Auditing Problems Intangibles Impairment and Revaluation PDF

Auditing Problems
Intangibles
Dianne France Carandang

Ponce Martin Celebrado
Jane Louise Constantino
Mary Annvic Cortes
Auditing Problems – Intangibles, Impairment and Revaluation
Problem NO. 1
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:
1996-1997 Research conducted to develop precipitator: P3840,000
Jan. 5, 1998 Design and construction of prototype 876,000
March 15 Testing the prototype models 420,000
Jan 2, 1999 Legal and other professional fees to process

the patent application (useful life = legal life) 620,000
Dec 10, 2001 Legal fees paid to successfully defend the device patent 357,000
Jan. 3, 2003 Acquisition of a competitive patent aimed

at protecting old patent 406,000
Jan. 5, 2004 Acquisition of the related patent which extended

the life of the patents for additional 2 years 654,375
Dec.31, 2006 Legal fees paid in unsuccessful patent infringement

suit against a competitor 250,000
1. What is the correct cost of the patent upon initial recognition?

a. P5,756,000 b. P1,916,000 c. P1,040,000 d. P620,000
2. What is the carrying value of the patent on December 31, 1999?

a. P589,000 b. P988,000 c. P1,820,200 d. P5, 468,200

a. P1, 181,000 b. P845,625 c. P465,000 d. P380,625

a. P1, 400,000 b. P1,300,000 c. P1,315,500 d. P1,323,529
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
Compute the carrying value of patent December 31, 1999?

Cost of obtaining patent 1999 620,000
Amortization 1999 (19,000)
Carrying Value, Dec. 31, 1999 589,000
Cost of patent 620,000

Legal Life of Patent /20
Amortization 19,000
3. Answer: B

Carrying value of Patent, Jan. 01, 2000 589,000
2000 Amortization (31,000)
Carrying value of Patent, Dec. 31, 2002 496,000
Acquisition of the related patent Jan. 3, 2003 406,000

902,000
2003 Amortization 56,375
Carrying value of Patent, Dec. 31, 2003 845,625
4. Answer: D
Carrying value of Patent, Jan. 1, 2004 845,625
Acquisition of the related patent Jan. 5, 2004 654,375
Total 1,500,000
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
Jimar Co. incurred the following costs during the year:
Cost of activities aimed at obtaining new knowledge P700,000
Marketing research to study consumer tastes 16,000
Cost of developing and producing a prototype model 23,000
Cost of testing the prototype model for safety and
environmental friendliness 80,000
Cost of revising designs for flaws in the prototype model 15,000
Salaries of employees, consultants, and technicians involved in R&D 120,000
Amount paid for conference for the introduction of the newly developed
product including fee of a model hired as endorser 102,000
Advertising to establish recognition of the newly developed product 43,000
Cost incurred on search for alternatives for material, devices,
products, processes, systems or services 30,000
Cost of final selection of possible alternatives for a new process 96,000
Periodic or routine design changes to existing products 2,500
Modification of design for a specific customer 10,000
Cost of design, construction and operation of a pilot plant that is not
Of a scale economically feasible for commercial production 5,000

Cost of routine, seasonal, and periodic design of tools, jigs, molds and dies 18,000
Cost of quality control during commercial production 32,000
Cost of building acquired to be used in various R&D projects 1,000,000
Depreciation on the building described above 100,000
Personnel costs of persons involved in research and development projects 41,200
Design, construction, and testing of production prototypes and models 96,000
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
Cost of activities aimed at obtaining new knowledge P 700,000
Cost of developing and producing a prototype model 23,000
Cost of testing the prototype model for safety and

environmental friendliness 80,000
Cost of revising designs for flaws in the prototype model 15,000
Salaries of employees, consultants, and technicians involved in R&D 120,000
Cost incurred on search for alternatives for material, devices,

products, processes, systems or services 30,000
Cost of final selection of possible alternatives for a new process 96,000
Cost of design, construction and operation of a pilot plant that is not

Of a scale economically feasible for commercial production 5,000
Depreciation on the building described above 100,000
Personnel costs of persons involved in research and development projects 41,200
Design, construction, and testing of production prototypes and models 96,000

Total Reseach and Development Expense 1,306,200
Charge all research cost to expense (PAS 38, par.54)

