482 Audit of Prepayments and Intangible Assets AUDIT PROGRAM FOR PREPAYMENTS ‘Audit Objectives: To dotnet 11 Charges to prcpeymente sepsesent amounes that ure =e oaably expected to be senlied toosgh fiere opens 2. Paepaymenes are propely recorded 3. The accounts axe properly casted and deseabed, and aGexutediseloetres have beets made far 6 AUDIT OF PREPAYMENTS ANDINTANGIRLE ASSETS 483 ‘Audit Procedures: ‘Obin or pespane dese anal ofthe accounts ‘Vent the accurseyof the analysis by performing tests of reathematcal computsions tothe extent deemed necee 4. Determine the rarure of the accounts included in the aoabes Detesmine the easratenes of the emote 5. Fsamine neppotting dosimentatioa. AUDIT PROGRAM FOR INTANGIBLE ASSETS Audit Objectives: To detains that ‘The asex represent amounts that ate rcxotably ex pected to he sealed dhrough Fence opestions of othet- “wise, and tha they ate propery recorded. ‘The assets are propett desceibed and elssfed, and ade. ‘quate discloses lave beet made inthe Snencial state484 (CPAEXAMINATION REVIEWER: AUDITING PROBLENS ‘Audit Procedures: 1. Oban an analyse of tangible ase. 2 Verify the accuncy of the analysis by perfocming tests of mathematcal computations to the extent deemed necer- sy. 3. nan intl ad, examine tansictions of poe peiod/s to determine if costs had been capitalized in scenecance with PAS 35, Intl Asser 4. In a securing audit, wace the beginning blances to lst yeas working pape 5. Vouch current year transactions to supporting docamen- 6. Determine if che compaay’s amonizaton policies age in accondanee with PAS 38. Recsleulite the amontztion eee. 7. Deteemine if dhere is proper allocation ofthe amortina- ton ecoeded forthe peri, 8 Decermine if there is impairment of value of insngible 9. Deceemine propriety of financial statement presetstion ad adequacy of dslonutes ‘otro 6 AUTOR PREPAYMENTS ANDINTANGILE ASSETS 485 PROBLEM 6-1 Keaei “and Amortization of Intangible Asset The INTANGIBLES COMPANY engaged in the folowing transactions at the begining of 20 1 Purchased & patent for P700,00 thet had orighnaty been fled in Jarory 2008, ‘The sqistion was made to grtert orate patent ‘that the compan had fled for in Sanary 2010 and subsequently e- oned Purchases the chs 1. novel bya bstseling novelst n exchange {or 100,007 erary shares (P10 pa) sling for 0 por share. The ook sels 2 milion copies in 2014 and is expected w sll a total of 500,000 copies i future yess Purchase the franchise to operat a ferry service fem the govern- ‘ment for P100,0. A bricge bas baen clannes > replace the fey, Sng expects that wll be competed fe yours. The com any hopes that the fey wil continue as a tmurksatrcton, but rots are expected to be only 20% cf those cared before the ‘ges cpenes. aid 280,009 t attorneys for the servis to successful defend the patent acqured in transaction I. Poi a tax! operetor 303,000 to have the comgeny name prom erty splay on Ms as or wo yeas. Basen the preceding formation, determine the carving vale of the foloaing ate end of 2014: ‘x Ps30,000 . po10,000 8. P5550 1. Pes0.000|485, (CPA EXAMINATION REVIEWER: AUDITING PROBLEMS, ftw 6 aubrrorenerayatests NO ReTANORLE ASSES 487 2. Copyright PROBLEM 6-2 En o20 & s3e0 00 a6 5. om so [eon wi Knorr Tatas Raa 2. bc he ‘la ner sane eto he ut gba 0 sangn Be : a Anon & pana ‘we he gos ted ha stuton 1 : 6.1 HOVEIES eps te log patrco Onmnr 31, SR ERRoNie 2012 statement of france pation, a 1. conotpatet 00000 oe ae Amoraztontos2014 @700000/4yeur) "aay rooen POMGES,nn ‘chae tar Cann le aconer 32a auc foes aphes So aa es ‘we: meré fame Selon IEE ‘eset phn me pa i eu Tie long eres sce ithe yr ended aceder 1, ovis emi i of yet aS Zn Saeed 1 Rem md decree ns f 770 ee neared ag 2 com ofcomyge eam te er, Toe css ered po eng oe Sevortatn 214 roe oi {6.00000 tot min) «40900 Eangrag vale December 244 Eo 2: Fle mas purus yr S01 a ema — iiecaveyeae > Apes ingemen of er he ty esa te 3. Cost of franchise Paneaso- cemiber 31, 2014. This is due to @ significant Yedurtion in the de- moran 2014 100,00/5 “un tas ta pcs rcs Pt BT eas Carne eco, 2 zanna ‘Stet eines ln eth fs Far es e December 31, 2015 (P80,000 Soomescae "eae Seema Soe ‘The eppropiatsckccun rate o be usd for these cash los Is 0%,488 (CEA Ex ATION REVIEWER: AUDITING PROBLEMS 1 What the total caving vale of Yong patents on December 3, Ped ‘5. 