curtis
value;
Company for a term of three years until December 31, 2023. The lease fee is
(f) understand the inventory estimation methods; and
P100,000 per month under an agreement for an increase annually at the rate of
(g) acquire proficiency and accuracy in answering theoretical questions and
5%. Curtis also requires a refundable deposit of P300,000 to be paid by Anne
solving problems related to inventories.
Company in advance upon occupancy. The effective interest rate at that time is
10% and present value of PI at 10% for three periods is 0.7513.
Definition and Nature
(16)At how much will the security deposit be initially recorded on January 2,2021?
^ a.
b.
P300,000
P225,390
Inventories are assets that are held for sale in the ordinary course of business, in
the process of production for such sale, or in the form of materials or supplies to be
I
c. P105,000 consumed in the production process or in the rendering of services.
d. P247,929

(17) How much is the accretion on the security depositfor the year 2021 and the Measurement

security deposit balance at December 31,2021, respectively? Inventories should be measured at the lower of cost and net realizable value. Net
a- P22,539 and P247,929 realizable value is the estimated selling price of an item reduced by the estimated
b. PO and P300,000 s
costs of completion and disposal.
c. P24,793 and P272,722
d. cannot be determined
Cost of Inventories
O. In the December 31, 2021 trial balance of Bea Incorporated, the following
accounts are available: > The cost of inventories should comprise all costs of purchase, costs of
conversion and other costs incurred in bringing the inventories to their
Cash Surrender Value - P37,500; Investment in Subsidiary - P500,000: present location and condition.
Investment Property - P750,000; Plant Expansion Fund - P150,000; Tax Fund -
P2,500; Sinking Fund Cash - P125,000; Accrued interest receivable on sinking > The cost of purchase of inventories comprise the purchase price, import duties
fund securities - P12,500; Change Fund - P25,000; Sinking Fund Securities - and other taxes, and transport, handling and other costs directly attributable
P2S0.000; Advances to Related Party - P50,000.
to the acquisition of finished goods, materials and services.
> Trade discounts, rebates and other similar items are deducted in determining
(18) How much should be reported as.non-currentinvestments at the December31, the costs of purchase.
2021 statement offinancial position ofBea Incorporated?
a. P575,000 > The cost of conversion of inventories includes costs directly related to the
b. Pl,125,000 units of production.
c. Pl,862,500
d. PI,875,000

202 J >«i4.