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Mindanao State University

 

College of Business Administration and Accountancy DEPARTMENT OF ACCOUNTANCY

 

Marawi City AUDIT OF INTANGIBLE ASSETS, PREPAYMENTS AND DEFERRED CHARGES

 

Accounting 152

 

PROBLEM 1: The accountant of the newly organized

 

Aqua Company provided to you the details of the

 

company?s intangible asset account as follows:

 

Date

 

Description

 

Amount

 

01/02/201 Organization costs

 

P

 

3

 

233,000

 

01/15/201 Goodwill

 

15,000

 

3

 

04/01/201 Patent

 

490,000

 

3

 

05/01/201 License and trademark

 

300,000

 

3

 

07/01/201 Research and development

 

3

 

laboratory

 

1,310,000

 

12/31/201 Product development costs

 

1,750,000

 

3

 

Total

 

P

 

4,098,000

 

Transactions during 2013 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 hand

 

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, P429,000 and patent application

 

and licensing fees, P61,000. It is

 

estimated that in 12 years, other

 

companies

 

will

 

have

 

developed

 

improved

 

processes,

 

making

 

the

 

company?s 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 no-par, ordinary

 

shares of Aqua selling for P50 per share.

 

The license is worth twice as much as

 

the trademark, both of which may be

 

used for 5 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 Paid salaries for an engineer and

 

chemist involved in research and

 

development totaling P1,750,000 in

 

2013.

 

It is the company?s policy to take full year amortization in

 

the year of acquisition. Based on the above and the

 

result of your audit, answer the following questions:

 

1. Compute the carrying amount of the intangible

 

assets as of December 31, 2013.

 

2. Compute the total amount resulting from the

 

foregoing transactions that should be expensed

 

when incurred.

 

PROBLEM 2: You gathered the following information

 

related to the patents account of the Tierra Corporation

 

in connection with your audit of the company?s financial

 

statements for the year 2012.

 

A. In 2011, Tierra developed a new machine that

 

reduces the time required to insert the fortunes

 

into its fortune cookies. Because the process is considered very valuable to the fortune cookie

 

industry, Tierra patented the machine. The

 

following expenses were incurred in developing

 

and patenting the machine:

 

Research

 

and

 

development

 

laboratory expenses

 

P1,000,00

 

0

 

Metal used in the construction of

 

the machine

 

320,000

 

Legal expenses to obtain patent

 

480,000

 

Blueprints used to design the

 

machine

 

128,000

 

Wages paid for the employees?

 

work

 

on

 

the

 

research,

 

development, and building of

 

the machine (70% of the time

 

was spent in actually building

 

the machine)

 

1,200,00

 

0

 

Expense of drawing required by

 

the

 

patent office to

 

be

 

submitted with the patent

 

application

 

68,000

 

Fees paid to the government

 

patent

 

office

 

to

 

process

 

application

 

100,000

 

B. During 2012, Tierra paid P150,000 in legal fees to

 

successfully defend the patent against an

 

infringement suit by Cookie Monster Corporation.

 

C. It is the company?s policy to take full year

 

amortization in the year of acquisition.

 

Based on the above and the result of your audit, answer

 

the following questions:

 

1. What amount should be recognized as the cost of

 

the patent?

 

2. What amount should be recognized as the cost of

 

the machine?

 

3. What amount should be charged to expense when

 

incurred in connection with the development of the

 

patented machine?

 

4. What is the carrying amount of the patent as of

 

December 31, 2013?

 

PROBLEM 3: You noted the following items relative to

 

the company?s intangible assets in connection with your

 

audit of Hielo Corporation?s financial statements for the

 

year ended December 31, 2013:

 

A. On January 1, 2013, Hielo signed an agreement

 

to operate as franchisee of Clear Copy Service,

 

Inc. for an initial franchise of P680,000. Of this

 

amount, P200,000 was paid when the agreement

 

was signed and the balance was payable in 4

 

annual payments of P120,000 beginning January

 

1, 2014. The agreement provides that the down

 

payment is not refundable and no future services

 

are required of the franchisor. The implicit rate

 

for loan is 14%. The agreement also provides

 

that 5% of the revenue from the franchise must

 

be paid to the franchisor annually. Hielo?s

 

revenue from the franchisee for 2013 was

 

P8,000,000. Hielo estimates that the useful life of

 

the franchise to be ten years.

 

B. Hielo incurred P624,000 of experimental and

 

development costs in its laboratory to develop a

 

patent which was granted on January 2, 2013.

 

Legal fees and another costs associated with the

 

registration of the patent totaled P131,200. Hielo

 

estimates that the useful life of the patent will be

 

8 years. Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2013-2014

 

Page|1 of 5 C. A trademark was purchased from Tsek

 

Company for P320,000 on July 1, 2010.

 

Expenditures for successful legislation in

 

defense of the trademark totaling P80,000

 

were paid on July 1, 2013. Hielo estimates

 

that the trademark?s useful life will be

 

indefinite.

