Audit of Current Liabilities

AUDIT OF INTANGIBLE ASSETS AND PREPAYMENTS Case 1: KABOOM LABORATORIES Kaboom Laboratories holds a valuable patent (No. 1122098) on a device that prevents certain types of air pollution. Kaboom does not manufacture or sell the products and processes it develops; it conducts research and develops products, which it patents, and then assigns the patents to manufacturers on a royalty basis. The history of Patent No. 1122098 is as follows: Date Activity Cost 20x1-20x2 Research conducted to develop device P1,259, 100 Jan. 20x3 Design and construction of a prototype 262,800 Mar. 20x3 Testing of models 26,000 Jan. 20x4 Legal and other fees to process patent application; patent granted June 186, 150 20x4 Nov. 20x5 Engineering activity necessary to advance the design of the device to the 244,500 manufacturing stage April 20x7 Research aimed at modifying the design of the patented device 129,000 May 20x8 Legal fees paid in a successful patent infringement suit against a 102,000 competitor Kaboom assumed a useful life of 17 years when it received the initial device patent. On January 1, 20x9, it revised its useful life estimate downward to five (5) years. Amortization is computed for a full year if the cost is incurred prior to July 1 and no amortization for the year if the cost is incurred after June 30. Kaboom's reporting date is December 31, 2x11. Compute the carrying value of Patent No. 1122098 on each of the following dates: 1. December 31, 20x4 2. December 31, 20x8 3 . December 31, 2x11 Case 2: MIKE COMPANY Mike Company has provided information on intangible assets as follows: . A patent was purchased from Via Company for P4,000,000 on January 1, 20x1. Mike estimates the remaining useful life of the patent to be 10 years. The patent was carried in Via's accounting records at a net book value of P4,000,000 when Via sold it to Mike. During 20x2, a franchise was purchased from Mark Company for P960,000. The contract, which runs for 10 years, provides that 5% of revenue from the franchise must be paid to Mark. Revenue from franchise for 20x2 was P5,000,000. Mike takes a full year amortization in the year of purchase. The following research and development costs were incurred by Mike in 20x2: Materials and equipment P284,000 Personnel 378,000 Indirect costs 204,000 Total P866,000On January 1, 20x2, Because of the recent events. Mike estimates that the remaining useful life of the patent purchased on January 1, 20x1, is only ve (5) years from January 1, 20x2. 4. What Is the total carrying value of the intangible assets on December 31, 20x2? 5. What Is the total amount of charges against Mike's income for the year ended December 31 . 20x2? Case 3: DREXLER CORPORATION lnfonnatlon concerning Drexler Corporation's intangible assets is as follows: 1. On January 1, 20x4, Drexler signed an agreement to operate as a franchisee of Houston Copy Service, Inc., for an Initial franchise fee of P255,000. Of this amount, P75,000 was paid when the agreement was signed, and the balance is payable In four (4) annual payments of P45,000 each beginning January 1, 20x5. The agreement provides that the down payment is not refundable, and no future services are required of the franchisor. The implicit rate for a loan of this type is 14%. The agreement also provides that 5% of the revenue from the franchise must be paid to the franchisor annually. Drexler's revenue from the franchise for 20x4 was P2.T00.000. Drexler estimates the useful life of the franchise to be 10 years. 2. Drexler Incurred P234.000 of experimental and development costs in its laboratory to develop a patent which was granted on January 2, 20x4. Legal fees and other costs associated with registration of the patent totaled P49,200. Management estimates that the useful life of the patent will be eight (8) years. 3. A trademark was purchased from Jordan Company for P120000 on July 1, 20x1. Expenditures for successful litigation in defense of the trademark totaling P30,000 were paid on July 1, 20x4. Management estimates that the useful life of the trademark will be 20 yearsfrom the date of acquisition. Questions: 6. What is the carrying amount of the franchise on December 31, 20x4? 7. What is the carrying amount of the patent on December 31, 20x4? 8. What is the carrying amount of the trademark on December 31, 20x4? 9. What is the total amortization expense? 10. What is the total amount of intangibles-related expenses (excluding amortization) that should be reported in the income statement for the year ended December 31, 20x4? AUDIT OF CURRENT LIABILITIES Case 4: PALAUTANG COMPANY The balance of Palautang Company's accounts payable on December 31, 20x1 was P900,000, before any necessary year-end adjustment relating to the following: a. Goods were in transit from a vendor to Palautang on December 31, 20x1. The invoice cost was P50,000, and goods were shipped FOB destination on December 29, 20x1. The goods were received on January 4, 20x2. b. Goods shipped FOB destination on December 20, 20x1 from a vendor to Palautang were lost in transit. The invoice cost was P25,000. On January 5, 20x2, Palautang led a P25.000 claim against the common carrier. 