Module 12: Investment Property, Derivatives & Other Investments

RELATED STANDARDS: IAS 40 – Investment Property;

IFRS 9 – Financial Instruments; IAS 32 – Financial Instruments: Presentation;
IFRS 7 – Financial Instruments: Disclosures

INTRODUCTION
Property assets such as land and buildings are key resources for all types of
organizations. Since there are lots of demand in the property market, it caused
investors started investing in property assets.

This chapter explains the nature and purpose of investment property,

difference between investment property and owner-occupied property,
requirements for recognition of investment property, its classifications, initial
measurement, subsequent measurement and reclassification.

It also explains the general nature of derivatives, the type of risk companies
faces and how different types of derivatives can be used to hedge those risks,
and the standards governing the accounting for derivatives and other types of
investment.

Learning Objectives:
1. Define investment property.
2. State the initial and subsequent measurement of investment properties.
3. Apply the fair value model of accounting for the investment property.
4. Account for transfers to/from the investment property.
5. Define derivatives.
6. Identify other types of investment.

 Definition of Terms
IAS 40
 Investment property – A property (land or a building or part of a
building or both) held (by the owner or by the lessee under a finance
lease) to earn rentals or for capital appreciation or both, rather than
for:
a. Use in the production or supply of goods or services or for
administrative purposes (IAS 16)
b. Sale in the ordinary course of business. (IAS 2)
 Owner-occupied property – A property held (by the owner or by the
lessee as a right-of-use asset) for use in the production or supply of
goods or services or for administrative purposes.

IAS 32
 Derivative - A financial instrument or other contract within the scope of
this Standard with all three of the following characteristics:
a) its value changes in response to the change in a specified interest
rate, financial instrument price, commodity price, foreign exchange
rate, index of prices or rates, credit rating or credit index, or other
variable, provided in the case of a non-financial variable that the
variable is not specific to a party to the contract (sometimes called
the ‘underlying’);
b) it requires no initial net investment or an initial net investment that
is smaller than would be required for other types of contracts that
would be expected to have a similar response to changes in
market factors.
c) it is settled at a future date.

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 Firm Commitment – A binding agreement for the exchange of a

specified quantity of resources at a specified price on a specified
future date or dates.
 Forecast transaction – An uncommitted but anticipated future
transaction.
 Hedge ratio – The relationship between the quantity of the hedging
instrument and the quantity of the hedged item in terms of their relative
weighting.

IFRS 7
 Credit risk – The risk that one party to a financial instrument will cause
a financial loss for the other party by failing to discharge an obligation.
 Currency risk – The risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in foreign
exchange rates.
 Interest rate risk – The risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in market
interest rates.
 Liquidity risk – The risk that an entity will encounter difficulty in meeting
obligations associated with financial liabilities that are settled by
delivering cash or another financial asset.
 Market risk – The risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in market prices.
Market risk comprises three types of risk: currency risk, interest rate
risk and other price risk.
 Other price risk – The risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in market prices
(other than those arising from interest rate risk or currency risk),
whether those changes are caused by factors specific to the individual
financial instrument or its issuer or by factors affecting all similar
financial instruments traded in the market.
I. Investment Property

 Examples of investment property

a. Land held for long-term capital appreciation
b. Land held for a currently undetermined future use
c. Building leased out under an operating lease
d. Vacant building held to be leased out under an operating lease
e. Property that is being constructed or developed for future use as
investment property

 Examples of items not classified as investment property

a. Property intended for sale in the ordinary course of business or in the
process of construction or development for such sale (IAS 2)
b. Owner-occupied property (IAS 16 and IFRS 16)
c. Property that is leased to another entity under a finance lease (IFRS 16)

 Initial measurement
 Investment property is initially measured at cost, including transaction
costs.
 Such cost should not include start-up costs, abnormal waste, or initial
operating losses incurred before the investment property achieves the
planned level of occupancy.

