Scribd
Upload
2 views5 pages

Comprehensive Problem Chap 22-24-095248

The document outlines the audit issues and adjustments for ABC Tech Solutions' financial statements for the year ended December 31, 2024, focusing on intangible assets, goodwill, and prepaid expenses. Key issues include patent impairment risk, trademark classification, customer list amortization corrections, and missing goodwill impairment tests. The document also presents a case study involving Azon, Inc., detailing amortization expenses and carrying amounts for various intangible assets as of December 31, 2021.

Uploaded by

laribachristine8
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
2 views5 pages

Comprehensive Problem Chap 22-24-095248

The document outlines the audit issues and adjustments for ABC Tech Solutions' financial statements for the year ended December 31, 2024, focusing on intangible assets, goodwill, and prepaid expenses. Key issues include patent impairment risk, trademark classification, customer list amortization corrections, and missing goodwill impairment tests. The document also presents a case study involving Azon, Inc., detailing amortization expenses and carrying amounts for various intangible assets as of December 31, 2021.

Uploaded by

laribachristine8
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 5

COMPREHENSIVE PROBLEM

By: Ashley Wela Acsibar


Marjou Dalan
Angela Lorona
Roselle Tagra

CHAPTER 22
Case Background
You are the audit senior for ABC Tech Solutions, a company specializing in software
development. The company’s financial statements for the year ended December 31, 2024, report the
following balances for intangible assets, goodwill, and prepaid expenses:

Account Balances (as of December 31, 2024)


Intangible Assets:
• Patents (Net) – ₱3,000,000
• Trademarks (Net) – ₱1,500,000
• Customer Lists (Net) – ₱2,200,000
Goodwill: ₱5,000,000
Prepaid Expenses:
• Prepaid Insurance – ₱600,000
• Prepaid Rent – ₱400,000

Audit Issues Identified:


1. Patent Impairment Risk:
• Acquired on January 1, 2020, for ₱4,000,000 with a legal life of 10 years.
• Amortized on a straight-line basis.
• A new technology introduced in 2024 may render this patent obsolete.
2. Trademark Classification Issue:
• Internally developed over 2019-2020, with costs capitalized at ₱1,500,000.
• Classified as having an indefinite useful life.
3. Customer Lists Amortization Check:
• Purchased on January 1, 2022, for ₱2,500,000.
• Estimated to have a useful life of 5 years.
• Amortized using the straight-line method.
4. Goodwill Impairment Test Missing:
• Arising from the acquisition of XYZ Innovations in 2021.
• No impairment losses recognized to date.
5. Prepaid Expenses Misclassification:
Prepaid Insurance:
• Policy purchased on July 1, 2024, for ₱1,200,000, covering two years.
Prepaid Rent:
• Lease agreement starting October 1, 2024, for one year, with total rent of ₱600,000 paid
upfront.

Adjustments and Solution


A. Patent Impairment Adjustment
Step 1: Calculate Net Book Value (NBV)
NBV = Original Cost - Accumulated Amortization
NBV = ₱4,000,000 - (₱400,000 x 4) = ₱2,400,000

Step 2: Determine Recoverable Amount


• The fair value of the patent is estimated at ₱1,500,000.
• Since the carrying value (₱2,400,000) is higher than the recoverable amount (₱1,500,000), an
impairment loss of ₱900,000 must be recognized.

1
B. Trademark Adjustment
• Incorrect capitalization: ₱1,500,000 should have been expensed under IAS 38.
• Adjustment: Expense ₱1,500,000 immediately.
• Impact: Decrease assets by ₱1,500,000, increase expenses.
C. Customer List Amortization Correction
Step 1: Correct Amortization Calculation
Annual Amortization = ₱2,500,000 \ 5 = ₱500,000
Total Amortization (2022-2024) = ₱500,000 x 3 = ₱1,500,000
Correct Carrying Value = ₱2,500,000 - ₱1,500,000 = ₱1,000,000
• Reported Value: ₱2,200,000
• Adjustment: ₱1,200,000 (overstatement).

D. Goodwill Impairment
• Revenue decline suggests potential impairment.
• Assume recoverable amount of XYZ Innovations is ₱3,500,000.
Impairment Loss = Carrying Value - Recoverable Amount
Impairment Loss = ₱5,000,000 - ₱3,500,000 = ₱1,500,000
• Adjustment: Reduce goodwill by ₱1,500,000.