Development costs are capitalized only after technical and commercialfeasibility of
the asset for sale or use have been established. This means that the entity must intend and
be able to complete the intangible asset and either uses it or sell it and be able to demonstrate
how the asset will generate future economic benefits. ( PAS 38, par.57)
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:
Research and laboratory expenses P1000,000

Metal used in the construction of the machine 320,000
Blueprints used to design the machine 128,000
Legal expenses to obtain patent 128,000
Wages paid for the employees’ work on the research, 1,200,000
development and building of the machine (60% of the time was
spent in actually building the machine)
Expense of drawing required by the patent office to be 68,000
submitted with the patent application
Fees paid to the government patent office to process 100,000
application
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
a. Analyze research and development expenditures to determine that only those

expenditures possessing future economic benefit have been capitalized.
b. Vouch the purchase by reference to underlying documentation.
c. Inquire as to the status of patent applications.
d. Evaluate the future revenue-producing capacity of the intangible asset.
1. ANSWER: C
Legal Expenses to obtain patent 480, 000
Expenses of drawing required by the patent office to be
submitted with the patent application 68, 000
Fees paid to the government patent office to process application 100, 000
Cost of Patent 648, 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
(c) expenditure on training staff to operate the asset.
2. ANSWER: D
Metal used in the construction of the machine 320, 000
Blueprints used to obtain patent 480, 000
Wages paid for the employees’ work on the R&D and
building of machine (1, 200,000 *60%) 720, 000
Cost of machine 1, 168, 000:
PAS 16, paragraph 16; 17 Elements of cost
The cost of an item of property, plant and equipment comprises:
(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.
Examples of directly attributable costs are:
(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;
(c) initial delivery and handling costs;
(d) installation and assembly costs;
(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
(f) professional fees.
3. ANSWER: A
Amount that should charged to expense when incurred in connection with the development of
the patented machine.
Research and development laboratory expenses 1,000,000
Wages paid for the employees’ work on the R&D and
building of machine (1, 200,000 *40%) 480, 000
Development expense 1, 480, 000
PAS 38, paragraph 54 and 57
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.
(c) its ability to use or sell the intangible asset.

(d) how the intangible asset will generate probable future economic benefits. Among
other things, the entity can demonstrate the existence of a market for the output
of the intangible asset or the intangible asset itself or, if it is to be used internally, the
usefulness of the intangible asset.
(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
Carrying amount of patent as of December 31, 2006
Solution:
Cost of Patent (refer to no. 1) 648, 000
Less: Amortization (648,000 / 20)*2 64, 800
Carrying amount 583, 200
PAS 38, paragraph 97 Amortization period and amortization method
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
Evaluate the future revenue-producing capacity of the intangible asset
PAS 38 Criteria for initial recognition

The previous version of IAS 38 required an intangible asset to be recognised if, and only if, it
was probable that the expected future economic benefits attributable to the asset would flow to
the entity, and its cost could be measured reliably. These recognition criteria have been
included in the Standard. However, additional guidance has been included to clarify that:
(a) the probability recognition criterion is always considered to be satisfied for

intangible assets that are acquired separately or in a business combination.
(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.
Future economic benefits
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.
Apr. 1 Patented a newly developed process with costs as follows:
Legal fees to obtain patent P 429,000
Patent application and licensing fees 63,500
Total P 492,500
It is estimated that in 6 years other companies will have developed improved

processes, making the Pink Corporation process obsolete.
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
4. Carrying amount of Intangible Assets

a. P712,604 b. P2,477,604 c. P697,604 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
1. Answer: See journal entry for April 1
Journal Entries
Jan. 2 Organization Expenses P 233, 000
Cash P 233, 000
15 Advertising Expenses 15, 000
Cash 15, 000
April 1 Patent 492, 500
Cash 492, 500
May 1 License 200, 000
Trademark 100, 000

Cash 300, 000
July 1 Building 1, 310, 000
Cash 1, 310, 000
Dec. 31 Research and Development Expenses 1, 750, 000
Cash 1, 750, 000
4. Answer: C
Cost:
Patent 492,500
License 200,000
Trademark 100,000 792 500
Less: Amortization for 2010
Patent (492, 500/6*[9/12]) 61,562

License (200, 000/6*[8/12]) 22,222
Trademark (100, 000/6*[8/12]) 11,111 (94,895)
Carrying Amount, 12/31/10 697, 604
5. Answer: C
Organization Expenses P 233,000

