PAMANTASAN NG CABUYAO

Auditing Problems
Intangibles

AP-06

MH

INTANGIBLES
PROBLEM 1: The following costs are generally incurred by a newly established
entity:
Pre- opening cost of a business facility
Purchased recipes and secret formulas
Training, customer loyalty, and market share
Licensing, royalty, and stand-still agreement
Operating and broadcasting rights
Goodwill purchased in a business organization
A license to manufacture a steroid by means of
government grant
Cost of courses taken by management in quality
engineering management
A television advertisement that will stimulate the sales in
technology industry
Investment in associate
6 month lease payment in advance
Cost of equipment acquired through a finance lease
Internally developed customer list
Cost incurred in the corporations formation and
organization
Operating losses incurred in the start-up of the business
Initial franchise fees paid
Continuing franchise fees
Internally generated goodwill
Cost of testing in search for a product alternative
Cost of purchasing a patent from an inventor
Legal cost in securing a patent
Legal costs incurred in successfully defending a patent
Cost of developing brands, mastheads, and publishing title
Cost of purchasing a trademark
Computer software for a computer-controlled machine
that cannot operate without a specific software
An operating system of a computer
Amount paid to a lessor for the exclusive right to rent a
facility under an operating lease agreement for a period of
10 years
Cost of improvements on a lease facility

P250, 000
150, 000
140, 000
300, 000
112,000
500, 000
150, 000
450, 000
100, 000
500,
300,
100,
120,
230,

000
000
500
500
000

130, 000
175, 000
50,000
800, 000
125, 000
137, 000
70, 000
55, 500
200,000
250, 000
325, 500
125, 000
100, 000

250, 000

How much from the above items can be recognized as intangible assets?
a. 2, 394, 500
c. 2, 064, 500
b. 1, 944, 000
d. 1, 874, 000

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PAMANTASAN NG CABUYAO
Auditing Problems
Intangibles

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MH

PROBLEM 2: The following information reflects the different modes of acquiring

an intangible asset. For each of the following independent scenarios, answer the
requirements that follow:
A. On December 30, 2010, ONIX CO. obtained a franchise from Marlon Corp. to
sell for 20 years Marlon products. The initial franchise fee as agreed upon
shall be P10, 000, 000, and shall be payable in cash, P1, 000, 000, when the
contract is signed and the balance in five equal installments every December
31 thereafter, as evidenced by a noninterest bearing note. The agreement
provides that the franchisor shall provide the necessary initial services
required under a franchise contract. By the end of the year, the company has
performed all the initial services for P1, 497, 728
Assuming that the franchise could borrow money at 12%, determine the
following:
1. How much should the franchise be initially recognized?
a. 9, 000, 000
b. 10, 000, 000
c. 7, 488, 640
d. 6, 488, 640
2. What is the carrying value of the franchise on December 31, 2011?
a. 8, 550, 000
b. 9, 500, 000
c. 7, 114, 208
d. 6, 164, 208
B. VINCENT CORP. is developing a new production process. During the year,
total expenditure amounted to P1, 000, 000, of which P900, 000 was
incurred before December 1, 2010 and P100, 000 was incurred between
December 1 to December 31 of the same year. The entity was able to
demonstrate that at December 1, 2010, the production process met the
criteria for recognition as an intangible asset. The recoverable amount of the
know-how embodied in the process (including cash outflows to complete the
process before it is available for use) is estimated to be P500, 000.
During 2011, expenditure incurred is P2, 000, 000. At the end of 2011, the
recoverable amount of the know-how embodied in the process (including
future cash outflows to complete the process before it is available for use) is
estimated to be P1, 900, 000.
1. How much intangible should be presented in the 2010 statement of financial
position?
a. 100, 000
b. 1, 900, 000
c. 2, 000, 000
d. 2,
100, 000
2. How much intangible should be presented in the 2011 statement of financial
position?
a. 100, 000
b. 1, 900, 000
c. 2, 000, 000
d. 2,
100, 000
PROBLEM 3: ERIKA INC. holds valuable patent on a precipitator that prevents
certain types of air pollution. Erika does not manufacture or sell the products and
process it develops. Instead, it conducts research and develops products and
processes which it patents, and then assigns patents to manufactures on a royalty

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PAMANTASAN NG CABUYAO
Auditing Problems
Intangibles

AP-06

MH

basis. Occasionally it sells patents. The following presents the summary of the
activities in relation to the aforementioned patent:
2001 2002
Jan. 1, 2003
Mar. 15
Jan. 2, 2004
Dec. 10, 2006
Jan. 1, 2008
Jan. 1, 2009
Dec. 31, 2011

