UNIVERSITY OF SAINT LOUIS

SCHOOL OF BUSINESS ADMINISTRATION AND ACCOUNTANCY

MIDTERM SECOND DEPT QUIZ IN APPLIED AUDITING (ACCTG 21&22)
PROBLEM 1
You are called in to make an audit of the PAGMAMAHAL Co. as of
December 31, 1999. The company has been in existence for six years and
has not been audited before. The books have not been closed. There is only
one Machinery account as shown below. The bookkeeper tells you that he
has been using straight-line depreciation rate of 20% per year, which was
suggested by the manufacturers of the machine. The company policy is to
depreciate the machine for full years rate in the year of acquisition and none
in the year of disposition.
MACHINERY
Date
Description
Debit
Credit
1/4/94
Machine 1
VR 1
15,000
7/2/94
Machine 2
VR 21
20,000
12/31/94
Depreciation GJ
7,000
4/1/95
Machine 3
VR 29
60,000
12/31/95
Depreciation GJ
19,000
7/1/96
Machine 4 VR 38
55,000
(Machine 1
traded
in;
allowance,
10,000), net
12/1/96
Repairs
to VR 42
1,000
Machine 3
12/31/96
Depreciation GJ
27,200
6/12/97
Major
VR 48
8,000
overhaul of
Machine 2
7/1/97
Automatic
VR 51
18,000
control put
on Machine
4
10/1/97
Sold
CR
5,000
Machine 3
12/31/97
Depreciation GJ
20,400
12/31/98
Depreciation GJ
20,400
7/1/99
Sold
CR
14,000
Machine 4
12/31/99
Depreciation GJ
5,800
Required: 2 points each
a. Gain or loss on trade in of Machine 1
b. Gain or loss on sale of Machine 3
c. Gain or loss on sale of Machine 4
d. Book value of Machine 2 as of 12/31/1999
e. Adjusted balance of the Machinery account as of 12/31/1999.

Problem 2
RAYEARTH Sportshouse has been experiencing growth in the demand for
its products over the last several years. The last two Olympic Games greatly
increased the popularity of basketball around the world. As a result, a
European sports retailing consortium entered into agreement with
RAYEARTHs Roundball Division to purchase basketballs and other
accessories on an increasing basis over the next 5 years.
To be able to meet the quantity commitments of this arrangement,
RAYEARTH had to obtain additional manufacturing capacity. A real estate
firm located an available factory in close proximity to RAYEARTHs
Roundball manufacturing facility, and RAYEARTH agreed to purchase the
factory and used machinery from MAJIC KNIGHT Athletic Equipment Coo.
On October 1, 2009. Renovations were necessary to convert the factory for
RAYEARTHs manufacturing use.
The terms of the agreement required RAYEARTH to pay MAJIC KNIGHT
P500,000 when renovations started on January 1, 2010, with the balance to
be paid as renovations were completed. The overall purchase price for the
factory and machinery was P4,000,000. The building renovations were
contracted to SAILORMOON Corporation at P1,000,000. The payments
made, as renovations progressed during 2010, are shown below. The factory
was placed in service on January 1, 2011.
01.01.10
MAJIC KNIGHT P500K
SAILORMOON

04.01.10
P1M
300K

10.01.10
P1M
300K

12.31.10
P1.5M
400K

Total
P4M
1M

On January 1 ,2010, RAYEARTH secured a P5,000,000 line of credit with a

12% interest rate to finance the purchase cost of the factory and machinery,
and the renovation costs. RAYEARTH drew down on the line of credit to
meet the payment schedule as shown above; this was RAYEARTHs only
outstanding loan during 2010.
Royce Cadapan, RAYEARTHs controller, will capitalize the maximum
allowable interest costs for this project. RAYEARTHs policy regarding
purchases of this nature is to use the appraisal value of the land for book
purposes and prorate the balance of the purchase price over the remaining
items. The building had originally costs MAJIC KNIGHT P3,000,000 and had
a net book value of P500,000, while the machinery originally cost
P1,250,000 and had a net book value of P400,000 on the date of sale. The
land was recorded on MAJIC KNIGHT books at P400,000. An appraisal,
conducted by independent appraisers at the time of acquisition, valued the

