AUDIT OF CURRENT LIABILITIES APPLIED AUDITING

Solutions:
Problem 1 Audit of Accounts Payable
Purchases Inventory, End Accounts Pay.

Unadjusted Balance 45,000 21,000 10,000

1 Goods held on consignment -3,000
2 Purchased Goods in transit FOB Destination -4,600 -4,600
3 Purchased Goods in transit FOB Shipping point 4,100 4,100 4,100
4 Special Sales -2,500
5 Inadvertently overlooked in the count 800
6 Purchased Goods in transit FOB Shipping point 3,100
Adjusted Balance 44,500 23,500 9,500

Problem 2 Audit of Warranty Liability

December 2015 Debit Credit
Warranty expense 700,000
Warranty Liability (5,000,000 * 14%) 700,000
Warranty Liability 140,000
Cash 140,000
December 2016
Warranty expense 840,000
Warranty Liability (6,000,000 * 14%) 840,000
Warranty Liability 300,000
Cash 300,000

Warranty liability
2015 Warranty expense 700,000
2016 Warranty expense 840,000
2015 Warranty payment -140,000
2016 Warranty payment -300,000
Balance 1,100,000
2015 Expiration Dec. 2016
Jan 2015 2,500,000 4% Dec 2015 0
10% Dec 2016 0
Jul 2015 2,500,000 4% Jun. 2016 0
10% Jun 2017 125,000
2016 Jan 2016 3,000,000 4% Dec 2016 0
10% Dec 2017 300,000
Jul 2016 3,000,000 4% Jun. 2017 60,000
10% Jun 2018 300,000
TOTAL 785,000
2015 5,000,000 5M x 10% / 4 125,000
2016 6,000,000 6M x 4% / 4 60,000
6,000,000 6M x 10% 600,000
785,000

Problem 3 Audit of Premium Liability

PREMIUMS
Cost per premium 60
2015 2016
Premiums prior year 0 200
Premiums to be distributed this year 4,200 5,800 Premium expense
Total Premiums available 4,200 6,000
Less: Premiums distributed this year 4,000 5,500
Premiums to be distributed next year 200 500 Premium liability
Premium expense for 2016 = 5,800 x 60 348,000
 AUDIT OF CURRENT LIABILITIES APPLIED AUDITING
Problem 4 Audit of Customer Loyalty Program
Sales 9,000,000 90% 8,100,000
Customer loyalty program (100,000pts) 1,000,000 10% 900,000
Total 10,000,000 9,000,000

Fair value of customer loyalty program 900,000 900,000 900,000

Points 100,000 100,000 100,000
Year 2015 80% 90% 90%
Points expected to be redeemed 80,000 90,000 90,000
Redeemed as to date 40,000 81,000 90,000
Percentage of redemption 50% 90% 100%
Amount recognized as to date 450,000 810,000 900,000
Amount recognized prior years 0 450,000 810,000
Amount recognized this year 450,000 360,000 90,000

Problem 5 Value-added taxes payable

Month Amount of Sales
Value Added Tax
July 560,000 60,000 *560,000 x 12/112
August 392,000 42,000
September 448,000 48,000
Total 150,000
Less: payment for July VAT 60,000
Answer 90,000
Problem 6 Bonus Payable
Net Income 4,200,000
Bonus rate 5%
Tax rate 30%
Based on net income before bonus and tax
Net income before bonus & tax 4,200,000
Less: Bonus (4.2M x 5%) 210,000
Net income after bonus 3,990,000
Less: Tax 1,197,000
Net income after bonus and tax 2,793,000
Based on net income after bonus but before tax
Net income before bonus & tax 4,200,000
Less: Bonus (4.2M x 5% / 105%) 200,000 5%
Net income after bonus 4,000,000
Less: Tax 1,200,000
Net income after bonus and tax 2,800,000
Based on net income after bonus and tax
Net income before bonus & tax 4,200,000
Less: Bonus (P x B(1-T) / (1 + B(1-T) 142,029 5.00%
Net income after bonus 4,057,971
Less: Tax 1,217,391
Net income after bonus and tax 2,840,580
Based on net income before bonus but after tax
Net income before bonus & tax 4,200,000 4,200,000
Less: Bonus (P x B(1-T) / (1 - BT) 149,239 5.00%
Net income after bonus 4,050,761
Less: Tax 1,215,228 1,215,228
Net income after bonus and tax 2,835,533 2,984,772
***4.2M x .05 x .7 / (1 - .05 x .3)
***4.2M x .05 x .7 / (1 - .015)
***4.2M x .035 / .985
 AUDIT OF CURRENT LIABILITIES APPLIED AUDITING
Problem 7 Estimated Liability from Court Case
60% 2,000,000 1,200,000
40% 1,000,000 400,000
1,600,000
80% Chance 1,280,000
8% risk adjustment factor ( x 1.08) 1,382,400 December 31, 2017
Present value (12%) ( x 1.12^-1) 1,234,286 December 31, 2016

Problem 8 Decommissioning Liability

Cost of mining site 8,000,000

Expected restoration cost 2,000,000
Present value (10years) 0.46319349
Decommissioning liability 926,387 Jan 1, 2016
Add: Interest 74,111 =2000000*(1.08^-9)
Decommissioning liability 1,000,498 Dec 31, 2016

Jan. 1, 2016
Mining site 8,926,387
Decommissiong liability 926,387
Cash 8,000,000
Dec. 31, 2016
Depletion expense 892,639
Accumulated depletion 892,639

Interest expense 74,111

Decommissiong liability 74,111

Date Interest Carrying amount

1/1/2016 0 926,387 926,387
12/31/2016 74,111 1,000,498 1,000,498
12/31/2017 80,040 1,080,538 1,080,538
12/31/2018 86,443 1,166,981
12/31/2019 93,358 1,260,339
12/31/2020 100,827 1,361,166
12/31/2021 108,893 1,470,060
12/31/2022 117,605 1,587,664
12/31/2023 127,013 1,714,678
12/31/2024 137,174 1,851,852 1,851,852
12/31/2025 148,148 2,000,000

= 2e6 * (1.08^-9)
1,000,498 .

Prepared by:
Daniel John F. Falo, CPA, MBA
Instructor, Applied Auditing