 

Based on the above and the result of your audit,

 

answer the following questions:

 

1. The total expenses relating to the intangible

 

assets in 2013 is:

 

2. The total carrying amount of the intangible

 

assets as of December 31, 2013 is:

 

PROBLEM 4: Fuego Company has been involved

 

in a project to develop an engine that runs on

 

extracts from sugarcane. It commenced the

 

project

 

in

 

February

 

2010.

 

Between

 

the

 

commencement date and June 30, Fuego spent

 

P3,810,000 on the project. At June 30, 2012, there

 

was no identification that the project would be

 

commercially feasible, although the company had

 

made significant progress and was sufficiently sure

 

of the future success that it was prepared to outlay

 

more funds on the project.

 

After spending a further P1,800,000 during July

 

and August, the company had built a prototype

 

that appeared to be successful. The prototype was

 

demonstrated to a number of engineering

 

companies during September and a number of

 

these companies expressed interest in the further

 

development of the engine. Convinced that it now

 

had a product that it would be able to sell, Fuego

 

spent a further P975,000 during October adjusting

 

for the problems that the engineering firms had

 

pointed out. On November 1, Fuego applied for the

 

patent on the engine, incurring administrative

 

costs of P525,000. The patent had an expected

 

useful life of 5 years.

 

Between November and December 2012, Fuego

 

spent an additional amount of P1,230,000 on

 

engineering and consulting costs to develop the

 

project such that the engine was at manufacturing

 

stage. These resulted in changes in the overall

 

design of the engine and costs of P75,000 were

 

incurred to add minor changes to the overall

 

design of the patent authority. On January 1, 2013,

 

Fuego invited tenders for the manufacture of the

 

engine for commercial sale. Based on the above

 

and the result of your audit, answer the following

 

questions:

 

1. What total amount should be charged to

 

expense when incurred?

 

2. What total amount should be capitalized as

 

patent cost on December 31, 2012?

 

PROBLEM 5: On December 31, 2011, Amazonas

 

Corporation acquired the following three intangible

 

assets:

 

A. 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.

 

B. Goodwill for P2,250,000. The goodwill is

 

associated

 

with

 

Amazonas?

 

Laguna

 

Manufacturing reporting unit. C. A customer list for P330,000. By contract,

 

Amazonas 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, 2012, 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 P15,000 per year. The

 

useful life of trademark still extends

 

beyond the foreseeable horizon.

 

B. The cash flows expected to be generated

 

by the Laguna Manufacturing reporting

 

unit is P375,000 per year for the next 22

 

years. Carrying amounts and fair values of

 

the assets and liabilities of the Laguna

 

Manufacturing reporting unit are as

 

follows:

 

Book

 

value

 

Fair value

 

Identifiable

 

P

 

P

 

assets

 

4,050,000

 

4,500,000

 

Goodwill

 

2,250,000

 

?

 

Liabilities

 

2,700,000

 

2,700,000

 

C. The cash flows expected to be generated

 

by the customer list are P180,000 in 2013

 

and P120,000 in 2014.

 

The appropriate discount rate for all items is 7%.

 

Based on the above and the result of your audit,

 

answer the following questions:

 

1. What is the total amortization on the

 

intangible assets for the year 2012?

 

2. What is total impairment loss on the

 

intangible assets for the year 2012?

 

3. What is the carrying amount of the

 

intangible assets on December 31, 2012?

 

PROBLEM 6: Viento Company acquired several

 

small companies at the end of 2011 and, based on

 

the acquisitions, reported the following intangibles

 

in its December 31, 2011 statement of financial

 

position:

 

Patent

 

P 200,000

 

Copyright

 

400,000

 

Trademark

 

350,000

 

Computer software

 

100,000

 

Goodwill

 

900,000

 

The company?s accountant determines that the

 

patent has an expected life of 10 years and no expected residual value, and that it will generate approximately equal benefits each year. The company expects to use the copyright and trade name

 

for the foreseeable future. The accountant knows

 

that the computer software is used in the company?s 120 sales offices. The company has replaced the software in 60 offices in 2012 and expects to replace the software in 40 more offices in

 

2013 and the remainder in 2014.

 

On December 31, 2012, there are no indications of

 

impairment of patent and computer software. The

 

following information relate to the other intangible

 

assets: Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2013-2014

 

Page|2 of 5 A. Because of the rampant piracy, the copyright is expected to generate cash flows of

 

just P8,000 per year.

 

B. The trade name is expected to generate

 

cash flows of P15,000 per year.

 

C. The goodwill is associated with Viento?s

 

SCV Manufacturing reporting unit. The

 

cash flows expected to be generated by

 

the SCV manufacturing reporting unit is

 

P200,000 per year for the next 25 years.

 

The reporting unit has a carrying amount

 

of P2,100,000.

 

Viento Company?s appropriate discount rate for all

 

items is 5%. Based on the above and the result of

 

your audit, answer the following questions:

 

1. What is the total amortization of intangible

 

assets in 2012?

 

2. What is the carrying amount of goodwill on

 

December 31, 2012?

