Auditing Problems Intangibles Impairment And Revaluation

Auditing Problems Intangibles

Dianne France Carandang Ponce Martin Celebrado Jane Louise Constantino Mary Annvic Cortes

Auditing Problems – Intangibles, Impairment and Revaluation Problem NO. 1 JOYCE CORP. holds a valuable patent on a precipitator that prevents certain types of air pollution. JOYCE does not manufacture or sell the products and processes it develops. Instead, it conducts research and develops products and processes which it patents and then assigns the patents to manufacturers on a royalty basis. Occasionally, it sells a patent. The following present the summary of the activities in relation to the aforementioned patent: 1996-1997

Research conducted to develop precipitator:

Jan. 5, 1998

Design and construction of prototype

876,000

March 15

Testing the prototype models

420,000

Jan 2, 1999

Legal and other professional fees to process the patent application (useful life = legal life)

620,000

Dec 10, 2001

Legal fees paid to successfully defend the device patent

357,000

Jan. 3, 2003

Acquisition of a competitive patent aimed at protecting old patent

406,000

Acquisition of the related patent which extended the life of the patents for additional 2 years

654,375

Legal fees paid in unsuccessful patent infringement suit against a competitor

250,000

Jan. 5, 2004

Dec.31, 2006

P3840,000

1. What is the correct cost of the patent upon initial recognition? a. P5,756,000 b. P1,916,000 c. P1,040,000

d. P620,000

2. What is the carrying value of the patent on December 31, 1999? a. P589,000 b. P988,000 c. P1,820,200

d. P5, 468,200

3. What is the carrying value of the patent on December 31, 2003? a. P1, 181,000 b. P845,625 c. P465,000

d. P380,625

4. What is the carrying value of the patent on December 31, 2005? a. P1, 400,000 b. P1,300,000 c. P1,315,500

d. P1,323,529

5. What is the total loss from patent write off should be recognized in 2006? a. P1, 235,294 b. P1,213,333 c. P1,225,000 d. P1,323,667

Solution and Explanation: 1. Answer: D 620,000 2. Answer: A Compute the carrying value of patent December 31, 1999? Cost of obtaining patent 1999 620,000 Amortization 1999 (19,000) Carrying Value, Dec. 31, 1999 589,000

Cost of patent Legal Life of Patent Amortization

620,000 /20 19,000

3. Answer: B Compute the carrying value of patent December 31, 2003? Carrying value of Patent, Jan. 01, 2000 589,000 2000 Amortization (31,000) 2001 Amortization (31,000) 2002 Amortization (31,000) Carrying value of Patent, Dec. 31, 2002 496,000 Acquisition of the related patent Jan. 3, 2003 2003 Amortization Carrying value of Patent, Dec. 31, 2003

406,000 902,000 56,375 845,625

4. Answer: D Compute the carrying value of patent December 31, 2005? Carrying value of Patent, Jan. 1, 2004 845,625 Acquisition of the related patent Jan. 5, 2004 654,375 Total 1,500,000 2004 Amortization 88,235 2005 Amortization 88,235 Carrying value of Patent, Dec. 31, 2005 1, 323,529 5. Answer: A 1, 323,529 /15 88, 235

1, 323,529 88, 235 1, 235,294

An intangible asset according to PAS 38 par 21 shall be recognised if, and only if: (a) it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and (b) the cost of the asset can be measured reliably. An intangible asset shall be measured initially at cost (PAS 38 par 24) and the subsequent recognition of intangible assets shall be carried at its cost less any accumulated amortization and any accumulated impairment losses over its remaining expected life.

Problem NO. 2 Jimar Co. incurred the following costs during the year:

Cost of activities aimed at obtaining new knowledge

P700,000

Marketing research to study consumer tastes

16,000

Cost of developing and producing a prototype model

23,000

Cost of testing the prototype model for safety and environmental friendliness

80,000

Cost of revising designs for flaws in the prototype model

15,000

Salaries of employees, consultants, and technicians involved in R&D

120,000

Amount paid for conference for the introduction of the newly developed product including fee of a model hired as endorser Advertising to establish recognition of the newly developed product

102,000 43,000

Cost incurred on search for alternatives for material, devices, products, processes, systems or services

30,000

Cost of final selection of possible alternatives for a new process

96,000

Periodic or routine design changes to existing products Modification of design for a specific customer

2,500 10,000

Cost of design, construction and operation of a pilot plant that is not Of a scale economically feasible for commercial production

5,000

Cost of routine, seasonal, and periodic design of tools, jigs, molds and dies

18,000

Cost of quality control during commercial production

32,000

Cost of building acquired to be used in various R&D projects Depreciation on the building described above

1,000,000 100,000

Personnel costs of persons involved in research and development projects

41,200

Design, construction, and testing of production prototypes and models

96,000

1. Compute for the total research and development expense during the year. a. P1,306,200 b. P1,176,200 c. P1,223,500 d. P1,034,000

Solution and Explanation: Cost of activities aimed at obtaining new knowledge

P 700,000

Cost of developing and producing a prototype model

23,000

Cost of testing the prototype model for safety and environmental friendliness

80,000

Cost of revising designs for flaws in the prototype model

15,000

Salaries of employees, consultants, and technicians involved in R&D

120,000

Cost incurred on search for alternatives for material, devices, products, processes, systems or services

30,000

Cost of final selection of possible alternatives for a new process

96,000

Cost of design, construction and operation of a pilot plant that is not Of a scale economically feasible for commercial production Depreciation on the building described above Personnel costs of persons involved in research and development projects Design, construction, and testing of production prototypes and models Total Reseach and Development Expense

Charge all research cost to expense (PAS 38, par.54)

5,000 100,000 41,200 96,000 1,306,200

Development costs are capitalized only after technical and commercialfeasibility of the asset for sale or use have been established. This means that the entity must intend and be able to complete the intangible asset and either uses it or sell it and be able to demonstrate how the asset will generate future economic benefits. ( PAS 38, par.57) If an entity cannot distinguish the research phase of an internal project to create an intangible asset from the development phase, the entity treats the expenditure for that project as if it were incurred in the research phase only. Problem NO. 3 You gathered the following information related to the Patents account of the Lady Han Cookie Corporation in connection with your audit of the company’s financial statements for the year 2006. In 2005, Lady Han 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, Lady Han patented the machine. The following expenses were incurred in developing and patenting the machine: Research and laboratory expenses Metal used in the construction of the machine Blueprints used to design the machine Legal expenses to obtain patent Wages paid for the employees’ work on the research, development and building of the machine (60% of the time was spent in actually building the machine) Expense of drawing required by the patent office to be submitted with the patent application Fees paid to the government patent office to process application

P1000,000 320,000 128,000 128,000 1,200,000

68,000 100,000

During 2006, Lady Han paid P150,000 in legal fees to successfully defend the patentagainst an infringement suit by Cookie Monster Corporation. It is the company’s policy to take full year amortization in the year of acquisition QUESTIONS: Based on the above and the result of your audit, determine the following: 1. Cost a. P580,000

b. P1,128,000

c. P648,000

d. P 798,0001

2. Cost of Machine a. P1,236,000

b. P1,040,000

c. P1,648,000

d. P1,168,000

3. Amount that should charged to expense when incurred in connection with the development of the patented machine a. P1,480,000 b. P1,608,000 c. P1,000,000 d. P 01

4. Carrying amount of patent as of December 31,2006 a. P522,000 b. P1,015,200 c. P583,200

d. P 837,900

5. The most effective means for the auditor to determine whether a recordedintangible 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.

