4.
When an internally generated asset meets the
ACCOUNTING 502
QUIZ 1 – FINAL
SET A
(for exclusive use by SAMCIS, Saint Louis University,
2600 Baguio City, Philippines)
GENERAL INSTRUCTIONS:
You are allowed to have three (3) 10-column or 12-column
worksheets ONLY. Write on the upper leftmost portion of each
worksheet “Page 1”, “Page 2”, and “Page 3” for pagination.
Erasures, superimpositions, or any form of alterations on the
pagination will INVALIDATE your quiz. Use blue or black ink
only.
Multiple Choice
INSTRUCTIONS: Write your answers on the DATE COLUMN
of Page 1 ONLY. Use the numbering on the left most portion
of the column. Answers for multiple choice written on either
Page 2 or Page 3 will not be considered. Erasures,
superimpositions, or any form of alterations will invalidate
your answers. Solutions for the multiple-choice problems are
not required. (2 points each)
1. In evaluating control risk and effectiveness for
intangible assets, controls should be designed for
numerous purposes. Which of the following is not a
usual control for intangible assets?
A. Ensure that decisions are appropriately made as to
when to capitalize or expense research and
development expenditures
B. Develop amortization schedules that reflect the
remaining useful life of patents or copyrights
associated with the assets
C. Identify and account for intangible asset
impairment
D. All of the above are usual controls for intangible
assets
2. The most effective means for the auditor to determine
whether a recorded intangible asset possesses the
characteristics of an asset is to:
A. Vouch the purchase by reference to underlying
documentation
B. Inquire as to the status of patent applications
C. Evaluate the future revenue-producing capacity of
the intangible asset
D. Analyze research and development expenditures to
determine that only those expenditures possessing
future economic benefit have been capitalized
3. 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
B. Completeness
C. Existence or occurrence
D. Rights and obligations
recognition criteria, the appropriate treatment for costs
previously expensed is:
A. Reinstatement
B. No adjustment as these amount may not be
reinstated
C. Include in the cost of the development of the asset
D. Capitalize into the cost of the asset and adjust the
opening balance of retained earnings
5. Which statement is correct regarding initial recognition
of research and development cost?
A. All research costs should be charged to expense
B. All development costs should be capitalized
C. If an entity cannot distinguish the research phase
of an internal project to create an intangible asset
from the development phase, the enterprise treats
the expenditure for that project as if it were
incurred in the development phase only
D. A research and development project acquired in a
business combination is not recognized as an asset
6. Assuming TLL Co. has capitalized all research and
development costs associated with patent. You, CPA,
who is examining this account, will probably:
A. Confer with management regarding transfer of the
amount from the balance sheet the income
statement
B. Confirm that the patent is registered and on file
with the intellectual property office
C. Confer with management regarding a change in the
title of the account to goodwill
D. Confer with management regarding ownership of
the patent
7. Which of the following comparisons would be the most
appropriate audit test for the amount of recorded
goodwill?
A. The purchase price and the book value of net assets
purchased
B. The purchase price and the fair value of net assets
purchased
C. The figure for goodwill specified in the contract for
purchase
D. Earnings in excess of 5% of net assets for the past
five years
8. In auditing accounts payable, an auditor’s procedures
most likely will focus primarily on management’s
assertion of:
A. Existence
B. Presentation and disclosure
C. Completeness
D. Valuation
9. An auditor performs a test to determine whether all
merchandise for which client was billed was received.
The population for this test consists of all:
A. Merchandise received
B. Vendor’s invoices
C. Canceled checks
D. Receiving reports
10. The primary audit test to determine if accounts payable
are valued properly is:
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ACCOUNTING 502 – QUIZ # 1 (FINAL) 2
May 4, 2019

A. Confirmation of accounts payable Transactions during 2019 included the following:

B. Vouching accounts payable to supporting
documentation
C. An analytical procedure
D. Verification that accounts payable was reported as
a current liability in the balance sheet
11. Which of the following procedures is least likely to be
performed before the balance sheet date?
