Apollo Shoes 7e Solution Liabilities
Apollo Shoes 7e Solution Liabilities
Apollo Shoes 7e Solution Liabilities
The liability portion of the audit will consist of both current liabilities and long-term
liabilities. We will have two lead schedules (current and long-term). The current
liabilities section will also require the students to test payroll expense and interest
expense. Darlene does not give many instructions in the current liabilities section. The
students will have to use an audit plan to determine what to do.
Current Liabilities
Long-Term Liabilities
Points to Remember
The guidance in this section from Darlene is very limited. It should be pointed
out to the students that this happens as the audit nears its end, the amount of
guidance that they will receive will be less and less as everyone gets busy to meet
deadlines.
The search for unrecorded liabilities is conducted in this section. This is a very
important part of the audit that should be emphasized.
Several of these liabilities will be related to expenses and will provide support for
the related expense (e.g. attorney fees and payroll expense).
Many students will forget to accrue the audit fee mentioned in the Board of
Director minutes at the beginning of the audit. Many students will also forget to
record an accrued liability for the 2017 bonuses approved in the January 6, 2018
Board meeting.
There will be a question concerning the Anglonesia R&R Institute invoice. On D-
4, we note that it was been received on December 31st. This liability SHOULD be
recorded. In the Inventory it was counted and included. Thus, to make inventory
balance, costs of goods sold must have been adjusted. Thus, the entry to record
this will be to adjust CGS.
Payroll will also need to be tested. The 2017 calendar used in this case does not
have the actual year-end. December 31, 2017 is on a Wednesday for this case.
The actual 31st is a Sunday. Wednesday was chosen so students would have to
address payroll accruals in the case. Per the manual, payroll is paid on Fridays, so
payroll expense needs to be accrued for three days (30% of 12/26 payroll).
The Payroll Flow Chart and Bridge Working Paper should be included in Internal
Controls.
Under the Notes payable section, interest expense should also be tested.
Interest Payable, Bonus Payable and Dividends Payable accounts are added to the
current liabilities lead schedule. There are no existing accounts related to these
amounts, so the student will have to create new ones.
In the search for unrecorded liabilities Check No. 3628 is payment to Sam Shaw
for washing cars. Shaw is an employee of the firm which makes this a related
party transaction. And, although only a few thousand dollars, this does not
appear to an arm’s-length transaction as the cost per car greatly exceeds any
reasonable rate for washing cars. The aggregate cost for a complete detailing of
all Apollo owned cars would be far less than half this amount. There is no basis
in the case for proposing any adjustment, but students should be suspicious of the
transaction, and a few should identify that it is a related party transaction. This
can also be the basis for a discussion around, “Is there such a thing as an
immaterial related party transaction?”
Audit plan – Current Liabilities (L)
3629 1/13/18 $927.09 1/10/2018 Just Boxes 1/7/2018 Packaging material ordered 1/7.
3630 1/14/18 $8,419.69 1/10/2018 Synergizer Battery Company 1/3/2018 The goods were received on January 6 with bill of lading
showing a January 3 shipping date and marked FOB, Shipping
- Chicago.
3631 1/14/18 $8,434,889.09 L-2 1/10/2018 Anglonesia R&R Institute 12/26/2017 The receiving report was dated December 30. The accounts
payable clerk indicated that the office party was held the
afternoon of the 30th and the receiving report was probably not
forwarded until the next working day so was not included in
year-end accounts payable. This inventory was counted and
included in the physical inventory at the end of the year.
3632 1/14/18 $1,117.19 L-2 1/10/2018 Office Hacks 12/31/2017 Business cards, picked up 12/30/17
3633 1/13/18 $6,924.96 1/10/2018 Smart Chip 1/13/2018 Computer purchased 1/10/18
3634 1/14/18 $4,994.99 L-2 1/10/2018 Sign Up! 12/31/2017 New logos on vehicles on 12/31/17
3635 1/13/18 $5,174.00 1/10/2018 Zrocks 1/13/2018 Copy machine purchased 1/13/18
3636 1/13/18 $585.28 1/10/2018 Smart Chip 1/13/2018 Computer supplies picked up 1/10/18
Note: Check No. 3628. Sam Shaw is an employee of the firm. Although only a few thousand dollars, this is an exorbitant
amount for washing the limited number of Apollo owned cars, and is also a related party transaction.
Apollo Shoes, Inc. N-1
Notes Payable Schedule Prepared by
For Year Ended 12/31/2017 Reviewed by
24200 Current Portion Long-Term Debt $0.00 $0.00 AJE#11 $12,000,000.00 $12,000,000.00 B-3
TB TB
AJE#11
3
N-1-1 270000 Notes Payable-NonCurrent $12,000,000.00
24200 Current Portion LTD $12,000,000.00
* As noted on B-3 and GA-3.1, the $10,000,000 line of credit was rolled into a $12 million note payable. This debt is due on
1/1/2018, so it is reclassed to current.
Note: The original LOC of $10,000,000.00 was rolled into a $12,000,000 note payable on 2-2-14. On 6/1/17 a new LOC of
$44,403,000 was entered into.
Interest Expense Accrual
For the Year Ended 12/31/2017
2) Long Term Note Payable 8.15% $12,000,000 1/2/2017 $978,000.00 N/A $978,000.00