CHAPTER

SUBSTANTIVE TESTS OF
14 LIABILITIES

14-1. a. Accounts receivable the auditors objective is to test the existence of

accounts receivable.
Accounts payable the auditors objective is to test the completeness of
accounts payable.

b. Accounts receivable In selecting accounts for confirmation, auditors focus

on a variety of characteristics, including
high-volume vendors.
high-value accounts.
accounts significantly smaller than in a previous period.
small or zero-balance accounts.

Accounts payable In selecting accounts for confirmation, auditors focus on

large, small, or dormant accounts and on vendors the client starts using
around year end.

c. Basic information included on the confirmation requests is the same for

accounts receivable and for accounts payable.

d. Procedures for mailing are substantially the same for accounts receivable and
for accounts payable.

e. For accounts receivable, an auditor examines documentary evidence that

indicates the customer was shipped goods and ultimately paid for them. For
accounts payable, if the objective of the confirmation process is to test the
existence of a payable and the vendor does not respond, the auditor should
attempt to verify existence of the liability by performing tests such as
examining the purchase order, the receiving report, and the vendors invoice
for the transaction. If the objective is to test completeness, the auditor should
reconcile accounts payable or reconcile to subsequent payments.

14-2. a. The auditor should perform the following procedures:

Trace balance per confirmation request to confirmation of the supplier /
creditor.
Trace balance per general ledger to subsidiary ledger.
Trace payments made to cash payments journal and paid checks.
For invoices not received at December 31, 2006, determine invoice date.
14-2 Solutions Manual to Accompany Applied Auditing, 2006 Edition

For goods shipped FOB destination, examine invoice to determine terms.

For goods shipped FOB shipping point, examine shipping document.
Ask client to explain unlocated differences, and then follow up to
determine that the clients explanation was valid.

b. For accounts not confirmed, the auditor should substantiate that a shipment
was received by examining the receiving report, the invoice copy, and
subsequent payment if possible.

c. The accounts payable clerk should not routinely perform the reconciliation of
monthly statements to the listing of accounts or vouchers payable. Whether
the accounts payable clerk or another employee performs the activity, the
auditor must substantiate the validity of the explanations.

14-3. a. The accounts payable audit procedures should be directed toward searching
for proper inclusion of all accounts payable (completeness) and ascertaining
that recorded amounts are reasonably stated (valuation), because the primary
audit purpose is to reveal any possible material understatements. The
principal objectives of the accounts payable examination are
to determine the adequacy of internal control for processing and payment
of invoices.
to prove that amounts shown on the balance sheet are in agreement with
supporting accounting records.
to determine that liabilities existing at the balance sheet date have been
recorded.

b. Tan is not required to use accounts payable confirmation procedures. Unlike

accounts receivable, accounts payable require no opinions as to valuation.
The auditor is required to obtain direct confirmation of accounts receivable,
since the primary audit test is for possible material overstatements and the
client usually has available only internal documents, such as sales invoices.
For accounts payable, the auditor can examine external evidence, such as
vendor invoices and vendor statements that substantiates the accounts payable
balance. Although not required, accounts payable confirmation procedures
are often used. The auditor might consider using them when
internal controls are weak.
the company is in a tight cash position, and bill paying is slow.
physical inventories exceed general ledger inventory balances by
significant amounts.
certain vendors do not send statements.
vendor accounts are pledged by assets.
vendor accounts include unusual transactions.
 Substantive Tests of Liabilities 14-3
c. A selection technique using the large peso balances of accounts is generally
used when the primary audit objective is to test for overstatements (e.g.,
accounts receivable audit work). Accounts with zero balances or relatively
small balances would not be subjected to selection under such an approach.
When auditing accounts payable, the auditor is primarily concerned with the
possibility of unrecorded payables or understatement of recorded payables.
Selection of accounts with relatively small or zero balances for confirmation
is the more efficient direction of testing since understatements are more likely
to be detected when examining such accounts. When selecting accounts
payable for confirmation, the following procedures could be followed:
Analyze the accounts payable population and stratify it into accounts
with large balances, accounts with small balances, and accounts with
zero balances.
Use a sampling technique that selects items based on criteria other than
the peso amount of the items (e.g., select based on terminal digits, select
every nth item based on predetermined interval, etc.).
Design a statistical sampling plan that will place more emphasis on
selecting accounts with zero balances or relatively small balances,
particularly when the client has had substantial transactions with such
vendors during the year.
Select prior-year vendors that are no longer used.
Select new vendors used in the subsequent period.
Select vendor that do not provide periodic statements.
Select accounts reflecting unusual transactions during the year.
Select accounts secured by pledged assets.