Solution and Explanation: 1. ANSWER: C Legal Expenses to obtain patent

480, 000

Expenses 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

Cost of Patent

648, 000

Explanation: Cost of an internally generated intangible asset (PAS 38 paragraph 65, 66, and 67) The cost of an internally generated intangible asset for the purpose of paragraph 24 is the sum of expenditure incurred from the date when the intangible asset first meets the recognition criteria in paragraphs 21, 22 and 57. Paragraph 71 prohibits reinstatement of expenditure previously recognized as an expense. The cost of an internally generated intangible asset comprises all directly attributable costs necessary to create, produce, and prepare the asset to be capable of operating in the manner intended by management. Examples of directly attributable costs are: (a) costs of materials and services used or consumed in generating the intangible asset; (b) costs of employee benefits (as defined in IAS 19) arising from the generation of the intangible asset;

(c) fees to register a legal right; and (d) amortisation of patents and licences that are used to generate the intangible asset. IAS 23 specifies criteria for the recognition of interest as an element of the cost of an internally generated intangible asset. The following are not components of the cost of an internally generated intangible asset: (a) selling, administrative and other general overhead expenditure unless this expenditure can be directly attributed to preparing the asset for use; (b) identified inefficiencies and initial operating losses incurred before the asset achieves planned performance; and (c) expenditure on training staff to operate the asset. 2. ANSWER: D Metal used in the construction of the machine

320, 000

Blueprints used to obtain patent

480, 000

Wages paid for the employees’ work on the R&D and building of machine (1, 200,000 *60%) Cost of machine

720, 000 1, 168, 000:

PAS 16, paragraph 16; 17 Elements of cost The cost of an item of property, plant and equipment comprises: (a) its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates. (b) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. (c) the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period. Examples of directly attributable costs are: (a) costs of employee benefits (as defined in IAS 19 Employee Benefits) arising directly from the construction or acquisition of the item of property, plant and equipment;

(b) costs of site preparation; (c) initial delivery and handling costs; (d) installation and assembly costs; (e) costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition (such as samples produced when testing equipment); and (f) professional fees.

3. ANSWER: A Amount that should charged to expense when incurred in connection with the development of the patented machine. Research and development laboratory expenses

1,000,000

Wages paid for the employees’ work on the R&D and building of machine (1, 200,000 *40%) Development expense

480, 000 1, 480, 000

PAS 38, paragraph 54 and 57 Research phase No intangible asset arising from research (or from the research phase of an internal project) shall be recognised. Expenditure on research (or on the research phase of an internal project) shall be recognised as an expense when it is incurred

Development phase An intangible asset arising from development (or from the development phase of an internal project) shall be recognised if, and only if, an entity can demonstrate all of the following: (a) the technical feasibility of completing the intangible asset so that it will be available for use or sale. (b) its intention to complete the intangible asset and use or sell it. (c) its ability to use or sell the intangible asset.

(d) how the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset. (e) the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset. (f) its ability to measure reliably the expenditure attributable to the intangible asset during its development.

4. ANSWER: C Carrying amount of patent as of December 31, 2006 Solution: Cost of Patent (refer to no. 1) Less: Amortization (648,000 / 20)*2 Carrying amount

648, 000 64, 800 583, 200

PAS 38, paragraph 97 Amortization period and amortization method The depreciable amount of an intangible asset with a finite useful life shall be allocated on a systematic basis over its useful life. Amortisation shall begin when the asset is available for use, ie when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Amortisation shall cease at the earlier of the date that the asset is classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with IFRS 5 and the date that the asset is derecognised. The amortisation method used shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. If that pattern cannot be determined reliably, the straight-line method shall be used. The amortisation charge for each period shall be recognised in profit or loss unless this or another Standard permits or requires it to be included in the carrying amount of another asset.

5. ANSWER: D Evaluate the future revenue-producing capacity of the intangible asset PAS 38 Criteria for initial recognition

The previous version of IAS 38 required an intangible asset to be recognised if, and only if, it was probable that the expected future economic benefits attributable to the asset would flow to the entity, and its cost could be measured reliably. These recognition criteria have been included in the Standard. However, additional guidance has been included to clarify that: (a) the probability recognition criterion is always considered to be satisfied for intangible assets that are acquired separately or in a business combination. (b) the fair value of an intangible asset acquired in a business combination can be measured with sufficient reliability to be recognised separately from goodwill. Future economic benefits The future economic benefits flowing from an intangible asset may include revenue from the sale of products or services, cost savings, or other benefits resulting from the use of the asset by the entity. For example, the use of intellectual property in a production process may reduce future production costs rather than increase future revenues

Problem NO. 4 Transactions during 2005 of the newly organized Pink Corporation included the following: Jan. 2

15

Apr. 1

Paid legal fees of P150,000 and stock certificate costs of P83,000 to complete organization of the corporation. 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. Patented a newly developed process with costs as follows: Legal fees to obtain patent Patent application and licensing fees Total

P 429,000 63,500 P 492,500

It is estimated that in 6 years other companies will have developed improved processes, making the Pink 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 Pink 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 2008.

QUESTIONS: Based on the above and the result of your audit, determine the following: 1. Cost of patent a. P492,500

b. P429,000

c. P63,500

d. P0

2. Cost of licenses a. P150,000

b. P200,000

c. P100,000

d. P0

3. Cost of trademark a. P150,000 b. P200,000

c. P100,000

d. P0

4. Carrying amount of Intangible Assets a. P712,604 b. P2,477,604

c. P697,604

d. P0

5. Total amount resulting from the foregoing transactions that should be expensed when incurred. a. P4,100,500 b. P1,983,000 c. P1,998,000 d. P0

Solution and Explanation: 1. Answer: See journal entry for April 1

Journal Entries Jan. 2

Organization Expenses

P 233, 000

Cash 15

P 233, 000

Advertising Expenses

15, 000

Cash April 1

Patent

492, 500 Cash

May 1

15, 000

492, 500

License

200, 000

Trademark

100, 000

Cash

July 1

Building

300, 000

1, 310, 000

Cash

Dec. 31

1, 310, 000

Research and Development Expenses

1, 750, 000

Cash

1, 750, 000

2. Answer: See journal entry for April 1

3. Answer: See journal entry for April 1

4. Answer: C Cost: Patent License Trademark Less: Amortization for 2010 Patent (492, 500/6*[9/12]) License (200, 000/6*[8/12]) Trademark (100, 000/6*[8/12]) Carrying Amount, 12/31/10

