[INTANGIBLE ASSETS & WASTING ASSETS] AUDITING/FAR

Problem 1
During 2017, the following were acquired/ paired for by Calibri Company:
 Trademarks and Certification Marks, P120,000.00
 Cable television license and franchise P95,000.00
 FVN operating system( for a computer controlled machine) P65,000.00
 Music copyrights P70,000.00
 Training cost of employees for a specialized product line P80,000.00
 Covenant not to compete P60,000.00

Question:
The amount to be included as intangible asset is?

Problem 2
During 2017, Ariel Company had the following transactions in relation to assets classified under intangible assets:
a) A copyright was purchased from Carlie Company for P500,000.00 on January 1, 2017. It was estimated
that the remaining useful life of the copyright was 10 years. The copyright as carried in the books of CArlie
Company at net book value of P300,000.00 when Carlie Company sold it to Ariel Company.
b) Ariel Company signed an agreement on January 1, 2016 to operate as a franchise of Prutas Company for
an initial franchise fee of P800,000. Of this amount P200,000 was paid when the agreement was signed
and the balance is payable in 4 equal annual payments of P150,000 every December 31. The down
payment is not refundable and no future services are required of the franchisor. Implicit rate for the note
of this type is 14%.
c) Received from the national government by way of a grant, a license to operate a radio and a television
station. The fair value of the license is currently at P450,000.
d) Acquired a license to use a special type of container and a distinctive trademark to be printed on the
container in exchange for 9,000 shares of Ariel Company’s P10 par value common stock current selling in
the market at P85 per share. The licensed based on an appraisal made is worth twice as much as the
trademark, both of which may be used for 6 years.

Question:
The amount to be included as intangible asset is?

Problem 3
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
Identifiable assets P2,700,000 P3,000,000
Goodwill 1,500,000 ?
Liabilities 1,800,000 1,800,000
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
2. Impairment loss for the year 2005

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 [INTANGIBLE ASSETS & WASTING ASSETS] AUDITING/FAR

3. Carrying value of Trademark as of December 31, 2005

4. Carrying value of Goodwill as of December 31, 2005
5. Carrying value of Customer list as of December 31, 2005

Problem 4
From the following independent cases identify the amount to be reported as amortization expense for the year
2017:
 Purchased patent on January 1 , 2017 for P2,000,000 and was expected to be a source of net cash inflows
for atleast 16 years.
 Purchased patent on January 1, 2017 for its fair value of P3,000,000 and was expected to be a source of
net cash inflows for atleast 16 years. A firm commitment was agrred upon with another entity that will
purchase it in 5 years at 60% of its fair value at the date it was acquired.
 Purchased a copyright on January 1, 2017 for P1,000,000 that has a remaining legal life of 50 years. An
analysis of consumer habits and market trends provides evidence that the copyrighted material will
generate net cash inflows for only 30 more years.
 Acquired a patent for P500,000 and expects that the patent will be useful for a total estimated production
units of P12,000,000. In 2017 total units produced were 3,500,000
 Acquired patent on July 1, 2014 for P900,000. It was expected that the patent would last for another 16
years. On July 1, 2017 the patent was successfully defended against an infringement case in which the
legal cost amounted to P65,000.

Problem 5
Adobe Company discloses the following items that it had recorded in its intangible assets section during 2017
Date Particulars Amount
01/02/2017 Purchased franchise (8-year useful life) P3,500,000.00
07/01/2017 Purchased patent “X” (18-year useful life) P1,560,000.00
07/01/2017 Purchased patent “Y” (25-year useful life) P1,560,000.00
09/01/2017 Purchased copyright (20-year useful life) P4,500,000.00

Question:
The amortization expense to be reported in 2017 is?

Problem 6
Courier Company has recently took over KKK Company at a cost of P20,000,000.00 Courier Company acquired the
following assets at fair value:
 Land and building P6,400,000.00
 Production machinery P4,000,000.00
 Inventory P3,600,000.00
 Accounts Receivable P1,400,000.00
In addition KKK Company owned but had not recognized the following
 Trademark P2,000,000.00
 Patent for special coating formula P1,000,000.00

Question:
The amount of goodwill to be recognized arising from the acquisition is?