2,303,500 < ¥2,106 000 B PL300;620 © Pxs73500 2. What amount ofimpainent loss should be reaotad by Yolng for the year ences December 31,2018? A pis7aso C Fs97,500 8. 9202500 B, piste20 3. What the toa caring vlue of Yong’ patents on December 31, Doe? A P1.365,080| & F2s8500 8 aaa 1. P22033500 Situation 2 In your aud ef the books of IEAARD CORP. forthe year ended De- camber 31, 20:4, you fous the flowing Rerrs in connection wR the company’s patents account 9) Diehard has spent 360,000 during the year ended December 33, 2013, for research anc development coss, This amaunt was debi ‘ect ks patents account, The company’s cost records discoses that Fed spent atta of P24 500 forthe research onc development of Is ates, of whic Po 500 Spent In 2013 fad Been debited 0 Re search and Doveopment Expense 1b) The patents were sued on July 1, 2012. In connection with the Issuance of the patents the company incurred legal expences of 240, which were Gebted to Lecal ard Professional Fees Ex- pense. 2) On Jeuney 5, 2036, iehars ple a retainer of P4000 for egal ser ees fv connection wth patent infringement suit brought agaist It Detered Coss was caged fo the amount oui AUDITOPPRERAPMENTS ANDINTANGIBLE ASSETS 489. 1) reply tm your ingury about the company’ batlies as of Dacem- ber 31,207, you reosved alte from tm compar’ legal counsel ated Jonsary 20,2015, which rected the a settnent of te po- tent inogertent su had been arranged. The pie wi op the suit and release the compary fm al future tabi in exchange for FEO}. Addonal lawyers fees wer incurred amounting to 3,760. 4 The comectng journal ene (encuting arertzton) on December Si, 2018 woud inde nek eb (red) Lege and Professional Patents Fass Ecense A. peate,te0) 106,793 & Gnee0) ° © Gri) 63700 ©. 53.380) +5000 Situation 3 ‘sth recemly appointed auditor fo: SUPERPOMER COMPANY, you have ten asked to examine selected scnurts. Your aut cent organized 1 2013, has setup a single acount forall ntang He assets. The follow Ing auerary shows the debt enties that have been recoded during 24 Jor.2 Purchased potent (3-year) 70,000 ed's Goodil 720,000, Sine 30 Payment of 12 mnths" rent on prosrty sec by Supeporer 182,000 uly Purchased ancise win 10 year if; fexprtion dete uy 1, 2024 00,000 fog. 2 Payment for capa (yea) 312,000 Seat Research and ceveopment cons ret ‘te patent (cures pris to actlesng ‘conome wei) = 2z0000 Sm490 (CPA EXAMINATION REVIEWER, AUDITING PROBLEMS 5. What is the total canyig value of Superpower’ tangible asets as cf Decenber 31, 20142 A P2s28917| B pzez2.250 c p2927;708 1B. P2713250 SOLUTION 6-2 1. Patent. Initial cost 1.224.000 ‘Amortization: 2010 °1224.000/17 10/12) 60,000 2011-2013 P1224000%3/17| 246.000 (276.000) 948,000 Patent 3 Initial cost 450,000 Amortization: 2011 (P4S0000/10x6/12) _F22,S00 2012-2013(P450000%2/10) 80.000 (412500) 337,500, Patent c Teil cost 32,000 Amortization: 2012 (e4s2000/4%4/12) 36,000 2013 (e432.000..4), 106.000 (148.000) 228.000 ‘otal carrying value of patents, Dec.31, 2013 BLSTSS00 Anse: D 2 Patents Carrying value, Dec. 31,2013 337,500 Less: 2014 amortization (P450.000.1/10) —as.000 (Carrying value, Dee 31,2014 292,500 Present value of future cash Nows (P60000x25770) _154.620 Impairment oss paras Answer & Jr 6 AUDIFOF FREPAYMENTS AND INTANGILEASSETS 491 4. Potent A Carrying value, Dee. 31,2013 