Advertising Expenses 15,000
R and D Expenses 1,750,000
Total 1, 998, 000
PAS 38 paragraph 21 to 22 provides a provision with regards to the recognition of Intangible

assets. An intangible asset shall be recognized 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 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.
Examples of separate classes may include:
(a) brand names;

(b) mastheads and publishing titles;
(c) computer software;
(d) licenses and franchises;
(e) copyrights, patents and other industrial property rights, service and operating rights;
(f) recipes, formulae, models, designs and prototypes; and
(g) intangible assets under development.
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
The goodwill account includes Three Items:
• Legal expenses relative to incorporation. These were

assigned to the account in January 2008. 45,000
• Excess of cost over assigned net asset values of an
enterprise acquired on early 2014 expected to be of
value for an indefinite period 200,000
• Paid to an advertising consulting firm in
early 2015 for a major advertising effort
expected to be beneficial for an indefinite period. 100,000
No amortization has been taken on any amount in taken on any amount in the Goodwill account
Questions:
1. Carrying value of the Patents on December 31, 2016

A. P388,929 C.P441,429
B. P445,000 D.510,714
2. Carrying value of the Franchise Agreement on December 31, 2016
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
6. Total Amortization in 2016

A. P56,071 C.P118,571
B. P108,571 D. Nil
Solution and Explanation
1. Answer: A
Carrying Value of the Patent 1/1/16 550,000

Unamortized Balance of P225,000 (225k x 7/10) (52,500)
Correct amount of amortized patent 497,500
2 Years patent (52,500)*
Remaining Patent (56,071)**
Carrying Value of the Patent 12/31/16 388,929
*497,500 X 210/995 = 105,000÷2=52,500

**497,500-105,000 = 392,500÷7 =56,071
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
Carrying value of Franchise Agreements, 1/1/16 95,000

Debit Error of 5% revenue 45,000
Actual Carrying Value of Franchise Agreements 50,000
Amortization Expense of Franchise Agreements 10,000
Carrying value of Franchise Agreements, 12/31/16 40,000
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.
3. Answer: A
Carrying value of Goodwill, 1/1/16 345,000

Legal Expenses (45,000)
Advertising Expense (100,000)
Carrying value of Goodwill, 12/31/16 200,000
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
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
590,000
5. Answer: A
Completion of total program design 130,000

Cost incurred for coding and testing to establish the
technological feasibility 100,000
230,000
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
Amortization of patent see N0. 1 solution
2 Years patent 52,500
Remaining Patent 56,071
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:
1. How much is the revaluation surplus on January 1, 2015?

a. P8,250,000 b. P11,000,000 c. P2,750,000 d. P5000,000
2. How much is the depreciation expense in 2015?

a. P337,500 b. P600,000 c. P1,650,000 d. P750,000
3. How much is the revaluation surplus at the end of 2015?

a. P8,250,000 b. P7,920,000 c. P6,600,000 d. P10,662,500
4. How much is the gain (or loss) on sale of machinery in 2017?

a. P1200,000 b. P11,400,000 c. P(5000,000) d. Nil
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
1. Answer: A
Cost Replacement Appreciation

Cost
Machinery 100% P9,000,000 P20,000,000 11,000,000
Accumulated
Depreciation 25% 2,250,000 5,000,000 2,750,000
CA/SV/RS 75% 6,750,000 15,000,000 8,250,000
Base in IAS 16 Paragraph 39 If an asset’s carrying amount is increased as a result of a

revaluation; the increase shall be recognized in other comprehensive income and accumulated
in equity under the heading of revaluation surplus. However, the increase shall be recognized in
profit or loss to the extent that it reverses a revaluation decrease of the same asset previously
recognized in profit or loss.
2. Answer: B
Sound value 15,000,000

New remaining useful life ÷ 25years
Depreciation for 2015 600,000
Base in IAS 16 Paragraph 39 If an asset’s carrying amount is increased as a result of a

3. Answer: B
Revaluation surplus 8,250,000

Less: Realization in 2015(8,250,000/25yrs) ( 330,000)
Revaluation surplus end 2015 7,920,000
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
Net proceeds 15,000,000

Less: CA 13,800,000
Gain on sale 1,200,000
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:
Classes Useful Life Cost Methods of

