AUDIT OF INVESTMENTS

Audit of Investments (Concept)

 Investments
- are assets held by an entity for the accretion of wealth through distribution such as
interest, royalties, dividends and rentals, for capital appreciation or for other benefits to
the investing entity such as those obtained through trading relationships
- classified either as current or noncurrent assets

readily realizeable,
intended to be held for more than one year or are not
intended to be held for
expected to be realized within twelve months after
not more than one year
reporting period

- purposes of investments:
o for accretion of wealth or regular income through interest, dividends, royalties and
rentals
o for capital appreciation
o for ownership control
o for meeting business requirements
o for protection
- examples of investments:
o Trading securities
o Financial asset at fair value through other comprehensive income
o Investment in nontrading equity securities
o Investment in bonds
o Investment in associate
o Investment in subsidiary
o Investment property
o Investment in fund
o Investment in joint venture

☼ Financial Assets
- cash, contractual right to receive cash or another financial asset from another entity
- contractual right to exchange financial instrument with another entity under conditions
that are potentially favorable
- equity instrument of another entity
- intangible assets are not financial assets
◊ examples:
o cash or currency In exchange of financial instruments, conditions
are potentially favorable when it result to gain
or addtl. cash inflow to entity.
 o deposit of cash
o gold bullion
◊ classifications:
o financial assets at fair value through profit or loss – include both equity
securities and debt securities
o financial assets at fair value through comprehensive income – include
both equity securities and debt securities

- represent an ownership
interest in an entity - any security that represents a
- owners known as creditor relationship with an
shareholders entity
- share- ownership interest or - has a maturity date and value
right
o financial assets at amortized cost – include only debt securities

◊ Initial measurement
- Fair value plus, in the case of financial asset not at fair value
through profit or loss, transaction costs that are directly
attributable to the acquisition of the financial asset
◊ Subsequent measurement
- After initial recognition financial asset shall be measured at:
a) Fair value through profit or loss
b) Fair value through comprehensive income
c) Amortized cost

☼ Equity Investments
- PFRS 9 provides that when a financial asset is recognized initially, an entity shall
measure it at fair value plus transaction costs that are directly attributable to the
acquisition.
- acquisition by exchange:
a) Fair value of asset given
b) Fair value of asset received
c) Carrying amount of asset given

☼ Investment in Associate
- refers to the investment in an entity in which the investor has significant influence but
does not have full control like a parent and a subsidiary relationship
- usually, the investor has significant influence when it has 20% to 50% of shares of
another entity.
 ◊ Accounting for investment in associate:
o Equity method
- there is not a 100% consolidation used. Instead, the proportion of shares
owned by the investor will be shown as an investment in accounting.

☼ Financial Asset at Amortized Cost (Bond Investment)

- Bond – formal unconditional promise made under seal to pay a specified sum of money
at a determinable future date, and to make periodic interest payments at a stated rate until
the principal sum is paid
◊ Initial measurement
-at fair value plus transaction costs that are directly attributable to the acquisition
◊ Subsequent measurement
-measured and accounted for as follows:
a) At fair value through profit or loss
b) At amortized cost
c) At fair value through other comprehensive income

☼ PFRS 9 requires that bond discount and bond premium shall be amortized using the
Effective Interest Method
- comparison between the interest earned or interest income and the interest received
- difference between the two represents the premium or discount amortization
o Effective rate- yield rate or market rate
o Nominal rate- coupon rate or stated rate

 Audit of Investments
1. Understand the Client’s investing activities
2. Internal Control Evaluation

Primary Substantive Tests

o Management Assertion: Existence and Rights
o Management Assertion: Completeness
o Management Assertion: Occurrence and Valuation and Allocation

Other Substantive Tests

o Management Assertion: Accuracy
o Management Assertion: Classification
o Management Assertion: Presentation & Disclosure
o Management Representations
Audit of Investments (Problems and Solutions)

Problem 1

RANDIE Corporation acquired a building on January 1, 2021. The acquisition cost is P5,000,000
payable at the rate of P1,000,000 at the beginning of each year starting on January 1, 2021. The
company paid option money totaling P400,000, P85,221 of which is attributed to real properties
not acquired. The company also paid property taxes in arrears. The company also paid property
taxes in arrears as of January 1, 2021 at P147,872. The prevailing market rate of interest for
transaction is 12%. The building is estimated to have useful life of 25 years.

The property was appraised at the end of each year as follows:

Year 2021 2022 2023
Appraised values P4,600,000 P4,100,000 P4,300,000

Question:
1. What is the carrying value of the property as of December 31, 2023, assuming that the
building is an investment property under the cost method?
a. P3,960,000
b. P4,360,000
c. P4,460,000
d. P3,660,000
2. How much recovery gain should be recognized from the asset in the 2023 profit or loss?
a. P38,261
b. P21,351
c. P37,624
d. P42,212

Solution:
Question 1 and 2
Recoverable amount 12/31/2022 P4,100,000
Less: Depreciation 2022: 4.1M/23 years (178,261)
Carrying value, before impairment recovery 3,921,739
1. CV had there been no impairment (4.5M*22/25) P3,960,000
 2. Impairment recovery- Profit and Loss P38,261

Problem 2

JJ Corporation had investments in marketable debt securities costing P650,000 that were
classified as available-for-sale. On June 30, 2021, JJ Corporation decided to hold the
investments to maturity and accordingly reclassified them from the held-to-maturity category on
that date. The investments’ market value was P575,000 at December 31, 2020; P530,000 at June
30, 2021; and P490,000 at December 31, 2021.

Question:
1. What amount of loss from investments should JJ Corporation report in its 2021 income
statement?
a. P0 b. P45,000 c. P85,000 d. P120,000
2. What amount should JJ Corporation report as net unrealized loss on marketable debt
securities in its 2021 statement of stockholder’s equity?
a. P160,000 b. P120,000 c. P45,000 d. P40,000

Solution:
Question 1 and 2
Valuation allowance 75,000
Unrealized holding loss (SHE) 75,000
(To close the valuation allowance of last year)

MES – HTM 530,000

Unrealized holding loss (SHE) 120,000
MES – SAS 650,000

Problem 3

Zoe Inc. acquired 30% of Mimi Co.’s voting stock for P200,000 on January 2, 2021. Zoe’s 30%
interest in Mimi gave Zoe the ability to exercise significant influence over Mimi’s operating and
financial policies. During 2021, Mimi earned P80,000 and paid dividends of P50,000. Mimi
reported earnings of P100,000 for the six months ended June 30, 2022, and P200,000 for the year
ended December 31, 2022. On July 1, 2022, Zoe sold half of its stock in Mimi for P150,000
cash. Mimi paid dividends of P60,000 on October 1, 2022.

