FINANCIAL ACCOUNTING 1_3RD ASSIGNMENT

INVESTMENT

Name: Date:

1. In 2010, SoftballFanatic, Inc. purchased a P1,000,000 life insurance policy on its president, of which
SoftballFanatic is the beneficiary. Information regarding the policy for the year ended December 31,
2013, follows:
Cash surrender value, 1/1/13 P 87,000
Cash surrender value, 12/31/13 108,000
Annual advance premium paid 1/1/13 40,000
During 2013, dividends of P6,000 were applied to increase the cash surrender value of the policy. What
amount should SoftballFanatic report as life insurance expense for 2013?

2. On June 1, 2007, RagingHounds Co. purchased merchandise worth 100,000 Brazilian Real from its
Brazilian supplier payable within 30 days under an open account arrangement. RagingHounds
issued a 30-day 6% note payable in Brazilian Real. On July 15, 2007 RagingHounds paid the note in
full. The following information on spot rates (P/SF) are provided:
Buying Selling
June 15, 2007 P24.03 P24.15
July 15, 2007 24.10 24.22
Compute (1) RagingHound’s foreign exchange gain (loss) for the transaction and (2) the amount paid
to the Brazilian supplier on July 15, 2007?

3. On August 1, 2006, BloodGriffins Co., a Philippine firm, signed an agreement with a foreign
manufacturer to purchase motorcycles priced at 500,000 FC. The motorcycles are to be delivered on
February 1, 2007 and payment is to be made on April 1, 2007. The Philippine firm prepares financial
statements on December 31 of each year. On August 1, 2006, BloodGriffins Co. enters into a
forward contract to purchase 500,000 FC on April 1, 2007. The forward exchange contract is a hedge
of an identifiable foreign currency commitment. Relevant exchange rates for the FC are as follows:
Spot rate 8-month forward rate
August 1, 2006 P0.50 P0.54
December 31, 2006 0.49
February 1, 2007 0.52
April 1, 2007 0.55
The amount of foreign currency exchange gain (loss) under the forward contract the Philippine
firm would present on its 2006 and 2007 income statements, respectively, are:

4. On November 2, 2006, AceWarriors Company, Philippine wholesaler, ordered merchandise from Indo
Corporation of Indonesia. The merchandise is to be delivered to AceWarriors Company on January
30, 2007 at a price of 1,000,000 Rupiah. Also on November 2, AceWarriors Company hedged the
foreign currency commitment with Indo Corporation by contracting with its bank to buy 50,000,000
Rupiah for delivery on January 30, 2007. Exchange rates for Rupiah are:
11/2/06 12/31/06 1/30/07
Spot rate P0.0052 P0.0053 P0.0055
30-day forward rate 0.0053 0.0055 0.0056
90-day forward rate 0.0055 0.0056 0.0047
On December 31, 2006, forex gain (loss) to be recorded for the import transactions and the forward
contract are:

5. On December 1, 2011, SlipperCatch Company paid P6,000 to purchase a 90-day option for Yuan
400,000. The option’s purpose is to hedge an exposed accounts receivable of Yuan 400,000 from a
sale of merchandise to a buyer from Beijing, China. The merchandise is to be shipped by
SlipperCatch on December 1, 2011, payment for which is due on March 1, 2012.Relevant rates and
market values at different dates are as follows:
12/01/11 12/31/11 03/01/12
Spot rate (market price) P6.80 P6.68 P6.70
Exercise price P6.80 P6.80 P6.80
Calculate the fair value of the option contract at December 31, 2011 assuming the time value
component is amortized by straight-line method.
6. The PalaroIsFun2014 Company purchased an investment property on January 1, 2009 for a cost of
P220,000. The property had a useful life of 40 years and at December 31, 2011 had a fair value of
P300,000. On January 1, 2012 the property was sold for net proceeds of P290,000. R
PalaroIsFun2014 uses the fair value model to account for investment properties.
What is the gain or loss to be recognized in the profit or loss for the year ended December 31, 2012
regarding the disposal of the property?

