Chapter14 - Answer

CHAPTER

14 14-1.

SUBSTANTIVE TESTS OF LIABILITIES

a.

Accounts receivable – the auditor’s objective is to test the existence of accounts receivable. Accounts payable – the auditor’s objective is to test the completeness of accounts payable.

b.

Accounts receivable – In selecting accounts for confirmation, auditors focus on a variety of characteristics, including  high-volume vendors.  high-value accounts.  accounts significantly smaller than in a previous period.  small or zero-balance accounts. Accounts payable – In selecting accounts for confirmation, auditors focus on large, small, or dormant accounts and on vendors the client starts using around year end.

14-2.

c.

Basic information included on the confirmation requests is the same for accounts receivable and for accounts payable.

d.

Procedures for mailing are substantially the same for accounts receivable and for accounts payable.

e.

For accounts receivable, an auditor examines documentary evidence that indicates the customer was shipped goods and ultimately paid for them. For accounts payable, if the objective of the confirmation process is to test the existence of a payable and the vendor does not respond, the auditor should attempt to verify existence of the liability by performing tests such as examining the purchase order, the receiving report, and the vendor’s invoice for the transaction. If the objective is to test completeness, the auditor should reconcile accounts payable or reconcile to subsequent payments.

a.

The auditor should perform the following procedures:  Trace balance per confirmation request to confirmation of the supplier / creditor.  Trace balance per general ledger to subsidiary ledger.  Trace payments made to cash payments journal and paid checks.  For invoices not received at December 31, 2006, determine invoice date.

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Solutions Manual to Accompany Applied Auditing, 2006 Edition   

14-3.

For goods shipped FOB destination, examine invoice to determine terms. For goods shipped FOB shipping point, examine shipping document. Ask client to explain unlocated differences, and then follow up to determine that the client’s explanation was valid.

b.

For accounts not confirmed, the auditor should substantiate that a shipment was received by examining the receiving report, the invoice copy, and subsequent payment if possible.

c.

The accounts payable clerk should not routinely perform the reconciliation of monthly statements to the listing of accounts or vouchers payable. Whether the accounts payable clerk or another employee performs the activity, the auditor must substantiate the validity of the explanations.

a.

The accounts payable audit procedures should be directed toward searching for proper inclusion of all accounts payable (completeness) and ascertaining that recorded amounts are reasonably stated (valuation), because the primary audit purpose is to reveal any possible material understatements. The principal objectives of the accounts payable examination are  to determine the adequacy of internal control for processing and payment of invoices.  to prove that amounts shown on the balance sheet are in agreement with supporting accounting records.  to determine that liabilities existing at the balance sheet date have been recorded.

b.

Tan is not required to use accounts payable confirmation procedures. Unlike accounts receivable, accounts payable require no opinions as to valuation. The auditor is required to obtain direct confirmation of accounts receivable, since the primary audit test is for possible material overstatements and the client usually has available only internal documents, such as sales invoices. For accounts payable, the auditor can examine external evidence, such as vendor invoices and vendor statements that substantiates the accounts payable balance. Although not required, accounts payable confirmation procedures are often used. The auditor might consider using them when  internal controls are weak.  the company is in a tight cash position, and bill paying is slow.  physical inventories exceed general ledger inventory balances by significant amounts.  certain vendors do not send statements.  vendor accounts are pledged by assets.  vendor accounts include unusual transactions.

Substantive Tests of Liabilities

14-4.

14-3

c.

A selection technique using the large peso balances of accounts is generally used when the primary audit objective is to test for overstatements (e.g., accounts receivable audit work). Accounts with zero balances or relatively small balances would not be subjected to selection under such an approach. When auditing accounts payable, the auditor is primarily concerned with the possibility of unrecorded payables or understatement of recorded payables. Selection of accounts with relatively small or zero balances for confirmation is the more efficient direction of testing since understatements are more likely to be detected when examining such accounts. When selecting accounts payable for confirmation, the following procedures could be followed:  Analyze the accounts payable population and stratify it into accounts with large balances, accounts with small balances, and accounts with zero balances.  Use a sampling technique that selects items based on criteria other than the peso amount of the items (e.g., select based on terminal digits, select every nth item based on predetermined interval, etc.).  Design a statistical sampling plan that will place more emphasis on selecting accounts with zero balances or relatively small balances, particularly when the client has had substantial transactions with such vendors during the year.  Select prior-year vendors that are no longer used.  Select new vendors used in the subsequent period.  Select vendor that do not provide periodic statements.  Select accounts reflecting unusual transactions during the year.  Select accounts secured by pledged assets.

a.

