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VI – AUDIT OF INTANGIBLE AND OTHER ASSETS SUMMARY OF PROBLEMS

PROBLEM NO. 1 – Audit of recognition and measurement of intangible assets (including preparation of a PROBLEM NO. 2 – Audit of patent PROBLEM NO. 3 – Amortization and impairment of intangible assets PROBLEM NO. 4 – Amortization and impairment of intangible assets PROBLEM NO. 5 – Expenses related to intangible assets PROBLEM NO. 6 – Impairment of cash generating unit PROBLEM NO. 7 – Impairment and reversal of impairment in a cash-generating unit PROBLEM NO. 8 – Impairment, reversal of impairment and revaluation of patent PROBLEM NO. 9 – Audit of intangibles and other assets PROBLEM NO. 10 – Audit of intangibles and other assets PROBLEM NO. 11 - Theory

assets (including preparation of adjusting journal entries)

nerating unit

PROBLEM NO. 1 - Zerg Corporation Requirement No. 1 1/2 Organization expenses Intangible assets

233,000 233,000

1/15 Advertising expense Intangible assets

15,000

4/1 Patents Intangible assets

490,000

5/1 Licences (P300,000 x 2/3) Trademark Intangible assets

200,000 100,000

7/1 Building Intangible assets 12/31 Research and development expense Intangible assets Amortization expense Patent (P490,000/5) Licences (P200,000/5) Trademark (P100,000/5) Requirement No. 2 Cost Patent Licences Trademark Less amortization Patent (P490,000/5) Licences (P200,000/5) Trademark (P100,000/5) Carrying amount, 12/31/12

15,000

490,000

300,000 1,310,000 1,310,000 1,750,000 1,750,000 158,000 98,000 40,000 20,000

490,000 200,000 100,000

Requirement No. 3 Organization expenses (Jan. 2 transaction) Advertising expense (Jan. 15 transaction) R and D expense (Dec. 31 transaction) Total

98,000 40,000 20,000

790,000

158,000 632,000

233,000 15,000 1,750,000 1,998,000

PROBLEM NO. 2 - TLL Cookie Corporation Requirement No. 1 Metal used in the construction of the machine Blueprints used to design the machine Wages paid to the employees (P1,800,000 x 60%) Cost of machine

480,000 192,000 1,080,000 1,752,000

Requirement No. 2 Research and development laboratory expenses Wages paid to the employees (P1,800,000 x 40%) R & D expense

1,500,000 720,000 2,220,000

Requirement No. 3 Legal expenses to obtain patent Expense of drawing required by the patent office Fees paid to the government patent office Cost of patent Less amortization up to 12/31/12 (P972,000 x 2/20) Carrying amount of patent, 12/31/12

720,000 102,000 150,000 972,000 97,200 874,800

Notes: Cost of defending the patent should be expensed Since the useful life is not given, the patent was amortized using the legal life of 20 years.

PROBLEM NO. 3 - Terran Corporation Requirement No. 1 Patent (P200,000/10) Computer software [P100,000 x (60/120)] Total amortization

20,000 50,000 70,000

*The useful lives of copyright and tradename are indefinite, so no amortization expense is recognized. ** Goodwill is not amortized. Requirement No. 2 Impairment loss Copyright: Carrying amount Recoverable amount (P8,000/0.05) Tradename: Carrying amount Recoverable amount (P15,000/0.05) Goodwill: Carrying amount of Anne Manufacturing unit Recoverable amount (P200,000 x 14.0939) Total impairment loss

400,000 160,000

240,000

350,000 300,000

50,000

3,000,000 2,818,780

Requirement No. 3 Original amount of Goodwill Less impairment loss Carrying amount of Goodwill, 12/31/12

900,000 181,220 718,780

Question No. 4 - A Patent (P200,000 - P20,000) Copyright (recoverable amount) Tradename (recoverable amount) Computer software (P100,000 - P50,000) Carrying amount of other intangible assets, 12/31/12

180,000 160,000 300,000 50,000 690,000

181,220 471,220

PROBLEM NO. 4 - Probe Corporation Requirement No. 1 Trademark* Goodwill* Customer list (P220,000/3) Total amortization

73,333 73,333

*The useful life is indefinite, so no amortization expense is recognized. Requirement No. 2 Impairment loss Trademark: Carrying amount Recoverable amount (P10,000/0.06) Goodwill*: Carrying amount of Manufacturing unit (P2,700,000 + P1,500,000 - P1,800,000) Recoverable amount (P250,000 x 12.0416) Customer list Carrying amount (P220,000 - P73,333) Recoverable amount: 2013: (P120,000 x 0.9434) 2014: (P80,000 x 0.8900) Total impairment loss

