AUDIT OF LONG-TERM LIABILITIES APPLIED AUDITING

Solutions:
Problem 1 KALMA CORPORATION Bonds Payable
Initial measurement PV Factor - 5% SA
PV of principal 800,000 0.67684 541,471
PV of interest (6% SA) 48,000 6.46321 310,234
Initial carrying amount 851,706

Date Int. paid Int. exp. Amort. Carrying amt.

4/1/2016. 0 0 0 851,706
9/30/2016. 48,000 42,585 5,415 846,291
3/31/2017. 48,000 42,315 5,685 840,606
9/30/2017. 48,000 42,030 5,970 834,636
3/31/2018. 48,000 41,732 6,268 828,368
9/30/2018. 48,000 41,418 6,582 821,786
3/31/2019. 48,000 41,089 6,911 814,875
9/30/2019. 48,000 40,744 7,256 807,619
3/31/2020. 48,000 40,381 7,619 800,000
(800,000 x 1.05^-8 + 48,000 x (1-1.05^-8)/.05). ANS + ANS x .05 - 48,000
4/1/2016.
Cash 851,706
Bonds payable 800,000
Premium on bonds payable 51,706

9/30/2016.
Interest expense 42,585
Premium on bonds payable 5,415
Cash 48,000

12/31/2016.
Interest expense 21,157
Premium on bonds payable 2,843
Interest payable 24,000

1/1/2017.
Interest payable 24,000
Interest expense 21,157
Premium on bonds payable 2,843

3/31/2017.
Interest expense 42,315
Premium on bonds payable 5,685
Cash 48,000

Face amounts of bonds 800,000 851,706

Unamortized premium 51,706 -14,085
Amortization (4/1/16 - 3/31/17) -11,100 837,621
Amortization (4/1/17 - 6/30/17) -2,985 37,621
Carrying amount of bonds 837,621
Fair value of bonds (102%) 816,000
Gain on retirement of bonds 21,621

Fair value of bonds 816,000

Accrued interest (800,000*.06*3/6) 24,000
 AUDIT OF LONG-TERM LIABILITIES APPLIED AUDITING
Solutions:
Cash payment 840,000

6/30/2017.
Interest expense 21,015
Premium on bonds payable 2,985
Interest payable 24,000

Bonds payable 800,000

Premium on bonds 37,621
Interest payable 24,000
Cash 840,000
Gain on retirement of bonds payable 21,621

Problem 2 CHILL COMPANY LEASE LIABILITY

Cash payment on Dec. 31, 2016 100,000 1.00000 100,000

Installments - next years 100,000 4.23054 423,054
Total Consideration 523,054

12/31/2015.
Equipment 523,054
Lease liability 423,054
Cash 100,000

Date Payment Int. ext Principal Carrying amt.

12/31/2015. 423,054
12/31/2016. 100,000 46,536 53,464 369,590
12/31/2017. 100,000 40,655 59,345 310,245
12/31/2018. 100,000 34,127 65,873 244,371
12/31/2019. 100,000 26,881 73,119 171,252
12/31/2020. 100,000 18,838 81,162 90,090
12/31/2021. 100,000 9,910 90,090 0

12/31/2016.
Lease liability 56,447
Interest expense 43,553
Depreciation expense 74,722
Accumulated Depreciation 74,722
Cash 100,000

12/31/2017.
Lease liability 59,345
Interest expense 40,655
Depreciation expense 74,722
Accumulated Depreciation 74,722
Cash 100,000

Presentation (2017)
Current portion 65,873
Non-current portion 244,371
Total 310,245

Problem 3 KALMAKALANG CORPORATION DEFERRED TAXES

Tax return Accounting Effect on Net income
 AUDIT OF LONG-TERM LIABILITIES APPLIED AUDITING
Solutions:
Royalty Income 20,000 40,000 20,000
Depreciation expense 125,000 100,000 25,000

