The document provides an example problem to demonstrate how to audit intangible assets. It gives background information on a patent held by Boom Laboratories and calculates the carrying value of the patent on several dates. It also provides information on intangible assets held by Bato Company and asks the reader to calculate the total carrying value and charges against income for 2015.
The document provides an example problem to demonstrate how to audit intangible assets. It gives background information on a patent held by Boom Laboratories and calculates the carrying value of the patent on several dates. It also provides information on intangible assets held by Bato Company and asks the reader to calculate the total carrying value and charges against income for 2015.
The document provides an example problem to demonstrate how to audit intangible assets. It gives background information on a patent held by Boom Laboratories and calculates the carrying value of the patent on several dates. It also provides information on intangible assets held by Bato Company and asks the reader to calculate the total carrying value and charges against income for 2015.
The document provides an example problem to demonstrate how to audit intangible assets. It gives background information on a patent held by Boom Laboratories and calculates the carrying value of the patent on several dates. It also provides information on intangible assets held by Bato Company and asks the reader to calculate the total carrying value and charges against income for 2015.
Davao del Norte Telefax: (084) 655-9591, Local 116
Big Picture in Focus: ULOd. Apply substantive test of intangible
assets.
Metalanguage Please proceed immediately to the “Essential Knowledge”.
Essential Knowledge To perform the aforesaid big picture (unit learning outcomes), you need to fully understand the following essential knowledge that will be laid down in the succeeding pages. Please note that you are not limited to exclusively refer to these resources. Thus, you are expected to utilize other books, research articles and other resources that are available in the university’s library e.g. ebrary, search.proquest.com etc.
1. SUBSTANTIVE AUDIT OF INTANGIBLE ASSETS
1.2 Audit Objectives and Procedures
The financial statement assertions, specific audit objectives, and the common audit procedures traditionally used to achieve the objectives for intangibles are summarized below: Assertions Audit Objectives Audit Procedures I. Existence or A. To determine that 1. Obtain an analysis of Occurrence intangibles exist and are ledger accounts for represented by contractual intangibles. rights, privileges or 2. Examine documentation earning power owned by supporting intangibles. the company. II. Completeness B. To determine that all 3. Vouch additions to or transactions related to acquisitions during the intangibles have been year. properly recorded. 4. Evaluate dispositions and write offs during the year. III. Rights and C. To determine that the 5. In addition to audit Obligations intangibles are owned by procedure no. 2, perform the company. analytical procedures. IV. Valuation or D. To determine that 6. In addition to audit Allocation intangibles are stated at procedure nos. 3 & 4, cost less amortization. evaluate amortization policy and verify computation of amortization. V. Presentation E. To determine whether 7. Evaluate financial and Disclosure presentation and statement presentation disclosures concerning and disclosure for intangibles are adequate intangibles. and in accordance with PAS/PFRS.
166 Department of Accounting Education Mabini Street, Tagum City Davao del Norte Telefax: (084) 655-9591, Local 116
ILLUSTRATIVE PROBLEM 1 The following independent situations relate to the audit of intangible assets. Answer the questions at the end of each situation.
BOOM LABORATORIES holds a valuable patent (No. 112170) on a device that
prevents certain types of air pollution. Boom does not manufacture or sell the products and processes it develops; it conducts research and develops products which it patents, and then assigns the patents to manufacturers on a royalty basis. The history of Patent No. 112170 is as follows:
Date Activity Cost
2005-2006 Research conducted to develop device P1,259,100 Jan. 2007 Design and construction of a prototype 262,800 Mar. 2007 Testing of models 126,000 Jan. 2008 Legal and other fees to process patent application; patent granted June 2008 186,150 Nov. 2009 Engineering activity necessary to advance the design of the device to the manufacturing stage 244,500 April 2011 Research aimed at modifying the design of the patented device 129,000 May 2015 Legal fees paid in a successful patent infringement suit against a competitor 102,000
Boom assumed a useful life of 17 years when it received the initial device patent. On January 1, 2013, it revised its useful life estimate downward to 5 remaining years. Amortization is computed for a full year if the cost is incurred prior to July 1 and no amortization for the year if the cost is incurred after June 30. Boom’s reporting date is December 31, 2015.
Compute the carrying value of Patent No. 112170 on each of the following dates: 1. December 31, 2008 A. P180,675 B. P186,150 C. P293,788 D. P175,200 2. December 31, 2012 A. P223,200 B. P52,560 C. P131,400 D. P122,640 3. December 31, 2015 A. P120,560 B. P78,840 C. P52,560 D. P98,550
167 Department of Accounting Education Mabini Street, Tagum City Davao del Norte Telefax: (084) 655-9591, Local 116
Carrying value, Dec. 31, 2015 P 52,560
BATO COMPANY has provided information on intangible assets as follows: A patent was purchased from Valenzuela Company for P4,000,000 on January 1, 2014. Bato estimates the remaining useful life of the patent to be 10 years. The patent was carried in Valenzuela’s accounting records at a net book value of P4,000,000 when Valenzuela sold it to Bato.
During 2015, a franchise was purchased from Delco Company for P960,000. The contract which runs for 10 years provides that 5% of revenue from the franchise must be paid to Delco. Revenue from the franchise for 2015 was P5,000,000. Bato takes a full year amortization in the year of purchase.
The following research and development costs were incurred by Bato in 2015: Materials and equipment P284,000 Personnel 378,000 Indirect costs 204,000 P866,000 Bato estimates that these costs will be recouped by December 31, 2018. The materials and equipment purchased have no alternative uses.
On January 1, 2015, because of recent events in the field, Bato estimates that the remaining life of the patent purchased on January 1, 2014 is only 5 years from January 1, 2015.
