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Se _
ay -
- Audit of Intangible Assets
Rems 10, 13, 15, 16, 19 and 23 could be recognized as intangible asset.
Item 1 -
(SFP)
Item 2 - Property, plant, and equipment in the SFP
Item 3 - Research and development expense in profit or loss
Item 4 - Current asset (prepaid rent) in the SFP
Item 5 -. Property, plant, and equipment in the SFP
Item 6 - Not recognized. PAS 38 par. 63 states that internally
generated brands, mastheads, publishing titles, customer
lists and other items similar in substance shall not be
recognized as intangible assets. Any costs related to
creating publishing titles incurred internally must be
expensed.
Item 7 - Charge as expense in profit or loss
Item 8 - Operating losses in profit or loss
Item 9 - Charge as expense in profit or loss
Item 11 - Not recognized. PAS 38 par. 48 states that internally
generated goodwill shall not be recognized as an asset.
Any costs incurred related to internally generated
goodwill must be expensed.
Item 12 - Research and development expense in profit or loss
Item 14 - Research and development expense in profit or loss
Item 17 - Charge as expense in profit or ioss
Item 18 - Research and development expense in profit or loss
Item 20 - Research and development expense in-profit or loss
Item 21 - Noncurrent asset in the SFP
Item 22 - Charge as expense in profit or loss
Item 24 - oe plant, and equipment in the SFP (see PAS 38
par, :
Item 25 - Property, plant, and equipment in the SFP (see PAS 35
par. 4)
400
the project such that the engine was at manufacturing stage. These
resulted in changes in the overall design of the engine, and costs of
P75,000 were incurred to add minor changes to the overall design of
QUESTIONS:
Based on the above: and the result of your audit, determine the
following:
401
VIII - Audit of Intangible Assets
T525,000
0
Answers: 1) C; 2) A
Suggested Solution:
Questiort No. 1
(b) its intention to complete the intangible asset and use or sell it.
(2) how the intangible asset will generate probable future economic
benefits. Among other things, the entity can demonstrate the
existence of a market for the output of the intangible asset or the
intangible asset itself or, if it is to be used internallu, the usefulness
of the intangible asset.
Question No, 2
402
—~
vi - Audit of Intangible Assets
Jan
Apr.
, May i
July 1
Dec.
1.2
Total PL477,500
aitinn
RUS AION.
403
Vil - Audit of Intangible Assets
QUESTIONS:
Based on the sbove anfi the result of your audit, determine -the
1. Cost of patent
a.-P1,477,500 c. 1,287,000
b P 190,500 de Po - 0.
‘2. .Cost of licenses
“a. P450;000 c. P600,000
b. . P300,000 - d. P 0
3._ Cost of trademark .
a. -P450,000 c. P600,000
b. .P300,000 a P “o
_.4. Carrying amount of Intangible Assets as of December 31, 2010
a P2,031,250 c. P1,981,250 .
b. P2,026,250 d. P- 0
§.. Total amount resulting from the foregoing transactions that should
be expensed when incurred. - :
a. P2,971,500 c. P5,424,000
b._. P1,494,000 d. P oO
Answers: 1) A; 2}C; 3) B; 4)C, 5)B
The following journal eniries to record the foregoing transactions will be —
useful in computing for the:requirements;
Jan. 2
Organization expenses. - P 699,000 -
Cash’ : ‘P 699,000
Advertising expense P- 45,C00 .
P 45.000
Cash
404
/ Apr. 1 -.
’ Paten P1,477,500
ts , :
Cash
P1,477,500
May 1 . .
Licenses (P900,000 x 2/3)
Trademark (P900,000 x 1/3)
_ Dec. 31
Research and development expense
Cash
Question No. 4
Cost:
Patent
Licenses
Trademark
Less amortization for 2010:
Patent (P1,;477,500/6)
Licenses 0800/6)
Trademark (P300,000/6)
Carrying amount, 12/31/10
P2,377,500
Pp 699,000
45,000
neaction!
“Qeeestion No. 5
meee (Jan. 2 transaccon
405
Vil- Audit of Intangible Assets
PROBLEM HO. 4 - Acquisition of intangible assets
Cavinti Company purchased a customer list and a formula for a total of.
Customer List
Outcome 1 - 20% probability of cash flows of P250,000 at the end of
each year for 5 years. oo,
Outcome 2 - 30% probability of cash flows of P150,000 at the end of
each year for4 years. .
