AUDIT OF INTANGIBLE ASSETS

SUBSTANTIVE AUDIT OF INTANGIBLE ASSETS

Existence: Recorded intangible assets exist Valuation and allocation: Intangible assets are valued in
accordance with GAAP
1. Obtain an analysis of ledger accounts for intangible
assets. 6. Vouch additions to or acquisitions during the year.

2. Examine documentation supporting intangible assets. 7. Evaluate dispositions and write offs during the year.

8. Evaluate amortization policy and verify computation of

Completeness: All intangible assets are recorded amortization.

3. Vouch additions to or acquisitions during the year.

Presentation and disclosure: Intangible assets are
4. Evaluate dispositions and write offs during the year. classified and disclosed in accordance with GAAP

9. Review financial statements and perform analytical

Rights and obligations: Intangible assets are owned by procedures to determine whether accounts are
the entity classified and disclosed in the financial statements in
accordance with GAAP.
5. Examine documentation supporting intangible assets.

INTERNAL CONTROL MEASURES

1. Acquisitions, dispositions and write offs of intangible assets should be properly authorized.

2. Adequacy and consistency of accounting policies governing intangible assets should be reviewed periodically.

3. General ledger account should be supported by adequate detailed records and they should be periodically reconciled.

4. Schedules of intangibles showing their cost and basis of amortization should be prepared periodically and reviewed by
a responsible official.

- end -

PROBLEM NO. 1 the Zerg Corporation process obsolete.

The accountant of the newly organized Zerg Corporation May1 Acquired both a license to use a special type of
provided to you the details of the company’s Intangible container and a distinctive trademark to be
Assets account as follows: printed on the container in exchange for 6,000,
no-par, ordinary shares of Zerg selling for P50
Intangible Assets
per share. The license is worth twice as much as
Date Description Amount
the trademark, both of which may be used for 5
01/02 Organization costs P 233,000
years.
01/15 Goodwill 15,000
04/01 Patent 490,000 Jul. 1 Constructed a shed for P1,310,000 to house
05/01 License and trademark 300,000 prototypes of experimental models to be
07/01 R & D laboratory 1,310,000 developed in future research projects.
12/31 Product development costs 1,750,000
Dec. Paid salaries for an engineer and chemist involved
P4,098,000
31 in research and development totaling P1,750,000.
Transactions during 2020 included the following:
It is the company’s policy to take full year amortization in
Jan.2 Paid legal fees of P150,000 and stock certificate the year of acquisition.
costs of P83,000 to complete organization of the
corporation. REQUIRED:
15 Hired a clown to stand in front of the corporate 1. Prepare the necessary adjusting journal entries as of
office for 2 weeks and hand out pamphlets and December 31, 2020.
candy to create goodwill for the new enterprise.
2. Compute the carrying amount of the Intangible assets
Clown cost, P10,000; pamphlets and candy,
as of December 31, 2020. P632,000
P5,000.
3. Compute the total amount resulting from the foregoing
Apr.1 Patented a newly developed process with costs as transactions that should be expensed when incurred.
follows:
4. The most effective means for the auditor to determine
Legal fees to obtain patent P429,000 whether a recorded intangible asset possesses the
Patent application and licensing fees 61,000 characteristics of an asset is to
Total P490,000 a. Evaluate the future revenue-producing capacity of
the intangible asset.
It is estimated that in 5 years other companies
will have developed improved processes, making