The fact that the client made a journal entry to record vendors’ invoices that were received late should simplify the CPA’s test for unrecorded liabilities and reduce the possibility of the need for a further adjustment, but the CPA’s test is nevertheless required. Clients normally are expected to make necessary adjustments to their books so that the CPA can examine statements that the client believes are complete and correct. If the client has not journalized late invoices, the CPA is compelled to substantiate what ultimately will be recorded as an adjusting entry. In this examination, the CPA should test entries in the 2004 voucher register to ascertain that all items that – according to dates of receiving reports or vendors’ invoices – were applicable to 2006 have been included in the journal entry recorded by the client.

b.

No. The CPA should obtain a letter in which responsible executives of the client’s organization represent that to the best of their knowledge all liabilities have been recognized. However, this is done as a normal audit procedure to afford additional assurance to the CPA; it does not eliminate the need to perform his or her own tests.

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Solutions Manual to Accompany Applied Auditing, 2006 Edition c.

Whenever a CPA is justified in relying on work done by an internal auditor, he or she should curtail (but not eliminate) his or her own audit work. In this case, the CPA should have ascertained early in the examination that Oracle’s internal auditor is qualified by being both technically competent and reasonably independent. Once satisfied on these points, the CPA should discuss the nature and scope of the internal audit program with the internal auditor and should review the working papers so that the CPA may properly coordinate his or her own program with that of the internal auditor. If the Oracle internal auditor is qualified and has made tests for unrecorded liabilities, the CPA can perform only a brief test in this audit area.

d.

Work done by an auditor for a government agency will normally have no effect on the scope of the CPA’s audit, since the concern of the government auditors is usually limited to matters unrelated to the financial statements. Nevertheless, the CPA should discuss the government auditor’s work program with her since there are isolated situations where specific procedures followed to a satisfactory conclusion by a government auditor will furnish the CPA with added assurance and therefore permit certain work in a particular area to be curtailed. However, government auditors are usually primarily interested in substantiating as valid and allowable those costs that a company has allocated against specific government contracts or sales to the government; consequently, there is little likelihood that the auditor for a government agency would check for unrecorded liabilities at Oracle.

e.

In addition to the 2007 voucher register, the CPA should consider the following sources for possible unrecorded liabilities:  Unentered vendors’ invoice file  Tax returns for prior years, the status of which is still open  Discussions with employees  Representations from management  Comparison of account balances with preceding-year balances  Examination of individual accounts during the audit  Existing contracts and agreements  Minutes of meetings  Attorneys’ bills and letters of representation  Status of renegotiable business  Correspondence with principal suppliers  Audit testing of cutoff date for reciprocal accounts (e.g., inventory, fixed assets)

14-5.

d

14-6.

b

Substantive Tests of Liabilities 14-7. 14-8.

a d

14-9.

Pelagio Corporation

14-5

(P900,000 + P50,000 + P25,000)

Computation of Bonus and Income Tax (a) Bonus

= =

10% x P90,000 P9,000

Income Tax = = (b) Bonus: B =

30% (P90,000 – P9,000) P24,300

10% (P90,000 – B)

Income Tax: T = 30% (P90,000 – B) Computation: B = P9,000 – 0.10 B; B = T T T

= = =

P9,000 1.1

=

P8,181.82

P27,000 – 0.3 B P27,000 – 0.3 (P8,181.82) P24,545.45

(c) Let B = Bonus; Let T = Income Tax B = 0.10 (P90,000 – T) T = 0.30 (P90,000 – B) Proof: Income Tax NI bef B & T B = P6,495 Less: B T = P25,051.50 Tax rate Tax (d) B T

= =

0.10 (P90,000 – B – T) 0.30 (P90,000 – B)

B T

= =

P5,888 P25,234

Proof: Bonus NI bef B & T Less: B T Balance

P90,000.00 6,495.00 P83,505.00 x 30% P25,051.50

P90,000.00 ( 5,888.00) (25,234.00) P58,878.00 x 10% P 5,887.80

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Solutions Manual to Accompany Applied Auditing, 2006 Edition

14-10.

Broadwall Corporation a.

Esteva should apply the following procedures: 1.