492,500 200,000 100,000

61,562 22,222 11,111

792 500

(94,895) 697, 604

5. Answer: C Organization Expenses Advertising Expenses R and D Expenses Total

P 233,000 15,000 1,750,000 1, 998, 000

PAS 38 paragraph 21 to 22 provides a provision with regards to the recognition of Intangible assets. An intangible asset shall be recognized if, and only if: (a) it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and

(b) the cost of the asset can be measured reliably. An entity shall assess the probability of expected future economic benefits using reasonable and supportable assumptions that represent management’s best estimate of the set of economic conditions that will exist over the useful life of the asset.” In addition, par 119 of PAS 38 enumerated common examples of Intangible assets that entities recognizes: A class of intangible assets is a grouping of assets of a similar nature and use in an entity’s operations. Examples of separate classes may include: (a) brand names; (b) mastheads and publishing titles; (c) computer software; (d) licenses and franchises; (e) copyrights, patents and other industrial property rights, service and operating rights; (f) recipes, formulae, models, designs and prototypes; and (g) intangible assets under development. And according to paragraph 24 of PAS 38 “an intangible asset shall be measured initially at cost.” Using the cost model according to paragraph 74 of PAS 38“an intangible asset shall be carried at its cost less any accumulated amortization and any accumulated impairment losses.”

The treatment to research and development, according to paragraph 126 of PAS 38, which states the entity “shall disclose the aggregate amount of research and development expenditure recognised as an expense during the period.” Advertising and organization cost shall be part of the expenses according to paragraph 69(a)(c) of PAS38 which states that “(a) expenditure on start-up activities unless this expenditure is included in the cost of an item of property, plant and equipment in accordance with IAS 16;(c) expenditure on advertising and promotional activities” Problem NO. 5 Gilead Enterprise has been in the business for several years. A Trial balance prepared by the company,s staff accountant for December 31, 2016 is presented below. Banawe Company UNADJUSTED TRIAL BALANCE December 31, 2016

Debit Cash Accounts Receivable Inventory Equipment Accumulated Depreciation – Equipment Buildings Accumulated Depreciation – Buildings 400,000 Patents Franchise Agreements Intangible Asset- Software cost Goodwill Accounts Payable Accrued Wages Payable Accrued Taxes Payable 60,000 Bonds Payable 500,000 Premium on Bonds Payable Preference Shares (P100 par value) Ordinary Shares (P25 par value) 1,100,000 Share Premium 220,000 Accumulated Profits (as of Janouary 1) 1,458,000 Sales revenue Cost of Goods Sold Selling and General Administrative Expense

Credit

20,000 50,000 120,000 800,000 250,000 1,200,000

550,000 95,000 1,160,000 345,000 12,000 5,000

35,000 100,000

900,000 400,000 5,040,000

300,000 5,040,000

Before 2016, Gilead Enterprises prepared financial statements internally, the company has not been audited because the ownership is held completely by one family and is not actively sold. As of 2016, however, in anticipation of bank loans and possible offering of common stock, the company needs audited financial statements prepared in conformity with generally accepted accounting principles. As a member of the team of independent auditors responsible for Gilead Enterprises, you have been assigned the intangible assets. You have observed that four intangible asset accounts appear on the unadjusted trial balance. Additional investigation reveals the following:

Patents: All patents were purchase from another company when Gilead Enterprises began operations on January 2, 2009. These patents are being amortized over an expected useful life of 14 years. Improvements made to equipment covered by the patent costing P75,000 was debited to the account in January 2013. Amortization in 2013-2015 included amortization on the P75,000 for the remaining life of the relevant patent. It is determined that the P75,000 should have been expensed in 2013. It is further determined on January 1, 2016, that one of the patents has a remaining life of only 2 years. This patent was originally assigned a cost of P210,000. Franchise Agreements: A franchise agreement was signed on January 1,2016. A P50,000 fee was paid, covering a 5-year period, at the end of which the company may renew the agreement by paying P50,000. A decision on renewal has not been made as of December 31, 2016. The agreement calls for an annual payment of 5% of its sales revenue. An entry debiting the account for P45,000 was made at the time of the cash payment for 2016.

Software Costs: During 2016 Gilea,d incurred cost to develop and produce routine, low risk computer software product as follows: Completion of total program design 130,000 Cost incurred for coding and testing to establish technological feasibility 100,000 Other coding cost after establishment of technological feasibility 240,000 Other testing cost after establishment of technological feasibility 200,000 Cost to product master 150,000 Duplication of computer software and training materials from product master (1,000 units) 250,000 Packaging product( 500 units) 90,000 P1,160,000 Goodwill The goodwill account includes Three Items: •

Legal expenses relative to incorporation. These were assigned to the account in January 2008.

•

45,000

Excess of cost over assigned net asset values of an enterprise acquired on early 2014 expected to be of value for an indefinite period 200,000 • Paid to an advertising consulting firm in early 2015 for a major advertising effort expected to be beneficial for an indefinite period. 100,000 No amortization has been taken on any amount in taken on any amount in the Goodwill account Questions: 1. Carrying value of the Patents on December 31, 2016

A. P388,929 B. P445,000

C.P441,429 D.510,714

2. Carrying value of the Franchise Agreement on December 31, 2016 A. P40,000 C.P76,000 B. P50,000 D.95,000 3. Carrying value of the Goodwill on December 31, 2016 A. P200,000 B. P300,000 4. Correct software cost. A. P590,000 B. P1,100,000

C.P345,000 D. Nil C.P680,000 D. 930,000

5. Total Costs incurred in the software that should be charge to expense in 2016. A. P230,000 C.P470,000 B. P320,000 D. 670,000 6. Total Amortization in 2016 A. P56,071 B. P108,571

C.P118,571 D. Nil

Solution and Explanation 1. Answer: A Carrying Value of the Patent 1/1/16 Unamortized Balance of P225,000 (225k x 7/10) Correct amount of amortized patent 2 Years patent Remaining Patent Carrying Value of the Patent 12/31/16

550,000 (52,500) 497,500 (52,500)* (56,071)** 388,929

*497,500 X 210/995 = 105,000÷2=52,500 **497,500-105,000 = 392,500÷7 =56,071 According to PAS 38 paragraph 74 When using the cost model for the initial measurement of the intangible assets, the subsequent recognition shall be carried at its cost less any accumulated amortization and any accumulated impairment losses. 2. Answer: A Carrying value of Franchise Agreements, 1/1/16

95,000

Debit Error of 5% revenue

45,000

Actual Carrying Value of Franchise Agreements

50,000

Amortization Expense of Franchise Agreements

10,000

Carrying value of Franchise Agreements, 12/31/16

40,000

According to PAS 38 the subsequent recognition of intangible assets shall be carried at its cost less any accumulated amortization and any accumulated impairment losses over its remaining expected life.

