SL U-DE PARTITI ET{T OF ACCI}U1{TAT{CY

AUDITNG PROBLEIIS
C.T.ESPEf{ILLA

AUDIT cF FROpER?Y, pI-Ai T At{tr EQUIFMET{T

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APOS-PROBLEITI 1:

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b' A mmpfete te"ieot-oitie ,*l"iec lnternar contrors and performs analyticar review tests current_yea. c' A preliminaryto verifu olthe retated aoaitioil'io p.op*rgy arrd equipment. review i"t*i*iitniroti de .A. examination of the batances u.t b&i;;; of the year.*rf;#s a thorough lhq (d' A preliminary t*ul** oi{ne relaGd i,rtf,*"l"iontrors 3'
and performs extensive tests of current-year property and eguipment transactions.
An auditor *"v rrrsulrrclent tf -{eprmiatiol c_harses are insufficient if he or s nctes l-arge-amounts of fully cJpreciated she Continuous trade_ini'fr?latively assets, new assets. I1c*sive recurring lossei on retired assets. Insured values OreaHy ir, L*.es, of book values.

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4. In violation of cornryny

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rhe audito;

erroneclllf-canitalized the cost G#;g-iiru.r-n;#ru#;menrs wsurd be msst of painiing i*

rikery to detcr

policy. Lilac"Cornpany

O inventory beins raken, that rhe z\ :::,:"1.Ilil; "u.il*i"J,=tfnr.,*r I,arehouse had been piinteu. 's/ ;l"ilning the construction work orders supporting items capitalized during

Discussing capitarization poricies Exarnining &p"n*

w*h

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accounts.

Lirac,s controfrer, )nrrorEr,

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maintenance expense mos'ikery wourd be segregation of duties oilrlpnvees 3' in *,* accounts payabre department. verincation oi in"orc"i r;;6;;;ments.reco*"ji, uquipment / Investigation of variances within a formar budgeting system. Authorization bv *'* uouia'oi;;;*r## ":nxi*L* equipment aquisitions. account is least to reveal evidence rerating to recorded ffi,filf,$which retirement of 'ikely Accumulated depreciation. 9. b. fnsulance expense. c. lroq3rty, ptant and equipment. rurcnase returns end allowances. @

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explanations most likely would satisfy an auditor who questions about significant debits ts the accumulated depreciatio{l accounts? management A The estimated rernaining useful lives of plant assets were revised upward. (!) Plant assets were retired during the year. c. The prior year's depreciation expefts was errsneously understated. d. Overhed allocntions were revised at year-end. In testing for unrecorded retirements of equipment, an auditor most likely would:

Select items of equiprnent from the accounting records and then loate them during the plant tour. b. Compare depreciation journal entries with similar prior year entries n search of fully

depreciated equipment. Inspect items of equipment observed during the plant tour and then trace them to the equipment subsidiary ledger. d. Scan the general journal for unusual equiprnent additions and excessive debits to repairs and maintenance accounts.

9.

The auditor is most likely to seek information from the plant rnanager with respect to the: a. Adequacy of the provision for uncollectible accounts. b. Appropriateness cf physical inventory observation procedures' aO Existence of obsolete rnachinery. -d" Deferral of procurernent of certain necessary insurance coverage.

10.In testinE plant and equiprnent balances, an auditor may inspect new additions listed on the analysis bf plant and equlpment. This procedure is designed to obtain evidence mncerning manaoement assertions of

A Existence Y Completeness c. Valuation d. Rights and obliEation

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Bacotod Inc incurred the foltowing expenditures in Z00B: Furchase of land Land survey

APOS.PROBLEFI 2:

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;ffi:H;rrsessment

l11|o]19_.onsrruction permit fiee Payments to'tenann ?a*,,iffo,"n workers I:H:l1v,: f::e3 '-' w"JL'uLt'ton for vacatins the buitdins Lost of ro naze rh" b;,rd;; s3g.:j_P_:ig.*," ;jrr:lfrbuitding Excavation of tne JanO "ra of the governrnent for road projcrs
inju ries susrained in construction where no

5=:1"-. seirch of tifle for tand

15,600,ooo 208,O00 24,00a 140.000

434ooo
1g4,Og0 940,o00 400,o00 B0,000 200,000

Lost of consructon : qor. pi'i,ig _ r.nsr of "r shruhs *_[9-,:: and-adjoining buitding h ru bs;, g profit on constructia __re vL,.suouuscElDllg costs n1tors 1 -d"#.:: rixl'::fu Aetv6n-the appraised vatue of the .,,, "f,"lE :i "r"J,u*::gOifrerence r"':T"*,:."*,'::" _.,v *:: #:HSH Trade diSCOUnt tare , " I EalurFrilrenr OUrChaSed "q; uost of freight and rl"ll,,t* machinery ano equipmenr purchased handrins Fl* :lFight the eqs;pment ,,Cost of testlng ""0

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336,000 78.o0o,o00 1,600.0o0 1,320.0o0 1,900,000 P4,567,000

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Additional infarmation:

50,o00 125.000

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A portion of the building site had been temporarity used by to operate a car A totar or p65o,ouu was ff::.l* eamed by Bacorodpark Proceeds from salg of Drrrrft'o rrn- rL^ io;G;tTot*uce from the testing done on the machinery and equipment

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Requirements: 1. What is the correct cCIst of the land? , i, . 2. what is the correct cost of rand irnprovements, if there are any? 3. What is the cost oi the building? . - ,i.

