13-2 Solutions Manual to Accompany Applied Auditing, 2006 EditionSubstantive Tests of Prepaid Expenses and Deferred Charges 13-3

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

P 105,000

Less: Rent Expense per audit

Last months rentP 10,000

Nonrefundable payment

amortization P60,000 x 1/12 1,000 11,000

5

Amount to be deferred

P 94,000

Answer: (c)

13-3.Brown Company

Funded past service costP 59,600

Amortized past service cost 46,700

Deferred pension costP 12,900

Answer: (a)13-4. Hansen, Inc.

Balance of Bond Discount, 1-1-06

P 61,000

Amortized Bond Discount:

Nominal InterestP 90,000

Effective Interest 93,900 (3,900)

Unamortized Bond Discount

P 57,100

Answer: (a)

13-5.Walton Company

Prepaid rent for 1/2 year (P36,000 x 1/2)P 18,000

Unexpired

P24,000 x 2.5 20,000

3

TotalP 38,000

Answer: (d)

13-6.Miller Corporation

The past service cost of P500,000 should be amortized over 10 years that is, from 2006 to 2015.

Answer: (c)

13-7.Mabini, Inc.Adjusting Journal Entries:

a.Prepaid advertisingP12,000

Advertising expense

P12,000

b.Office supplies on hand 250

Office supplies expense

250

c.Insurance expense 350

Prepaid insurance

350

d.Factory supplies on hand 1,100

Factory supplies expense

1,100

e.Unexpired subscriptions 1,400

Subscriptions expense

1,400

28 x P1,800

36

f.Insurance expense 400

Prepaid insurance

400

4 x P3,600

36

g.Prepaid closing costs 11,400

Rent expense

11,400

9.5 x P12,000

10

h.Unexpired dues and subscriptions 800

Dues and subscriptions expense

800

8 x P1,200

12

i.Dues and subscriptions expense 360

Prepaid dues and subscriptions

360

j.Prepaid vacation expense 3,000

Vacation expense

3,000

13-8.Raven Construction CompanyRequirement (1)

Raven Construction Company

Insurance Schedule

12-31-06

Premium

Policy

Type ofPesoPeriod CoveredTotalChargeable to ExpensePrepaid

No.CompanyCoverageCoverageFromToPremiumPrior to 2006200612-31-06

0010AtlasFire - Bldgs.P100,0008-1-058-1-08P 1,872P 260P 624.00P 988.00

0020ClaraFire - Bldgs.150,0002-1-062-1-092,736- 836.00 1,900.00

0030Pioneer Fire - Office100,0003-1-053-1-07720 300 360.00 60.00

0040Fortune Product Liability100,0007-1-047-1-08768 288 192.00 288.00

0050Mayon Fire and Theft-Inventory65,0008-1-068-1-09360- 50.00 310.00

0060MatinoMedical-Officers100,0006-1-056-1-071,200 350 600.00 250.00

0070MatalinoDelivery Equipment50,00011-1-0611-1-07240- 40.00 200.00

0080MagandaBlanket Position Bond30,0002-1-052-1-07480 220 240.00 20.00

0090MalinisConstruction 100,0004-1-064-1-07195- 146.25 48.75

0100MabutiPersonnel75,0005-1-055-1-092,160 360 540.00 1,260.00

0110MalayanOfficers Life 50,0009-1-069-1-07120- 40.00 80.00

0120AFLAOfficers Life50,0009-1-069-1-07 120

-

40.00 80.00

P10,971P1,778P3,708.25 P5,484.75

Requirement (2)Adjusting Journal Entry:

Insurance expense P 3,708.25

Retained earnings 1,778.00

Prepaid insurance

P 5,486.25

13-9.Queen CompanyRequirement (a)

Queen Company

Insurance Schedule

12.31.06

PolicyInsurance

Period CoveredAmount ofTotal

Prepaid

No.CompanyCoverageFromToCoveragePremiumPrior to 2006200612.31.06

101PioneerFire and extended, factory building7/1/057/1/08P 50,000P 648P 108P 216P 324

102PioneerFire and extended, factory building8/16/068/16/09150,0001,728-2161,512

103CommonwealthFire and extended, office building2/1/022/1/0725,000300 235605

104MalayanFire and extended, office building10/1/0310/1/0827,000480 21696168

105AFISCOFire, merchandise5/1/065/1/0710,000444-296148

106DomesticComprehensive delivery equipment8/1/068/1/0715,000240-100140

107PhilamLiability, delivery equipment8/1/068/1/0750,000

100,000360-150210

108FilipinasInside theft and burglary11/1/0611/1/0920,000450-25425

109BankersEmployee fidelity3/1/063/1/0930,000900-250650

110FortuneWorkmens Compensation9/1/069/1/07Payroll total at P0.25 per500-205295

P100

Total

P 6,050P 559P1,614P 3,877

Requirement (b)

Prepaid insurance3,877

Insurance expense

3,008

Retained earnings

869

To set up prepaid insurance as of 12.31.06

and to correct insurance expense for 2006

and prior years profits.

CHAPTER

13

SUBSTANTIVE TESTS OF

PREPAID EXPENSES AND

DEFERRED CHARGES