948,000 ess: 2014 amortization (1223,000x 1/17) 72.000 P876,000 Patent 154620, Patent € Carrying value, Dec. 31, 2013 288,000 Less: 2014 amortization (P432000x%3) 108.000 180,000 Patent D Initial cost 55,000 less: 2014 amortization (Pe55,000/95 x9/12)_45.000 810.000 “Total carrying value of patents,Dee.31, 2014 PRQ20620. Answer 8 Situation 2 4 Aojusting Journal Enres Decembes 24,2014 9) Retained earnings 360,000, Patents 360,000 b) Patents 2810 Retained earnings 22910 ©) Legaland professonaliees expense 45,000, Deferred costs 45,000 4) Legaland professional fes expense 63,780 “Labi for settlement of patent Infringement suit 60,000 ‘Accrued attorney's fees 3.780 Anse492 (CPABXAMINGATION REVIEIFER: AUDITING PROBLEMS, situation 3 5, Patent 370,000 Less: Amortization (P870.00/8) 108.250 P761,250 Goodwill 72000 Franchise 300.000 Less: Amortization P900.09/10x 6/12) 45.000 855000, Copyright 12.000 Less: Amortization P312,000/5x5/12) 26.000 286000, Total carrying vale, Dec. 3, 2014 beez22s0 posi: PROBLEM 6-3 ‘orn: 6 AUDIT OF PREPATEENTS AND INTANGBLEASSETS 493 Balance of Fary supplies exsese aeaunt, ‘Dee 31,2014 9,000 Pryscal inverter of factory supple, ‘Dec. 31,2014 58,500, 5. On May 3, 2014, 2 two-yeer subscription t the Industry Journal in We amount of PI4AGd wes paid. Subsciatons expense. wos charged forthe ene arnt. Prepare the adjusting jouralentes on December 32, 2014, based on the srunoors eset SOLUTION 6-3 Prepayments ‘The falling stutions are found Inthe records of the KILIMANIARO, INC. In your aut of the company’s fpancal statements for the yest ‘ended December 31,2014 4, December 3, 2014: ‘Advetisng expense 72500 ‘cash 72300 "amen 62015 aden contract 2. Balance of office suplies expense, Dec. 31,2014 45,000 Balance of Unused ofcesuples, Dec. 31, 2014 15000 Inventor of ofice supplies, De. 31,2014 2500 3. dune 2, 2016: Prepaid insurance 000 ‘cosh 54,00 "amert of ane yer swance prem fr iver. [ADJUSTING JOURNAL ENTRIES Deoember 3, 2014 A, Prepaid advertising 72,000 ‘Advertising expense 72,000 2 Unused office supplies 7500 Office supplies expense 7500 (722500 F15,000) 3. Insurance expense 31500 Prepaid Insurance 31500 (F54000307/22) 4. Factory suppliesinventory 58500 Factory supplies expense sas00 5. Prepaid subscriptions 9,500 ‘Subscriptions expense 9.600 (ritstoxt6/24)494 (4 EXAMINATION REVIEWER: AUDITING PROBLEMS PROBLEM 6-4 Cost of Patent KENYA ENTERPRISES developed a new machine that reduces the tne reauired to mix the chemical used n one of Rs lading products, ‘use the process consider vary valuable to te compary, Kena patented the mace. ‘Kenya incurred the olowing expenses in develosing aad patenting the ‘machine: Research and development laboratory expenses 7s0,000 Matrias used in the construction ofthe machine 280,000, ‘Blueprints used to design the machine ‘6000 Lego expenses to obtan patent 350000 ages pad for the employes’ work onthe research, evelopment, and bung of te machine (60% o the time was spat mn acl bung the mace) 900,009 ‘Expense of drawing reared by the Patent Ofice {be subratad vith the patent apoteaten 51000 Fees paid to Patent Off to process aplcton 73009 (One year later, Kenya Enterprises paid P525,000 in legal fees to sucess- fly defend a patent against an iningemient suit by Gaya-aya Compa 1. What isthe total cot of the patent? ‘8 Poss,000 © P564.000 8. eee,c00 . Pr2é.ac0 2. What ste total cost ofthe new machine? A P1362,00 ‘c P760,000 a PO , 575,00 oy. 6 AUF OF PRERAYMETS ANE ITANCIBLE ASSEHS 495 9 Whets the en to recor the lgal espa or the sucessful de- ‘ence o the poten: against te inf ingerren Si A Patents 525,000 Cosh 525,000 5. Legal fees expense 525.000 ‘cosh 525,000 echinery 525.000 cas 525,000 . Amertition expense Paters 325.000, cash 525,000 SOLUTION 6-4 1L_Legal expenses te absain patent 360,000 Essense of drawing required