CHAPTER

SUBSTANTIVE TESTS OF
13 PREPAID EXPENSES AND
DEFERRED CHARGES
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 rent P 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 cost P 59,600

Amortized past service cost 46,700
Deferred pension cost P 12,900
Answer: (a)

13-4. Hansen, Inc.

Balance of Bond Discount, 1-1-06 P 61,000

Amortized Bond Discount:
Nominal Interest P 90,000
Effective Interest 93,900 (3,900)
Unamortized Bond Discount P 57,100
Answer: (a)
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) P 18,000

Unexpired
P24,000 x 2.5 20,000
3
Total P 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 advertising P12,000

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
 Substantive Tests of Prepaid Expenses and Deferred Charges 13-3
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
13-4 Solutions Manual to Accompany Applied Auditing, 2006 Edition
13-8. Raven Construction Company

Requirement (1)
Raven Construction Company
Insurance Schedule
12-31-06
Premium
Policy Type of Peso Period Covered Total Chargeable to Expense Prepaid
No. Company Coverage Coverage From To Premium Prior to 2006 2006 12-31-06
0010 Atlas Fire - Bldgs. P100,000 8-1-05 8-1-08 P 1,872 P 260 P 624.00 P 988.00
0020 Clara Fire - Bldgs. 150,000 2-1-06 2-1-09 2,736 - 836.00 1,900.00
0030 Pioneer Fire - Office 100,000 3-1-05 3-1-07 720 300 360.00 60.00
0040 Fortune Product Liability 100,000 7-1-04 7-1-08 768 288 192.00 288.00
0050 Mayon Fire and Theft-Inventory 65,000 8-1-06 8-1-09 360 - 50.00 310.00
0060 Matino Medical-Officers 100,000 6-1-05 6-1-07 1,200 350 600.00 250.00
0070 Matalino Delivery Equipment 50,000 11-1-06 11-1-07 240 - 40.00 200.00
0080 Maganda Blanket Position Bond 30,000 2-1-05 2-1-07 480 220 240.00 20.00
0090 Malinis Construction 100,000 4-1-06 4-1-07 195 - 146.25 48.75
0100 Mabuti Personnel 75,000 5-1-05 5-1-09 2,160 360 540.00 1,260.00
0110 Malayan Officers Life 50,000 9-1-06 9-1-07 120 - 40.00 80.00
0120 AFLA Officers Life 50,000 9-1-06 9-1-07 120 - 40.00 80.00
P10,971 P1,778 P3,708.25 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
 Substantive Tests of Prepaid Expenses and Deferred Charges 13-5
13-9. Queen Company

Requirement (a)
Queen Company
Insurance Schedule
12.31.06
Policy Insurance Period Covered Amount of Total Prepaid
No. Company Coverage From To Coverage Premium Prior to 2006 2006 12.31.06
101 Pioneer Fire and extended, factory building 7/1/05 7/1/08 P 50,000 P 648 P 108 P 216 P 324
102 Pioneer Fire and extended, factory building 8/16/06 8/16/09 150,000 1,728 - 216 1,512
103 Commonwealth Fire and extended, office building 2/1/02 2/1/07 25,000 300 235 60 5
104 Malayan Fire and extended, office building 10/1/03 10/1/08 27,000 480 216 96 168
105 AFISCO Fire, merchandise 5/1/06 5/1/07 10,000 444 - 296 148
106 Domestic Comprehensive delivery equipment 8/1/06 8/1/07 15,000 240 - 100 140
107 Philam Liability, delivery equipment 8/1/06 8/1/07 50,000 360 - 150 210
100,000
108 Filipinas Inside theft and burglary 11/1/06 11/1/09 20,000 450 - 25 425
109 Bankers Employee fidelity 3/1/06 3/1/09 30,000 900 - 250 650
110 Fortune Workmens Compensation 9/1/06 9/1/07 Payroll total 500 - 205 295
at P0.25 per
P100
Total P 6,050 P 559 P1,614 P 3,877

Requirement (b)
Prepaid insurance 3,877
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.