Outcome 3 - 50% probability of cash flows of P50,000 at the end of
each year for 3 years.
Formula oO
QUESTIONS:
1. The estimated fair value of the customer list is
a. P413,110 -c. P106,697
b. P 86,951 d. P541,284
2. The estimated fair value of the forrnula is .
a. P4,164,771 c. P309,687
b. P1,878,915 d. P433,485
3. ‘The cost to be allocated to the customer list is’
a. P360,476 c. P230,037-
b. P438,440 d. P395,042
4. The cost to be allocated to the formula is
a. P1,769,963-- _¢. P1,561,560
b. P1,604,958 -d. P1,639,524
~~ ee ee
Answers: 1) A; 2)B; 3) a; 4) D
‘Suggested Solution:
Question No. 1
Probability weighted
Qutcome Present value ~ :
i. 998,178 20% 199,636
2 496,319 30% 149,046
3 128,855 -50% 64,428
413,110
Question No. 2
7 Probability weighted
Outcome Presentyalue Probability / present value
“ 10,065,122 10% — 1,006,512
2 - 1,656,063° 20% 331,213
.3 - 773,129" 70% 541,190
: 1.878.215
Question Nos. 3 & 4
. Fair value Fraction Allocation
Customer list) 413,110 | 413,1}0/2,292,025 sae
Formula 1.878.915 ~ 1,878,915/2,292,025 1,639.52
QUESTIONS:
Based on the above and the result of your audit, determine the
following: . -
a. P900,000 — i c. P720,000
b. P800,000 d. P400,000
Answers: 1) C; 2) A; 3)D; 4) D
408
os
i nt tn onerate AR
409
VIII - Audit of Intangible Assets
QUESTIONS:
Based on the above and the result of your audit, determine the
following: (Round off present value Sactors to ¢ decimal places)
a. P503,914 c. P448,950
b. P535,200 d. P454,964
c. P538,733
b. P494,680 dad: P612,000
3. Carrying amount of patent as of December 31, 2010
a. P131,200 c. P124,640
b- P114,800
d. P123,482
410
Question No. 1
Down payment
Amortization of franchise
Periodic franchise fee (P8,000,000 x 5%}
Imputed interest expense (P349,644 x 14%}
Total expenses related to franchise in 2010
Question No. 2:
Cost of franchise (see no. 1)
Less amortization in 2010 (see no. 1)
Carrying amount of franchise, 12/31/10
Question No. 3
Cast. of patent
Question No. 5
a - a ’
tae on St ~ peerte 12
af intangeree aSseTt>
Oa wy a BS am ont
411
VIII - Audit of Intangible Assets
PROBLEM NO. 7 ~ internally generated patent
machine) 1,200,000
Expense of drawing required by the patent office to be -
application 100,000
QUESTIONS:
Based on the above and the result of your audit, determine the
following:
Con ook “
& Po48,000 d. P 798,000
412
—_—_
c. P1,040,000
d. P1,168,000
a. P1,480,000 c. P1,608,000
b. P1,000,000 d. P 0
4. ing amount of patent as of December 3:1, 2010
a. P522,000 c. P1,015,200
b. P583,200 d. P 837,900
Answers: 1) B; 2) D; 3) 4; 4)B
Suggested Solution:
Question No. 1
te i P480,000
Legal expenses to obtain patent i
Expense of drawing required by the patent office 68,000
Fees paid to the government patent office 100,000
Cost of patent . P648,000
Question No. 2
i : tion of the machine P 320,000.
Metal used in the constriction sca oe
Question No. 3
1,000,000
Research and development laboratory expenses Pl, /
Wages paid to the employees (P1,200,000 x 40%) 480,000
413
VIII - Audit of Intangible Assets
Notes: 1) Cost of defending the patent should be expensed.
