AACP1.

IM6 - Audit of Intangible Assets

SUBSTANTIVE AUDIT OF INTANGIBLE ASSETS

Existence: Recorded intangible assets exist Valuation and allocation: Intangible assets are valued in
accordance with GAAP
1. Obtain an analysis of ledger accounts for intangible
assets. 6. Vouch additions to or acquisitions during the year.

2. Examine documentation supporting intangible assets. 7. Evaluate dispositions and write offs during the year.

8. Evaluate amortization policy and verify computation of

Completeness: All intangible assets are recorded amortization.

3. Vouch additions to or acquisitions during the year.

Presentation and disclosure: Intangible assets are
4. Evaluate dispositions and write offs during the year. classified and disclosed in accordance with GAAP

9. Review financial statements and perform analytical

Rights and obligations: Intangible assets are owned by procedures to determine whether accounts are
the entity classified and disclosed in the financial statements in
accordance with GAAP.
5. Examine documentation supporting intangible assets.

INTERNAL CONTROL MEASURES

1. Acquisitions, dispositions and write offs of intangible assets should be properly authorized.

2. Adequacy and consistency of accounting policies governing intangible assets should be reviewed periodically.

3. General ledger account should be supported by adequate detailed records and they should be periodically reconciled.

4. Schedules of intangibles showing their cost and basis of amortization should be prepared periodically and reviewed by
a responsible official.

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PROBLEM NO. 1
It is estimated that in 5 years other companies
The accountant of the newly organized Zerg Corporation will have developed improved processes, making
provided to you the details the company’s Intangible the Zerg Corporation process obsolete.
Assets account as follows:
May1 Acquired both a license to use a special type of
container and a distinctive trademark to be
Intangible Assets
printed on the container in exchange for 6,000,
Date Description Amount
no-par, ordinary shares of Zerg selling for P50
01/02/22 Organization costs P 233,000
per share. The license is worth twice as much as
01/15/22 Goodwill 15,000
the trademark, both of which may be used for 5
04/01/22 Patent 490,000
years.
05/01/22 License and trademark 300,000
07/01/22 R & D laboratory 1,310,000 Jul. 1 Constructed a shed for P1,310,000 to house
12/31/22 Product development costs 1,750,000 prototypes of experimental models to be
P4,098,000 developed in future research projects.

Transactions during 2022 included the following: Dec. Paid salaries for an engineer and chemist involved
31 in research and development totaling P1,750,000
in 2022.
Jan.2 Paid legal fees of P150,000 and stock certificate
costs of P83,000 to complete organization of the
It is the company’s policy to take full year amortization in
corporation.
the year of acquisition.
15 Hired a clown to stand in front of the corporate
REQUIRED
office for 2 weeks and hand out pamphlets and
candy to create goodwill for the new enterprise. 1. Prepare the necessary adjusting journal entries as of
Clown cost, P10,000; pamphlets and candy, December 31, 2022.
P5,000.
2. Compute the carrying amount of the Intangible assets
as of December 31, 2022.
Apr.1 Patented a newly developed process with costs as
3. Compute the total amount resulting from the foregoing
follows:
transactions that should be expensed when incurred.
Legal fees to obtain patent P429,000
Patent application and licensing fees 61,000
Total P490,000