hy Patent Office te be submitted with pateatapplcaton 51,000 Fees paid ta process patent application 75.000 "Total cos of patent aicong Arswecs 8 2, Materials used the constucton ofthe machice 240,000 ‘Blueprints used to design the machine ‘96.000 ‘Wages pad forthe employees" work oo the ‘construction ofthe machine P600000x6Da)._s49,000 ‘Total cos of mackine azeooo Anam © 3 The lagal fees paid for the successful defense of he patent should bbe expensed, notcapltallzed. This expenditure does cat meet the defiation of and the recognition criteria for an intangise asset ‘The entey to record the legal f2es pal Legal fees expense 525.000 Cash 525,000 Arse 8496 (DPA BXAMENATION REVIEWER: AUDITING PROBLEMS PROBLEM 6-5 Taentfying Intangible Awe The folowng amounts are incuded in the gener edger of MARGHERITA PEAK COSPORATION at December 31, 20142 = be oes a ae Ss es ee Fe ce ee rene aa see bee ee poe a re ee PG ea (nthe bass ofthe information above, whats the total emount of a= tangle assts to be renorted by Targherta Peak nfs staterrent of fancal restion at December 31, 2014? 1k P32,000 ©. 510,000 8. P270,200 1. 830,000 SOLUTION 6-5 ‘Trademars 45,000 Patense 225,000 “Total itanglbe assets zzzona0 ose & + Orpazation cox shoul be recognized as expense ia the period its income ‘Discount on bonds payable shouldbe reponed as a sonta aeccunt 1 bonds payable ‘ous 6 AUDITOR PAEPAY MENTS AND INTANGIBLE ASSETS 497 “+ Cost of equipment aoquine for various research and development projects sould be included in the propery, plan. and equipeeen Section. ‘Deposits with advising agency for» promote goodwill the ‘sompany shouldbe reporte as prepaid advertising in the cure a sels sexton. PAS 38 doesnot pccade ecomnzing a peegayment a “avast when payment for he dlivery of enede a series has been nate in advanoe of th delivery of goods or rendering of the Ser PROBLEM 6-6 Patent 2 2 member ofthe aut seam fo the audit of RAS DASHEN COMPANY'S financial statements fr the yeor ended December 3, 2004, you have: buen asked > cxamre seected acaunts, The conbelkr for Ras Dashen mentions that thee nly one accunt (shown Selo) Kost forintangele assets, INTANGIBLE ASSETS a Debit Cred falc Fas 7 Orpanaaion coat Preceo Prz000 Nav 15. Research ans development coe 1.30200 4.352.000 Ail 3 Lepalcasts te obtain patent "150200 2102000 May 1 Payment ct 12 months ren ‘on sorer leases by Ree Deshen a.000 234,000 June 18. Prometonal experses related osartupatbusiess$:4.000 2:788,00 Des 31. Unsmorized tone dsoant enbonds dve Oe: 31,2034 163.000, 2004200 sc 31 Operating eeses‘orirsiyear 482000 308.000498 CPA EXAMINATION REVIEWER: AUDITING PROBLENS 1. The amountof argartation expanses in be report in Ras Dashen’s Income ta:emen forthe yeor ended December 31, 201, i A 2368.00 ‘© 552000 8. pabe.000 5. P249jo00 2. What i the caving wale of the patent at December 31,2034, as- ‘Sing tat ts seul Fe s 10 yeas? A Pis0003 c #135,000 8. PIs, 750 oF 3, The prepaid rent tobe shown on Ras Dashonsstatererk ffs positon at December 31,2015, 5 A Pien200 G Pe0000, B. paas.cco DP SOLUTION 6-6 1. Orgasization costs P 72000 Promotional expenses related to star-ap of business 414.000 ‘Tora aganization expenses Econ psior: B 2. Legal costto obtain parert 10.909 Less: Amortleain, Appl 3~ Dee 31 (r1so000/10%3/:2) 11.250 Balance, Dee 31,2018 Bisezs0 ansver: 8 3. Prepaid rent Dec 31,2014 @r20090 x62) pao on an 2015 -Nays 2s sor © ‘oynrnse 6 AAD OF REPAYMENTS ANDISTARGIALEASSETS 499) PROBLEM 6-7 ie Bonus and Leasehold lmprovements MERU, MC. leases an lt bllng whic nts to knprowe and use for ecminstaive cuposes. The company nays a anus of °100,000 to ‘obtain the lease. fcrual etl fr the 10-year lease ped is PIG, 000 fe etn fre eke rw prs ne ope he ater obtaining the eos, improvements onthe fesse oding are mace Sestng POCO, The Du ts an eines reing wife of years. 