VI AUDIT OF INTANGIBLE AND OTHER ASSETS

SUMMARY OF PROBLEMS

PROBLEM NO. 1 Audit of recognition and measurement of intangible assets (including preparation of a

PROBLEM NO. 2 Audit of patent

PROBLEM NO. 3 Amortization and impairment of intangible assets

PROBLEM NO. 4 Amortization and impairment of intangible assets

PROBLEM NO. 5 Expenses related to intangible assets

PROBLEM NO. 6 Impairment of cash generating unit

PROBLEM NO. 7 Impairment and reversal of impairment in a cash-generating unit

PROBLEM NO. 8 Impairment, reversal of impairment and revaluation of patent

PROBLEM NO. 9 Audit of intangibles and other assets

PROBLEM NO. 10 Audit of intangibles and other assets

PROBLEM NO. 11 - Theory

assets (including preparation of adjusting journal entries)

nerating unit
PROBLEM NO. 1 - Zerg Corporation

Requirement No. 1
1/2 Organization expenses 233,000
Intangible assets 233,000

1/15 Advertising expense 15,000

Intangible assets 15,000

4/1 Patents 490,000

Intangible assets 490,000

5/1 Licences (P300,000 x 2/3) 200,000

Trademark 100,000
Intangible assets 300,000

7/1 Building 1,310,000

Intangible assets 1,310,000

12/31 Research and development expense 1,750,000

Intangible assets 1,750,000

Amortization expense 158,000

Patent (P490,000/5) 98,000
Licences (P200,000/5) 40,000
Trademark (P100,000/5) 20,000

Requirement No. 2
Cost
Patent 490,000
Licences 200,000
Trademark 100,000 790,000
Less amortization
Patent (P490,000/5) 98,000
Licences (P200,000/5) 40,000
Trademark (P100,000/5) 20,000 158,000
Carrying amount, 12/31/12 632,000

Requirement No. 3
Organization expenses (Jan. 2 transaction) 233,000
Advertising expense (Jan. 15 transaction) 15,000
R and D expense (Dec. 31 transaction) 1,750,000
Total 1,998,000
PROBLEM NO. 2 - TLL Cookie Corporation

Requirement No. 1
Metal used in the construction of the machine 480,000
Blueprints used to design the machine 192,000
Wages paid to the employees (P1,800,000 x 60%) 1,080,000
Cost of machine 1,752,000

Requirement No. 2
Research and development laboratory expenses 1,500,000
Wages paid to the employees (P1,800,000 x 40%) 720,000
R & D expense 2,220,000

Requirement No. 3
Legal expenses to obtain patent 720,000
Expense of drawing required by the patent office 102,000
Fees paid to the government patent office 150,000
Cost of patent 972,000
Less amortization up to 12/31/12 (P972,000 x 2/20) 97,200
Carrying amount of patent, 12/31/12 874,800

Notes: Cost of defending the patent should be expensed

Since the useful life is not given, the patent was amortized using
the legal life of 20 years.
PROBLEM NO. 3 - Terran Corporation
Requirement No. 1
Patent (P200,000/10) 20,000
Computer software [P100,000 x (60/120)] 50,000
Total amortization 70,000
*The useful lives of copyright and tradename are indefinite, so no amortization expense is recognized.
** Goodwill is not amortized.

Requirement No. 2
Impairment loss
Copyright:
Carrying amount 400,000
Recoverable amount (P8,000/0.05) 160,000 240,000
Tradename:
Carrying amount 350,000
Recoverable amount (P15,000/0.05) 300,000 50,000
Goodwill:
Carrying amount of Anne Manufacturing unit 3,000,000
Recoverable amount (P200,000 x 14.0939) 2,818,780 181,220
Total impairment loss 471,220

Requirement No. 3
Original amount of Goodwill 900,000
Less impairment loss 181,220
Carrying amount of Goodwill, 12/31/12 718,780

Question No. 4 - A
Patent (P200,000 - P20,000) 180,000
Copyright (recoverable amount) 160,000
Tradename (recoverable amount) 300,000
Computer software (P100,000 - P50,000) 50,000
Carrying amount of other intangible assets, 12/31/12 690,000
PROBLEM NO. 4 - Probe Corporation

Requirement No. 1
Trademark* -
Goodwill* -
Customer list (P220,000/3) 73,333
Total amortization 73,333
*The useful life is indefinite, so no amortization expense is recognized.

