AUDITING (2018 EDITION) SOLUTIONS GUIDE

CTESPENILLA 1 of 11

CHAPTER 8-PROBLEM 16:

CASE 1: Mansion Company (LESSEE)
Periodic rentals (September to December); (40,000*4mo) 160,000
Amortization of lease bonus (120,000/12mos)*4mos 40,000
Rent Expense 200,000

CASE 2: Travel Corporation (LESSEE)

Annual rental 300,000
Amortization of lease bonus (100,000/3yrs) 33,333
Contingent rental (P2.5M-P2M)*5% 25,000
Rent Expense 358,333

CASE 3: Pemier Arts Company (LESSOR)

Total lease payments: P30,000*(24mo - 9mo) 450,000
Divide by: 2 years 2
Annual rental expense 225,000
Mulitply by: 11mo/12mo 11/12
Rent expense for 2018 206,250
Less: Amount paid for the year (Nov. and Dec.) (60,000)
Accrued rent expense, 12/31 146,250

CASE 4: Trend Sound System Company (LESSEE)

Total lease payments: P40,000*(36mo-3mo) 1,320,000
Divide by: 3 years 3
Annual rental expense 440,000
Multiply by: 4mo/12mo 4/12
Rent expense for 2018 146,667

*if lease term for the office is the same with the office furniture and equiment
Leasehold improvement cost 300,000
Divide by: remaining lease term, Sept. 30 35 months
Depreciation expense per month 8,571
Mulitply by: 3mo in 2018 3 25,714
Total expense for 2018 172,381

CASE 5: Orange Company (LESSOR)

Total lease collection:
First two years: (P2,000*100*2yrs) 400,000
Last two years: (P3,000*100*2yrs) 600,000 1,000,000
Divide by: 4 years 4
Annual rental income 250,000
Multiply by: 9mo/12mo 9/12
Rent income for the period ended 9/30/14 187,500
Amount collected in 2014 200,000
Unearned rental income (12,500)

CASE 6: Sabotage Company (LESSOR)

Gross rental income 500,000
Amortization of direct lease expense (150,000/5years) (30,000)
Depreciation expense (120,000)
Property taxes (90,000)
Net rental income 260,000

CHAPTER 8-PROBLEM 17: BOOKS OF LESSEE

CASE 1: ABC Corp.
1. Ans. P1,507,946
PV OF MLP
Periodic payment in arrears (annual) 400,000
Mult by: PV factor of 1 at 10% for 4 pds, annuity in arrears 3.1699 1,267,946 1
Direct lease expense + Lease Bonus - Reimbursement 240,000
Initial cost of the asset 1,507,946

Entry:
Right of Use Asset 1,507,946
Cash 240,000
Lease Liability 1,267,946

2. Ans. P126,795; 3. Ans.P 694,215

Amortization Table: Periodic Payment Int. Exp. Principal Balance
Initial Liability Balance, 1/1/17 1,267,946
December 31, 2017: 400,000 126,795 273,205 994,741
December 31, 2018: 400,000 99,474 300,526 694,215
December 31, 2019: 400,000 69,421 330,579 363,636
December 31, 2020: 400,000 36,364 363,636 0

4. Ans. P376,987
Cost 1,507,946
Divide by: Term (since there is no transfer of ownership) 4
Depreciation Expense, 2017 376,987

CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES

AUDITING (2018 EDITION) SOLUTIONS GUIDE
CTESPENILLA 2 of 11

5. Ans. P753,973
Cost 1,507,946
Accum Depr, 12/31/18 (376,987*2yrs) 753,973
Carrying Valye, 12/31/18 753,973

CASE 2: DEF Corp.