Question:
1. Before income taxes, what amount should Zoe include in its 2021 income statements as a
result of investment?
 a. P24,000
b. P50,000
c. P15,000
2. In Zoe’s December 31, 2021 balance sheet, what should be the carrying amount of the
investment?
a. P200,000
b. P209,000
c. P224,000
d. P230,000
3. In its 2022 income statement, what amount should Zoe report as gain from the sale of
half of its investment?
a. P30,500
b. P45,500
c. P35,000
d. P24,500

Solution:
Question 1
P80,000 x 30% = P24,000

Question 2
Purchase price 200,000
Income from Investment 24,000
Dividends (15,000)
Ending balance- 12/31/21 209,000

Question 3
Beginning balance- 1/1/22 209,000
Income from Investment
(100,000 x 30%) 30,000
Balance- June 30 239,000

Selling price 150,000

Cost (239,000 x ½) 119,500
Gain on sale 30,500

Problem 4

During 2021, Evette Company bought shares of another entity to be held for trading.
June 1 20,000 shares @ P100 2,000,000
December 1 30,000 shares @P120 3,600,000
Transaction for 2022
January 10 Received cash dividend at P10 per share
January 20 Received 20% share dividend
December 10 Sold 30,000 shares at P125 per share

Question:
1. What is the gain on sale of investment using the FIFO approach?
a. 1,150,000
b. 950,000
c. 150,000
d. 550,000
2. What is the gain on sale of investment using the average approach?
a. 950,000
b. 750,000
c. 800,000
d. 900,000

Solution:
Question 1
June 1 December 1
Original shares 20,000 30,000
Share dividend – 20% 4,000 6,000
Total shares 24,000 36,000
Sales price (30,000 x 125) 3,750,000
Cost of shares sold
Fr. June – 24,000 shares 2,000,000
Fr. Dec. 1 – 6,000 shares 600,000 2,600,000
(6k/36k x 3.6M)
Gain on Sale 1,150,000

Question 2
Sale price 3,750,000
Cost of shares sold (30,000/60,000 x 5,600,000) 2,800,000
Gain on sale 950,000

Problem 5
On January 1, 2021, Rands Company purchased 100,000 ordinary shares at P80 per share to be
classified as nontrading through other comprehensive income.

On September 30, 2021, the entity perceived 100,000 share rights to purchase 20,000 shared at
P90 per share. The share rights had an expiration date of February 1, 2022.

On September 30, 2021, each share had a market value of P114 and the share right had a market
value of P6.

Question:
1. What amount should be reported on September 30, 2021 as investment in share rights?
a. 100,000
b. 600,000
c. 400,000
d. 500,000
2. What is the total cost of the new investment if all of the share rights are exercised?
a. 1,800,000
b. 1,600,000
c. 2,200,000
d. 2,400,000

Solution:
Question 1
Cost of rights = 100,000 x 6 = 600,000

Question 2
Cash payment (20,000 x 90) 1,800,000
Cost of rights exercised 600,000
Total cost of new investment 2,400,000

Problem 6

FLUFFY CORP. purchased 40% of Associate Company’s outstanding ordinary shares on

January 2, 2021, for P270,000,000. The book value of Associate Company’s assets
(shareholders’ equity) at the purchase date totaled P450,000,000. Book values and fair values
were the same for all financial statement items except for inventory and buildings, for which fair
values exceeded book values by P12,500,000 and P112,500,000, respectively. All inventory on
hand at the purchase date was sold during 2021. The buildings have average remaining useful
lives of 15 years.
Associate Company reported net income of P110,000,000 for the year ended December 31,
2018, and paid cash dividends of P40,000,000. The fair value of FLUFFY’s investment in
Associate was P300,000,000 at December 31, 2021.

Question:
1. Of the amount paid for the acquisition of Associate Company’s ordinary shared, how
much is attributable to goodwill?
a. P50,000,000
b. P45,000,000
c. P40,000,000
d. P90,000,000
2. What is the investment balance at December 31, 2021?
a. P270,000,000
b. P300,000,000
c. P290,000,000
d. P298,000,000

Solution:
Question 1
Purchase price P270,000,000
Less: Fair value of Associate Company’s net assets
(450M+12.5M+112.5M=575M x 40%) 230,000,000
Goodwill P 40,000,000

Question 2
Purchase Price P270,000,000
Share of net income (110,000,000 x 40%) 44,000,000
Cash dividends received (40,000,000 x 40%) ( 16,000,000)
Increase in cost of goods sold (12,500,000 x 40%) ( 5,000,000)
Additional depreciation
(112.5M x 40% = 45M/15 years) ( 3,000,000)
Investment balance, Dec. 31, 2021 P290,000,000

Problem 7

Duday Company’s permanent investment consists of the following:

3-year 8% P100,000 face value Paul Bonds (cost) 96,500

Cash surrender value of life insurance of the president 15,000
Available-for-sale securities held for long-term appreciation
of value (at cost) 180,000
The cost and market value of these securities are presented here:

Cost Market
Sony Incorporate 80,000 90,000
Macky Corporation 60,000 60,000
Ruela Company 40,000 20,000

Additional information:
1. According to the company’s treasurer, investment in Paul bonds was acquired at
the beginning of the year with the intention of selling it when the need for additional
working capital arises. Interest at 8% is received annually every January 1. Accrued
interest on these bonds had been recorded. Effective interest rate for this type of
securities is 10%. The fair market value of Paul Bonds at the end of the year is P 98,000.
2. As part of additional compensation, the company insured the life of its president for
a total coverage of P2 million pesos. Insurance premium paid during the year amounted
to P54,000. Increase in cash surrender value of 5,000 was credited to insurance
expense account.
3. Subsequent event review revealed that the year-end market decline of Ruela Company
stock was other than temporary.

Question:
1. The total Available-for-sale securities of Roxanne Company at year-end is:
a. 170,000
b. 180,000
c. 185,000
d. 268,000
2. The Paul bond at year-end is:
a. 98,150
b. 98,000
c. 96,500
d. 100,000

Solution:
Question 1
Long-term Investment
Cash surrender value of life insurance 15,000
Long-term MES, at market 170,000
Total 185,000

Question 2
Current MES
3-year 8% P100,000 Paul bonds= P96,500

Problem 8
The following transactions of the Lyn Company were completed during the year 2021:
Jan. 2 Purchased 20,000 shares of Belen Auto Co. for P40 per share plus brokerage costs
of P4,500. These shares were classified as trading securities.

Feb. 1 Purchased 20,000 shares of Malolo Company common stock atP125 per share plus
brokerage fees of P19,000. Lyn classifies this stock as and available-for-sale security.
Apr. 1 Purchased P2,000,000 of RP Treasury 7% bonds, paying 102.5 plus accrued
interest of P35,000. In addition, the company paid brokerage fees of P18,000. Lyn
classified these bonds as a trading security.

Jul. 1 Received semiannual interest on the RP Treasury Bonds.

Aug. 1 Sold P500,000 of RP Treasury 7% bonds at 103 plus accrued interest.

Oct. 1 Sold 3,000 shares of Malolo at P132 per share.

