Audit of Prepayments and Intangible Assets

AUDIT OF PREPAYMENTS
6 AND INTANGIBLE ASSETS

AUDIT PROGRAM FOR PREPAYMENTS
Audit Objectives
To determine that:
a. Charges to prepayments represent amounts that are reasonably expected to be realized through
future operations.
b. Prepaayemnts are properly recorded.
c. The accounts are properly classified and described and adequate disclosures have been made.
Audit Procedures
1. Obtain or prepare detailed analysis of the accounts.

2. Verify the accuracy of the analysis by performing tests of mathematical computations to the
extent deemed necessary.
3. Deterrmine the nature of the accounts included in the analysis.
4. Determine the reasonableness of the amounts.
5. Examine supporting documents.
AUDIT PROGRAM FOR INTANGIBLE ASSETS
Audit Objectives
To determine that:
a. The assets represent amounts that are reasonablyexpected to be realized through future operations
or otherwise, and that they are properly recorded.
b. The assets are properly described and classified, and adequate disclosures have been made in the
financial statements.
Audit Procedures
1. Obtain an analysis of intangible assets.

2. Verify the accuracy of the analysis by performing tests of mathematical computations to the extent
deemed necessary.
3. In an initial audit, examine transactions of prior period/s to the determine if costs had been capitalized
in accordance with the GAAP/IFRS.
4. In recurring audit, trace the beginning balances to last year's working papers.
5. Vouch current year transactions to supporting documents.
6. Determine if there is proper allocation of the amortization recorded for the period.
7. Determine if there is impairment of value of intangible assets.
8. Deterrmine propriety of financial statememt presentation and adequacy of disclosure.
AYMENTS
E ASSETS
MENTS
pected to be realized through
sclosures have been made.
cal computations to the
E ASSETS
alized through future operations
closures have been made in the

cal computations to the extent
mine if costs had been capitalized
or the period.
acy of disclosure.
6 problems
Problem 6-1
Acquisition and Amortization of Intangible Assets
Angel Company engaged in the following transactionsat the beginning of 2019:
1. Purchases a patent for $700,000 that had originally been filled in January 2013. The
acquisition was made to protect another patent that the company had filled for in January
2015 and subsequently received. Life span 16 years
2. Purchased the rights to a novel by a best-selling novelist in exchange for 100,000 ordinary
shares ($10 par) selling for $60 perr share. The book sells 1,000,000 copies in 2019 and
is expected to sell a total of 500,000 copies in the future years.
3. Purchase the francise to operrate a ferry service from the government for $100,000. A bridge
has been planned to replace the ferry, and it is expected that it will be completed in five years.
The company hopes that the ferry will continue as a tourist attraction, but profits are expected
to be only 20% of those earned before the bridge is opened.
4. Paid $280,000 to attorneys for the services to successfully defend the patent acquired in
transaction 1.
5. Paid a taxi operator $500,000 to have the company name prominently displayed on his taxis
for two years.
Required:
Based on the preceding information, deternime the carrying value of the following at the end
of 2019:
1. Patent
2. Copyright
3. Franchise
Problem 6-2
Prepayment
The ffollowing situations are found in the records of the Philadephia Company, in your audit of the
company's financial statements for the year ended December 31, 2019:
1. December 1, 2019:
Advertising expense 72,000
Cash
Payment of 2020 advertising contract.
2. Balance of Office supplies expense, December 31, 2019

Balance of Unused Office supplies, December 31, 2019
Inventory of Office supplies, December 31, 2019
3. June 2, 2019:
Prepaid insurance 54,000
Cash
Paymentof one-year insurance premium for inventory
4. Balance of Factory supplies expense account, December 31, 2019

Physical inventory of factory supplies, December 31, 2019
5. On May 1, 2019, a two-year subscription to the Daily Tribune in the amount of $14,400 was
paid. Subscription expense was charged for the entire amount.
Required:
Prepare the adjusting journal entries on Decmeber 31, 2019 based on the situations described.
Problem 6-3
Identifyinf Intangible Asset
The following amounts are included in the general ledger of Mangrove Company at December
31, 2019:
Organization costs $ 72,000

Trademarks 45,000
Patents 225,000
Discount on bonds payable 105,000
Deposits with advertising agency for ads to promote goodwill
of company 30,000
Cost of equipment acquired for various research and development
projects 320,000
Cost of developing a secret formula for a product that is expected
to be marketed for at least 20 years 240,000
Required:
On the basis of the information above, what is the total amount of intangible assets to be
reported by Mangrove Company in its statement of financial position at December 31, 2019?
Intangible Assets
or in January
0,000 ordinary
s in 2019 and
00,000. A bridge
eted in five years.
ofits are expected
t acquired in
ayed on his taxis
owing at the end
Prepayments
your audit of the

72,000
$ 45,000
15,000
22,500
54,000
$ 69,000
58,500
of $14,400 was
ituations described.
Intangible Assets
t December
assets to be
ember 31, 2019?

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AUDIT OF PREPAYMENTS

6 AND INTANGIBLE ASSETS

1. Obtain or prepare detailed analysis of the accounts.

AUDIT PROGRAM FOR INTANGIBLE ASSETS

1. Obtain an analysis of intangible assets.

pected to be realized through

sclosures have been made.

cal computations to the

alized through future operations

closures have been made in the

mine if costs had been capitalized

Angel Company engaged in the following transactionsat the beginning of 2019:

2. Balance of Office supplies expense, December 31, 2019

4. Balance of Factory supplies expense account, December 31, 2019

Organization costs $ 72,000

ayed on his taxis

owing at the end

your audit of the

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