Chapter 12

Other Long-term Investments

PROBLEM 1: TRUE OR FALSE

1. TRUE

2. FALSE

3. FALSE

4. FALSE

5. FALSE

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. C

2. C

3. D

4. C

5. D

PROBLEM 3: EXERCISE

1. 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) 4/15/x5

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: 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