E. Prepaid Expenses Adjustments

ADJUSTED BALANCES

CHAPTER 23
PROBLEM 23-15
Azon, Inc. reported other noncurrent asset account balances on December 3, 2020, as follows:
Patent 384,000
Accumulated Amortization. (48,000)
Net Patent. 336,000

- Transactions during 2021 and other information relating to Azon's other noncurrent assets included the
following the patent was purchased from Ruby Company on January 2, 2019, when the remaining legal
life was 16 years, On January 2, 2021, Azon determine that the remaining useful life of the patent was
only 8 years from the date of its acquisition.
- On January 3, 2021, in connection with the purchase of a trademark from Golden Corp, the parties
entered into a noncompetition agreement. Azon paid Golden P1,600,000, of which three-quarters related
to the trademark and one-quarter reflected Golden's agreement not to compete for a period of five years
in the line of business covered by the trademark. Azon considers the life of the trademark to be
indefinite.
- On January 3, 2021, Azon acquired all the noncash assets and assumed all liabilities of White Company
at a cash purchase price of P2,400,000. Azon determined that the fair value of the net asset acquired
in the transaction is P1,600,000.

2
Questions:
Based on the above, determine the following:
1. Amortization expense of Patent in 2021
a. 56,000
b. 48,000
c. 42,000
d. none
2. Amortization expense of Trademark in 2021
a. 80,000
b. none
c. 32,000
d. 16,000
3. Amortization expense of Noncompetition agreement in 2021
a. P80,000
b. none
c. 320,000
d. 160,000
4. Carrying amount of Goodwill as of December 31, 2021.
a. P800,000
b. 2,400,000
c. 1,600,000
d. 720,000

5. Total carrying amount of the intangible assets as of December 31, 2021.


a. ₽ 2,600,000
b. 1,800,000
c. 2,608,000
d. P2,614,000

ANSWER:
1. What is the amortization expense of the patent in 2021?
• Solution Process: The patent was initially purchased with a 16-year useful life. On January 2, 2021, the
remaining useful life was revised to 8 years. The net book value of thelpatent on January 2, 2021, was
P336,000. Therefore, the annual amortization expense is P336,000 / 8 years = ₽ 42,000.
• Answer: d. ₽ 42,000

2. What is the amortization expense of the trademark in 2021?


• Solution Process: The problem states that the life of the trademark is indefinite. Indefinite-life
intangible assets are not amortized. Instead, they are tested for impairment annually.
• Answer: b. None

3. Question: What is the amortization expense of the non-competition agreement in 2021?


• Solution Process: The non-competition agreement has a 5-year life (one-quarter of the P1,600,000 total
cost relates to the trademark, and three-quarters, or P1,200,000, to the non-competition agreement).
The annual amortization is P1,200,000 / 5 years = P240,000.
• Answer: b. None

4. Question: What is the carrying amount of goodwill as of December 31, 2021?


• Solution Process: Goodwill is calculated as the excess of the purchase price over the fair value of net
assets acquired. The purchase price was P2,400,000, and the fair value of net assets was
P1,600,000.Therefore, goodwill is P2,400,000 - P1,600,000 = P800,000. Goodwill is not amortized; it is
tested for
impairment.
• Answer: a. ₽ 800,000

5. Question: What is the total carrying amount of intangible assets as of December 31, 2021?

3
• Solution Process: This requires summing the carrying amounts of all intangible assets:
• Patent: P336,000 - P42,000 = P294,000
• Trademark: P1,200,000 (This is the portion of the purchase price attributed to the trademark. It is not
amortized.)
• Non-competition agreement: P1,200,000 - ₽ 240,000 = ₽ 960,000
• Goodwill: P800,000
• Total: P294,000 + ₽ 1,200,000 + P960,000 + ₽ 800,000 = P3,254,000
• Answer: NONE

CHAPTER 24
ILLUSTRATION: Revaluation (Disregarding Tax Implications)
An entity acquired a building on January 1, 2018 at a cost of P10,000,000.
The building had a useful life of 6 years and residual value of P1,000,000.
The building was revalued on January 1, 2021 and the revaluation revealed replacement cost of
P15,000,000, residual value of P2,000,000 and revised useful life of 8 years from the date of acquisition.

Required:
Based from the above information:
1. What is the revaluation surplus on January 1, 2021?
2. What is the revaluation surplus on December 31, 2021?
3. Prepare all the necessary entries in 2021.

SOLUTION:
Requirement No. 1
Determine the carrying amount as of the date revaluation under the cost model. Then, determine the
sound value under the revaluation model.

4
B.

You might also like