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PROBLEM NO. 2 the software in 60 offices in 2022 and expects to replace
the software in 40 more offices in 2023 and the remainder
You gathered the following information related to the
in 2024.
Patents account of the Templar Cookie Corporation in
connection with your audit of the company’s financial
On December 31, 2022, there are no indications of
statements for the year 2022.
impairment of patent and computer software. The
following information relate to the other intangible assets:
In 2021, Templar developed a new machine that reduces
the time required to insert the fortunes into its fortune a) Because of the rampant piracy, the copyright is
cookies. Because the process is considered very valuable expected to generate cash flows of just P8,000 per
to the fortune cookie industry, Templar patented the year.
machine. The following expenses were incurred in
developing and patenting the machine: b) The tradename is expected to generate cash flows of
P15,000 per year.
Research and development laboratory
expenses P1,500,000 c) The goodwill is associated with Terran’s SCV
Metal used in the construction of the Manufacturing reporting unit. The cash flows expected
machine 480,000 to be generated by the SCV Manufacturing reporting
Blueprints used to design the machine 192,000 unit is P200,000 per year for the next 25 years. The
Legal expenses to obtain patent 720,000 reporting unit has a carrying amount of P2,100,000.
Wages paid for the employees’ work on
the research, development, and QUESTIONS:
building of the machine (60% of the Based on the above and the result of your audit, determine
time was spent in actually building the the following: (Assume that the appropriate discount rate
machine) 1,800,000 for all items is 5%)
Expense of drawing required by the patent
office to be submitted with the patent 1. Total amortization of intangible assets in 2022
application 102,000 a. P 70,000 c. P88,750
Fees paid to the government patent office b. P107,500 d. P20,000
to process application 150,000 2. Total loss on impairment in 2022
a. P452,470 c. P471,220
During 2022, Templar paid P225,000 in legal fees to
b. P530,280 d. P433,720
successfully defend the patent against an infringement suit
by Cookie Monster Corporation. 3. Carrying amount of goodwill on December 31, 2022
a. P900,000 c. P855,000
It is the company’s policy to take full year amortization in b. P718,780 d. P659,720
the year of acquisition.
4. Carrying amount of other intangible assets on
QUESTIONS: December 31, 2022
a. P690,000 c. P980,000
Based on the above and the result of your audit, determine b. P640,000 d. P706,667
the following:
PROBLEM NO. 4
1. Cost of machine
a. P1,854,000 c. P1,560,000 Protoss Corporation acquired a patent right on July 1,
b. P2,472,000 d. P1,752,000 2019 for P250,000. The remaining a legal life on the date
of purchase is 15 years. However, due to rapidly changing
2. Amount that should charged to expense when incurred
technology, management estimates that the remaining
in connection with the development of the patented
useful life on July 1, 2019 is only 5 years.
machine
a. P2,220,000 c. P2,412,000
At January 1, 2020, management is uncertain that the
b. P1,500,000 d. P 0
process can actually be made economically feasible, and
3. Carrying amount of patent as of December 31, 2022 decides to write down the patent to an estimated
a. P 783,000 c. P 874,800 recoverable amount of P75,000. Amortization will be
b. P1,522,800 d. P1,256,850 taken over 3 years from that point.

PROBLEM NO. 3 On January 1, 2022, having perfected the related

production process, the entity adopts the revaluation
The Terran Company acquired several small companies
model to measure the patent. The patent now has a fair
at the end of 2021 and, based on the acquisitions,
value of P300,000. Furthermore, the estimated remaining
reported the following intangibles in its December 31,
useful life is now believed to be 5 years.
2021 statement of financial position:
Patent P200,000 QUESTIONS:
Copyright 400,000
Based on the above and the result of your audit, determine
Tradename 350,000
the following:
Computer software 100,000
Goodwill 900,000 1. How much is the loss on impairment on January 1,
2020?
The company's accountant determines the patent has an a. P150,000 c. P125,000
expected life of 10 years and no expected residual value, b. P166,667 d. P 0
and that it will generate approximately equal benefits each
2. How much can be recognized as gain on impairment
year. The company expects to use the copyright and
recovery in 2022?
tradename for the foreseeable future. The accountant
a. P150,000 c. P275,000
knows that the computer software is used in the
b. P100,000 d. P175,000
company's 120 sales offices. The company has replaced

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3. How much is the revaluation surplus as of December PROBLEM NO. 5
31, 2022?
a. P275,000 c. P220,000 Select the best answer for each of the following:
b. P175,000 d. P140,000
1. The most effective means for the auditor to determine
4. How much is the carrying amount of the patent on
whether a recorded intangible asset possesses the
December 31, 2022?
characteristics of an asset is to
a. P300,000 c. P125,000
a. Vouch the purchase by reference to underlying
b. P240,000 d. P100,000
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.

2. 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.

3. Assuming TLL 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 to 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.

4. There is goodwill involved in the acquisition of a

business if the purchase price paid is in excess of the
proprietorship of the business acquired.
Goodwill might be viewed as the enjoyment of a profit
by a company in excess of the normal or usual return
for the industry as a whole but such goodwill is not
recorded if it has not been purchased or paid for.
a. False; True.
b. True; False.
c. False; False.
d. True; True.

