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Intangibles
JOYCE CORP. holds a valuable patent on a precipitator that prevents certain types of air
pollution. JOYCE does not manufacture or sell the products and processes it develops. Instead,
it conducts research and develops products and processes which it patents and then assigns
the patents to manufacturers on a royalty basis. Occasionally, it sells a patent. The following
present the summary of the activities in relation to the aforementioned patent:
Dec 10, 2001 Legal fees paid to successfully defend the device patent 357,000
5. What is the total loss from patent write off should be recognized in 2006?
a. P1, 235,294 b. P1,213,333 c. P1,225,000 d. P1,323,667
Solution and Explanation:
1. Answer: D 620,000
2. Answer: A
3. Answer: B
4. Answer: D
Compute the carrying value of patent December 31, 2005?
Carrying value of Patent, Jan. 1, 2004 845,625
Acquisition of the related patent Jan. 5, 2004 654,375
Total 1,500,000
2004 Amortization 88,235
2005 Amortization 88,235
Carrying value of Patent, Dec. 31, 2005 1, 323,529
5. Answer: A
1, 323,529 1, 323,529
/15 88, 235
88, 235 1, 235,294
An intangible asset according to PAS 38 par 21 shall be recognised if, and only if:
(a) it is probable that the expected future economic benefits that are attributable to the
asset will flow to the entity; and
(b) the cost of the asset can be measured reliably.
An intangible asset shall be measured initially at cost (PAS 38 par 24) and the subsequent
recognition of intangible assets shall be carried at its cost less any accumulated amortization
and any accumulated impairment losses over its remaining expected life.
Problem NO. 2
Amount paid for conference for the introduction of the newly developed
1. Compute for the total research and development expense during the year.
a. P1,306,200
b. P1,176,200
c. P1,223,500
d. P1,034,000
If an entity cannot distinguish the research phase of an internal project to create an intangible
asset from the development phase, the entity treats the expenditure for that project as if it were
incurred in the research phase only.
Problem NO. 3
You gathered the following information related to the Patents account of the Lady Han
Cookie Corporation in connection with your audit of the company’s financial statements for the
year 2006.
In 2005, Lady Han developed a new machine that reduces the time required to insert the
fortunes into its fortune cookies. Because the process is considered very valuable to the fortune
cookie industry, Lady Han patented the machine. The following expenses were incurred in
developing and patenting the machine:
During 2006, Lady Han paid P150,000 in legal fees to successfully defend the patentagainst an
infringement suit by Cookie Monster Corporation.
It is the company’s policy to take full year amortization in the year of acquisition
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Cost
a. P580,000 b. P1,128,000 c. P648,000 d. P 798,0001
2. Cost of Machine
a. P1,236,000 b. P1,040,000 c. P1,648,000 d. P1,168,000
3. Amount that should charged to expense when incurred in connection with the
development of the patented machine
a. P1,480,000 b. P1,608,000 c. P1,000,000 d. P 01
4. Carrying amount of patent as of December 31,2006
a. P522,000 b. P1,015,200 c. P583,200 d. P 837,900
5. The most effective means for the auditor to determine whether a recordedintangible asset
possesses the characteristics of an asset is to
1. ANSWER: C
Fees paid to the government patent office to process application 100, 000
Explanation:
Cost of an internally generated intangible asset (PAS 38 paragraph 65, 66, and 67)
The cost of an internally generated intangible asset for the purpose of paragraph 24 is
the sum of expenditure incurred from the date when the intangible asset first meets the
recognition criteria in paragraphs 21, 22 and 57. Paragraph 71 prohibits reinstatement of
expenditure previously recognized as an expense.
The cost of an internally generated intangible asset comprises all directly attributable
costs necessary to create, produce, and prepare the asset to be capable of operating in the
manner intended by management. Examples of directly attributable costs are:
(a) costs of materials and services used or consumed in generating the intangible asset;
(b) costs of employee benefits (as defined in IAS 19) arising from the generation of the
intangible asset;
(c) fees to register a legal right; and
(d) amortisation of patents and licences that are used to generate the intangible asset.
IAS 23 specifies criteria for the recognition of interest as an element of the cost of an
internally generated intangible asset.
The following are not components of the cost of an internally generated intangible asset:
(a) selling, administrative and other general overhead expenditure unless this
expenditure can be directly attributed to preparing the asset for use;
(b) identified inefficiencies and initial operating losses incurred before the asset
achieves planned performance; and
2. ANSWER: D
(a) its purchase price, including import duties and non-refundable purchase taxes, after
deducting trade discounts and rebates.
(b) any costs directly attributable to bringing the asset to the location and condition
necessary for it to be capable of operating in the manner intended by
management.
