Name: Date:

Instructor: Boy Carlo Romero, CPA, MMIA, CTT Score:

AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS II

INSTRUCTION: Read and solve the following problems below. Write your final answer on the space provided after each
question. Provide your solution on a separate piece of paper.

PROBLEM 1
As part of your engagement to audit the financial statements of the Rex Company, you found the following patent account:
Patent
1/1/2021 500,000
1/1/2023 240,000
1/1/2024 200,000
1/1/2025 100,000 1,040,000 12/31/2025

Additional information:
• The balance on January 1, 2021 reflects the amount debited to the account when it acquired a patent from unrelated
patent company for P500,000. Rex estimates that the patent has a remaining useful life of 10 years.
• On January 1, 2023, Rex Co. debited the patent account when it acquired a competitive patent from Dauz Corp. for
P240,000 in order to protect the old patent. The competitive patent has a remaining legal life and useful life of 16 years.
• On January 1, 2024, Rex Co. debited the patent account when it acquired a related patent from Banggawan Corp. for
P200,000. The related patent extended the useful life of the old and competitive patents to 20 years.
• On January 1, 2025, Rex Co. debited the patent account when it incurred litigation costs of P100,000 in an unsuccessful
defense of the patents held.
• No amortization has yet been recognized by the company.

Questions: Based on the above data, compute for the following:

Problem 2:
Jimar Co. incurred the following costs during the year:
1. Radical modification of formulation of a glassware product P70,000
2. Cost of activities aimed at obtaining new knowledge 700,000
3. Marketing research to study consumer tastes 16,000
4. Cost of developing and producing a prototype model 23,000
5. Cost of testing the prototype model for safety and environmental friendliness 80,000
6. Cost of revising designs for flaws in the prototype model 15,000
7. Salaries of employees, consultants, and technicians involved in R&D 120,000
8. Amount paid for conference for the introduction of the newly developed product
including fee of a model hired as endorser 102,000
9. Advertising to establish recognition of the newly developed product 43,000
10. Cost incurred on search for alternatives for materials, devices, products, processes,
systems or services 30,000
11. Cost of final selection of possible alternatives for a new process 96,000
12. Periodic or routine design changes to existing products 2,500
13. Modification of design for a specific customer 10,000
14. Cost of design, construction and operation of a pilot plant that is not of
a scale economically feasible for commercial production 5,000
15. Cost of routine, seasonal, and periodic design of tools, jigs, molds and dies 18,000
16. Cost of quality control during commercial production 32,000
17. Cost of building acquired to be used in various R&D projects 1,000,000
18. Depreciation on the building described above 100,000
19. Personnel costs of persons involved in research and development projects 41,200
20. Design, construction, and testing preproduction prototypes and models 96,000

Required: Compute for the total research and development expense during the year ___________________
PROBLEM 3:
On February 14, 2024, Karen Inc. exchanged 2,000 shares of its 100 par value ordinary shares held in treasury for a patent
owned by Omero Co. The treasury shares were acquired in 2023 at a cost of P160,000. At exchange date, Karen’s ordinary
share was quoted at P110 per share and the patent had a net carrying value on Omero’s book of P180,000. Karen should
record the patent at _________________________.

PROBLEM 4:
On June 30, 2024, Dale signed an agreement to operate as a franchisee of Josiah Printers for an initial franchise fee of
P6,000,000. The same date, Dale paid P2,000,000 and agreed to pay the balance in four equal annual payments of
P1,000,000 beginning July 1, 2025. The downpayment is not refundable and no future services are required of the franchisor.
Dale can borrow at 14% for a loan of this type. Present and future value factors are as follows:
Present value of 1 at 14% for 4 periods 0.59
Future amount of 1 at 14% for 4 periods 1.69
Present value of an ordinary annuity of 1 at 14% for 4 periods 2.91

Dale should record the acquisition cost of the franchise on June 30, 2024 at __________________.

PROBLEM 5:
Joy Company engaged your services to compute the goodwill in the purchase of another entity which provided the following:
Net income Net assets
2022 P2,000,000 P7,800,000
2023 2,500,000 8,700,000
2024 3,900,000 9,000,000

Goodwill is measured by capitalizing excess earnings at 25% with normal return on average net assets at 20%. How much
is the purchase price for the other entity? ___________________

PROBLEM 6:
Faith Corporation was organized in 2022. Its accounting records include only one account for all intangible assets. The
following is a summary of the debit entries that have been recorded and posted during 2022 and 2023:
INTANGIBLE ASSETS
July 1, 2022 8-year franchise; expires June 30, 2030 P126,000
October 1, 2022 Advance payment on leasehold (term of lease 2 years) 84,000
December 31, 2022 Net loss for 2022 including incorporation fee, P3,000, and
Related legal fees of organizing, P15,000 (all fees incurred in 2022) 48,000
January 2, 2023 Acquired patent (10-year life) 222,000
March 1, 2023 Cost of developing a secret formula 225,000
April 1, 2023 Goodwill purchased 835,200
July 1, 2023 Legal fee for successful defense of patent purchased above 37,950
October 1, 2023 Research and development costs 480,000

Ignore income tax effects.

Questions:
1. The unamortized patent cost at December 31, 2023, should be ______________________
2. The unamortized franchise cost at December 31, 2023, should be ___________________
3. The amount of prepaid rent to be reported on Faith’s December 31, 2023, statement of financial position
__________________
4. The adjusting entries on December 31, 2023, should include a net debit to the retained earnings account of
___________________
5. As a result of the adjustments at December 31, 2023, the total charges against Faith’s 2023 income should be
_________________

--- NOHING FOLLOWS ---