UNIT 5 AUDIT OF BIOLOGICAL ASSETS AND AGRICULTURAL PRODUCE Estimated Time: 3.0 HOURS
Discussion questions 5-1
1. Describe the following agriculture-related terms. You should provide pictures to the class. a. Agricultural activity b. Biological assets c. Agricultural produce d. Bearer biological asset e. Consumable biological asset f. Bearer biological asset g. Biological transformation 2. Provide an example of an audit program for biological assets. 3. What audit procedures address the existence and rights and obligations assertions of biological assets? 4. What audit procedures address the valuation assertion of biological assets?
Discussion questions 5-2 1. Do some research on recent changes in IAS 41 or PAS 41. Document findings and present to class. 2. Does the revised PAS 41 allow recognition at cost method? Under what circumstances? Are there special disclosures required? 3. Select a company engaged in Agricultural Activity, provide pictures or screenshots, and enumerate the biological assets and agricultural produce held by this company based on the latest available financial statements. How does this company comply with the recognition and measurement principles of PAS 41? Problem 5-1
Pikachu Fuzz has a herd of 12 two-year old animals on January 1, 2012. One animal aged 2.5 years was purchased on July 1, 2012 for P108, and one animal was born on July 1, 2012. No animals were sold or disposed of during the year. The fair value less cost to sell per unit is as follows: 2 – year old animal on January 1 2.5 – year old animal on July 1 New born animal on July 1 2 – year old animal on December 31 2.5 – year old animal on December 31 New born animal on December 31 3 – year old animal on December 31 0.5 – year old animal on December 31
100 108 70 105 111 72 120 80
1. What is the fair value of the biological assets on December 31, 2012? 2. What is the gain from change in fair value of biological assets to be recognized in
2012?
3. What is the gain from change in fair value due to price change?
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Problem 5-2
Amadeo Farms Company, an audit client, has a coffee bean plantation. Harvested coffee beans are processed further before these are sold to various interested buyers. The following were the financial information from the client-prepared schedule related to the coffee bean plantation: As of December 31, 2012: Biological assets – coffee Agricultural produce – coffee bean Inventories
P2,500,000 1,000,000 1,200,000
The following additional information were gathered by the auditor in the course of the audit: •
•
• •
The biological assets – coffee had fair value less costs to sell of P2,000,000 as of December 31, 2012. The amount provided in the client-prepared schedule was based on the fair value less costs to sell as of November 30, 2010 and capitalized fertilizers and other costs amounting to P250,000. The agricultural produce – coffee beans in the client-prepared schedule included P300,000 coffee beans which were already processed. The processed coffee beans underwent processing last December 15, 2012. The value of these coffee beans reflected the fair value less costs to sell of P250,000 as of December 1, 2012. Processing costs amounted to P50,000. These coffee beans had fair value less costs to sell of P275,000 as of December 15, 2012 (just right before these had undergone processing). As of December 31, 2012, these processed coffee beans had net realizable value of P320,000. The unprocessed coffee beans had fair value less costs to sell of P760,000 as of December 31, 2012. The inventories of P1,200,000 as of December 31, 2012 were properly valued at their net realizable values.
1. Proposed adjusting journal entry related to item a. 2. Proposed adjusting journal entry related to item c. 3. Amount of inventory to be recognized from the December 15 processing on that date. 4. Adjusted balance of inventory as of December 31, 2012.
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Problem 5-3
Baba Black Sheep has 120 heads of sheep in January 1, 2012 composed of the following: Wool Livestock – Class A (55 heads) Wool Livestock – Class B (40 heads) Wool Livestock – Class C (25 heads)
P660,000 380,000 137,500
On July 1, 2012, the company purchased five Class A sheep at P15,000 each, 10 Class B sheep at P13,000 each, and three Class C sheep at P8,100 each. At the end of the third quarter, four kids and nine kids out of Class A sheep and Class B sheep, respectively, were born. During that time, the fair value of the kid less costs to sell is P6,200 each for both classes. Close to the end of the year, the company decided to sell five Class B sheep for P9,800 each after a disease struck causing eight Class B sheep to die. Because their locations are adjacent, the disease affected also the Class A sheep causing three Class A sheep to die (including one kid). On December 31, 2012, the fair values less costs to sell of each class of sheep revealed: Class A, P15,480; Class B, P12,350; Class C, P8,400; and the kids, P7,105. It is the practice of the company to group the kid and the adult sheep in one subsidiary account and to employ FIFO costing method.