14-4. a. The fact that the client made a journal entry to record vendors invoices that
were received late should simplify the CPAs test for unrecorded liabilities
and reduce the possibility of the need for a further adjustment, but the CPAs
test is nevertheless required. Clients normally are expected to make
necessary adjustments to their books so that the CPA can examine statements
that the client believes are complete and correct. If the client has not
journalized late invoices, the CPA is compelled to substantiate what
ultimately will be recorded as an adjusting entry. In this examination, the
CPA should test entries in the 2004 voucher register to ascertain that all items
that according to dates of receiving reports or vendors invoices were
applicable to 2006 have been included in the journal entry recorded by the
client.

b. No. The CPA should obtain a letter in which responsible executives of the
clients organization represent that to the best of their knowledge all liabilities
have been recognized. However, this is done as a normal audit procedure to
afford additional assurance to the CPA; it does not eliminate the need to
perform his or her own tests.
14-4 Solutions Manual to Accompany Applied Auditing, 2006 Edition

c. Whenever a CPA is justified in relying on work done by an internal auditor,

he or she should curtail (but not eliminate) his or her own audit work. In this
case, the CPA should have ascertained early in the examination that Oracles
internal auditor is qualified by being both technically competent and
reasonably independent. Once satisfied on these points, the CPA should
discuss the nature and scope of the internal audit program with the internal
auditor and should review the working papers so that the CPA may properly
coordinate his or her own program with that of the internal auditor. If the
Oracle internal auditor is qualified and has made tests for unrecorded
liabilities, the CPA can perform only a brief test in this audit area.

d. Work done by an auditor for a government agency will normally have no

effect on the scope of the CPAs audit, since the concern of the government
auditors is usually limited to matters unrelated to the financial statements.
Nevertheless, the CPA should discuss the government auditors work
program with her since there are isolated situations where specific procedures
followed to a satisfactory conclusion by a government auditor will furnish the
CPA with added assurance and therefore permit certain work in a particular
area to be curtailed. However, government auditors are usually primarily
interested in substantiating as valid and allowable those costs that a company
has allocated against specific government contracts or sales to the
government; consequently, there is little likelihood that the auditor for a
government agency would check for unrecorded liabilities at Oracle.

e. In addition to the 2007 voucher register, the CPA should consider the
following sources for possible unrecorded liabilities:
Unentered vendors invoice file
Tax returns for prior years, the status of which is still open
Discussions with employees
Representations from management
Comparison of account balances with preceding-year balances
Examination of individual accounts during the audit
Existing contracts and agreements
Minutes of meetings
Attorneys bills and letters of representation
Status of renegotiable business
Correspondence with principal suppliers
Audit testing of cutoff date for reciprocal accounts (e.g., inventory, fixed
assets)

14-5. d

14-6. b

14-7. a
 Substantive Tests of Liabilities 14-5
14-8. d (P900,000 + P50,000 + P25,000)

14-9. Pelagio Corporation

Computation of Bonus and Income Tax

(a) Bonus = 10% x P90,000

= P9,000
Income Tax = 30% (P90,000 P9,000)
= P24,300

(b) Bonus:
B = 10% (P90,000 B)
Income Tax:
T = 30% (P90,000 B)
Computation:
B = P9,000 0.10 B; B = P9,000 = P8,181.82
1.1
T = P27,000 0.3 B
T = P27,000 0.3 (P8,181.82)
T = P24,545.45

(c) Let B = Bonus; Let T = Income Tax

B = 0.10 (P90,000 T)
T = 0.30 (P90,000 B) Proof: Income Tax
NI bef B & T P90,000.00
B = P6,495 Less: B 6,495.00
T = P25,051.50 P83,505.00
Tax rate x 30%
Tax P25,051.50

(d) B = 0.10 (P90,000 B T)

T = 0.30 (P90,000 B) Proof: Bonus
NI bef B & T P90,000.00
B = P5,888 Less: B ( 5,888.00)
T = P25,234 T (25,234.00)
Balance P58,878.00
x 10%
P 5,887.80
14-6 Solutions Manual to Accompany Applied Auditing, 2006 Edition

14-10. Broadwall Corporation

a. Esteva should apply the following procedures:

