CHAPTER

13
13-1.

SUBSTANTIVE TESTS OF PREPAID EXPENSES AND DEFERRED CHARGES

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. Rhan Corporation Rent Expense per clients record "ess# Rent Expense per audit "ast months rent $onrefundable payment amorti%ation P& , x 1'1( ! )mount to be deferred )nswer# ,cP 1 !, P1 , 1, 11, P *+,

13-2.

13-3.

Brown Company .unded past service cost )morti%ed past service cost 0eferred pension cost )nswer# ,aP !*,& +&,/ P 1(,*

13-4.

Hansen, Inc. 1alance of 1ond 0iscount, 1212 & )morti%ed 1ond 0iscount# $ominal Interest Effective Interest 4namorti%ed 1ond 0iscount P &1, P* , *3,* ,3,* P !/,1 -

13-2
13-5.

Solutions Manual to Accompany Applied Auditing, 2006 Edition )nswer# ,a-

Walton Company Prepaid rent for 1'( year ,P3&, 4nexpired P(+, x (.! 3 6otal )nswer# ,dx 1'(P 15, ( , P 35,

13-6.

Miller Corporation 6he past service cost of P! ( & to ( 1!. )nswer# ,c, should be amorti%ed over 1 years that is, from

13-7.

Mabini, Inc. )d7usting 8ournal Entries# a. b. c. d. e. Prepaid advertising )dvertising expense 9ffice supplies on hand 9ffice supplies expense Insurance expense Prepaid insurance .actory supplies on hand .actory supplies expense 4nexpired subscriptions :ubscriptions expense (5 x P1,5 3& Insurance expense Prepaid insurance + x P3,& 3& P1(, P1(, (! (! 3! 3! 1,1 1,1 1,+ 1,+

f.

+ +

Substantive Tests of Prepaid Expenses and eferred !"arges

13-3

g.

Prepaid closing costs Rent expense *.! x P1(, 1 4nexpired dues and subscriptions 0ues and subscriptions expense 5 x P1,( 1( 0ues and subscriptions expense Prepaid dues and subscriptions Prepaid vacation expense ;acation expense

11,+ 11,+

h.

5 5

i. 7.

3& 3& 3, 3,

13-8.

Raven Construction Company Raven Construction Company Insurance Schedule 12-31-06

#e$uirement %&'

Policy $o% 0010 0020 0030 00-0 00+0 0060 00,0 00*0 00.0 0100 0110 0120

Company 'tlas Clara Pioneer &ortune 1ayon 1atino 1atalino 1a anda 1alinis 1a!uti 1alayan '&0'

Type of Covera e &ire - (ld s% &ire - (ld s% &ire - /ffice Product 0ia!ility &ire and Theft-Inventory 1edical-/fficers 2elivery "3uipment (lan4et Position (ond Construction Personnel /fficer5s 0ife /fficer5s 0ife

Peso Covera e P100)000 1+0)000 100)000 100)000 6+)000 100)000 +0)000 30)000 100)000 ,+)000 +0)000 +0)000

Period Covered &rom To *-1-0+ 2-1-06 3-1-0+ ,-1-0*-1-06 6-1-0+ 11-1-06 2-1-0+ --1-06 +-1-0+ .-1-06 .-1-06 *-1-0* 2-1-0. 3-1-0, ,-1-0* *-1-0. 6-1-0, 11-1-0, 2-1-0, --1-0, +-1-0. .-1-0, .-1-0,

Total Premium P 1)*,2 2),36 ,20 ,6* 360 1)200 2-0 -*0 1.+ 2)160 120 120 P10).,1

Premium Char ea!le to "#pense Prior to 2006 2006 P 260 300 2** 3+0 220 360 P1),,* P 62-%00 *36%00 360%00 1.2%00 +0%00 600%00 -0%00 2-0%00 1-6%2+ +-0%00 -0%00 -0%00 P3),0*%2+

Prepaid 12-31-06 P .**%00 1).00%00 60%00 2**%00 310%00 2+0%00 200%00 20%00 -*%,+ 1)260%00 *0%00 *0%00 P+)-*-%,+

#e$uirement %2' )d7usting 8ournal Entry# Insurance expense Retained earnings Prepaid insurance P 3,/ 5.(! 1,//5. P !,+5&.(!

13-5

Solutions Manual to Accompany Applied Auditing, 2006 Edition

Substantive Tests of Prepaid Expenses and eferred !"arges 13-9. Queen Company
6ueen Company Insurance Schedule 12%31%06 Policy $o% 101 102 103 1010+ 106 10, 10* 10. 110 Insurance Company Pioneer Pioneer Common8ealth 1alayan '&ISC/ 2omestic Philam &ilipinas (an4ers &ortune Covera e &ire and e#tended) factory !uildin &ire and e#tended) factory !uildin &ire and e#tended) office !uildin &ire and e#tended) office !uildin &ire) merchandise Comprehensive delivery e3uipment 0ia!ility) delivery e3uipment Inside theft and !ur lary "mployee fidelity 9or4men5s Compensation Period Covered &rom To ,7170+ *716706 271702 1071703 +71706 *71706 *71706 1171706 371706 .71706 ,7170* *71670. 27170, 107170* +7170, *7170, *7170, 117170. 37170. .7170, 'mount of Covera e P +0)000 1+0)000 2+)000 2,)000 10)000 1+)000 +0)000 100)000 20)000 30)000 Payroll total at P0%2+ per P100 Total Premium P 6-* 1),2* 300 -*0 --2-0 360 -+0 .00 +00 Prior to 2006 P 10* 23+ 216 2006 P 216 216 60 .6 2.6 100 1+0 2+ 2+0 20+

13-7

#e$uirement %a'

Prepaid 12%31%06 P 321)+12 + 16* 1-* 1-0 210 -2+ 6+0 2.+

Total

P 6)0+0

P ++.

P1)61-

P 3)*,,

#e$uirement %b' Prepaid insurance Insurance expense Retained earnings 6o set up prepaid insurance as of 1(.31. & and to correct insurance expense for ( & and prior years profits. 3,5// 3, 5 5&*

Substantive Tests of Prepaid Expenses and eferred !"arges

13-8