3. Answer: A

Carrying value of Goodwill, 1/1/16

345,000

Legal Expenses

(45,000)

Advertising Expense

(100,000)

Carrying value of Goodwill, 12/31/16

200,000

According to PAS 38 paragraph 48, internally generated goodwill is not recognized as an asset. It was also stated in PFRS 3 paragraph 32 that the acquirer shall recognize goodwill if there is an excess of consideration over the fair value of identifiable assets. 4. Answer: A Other coding cost after establishment of technological feasibility 240,000 Other testing cost after establishment of technological feasibility 200,000 Cost to product master 150,000 590,000 5. Answer: A Completion of total program design Cost incurred for coding and testing to establish technological feasibility

130,000 the 100,000 230,000

PAS 38 stated that the cost incurred in generating a software product shall be charge to expense when incurred until a technical feasibility has been established for the product. Actually, this is the research stage where there is so much uncertainty about the future economic benefits. Hence, research costs shall be expense outright. After technological feasibility has been established, capitalized software costs include the cost of coding and testing and the cost to produce the masters. The costs incurred to actually produce the software from masters and package the software for sale shall be charged toInventory.

6. Answer: C Amortization of patent see N0. 1 solution 2 Years patent

52,500

Remaining Patent

56,071

Total Add: Amortization of franchise (50,0000/5) Total amortization

108,571 10,000 118,571

According to PAS 38 the subsequent recognition of intangible assets shall be carried at its cost less any accumulated amortization and any accumulated impairment losses over its remaining expected life. PROBLEM NO. 6 On January 1, 2015, Lester Co. revalued its machinery with a cost of P9,000,000 acquired 5 years ago with an estimated useful life of 20 years and has been estimated to have a replacement cost of P20,000,000. The machinery is estimated to have a remaining useful life of 25 years as of January 1, 2015. On January 2, 2017, the machinery was sold at a net proceeds of P15, 000,000. QUESTIONS: Based on the above data, answer the following: 1. How much is the revaluation surplus on January 1, 2015? a. P8,250,000 b. P11,000,000 c. P2,750,000

d. P5000,000

2. How much is the depreciation expense in 2015? a. P337,500 b. P600,000 c. P1,650,000

d. P750,000

3. How much is the revaluation surplus at the end of 2015? a. P8,250,000 b. P7,920,000 c. P6,600,000

d. P10,662,500

4. How much is the gain (or loss) on sale of machinery in 2017? a. P1200,000 b. P11,400,000 c. P(5000,000)

d. Nil

5. How much is the total revaluation surplus to be closed to retained earnings in 2017? a. P7,590,000 b. Nil c. P10,266,667 d. P8,250,000

Solution and Explanation: 1. Answer: A Cost Machinery Accumulated Depreciation CA/SV/RS

100% P9,000,000 25% 75%

Replacement Cost P20,000,000

2,250,000 6,750,000

5,000,000 15,000,000

Appreciation 11,000,000 2,750,000 8,250,000

Base in IAS 16 Paragraph 39 If an asset’s carrying amount is increased as a result of a revaluation; the increase shall be recognized in other comprehensive income and accumulated in equity under the heading of revaluation surplus. However, the increase shall be recognized in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognized in profit or loss. 2. Answer: B Sound value New remaining useful life Depreciation for 2015

15,000,000 ÷ 25years 600,000

Base in IAS 16 Paragraph 39 If an asset’s carrying amount is increased as a result of a revaluation; the increase shall be recognized in other comprehensive income and accumulated in equity under the heading of revaluation surplus. However, the increase shall be recognized in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognized in profit or loss.

3. Answer: B Revaluation surplus Less: Realization in 2015(8,250,000/25yrs) Revaluation surplus end 2015

8,250,000 ( 330,000) 7,920,000

As a matter of procedure, the carrying amount, sound value, and revaluation surplus shall be allocated over the remaining useful life of an asset.C.Valix(2015) 4. Answer: A Net proceeds Less: CA Gain on sale

15,000,000 13,800,000 1,200,000

PAS 16 par.68 stated that the gain or loss arising from the derecognition of an item of property, plant and equipment shall be included in profit or loss when the item is derecognised (unless PAS 17 requires otherwise on a sale and leaseback). Gains shall not be classified as revenue.

5. Answer: A Beginning revaluation surplus Less: Realization for 2 years (2015 & 2016) Revaluation surplus to be close to RE

8,250,000 660,000 7,590,000

PAS 16 par. 41 The revaluation surplus included in equity in respect of an item of property, plant and equipment may be transferred directly to retained earnings when the a sset is derecognised. This may involve transferring the whole of the surplus when the asset is retired or disposedof. However, some of the surplus may be transferred as the asset is used by an entity. In such a case, the amount of the surplus transferred would be the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on the asset’s original cost. Transfers from revaluation surplus to retained earnings are not made through profit or loss.

PROBLEM NO.7 On January 1, 2007, RHAD Company acquired two classes of property, plant, and equipment. Data relating to the asset follow: Classes

Useful Life

Cost

Machinery Office Equipment

5 years 4 years

2,000,000 1,000,000

Methods of Depreciation Straight line Straight line

The company uses the cost model for the machinery and revaluation model for the office equipment. On January 1, 2008, the following are the recoverable amounts (fair values) of the assets: Recoverable Amount Machinery

1,800,000

Office Equipment

996,000

On January 1, 2009, the following are the recoverable amounts (fair values) of the assets: Recoverable Amount Machinery

1,000,000

Office Equipment

494,000

QUESTIONS: Based on the above data, compute the following: 1. The total depreciation in 2007?

a. P650,000

b. P732,000

c. P400,000

d. P782,000

2. The total revaluation surplus on January 1, 2008? a. P446,000 b. P246,000 c. P200,000

d. P0

3. The total depreciation in 2008? a. P650,000 b. P732,000

d. P782,000

c. P400,000

4. The total impairment loss in the income statement in 2009? a. P450,000 b. P206,000 c. P520,000

d. P370,000

5. How much is the total revaluation surplus to be closed to retained earnings in 2017? a. P0 b. P170,000 c. P150,000 d. P144,000 1. A Depreciation in 2017: Machinery 2,000,000÷ 5yrs Office equipment 1,000,000÷ 4yrs Total Depreciation

400,000 250,000 650,000

IAS 16 paragraph 43 &50 states thateach part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately and the depreciable amount of an asset shall be allocated on a systematic basis over its useful life.