Send standard bank confirmation a. Direct liabilities b. Security agreements 2. Examine notes for terms, provisions, etc. 3. Review board meeting minutes a. Authority for transactions b. Dividends declared 4. Determine compliance with bank loan provisions 5. Consider effects of president’s loans on debt/equity 6. Investigate business purpose of loan 7. Trace loan proceeds to cash receipts records 8. Trace interest and principal payments to cash disbursements records 9. Recompute and verify interest expense and accrual computations 10. Consider balance sheet presentation/disclosure a. Current/noncurrent portions b. Assets pledged as collateral c. Related party 11. Obtain management representation letter b.

Broadwall’s financial statements should include the following related party disclosures: 1. 2. 3. 4.

14-11.

Nature of party’s relationship Description of the transaction Peso volume of the loans Amounts due to president and terms of settlement.

Bem, Inc. Item No.

AJE

1

None

2

Insurance expense Prepaid insurance

3

None

4

None

5

None

6

Prepaid dues and subscriptions

9,167 9,167

500

Substantive Tests of Liabilities Dues and subscriptions expense None

8

None

9

Accounts payable Inventory

8,400

Legal and professional fees Accrued legal and professional fees

4,600

Medical expenses Accrued medical expenses

2,500

Inventory Accounts payable

5,500

11 12

AJE

13

None (adjustment already made by client)

14

None

15

None (adjustment already made by client)

16

None

17

None

18

None (adjustment already made by client)

19

Machinery and equipment Accounts payable - others

20 14-12.

500

7 Item No.

10

14-7

8,400 4,600 2,500 5,500

25,400 25,400

None (adjustment already made by client)

AFC Manufacturing Requirement (a) It is essential to coordinate the cutoff tests with the physical observation of inventory. If the cutoff is inconsistent with the physical inventory there can be significant errors in the income statement and the balance sheet. For example, assume an inventory acquisition for P40,000 is received late in the afternoon of December 31, after the physical inventory is completed. If the acquisition is included in accounts payable and purchases but excluded from inventory, the result is an understatement of net earnings of P40,000. On the other hand, if the acquisition is excluded from both inventory and accounts payable, there is an error in the balance sheet, but the income statement is correct.

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Solutions Manual to Accompany Applied Auditing, 2006 Edition

Requirement (b) Adjusting Entry Receiving Report #

Description of Error(s)

Debit Account

Amount

Credit Account Amount

2631

None

2632

Received prior to year end and not recorded

Inventory

3,709.16

Accounts payable

3,709.16

2633

Included in accounts payable and not inventory

Inventory

5,182.31

Purchases

5,182.31

2634

Received prior to year end and not recorded

Inventory

6,403.00

Accounts payable

6,403.00

2635

Included in accounts payable and not inventory

Inventory

8,484.91

Purchases

8,484.91

2636

None

2637

Title passed prior to year end and not recorded

Inventory

7,515.50

Accounts payable

7,515.50

2638

None

Requirement (c) Typically errors which have an effect on earnings are most important because of the importance of earnings to users of financial statements. Receiving report numbers 2633 and 2635 affect earnings. In addition, these errors are more important because they represent the recording of part of the entry. If they are not adjusted, the inventory balance the following year will be understated by P13,667.22 (P5,182.31 + P8,484.91). For the other three items (receiving report numbers 2632, 2634 and 2637), the error is less important because they would be recorded the following year and the account balances would then be proper.

Substantive Tests of Liabilities

14-13.

14-9

Cute People, Inc. Requirement (a) Current Liability Section of the Balance Sheet for Cute People, Inc. Current liabilities Notes payable Accounts payable to trade creditors Accrued salaries and wages Payroll taxes and deductions withheld (P15,000 + P30,000 + P3,000) Income taxes payable Other taxes payable (P100,000 + P185,000) Estimated warranty payables (P55,000 + P145,000 - P130,000) Cash dividends payable (2,500,000 x P0.40) Accrued interest [(P4,000,000 x .07 x 1/4) + P90,000] Miscellaneous accruals Total current liabilities

P 600,000 325,000 145,000 48,000 250,000 285,000 70,000 1,000,000 160,000 50,000 P2,933,000

Requirement (b) The following items of information were not used in preparing the current liability section of the balance sheet: 1. Bonds payable were not included among current liabilities, because they mature in 2010. Interest accrued on these bonds, however, for the period January 1 - March 31, 2006 (P4,000,000 x 7% x 1/4 year = P70,000) is included. 2. Notes payable due after March 31, 2007, totaling P2,400,000, were excluded because they are not due within the next year. 3. The par and market values of the ordinary shares are not used. These items would be needed to record the stock dividend, but have no impact on current liabilities. 14-14.