(c) the initial estimate of the costs of dismantling and removing the item and restoring
the site on which it is located, the obligation for which an entity incurs either when
the item is acquired or as a consequence of having used the item during a
particular period for purposes other than to produce inventories during that
period.
(a) costs of employee benefits (as defined in IAS 19 Employee Benefits) arising directly from
the construction or acquisition of the item of property, plant and equipment;
(b) costs of site preparation;
(e) costs of testing whether the asset is functioning properly, after deducting the net proceeds
from selling any items produced while bringing the asset to that location and condition
(such as samples produced when testing equipment); and
3. ANSWER: A
Amount that should charged to expense when incurred in connection with the development of
the patented machine.
Research phase
No intangible asset arising from research (or from the research phase of an internal
project) shall be recognised. Expenditure on research (or on the research phase of an
internal project) shall be recognised as an expense when it is incurred
Development phase
An intangible asset arising from development (or from the development phase of an
internal project) shall be recognised if, and only if, an entity can demonstrate all of the
following:
(a) the technical feasibility of completing the intangible asset so that it will be available
for use or sale.
(b) its intention to complete the intangible asset and use or sell it.
(e) the availability of adequate technical, financial and other resources to complete the
development and to use or sell the intangible asset.
(f) its ability to measure reliably the expenditure attributable to the intangible asset
during its development.
4. ANSWER: C
Solution:
The depreciable amount of an intangible asset with a finite useful life shall be allocated
on a systematic basis over its useful life. Amortisation 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. Amortisation shall cease at the earlier of the date that the
asset is classified as held for sale (or included in a disposal group that is classified as held for
sale) in accordance with IFRS 5 and the date that the asset is derecognised. The amortisation
method used shall reflect the pattern in which the asset’s future economic benefits are expected
to be consumed by the entity. If that pattern cannot be determined reliably, the straight-line
method shall be used. The amortisation charge for each period shall be recognised in profit or
loss unless this or another Standard permits or requires it to be included in the carrying amount
of another asset.
5. ANSWER: D
(b) the fair value of an intangible asset acquired in a business combination can be
measured with sufficient reliability to be recognised separately from goodwill.
The future economic benefits flowing from an intangible asset may include revenue from
the sale of products or services, cost savings, or other benefits resulting from the use of the
asset by the entity. For example, the use of intellectual property in a production process may
reduce future production costs rather than increase future revenues
Problem NO. 4
Transactions during 2005 of the newly organized Pink Corporation included the following:
Jan. 2 Paid legal fees of P150,000 and stock certificate costs of P83,000 to complete
organization of the corporation.
15 Hired a clown to stand in front of the corporate office for 2 weeks and hound out
pamphlets and candy to create goodwill for the new enterprise. Clown cost,
P10,000; pamphlets and candy, P5,000.
Total P 492,500
May 1 Acquired both a license to use a special type of container and a distinctive
trademark to be printed on the container in exchange for 6,000 shares of Pink s
no-par common stock selling for P50 per share. The license is worth twice as
much as the trademark, both of which may be used for 6 years.
July 1 Constructed a shed for P1,310,000 to house prototypes of experimental models
to be developed in future research projects.
Dec. 31 Incurred salaries for an engineer and chemist involved in product development
totaling P1,750,000 in 2008.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Cost of patent
a. P492,500 b. P429,000 c. P63,500 d. P0
2. Cost of licenses
a. P150,000 b. P200,000 c. P100,000 d. P0
3. Cost of trademark
a. P150,000 b. P200,000 c. P100,000 d. P0
5. Total amount resulting from the foregoing transactions that should be expensed when
incurred.
a. P4,100,500 b. P1,983,000 c. P1,998,000 d. P0
Journal Entries
4. Answer: C
Cost:
Patent 492,500
License 200,000
Trademark 100,000 792 500
Less: Amortization for 2010
5. Answer: C
(a) it is probable that the expected future economic benefits that are attributable to the asset will
flow to the entity; and
(b) the cost of the asset can be measured reliably. An entity shall assess the probability of
expected future economic benefits using reasonable and supportable assumptions that
represent management’s best estimate of the set of economic conditions that will exist over
the useful life of the asset.”
In addition, par 119 of PAS 38 enumerated common examples of Intangible assets that entities
recognizes:
A class of intangible assets is a grouping of assets of a similar nature and use in an entity’s
operations.
And according to paragraph 24 of PAS 38 “an intangible asset shall be measured initially at
cost.”
Using the cost model according to paragraph 74 of PAS 38“an intangible asset shall be carried
at its cost
less any accumulated amortization and any accumulated impairment losses.”