1. Ans. P2,219,982
PV OF MLP
Periodic payment in advance (annual) 500,000
Mult by: PV factor of 1 at 8% for 3 pds, annuity in advance 2.7833 1,391,632 1
Direct lease expense + Lease Bonus - Reimbursement 420,000
PV of Future Retirement Cost
Projected Future Retirement Cost 600,000
Mult by: PV factor of 1 at 8% for 5 pds, w/o annuity in arrears 0.6806 408,350
*note that the retirement cost will be incurred after the 5-year life
Initial cost of the asset 2,219,982

Entry:
Right of Use Asset 2,219,982
Cash (420,000+500,000) 920,000
Lease Liability (balance after the first payment in advance) 891,632
Provision for Asset Retirment Obligation 408,350

2. Ans. P71,331; 4. Ans.P500,000

Amortization Table (Lease Liability) Periodic Payment Int. Exp. Principal Balance
Initial Liability Balance, 1/1/17 891,632
December 31, 2017: Amortization 71,331 962,963
January 1, 2018: Principal Payment 500,000 500,000 462,963
December 31, 2018: Amortization 37,037 500,000
January 1, 2019: Principal Payment 500,000 500,000 -

3. Ans. 32,668; 5. Ans. P476,229

Amorization Table (Asset Retirment Obligation)
Interest Expense
Initial Liability balance, 1/1/17 408,350
December 31, 2017: 32,668 441,018
December 31, 2018: 35,281 476,299
December 31, 2019: 38,104 514,403
December 31, 2020: 41,152 555,556
December 31, 2021: 44,444 600,000

6. Ans. P403,996
Cost 2,219,982
Less: Salvage value after 5-year life (200,000)
Depreciable cost 2,019,982
Divide by: Life (since there is transfer of ownership) 5
Depreciation Expense, 2017 403,996

7. Ans. P1,411,989
Cost 2,219,982
Accum Depr, 12/31/18 (403,996*2yrs) 807,993
Carrying Value, 12/31/18 1,411,989

CASE 3: GHI Corp.

1. Ans. P3,476,332
PV OF MLP
Periodic payment in arrears (semi-annual) 500,000
Mult by: PV factor of 1 at 5% for 6 pds, annuity in arrears 5.0757 2,537,846 1
Certain purchase option 400,000
Mult by: PV factor of 1 at 5% for 6 pds, w/o annuity 0.7462 298,486 2,836,332
Direct lease expense + Lease Bonus - Reimbursement 640,000
Initial cost of the asset 3,476,332

Entry:
Right of Use Asset 3,476,332
Cash 640,000
Lease Liability 2,836,332

2. Ans. P265,724; 3. Ans. P1,292,517

Amortization Table: Periodic Payment Int. Exp. Principal Balance
Initial Liability Balance, 1/1/17 2,836,332
June 30, 2017: 500,000 141,817 358,183 2,478,149
December 31, 2017: 500,000 123,907 376,093 2,102,056
June 30, 2018: 500,000 105,103 394,897 1,707,159
December 31, 2018: 500,000 85,358 414,642 1,292,517
June 30, 2019: 500,000 64,626 435,374 857,143
December 31, 2019: 500,000 42,857 457,143 400,000
December 31, 2019: Certain purchase option 400,000 - 400,000 -

Interest expense from 1/1 - 6/30/2017 141,817

Interest expense from 7/1 - 12/31/2017 123,907
Interest expense for 2017 265,724

CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES

AUDITING (2018 EDITION) SOLUTIONS GUIDE
CTESPENILLA 3 of 11

4. Ans. P675,266
Cost 3,476,332
Less: Salvage value after 5 years (100,000)
Depreciable cost 3,376,332
Divide by: Term (since there is transfer of ownership) 5
Depreciation Expense, 2017 675,266

5. Ans. P753,973
Cost 3,476,332
Accum Depr, 12/31/18 (675,266*2yrs) 1,350,533
Carrying Valye, 12/31/18 2,125,799

6. Ans.
Lease liability 400,000
Cash 400,000

7. Ans.
Lease liability 400,000
Accumulated depreciation 2,025,799 (as of 12/31/19)
Loss 1,050,533
Right of Use Asset 3,476,332

CASE 4: GHI Corp.