Research aimed at the discovery of the new

technology
Design and construction of a prototype
Testing the prototype models
Legal and other professional fees to process the
patent application (useful life = 18 years)
Legal fees paid to successfully defending the
device patent
Acquisition of a competitive patent aimed at
protecting old patent that resulted in an
increased revenue
Acquisition of the related patent which extended
the life of the patents for additional 2 years
Legal fees paid in unsuccessful patents
infringement suit against a competitor

P3, 840, 000

876, 000
420, 000
558, 000
357, 000
406,000
420, 000
250, 000

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

a. 5, 756, 000
b. 1, 916, 000
c. 1, 040, 000
d. 558, 000
2. What is the carrying value of the patent on December 31, 2004?
a. 527, 000
b. 988, 000
c. 1, 820, 200
d. 5, 468,
200
3. What is the carrying value of the patent on December 31, 2008?
a. 1, 181, 625
b. 780, 000
c. 490, 000
d. 380, 625
4. What is the carrying value of the patent of December 31, 201?
a. 1, 400, 000
b. 1, 300, 000
c. 1, 312, 500
d. 1, 040, 000
5. How much in total shall be recognized in the profit or loss in 2011 in relation
to the patent?
a. 1, 335, 294
b. 1, 290, 000
c. 1, 225, 000
d. 960, 000
PROBLEM 4: DEF Corp. patents had carrying value amounting to P560, 000 as of
December 31, 2011, before amortization. All patents were purchased on January 2,
2003, 6 years after their registration. Thus, these patents are being amortized over
their remaining legal life from date of purchase. Legal expenses in successfully
defending the patent totalling to P75, 000 were debited to the account on January
2008. Amortization in 2008 2010 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 2008. It is further determined, that one of the patents has a
remaining life of only 3 years as at the beginning of 2011. This patent was
originally assigned a cost of P210, 000.
1. What is the correct amortization for 2011?

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PAMANTASAN NG CABUYAO
Auditing Problems
Intangibles
a. 85, 000

b. 93, 333

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c. 100, 000

MH

d. 120, 000

2. What is the adjusted carrying value of the patents as of December 31, 2011?
a. 410, 000
b. 420, 000
c. 440, 000
d. 460, 000
3. What is the retroactive adjustment to the beginning retained earnings, if
there are any,
as a result of your audit?
a. None
b. 25, 000 cr.
c. 50, 000 cr.
d. 50,
000 dr.
PROBLEM 5: On January 3, 2011, VINCENT CORP. is contemplating to acquire all
the issued and outstanding ordinary shares of JACK INC. In a business combination
accounted for as a purchase. The recorded assets and liabilities of Jack Inc. on
January 3, 2011, follows:
Cash
Inventory
Property and equipment, net of accumulated depreciation of
P3, 200, 000
Intangibles assets, including 500, 000 goodwill

P800, 000
2, 400, 000
3, 500, 000
1, 300, 000

On April 1, 2011, it was determined that the inventory of Jack Inc. approximated its
fair value, the property and equipment, having an average remaining useful life of
6 years, had a sound value of P4, 100, 000, and its identifiable intangibles having
indefinite useful life, had a fair value of P1, 000, 000.
Records show that the company earned an accumulated net income of P4, 650, 000
from 2006 to 2010. The said accumulated profits included a gain on sale of fixed
assets in 2008 and 2009 totaling to P1, 000, 000 and presidents annual bonus
averaging to P150, 000. The industrys normal rate of return is at 9%.
1. Assuming that the company contemplates the acquisition price at P8, 000,
000, how much is the goodwill resulting from the business combination?
a. 0
b. 500, 000
c. 1, 500, 000
d. 1, 800, 000
2. How much is the resulting goodwill and the assumed acquisition price if
goodwill is computed using the purchase of excess earnings method over a
10 year period?
a. 1, 950, 000 and 8, 250, 000
c. 1, 860, 000 and 8, 160, 000
b. 1, 950, 000 and 8, 450, 000
d. 1, 860,000 and 8, 360, 000
3. How much is the resulting goodwill and the assumed acquisition price if the
excess earnings will be capitalized at 12%?
a. 1, 625, 000 and 7, 925, 000
c. 1, 625, 000 and 8, 125, 000
b. 1, 575, 000 and 7, 875, 000
d. 1, 575, 000 and 8, 075, 000
4. How much is the resulting goodwill and the assumed acquisition price if the
average earnings will be capitalized at 10%?
a. 1, 060, 000 and 7, 560, 000
c. 1, 260, 000 and 7, 560, 000
b. 1, 500, 000 and 7, 800, 000
d. 1, 300, 000 and 7, 800, 000

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PAMANTASAN NG CABUYAO
Auditing Problems
Intangibles