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 b. Vouch the purchase by reference to underlying
4. Carrying amount of other intangible assets on
documentation.
December 31, 2020
c. Inquire as to the status of patent applications.
a. P690,000 c. P980,000
d. Analyze research and development expenditures to
b. P640,000 d. P706,667
determine that only those expenditures possessing
future economic benefit have been capitalized. 5. Which statement is incorrect regarding audit of
intangible assets?
5. Assuming the company has capitalized all research and a. Accounting principles allow goodwill to be held on
development costs associated with patent. The auditor the books of a company indefinitely and not
will probably amortized over time.
a. Confer with management regarding transfer of the b. Patents are amortized over the remaining legal life
amount from the balance sheet to the income or their useful life.
statement. c. When testing a client's additions to an asset for
b. Confirm that the patent is registered and on file research and development, the auditor must
with the intellectual property office. remember that such costs should be amortized
c. Confer with management regarding a change in over the lesser of their legal lives or useful lives.
the title of the account to "goodwill." d. All the statements are correct.
d. Confer with management regarding ownership of
the patent.
PROBLEM NO. 3
The statement of financial position of Walsh Corporation as
PROBLEM NO. 2 of December 31, 2019 reported the Intangible Assets, net
as follows:
The Terran Company acquired several small companies
at the end of 2019 and, based on the acquisitions, Patent A P1,680,000
reported the following intangibles in its December 31, Patent B 2,450,000
2019 statement of financial position: P4,130,000
Patent P200,000
Copyright 400,000 During the course of your audit, you noted the following.
Tradename 350,000 a. Patent A was purchased for P1,920,000 on January 1,
Computer software 100,000 2018, at which date the remaining legal life was sixteen
Goodwill 900,000 years. On January 1, 2020, Walsh determined that the
useful life of the patent was only eight years from the
The company's accountant determines the patent has an date of acquisition.
expected life of 10 years and no expected residual value,
and that it will generate approximately equal benefits each b. On May 1, 2020, Walsh sold Patent B in exchange for a
year. The company expects to use the copyright and P5,000,000 non-interest bearing note due on May 1,
tradename for the foreseeable future. The accountant 2023. There was no established exchange price for the
knows that the computer software is used in the patent, and the note had no ready market. The
company's 120 sales offices. The company has replaced prevailing rate of interest for a note of this type at May
the software in 60 offices in 2020, and expects to replace 1, 2020 was 14%. The patent was purchased for
the software in 40 more offices in 2021 and the remainder P3,150,000 on September 1, 2016. On that date, the
in 2022. remaining legal life was fifteen years, which was also
determined to be the useful life.
On December 31, 2020, there are no indications of c. On January 3, 2020, in connection with the purchase of
impairment of patent and computer software. The a trademark from Joe Corporation, the parties entered
following information relate to the other intangible assets: into a noncompetition agreement and a consulting
a) Because of the rampant piracy, the copyright is contract. Walsh paid Joe P8,000,000, of which three-
expected to generate cash flows of just P8,000 per quarters was for the trademark and one-quarter was for
year. Joe’s agreement not to compete for a five-year period
in the line of business covered by the trademark.
b) The tradename is expected to generate cash flows of Walsh considers the life of the trademark to be
P15,000 per year. indefinite. Under the consulting contract, Walsh agreed
c) The goodwill is associated with Terran’s SCV to pay Joe P500,000 annually on January 3 for five
years. The first payment was made on January 3,
Manufacturing reporting unit. The cash flows expected
to be generated by the SCV Manufacturing reporting 2020.
unit is P200,000 per year for the next 25 years. The
reporting unit has a carrying amount of P2,100,000. d. At December 31, 2020, Walsh determined the
recoverable amount of the intangible assets as follows:
QUESTIONS:
Patent A P1,350,000
Based on the above and the result of your audit, determine Trademark 5,500,000
the following: (Assume that the appropriate discount rate Noncompetition agreement 1,800,000
for all items is 5%)
1. Total amortization of intangible assets in 2020
a. P 70,000 c. P88,750 QUESTIONS:
b. P107,500 d. P20,000 Based on the above and the result of your audit, determine
2. Total loss on impairment in 2020 the following:
a. P452,470 c. P471,220 1. Gain on sale of Patent B
b. P530,280 d. P433,720 a. P2,620,000 c. P 995,000
3. Carrying amount of goodwill on December 31, 2020 b. P1,012,500 d. P 977,500
a. P900,000 c. P855,000
b. P718,780 d. P659,720

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2. Total amortization to be recognized in 2020
Item 3:
a. P680,000 c. P 767,500
In December 2019, an explosion caused a permanent 60
b. P750,000 d. P1,950,000
percent reduction in the expected revenue-producing value
3. Total impairment loss to be recognized in 2020 of Licensing Agreement – A, and in January 2021, a flood
a. P750,000 c. P550,000 caused additional damage, which rendered the agreement
b. P620,000 d. P 50,000 worthless.