1. Ans. P3,1,77,846
PV OF MLP
Periodic payment in arrears (semi-annual) 500,000
Mult by: PV factor of 1 at 5% for 6 pds, annuity in arrears 5.0757 2,537,846 1
Direct lease expense + Lease Bonus - Reimbursement 640,000
Initial cost of the asset 3,177,846

Entry:
Right of Use Asset 3,177,846
Cash 640,000
Lease Liability 2,537,846

2. Ans. P235,129; 3. Ans. P929,705

Amortization Table: Periodic Payment Int. Exp. Principal Balance
Initial Liability Balance, 1/1/17 2,537,846
June 30, 2017: 500,000 126,892 373,108 2,164,738
December 31, 2017: 500,000 108,237 391,763 1,772,975
June 30, 2018: 500,000 88,649 411,351 1,361,624
December 31, 2018: 500,000 68,081 431,919 929,705
June 30, 2019: 500,000 46,485 453,515 476,190
December 31, 2019: 500,000 23,810 476,190 -

Interest expense from 1/1 - 6/30/2017 126,892

Interest expense from 7/1 - 12/31/2017 108,237
Interest expense for 2017 235,129

4. Ans. P1,059,282
Cost 3,177,846
Divide by: Term (since there is no transfer of ownership) 3
Depreciation Expense, 2017 1,059,282

5. Ans. P1,059,282
Cost 3,177,846
Accum Depr, 12/31/18 (675,266*2yrs) 2,118,564
Carrying Valye, 12/31/18 1,059,282

CASE 5: JKL Corp.

ERRATUM: The asset had an estimated salvage value of P300,000 after 4 years and P100,000 after 6 years.
1. Ans. P5,454,129
PV OF MLP
Periodic payment in arrears (semi-annual) 800,000
Mult by: PV factor of 1 at 6% for 8 pds, annuity in advance 6.5824 5,265,905 1
Guaranteed residual value 300,000
Mult by: PV factor of 1 at 6% for 8 pds, w/o annuity 0.6274 188,224 5,454,129
Initial cost of the asset 5,454,129

Entry:
Right of Use Asset 5,454,129
Cash 800,000
Lease Liability 4,654,129

CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES

AUDITING (2018 EDITION) SOLUTIONS GUIDE
CTESPENILLA 4 of 11

2. Ans. P527,250; 3. Ans. P3,176,038

Amortization Table: Periodic Payment Int. Exp. Principal Balance
Initial Liability Balance, 1/1/17 4,654,129
July 1, 2017 800,000 279,248 520,752 4,133,377
December 31, 2017: 248,003 4,381,379
January 1, 2018: 800,000 800,000 3,581,379
July 1, 2018 800,000 214,883 585,117 2,996,262
December 31, 2018: 179,776 3,176,038
January 1, 2019: 800,000 800,000 2,376,038
July 1, 2019: 800,000 142,562 657,438 1,718,600
December 31, 2019: 103,116 1,821,716
January 1, 2020 800,000 800,000 1,021,716
July 1, 2020 800,000 61,303 738,697 283,019
December 31, 2020 16,981 300,000

Interest expense from 1/1 - 6/30/2017 279,248

Interest expense from 7/1 - 12/31/2017 248,003
Interest expense for 2017 527,250

4. Ans. P1,288,532
Cost 5,454,129
Less: Salvage value after 4 years (300,000)
Depreciable cost 5,154,129
Divide by: Term (since there no transfer of ownership) 4
Depreciation Expense, 2017 1,288,532

5. Ans. P1,288,532
Cost 5,454,129
Less: Salvage value after 4 years (300,000)
Depreciable cost 5,154,129
Divide by: Term (since there no transfer of ownership) 4
Depreciation Expense, 2017 1,288,532

6. Ans. P1,338,532
Cost 5,454,129
Less: Salvage value after 4 years (100,000)
Depreciable cost 5,354,129
Divide by: Term (since there no transfer of ownership) 4
Depreciation Expense, 2017 1,338,532

7. Ans. P1,363,532
Cost 5,454,129
Less: Salvage value after 4 years -
Depreciable cost 5,454,129
Divide by: Term (since there no transfer of ownership) 4
Depreciation Expense, 2017 1,363,532

CASE 6: JKL Corp.