 Measurement subsequent to initial recognition

1. Fair value model

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 Investment property is remeasured at fair value, which is the amount

for which the property could be exchanged between knowledgeable,
willing parties in an arm's length transaction.
 Gains or losses arising from changes in the fair value of investment
property must be included in net profit or loss for the period in which it
arises.

2. Cost model
a. After initial recognition, an entity that chooses the cost model shall
measure investment property:
a. In accordance with IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations if it meets the criteria to be classified as
held for sale.
b. In accordance with IFRS 16 if it is held by a lessee as a right-of-use
asset and is not held for sale in accordance with IFRS 5.
c. In accordance with the requirements in IAS 16 for the cost model in
all other cases (cost less accumulated depreciation and less
accumulated impairment losses).

 Transfers to or from investment property classification

 Transfers to, or from, investment property should only be made when
there is a change in use, evidenced by one or more of the following (non-
exhaustive list):
a. Commencement of owner-occupation (transfer from investment
property to owner-occupied property)
b. Commencement of development with a view to sale (transfer from
investment property to inventories)
c. End of owner-occupation (transfer from owner-occupied property to
investment property)
d. Commencement of an operating lease to another party (transfer from
inventories to investment property)

 Accounting for transfers between categories

a. For a transfer from investment property carried at fair value to owner-
occupied property or inventories, the fair value at the change of use is
the 'cost' of the property under its new classification.
b. For a transfer from owner-occupied property to investment property
carried at fair value, IAS 16 should be applied up to the date of
reclassification. Any difference arising between the carrying amount
under IAS 16 at that date and the fair value is dealt with as a
revaluation under IAS 16.
c. For a transfer from inventories to investment property at fair value, any
difference between the fair value at the date of transfer and its
previous carrying amount should be recognized in profit or loss.
d. When an entity completes construction/development of an investment
property that will be carried at fair value, any difference between the
fair value at the date of transfer and the previous carrying amount
should be recognized in profit or loss.
e. When an entity uses the cost model for investment property, transfers
between categories do not change the carrying amount of the property
transferred, and they do not change the cost of the property for
measurement or disclosure purposes.

 Disposal

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 An investment property should be derecognized on disposal or when the

investment property is permanently withdrawn from use and no future
economic benefits are expected from its disposal.
 The gain or loss on disposal should be calculated as the difference
between the net disposal proceeds and the carrying amount of the asset
and should be recognized in the income statement.
 Compensation from third parties is recognized when it becomes
receivable.

ILLUSTRATION 1:

Wild company ventured into construction of condominium in Makati which is

rated as the largest state-for-the-art structure.

The Board of Directors decided that instead of selling the condominium, the
entity would hold this property for purposes of earning rentals by letting out
space to business executives in the area.

The construction of condominium was completed and the property was

placed in the service on January 1, 2019.

The cost of the construction was P50,000,000. The useful life of the
condominium is 25 years and the residual value is P5,000,000.

An independent valuation expert provided the following fair value at each

subsequent year end:
December 31, 2019 55,000,000
December 31, 2020 53,000,000
December 31, 2021 60,000,000

REQUIREMENTS:

1. Under the cost model, what amount should be reported as depreciation

of investment property for 2019?

2. Under the fair value model, what amount should be recognized as gain on
change in fair value in 2019?

Solution:
Question #1
Cost of investment property 50,000,000
Residual value (5,000,000)
Depreciable amount 45,000,000
Annual depreciation (45,000,000/25 years) 1,800,000
Question #2
Journal entry on December 31,2019
Investment property 5,000,000
Gain from change in fair value 5,000,000

Fair value – December 31, 2019 55,000,000

Cost – January 1, 2019 (50,000,000)
Gain from change in fair value 5,000,000

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II. Derivatives

 Basic principles
 A derivative is a financial instrument whose value changes in relation to
changes in a variable, such as an interest rate, commodity price, credit
rating, or foreign exchange rate.
 It requires either a small or no initial investment, and is settled at a future
date.
 Examples of derivatives are call options, put options, forwards, futures,
and swaps.
 Derivatives may be traded over the counter or on a formal exchange.
 An embedded derivative is a component of a hybrid contract that also
includes a non-derivative host, with the effect that some of the cash flows
of the combined instrument vary in a way similar to a stand-alone
derivative.
 A derivative that is attached to a financial instrument but is contractually
transferable independently of that instrument, or has a different
counterparty, is not an embedded derivative, but a separate financial
instrument.

