Audit of Intangibles

AUDIT OF INTANGIBLES ( AP – 7404 cpar oct 2013) PROBLEM 1 Transaction during 2013 of the newly organized zerg corporation included the following Jan 2 paid legal fees of 233,000 to complete organization of the corporation 15 hired a clown to stand in front of the corporate office for 2 weeks and handout pamphlets and candy to create goodwill for the new enterprise. Clown cost 10,000 , pamphlets and candy 5,000. April 1 patented an newly developed process with cost as follows Legal fees to obtain patent 429,000 Patent application and licensing fees 63,500 Total P492,500 It is estimated that in 6 years other companies will have developed improved processes, making zerg corporation process obsolete May 1 acquired both a license to use a special type of container and a distinctive trademark to be printed on the container in exchange for 6,000 shares of zerg’s no-par ordinary shares selling for 50 per share. The license it worth twice as much as the trademark, both of which may be used for 6 years July 1 constructed a shed for 1,310,000 to house prototypes of experimental models to be developed in future research projects. Dec 31 incurred salaries for an engineer and chemist involved in the product development totaling 1,750,000 in 2013 Based on the above and the result of your audit, determine the following 1. Cost of patent a. 492,000 b. 429,000 c. 63,500 d. -02. Cost of licenses a. 150,000 b. 200,000 c. 100,000 d. -03. Cost of trademark a. 150,000 b. 200,000 c. 100,000 d. -04. Carrying amount of intangible assets a. 712,604 b. 2,477,604 c. 697,604 d. -05. Total amount resulting from the foregoing transactions that should be expensed when incurred a. 4,100,500 b. 1,983,000 c. 1,998,000 d. -0PROBLEM NO. 2 The terran company acquired several small companies at the end of 2012 and based on the following acquisitions, reported the following intangibles in its dec 31 2012 statement of financial position Patent 200,000 Copyright 400,000 Trade name 350,000 Computer software 100,000 Goodwill 900,000 The company’s accountant determines the patent has an expected life of 10 years and no expected residual value, and that it will generate approximately equal benefits each year. The company expects to use the copyright and tradename for the foreseeable future. The accountant knows that the company software is used in the company’s 120 sales office. The company has replaced the software in 60 offices in 2013, and expects to replace the software on 40 more offices in 2014 and the remainder in 2015

On dec 31 2013, there are no indications of impairment of patent and computer software. The following information relates to other intangible assets a. Because of rampant piracy, the copyright is expected to generate cash flows of just 8,000 per year b. The trademark is expected to generate cash flows of 15,000 per year c. The goodwill is associated with terrans scv manufacturing unit. The cash flows expected to be generated by the scv manufacturing unit is 200,000 per year for the next 25 years. The reporting unit has a carrying amount of 3,000,000 Based on the above and the result of your audit, determine the following (assume that the appropriate discount rate for all items is 5%) 1. Total amortization of intangible assets in 2013 a. 70,000 b. 88,750 c. 107,500 d. 20,000 2. Total loss on impairment in 2013 a. 452,470 b. 530,280 c. 471,220 d. 433,720 3. Carrying amount of goodwill on dec 31 2013 a. 900,000 b. 718,780 c. 855,000 d. 659,720 4. Carrying amount of other intangible assets on dec 31 2013 (other than goodwill) a. 690,000 b. 980,000 c. 640,000 d. 706,667 PROBLEM NO. 3 Regal corp has its own research department. However the company purchases patents from time to time. The following is a summary of transactions involving patents now owned by the company.  During 2007 and 2008 , regal spent a total of 459,000 in developing a new process that was patented (patent a) on april 1 2009; additional legal and other costs of 50,000 were incurred.  A patent (patent B) develop by noynoy inventor, an inventor, was purchased for 187,500 on dec 1 2010, on which date it had an estimated useful life of 12 1/2 years.  During 2009,2010 and 2011 research and development activities cost 510,000. No additional patents resulted from these activities.  A patent infringement suit brought by the company against a competitor because of the manufacturer of articles infringing on patent b was successfully preosecuted at a cost of 42,600. A decision in the case was rendered in june 2011  On july 1 2012, patent c was purchased for 172,800. This patent has 16 years yet to run.  During 2013, regal expended 180,000 on patent development. However the company is still undecided as to how the patent, if approved by the bureau of patents, will generate probable future economic benefits. Assume that the legal life of patent is also its useful life 1. What is patent a’s carrying value on dec 31 2013? a. 120,888 c. 38,125 b. 497,125 d. 388,113 2. What is patent b’s carrying value on dec 31 2013? a. 141,250 c.32,092 b. 28,906 d. 173,342 3. What is patent c’s carrying value on dec 31 2013 a. 162,000 c. 159,840 b. 327,600 d. 156,600

4. What is the total patent amortization expense to be reported on regal’s income statement for the year ended dec 31 2013 a. 37,300 c.74,325 b. 28,741 d. 28,300 THEORY 1. The most effective means for the auditor to determine whether a recorded intangible asset possesses the characteristic of an asset is a. Vouch the purchase by reference to underlying documentation b. Inquire as to the status of patent application c. Evaluate the future revenue-producing capacity of the intangible asset d. Analyze the research and development expenditures to determine that only those expenditures possessing future economic benefit have been capitalized 2. In auditing intangible assets, an auditor most likely would review or recomputed amortization and determine whether the amortization period is reasonable in support of managements financial statement assertion of a. Valuation b. Existence c. Completeness d. Rights and obligation 3. Assuming TLL has capitalized all research and development cost of patent. York CPA, who is examining this account will probably a. Confer with management regarding transfer of the amount from the balance sheet to the income statement. b. Confirm that the patent is registered and on file with the intellectual property office c. Confer with the management regarding a change in the title of the account to goodwill d. Confer with management regarding ownership of the patent 4. There is goodwill involved in the acquisition of a business if the purchase price paid is in excess of the proprietorship of the business acquired Goodwill might be viewed as the enjoyment of a profit by a company in excess of the normal or usual return for the industry as a whole but such goodwill is not recorded if it has not been purchased or paid for a. False;true b. False;false c. True;false d. True;true 5. Which of the following comparisons would be most appropriate audit test for the amount of recorded goodwill a. The purchase price and the book value of assets purchased b. The purchase price and the fair value of asset purchased c. The figure for goodwill specified in the contract of purchase d. Earning in excess of 5% of net assets for the past five years 6. In verifying the amount of goodwill recorded by a client, the most convincing evidence an auditor can obtain is by comparing the recorded value of asset acquired with a. Assessed value as evidenced by tax bills b. Sellers book value as evidenced by financial statements c. Insured value as evidenced by insurance policy d. Appraised value as evidence by independent appraisals

7. A corporate balance sheet indicated that one of the corporate asset is a patent. An auditor is most likely obtain evidence regarding the continuing validity and existence of this patent by obtaining a written representation from a. A patent attorney b. The sec c. The patent inventor d. The patent owner