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    Audit of Current Liabilities

    Uploaded by

    Eva Dagus
    This document contains 8 problems related to auditing various current liabilities: 1) Accounts payable with adjustments for goods in transit and errors 2) Warranty liability calculations over multiple years 3) Premium liability for points earned on sales over two years 4) Customer loyalty program liability based on points earned and redeemed 5) Value added tax payable for 3 months 6) Bonus payable calculation under different scenarios 7) Estimated liability from a court case based on probability percentages 8) Decommissioning liability for a mining site calculated over several years

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    Audit of Current Liabilities

    Uploaded by

    Eva Dagus
    1K views3 pages
    This document contains 8 problems related to auditing various current liabilities: 1) Accounts payable with adjustments for goods in transit and errors 2) Warranty liability calculations over multiple years 3) Premium liability for points earned on sales over two years 4) Customer loyalty program liability based on points earned and redeemed 5) Value added tax payable for 3 months 6) Bonus payable calculation under different scenarios 7) Estimated liability from a court case based on probability percentages 8) Decommissioning liability for a mining site calculated over several years

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    AP 5103

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    This document contains 8 problems related to auditing various current liabilities: 1) Accounts payable with adjustments for goods in transit and errors 2) Warranty liability calculations over multiple years 3) Premium liability for points earned on sales over two years 4) Customer loyalty program liability based on points earned and redeemed 5) Value added tax payable for 3 months 6) Bonus payable calculation under different scenarios 7) Estimated liability from a court case based on probability percentages 8) Decommissioning liability for a mining site calculated over several years

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    1K views3 pages

    Audit of Current Liabilities

    Uploaded by

    Eva Dagus
    This document contains 8 problems related to auditing various current liabilities: 1) Accounts payable with adjustments for goods in transit and errors 2) Warranty liability calculations over multiple years 3) Premium liability for points earned on sales over two years 4) Customer loyalty program liability based on points earned and redeemed 5) Value added tax payable for 3 months 6) Bonus payable calculation under different scenarios 7) Estimated liability from a court case based on probability percentages 8) Decommissioning liability for a mining site calculated over several years

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    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

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