Answer with solution

You are assigned to audit Umbrella, Inc., a domestic corporation engaged in manufacturing and distributing pharmaceutical and analytical laboratory products for the calendar year ended December 31, 2020. Based on your team's preliminary risk assessment procedures, you determined that the Company's "Intangible Assets" account is significant. As of December 31, 2020, its total unadjusted balance approximates 5% of the total noncurrent assets and 2% of the total assets. Prior year's audited balance shows that it represents 7% of total noncurrent assets and 3% of the total assets. Your team also assessed a higher inherent risk on the valuation assertion of the account as the management employs significant judgment upon impairment assessment on its existing goodwill. In addition, the Company had continuously facing litigations on its products' patents. Within the last 5 years, it already written off Php 10 million worth of patents as they were not able to successfully defend them during legal proceedings. Also, on December 31, 2019, the Company revised the useful life of its trademark from indefinite to 35 years. Upon doing substantive procedures, you requested the schedule of "Intangible Assets" account. The Accounting Clerk was able to provide you the following: Umbrella, Inc. Intangible Assets Subledger As of December 31, 2020 (in Php) Account Name Account Code Debit Credit Patent 170001 22,000,000 Accumulated Amortization - Patent 171001 (14,500,000) Franchise 170002 7,500,000 Accumulated Amortization - Franchise 171002 (1,500,000) Trademark 170003 10,000,000 Accumulated Amortization - Trademark 171003 (285,714) Goodwill 170004 50,000,000 Allowance for Impairment - Goodwill 171004 Umbrella, Inc. Rollforward of Intangible Assets As of December 31, 2020 (in Php) Patent Franchise Trademark Goodwill Cost Beginning balance 25,000,000 7,500,000 10,000,000 50,000,000 Additions 2,000,000 Disposals (5,000,000) Ending balance 22,000,000 7,500,000 10,000,000 50,000,000 Accumulated amortization Beginning balance (11,500,000) (1,500,000) Amortization during the year (3,000,000) (285,714) Disposals Ending balance (14,500,000) (1,500,000) (285,714) Impairment Net book value - December 31, 2020 7,500,000 6,000,000 9,714,286 50,000,000You also obtained the transaction listing for "Intangible Assets" account and noted the following: (a) On June 30, 2020, the Company capitalized Php 1 million representing legal fees paid to one of its legal counsels in successfully defending a patent. The Company started the amortization on July 1 using a 10-year useful life. (b) The management assessed that the useful life of a patent costing Php 2 million has a remainig life of 5 years as of January 1, 2020. Since the clerk is new in the process, she recorded the related amortization using the 15- year basis. The patent had been amortized for 5 years. (c) Two patents have been written off during the year totalling 5 million as the Company was not able to defend the patent infringement case initiated by Diamond Pharmaceutical Corporation against the Company. The total net carrying amount of the patents is Php 1 million. (d) The clerk made an error in recording the amortization of the franchise for 2020. Upon further investigation, you revealed that she charged the related franchise amortization to the franchise stores and equipments depreciation (account code: 151010) under the "Property, plant and equipment" account amouting to Php 500,000. (e) Starting January 1, 2020, trademark is subjected to annual amortization using the most recent estimate made by the management. Furthermore, the team obtained and reviewed the Company's impairment analysis of all intangible assets. You were able to assess the reasonableness of the assumptions used by the management and noted indications that goodwill arising from business combinations should be impaired by 20% as one of its subsidiaries is currently experiencing continuous losses for the past 3 years and there have been a significant loss on its market share. Based on inquiry, the management has not yet recorded any impairment losses for the year. Required: 1. Prepare necessary adjusting entries based on the findings you have noted above (15 points)