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MH

5. How much is the resulting goodwill and the assumed acquisition price if the
present value method is in place and that the prevailing rate of interest is at
10% over the 10 year period excess earnings is expected to be generated?
a. 1, 198, 200 and 7,698, 200
c. 1, 198, 200 and 7, 498, 200
b. 1, 161, 300 and 7, 461, 300
d. 1, 161, 300 and 7, 661, 300
PROBLEM 6: On January 1, 2010, T Corporation acquired M Inc. net assets for a
total of P10, 000, 000. M Inc. has manufacturing plants in three countries. The fair
market values of the identifiable net assets of the operations from each country
were as follows:
Country A
P2, 000, 000
Country B
1, 500, 000
Country C
4, 500, 000
At the beginning of 2011, a new government is elected in country C. It has
promulgated a new legislation significantly restricting exports of T Corporations
main product. As a result, and for the foreseeable future, T Corporations
production in Country C will be cut by 40%. On the same date, the carrying values
of Country Cs net assets were as follows:
Cash
P700, 000
Receivables
1, 800, 000
Inventories
1, 500, 000
Property and equipment, net
2, 700, 000
Goodwill
?
Payables
700, 000
Moreover, the company originally estimated annual future net cash flows from its
operations in Country C at P1, 500, 000. (assume to include future cash flows in
relation to settlements of country Cs direct liabilities)
T uses straight line depreciation over a-10 year life for the Country C identifiable
assets and anticipates no residual value. It is also estimated that the prevailing
market rate of interest that reflects current market assessments of the time value
of money and the risks specific to Country C cash-generating unit was 15%.
1. How much is goodwill allocated to the CGU Country C upon acquisition?
a. 0
b. 1, 125, 000
c. 1, 500, 000
d. 2,
000, 000
2. How much is the value in the use of the CGU Country C as of January 1,
2011?
a. 4, 294, 426
b. 4, 516, 892
c. 7, 157, 376
d. 7, 528, 153
3. How from the impairment should be recognized against goodwill of the CGU
country C?
a. 2, 830, 574
b. 1, 705, 574
c. 1, 125, 000
d. 0
4. What is the carrying value of the CGU Country Cs Property and equipment
after impairment loss recognition?

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PAMANTASAN NG CABUYAO
Auditing Problems
Intangibles
a. 767, 508
500, 000

b. 1, 932, 492

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c. 2, 000, 000

MH

d. 2,

5. Assuming that inventories had fair value less cost to sell of P1, 500, 000,
what is the carrying value of Property and equipment after the impairment
loss recognition?
a. 767, 508
b. 1, 023, 344
c. 1, 676, 656
d. 1,
932, 492
PROBLEM 7: COMPUTRONIX CORP is engaged in developing computer software
for small business at home computer market. Most of the computer programmers
are involved in developmental work designed to produce software that will perform
fairly specific tasks in a user friendly manner. Extensive testing of the working
model is performed before it is released to production for preparation of masters
and further testing. As a result of careful preparation, Computronix Corp. has
produced several products that have been very successful in the market place. The
following costs were incurred during 2011:
Salaries and wages of programmers doing research
Expenses related to projects prior to establishment of
technological feasibility
Cost of completing the detailed program designed
Cost of coding the product master after technical
feasibility has been established
Cost of testing the product mater after technical feasibility
has been established
Amortization of capitalized software development cost
from current and prior years
Costs to produce and prepare software for sale
Additional data for 2011:
Sales of products for the year
Beginning inventory
Portion of goods available for sale sold during year

P440, 000
313, 600
500, 000
94, 000
104, 000
107, 000
225, 200
P2, 060, 000
568, 000
60%

Based on the above and the result of your audit, determine the following:
1. Amount to be capitalized as software development cost subject to
amortization
a. 1, 451, 600
b. 198, 000
c. 736, 800
2. Cost of ending inventory
a. 270, 000
b. 317, 280

c. 439, 280

d. 0

d. 360, 080

3. Total amount related to the development of computer software that should

be expense when incurred:
a. 1, 253, 600
b. 940, 000
c. 1, 451, 600
d. 0

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PAMANTASAN NG CABUYAO
Auditing Problems
Intangibles

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MH

PROBLEM 9:
1. In auditing intangible assets, an auditor most likely would review or
recomputed amortization and determine whether the amortization period is
reasonable in support of managements financial statement assertion of:
a. Valuation
b. Existence
c. Completeness
d. Rights and obligation
2. Examining documentation of the purchase of intangible assets is consistent
with the auditors objective of validating the managements assertion of:
a. Valuation
b. Existence
c. Completeness
d. Rights and obligation
3. When auditing prepaid insurance, an auditor discovers that the original
insurance policy on plant equipment is not available for inspection. The
policys absence most likely indicates the possibility of a(n)
a. Insurance premium due but not recorded
b. Deficiency in the coinsurance provision
c. Lien on the plant equipment
d. Understatement of insurance expense

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