1. Send standard bank confirmation
a. Direct liabilities
b. Security agreements
2. Examine notes for terms, provisions, etc.
3. Review board meeting minutes
a. Authority for transactions
b. Dividends declared
4. Determine compliance with bank loan provisions
5. Consider effects of presidents loans on debt/equity
6. Investigate business purpose of loan
7. Trace loan proceeds to cash receipts records
8. Trace interest and principal payments to cash disbursements records
9. Recompute and verify interest expense and accrual computations
10. Consider balance sheet presentation/disclosure
a. Current/noncurrent portions
b. Assets pledged as collateral
c. Related party
11. Obtain management representation letter

b. Broadwalls financial statements should include the following related party

disclosures:
1. Nature of partys relationship
2. Description of the transaction
3. Peso volume of the loans
4. Amounts due to president and terms of settlement.

14-11. Bem, Inc.

Item No. AJE

1 None
2 Insurance expense 9,167
Prepaid insurance 9,167
3 None
4 None
5 None
6 Prepaid dues and subscriptions 500
Dues and subscriptions expense 500
7 None
 Substantive Tests of Liabilities 14-7
Item No. AJE

8 None
9 Accounts payable 8,400
Inventory 8,400
10 Legal and professional fees 4,600
Accrued legal and professional fees 4,600
11 Medical expenses 2,500
Accrued medical expenses 2,500
12 Inventory 5,500
Accounts payable 5,500
13 None (adjustment already made by client)
14 None
15 None (adjustment already made by client)
16 None
17 None
18 None (adjustment already made by client)
19 Machinery and equipment 25,400
Accounts payable - others 25,400
20 None (adjustment already made by client)

14-12. AFC Manufacturing

Requirement (a)

It is essential to coordinate the cutoff tests with the physical observation of

inventory. If the cutoff is inconsistent with the physical inventory there can be
significant errors in the income statement and the balance sheet. For example,
assume an inventory acquisition for P40,000 is received late in the afternoon of
December 31, after the physical inventory is completed. If the acquisition is
included in accounts payable and purchases but excluded from inventory, the
result is an understatement of net earnings of P40,000. On the other hand, if the
acquisition is excluded from both inventory and accounts payable, there is an error
in the balance sheet, but the income statement is correct.
14-8 Solutions Manual to Accompany Applied Auditing, 2006 Edition

Requirement (b)

Adjusting Entry
Receiving Description of Debit Credit
Report # Error(s) Account Amount Account Amount
2631 None
2632 Received prior to Inventory 3,709.16 Accounts 3,709.16
year end and not payable
recorded
2633 Included in accounts Inventory 5,182.31 Purchases 5,182.31
payable and not
inventory
2634 Received prior to Inventory 6,403.00 Accounts 6,403.00
year end and not payable
recorded
2635 Included in accounts Inventory 8,484.91 Purchases 8,484.91
payable and not
inventory
2636 None
2637 Title passed prior to Inventory 7,515.50 Accounts 7,515.50
year end and not payable
recorded
2638 None

Requirement (c)

Typically errors which have an effect on earnings are most important because of
the importance of earnings to users of financial statements. Receiving report
numbers 2633 and 2635 affect earnings. In addition, these errors are more
important because they represent the recording of part of the entry. If they are not
adjusted, the inventory balance the following year will be understated by
P13,667.22 (P5,182.31 + P8,484.91). For the other three items (receiving report
numbers 2632, 2634 and 2637), the error is less important because they would be
recorded the following year and the account balances would then be proper.
 Substantive Tests of Liabilities 14-9
14-13. Cute People, Inc.

Requirement (a)
Current Liability Section of the Balance Sheet for Cute People, Inc.
Current liabilities
Notes payable P 600,000
Accounts payable to trade creditors 325,000
Accrued salaries and wages 145,000
Payroll taxes and deductions withheld
(P15,000 + P30,000 + P3,000) 48,000
Income taxes payable 250,000
Other taxes payable (P100,000 + P185,000) 285,000
Estimated warranty payables (P55,000 + P145,000 - P130,000) 70,000
Cash dividends payable (2,500,000 x P0.40) 1,000,000
Accrued interest [(P4,000,000 x .07 x 1/4) + P90,000] 160,000
Miscellaneous accruals 50,000
Total current liabilities P2,933,000

Requirement (b)
The following items of information were not used in preparing the current liability
section of the balance sheet:
1. Bonds payable were not included among current liabilities, because they
mature in 2010. Interest accrued on these bonds, however, for the period
January 1 - March 31, 2006 (P4,000,000 x 7% x 1/4 year = P70,000) is
included.
2. Notes payable due after March 31, 2007, totaling P2,400,000, were excluded
because they are not due within the next year.
3. The par and market values of the ordinary shares are not used. These items
would be needed to record the stock dividend, but have no impact on current
liabilities.