Depreciation
Machinery 5 years 2,000,000 Straight line
Office Equipment 4 years 1,000,000 Straight line
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
Office Equipment 996,000
On January 1, 2009, the following are the recoverable amounts (fair values) of the assets:
Recoverable Amount
Machinery 1,000,000
Office Equipment 494,000
QUESTIONS:
Based on the above data, compute the following:
1. The total depreciation in 2007?

a. P650,000 b. P732,000 c. P400,000 d. P782,000
2. The total revaluation surplus on January 1, 2008?

a. P446,000 b. P246,000 c. P200,000 d. P0

a. P650,000 b. P732,000 c. P400,000 d. P782,000
4. The total impairment loss in the income statement in 2009?

a. P450,000 b. P206,000 c. P520,000 d. P370,000
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
Base in PAS 16 Paragraph 39 If an asset’s carrying amount is increased as a result of a

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:
Machinery 2,000,000/5yrs 400,000

Office equipment 996,000/ 3years 332,000
Total depreciation for 2008 732,000
According to PAS 16 paragraph 35, when an item of property, plant and equipment is revalued,
any accumulated depreciation at the date of the revaluation is treated in one of the following
ways:
(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:
Impairment of Office Equipment

(CA of P664,000 less RA of P494,000) 170,000
Less: Unrealized Revaluation surplus

(246,000-(246,000/3yrs)) (164,000)
Net impairment loss on OE 6,000
Add: Impairment of Machinery

(CA of 1,200,000 less RA of 1,000,000) 200,000
Total impairment loss 206,000
CA- Carrying Amount

RA- Recoverable amount
40 If an asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be

recognised in profit or loss. However, the decrease shall be recognized in other comprehensive
income to the extent of any credit balance existing in the revaluation surplus in respect of that
asset. The decrease recognized in other comprehensive income reduces the amount
accumulated in equity under the heading of revaluation surplus.
In addition, according to Pas 36 an impairment loss on revalued asset is recognized directly
against any revaluation surplus related to the asset and excess recognized as profit or 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:
Classes Useful Life Cost Methods of

Depreciation
Machinery 5 years 4,000,000 Straight line
Office Equipment 4 years 2,000,000 Straight line
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
Office Equipment 1,200,000
On January 1, 2009, the following are the recoverable amounts (fair values) of the assets:
Recoverable Amount
Machinery 2,600,000
QUESTIONS:

a. P400,000 b. P800,000 c. P1,300,000 d. P1,100,000
2. The total impairment loss in the income statement 2008?

a. P400,000 b. P300,000 c. P700,000 d. P0

a. P400,000 b. P800,000 c. P1,300,000 d. P1,100,000
4. Gain on impairment recovery in the income statement in 2009?

a. P900,000 b. P500,000 c. P1,100,000 d. P1,200,000
5. Revaluation surplus in 2009?

a. P0 b. P200,000 c. P400,000 d. P600,000
1. Answer: C
Machinery (4,000,000/5) 800, 000
Office Equipment (2,000,000/4) 500, 000
Total Depreciation Expense 2007 1,300,000
2. Answer: C
Machinery (3,200,000-2,800,000) 400,000
Office Equipment (1,500,000-1,200,000) 300,000
Total Impairment loss 2008 700,000
3. Answer: D
Machinery (2,800,000/4) 700,000
Office Equipment (1,200,000/3) 400,000
Total Depreciation Expense 2008 1,100,000
4. Answer: B
Machinery (2,600,000-2,100,000) 500,000
5. Answer: C
Office Equipment fair value 1/1/2009 1,400,000
Less: Office Equipment carrying amount 2009
Less: Depreciation for 2007 and 2008 1,000,000
Carrying Amount 1,000,000
Revaluation surplus in 2009 400,000

PAS 16 Property, Plant and Equipment
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.
Depreciable amount and depreciation period
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
PAS 36 Impairment of Assets
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:
Original Cost P1,200,000
Depreciation in 2005 400,000
Depreciation in 2006 320,000

Adjusted Accumulated depreciation 720,000
Selling price 600,000
Estimated cost to make the sale 267,000
Value-in-use 300,000
Method of Depreciation Sum of the years’s digits
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
2. How much loss on impairment is recognized in 2006? 147,000
3. How much is the depreciation expense recognized in 2007? 166,500
4. How much gain on recovery is recognized in 2007? 73,500
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
2400𝑥 = 400𝑥 + 400𝑥 2
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
Carrying amount (1,200,000-720,000) 480,000
Less: Recoverable amount (600,000-267,000) 333,000
Impairment Loss 2006 147,000
3. Answer: 166,500
Carrying amount 333,000