The treatment to research and development, according to paragraph 126 of PAS 38, which
states the entity “shall disclose the aggregate amount of research and development expenditure
recognised as an expense during the period.”
Advertising and organization cost shall be part of the expenses according to paragraph 69(a)(c)
of PAS38 which states that “(a) expenditure on start-up activities unless this expenditure is
included in the cost of an item of property, plant and equipment in accordance with IAS 16;(c)
expenditure on advertising and promotional activities”
Problem NO. 5
Gilead Enterprise has been in the business for several years. A Trial balance prepared by the
company,s staff accountant for December 31, 2016 is presented below.
Banawe Company
UNADJUSTED TRIAL BALANCE
December 31, 2016
Debit Credit
Cash 20,000
Accounts Receivable 50,000
Inventory 120,000
Equipment 800,000
Accumulated Depreciation – Equipment 250,000
Buildings 1,200,000
Accumulated Depreciation – Buildings
400,000
Patents 550,000
Franchise Agreements 95,000
Intangible Asset- Software cost 1,160,000
Goodwill 345,000
Accounts Payable 12,000
Accrued Wages Payable 5,000
Accrued Taxes Payable
60,000
Bonds Payable
500,000
Premium on Bonds Payable 35,000
Preference Shares (P100 par value) 100,000
Ordinary Shares (P25 par value)
1,100,000
Share Premium
220,000
Accumulated Profits (as of Janouary 1)
1,458,000
Sales revenue 900,000
Cost of Goods Sold 400,000
Selling and General Administrative Expense 300,000
5,040,000 5,040,000
Before 2016, Gilead Enterprises prepared financial statements internally, the company has not
been audited because the ownership is held completely by one family and is not actively sold.
As of 2016, however, in anticipation of bank loans and possible offering of common stock, the
company needs audited financial statements prepared in conformity with generally accepted
accounting principles.
As a member of the team of independent auditors responsible for Gilead Enterprises, you have
been assigned the intangible assets. You have observed that four intangible asset accounts
appear on the unadjusted trial balance. Additional investigation reveals the following:
Patents: All patents were purchase from another company when Gilead Enterprises began
operations on January 2, 2009. These patents are being amortized over an expected useful life
of 14 years. Improvements made to equipment covered by the patent costing P75,000 was
debited to the account in January 2013. Amortization in 2013-2015 included amortization on the
P75,000 for the remaining life of the relevant patent. It is determined that the P75,000 should
have been expensed in 2013. It is further determined on January 1, 2016, that one of the
patents has a remaining life of only 2 years. This patent was originally assigned a cost of
P210,000.
Franchise Agreements: A franchise agreement was signed on January 1,2016. A P50,000 fee
was paid, covering a 5-year period, at the end of which the company may renew the agreement
by paying P50,000. A decision on renewal has not been made as of December 31, 2016. The
agreement calls for an annual payment of 5% of its sales revenue. An entry debiting the account
for P45,000 was made at the time of the cash payment for 2016.
Software Costs: During 2016 Gilea,d incurred cost to develop and produce routine, low risk
computer software product as follows:
Completion of total program design 130,000
Cost incurred for coding and testing to establish
technological feasibility 100,000
Other coding cost after establishment of technological feasibility 240,000
Other testing cost after establishment of technological feasibility 200,000
Cost to product master 150,000
Duplication of computer software and training materials from
product master (1,000 units) 250,000
Packaging product( 500 units) 90,000
P1,160,000
Goodwill
Questions:
A. P40,000 C.P76,000
B. P50,000 D.95,000
3. Carrying value of the Goodwill on December 31, 2016
A. P200,000 C.P345,000
B. P300,000 D. Nil
4. Correct software cost.
A. P590,000 C.P680,000
B. P1,100,000 D. 930,000
5. Total Costs incurred in the software that should be charge to expense in 2016.
A. P230,000 C.P470,000
B. P320,000 D. 670,000
1. Answer: A
According to PAS 38 paragraph 74 When using the cost model for the initial
measurement of the intangible assets, the subsequent recognition shall be carried at its
cost less any accumulated amortization and any accumulated impairment losses.
2. Answer: A
3. Answer: A
According to PAS 38 paragraph 48, internally generated goodwill is not recognized as an asset.
It was also stated in PFRS 3 paragraph 32 that the acquirer shall recognize goodwill if there is
an excess of consideration over the fair value of identifiable assets.
4. Answer: A
PAS 38 stated that the cost incurred in generating a software product shall be charge to
expense when incurred until a technical feasibility has been established for the product.
Actually, this is the research stage where there is so much uncertainty about the future
economic benefits. Hence, research costs shall be expense outright.