ERRATUM: The asset had an estimated salvage value of P300,000 after 4 years and P100,000 after 6 years.
1. Ans. P5,265,905
PV OF MLP
Periodic payment in arrears (semi-annual) 800,000
Mult by: PV factor of 1 at 6% for 8 pds, annuity in advance 6.5824 1
Initial cost of the asset 5,265,905

Entry:
Right of Use Asset 5,265,905
Cash 800,000
Lease Liability 4,465,905

2. Ans. P503,986; 3. Ans. P2,938,410

Amortization Table: Periodic Payment Int. Exp. Principal Balance
Initial Liability Balance, 1/1/17 4,465,905
July 1, 2017 800,000 267,954 532,046 3,933,859
December 31, 2017: 236,032 4,169,891
January 1, 2018: 800,000 800,000 3,369,891
July 1, 2018 800,000 202,193 597,807 2,772,084
December 31, 2018: 166,325 2,938,410
January 1, 2019: 800,000 800,000 2,138,410
July 1, 2019: 800,000 128,305 671,695 1,466,714
December 31, 2019: 88,003 1,554,717
January 1, 2020 800,000 800,000 754,717
July 1, 2020 800,000 45,283 754,717 0

Interest expense from 1/1 - 6/30/2017 267,954

Interest expense from 7/1 - 12/31/2017 236,032
Interest expense for 2017 503,986

4. Ans. P1,316,476
Cost 5,265,905
Divide by: Term (since there no transfer of ownership) 4
Depreciation Expense, 2017 1,316,476
*Note that the salvage value is simply ignored as it was not guaranteed.

CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES

AUDITING (2018 EDITION) SOLUTIONS GUIDE
CTESPENILLA 5 of 11

5. Ans. P257,143
Cost of Leasehold Improvements 900,000
Divide by: Remaining Ter, July 1, 2017 (shorter than life) 3.50
Annual Depreciaiton expense 257,143
Mulitly by: 6mos/12mos 50%
Depreciaiton Expense, 2017 128,571

CASE 7: MNO Corp.

ERRATUM: The Building has an estimated useful life of 15 years.
1. Ans. P3,765,910
PV OF MLP
Periodic payment in arrears (annual) 600,000
Mult by: PV factor of 1 at 12% for 5 pds, annuity in arrears 3.6048 2,162,866 1
Additional payments under certain renewal option 500,000
Mult by: PV factor of 1 at 12% for 10 pds, w annuity 5.6502 0
PV of the additional payments as of 12/31/21 2,825,112
Mult by: PV factor of 1 at 12% for 5 pds, w/o annuity 0.5674 1,603,044
Initial cost of the asset 3,765,910

Entry:
Right of Use Asset 3,765,910
Lease Liability 3,765,910

2. Ans. P451,909; 3. Ans. P3,451,957

Amortization Table: Periodic Payment Int. Exp. Principal Balance
Initial Liability Balance, 1/1/17 3,765,910
December 31, 2017: 600,000 451,909 148,091 3,617,819
December 31, 2018: 600,000 434,138 165,862 3,451,957
December 31, 2019: 600,000 414,235 185,765 3,266,192
December 31, 2020: 600,000 391,943 208,057 3,058,135
December 31, 2021: 600,000 366,976 233,024 2,825,112
December 31, 2022: 500,000 339,013 160,987 2,664,125
December 31, 2023: 500,000 319,695 180,305 2,483,820
December 31, 2024: 500,000 298,058 201,942 2,281,878
December 31, 2025: 500,000 273,825 226,175 2,055,704
December 31, 2026: 500,000 246,684 253,316 1,802,388
December 31, 2027: 500,000 216,287 283,713 1,518,675
December 31, 2028: 500,000 182,241 317,759 1,200,916
December 31, 2029: 500,000 144,110 355,890 845,026
December 31, 2030: 500,000 101,403 398,597 446,429
December 31, 2031: 500,000 53,571 446,429 0

4. Ans. P251,061
Cost 3,765,910
Divide by: Extended Term (since there is certain renewal option) 15
Depreciation expense, 2017 251,061

5. Ans. P56,250
Cost, Leasehold Improvement 1,350,000
Divide by: Life (since shorter than extended remaining term 14.5yrs) 12
Annual depreciation 112,500
Multitpy by: 6mos/12mos 50%
Depreciation expense, 2017 56,250

CASE 8: MNO Corp.