A. Observation of inventory
B. Search for unrecorded liabilities
C. Testing of internal control over cash
D. Confirmation of receivables
12. When title to merchandise in transit has passed to the
audit client, the auditor engaged in the performance of
a purchase cut-off will encounter the greatest difficulty
in gaining assurance with respect to the:
A. Quantity
B. Price
C. Quality
D. Terms
13. Which of the following audit procedures is least likely to
detect an unrecorded liability?
A. Analysis and re-computation of interest expense
B. Analysis and re-computation of depreciation
expense
C. Mailing of standard bank confirmation forms
D. Reading of the minutes of meetings of the board of
directors
14. Unrecorded liabilities are most likely to be found during
the review of which of the following documents?
A. Unpaid bills
B. Shipping records
C. Bills of lading
D. Unmatched sales invoices
Jan. 2 Paid legal fees of P150,000 and stock certificate
costs of P83,000 to complete the organization
of the corporation.
Jan. 15 Hired a clown to stand in front of the
corporation office for 2 weeks and hand out
pamphlets and candy to create goodwill for the
new enterprise. Clown costs P10,000 and
pamphlets and candy for P5,000.
Apr. 1 Patented a newly developed process with costs
as follows:
Legal fees to obtain patent P 429,000
Patent application/licensing 61,000
Total P 490,000
It is estimated that in 5 years, other companies
will have developed improved processed,
making the Zinc Corporation process obsolete.
May 1 Acquired both a license to use as a special type
of container and a distinctive trademark to be
printed on the container in exchange for 6,000
no-par, ordinary shares of Zinc selling for P50
per share. The license is worth twice as much
as the trademark, both of which may be used
for 5 years.
Jul. 1 Constructed a shed for P1,310,000 to house
prototypes of experimental models to be
developed in future research projects.
Estimated useful life is 5 years with no residual
value. Zinc plans to use straight-line method.
Dec. 31 Paid salaries for an engineer and chemist
involved in research and development totaling
P1,750,000 in 2015.
It is the company’s policy to take full year amortization
and depreciation in the year of acquisition.

15. In verifying debits to perpetual inventory records of a 16. Compute the carrying amount of the Intangible Assets
non-manufacturing firm, the auditor is most interested as of December 31, 2019.
in examining the purchase: A. 565,000
A. Journal B. 625,000
B. Orders C. 632,000
C. Requisitions D. 655,000
D. Invoices
17. Compute the total amount resulting from the foregoing
Use the following information to answer 16 – 17: transactions that should be expensed when incurred.
The accountant of newly organized Zinc Corporation A. 1,998,000
provided to you the following details pertaining to the B. 2,098,000
company’s Intangible Assets account for 2019: C. 2,100,000
D. 2,150,000
Intangible Assets
Date Description Amount Use the following information to answer 18 – 21:
Jan. 2 Organization Costs P 233,000 Aluminum Corporation engaged you for the first time to
Jan. 15 Goodwill 15,000 audit their financial statements as of and for the period
Apr. 1 Patent 490,000 ended December 31, 2017. They presented the following
May 1 License and Trademark 300,000 balances of their intangibles as of December 31, 2017:
Jul. 1 R&D Laboratory 1,310,000
Dec. 31 Product Development Costs 1,750,000
Total P 4,098,000

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ACCOUNTING 502 – QUIZ # 1 (FINAL)
May 4, 2019
Patent A P 1,317,500
Patent B 2,200,000
Patent C 2,000,000
Trademark 1,000,000
Franchise 4,050,000
Relevant information related to the intangibles are as
follows:
a. The entity incurred P800,000 research and
development costs in 2016 related to the Patent A.
