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Masters Technological Institute of Mindanao Problem 3

Applied Auditing
The Las Vegas Inc. acquired several small companies at the end of
Audit of Intangibles and Correction of Errors 2016 and based on the acquisitions, reported the following
intangibles in its 12/31/16 Balance Sheet:
Problem 1 Patent P 600,000
Information concerning Ruth Corporation Intangible Asset is as Copyright 1,200,000
follows: Trade name 1,050,000
a. On January 1, 2016, Ruth signed an agreement to operate Computer Software 300,000
as a franchisee of Rapid Copy Service, Inc., for an initial Franchise 480,000
franchise fee of P85,000. Of this amount, P25,000 was paid Goodwill 2,700,000
when the agreement was signed and the balance is
payable in four annual payments of P15,000 each Additional information:
beginning January 1, 2017. The agreement provides that a. The patent which ad remaining legal life of 15 years, was
the down payment is not refundable and no future purchased from FAC for P600,000. The company estimates
services are required of the franchisor. The present value that the patent will be useful in generating the company
at January 1, 2016, of the four annual payments cash flows over a ten year period. The patent was carried
discounted at 14% (the implicit rate for a loan of this type on FAC’s accounting records at a net book value of
is P43,700.) the agreement also provides that 5% of the P800,000 when it sold the same to Las Vegas.
revenue from the franchise must be paid to the franchisor b. The company was able to generate approximately P1.5M
annually. Ruth’s revenue from the franchise for 2016 was in 2017 from distribution of the copyright protected
P900,000. Ruth estimates the useful life of the franchise to materials. Moreover, the company estimates that P3.5M
be ten years. will be further generated from the copyrighted materials.
b. Ruth incurred prior to 2016, 78,000 of experimental and c. The company expects to use the trade name for the
development costs in its laboratory to develop a patent foreseeable future.
which was granted on January 2, 2016. Legal fees and d. The accountant knows that the computer software is used
other costs associated with the registration of the patent in the company’s 240 sales offices. The company has
totaled P16,400. Management estimates that the useful replaced the software I its 10 offices in 2017 and expects
life of the patent will be eight years. to replace the software in 80 more offices in 2018 and the
c. A trademark was purchased from Sampson Company for remainder in 2019.
P40,000 on July 1, 2013. Expenditures for successful e. The franchise was purchased from JC Company. In
litigation in defense of the trademark totaling P10,000 addition, 5% of the revenue from the franchise must be
were paid on July 1, 2016. Management estimates that the paid to JC. Revenue from the franchise for 2017 was
useful life of the trademark will be 20 years from the date P2.5M. Las Vegas Inc. estimates that the useful life of the
of acquisition. franchise to be 10 years and takes full year amortization in
Required: Correct balances as of 12/31/16 the year of purchase.
1. Franchise f. The company incurred research and development cost in
2. Patent 2017 as follows:
3. Trademark Materials 42,000
4. Total Intangibles Equipment, 4 years useful life 100,000
5. Total expenses Personnel 189,000
Indirect Costs 102,000
Problem 2 The company estimates that these costs will be recouped
Batibot Corp. was organized in 2015. Its accounting records include by December 31, 2020. the materials and equipment
only one account for all intangible assets. The following is a purchased have no alternative use.
summary of the debit entries that have recorded and posted during Using the above information, ascertain the following item:
2015 and 2016: 1. What is the amortization expense on the Patent and
7/1/15 8-year franchise; expires 6/30/2023 P126,000 Copyright combined in 2017?
10/1/15 Advance payment on leasehold (term 2. How much is the total expense related to the franchise
of lease is 2years) 84,000 and computer software combined in 2017?
12/31/15 Net loss for 2015 including incorporation 3. What is the total research and development expense in
fee, P3,000, and related legal fees of 2017?
organizing, P15,000 (all fees incurred 4. What is the total intangibles as of 12/31/17?
in 2015) 48,000
1/2/16 Acquired patent (10-year life) 222,000 Correction of Error
3/1/16 Cost of developing a secret formula 225,000 Problem 4