AUDTTING PROBLEHS-PE

4.

What is the cost of machfnery and eguipment?

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APOS-PROBLEITI 3:

l"liram Cornpany, was organized in lune 2008. In your audit of the company's books, you find the following land, building and equipment account: Account June 2 15
15

title:

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20 lune 30

Aug.29 Sept. I
Dec. 15

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Land, buildlng and equipment P120,000 Organization fees 1,890,OO0 Land site and old building 250.OOO Sption payments 110,400 Title clearance fees 50,000 Cost of remodeling the building 360,O00 Salaries of Executives Stock bonus to srporate promoters 1?,000 300.soo shares, P25 market value per share 86,4O0 Real property taxes

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notes:

' The b,uilding acquired on June 15, 2008, had a fair value of F450,S00 while the land was currently appraied at P1,800"000.
P50,0CI0

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of the option money paid were for properties nst aquired.

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The executives had no participation or the remodeling of the building. The property taxes were for the second half of the calendar year" Requirements: 1. How much is the correct balance sf the Land account as of December 31, 2008? 2.
i-low much is the correct balance of the Building account as of December 31, 2OO8?

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3. The net income for 20SB should be adjusted by:

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the beginning af 2O1O. In your audit of ABC Corporation's financial stateme*ts the fallowing PPE schedule was presented ta you by its accountantABC Corporation started its operations at Land

Building Equipment Fumiture and Fixtures

Plo.000,oo0 6,500,000 6.000,000 3,500,000

Audit notes: a' The company acquired the land at the beginning of the year at a total purchase price of P10,O00,0O0, The term af the acquisition calls for a 20ole downpayment and the issuance of a 5 year non-interest bearing note for the balance. The note is payable equally at the end of each year starting Demmber 31. 2010.
b. The building was onstructed by XYZ constructions which costed the said construction

company a totalof P6.5M. The construction started even before the commencement of operations in 2010 and was completed in time for the company's inception of operation at the beginning of 2010. The agreement with the said construction company calls for the issuance af 100,000 of ABC's own shares in exchange of the constructed building. The prevailing fiair value of the shares on this date was P70 per share,

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d.

Three equipment were acquired during the year by the company is separate occasion as follows: Equipment A was acquired on account at the beginning of 3anuary at PZ,O0O,OOO pqyablq tht'ee eqnths f;gm daE: qlpqrchase. A 109b discount on the price shall be provided if payment was made within January, Due to unavailability of cash" the company paid the amount due at the end of the March. - Equipment B was aquired on July 1 at a purchase prie of P4.OOO.CIOO. The company incuned import duties and non-refundable taxes amounting to P250,0O0 which it had charged to operatians. Additional inshllation costs were incurred at P5O,0O0 which urere also charged to operations. The compaily expecb to incur dismantling cost on the asset upon retirement at P161,051. The prevailing rate of interests on this date was at 104/a. - Another Equiprnent (c), which was not recorded in the empanyt books, was received from one of its major stockholders on September 1. The equipment had a prevailing fair value on the same date at PI'ZOO,OOO. The corrrpany incurred legal fees in processing the donation at P100,000 which was charged to operating expns. Various Furniture and Fixtures were acquired at the beginning of the year fi'om a single supplier with the following terrns of payments: Cash P1,000,000 3 year ltlon interest bearing note 2,000,000 10.000 shares at par P50 500.o00

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It was ascerbined that the total esh price of the various furniture and fixtures was at
P3,200,000.

Depreciation on the assets are yet to be made by year end, You have asertained that the following depreciation policies shall be appropriate in the circumstane: Depreciation Method Useful life Building 1 50ola Declining Balance 15 years. Equipment SYD 5 years Fumiture and Fixtures Straight-Line 10 years Salvage values of the assets were rendercd irnmaterial.

