Solution manual applied auditing by cabrera 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