Requirement No. 2
Impairment loss
Trademark:
Carrying amount 300,000
Recoverable amount (P10,000/0.06) 166,667 133,333
Goodwill*:
Carrying amount of Manufacturing unit
(P2,700,000 + P1,500,000 - P1,800,000) 2,400,000
Recoverable amount (P250,000 x 12.0416) 3,010,400 -
Customer list
Carrying amount (P220,000 - P73,333) 146,667
Recoverable amount:
2013: (P120,000 x 0.9434) 113,208
2014: (P80,000 x 0.8900) 71,200 184,408 -
Total impairment loss 133,333

*Since goodwill does not generate cash flows independently from other assets or group
of assets, the recoverable amount of goodwill as an individual asset cannot be
determined. Therefore, the recoverable amount is determined for the cash
generating unit to which goodwill belongs.

Requirement No. 3
Cost 300,000
Less impairment loss 133,333
Carrying amount of Trademark, 12/31/12 166,667

Requirement No. 4
Since goodwill is not amortized and is not impaired as of 12/31/12,
the carrying amount is P1,500,000.

Requirement No. 5
Cost 220,000
Less amortization for 2012 73,333
Carrying amount of Customer List, 12/31/12 146,667
PROBLEM NO. 5 - Five Company

Requirement No. 1
Down payment 200,000
Add PV of installment payments (P120,000 x 2.9137) 349,644
Cost of franchise 549,644
2012 amortization (P549,644/10) (54,964)
Carrying amount of franchise, 12/31/12 494,680 eboy

Requirement No. 2
Cash paid 400,000
Fair value of shares issued (10,000 x P20) 200,000
PV of note payable (P500,000 x 0.7118) 355,900
Cost of patent 955,900
2012 amortization (P955,900/10 x 6/12) (47,795)
Carrying amount of patent, 12/31/12 908,105

Requirement No. 3
Franchise related expenses
Amortization of franchise (see no. 1) 54,964
Periodic franchise fee (P8,000,000 x .05) 400,000
Interest expense (P349,644 x .14) 48,950 503,914
Patent related expenses:
Amortization (see no. 2) 47,795
Interest expense (P355,900 x .12 x 6/12) 21,354 69,149
Trademark related expense (Impairment loss)
Carrying amount 1,200,000
Recoverable amount:
Outcome 1 (P40,000/.05 x .7) 560,000
Outcome 2 (P80,000/.05 x .3) 480,000
1,040,000 160,000
Total expenses - 2012 733,063
PROBLEM NO. 6 - Rodeo Corporation

CA after
Carrying Impairment CA after Impairment impairment
Assets amount allocated impairment reallocation reallocation
1 Goodwill 200,000 (200,000) - - -
2 Operating license 1,200,000 (333,333) 866,667 33,333 900,000
3 Property-train stations a 300,000 (83,333) 216,667 (16,667) 200,000
4 Rail tracks and coaches 300,000 (83,333) 216,667 (16,667) 200,000
5 Steam engines (2) 1,000,000 (500,000) 500,000 - 500,000
3,000,000 (1,200,000) 1,800,000 1,800,000

Computation of impairment loss:

Carrying amount of the CGU 3,000,000
Recoverable amount (VIU) 1,800,000
Impairment loss 1,200,000

Allocation of impairment loss:

Exploded steam engine (500,000)
Goodwill (200,000)
Balance pro rata (Operating license, Train stations and Rail tracks) (500,000)

Re-allocation of impairment loss:

Pro rata (Train stations and Rail tracks) 33,333

Alternative solution:
Carrying Impairment CA after
Assets amount allocated impairment
1 Goodwill 200,000 (200,000) -
2 Operating license 1,200,000 (300,000) 900,000
3 Property-train stations a 300,000 (100,000) 200,000
4 Rail tracks and coaches 300,000 (100,000) 200,000
5 Steam engines (2) 1,000,000 (500,000) 500,000
3,000,000 (1,200,000) 1,800,000

Allocation of impairment loss:

Exploded steam engine 500,000
Goodwill 200,000
Operating license (P1,200,000 - P900,000) 300,000
Balance pro rata (Train stations and Rail tracks) 200,000
1,200,000
PROBLEM NO. 7 - Tweak Corporation

Requirement No. 1 500,000

CA I.L. Allocation* CA after 1%
Buildings 240,000 (9,600) 230,400 wood
Factory machinery 180,000 (7,200) 172,800 wood
Goodwill 15,000 (15,000) - Christian
Inventory 80,000 (3,200) 76,800 wood
Receivables 35,000 35,000 Christian
Cash 20,000 20,000 Christian
570,000 (35,000) 535,000
* Charge the impairment loss first to goodwill. The balance (P20,000) will be
allocated pro rata to the other assets in the unit except cash and receivables.