Higher Financial Income than Taxable = Future Taxable Temp. Diff (FI > TI = FTTD)
Lower Financial Income than Taxable = Future Deductible Temp. Diff (FI < TI = FDTD)
Future Taxable Temp. Diff will result to Deferred tax expense Increase in DTL = Deferred tax expense
Future Deductible Temp. Diff will result to Deferred tax benefit Decrease in DTL = Deferred tax benefit

Net Income before tax 400,000

Less: Income tax
Current tax expense 106,500
Deferred tax expense 13,500 120,000
Net Income after tax 280,000

Problem 4 PAPASAKARIN CORPORATION LONG-TERM LIABILITIES

Notes payable 2,800,000
Finance lease liability 430,000
Deferred tax liability 360,000

1 Notes payable 700,000 annual 4-equal payments 15% April 1, 2015

2 Lease liability - 430,000 present value 7 years remaining, 14%
3 Future taxable temp diff - 90,000
4 Bonds payable-discount 1,774,000 PV FcA 2,000,000 ER - 12% NR - 10%
Noncurrent Current Accrued Interest Deferred
portion portion interest expense Tax exp
Notes payable 1,400,000 700,000 236,250 341,250 0
Finance lease 344,828 45,372 0 60,200 0
Deferred tax liability 387,000 0 0 0 27,000
Bonds payable 1,780,440 0 100,000 106,440 0
3,912,268 1,081,622 534,890

Jan. 1, 2016 - Mar. 31, 2016 2,800,000 x .15 x 3/12 105,000

Apr. 1, 2016 - Dec. 31, 2016 2,100,000 x .15 x 9/12 236,250
341,250
Finance lease liability
Date Lease pay. Int exp Principal Carry amount
1/1/16. 430,000
12/31/16. 100,000 60,200 39,800 390,200
12/31/17. 100,000 54,628 45,372 344,828

Bonds payable
face amount 2,000,000
ER 12%
NR 10%
PV 1,774,000
Discount amortization Jul. 1, 2016
Interest expense 212,880 106,440
Interest payment 200,000 100,000
Discount amortization 12,880 6,440
Dec. 31, 2016
Interest expense 106,440
Discount on BP 6,440
Accrued interest payable 100,000
 AUDIT OF LONG-TERM LIABILITIES APPLIED AUDITING
Solutions:
Problem 5 JEWEL COMPANY BONDS PAYABLE
10,000,000 x (1.05^-40) + 10,000,000 x .055 x (1-1.05^-40)/.05
10,000,000 0.14205 1,420,457
550,000 17.15909 9,437,497
10,857,954
Jan. 1, 2016
Cash 10,857,954
Bonds payable 10,000,000
Premium on bonds payable 857,954

Date Int. pay Int Exp Amor Car Amt

1/1/16. 10,857,954
6/30/16. 550,000 542,898 7,102 10,850,852
12/31/16. 550,000 542,543 7,457 10,843,395
6/30/17. 550,000 542,170 7,830 10,835,564
12/31/17. 550,000 541,778 8,222 10,827,343

6/30/16.
Interest expense 542,898
Premium on BP 7,102
Cash 550,000

Problem 6 WAGMAINIP CORPORATION DEBT RESTRUCTURING

Debt restructuring
Carrying amount liability 372,000
Fair value, 10,000 shares 350,000
Par value 100,000
Under equity swap
Notes payable 300,000
Accrued interest payable 72,000
Ordinary shares 100,000
Share premium 250,000
Gain on debt restructuring 22,000
Under asset swap
Notes payable 300,000
Accrued interest payable 72,000
Land 324,000
Gain on debt restructuring 48,000

US GAAP
Notes payable 300,000
Accrued interest payable 72,000
Land 324,000
Gain on settlement 30,000
Gain on debt restructuring 18,000