The market values of the stocks and bonds on December 31, 2021, are as follows:
Belen Auto Co. P45 per share
Malolo Company P130 per share
RP Treasury 7% bonds 102

Question:
1. Gain or loss on sale of P500,000 RP Treasury Bonds on August 1, 2021
a. P15,000 gain
b. P 2,500 gain
c. P 2,000 loss
d. P 7,500 loss
2. Gain or loss on sale of 3,000 Malolo shares on October 1, 2021
a. P18,150 loss
b. P18,150 gain
c. P 2,000 loss
d. P21,000 gain

Solution:
Question 1
Sales proceeds (P500,000 x 1.03) P515,000
Less cost of RP Treasury bonds sold (P500,000 x 1.025)* 512,500
Gain on sale of P500,000 RP Treasury Bonds P 2,500

Question 2
Sales proceeds (3,000 shares x P132) P396,000
Less cost of shares sold
{[(20,000 x P125) + P19,000] x 3/20} 377,850
Gain on sale of 3,000 Malolos shares P 18,150

Problem 9

Tyeso Corp. has a building classified as investment property. The building was acquired on
January 1, 2021 at a cost of P50,000,000. The building has an estimated life of 25 years and nil
residual value. The following information is available:
12/31/23 12/31/24
Fair value P45,000,000 42,000,000
Costs of disposal 4,000,000 3,500,000
Value in use 43,000,000 39,500,000

Question:
1. If Tyeso Corp. used the cost model, the total expense to be recognized in 2023 profit or
loss is
a. P 500,000
b. P2,000,000
c. P2,500,000
d. P3,500,000
2. If Tyeso Corp. used the cost model, the total expense to be recognized in 2024 profit or
loss is
a. P 500,000
b. P2,000,000
c. P2,500,000
d. P3,500,000

Solution:
Question 1
Depreciation – 2023 (P50,000,000/25) P2,000,000

Question 2
Depreciation – 2024 (P50,000,000/25) P2,000,000
Impairment loss (40M-39.5M) 500,000
Total expense – 2024 P2,500,000

Problem 1o

Rhino Company, a real estate entity, had a building with a carrying amount of P20,000,000 on
December 31, 2021. The building was used as offices of the entity’s administrative staff.

On December 31, 2021, the entity intended to rent out the building to independent third parties.
The staff will be moved to a new building purchased early in 2021.

On December 31, 2021, the original building had a fair value of P35,000,0000.

On December 31, 2019, the entity also had land that was held for sale in the ordinary course of
business.

The land had a carrying amount of P10,000,000 and fair value of P15,000,000 on December 31,
2019.
On such date, the entity decided to hold the land for capital appreciation. The accounting policy
is to carryall investment property at fair value.-

Question:
1. On December 31, 2019, what amount should be recognized in revaluation surplus as a
result of transfer of the building to investment property?
a. 20,000,000
b. 35,000,000
c. 15,000,000
d. 0
2. On December 31, 2019, what amount should be recognized in profit or loss as a result of
transfer of the land to investment property?
a. 15,000,000
b. 10,000,000
c. 5,000,000
d. 0

Solution:
Question 1
Fair value of building P35,000,000
Carrying amount of building 20,000,000
Revaluation surplus P15,000,000
Question 2
Fair value of land P15,000,000
Carrying amount of land 10,000,000
Gain on reclassification P5,000,000

AUDIT OF PROPERTY PLANT AND EQUIPMENT

Audit of Property, Plant and Equipment (Concept)

 Property, Plant and Equipment (PPE)
- are tangible assets that are held for use in production or supply of goods or services, for
rental to others, or for administrative purposes, and are expected to be used during more
than one period.
- Major characteristics:
o Tangible assets – with physical substance
o Used in business – used in production or supply of goods or services, for rental
purposes and for administrative purposes
o Expected to be used over a period of more than one year

◊ Measurement at recognition
-an item of PPE that qualifies for recognition as an asset shall be measured at cost

-amount of cash or cash equivalent paid and the fair

value of the other consideration given to acquire an asset
at the time of acquisition or construction
-elements:
o Purchase price
o Cost directly attributable
o Cost of dismantling

◊ Measurement after recognition

 - either cost model or the revaluation model

-PPE are carried at cost less any -PPE are carried at revalued carrying
acc. dep and acc. impairment loss amount
Fair value at the date of revaluation less any
subsequent acc. dep. and acc. impairment loss

- shall apply such accounting policy to an entire class of PPE

☼ Acquisition on a cash basis

- General rule: cost of PPE is the cash price equivalent at the recognition date
- simply includes:
o Cash paid
o Directly attributable costs

☼ Acquisition on account
- when subject to a cash discount, cist of asset is equal to the invoice price minus the
discount, regardless of whether the discount is taken or not.

☼ Acquisition on installment basis

- when payment is deferred beyond normal credit terms, the cost is the cash price
equivalent

☼ No available cash price

- asset is recorded at an amount equal to present value of all payments using an implied
interest rate

Philippine GAAP provides that if shares are issued for consideration other than actual cash, the
proceeds shall be measured at the fair value of the consideration received.

☼ Commercial substance
- event or transaction causing the cash flows of the entity to change significantly from the
cash flows of the asset transferred

☼ Derecognition
- PAS 16, paragraph 67, “carrying amount of an item or property, plant and equipment
shall be derecognized on disposal or when no future economic benefits are expected from
the use or disposal
 - gain or loss from the derecognition of an item of PPE shall be included in profit or loss.

☼ Borrowing costs
- interest and other costs that an entity incurs in connection with the borrowing of funds
- may include:
o Interest expense
o Interest in respect of lease liabilities
o Exchange differences
- does not include actual or imputed cost of equity capital including any preferred capital
not classified as a liability pursuant to PAS 32
- borrowing cost that are directly attributable to acquisition, construction or production of
a qualifying asset should be capitalized
- other borrowing costs are recognized as an expense
Asset that take substantial period of
time to get ready for its intended use

- Borrowing costs eligible for capitalization:

o Specific borrowing
o 90General borrowings
☼ Government grants
- assistance by government in the form of transfers of resources to an entity in return for
past or future compliance with certain conditions relating to the operating activities of the
entity
- shall be recognized as income over periods necessary to match them with the related
costs which they are intended to compensate, on a systematic basis

☼ Depreciation
- systematic allocation of the depreciable amount of an asset over its useful life

Audit of Property, Plant and Equipment (Problems and Solutions)

Problem 1

You noted during your audit of the Shine Company that the company carried out a number of
transactions involving the acquisition of several assets. All expenditures were recorded in the
following single assets. All expenditures were recorded in the following single asset account,
identified as Property and equipment:
Property and equipment
Acquisition price of land and building 960,000
Options taken out on several pieces of property 16,000
 List price of machinery purchased 318,400
Freight on machinery purchased 5,000
Repair to machinery resulting from damage during shipment 1,480
Cost of removing old machinery 4,800
Driveways and sidewalks 102,000
Building remodeling 400,000
Utilities paid since acquisition of building 20,800
1,828,480

Based on property tax assessments, which are believed to fairly represent the relative values
involved, the building is worth twice as much as the land. The machinery was subject to a 2%
cash discount, which was taken and credited to Purchases Discounts. Of the two options, 6,000 is
related to the building and land purchased and 10,000 related to those not purchased. The old
machinery was sold at book value.

