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Auditing Problem 3

PRTC Corporation acquired several intangible assets in 2012: 1) A franchise for P680,000 payable over 4 years with annual payments of P120,000 and 5% revenue sharing. Revenue was P8,000,000. 2) A patent purchased for P1,100,000 through cash, shares, and a note payable. The patent has a 10 year useful life. 3) A trademark for P1,200,000 determined to have an indefinite useful life but reduced future cash flows due to new competition. The auditor must determine expenses, carrying amounts, and total expenses related to the intangible assets and verify the amortization period asserts management's financial statement

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459 views1 page

Auditing Problem 3

PRTC Corporation acquired several intangible assets in 2012: 1) A franchise for P680,000 payable over 4 years with annual payments of P120,000 and 5% revenue sharing. Revenue was P8,000,000. 2) A patent purchased for P1,100,000 through cash, shares, and a note payable. The patent has a 10 year useful life. 3) A trademark for P1,200,000 determined to have an indefinite useful life but reduced future cash flows due to new competition. The auditor must determine expenses, carrying amounts, and total expenses related to the intangible assets and verify the amortization period asserts management's financial statement

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jhobs
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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PROBLEM NO.

You noted the following items relative to the company’s Intangible assets in connection with your audit
of the PRTC Corporation’s financial statements for the year 2012. Franchise On January 1, 2012, PRTC
signed an agreement to operate as franchisee of Clear Copy Service, Inc. for an initial franchise of
P680,000. Of this amount, P200,000 was paid when the agreement was signed and the balance was
payable in four annual payments of P120,000 each, beginning January 1, 2013. The agreement provides
that the down payment is not refundable and no future services are required of the franchisor. The
implicit rate for loan of this type is 14%. The agreement also provides the 5% of the revenue from the
franchise must be paid to the franchisor annually. PRTC’s revenue from the franchise for 2012 was
P8,000,000. PRTC estimates the useful life of the franchise to be ten years. Patent On July 1, 2012, PRTC
purchased a patent from the inventor, who asked P1,100,000 for it. PRTC paid for the patent as follows:
cash, P400,000; issuance of 10,000 shares of its own ordinary shares, par P10 (market value, P20 per
share); and a note payable due at the end of three years, face amount, P500,000, noninterest-bearing.
The current interest rate for this type of financing is 12 percent. PRTC estimates the useful life of the
patent to be ten years. Trademark PRTC purchased for P1,200,000 a trademark for a very successful soft
drink it markets under the name POWER!. The trademark was determined to have an indefinite life. A
competitor recently introduced a product that is in direct competition with the POWER! product, thus
suggesting the need for an impairment test. Data gathered by the entity suggests that the useful life of
the trademark is still indefinite, but the cash flows expected to be generated by the trademark have
been reduced either to P40,000 per year (with a probability of 70%) or to P80,000 per year (with 30%
probability). The appropriate risk-free interest rate is 5%. The appropriate riskadjusted interest rate is
10%.

QUESTIONS:

Based on the above and the result of your audit, determine the following: (Round off present value
factors to 4 decimal places)

1. Total expenses related to franchise in 2012


a. P503,914 c. P448,950
b. P535,200 d. P454,964
2. Carrying amount of franchise as of December 31, 2012
a. P549,644 c. P538,733
b. P494,680 d. P612,000
3. Carrying amount of patent as of December 31, 2012
a. P1,045,000 c. P860,310
b. P 955,900 d. P908,105
4. Total expenses related to the intangible assets in 2012
a. P662,759 c. P733,063
b. P711,709 d. P802,212
5. In auditing intangible assets, an auditor most likely would review or recompute amortization and
determine whether the amortization period is reasonable in support of management’s financial
statement assertion of
a. Valuation. c. Completeness.
b. Existence or occurrence. d. Rights.

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