Problem 7 TANGENT COMPANY DEFERRED TAX LIABILITY

If Financial Income > Taxable Income: Future taxable temporary difference
FI > TI = FTTD
If Financial Income < Taxable Income: Future deductible temporary difference
FI < TI = FDTD
 AUDIT OF LONG-TERM LIABILITIES APPLIED AUDITING
Solutions:
Revenues 229,600
Expenses 160,100
Financial income 69,500
1 Depreciation FDTD 11,000 deferred tax benefit
2 Depletion FTTD -15,600 deferred tax expense
3 Warranty FTTD -8,900 deferred tax expense
4 Legal Expense FDTD 9,800 deferred tax benefit
Taxable Income 65,800
Current tax rate 30%
Current tax expense 19,740

Future taxable amount x Future tax rate = Deferred tax liability

FTA x FTR = DTL; Inc in DTL = DTE; Dec. in DTL = DTB
Future deductible amount x Future tax rate = Deferred tax asset
FDA x FTR = DTA; Inc. in DTA = DTB; Dec. in DTA = DTE

Depreciation expense
Ft tax. Amt Tax rate Def. tax liab.
1/1/2016. 74,000 30% 22,200
12/31/2016. 63,000 25% 15,750
Temp. difference (Dec)11,000 6,450 Dec. in DTL; DTB

Depletion expense
Temp. diff. 12/31/201615,600 25% 3,900 Inc. in DTL; DTE
2,550 Net Dec. in DTL
Warranty costs
Ft Ded. Amt Tax rate Def. tax asset
1/1/2016. 57,300 30% 17,190
12/31/2016. 48,400 25% 12,100
Temp. difference (Dec) 8,900 5,090 Dec. in DTA; DTE

Legal Expenses
Temp. diff. 12/31/2016 9,800 25% 2,450 Inc. in DTA; DTB
2,640 Net Dec. in DTA
Revenues 229,600
Expenses 160,100
Net income before tax 69,500
Less: Income tax
Current tax expense 19,740
Deferred tax expense 8,990
Deferred tax benefit -8,900 19,830
Net income after tax 49,670

Depreciation expense
Deferred tax liability 6,450
Deferred tax benefit 6,450

Depletion
Deferred tax expense 3,900
Deferred tax liability 3,900

Warranty
 AUDIT OF LONG-TERM LIABILITIES APPLIED AUDITING
Solutions:
Deferred tax expense 5,090
Deferred tax asset 5,090

Legal expenses
Deferred tax asset 2,450
Deferred tax benefit 2,450

Compound journal entry

Deferred tax expense 8,990
Deferred tax liability 2,550
Deferred tax benefit 8,900
Deferred tax asset 2,640
0 11,540

Sample exercise for deferred tax expense and liability

Building 1,000,000
USL 10 years
Depreciation
Acctg Tax Temp. diff Acct base Tax base FTA
1 100,000 181,818 81,818 FTTD -100,000 818,182 -918,182 -918,182 FTTD
2 100,000 163,636 63,636 FTTD -200,000 654,545 -854,545 63,636 FTTD
3 100,000 145,455 45,455 FTTD -300,000 509,091 -809,091 45,455 FTTD
4 100,000 127,273 27,273 FTTD -400,000 381,818 -781,818 27,273 FTTD
5 100,000 109,091 9,091 FTTD -500,000 272,727 -772,727 9,091 FTTD
6 100,000 90,909 -9,091 FDTD -600,000 181,818 -781,818 -9,091 FDTD
7 100,000 72,727 -27,273 FDTD -700,000 109,091 -809,091 -27,273 FDTD
8 100,000 54,545 -45,455 FDTD -800,000 54,545 -854,545 -45,455 FDTD
9 100,000 36,364 -63,636 FDTD -900,000 18,182 -918,182 -63,636 FDTD
10 100,000 18,182 -81,818 FDTD -1,000,000 0 -1,000,000 -81,818 FDTD
1,000,000 1,000,000

ASSETS
IF Acctg Base > Tax Base = FTA
IF Acctg Base < Tax Base = FDA

LIABILITY
If Acctg Base < Tax Base = FTA
If Acctg Base > Tax Base = FDA

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