2) Since the useful life is not given, the patent was amortize
Based on the above and the result of your audit, determine the
following:
1. Carrying amoynt of patent as of December 31, 2006
a. P360,000 c. P369,600 —
b. P240,000 d. ° P355,200
2. Amortization of patent in 2007 -
a. P64,000 c. P52,000
b. P64,960 d. P63,520
3. Carrying amount df patents as of December 31, 2009
a. P448,000 c. P444,640
b. P454,720 d. P364,000
4. Loss on patent obsolescence in 2010
a. P338,000 c. P448,000
b. P416,000 d. P364,000
Answers: 1) B; 2) C; 3) D; 4)A4
414
—— ——————
Question No. 1
Cost of patent . P480,000
Less amortization up to 12/31/06 (P480,000 x 5/10) 240,000
Carrying amount of patent, 12/31/06 P240,000
Question No. 2
Amortization on original patent (P240,000/ 10) P24,000
Amortization on related patent (P280,000/ 10) _28,000
Total amortization in 2007 Pa2.000
Question No. 3
Original patent (P240,000 x 7/10) . P168,000
Related patent (P280,000 x 7/10) _196,000
Carrying amount of patents, 12/31/09 P264,000
Question No. 4
Carrying amount of patents, 12/31/09 P364,000
000
Cash P110,
415
Vil - Audit of Intangible Assets
Debit Credi
Accounts receivable 685,000 ‘
Allowance for doubtful agcounts P5,000 c. On January 3, 2009, purchased licensing
agreement 1, which
Inventories 385,000 was believed to have a 20-year useful life. The balance in the
Machinery 750,000 licensing agreement 1 account includes its purchase price of
t 290,000 P480,000 and costs of P20,000 related to the acquisition. On
Accumulated depreciation 100,000 January 1, 2010, Famy bought licensing agreement
2, which has a
Patents 1,020,000 life expectancy of 10 years. The balance in the licensing
agreement
Prepaid expenses 105,000. 2 account included the P580,000 purchase price and
P20,000 in
O ization costs 290,000 acquisition costs, but it has been reduced by a credit of
P10,000 for
Goodwill 240,000 the advance collection of 2011 revenue from the agreement. No
Licensing agreement 1 500,000 amortization on agreement 2 has been recorded.
Licensi
hana se on 590,000 hopes In early 2010, an explosion caused a permanent 60 percent
Uneamed revesige 195 00 reduction in the expected revenue-producing value of
licensing
Share capital 8 ‘vo 0 agreement 1. No eatries have been made during 2009 or 2010
Retained ings, 1/1/2010 170.000 170,000 amortization or for the explosion in 2010.
Goat st anode sold 4,540,000 eens @. The balance in the goodwill account includes
(1) P80,000 paid
Gelling anid general expenses i'730/000 December, 30, 2009, for an advertising
program that management
Interest expense , 35-000 believes will assist in increasing Famy's sales over a
period of three
Loaa on typhoon 13 , to five years following the disbursement and (2) legal
expenses of
Totals — 120,000 _____ P160,000. incurred for Famy's incorporation on January 3,
2009.
B1L560,000 P11.560,000 No amortization has ever been recorded on the goodwill.
The following information relates to accounts that i i UESTIONS:
adjustment: : eS Sane e ia
2010 to, improve machinery covered by the patents and was debited 1. Patents
been properly recorded for 2010 in accordance with Famy's b P646. 000 a , 000
straight-line method for all depreciation and amortization. S00 000 Costs ¢.
P217,500
. a b. P174,000 d. P 0
during the organization period. Famy has exercised ite option to 3. ing A t1
January 1, 2009, for income tax purposes and will.amortize these b. P172,800 ad. P
0
416 417
_ VI - Audit of Intangible Assets
4. Licensing Agreement 2
a. P540,000 c. P531,000
b. P522,000 dP 0
5. Goodwill
a. P240;,000 c. P80,000
b. P 76,000 d. P oO.
Answers: 1) B; 2) D; 3) A; 4) A, 5).D
Suggested Solution:
Question No. 1
Question No. 2
Question No. 3
Question No. 4
418
P1,020,000,
(346,000)
680,000
(34,000)
P_646,000
P500,000
(25,000)
475,000
(285,000)
190,000
(10,000)
£180,900
P590,000
10,000
600,000
Question No. 5:
a. , P1,056,000 c. P1,146,000
b. P1,206,000 d. P. 966,000
i)
419
The recorded amounts.all approximate current values except land
(worth P120,000), inventory (worth P250,000), and trademar,
{worthless}.