Question:
Based on the given information and the result of your audit, determine the adjusted balance of
the following:
1. Land
a. 322,000
b. 326,000
c. 424,000
d. 644,000
2. Building
a. 644,000
b. 722,000
c. 1,040,000
d. 1,044,000

Solution:
Questions 1 and 2
Land Building
Allocation of acquisition price:
Land (960,000 x 1/3) 320,000
Building (960,000 x 2/3) 640,000
Option paid on property acquired:
Land (6,000 x 1/3) 2,000
Building (6,000 x 2/3) 4,000
Cost of building remodeling . 400,000
Adjusted balance 322,000 1,044,000
Problem 2

Sax Company acquires a new manufacturing equipment on January 1, 2021, on installment basis.
The deferred payment contract provides for a down payment of 300,000 and an 8-year note for
3,204,260. The note is to be paid in 8 equal annual installment payment of 388,020, including
10% interest. The payments are to be made on December 31 of each year, beginning December
31, 2021. The equipment has a cash price equivalent of 2,370,000. Sax’s financial year-end is
December 31.

Question:
1. What is the acquisition cost of the equipment?
a. 3,404,160
b. 2,804,160
c. 2,370,000
d. 3,104,160
2. The amount to be recognized on January 1, 2021, as discount on note payable is
a. 1,034,160
b. 310,416
c. 837,160
d. 0

Solution:
Question 1
Acquisition cost of equipment (cash price equivalent) 2,370,000

Question 2
Cost of equipment (cash price equivalent) 2,370,000
Less: Down payment 300,000
Amount assigned to note payable 2,070,000
Face value of note 3,104,160
Discount on note payable, January 1, 2021 1,034,160

Problem 3

Isabela Company incurred the following costs during the current year:
Option fee for land acquired 10,000
Option fee for land not acquired 10,000
Taxes in arrears on land 50,000
Payment for land
1,000,000
Architect fee 230,000
Payment to city hall for approval
of building construction 120,000
Contract price for factory building 5,000,000
Safety fence around construction site
35,000
Safety inspection on building 30,000
Removal of safety fence after
completion of building 20,000
New fence surrounding the factory 80,000
Driveway, parking bay and safety lightning 550,000
Trees, shrubs and other landscaping 200,000
Option fee for land acquired 10,000
Option fee for land not acquired 10,000
Taxes in arrears on land 50,000
Payment for land 1,000,000
Architect fee 230,000
Payment to city hall for approval of building construction 120,000
Contract price for factory building 5,000,000
Safety fence around construction site 35,000
Safety inspection on building 30,000
Removal of safety fence after completion of building 20,000
New fence surrounding the factory 80,000
Driveway, parking bay and safety lightning 550,000
Trees, shrubs and other landscaping 200,000

Question:
1. What amount should be recorded as cost of land?
a. 1,060,000
b. 1,260,000
c. 962,000
d. 1,066,000
2. What amount should be recorded as cost of new building?
a. 4,345,000
b. 2,555,350
c. 5,435,000
d. 5,432,450

Solution:
Question 1:
Option fee for land acquired 10,000
Taxes in arrears on land 50,000
Payment for land 1,000,000
Total cost of land 1,060,000

Question 2
Architect fee 230,000
Payment to city hall for approval of building construction 120,000
Contract price for factory building 5,000,000
Safety fence around construction site 35,000
Safety inspection on building 30,000
Removal of safety fence after completion of building 20,000
Total cost of new building 5,435,000

Problem 4

Celine Company exchanged a car from inventory for a computer to be used as a long-term asset.
The following information relates to this exchange:

Carrying amount 600,000

List selling price of the car 900,000
Fair value of the computer 860,000
Cash difference paid by Caine 100,000

Question:
1. What amount of gain should be recognized on the exchange?
a. 760,000
b. 160,000
c. 600,000
d. 100,000
2. What is the cost of computer acquired in exchange?
a. 760,000
b. 960,000
c. 660,000
d. 860,000

Solution:
Question 1
Fair value of the computer 860,000
Less: Cash difference paid by Caine 100,000
Fair value of car - asset given 760,000
Less: Carrying amount 600,000
Gain on exchange 160,000

Question 2
Fair value of car - asset given 760,000
Cash difference paid by Caine 100,000
Cost of computer acquired in exchange 860,000

Problem 5

On January 1, 2021, Tiktok Corporation purchased a tract of land (site number 101) with a
building for 1,800,000. Additionally, Tiktok paid a real state broker’s commission of
108,000, legal fees of 18,000 and title guarantee insurance of 54,000. The closing statement
indicated that the land value was 1,500,000 and the building value was 300,000. Shortly after
acquisition, the building was razed at a cost of P225,000.

Tiktok entered into a 9,000,000 fixed-price contract with Kumu Builders, Inc. on March 1, 2021
for the construction of an office building on the land site 101. The building was completed and
occupied on September 30, 2022. Additional construction costs were incurred as follows:
Plans, specifications and blueprints 36,000
Architect’s fees for design and supervision 285,000

The building is estimated to have a forty-year life from date of completion and will be
depreciated using the 150%-declining-balance method.

To finance the construction cost, Tiktok borrowed 9,000,000 on March 1, 2021. The loan is
payable in ten annual installments of 900,000 plus interest at the rate of 14%. Cabiao used part of
the loan proceeds for working capital requirements. Tiktok’s average amounts of accumulated
building construction expenditures were as follows:
For the period March 1 to December 31, 2005 2,700,000
For the period January 1 to September 31, 2006 6,900,000

Tiktok is using the allowed alternative treatment for borrowing cost.

Question:
1. Cost of land site number 101
a. 1,905,000
b. 1,800,000
c. 2,205,000
 d. 2,151,000
2. Cost of office building
a. 10,581,000
b. 10,360,500
c. 10,329,000
d. 10,960,500

Solution:
Question 1
Acquisition cost 1,800,000
Real estate broker's commission 108,000
Legal fees 18,000
Title guarantee insurance 54,000
Cost of razing the existing building 225,000
Total cost of land site 101 2,205,000

Question 2
Fixed-price contract cost 9,000,000
Plans, specifications and blueprints 36,000
Architect's fees and design supervision 285,000
Capitalizable borrowing cost:
Mar. 1 to Dec. 31, 2021 (2,700,000 x 14% x 10/12) 315,000
Jan. 1 to Sept. 30, 2022 (6,900,000 x 14% x 9/12) 724,500 1,039,500
Total cost of office building 10,360,500

Problem 6

Oslo Company’s property, plant and equipment and accumulated depreciation balances at
December 31, 2021 are:
Accumulated
Cost Depreciation
Machinery and equipment 1,380,000 367,500
Automobiles and trucks 210,000 114,326
Leasehold improvements 432,000 108,000
Additional information follows:
Depreciation methods and useful lives:
Machinery and equipment – straight line; 10 years.
Automobiles and trucks – 150% declining balance; 5 years, all acquired after 2017
Leasehold improvements – straight line
Depreciation is computed to the nearest month.
 Salvage values are immaterial except for automobiles and trucks which have estimated
salvage values equal to 15% of cost.
Other additional information:
Gabaldon entered into a 12-year operating lease starting January 1,
2003. The leasehold improvements were completed on December 31,
2002 and the facility was occupied on January 1, 2003.