2. B Office Equipment using revaluation model: Recoverable amount Carrying amount Revaluation surplus

996,000 750,000 246,000

Base in PAS 16 Paragraph 39 If an asset’s carrying amount is increased as a result of a revaluation; the increase shall be recognized in other comprehensive income and accumulated in equity under the heading of revaluation surplus. However, the increase shall be recognized in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognized in profit or loss. In this case only the appreciation on office equipment is recognize as revaluation surplus because it’s using revaluation model. On the other hand machinery which is using cost model shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses according to PAS 16 paragraph 30. 3.B Depreciation: Machinery 2,000,000/5yrs Office equipment 996,000/ 3years Total depreciation for 2008

400,000 332,000 732,000

According to PAS 16 paragraph 35, when an item of property, plant and equipment is revalued, any accumulated depreciation at the date of the revaluation is treated in one of the following ways: (a)restated proportionately with the change in the gross carrying amount of the asset so that the carrying amount of the asset after revaluation equals its revalued amount. This method is often used when an asset is revalued by means of applying an index to determine its depreciated replacement cost. (b)Eliminated against the gross carrying amount of the asset and the net amount restated to the revalued amount of the asset. This method is often used for buildings. The amount of the adjustment arising on the restatement or elimination of accumulated depreciation forms part of the. 4. B Impairment Loss: Impairment of Office Equipment (CA of P664,000 less RA of P494,000)

170,000

Less: Unrealized Revaluation surplus (246,000-(246,000/3yrs)) Net impairment loss on OE

(164,000) 6,000

Add: Impairment of Machinery (CA of 1,200,000 less RA of 1,000,000) Total impairment loss

200,000 206,000

CA- Carrying Amount RA- Recoverable amount 40 If an asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in profit or loss. However, the decrease shall be recognized in other comprehensive income to the extent of any credit balance existing in the revaluation surplus in respect of that asset. The decrease recognized in other comprehensive income reduces the amount accumulated in equity under the heading of revaluation surplus. In addition, according to Pas 36 an impairment loss on revalued asset is recognized directly against any revaluation surplus related to the asset and excess recognized as profit or loss. 5. Answer: A Revaluation surplus= 0 Refer to number 4.

PROBLEM NO. 8 On January 1, 2007, REX Company acquired two classes of property, plant, and equipmen. Data relating to the asset follow: Classes

Useful Life

Cost

Machinery Office Equipment

5 years 4 years

4,000,000 2,000,000

Methods of Depreciation Straight line Straight line

The company uses the cost model for the machinery and revaluation model for the office equipment. On January 1, 2008, the following are the recoverable amounts (fair values) of the assets: Recoverable Amount Machinery

2,800,000

Office Equipment

1,200,000

On January 1, 2009, the following are the recoverable amounts (fair values) of the assets: Recoverable Amount Machinery

2,600,000

Office Equipment

1,400,000

QUESTIONS: Based on the above data, compute the following:

1. The total depreciation in 2007? a. P400,000 b. P800,000

c. P1,300,000

d. P1,100,000

2. The total impairment loss in the income statement 2008? a. P400,000 b. P300,000 c. P700,000

d. P0

3. The total depreciation in 2008? a. P400,000 b. P800,000

d. P1,100,000

c. P1,300,000

4. Gain on impairment recovery in the income statement in 2009? a. P900,000 b. P500,000 c. P1,100,000 d. P1,200,000 5. Revaluation surplus in 2009?

a. P0

b. P200,000

c. P400,000

d. P600,000

Solution and Explanation: 1. Answer: C Machinery (4,000,000/5)

800, 000

Office Equipment (2,000,000/4)

500, 000

Total Depreciation Expense 2007

1,300,000

2. Answer: C Machinery (3,200,000-2,800,000)

400,000

Office Equipment (1,500,000-1,200,000)

300,000

Total Impairment loss 2008

700,000

3. Answer: D Machinery (2,800,000/4)

700,000

Office Equipment (1,200,000/3)

400,000

Total Depreciation Expense 2008

1,100,000

4. Answer: B Machinery (2,600,000-2,100,000)

500,000

5. Answer: C Office Equipment fair value 1/1/2009

1,400,000

Less: Office Equipment carrying amount 2009 Office Equipment

2,000,000

Less: Depreciation for 2007 and 2008

1,000,000

Carrying Amount

1,000,000

Revaluation surplus in 2009

400,000

PAS 16 Property, Plant and Equipment Depreciation Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately. Depreciable amount and depreciation period The depreciable amount of an asset shall be allocated on a systematic basis over its useful life. The residual value and the useful life of an asset shall be reviewed at least at each financial year- end and, if expectations differ from previous estimates, the change(s) shall be accounted for as a change in an accounting estimate in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors PAS 36 Impairment of Assets An entity shall assess at the end of each reporting period whether there is any indication that an asset may be impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset. An impairment loss is the amount by which the carrying amount of an asset or a cashgenerating unit exceeds its recoverable amount. PAS 16 Property, Plant and Equipment Revaluation model After recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period.

PROBLEM NO. 9 On December 31, 2006, NOEMI subjected to impairment test a piece of equipment which was acquired on January 1, 2005. Data pertinent to the equipment as of December 31, 2006 follow: Original Cost

P1,200,000

Depreciation in 2005

400,000

Depreciation in 2006

320,000

Adjusted Accumulated depreciation

720,000

Selling price

600,000

Estimated cost to make the sale

267,000

Value-in-use

300,000

Method of Depreciation

Sum of the years’s digits

On December 31, 2007, the asset is found to have a recoverable amount of P1,000,000 1. What is the sum of the years digits that was used in the computation of Depreciation in 2005 and 2006? 5/15 2. How much loss on impairment is recognized in 2006? 147,000 3. How much is the depreciation expense recognized in 2007? 166,500 4. How much gain on recovery is recognized in 2007? 73,500 5. How much is the depreciation expense recognized in 2008 under the cost model? 160,000 6. How much is the depreciation expense recognized in 2008 under the revaluation model? 666,667

Solution and Explanation: 1. Answer: 5/15 2𝑥 1200 ( ) = 400 𝑥 + 𝑥2 2400𝑥 + 400 𝑥 + 𝑥2 2400𝑥 = 400𝑥 + 400𝑥 2 2000𝑥 400𝑥 2 = 400𝑥 400𝑥 5=𝑥

X= 5 5 + 4 + 3 + 2 + 1 = 15 2005=

5 15

2006=

4 15

2. Answer: 147,000 Carrying amount (1,200,000-720,000)

480,000

Less: Recoverable amount (600,000-267,000)

333,000

Impairment Loss 2006

147,000

3. Answer: 166,500 Carrying amount

333,000 3 6

Multiply by SYD rate Depreciation Expense 2007

166,500

4. Answer: 73,500 Carrying amount at cost model

240,000

Less: Carrying amount at revaluation model

166,500

Gain on Recovery

73, 500

5. Answer: 160,000 Particular

Depreciation

Accumulated depreciation

Carrying amount

5 15 4 15 3 15 2 15 1 15

x 1,200,000

400,000

400,000

1,200,000 800,000

x 1,200,000

320,000

720,000

480,000

x 1,200,000

240,000

960,000

240,000

x 1,200,000

160,000

1,120,000

80,000

x 1,200,000

80,000

1,200,000

0

6. Answer: 666,667 How much is the depreciation expense recognized in 2008 under the revaluation model?

Recoverable amount 2007

1,000,000 3 6

Multiply by Depreciation expense 2008

666,667

: Sum of the years digits method provides for depreciation that is computed by multiplying the depreciable amount by a series of fractions whose numerator is the digit in the useful life of the asset and whose denominator is the sum of the digits in the useful life of the asset. PAS 16 Property, Plant and Equipment Cost model After recognition as an asset, an item of property, plant and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses. Revaluation model After recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period.

