AUDITING PROBLEMS

AUDIT OF INTANGIBLES
Practice Problems

PROBLEM NO. 1

Information concerning ROBOT CORPORATION’S intangible assets is as follow

1. On January 1, 2017 Robot corporation signed an agreement to operate as a franchisee of Patok

copy service inc., for an initial franchise fee of P255,000. Of this amount P75,000 was paid when
the agreement was signed and the balance is payable in four annual payments of P45,000 each
beginning January 1, 2018. The agreement provides that the down payment is not refundable and
no future services are required of the franchisor. The implicit interest rate for a loan of this type
on January 1, 2017 is 14%. The agreement also provides that 5% of the revenue from the
franchise must be paid to the franchisor annually. Robot’s revenue from the franchise for 2017
was P2,700,000. The robot estimates the useful life of franchise to be ten years.

2. Robot incurred P234,000 of experimental and development cost 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 P49,200. Management estimate that the useful life of the patent
will be 8 years.

3. A trademark was purchased from Salonga company for P120,000 on July 1,2014. Expenditures
for successful litigation in defense of the trademark totaling P30,000 were paid on July 1,2017.
Management 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 franchise on december,31,2017?

a. P185,504 b. P206,116 c. 225,000 d. 229,500

2. What is the carrying amount of the patent on December 31,2017?

a. P43,050 b. 204,750 c. 247,800 d. 277,050

3. What is the carrying amount of the trademark on December 31,2017

a. P99,000 b. 114,000 c. 123,750 d. 129,000

4. What is the total amortization expense in 2017?

 a. P32,762 b. P37,650 c. P47,762 d. P62,012

5. What is the total amount of intangible-related expenses ( excluding amortization) that should
be reported in the income statement for the year ended December 31,2017?

a. P153,356 b. 165,000 c. 183,356 d. 190,200

PROBLEM NO. 2

The TERRAN COMPANY acquired several small companies at the end of 2016 and,based on the
acquisition, reported the following intangibles in its December 31,2016 statement of the financial
position:

Patent P200,000
Copyright 400,000
Tradename 350,000
Computer software 100,000
Goodwill 900,000

The company’s accountant determines the patent has an expected life of 10yrs and no expected residual
value, and that it will generate approximately equal benefits each year. The company expects to use the
copyright and trade name for foreseeable future. The accountant knows that the computer software is used
in the company’s 120 sales offices. The company has replaced the software in 60 offices in 2017, and
expects to replace the software in 40 more offices in 2018 and the remainder in 2019.

On December 31, 2017 there are no indication impairment of patent and computer software. The
following information relates to the other intangible assets.

a) Because of the rampant piracy, the copyright is expected to generate cash flow of just P8,000 per
year.
b) The tradename is expected to generate cash flow of P15,000 per year
c) The goodwill is associated with Terran’s SCV manufacturing reporting unit. The cash flows
expected to be generated by the SCV Manufacturing reporting unit is P200,000 per year for the
next 25 years, the reporting unit has a carrying amount of P3,000,000

Based on the above and the result of your audit, determine the following ( assume that the
appropriate discount rate for all items in 5%)
1. Total amortization of intangible assets in 2017

a. 70,000 b. 88,750 c. 107,500 d. 20,000

2. Total loss of impairment in 2017?

a. 452,470 b. 530,280 c. 471,220 d. 433,720

 3. Carrying amount of the goodwill on December 31,2017

a. 900,000 b. 718,780 c. 855,000 d. 659,720

4. Carrying amount of other intangible assets on December 31,2017

a. P690,000 b. P980,000 c. P640,000 d. P706,667

PROBLEM NO. 3

BANAWE COMPANY began operations on January 2, 2009. Shown below is the company trial balance
prepared by it’s staff accountant for December 31, 2017.

Banawe company
UNADJUSTED TRIAL BALANCE
December 31,2017
(in thousands of pesos)

Debit Credit

Cash P 60
Accounts receivable 150
Inventory 360
Equipment 2,400
Accumulated depreciation-equipment P 750
Buildings 3,600
Accumulated depreciation-equipment 1,200
Patents 1,650
Franchise agreement 285
Organization costs 306
Goodwill 1,035
Accounts payable 36
Accrued wages payable 15
Accrued taxes payable 180
Bonds payable 1,500
Premium on bonds payable 105
Preference shares (P100 par value 300
Ordinary shares (P25 par value) 3,300
Premium on share capital 660
Retained earnings (as of january1) 1,200
Sales 2,700
Cost of goods sold 1,200
 Selling and administrative expenses 900
P11,946 P11,946

As a member of the audit team for Banawe company, you have been assigned the audit of the company’s
intangible assets. Your investigation reveals the following:

Patents

The patents, acquired January 2, 2010 are being amortized over an expected useful life of 14 years.
Improvements made to equipment covered by the patents costing P225,000 were debited to the account in
January 2014. Amortization in 2014-2016 included amortization on the P225,000 for the remaining life of
the relevant patent. It is determined that the P225,000 should have been expensed in 2014. It is further
determined on December 31,2016 that one of the patent has a remaining life of only 2 years. This patent
was originally assigned a cost of P630,000.

Franchise agreement

A franchised agreement was signed on January 1,2017. A P150,000 fee was paid covering a 5-year
period, at the end of which company may renew the agreement by paying P150,000. A decision on
renewal has not been made as of December 31,2017. The agreement calls for an annual payment of 5% of
revenue. An entry debiting the account for P135,000 was made at the time of cash payment for 2017.

Organization costs

Organization costs include the unamortized portion of amounts paid to promote for services rendered at
the inception of the corporation. These fees have been amortized, since inception, over an estimated 40-
year life. The decision is made, as of December 31, 2017,to reduce the total period of amortization of
organization costs to 12 years.

Goodwill

The goodwill account includes the following:

P135,000 – legal expenses relative to incorporation. These were assigned to the account in January
2009.
P600,000 – excess of cost over assigned net asset values of an enterprise acquired in early 2015
expected to be of value for an indefinite period.

P300,000 –paid to an advertising consulting firm in early 2016 for a major advertising effort expected
to be beneficial for an indefinite period.

No amortization has been taken on any amount in the goodwill account.

Questions:
1. What is the carrying value of the patents on December 31,2017 ?

a. 1,211,786 b. 1,009,286 c. 1,166,786 d. 1,256,786

 2. What is the carrying value of the franchise agreement on December 31,2017?

a. P120,000 b. 228,000 c. 123,000 d. 112,500

3. What is the carrying value of the organization cost on December 31,2017?

a. P171,000 b. P 0 c. 417,375 d. 194,625

4. What is the carrying value of the goodwill on December 31,2017?

a. P1,035,000 b. 585,000 c. 1,009,125 d. 600,000

5. What is the total patent amortization for 2017?

a. P370,714 b. 168,214 c. 315,000 d. 325,714

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