3
Multiply by SYD rate 6
Depreciation Expense 2007 166,500
4. Answer: 73,500
Carrying amount at cost model 240,000
Less: Carrying amount at revaluation model 166,500
Gain on Recovery 73, 500
5. Answer: 160,000
Particular Depreciation Accumulated Carrying amount

depreciation
1,200,000
5 400,000 400,000 800,000
x 1,200,000
15
4 320,000 720,000 480,000
15
x 1,200,000
3 240,000 960,000 240,000
15
x 1,200,000
2 160,000 1,120,000 80,000
x 1,200,000
15
1 80,000 1,200,000 0
15
x 1,200,000
6. Answer: 666,667
How much is the depreciation expense recognized in 2008 under the revaluation model?
Recoverable amount 2007 1,000,000

3
Multiply by
6
Depreciation expense 2008 666,667
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:
1. Total amortization of Intangible assets in 2009?

a. P70,000 b. P88,750 c. P107,500 d. P20,000
2. Total impairment loss in 2009?

a. P452,470 b. P530,280 c. P471,220 d. P433,720
3. Carrying amount of goodwill on December 31, 2009?

a. P400,000 b. P718,780 c. P855,000 d. P659,720
4. Carrying amount of other intangibles assets on December 31, 2009?

a. P690,000 b. P980,000 c. P640,000 d. P706,667
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
Carrying value before impairment 900,000

Impairment loss (181,220)
Carrying Value 718,780
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
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 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. Total amortization for the year 2005

a. P73,333 b. P141,515 c. P116,190 d. P86,857
2. Impairment loss for the year 2005

a. P90,476 b. P133,333 c. P179,584 d. P0
3. Carrying value of Trademark as of December 31, 2005

a. P300,000 b. P257,143 c. P166,667 d. P120,416
4. Carrying value of Goodwill as of December 31, 2005

a. P1,500,000 b. P1,431,818 c. P1,425,000 d. P1,462,500
5. Carrying value of Customer list as of December 31, 2005

a. P220,000 b. P146,667 c. P176,000 d. P0
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)
Hence, the Trademark and Goodwill were not amortized.

2. Answer: B
Trademark:
Carrying value 300,000
Recoverable amount (P10,000/0.06) 166,667 133,333
Goodwill*: -
Customer list*: -000000
Total Impairment Loss 133,333
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:
1. How much is the impairment loss to be recognized on January 1, 2016?

a. Nil b. P100,000 c. P120,000 d. P500,000
2. How much is the depreciation expense in 2016?

a. Nil b. P20,000 c. P60,000 d. P120,000
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
5. Carrying amount of other intangibles assets on December 31, 2009?

a. P690,000 b. P980,000 c. P640,000 d. P706,667
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
Impairment loss recognized (limit) 120,000
Gain to be recognized 120,000

An entity shall recognize 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
recognized either in accordance with PFRS 5 or previously in accordance with PAS 36.
(PFRS 5, par 21)
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
Land at cost 400,000

Plant and machinery (Note 1)
-cost 385,000
-Accumulated depreciation at September 30, 2015 144,375
Freehold buildings (Note 2)
-valuation 1,644,000
-accumulated depreciation at September 30, 2015 192,000
The following additional information is available:

• On April 1, 2016, Athena Co. decided to sell one of its machines which had a carrying
amount of P8,200 on September 30, 2015. On April 1, 2016, the machine had a fair value of
P6,500 and met the “held for sale” criteria of PFRS 5, Non-current Assets Held for Sale and
Discontinued Operations. The machine was still held by Athena Co. at the year end, although
a buyer had been found. No adjustment to the above balances has been made in respect of
this machine. There have been no other changes to plant and machinery in the current year.
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
Carrying Amount of asset held for sale, 9/30/15 8,200

