Chapter13 - Answer

CHAPTER SUBSTANTIVE TESTS OF PREPAID EXPENSES AND DEFERRED CHARGES

13 13-1.

Rights and obligations are tested by examining the insurance policies and confirming the policy with insurance carriers. In turn, an auditor tests valuation by recalculating unexpired premiums through evidence obtained from the prior year’s unexpired insurance and from current premiums. In addition, to address clerical accuracy, the auditor reconciles premium payments with cash disbursements records, and total expense and unexpired premiums with the general ledger.

13-2.

Rhan Corporation Rent Expense per client’s record Less: Rent Expense per audit Last month’s rent Nonrefundable payment amortization P60,000 x 1/12 5 Amount to be deferred Answer:

13-3.

P 10,000 1,000

11,000 P 94,000

(c)

Brown Company Funded past service cost Amortized past service cost

P 59,600 46,700

Deferred pension cost

P 12,900

Answer: 13-4.

P 105,000

(a)

Hansen, Inc. Balance of Bond Discount, 1-1-06 Amortized Bond Discount: Nominal Interest Effective Interest Unamortized Bond Discount Answer:

(a)

P 61,000 P 90,000 93,900

(3,900) P 57,100

13-2

Solutions Manual to Accompany Applied Auditing, 2006 Edition

13-5.

Walton Company Prepaid rent for 1/2 year (P36,000 x 1/2) Unexpired P24,000 x 2.5 3 Total Answer:

13-6.

P 18,000 20,000 P 38,000

(d)

Miller Corporation The past service cost of P500,000 should be amortized over 10 years that is, from 2006 to 2015. Answer:

13-7.

(c)

Mabini, Inc. Adjusting Journal Entries: a. b. c. d. e.

f.

Prepaid advertising Advertising expense

P12,000 P12,000

Office supplies on hand Office supplies expense

250

Insurance expense Prepaid insurance

350

250 350

Factory supplies on hand Factory supplies expense

1,100

Unexpired subscriptions Subscriptions expense 28 x P1,800 36

1,400

Insurance expense Prepaid insurance 4 x P3,600 36

1,100 1,400

400 400

Substantive Tests of Prepaid Expenses and Deferred Charges g.

h.

i. j.

Prepaid closing costs Rent expense 9.5 x P12,000 10

11,400 11,400

Unexpired dues and subscriptions Dues and subscriptions expense 8 x P1,200 12

800

Dues and subscriptions expense Prepaid dues and subscriptions

360

Prepaid vacation expense Vacation expense

13-3

800

360 3,000 3,000

13-4 13-8.

Solutions Manual to Accompany Applied Auditing, 2006 Edition Raven Construction Company

Requirement (1) Raven Construction Company Insurance Schedule 12-31-06 Policy No. 0010 0020 0030 0040 0050 0060 0070 0080 0090 0100 0110 0120

Company

Type of Coverage

Peso Coverage

Atlas Clara Pioneer Fortune Mayon Matino Matalino Maganda Malinis Mabuti Malayan AFLA

Fire - Bldgs. Fire - Bldgs. Fire - Office Product Liability Fire and Theft-Inventory Medical-Officers Delivery Equipment Blanket Position Bond Construction Personnel Officer’s Life Officer’s Life

P100,000 150,000 100,000 100,000 65,000 100,000 50,000 30,000 100,000 75,000 50,000 50,000

Period Covered From To 8-1-05 2-1-06 3-1-05 7-1-04 8-1-06 6-1-05 11-1-06 2-1-05 4-1-06 5-1-05 9-1-06 9-1-06

8-1-08 2-1-09 3-1-07 7-1-08 8-1-09 6-1-07 11-1-07 2-1-07 4-1-07 5-1-09 9-1-07 9-1-07

Total Premium P 1,872 2,736 720 768 360 1,200 240 480 195 2,160 120 120 P10,971

Premium Chargeable to Expense Prior to 2006 2006 P 260 300 288 350 220 360 P1,778

Requirement (2) Adjusting Journal Entry: Insurance expense Retained earnings Prepaid insurance

P 3,708.25 1,778.00 P 5,486.25

P 624.00 836.00 360.00 192.00 50.00 600.00 40.00 240.00 146.25 540.00 40.00 40.00 P3,708.25

Prepaid 12-31-06 P 988.00 1,900.00 60.00 288.00 310.00 250.00 200.00 20.00 48.75 1,260.00 80.00 80.00 P5,484.75

Substantive Tests of Prepaid Expenses and Deferred Charges 13-9.

13-5

Queen Company

Requirement (a) Queen Company Insurance Schedule 12.31.06 Policy No.

Insurance Company

101 102 103 104 105 106 107

Pioneer Pioneer Commonwealth Malayan AFISCO Domestic Philam

Fire and extended, factory building Fire and extended, factory building Fire and extended, office building Fire and extended, office building Fire, merchandise Comprehensive delivery equipment Liability, delivery equipment

7/1/05 8/16/06 2/1/02 10/1/03 5/1/06 8/1/06 8/1/06

7/1/08 8/16/09 2/1/07 10/1/08 5/1/07 8/1/07 8/1/07

108 109 110

Filipinas Bankers Fortune

Inside theft and burglary Employee fidelity Workmen’s Compensation

11/1/06 3/1/06 9/1/06

11/1/09 3/1/09 9/1/07

Coverage

Period Covered From To

Amount of Coverage

Total Premium

Prior to 2006

2006

Prepaid 12.31.06

P 50,000 150,000 25,000 27,000 10,000 15,000 50,000 100,000 20,000 30,000 Payroll total at P0.25 per P100

P 648 1,728 300 480 444 240 360

P 108 235 216 -

P 216 216 60 96 296 100 150

P 324 1,512 5 168 148 140 210

25 250 205

425 650 295

Total

450 900 500

-

P 6,050

P 559

Requirement (b) Prepaid insurance Insurance expense Retained earnings To set up prepaid insurance as of 12.31.06 and to correct insurance expense for 2006 and prior years’ profits.

3,877 3,008 869

P1,614

P 3,877