After technological feasibility has been established, capitalized software costs include the
cost of coding and testing and the cost to produce the masters. The costs incurred to
actually produce the software from masters and package the software for sale shall be charged
toInventory.
6. Answer: C
Total 108,571
Add:
Amortization of franchise (50,0000/5) 10,000
Total amortization 118,571
According to PAS 38 the subsequent recognition of intangible assets shall be carried at its cost
less any accumulated amortization and any accumulated impairment losses over its remaining
expected life.
PROBLEM NO. 6
On January 1, 2015, Lester Co. revalued its machinery with a cost of P9,000,000 acquired 5
years ago with an estimated useful life of 20 years and has been estimated to have a
replacement cost of P20,000,000. The machinery is estimated to have a remaining useful life of
25 years as of January 1, 2015.
On January 2, 2017, the machinery was sold at a net proceeds of P15, 000,000.
QUESTIONS:
Based on the above data, answer the following:
5. How much is the total revaluation surplus to be closed to retained earnings in 2017?
a. P7,590,000 b. Nil c. P10,266,667 d. P8,250,000
Solution and Explanation:
1. Answer: A
2. Answer: B
3. Answer: B
As a matter of procedure, the carrying amount, sound value, and revaluation surplus shall be
allocated over the remaining useful life of an asset.C.Valix(2015)
4. Answer: A
PAS 16 par.68 stated that the gain or loss arising from the derecognition of an item of property,
plant and equipment shall be included in profit or loss when the item is derecognised (unless
PAS 17 requires otherwise on a sale and leaseback). Gains shall not be classified as revenue.
5. Answer: A
Beginning revaluation surplus 8,250,000
Less: Realization for 2 years (2015 & 2016) 660,000
Revaluation surplus to be close to RE 7,590,000
PAS 16 par. 41 The revaluation surplus included in equity in respect of an item of property,
plant and equipment may be transferred directly to retained earnings when the a sset is
derecognised. This may involve transferring the whole of the surplus when the asset is retired or
disposedof. However, some of the surplus may be transferred as the asset is used by an entity.
In such a case, the amount of the surplus transferred would be the difference between
depreciation based on the revalued carrying amount of the asset and depreciation based on the
asset’s original cost. Transfers from revaluation surplus to retained earnings are not made
through profit or loss.
PROBLEM NO.7
On January 1, 2007, RHAD Company acquired two classes of property, plant, and equipment.
Data relating to the asset follow:
The company uses the cost model for the machinery and revaluation model for the office
equipment. On January 1, 2008, the following are the recoverable amounts (fair values) of the
assets:
Recoverable Amount
Machinery 1,800,000
On January 1, 2009, the following are the recoverable amounts (fair values) of the assets:
Recoverable Amount
Machinery 1,000,000
QUESTIONS:
5. How much is the total revaluation surplus to be closed to retained earnings in 2017?
a. P0 b. P170,000 c. P150,000 d. P144,000
1. A
Depreciation in 2017:
Machinery 2,000,000÷ 5yrs 400,000
Office equipment 1,000,000÷ 4yrs 250,000
Total Depreciation 650,000
IAS 16 paragraph 43 &50 states thateach part of an item of property, plant and equipment
with a cost that is significant in relation to the total cost of the item shall be depreciated
separately and the depreciable amount of an asset shall be allocated on a systematic basis over
its useful life.
2. B
Office Equipment using revaluation model:
Recoverable amount 996,000
Carrying amount 750,000
Revaluation surplus 246,000
In this case only the appreciation on office equipment is recognize as revaluation surplus
because it’s using revaluation model. On the other hand machinery which is using cost model
shall be carried at its cost less any accumulated depreciation and any accumulated impairment
losses according to PAS 16 paragraph 30.
3.B
Depreciation:
(a)restated proportionately with the change in the gross carrying amount of the asset so that the
carrying amount of the asset after revaluation equals its revalued amount. This method is often
used when an asset is revalued by means of applying an index to determine its depreciated
replacement cost.
(b)Eliminated against the gross carrying amount of the asset and the net amount restated to the
revalued amount of the asset. This method is often used for buildings. The amount of the
adjustment arising on the restatement or elimination of accumulated depreciation forms part of
the.
4. B
Impairment Loss:
5. Answer: A
Revaluation surplus= 0
Refer to number 4.
PROBLEM NO. 8
On January 1, 2007, REX Company acquired two classes of property, plant, and equipmen.