14-14. Pine, Inc.

Requirement (a)
The following additional information is needed to determine the proper lease
classification as financing or operating:
1. The fair value of the building space as of the date on which the lease
agreement was signed.
2. The initial lease term and whether a bargain purchase or renewal option is
available at the end of the term.
3. The estimated useful life of the property.
4. Whether the quarterly lease payments include provision for executory costs
(insurance, taxes, etc.)
5. Whether the residual value is guaranteed by Pine
14-10 Solutions Manual to Accompany Applied Auditing, 2006 Edition

Requirement (b)
The following auditing procedures should be applied in gathering the information
meeting the requirements set forth in (a) above:
1. Examine the lease agreement for details surrounding the initial lease term,
payment of executory costs, and the existence of purchase or renewal options.
2. Examine appraisal reports and property tax bills for an indication of fair value
at date of lease.
3. Inquire of management or confirm with lessor as to the estimated useful life
of the property.

Requirement (c)

Pine, Inc.
Obligation under Capital Leases, 2006
December 31, 2006

1/1/06: Liability as calculated:

NPV of P150,000 per period for 40 periods
at 3% per period (ordinary annuity) P3,467,215 C
4/1/06: Payment:
Interest (3% x P3,467,215) = P104,016
Principal (P150,000 - P104,016) (45,984) C
7/1/06: Payment:
Interest [3% x (P3,467,215 - P45,985)] = P102,637
Principal (P150,000 - P102,637) (47,363) C
9/1/06: Payment:
Interest [3% x (P3,467, 215 - P45,984 - P47,363)]
= P101,216
Principal (P150,000 - P101,216) (48,784) C
12/31/06: Principal balance
P3,325,084
F
Requirement (d)

Audit adjustments:

(1)
Lease Property 3,467,215
Interest Expense 307,869
Obligation under Capital Lease 3,325,084
Rent Expense 450,000 T
To capitalize financing lease and
reverse rental charges erroneously
recognized as expense.
 Substantive Tests of Liabilities 14-11
(2)
Depreciation Expense 346,721
Accumulated Depreciation 346,721
To record depreciation on leased
assets, assuming straight-line
depreciation and full year policy
concerning depreciation in the year
of acquisition.

(3)
Interest Expense 99,753
Interest Payable 99,753
3% of P3,325,084 (4th quarter interest)

AUDIT LEGENDS: Examined lease agreement C Calculated

T Traced to general ledger F Footed

14-15. Roehl Wholesale Foods, Inc.

a. See Exhibit A.1.

b. This is a capital lease inasmuch as the present value of the minimum lease
payments exceeds 90% of the fair value of the property at the date of lease
signing.

c. In auditing the Belle lease, the student should identify the following
objectives:
1) Determine that the warehouse exists and that the transaction was
completed in 2006.
2) Establish proper classification of the lease as to capital or operating.
3) Verify proper recording of the lease.
4) Ascertain validity of the quarterly payments and determine that they have
been correctly classified as to interest expense and principal reduction.
5) Determine proper authorization of the lease transaction.
6) Verify terms of the lease, i.e., initial lease term, explicit interest rate,
quarterly lease payments and dates of payment, responsibility for
executory costs, and absence of contingent rentals.

d. See Exhibit B.1.

14-12 Solutions Manual to Accompany Applied Auditing, 2006 Edition

Exhibit A.1.

Belle Warehouse Lease

Amortization Schedule
December 31, 2006

(1) (2) (3) (4)

Obligations Lease
Interest under Long-term Liability-
Expense-debit Lease-debit balance
Period Cash-credit [2% x (4)] [(1) (2)] [(4) (3)]

1/2/06 P4,185,388 C
1/2/06 P150,000 P150,000 P4,035,388
4/1/06 P150,000 P80,708 P69,292 P3,966,096
7/2/06 P150,000 P79,322 P70,678 P3,895,418
10/1/06 P150,000 P77,908 P72,092 P3,823,326
1/2/07 P150,000 P76,467 P73,533 P3,749,793
4/1/07 P150,000 P74,996 P75,004 P3,674,789
7/1/07 P150,000 P73,496 P76,504 P3,598,285
10/1/07 P150,000 P71,966 P78,034 P3,520,251
1/2/08 P150,000 P70,405 P79,595 P3,440,656
4/1/08 P150,000 P68,813 P81,187 P3,359,469
7/1/08 P150,000 P67,189 P82,811 P3,276,658
10/1/08 P150,000 P65,533 P84,467 P3,192,191
1/2/09 P150,000 P63,844 P86,156 P3,106,035

C Calculated as follows:
Net present value of an annuity due of P150,000
per period for 40 periods at 2% equals P4,185,388.
 Substantive Tests of Liabilities 14-13
Exhibit B.1.