ERRATUM: Using the information in Case 7:
1. Ans. P2,162,866
PV OF MLP
Periodic payment in arrears (annual) 600,000
Mult by: PV factor of 1 at 12% for 5 pds, annuity in arrears 3.6048 1
Initial cost of the asset 2,162,866

Entry:
Right of Use Asset 2,162,866
Lease Liability 2,162,866

2. Ans. P259,544; 3. Ans. P1,441,099

Amortization Table: Periodic Payment Int. Exp. Principal Balance
Initial Liability Balance, 1/1/17 2,162,866
December 31, 2017: 600,000 259,544 340,456 1,822,410
December 31, 2018: 600,000 218,689 381,311 1,441,099
December 31, 2019: 600,000 172,932 427,068 1,014,031
December 31, 2020: 600,000 121,684 478,316 535,714
December 31, 2021: 600,000 64,286 535,714 0

4. Ans. P432,573
Cost 2,162,866
Divide by: Extended Term 5
Depreciation expense, 2017 432,573

CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES

AUDITING (2018 EDITION) SOLUTIONS GUIDE
CTESPENILLA 6 of 11

5. Ans. P150,000.
Cost, Leasehold Improvement 1,350,000
Divide by: Remaining Lease Term (since shorter than the 12-year life) 4.5
Annual depreciation 300,000
Multitpy by: 6mos/12mos 50%
Depreciation expense, 2017 150,000

CASE 9: MNO Corp.

ERRATUM: Using the information in Case 7:
1. Ans. P2,162,866
Initial Cost of the Asset, 1/1/17
PV OF MLP
Periodic payment in arrears (annual) 600,000
Mult by: PV factor of 1 at 12% for 5 pds, annuity in arrears 3.6048 1
Initial cost of the asset 2,162,866

1/1/17:
Right of Use Asset 2,162,866
Lease Liability 2,162,866

12/31/17:
Interest expense 259,544
Lease Liability 340,456
Cash 600,000

Depreciation Expense (RoUA) 432,573

Accumulated Depreciation 432,573
(2,162,866 /5 years)

Depreciation Expense (Leasehold Impr) 150,000

Accumulated Depreciation 150,000
(1,350,000/4.5 years)*6/12

12/31/18:
Interest expense 218,689
Lease Liability 381,311
Cash 600,000

Depreciation Expense (RoUA) 432,573

Accumulated Depreciation 432,573
(2,162,866 /5 years)

Depreciation Expense (Leasehold Impr) 300,000

Accumulated Depreciation 300,000
(1,350,000/4.5 years)

Amortization Table: Periodic Payment Int. Exp. Principal Balance

Initial Liability Balance, 1/1/17 2,162,866
December 31, 2017: 600,000 259,544 340,456 1,822,410
December 31, 2018: 600,000 218,689 381,311 1,441,099

1. Ans. P3,451,957.
1/1/19: (Change in Condition/Estimate - Treated Prospectively)
Remaining MLP on original term (12/31/19 - 12/31/21)
Periodic payment on original term 600,000
Mult by: PV factor 1 at 12% for 3 pds, w/ annuity 2.40183 1,441,099 1
Periodic payment on certain renewal option term 500,000
Mult by: PV factor 1 at 12% for 10 pds, w/ annuity 5.65022 0
PV of the additional payments, 12/31/21 2,825,112
Mult by: PV factor 1 at 12% for 3 pds, w/o annuity 0.71178 2,010,859
Revised Carrying Value of the Lease Liability, 1/1/19 3,451,957
Carrying value based on original term 1,441,099
Adjustment to the Carrying value of the RoUA and Lease Liability 2,010,859