 Measurement of derivatives
 All derivatives in scope of IFRS 9, including those linked to unquoted
equity investments, are measured at fair value. Value changes are
recognized in profit or loss unless the entity has elected to apply hedge
accounting by designating the derivative as a hedging instrument in an
eligible hedging relationship.

 Hedge accounting
 The hedge accounting requirements in IFRS 9 are optional. If certain
eligibility and qualification criteria are met, hedge accounting allows an
entity to reflect risk management activities in the financial statements by
matching gains or losses on financial hedging instruments with losses or
gains on the risk exposures they hedge.

 Qualifying criteria for hedge accounting

A hedging relationship qualifies for hedge accounting only if all of the
following criteria are met:
1. The hedging relationship consists only of eligible hedging instruments
and eligible hedged items.
2. At the inception of the hedging relationship there is formal designation
and documentation of the hedging relationship and the entity’s risk
management objective and strategy for undertaking the hedge.
3. The hedging relationship meets all of the hedge effectiveness
requirements.

 Summary of derivative instruments

Type Definition
Cal option Provides the holder the right to acquire an underlying at an
exercise or strike price, anytime during the option term.
Put option Provides the holder the right to sell the underlying at an exercise

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or strike price, anytime during the option term.

Forward An agreement between two parties to buy and sell a specific
contract quantity of a commodity, foreign currency, or financial instrument
at an agreed-upon price, with delivery and/or settlement at a
designated future date.
Futures A forward-based contract to make or take delivery of a
contract designated financial instrument, foreign currency, or commodity
during a designated period, at a specified price or yield. A futures
contract is traded on a regulated exchange.
Swap Forward-based contract or agreement generally between two
counterparties to exchange streams of cash flows over a
specified period in the future.

 Summary of the types of hedge

Fair Value Hedge Cash Flow Hedge Net Investment
Hedge
Purpose Hedge of the Hedge of the Hedge future
exposure to exposure to changes in currency
changes in fair variability in cash exposure of a net
value. flows investment in a
foreign operation.
Examples Recognized asset Recognized asset Foreign
of hedged or liability. or liability (such as subsidiaries.
items Unrecognized firm all or some future
commitment. interest payments
A component of any on variable-rate
such item, that is debt).
attributable to a Highly probable
particular risk and forecast
could affect profit or Transaction.
loss (or OCI for Firm commitment.
equity instrument)
Gain/loss Recognized in profit Effective hedge is Effective hedge is
on or loss. recognized in OCI. recognized in OCI.
hedging Remain in OCI if the Ineffective hedge to Ineffective hedge to
instrumen hedge item is an P/L. P/L.
t equity instrument (Accounted similarly
designated as FA- as cash flow hedge)
FVTPL

 Summary of accounting for hedging instruments

Hedged Item Apply Hedge Type of hedge
Accounting?
Exposed asset or liability No Undesignated hedge
Firm commitment Yes Fair value hedge
(Cash flow hedge may be used
see below)
Forecasted transaction Yes Cash flow hedge
Net investment in foreign Yes Net investment hedge – cash
entity flow hedge
Speculation (no hedge No Not applicable
item)

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ILLUSTRATION 2:
On January 1, 2019, Nike company entered into a two-year P3,000,000 variable
interest rate loan at the prevailing rate of 12%.

In 2020, the interest rate is equal to the prevailing interest rate at the beginning of
the year.

The principal loan is payable on December 31, 2020 and the interest is payable
on December 31 of each year.