4. wat Em en cs (ug deprecan) oft ese fo a F210,c00 . pisa.ooo B £200,000 ©, pizajo00 2, What the amout of axa! ceprecston Graigh ne), any, should Mer, In vecre? Nae 1 Pao000 ©. psn 5 e000 D Po 3. Whats the eat 2 recor the ese bonus fad af the inepton of ‘he leaee? 2». Rent expense 100,000 coat 100,000 3. Prepaid rent 300,000 cast 300,000 Prep rent 0.000 Remterpense 10,00 ca 320,000 D. Rent expense so.00 Preparer: ro00 ‘Cash 120,000500 A EXERTION REVIEWER: AUDITING PROBLEMS. SOLUTION 6-7 ‘auer 6 AUDFTOF FREPAYNESTS ANDINTANGIBLE ASSETS SOL SOLUTION 6-8 4. Anneal rental 60.000 ‘Amortization of ease bonus —19.000 ‘Annual cost of ease zoo ‘arse: D 2. Annual deprecation on leaseold improvements (@acoa00/r0 sexes) so.900 ose A 3. Prepaidreat 100000 Gast 10,000 Answer 8 PROBLEM 6-8 ‘Organization Costs [ELGON COMPANY as rganized in 2013 anc began operations et the begining of 2014 The concany proves ledscaping serves. The folowing costs were incurred 22 Ue start of operations Legal ees in connection with organization ofthe company i7i,c00 Improvements to lszadoffce space pri to aaszarcy 225,000 cots of meetings of incorprators to cust organ aces 3,000 Fin to to ncrpoate 2.000 Eom ‘Whats the total ameunt of rgarizaton costs that should be reported In gon income sistent? A P2830 © ie0.c00 8 PE,C00 ©. 207,000 Legal fees in connection with organization ofthe company P171,000 Cost of meetings of ncorporatorste discuss orgenatonal actiitias ‘63000 Fling fe to incorporate 3000 ‘oral organiaational experses Es000 Answer: A Improverments to leased flee space por to oscupuncy of P225,000 shold be lasted easel mypeoversats PROBLEM 6-9 ‘esounting for Patent, Franchise, and RED Costs (APEROON CORP. tos protest on rtarabe ses a ob ‘+ Apaten: es purchase fram Pater Company fr 6,000,000 ‘on January 1, 2013. On the acquistion date, the patent was es Uae to have o uel eof 10 yeas. Te patent had 2 net book value of 5,000,000 when Patter 50% Ro Cameroon + On February 2, 2014, a franchise was purchased fom the Fran- mand facturing operations Prepare the adjusting youral enties that should be made on Dsceniser 31,2014. Use a separate account fr the accumulation of each Spe ot mortation SOLUTION 6-16 ‘aca Corp, [ADJUSTING JOURNAL ENTRIES December 31, 2514 4. Machinery 694000 Patents 94000 To reclassify the costot Improving chines to che Machinery eccoune. sonra 6 AUDIT OF REPAYMENTS AND INTANGILE ASSETS 521 2. Castaf goods sold (Patentamorization) 93,500 ‘Accunlated amortization ~ Patents 93500 Torerd 2014 onartzaton of poten (PLATOON =r) 3. Licensing agreement H.2 0000 Tinesrnedrevemse 0000 Torco uncrot eas Je See lta of 015 ‘ean rom nears. 4, Retained earings 720,000 Licensing agreement No.1 720,000 “Toren te impair vel of ‘esning Agreement 1. est of Liens Areernnt NO 1 1200000 Recorertlevalce ‘0.000 Irnparment ingen 2033 pao 5. Costof goods sald (Licensing szeemeot arortizxion) 120,000 “Accumulated amortization = Licensing Agreement No.2 320000 Torewnel 2016 amertnaon of Lcesing Agreements 2 {iome0. P1269 ~r270809/36- exzn800) 6. Prepaid expenses 500.0003 4) 0.00, Selling and administrative expenses (@on0c03-3), 150,000 Geodwi 600,000 Tareas prepaid eden ‘expense inproperly changed toch522 (CEA EXAMINATION REVIEWER: AUDITING PROBLEMS 7. Machinery and equipctent 300,000 Leascheld improvements 300000 Torey cost of equipment charged to eset improvercnt= 8. Retained earnings (300,000/10) 30,000 Cost of goods sald (P306000/10), 30,000 “Accumulated deprecation - Leasehoid improversents 60,000 Torecunt 2013 and 20%¢ deprecation oe anshelaimprnsemets| PROBLEM 6-17 atents and Research & Development Costs During 202. APEX COMPANY purctased a bulking ske for Rs oroposee reseorch and development iabortery at cat of PL200,000. Conctne: tion ofthe bulcing was arte in 2012. The bukdirg