Aluminum Corporation incurred P750,000 for the
application of the patent, and it was approved on July
2, 2016. The entity estimated that the useful life of the
patent is 10 years. The entity capitalized all costs
incurred related to the patent, including the research
and development costs, and amortized the patent
accordingly.
b. Patent B was purchased last January 2, 2017 for
P2,500,000. Based from the previous owner’s estimate,
the remaining useful life of the patent upon purchase
was 2 years, however, Aluminum Corporation expects
to benefit from the patent for 5 years from the date of
acquisition. On December 30, 2017, the entity
successfully defended the patent from an infringement
lawsuit. The company paid P200,000 legal expenses,
which was capitalized by the entity. The entity
amortized the patent accordingly.
c. Aluminum Corporation applied for another patent
(Patent C) on June 30, 2017. The entity incurred
P2,000,000 for the registration of the patent, and
expects to benefit from the patent for the whole duration
of its legal life. However, the entity was not able to
provide an amortization for this patent.
d. The trademark was purchased last November 2, 2017
for P1,000,000. The useful life of the said trademark is
deemed to be indefinite. By the end of 2017, the
recoverable amount of the trademark is P1,050,000.
e. A franchise agreement was entered into by your client
on January 2, 2017. The initial franchise fee is
P5,000,000, and the franchise is good for 5 years.
Aluminum Corporation is required to pay 5% of its
annual revenue from the franchise. The entity
generated P1,000,000 during 2017, and capitalized the
additional payment made in 2017.
18. How much is understatement or overstatement of the
retained earnings by the end of 2016?
A. 760,000 overstatement
B. 760,000 understatement
C. 800,000 overstatement
D. 800,000 understatement
19. How much is the correct total amortization expense for
2017?
A. 1,125,000
B. 1,550,000
C. 1,575,000
D. 1,625,000
20. How much is the correct total expense related to the
intangibles for 2017?
3
A. 1,375,000
B. 1,800,000
C. 1,825,000
D. 1,875,000
21. What is the correct carrying value of the intangibles on
December 31, 2017?
A. 8,587,500
B. 9,537,500
C. 9,587,500
D. 9,637,500
Use the following information to answer 22 – 24:
Gold Corporation carries a wide variety of musical
instruments, sound reproduction equipment, recorded
music, and sheet music. To promote the sale of its products,
Gold Corporation uses two promotion techniques –
premiums and warranties.
PREMIUMS
The premium is offered on the recorded and sheet music.
Customers receive a coupon for each P10 spent on recorded
music and sheet music. Customers may exchange 200
coupons and P200 for a CD player. Gold Corporation pays
P340 for each CD player and estimates that 60% of the
coupons given to customers will be redeemed. A total of
6,500 CD players used in the premium program were
purchased during the year and there were 1,200,000
coupons redeemed in 2016.
WARRANTIES
Musical instruments and sound reproduction equipment
are sold with a one-year warranty for replacement of parts
and labor. The estimated warranty cost, based on past
experience, is 2% of sales. Replacement parts and labor for
warranty work totaled P1,640,000 during 2016.
Gold Corporation uses the accrual method to account for
the warranty and premium costs for financial reporting
purposes. Gold Corporation’s sales for 2016 totaled P72
million – P54 million from musical instruments and sound
reproduction equipment, and P18 million from recorded
music and sheet music. The balances in the accounts
related to warranties and premiums on January 1, 2016
were as shown below:
Inventory of premium CD players 399,500
Estimated premium claims outstanding 448,000
Estimated liability from warranties 1,360,000
Based on the preceding information, determine the amounts
that will be shown on the 2016 financial statements for the
following:
22. Estimated liability from warranties
A. 240,000
B. 800,000
C. 1,080,000
D. 1,920,000
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ACCOUNTING 502 – QUIZ # 1 (FINAL)
May 4, 2019
23. Inventory of premium CD players
A. 399,500
B. 569,500
C. 739,500
D. 2,210,000
24. Estimated premium claims outstanding
A. 364,000
B. 672,000
C. 756,000
D. 840,000
Use the following information to answer 25 – 27:
You are engaged to audit the December 31, 2016, financial
statements of Magnesium Company, a manufacturer of
household appliances. Your audit disclosed the following
situations.
a. In June 2016, the company began producing and
selling a new line of dishwasher. By the end of the year,
it had sold 120,000 to various dealers for P15,000 each.