300,000 166,667

133,333

2,400,000 3,010,400

-

146,667 113,208 71,200

184,408

133,333

*Since goodwill does not generate cash flows independently from other assets or group of assets, the recoverable amount of goodwill as an individual asset cannot be determined. Therefore, the recoverable amount is determined for the cash generating unit to which goodwill belongs. Requirement No. 3 Cost Less impairment loss Carrying amount of Trademark, 12/31/12

300,000 133,333 166,667

Requirement No. 4 Since goodwill is not amortized and is not impaired as of 12/31/12, the carrying amount is P1,500,000. Requirement No. 5 Cost Less amortization for 2012 Carrying amount of Customer List, 12/31/12

220,000 73,333 146,667

PROBLEM NO. 5 - Five Company Requirement No. 1 Down payment Add PV of installment payments (P120,000 x 2.9137) Cost of franchise 2012 amortization (P549,644/10) Carrying amount of franchise, 12/31/12

200,000 349,644 549,644 (54,964) 494,680 eboy

Requirement No. 2 Cash paid Fair value of shares issued (10,000 x P20) PV of note payable (P500,000 x 0.7118) Cost of patent 2012 amortization (P955,900/10 x 6/12) Carrying amount of patent, 12/31/12

400,000 200,000 355,900 955,900 (47,795) 908,105

Requirement No. 3 Franchise related expenses Amortization of franchise (see no. 1) Periodic franchise fee (P8,000,000 x .05) Interest expense (P349,644 x .14) Patent related expenses: Amortization (see no. 2) Interest expense (P355,900 x .12 x 6/12) Trademark related expense (Impairment loss) Carrying amount Recoverable amount: Outcome 1 (P40,000/.05 x .7) Outcome 2 (P80,000/.05 x .3) Total expenses - 2012

54,964 400,000 48,950

503,914

47,795 21,354

69,149

1,200,000 560,000 480,000 1,040,000

160,000 733,063

PROBLEM NO. 6 - Rodeo Corporation

1 2 3 4 5

Assets Goodwill Operating license Property-train stations a Rail tracks and coaches Steam engines (2)

Carrying amount 200,000 1,200,000 300,000 300,000 1,000,000 3,000,000

Impairment allocated (200,000) (333,333) (83,333) (83,333) (500,000) (1,200,000)

CA after impairment 866,667 216,667 216,667 500,000 1,800,000

Computation of impairment loss: Carrying amount of the CGU Recoverable amount (VIU) Impairment loss

3,000,000 1,800,000 1,200,000

Allocation of impairment loss: Exploded steam engine Goodwill Balance pro rata (Operating license, Train stations and Rail tracks) Re-allocation of impairment loss: Pro rata (Train stations and Rail tracks)

1 2 3 4 5

Carrying amount 200,000 1,200,000 300,000 300,000 1,000,000 3,000,000

(500,000) (200,000) (500,000)

33,333

Alternative solution: Assets Goodwill Operating license Property-train stations a Rail tracks and coaches Steam engines (2)

CA after Impairment impairment reallocation reallocation 33,333 900,000 (16,667) 200,000 (16,667) 200,000 500,000 1,800,000

Impairment allocated (200,000) (300,000) (100,000) (100,000) (500,000) (1,200,000)

Allocation of impairment loss: Exploded steam engine Goodwill Operating license (P1,200,000 - P900,000) Balance pro rata (Train stations and Rail tracks)

CA after impairment 900,000 200,000 200,000 500,000 1,800,000

500,000 200,000 300,000 200,000 1,200,000

PROBLEM NO. 7 - Tweak Corporation Requirement No. 1 Buildings Factory machinery Goodwill Inventory Receivables Cash

CA 240,000 180,000 15,000 80,000 35,000 20,000 570,000

500,000 I.L. Allocation* (9,600) (7,200) (15,000) (3,200)

(35,000)