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Reouirements:
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l.Determinethedepreciationexpenseforthefo||owingassetsfor2010:

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a. Building b. EquiPment A B c' Equiprnent C d. EquiPment

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as or December 31' 2o10: uaiues or the rollowins assets

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c. EquiPment A d. EquiPment B e" EquiPment C . Furniture and Fixture

Building

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APOS-PROELE]TI 5: panalo Corporation contracted Natalo Inc. on January 1, 200S to construct building for

back. The contract provides that panalo is to make.five payments in 2008, witft the last payment to be made upon completion. The building ntat connpleted sn December 31, 2!Q-8'
pgO.OgO,gOg on land Panalo purchased a couple of yeam

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Panalo made the following paymenB during 2O08:

; ;29i 31

January 1 April 1 July 31 October 1

P8,0OO,OOO

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; i ','i' l,t" ) Panalo made the following alrangements with financing companies in 2O0B:

Deember 31

19,000,000 24,400,000 27,600,000 14,000,000

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Both principal and interest are payable on Deember 31, 2O1L. This loan related specifically to the building project.

I2o/o, p20t4 loan dated January 1, 2008, with interest rnmpounded quarterly.

AUDITITTG PROBLEI'iS

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Requirements:

!.0016, 10-year, P14lrl note dahd December 31, 2004, with simple interest; interest payable annually cn December 3L, The l*an was Sor general financing purposes including the partial financing of the construction.

t7Yo,S-year. P20M note dated December 31, 2S06, with simple interest; intercst payable annually on Decemher 31. The loan was fcr general fina*cing purposes including the partial frnancing of the construction.

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1.

The amount of interest to be capitalized in 2008?

2, The amount of interest to be expense in 2008? 3. The carrying value of the building as of December 31, 2008?

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APT}S'PROELEPT

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operating asset and accumulated 31' 2006' KELSON CORP''s noncurrent At December balances as follows: depreciation uttou*Jhad Life

Cost

Accum DePn

DePn

Method

Land Buildings MachinerY and equiPment oitivery equiPment LeaserriltO lmProvements

:.ooo,ooo 796,204 588,600

P390,o00

z,iis,ooo
396,OO0

declining itraight line

150o/o

25 Years 10
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663,000

258,6O0 331,500

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Depreciation is computed to the nearest month and the residual values of the depreciable assets are considered immaterial. The foltowing transactions ocurred in 20O7: a" Gn January 6, a facility which included a tand and a building structure was acquired from Wayde.Corp. for P1,8O0,0OO. The land had a market value of p36O,OOO. b. On April 6, the construction of parking lots, streets and sidewalks were completed at the acquired facility. The company incurred a total cost of p576,00O on this projqct. These expenditures had an estimated useful life of 12 years and are Oepre*jUle ' using the straight line method.
c. The leasehold imprcvements were completed on December 31. 2003. and had an

estimated useful life af I years. The related lease, which would have expired on December 31, 2009, lras renewable for an additional 5 year term. On February Zg, 2007 the company exercised the renewal opticn.

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d. On July 1, machinery and equipment were purchased at a tstal invoice cost bf P750,000. Additional cost of P30,O00 and P90,0O0 for installation were incurred.
e, On August

3fi, Kelson purchased.a new truck for p45,00O.

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On September 30, a truck with a cost of P72,00O and a carrying value of p24.30O on the date of sale was sold for p34,5o0. Depreciation fsr the 9 month ended September 30, 20O7 was p7,056.

9. On December 2O, a machine with a cost of P51,0OO and a carrying amount of pg,g25 bt date of disposition was scrapped without cash recovered.

Requirements: what are the depreciation expenses for the following: 1. Building:

a. 168.228

b. 302.400

c. 339.504

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a. Machinery and equipqent: a. 319.5oO (S 276,000

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c. ?60,70C c. 82,875
c.
45,720

d.

?"32,500

Leasehold improvenppt:

a. 47,3ss

[9.) 00,:00
43,359

d. 110,5OO d.
52,776
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Delivery equipment: a. 3:.,812

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for the period In the course of ycur audit of property, plant and equipment of f*tALoKo coRp. to determine propriety ended December sr. iOOg, you nl"e decided to review property additions accounts to of itte items capitalized and the cornpanyt repairs and maintenane expense by the company: Oeiermine wheiher there are capitalizabie ccts which were expensed
MALOKO CORP.

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For the period ended December 31' 2c08

PropertY Additions

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Additions ta Buildings: Replacement of the old wooden raof with a ftreProof brick roof Repainting of the Plant buildings Routinary rePairs on buildings Rdditions to EquiPment: Replacement of minor gears Replacement of retired factory equipment Rearrangement costs of a graup cf factory equiprnent to ensue greater efficiency in production Total amount caPitalized

P300,00o 60,o00

50,0CI0

P410,000

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P20,00CI

500,000

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120.OOO*

740,o00

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*Comprises of moving cosb amounting to P40,00o and reinstallation msts of P80'0o0.

i,IALOKO CORP.

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For the period ended December 31' 2008

RePairs and Maintenance ExPense

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Major improvements to the electrical wiring system Seruice contract on sffice equipment Acquisition of furnitures Storm windows and screens installation Autornatic door-opening syttem installation Sealing of roof leaks in the factory Overhead crane in the assembly department

70,0O0 40,000 50,o00 152,000 20s,oo0 25,000

70,OOO

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How'much from the above items shou|d be capitatized to: a. Building b. EquiPment c. Furniture and fixture
How much from the above items shosld be expensed?