b. On July 1, 2006, machinery and equipment were purchased at a total

invoice cost of P325,000. Installation cost of P44,000 was incurred.

c. On August 30, 2006, Gabaldon purchased new automobile for P25,000.

d. On September 30, 2006, a truck with a cost of P48,000 and a carrying

amount of P30,000 on December 31, 2005 was sold for P23,500.

e. On December 20, 2006, a machine with a cost of P17,000, a carrying

amount of P2,975 on date of disposition, was sold for P4,000.
a. Oslo entered into a 12-year operating lease starting January 1, 2019. The leasehold
improvements were completed on December 31, 2018 and the facility was occupied on
January 1, 2019.
b. On July 1, 2022, machinery and equipment were purchased at a total invoice cost of
325,000. Installation cost of 44,000 was incurred.
c. On August 30, 2022, Oslo purchased new automobile for 25,000.
d. On September 30, 2022, a truck with a cost of 48,000 and a carrying amount of 30,000
on December 31, 2021 was sold for 23,500.
e. On December 20, 2022, a machine with a cost of 17,000, a carrying amount of
2,975 on date of disposition, was sold for 4,000.

Question:
1. The gain on sale of truck on September 30 is
a. 2,680 c. 250
b. 6,500 d. 0
2. The gain on sale of machinery on December 20, 2022 is
a. 1,025 c. 13,000
b. 2,727 d. 0
3. The adjusted balance of the property, plant and equipment as of December 31, 2022 is
a. 1,919,000 c. 2,307,000
b. 2,388,500 d. P2,351,000

Solution:
Question 1
Sales proceeds 23,500
 Less carrying value of truck 48,000
Cost
Less acc. dep.: Bal, 1/1/22 (48,000 –
30,000) 18,000
Depreciation for 2022 (30,000 x 30% x
9/12) 6,750 24,750 23,250
Gain on sale of truck 250

Question 2
Sales proceeds 4,000
Less carrying value of machine sold 2,975
Gain on sale of machine 1,025

Question 3
Machinery and equipment:
Balance, 1/1 1,380,000
Acquired, 7/1 (325,000 + 44,000) 369,000
Machine sold, 12/20 (17,000) 1,732,000
Automobiles and trucks:
Balance, 1/1 210,000
Acquired, 8/30 25,000
Truck sold, 9/30 (48,000) 187,000
Leasehold improvements 432,000
Property, plant & equipment, 12/31/22 2,351,000

Problem 7

Your new audit client, Tokyo Company, prepared the trial balance below as of December 31,
2021. The company started its operations on January 1, 2020. Your examination resulted in
the necessity of applying the adjusting entries indicated in the additional data below.
Tokyo Company
TRIAL BALANCE
December 31, 2021
Debits Credits
Cash 510,000
Accounts receivable – net 600,000
Inventories, December 31, 2020 669,000
Land 660,000
Buildings 990,000
Accumulated depreciation, building 19,800
Machinery 444,000
 Accumulated depreciation, machinery 45,000
Sinking fund assets 75,000

Tokyo Company
TRIAL BALANCE
December 31, 2021
Debits Credits
Bond discount 75,000
Treasury stock, common 105,000
Accounts payable 567,000
Accrued bond interest 11,250
First mortgage, 6% sinking fund bonds 679,500
Common stock 1,500,000
Premium on common stock 150,000
Stock donation 180,000
Retained earnings, December 31, 2005 222,450
Net sales 2,625,000
Purchases 850,500
Salaries and wages 507,000
Factory operating expenses 364,500
Administrative expenses 105,000
Bond interest 45,000
6,000,000 6,000,000
Additional data are as follows:
1. The 1,500,000 common stock was issued at a 10 percent premium to the owners of the
land and buildings on December 31, 2019, the date of organization. Stock with a par
value of 180,000 was donated back by the vendors. The following entry was made:
Treasury stock 180,000
Stock donation 180,000
The stock was donated because the proceeds from its subsequent sale were to be
considered as an allowance on the purchase price of land and buildings in
proportion to their values as first recorded. The treasury stock was sold in
2006 for 75,000, which was credited to Treasury Stock.
2. On December 31, 2021, a machine costing 15,000 when the business started was
removed. The machine had been depreciated at 10 percent during the first year. The
only entry made was one crediting the Machinery account with its sales price of 6,000.
3. Depreciation is to be provided on the straight-line basis, as follows: buildings, 2
percent of cost; machinery, 10 percent of cost. Ignore salvage values.

Question:
 1. The correct balance of Land account as of December 31, 2021 is
a. 660,000 c. 630,000
b. 588,000 d. 0
2. The adjusted carrying value of Building as of December 31. 2021 is
a. 907,200 c. 905,400
b. 950,400 d. 945,000

Solution:
Question 1
Land Building Total
Unadjusted balances 660,000 990,000 1,650,000
Proceeds from sale of donated stock
Applied as deduction to:
Land (75,000 x 660/1650) (30,000) (30,000)
Bldg. (75,000 x 660/1650) . (45,000) (45,000)

Adjusted balances 630,000 945,000 1,575,000

Question 2
Adjusted cost of building (see no. 1) 945,000
Less accumulated depreciation, 12/31/06 (P945,000 x 2% x 2) (37,800)
Carrying value of building, 12/31/06 907,200

Problem 8

The third year of a construction project of Taylor Company began with a 3,000,000 balance in
construction in progress. Included in that figure is 600,000 of interest capitalized in the first two
years. Construction expenditures during the third year were 8,000,000 which were incurred
evenly throughout the entire year. The entity had 30,000,000 in interest-bearing debt outstanding
in the third year at an interest rate of 9%

Question:
1. What amount of interest for the third year is capitalized?
a. 36,000 c. 936,000
b. 630,000 d. 990,000
2. What amount should be reported as interest expense for the third year?
a. 2,700,000 c. 2,070,000
b. 1,980,000 d. 1,350,000

Solution:
 Question 1
Balance- 1st and 2nd year 3,000,000
Construction expenditures- 3rd year (8m/2) 4,000,000 4,000,000
Total 7,000,000

Capitalized Interest (7m x 9%) 630,000 630,000

Question 2
Actual borrowing cost (30M x 9%) 2,700,000
Capitalize borrowing cost (630,000)
Interest Expense 2,070,000

Problem 9

At the beginning of the current year, Mimi Company reported the following balances:
Land 2,200,000
Building 6,500,000

During the current year, the following transactions occurred:

 A piece of land was acquired for 1,600,000.

To be able to acquire the land, 175,000 was paid to a real estate agent, and P 50,000 was
incurred to clear the land.
During the course of clearing the land, timber and gravel were recovered and sold for
25,000
 A second piece of land with a building was acquired for 4,500,000.

The appraiser valued the land at P 2,000,000 and the building at 1,000,000.

Shortly after acquisition, the building was demolished at a cost of 100,000.