was coma December 31, 2023, sta cost ofPS.600,000 and wes placed i eevee (on January 2; 20:4. The estimates use fe cf the being for dope. tion purposes was 20 years; the svailine matod of depecstion sf be employed and there wn no estrated avons veh Management estates ‘hat about 50% of the projects of the research and deveiopment group wil rest longterm bene (ie, at east 10 yeas) t te corporetn. However, Apa fale to demons ate how such projets wil generate probable tue economic bene, The remering Projets ether Benet ta cuten peioc or ae aeandored before cor Dletion. A summary of the number of profes an the cast costs Sued in conjuncion wth the research ard devebomert acts or 2014 arpears tee, ‘Upon recommendaton of the research end development aL, Apex Company scaued 2 potent for marufacunng nights af sco of Siorm 26 AUDIT OF PREPAYAEENTS AMDITANGIBUE ASSETS 523 600,000, Te patent was accute on Ape 1, 2013, and has an eco- wire if of 30 years Seloies and) Ofer Exposes unter “Emaloyee” exctatrg Bataig ‘tprocts Sines Deotecaton Cras) Gomclted ajc with ‘Grgterm benefes 30 Pigo0.000 9,000,000, Nsrdored oj or rosets that benef the ‘urent period 221,300,000 308,000 Projets process — resus ndeterminate --fncoo —_aana0g 10 os! @ Bom als 2. “The total research and developmert expenses fr 2034 shoud be A. 72800,00 C ¥5,50,000 8. P3.¢80,900 D. 5,720,200 2. Vinats the arnaut of oatet amortization for 20147 A Pe0.ce0 © Fi20,000 B. Piso.cco ar \Whetisthe book vive the balling on Oeceber 31,2014? ‘A. F5220,000 P50%0.000 8. 5,600,000 1 P5,s50,000| har the caring value the petet at Oecenter 31, 2014? A. Pt.ze0,000 & PI.0,000 pu320,000 5 Po SOLUTION 6-17 Sea eae ete a eres 1 Salaries and employee benefits 3900000 Depreciation - building (5,503 060/20 pers) 280.000524 (Ch EXAMINATION REVIEWER: AUDITING PROBLEMS other expenses 1.590.009 ‘otal esearch and development expenses zz000 “Answer: D 2, Patent amortization for 2014 (P1,600.000/10 yeas) PLOON0 aie 8 3. Costof building 5.600.000 Less: Accumulated deprecation, Dec. 31,2014 (3.50.000/20 yeas) — 200000 Book value, Dec 31, 2014 B00 Answer: 4. Costof patent purchased April 12013, 1,600,000 Less: Amortization: ‘April 1~ Dec. 31,2013 (P.600000/10%9/12) 120,000 Jan 1—Dec. 31,2014 (P1600,000/10) Asoo — 200.000 (Carryingvalue, Dec. 31,2014 SRW Arsen 8 PROBLEM 6-18 “Kequisition and Amorization of Various Intangible Assets “Te flowing Information pertains to BAKER COMPANY’ intangible a cats 1 On Jonany 1, 2014 Ser stoned an agreement to oxen a 8 fnchiee of ‘Max & Jess Food Chain, Inc. for an titel franchise fee GF ust o00. OF this amin F300000 nas. ot when oe ‘recent assed andthe lane pate 4 aul 7 Meno 200000 each, beg Tonory 20:5. The ae (iar 6 AUDIT OF PREPATAIENTS ANDINTANGIBLE ASSETS 525 ‘ment srovdes thatthe down payment ls pot refundable and no fu lure sereces ate required ofthe Ranchisor.. "The preset value et Joruary 1, 2026, of the annual payments scoured at 1496 (the Impl rae for 2 loan of this type) 874,000. The agreement aso Drovises that 5% ofthe revenue fom the ranchize must be pai {he fancisor annually. Baker’ revenue fromthe fanchise fr 2014 ‘was P1S,000,000. Boker estinats the usefl ie ofthe franchise to be 10 years. 2. Sater incre 1,300,020 of expermenta and development costs in fs laboratory to develop 2 patent ich was granted on Janay 2, 2018, Legal fees aed ether costs esocatd uth registration of the poten tled P272,000. Baker estates that the uel if of the Pte al be & years. 5. trademark was purchased irom Bane Company fr 40,000 on ‘hij 1, 2011. Erpendtres for succes gation n defense ofthe trademark wialing PL63,250 were paid on July 3, 2033. Baker est nates that the wef fe of the rademark wil be 20 years from the ate of acaulstion, 1 Whatis the carrying vaue of the franchise at December 31,2014? 