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APOS*PROELEFI

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acguird a machine on January 1, 2009, at a cost of Pt'2O0'000' It was in expected to hive a usetul ecnomic life of 1O iears. NAIA uss the straight-line methd
NAIA Company

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depreciating its machinery and equipment and reports on a calendar year basis-

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on Deernber 31, 2010, the machine
pL,sog,oS3. NAIA applis the reviluation riridel in valuing ttr'is ciass of ircperV, plant, and equipment a*er ib initial recognition'
Requirements; 1. l-low much is the deprsiation xpeflse in 2011?
2, How much is the balane of the revaluation surpl$s accou$t on Decemer 31. 2011 assurn;ngthat the campany uses the'Pieerneel basis'of realizing the revaluaticn was appErised as having a gross replacement

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surplus?

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3. What is the carrying value of the machine on December 31, zAtL? 4. Assuming that the fair rnarket value of the equipment is P1.5t'{ on December 31' 2010' what i* ** olying value of the revaluation surplus on Dmemkr 31, 2o11 under Piecemeal basis of realizing the revaluation surplus?

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ponlon Company purchased a manufacturing plant building on January 1999, for pS.ZM. The building has been depreciated using the straight*tine methad with 3O year usefu! lifie and a lAo/a residual value.
Bonbon's manufacturin-g operations has experienced significant downturn for the past two years because of loss of significant portion of t}re market because the competitor has introduced a

msre superi*r product that the cnrnpanyk.

On December 31, 2008, Bonbon estimates that the building has a remaining useful life of 15 years, and that the net cash inflow from the use of the buitding witl be p20S,000 per year. The fair value less cost to' sell of the asset was set at p1"S60,000 The prevailing disount rate at that time was
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Requirements: 1. What is the carrying value of the asset on Deernber 31, 2008?

2. l{hat is the value in use of the asset on December 31, 2OOg? 3. What is the recoverable value on December 31, 2008? 4. What is the impairment loss to be recognized in 2008? 5.
What is the depreciation exense related to the asset in ZO0g?
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APO5.PROBLEI{
Legaspi corp' is assessing ane of its operating departrnents 200&' The operatitg jteearlment camfrise oisrrlraig;& for impairment as of Deember 31. J - -' of assee with aggregare carrying amount of p7,380,000 as of the testing date.

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rndividual cashflows retated to each asset comprising the department cannot be asertained thus you suggested that thg company treat the op"iating-depul*"nt.us a single cash generating for the putpose of applying i4p'ro,- impairment or isseii. rl generating unit as defined unit by the said standards is ttre smallest ioentifiaule .A 13 that generates cash inffows that oroup *;;;* are largely independent of the cash inflows *om oitrer urr"tu cr group of assets. The followi*g presents the estimated cash flows from the continued operations of the department:
Year 2009 2010 2011 2012
Revenues Expense. excluding Degreciation P1,680,000 2,520,00o 3,300,000 900,00o

P4,500.00o 4,800,000 3,900,000 1,200,000

AUDTTING PROBLE}IS

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determined to The fair value of the group of machineries net of estimated'disposition costs was pre-tax discount rate appropriate for this analysis is 5olo. n"-pS,Ozg,O0O. The !.euailing
1. What is

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2, l{ow much is the recoverable amount of the group af assets? 3. How much is the imPairment loss?
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-factary uitJ. companv deem{

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which lvas the to irneqirment test a building tot !19 companv's product' the of rhe J;fi;-*;ii.,".tt*.iu*"no iJpo"in* impairment loss' Data
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rte corfiD'rlYf cornpany:s

p24,000,000

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of the depreciation at the besinnins ^

veat

' 'r' --r^ gsti#itlO cost ta make the sale

Prie

6'000'000 t+,ooo,ooo 500'000

14,0OO,CIO0

vatue in use at the beginning of the Rmaining useful litu as Method af dePreciation
asset ",, is no$t found to have u
1.

year
=t'u'3n13'fl[ ror renta's' As a resuk the

12

[ti""#Ue amount "*.;;;;;;9;:,1:".gis::rfg:o#"T,';ifff'Jffi,3tt:ing

l

of Ptr5'000'000'

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Howmuch|ossonimpairmerrtisrecognizedin2o0S? 2009? expense remgnized in z. How rnuch is the depreciation

3. Howmuchgainonrecoveryisrecognizedin2ol0incomeStatement?..1..' under the cost model? expense recognized in 20Ll much is the depreciation 4. How

Howmucl1isthedepreciationexpenserecognizedin20llundertherevaluationmode|?