On January 1, 2019, Nike company entered into a “receive variable, pay fixed”
interest swap agreement with a speculator bank designated as a cash flow
hedge.

The prevailing interest rate on January 1, 2020 is 14% and the present value of 1
at 14% for one period is .877.

REQUIREMENTS:
1. What amount should be reported a interest rate swap receivable on December
31, 2019?
2. What amount should be reported as interest expense for 2020?

Solution:
Question #1
Sice the interest on January 1, 2019 is 14% which is 2% higher than fixed rate of
12%, It means that Nike Company shall receive P60,000 from the bank on
December 31, 2020 or 2% times P3,000,000

This receivable is recognized as a derivative asset on December 31, 2019 at

present value of P52,620 computed by multiplying P60,000 by .877.

Question #2
Interest expense for 2020 (12% x 3,000,000) 360,000

III. Fund and Other Investments

 Funds set aside for noncurrent purposes
 Long-term funds classified as noncurrent assets include:
a. Sinking fund
b. Preferred stock redemption fund
c. Plant expansion fund
d. Contingency fund
e. Insurance fund
 Long-term funds are measured at the amount of cash plus the cost of
securities adjusted for discount or premium amortization, and other assets
in the fund.

 Sinking fund
 Sinking or redemption fund is a fund set aside for the liquidation of long
term debt.
 The fund may be under the administration of the entity or under the charge
of a trustee.
 Annual contribution to fund = Target future value ÷ FV factor (ordinary
annuity or annuity in advance).

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 The classification of sinking fund must be parallel to the classification of

the related liability.
 An accounting policy of the entity may require appropriation of retained
earnings.

 Cash surrender value

 It is the amount which the insurance company will pay upon the surrender
and cancellation of the life insurance policy.
 The entity may insure the life of its officers. The beneficiary may be the
officer insured or his family, or the entity itself.
 If the beneficiary is the entity itself, cash surrender value must be
recognized by the entity.
 Cash surrender value arises if
a. The insurance policy is life policy.
b. Premiums for 3 full years have been paid
c. Policy is surrendered at the end of the 3rd year or anytime thereafter.
 Cash surrender value legally accrued at the end of the third year.
 Life insurance expense = Premium paid(expired) – increase in cash
surrender value(current period)
 Gain on life insurance = Face of policy – Cash surrender value –
Unexpired premium paid

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****************************************************
Illustrative Problems
1. A property held (by the owner or by the lessee as a right-of-use asset) for
use in the production or supply of goods or services or for administrative
purposes.
A. Owner-occupied property C. Property, plant and equipment
B. Investment property D. Right-of-use asset

2. The relationship between the quantity of the hedging instrument and the
quantity of the hedged item in terms of their relative weighting.
A. Hedge ratio
B. Undesignated hedge
C. Hedging
D. Hedge effectiveness

3. A binding agreement for the exchange of a specified quantity of resources

at a specified price on a specified future date or dates.
A. Forecast transaction C. Call option
B. Firm commitment D. Put option

4. The risk that the fair value or future cash flows of a financial instrument will
fluctuate because of changes in foreign exchange rates.
A. Interest rate risk C. Currency risk
B. Credit risk D. Liquidity risk

5. The risk that an entity will encounter difficulty in meeting obligations

associated with financial liabilities that are settled by delivering cash or
another financial asset.
A. Interest rate risk C. Currency risk
B. Credit risk D. Liquidity risk

6. The risk that one party to a financial instrument will cause a financial loss
for the other party by failing to discharge an obligation.
A. Interest rate risk C. Market risk
B. Credit risk D. Liquidity risk

7. The following are investment properties, except

A. Land held for a currently undetermined future use.
B. Land held for long-term capital appreciation.
C. Property that is leased to another entity under a finance lease.
D. None of the foregoing.