4/1/16 Goodwill purchased 835,000 Jessica Company reported net income for a two-year period as
7/1/16 Legal fee for successful defense of follows:
patent purchased above 37,950 2014: P6M 2015: P8M
10/1/16 Research and development costs 480,000 In an audit of the statement for the year ended 12/31/14, the
Ignore Income tax effects. following errors are discovered:
Required: A. The company paid one year insurance premium of
1. The unamortized patent cost at 12/31/16, should be? P240,000 effective April 1, 2014. The entire amount was
2. The unamortized franchise cost at 12/31/16, should be? debited to asset account and no adjustment was made at
3. The amount of prepaid rent to be reported in Batibot’s the end of 2014.
12/31/16, statement of financial position is? B. The company leased a portion of its building for P480,000.
4. The adjusting entries on 12/31/16, should include a net The term of the lease is 1 year ending April 30, 2015.
debit to the retained earnings account of? Collection of rent was credited to unearned rent revenue
5. As a result of the adjustments at 12/31/16, the total account. At the end of 2014, no entry was made to take up
charges against Batibot’s 2014 income should be? the earned portion of the amount collected.
C. Depreciation expense in 2014 was understated by
D. Depreciation expense in 2015 was overstated by P14,000. D. Prepaid insurance were consistently omitted at the end of
E. Bad debts expense of P11,000 was not recorded in 2014. each year:
2012 P75,000
Required: 2013 100,000
1. Adjusted income in 12/31/14. 2014 115,000
2. Adjusted Income in 12/31/15. 2015 120,000
3. Adjusted Retained Earnings in 12/31/14. E. Interest receivable were not recorded on December 31 of
4. Adjusted Retained Earnings in 12/31/15. the following years:
2013 P20,000
Problem 5 2014 25,000
Bee Co.’s net income for 2014, 2015 and 2016 were P100,000 and 2015 30,000
P185,000; respectively. The following items were not handled F. On January 1, 2015 an equipment costing P400,000 was
properly. sold for 220,000. At the date of sale the equipment had
a. Rent of P6,500 for 2017 was received from a lease on accumulated depreciation of P240,000. The cash received
December 23, 2016, and recorded as outright income in was recorded by the company as miscellaneous income.
2016. G. You also discovered that on July 1, 2013, the company
b. Salaries payable at the end of the following years were completed the construction of the left wing of its factory
omitted. building incurring a total cost of P750,000, which it had
charged to repairs expense. the said building has been
12/31/13 P2,500 used in operations for 5 years as of July 1, 2013 and its life
12/31/14 P5,500 was unaffected by the extension. The building which had
12/31/15 P7,500 an original cost of P3,000,000 had an accumulated
12/31/16 P4,700 depreciation of P1,125,000 as of December 31, 2015.
c. The following unused office supplies were omitted in the 1. What is the correct depreciation expense in 2015?
accounting records: 2. What is the correct net income in 2013?
3. What is the correct net income in 2014?
12/31/13 P3,500 4. What is the correct net income in 2015?
12/31/14 P6,500
12/31/15 P3,700
12/31/16 P7,100

d. On January 1, 2014, the company completed major repairs

on the company’s machinery and equipment totaling
P220,000, which was expensed outright. The said
equipment is 5 years old as of January 1, 2014. S of
December 31,2016, the equipment had an original cost of
P500,000 and a carrying value of P250,000.
1. The correct 2016 depreciation expense is?
2. The corrected 2014 net income is?
3. The corrected 2015 net income is?
4. The corrected 2016 net income is?
5. The effect of the above errors on the 2016 beginning
retained earnings is?
6. The effect of the above errors on 2016 working capital is?

Problem 6
The income statements of Gerald Inc. indicate the following net
2013 P1,500,000
2014 1,750,000
2015 2,000,000

An examination of the accounting records for the year ended

December 31, 2015 indicates that several errors were made. The
following errors were discovered:
A. Several accruals on December 31, were consistently
2012 P95,000
2013 110,000
2014 100,000
2015 140,000

B. The footings and extensions showed that the inventory on

December 31, 2014 was overstated by P190,000.
C. P150,000 worth of inventories were received on January 4,
2016. Upon investigation you discovered that these goods
were shipped by the supplier on December 31, 2015 FOB
shipping point. Further investigation revealed that liability
on the item were recorded when the goods were received.