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^POS-PROBLEITI

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for P5,000"o0c' The same had an RAF4ON CORP. purchased a machinery on January 1, 2008 of P4,5O0'00O' On January On January 1, 2010, the asset-is api#se.O as having a ry^u1!1alue

1. l,loer much 2.

revaluation in is credited to the revaluation surplus as a result of the

2o10?

-'
::

What is the correct depreciation to be recognized in

2010?

.
.

l--

3.

on January 1' 2013? How much is the loss on impairrnent should be recqnized What is the deprciatioft expense in 2O14?

ae

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AUDITING PROBLETIIS

PPE

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AUDIT OF INTANGIBLES AND OTHER ASSETS

APO6-PROBLEM 1:
l-

1'

In auditing intangible assets, an auditor most tikely would review or recomputed amoftization and determine whether the amortization period is reasonable in support of rnanagement,s financial statemelt assertion of :

Qrl
:

rl

b, c. d.

Vatuation Existence Completeness Rights and obtigation

*!

2"

objective of validating the management,s assertioriof: A Valuation

Exarnining documentation of the purchase of intangible assets is consistent with the auditor,s

tbi E. d.

Existence Completeness Rights and obtigation

3'

When auditing prepaid insurance, an auditor discovens that the original insurance poliiy on plant equipment is not available for inspection, The poliry's absence most likely indicates the possibility of a(n) a. Insurance premium due but not recorded L u. Deficiency in the coinsurance provision Lien on the plant equipment n Understatement of insurance expense.

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APO6-PROBLEM 2; newly established entify: The following costs are generally incurred by a

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i

1. Investment in a subsldiary company product to , "-, Timberland activity required to advance the design of a Cost of
",rginee.ing rnanufacture stage

P1,500,000 2,oo0,ooo
12O,o0o

iJli" ti"J"v*eitt
iioii.

(6 months rent paid in.advance)

iniuireO in the tormation of the corporation business Operating losses incurred in the start-up of.the of operations Training Zosts incurred in start-up Purchase of a franchise Goodwill internallY generated d"Ji"i i"tting i; siarcn for product-alternatives Goodwill acquired in the purchase of a business ;;;i;i develoPins a Patent a patent. ' Leqal costs incurred in securing to protect the patent ' '|'" ;;'J;;;.cessfut legal suit Cost of purchasing I p"t:ll from an inventor ., Cost of lJnceptua'i foimulation of possible product alternatives Cost of Purchasing a coPYright Reseafch and development costs long-term receivables Cost of develoPing a trademart< Cost of purchaslng a trademark __L:_- !L{* cannot operate without machine that ^_^^^} ^r Computer software fo. a .o'rJpt ter-controlled that sPecific software ' oP"taiing system of a comPuter
as intangible assets? How much from the above items can be recognized
lt

60,000 70o,0oo 230r000 9o,o0o 560,ooo 80,000 1,200,000 300,000 65,000 540f000 140,000 70,000 230,000 500,000 160,000 900,000 340.000 310,000 61,000 290,000 130.000 10,000

22

tll

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Thefo|lowingisasummaryoftransactionsinvolv|ngpatents:*n"obvtne'colFul'..

in deve|opinn"i'iii"". Coro, spent a.total of P918,000 During 2001 and 2002, Cloud }ine

processtnatilalilg;I;git1'5{}^ib"J'inpiirr,2003;additiona|legali *"re incurred' luiaining tntp"'tt-I^ipibo'rjoo -:r..,^,

'"

s;fftfii:[:i,jJ5$:38'.'.St*T:l;3"',+#igf5til,''?li;,?$:;;t3H*:n1"j"'I-y"

c. ;;ffi;::fi;;""rchanddeveropmentactivitiescostpl,020,000' frorn these activities' pJtJntt

aJoiti6nat

No

tr |
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d.

PATENT by the company against a competitorregarding patent infringement suit brought A p-'lu"tuiui at a cost of P42'600' DEF was

'"tulted

t'#'J;il

e.onJu|y1,2005,PATENTGHIwaspurchasedforP345,6o0'Thispatentisestimatedtobefl

r ffi|ji'a",'*i::';11"ilffi'J:',?$'^t;li,'#;::i3","JlBsill;J?:::sx"JL T-l
Requirements:

l,WhatisthetotatcarryingvalueofCloudNinepatentsonDecember3t'2AA7?|:l 2.whatisthetotalamortizationexpensetoberepqftedoncloudNine's2007income'+l
statement?