a. P885,000 c. P 930,000
b. P990,000 d. P1,050,000
conclusions:
a. P175,000 c. P775,000
b. P700,000 d, P600,000
summarized below:
Current assets P1,500,000 Current liabilities P1,500,060
420
a. P1,089,465 c. P460,928
b. P1,380,880. d. P712,343
Lad
Answers: 1) C; 2) A; 3) A; 4) B, 5)C
Suggested Solution:
Question No. 1
Pretax accounting income P1,275,000
Add: Impairment of goodwill P90,000
Loss from fire 66,000 10
1,431,000
Less: Gain on sale of machinery 225,000
Additional depreciation based on fair
value and extended life
{(P120,000 x 3.x 1/2) - P120,000] _60,000 _ 285,000
Adjusted normal earnings PL146.000
Cash P100,900
Receivables . 320,000
Inventory 250,000
Land 120,000
421
VIII - Audit of Intangible Assets
422
> oe
Vill - Audit of Intangible Assets
PROBLEM NO. 11 — Audit of research and development expenditures
Presented below are five unrelated situations. For each situation
compute the amount that will be classified and expensed as research
and development.
knowledge 540,000
Engineering follow-through in an early phase of
b. P2,135.000 d. P1,965,000
423
VII - Audit of Intangible Assets
knowledge
a. P1,450,000 c. P2,150,000
b. P 850,000 d. P1,350,000
P700,000
600,000
-850,000 °
4. Rizal Company incurred the following costs during the year ended
knowledge
.8. P 630,000 c. P1,440,000
b. P1,065,000 d. P1,005,000
P435,@00
375,000
450,000
630,000
5. Victoria, Inc. incutred the foliowing custs during the year enced
a. FP 855,000 c. P300,000
b. P1,380,000 d. P637,500
424
P300,000
217,500
525,000
337,500
ne
w
Suggested Solution:
PAS 38 par., 54 states that no intangible asset arising from research (or
from the research: phase of an internal project) shall be recognize d.
Expenditure on research (or on the research phase of an internal project}
shail be recognized as an expense when it is incurred.
: : a ton OD vat
intangible asset diving fs devmtupereest.
425
VIII - Audit of Intangible Assets
e the design of tools, jigs, moulds and dies involving new technology
production
existing product
customer need
equipment
Question Ho. i
426
nl
yl ; Audit of Intangible Assets
Question No. 2
(P1,400,000/5) P 280,000
Materials consumed in R & D projects 295,000
Consulting fees paid to outsiders for R & D-projects 500,000
Personnel costs of persons involved in R & D projects 640,000
Indirect costs reasonably allocable to R & D projects ___ 250,000
Total Pi,265,000
Question No. 3
knowledge 850,000
Total P2,130,000
Question No. 4
Design, construction, and testing of preproduction
a $y Comper KISS
Lumben Softwarc Company i A% established
. ¢ i coets in the
company. In 2009, the firm incurred the following process
427
Vill - Audit of Intangible Assets
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. How : i
mae of the R and D and production cost will be expensed in
. Spee c. P6,300,000
- 20, d. P5,400,000
2. How i ion
al of the R arid D and production costs will be expensed in
a
. rheaee ec. P1,575,000
29258, d. P1,260,000
Answers: 1) D; 2) A
Suggested Solutiun:
Question No. 1 .
Designing and planning P1,800,000
oo develupment 2,700,000
Feo et —— meneame & ‘Be: 2 —
MES! amount te be expenacd inf anng PS 400. on0
Pe tES Sf
428
Question No. 2
Software production cost . P1,800,000
Amortization of software development cost
(P4,500,000 x 4.32/21.6) ___ 900,000
Total amount to be expensed in 2010 P2.700,000
The amortization method used shall reflect the pattern in which the
asset's future economic benefits are expected to be consumed by the
entity. If that pattern cannot be determined reliably, the straight-line
method shall be used. The umortization charge for each period shall be
recognized in profit or loss unless permitted or required to be included
the carrying amount of another asset.
429
VIII - Audit of Intangible Assets
QUESTIONS:
Based on the above and the result of your audit, determine the
following:
: th
Answers: 1) B; 2) D;. 3) A
Suggested Solution:
Question No. 1
Amount to be capitalized as software development cost P198.000
Question No. 2
Beginning inventory P568,000
Costs of produce and prepare software for sale 225,200
Amortization of software development cost 107,000
Total cost'of goods available for sale 900,200
Percentage of ending inventory (100%-60%) 40%
Ending inventory £300,060
430
~~
> <A trademark for P450,000. The trademark has 7 years remaining
legal life. It is anticipated that the trademark will be renewed in the
future, indefinitely, without problem.
