300399 Cash Surrender Value 2G

Question 1

t the time of death of an insured officer or employee:

a gain would be recognized equal to the excess of the face amount of the policy over the cash surrender value at the time.

a loss would be recognized equal to the fair value of the policy over the proceeds received.

no gain or loss could be recognized.

a gain would be recognized equal to the increase in the fair value of the policy.

Question #300399

Answer 1

a gain would be recognized equal to the excess of the face amount of the policy over the cash surrender value at the time.

At the time of death of an insured officer or employee, a gain would be recognized equal to the excess of the face amount of the policy over the cash surrender value at the time, as presented:

Cash XXX
Cash Surrender Value XXX
Gain from Proceeds of Life Insurance XXX

Question 2

Cash Surrender Value

Answer 2

The cash surrender value is the amount available in cash upon voluntary termination of a life insurance policy by its owner before it becomes payable by death or maturity.

Question 3

Premium

Answer 3

Premium is the excess of proceeds (cash paid) on a bond over the face value of the bond. A bonus (i.e., the borrower receives proceeds more than the face value) is considered a premium, which is in contrast to a discount. A premium results when the stated interest rate is greater than the effective (market) rate. A premium is amortized over the life of the bond with the amount of amortization reported as interest, and it is also the difference between the present value of the bond and its face value (where the face value is lower). A premium is recorded on the balance sheet as an adjunct account inseparable from the bond that gives rise to it. It must be disclosed on the balance sheet as a direct addition to the face amount of the bond.

Example: A bond at face value is a $1,000, 20-year bond bearing interest at 10% annually where the stated interest rate is 10% and cash interest paid is $100 per year. If the prevailing market rate is 8%, the bond will sell for more than $1,000 (proceeds received will equal $1,197) because the lender could only earn 8% on any other investment (so this bond’s market value is more than its face value). The bond sells at a premium.

• i = .08, n = 20, (PVA × 100) = (9.82 × 100) + (PV × 1,000) = (.215 × 1,000)
• Selling price = 982 + 215 = 1,197
• Premium = 1,197 - 1,000 = 197

Question 4

Whole Life Contract

Answer 4

A whole life contract is an insurance policy that may be kept in force for a person’s entire life with payment of one or more premiums. A benefit is paid at the death of the insured. Nonforfeiture benefits also accrue. The premiums pay for protection in case the insured dies, and also builds cash value with the remaining premium. It is generally a low-return investment.

Question 5

2253.14

Answer 5

Cash surrender value: Enterprises often carry life insurance policies on the lives of key officers and employees. If the enterprise is the beneficiary, the cash surrender value of the policy is an asset of the enterprise. The amount to be charged to expense is the amount of such premiums paid less the increase in cash surrender value during the period. For example, if Company X pays an annual premium of $3,000 on a policy covering its president, the entry during a year when the cash surrender value increased by $600 would be:

Insurance Expense 2,400
* Cash Surrender Value 600
* Cash 3,000

Question 6

2253.15

Answer 6

At the time of death of an insured officer or employee, a gain would be recognized equal to the excess of the face amount of the policy over the cash surrender value at the time, as presented:

Cash XXX
* Cash Surrender Value XXX
* Gain from Proceeds of Life Insurance XXX

Question 7

FASB ASC 325-30-40-1A