Entry: 1/1/19
Right of Use Asset 2,010,859
Lease Liability 2,010,859

2. Ans. P3,308,578.
Initial Cost of RoUA 2,162,866
Less: Accum Depr, 12/31/18 865,146
CV, 12/31/18 1,297,719
Add: Adjustment 1/1/19 2,010,859
Revised CV of RoUA, 1/1/19 3,308,578

CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES

AUDITING (2018 EDITION) SOLUTIONS GUIDE
CTESPENILLA 7 of 11

3. Ans. P414,235; 4. P3,058,135

Revised Amortization Table:
January 1, 2019: Revised Balance 3,451,957
December 31, 2019: 600,000 414,235 185,765 3,266,192
December 31, 2020: 600,000 391,943 208,057 3,058,135
December 31, 2021: 600,000 366,976 233,024 2,825,112
December 31, 2022: 500,000 339,013 160,987 2,664,125
December 31, 2023: 500,000 319,695 180,305 2,483,820
December 31, 2024: 500,000 298,058 201,942 2,281,878
December 31, 2025: 500,000 273,825 226,175 2,055,704
December 31, 2026: 500,000 246,684 253,316 1,802,388
December 31, 2027: 500,000 216,287 283,713 1,518,675
December 31, 2028: 500,000 182,241 317,759 1,200,916
December 31, 2029: 500,000 144,110 355,890 845,026
December 31, 2030: 500,000 101,403 398,597 446,429
December 31, 2031: 500,000 53,571 446,429 0

5. Ans. P254,506
Revised CV of RoUA, 1/1/19 3,308,578
Divide by: Remaining Extended Term 13
Depreciation expense, 2019 254,506

5. Ans. P85,714.
CV, Leasehold Improvement 1/1/19 (1,350,000 - 450,000) 900,000
Divide by: Remaining life (since shorter than the 1-year rem. ext. term) 10.5
Depreciation expense, 2019 85,714

CHAPTER 8-PROBLEM 18: ANGLO INC.

Correct Entries:
1/1/18:
Right of use asset 3,072,284
Lease liability 3,072,284
Initial Cost of the Asset, 1/1/18
PV OF MLP
Periodic payment in arrears (annual) 500,000
Mult by: PV factor of 1 at 10% for 10 pds, annuity in arrears 6.1446 0
Initial cost of the asset 3,072,284

CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES

AUDITING (2018 EDITION) SOLUTIONS GUIDE
CTESPENILLA 8 of 11

12/31/18
Interest expense 307,228 0
Lease liability 192,772
Cash 500,000
Amortization table (per audit Finance Lease
Periodic PaymentCorrect Int. Principal Balance
1/1/18 Balance 3,072,284
December 31, 2018: 500,000 307,228 192,772 2,879,512
December 31, 2019: 500,000 287,951 212,049 2,667,463
December 31, 2020: 500,000 266,746 233,254 2,434,209
December 31, 2021: 500,000 243,421 256,579 2,177,630
December 31, 2022: 500,000 217,763 282,237 1,895,393
December 31, 2023: 500,000 189,539 310,461 1,584,933
December 31, 2024: 500,000 158,493 341,507 1,243,426
December 31, 2025: 500,000 124,343 375,657 867,769
December 31, 2026: 500,000 86,777 413,223 454,545
December 31, 2027: 500,000 45,455 454,545 0

12/31/18
Depreciation expense 307,228
Accumulated Depreciation 307,228
(P3,072,284/10years)

AUDIT ANALYSIS:
1. Ans. P114,457
Expenses per audit
Interest on finance lease liability 307,228
Depreciation expense 307,228 614,457
Expense per books (Rent expense) 500,000
Overstatement in expense/Understatement in NI 114,457

2. Ans. P2,879,512.

3. Ans. P2,765,055.
Intial Cost 3,072,284
Less: Accumulated Depreciation (307,228)
CV, 12/31/18 2,765,055

CHAPTER 8-PROBLEM 19: LACTUM INC.