1 P2350,000 c PI.056/600 & pusoxo00 D. Pi,t74,000, 2. Whats the carrying value ofthe patent at December 31, 20147 A P238000 © P1.375,500 ® Pa7zo00 i. 256,400 3. Whats the carrying value othe trademark on Deceber 31, 20342 ‘P06 403 545,000 8. 523,000, . 707,200, 4. The total expenses resting fom the trassactons that woul appear on Baker’ ince satevet forthe year ended December 31,2034, Stovd be526 (CPAEXAMINATION REVIEWER: AUDITING PROBLENS A. P1,255,760 p1.133400 8. P1260 . iss.) SOLUTION 6-18 0 41. Down payment 300,00 resent value of 4 annual payments _srac00 Total cost of franchise 774000 Less: Amortization for 2014 (P1174000/10) _147.400 (Caeying value of franchise, Dec. 31,2014 Biase.00 Anse 2. Costofsecurng patent onan. 22014 272.000 Less: Amortiation for 2014 (2272,000/0) 34000 Carrying value of patent, Dec. 31,2014 000 ‘Anaver: 3. Costof trademark P6to,000 Less: Amortization, July 1,2011 ~Dee. 31,2018 (640 .000/20 x3 6/12) aitz.000 Carrying value of trademark, Dec. 31,2014 Pszegoo Anse: 8 4. Interest expense (2974000 14%) P22,360 ‘Amortization of franchise (P174,000/10) 117.400 “Amortization of patent (P272000/8) 34000, Amortization of trademark (P640.000/20) 32000 Franchise fe (P19,00000059%) 40.000 Total expenses asi “Anse h Sorms 6 AUDITOR PREPAYMENTS AKDIVTANCIBLE ASSETS 527 PROBLEM 6-19 Purchase ofa a eae In ne with CANDLER COMPANY'S expansion progam, It has become Interested i accureg a pant Mincanoo to hance many of ts produ on functions in that seo. ‘One pospecve sel $2yo Na Co. whose ‘nners have decided to sal he burines Ifa pres aetllement con be bist. Soyo ta Go's statement of fan sorion appar 6 Curentasset 4.500.002 Crem faniies _P2400,000 Invwstnans 4,800,000 Nocurent abuses 2.000.000 Property lar. ane ‘ordary snares 500,000, eauipmrent(nes) 42000000 Ste prion 5 100000 saan Relaredsorings _s0001900 Toislassets BIE TGOTNG Tats eautes nogoon0 Gonder hos ved (as Appiaisal Company to determine the oroper ice to pay fer Sayo Na Co. The aoprakel compar finds thet thet vestments have = fair alse of 500,00 snd the fvenory i Unde Bate: by F2:40,001. Allother eset an equtis ste eopely stated, ‘av exninetion ofthe companys income for the lat years indicates thot the net income hs stanly incensed. In 2013, te orpony Nod ‘et cperating score of 3,005,000, rich expected to increase 2056 ‘ech year over the next 4 years. Corder believes that normal retire inthis type of business 185 on net asst, "The ass Investnert ‘he Nindoneo lant expected t sy te sare for the next yeas, According to Kats Aral Conpany, the fa vale of Soyo No Co can be estimated in many diferent ways. Calcd an estmete ofthe vol ‘of Soyo No Co, assuming tat any ood wl bs compted as: 1. The cptatamion of the average ees eam of Seo Na Co, at A Pas.e40,00 © Pia.286 a6 3. P36.o00/000 D. p26.e40000528 cea BxcaMMN-ATION REVIEWER: AUDITING PROBLENS 2. The purchase of average excess errings over the nest four years, 24,364,800 | ‘C 730,960,000| 5. P19,581,200 , 22,831,200 13. ‘The capitalzaton of average excess earrings of Sayo Ne Co. at 28%, ‘A. Pat,s00,000 5. P24630,000 c Fig3e1as8 ©. P365520,00 4. The present vale of the average cess earings ove the ne four oar dcounted at 15M. (The resent vale ofan ercinay sanity GF Tot 15% for 4 ptogs is 2.85498.) A. Pu1782979 paase6s 8 755.932 484 D, P27.250,135 5. Tf Conder were to poy P23100,000 to purchase the asels and as- ‘ume the babies Of Sayo Ne Co, how ruch would be charged 19 i e.0,000 © Po 5. 5,364,800 . 