Problem 7
The owners of Verdana Company are planning to sell its business to new interests. Verdana Company believes that
the selling price would be for an amount equal to the entity’s net assets fair value plus good will determined on
the basis of capitalizing average regular net earnings at 10 %. The fair value of Verdana Company’s net assets was
P16,000,000.00. Cumulative earnings for the past five years amounted to P11,000,000 which includes an
expropriation gain of P1,000,000 from year 4

Question:
The amount of goodwill to be recognized is?

Problem 8
Chiller Company engaged you to assist in the acquisition of Warmer Company on January 2018. It was agreed that
Warmer Company would receive an amount for goodwill based on the capitalization of excess earnings at 40%

The following information was taken from the records of Warmer Company.
Year Net Income Net Assets

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 [INTANGIBLE ASSETS & WASTING ASSETS] AUDITING/FAR

2013 P180,000.00 P800,000.00

2014 P194,000.00 P900,000.00
2015 P144,000.00 P950,000.00
2016 P190,000.00 P1,000,000.00
2017 P197,000.00 P1,050,000.00

The normally rate of return on average net assets in the industry to which Warmer Company operates is 10%

Question:
The purchase price of Warmer Company is?

Problem 9
One Corporation purchased land for P6,000,000. The Company expected to extract 1 million tons from this land
over the next 20 years at which time, residual value shall be zero. During the first 2 years of the mine’s operations,
30,000 tons were mined each year and sold for P80 per ton. The estimate of the total remaining lifetime capacity
of the mine was raised to 1,200,000 tons at the start of the third year and residual value was estimated to be
P480,000. During the third year, 50,000 tons were mined and sold for P85 per ton.

Question:
How much would be the depletion for the third year?

Problem 10
Two Corporation, the largest mining Company, paid P20,000,000 to the local government for the right to explore
and extract mineral reserves in the area of interest. The following costs were also incurred related to the
exploration and evaluation activities of the entity P7,000,000 and evaluation costs of P3,000,000. Results of the
study revealed that the total estimated mineral reserve is 10,000,000 tons. Two Corporation started its commercial
production in year 2014. The company produced 1,200,000 tons in 2014.

Question:
How much would be the depletion for the year?

Problem 11
In January 2014, Three Inc paid the national government a fee in the amount of P129,000,000 for an area of
interest with removable ore estimated by geological surveys at P4,320,000 tons. Three Inc is required by the
national government to restore the specific area of interest after the extraction of the estimated units of reserves.
On January 1, 2014 the present value of restoration costs discounted at 10% based on the expected 10 years the
mineral reserves are extracted is P3,850,000. The Company incurred P2,150,000 of development costs in preparing
the property for the extraction of ore. During 2014 540,000 tons were remove.

Question:
How much would be the depletion for the year?

Problem 12
In 2012 Short Company paid P4,000,000 to purchase land containing a total estimated 160,000 tons of extractable
mineral deposits. The estimated value of the property after the mineral has been removed is P800,000. Extraction
activities began in 2013 and by the end of the year 20,000 tons had been removed and sold. In 2014 geological
studies indicated that the total amount of mineral deposits had been underestimated by 60,000 tons. During 2014
30,000 tons were extracted and 28,000 tons were sold.

Question:
How much would be the depletion rate for the year 2014?

Problem 13
Long company has the following information pertaining to its mining operations:
Estimated cost of restoring property after mining is completed P400,000.00
Number of tons mined during the current year 50,000 tons
Cost of Land P6Million
Estimated number of tons of ore to be mined 400,000 tons
Sales value of land after mining P300,000.00
Development costs incurred P500,000.00
Number of tons sold during the current year 35,000 tons
Cost of production unit(excluding depletion) P7.00

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 [INTANGIBLE ASSETS & WASTING ASSETS] AUDITING/FAR

Question:
How much is the Cost of goods sold/ Cost of sales?

Problem 14
In connection with your audit of the Josef Mining Corporation for the year ended December 31, 2005, you noted
that the company purchased for P10,400,000 mining property estimated to contain 8,000,000 tons of ore. The
residual value of the property is P800,000. Building used in mine operations costs P800,000 and have estimated life
of fifteen years with no residual value. Mine machinery costs P1,600,000 with an estimated residual value
P320,000 after its physical life of 4 years.