Pine, Inc. Requirement (a) The following additional information is needed to determine the proper lease classification as financing or operating: 1. The fair value of the building space as of the date on which the lease agreement was signed. 2. The initial lease term and whether a bargain purchase or renewal option is available at the end of the term.

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Solutions Manual to Accompany Applied Auditing, 2006 Edition 3. 4.

The estimated useful life of the property. Whether the quarterly lease payments include provision for executory costs (insurance, taxes, etc.) 5. Whether the residual value is guaranteed by Pine Requirement (b) The following auditing procedures should be applied in gathering the information meeting the requirements set forth in (a) above: 1. Examine the lease agreement for details surrounding the initial lease term, payment of executory costs, and the existence of purchase or renewal options. 2. Examine appraisal reports and property tax bills for an indication of fair value at date of lease. 3. Inquire of management or confirm with lessor as to the estimated useful life of the property. Requirement (c) Pine, Inc. Obligation under Capital Leases, 2006  December 31, 2006 1/1/06:

Liability as calculated: NPV of P150,000 per period for 40 periods at 3% per period (ordinary annuity) P3,467,215 4/1/06: Payment: Interest (3% x P3,467,215) = P104,016 Principal (P150,000 - P104,016) (45,984) 7/1/06: Payment: Interest [3% x (P3,467,215 - P45,985)] = P102,637 Principal (P150,000 - P102,637) (47,363) 9/1/06: Payment: Interest [3% x (P3,467, 215 - P45,984 - P47,363)] = P101,216 Principal (P150,000 - P101,216) (48,784) 12/31/06: Principal balance P3,325,084 F Requirement (d)

C C C

C

Audit adjustments: (1) Lease Property Interest Expense Obligation under Capital Lease Rent Expense

3,467,215 307,869 3,325,084 450,000

T

Substantive Tests of Liabilities

14-11

To capitalize financing lease and reverse rental charges erroneously recognized as expense. (2) Depreciation Expense Accumulated Depreciation To record depreciation on leased assets, assuming straight-line depreciation and full year policy concerning depreciation in the year of acquisition.

346,721

(3) Interest Expense Interest Payable 3% of P3,325,084 (4th quarter interest)

AUDIT LEGENDS:

14-15.

 T

Examined lease agreement Traced to general ledger

346,721

99,753 99,753

C F

Calculated Footed

Roehl Wholesale Foods, Inc. a.

See Exhibit A.1.

b.

This is a capital lease inasmuch as the present value of the minimum lease payments exceeds 90% of the fair value of the property at the date of lease signing.

c.

In auditing the Belle lease, the student should identify the following objectives: 1) Determine that the warehouse exists and that the transaction was completed in 2006. 2) Establish proper classification of the lease as to capital or operating. 3) Verify proper recording of the lease. 4) Ascertain validity of the quarterly payments and determine that they have been correctly classified as to interest expense and principal reduction. 5) Determine proper authorization of the lease transaction. 6) Verify terms of the lease, i.e., initial lease term, explicit interest rate, quarterly lease payments and dates of payment, responsibility for executory costs, and absence of contingent rentals.

d.

See Exhibit B.1.

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Solutions Manual to Accompany Applied Auditing, 2006 Edition

Exhibit A.1. Belle Warehouse Lease Amortization Schedule December 31, 2006 (1)

(2)

Period

Cash-credit

Interest Expense-debit [2% x (4)]

1/2/06 1/2/06 4/1/06 7/2/06 10/1/06 1/2/07 4/1/07 7/1/07 10/1/07 1/2/08 4/1/08 7/1/08 10/1/08 1/2/09

P150,000 P150,000 P150,000 P150,000 P150,000 P150,000 P150,000 P150,000 P150,000 P150,000 P150,000 P150,000 P150,000

C

P80,708 P79,322 P77,908 P76,467 P74,996 P73,496 P71,966 P70,405 P68,813 P67,189 P65,533 P63,844

(3) Obligations under Long-term Lease-debit [(1) – (2)] P150,000 P69,292 P70,678 P72,092 P73,533 P75,004 P76,504 P78,034 P79,595 P81,187 P82,811 P84,467 P86,156

Calculated as follows: Net present value of an annuity due of P150,000 per period for 40 periods at 2% equals P4,185,388.

