DOMALAON, LORIE JAE E.

HW # 4
ACT 123 May 7, 2017
EASY

Problem 1

The INTANGIBLES COMPANY engaged in the following transactions at the beginning of 2014:

1. Purchased a patent for P700,000 that had originally been filed in January 2008. The acquisition
was made to protect another patent that the company had filed in January 2010 and
subsequently received.

2. Purchased the rights to a novel by a best-selling novelist in exchange for 100,000 ordinary
shares (P10 par) selling P60 per share. The books sells 1 million copies in 2014 and is
expected to sell a total of 500,000 copies in the future years.

3. Purchased the franchise to operate a ferry service from the government for P100,000. A bridge
has been planned to replace the ferry, and it is expected that it will be completed in five years.
The company hopes that the ferry will continue as a tourist attraction, but profits are expected to
be only 20% of those earned before the bridge is opened.

4. Paid P280,000 to attorneys for services to successfully defend the patent acquired in
transaction 1.

5. Paid a taxi operator P500,000 to have the company name prominently displayed on his taxis for
two years.

Based on the preceding information, determine the carrying value of the copyright.

SOLUTION:

Cost of copyright P6,000,000

Amortization for 2014(6M X1M / 1.5M (4,000,000)

Carrying value, December 31, 2014 P2,000,00

Problem 2

The following situations are found in the records of the KILIMANJARO, INC. in your audit of the
companys financial statements for the year ended December 31, 2014.

1. December 1, 2014:
Advertising expense 72,000
Cash 72,000

Payment of 2015 advertising contract

2. Balance of Office supplies expense, Dec. 31, 2014 45,000

Balance of Unused office supplies, Dec. 31, 2014 15,000
Inventory of office supplies, Dec. 31, 2014 22,500
 DOMALAON, LORIE JAE E. HW # 4
ACT 123 May 7, 2017
3. June 2, 2014:

Prepaid Insurance 54,000

Cash 54,000

Payment of one-year insurance premium for inventory

4.

Balance of Factory supplies expense account, Dec. 31, 2014 P69,00 0

Physical inventory of factory supplies, Dec. 31, 2014 58,000

5. On May 1, 2014, a two-year subscription to the Industrial Journal in the amount of P14,400
was paid. Subscriptions expense was charged for the entire amount.

How much is the insurance expense to be recorded?

SOLUTION:

Insurance Expense (P54,000x7/12) = P 31,500

PROBLEM 3

As a member of the audit team for the audit of RAS DASHEN COMPANYs financial
statements for the year ended December 31, 2014, you have been asked to examine
selected accounts. The controller for Ras Dashen mentions that there is only one account
(shown below) kept for intangible assets.

Debit Credit

Feb 1 Organization costs P72,000 P72,000

Mar 15 Research and development 1,880,000 1,952,00 0

Apr 3 Legal costs to obtain patent 150,000 2,102,00 0

May 1 Payment of 12 months rent

on property leased by Ras Dashen 240,000 2,342,00 0

Jun 15 Promotional expenses related

to start-up of business 414,000 2,756,00 0

DOMALAON, LORIE JAE E. HW # 4
ACT 123 May 7, 2017
Dec 31

Unamortized bond discount

on bonds due Dec. 31, 2034 168,000 2,924,000

Operating losses for firstyear 428,000 3,406,000

The amount of organization expenses to be reported in Ras Dashens income statement for the
year ended Dec. 31, 2014, is?

SOLUTION:

Organization costs 72,000

Promotional expenses related

to start-up of business 414,000

Total organization expenses 486,000

MODERATE

PROBLEM 4

MERU, INC. leases an old building which it intends to improve and use for administrative
purposes. The company pays a bonus of P100,000 to obtain lease.

Annual rental for the 10-year lease period is P160,000. No option to renew the lease or right to
purchase the property is given by the lessor.

After obtaining the lease, improvements on the leased building are made costing P400,000. The
building has an estimated remaining useful life of 19 years.

What is the annual cost (excluding depreciation) of this lease to Meru, Inc.?

SOLUTION:

Annual rental P160,000

Amortization of lease bonus 10,000

Annual cost of lease P170,000

DOMALAON, LORIE JAE E. HW # 4
ACT 123 May 7, 2017

HARD

Problem 5

ELGON COMPANY was organized in 2013 and began operations at the beginning of 2014. The
company provides landscaping services. The following costs were incurred prior to the start of
operations:

Legal fees in connection with organization of the company 171,000 Improvements to leased
office space prior to occupancy225,000Costs of meetings of incorporators to discuss
organizational activities 63,000

Filing fee to incorporate 9,000

What is the total amount of organizational costs that should be reported in Elgons income
statement?

SOLUTION:

171,000 + 63,000 + 9,000 = P 243,000