On December 31, 2010, before any adjusting entries for the year were
made, the following information was assembled about each of the
intangible assets:
i t Fair values
Identifiabie assets P4,050,000 4,500,000
soodwi 2,250,000 ?
ees 2700000 2, /UU, 000
=
8
fu
0
oe
to
&
431
VII - Audit of Intangible Assets
QUESTIONS.
Based on the above and the result of your audit, determine the
following: (Assume that the appropriate discount rate for all items is 6%,
a. P110,000 c. . P212,273
b. P174,285 d. P130,285
2. Impairment loss for the year 2010
a. P135,714 . c. P200,000
b. P269,376 d. P 0
3. Carrying amount of Trademark as of Detember 31, 2010
a. P450,000 c. P385,715
b. P250,000 d. P180,624
4. Carrying amount of Goodwill as of December 31, 2010
a. P2,250,000 c. P2,147,727
b. P2,137,500 d. P2,193,750
5. .Carrying amount of Customet list as of December 31, 2010
a. P330,000 c. P220,000
b. P264,000 d. P 0
PAS 38 par. 107 states that an intangible asset with an indefiriite useful
life shall not be amortized. Therefore, the trademark and goodurll were
23 socccte-d
MS amorasoe.
432
Question No. 2
Trademark: 50.000
Carrying amount P450,
Recoverable amount (P15,000/0.06) 250,000 200,000
Goodwill:
Carrying amount of Laguna
Manufacturing unit
(P4,050,000+P2,250,000-P2,700,000) 3,600,000
Recoverable amount (P375,000x12.0416) 4,5 15,600
Customer list:
; PAS 36 par.
ide the fair value less costs to sell.
vid te ey determine fair value less costs to sell
Cost of ia _ 200,000
vuestion No. 1
PROBLEM NO. 15 — Impai t and revaluation of li Z Carrying amount, 1/1/08 (P450,000
x 4.5/5) P405,000
Recoverable amount _135.000
A license is acquired July 1, 2007, for P450,000; while it has a legal life
Impairment loss P270.900
of 1S years, due to rapidly changing environment, management ;
estimates a useful life of only 5 years. Straight-line amortization will be ast es
3B
used. At January 1, 2008, management estimated that the recoverable Carrying amount
without impairment, 1/1/16
amount of the license is only P135,000. Amortization will be taken over (P450,000 x
2.5/5) Palas SOO
3 years from that point. Carrying amount, 1/1/10 (P135,000 x 1/3) (_ 45.090)
Gain on impairment recovery 180,000
last impairment loss was recognized. If this is the case, the carrying
amount of the asset shall be increased te its recoverable amount. Thai
increase is a reversal of an impairment loss. (PAS 36 par. 114)
QUESTIONS:
Based on the above and the result of your audit, determine the
- ing: ' The increased carrying amount of an asset other than goodwill
attributable to a reversal of an impairment loss shall not exceed the
:. Hew much is the loss on impairment on J » 1 2008? carrying amount that would
have been determined (net of amortization or
a. P270,000 c. P225,000 , | depreciation) had no impairment loss been recognized
for the asset in
b. P300,000 d. P 0 prior years. (PAS 36 par. 117)
2. How much can be recognized as gain on impairment recovery in Question No. 3
2010? : P540,000
a. P270,000 Fair value, 1/1/10 PS40,0¢
%. Pi80,000 c. P495,000 Carrying amount, 1/1/15 (F19035,000 x 1/3) {_45,000)
b. P180,000 d. P315,000 Increase in value 495,000
Gain on impairment recovery (see no. 2) {180,000}
Revaluation surplus . Bei
435
434
VI - Audit of Intangible Assets
a. Inquiry
b. Observation
c, Analytical review
d. Inspection of documents
is to
a. Evaluate the future revenne-oroducing capacity of the intangible
asset.
b. Analyze research and development expenditures fo determine
that only those expenditures possessing future economic benefit
436
\
VIII - Audit of Intangible Assets
c. Earnings in excess of 15% of net assets for the past five years.
purchased.
paid fur. .
a. False; True c. False; False
b. True; False d. Truc; True
437