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The following costs are generally incurred by a newly established entity:

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Investment in a subsidiary comPany Timberland Cost of engineering activity required to advance the design of a product to manufacture stage Lease prepayments (6 months rent paid in advance) Cost of equipment obtained under finance lease Internally generated publishing titte ! Costs incuired in the formation of the corporation Operating losses incurred in the start-up of the business Training costs incurred in start-up of operations
Goodwill internally generated Cost of testing in search for product alternatives Goodwill acquired in the purchase of a business Cost of develoPing a Patent 'il - i Legal costs incurred in securing a patent i Co-sts of successful legal suit to protect the patent 1'': 1 ' purchasing a patent from an inventor Cost of cost of conceptual formulation of possible product alternatives Cost of purchasing a coPYright . Research and development costs '' Long-term receivables Cost of develoPing a trademark cost of purchasing a ffademark Computer software for a computer-controlled machine that cannot operate without that specific software ' ' Operating system of a comPulter
I

P1,500,000 2,000,000 120,000 60,000 700,000 230,000 90,000 560,000 80,000 1,200,000 30o,ooo 65,000 640,000 140,000 70,000 230,000 500,000 160,ooo 900,000 340.000 310,000 61,000 290,000 130,000 10,000

'

Purchase of a

franchise

How much frorn the above items can be recognized as intangible assets?
i

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q a. Durins 2001 and 2002, croud.Iff ffirffl'r?,ltiSlfl3f..,3#ff5'""?'Xt"in!."t*,,n r'

lnj;:*'a:x.3;f"'1i"3,5[tTH ffJ"i':J
DEF) !r'-:: Another patent (PATENT

:Pr''

the Corp' afid was purchased bv developedbv-!'y:Y S*en the patent o1 the .i'ilin]nirljariir" of pi)s,ooo o1'9ec'11oJr i;;'dril:'rnu company ro. out"'"liiz L/2 Years'

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a

c.During2003,20o4and2o'o:,'re?earchanddevelopmentactivities.costPl,o20,000,No' Jt"o rtb* these activiti es'

Ja iti-ona t

pJt!i"-t"t

d.APatentinfringementsuitbroughtbythecompanyagainstacompetitor.regardingPATENT pt'it-"*t"o tt u tott of P42'600'

DEF was

""::";;il

e.onJu|yt,2006,PATENTGHIwaspurchasedforP345,60o.Thispatentisestirnatedtobe

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APO6-PROBLEI.I 4: Gary Inc., a nianufacturer of rubbei materials useful for the manufacture,of tires, expended pt,tiZO,ggq in research and developmpnt costs which resulted to a new formula which extends the useful life'of its rubber products btr 50o/o. The patent related to the "know how" was approved and processing gii"i"J bitnJ government in eariy October of 2004. The company incuried legal costs offormula for pigo,goo. The company estimates that it would be able to benefit from the fne pateni at

-+
26

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i0yuuo,after:whitncompetitorsareestimatedtohavecomeupwiththesameformula.
On tune 1, 2006, Gary Inc. spent P50,600 to successfully defend a patent infringgment. On January

the company acquired a related patent at P200,000 which extended the life of the : ' . I , original patent to 15 years from October 1, 2004.

I,

ZOOT

At the beginning of 2008, the company determined that with the comPetitor la"unching a more superior product, the patent l.nigl"ri have been impaired. The comirany estimates that the remaining net cash flows from the patent s-njlt o" p150,000^for the next 10 ye-ars. The appropriate market rate of interest was 89o at this time.
l

1.

What is the amortization expdnse in each year: a. 2044 b. 2005

I'

i.,

c. d. e.

2AA6

2007 2008

l" +
l"_.,_

2. 3.

Whatistherecoverableva|ueofthepatehtatfhebeginningof2oo8?
what is the impairment loss to be recognized in tnelzoog income statements?
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7

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pl

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28
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32

33

PAGI -_

APO6-PROBLE}T ate colgi company's intangible assetsi ,. r to ctoerate as a ftanchirg gf llt".:,^

5:

pertains to The foilowing information

---F-

a
- -Tf ol
it
+

?*i"il?"#
of each

k.,1',','#i#Hftil'.3.Tf,:',r",*n:ruli"fli'""::'ti:il'l1U:illLi *'iliig"Jfu ,l: t::?:*??l?J;"',lJ,iffi;til pavment is not retundabre provides tr aereement zdos' the agreement
,""''lliing

'(4q\

and
a

H::'fi"S?t|"ffi
revenue of P3'
t0o/o
'

tt:-tri:l'.u

servces

are.='iiii{,!'Fj"J'..:F",H,iJ:,'ffi$rtiii,:"tf:$.iJl;{.itt1t},",;
I

'-annuatty' ne PrEYs'r"rY franchise is at P240'000

;*$n**,ru*t:i1ili""',:,',Tliil;;;i

*", ",

b:*,,fr'$'*:nl'?{!k:*?.:fiiiit#,Ytr+.T:iiil,l*:rll{lH"'ft
with its-regts other costs associate

lj?:#*.[{i^:

r. ", . * #: ti+#sri *[fikq**ry*.{*i r,+*,ffi'f*TfiT,i.f[:*t

ExPenditures

lulv 1' 2008'

17,

Pt20,ooo fot

--: +:' -,10 ii '"ii --11

20 tl
li

18

at of the franchise is the carrying value 'as rur 4v t--'-' Reouirements:the franchise term was for 20 years, what r Assuming tnar

1oo/o'
or

in"

zoogz

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22

"nO

f the franchise at

).Assumingthatthefranchisehasnodefiniteterm,whatisthecarryingvalueo
irre enO of 2008?

