AP.

03 Audit of Intangible Assets

Question 1
On December 31, 2019, Probe Corporation acquired the following three intangible assets:
 A trademark for P300,000. The trademark has 7 years remaining legal life.  It is anticipated
that the trademark will be renewed in the future, indefinitely, without problem.
 Goodwill for P1,500,000. The goodwill is associated with Probe’s Nexus Manufacturing
reporting unit.
 A customer list for P220,000. By contract, Probe has exclusive use of the list for 5 years. 
Because of market conditions, it is expected that the list will have economic value for just 3
years.

On December 31, 2020, before any adjusting entries for the year were made, the following
information was assembled about each of the intangible assets:

a. Because of a decline in the economy, the trademark is now expected to generate cash flows of just
P10,000 per year. The useful life of trademark still extends beyond the foreseeable horizon.
 

b. The cash flows expected to be generated by the Nexus Manufacturing reporting unit is P250,000
per year for the next 22 years. Book values and fair values of the assets and liabilities of the Nexus
Manufacturing reporting unit are as follows:
 

  Book values Fair values

Identifiable assets P2,700,000 P3,000,000

Goodwill 1,500,000 ?

Liabilities 1,800,000 1,800,000

c. The cash flows expected to be generated by the customer list are P120,000 in 2021 and P80,000 in
2022.
 

REQUIRED:

Based on the above and the result of your audit, determine the following: (Assume that the
appropriate discount rate for all items is 6%):

 
Carrying amount of Goodwill as of December 31, 2020

Response: P1,431,818
Feedback:

Since goodwill is not amortized and is not impaired as of 12/31/20, 

 the carrying amount is P1,500,000.

Correct answer: P1,500,000
Score: 0 out of 1 No

Question 2
On November 15, 2020, Rodeo Corporation acquired Rapids, a company that operates a scenic railway
along the coast of a popular tourist area.  The summarized statement of financial position at fair
values of Rapids on July 1, 2020, reflecting the terms of acquisition was:

Goodwill P   200,000

Operating license 1,200,000

Property-train stations and land 300,000

Rail track and coaches 300,000

Steam engines (2)  1,000,000

Purchase consideration P3,000,000

The operating license is for ten years.  It has recently been renewed by the transport authority and is
stated at the cost of its renewal.  The carrying amounts of the property and rail track and coaches are
based on their estimated replacement cost.  The engines are valued at their net selling price.

On December 1, 2020, the boiler of one of the steam engines exploded, completely destroying the
whole engine.  Fortunately no one was injured, but the engine was beyond repair.  Due to its age, a
replacement could not be obtained.  Because of the reduced passenger capacity, the estimated value
in use of the business after the accident was assessed at P2 million.

Passenger numbers after the accident were below expectations even after allowing for the reduced
capacity.  A market research report concluded that tourists were not using the railway because of the
fear of a similar accident occurring to the remaining engine.  In the light of this, the value in use of
the business was re-assessed on December 31, 2020 at P1.8 million.  On this date Rodeo received an
offer of P900,000 in respect of the transferable operating license.

QUESTIONS:

Based on the above and the result of your audit, compute the carrying amount of the following as of
December 31, 2020 after recognizing the impairment loss, if any:

 
Rail track and coaches

Response: P200,000
Feedback: Folder1/AP.3003D_P2(4).png
Correct answer: P200,000
Score: 1 out of 1 Yes

Question 3
On December 31, 2019, Probe Corporation acquired the following three intangible assets:
 A trademark for P300,000. The trademark has 7 years remaining legal life.  It is anticipated
that the trademark will be renewed in the future, indefinitely, without problem.
 Goodwill for P1,500,000. The goodwill is associated with Probe’s Nexus Manufacturing
reporting unit.
 A customer list for P220,000. By contract, Probe has exclusive use of the list for 5 years. 
Because of market conditions, it is expected that the list will have economic value for just 3
years.

On December 31, 2020, before any adjusting entries for the year were made, the following
information was assembled about each of the intangible assets:

a. Because of a decline in the economy, the trademark is now expected to generate cash flows of just
P10,000 per year. The useful life of trademark still extends beyond the foreseeable horizon.
 

b. The cash flows expected to be generated by the Nexus Manufacturing reporting unit is P250,000
per year for the next 22 years. Book values and fair values of the assets and liabilities of the Nexus
Manufacturing reporting unit are as follows:
 

  Book values Fair values

Identifiable assets P2,700,000 P3,000,000

Goodwill 1,500,000 ?

Liabilities 1,800,000 1,800,000

c. The cash flows expected to be generated by the customer list are P120,000 in 2021 and P80,000 in
2022.
 

REQUIRED:

Based on the above and the result of your audit, determine the following: (Assume that the
appropriate discount rate for all items is 6%):

 
Impairment loss for the year 2020

Response: P133,333
Feedback: Folder1/AP.3003D_P1_2.png
Correct answer: P133,333
Score: 1 out of 1 Yes

Question 4
On December 31, 2019, Probe Corporation acquired the following three intangible assets:
 A trademark for P300,000. The trademark has 7 years remaining legal life.  It is anticipated
that the trademark will be renewed in the future, indefinitely, without problem.
 Goodwill for P1,500,000. The goodwill is associated with Probe’s Nexus Manufacturing
reporting unit.
 A customer list for P220,000. By contract, Probe has exclusive use of the list for 5 years. 
Because of market conditions, it is expected that the list will have economic value for just 3
years.

On December 31, 2020, before any adjusting entries for the year were made, the following
information was assembled about each of the intangible assets:

a. Because of a decline in the economy, the trademark is now expected to generate cash flows of just
P10,000 per year. The useful life of trademark still extends beyond the foreseeable horizon.
 

b. The cash flows expected to be generated by the Nexus Manufacturing reporting unit is P250,000
per year for the next 22 years. Book values and fair values of the assets and liabilities of the Nexus
Manufacturing reporting unit are as follows:
 

  Book values Fair values

Identifiable assets P2,700,000 P3,000,000

Goodwill 1,500,000 ?

Liabilities 1,800,000 1,800,000

c. The cash flows expected to be generated by the customer list are P120,000 in 2021 and P80,000 in
2022.
 

REQUIRED:

Based on the above and the result of your audit, determine the following: (Assume that the
appropriate discount rate for all items is 6%):

 
Total amortization for the year 2020

Response: P  73,333
Feedback:

                
Trademark*
-  
Goodwill*                 
 -  
Customer list (P220,000/3)          73,333
Total amortization          73,333

*The useful life is indefinite, so no amortization expense is recognized.

Correct answer: P  73,333

Score: 1 out of 1 Yes

Question 5
On December 31, 2019, Probe Corporation acquired the following three intangible assets:
 A trademark for P300,000. The trademark has 7 years remaining legal life.  It is anticipated
that the trademark will be renewed in the future, indefinitely, without problem.
 Goodwill for P1,500,000. The goodwill is associated with Probe’s Nexus Manufacturing
reporting unit.
 A customer list for P220,000. By contract, Probe has exclusive use of the list for 5 years. 
Because of market conditions, it is expected that the list will have economic value for just 3
years.

On December 31, 2020, before any adjusting entries for the year were made, the following
information was assembled about each of the intangible assets:

a. Because of a decline in the economy, the trademark is now expected to generate cash flows of just
P10,000 per year. The useful life of trademark still extends beyond the foreseeable horizon.
 

b. The cash flows expected to be generated by the Nexus Manufacturing reporting unit is P250,000
per year for the next 22 years. Book values and fair values of the assets and liabilities of the Nexus
Manufacturing reporting unit are as follows:
 

  Book values Fair values

Identifiable assets P2,700,000 P3,000,000

Goodwill 1,500,000 ?

Liabilities 1,800,000 1,800,000

c. The cash flows expected to be generated by the customer list are P120,000 in 2021 and P80,000 in
2022.
 

REQUIRED:

Based on the above and the result of your audit, determine the following: (Assume that the
appropriate discount rate for all items is 6%):

 
Carrying amount of Trademark as of December 31, 2020

Response: P166,667
Feedback:

Cost       300,000

Less impairment loss       133,333
Carrying amount, 12/31/20       166,667

Correct answer: P166,667
Score: 1 out of 1 Yes

Question 6
On December 31, 2019, Probe Corporation acquired the following three intangible assets:
 A trademark for P300,000. The trademark has 7 years remaining legal life.  It is anticipated
that the trademark will be renewed in the future, indefinitely, without problem.
 Goodwill for P1,500,000. The goodwill is associated with Probe’s Nexus Manufacturing
reporting unit.
 A customer list for P220,000. By contract, Probe has exclusive use of the list for 5 years. 
Because of market conditions, it is expected that the list will have economic value for just 3
years.

On December 31, 2020, before any adjusting entries for the year were made, the following
information was assembled about each of the intangible assets:

a. Because of a decline in the economy, the trademark is now expected to generate cash flows of just
P10,000 per year. The useful life of trademark still extends beyond the foreseeable horizon.
 

b. The cash flows expected to be generated by the Nexus Manufacturing reporting unit is P250,000
per year for the next 22 years. Book values and fair values of the assets and liabilities of the Nexus
Manufacturing reporting unit are as follows:
 

  Book values Fair values

Identifiable assets P2,700,000 P3,000,000

Goodwill 1,500,000 ?

Liabilities 1,800,000 1,800,000

c. The cash flows expected to be generated by the customer list are P120,000 in 2021 and P80,000 in
2022.
 

REQUIRED:

Based on the above and the result of your audit, determine the following: (Assume that the
appropriate discount rate for all items is 6%):
 
Carrying amount of Customer list as of December 31, 2020

Response: P146,667
Feedback:

Cost       220,000

Less amortization for 2020         73,333
Carrying amount, 12/31/20       146,667

Correct answer: P146,667
Score: 1 out of 1 Yes

Question 7
On November 15, 2020, Rodeo Corporation acquired Rapids, a company that operates a scenic railway
along the coast of a popular tourist area.  The summarized statement of financial position at fair
values of Rapids on July 1, 2020, reflecting the terms of acquisition was:

Goodwill P   200,000

Operating license 1,200,000

Property-train stations and land 300,000

Rail track and coaches 300,000

Steam engines (2)  1,000,000

Purchase consideration P3,000,000

The operating license is for ten years.  It has recently been renewed by the transport authority and is
stated at the cost of its renewal.  The carrying amounts of the property and rail track and coaches are
based on their estimated replacement cost.  The engines are valued at their net selling price.

On December 1, 2020, the boiler of one of the steam engines exploded, completely destroying the
whole engine.  Fortunately no one was injured, but the engine was beyond repair.  Due to its age, a
replacement could not be obtained.  Because of the reduced passenger capacity, the estimated value
in use of the business after the accident was assessed at P2 million.

Passenger numbers after the accident were below expectations even after allowing for the reduced
capacity.  A market research report concluded that tourists were not using the railway because of the
fear of a similar accident occurring to the remaining engine.  In the light of this, the value in use of
the business was re-assessed on December 31, 2020 at P1.8 million.  On this date Rodeo received an
offer of P900,000 in respect of the transferable operating license.
 

QUESTIONS:

Based on the above and the result of your audit, compute the carrying amount of the following as of
December 31, 2020 after recognizing the impairment loss, if any:

 
Goodwill

Response: P          0
Feedback: Folder1/AP.3003D_P2.png
Correct answer: P          0
Score: 1 out of 1 Yes

Question 8
On November 15, 2020, Rodeo Corporation acquired Rapids, a company that operates a scenic railway
along the coast of a popular tourist area.  The summarized statement of financial position at fair
values of Rapids on July 1, 2020, reflecting the terms of acquisition was:

Goodwill P   200,000

Operating license 1,200,000

Property-train stations and land 300,000

Rail track and coaches 300,000

Steam engines (2)  1,000,000

Purchase consideration P3,000,000

The operating license is for ten years.  It has recently been renewed by the transport authority and is
stated at the cost of its renewal.  The carrying amounts of the property and rail track and coaches are
based on their estimated replacement cost.  The engines are valued at their net selling price.

On December 1, 2020, the boiler of one of the steam engines exploded, completely destroying the
whole engine.  Fortunately no one was injured, but the engine was beyond repair.  Due to its age, a
replacement could not be obtained.  Because of the reduced passenger capacity, the estimated value
in use of the business after the accident was assessed at P2 million.

Passenger numbers after the accident were below expectations even after allowing for the reduced
capacity.  A market research report concluded that tourists were not using the railway because of the
fear of a similar accident occurring to the remaining engine.  In the light of this, the value in use of
the business was re-assessed on December 31, 2020 at P1.8 million.  On this date Rodeo received an
offer of P900,000 in respect of the transferable operating license.

 
QUESTIONS:

Based on the above and the result of your audit, compute the carrying amount of the following as of
December 31, 2020 after recognizing the impairment loss, if any:

 
Operating license

Response: P900,000
Feedback: Folder1/AP.3003D_P2(2).png
Correct answer: P900,000
Score: 1 out of 1 Yes

Question 9
On November 15, 2020, Rodeo Corporation acquired Rapids, a company that operates a scenic railway
along the coast of a popular tourist area.  The summarized statement of financial position at fair
values of Rapids on July 1, 2020, reflecting the terms of acquisition was:

Goodwill P   200,000

Operating license 1,200,000

Property-train stations and land 300,000

Rail track and coaches 300,000

Steam engines (2)  1,000,000

Purchase consideration P3,000,000

The operating license is for ten years.  It has recently been renewed by the transport authority and is
stated at the cost of its renewal.  The carrying amounts of the property and rail track and coaches are
based on their estimated replacement cost.  The engines are valued at their net selling price.

On December 1, 2020, the boiler of one of the steam engines exploded, completely destroying the
whole engine.  Fortunately no one was injured, but the engine was beyond repair.  Due to its age, a
replacement could not be obtained.  Because of the reduced passenger capacity, the estimated value
in use of the business after the accident was assessed at P2 million.

Passenger numbers after the accident were below expectations even after allowing for the reduced
capacity.  A market research report concluded that tourists were not using the railway because of the
fear of a similar accident occurring to the remaining engine.  In the light of this, the value in use of
the business was re-assessed on December 31, 2020 at P1.8 million.  On this date Rodeo received an
offer of P900,000 in respect of the transferable operating license.

QUESTIONS:
Based on the above and the result of your audit, compute the carrying amount of the following as of
December 31, 2020 after recognizing the impairment loss, if any:

 
Steam engines

Response: P500,000
Feedback: Folder1/AP.3003D_P2(5).png
Correct answer: P500,000
Score: 1 out of 1 Yes

Question 10
On November 15, 2020, Rodeo Corporation acquired Rapids, a company that operates a scenic railway
along the coast of a popular tourist area.  The summarized statement of financial position at fair
values of Rapids on July 1, 2020, reflecting the terms of acquisition was:

Goodwill P   200,000

Operating license 1,200,000

Property-train stations and land 300,000

Rail track and coaches 300,000

Steam engines (2)  1,000,000

Purchase consideration P3,000,000

The operating license is for ten years.  It has recently been renewed by the transport authority and is
stated at the cost of its renewal.  The carrying amounts of the property and rail track and coaches are
based on their estimated replacement cost.  The engines are valued at their net selling price.

On December 1, 2020, the boiler of one of the steam engines exploded, completely destroying the
whole engine.  Fortunately no one was injured, but the engine was beyond repair.  Due to its age, a
replacement could not be obtained.  Because of the reduced passenger capacity, the estimated value
in use of the business after the accident was assessed at P2 million.

Passenger numbers after the accident were below expectations even after allowing for the reduced
capacity.  A market research report concluded that tourists were not using the railway because of the
fear of a similar accident occurring to the remaining engine.  In the light of this, the value in use of
the business was re-assessed on December 31, 2020 at P1.8 million.  On this date Rodeo received an
offer of P900,000 in respect of the transferable operating license.

QUESTIONS:
Based on the above and the result of your audit, compute the carrying amount of the following as of
December 31, 2020 after recognizing the impairment loss, if any:

 
Property – train stations and land

Response: P200,000
Feedback: Folder1/AP.3003D_P2(3).png
Correct answer: P200,000
Score: 1 out of 1