A new building was constructed at a cost of P 5,000,000 plus excavation fee 50, 000,
architect fee 80,000 and building permit 70,000

 A third piece of land was acquired for P 2,000,000 and was held for undetermined use.

Question:
 1. What total cost of land should be reported in the statement of financial position under
property plant and equipment?
a. 8,500,000
b. 7,000,000
c. 7,100,000
d. 8,600,000
2. What is the cost of new building?
a. 5,200,000
b. 5,300,000
c. 6,800,000
d. 6,700,000
Solution:
Question 1
Balance of land account on January 1 2,200,000
First piece of land acquired:
Cost 1,600,000
Payment to real estate agent 175,000
Cost of clearing land 50,000
Timber and gravel recovered (25,000
)
1,800,000
Second piece of land acquired (4,500,000 x 2/3) 3,000,000
Total cost of land under property plant and
equipment 7,000,000

Second piece of land with an old building:

Land 2,000,000
Old Building 1,000,000
Total appraised value 3,000,000

Allocated cost:
Land (4,500,000 x 2/3) 3,000,000
Old Building (4,500,000 x 1/3) 1,500,000
Total purchase price 4,500,000

Question 2
Demolition of old building 100,000
New construction cost 5,000,000
Excavation fee 50,000
Architect fee 80,000
Building permits 70,000
 Total cost of new building 5,300,000

Problem 10

Keith Company incurred the following expenditures related to land and building:
Cash paid for land and dilapidated building 1,000,000
Fee for title search 10,000
Survey before construction of new building 20,000
Assessment by city government for drainage project 5,000
Cost of grading, leveling and landfill 45,000
Removal of old building to make room for construction of new building 50,000
Payment to tenants for vacating old building 15,000
Architect fee for new building 200,000
Building permits for new construction 30,000
Excavation before new construction 100,000
New building constructed 6,000,000
Driveway and walk to new building from street as part of building plan 40,000
Temporary quarters for construction crew 80,000
Temporary building to house tools and materials 60,000
Cost of changes during construction to make new building
more energy efficient 50,000
Cost of windows broken by vandals 25,000

Question:
1. What amount should be recorded as cost of land?
a. 1,080,000
b. 1,035,000
c. 1,075,000
d. 1,160,000
2. What amount should be recorded as cost of new building?
a. 6,575,000
b. 6,625,000
c. 6,705,000
d. 6,425,000

Solution:
Question1
Cash paid for land 1,000,000
Fee for title search 10,000
Survey before construction 20,000
Assessment for drainage project 5,000
Cost of grading, leveling and landfill 45,000
Total cost of land 1,080,000

Question 2
Removal of old building 50,000
Payment to tenants 15,000
Architect fee 200,000
Building permits 30,000
Excavation 100,000
New building constructed 6,000,000
Driveway and walk to building 40,000
Temporary quarters for crew 80,000
Temporary building to house tools and materials 60,000
Cost of construction changes 50,000
Total cost of new building 6,625,000
 AUDIT OF INTANGIBLE ASSETS

Audit of Intangible Assets (Concept)

 Intangible Assets
- PAS 38, paragraph 8, ‘an intangible asset is an identifiable nonmonetary asset without
physical substance
- Must be controlled by the entity as a result of past event and from which future economic
benefits are expected to flow to the entity
◊ Recognition of an intangible asset
- recognized if the ff. conditions are present
o Probable that future economic benefits will flow
o Cost of intangible asset can be measured reliably
◊ Initial measurement
- shall be measured initially at cost

Depends on:
o Separate acquisition
o Acquisition as part of a business combination
o Acquisition by way of a government grant
o Acquisition by exchange
o Acquisition by self-creation or internal generation

◊ Recognition as expense
- an expenditure on an intangible item that does not meet the recognition criteria
for an intangible asset shall be expensed when incurred
◊ Subsequent expenditure
- shall be recognized as expense

Acquisition Recognition and Accounting

Purchased separately Recognized and Capitalized at
Cost/Purchased price
Exchange transactions Cost of such item is measured at fair
value.
Granted by government At fair value of normal amount ( Plus )
any expenditure incurred
Acquired in business combination Recognize any intangible asset so
acquired at its fair value.
This may include any Research and
development in progress of acquiree.
Internally generated
☼ IAS 38 Research and Development
- costs incurred on internally generated intangible assets are incurred at Research Phase
and Development stage.
◊ Research costs
- Examples of costs at Research Phase are costs from:
o obtaining new knowledge.
o search for application of knowledge and material.
o testing of materials.
o Research costs are expensed as incurred.
◊ Development costs
- Capitalize as intangible if all of following are met:
o project is technically feasible to complete.
o company intends to complete the project.
o it is capable of being used/sold and future benefits can be generated.
o resources are available to complete it.
o development expenditure can be measured reliably.

◊ Subsequent measurement
Cost Model Revaluation Model
An intangible asset is carried as its  Very rare in practice.
cost (less) any accumulated  Intangible assets may be
depreciation and impairment loss after carried at a revalued amount
initial recognition. (based on fair value) less any
subsequent amortization and
Cost includes: impairment losses only if fair
 expenditure on material and value can be determined by
services used. reference to an active market.
 salaries, wages and other
employment related cost
directly engaged in generating
the asset.

Cost prohibited:
 selling and administration
overheads.
 initial operating losses.
 training expenditure.

 Amortization
With finite life
 Asset must be amortized over
its life.
 Amortization method should
reflect the pattern in which
asset’s future economic
benefits are expected to be
consumed.
 if that pattern cannot be
determine reliably, use
straight-line method

Indefinite life
 The asset should not be
amortized but impairment
review should have carried out
annually.
 The life should be review each
period.
 The change in life is a change
in accounting estimate in
accordance with IAS 8.

☼ Audit Objectives and Procedures

Assertions Audit Objectives Audit Procedures
I. Existence or A. To determine that 1. Obtain an analysis of
Occurrence intangibles exist and are ledger accounts for
represented by contractual intangibles
rights, privileges or 2. Examine
earning power owned by documentation
the company. supporting intangibles.
II. Completenes B. To determine that all 3. Vouch additions to or
s transactions related to acquisitions during the
intangibles have been year.
properly recorded 4. Evaluate dispositions
and write offs during
the year.
III. Rights and C. To determine that the 5. In addition to audit
Obligations intangibles are owned by procedure no. 3, & 4,
 the company evaluate
IV. Valuation or D. To determine that 6. In addition to audit
Allocation intangibles are stated at procedure nos. 3 & 4,
cost less amortization. evaluate amortization.
V. Presentation E. To determine whether 7. Evaluate financial
and presentation and statement presentation
Disclosure disclosures concerning and disclosure
intangibles are adequate
and in accordance

Audit of Intangible Assets (Problems and Solutions)

Problem 1

Jack Industries reports the following patents on its December 31, 2021, statement of financial
position.
Useful Life (at date
Initial Cost Date of Acquisition of acquisition)
Patent A 1,224,000 March 1, 2018 17 years
Patent B 450,000 July 1, 2019 10 years
Patent C 432,000 Sept. 1, 2020 4 years

The following events occurred during the year ended December 31, 2022.