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3. 4.

s.

at the end of 2008? I ' "i' value of the patent the carrying What is the carryrng 10 yeafs, what is acquisition was at of tradem||{illu,,.o' date Assuming that the ' end of 2008? the ,g value of the value of the tiilttllx "t life' what is the carryin indeln:te an lseful Assumins. try*!"-g1?$lbf"o ': eno or

?:T#;d;[inu

2oo8? :

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APO6-PROBLEI.I 5:

Karen Corporation is negotiation with Julius Corp.

assurne all liabilities.

to

purchase afl of Julius Corp.'s net assets and

-l

3
I

Ei

-1

You have been asked to help develop a tentative offer price which will include the least amount of goodwill involved (since Karen shall be paying the net assets at FMV plus additional amount which shall correspond to the goodwill.)
Karen made available to you the following information about the books of Julius Corp. Current Assets Non-current assetsx Current and Noncurrent Liabilities

";
3
1C

BV 550,000 2,650,000 900,000

1,900,000

FMV

700,000 *x2,900,000 900,000

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tl
1

Total accumulated Net income from 2003-2OO7***

;'
15
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*Book value includes a P200,000 goodwitl and P1,500,000 depreciable assets with an average remaining useful life of 5 years.' The balance was attributed to the land whose fair value approximated its book value.
xxExcludes the goodwill. xx*Included in the accumulated earnings above is an annual presidents' bonus averaging to p50,000 and an gain on sale of equipment in 2006 at P200,000 Normal earnings for similar companies within the industry is

tt!8

10o/o.

ir:'
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You were given the following options by which goodwill shall be computed: '::::, a) Purchase of goodwill in the form of 5 years excess earnings. b) Capitalize excess earnings at 25olo

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:

'

c) d)

Capitalize average earningsrat 10o/o Present value method assuming current effective rate is at

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10o/o

,.'
.^2A

Requirentents: Compute for the goodwill under each option above:

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2_5

0otion

c
300,000 200,000 375,000 227,444
E

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)7

l 2el
a,] Ii

1.{a) 2.(b) 3. (c) 4. (d)

i

200,000 120,000 300,000 151,600

250,000 160,000 350,000 189,500

D 35C1,000

220,000 400,000 265.400

t)

:^

Compute for the purchase/acquisition price under each option above:

30

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Ootion
s, (a) 6. (b)

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,r.,
32

2,g0o,oo0 2.620,000
219-afi,000

i+

7.(c) B.(d)

2,+31,600

2,850,000 2,760,000 2,950,000 2,6gg,5oo

2,goo,o00 2,800,000
2,975,OAA

z.8so,ooo 2,g2o,ooo 3,000,000

2,765,4OO

2,727,400

-;a JJ

--+

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3s -+ I
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What is the best option on the point of view of the acquiring company? c. Option c. a, Option a, d.' Option d. b, Option b.
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22

APO6-PROBLEM 7:
24

acquisition price of PSM on January L, 2OLA. XYZ had fbur cash generating units with:the following fair values of their attributable identifiable intangibles: 1r500,000 700,000 cGU 1,000,000 The following information were available about each cash generating units at the end'of the year:
CGU GHI
CGU ABC CGU DEF

ABC Corporation acquired the net assets of KYZ Corporation in a business combination for a total

IJ ZE

P800,000
27
a6

2E

JKt^

29 30

ABC Cash

DEF

P50,000

P100,000

GHI P70,000

JKL

31

Receivable

5Z JJ

Inventories Equipment
Goodwill

Payables

i .''
..

100,000 250,000 500,000

?

240,000 490,000 900,000

?

100,o00 120,000 400,000

?

P150,000 200,000 200,000 700,000

?

31

(70,000)

(50,000) r5
10o/o.

(120,000) 76,49A
10

(50,000)

Future Net Cash flows 749,726 Average nemaining life 10

?,89,242

162,745

t2

The prevailing market rate of interest on this date was

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Requirements: -

Xon

*rin

it tn" total goodwill from the, initial acquisition of XYZ

Corp-?

'(','

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How much in total goodwillshoutd be presented in ABC's 2010 statementof financial position? How much is the total lmpalrment loss on gooclwill for 2O1O?