1. Carrying value (before adjustments to fair value less costs to sell) of Wool Livestock – Class A at December 31, 2012. 2. Carrying value (before adjustments to fair value less costs to sell) of Wool Livestock – Class B at December 31, 2012. 3. Carrying value (before adjustments to fair value less costs to sell) of Wool Livestock – Class C at December 31, 2012. 4. Amount to be debited or credited to Wool Livestock – Class A at December 31, 2012 to adjust the carrying value due to effects in the fair value less costs to sell. 5. Amount to be debited or credited to Wool Livestock – Class B at December 31, 2012 to adjust the carrying value due to effects in the fair value less costs to sell. *The client uses the term kid to describe an immature sheep.
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Problem 5-4
In the audit of JUNE Egg Farms Inc. for the year 2012, you obtained the following information: June is engaged in egg production for supply to various customers. The company has 360 heads of egg-laying chickens in January 1, 2012 composed of the following: Poultry Chicken - mature (330 heads) Poultry Chicken - immature (30 heads)
P31,350 2,100
Additional information: 1. On December 31, 2011, June has 400 dozens of eggs on hand with carrying value of P16,500. 2. On May 1, 2012, the company purchased 100 heads of mature chicken to increase its production by 40%. Fair value less costs to sell during that time was P99 per head. 3. At the end of the second quarter of 2012, 20 heads of immature chickens were sold for P74 per head to accommodate the space for another 20 heads of mature chickens bought during that month. The fair value less costs to sell of the mature chickens during that month was P99.80. 4. On October 15, the company incurred P12,500 expense for the medicines bought to control avian pests. An avian pest disease struck the poultry killing 20 mature chickens and 5 immature chickens. The fair values less costs to sell of the mature chickens and immature chickens during that month were P102 and P75 per head, respectively. 5. During the year, June produced 10,000 dozens of egg with total fair value less costs to sell of P460,000 and sold 10,350 dozens of eggs for P645,840. The company uses the FIFO method and the perpetual inventory system. 6. On December 31, 2012, the fair values less costs to sell of each class of chicken were determined to be: Mature chickens – P104.50 per head and Immature Chickens – P75.80 per head.
1. Total amount of changes in fair value of biological assets to be recognized for the year in the income statement (prior to item 6 above). 2. Correct amount of Egg Inventory at year-end. 3. Adjusting entry to be made at year-end to update the Poultry Chicken-Mature account ending balance. 4. Adjusting entry to be made at year-end to update the Poultry ChickenImmature account ending balance. 5. Correct amount of one-line item biological assets to be presented in the balance sheet at year-end.
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Problem 5-5
APRIL Company is engaged in milk production for supply to various customers. As of December 31, 2011, April held 35 mature goats able to produce milk and 15 immature goats being raised to produce milk in the future. The books of April disclosed the following: DAIRY LIVESTOCK – MATURE 2012 Debit BEGINNING balance P 437,500 02.01 Purchase of 7 mature goats 89,600 07.01 Death of 2 mature goats 10.01 Sold 3 mature goats DAIRY LIVESTOCK – IMMATURE 2012 Debit BEGINNING balance P 93,000 02.01 Purchase of 3 immature goats 19,500 07.01 Death of 3 immature goats 09.01 Birth of 2 kids (immature goats) 14,100
Credit P 26,000 39,450 Credit P 21,000
In the course of your audit, you also obtained the following information regarding the fair values less costs to sell of the goats (mature and immature) for the year under audit: Month January February March April May June July August September October November December
Mature P 12,500 12,800 12,800 12,900 12,700 12,750 13,000 13,100 12,900 13,200 13,150 13,250
Immature P 6,200 6,500 6,600 6,800 6,700 6,800 7,000 7,050 7,000 7,100 7,150 7,300
The client uses FIFO method for accounting for the physical “in” and “out” of the biological assets.
1. Amount to be debited or credited to dairy livestock – mature at year-end 2012 to reflect gain or loss on change in fair value as per PAS 41 (indicate whether debit or credit). 2. Amount to be debited or credited to dairy livestock – immature at year-end 2012 to reflect gain or loss on change in fair value as per PAS 41 (indicate whether debit or credit). 3. Total amount of changes in fair value of dairy livestock to be recognized in the 2012 financial statements (after considering answers to requirements 1 and 2). 4. Total number (combined mature and immature) of dairy livestock to be disclosed in the 2012 financial statements.
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