1. Research and development costs of 737,100 were incurred during the year. These costs
were incurred prior to projects achieving economic viability.
2. Patent D was purchased on July 1 for 855,000 It has a remaining life of 9 ½ years.
3. A possible impairment of Patent B’s value may have occurred at December 31, 2022.
This is due to a significant reduction in the demands for certain products protected by
Patent B. The company’s controller estimates the following future cash flows from Patent
B.
December 31, 2023 60,000
December 31, 2024 60,000
December 31, 2025 60,000

The appropriate discount rate to be used for these cash flows is 8%.

Question:
1. What is the total carrying value of Jack’s patents on December 31, 2021?
a. 2,383,500
 b. 1,390,620
c. 2,106,000
d. 1,573,500

2. What amount of impairment loss should be reported by Jack for the year ended December
31, 2023?
a. 137,880
b. 292,500
c. 337,500
d. 154,620

Solution:
Question 1
Patent A
Initial cost 1,224,000
Amortization:
2018 (1,224,000/17 x 10/12) 60,000
2019-2021 (1,224,000 x 3/17) 216,000 (276,000) 948,000

Patent B
Initial cost 450,000
Amortization
2019 (450,000/10 x 6/12) 22,500
2020-2021 (450,000 x 2/10) 90,000 (112,500) 337,500

Patent C
Initial cost 432,000
Amortization
2020 (432,000/4 x 4/12) 36,000
2021 (432,000 x ¼) 108,000 144,000 288,000
Total carrying value of patents, Dec. 31, 2017 1,573,500

Question 2
Patent B
Carrying value, Dec. 31, 2021 337,500
Less: 2018 amortization (450,000 x 1/10) 45,000
Carrying value, Dec. 31, 2022 292,500
Present value of future cash flows (60,000 x 2.5770) 154,620
Impairment loss 137,880

Problem 2
On January 2, 2017, Shine Company acquired a patent for 480,000. The patent had an estimated
useful life of 10 years. At the beginning 2021, the company spent 144,000 in successfully
prosecuting an attempted patent infringement. At the beginning of 2022, the company purchased
for 280,000 a patent that was expected to prolong the life of its original patent 5 years. On July 1,
2025, a competitor obtained rights to a patent that made the company’s patents obsolete.

Question:
1. Carrying amount of patent of patent as of December 31, 2021
a. 240,000
b. 355,200
c. 360,000
d. 369,600
2. Amortization of patent in 2022
a. 52,000
b. 63,520
c. 64,000
d. 64,960

Solution:
Question 1
Cost of patent 480,000
Less amortization up to 12/31/21 (480,000 x 5/10) 240,000
Carrying amount of patent, 12/31/21 240,000

Question 2
Amortization on original patent (240,000/10) 24,000
Amortization on related patent (280,000/10) 28,000
Total amortization in 2022 52,000

Problem 3
A license is acquired July 1, 2018, for 450,000; while it has a legal life of 15 years, due to
rapidly changing environment, management estimates a useful life of only 5 years. Straight-line
amortization will be used. At January 1, 2019, management estimated that the recoverable
amount of the license is only 135,000. Amortization will be taken over 3 years from that point.

On January 1, 2021, due to the change in general economic situations, the license now has a fair
value of 540,000. The entity adopted the revaluation model to measure the license starting
January 1, 2021. The estimated remaining useful lie is now believed to be 5 years.

Question:
 1. How much is the loss on impairment on January 1, 2019?
a. 0
b. 225,000
c. 270,000
d. 300,000
2. How much can be recognized as reversal of impairment loss in 2021 profit or loss?
a. 180,000
b. 270,000
c. 315,000
d. 495,000

Solution:
Question 1
Carrying amount, 1/1/19 (450,000 x 4.5/5) 405,000
Recoverable amount 135,000
Impairment loss 270,000

Question 2
Carrying amount without impairment, 1/1/21
(450,000 x 2.5/5) 225,000
Carrying amount, 1/1/21 (135,000 x 1/3) ( 45,000)
Reversal of impairment loss 180,000

Problem 4

RANDIE . has provided information on intangible assets as follows:

 A patent was purchased from Eidnar Company for 6,000,000 on January 1, 2019. On the
acquisition date, the patent was estimated to have a useful life of 10 years. The patent had
a net book value of 6,000,000 when Eidnar sold it to Randie.
 On February 1, 2020, a franchise was purchased from the Franchisor Company for
1,440,000. The contract which runs for 20 years provides that 5% of revenue from the
franchise must be paid to Franchisor. Revenue from the franchise for 2020 was
7,500,000.
 The following research and development costs were incurred by Randie in 2020:
Materials and equipment 426,000
Personnel 567,000
Indirect costs 306,000
Total 1,299,0007
Because of recent events, Randie, on January 1, 2020, estimates that the remaining useful life of
the patent purchased on January 1, 2019, is only 5 years from January 1, 2020.
Question:
1. On December 31, 2020, the carrying value of the patent should be
a. 4,320,000
b. 6,000,000
c. 1,680,000
d. 0
2. The unamortized cost of the franchise at December 31, 2020 should be
a. 999,999
b. 1,356,250
c. 1,440,000
d. 1,374,000

Solution:
Question 1
Acquisition cost of patent purchased Jan. 1, 2019 6,000,000
Less: Amortization:
2019 (6,000,000/10 years) 600,000
2020 (6,000,000 – 600,000 = 5,400,000/5 years) 1,080,000 1,680,000
Carrying value of patent, Dec. 31, 2020 4,320,000

Question 2
Acquisition cost of franchise purchased Feb. 1, 2020 1,440,000
Less: Amortization (1,440,000/20 years x 11/12) 66,000
Carrying value of franchise, Dec. 31, 2020 1,374,000

Problem 5

Papap Company’s own research department has an on-going project to develop a new production
process. At the end of 2020, Papap had already spent a total 300,000, of which 270,000 was
incurred before November 1, 2020. On November 1, 2020, the company’s newly developed
production process met the criteria for recognition as an intangible asset.

During 2021, Papap incurred additional expenditure of 600,000. At the end of 2021, the
recoverable amount of the intangible asset was estimated to be 570,000, including future cash
flows to complete the process before it is available for its intended use.