× 20%
1,640
Depreciation of remaining asset held for sale × 6/12 820
Depreciation Expense for 9/30/16 47,305
The depreciable amount of an asset shall be allocated on a systematic basis over its
useful life. (PAS 16, par 50)
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.
2. In auditing Intangible Assets, an auditor most likely would review or recompute

amortization and determine whether the amortization period is reasonable in support of
management’s financial statement assertion of
a. Valuation and allocation
b. Existence
c. Completeness
d. Rights and Obligations
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
Solutions and Explanations
1. Answer: C
PAS 38 Criteria for initial recognition
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)
Goodwill recognised in a business combination is an asset representing the future economic

benefits arising from other assets acquired in a business combination that are not individually
identified and separately recognised. The future economic benefits may result from synergy
between the identifiable assets acquired or from assets that, individually, do not qualify for
recognition in the financial statements. (PAS 38, par 11)
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:
PSA 580, paragraph 3 Written Representations as Audit Evidence
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.
PSA 580, paragraph A4 to A7 Management from whom Written Representations Requested
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:
• An actuary responsible for actuarially determined accounting measurements.
• 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
PSA 500, paragraph A14: A15 Inspection
Inspection involves examining records or documents, whether internal or external, in paper

form, electronic form, or other media, or a physical examination of an asset. Inspection of
records and documents provides audit evidence of varying degrees of reliability, depending on
their nature and source and, in the case of internal records and documents, on the effectiveness
of the controls over their production. An example of inspection used as a test of controls is
inspection of records for evidence of authorization.
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.

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Auditing Problems

Dianne France Carandang

1996-1997 Research conducted to develop precipitator: P3840,000

Jan. 5, 1998 Design and construction of prototype 876,000

March 15 Testing the prototype models 420,000

Jan 2, 1999 Legal and other professional fees to process

Jan. 3, 2003 Acquisition of a competitive patent aimed

Jan. 5, 2004 Acquisition of the related patent which extended

Dec.31, 2006 Legal fees paid in unsuccessful patent infringement

1. What is the correct cost of the patent upon initial recognition?

2. What is the carrying value of the patent on December 31, 1999?

3. What is the carrying value of the patent on December 31, 2003?

4. What is the carrying value of the patent on December 31, 2005?

Compute the carrying value of patent December 31, 1999?

Cost of patent 620,000

Compute the carrying value of patent December 31, 2003?

Acquisition of the related patent Jan. 3, 2003 406,000

Jimar Co. incurred the following costs during the year:

Cost of activities aimed at obtaining new knowledge P700,000

Marketing research to study consumer tastes 16,000

Cost of developing and producing a prototype model 23,000

Cost of testing the prototype model for safety and

environmental friendliness 80,000

Cost of revising designs for flaws in the prototype model 15,000

Salaries of employees, consultants, and technicians involved in R&D 120,000

product including fee of a model hired as endorser 102,000

Advertising to establish recognition of the newly developed product 43,000

Cost incurred on search for alternatives for material, devices,

products, processes, systems or services 30,000

Cost of final selection of possible alternatives for a new process 96,000

Periodic or routine design changes to existing products 2,500

Modification of design for a specific customer 10,000

Cost of design, construction and operation of a pilot plant that is not

Of a scale economically feasible for commercial production 5,000

Cost of quality control during commercial production 32,000

Cost of building acquired to be used in various R&D projects 1,000,000

Depreciation on the building described above 100,000

Personnel costs of persons involved in research and development projects 41,200

Design, construction, and testing of production prototypes and models 96,000

Solution and Explanation:

Cost of activities aimed at obtaining new knowledge P 700,000

Cost of developing and producing a prototype model 23,000

Cost of testing the prototype model for safety and

Cost of revising designs for flaws in the prototype model 15,000

Salaries of employees, consultants, and technicians involved in R&D 120,000

Cost incurred on search for alternatives for material, devices,

Cost of final selection of possible alternatives for a new process 96,000

Cost of design, construction and operation of a pilot plant that is not

Depreciation on the building described above 100,000

Personnel costs of persons involved in research and development projects 41,200

Design, construction, and testing of production prototypes and models 96,000

Charge all research cost to expense (PAS 38, par.54)

Research and laboratory expenses P1000,000

a. Analyze research and development expenditures to determine that only those

b. Vouch the purchase by reference to underlying documentation.

c. Inquire as to the status of patent applications.

d. Evaluate the future revenue-producing capacity of the intangible asset.

Solution and Explanation:

Legal Expenses to obtain patent 480, 000

Expenses of drawing required by the patent office to be

submitted with the patent application 68, 000

Cost of Patent 648, 000

(c) expenditure on training staff to operate the asset.