PROBLEM NO. 10 The Terran Company Acquired several small companies at the end of 2008 and, based on the acquisitions, reported the following intangibles in its December 31, 2008 statement of financial position: Patent Copyright Tradename Computer software Goodwill

200,000 400,000 350,000 100,000 900,000

The company’s accountant determines 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 tradename for the foreseeable future. The accountant knows that the computer software will be used in 120 offices: 60 offices in 2009, and expects to replace the software in 40 more offices in 2010 and the remainder in 2011. On December 31, 2009, there are no indications of impairment of patent and computer software. The following information relates to the other intangibles: a. Because of the rampant piracy, the copyright is expected to generate cash flows of just P8,000 per year. b. The tradename is expected to generate cash flows of P15,000 per year. c. The goodwill is associated with Terran’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 P3000,000. QUESTIONS: Based on the above data, compute the following: 1. Total amortization of Intangible assets in 2009? a. P70,000 b. P88,750 c. P107,500

d. P20,000

2. Total impairment loss in 2009? a. P452,470 b. P530,280

c. P471,220

d. P433,720

3. Carrying amount of goodwill on December 31, 2009? a. P400,000 b. P718,780 c. P855,000

d. P659,720

4. Carrying amount of other intangibles assets on December 31, 2009? a. P690,000 b. P980,000 c. P640,000 d. P706,667 Solutions:

1. Answer: A Patent (200,000/10) Computer Software (100,000 x 60/120) Total Amortization

20,000 50,000 70,000

According to PAS 38, paragraph 97, the depreciable amount of an intangible asset with a finite useful life shall be allocated on a systematic basis over its useful life. Amortization shall begin

when the asset is available for use, ie when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Trade name and copy rights are not amortized because it is stated in PAS 38, paragraph 107, that an intangible asset with an indefinite useful life shall not be amortized. 2. Answer: C Copy right 400,000- (8,000/5%) Trade name 350,000- (15,000/5%) Goodwill 3,000,000- (14.0939 x 200,000) Total impairment loss

240,000 50,000 181,220 471,220

As stated in PAS 38, paragraph 107 and 108, an intangible asset with an indefinite useful life shall not be amortized. In accordance with IAS 36, an entity is required to test an intangible asset with an indefinite useful life for impairment by comparing its recoverable amount with its carrying amount (a) annually, and (b) whenever there is an indication that the intangible asset may be impaired.

3. Answer: B Carrying value before impairment Impairment loss Carrying Value

900,000 (181,220) 718,780

Under PAS 38, paragraph 107, An intangible asset with an indefinite useful life shall not be amortized. In accordance with IAS 36, an entity is required to test an intangible asset with an indefinite useful life for impairment by comparing its recoverable amount with its carrying amount (a) annually, and (b) whenever there is an indication that the intangible asset may be impaired. 4. Answer: A Patent (200,000 – 20,000 ) Computer software (100,000 – 50,000 ) Trade name (350,000 – 50,000)

180,000 50,000 300,000

Copy right (400,000 – 240,000) Total carrying amount of Intangibles

160,000 690,000

Good will is not recognized as part of intangible assets because it is defined as “unidentifiable” for it cannot be sold, transferred, licensed, rented or exchange separately. The Standard states that an asset meets the identifiability criterion in the definition of an intangible asset when it: (a) is separable, ie capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, asset or liability; or (b) arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations. The new carrying value of the intangible assets at the end of the period is the difference between its original amount less the amortization or impairment loss recognized for the year.

PROBLEM NO.11 On December 31, 2004, Silver 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.

•

Goodwill for P1,500,000. The goodwill is associated with Silver s Hayo Manufacturing reporting unit.

•

A customer list for P220,000. By contract, Silver 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, 2005, 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 Hayo 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 Hayo Manufacturing reporting unit are as follows:

Book values

Fair values

P2,700,000

P3,000,000

Goodwill

1,500,000

?

Liabilities

1,800,000

1,800,000

Identifiable assets

c) The cash flows expected to be generated by the customer list are P120,000 in 2006 and P80,000 in 2007. 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 2005 a. P73,333 b. P141,515

c. P116,190

d. P86,857

2. Impairment loss for the year 2005 a. P90,476 b. P133,333

c. P179,584

d. P0

3. Carrying value of Trademark as of December 31, 2005 a. P300,000 b. P257,143 c. P166,667

d. P120,416

4. Carrying value of Goodwill as of December 31, 2005 a. P1,500,000 b. P1,431,818 c. P1,425,000

d. P1,462,500

5. Carrying value of Customer list as of December 31, 2005 a. P220,000 b. P146,667 c. P176,000

d. P0

Solution and Explanation: 1. Answer: A Trademark* Goodwill* Customer list (P220,000/3) Total Amortization

73,333 73,333

An intangible asset with an indefinite useful life shall not be amortized. (PAS 38, par 107) Hence, the Trademark and Goodwill were not amortized.

2. Answer: B Trademark: Carrying value Recoverable amount (P10,000/0.06) 166,667 Goodwill*: Customer list*:

300,000 133,333 -000000

Total Impairment Loss

133,333

An asset is impaired when its carrying amount exceeds its recoverable amount. (PAS 36, par 8) If it is not possible to determine the fair value less costs to sell because there is no basis for making a reliable estimate of the amount obtainable from the sale of the asset in an arm’s length transaction between knowledgeable and willing parties, the entity may use the asset’s value in use as its recoverable amount. (PAS 36, par 20) 3. Answer: C Cost Less: Impairment Loss Carrying value, 12/31/08

300,000 133,333 166,667

4. Answer: A Since goodwill is not amortized and is not impaired as of 12/31/08, the carrying value is still P1,500,000. 5. Answer: B Cost 220,000 Less: Amortization for 2008 73,333 Carrying value, 12/31/08 146,667 An entity shall choose either the cost model in paragraph 74 or the revaluation model in paragraph 75 as its accounting policy. (PAS 38, par 72) In the cost model: After initial recognition, an intangible asset shall be carried at its cost less any accumulated amortisation and any accumulated impairment losses. (PAS 38, par 74) In the revaluation model: After initial recognition, an intangible asset shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated amortisation and any subsequent accumulated impairment losses. (PAS 38, par 75)

PROBLEM NO.12 On January 1, 2016, Onin Co. decided to sell a machinery with a cost of 1200,000 and accumulated depreciation of 480,000. Depreciation of P10,000 per month has been provided by the company since it was acquired. The machinery will continue to be operated until sold. The company undertook all the necessary actions to be able to classify the asset as held for sale. On the same date, The fair value of asset amounted to 620,000 while the costs to sell total P20,000.