(4) Lease Liabilitybalance [(4) – (3)] P4,185,388 P4,035,388 P3,966,096 P3,895,418 P3,823,326 P3,749,793 P3,674,789 P3,598,285 P3,520,251 P3,440,656 P3,359,469 P3,276,658 P3,192,191 P3,106,035

C

14-13

Substantive Tests of Liabilities

Exhibit B.1. ROEHL WHOLESALE FOODS, INC. Belle Warehouse Obligation Under Long-Term Lease December 31, 2006

Date

Description

1/2/06 1/2/06 4/1/06 7/1/06 10/1/06 12/31/06

Belle warehouse lease Initial payment Payment Payment Payment Accrual

12/31/06

Audited Balances

12/31/06

12/31/06

Cash-credit

Lease Obligation debit

^

C

Interest Expense

Interest Payable

P4,185,388 E & P4,035,388 P3,966,096 P3,895,418 P3,823,326 ---------------

P P P P

P3,823,326

P314,405

P76,467

To WP P

To WP R

To WP R

Balance per Ledger

P3,585,388

P

P

AJE 1

P 237,938

P314,405

P76,467

Balance per Audit - as above

P3,823,326

P314,405

P76,467

P150,000 @ P150,000 @ P150,000 @ P150,000 @ P 0

P150,000 P 69,292 P 70,678 P 72,092 -------------

C C C C

AJE 1 Interest expense Interest payable Obligation under long-term lease To adjust obligation for interest not recognized in lease payments. @ E

Lease Obligation balance

Examined canceled check. Examine lease agreement and recalculated net present value of minimum lease payments. Also inspected warehouse. Determined that this is a capital lease. NPV of lease payments equals P4,185,388, the fair value of the warehouse at date of lease. Calculated.

80,708 79,322 77,908 76,467

0

C C C C

P76,476

0

314,405 76,467 237,938

Lease Terms: Term: 10 years with no purchase or renewal option. Payments: P150,000 per quarter payable in advance. Executory costs assumed by lessee. Interest rate: 8 percent per annum. Market value of warehouse: P4,185,388. Date of lease: January 2, 2006 Date of first payment: January 2,

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Solutions Manual to Accompany Applied Auditing, 2006 Edition &

14-16.

Examined directors’ minutes to establish proper authorization of lease transaction.

2006

Franda Company 1.

This loss contingency is accrued at the end of 2006 because (a) it is an existing condition, (b) a loss is probable, and (c) the loss can be reasonably estimated. The loss is accrued at the most likely amount (P70,000) within the range of amounts as follows: 2006 Dec. 31

2.

Estimated Loss from Litigation Estimated Liability from Pending Lawsuit

70,000 70,000

This loss contingency is accrued at the end of 2006 because (a) it is an existing condition, (b) a loss is probable, and (c) the loss can be reasonably estimated. The loss is accrued at the estimated cost of repairs (P200,000) as follows: 2006 Dec. 31

Estimated Expense from Recall Repairs Estimated Liability for Recall Repairs

200,000 200,000

The potential lawsuits for injury claims are disclosed in a note to the financial statements because there is a reasonable possibility that a loss may have been incurred. 3.

This loss contingency is accrued at the end of 2006 because (a) it is an existing condition, (b) a loss is probable, and (c) the loss can be reasonably estimated. The loss is accrued at the minimum amount of the range (P40,000) because it is not likely that the loss will be less, as follows: 2006 Dec. 31

4.

Estimated Loss from Pollution Fine Estimated Liability from Pollution Fine

40,000 40,000

Because of conservatism, this gain contingency is not accrued but is disclosed in the notes to the financial statements.

14-17. #

Assets

Liabilities

Owners’ Equity

Net Income

1

I

I

NE

NE

14-15

Substantive Tests of Liabilities

14-18.

2

NE

NE

NE

NE

3

NE

I

D

D

4

I

I

NE

NE

#

Assets

Liabilities

Owners’ Equity

Net Income

5

NE

I

D

D

6

I

I

I

I

7

D

I

D

D

8

NE

I

D

D

9

NE

I

D

D

10

I

I

NE

NE

11

NE

I

D

D

12

NE

I

D

D

13

NE

I

D

D

14

D

D

NE

NE

15

I

I

I

I

16

D

NE

D

D

17

NE

D

I

I

18

NE

I

D

D

Boogie Corporation Reacquisition price (P900,000 X 101%) Less: Net carrying amount of bonds redeemed: Par value Unamortized discount Unamortized bond issue costs Loss on redemption Calculation of unamortized discount— Original amount of discount: P900,000 X 3% = P27,000 P27,000/10 = P2,700 amortization per year Amount of discount unamortized: P2,700 X 5 = P13,500 Calculation of unamortized issue costs— Original amount of costs: P24,000 X P900,000/P1,500,000 = P14,400 P14,400/10 = P1,440 amortization per year