8. Initial measurement of investment property is

A. Cost
B. Cost plus transaction costs and start-up costs
C. Cost plus transaction costs
D. Cost minus transaction costs

9. Subsequent measurement of investment property does not include

A. Cost model C. Revaluation model
B. Fair value model D. None of the foregoing

10. If an owner-occupied property is transferred to investment property carried

at fair value, IAS 16 should be applied up to the date of reclassification.
Any difference arising between the carrying amount under IAS 16 at that
date and the fair value is dealt with as a

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A. Revaluation C. Gain or loss for the period

B. Change in accounting estimate D. Impairment

11. Transfer from inventories to investment property at fair value, any

difference between the fair value at the date of transfer and its previous
carrying amount should be recognized
A. As revaluation C. Directly to retained earnings
B. In other comprehensive income D. In profit or loss

12. An increase in the cash surrender value of a life insurance policy owned
by a company would be recorded by
A. Decreasing annual insurance expense.
B. Recording a memorandum entry only.
C. Increasing investment income.
D. Decreasing a deferred charge.

13. Upon the death of an officer, Jung Co. received the proceeds of a life
insurance policy held by Jung on the officer. The proceeds were not
taxable. The policy’s cash surrender value had been recorded on Jung’s
books at the time of payment. What amount of revenue should Jung report
in its statements?
A. Proceeds received.
B. Proceeds received less cash surrender value.
C. Proceeds received plus cash surrender value.
D. None.

14. Derivatives are financial instruments that derive their value from changes
in a benchmark based on any of the following except
A. Stock prices.
B. Commodity prices.
C. Mortgage and currency rates.
D. Discounts on accounts receivable.

3. Derivative instruments are financial instruments or other contracts that

must contain
A. One or more underlyings, or one or more notional amounts.
B. No initial net investment or smaller net investment than required for
similar response contacts.
C. Terms that do not require or permit net settlement or delivery of an
asset.
D. All of the above.

4. The basic purpose of derivative financial instruments is to manage some

kind of risk such as all of the following except
A. Stock price movements.
B. Currency fluctuations
C. Interest rate variations.
D. Uncollectibility of accounts receivables.

5. Which of the following statements is(are) true regarding derivative

financial instruments?
I. Derivative financial instruments should be measured at fair value and
reported in the balance sheet as assets or liabilities.
II. Gains and losses on derivative instruments not designated as hedging
activities should be reported and recognized in earnings in the period
of the change in fair value.

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A. I only. C. Both I and II

B. II only. D. Neither I nor II.

6. Which of the following is not a distinguishing characteristic of a derivative

instrument?
A. Terms that require or permit net settlement.
B. No initial net investment.
C. Must be “highly effective” throughout its life.
D. One or more underlyings and notional amounts.

7. An example of a notional amount is

A. Number of barrels of oil. C. Currency swaps.
B. Interest rates. D. Stock prices.

8. A contract to purchase or sell specified commodity at some future date at

a specified price and is traded in an exchange market
A. Forward contract C. Call or put option
B. Futures contract D. Purchase commitment

9. Change in fair value of a derivative instrument that is determined to be an

effective cash flow hedge shall be
A. Recognized directly in equity as part of OCI
B. Included in the retained earnings
C. Recognized in profit or loss for the period
D. Disclosed only and no recognition is required.

10. H COMPANY and its subsidiaries provided the following properties owned
by the group.
Land held for undetermined future use 1,000,000
Vacant building to be leased out under an operating lease 2,000,000
Property held for use in production 4,000,000
Property held by a subsidiary, a real estate firm,
in the ordinary course of business 3,000,000
Building owned by a subsidiary and for
which the subsidiary provides security
and maintenance services to the lessess 2,500,000
Land leased to a subsidiary under an operating lease 1,500,000
Equipment leased to an unrelated party under
an operating lease 500,000
Building under construction for use as investment property 3,500,000
In the consolidated statement of financial position of the parent and its
subsidiaries, what total amount should be reported as investment
property?
A. 6,000,000 C. 8,000,000
B. 5,500,000 D. 9,000,000