4. What is the total carrying value of Bato’s intangible assets on December 31, 2015? A. P3,744,000 B. P4,864,000 C. P2,880,000 D. P3,681,500
5. As a result of the facts above, compute the total amount of charges against income for the year ended December 31, 2015? A. P2,428,000 B. P1,932,000 C. P1,648,000 D. P1,116,000
SUGGESTED SOLUTIONS: 4. A Cost of patent purchased on Jan. 1, 2014 P4,000,000 2014 amortization (P4,000,000/10) (400,000) Carrying value, Dec. 31, 2014 3,600,000 2015 amortization (P3,600,000/5) (720,000) P2,880,000 Cost of franchise P960,000 2015 amortization (P960,000/10) (96,000) 864,000 Total carrying value of intangibles P3,744,000
45. B Amortization of patent – 2015 P720,000
Amortization of franchise – 2015 96,000 Payment to Delco (P5,000,000 x 5%) 250,000 Research and development costs 866,000 Total charges against 2015 income P1,932,000
168 Department of Accounting Education Mabini Street, Tagum City Davao del Norte Telefax: (084) 655-9591, Local 116
Self-Help: You can also refer to the sources below to help you further understand the lesson: *Cabrera, M.E. (2017). Applied auditing. (2017 ed.). Manila, Philippines: GIC Enterprises & Co., Inc.
Activity 1. Mutiple Choice Questions. Encircle the letter that corresponds to your answer.
1. 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 enjoyment 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. c. True; False. b. False; False. d. True; True.
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. c. Completeness. b. Existence or occurrence. d. Rights and obligations.
3. The most effective means for the auditor to determine whether a recorded intangible 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.
4. The auditee has just acquired another company by purchasing all its assets. As a result of the purchase, "goodwill" has been recorded on the auditee's books. Which of the following comparisons would be the most appropriate audit test for the amount of recorded goodwill? a. The purchase price and the book value of assets purchased. b. The figure for goodwill specified in the contract for purchase.
169 Department of Accounting Education Mabini Street, Tagum City Davao del Norte Telefax: (084) 655-9591, Local 116
c. Earnings in excess of 15% of net assets for the past five years. d. The purchase price and the fair market value of assets purchased.
5. In verifying the amount of goodwill recorded by a client, the most convincing
evidence which an auditor can obtain is by comparing the recorded value of assets acquired with the 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.
Let’s Analyze
Activity 1. Solve the following problems. Show your solution in proper format.
PROBLEM 1 In connection with your audit of BB Corporation, you noted that on January 2, 2012, the corporation purchased a building site for its proposed research and development laboratory at a cost of P2,400,000. Construction of the building was started in 2012. The building was completed on December 31, 2013, at a cost of P11,200,000 and was placed in service on January 1, 2014. The estimated useful life of the building for depreciation purposes was 20 years; the straight-line method of depreciation was to be employed and there was no estimated salvage value.
Management estimates that about 50% of the projects of the research and development group will result in long-term benefits to the corporation. The remaining projects either benefit the current period or are abandoned before completion. A summary of the number of projects and the direct costs incurred in conjunction with the research and development activities for 2014 appears below.
No. of Salaries and Other expenses
Projects employee benefits (excluding dep’n.) Completed projects with long-term benefits 60 3,600,000 2,000,000 Abandoned projects that benefit the current year 40 2,600,000 600,000 Projects in process – results indeterminate 20 1,600,000 480,000
Upon the recommendation of the research and development group, BB Corporation acquired a patent for manufacturing rights at a cost of P3,200,000. The patent was acquired on March 31, 2013, and has an economic life of 10 years.
Questions
1. Carrying value of the patent as of December 31, 2014 is:
a. P 3,600,000 b. P 3,200,000 c. P 2,880,000 d. P 2,640,000
2. Carrying value of the building as of December 31, 2014 is:
170 Department of Accounting Education Mabini Street, Tagum City Davao del Norte Telefax: (084) 655-9591, Local 116
a. P 5,320,000 b. P 10,640,000 c. P 10,080,000 d. P 0
3. Carrying value of the land as of December 31, 2014 is:
a. P 1,200,000 b. P 2,400,000 c. P 2,160,000 d. P 0
4. Research and development expense for 2014 is:
a. P 5,280,000 b. P 10,880,000 c. P 11,440,000 d. P 11,760,000
PROBLEM 2 On December 31, 2016, Probe Corporation acquire 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 Probe’s Nexus Manufacturing reporting unit.
• A customer list for P220,000. By contract, Probe 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, 2017, 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 Nexus 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 Nexus 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 2018 and P80,000 in 2019.
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 2017
a. P 73,333 b. P141,515 c. P116,190 d. P 86,857
2. Impairment loss for the year 2017
a. P 90,476 b. P179,584 c. P133,333 d. P 0
3. Carrying amount of Trademark as of December 31, 2017
a. P300,000 b. P166,667 c. P257,143 d. P120,416
4. Carrying amount of Goodwill as of December 31, 2017
a. P1,500,000 b. P1,431,818 c. P1,425,000 d. P1,462,500
5. Carrying amount of Customer list as of December 31, 2017
a. P220,000 b. P176,000 c. P146,667 d. P 0
171 Department of Accounting Education Mabini Street, Tagum City Davao del Norte Telefax: (084) 655-9591, Local 116
In a Nutshell
In this part you are going to jot down what you have learned in this unit. The said statement of yours could be in a form of concluding statements, arguments, or perspective you have drawn from this lesson.
In this section you are going to list what boggles you in this unit. You may indicate your questions but noting you have to indicate the answers after your question is being raised and clarified. You can write your questions below.