Following is the summary of the company’s operations for first year of operations.
Tons mined 800,000 tons
Tons sold 640,000 tons
Unit selling price per ton P4.40
Direct labor 640,000
Miscellaneous mining overhead 128,000
Operating expenses (excluding depreciation) 576,000

Inventories are valued on a first-in, first-out basis. Depreciation on the building is to be allocated as follows: 20% to
operating expenses, 80% to production. Depreciation on machinery is chargeable to production.

QUESTIONS:
Based on the above and the result of your audit, answer the following: (Disregard tax implications)
1. How much is the depletion for 2005?
a. P768,000 b. P960,000 c. P192,000 d. P1,040,000
2. Total inventoriable depreciation for 2005?
a. P400,000 b. P362,667 c. P384,000 d. P0
3. How much is the Inventory as of December 31, 2005?
a. P438,400 b. P422,400 c. P425,600 d. P418,133
4. How much is the cost of sales for the year ended December 31, 2005?
a. P1,689,600 b. P1,753,600 c. P1,702,400 d. P1,672,533
5. How much is the maximum amount that may be declared as dividends at the end of the company’s first
year of operations?
a. P1,494,400 b. P1,289,600 c. P1,302,400 d. P1,319,467

**********ADDITIONAL PROBLEMS**********
Problem 1
The trial balance of Aguilar Enterprises on December 31, 2006 shows P350,000 as the
unaudited balance of the Machinery account. On April 1, 2006, a Jucuzzi machine costing
P40,000 with accumulated depreciation of P30,000 was sold for P20,000, which proceeds
was credited to the Machinery account. On June 30, 2006, a Goulds machine, costing
P50,000 and with accumulated depreciation of P22,000 was traded in for a new Pioneer
machine with an invoice price of P100,000. The cash paid of P90,000 for the Pioneer
machine (P100,000 less trade-in allowance of P10,000 was debited to the Machinery
account).

Company policy on depreciation which you accept, provides an annual rate of 10% without
salvage value. A full year’s depreciation is charged in the year of acquisition and none in
the year of disposition.

Question
1 The adjusted balance of the Machinery account at December 31, 2006 is:
2 The correct depreciation expense for the machinery for the year ended December 31,
2006 is:

Problem 2

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 [INTANGIBLE ASSETS & WASTING ASSETS] AUDITING/FAR

Two independent companies, KAYA and MUYAN, are in the home building business. Each
owns a tract of land for development, but each company would prefer to build on the other’s
land. Accordingly, they agreed to exchange their land. An appraiser was hired and from
the report and the companies records, the following information was obtained:

KAYA Co.’s Land MUYAN Co.’s Land

Cost (same as book value) P 800,000 P 500,000
Market value, per appraisal 1,000,000 900,000
The exchange of land was made and based on the difference in appraised values, MUYAN
Company paid P100,000 cash to KAYA Company.

Question
1. For financial reporting purposes, KAYA Company would recognize a pretax gain on the
exchange in the amount of:
2. For financial reporting purposes, MUYAN Company recognize a pretax gain on the
exchange in the amount of:
3. After the exchange, KAYA Company record its newly acquired land at:
4. After the exchange, MUYAN Company record its newly acquired land at:

Problem 3

On an audit engagement for 2007, you handled the audit of fixed assets of Esmedina
Copper Mines. This mining company bought the exploration rights of Maharishi Exploration
on June 30, 2007 for P7,290,000. Of this purchase price, P4,860,000 was allocated to
copper ore which had remaining reserves estimated at 1,620,000 tons. Esmedina Copper
Mines expects to extract 15,000 tons of ore a month with an estimated selling price of P50
per ton. Production started immediately after some new machines costing P600,000 was
bought on June 30, 2007. These new machineries had an estimated useful life of 15 years
with a scrap value of 10% of cost after the ore estimated has been extracted from the
property, at which time the machineries will already be useless.