 

3. What is the total impairment loss in 2012?

 

4. What is the carrying amount of the other intangible assets on December 31, 2012?

 

PROBLEM 7: You are examining the financial

 

statements of the Luna Sol Retail Company for the

 

year ended December 31, 2012. The client?s

 

accounting department presented you with an

 

analysis of the prepaid expenses account at

 

December 31, 2012 as shown below:

 

Luna Sol Retail Company

 

Analysis of Prepaid Expenses Account

 

December 31, 2012

 

Description

 

Unexpired fire insurance

 

Unexpired liability insurance

 

Utility deposits

 

Loan to officer

 

Purchase of postage meter, ½ of

 

invoice price

 

Bond discount

 

Advertising of store opening

 

Amount due for overpayment on

 

purchase of fixtures

 

Unsalable inventory ? entered June

 

30, 2012

 

Book value of obsolete machinery

 

held for resale

 

Funds delivered to New Stores with

 

purchase offer Balance at

 

Dec. 31,

 

2012

 

P

 

750

 

4,900

 

2,000

 

500

 

400

 

3,000

 

9,600

 

700 Additional information includes the following:

 

A. The postage meter was delivered in

 

November and the balance due was paid

 

January. Unused postage of P700 in the

 

machine at December 31, 2012, was

 

recorded as expense at time of purchase.

 

B. Bond discount represents the unamortized

 

portion applicable to bonds maturing 2013.

 

C. Insurance policy data follows:

 

Type

 

Fire

 

Liability Period Covered

 

12/31/2012 to

 

12/31/2013

 

06/30/2012 to

 

06/30/2013 Premium

 

P 1,000

 

9,500 D. The P9,600 paid and recorded for

 

advertising was for the cost of an

 

advertisement to be run in a monthly

 

magazine for 6 months, beginning in

 

December 2012. You examined an invoice

 

received from the advertising agency and

 

extracted

 

the

 

following

 

description:

 

?Advertising services rendered for store

 

opened in November 2012, P6,900.?

 

E. Luna Sol has contracted to purchase New

 

Stores and has been required to

 

accompany its offer with a check for

 

P1,000 to be held in escrow as an

 

indication of good faith. An examination of

 

paid checks revealed the check has not

 

been returned from the bank through

 

January 2013.

 

Based on the above and the result of your audit,

 

answer the following questions:

 

1.

 

2.

 

3. What is the adjusted balance of the prepaid

 

expenses account as of December 31, 2012?

 

Prepare the necessary entries to correct the

 

prepaid expenses account.

 

The net income for 2012 is overstated

 

(understated) by: PROBLEM 8: The audit for the year ending

 

December 31, 2013 of the Raven Construction

 

Company revealed that the present balance of

 

prepaid insurance account consisted of the

 

following policies. All insurance premiums were

 

charged to this account. 8,300

 

550

 

1,000 Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2013-2014

 

Page|3 of 5 Policy

 

Number

 

0010

 

0020

 

0030

 

0040

 

0050

 

0060

 

0070

 

0080

 

0090

 

0100

 

0110 Albania

 

Bosnia

 

Czech

 

Denmark

 

Estonia

 

France

 

Germany

 

Holland

 

Ireland

 

Jamaica

 

Kazakhstan 0120 Latvia Company F.

 

G. 1. Type of

 

Coverage Peso

 

Coverage Fire and extended ? Buildings

 

Fire and extended ? Buildings

 

Fire and extended ? Offices

 

Product liability

 

Fire and theft inventory

 

Medical ? Officers

 

Delivery equipment

 

Blanket position bond

 

Construction bonding

 

Term insurance on key personnel

 

Officer?s life ? beneficiary is Raven

 

Officer?s life ? beneficiary is officer?s

 

wife Based on the above and the result of your

 

audit, answer the following questions:

 

In recording the necessary adjustments, the

 

amount to be charged against retained

 

earnings is: P100,000

 

150,000

 

100,000

 

100,000

 

65,000

 

100,000

 

50,000

 

30,000

 

100,000

 

75,000

 

50,000

 

50,000 2.

 

H. 3. Policy

 

Date Expiration

 

Date Amount of

 

Premium 08/01/2012

 

02/01/2013

 

03/01/2012

 

07/01/2011

 

08/01/2013

 

06/01/2012

 

11/01/2013

 

02/01/2012

 

04/01/2013

 

05/01/2012

 

09/01/2013

 

09/01/2013 08/01/2015

 

02/01/2016

 

03/01/2014

 

07/01/2015

 

08/01/2016

 

06/01/2014

 

11/01/2014

 

02/01/2014

 

04/01/2014

 

05/01/2016

 

09/01/2014

 

09/01/2014 P 18,720

 

27,360

 

7,200

 

7,680

 

3,600

 

12,000

 

2,400

 

4,800

 

1,950

 

21,600

 

1,200

 

1,200 To effect the necessary adjustments, the

 

amount to be charged against the 2013

 

profit or loss is:

 

What is the adjusted prepaid insurance

 

balance of Raven as of December 31, 2013? Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2013-2014

 

Page|4 of 5 I. J. K.

 







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