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May 2020 - AP Drill 2 (PPE and Intangibles) - Final
May 2020 - AP Drill 2 (PPE and Intangibles) - Final
Name: Date:
Subject Teacher: Score:
Directions: Read and solve the following problems carefully. Write your answers on a yellow sheet of paper. At
times of difficulties, crying is allowed but please do so quietly. DO NOT wipe your tears on the questionnaire. Finish
the exam in three hours. When the time is up, you should know how to stop and let go. GOOD LUCK and GOD
BLESS!
Problem 2
In connection with your audit of the THVDBIRWRVNSK Mining Corporation for the year ended December 31, 2018,
you noted that the company purchased for P10,400,000 mining property estimated to contain 8,000,000 tons of
ore. The residual value of the property is P800,000.
Building used in mine operations costs P800,000 and have estimated life of fifteen years with no residual value.
Mine machinery costs P1,600,000 with an estimated residual value P320,000 after its physical life of 4 years.
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Following is the summary of the company’s operations for first year of operations.
Tons mined 800,000 tons
Tons sold 640,000 tons
Unit selling price per ton P4.40
Direct labor 640,000
Miscellaneous mining overhead 128,000
Operating expenses (excluding depreciation) 576,000
Inventories are valued on a first-in, first-out basis. Depreciation on the building is to be allocated as follows: 20%
to operating expenses, 80% to production. Depreciation on machinery is chargeable to production.
QUESTIONS: Based on the above and the result of your audit, answer the following: (Disregard tax implications)
1. How much is the depletion for 2018?
a. P768,000 b. P960,000 c. P192,000 d. P1,040,000
2. Total inventoriable depreciation for 2018?
a. P400,000 b. P362,667 c. P384,000 d. P0
3. How much is the Inventory as of December 31, 2018?
a. P438,400 b. P422,400 c. P425,600 d. P418,133
4. How much is the cost of sales for the year ended December 31, 2018?
a. P1,689,600 b. P1,753,600 c. P1,702,400 d. P1,672,533
5. How much is the maximum amount that may be declared as dividends at the end of the company’s first year of
operations?
a. P1,494,400 b. P1,289,600 c. P1,302,400 d. P1,319,467
Problem 3
Information pertaining to Highland Corporation’s property, plant and equipment for 2018 is presented below:
Account balances at January 1, 2018:
Debit Credit
Land 150,000
Buildings 1,200,000
Accumulated depreciation – Buildings P263,100
Machinery and equipment 900,000
Accumulated depreciation – Machinery and equipment 250,000
Automotive equipment 115,000
Accumulated depreciation – Automotive equipment 84,600
Depreciation data:
Depreciation method Useful life
Buildings 150% declining-balance 25 years
Machinery and equipment Straight-line 10 years
Automotive equipment Sum-of-the-years’-digits 4 years
Leasehold improvements Straight-line -
The salvage values of the depreciable assets are immaterial. Depreciation is computed to the nearest month.
Transactions during 2018 and other information are as follows:
a. On January 2, 2018, Highland purchased a new car for P20,000 cash and trade-in of a 2-year-old car with
a cost of P18,000 and book value of P5,400. The new car has a cash price of P24,000; the market value of the trade-
in is not known.
b. On April 1, 2018, a machine purchased for P23,000 on April 1, 2013, was destroyed by fire, Highland
recovered P15,500 from its insurance company.
c. On May 1, 2018, costs of P168,000 were incurred to improve leased office premises. The leasehold
improvements have a useful life of 8 years. The related lease terminates on December 31, 2024.
d. On July 1, 2018, machinery and equipment were purchased at a total invoice cost of P280,000; additional
costs of P5,000 for freight and P25,000 for installation were incurred.
e. Highland determined that the automotive equipment comprising the P115,000 balance at January 1,
2018, would have been depreciated at a total amount of P18,000 for the year ended December 31,2018.
Problem 4
On January 1, 2013, PGNJRVNSRBS acquired two assets within the same class of plant and equipment. Information
on these assets is as follows:
Cost Estimated UL
Machine A 300,000 5 years
Machine B 180,000 3 years
The machines are expected to generate benefits evenly over their useful lives. The class of plant and equipment is
measured using the revaluation model.
Problem 5
The following information pertains to Marlisa Company’s delivery trucks:
Audit of Intangibles
Problem 6
You noted the following items relative to the company’s Intangible assets in connection with your audit of the
THANKYOU!!! Corporation’s financial statements for the year 2018.
Franchise
On January 1, 2018, THANKYOU!!! signed an agreement to operate as franchisee of Clear Copy Service, Inc. for an
initial franchise of P680,000. Of this amount, P200,000 was paid when the agreement was signed and the balance
was payable in four annual payments of P120,000 each, beginning January 1, 2019. The agreement provides that
the down payment is not refundable and no future services are required of the franchisor. The implicit rate for
loan of this type is 14%. The agreement also provides the 5% of the revenue from the franchise must be paid to the
franchisor annually. THANKYOU!!!’s revenue from the franchise for 2018 was P8,000,000. THANKYOU!!!
estimates the useful life of the franchise to be ten years.
