Name: BLESSED NIZELLE Q.

VALDEZ
SECTION: BSA 3-A
SUBJECT: AUDITING AND ASSURANCE: COMCEPT AND APPLICATION

AUDIT
ON
On July 1, 2002, Mountain Systems acquired 8,000 shares of Precision Services’
40,000 outstanding common shares at a cost of $240,000. The book value and fair
market value of Precision's net assets on that date was $880,000. The following
INVEST
data pertain to Precision Services for 2002.

Net income reported in 2002:

MENT
January 1 - June 30..................................................................
July 1 - December 31...............................................................
Total....................................................................................
$28,000
36,000
$64,000

Cash dividends declared and paid:

January 1 - June 30.................................................................. $30,000
July 1 - December 31............................................................... 30,000
Total.................................................................................... $60,000

Requirement
1. Compute the fair value of net assets
2. Prepare the entry to record the original investment on July 1.
3. Compute the goodwill (if any) on the purchase.
4. Prepare the necessary entries (other than acquisition) for 2002 on
Mountain Systems’ books using the cost method.
5. Prepare the necessary entries (other than acquisition) for 2002 on
Mountain Systems’ books using the equity method.

Solution
(1) Fair market value of net assets............................................. $880,000
8,000/40,000 shares.............................................. x 20%
Fair market value of Mountain’s share of net assets.... $176,000

(2) Investment in Precision Services Stock........................ 240,000

Cash...................................................................... 240,000

(3) Goodwill computation:

Purchase price............................................................... $240,000
Fair market value of net assets............................. $880,000
8,000/40,000 shares.............................................. x 20%
Fair market value of Mountain’s share of net assets.... 176,000
Goodwill......................................................................... $ 64,000
Name: BLESSED NIZELLE Q. VALDEZ
SECTION: BSA 3-A
SUBJECT: AUDITING AND ASSURANCE: COMCEPT AND APPLICATION

(4) Cost method:

Cash ($30,000 x 20%)........................................................ 6,000
Dividend Revenue................................................. 6,000
Cash dividends received (July 1 - December 31).

(5) Equity method:

Cash.............................................................................. 6,000
Investment in Precision Services Stock................ 6,000
Cash dividends received (July 1 - December 31).

Investment in Precision Services Stock ($36,000 x 20%). . 7,200

Income from Investment in Precision Stock.......... 7,200
20% share of investee earnings (July 1 - December 31).

Income from Investment in Precision Stock

($64,000/40 yrs. x ½ yr.)..................................................... 800
Investment in Precision Services Stock................ 800
Amortization of goodwill for 6 months.
Name: BLESSED NIZELLE Q. VALDEZ
SECTION: BSA 3-A
SUBJECT: AUDITING AND ASSURANCE: COMCEPT AND APPLICATION

AUDIT ON
PROPERTY,
On March 1, 2018, Levy Co., acquired land and building by paying ₱ 6,000,000 and assuming a mortgage
PLANT AND
of ₱ 1,500,000. The building will be used by Levy Co. as its head office.

1. Cost of survey 50,000

EQUIPEMENT
2. Cost of paving parking lot adjoining building 50,000
3. Cost of option of the land not acquired 7,000
4. Broker’s fee on the properties acquired 10,000
5. Cost of relocating and reconstructing the property belonging to
others in order to acquire the property 23,000
6. Payment to real estate agent 40,000
7. Registration fees and transfer of title 13,000
8. Title insurance 15,000
9. Real Property taxes on the land accrued after acquisition 5,000
10. Cost of shrubs, trees, and other landscaping 53,000
11. Unpaid real property taxes up to the date of acquisition 14,000
12. Driveway, parking bay, and safety lighting 19,000
13. Payment for claim for injuries not covered by insurance 40,000
14. Cost of removing trees from the land 70,000
15. Salvage value of the timber recovered from the land 5,000
16. Renovation cost of the building 400,000
17. Payment of medical bills of employees accidentally injured
during building renovation 8,600

REQUIRED: Based on the above data, determine the adjusted cost of the following:

CASE NO.1 – Assume that on the date of acquisition, the land and building have fair values of
₱ 6,000,000 and ₱ 2,000,000 respectively.

1. Determine the Land

a. ₱ 7,790,600 c. ₱ 7,730,000
b. ₱ 7,560,000 d. ₱ 5,833,250.