15. I COMPANY purchased an investment property on January 1, 2015 at a

cost of P2,200,000. The property had a useful life of 40 years and on
December 31, 2017 had a fair value of P3,000,000. On December 31,
2017 the property was sold for net assets proceeds of P2,900,000. The
entity used the cost model to account for investment property. What is the
gain or loss to be recognized for 2017 regarding the disposal of the
property?
A. 865,000 gain C. 100,000 loss
B. 810,000 gain D. 700,000 gain

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16. On January 1, 2016, J COMPANY acquired three investment properties

Initial cost Fair value 12/31/16 Fair value 12/31/17
Property 1 2,700,000 3,200,000 3,500,000
Property 2 3,450,000 3,000,000 2,800,000
Property 3 3,300,000 3,900,000 3,400,000
Each property had an estimated useful life of 50 years. The accounting
policy is to use the fair value model for investment property. What is the
gain or loss to be recognized for the year ended December 31, 2017?
A. 250,000 loss C. 300,000 gain
B. 400,000 loss D. 700,000 loss

17. On January 1, 2016, K COMPANY acquired an investment property at a

total cost of P5,000,000. At December 31, 2016, the carrying value of the
property in the company’s books is P6,000,000. On December 31, 2017,
the company decided to use the property and immediately reclassify as
plant asset. What would be the initial cost of the plant asset if it has fair
value of P6,500,000 at conversion date?
A. 5,000,000 C. 6000,000
B. 5,500,000 D. 6,500,000

18. Refer to the preceding problem. What amount of revaluation surplus the
company would recognize at the time of conversion?
A. None C. 1,000,000
B. 500,000 D. 1,500,000

19. On January 2, 2016, L COMPANY has an investment property that was

carried at fair value with a carrying amount of P2,500,000 (historical cost,
P2,400,000). As of December 31, 2016, the fair market value of the
property is P2,600,000. On December 31, 2017, the fair market value of
the property is P2,800,000. On this date, the company decided to
reclassify/transfer the property to inventory. On the date of transfer, what
amount should the inventory be valued?
A. 2,400,000 C. 2,600,000
B. 2,500,000 D. 2,800,000

20. On January 1, 2016, M COMPANY made a test of impairment on one of

its buildings carried as plant assets. The test of impairment revealed a
recoverable value of P5,500,000 on that building. The carrying value of
this building as of January 1, 2016 is P8,000,000 with remaining useful life
of 10 years.
On January 1, 2018, the company decided to convert this building into an
investment property that is to be carried at fair value. The cost of
converting the building is insignificant but as a result of the change in the
usage, the fair market value of the building was reliably measured at
P7,000,000. What amount of unrealized gain/revaluation surplus should
the company recognize in its shareholders’ equity on the date of the
transfer?
A. None C. 2,000,000
B. 600,000 D. 2,600,000

21. What amount of realized revenue/impairment recovery should the

company record in profit or loss on the date of the transfer?
A. None C. 2,000,000
B. 600,000 D. 2,600,000

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22. On January 1, 2016, S COMPANY borrowed P5,000,000 from a bank at a

variable rate of interest for 2 years. Interest will be paid annually to the
bank on December 31 and the principal is due on December 31, 2017.
Under the agreement, the market rate of interest every January 1 resets
the variable rate for that period and the amount of interest to be paid on
December 31. In conjunction with the loan, the entity entered into a
“receive variable, pay fixed” interest rate swap agreement with another
bank speculator as a cash flow hedge. The market rates of interest are
10% on January 1, 2016 and 12% on January 1, 2017. The “underlying”
fixed interest rate is 10%. The PV of 1 at 10% for one period is .91 and the
PV of 1 at 12% for one period is .89. What is the derivative asset or
liability on December 31, 2016?
A. 89,000 asset C. 91,000 asset
B. 89,000 liability D. 91,000 liability

