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
years 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 clients record
Less: Rent Expense per audit
Last months 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
Officers Life
Officers 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
Workmens 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

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CHAPTER

Deferred pension cost

Solutions Manual to Accompany Applied Auditing, 2006 Edition

Office supplies on hand

Factory supplies on hand

Substantive Tests of Prepaid Expenses and Deferred Charges

Prepaid closing costs

Unexpired dues and subscriptions

Dues and subscriptions expense

Prepaid vacation expense

Solutions Manual to Accompany Applied Auditing, 2006 Edition

Requirement (2) Adjusting Journal Entry:

Substantive Tests of Prepaid Expenses and Deferred Charges

Fire and extended, factory building

Inside theft and burglary

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