AUDITING PROBLEMS

SY 2014-2015

1505 06
AUDIT OF INTANGIBLES

J.M. Tang

PROBLEM NO. 1
The following costs are generally incurred by Kitamoto Corporation, a newly established entity:
Pre-opening cost of a business facility
Cost incurred in the corporations formation and organization
Licensing and stand-still agreement
A license to manufacture a steroid by means of a government grant
Operating and broadcast rights
Goodwill purchased in a business combination
Internally generated goodwill
Purchased recipes and secret formulas
Internally developed customer list
Training, customer loyalty, and market share
Cost of courses taken by management in quality engineering management
A television advertisement that will stimulate the sales in technology industry
2 months lease payment in advance
Cost of testing in search for a product alternative
Operating losses incurred in the start-up of the business
Initial franchise fees paid
Continuing franchise fees
Cost of purchasing a patent from an inventor
Legal cost in securing a patent
Legal costs incurred in successfully defending a patent
Cost of developing brands, mastheads and publishing title
Cost of purchasing a trademark
Computer software for a computer-controlled machine that cannot operate
without that specific software
An operating system of a computer
Amount paid to a lessor for the exclusive right to rent a facility under an
operating lease agreement for a period of 5 years
Cost of improvements on a leased facility

600,000
552,000
720,000
360,000
268,800
1,200,000
1,920,000
360,000
289,200
336,000
1,080,000
240,000
720,000
300,000
312,000
420,000
120,000
328,800
168,000
133,200
480,000
600,000
781,200
300,000
240,000
600,000

Required:
Based on your audit, how much from the above items can be recognized as intangible assets?
a. 3,316,800
b. 4,665,000
c. 4,965,000
d. 6,885,600

PROBLEM NO. 2
Gangster Inc. holds a valuable patent on a precipitator that prevents certain types of air pollution. Ganster does
not manufacture or sell the products and process it develops. Instead, it conducts research and develops
products and processes which it patents, and then assigns patents to manufactures on a royalty basis.
Occasionally it sells patents. The following presents the summary of the activities in relation to the
aforementioned patent:
2003-2004
Jan. 5, 2005
Mar. 15, 2004
Jan. 2, 2006
Dec. 10, 2009
Jan. 3, 2010
Jan. 5, 2011
Dec. 31, 2013

Research aimed at the discovery of the new technology

Design and construction of a prototype
Testing the prototype models
Legal and other professional fees to process the patent application
(useful life = legal life)
Legal fees paid to successfully defending the device patent
Acquisition of a competitive patent aimed at protecting old patent
Acquisition of the related patent which extended the life of the
patents for additional 2 years
legal fees paid in unsuccessful patent infringement suit against a

P3,840,000
876,000
420,000
620,000
357,000
406,000
654,375
250,000

competitor
Based on the above and result of your audit, determine the following:
1. What is the correct cost of the patent upon initial recognition?
A. 5,756,000
B. 1,916,000
C. 1,040,000

D. 620,000

2. What is the carrying value of the patent on December 31, 2006?

A. 589,000
B. 988,000
C. 1,820,200

D. 5,468,200

3. What is the carrying value of the patent on December 31, 2010?

A. 1,181,625
B. 845,625
C. 465,000

D. 380,625

4. What is the carrying value of the patent as of December 31, 2012?

A. 1,400,000
B. 1,300,000
C. 1,312,500

D. 1,323,529

5. What is the total loss from patent write off that should be recognized in 2013?
A. 1,235,294
B. 1,213,333
C. 1,225,000
D. 1,306,667

PROBLEM NO. 3
On December 31, 2012, Invinsible Corporation acquired the following three intangible assets:

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.

Goodwill for P2,250,000. The goodwill is associated with Invinsibles Lunar Manufacturing reporting
unit.

A customer list for P330,000. By contract, Invinsible has exclusive use of the list for 5 years. Because
of market conditions, it is expected that the list will have economic value for just 3 years.

On December 31, 2013, before any adjusting entries for the year were made, the following information was
assembled about each of the intangible assets:

Because of a decline in the economy, the trademark is now expected to generate cash flows of just
P15,000 per year. The useful life of trademark still extends beyond the foreseeable horizon.

The cash flows expected to be generated by the Lunar Manufacturing reporting unit is P375,000 per
year for the next 22 years. Book values and fair values of the assets and liabilities of the Lunar
Manufacturing reporting unit are as follows:

Identifiable assets
Goodwill
Liabilities

Book values
P4,050,000
2,250,000
2,700,000

Fair values
P4,500,000
?
2,700,000

The cash flows expected to be generated by the customer list are P180,000 in 2014 and P120,000 in
2015.

Assume that the appropriate discount rate for all items is 6%. Round off present value factors to 4
decimal places.

Based on the above and the result of your audit, determine the following:
1. Total amortization for the year 2013
a. P110,000
c. P212,273
b. P174,285
d. P130,285
2. Impairment loss for the year 2013
a. P135,714
c. P200,000
b. P269,376
d. P
0
3. Carrying amount of Trademark as of December 31, 2013
a. P450,000
c. P385,715

b. P250,000

d. P180,624

4. Carrying amount of Goodwill as of December 31, 2013

a. P2,250,000
c. P2,147,727
b. P2,137,500
d. P2,193,750
5. Carrying amount of Customer list as of December 31, 2013
a. P330,000
c. P220,000
b. P264,000
d. P
0

PROBLEM NO. 4
The following costs were incurred by Yehey Corporation during 2013:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.

Searching for applications of new research findings

Laboratory research aimed at discovery of new technology
Testing for evaluation of new products
Design, construction and testing of preproduction prototypes and models
Radical modification of the formulation of a glassware production
Trouble-shooting in connection with breakdowns during commercial production
Adaption of an existing capability to a particular requirement or customers need as
a part of continuing commercial activity
Engineering follow-through in an early phase of commercial production
Materials consumed in research and development projects
Consulting fees paid to outsiders for research and development projects
Personnel costs of persons involved in research and development projects
Indirect costs reasonably allocable to research and development projects
Quality control during commercial production, including routine testing of products
Materials purchased for future research and development projects
Research and development costs reimbursable under a contract to perform research
and development for Client Corporation
Routine and on-going efforts to refine, enrich or otherwise improve upon the
qualities of an existing product

91,200
326,400
115,200
1,392,000
124,800
139,200
62,400
72,000
283,200
480,000
614,400
240,000
278,400
163,200
1,680,000
1,200,000
7,262,400

Required:
How much should be classified as research and development for the year 2013
a. 3,667,200
b. 3,830,400
c. 3,902,400
d. 5,582,400

NOTE: AUDIT OF PPE

PROBLEM NO. 6
Problem 11
Page 208

Brilliant Electronics, Inc

e. Depreciation Expense Building

Accumulated Depreciation Building
12,000,000 / 20 x 6/12
Investment Property Land
Investment Property Building
Accumulated Depreciation Building (PPE) (12M/20 x 4.5)
Land
Building
Revaluation Surplus

300,000
300,000

8,000,000
12,000,000
2,700,000
6,500,000
12,000,000
4,200,000

Investment Property Land

Investment Property Building
Fair Value Gain on Investment Property

500,000
400,000
900,000