Data relating to the asset follow:
The company uses the cost model for the machinery and revaluation model for the office
equipment. On January 1, 2008, the following are the recoverable amounts (fair values) of the
assets:
Recoverable Amount
Machinery 2,800,000
On January 1, 2009, the following are the recoverable amounts (fair values) of the assets:
Recoverable Amount
Machinery 2,600,000
QUESTIONS:
1. Answer: C
2. Answer: C
3. Answer: D
4. Answer: B
5. Answer: C
Depreciation
Each part of an item of property, plant and equipment with a cost that is significant in
relation to the total cost of the item shall be depreciated separately.
The depreciable amount of an asset shall be allocated on a systematic basis over its
useful life.
The residual value and the useful life of an asset shall be reviewed at least at each
financial year- end and, if expectations differ from previous estimates, the change(s) shall be
accounted for as a change in an accounting estimate in accordance with IAS 8 Accounting
Policies, Changes in Accounting Estimates and Errors
An entity shall assess at the end of each reporting period whether there is any indication
that an asset may be impaired. If any such indication exists, the entity shall estimate the
recoverable amount of the asset.
An impairment loss is the amount by which the carrying amount of an asset or a cash-
generating unit exceeds its recoverable amount.
Revaluation model
After recognition as an asset, an item of property, plant and equipment whose fair value
can be measured reliably shall be carried at a revalued amount, being its fair value at the date
of the revaluation less any subsequent accumulated depreciation and subsequent
accumulated impairment losses. Revaluations shall be made with sufficient regularity to
ensure that the carrying amount does not differ materially from that which would be determined
using fair value at the end of the reporting period.
PROBLEM NO. 9
On December 31, 2006, NOEMI subjected to impairment test a piece of equipment which was
acquired on January 1, 2005. Data pertinent to the equipment as of December 31, 2006 follow:
Value-in-use 300,000
On December 31, 2007, the asset is found to have a recoverable amount of P1,000,000
1. What is the sum of the years digits that was used in the computation of Depreciation
in 2005 and 2006? 5/15
5. How much is the depreciation expense recognized in 2008 under the cost model?
160,000
6. How much is the depreciation expense recognized in 2008 under the revaluation
model? 666,667
1. Answer: 5/15
2𝑥
1200 ( ) = 400
𝑥 + 𝑥2
2400𝑥
+ 400
𝑥 + 𝑥2
2000𝑥 400𝑥 2
=
400𝑥 400𝑥
5=𝑥
X= 5
5 + 4 + 3 + 2 + 1 = 15
5
2005=
15
4
2006=
15
2. Answer: 147,000
3. Answer: 166,500
4. Answer: 73,500
5. Answer: 160,000
How much is the depreciation expense recognized in 2008 under the revaluation model?
Sum of the years digits method provides for depreciation that is computed by multiplying the
depreciable amount by a series of fractions whose numerator is the digit in the useful life of the
asset and whose denominator is the sum of the digits in the useful life of the asset.
Cost model
After recognition as an asset, an item of property, plant and equipment shall be carried
at its cost less any accumulated depreciation and any accumulated impairment losses.
Revaluation model
After recognition as an asset, an item of property, plant and equipment whose fair value
can be measured reliably shall be carried at a revalued amount, being its fair value at the date
of the revaluation less any subsequent accumulated depreciation and subsequent
accumulated impairment losses. Revaluations shall be made with sufficient regularity to
ensure that the carrying amount does not differ materially from that which would be determined
using fair value at the end of the reporting period.
PROBLEM NO. 10
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:
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:
Solutions:
1. 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.
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
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
(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.
PROBLEM NO.11
On December 31, 2004, Silver 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 Silver s Hayo Manufacturing
reporting unit.
• A customer list for P220,000. By contract, Silver 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, 2005, 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 Hayo 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 Hayo Manufacturing reporting unit are as follows:
Book values Fair values
Goodwill 1,500,000 ?
c) The cash flows expected to be generated by the customer list are P120,000 in 2006 and
P80,000 in 2007.
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%):
1. Answer: A
Trademark*
Goodwill*
Customer list (P220,000/3) 73,333
Total Amortization 73,333
An intangible asset with an indefinite useful life shall not be amortized. (PAS 38, par 107)
An asset is impaired when its carrying amount exceeds its recoverable amount. (PAS 36, par 8)
If it is not possible to determine the fair value less costs to sell because there is no basis
for making a reliable estimate of the amount obtainable from the sale of the asset in an
arm’s length transaction between knowledgeable and willing parties, the entity may use
the asset’s value in use as its recoverable amount. (PAS 36, par 20)
3. Answer: C
Cost 300,000
Less: Impairment Loss 133,333
Carrying value, 12/31/08 166,667
4. Answer: A
Since goodwill is not amortized and is not impaired as of 12/31/08, the carrying value is
still P1,500,000.