2. Determine the Old building

a. ₱ 400,000 c. ₱ 2,357,350
b. ₱ 2,296,750 d. ₱ 2,418,750

3. Determine the Land improvements

a. ₱ 60,600 c. ₱ 122,000
b. ₱ 61,400 d. ₱ 182, 600
Name: BLESSED NIZELLE Q. VALDEZ
SECTION: BSA 3-A
SUBJECT: AUDITING AND ASSURANCE: COMCEPT AND APPLICATION

CASE NO.2 – Assume that on the date of acquisition, the old building has a minimal fair value.

1. Determine the Land

a. ₱ 7,790,600 c. ₱ 7,730,000
b. ₱ 7,560,000 d. ₱ 5,690,000

2. Determine the Old building

a. ₱ 400,000 c. ₱ 2,357,350
b. ₱ 2,296,750 d. ₱ 2,418,750

3. Determine the Land improvements

a. ₱ 60,600 c. ₱ 122,000
b. ₱ 61,400 d. ₱ 182, 600

Solution:

CASE 1 LAND BLDG LI NOTES

*5,625,000 *1,875,000 - (1)
1. Cost of survey 50,000 (2)
2. Cost of paving parking lost adjoining building 50,000 (3)
3. Cost of option of the land not acquired - - - (4)
4. Broker’s fee on the properties acquired 7,500 2,500 (5)
5. Cost of relocating and reconstructing the property
belonging to others in order to acquire the property 17,250 5,750 (5)
6. Payment to real estate agent 30,000 10,000 (5)
7. Registration fees and transfer of title 13,000 (2)
8. Title insurance 15,000 (2)
9. Real Property taxes on the land accrued after acquisition - - - (4)
10. Cost of shrubs, trees, and other landscaping 53,0000 (3)
11. Unpaid real property taxes up to the date of acquisition 10,500 3,500 (5)
12. Driveway, parking bay, and safety lighting 19,000 (3)
13. Payment for claim for injuries not covered by insurance - - - (6)
14. Cost of removing trees from the land 70,000 (2)
15. Salvage value of the timber recovered from the land (5,000) (7)
16. Renovation cost of the building 400,000 (2)
17. Payment of medical bills of employees accidentally injured
during building renovation _______ ________ _______ (6)
TOTAL 5,690,000 2,296,750 122,000

Cost of allocated to Land:

6,000,000 7,500,000= 5,625,000
8,000,000 X

800,000 7,500,000= 1,875,000

X
Name: BLESSED NIZELLE Q. VALDEZ
SECTION: BSA 3-A
SUBJECT: AUDITING AND ASSURANCE: COMCEPT AND APPLICATION

8,000,000
CASE 12 LAND BLDG LI NOTES
7,500,000 - (1)
1. Cost of survey 50,000 (2)
2. Cost of paving parking lost adjoining building 50,000 (3)
3. Cost of option of the land not acquired - - - (4)
4. Broker’s fee on the properties acquired 10,000 (5)
5. Cost of relocating and reconstructing the property
belonging to others in order to acquire the property 40,000 (5)
6. Payment to real estate agent 30,000 (5)
7. Registration fees and transfer of title 13,000 (2)
8. Title insurance 15,000 (2)
9. Real Property taxes on the land accrued after acquisition - - 53,000 (4)
10. Cost of shrubs, trees, and other landscaping 53,0000 (3)
11. Unpaid real property taxes up to the date of acquisition 14,000 (5)
12. Driveway, parking bay, and safety lighting 19,000 (3)
13. Payment for claim for injuries not covered by insurance - - - (6)
14. Cost of removing trees from the land 70,000 (2)
15. Salvage value of the timber recovered from the land (5,000) (7)
16. Renovation cost of the building 400,000 (2)
17. Payment of medical bills of employees accidentally injured
during building renovation _______ ________ _______ (6)
TOTAL 7,730,000 400,000 122,000

REFERENCE: file:///C:/Users/user/Downloads/toaz.info-solution-guide-for-ppe-
pr_5f2fe8c6581e529131f434ca04b760e1.pdf
 Name: BLESSED NIZELLE Q. VALDEZ
SECTION: BSA 3-A
SUBJECT: AUDITING AND ASSURANCE: COMCEPT AND APPLICATION

AUDIT ON
INTANGIBLE
The Terran Company Acquired several small companies at the end of 2008 and, based on the
acquisitions, reported the following intangibles in its December 31, 2008 statement of financial position:
ASSET
Patent 200,000
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 10 years and no expected
residual value, and that it will generate approximately equal benefits each year. The company expects to
use the copyright and tradename for the foreseeable future. The accountant knows that the computer
software will be used in 120 offices: 60 offices in 2009, and expects to replace the software in 40 more
offices in 2010 and the remainder in 2011.

