Quizzer – AFAR – Expense Recognition
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Question 1 of 3
1. Question
The failure to record an accrued expense at year-end will result in overstatement errors of:
CorrectIncorrect -
Question 2 of 3
2. Question
The following account balances are excerpt from STU Corporation’s trial balance for the audit period ended December 31, 2023:
Patents P 4,940,000
Licensing agreement 1,680,000
Trademark 1,606,000
Leasehold improvements 1,300,000
Audit notes:
A. Patents for STU’s manufacturing process were acquired January 2, 2023, at a cost of P3,740,000. An additional amount of P 1,387,000 was spent on December 30, 2023, for repairs on machinery covered by the patents and charged to Patent account. The repairs were necessarily incurred to bring back the said machinery to its original working condition. STU uses the straight line method for all depreciation and amortization. The useful life of the patent is its legal life.
B. On January 1, 2012, STU purchased the Licensing agreement, which was useful for ten years, The Licensing Agreement account balance included the purchase price of P2,160,000 and P240,000 cost to train employees at the inception of the licensing agreement. The license have been amortized over the agreement term which is 10 years.
C. A trademark was purchased by STU for P 1,280,000 on July 1, 2012. Expenditures for the successful litigation in defense of the trademark totaled to P326,000 were paid on July 1, 2024 and were charged to the trademark account. The trademark was estimated to have an indefinite life. By the end of 2024, the company estimated to generate annual net future cash flows from the continued use of the trademark at P90,000. The prevailing market rate of interest on this date was at 9%.
D. A 10-year non-renewable lease was signed January 3, 2024, for the leased building that STU used in manufacturing operations. The Leasehold Improvement account includes:
P900,000 cost of improvements with a total estimated useful life of 5 years, which was completed on March 1, 2024.
P400,000 lease rights paid for the exclusive right to occupy the leased property for the duration of the lease term without the lessor having the right to lease it out to other third parties.Amortization/depreciation is yet to be recognized on lease-related assets.
What is the total amount chargeable to expense for the current year (2024) as a result of your audit?
CorrectIncorrect -
Question 3 of 3
3. Question
The following account balances are excerpt from STU Corporation’s trial balance for the audit period ended December 31, 2023:
Patents P 4,940,000
Licensing agreement 1,680,000
Trademark 1,606,000
Leasehold improvements 1,300,000
Audit notes:
A. Patents for STU’s manufacturing process were acquired January 2, 2023, at a cost of P3,740,000. An additional amount of P 1,387,000 was spent on December 30, 2023, for repairs on machinery covered by the patents and charged to Patent account. The repairs were necessarily incurred to bring back the said machinery to its original working condition. STU uses the straight line method for all depreciation and amortization. The useful life of the patent is its legal life.
B. On January 1, 2012, STU purchased the Licensing agreement, which was useful for ten years, The Licensing Agreement account balance included the purchase price of P2,160,000 and P240,000 cost to train employees at the inception of the licensing agreement. The license have been amortized over the agreement term which is 10 years.
C. A trademark was purchased by STU for P 1,280,000 on July 1, 2012. Expenditures for the successful litigation in defense of the trademark totaled to P326,000 were paid on July 1, 2024 and were charged to the trademark account. The trademark was estimated to have an indefinite life. By the end of 2024, the company estimated to generate annual net future cash flows from the continued use of the trademark at P90,000. The prevailing market rate of interest on this date was at 9%.
D. A 10-year non-renewable lease was signed January 3, 2024, for the leased building that STU used in manufacturing operations. The Leasehold Improvement account includes:
P900,000 cost of improvements with a total estimated useful life of 5 years, which was completed on March 1, 2024.
P400,000 lease rights paid for the exclusive right to occupy the leased property for the duration of the lease term without the lessor having the right to lease it out to other third parties.Amortization/depreciation is yet to be recognized on lease-related assets.
What is the total expense to be recognized for 2024 in relation to the lease agreement?
CorrectIncorrect