Audit of Intangibles
Audit of Intangibles
Audit of Intangibles
SY 2014-2015
1505 06
AUDIT OF INTANGIBLES
J.M. Tang
PROBLEM NO. 1
The following costs are generally incurred by Kitamoto Corporation, a newly established entity:
Pre-opening cost of a business facility
Cost incurred in the corporations formation and organization
Licensing and stand-still agreement
A license to manufacture a steroid by means of a government grant
Operating and broadcast rights
Goodwill purchased in a business combination
Internally generated goodwill
Purchased recipes and secret formulas
Internally developed customer list
Training, customer loyalty, and market share
Cost of courses taken by management in quality engineering management
A television advertisement that will stimulate the sales in technology industry
2 months lease payment in advance
Cost of testing in search for a product alternative
Operating losses incurred in the start-up of the business
Initial franchise fees paid
Continuing franchise fees
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 that 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 5 years
Cost of improvements on a leased facility
600,000
552,000
720,000
360,000
268,800
1,200,000
1,920,000
360,000
289,200
336,000
1,080,000
240,000
720,000
300,000
312,000
420,000
120,000
328,800
168,000
133,200
480,000
600,000
781,200
300,000
240,000
600,000
Required:
Based on your audit, how much from the above items can be recognized as intangible assets?
a. 3,316,800
b. 4,665,000
c. 4,965,000
d. 6,885,600
PROBLEM NO. 2
Gangster Inc. holds a valuable patent on a precipitator that prevents certain types of air pollution. Ganster 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 basis.
Occasionally it sells patents. The following presents the summary of the activities in relation to the
aforementioned patent:
2003-2004
Jan. 5, 2005
Mar. 15, 2004
Jan. 2, 2006
Dec. 10, 2009
Jan. 3, 2010
Jan. 5, 2011
Dec. 31, 2013
P3,840,000
876,000
420,000
620,000
357,000
406,000
654,375
250,000
competitor
Based on the above and result of your audit, determine the following:
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. 620,000
D. 5,468,200
D. 380,625
D. 1,323,529
5. What is the total loss from patent write off that should be recognized in 2013?
A. 1,235,294
B. 1,213,333
C. 1,225,000
D. 1,306,667
PROBLEM NO. 3
On December 31, 2012, Invinsible Corporation acquired the following three intangible assets:
A trademark for P450,000. 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 P2,250,000. The goodwill is associated with Invinsibles Lunar Manufacturing reporting
unit.
A customer list for P330,000. By contract, Invinsible 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, 2013, before any adjusting entries for the year were made, the following information was
assembled about each of the intangible assets:
Because of a decline in the economy, the trademark is now expected to generate cash flows of just
P15,000 per year. The useful life of trademark still extends beyond the foreseeable horizon.
The cash flows expected to be generated by the Lunar Manufacturing reporting unit is P375,000 per
year for the next 22 years. Book values and fair values of the assets and liabilities of the Lunar
Manufacturing reporting unit are as follows:
Identifiable assets
Goodwill
Liabilities
Book values
P4,050,000
2,250,000
2,700,000
Fair values
P4,500,000
?
2,700,000
The cash flows expected to be generated by the customer list are P180,000 in 2014 and P120,000 in
2015.
Assume that the appropriate discount rate for all items is 6%. Round off present value factors to 4
decimal places.
Based on the above and the result of your audit, determine the following:
1. Total amortization for the year 2013
a. P110,000
c. P212,273
b. P174,285
d. P130,285
2. Impairment loss for the year 2013
a. P135,714
c. P200,000
b. P269,376
d. P
0
3. Carrying amount of Trademark as of December 31, 2013
a. P450,000
c. P385,715
b. P250,000
d. P180,624
PROBLEM NO. 4
The following costs were incurred by Yehey Corporation during 2013:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
91,200
326,400
115,200
1,392,000
124,800
139,200
62,400
72,000
283,200
480,000
614,400
240,000
278,400
163,200
1,680,000
1,200,000
7,262,400
Required:
How much should be classified as research and development for the year 2013
a. 3,667,200
b. 3,830,400
c. 3,902,400
d. 5,582,400
300,000
300,000
8,000,000
12,000,000
2,700,000
6,500,000
12,000,000
4,200,000
500,000
400,000
900,000