5. Answer: B
Cost 220,000
Less: Amortization for 2008 73,333
Carrying value, 12/31/08 146,667
An entity shall choose either the cost model in paragraph 74 or the revaluation model in
paragraph 75 as its accounting policy. (PAS 38, par 72)
In the cost model: After initial recognition, an intangible asset shall be carried at its cost less any
accumulated amortisation and any accumulated impairment losses. (PAS 38, par 74)
In the revaluation model: After initial recognition, an intangible asset shall be carried at a
revalued amount, being its fair value at the date of the revaluation less any subsequent
accumulated amortisation and any subsequent accumulated impairment losses. (PAS 38, par
75)
PROBLEM NO.12
On January 1, 2016, Onin Co. decided to sell a machinery with a cost of 1200,000 and
accumulated depreciation of 480,000. Depreciation of P10,000 per month has been provided by
the company since it was acquired. The machinery will continue to be operated until sold. The
company undertook all the necessary actions to be able to classify the asset as held for sale.
On the same date, The fair value of asset amounted to 620,000 while the costs to sell total
P20,000.
On February 28, 2016, the plant had not been sold but there has been objective evidence that
the fair value went up to P810,000.
On July, 1, 2016, Onin Co. sold the machinery for P8,00,000 after incurring selling costs of
P50,000.
QUESTIONS:
3. How much is the gain to be recognized in profit or loss in 2016 asa result of increase in the
fair value of the asset?
a. Nil b. P30,000 c. P120,000 d. P190,000
4.How much is the net gain (or loss) on sale of the asset in 2016?
a. Nil b. P30,000 c. P120,000 d. P190,000
1. Answer: C
Cost of Machinery 1,200,000
Less: Acc. Depreciation, 1/1/16 480,000
Carrying Amount, 1/1/16 720,000
Less: FV less costs to sell, 1/1/16
(620,000-20,000) 600,000
Impairment Loss 120,000
An entity shall measure a noncurrent asset classified as held for sale at the lower of its
carrying amount and fair value less costs to sell. (PFRS 5, par 15)
An entity shall recognize an impairment loss for any initial or subsequent write-down of
the asset to fair value less costs to sell. (PFRS 5, par 20)
2. Answer: A
Nil or Zero
An entity shall not depreciate a noncurrent asset while it is classified as held for sale.
(PFRS 5, par. 25)
3. Answer: C
Fair Value less costs to sell, 2/28/16
(810,000 – 20,000) 790,000
FV less costs to sell, 1/1/16
(620,000-20,000) 600,000
Increase in FV less costs to sell 190,000
4. Answer: B
Net sales proceeds (800,000 – 50,000) 750,000
Carrying Amount after the reversal
of Impairment Loss (600,000 – 120,000) (720,000)
Gain on Sale 30,000
The gain or loss arising from the derecognition of an item of property, plant and
equipment shall be determined as the difference between the net disposal proceeds, if
any, and the carrying amount of the item. (PAS 16, par 71)
5. Answer: A
Nil or Zero
Since the fair value less costs of disposal is greater than the carrying amount at the date
of reclassification, there is no impairment loss to be recognized.
An entity shall recognise an impairment loss for any initial or subsequent write-down of
the asset (or disposal group) to fair value less costs to sell, to the extent that it has not
been recognised in accordance with paragraph 19. (PFRS 5, par 20)
An entity shall recognise a gain for any subsequent increase in fair value less costs to
sell of an asset, but not in excess of the cumulative impairment loss that has been
recognised either in accordance with this IFRS or previously in accordance with PAS 36.
(PFRS 5, par 21)
PROBLEM NO.13
The following balances have been extracted from the nominal ledger of Athena Co. at
September 30, 2016
Plant and machinery is depreciated using the reducing balance method at a rate of 20% pa.
• Athena Co. carries its freehold buildings ( Property A and Property B) under the
revaluation method. The latest revaluations were on October 1, 2015 but these have
not yet been reflected in the above balances. The following information is available with
regard to these properties:
Property A Property B
Date of purchase October 1, 2006 October 1, 1995
Useful life at purchase 40 years 50 years
Cost P400,000 P1000,000
Revaluation surplus at P62,000 P456,000
September 30, 2015
Carrying amount at P372,000 P1,080,000
September 30, 2015
Valuation at October 1, P449,500 P600,000
2015
The useful lives of both properties are unchanged. Where possible, Athena Co. makes an
annual transfer between the revaluation surplus and retained earnings in accordance with best
practice.