Requirement No. 2
Reversal of impairment loss on impaired assets:
Inventory - Sold already. No more reversal.
Goodwill - Not allowed.
Buildings - Allowed subject to limit.
Machinery - Allowed subject to limit.

Computation of limit on the extent of reversal:

Buildings Machinery Total
CA, 12/31/12 - without impairment
Buildings (P240,000 - P60,000) 180,000
Machinery (P180,000 - P45,000) 135,000
CA, 12/31/12 - with impairment
Buildings (P230,400 - P65,000) 165,400
Machinery (P172,800 - P50,000) 122,800
14,600 12,200 26,800
Alternative computation:
Buildings Machinery Total
Allocated impairment loss 9,600 7,200 16,800
Increase in depreciation 5,000 5,000 10,000
14,600 12,200 26,800
*Since the excess of RA over the CA did not exceed the limit, the reversal would be
based on a pro rata allocation based on carrying amounts at time of reversal.

CA Allocation* CA after
Buildings 165,400 11,478 176,878
Machinery 122,800 8,522 131,322
288,200 20,000 308,200 Shiela
al would be
PROBLEM NO. 8 - Protoss Corporation

Requirement No. 1 2%
Carrying amount, 1/1/10 (P250,000 x 4.5/5) 225,000
Recoverable amount 75,000
Impairment loss 150,000 Donna

Requirement No. 2
Fair value, 1/1/12 300,000
Carrying amount, 1/1/12 (P75,000 x 1/3) 25,000
Revaluation increase 275,000

CA without impairment, 1/1/12 (P250,000 x 2.5/5) 125,000

Carrying amount, 1/1/12 (P75,000 x 1/3) 25,000
Gain on impairment recovery 100,000 Aquino, persia

Requirement No. 3
Revaluation increase 275,000
Gain on impairment recovery (100,000)
Revaluation surplus, 1/1/12 175,000
Realized - 2012 (P175,000/5) (35,000)
Revaluation surplus, 12/31/12 140,000 Dimaano

Requirement No. 4
Carrying amount (Fair value), 1/1/12 300,000
Amortization - 2012 (P300,000/5) (60,000)
Carrying amount, 12/31/12 240,000 Judie De leon

page 11 of 14
PROBLEM NO. 9 - Naga Corporation

Requirement No. 1
Present of note received (P5,000,000 x 0.675) 3,375,000
Less carrying amount of patent, 5/1/12:
Carrying amount, 1/1/11 2,450,000
Amortization up to 5/1/12 (P3,150,000/15x4/12) (70,000) 2,380,000
Gain on sale of patent 995,000

Requirement No. 2
Note receivable from sale of patent (P3,375,000 x 14% x 8/12) 315,000
Installment contract:
1/1 to 3/31 (P7,200,000 x 13% x 3/12) 234,000
4/1 to 12/31 (P5,400,000 x 13% x 9/12) 526,500 760,500
Total interest income - 2012 1,075,500

Requirement No. 3
Installment contract receivable, 12/31/11 7,200,000
Less principal payment received, 3/31/12 1,800,000
Balance, 12/31/12 5,400,000
Less principal payment to be received, 3/31/13 1,800,000
Noncurrent portion 3,600,000 shiela

Requirement No. 4
CA - NR from sale of patent, 5/1/12 3,375,000
Amortization of discount, 5/1/ to 12/31 (P3,375,000 x 14% x 8/1 315,000
CA - NR from sale of patent, 12/31/12 3,690,000 dimaano

Requirement No. 5
Acquisition cost 18,800,000
Dividends received (750,000 x 2) (1,500,000)
Share of profit (P7,040,000 x 25%) 1,760,000
CA - Investment in Pure Corp., 12/31/12 19,060,000 antiquera
PROBLEM NO. 10 - GDL, Inc.

Requirement No. 1
Patent amortization (P1,680,000/6) 280,000
Trademark -
Noncompetition agreement (P2,000,000/5) 400,000
Total amortization 680,000

Requirement No. 2
Patent (P1,680,000 - P280,000) 1,400,000
Trademark (P8,000,000 x 3/4) 6,000,000
Noncompetition agreement (P2,000,000 - P400,000) 1,600,000
Carrying amount of intangible assets, 12/31/12 9,000,000

Requirement No. 3
Deferred tax asset, 12/31/11 360,000
Decrease in deferred tax asset:
Decrease in unearned rent (P200,000 x 35%) (70,000)
Increase in warranty liability (P150,000 x 35 52,500 (17,500)
Deferred tax asset, 12/31/12 342,500
PROBLEM NO. 11 - Theory

1 D
2 C
3 A
4 B
5 A
6 A
7 D
8 B