The product was sold under a 1-year warranty, and the
company estimates warranty costs to be P750 per
dishwasher. Magnesium had paid out P30 million in
warranty expenses as of December 31, 2016 which is
also the amount shown as warranty expense in its
income statement for the current year.
b. In response to your letter of audit inquiry, Magnesium’s
lawyer informed you that the company is involved in a
lawsuit for violating environmental laws regulating
hazardous waste. Although the litigation is pending,
Magnesium’s lawyer is certain that Magnesium will
most probably have to pay cleanup costs and fines of
P5,500,000. Magnesium neither accrued nor disclosed
this loss in the financial statements.
c. Magnesium is the defendant in a patent infringement
suit by Megan Yang over Magnesium’s use of hydraulic
compressor in several of its manufactured appliances.
Magnesium’s lawyer informed you that if the suit goes
against your audit client, the loss may be as much as
P10 million. However, the lawyer believes that the loss
of this suit is only possible. Magnesium did not in any
way disclose this pending litigation in its financial
statements.
25. What amount of warranty expense should be shown on
Magnesium’s income statement for the year ended
December 31, 2016?
A. 30,000,000
B. 60,000,000
C. 90,000,000
D. Zero
26. What amount of warranty liability should be shown on
Magnesium’s statement of financial position as of
December 31, 2016?
A. Zero
B. 30,000,000
C. 60,000,000
D. 90,000,000
4
27. What amount of lawsuit liability should be reported as
a provision on Magnesium’s December 31, 2016,
statement of financial position?
A. Zero
B. 5,500,000
C. 10,000,000
D. 15,500,000
Use the following information to answer 28:
At December 31, 2018, Hydrogen Company’s liabilities
include the following:
▪ P10 million of 10% notes are due on March 31, 2023.
The financing agreement contains a covenant that
requires Hydrogen to maintain current assets at least
equal to 200% of its current liabilities. As of December
31, 2018, Hydrogen has breached this loan covenant.
On February 10, 2019, before Hydrogen’s financial
statements are authorized for issue, Hydrogen obtained
a grace period from Manganese Bank until January 31,
2020, having convinced the bank that the company’s
normal 3 to 1 ratio will be re-established during 2019.
▪ P15 million of noncancelable 12% bonds were issued at
face value on September 30, 1997. The bonds mature
on August 31, 2019. Hydrogen expects to have
sufficient cash available to redeem the bonds at
maturity.
▪ P20 million of 10% bonds were issued at face value on
June 30, 1999. The bonds mature on June 30, 2028,
but bondholders have the option to call (demand
payment on) the bonds on June 30, 2019. However, the
call option is not expected to be exercised, given
prevailing market conditions.
28. What portion of Hydrogen Company’s debt should be
reported as a non-current liability?
A. 10 million
B. 20 million
C. 30 million
D. Zero
Use the following information to answer 29 – 30:
Antimony Company entered into a lawsuit on December 25,
2016 and recognized on the same date a provision of
P2,000,000. On February 28, 2017, when the financial
statements for the year ended December 31, 2016 had not
yet been authorized for issue, the case was settled, and the
court decided the final total damages to paid by the entity
at P3,000,000. In addition, Antimony Company has a loan
payable of P2,000,000 due on June 30, 2017. On January
1, 2017, before the authorization of the issuance of financial
statements, the bank agreed to refinance the loan,
extending the maturity to June 30, 2019. Also, another loan
amounting to P7,000,000 due on December 1, 2017 was
obtained by Antimony Company from BPI. Antimony
Company has the discretion to refinance or roll over the loan
for at least twelve months from December 31, 2017.
29. Compute for the current liability to be presented in the
financial position.
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ACCOUNTING 502 – QUIZ # 1 (FINAL)
May 4, 2019
A. 4 million
B. 5 million
C. 10 million
D. 12 million
30. Compute for the non-current liability to be presented in
the financial position
A. 2 million
B. 7 million
C. 9 million
D. Zero
Problem Solving
INSTRUCTIONS: Write a SUMMARY OF ANSWERS on the
long problems on the first few rows of Page 1 ONLY. Erasures
on the Summary of Answers will INVALIDATE ALL OF YOUR
ANSWERS on the long problems. In case you do not have any
answer on any item, write “NO ANSWER”. Leaving any item
on the Summary of Answers blank will INVALIDATE ALL OF
YOUR ANSWERS on the long problems. Answers in the
Summary of Answers should have a corresponding solution
in good accounting form to be given credit. Also, any answers
in the Summary of Answers without any corresponding
solutions, or with a solution that does not match with the said
answer, will not be given credit. Double-rule and encircle your
final answers on your solutions. Answers that are not double-
ruled or encircled, or both, will be considered as no solution.