QUESTIONS:
1. Depreciation expense for the plant and machinery for the year ended September 30, 2016?
a. P46,805 b. P47,305 c. P48,125 d. P77,000
2. Carrying amount of the plant and machinery for the year ended September 30, 2016?
a. P185,940 b. P192,500 c. P194,140 d. P185,120
3. Carrying amount of the property A for the year ended September 30, 2016?
a. P449,500 b. P435,000 c. P372,000 d. P600,000
4. Carrying amount of the property B for the year ended September 30, 2016??
a. P480,000 b. P580,000 c. P600,000 d. P1,080,000
5. Total impairment loss to be recognized during the year ended September 30, 2016?
a. 1,700 b. P24,000 c. P24,880 d. P77,500
6. Total revaluation surplus to be closed to retained earnings during the year ended September
30, 2016?
a. Nil b. P880 c. P3,620 d. P4,500
1. Answer: B
Carrying Amount of Plant & Machinery, 9/30/15
(385,000 – 144,375) 240,625
Carrying Amount of asset held for sale 8,200
Carrying amount of remaining Plant & Machinery 232,425
Depreciation of remaining Plant & Machinery × 20% 46,485
Depreciation of an asset begins when it 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. Depreciation of an asset ceases at the earlier of the date that the asset is
classified as held for sale (or included in a disposal group that is classified as held for
sale) in accordance with IFRS 5 and the date that the asset is derecognised. Therefore,
depreciation does not cease when the asset becomes idle or is retired from active use
unless the asset is fully depreciated. However, under usage methods of depreciation the
depreciation charge can be zero while there is no production. (PAS 16, par 55)
An entity shall not depreciate (or amortise) a non-current asset while it is classified as
held for sale or while it is part of a disposal group classified as held for sale. Interest and
other expenses attributable to the liabilities of a disposal group classified as held for sale
shall continue to be recognised. (PFRS 5, par 25)
2. Answer: A
Carrying amount of remaining Plant & Machinery 232,425
Less: Depreciation for 9/30/16 46,485
Carrying Amount of Plant & Machinery 9/30/16 185,940
Carrying amount is the amount at which an asset is recognised after deducting any
accumulated depreciation and accumulated impairment losses. (PAS 16, par 6)
3. Answer: B*
Carrying Amount of A @ 10/1/15 449,500
Annual Depreciation (449,500/31 years) 14,500
Carrying Amount of A @ 9/30/16 435,000
4. Answer: B*
Carrying Amount of B @ 10/1/15 600,000
Annual Depreciation (600,000/30 years) 20,000
Carrying Amount of B @ 9/30/16 580,000
*After recognition as an asset, an item of property, plant and equipment whose fair value
can be measured reliably shall be carried at a revalued amount, being its fair value at
the date of the revaluation less any subsequent accumulated depreciation and
subsequent accumulated impairment losses. Revaluations shall be made with sufficient
regularity to ensure that the carrying amount does not differ materially from that which
would be determined using fair value at the end of the reporting period. (PAS 16, par 31)
5. Answer: C
6. Answer: D
THEORY QUESTIONS
1. The most effective means for the auditor to determine whether a recorded intangible
asset possesses the characteristic of an asset is
a. Vouch the purchase by reference to underlying documentation.
b. Inquire as to the status of patent application.
c. Evaluate the future revenue-producing capacity of the intangible asset.
d. Analyze the research and development expenditures to determine that only those
expenditures possessing future economic benefit have been capitalized.
3. Assuming NL has capitalized all research and development cost associated with patent,
Jon, CPA, who is examining this account will probably
a. Confer with management regarding the transfer of the amount from the balance
sheet to the income statement
b. Confirm that the patent is registered and on the 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 employment 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. False; False
c. True;False
d. True;True
5. Which of the following comparisons would be 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 the asset purchased.
c. The figure for goodwill specified in the contract of purchase.
d. Earnings in excess of 5% of net assets for the past five years.
6. In verifying the amount of goodwill recorded by a client, the most convincing evidence an
auditor can obtain is by comparing the recorded value of asset acquired with
a. Assessed value as evidenced by tax bills.
b. Seller’s book value as evidenced by financial statements.
c. Insured value as evidenced by insurance policies.
d. Appraised value as evidenced by independent appraisals.