On February 28, 2016, the plant had not been sold but there has been objective evidence that the fair value went up to P810,000. On July, 1, 2016, Onin Co. sold the machinery for P8,00,000 after incurring selling costs of P50,000. QUESTIONS: Based on the above data, compute the following:

1. How much is the impairment loss to be recognized on January 1, 2016? a. Nil b. P100,000 c. P120,000 d. P500,000 2. How much is the depreciation expense in 2016? a. Nil b. P20,000 c. P60,000

d. P120,000

3. How much is the gain to be recognized in profit or loss in 2016 asa result of increase in the fair value of the asset? a. Nil b. P30,000 c. P120,000 d. P190,000 4.How much is the net gain (or loss) on sale of the asset in 2016? a. Nil b. P30,000 c. P120,000 d. P190,000 5. Carrying amount of other intangibles assets on December 31, 2009? a. P690,000 b. P980,000 c. P640,000 d. P706,667

Solution and Explanation: 1. Answer: C Cost of Machinery Less: Acc. Depreciation, 1/1/16 Carrying Amount, 1/1/16 Less: FV less costs to sell, 1/1/16 (620,000-20,000)

1,200,000 480,000 720,000 600,000

Impairment Loss

120,000

An entity shall measure a noncurrent asset classified as held for sale at the lower of its carrying amount and fair value less costs to sell. (PFRS 5, par 15) An entity shall recognize an impairment loss for any initial or subsequent write-down of the asset to fair value less costs to sell. (PFRS 5, par 20)

2. Answer: A Nil or Zero An entity shall not depreciate a noncurrent asset while it is classified as held for sale. (PFRS 5, par. 25)

3. Answer: C Fair Value less costs to sell, 2/28/16 (810,000 – 20,000) 790,000 FV less costs to sell, 1/1/16 (620,000-20,000) 600,000 Increase in FV less costs to sell 190,000 Impairment loss recognized (limit)

120,000

Gain to be recognized 120,000 An entity shall recognize a gain for any subsequent increase in fair value less costs to sell of an asset, but not in excess of the cumulative impairment loss that has been recognized either in accordance with PFRS 5 or previously in accordance with PAS 36. (PFRS 5, par 21)

4. Answer: B Net sales proceeds (800,000 – 50,000) 750,000 Carrying Amount after the reversal of Impairment Loss (600,000 – 120,000) (720,000) Gain on Sale 30,000 The gain or loss arising from the derecognition of an item of property, plant and equipment shall be determined as the difference between the net disposal proceeds, if any, and the carrying amount of the item. (PAS 16, par 71)

5. Answer: A Nil or Zero

Since the fair value less costs of disposal is greater than the carrying amount at the date of reclassification, there is no impairment loss to be recognized. An entity shall recognise an impairment loss for any initial or subsequent write-down of the asset (or disposal group) to fair value less costs to sell, to the extent that it has not been recognised in accordance with paragraph 19. (PFRS 5, par 20) An entity shall recognise a gain for any subsequent increase in fair value less costs to sell of an asset, but not in excess of the cumulative impairment loss that has been recognised either in accordance with this IFRS or previously in accordance with PAS 36. (PFRS 5, par 21)

PROBLEM NO.13 The following balances have been extracted from the nominal ledger of Athena Co. at September 30, 2016 Land at cost Plant and machinery (Note 1) -cost -Accumulated depreciation at September 30, 2015 Freehold buildings (Note 2) -valuation -accumulated depreciation at September 30, 2015

400,000 385,000 144,375 1,644,000 192,000

The following additional information is available: • On April 1, 2016, Athena Co. decided to sell one of its machines which had a carrying amount of P8,200 on September 30, 2015. On April 1, 2016, the machine had a fair value of P6,500 and met the “held for sale” criteria of PFRS 5, Non-current Assets Held for Sale and Discontinued Operations. The machine was still held by Athena Co. at the year end, although a buyer had been found. No adjustment to the above balances has been made in respect of this machine. There have been no other changes to plant and machinery in the current year. Plant and machinery is depreciated using the reducing balance method at a rate of 20% pa. •

Athena Co. carries its freehold buildings ( Property A and Property B) under the revaluation method. The latest revaluations were on October 1, 2015 but these have not yet been reflected in the above balances. The following information is available with regard to these properties:

Date of purchase Useful life at purchase Cost Revaluation surplus at September 30, 2015 Carrying amount at

Property A October 1, 2006 40 years P400,000 P62,000

Property B October 1, 1995 50 years P1000,000 P456,000

P372,000

P1,080,000

September 30, 2015 Valuation at October 1, 2015

P449,500

P600,000

The useful lives of both properties are unchanged. Where possible, Athena Co. makes an annual transfer between the revaluation surplus and retained earnings in accordance with best practice. QUESTIONS: Based on the above data, compute the following: 1. Depreciation expense for the plant and machinery for the year ended September 30, 2016? a. P46,805 b. P47,305 c. P48,125 d. P77,000 2. Carrying amount of the plant and machinery for the year ended September 30, 2016? a. P185,940 b. P192,500 c. P194,140 d. P185,120 3. Carrying amount of the property A for the year ended September 30, 2016? a. P449,500 b. P435,000 c. P372,000 d. P600,000 4. Carrying amount of the property B for the year ended September 30, 2016?? a. P480,000 b. P580,000 c. P600,000 d. P1,080,000 5. Total impairment loss to be recognized during the year ended September 30, 2016? a. 1,700 b. P24,000 c. P24,880 d. P77,500 6. Total revaluation surplus to be closed to retained earnings during the year ended September 30, 2016? a. Nil b. P880 c. P3,620 d. P4,500 1. Answer: B Carrying Amount of Plant & Machinery, 9/30/15 (385,000 – 144,375) Carrying Amount of asset held for sale Carrying amount of remaining Plant & Machinery Depreciation of remaining Plant & Machinery Carrying Amount of asset held for sale, 9/30/15

240,625 8,200 232,425 × 20%

46,485

8,200 × 20% 1,640 × 6/12

Depreciation of remaining asset held for sale 820 Depreciation Expense for 9/30/16 47,305 The depreciable amount of an asset shall be allocated on a systematic basis over its useful life. (PAS 16, par 50) Depreciation of an asset begins when it is available for use, ie when it is in the location and condition necessary for it to be capable of operating in the manner intended by

management. Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with IFRS 5 and the date that the asset is derecognised. Therefore, depreciation does not cease when the asset becomes idle or is retired from active use unless the asset is fully depreciated. However, under usage methods of depreciation the depreciation charge can be zero while there is no production. (PAS 16, par 55) An entity shall not depreciate (or amortise) a non-current asset while it is classified as held for sale or while it is part of a disposal group classified as held for sale. Interest and other expenses attributable to the liabilities of a disposal group classified as held for sale shall continue to be recognised. (PFRS 5, par 25)

2. Answer: A Carrying amount of remaining Plant & Machinery 232,425 Less: Depreciation for 9/30/16 46,485 Carrying Amount of Plant & Machinery 9/30/16 185,940 Carrying amount is the amount at which an asset is recognised after deducting any accumulated depreciation and accumulated impairment losses. (PAS 16, par 6)

3. Answer: B* Carrying Amount of A @ 10/1/15 Annual Depreciation (449,500/31 years) Carrying Amount of A @ 9/30/16

449,500 14,500 435,000

4. Answer: B* Carrying Amount of B @ 10/1/15 600,000 Annual Depreciation (600,000/30 years) 20,000 Carrying Amount of B @ 9/30/16 580,000 *After recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period. (PAS 16, par 31)

