ASSIGNMENT 01 :AUDIT OF INTANGIBLE ASSETS
Problem 1:
Transactions during 2015 of the newly organized Paper 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 Paper 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 Paper’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 2015.
Required: Based on the above and the result of your audit, determine the following:
1. Cost of patent
2. Cost of licenses
3. Cost of trademark
4. Carrying amount of Intangible Assets
5. Total amount resulting from the foregoing transactions that should be expensed when incurred
ANSWERS:
Number Answers
1 P 492,500
2 P 200,000
3 P 100,000
4 P 697,604
5 P 1,998,000
Problem 2:
On December 31, 2014, Solver 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.
• A customer list for P220,000. By contract, Solver 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, 2015, 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 customer list are P120,000 in 2016 and P80,000
in 2017.
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 2015
2. Impairment loss for the year 2015
3. Carrying value of Trademark as of December 31, 2015
4. Carrying value of Customer list as of December 31, 2015
5. In auditing intangible assets, an auditor most likely would review or re-compute 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.
Number Answers
1 P73,333
2 P133,333
3 P166,667
4 P146,667
5 A.
SOLUTIONS
Problem 1
1. Cost of patent
Legal fees to obtain patent P 429,000
Patent application and licensing fees 63,500
Total P 492,500
2. Cost of licenses
Licences (P300,000 x 2/3) P 200,000
3. Cost of trademark
4. Common stock 300,000
Licences 200,000
Trademark P 100,000
5. Carrying amount of Intangible Assets
Cost
Patent P 492,500
Licences 200,000
Trademark 100,000 792,500
Less amortization Patent (P492,500/6 x 9/12) 61,563
Licences (P200,000/6 x 8/12) 22,222
Trademark (P100,000/6 x 8/12) 11,111 94,896
Carrying value, 12/31/15 P 697,604
6. Total amount resulting from the foregoing transactions that should be expensed when
incurred
Organization expenses (Jan. 2 transaction) 233,000
Advertising expense (Jan. 15 transaction) 15,000
R and D expense (Dec. 31 transaction) 1,750,000
Total P 1,998,000
PROBLEM 2
1. Total amortization for the year 2015
Customer list (P220,000/3) P 73,333
2. Impairment loss for the year 2015
Carrying value 300,000
Recoverable amount (P10,000/0.06) 166,667
Impairment Loss P 133,333
3. Carrying value of Trademark as of December 31, 2015
Cost 300,000
Less impairment loss 133,333
Carrying value, 12/31/15 P 166,667
4. Carrying value of Customer list as of December 31, 2015
Cost 220,000
Less amortization for 2005 73,333
Carrying value, 12/31/15 P 146,667