ROEHL WHOLESALE FOODS, INC.

Belle Warehouse
Obligation Under Long-Term Lease
December 31, 2006

Lease Lease
Obligation Obligation Interest Interest
Date Description Cash-credit debit balance Expense Payable

1/2/06 Belle warehouse

lease P4,185,388 E &
1/2/06 Initial payment P150,000 @ P150,000 C P4,035,388
4/1/06 Payment P150,000 @ P 69,292 C P3,966,096 P 80,708 C
7/1/06 Payment P150,000 @ P 70,678 C P3,895,418 P 79,322 C
10/1/06 Payment P150,000 @ P 72,092 C P3,823,326 P 77,908 C
12/31/06 Accrual P 0 ------------- --------------- P 76,467 C P76,476
12/31/06 Audited Balances P3,823,326 P314,405 P76,467

To WP P To WP R To WP R

12/31/06 Balance per Ledger P3,585,388 P 0 P 0

AJE 1 P 237,938 P314,405 P76,467

12/31/06 Balance per Audit - as above P3,823,326 P314,405 P76,467

AJE 1
Interest expense 314,405
Interest payable 76,467
Obligation under long-term lease 237,938
To adjust obligation for interest not
recognized in lease payments.

@ Examined canceled check.

E Examine lease agreement and Lease Terms:
recalculated net present value Term: 10 years with no purchase
of minimum lease payments. or renewal option.
Also inspected warehouse. Payments: P150,000 per quarter
payable in advance.
^ Determined that this is a capital Executory costs assumed by lessee.
lease. NPV of lease payments Interest rate: 8 percent per annum.
equals P4,185,388, the fair Market value of warehouse:
value of the warehouse at date P4,185,388.
of lease. Date of lease: January 2, 2006
C Calculated. Date of first payment: January 2,
& Examined directors minutes to 2006
establish proper authorization
of lease transaction.
14-14 Solutions Manual to Accompany Applied Auditing, 2006 Edition

14-16. Franda Company

1. This loss contingency is accrued at the end of 2006 because (a) it is an

existing condition, (b) a loss is probable, and (c) the loss can be reasonably
estimated. The loss is accrued at the most likely amount (P70,000) within the
range of amounts as follows:

2006
Dec. 31 Estimated Loss from Litigation 70,000
Estimated Liability from Pending
Lawsuit 70,000

2. This loss contingency is accrued at the end of 2006 because (a) it is an

existing condition, (b) a loss is probable, and (c) the loss can be reasonably
estimated. The loss is accrued at the estimated cost of repairs (P200,000) as
follows:

2006
Dec. 31 Estimated Expense from Recall Repairs 200,000
Estimated Liability for Recall Repairs 200,000

The potential lawsuits for injury claims are disclosed in a note to the financial
statements because there is a reasonable possibility that a loss may have been
incurred.

3. This loss contingency is accrued at the end of 2006 because (a) it is an

existing condition, (b) a loss is probable, and (c) the loss can be reasonably
estimated. The loss is accrued at the minimum amount of the range (P40,000)
because it is not likely that the loss will be less, as follows:

2006
Dec. 31 Estimated Loss from Pollution Fine 40,000
Estimated Liability from Pollution Fine 40,000

4. Because of conservatism, this gain contingency is not accrued but is disclosed

in the notes to the financial statements.

14-17.