5. 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 assets
purchased.
b. The purchase price and the fair value of 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.

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 DO-IT-YOURSELF (DIY) DRILL
PROBLEM NO. 1 PROBLEM NO. 2
On December 31, 2021, Probe Corporation acquired the On November 15, 2022, Rodeo Corporation acquired
following three intangible assets: Rapids, a company that operates a scenic railway along
• A trademark for P300,000. The trademark has 7 years the coast of a popular tourist area. The summarized
remaining legal life. It is anticipated that the statement of financial position at fair values of Rapids on
trademark will be renewed in the future, indefinitely, July 1, 2022, reflecting the terms of acquisition was:
without problem. Goodwill P 200,000
• Goodwill for P1,500,000. The goodwill is associated Operating license 1,200,000
with Probe’s Nexus Manufacturing reporting unit. Property-train stations and land 300,000
Rail track and coaches 300,000
• A customer list for P220,000. By contract, Probe has Steam engines (2) 1,000,000
exclusive use of the list for 5 years. Because of Purchase consideration P3,000,000
market conditions, it is expected that the list will have
economic value for just 3 years. The operating license is for ten years. It has recently been
renewed by the transport authority and is stated at the
On December 31, 2022, before any adjusting entries for
cost of its renewal. The carrying amounts of the property
the year were made, the following information was
and rail track and coaches are based on their estimated
assembled about each of the intangible assets:
replacement cost. The engines are valued at their net
d) Because of a decline in the economy, the trademark is selling price.
now expected to generate cash flows of just P10,000
per year. The useful life of trademark still extends On December 1, 2022, the boiler of one of the steam
beyond the foreseeable horizon. engines exploded, completely destroying the whole engine.
Fortunately no one was injured, but the engine was
e) The cash flows expected to be generated by the Nexus
beyond repair. Due to its age, a replacement could not be
Manufacturing reporting unit is P250,000 per year for
obtained. Because of the reduced passenger capacity, the
the next 22 years. Book values and fair values of the
estimated value in use of the business after the accident
assets and liabilities of the Nexus Manufacturing
was assessed at P2 million.
reporting unit are as follows:
Book values Fair values Passenger numbers after the accident were below
Identifiable assets P2,700,000 P3,000,000 expectations even after allowing for the reduced capacity.
Goodwill 1,500,000 ? A market research report concluded that tourists were not
Liabilities 1,800,000 1,800,000 using the railway because of the fear of a similar accident
f) The cash flows expected to be generated by the occurring to the remaining engine. In the light of this, the
customer list are P120,000 in 2023 and P80,000 in value in use of the business was re-assessed on December
2024. 31, 2022 at P1.8 million. On this date Rodeo received an
offer of P900,000 in respect of the transferable operating
REQUIRED: license.
Based on the above and the result of your audit, determine
the following: (Assume that the appropriate discount rate QUESTIONS:
for all items is 6%):
Based on the above and the result of your audit, compute
1. Total amortization for the year 2022 the carrying amount of the following as of December 31,
a. P 73,333 c. P141,515 2022 after recognizing the impairment loss, if any:
b. P116,190 d. P 86,857
6. Goodwill
2. Impairment loss for the year 2022 a. P120,000 c. P200,000
a. P 90,476 c. P179,584 b. P166,667 d. P 0
b. P133,333 d. P 0
7. Operating license
3. Carrying amount of Trademark as of December 31, a. P900,000 c. P771,429
2022 b. P866,667 d. P720,000
a. P300,000 c. P166,667
8. Property – train stations and land
b. P257,143 d. P120,416
a. P200,000 c. P216,667
4. Carrying amount of Goodwill as of December 31, 2022 b. P192,857 d. P168,750
a. P1,500,000 c. P1,431,818
9. Rail track and coaches
b. P1,425,000 d. P1,462,500
a. P200,000 c. P168,750
5. Carrying amount of Customer list as of December 31, b. P216,667 d. P192,857
2022
10. Steam engines
a. P220,000 c. P176,000
a. P562,500 c. P500,000
b. P146,667 d. P 0
b. P642,857 d. P600,000

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