7. The following transactions relate to a sinking fund for retirement of long term bonds of
JirehKotico_aka_“babygirl” Company.
1. In accordance with the terms of the bond indenture, cash in the amount if P2,000,000 is
transferred at the end of the first year, from the regular cash account to the sinking fund. The
entity administers the fund.
2. The sinking fund cash is used to acquire AB Company 12% bonds of P500,000 face value,
maturing in five years for P450,000.
3. The sinking fund cash is used to acquire 10% P100 par value CD 5,000 preference shares, at P80
per share.
4. Annual interest is received on the AB bonds. The discount on the bonds is amortized accordingly
using straight line method.
5. Sinking fund expenses of P20,000 are paid out of the sinking fund cash.
6. The sinking fund cash is used to acquire EF Company 10% bonds of P400,000 face value,
maturing in four years for P400,000 plus accrued interest of P10,000.
7. Annual dividend is received on the CD preference share.
8. Interest is received on the EF bonds, P20,000, including the accrued interest at the time of
purchase.
9. All EF bonds are sold for P450,000. No interest is accrued at the time of sale.
10. Retained earnings appropriated in an amount equal to the sinking fund balance.
Required: Prepare journal entries to record the transactions.

8. The following accounts are found under current assets in the December 31,2012 statement of
financial position of WendyAmataBalacuit Company:

Cash surrender value 90,000

Less: Policy loan from insurance company 50,000 40,000
Dividend receivable from insurance company 2,000
The above accounts are the only ones in the statement of financial position which pertain to the
insurance policy or the loan. Upon investigation, the following data are gathered:
a. The cash surrender value reported in the statement of financial position is for June 30,2013 the cash
surrender value was P80,000 on June 30,2012.
b. On June 30, 2012 the entity paid the annual premium of P30,000 minus the dividend declared of
P2,000.
c. The loan from the insurance company is a one year note dated April 1,2012. The 12% interest is
payable on the date of maturity.
d. The dividend declared was recorded by debiting dividend receivable and crediting dividend income.
Required: a. Prepare the journal entries to correct the accounts on December 31,2012.
b. Indicate the financial statement classification of the accounts related to the insurance
policy and the loan.

9. On January 1,2013, ChantalDominique Corporation insured the lives of its President, Vice-President,
Controller and treasurer for P100,000 each. The annual premium on each policy is P4,200, payable
on January 1 of each year, and the cash surrender value of the policy increase by 4% of the annual
premiums paid. Premium payments were made on the scheduled date by ChantalDominique
Corporation through 2015, and the following dividends were received at the end of the year on each
policy; 2013, P450; 2014, P575; 2015, P550. On February 1,2016, the treasurer died and
ChantalDominique Corporation collected the face value of his policy plus eleven months premium.
Required: Prepare journal entries to record the preceding information for the years 2013 through 2016.
(round calculation to the nearest peso.)
10. The following is available concerning the FarenGrace Corporation’s sinking fund:
Jan. 1, 2013 Established a sinking fund to retire an outstanding bond issue by contributing P425,000.
Feb. 3,2013 Purchased securities for P400,000.
July 30,2013 Sold securities originally costing P48,000 for P45,000 securities in the amount of
P49,000; the securities had a market value of P355,000 at this time.
Dec.31, 2014 Collected dividends and interest on the remaining securities in the amount of P40,000.
Paid sinking fund expenses of P4,500.
Sold the remaining securities in the fund in the amount for P360,000.
Retired an outstanding bond issue of P500,000 with the cash form the fund and
transferred the remaining fund balance back to the cash account.
Required: Prepare journal entries to record the preceding transactions for the FarenGrace Corporation.

11. On January 2,2013, RogenAnnNuto Company purchases a call option for P300 on Merchant ordinary
shares. The call option gives RogenAnnNuto the option to by 1,000 shares of Merchant at a strike
price of P50 per share. The market price of a Merchant share is P50 on January 2,2013 ( the intrinsic
value is therefore P0). On March 31,2013, the market price for Merchant shares is P53 per share,
and the time value of the option is P200.
Required: a. Prepare all necessary journal entries.
b. What was the effect on net income of entering into the derivative transaction for the
period January to March 31,2013.

12. On January 2,2013, Jo-AnnPasquito Co. issued a 4-year, P100,000 note at 6% fixed interest payable
semiannually. Jo-AnnPasquito now wants to change the note to a variable-rate note. As a result, on
January 2,2013, Jo-AnnPasquito enters into an interest rate swap where it agrees to receive 6% fixed
and pay LIBOR of 5.7% for the first 6 months on P100,000. At each 6-month period, the variable rate
will be reset. The variable rate is reset to 6.7% on June 30,2013.
Required: a. Compute the net interest expense to be reported for this note and related swap transaction
as of June 30,2013.
b. Compute for the net interest expense to be reported for this note and related swap
transaction as of December 31,2013.