What is the carrying value of CGU GHI's Equipment as of December 31, 2OIO?
v_

5.Whatisthecarryin9valueofCGUJKL,sEquipmentasofDecember31,

13

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APO6.PROBLE}I 8:
On January 1, 2008 EDD Corp. leased an old building which intends to improve and use for administrative purposes. The company pays for the lease rights of P30O,000 to obtain the lease. Annual rental for the 10 year lease period is P480,000. 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 costing Pl,200,000 were made and completed on June 30. The improvement was estimated to be useful for 15 years.

1, Z. 3.

What is the total expense (excluding depreciation) in relation to the lease?

rrt"". order? What is the total depreciationrexpense, assuming straioht line method is in c ".*u-,na straight

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5th

What is the depreciation expense on the sixth year assuming that at the beginning of the year, the lessor granted the company a renewal option for another 10 years and that it is probable that EDD Corn. wltl.be taking advantage of the said renewal option?

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to develop a more efficient rnethod of discs. Management expects to be able to lease its production facilities, when recording compact completily refined, to the many record-producing companies in the area'
MUSAR CORP. has initiated extensive research program

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you have been asked to assist in the preparation of financial statements for the year ended December gi, zooe . Costs retated to the proje& have been accumulated in a master account identified simply asiRecording" since the beginning of the project in early 2006, as follows:

P185,000 Equipment purchased for use in many research projects over a five78,000 17,500 24,800 year period Sataribs of staff working on research project. Computer program setiices purchased through a contract with another enterprise Legal fees relited to the patent acqulred on the new productlon prJcess, which is expected to be useful in producing revenues for

Debits

ten years.

P88,000 Down-payments

received from other companies that have to use the new production process in the future contracted

Credits

Management has determined that general and administrative expense.of P175,500.w"i" ll.YT"-9. . durin! 2006. Based on the time spent on the various enterprise functions, you estimate that ZSalo of this amount relates to research project identified as "Recording"' year's Discussions with corporate officials reveal that all lor,-lived assets are depreciated with a full in the year of acquisition and no* in the year of disposal. You determine that the amoftization taken process began to generate revenue in 2006 and, therefore, the amortizatiqn of the patent should begin this year.

1.

How much should be reported as research and development cost in 2006?

How rnuch should be repofted as amortization expense from any intangible asset in 2006?

What is the carrying value of any intangible asset in 2006?

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APO6.PROBLE}I 10:
BITS AND BYTES is engaged in developing computer software for small business at home computer market. Most of the computer programmers are involved in developmental work designed to produce software that wif l perform fairly specific tasks in a user friendly manner. Extensive testing of the working model is performed before it is released to production for preparation of masters and further testing. As a result of careful preparation, Bits and Bytes has produced several products that have been very successful in,the market place. The following costs were incurred during 2006r

Salaries and wages of programmers doing research Expenses related to projects prior to establishment of technological feasibility Expenses related to projects after technological feasibility has been established but before software is available for production ' Amoftization of capitalized software development cost from '. current and prior years Costs to produce and prepare software for sale

P940,000

313,600 198/000 107,000

225,2O0

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Additional data for 2005: Sales of products for the year Beginning inventory ' Portion of goods available for sale sold during year

P2,060,000 568,000
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Based on the above and the result of your audit, determine the following: 1. Amount to be capitalized as software devetopment cost subject to amortization

2. 3.

Cost of ending inventory

Total arnount related to the development of computer sofrware that should be expense when incurred:

PAG 5

APO6.PROBLEM 11:

Harry Merchants Corporation presented to the following analysis on its prepayments and deferred charges accounts. Classified as current assets in the Company's balance sheet:
Har vey

*ler c h an ts orpora t i o n
Prepaymenfs

September 30,2008 lJnexpiled Rent

Unexpired insurance
Prepo id A d verl i s ing

P350,WO

ExF nses

Office Supplies
I

r25,0@ 75,mO It5,O@

135,@O

i Adyances to Officers

Idle Office Equrpnent, NRV

Bond Redenpfion Fund TOTAL

25,000

uza-w

545.0O0

a)

On September 1, 2008, the company leased an office/warehouse building located in Naguilian, Pangasinan at a monthly rental amount of P20,000 for 1year. On that date, the Co.'s

unexpired rent;
Rent security Deposit: P50,000 1 Year Rent Lease Bonus

240,000
6Q.000

3s0.0q0

b)

Unexpired insurance refen to the following insurance policies: Type: Period Covered
Fire Insurance 111108-lJVAg P50,000

Prernium

Propedy

Insurance 6/3AlA8-6/30/09
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12s.000
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ru.000

cornpany gaic_31! rgcor{ed:ly:t:ls .l oJ":"" ,, ,r," Bombo Radyo Phitippines for 5 months'
everyelay over

cost amounring to p7s,000 to be aired

d)P25,o0worthofofficesupp|iesrernainedintheCo.asofSep.200s
REQUIREMENTS:

1.
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as expense' How much from the prepayments should be reported Balance

2.

ofthe prepayment account'

be repofted in the How should the other items, not classified as prepayment should
balance sheet?

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