P909,000 P900,000 (13,500) (7,200)

879,300 P 29,700

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Solutions Manual to Accompany Applied Auditing, 2006 Edition Amount of costs unamortized: P1,440 X 5 = P7,200

January 2, 2006 Bonds Payable........................................................................................................................ 900,000 Loss on Redemption of Bonds .............................................................................................. 29,700 Unamortized Bond Issue Cost................................................................................. 7,200 Discount on Bonds Payable..................................................................................... 13,500 Cash......................................................................................................................... 909,000

14-19.

Stargazer Company Reacquisition price (P300,000 X 104%)............................................................................... P312,000 Less: Net carrying amount of bonds redeemed: Par value................................................................................................................ P300,000 Unamortized discount............................................................................................ (10,000) 290,000 Loss on redemption................................................................................................................ P 22,000 Bonds Payable........................................................................................................................ 300,000 Loss on Redemption of Bonds............................................................................................... 22,000 Discount on Bonds Payable..................................................................................... 10,000 Cash......................................................................................................................... 312,000 (To record redemption of bonds payable) Cash........................................................................................................................................ 306,000 Unamortized Bond Issue Costs.............................................................................................. 3,000 Premium on Bonds Payable..................................................................................... 9,000 Bonds Payable......................................................................................................... 300,000 (To record issuance of new bonds)

14-20.

Miguel Company Requirement (a) Transfer of property on December 31, 2006: Miguel Company (Debtor): Note Payable............................................................................................................ 200,000 Interest Payable....................................................................................................... 18,000 Accumulated Depreciation—Machine.................................................................... 221,000 Machine........................................................................................................... 390,000 Gain on Disposition of Machine...................................................................... 21,000a

Substantive Tests of Liabilities

14-17

Gain on Debt Restructuring............................................................................. 28,000b a

P190,000 – (P390,000 – P221,000) = P21,000. (P200,000 + P18,000) – P190,000 = P28,000.

b

Prime National Bank (Creditor): Machine................................................................................................................... 190,000 Allowance for Doubtful Accounts........................................................................... 28,000 Note Receivable............................................................................................... 200,000 Interest Receivable.......................................................................................... 18,000 Requirement (b) “Gain on Machine Disposition” and the “Gain on Debt Restructuring” should be reported as an ordinary gain in the income statement. Requirement (c) Granting of equity interest on December 31, 2006: Miguel Company (Debtor): Note Payable............................................................................................................ 200,000 Interest Payable....................................................................................................... 18,000 Ordinary Shares............................................................................................... 150,000 Additional Paid-in Capital............................................................................... 40,000 Gain on Debt Restructuring............................................................................. 28,000 Prime National Bank (Creditor): Investment (Trading)............................................................................................... 190,000 Allowance for Doubtful Accounts........................................................................... 28,000 Note Receivable............................................................................................... 200,000 Interest Receivable.......................................................................................... 18,000 14-21.

Grease Products Company Requirement (a) Depot..................................................................................................................................... 600,000 Cash......................................................................................................................... 600,000 Depot...................................................................................................................................... 41,879 Asset Retirement Obligation................................................................................... 41,879 Requirement (b) Depreciation Expense............................................................................................................ 60,000 Accumulated Depreciation...................................................................................... 60,000 Depreciation Expense............................................................................................................ 4,187.90

14-18

Solutions Manual to Accompany Applied Auditing, 2006 Edition Accumulated Depreciation...................................................................................... 4,187.90* Interest Expense..................................................................................................................... 2,512.74 Asset Retirement Obligation................................................................................... 2,512.74** *P41,879/10. **P41,879 X .06. Requirement (c) Asset Retirement Obligation........................................................................ 75,000 Loss on ARO Settlement........................................................................................................ 5,000 Cash......................................................................................................................... 80,000

14-22.

Johnny B. Good Corporation December 31 1.

No adjustment necessary

2.

Interest Expense (P36,000 X 12% X 9/12) Interest Payable

3,240

Interest Expense (P12,000 X 8/12) Discount on Notes Payable

8,000

3. 4.

No adjustment necessary

3,240 8,000