Question:
1. At December 31, 2020, the production process should be recognized at cost of
a. 300,000
b. 0
 c. 30,000
d. 270,000
2. What is the total cost of the production process at December 31, 2021?
a. 630,000
b. 600,000
c. 870,000
d. 900,000

Solution:
Question 1
Cost of the production process at Dec. 31, 2020
(300,000 – 270,000) 30,000

Question 2
Expenditure incurred:
From November 1, 2020 - December 31, 2020
(300,000 - 270,000) 30,000
During 2016 600,000
Total as of December 31, 2021 630,000

Problem 6

The following information pertains to Evette company’s intangible assets:

1. On January 1, 2017, Baker signed an agreement to operate as a franchise of Max and Jess
Food Chain, Inc. for an initial franchise fee if 1,500,000. Of this amount 300,000 was
paid when the agreement was signed and the balance is payable in 4 annual payments of
300,000 each beginning in January 1, 2018. The agreement provides that the down
payment is not refundable and no future services are required of the franchisor. The
present value at January 1, 2017 of the 4 annual payments discounted at 14% (the implicit
rate for a loan of this type) is 874,000. the agreement is also providing the 5% of the
revenue from the franchise that must be paid to the franchisor annually. Evette’s revenue
from the franchise for 2017 was 19,000,000. Evette estimates the useful life of the
franchise to be 10 years.
2. Evette incurred 1,300,000 of the experimental and development costs in its laboratory to
develop a patent which was granted on January 2, 2017. Legal fees and other costs
associated with registration of the patent totaled 272,000. Evette estimates that the useful
life of the patent will be 8 years.
3. A trademark was purchased from Eidnar Company for P640,000 on July 1, 2014.
Expenditures for successful litigation in defense of the trademark totaling 163,200 ware
 paid on July 1, 2017. Evette estimates that the useful life of the trademark will be 20
years from the date of acquisition.

Question
1. What is the carrying amount of the franchise at December 31, 2017?
a. 1,350,000
b. 1,500,000
c. 1,056,500
d. 1,174,000
2. What is the carrying amount of the patent at December 31, 2017?
a. 238,000
b. 272,000
c. 1,375,500
d. 258,400

Solution:
Question 1
Down payment 300,000
Present value of 4 annual payments 874,000
Total cost of franchise 1,174,000
Less: Amortization for 2017 (1,174,000/10) 117,400
Carrying value of franchise, Dec. 31, 2017 1,056,600

Question 2
Cost of securing patent on Jan. 2, 2017 272,000
Less: Amortization for 2017 (272,000/8) 34,000
Carrying value of patent, Dec. 31, 2017 238,000

Problem 7

Denver’s Company engaged in the following transactions at the beginning of 2018:

1. Purchased a patent for P700,000 that had originally been filed in January 2012. The
acquisition was made to protect another patent that the company had filed for in January
2014 and subsequently received.
2. Purchased the rights to a novel by a best-selling novelist in exchange for 100,000
ordinary shares (P10 par) selling for P60 per share. The book sells 1 million copies in
2018 and is expected to sell a total of 500,000 copies in future years.
3. Purchased the franchise to operate a ferry service from the government for P100,000. A
bridge has been planned to replace the ferry, and it is expected that it will be completed in
five years. The company hopes that the ferry will continue as a tourist attraction, but
profits are expected to be only 20% of those earned before the bridge is opened.
 4. Paid P280,000 to attorneys for the services to successfully defend the patent acquired in
transaction 1.
5. Paid a taxi operator P500,000 to have the company name prominently displayed on his
taxis for two years.

Question:
Based on the preceding information, determine the carrying value of the following at the end of
2018:
1. Patent
a. 650,000
b. 630,000
c. 800,000
d. 700,000
2. Copyright
a. 4,000,000
b. 6,000,000
c. 2,000,000
d. 3,000,000

Solution:
Question 1
Cost of patent 700,000
Amortization for 2018 (700k/14 years) (50,000)
Carrying value, Dec. 31, 2018 650,000

Question 2
Cost of copyright 6,000,000
Amortization for 2018 (6M x 1M/1.5M) (4,000,000)
Carrying value, Dec. 31, 2018 2,000,000

Problem 8

You gathered the following information related to the patents account of Jo Corporation, a
company manufacturing fortune cookies in connection with your audit of the company’s
financial statements for the year 2021.
In 2020, Jo developed a new machine that reduces the time required to insert the fortune into its
fortune cookies. Because the process is considered very valuable to the fortune cookie industry,
Jo patented the machine.
Research and development laboratory expenses 1,000,000
Metal used in the construction of the machine 320,000
Blueprints used to design the machine 128,000
 Legal expenses to obtain patent 480,000
Wages paid for the employees’ work on the research, development, and
building of the machine 1,200,000
Expense of drawing required by the patent office to be submitted with the
patent application 68,000
Research and development laboratory expenses 1,000,000
Fees paid to the government patent office to process application 100,000

During 2021, Jo paid 150,000 in legal fees to successfully defend the patent against an
infringement suit by Ja Cookies.

Question:
1. What is the cost of the patient?
a. 648,000
b. 680,000
c. 780,000
d. 580,000
2. What is the cost of machine?
a. 1,655,000
b. 1,560,000
c. 1,168,000
d. 1,347,000

Solution:
Question 1
Legal expenses to obtain patent 480,000
Expense of drawing required by the patent
office 68,000
Fees paid to the government patent office 100,000
Cost of patent 648,000

Question 2
Metal used in the construction of the machine 320,000
Blueprints used to design the machine 128,000
Wages paid to the employees (P1.2M x 60%) 720,000
Cost of machine 1,168,000

Problem 9

Sissy Corporation spent 510,000 in research and development costs. These activities resulted to a
new product called the MDOC. It was patented at additional legal and other costs of 54,000. The
patent application was filed on October 1, 2014, and the patent was estimated to have a useful
life of 10 years.
On June 1, 2016, Sissy spend 28,440 to successfully prosecute a patent infringement. In addition,
the patent’s estimated useful life was extended to 12 years from June 1, 2016. At the beginning
of 2018, Sissy determined that a competitor’s product would make the MDOC obsolete and the
patent worthless by December 31, 2019.

Question:
1. What is the patent amortization expense in 2014?
a. 3454
b. 6,310
c. 1,350
d. 3,544
2. What is the patent amortization expense in 2015?
a. 5,400
b. 6,340
c. 4,232
d. 5,332

Solution:
Question 1
Patent amortization for 2014:
Oct. 1 – Dec. 31 (54,000/10 x 3/12) 1,350

Question 2
Patent amortization for 2015:
Jan. 1 – Dec. 31 (P54,000/10) 5,400

Problem 10

You have been instructed by Beth Company, a high-flying conglomerate, to conduct a purchase
audit of Rand Co.’s books to determine a possible purchase price for Rand Co.’s net assets. You
find the following information:

Total identifiable assets of EXO Co, at fair market value 5,000,000

Liabilities 1,200,00
Average rate of return on net assets for EXO Co.’s industry 15%
Forecasted earnings per year based on past earing figures 700,000

Question:
1. Goodwill is equal to 3 years’ excess earnings
 a. 4,190,000
b. 5,334,000
c. 4,356,000
d. 3,565,000
2. Goodwill is equal to the capitalization of excess earnings at 15%
a. 7,000,000
b. 4,666,667
c. 5,545,000
d. 3,455,000

Solution:
Total identifiable assets 5,000,000
Less: liabilities 1,200,000
Net assets 3,800,000
Average rate of return on net assets X 15%
Average earnings P570,000

Forecasted earnings 700,000

Average earnings 570,000
Excess Earnings 130,000

Question 1
Goodwill – 3 years excess (130,000 x 3) 390,000
Net Assets 3,800,000
Purchase price 4,190,000

Question 2
Goodwill (130,000/15%) 866,667
Net assets 3,800,000
Purchase price 4,666,667
---------------------------------- Thank You ----------------------------------