Among the operating expenses of Esmedina Copper Mines at December 31, 2007 were:

Depletion expense P 405,000

Depreciation of machineries 40,000

Questions
1. Recorded depletion expense was
a. Overstated by P90,000 c. Overstated by P135,000
b. Understated by P90,000 d. Understated by P135,000

2. Recorded depreciation expense was

a. Overstated by P10,000 c. Overstated by P20,000
b. Understated by P10,000 d. Understated by P20,000

Problem 4

Norie Company’s property, plant and equipment and accumulated depreciation balance at
December 31, 2005 are:
Accumulated
Cost Depreciation
Machinery and equipment P 1,380,000 P 367,500
Automobiles and trucks 210,000 114,320
Leasehold improvements 432,000 108,000
Additional information:
Depreciation methods and useful lives:
Machinery and equipment – straight line; 10 years
Automobiles and trucks – 150% declining balance; 5 years, all acquired after 2000.
Leasehold improvements – straight line
Depreciation is computed to the nearest month.
Salvage values are immaterial except for automobiles and trucks, which have an estimated
salvage values equal to 10% of cost.

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 [INTANGIBLE ASSETS & WASTING ASSETS] AUDITING/FAR

Other additional information:

- Norie Company entered into a 12-year operating lease starting January 1, 2003. The
leasehold improvements were completed on December 31, 2002 and the facility was
occupied on January 1, 2003.
- On July 1, 2006, machinery and equipment were purchased at a total invoice cost of
P325,000. Installation cost of P44,000 was incurred.
- On August 30, 2006, Norie Company purchased new automobile for P25,000.
- On September 30, 2006, a truck with a cost of P48,000 and a carrying amount of
P30,000 on December 31, 2005 was sold for P23,500.
- On December 30, 2006, a machine with a cost of P17,000, a carrying value of P2,975 on
date of disposition, was sold for P4,000.
Questions
1. The gain on sale of truck on September 30, 2006 is:
2. The gain on sale of machinery on December 30, 2006 is:
3. The adjusted balance of the property, plant, and equipment as of December 31, 2006 is:
4. The total depreciation expense to be reported on the income statement for the year ended
December 31, 2006 is:
5. The carrying amount of property, plant, and equipment as of December 31, 2006 is:

Problem 5
Information pertaining to Highland Corporation’s property, plant and equipment for
2005 is presented below:
Account balances at January 1, 2005:

Debit Credit

Land P 150,000
Buildings 1,200,000
Accumulated depreciation – Buildings P263,100
Machinery and equipment 900,000
Accumulated depreciation – Machinery and equipment 250,000
Automotive equipment 115,000
Accumulated depreciation – Automotive equipment 84,600
Depreciation data:

Depreciation method Useful life

Buildings 150% declining-balance 25 years

Machinery and equipment Straight-line 10 years
Automotive equipment Sum-of-the-years’-digits 4 years
Leasehold improvements Straight-line -
The salvage values of the depreciable assets are immaterial. Depreciation is computed to
the nearest month.

Transactions during 2005 and other information are as follows:

a. On January 2, 2005, Highland purchased a new car for P20,000 cash and trade-in of a 2-
year-old car with a cost of P18,000 and book value of P5,400. The new car has a cash
price of P24,000; the market value of the trade-in is not known.
b. On April 1, 2005, a machine purchased for P23,000 on April 1, 2000, was destroyed by
fire, Highland recovered P15,500 from its insurance company.
c. On May 1, 2005, costs of P168,000 were incurred to improve leased office premises. The
leasehold improvements have a useful life of 8 years. The related lease terminates on
December 31, 2011.
d. On July 1, 2005, machinery and equipment were purchased at a total invoice cost of
P280,000; additional costs of P5,000 for freight and P25,000 for installation were
incurred.

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 [INTANGIBLE ASSETS & WASTING ASSETS] AUDITING/FAR

e. Highland determined that the automotive equipment comprising the P115,000 balance
at January 1, 2005, would have been depreciated at a total amount of P18,000 for the
year ended December 31,2005.
Questions
Based on the information above, answer the following questions:
1. The adjusted balance of Machinery and Equipment (at cost) at December 31, 2005 is:
2. The adjusted balance of Automotive Equipment (at cost) at December 31, 2005 is:
3. The adjusted balance of Accumulated Depreciation of Building at December 31, 2005 is:
4. The adjusted balance of Accumulated Depreciation of Machinery and Equipment at December 31, 2005 is:
5. The adjusted balance of Accumulated Depreciation of Automotive Equipment at December 31, 2005 is:
6. The adjusted balance of Accumulated Depreciation of Leasehold Improvements at December 31, 2005 is:
7. The total adjusted balance of Accumulated Depreciation of Property and Equipment at December 31,
2005 is:
8. The total gain(loss) from disposal of assets at December 31, 2005 is:
9. The adjusted book value of Building at December 31, 2005 is:
10. The adjusted book value of Leasehold Improvement at December 31, 2005 is:

Problem 6
The following information pertains to Marlisa Company’s delivery trucks:

Date Particulars Debit Credit

1/1/04 Trucks 1, 2, 3, & 4 3,200,000
3/15/05 Replacement of truck 3 tires 25,000
7/1/05 Truck 5 800,000
7/10/05 Reconditioning of truck 4, which was
damaged in a collision 35,000
9/1/05 Insurance recovery on truck 4 accident 33,000
10/1/05 Sale of truck 2 600,000
4/1/06 Truck 6 1,000,000 150,000
5/2/06 Repainting of truck 4 27,000
6/30/06 Truck 7 720,000
12/1/06 Cash received on lease of truck 7 22,000

ACCUM. DEPRECIATION - DELIVERY EQUIPMENT

Date Particulars Debit Credit

12/31/04 Depreciation expense 300,000
12/31/05 Depreciation expense 300,000
12/31/06 Depreciation expense 300,000
a. On July 1, 2005, Truck 3 was traded-in for a new truck. Truck 5, costing P850,000; the
selling party allowed a P50,000 trade in value for the old truck.
b. On April 1, 2006, Truck 6 was purchased for P1,000,000; Truck 1 and cash of P850,000
being given for the new truck.
c. The depreciation rate is 20% by unit basis.
d. Unit cost of Trucks 1 to 4 is at P800,000 each.
Questions
1. What is the loss on trade-in of truck 3?
2. The correct cost of truck 5 is
3. The book value of truck 5 at December 31, 2006 is
4. What is the loss in trade-in of Truck 1?
5. The correct cost of truck 6 is
6. The carrying value of Truck 6 at December 31, 2006 is
7. The gain (loss) on sale of truck 2 is
8. The book value of truck 4 at December 31, 2006 is
9. The 2000 depreciation expense is understated by

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 [INTANGIBLE ASSETS & WASTING ASSETS] AUDITING/FAR

Problem 7
You are engaged to audit the financial statements of TRIUMPH CORPORATION for the year
ended December 31, 2006. You gathered the following information pertaining to the
company’s Equipment and Accumulated Depreciation accounts.

EQUIPMENT
1.1.06 Balance P 446,000 9.1.06 No. 6 sold P 9,000
6.1.06 No. 12 36,000 12.31.06 Balance 474,000
9.1.03 Dismantling
of No. 6 1,000 ______
P 483,000 P 483,000

ACCUMULATED DEPRECIATION – EQUIPMENT

12.31.06 Balance P 271,400 1.1.06 Balance P 224,000
______ 12.31.06 2006 Dep’n 47,400
P 271,400 P 271,400

The following are the details of the entries above:

1. The company depreciates equipment at 10% per year. The oldest equipment owned is
seven years old as of December 31, 2006.
2. The following adjusted balances appeared on your last year’s working papers:
Equipment P 446,000
Accumulated depreciation 224,000
3. Machine No. 6 was purchased on March 1, 1999 at a cost of P30,000 and was sold on
September 1, 2006, for P9,000.
4. Included in charges to the Repairs Expense account was an invoice covering installation
of Machine No. 12 in the amount of P2,500.
5. It is the company’s practice to take a full year’s depreciation in the year of acquisition
and none in the year of disposition.

Questions
1. The gain/(loss) on sale of Machine 6 is:
2. The Equipment balance of TRIUMPH CORPORATION at December 31, 2006 is:
3. The Depreciation expense – Equipment of TRIUMPH CORPORATION at December 31,
2006 is:
4. The entry to correct the sale of Machine 6 is:
a. Loss on sale of equipment 1,000
Accumulated depreciation 21,000
Equipment 22,000
b. Accumulated depreciation 22,500
Equipment 22,000
Gain on sale 500
c. Accumulated depreciation 21,500
loss on sale of equipment 500
Equipment 22,000
d. Accumulated depreciation 23,000
Equipment 22,000
Gain on sale of equipment 1,000

5. The Depreciation Expense at December 31, 2006 is:

a. Overstated by P6,125 c. Understated by P1,950
b. Understated by P6,125 d. Overstated by P1,950

********END********

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