Patent
On July 1, 2018, THANKYOU!!! purchased a patent from the inventor, who asked P1,100,000 for it. THANKYOU!!!
paid for the patent as follows: cash, P400,000; issuance of 10,000 shares of its own ordinary shares, par P10
(market value, P20 per share); and a note payable due at the end of three years, face amount, P500,000,
noninterest-bearing. The current interest rate for this type of financing is 12 percent. THANKYOU!!! estimates the
useful life of the patent to be ten years.
Trademark
THANKYOU!!! purchased for P1,200,000 a trademark for a very successful soft drink it markets under the name
POWER!. The trademark was determined to have an indefinite life. A competitor recently introduced a product
that is in direct competition with the POWER! product, thus suggesting the need for an impairment test. Data
gathered by the entity suggests that the useful life of the trademark is still indefinite, but the cash flows expected to
be generated by the trademark have been reduced either to P40,000 per year (with a probability of 70%) or to
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P80,000 per year (with 30% probability). The appropriate risk-free interest rate is 5%. The appropriate
riskadjusted interest rate is 10%.
QUESTIONS:
1. Total expenses related to franchise in 2018
a. P503,914 c. P448,950
b. P535,200 d. P454,964
2. Carrying amount of franchise as of December 31, 2018
a. P549,644 c. P538,733
b. P494,680 d. P612,000
3. Carrying amount of patent as of December 31, 2018
a. P1,045,000 c. P860,310
b. P 955,900 d. P908,105
4. Total expenses related to the intangible assets in 2018
a. P662,759 c. P733,063
b. P711,709 d. P802,212
5. In auditing intangible assets, an auditor most likely would review or recompute amortization and determine
whether the amortization period is reasonable in support of management’s financial statement assertion of
a. Valuation. c. Completeness.
b. Existence or occurrence. d. Rights.
Problem 7
The following independent situations relate to the audit of intangible assets. Answer the questions at the end of
each situation.
CABOOM LABORATORIES holds a valuable patent (No. 112170) on a device that prevents certain types of air
pollution. Caboom does not manufacture or sell the products and processes it develops; it conducts research and
develops products which it patents, and then assigns the patents to manufacturers on a royalty basis. The history
of Patent No. 112170 is as follows:
Caboom assumed a useful life of 17 years when it received the initial device patent. On January 1, 2013, it revised
its useful life estimate downward to 5 remaining years. Amortization is computed for a full year if the cost is
incurred prior to July 1 and no amortization for the year if the cost is incurred after June 30. Caboom’s reporting
date is December 31, 2015.
Compute the carrying value of Patent No. 112170 on each of the following dates:
1. December 31, 2008
A. P180,675 B. P186,150 C. P293,788 D. P175,200
2. December 31, 2012
A. P223,200 B. P52,560 C. P131,400 D. P122,640
3. December 31, 2015
A. P120,560 B. P78,840 C. P52,560 D. P98,550
4. What is the total carrying value of Bartolo’s intangible assets on December 31, 2015?
A. P3,744,000 B. P4,864,000 C. P2,880,000 D. P3,681,500
5. As a result of the facts above, compute the total amount of charges against income for the year ended December
31, 2015?
A. P2,428,000 B. P1,932,000 C. P1,648,000 D. P1,116,000
Problem 8
Transactions during 2005 of the newly organized Pink Corporation included the following:
Jan. 2 Paid legal fees of P150,000 and stock certificate costs of P83,000 to
complete organization of the corporation.
15 Hired a clown to stand in front of the corporate office for 2 weeks and hound out pamphlets and
candy to create goodwill for the new enterprise. Clown cost, P10,000; pamphlets and candy, P5,000.
Apr. 1 Patented a newly developed process with costs as follows:
Legal fees to obtain patent P 429,000
Patent application and licensing fee 63,500
Total P 492,500
It is estimated that in 6 years other companies will have developed improved
processes, making the Pink Corporation process obsolete.
May 1 Acquired both a license to use a special type of container and a distinctive trademark to
be printed on the container in exchange for 6,000 shares of Pink’s no-par common stock selling for P50
per share. The license is worth twice as much as the trademark, both of which may be used for 6 years.
July 1 Constructed a shed for P1,310,000 to house prototypes of experimental models to be developed
in future research projects.
Dec. 31 Incurred salaries for an engineer and chemist involved in product development totalling
P1,750,000 in 2005.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Cost of patent
a. P492,500 b. P429,000 c. P63,500 d. P0
2. Cost of licenses
a. P150,000 b. P200,000 c. P100,000 d. P0
3. Cost of trademark
a. P150,000 b. P200,000 c. P100,000 d. P0
4. Carrying amount of Intangible Assets
a. P712,604 b. P2,477,604 c. P697,604 d. P0
5. Total amount resulting from the foregoing transactions that should be expensed when incurred
a. P4,100,500 b. P1,983,000 c. P1,998,000 d. P0
Problem 9
1. Property, plant and equipment is typically judged to be one of the accounts least susceptible to fraud
because
a. The amounts recorded on the balance sheet for most companies are immaterial.
b. The inherent risk is usually low.
c. The depreciated values are always smaller than cost.
d. Internal control is inherently effective regarding this account.