CA after 230,400 172,800 76,800 35,000 20,000 535,000

1% wood wood Christian wood Christian Christian

* Charge the impairment loss first to goodwill. The balance (P20,000) will be allocated pro rata to the other assets in the unit except cash and receivables. Requirement No. 2 Reversal of impairment loss on impaired assets: Inventory - Sold already. No more reversal. Goodwill - Not allowed. Buildings - Allowed subject to limit. Machinery - Allowed subject to limit. Computation of limit on the extent of reversal: Buildings CA, 12/31/12 - without impairment Buildings (P240,000 - P60,000) 180,000 Machinery (P180,000 - P45,000) CA, 12/31/12 - with impairment Buildings (P230,400 - P65,000) 165,400 Machinery (P172,800 - P50,000) 14,600

Machinery

Total

135,000

122,800 12,200

26,800

Machinery 7,200 5,000 12,200

Total 16,800 10,000 26,800

Alternative computation: Buildings 9,600 5,000 14,600

Allocated impairment loss Increase in depreciation

*Since the excess of RA over the CA did not exceed the limit, the reversal would be based on a pro rata allocation based on carrying amounts at time of reversal.

Buildings Machinery

CA 165,400 122,800 288,200

Allocation* 11,478 8,522 20,000

CA after 176,878 131,322 308,200 Shiela

al would be

PROBLEM NO. 8 - Protoss Corporation Requirement No. 1 Carrying amount, 1/1/10 (P250,000 x 4.5/5) Recoverable amount Impairment loss

225,000 75,000 150,000 Donna

Requirement No. 2 Fair value, 1/1/12 Carrying amount, 1/1/12 (P75,000 x 1/3) Revaluation increase

300,000 25,000 275,000

CA without impairment, 1/1/12 (P250,000 x 2.5/5) Carrying amount, 1/1/12 (P75,000 x 1/3) Gain on impairment recovery Requirement No. 3 Revaluation increase Gain on impairment recovery Revaluation surplus, 1/1/12 Realized - 2012 (P175,000/5) Revaluation surplus, 12/31/12 Requirement No. 4 Carrying amount (Fair value), 1/1/12 Amortization - 2012 (P300,000/5) Carrying amount, 12/31/12

2%

125,000 25,000 100,000 Aquino, persia

275,000 (100,000) 175,000 (35,000) 140,000 Dimaano

300,000 (60,000) 240,000 Judie De leon

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PROBLEM NO. 9 - Naga Corporation Requirement No. 1 Present of note received (P5,000,000 x 0.675) Less carrying amount of patent, 5/1/12: Carrying amount, 1/1/11 Amortization up to 5/1/12 (P3,150,000/15x4/12) Gain on sale of patent Requirement No. 2 Note receivable from sale of patent (P3,375,000 x 14% x 8/12) Installment contract: 1/1 to 3/31 (P7,200,000 x 13% x 3/12) 4/1 to 12/31 (P5,400,000 x 13% x 9/12) Total interest income - 2012

3,375,000 2,450,000 (70,000)

2,380,000 995,000

315,000 234,000 526,500

760,500 1,075,500

Requirement No. 3 Installment contract receivable, 12/31/11 Less principal payment received, 3/31/12 Balance, 12/31/12 Less principal payment to be received, 3/31/13 Noncurrent portion

7,200,000 1,800,000 5,400,000 1,800,000 3,600,000 shiela

Requirement No. 4 CA - NR from sale of patent, 5/1/12 Amortization of discount, 5/1/ to 12/31 (P3,375,000 x 14% x 8/1 CA - NR from sale of patent, 12/31/12

3,375,000 315,000 3,690,000 dimaano

Requirement No. 5 Acquisition cost Dividends received (750,000 x 2) Share of profit (P7,040,000 x 25%) CA - Investment in Pure Corp., 12/31/12

18,800,000 (1,500,000) 1,760,000 19,060,000 antiquera

PROBLEM NO. 10 - GDL, Inc. Requirement No. 1 Patent amortization (P1,680,000/6) Trademark Noncompetition agreement (P2,000,000/5) Total amortization

280,000 400,000 680,000

Requirement No. 2 Patent (P1,680,000 - P280,000) Trademark (P8,000,000 x 3/4) Noncompetition agreement (P2,000,000 - P400,000) Carrying amount of intangible assets, 12/31/12 Requirement No. 3 Deferred tax asset, 12/31/11 Decrease in deferred tax asset: Decrease in unearned rent (P200,000 x 35%) Increase in warranty liability (P150,000 x 35 Deferred tax asset, 12/31/12

1,400,000 6,000,000 1,600,000 9,000,000

360,000 (70,000) 52,500

(17,500) 342,500

PROBLEM NO. 11 - Theory 1 2 3 4 5 6 7 8

D C A B A A D B