7. A corporate balance sheet indicates that one of the corporate assets is a patent. An
auditor will most likely obtain evidence regarding the continuity validity and existence of
this patent by obtaining a written representation from
a. A patent attorney
b. The patent advisor
c. The SEC
d. The patent owner
8. In testing the existence assertion for an intangible asset, an auditor would probably rely
on:
a. Observation
b. Recomputation
c. Vouching
d. Analytical Review
9. When the auditor wants to test the asset for impairment, the auditor would most likely be
concerned with the recoverable amount of an intangible asset. For this purpose,
recoverable amount of an intangible asset is:
a. Fair value less cost to sell
b. Value in use
c. Fair value less cost to sell or value in use, whichever is lower
d. Fair value less cost to sell or value in use, whichever is higher
10. An auditor, examining intangible assets would most likely take exception to the
capitalization of the cost of:
a. Website development
b. Software development
c. Licensing a patent
d. Goodwill in a business combination
1. Answer: C
2. Answer: A
Assertions about valuation and allocation deal with whether assets, liabilities, and equity
interests have been included in the financial statements at appropriate amounts. Recalculation
of the amortization and review of the amortization period would test the valuation and allocation
assertion.
3. Answer: A
The cost of an internally generated intangible asset comprises all directly attributable costs
necessary to create, produce, and prepare the asset to be capable of operating in the manner
intended by management. (PAS 38, par 66)
Research and development activities are directed to the development of knowledge. Therefore,
although these activities may result in an asset with physical substance (eg a prototype), the
physical element of the asset is secondary to its intangible component, ie the knowledge
embodied in it. (PAS 38, par 5)
4. Answer: D
The acquirer shall recognise goodwill as of the acquisition date measured as the excess of (a)
over (b):
(a) the aggregate of: (i) the consideration transferred measured in accordance with this IFRS,
which generally requires acquisition-date fair value; (ii) the amount of any non-controlling
interest in the acquiree measured in accordance with this IFRS; and (iii) in a business
combination achieved in stages, the acquisition-date fair value of the acquirer’s previously held
equity interest in the acquiree.
(b) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities
assumed measured in accordance with this IFRS. (PFRS 3, par 32)
5. Answer: B
The acquirer shall recognise goodwill as of the acquisition date measured as the excess of (a)
over (b):
(a) the aggregate of: (i) the consideration transferred measured in accordance with this IFRS,
which generally requires acquisition-date fair value;(ii) the amount of any non-controlling interest
in the acquiree measured in accordance with this IFRS; and (iii) in a business combination
achieved in stages, the acquisition-date fair value of the acquirer’s previously held equity
interest in the acquiree.
(b) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities
assumed measured in accordance with this IFRS. (PFRS 3, par 32)
6. Answer: D
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction in the principal (or most advantageous) market at the measurement date
under current market conditions (ie an exit price) regardless of whether that price is directly
observable or estimated using another valuation technique. (PFRS 13, par 24)
7. Answer: A
Explanation:
Audit evidence is all the information used by the auditor in arriving at the conclusions on which
the audit opinion is based. Written representations are necessary information that the auditor
requires in connection with the audit of the entity’s financial statements. Accordingly, similar to
responses to inquiries, written representations are audit evidence.
Written representations are requested from those responsible for the preparation and
presentation of the financial statements. Those individuals may vary depending on the
governance structure of the entity, and relevant law or regulation; however, management (rather
than those charged with governance) is often the responsible party. Written representations
may therefore be requested from the entity’s chief executive officer and chieffinancial officer, or
other equivalent persons in entities that do not use such titles. In some circumstances, however,
other parties, such as those charged with governance, are also responsible for the preparation
and presentation of the financial statements.
Due to its responsibility for the preparation and presentation of the financial statements, and its
responsibilities for the conduct of the entity’s business, management would be expected to have
sufficient knowledge of the process followed by the entity in preparing and presenting the
financial statements and the assertions therein on which to base the written representations.
In some cases, however, management may decide to make inquiries of others who participate
in preparing and presenting the financial statements and assertions therein, including individuals
who have specialized knowledge relating to the matters about which written representations are
requested. Such individuals may include:
• Staff engineers who may have responsibility for and specialized knowledge about
environmental liability measurements.
• Internal counsel who may provide information essential to provisions for legal claims.
In some cases, management may include in the written representations qualifying language to
the effect that representations are made to the best of its knowledge and belief. It is reasonable
for the auditor to accept such wording if the auditor is satisfied that the representations are
being made by those with appropriate responsibilities and knowledge of the matters included in
the representations.
8. Answer: C
Some documents represent direct audit evidence of the existence of an asset, for example, a
document constituting a financial instrument such as a stock or bond. Inspection of such
documents may not necessarily provide audit evidence about ownership or value. In addition,
inspecting an executed contract may provide audit evidence relevant to the entity’s application
of accounting policies, such as revenue recognition.
9. Answer: D
The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less
costs to sell and its value in use. (PAS 36, par 6)
10. Answer: A
Website Development does not fall under the definition of Intangible Assets in PAS 38,
paragraphs 8-17, as well as under the recognition criteria in paragraphs 21-23 of the same
standard.