UNIT 5

AUDIT OF BIOLOGICAL ASSETS

AND AGRICULTURAL PRODUCE
Estimated Time: 3.0 HOURS

Discussion questions 5-1

1. Describe the following agriculture-related terms. You should provide pictures to the
class.
a. Biological assets
b. Consumable biological assets
c. Bearer biological assets
d. Mature biological assets
e. Agricultural produce
f. Agricultural activity
g. Biological transformation
h. Harvest
i. Bearer Plant
2. What audit procedures address the existence and rights and obligations assertions of
biological assets?
3. What audit procedures address the valuation assertion of biological assets?
4. Prepare an audit work program for biological assets.
Discussion questions 5-2
1. Do some research on recent changes in IAS 41 or PAS 41. Document findings and
present to class.
2. Does the revised PAS 41 allow recognition at cost method? Under what
circumstances? Are there special disclosures required?
3. Select a company engaged in Agricultural Activity, provide pictures or screenshots,
and enumerate the biological assets and agricultural produce held by this company
based on the latest available financial statements. How does this company comply
with the recognition and measurement principles of PAS 41?
Problem 5-1 Fair Value Less Cost to Sell
Given the following information, compute for (1) fair value, (2) cost to sell, and (3) fair
value less cost to sell:
Estimated selling price
Commissions to brokers
Transport costs
Levies by commodity exchange
Transfer taxes and duties
Advertising costs

P20,000
1,000
700
300
500
200

Problem 5-2 Contract Prices

Information on a biological asset of ABC Co. is shown below:
Historical cost
Quoted price in Active Market 1
Quoted price in Active Market 2
Costs to sell in either active market
Contract price

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P10,000
28,000
30,000
5,000
32,000

Third Term, AY 2015-2016

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Required: ABC is contemplating on transacting in Active Market 1. At what amount

would the biological asset be recognized in the year-end financial statements?

Problem 5-3 Fair Value Less Cost to Sell/Gain from Price and Physical Change
On January 1, 2016, the biological assets of ABC Co. consists of ten 2 year old animals
with fair value less cost to sell of P10,000 each for a total of P100,000.
Transactions during the year include the following:
One animal aged 2.5 years was purchased on July 1, 2016 for P10,800.
One animal was born on July 1, 2016.
No animals were sold or disposed of during the period.
Per unit fair values less costs to sell are as follows:
New born animal on July 1
2 year old animal on July1
2.5 year old animal on July 1
3 year old animal on July1
New born animal on December 31
0.5 year old animal on December 31
2 year old animal on December 31
2.5 year old animal on December 31
3 year old animal on December 31

P7,000
10,300
10,800
13,000
7,200
8,000
10,500
11,100
12,000

Case 1:
1. Prepare the necessary journal entries to record these transactions.
2. What is the fair value of the biological assets on December 31, 2016?
3. What is the gain from change in fair value of biological assets to be recognized in
2016?
4. What is the gain from change in fair value due to price change in 2016?
5. What is the gain from change in fair value due to physical change in 2016?
6. What is the amount of realized loss to be reported in profit or loss in 2016?
Case 2:
Assume that all of the given above are the same except that two animals with age of 2
years were sold for P15,000 on August 1, 2016 and another 2 year old died in
September 1, 2016.
1. Prepare the necessary journal entries to record these transactions.
2. What is the fair value of the biological assets on December 31, 2016?
3. What is the gain from change in fair value of biological assets to be recognized in
2013?
4. What is the gain from change in fair value due to price change?
5. What is the gain from change in fair value due to physical change?
6. What is the amount of realized loss to be reported in profit or loss in 2016?

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Problem 5-4 Government Grant

Case 1: Unconditional Government Grant
On January 1, 2016, ABC Co. was granted by a local government a grant of P100,000 to
aid ABC in financing the domestication of ostriches. The ostriches are managed to
produce eggs that are sold to the community. ABC measures its biological assets at fair
value less cost to sell. No conditions are attached to the grant.

Required: How much is the income from government grant to be recognized in 2016?
Case 2: Conditional Government Grant
On December 1, 2016, ABC Co. was granted by a local government a grant of P100,000
to aid ABC in planting American Evergreeen trees. This certain tree has small yellowish
flowers by fleshy pods with many seeds that bears cacao. Cacao beans are dried, partly
fermented, powdered ground and roasted in order to produce a raw material for the
production of chocolates.
The grant is receivable when ABC has acquired a suitable site to plant trees. As of
December 31, 2016, ABC did not yet comply with the condition.

Required: How much is the income from government grant to be recognized in 2016?
Case 3: Conditional Government Grant
In 2016, ABC Co. granted by a local government a 3-hectare land to plant camote. The
land has a fair value of P500,000. The grant requires ABC to farm only within the city
limits for five years. If any of the conditions is breached, ABC is required to return the
entire grant.

Required:
1. How much is the income from government grant to be recognized in 2016?
2. How much income from government grant is to be recognized in 2021 after the 5year restriction has lapsed.
Case 4: Government Grant Retained Due to Passage of Time
On January 1, 2016, ABC Co. was granted by a local government a P500,000 grant to
aid ABC Co. in planting sayote. The grant requires ABC to farm only within the city limits
for five years. If any of the conditions is breached, ABC must return the grant taking into
consideration the portion retained based on passage of time.

Required:
1. Assuming there is no breach of condition, how much income from government grant
is recognized in 2016?
2. Assuming there is no breach of condition, how much income from government grant
is recognized in 2017?

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Problem 5-5
Cebu Farms Company, an audit client, has a Mango plantation. Harvested mangoes
may be sold as is or may be processed further before these are sold to various
interested buyers. The following were the financial information from the client-prepared
schedule related to the mango plantation:
As of December 31, 2016:
Biological assets Mango Tree
Biological assets Harvested Mangoes
Inventories Dried Mangoes

P2,500,000
1,000,000
1,200,000

The following additional information were gathered by the auditor in the course of the
audit:
a. The biological assets mango tree had fair value less costs to sell of P2,000,000 as
of December 31, 2016. The amount provided in the client-prepared schedule was
based on the fair value less costs to sell as of November 30, 2016 and capitalized
fertilizers and other costs amounting to P250,000.The estimated useful life of the
mango tree to bear fruits is for a period of 20 years.
b. The biological assets harvested mangoes in the client-prepared schedule included
P300,000 mangoes which were already processed. The processed mangoes
underwent processing last December 15, 2016. The value of these mangoes
reflected the fair value less costs to sell of P250,000 as of December 1, 2016.
Processing costs amounted to P50,000. These mangoes had fair value less costs to
sell of P275,000 as of December 15, 2016 (just right before these had undergone
processing). As of December 31, 2016, these processed mangoes had net realizable
value of P320,000.
c. The unprocessed mangoes had fair value less costs to sell of P760,000 as of
December 31, 2016.
d. The inventories of P1,200,000 as of December 31, 2016 were properly valued at their
net realizable values.

Required:
1. Proposed adjusting journal entries.
2. Amount of inventory to be recognized from the December 15 processing on that date.
3. Adjusted balance of inventory as of December 31, 2016.
4. Amount to be reported as biological assets as of December 31, 2016.

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