23. U COMPANY operates a chain of seafood restaurants. On July 1, 2016,

the entity determined that it will need to purchase 50,000 kilos of deluxe
fish on July 1, 2017. Because of the volatile fluctuation in the price of
deluxe fish, on July 1, 2016, the entity negotiated a forward contract as a
cash flow hedge with a reputable bank to purchase 50,000 kilos of deluxe
fish on July 1, 2017 at a strike price of P50 per kilo or P2,500,000. This
derivative forward contract provides that if the market price of deluxe fish
on July 1, 2017 is more than P50, the difference is paid by the bank to the
entity. On the other hand, of the market price on July 1, 2017 is less than
P50, the entity will pay the difference to the bank. The market price per
kilo of the deluxe fish is P55 on December 31, 2016 and P52 on July 1,
2017. What is the derivative asset or liability on December 31, 2016?
A. 100,000 asset C. 250,000 asset
B. 100,000 liability D. 250,000 liability

24. On January 1, 2017, N COMPANY adopted a plan to accumulate funds for

a new building to be erected beginning January 1, 2021 at an estimated
cost of P20,000,000. The entity intends to make four equal annual
deposits in a fund beginning December 31, 2017 that will earn interest at
12% compounded annually. The future value of an ordinary annuity of 1 a
12% for 4 periods is 4.78, and the future value of an annuity of 1 in an
advance at 12% for 4 periods is 5.35. What is the annual deposit to the
funds?
A. 5,000,000 C. 3,738,318
B. 4,184,100 D. 3,149,606

25. COMPANY insured the life of its president for P2,000,000, the entity being
the beneficiary of an ordinary life insurance policy. The annual premium is
P80,000 and the policy is dated January 1, 2012. The entity reported the
following cash surrender value:
December 31, 2016 15,000
December 31, 2017 19,000
The president died on October 1, 2017 and the policy is settled on
December 31, 2017. What amount should be reported as gain on life
insurance settlement for 2017?
A. 1,962,000 C. 1,961,000
B. 2,000,000 D. 1,981,000

26. On January 1, 2014, P COMPANY purchased P2,000,000 ordinary life

policy on its president. The entity reported the following data for 2017:
Cash surrender value, January 1 50,000

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Investment Property, Derivatives & Other Investments

Cash surrender value, December 31 60,000

Annual advance premium paid on January 1 100,000
Dividend received on July 1 5,000
The entity is the beneficiary under the life insurance policy. What amount
should be reported as life insurance expenses for 2017?
A. 100,000 C. 85,000
B. 95,000 D. 90,000

27. Q COMPANY purchased a P1,000,000 life insurance policy on its

president, of which the entity is the beneficiary. The entity provided the
following information for 2017:
Cash surrender value – January 1 90,000
Cash surrender value – December 31 110,000
Annual premium paid on January 1 80,000
During 2017, dividend of P5,000 was applied to increase the cash
surrender value of the policy. What amount should be reported as life
insurance expense for 2017?
A. 80,000 C. 55,000
B. 60,000 D. 65,000

28. R COMPANY insures the life of its president for P4,000,000, the company
being the beneficiary of an ordinary life policy. The monthly premium is
P6,000 payable every first day of the month. The policy is dated January
1, 2012 and carries the following cash surrender values:
End of policy year Cash surrender value
2012 -
2013 -
2014 25,200
2015 30,000
2016 39,600
2017 50,400

The company follows the calendar year as its fiscal period. The president died
on October 31, 2017 and the policy was collected on December 1, 2017.
What is the gain on life insurance settlement?
A. 3,913,600 C. 3,951,400
B. 3,939,400 D. 4,000,000

“Keep your dreams alive. Understand to achieve anything requires faith and
belief in yourself, vision, hard work, determination, and dedication. Remember all
things are possible for those who believe.” Gail Devers

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Investment Property, Derivatives & Other Investments

Answer Key:

1. A 11. D 21. A
2. A 12. A 22. D
3. B 13. B 23. A
4. C 14. D 24. B
5. D 15. B 25. D
6. B 16. D 26. A
7. C 17. C 27. D
8. C 18. C 28. B
9. C 19. A 29. C
10. A 20. B

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