a. Gather information: What is the economic substance of the patent acquired by Lewis Company? In your opinion, has Lewis Company accurately accounted for the investing side of the transaction?

b. Analysis: Describe the audit procedures that you would perform in 2022 to audit the patent. For each procedure, describe how the procedure satisfies the audit of financial statement assertions.

c. Gather information: What is the economic substance of the preferred stock issued by Lewis Company? In your opinion, has Lewis Company accurately accounted for the financing side of the transaction?

d. Analysis: Describe the audit procedures that you would perform in 2022 to audit the preferred stock. For each procedure, describe how the procedure satisfies the audit of financial statement assertions.

Lewis Company is a biotechnology company that recently received U.S. Food and Drug Administration (FDA) approval for a new drug that treats Parkinson’s disease. Sales are showing early signs of success. On the wave of this success, Lewis Company acquired a patent for a related drug that is designed to treat Alzheimer’s disease from Brown and Harley, another biotechnology company. Brown and Harley has completed successful animal tests with the patented drug, known as AZH. Now that Lewis has acquired the patent, Lewis will have to take the drug through human trials and obtain FDA approval, a process that could last two to four years.

Lewis agreed to pay Brown and Harley $10 million for the patent on February 29, 2022. Brown and Harley’s book value associated with the patent was only $500,000. Lewis acquired the patent from Brown and Harley for $1 million in cash and $9 million in 9%, preferred stock redeemable on February 29, 2026. Lewis accounted for the transaction by debiting an asset account for the patent in the amount of $10 million, with an intent to amortize the patent over 16 years, the remaining legal life of the patent, crediting cash for $1 million and crediting stockholders’ equity accounts for $9 million.