Entries made per books, operating lease:
January 1, 2018:
Rent expense 150,000
Cash 150,000

April 1, 2018:
Rent expense 150,000
Cash 150,000

July 1, 2018:
Rent expense 150,000
Cash 150,000

October 1, 2018:
Rent expense 150,000
Cash 150,000

Correct entries per audit, finance lease

January 1, 2018:
Building* 4,185,388
Cash 150,000
Lease liability 4,035,388
*PV of MLP at 2% for 40 quarters in advance. (P150,000*27.9025888) 26.9025888 27.9025888
0.4619482
Amortization table: Finance lease liabilty:
Periodic PaymentCorrect Int. Principal Balance
January 1, 2018: 4,035,388
April 1, 2018: 150,000 80,708 69,292 3,966,096
July 1, 2018: 150,000 79,322 70,678 3,895,418
October 1, 2018: 150,000 77,908 72,092 3,823,326
December 31, 2018: 76,467 3,899,793
Janaury 1, 2019: 150,000 150,000 3,749,793
April 1, 2019: 150,000 74,996 75,004 3,674,789
July 1, 2019: 150,000 73,496 76,504 3,598,285
October 1, 2019: 150,000 71,966 78,034 3,520,250
December 31, 2019 70,405 3,590,655

April 1, 2018:
Interest expense 80,708
Lease liability 69,292
Cash 150,000

CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES

AUDITING (2018 EDITION) SOLUTIONS GUIDE
CTESPENILLA 9 of 11

July 1, 2018:
Interest expense 79,322
Lease liability 70,678
Cash 150,000

October 1, 2018:
Interest expense 77,908
Lease liability 72,092
Cash 150,000

December 31, 2018:

Interest expense -
Interest payable -

Depreciation expense 418,539

Accumulated depreciation 418,539
(P4,185,388/10years) * no transfer of ownership, thus depr shall be over term.

1. Ans. P132,943.
Expense per books
Rent expense (P150,000*4qtrs) 600,000
Expense per audit:
Interest expense 314,405
Depreciation expense 418,539 732,943
Understatement in Expense/Overstatement Net Income (132,943)

2. Ans. P3,899,793

3. Ans. P379,543
Principal due from January 1, 2019 to December 31, 2019 (see amortization table)
Janaury 1, 2019: 150,000
April 1, 2019: 75,004
July 1, 2019: 76,504
October 1, 2019: 78,034
Current portion of lease liability 379,543

CHAPTER 8-PROBLEM 20:

CASE 1: ABC Corp. (Selling price = FMV of Asset)
1. Ans. P172,553.
2. Ans. P341,171.
Entry:
Cash 1,000,000
Right of use asset (b) 341,171
Equipment 600,000
Lease Liability (a) 568,618
Gain on sale and lease back (c) 172,553

Where: (a)
(a)
Periodic payment in arrears (annual) 150,000
Mult. By: PV factor of 1 at 10% for 5 years, w/ annuity 3.7908 1
PV of MLP 568,618

(b)
PV of the MLP (a) 568,618
Divide by: FMV of the Asset 1,000,000
Portion of the asset reacquired in % 56.86%
Multiplied by: CV of the Asset 600,000
Portion of the asset Reacquired (DR to Right to Use Asset) 341,171
Less: CV of the Asset 600,000
Portion of the Asset Sold 258,829

(c)
Proceeds from Sale and leaseback 1,000,000
Less: PV of the MLP (CR to Lease Liability) (568,618)
Proceeds from portion sold 431,382
CV of the portion sold (see b) (258,829)
Loss/Gain on Sale and Lease back 172,553

3. Ans. P56,862; P457,480.

Amortization Table: Periodic PaymentCorrect Int. Principal Balance
January 1, 2018: 568,618
December 31, 2018: 150,000 56,862 93,138 475,480
December 31, 2019: 150,000 47,548 102,452 373,028
December 31, 2020: 150,000 37,303 112,697 260,331
December 31, 2021: 150,000 26,033 123,967 136,364
December 31, 2022: 150,000 13,636 136,364 0