4. Intangible assets to be recognized in the statement of Item 4:

financial position as of December 31, 2020 A study of Licensing Agreement – B made by Summer in
a. P7,750,000 c. P8,450,000 January 2020 revealed that its estimated remaining life
b. P7,950,000 d. P8,850,000 expectancy was only 10 years as of January 1, 2020.
5. In auditing intangible assets, an auditor most likely
would review or recompute amortization and Item 5:
determine whether the amortization period is The balance in the Goodwill account includes P24,000 paid
reasonable in support of management’s financial December 30, 2019, for an advertising program, which it is
statement assertion of estimated will assist in increasing Summer’s sales over a
a. Valuation. c. Existence period of four years following the disbursement.
b. Completeness. d. Rights
Item 6:
The Leasehold Improvement account includes (a) the
PROBLEM NO. 4 P15,000 cost of improvements with a total estimated
useful life of 12 years, which Summer, as tenant made to
Summer Manufacturing Corporation was incorporated on leased premises in January 2019; (b) movable assembly-
January 3, 2019. The corporation’s financial statements line equipment costing P8,500, which was installed in the
for its first year’s operations were not examined by a CPA. leased premises in December 2020; and (c) real estate
You have been engaged to audit the financial statements taxes of P2,500 paid by Summer, which under the terms of
for the year ended December 31, 2020, and your work is the lease, should have been paid by the landlord. Summer
substantially completed. A partial trial balance of the paid its rent in full during 2020. A 10-year nonrenewable
company’s accounts follows: lease was signed January 3, 2019, for the leased building
Account Title Debit Credit that Summer used in manufacturing operations.
Cash P11,000
Accounts receivable 42,500 Item 7:
Allowance for doubtful accounts P 500 The balance in the Organization Expenses account includes
Inventories 38,500 pre-operating costs incurred during the organizational
Machinery 75,000 period.
Equipment 29,000
Accumulated depreciation 10,000 QUESTIONS:
Patents (Item 1) 85,000 1. The carrying amount of Patents as of December 31,
Leasehold improvements (Item 6) 26,000 2020 is
Prepaid expenses 10,500 a. P85,000 c. P66,000
Organization expenses (Item 7) 29,000 b. P64,000 d. P46,000
Goodwill (Item 5) 24,000
Licensing Agreement – A 2. The carrying amount of Licensing Agreement – A as of
(Item 2 & 3) 50,000 December 31, 2020 is
Licensing Agreement – B a. P20,000 c. P10,000
(Item 2 & 4) 49,000 b. P0 d. P50,000
3. The carrying amount of Licensing Agreement – B as of
Additional information: December 31, 2020 is
a. P66,000 c. P45,000
Item 1: b. P85,000 d. P64,000
Patents for Summer’s manufacturing process were
purchased January 2, 2020, at a cost of P68,000. An 4. The carrying amount of Leasehold Improvements as of
additional P17,000 was spent in December 2020 to December 31, 2020 is
improve machinery covered by the patents and charged to a. P26,000 c. P13,500
the Patents account. The patents had a remaining legal b. P15,000 d. P12,000
term of 17 years.
5. The net adjustment to Retained earnings to reflect all
the necessary corrections from Item 1 to 7 will amount
Item 2:
to
On January 3, 2019, Summer purchased two licensing
a. P84,500 debit c. P83,000 debit
agreements; at that time they were believed to have
b. P84,500 credit d. P55,400 debit
unlimited useful lives. The balance in the Licensing
Agreement – A account included its purchase price of - now do the DIY drill -
P48,000 and P2,000 in acquisition expenses. Licensing
agreement – B also was purchased on January 3, 2019, for
P50,000 but it has been reduced by credit of P1,000 for
the advance collection of revenue from the agreement.

