PROBLEM NO. 4

Summer Manufacturing Corporation was incorporated on January 3, 2019. The corporations financial statements for its first years operations were not examined by a CPA. You have been engaged to audit the financial statements for the year ended December 31, 2020, and your work is substantially completed. A partial trial balance of the companys accounts follows:

Account Title Debit Credit

Cash. P11,000 Accounts receivable. 42,500 Allowance for doubtful accounts P 500 Inventories. 38,500 Machinery. 75,000 Equipment. 29,000 Accumulated depreciation. 10,000 Patents (Item 1) 85,000 Leasehold improvements (Item 6) 26,000 Prepaid expenses. 10,500 Organization expenses (Item 7) 29,000 Goodwill (Item 5) 24,000 Licensing Agreement A (Item 2 & 3) 50,000 Licensing Agreement B (Item 2 & 4) 49,000 Additional information:

Item 1: Patents for Summers manufacturing process were purchased January 2, 2020, at a cost of P68,000. An additional P17,000 was spent in December 2020 to improve machinery covered by the patents and charged to the Patents account. The patents had a remaining legal term of 17 years.

Item 2: On January 3, 2019, Summer purchased two licensing agreements; at that time they were believed to have unlimited useful lives. The balance in the Licensing Agreement A account included its purchase price of P48,000 and P2,000 in acquisition expenses. Licensing agreement B also was purchased on January 3, 2019, for P50,000 but it has been reduced by credit of P1,000 for the advance collection of revenue from the agreement.

Item 3: In December 2019, an explosion caused a permanent 60 percent reduction in the expected revenue-producing value of Licensing Agreement A, and in January 2021, a flood caused additional damage, which rendered the agreement worthless.

Item 4: A study of Licensing Agreement B made by Summer in January 2020 revealed that its estimated remaining lifeexpectancy was only 10 years as of January 1, 2020.

Item 5: The balance in the Goodwill account includes P24,000 paid December 30, 2019, for an advertising program, which it is estimated will assist in increasing Summers sales over a period of four years following the disbursement.

Item 6: The Leasehold Improvement account includes (a) the P15,000 cost of improvements with a total estimated useful life of 12 years, which Summer, as tenant made to leased premises in January 2019; (b) movable assembly- line equipment costing P8,500, which was installed in the leased premises in December 2020; and (c) real estate taxes of P2,500 paid by Summer, which under the terms of the lease, should have been paid by the landlord. Summer paid its rent in full during 2020. A 10-year nonrenewable lease was signed January 3, 2019, for the leased building that Summer used in manufacturing operations.

Item 7: The balance in the Organization Expenses account includes pre-operating costs incurred during the organizational period.

QUESTIONS: 1. The carrying amount of Patents as of December 31, 2020 is

a. P85,000. c. P66,000

b. P64,000. d. P46,000

2. The carrying amount of Licensing Agreement A as of December 31, 2020 is

a. P20,000. c. P10,000

b. P0. d. P50,000

3. The carrying amount of Licensing Agreement B as of December 31, 2020 is

a. P66,000. c. P45,000

b. P85,000. d. P64,000

4. The carrying amount of Leasehold Improvements as of December 31, 2020 is

a. P26,000. c. P13,500

b. P15,000. d. P12,000

5. The net adjustment to Retained earnings to reflect all the necessary corrections from Item 1 to 7 will amount to

a. P84,500 debit. c. P83,000 debit

b. P84,500 credit. d. P55,400 debit