# Assets Liabilities Owners Equity Net Income

1 I I NE NE
2 NE NE NE NE
3 NE I D D
4 I I NE NE
 Substantive Tests of Liabilities 14-15
# Assets Liabilities Owners Equity Net Income
5 NE I D D
6 I I I I
7 D I D D
8 NE I D D
9 NE I D D
10 I I NE NE
11 NE I D D
12 NE I D D
13 NE I D D
14 D D NE NE
15 I I I I
16 D NE D D
17 NE D I I
18 NE I D D

14-18. Boogie Corporation

Reacquisition price (P900,000 X 101%) P909,000

Less: Net carrying amount of bonds redeemed:
Par value P900,000
Unamortized discount (13,500)
Unamortized bond issue costs (7,200) 879,300
Loss on redemption P 29,700
Calculation of unamortized discount
Original amount of discount:
P900,000 X 3% = P27,000
P27,000/10 = P2,700 amortization per year
Amount of discount unamortized:
P2,700 X 5 = P13,500
Calculation of unamortized issue costs
Original amount of costs:
P24,000 X P900,000/P1,500,000 = P14,400
P14,400/10 = P1,440 amortization per year
Amount of costs unamortized:
P1,440 X 5 = P7,200
14-16 Solutions Manual to Accompany Applied Auditing, 2006 Edition

January 2, 2006
Bonds Payable ................................................................................................
900,000
Loss on Redemption of Bonds ................................................................
29,700
Unamortized Bond Issue Cost................................ 7,200
Discount on Bonds Payable ................................ 13,500
Cash ................................................................................................ 909,000

14-19. Stargazer Company

Reacquisition price (P300,000 X 104%) ................................ P312,000

Less: Net carrying amount of bonds redeemed:
Par value................................................................P300,000
Unamortized discount ................................................................
(10,000) 290,000
Loss on redemption ................................................................ P 22,000

Bonds Payable ................................................................................................

300,000
Loss on Redemption of Bonds ................................................................
22,000
Discount on Bonds Payable ................................ 10,000
Cash ................................................................................................ 312,000
(To record redemption of bonds
payable)

Cash................................................................................................
306,000
Unamortized Bond Issue Costs ................................................................ 3,000
Premium on Bonds Payable ................................ 9,000
Bonds Payable................................................................ 300,000
(To record issuance of new bonds)

14-20. Miguel Company

Requirement (a)
Transfer of property on December 31, 2006:

Miguel Company (Debtor):

Note Payable ................................................................200,000
Interest Payable................................................................
18,000
Accumulated DepreciationMachine................................ 221,000
Machine................................................................ 390,000
Gain on Disposition of Machine ................................ 21,000a
Gain on Debt Restructuring ................................ 28,000b
a
P190,000 (P390,000 P221,000) = P21,000.
b
(P200,000 + P18,000) P190,000 = P28,000.
 Substantive Tests of Liabilities 14-17
Prime National Bank (Creditor):
Machine ................................................................................................
190,000
Allowance for Doubtful Accounts ................................ 28,000
Note Receivable ................................................................ 200,000
Interest Receivable................................................................ 18,000
Requirement (b)
Gain on Machine Disposition and the Gain on Debt Restructuring should be
reported as an ordinary gain in the income statement.
Requirement (c)
Granting of equity interest on December 31, 2006:
Miguel Company (Debtor):
Note Payable ................................................................ 200,000
Interest Payable................................................................ 18,000
Ordinary Shares................................................................ 150,000
Additional Paid-in Capital................................................................
40,000
Gain on Debt Restructuring ................................................................
28,000

Prime National Bank (Creditor):

Investment (Trading)................................................................
190,000
Allowance for Doubtful Accounts ................................ 28,000
Note Receivable ................................................................ 200,000
Interest Receivable................................................................ 18,000

14-21. Grease Products Company

Requirement (a)
Depot ................................................................................................
600,000
Cash................................................................................................ 600,000
Depot ................................................................................................
41,879
Asset Retirement Obligation ................................ 41,879
Requirement (b)
Depreciation Expense ................................................................ 60,000
Accumulated Depreciation ................................................................
60,000
Depreciation Expense ................................................................4,187.90
Accumulated Depreciation ................................................................
4,187.90*
Interest Expense................................................................ 2,512.74
Asset Retirement Obligation ................................ 2,512.74**
*P41,879/10.
**P41,879 X .06.
14-18 Solutions Manual to Accompany Applied Auditing, 2006 Edition

Requirement (c)
Asset Retirement Obligation................................ 75,000
Loss on ARO Settlement ................................................................5,000
Cash................................................................................................ 80,000

14-22. Johnny B. Good Corporation

December 31
1. No adjustment necessary

2. Interest Expense (P36,000 X 12% X 9/12) 3,240

Interest Payable 3,240

3. Interest Expense (P12,000 X 8/12) 8,000

Discount on Notes Payable 8,000

4. No adjustment necessary