0. Goods shipped FOB shipping point on December 31, 20x1 from a vendor to Palautang were received on January 6. 20x2. The invoice cost was P15,000. 11. What amount should Palautang report on Accounts Payable on its December 31, 20x1 statement of financial position? Case 5: FEEL NA FEEL, INC. In the audit process, the following data were obtained from the books of Feel na Feel. Inc.. which uses a voucher system. All invoices are subject to terms 2l10, nr'30. and are entered net with the discount entered in Purchase Discounts column of the voucher register. The accountant in charge of the books went on leave to attend to his family based in New Jersey. A fresh accountancy graduate has been assigned to record the transactions. At year-end. the substitute accountant nds that the unpaid vouchers do not agree with the Vouchers Payable control account. You are called to adjust the matter. A schedule of unpaid vouchers as of December 31, 20x1. all of which are net of discount. is presented to you. Date Voucher No. Supplier Amount Nov. 27 896 Balentong Traders P78,400 Dec. 2 909 Shala Company 19,600 11 918 Mukasim Dealers 44,100 20 952 Boom Panes. Inc. 17,150 21 955 Edi Wow Company 22,050 22 968 Neknek Company 80,850 31 982 Bebct. Inc. 78,400 P340,550 Vouchers Pa able Control Account Cash disbursements 1.309.500 Purchases journal 1.645.000 Purchase returns journal 36,750" *chcher nos. 909 and 952 cancelled as goods were returned in December. Based on the above information and the result of your audit. compute the following: 12. Adjusted balance of Vouchers Payable as of December 31. 20x1 13. Purchase Discounts Lost on paid vouchers 14. Purchase discount lost on paid vouchers Case 6: VICTORY. INC. Victory. Inc. is a manufacturer and retailer of household furniture. Your audit of the company's nancial statements forthe year ended December 31, 20x1. discloses the following debt obligations of the company at the end of the reporting period. a. A P200,000 short-term obligation due on March 1, 20x2. Its maturity could be extended to March 1. 20x4. provided Victory agrees to provide additional collateral. On February 12, 20x2, an agreement is reached to extend the loan's maturity to March 1, 20x4. b. A short-term obligation of P4,200,000 in the form of notes payable due February 5, 20x2. The company issued 80,000 ordinary shares for P40 per share on January 25, 20x2. The proceeds form the issuance, plus P1.000.000 cash, were used to settle the debt on February 5. 20x2. 0. A long-term obligation of P1,500.000 due on December 31. 2x11. On November 10, 20x1, Victory breaches a covenant on its debt obligation, and the loan becomes payable on demand. An agreement is reached to provide a waiver of the breach on January 11, 20x2. d. A long-term obligation of P4,000,000. The loan is maturing over eight (8) years. amounting to P500000 annually. The loan is dated September 1. 20x1, and the first maturity date is September 1, 20x2. 9. A debt obligation of P600,000 maturing on December 31, 20x4. The debt is callable on demand by the lender at any time. 15. What amount of current liabilities should be reported on the December 31. 20x1, statement of nancial position? Case 7: JB MUSIC JB Music carries a wide variety of musical instruments, sound reproduction equipment, recorded music, and sheet music. To attract customers, JB uses two (2) promotion techniques premiums and warranties. The premium is offered on the recorded and sheet music. Customers receive a coupon for each peso spent on recorded music and sheet music. Customers may exchange 200 coupons and P20 for a CD player. JB pays P34 for each CD player and estimates that 80% of the coupons given to customers will be redeemed. A total of 7,400 CD players used in the premium program were purchased during the year, and there were 1,250,000 coupons redeemed in 20x1. Musical instruments and sound reproduction equipment are sold with a one-year warranty for replacement of parts and labor. The estimated warranty cost, based on previous experience, is 4% of sales. Replacement parts and labor for warranty work totaled P180,000 during 20x1. .JB's sales for 20x1 totaled P7,200.000 P5,400,000 from musical instruments and sound reproduction equipment and P1,800,000 from recorded music and sheet music. JB uses the accrual method to account for the warranty and premium costs for nancial reporting purposes. The balances in the accounts related to warranties and premiums on January 1, 20x1, were as shown below: Inventory of premium CD players P39,950 Estimated premium claims outstanding 44,800 Estimated liability from warranties 136,000 Based on the preceding information, determine the amounts that will be shown on the December 31, 20x1 financial statements for the following: 16. Warranty expense for 20x1 1?. Estimated liability from warranties 18. Premium expense for 20x1 19. Inventory of premium CD players 20. Estimated premium claims outstanding