5. Answer: C 6. Answer: D

THEORY QUESTIONS 1. The most effective means for the auditor to determine whether a recorded intangible asset possesses the characteristic of an asset is a. Vouch the purchase by reference to underlying documentation. b. Inquire as to the status of patent application. c. Evaluate the future revenue-producing capacity of the intangible asset. d. Analyze the research and development expenditures to determine that only those expenditures possessing future economic benefit have been capitalized. 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 and allocation b. Existence c. Completeness d. Rights and Obligations 3. Assuming NL has capitalized all research and development cost associated with patent, Jon, CPA, who is examining this account will probably a. Confer with management regarding the transfer of the amount from the balance sheet to the income statement b. Confirm that the patent is registered and on the file with the intellectual property office c. Confer with management regarding a change in the title of the account to “goodwill” d. Confer with management regarding ownership of the patent 4. 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 employment 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 b. False; False c. True;False d. True;True 5. Which of the following comparisons would be most appropriate audit test for the amount of recorded goodwill? a. The purchase price and the book value of assets purchased. b. The purchase price and the fair value of the asset purchased. c. The figure for goodwill specified in the contract of purchase. d. Earnings in excess of 5% of net assets for the past five years. 6. In verifying the amount of goodwill recorded by a client, the most convincing evidence an auditor can obtain is by comparing the recorded value of asset acquired with 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.

7. A corporate balance sheet indicates that one of the corporate assets is a patent. An auditor will most likely obtain evidence regarding the continuity validity and existence of this patent by obtaining a written representation from a. A patent attorney b. The patent advisor c. The SEC d. The patent owner 8. In testing the existence assertion for an intangible asset, an auditor would probably rely on: a. Observation b. Recomputation c. Vouching d. Analytical Review 9. When the auditor wants to test the asset for impairment, the auditor would most likely be concerned with the recoverable amount of an intangible asset. For this purpose, recoverable amount of an intangible asset is: a. Fair value less cost to sell b. Value in use c. Fair value less cost to sell or value in use, whichever is lower d. Fair value less cost to sell or value in use, whichever is higher 10. An auditor, examining intangible assets would most likely take exception to the capitalization of the cost of: a. Website development b. Software development c. Licensing a patent d. Goodwill in a business combination

Solutions and Explanations 1. Answer: C PAS 38 Criteria for initial recognition 2. Answer: A Assertions about valuation and allocation deal with whether assets, liabilities, and equity interests have been included in the financial statements at appropriate amounts. Recalculation of the amortization and review of the amortization period would test the valuation and allocation assertion.

3. Answer: A The cost of an internally generated intangible asset comprises all directly attributable costs necessary to create, produce, and prepare the asset to be capable of operating in the manner intended by management. (PAS 38, par 66) Research and development activities are directed to the development of knowledge. Therefore, although these activities may result in an asset with physical substance (eg a prototype), the physical element of the asset is secondary to its intangible component, ie the knowledge embodied in it. (PAS 38, par 5) 4. Answer: D The acquirer shall recognise goodwill as of the acquisition date measured as the excess of (a) over (b): (a) the aggregate of: (i) the consideration transferred measured in accordance with this IFRS, which generally requires acquisition-date fair value; (ii) the amount of any non-controlling interest in the acquiree measured in accordance with this IFRS; and (iii) in a business combination achieved in stages, the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree. (b) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured in accordance with this IFRS. (PFRS 3, par 32)

Goodwill recognised in a business combination is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognised. The future economic benefits may result from synergy between the identifiable assets acquired or from assets that, individually, do not qualify for recognition in the financial statements. (PAS 38, par 11) 5. Answer: B The acquirer shall recognise goodwill as of the acquisition date measured as the excess of (a) over (b): (a) the aggregate of: (i) the consideration transferred measured in accordance with this IFRS, which generally requires acquisition-date fair value;(ii) the amount of any non-controlling interest in the acquiree measured in accordance with this IFRS; and (iii) in a business combination achieved in stages, the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree. (b) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured in accordance with this IFRS. (PFRS 3, par 32)

6. Answer: D Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (ie an exit price) regardless of whether that price is directly observable or estimated using another valuation technique. (PFRS 13, par 24)

7. Answer: A Explanation: PSA 580, paragraph 3 Written Representations as Audit Evidence Audit evidence is all the information used by the auditor in arriving at the conclusions on which the audit opinion is based. Written representations are necessary information that the auditor requires in connection with the audit of the entity’s financial statements. Accordingly, similar to responses to inquiries, written representations are audit evidence. PSA 580, paragraph A4 to A7 Management from whom Written Representations Requested Written representations are requested from those responsible for the preparation and presentation of the financial statements. Those individuals may vary depending on the governance structure of the entity, and relevant law or regulation; however, management (rather than those charged with governance) is often the responsible party. Written representations may therefore be requested from the entity’s chief executive officer and chieffinancial officer, or other equivalent persons in entities that do not use such titles. In some circumstances, however, other parties, such as those charged with governance, are also responsible for the preparation and presentation of the financial statements. Due to its responsibility for the preparation and presentation of the financial statements, and its responsibilities for the conduct of the entity’s business, management would be expected to have sufficient knowledge of the process followed by the entity in preparing and presenting the financial statements and the assertions therein on which to base the written representations. In some cases, however, management may decide to make inquiries of others who participate in preparing and presenting the financial statements and assertions therein, including individuals who have specialized knowledge relating to the matters about which written representations are requested. Such individuals may include: • An actuary responsible for actuarially determined accounting measurements. • Staff engineers who may have responsibility for and specialized knowledge about environmental liability measurements. • Internal counsel who may provide information essential to provisions for legal claims.

In some cases, management may include in the written representations qualifying language to the effect that representations are made to the best of its knowledge and belief. It is reasonable for the auditor to accept such wording if the auditor is satisfied that the representations are being made by those with appropriate responsibilities and knowledge of the matters included in the representations.

8. Answer: C PSA 500, paragraph A14: A15 Inspection Inspection involves examining records or documents, whether internal or external, in paper form, electronic form, or other media, or a physical examination of an asset. Inspection of records and documents provides audit evidence of varying degrees of reliability, depending on their nature and source and, in the case of internal records and documents, on the effectiveness of the controls over their production. An example of inspection used as a test of controls is inspection of records for evidence of authorization. Some documents represent direct audit evidence of the existence of an asset, for example, a document constituting a financial instrument such as a stock or bond. Inspection of such documents may not necessarily provide audit evidence about ownership or value. In addition, inspecting an executed contract may provide audit evidence relevant to the entity’s application of accounting policies, such as revenue recognition. 9. Answer: D The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs to sell and its value in use. (PAS 36, par 6) 10. Answer: A Website Development does not fall under the definition of Intangible Assets in PAS 38, paragraphs 8-17, as well as under the recognition criteria in paragraphs 21-23 of the same standard.