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 DO-IT-YOURSELF (DIY) DRILL
PROBLEM NO. 1
PROBLEM NO. 2
On December 31, 2019, Probe Corporation acquired the
following three intangible assets: On November 15, 2020, Rodeo Corporation acquired
 A trademark for P300,000. The trademark has 7 years Rapids, a company that operates a scenic railway along
remaining legal life. It is anticipated that the the coast of a popular tourist area. The summarized
trademark will be renewed in the future, indefinitely, statement of financial position at fair values of Rapids on
without problem. July 1, 2020, reflecting the terms of acquisition was:

 Goodwill for P1,500,000. The goodwill is associated Goodwill P 200,000

with Probe’s Nexus Manufacturing reporting unit. Operating license 1,200,000
Property-train stations and land 300,000
 A customer list for P220,000. By contract, Probe has Rail track and coaches 300,000
exclusive use of the list for 5 years. Because of Steam engines (2) 1,000,000
market conditions, it is expected that the list will have Purchase consideration P3,000,000
economic value for just 3 years.
The operating license is for ten years. It has recently been
On December 31, 2020, before any adjusting entries for
renewed by the transport authority and is stated at the
the year were made, the following information was cost of its renewal. The carrying amounts of the property
assembled about each of the intangible assets:
and rail track and coaches are based on their estimated
d) Because of a decline in the economy, the trademark is replacement cost. The engines are valued at their net
now expected to generate cash flows of just P10,000 selling price.
per year. The useful life of trademark still extends
beyond the foreseeable horizon. On December 1, 2020, the boiler of one of the steam
engines exploded, completely destroying the whole engine.
e) The cash flows expected to be generated by the Nexus
Fortunately no one was injured, but the engine was
Manufacturing reporting unit is P250,000 per year for
beyond repair. Due to its age, a replacement could not be
the next 22 years. Book values and fair values of the
obtained. Because of the reduced passenger capacity, the
assets and liabilities of the Nexus Manufacturing
estimated value in use of the business after the accident
reporting unit are as follows:
was assessed at P2 million.
Book values Fair values
Identifiable assets P2,700,000 P3,000,000 Passenger numbers after the accident were below
Goodwill 1,500,000 ? expectations even after allowing for the reduced capacity.
Liabilities 1,800,000 1,800,000 A market research report concluded that tourists were not
f) The cash flows expected to be generated by the using the railway because of the fear of a similar accident
customer list are P120,000 in 2021 and P80,000 in occurring to the remaining engine. In the light of this, the
2022. value in use of the business was re-assessed on December
31, 2020 at P1.8 million. On this date Rodeo received an
REQUIRED: offer of P900,000 in respect of the transferable operating
Based on the above and the result of your audit, determine license.
the following: (Assume that the appropriate discount rate
for all items is 6%): QUESTIONS:
1. Total amortization for the year 2020 Based on the above and the result of your audit, compute
a. P 73,333 c. P141,515 the carrying amount of the following as of December 31,
b. P116,190 d. P 86,857 2020 after recognizing the impairment loss, if any:
2. Impairment loss for the year 2020 6. Goodwill
a. P 90,476 c. P179,584 a. P120,000 c. P200,000
b. P133,333 d. P 0 b. P166,667 d. P 0
3. Carrying amount of Trademark as of December 31, 7. Operating license
2020 a. P900,000 c. P771,429
a. P300,000 c. P166,667 b. P866,667 d. P720,000
b. P257,143 d. P120,416
8. Property – train stations and land
4. Carrying amount of Goodwill as of December 31, 2020 a. P200,000 c. P216,667
a. P1,500,000 c. P1,431,818 b. P192,857 d. P168,750
b. P1,425,000 d. P1,462,500
9. Rail track and coaches
5. Carrying amount of Customer list as of December 31, a. P200,000 c. P168,750
2020 b. P216,667 d. P192,857
a. P220,000 c. P176,000
10. Steam engines
b. P146,667 d. P 0
a. P562,500 c. P500,000
b. P642,857 d. P600,000

 - end of AP.2903 - 

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