2. Which is the best audit procedure to obtain evidence to support the legal ownership of real property?
a. Examination of corporate minutes and board resolutions with regard to approvals to acquire real
property.
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b. Examination of closing documents, deeds and ownership documents registered and on file at the
register of deeds.
c. Discussion with corporate legal counsel concerning the acquisition of a specific piece of property.
d. Confirmation with the title company that handled the escrow account and disbursement of
proceeds for the closing of the property.
3. When few property and equipment transactions occur during the year the continuing auditor usually obtains
and understanding of internal control and performs
a. Tests of controls
b. Analytical procedures to verify current year additions to property and equipment c. A thorough
examination of the balances at the beginning of the year.
d. Extensive tests of current year property and equipment transactions.
4. Which of the following combinations of procedures is an auditor most likely to perform to obtain evidence about
fixed asset addition?
a. Inspecting documents and physically examining assets.
b. Recomputing calculations and obtaining written management representations.
c. Observing operating activities and comparing balances to prior period balances.
d. Confirming ownership and corroborating transactions through inquiries of client personnel.
5. If an auditor tours a production facility, which of the misstatements or questionable practices is most likely to be
detected by the audit procedures specified?
a. Depreciation expense on fully depreciated machinery has been recognized.
b. Overhead has been overapplied.
c. Necessary facility maintenance has not been performed.
d. Insurance coverage on the facility has lapsed.
6. In testing for unrecorded retirements of equipment, an auditor is most likely to
a. Select items of equipment from the accounting records and then locate them during the plant tour.
b. Compare depreciation journal entries with similar prior-year entries in search of fully depreciated
equipment.
c. 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 equipment additions and excessive debits to repairs and
maintenance expense.
7. Determining that proper amounts of depreciation are expensed provides assurance about management’s
assertions of valuation and
a. Presentation and disclosure. c. Rights and obligations.
b. Completeness. d. Existence or occurrence.
8. The auditor may conclude that depreciation charges are insufficient by noting
a. Insured values greatly in excess of book values.
b. Large numbers of fully depreciated assets.
c. Continuous trade-in of relatively new assets.
d. Excessive recurring losses on assets retired.
9. An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit
assertion that all
a. Noncapitalizable expenditures for repairs and maintenance have been recorded in the proper period.
b. Expenditures for property and equipment have been recorded in the proper period.
c. Noncapitalizable expenditures for repairs and maintenance have been properly charged to expense.
d. Expenditures for property and equipment have not been charged expense.
10. In violation of company policy, Coatsen Company erroneously capitalized the cost of painting its warehouse.
An auditor would most likely detect this when
a. Discussing capitalization policies with Coatsen's controller.
b. Examining maintenance expense accounts.
c. Observing that the warehouse had been painted.
d. Examining construction work orders that support items capitalized during the year.
11. Additions to equipment are sometimes understated. Which of the following accounts would be reviewed by the
auditor to gain reasonable assurance that additions are not understated?
a. Accounts payable c. Depreciation expense
b. Gain on disposal of equipment d. Repair and maintenance expense
12. When an auditor interviews the plant manager, he will most likely seek from the plant manager information
regarding
a. Appropriateness of physical inventory observation procedures.
b. Existence of obsolete machinery.
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c. Deferral of procurement of certain necessary insurance coverage.
d. Adequacy of the provision for uncollectible accounts.
13. The auditor is least likely to learn of retirements of equipment through which of the following?
a. Review of the purchase return and allowance account.
b. Review of depreciation.
c. Analysis of the debits to the accumulated depreciation account.
d. Review of insurance policy riders.
14. Which of the following is not likely a motive for management to manipulate the timing and amount of impaired
asset writedowns?
a. Steady increases in earnings per share over the past 5 years.
b. Income smoothing.
c. A "big bath."
d. An abnormally unprofitable year.
15. There is goodwill involved in the acquisition of a business if the purchase price paid is in excess of the
proprietorship of the business acquired.
Goodwill might be viewed as the enjoyment of a profit by a company in excess of the normal or usual return for the
industry as a whole but such goodwill is not recorded if it has not been purchased or paid for.
a. False; True. c. True; False.
b. False; False. d. True; True.
16. In auditing intangible assets, an auditor most likely would review or recompute amortization and
determine whether the amortization period is reasonable in support of management’s financial statement
assertion of
a. Valuation. c. Completeness.
b. Existence or occurrence. d. Rights and obligations.
In the end, what matters most is how your life mattered to the lives of others. Everything else is just a passing moment.
~End of Examination~
Prepared by:
Checked by:
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