5,100,000 SOLUTION 6-19 pcinmasiaek Sic OMe el eS (Gurren assets (4.500.000 +P2.400.000) 6,900,000 Tavestments 4500,000 Property, plant and equipment (net) 3.900000 current labilties (400.000), ‘Noncuerent abilities _(3.on0.000) Netaseetsat air value FSTATONTOE Normal earnings (P18000,000 18%) pazacoa 3.600.000 ‘4320000 5,184,000 6220800 Pasazeuo umn 6 ALDIToFPREPaYwENTS AND TANGLE ASSETS 529 ‘Average earnings over the next 4 years (rips2ea00/4) Pe3200 ‘Average excess earnings (P431200-F3230.000) 591200 1. Goodwa (P1.551200/108%) » sioco0 rae eet Tora zea, frome 0 2 Govan rs sp12c056) P 66400 Falerahe oars Tae essen a 8 Goon nac9n ® 620000 Fares “o0wann eon 4 covét en s9:2t0523505 Pas Faic value of net assets : goons Tor asi some: € Dreier "yao0n.co9 Seed Festiyi feo 0or 6 AUDIT OF FEDAYMENTS AND INTANGABLE ASSETS S31. 590 Goa aMNATON REV TEIPER: AUDITING PROBLENS Bevcucciaonrge 700000 PROBLEM 6-20 ‘Average earnings re7o009 abe aaa Goo 1. Guntl- yeas exces earings (P132800<3) > 300000 You have been sce by CANNON COMPA, 9 in ono Nevasets ane Teale Sse sects aut of WE as boom 1 cee 8 Porciase ple pecan as carves pres fr x02 Cos net ets You te eo eee Fomor ee Sarnia teate slau % Geotwi rrsconx22829 » zssazo Ustites 41200,000 ee -2ua09.009 pee rt of er o et aes orrZ Cas sty Se c Pensa NeceSalconc er woteedon po comngs gues 70600 amar Detainee prcase re on th i te ong asc: 3 Goodwillertsnceo 155 5667 Neeasets ‘amano 1. ood exalt 3 ya exes cama pe, on Stato © psabo0 ee & reson3 ©. peso 2. ood senual to the preset value of excess earnings discounted {L154 for 3 yeas, (The present value factor ofan onary erry OF at 25% for 3 porads © 2.28573) PROBLEM 6-21 i es3e6281 €. bso ‘Goad Compatation 8, Pa 620 BL peaouast DASH, INC 5 conssing purchesrg A Kersh has 5 Goon sequal tthe captain of excess earings ot 15% the folowing asses an lies x erenoo00 © P6587 5 passes? D. pest0;00 ‘cost Fale Market Value SOLUTION 6-20 esos ecevasie go000 -P 4,400,000 = Inver ‘sono Soca c00 otal denciable assets 09 Prepaid Insurance 24200 "000 une ea Buikings and ecuimen: (net) 4400000 400,000, less: Usbities -zag.000 = aie Zone scouts aso —_.2c0.000) ‘Average Fate ofr=tur on net assets 315% = Peco = pgcocun ‘Average carninas Earoc00532 (CPA EXAMINATION REV 1 the purchase price Is 12,600,000, the amount of goodnll to be ‘charged in recording the acqustion ts o'Pa.e00,000 ‘© 2,200,000 8. 72,400,000 D. Po SOLUTION 6-21 Purchase price 32,600,000 Fair market value ofmet assets “0.400.005 Goodwill E2200.000 arsier: © PROBLEM 6-22 ‘Kecounting for Compater Software Cost [OAURIAN COMPANY dovelops sofware for small businesses and home computer markets. Most ofthe company’s compsterprogramenes are Involved in developmental wor designed to produce sfttare tet ul erform fly sponte tasks ina userfiendy manner. Excensive testing Gf the working mode is performed before ts reeased io orocation for ‘reparton of masters and further festng. Ths ere preparation has ‘ested to the precicton of several computer stare padages tat the boon very Successful ln the maretlace Daurian incurred the following costs during 2014: Soares and wages of programmers doing research pms.ax0 Espenses related to proecs porto estabishment of ‘echnlogal fealty 235,200 ‘Expenses related to projects after echnlogcal fess, hasbeen etabished but before software i avatabhe for commercial production 145,500 vie: 6 AUDIT OF REPAYMENTS AND DSTANGILEASSETS 533 Avortation of cated software cevelopment ests fiom cument end por years 29.250 (ons to produce end prepare software forsale 168,900 ‘Mditional data for 2024: Sales of products forthe year 1,545,000 Begining ventory "26,000 orton af goods avaable for sie sold curing year eo Tae arte i 30% ‘oat Daurn's et etme for 20157 A r3,757 © 25072 IB iss sa1 D. 9285.746 SOLUTION 6-22 Ses 1.585000 Costof goods sold: Begining inventory 26.000, Software production ensts (including ‘amortization of capitalized software vst) (F369;300 + P3050) ‘Goods avilablefor sale Endinginventory(40%x575:159) 405.090 Gross income 1139910 Expensas Salaries and wages programmers P705,000 Research-related expenses 235200 940.200 Income before income 199.710 Income tax 0%) 32913 Netincome Bae Answer: