MOUNTAIN VIEW COLLEGE

SCHOOL OF BUSINESS AND ACCOUNTANCY

AUDITING & ASSURANCE: CONCPTES AND APPLICATION

WORKSHEET#07: AUDIT OF INTANGIBLES & PREPAYMENTS

INSTRUCTIONS: Answers and all necessary solutions to the requirements must be written in a clean
sheet of paper (all in good form). Submission format must be in pdf file (one file
only).

PROBLEM #1
You are currently auditing JAPAN CORP.'s intangible assets. The following cost information were obtained in
relation to your audit:
Web site costs, for external use, customer can place orders on web site ...................................... 160,000
Web site costs, for external use, customer cannot place orders on web site................................. 200,000
Internally generated mastheads ....................................................................................................... 40,000
Goodwill internally generated......................................................................................................... 50,000
Operating losses incurred in the start-up of the business .............................................................. 280,000
Cost of internally generated patent:
Wages paid for the employees' work on the research, development .......................................... 100,000
Expense of drawing required by the patent office to be submitted with the patent application 175,000
Fees paid to the government patent office to process application................................................ 30,000
Lease prepayments (6 months rent paid in advance) .................................................................... 120,000
Initial franchise fee paid................................................................................................................ 300,000
Continuing franchise fee paid ....................................................................................................... 120,000
Mastheads, purchased from a competitor ....................................................................................... 30,000
Costs of marketing research ............................................................................................................ 60,000
Cost of successful legal suit to protect the patent ......................................................................... 140,000
Internally developed customer list .................................................................................................. 50,000
Customer list acquired from another entity .................................................................................... 70,000
Goodwill acquired in the purchase of a business .......................................................................... 210,000
Internally generated publishing title ............................................................................................... 40,000
Lease right, ...................................................................................................................................... 50,000
Leasehold improvements ................................................................................................................ 80,000
Operating system of a computer ..................................................................................................... 90,000
Cost of purchased copyright ......................................................................................................... 130,000

Required: How much is the correct amount of intangible assets, including goodwill, shall be presented in the
current ear's statement of financial position?

PROBLEM #2
You noted the following related to the company's intangible asset in connection with your audit of CHINA
COMPANY's financial statements the year 2021:

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On January 1, 2021, CHINA signed an agreement to operate as a franchisee of PUPPY CORP. for an initial
franchise fee of P425,000. Of this amount, 125,000 was paid when the agreement was signed and the balance was
payable in four annual payments of P75,000 each, beginning January 1, 2022. The agreement provides that the
down payment is not refundable and no future services are required of the franchisor. The present value of
January 1, 2021 of the four annual payments discounted at 14% (the implicit rate for a loan of this type) is
P218,500. The agreement also provides that 5% of the revenue from the franchise must be paid to the franchisor
annually. CHINA's revenue from the franchise for 2021 was P450.000. CHINA estimates the useful life of the
franchise to be ten years.

CHINA incurred P300,000 of research and development costs to develop a product for which a patent was granted
at the beginning of current year. Legal fees and other costs associated with registration of the patent totaled
P300,000. The patent has a legal life of 15 years and useful life of 12 years. At year-end, the entity paid P75,000
for legal fees in a successful defense for the patent.

On April 1, 2021, CHINA acquired a customer list on a deferred settlement basis with a price of P150,000. The
cash price equivalent of the asset is P125,000. Legal fees and other professional fees paid amounted to P50,000
while administration and overhead costs amounted to P40,000. The liability was settled before year-end. The
customer list is expected to have a 5-vear useful life.

On July 1, 2021, CHINA leased a commercial building which intends to improve and utilized for administrative
purposes. The annual rental for the 5-year lease period is P240,000. The company paid for a lease right amounting
to P150,000 and P480,000 as a 2-year rent advance. After obtaining the lease, improvements on the leased
building costing P600,000 were made and completed on October 1. These improvements were estimated to have a
useful life of 10 years.

On October 1, 2021, CHINA (non-VAT registered) purchased a trademark from another entity amounting to
P672,000 including VAT. A 5% discount is available on the purchase. The trademark is to be amortized over its
remaining legal life of 15 years but management estimates its remaining useful life at 10 years. On December 31,
2021, CHINA incurred legal fees of P50,000 for the defense of infringement case. Unfortunately, the decision of
the court is CHINA.

Required:
1. How much is the total initial cost of the intangible assets above?
2. How much is the total amortization expense for 2021?
3. What is the total carrying amount of intangible assets as of December 31, 2021?
4. What is the total amount of expense in relation to the above information presented in 2021 statement of
profit or loss?

PROBLEM #3
BANGLADESH CORP. incurred the following costs during the year ended December 31, 2021:
Routine, on-going efforts to refine, enrich, & improve
upon the qualities of an existing product ............................................................................ 300,000
Design, construction, and testing of pre-production prototypes and models ................................ 400,000
Quality control during commercial production including routine testing of products ................... 10,000
Laboratory research aimed at discovery of new knowledge......................................................... 200,000
Design of tools, jigs, molds and dies involving new technology.................................................... 90,000
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 Advertising expense to introduce a new product .......................................................................... 300,000
Testing in search for new products or process Iteratives .............................................................. 250,000
R and D equipment with useful life of four years in various R & D projects ........................... 2,000,000
Start-up costs incurred when opening a new plant ....................................................................... 600,000
Conceptual formulation and design of possible product or process alternatives .......................... 200,000
Cost of marketing research ........................................................................................................... 120,000
Advertising expense to introduce a new product .......................................................................... 100,000
Engineering costs incurred to advance a product to full
production stage but economic viability is not yet achieved .............................................. 700,000

Required: How much is the total research and development expense?

PROBLEM #4
MALAYSIA CORP. has maintained a research and development department to develop new "know hows" which
the company patents from time to time. Moreover, the company also purchase patents.

The following is a summary of transactions involving patents owned by the company.

a. During 2015 and 2016, MALAYSIA spent a total of P1,254,000 and P1,560,000, respectively. In
developing a new process that was patented (Patent A) on April 1, 2017, additional legal and other costs
in registering this patent amounting to P300,000 were incurred.
b. Another patent (Patent B) was developed by another entity and was purchased by MALAYSIA for
P1,125,000 on December 31, 2018. The remaining legal life of the patent on the acquisition date was 12.5
years.
c. During 2017, 2018 and 2019, research and development activities cost P375,000, P1,350,000 and
P1,500,000, respectively were incurred. No additional patents resulted from these activities.
d. A patent infringement suit brought by the company against a competitor regarding Patent B was
successfully prosecuted at a cost of P127,800 in 2019.
e. On July 1, 2020, Patent C was acquired In exchange of a piece of equipment having a fair value of
P900,000. The company paid additional cash on the exchange at P150,000. The carrying value of the
equipment on July 1, was at P1,140,000. This patent is estimated to be useful for 16 years.
f. During 2021, the company expended P1,080,000 on patent development. The company, however is still
undecided as to how the patent will generate probable future economic benefits.

Required:
1. What is the total expense related to the patents to be recognized for each year from 2015 to 2021?
2. What is the total carrying value of MALAYSIA patents as of December.31, 2021?

PROBLEM #5
INDONESIA COMPANY's nature of business involves developing computer software which is used by various
business from different industries. The following costs were incurred by the entity for the current year, 2021 in
relation to the development and production of its computer software to be used as an integrated system for various
customers and retail slots.
Completion of detailed program design........................................................................... 5,200,000
Salaries and wages of programmers doing the research .................................................. 1,500,000
Costs incurred for coding and testing to establish technological feasibility.................... 4,000,000
Other coding costs after establishment of technological feasibility ................................ 9,600,000
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 Other testing costs after establishment of technological feasibility................................. 8,000,000
Costs of producing product masters for training materials .............................................. 6,000,000
Duplication of computer software and training materials from product masters .......... 10,000,000
Packaging product ............................................................................................................ 3,600,000

Technological feasibility of such computer software was achieved and established at June 30, 2021. During 2021,
the entity's sales for such software is at P50,000,000 representing 70% of the goods available for sale of the
current period.

Required:
1. What total amount of the costs incurred should be expensed immediately?
2. What amount should be capitalized as software cost, subject to amortization?
3. What is the cost of ending inventory assuming that the computer software has a userul life or 5 years
4. What is the net income in relation to the above computer software for the current year, 2021?

PROBLEM #6
SINGAPORE CORP. engaged our services to compute the goodwill and purchase price for the acquisition of
SINGAPORE CORP. The following data are available for the SINGAPORE CORP.

Current Assets P 6,000,000 Current liabilities P 3,500,000

Investments 2,500,000 Noncurrent liabilities 2,500,000
PPE 13,000,000 Ordinary Share Premium 1,500,000
Total Assets P 21,500,000 Accumulated Profits 7,000,000
Total Liab and SHE P 21,500,000

You found out that the investments have a fair value of P2,000,000 and the current assets and property, plant and
equipment are understated by P800,000 and P1,850,000,respectively. All other assets and equities are properly
stated. An examination of the company's income for the last 4 years revealed that the total earnings amounted to
P9,000,000. The said earnings include gain on sale during the last year of P100,000 and P150,000 annual bonus of
the president. The normal rate of return is 10%.
REQUIREMENTS:
earnings using 12% rate.

Required: Compute for the goodwill and the corresponding purchase price assuming:
1. Purchase of goodwill for 4 years.
2. Capitalization of average excess earning using 10%
3. Capitalization of average earnings using 8%
4. Discounted average excess

PROBLEM #7
On January 1, 2021, KOREA CORP. acquired a factory equipment at a cost of P450,000. The equipment is being
depreciated using the straight-line method over its projected useful life of 10 years with P50,000 salvage value.

On December 31, 2022, a determination was made that the future net cash flows expected from the continued use
of the asset shall be P40,000 per year. Estimated salvage value remains to be P50,000. The asset also had a fair

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value less cost to sell at P220,000 on the same date. You ascertained that this was properly computed and that
recognition of the impairment was warranted. (the prevailing interest rate is 10%)

On December 31, 2024, the asset's replacement cost was determined to be P555,000 with a total life of 12 years
from date of acquisition. Salvage value is still estimated to be at P50,000. You also ascertained that this valuation
is reasonable in the circumstance.

You have been asked the company's accountant in the application of PAS 36, the standard on impairment of
assets.

Required:
1. What is the recoverable value of the asset on December 31, 2022?
2. How much impairment loss should be recognized on December 31, 2022?
3. What is the asset's carrying amount on December 31, 2024?
4. How much impairment recovery should be reported in the 2024 income statement?
5. What is the depreciation expense in 2026, under the cost method?
6. What is the depreciation expense in 2026, under the revaluation method?
7. What is the balance of any revaluation surplus at the end of 2026, under piecemeal realization?

PROBLEM #8
On December 31, 2021, the following data are available on one of the cash generating units of THAILAND
CORP:
Carrying amount before impairment:
Inventory ..................................................................................................................... P20.000.000
Investments at fair value through other comprehensive income ................................... 40,000,000
Property, plant and equipment ....................................................................................... 60.000.000
Patent.............................................................................................................................. 20,000,000
Goodwill .......................................................................................................................... 4.000,000
Total ........................................................................................................................... P144,000,000

On December 31, 2021, THAILAND CORP. has undertook impairment testing of the cash generating unit and
determined the value in use of the unit at P120,000,000.

Required: Determine the impairment loss allocated to the following assets:

1. Goodwill
2. Inventory
3. Investments at FVTOCI
4. Property, plant and equipment
5. Patent

PROBLEM #9
The following information pertains to VIETNAM CORP.'s intangibles as of December 31, 2021:
• On January 1, 2021, VIETNAM CORP. signed an agreement to operate as a franchisee for 10 years of
MCDOLIBEE FRANCHISE CORP. for an initial franchise fee of P3,000,000. P600,000 was paid as a
downpayment with the balance being payable in 3 equal annual payments beginning January 1, 2022. The
agreement provides that the down payment is non-refundable and that no future services are required of
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 MCDOLIBEE FRANCHISE CORP. The prevailing implicit rate for loans of this type was at 14%. The
agreement further provides that 5% of the revenue from the franchise must be paid to the franchisor
annually. VIETNAM CORP.'s revenue from the franchise for 2021 was at P12,000,000. The company
also estimates that the net annual cash flows from the franchise agreement shall be P370,000. The
prevailing market rate of interest on December 31, 2021 was at 10%.
• On April 1, 2021, VIETNAM purchased a trademark for an amount of P600,000. Due to the indefinite
renewal option of the trademark, the entity assessed the intangible asset to have an indefinite life. On June
30, 2021, the company is successful in defending the trademark from infringement. Legal costs in relation
to the successful defense is P30,000. Due to internal impairment indicators, VIETNAM assessed the
trademark to be impaired on December 31, 2021. The fair value less cost to sell of trademark on that date
is P450,000. The annual future cash flows from the trademark is P50.000.
• A patent was purchased from another entity for P1,000,000 on January 1, 2019 with an estimated useful
life of 10 years. Expenditures totalling to P326,400 for successfully defending the patent was incurred in
July 1, 2021. By the end of 2019 and 2020, estimates place future net cash flows from the patent at
P200,000 for its remaining life. By the end of 2021, the estimate had been revised to P80,000 because of a
recent technological development in the industry. The prevailing market rate of interest were at 9%, 9.5 at
the end of 2019 and 2020, respectively.

Required:
1. What is the carrying amount of the franchise at the end of 2021?
2. What is the carrying amount of the trademark at the end of 2021?
3. What is the carrying amount of the trademark at the end of 2019, 2020 & 2021?
4. What is the total amount of expense to be recognized in the statement of profit or loss for 2021?

PROBLEM #10
PHILIPPINES CORP. presented the following analysis on its prepayment and deferred charges accounts
classified as current assets in the company's statement of financial position:
PHILIPPINES CORP.
Prepayments
September 30, 2021
Unexpired rent P 700,000
Unexpired insurance 250,000
Prepaid advertising expense 150,000
Office supplies 230,000
Advances to officers 270,000
Idle office equipment, NRV 50,000
Bond redemption fund 1,090,000

a. On September 1, 2021, the company leased an office or warehouse building located in Pangasinan at a
monthly rental amount of P20,000 for 1 year. On that date, the company's unexpired rent composed of the
following:
Rent security deposit ........................................................................ P100,000
1 year rent ............................................................................................ 480,000
Lease bonus ......................................................................................... 120,000
b. Unexpired insurance refer to the following insurance policies:
Type: Period Covered Fire insurance
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 Premium 1/1/2021 - 1/1/2022 P100,000
Property insurance 6/30/2021 - 6/30/2022 150,000
c. On June 1, the company paid and recorded advertising cost amounting to P150,000 to be aired everyday
over a radio station for 6 months.
d. P50,000 worth of office supplies remained in the company as of September 2021.

Required:
1. How much from the prepayments should be reported as expense in 2021?
2. What is the balance of the prepayment account to be presented as current asset in the 2021 statement of
financial position?
3. How should the other items, not classified as prepayment should be reported in the balance sheet?

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