On December 31, 2009, there are no indications of impairment of patent and computer software. The
following information relates to the other intangibles:

a. Because of the rampant piracy, the copyright is expected to generate cash flows of just
P8,000 per year.
b. The tradename is expected to generate cash flows 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 P3000,000.

QUESTIONS:

Based on the above data, compute the following:

1. How much is the patent every year?

a. 70,000 b. P88,750 c. P107,500 d. P20,000

2. Total amortization of Intangible assets in 2009?
a. P70,000 b. P88,750 c. P107,500 d. P20,000

3. Total impairment loss in 2009?

a. P452,470 b. P530,280 c. P471,220 d. P433,720

4. Carrying amount of goodwill on December 31, 2009?

a. P400,000 b. P718,780 c. P855,000 d. P659,720
 Name: BLESSED NIZELLE Q. VALDEZ
SECTION: BSA 3-A
SUBJECT: AUDITING AND ASSURANCE: COMCEPT AND APPLICATION

5. Carrying amount of other intangibles assets on December 31, 2009?

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

Solutions:

1.) Answer: D

Patent……………… …………. 200,000

Divide: Expected life…….. 10 years
Patent per year………… 20,000

2. Answer: A

Patent
(200,000/10) 20,000
Computer Software (100,000 x
60/120) 50,000
Total Amortization 70,000

According to PAS 38, paragraph 97, the depreciable amount of an intangible asset with a finite useful life
shall be allocated on a systematic basis over its useful life. Amortization shall begin when the asset is
available for use, ie when it is in the location and condition necessary for it to be capable of operating in
the manner intended by management.

Trade name and copy rights are not amortized because it is stated in PAS 38, paragraph 107, that an
intangible asset with an indefinite useful life shall not be amortized.

2. Answer: C

Copy right
400,000- (8,000/5%) 240,000
Trade name
350,000- (15,000/5%) 50,000
Goodwill
3,000,000- (14.0939 x 200,000) 181,220
Total impairment loss 471,220

As stated in PAS 38, paragraph 107 and 108, an intangible asset with an indefinite useful life shall not be
amortized.
Name: BLESSED NIZELLE Q. VALDEZ
SECTION: BSA 3-A
SUBJECT: AUDITING AND ASSURANCE: COMCEPT AND APPLICATION

In accordance with IAS 36, an entity is required to test an intangible asset with an indefinite useful
life for impairment by comparing its recoverable amount with its carrying amount (a) annually, and

(b) whenever there is an indication that the intangible asset may be impaired.

3. Answer: B

Carrying value before impairment 900,000

Impairment loss (181,220)

Carrying Value 718,780

Under PAS 38, paragraph 107, An intangible asset with an indefinite useful life shall not be amortized.

In accordance with IAS 36, an entity is required to test an intangible asset with an indefinite useful life
for impairment by comparing its recoverable amount with its carrying amount (a) annually, and
(b) whenever there is an indication that the intangible asset may be impaired.

4. Answer: A

Patent
(200,000 – 20,000 ) 180,000
Computer software (100,000 –
50,000 ) 50,000
Trade name
(350,000 – 50,000) 300,000
Copy right
(400,000 – 240,000) 160,000
Total carrying amount of Intangibles 690,000

Good will is not recognized as part of intangible assets because it is defined as “unidentifiable” for it
cannot be sold, transferred, licensed, rented or exchange separately.

The Standard states that an asset meets the identifiability criterion in the definition of an intangible
asset when it:

(a) is separable, ie capable of being separated or divided from the entity and sold, transferred, licensed,
rented or exchanged, either individually or together with a related contract, asset or liability; or
Name: BLESSED NIZELLE Q. VALDEZ
SECTION: BSA 3-A
SUBJECT: AUDITING AND ASSURANCE: COMCEPT AND APPLICATION

(b) arises from contractual or other legal rights, regardless of whether those rights are transferable or
separable from the entity or from other rights and obligations.

The new carrying value of the intangible assets at the end of the period is the difference between its
original amount less the amortization or impairment loss recognized for the year.