13. On January 2, 2013, Carpio_aka_“Abunda” Inc. issues a 5-year, P10,000,000 note at LIBOR, with
interest paid annually. The variable rate is reset at the end of each year. The LIBOR rate for the first
year is 5.8%. PCarpio_aka_“Abunda” decides it prepares fixed-rate financing and wants to lock in a
rate of 6%. As a result, Carpio_aka_“Abunda” enters into an interest rate swap to pay 6% fixed and
receive LIBOR based on P10 million. The variable rate is reset to 6.6% on January 2,2014.
Required: a. Compute the net interest expense to be reported for this note and related swap transaction
as of December 31, 2013.
b. Compute for the net interest expense to be reported for this note and related swap
transaction as of December 31,2014.

14. Call Option. On August 15,2013, TinkerBell Co. invested idle cash by purchasing a call option on
Kenny Inc. ordinary shares for P360. The notional value of the call option is 400 shares, and the
option price is P40.( Market price of Kenny share is P40.) The option expires on January 31,2014.
The following data are available with respect to the call option.
Date Market Price of Time Value of Call
Counting Kenny Shares Option
September 30,2013 P48 per share P180
December 31, 2013 P46 per share 65
January 15, 2013 P47 per share 30

Required: Prepare the journal entries for TinkerBell for the following dates.
a. Investment in call option on Kenny shares on August 15, 2013.
b. September 30, 2013 – TinkerBell prepares financial statements.
c. December 31,2013 - TinkerBell prepares financial statements.
 d. January 15, 2014 – TinkerBell settles the call option on the Kenny shares.

15. On January 1,2012, Nuez Company borrowed P1,000,000 from a bank at an 8% fixed interest with
interest to paid annually on December 31 and the principal to be repaid on December 31,2014.
On January 1,2012, the entity entered into a “received fixed, pay variable” interest rate swap with a
speculator and has designated the swap as a fair value hedge of the fixed interest rate loan.
The market rate of interest on January of each year determines the interest swap settlement to be made
every December 31.
This means that the entity will make a swap payment if the market rate of interest on January 1 is higher
than the 8% fixed rate and will receive a swap payment if the market rate of interest on January 1 is lower
than the 8% fixed rate.
The market rates of interest are :
January 1, 2012 8%
January 1, 2013 10%
January 1, 2014 11%
Required: Prepare all indicated entries from 2012 to 2014 to recognize all transactions relating to the
contract of loan and the interest rate swap agreement.

16. On January 1,2012, AceGoesToEdlimar Company borrowed P5,000,000 from a bank at an 8%

variable interest with interest to paid annually on December 31 and the principal to be repaid on
December 31,2015. Under the agreement, the market rate of interest on each January 1 resets the
variable rate for that period and the amount of interest to be paid on December 31.
On January 1,2012, the entity entered into a “received variable, pay fixed” interest rate swap with a
speculator and has designated the swap as a cash flow hedge of the variable interest rate loan. The
market rate of interest on January of each year determines the interest swap settlement to be made
every December 31.
This means that the entity will receive a swap payment if the market rate of interest on January 1 is
higher than the 8% fixed rate and will make a swap payment if the market rate of interest on January 1 is
lower than the 8% fixed rate.
The market rates of interest are :
January 1, 2012 8%
January 1, 2013 10%
January 1, 2014 11%
January 1, 2015 12%
Required: Prepare all indicated entries from 2012 to 2015 to recognize all transactions relating to the
contract of loan and the interest rate swap agreement.

Value in each challenge

Challenge is a fact of life. Though it might seem nice to trade your own particular challenges for somebody else’s,
you’d likely find those other challenges to be just as burdensome.

Instead of seeking to be free of your challenges, seek to be motivated to move successfully through them. A life with
no challenge is a life with no opportunity for growth, fulfillment or satisfaction.

Your challenges are yours for a very good reason. They are precisely the challenges that will enable you to grow
stronger, more capable, and more fulfilled.

So don’t resent the challenges, and don’t avoid those challenges. Don’t complain about the challenges or pretend
they’re not there.

Deal with each challenge and become stronger. Work through every challenge and feel the confidence that comes
from knowing you can do it.

Life’s challenges give you the opportunity to experience yourself growing stronger. See each challenge for the
potential value it represents, and make that value your own.

— Ralph Marston