UNIVERSITY OF SAINT LOUIS

SCHOOL OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
MIDTERM SECOND DEPT QUIZ IN APPLIED AUDITING (ACCTG 21&22)
land at P2,800,000, the building at P1,050,000, and the machinery at
P450,000.
Rancho Chanchad, chief engineer, estimated that the renovated plant would
be used for 15 years with an estimated salvage value of P300,000. Rene
estimated that the machinery would have a remaining useful life of 5 years
and a salvage value of P30,000. RAYEARTHs depreciation policy specifies
the double declining balance method for machinery and the 150% declining
balance method for the building. One-half years depreciation is taken in the
year the plant is placed in service and one-half year is allowed when the
property is disposed of or retired.
REQUIREMENTS:
a. Determine the amount to be recorded on the books of RAYEARTH
Sportshouse as of December 31, 2010 for each of the following properties
acquired from MAJIC KNIGHT Athletic Equipment Co.
Land (2) - Building (2)
- Machinery (2)
b. How much depreciation expense will be recognized on the books of
RAYEARTH Sportshouse as of December 31, 2011 for the building acquired
from MAJIC KNIGHT Athletic Equipment Co.? (2)
c. How much depreciation expense will be recognized on the books of
RAYEARTH Sportshouse as of December 31, 2011 for the machinery
acquired from MAJIC KNIGHT Athletic Equipment Co.? (2)
Problem 3
In an audit of the books of Active Company for the year ended December 31,
2009, the following data are discovered in connection with the entitys patent
account.
1. The entity spent P500,000 during the fiscal year ended December 31,
2008 for research and development cost and charged this amount to the
patent account. The records showed that for 2007 the research and
development cost amounted to P150,000 and was charged to expense.
2. The patent rights were granted on January 1, 2008. Legal expense and
other direct costs in connection with the issuance of the patent totalled
P510,000 and were charged to legal and professional fees.
3. The entity paid a legal counsel P50,000 on January 1, 2009 for legal
services in connection with an infringement suit brought against the entity.
This amount was charged to legal and professional fees.
4. On January 15, 2010, it was learned from the legal counsel handling the
infringement suit that an amicable settlement was agreed and that the entity
has to pay P100,000 damages. Accrued legal counsel fee, P30,000.
5.
The balance of the patent account on December 31, 2009 was
P450,000. The entity has not yet recorded amortization for the current year
2009. The patent has a useful life equal to its legal life.

REQUIREMENTS:
a. Prepare a compound journal entry to adjust the books as at December 31,
2009 before recognizing any amortization expense. (3)
b. Amount of amortization expense for the year 2010. (1)
c. Carrying amount of the patent as at December 31, 2011. (1)
Problem 4:
On December 31, 2005, Rebecca Rose Corporation acquired the following
three intangible assets:
a. 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.
b. Goodwill for P400,000. The goodwill is associated with Rebecca Roses
Hayo Manufacturing reporting unit.
c. A customer list for P220,000. By contract, Rebecca Rose has exclusive
use of the list for5 years. Because of market conditions, it is expected that
the list will have economic value for just 3 years.
On December 31, 2006, 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, 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 Hayo Manufacturing
reporting unit is P250,000 per year for the next 22 years. The units fair value
less costs to sell is P3,000,000. As of December 31, 2006, the units carrying
amount amounts to P3,500,000.
c. The cash flows expected to be generated by the customers list are
P120,000 in 2007 and P80,000 in 2008.
Assume that the appropriate discount rate for all items is 6%
REQUIREMENTS:
a. What is the total amount of impairment loss for the year 2006? (3)
b. What is the amount of goodwill written off during 2006? (1)
c. What could be the most reasonable entry to record the impairment loss?
( You may use an aggregate account title for accounts not specifically
identified.) (2)
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