Erasures are allowed, as long as they are done correctly and
neatly. (5 points each)
Use the following information to answer 1 – 2:
On January 1, 2018, the biological assets of Titanium Co.
consists of eleven 2-year-old animals with fair value less
cost to sell of P10,000 each for a total of P110,000.
Transactions during the year include the following:
- One animal aged 2.5 years was purchased on July 1,
2018 for P10,600
- One animal was born on July 1, 2018
- No animals were sold or disposed of during the period.
Per unit fair values less cost to sell are as follows:
New born animal on July 1 7,000
2-year-old animal on July 1 10,300
2.5-year-old animal on July 1 10,600
3-year-old animal on July 1 13,000
New born animal on December 31 7,200
0.5-year-old animal on December 31 8,000
2-year-old animal on December 31 10,500
2.5-year-old animal on December 31 11,100
3-year-old animal on December 31 12,000
1. What is the fair value of the biological assets on
December 31, 2018?
2. What is the gain from change in fair value of the
biological assets due to price change in 2018?
Use the following information to answer 3 – 5:
Oxygen Corporation has provided information on intangible
assets as follows:
5
- A patent was purchased from Carbon Company for
P6,500,000 on January 1, 2017. On acquisition date,
the patent was estimated to have a useful life of 10
years. The patent had a net book value of P6,000,000
when Carbon Company sold it to Oxygen Corporation.
- On February 1, 2018, a franchise was purchased from
the Franchisor Company for P1,140,000. The contract
which runs from 20 years provides that 5% of revenue
from the franchise must be paid to Franchisor. Revenue
from the franchise for 2018 was P7,500,000.
- The following research and development costs were
incurred by Oxygen Corporation in 2018:
Materials and equipment 426,000
Personnel 567,000
Indirect costs 307,000
Total 1,300,000
- Because of recent events, Oxygen Corporation, on
January 1, 2018, estimates that the remaining useful
life of the patent purchased on January 1, 2017, is only
5 years from January 1, 2018.
3. On December 31, 2018, the carrying value of the patent
should be?
4. The unamortized cost of the franchise at December 31,
2018 should be?
5. How much should be charged against Oxygen
Corporation’s income for the year ended December 31,
2018?
Use the following information to answer 6 – 8:
Sulfur Company carries a wide variety of promotion
techniques to attract customers. Kitchen and home
appliances are sold in a one-year warranty for replacement
of parts and labor. The estimated warranty cost, based on
past experience, is 6% of sales.
The premium is offered on the home furniture. Customer
receive a coupon for each peso spent on home furniture.
Customers may exchange 2,000 coupons and P55 for a rice
cooker which the company purchased at P340 for each rice
cooker and estimates that 60% of the coupons given to
customers will be redeemed.
The company’s total sales for 2019 were P115,200,000 –
P86,400,000 from kitchen and home appliances and
P28,800,000 from home furniture. Replacement parts and
labor for warranty work totaled P2,624,000 during 2019. A
total of 5,200 rice cookers used in the premium program
were purchased during the year and there were 9,600,000
coupons redeemed in 2019.
The accrual method is used by the company to account for
the warranty and premium costs for financial reporting
purposes. The balance in the accounts related to warranties
and premiums on January 1, 2019, were as shown below:
Inventory of premium items P340,000
Estimated liabilities for premiums 716,000
Estimated liabilities for warranties 2,176,000
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ACCOUNTING 502 – QUIZ # 1 (FINAL) 6
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6. Determine the promotional expense related to 8. Determine the estimated liabilities for warranties as of
premiums for the current year 2019? December 31, 2019?
7. Determine the estimated liabilities for premiums as of
December 31, 2019? ~~~End of Quiz 1~~~

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