5. Ans. P68,234.
Initial cost of Right of use asset 341,171
Divide by: Term 5
Depreciation Expense, 2018 68,234

CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES

AUDITING (2018 EDITION) SOLUTIONS GUIDE
CTESPENILLA 10 of 11

Case 2: ABC Corp. (Selling price > FMV of Asset)

1. Ans. P252,553
2. Ans. P221,171
Entry:
Cash 1,200,000
Right of use asset (b) 221,171
Equipment 600,000
Lease Liability (a) 568,618
Gain on sale and lease back (c) 252,553

Where: (a)
(a)
Periodic payment in arrears (annual) 150,000
Mult. By: PV factor of 1 at 10% for 5 years, w/ annuity 3.7908 1
PV of MLP 568,618

(b)
PV of the MLP (a) 568,618
Less: Excess of Selling price over FMV of asset (200,000)
PV of MLP related to the portion reacquired 368,618
Divide by: FMV of the Asset 1,000,000
Portion of the asset reacquired in % 36.86%
Multiplied by: CV of the Asset 600,000
Portion of the asset Reacquired (DR to Right to Use Asset) 221,171
Less: CV of the Asset 600,000
Portion of the Asset Sold 378,829

(c)
Proceeds from Sale and leaseback 1,200,000
Less: PV of the MLP (CR to Lease Liability) (568,618)
Proceeds from portion sold 631,382
CV of the portion sold (see b) (378,829)
Loss/Gain on Sale and Lease back 252,553

3. Ans. P56,862; P457,480.

Amortization Table: Periodic PaymentCorrect Int. Principal Balance
January 1, 2018: 568,618
December 31, 2018: 150,000 56,862 93,138 475,480
December 31, 2019: 150,000 47,548 102,452 373,028
December 31, 2020: 150,000 37,303 112,697 260,331
December 31, 2021: 150,000 26,033 123,967 136,364
December 31, 2022: 150,000 13,636 136,364 0

5. Ans. P44,234.
Initial cost of Right of use asset 221,171
Divide by: Term 5
Depreciation Expense, 2018 44,234

Case 3: ABC Corp. (Selling price < FMV of Asset)

1. Ans. P132,553
2. Ans. P401,171
Entry:
Cash 900,000
Right of use asset (b) 401,171
Equipment 600,000
Lease Liability (a) 568,618
Gain on sale and lease back (c) 132,553

Where: (a)
(a)
Periodic payment in arrears (annual) 150,000
Mult. By: PV factor of 1 at 10% for 5 years, w/ annuity 3.7908 1
PV of MLP 568,618

(b)
PV of the MLP (a) 568,618
Less: Excess of FMV over Selling price of asset 100,000
PV of MLP related to the portion reacquired 668,618
Divide by: FMV of the Asset 1,000,000
Portion of the asset reacquired in % 66.86%
Multiplied by: CV of the Asset 600,000
Portion of the asset Reacquired (DR to Right to Use Asset) 401,171
Less: CV of the Asset 600,000
Portion of the Asset Sold 198,829

(c)
Proceeds from Sale and leaseback 900,000
Less: PV of the MLP (CR to Lease Liability) (568,618)
Proceeds from portion sold 331,382
CV of the portion sold (see b) (198,829)
Loss/Gain on Sale and Lease back 132,553

CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES

AUDITING (2018 EDITION) SOLUTIONS GUIDE
CTESPENILLA 11 of 11

3. Ans. P56,862; P457,480.

Amortization Table: Periodic PaymentCorrect Int. Principal Balance
January 1, 2018: 568,618
December 31, 2018: 150,000 56,862 93,138 475,480
December 31, 2019: 150,000 47,548 102,452 373,028
December 31, 2020: 150,000 37,303 112,697 260,331
December 31, 2021: 150,000 26,033 123,967 136,364
December 31, 2022: 150,000 13,636 136,364 0

5. Ans. P80,234.
Initial cost of Right of use asset 401,171
Divide by: Term 5
Depreciation Expense, 2018 80,234

CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES