UNIT 7

AUDIT OF BIOLOGICAL ASSETS

AND AGRICULTURAL PRODUCE
Estimated Time: 2.0 HOURS

Discussion questions 7-1

1. Describe the following agriculture-related terms.
a. Biological assets f. Agricultural activity
b. Consumable biological assets g. Biological transformation
c. Bearer biological assets h. Harvest
d. Mature biological assets i. Bearer Plant
e. Agricultural produce
2. What audit procedures address the existence and rights and obligations assertions of
biological assets?
3. What audit procedures address the valuation assertion of biological assets?

Problem 7-1 Fair Value less Cost to Sell

You are auditing the books of Café Company which is engaged in agricultural activity.
Upon inspection of the company’s records, you noted the valuation schedule below
related to one of its biological assets group:
Estimated selling price P20,000
Cost to sell:
Commissions to brokers P1,000
Transport costs 700
Transfer taxes and duties 500
Levies by commodity exchange 300
Advertising costs 200 2,700
Fair value less cost to sell P17,300
Required:
1. How much is the fair value of the biological assets?
2. How much is the cost to sell of the biological assets?

Problem 7-2 Contract Prices, Active Market, Most Advantageous Market

Mabuhay Company is engaged in agricultural activity. In your audit of its records, you
noted the following information on a biological asset:
Contract price P32,000
Cost to sell in an active market 5,000
Fair value less cost to sell P27,000
The biological asset was acquired at a cost of P10,000. To test whether the valuation
was appropriate, you gathered information from the active markets wherein transactions
for this asset take place with sufficient frequency and volume. The cost to sell will be the
same for both markets.
Quoted price in Active Market 1 28,000
Quoted price in Active Market 2 30,000
ABC is contemplating on transacting in Active Market 1.
Required:
1. How much biological assets should be recognized in the year-end financial
statements?
2. Assuming that the company has not chosen any market yet, how much biological
assets should be recognized in the year-end financial statements?

Auditing Practice I Second Term, AY 2019-2020

Workbook Page 7-1
Problem 7-3 Fair Value less Cost to Sell/Gain from Price and Physical Change
You were assigned to audit the books of Zubic Company for the year 2019. It was
already on its second year of operations but no reports were prepared yet for 2019
because the former accountant of the owner left and no replacement was made. All the
necessary documents were kept intact for reference.
On January 1, 2019, the biological assets of ABC Co. consists of ten 2 year old animals
with fair value less cost to sell of P10,000 each for a total of P100,000. This was based
on the prior year’s audited financial report.
Transactions during the year include the following:
§ One animal aged 2.5 years was purchased on July 1, 2019 for P10,800.
§ One animal was born on July 1, 2019.
§ No animals were sold or disposed of during the period.
In your audit, you were able to gather the per unit fair values less costs to sell of these
animals for different dates from an active market as follows:
New born animal on July 1 P7,000
2 – year old animal on July1 10,300
2.5 – year old animal on July 1 10,800
3 – year old animal on July1 13,000
New born animal on December 31 7,200
0.5 – year old animal on December 31 8,000
2 – year old animal on December 31 10,500
2.5 – year old animal on December 31 11,100
3 – year old animal on December 31 12,000
Case 1:
1. Prepare the necessary journal entries to record these transactions.
2. How much is the fair value of the biological assets on December 31, 2019?
3. How much is the gain from change in fair value of biological assets to be recognized
in 2019?
4. How much is the gain from change in fair value due to price change in 2019?
5. How much is the gain from change in fair value due to physical change in 2019?

Case 2:
Assume that all of the given above are the same except that two animals with age of 2
years were sold for P15,000 each on August 1, 2019 and another 2 year old died in
September 1, 2019.
1. Prepare the necessary journal entries to record these transactions.
2. How much is the fair value of the biological assets on December 31, 2019?
3. How much is the gain from change in fair value of biological assets to be recognized
in 2019?
4. How much is the gain from change in fair value due to price change?
5. How much is the gain from change in fair value due to physical change?

Auditing Practice I Second Term, AY 2019-2020

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Problem 7-4 Government Grant
You are the manager in charge of the audit of industries involving accounting for
biological assets and agricultural produce. Your audit staff referred to you the following
cases of government grants related to biological assets of their respective audit clients:

Case 1: Unconditional Government Grant

On January 1, 2019, ABC Co. was granted by a local government a grant of P100,000 to
aid ABC in financing the domestication of ostriches. The ostriches are managed to
produce eggs that are sold to the community. ABC measures its biological assets at fair
value less cost to sell. No conditions are attached to the grant.

Case 2: Conditional Government Grant (Bearer Plant)

On December 1, 2019, ABC Co. was granted by a local government a grant of P100,000
to aid ABC in planting American Evergreen trees. This certain tree has small yellowish
flowers by fleshy pods with many seeds that bears cacao. Cacao beans are dried, partly
fermented, powdered ground and roasted in order to produce a raw material for the
production of chocolates.

The grant is receivable when ABC has acquired a suitable site to plant trees. As of
December 31, 2019, ABC did not yet comply with the condition.

Case 3: Conditional Government Grant

In 2019, ABC Co. granted by a local government a 3-hectare land to plant “camote”. The
land has a fair value of P500,000. The grant requires ABC to farm only within the city
limits for five years. If any of the conditions is breached, ABC is required to return the
entire grant.

Case 4: Government Grant Retained Due to Passage of Time

On January 1, 2019, ABC Co. was granted by a local government a P500,000 grant to
aid ABC Co. in planting sayote. The grant requires ABC to farm only within the city limits
for five years. If any of the conditions is breached, ABC must return the grant taking into
consideration the portion retained based on passage of time.

Required:
1. For Case 1, how much income from government grant is to be recognized in 2019?
2. For Case 2, how much income from government grant is to be recognized in 2019?
3. For Case 3, how much income from government grant is to be recognized in 2019?
4. For Case 3, how much income from government grant is to be recognized in 2021
after the 5-year restriction has lapsed? (assume that the fair value didn’t change)
5. For Case 4, assuming there is no breach of condition, how much income from
government grant is recognized in 2019?
6. For Case 4, assuming there is no breach of condition, how much income from
government grant is recognized in 2020?

Auditing Practice I Second Term, AY 2019-2020

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Problem 7-5 Bearer Plant, Produce Growing on Bearer Plant, Inventory
Cebu Farms Company, an audit client, has a Mango plantation. Harvested mangoes
may be sold as is or may be processed further before these are sold to various
interested buyers. The following were the financial information from the client-prepared
schedule related to the mango plantation:

As of December 31, 2019:

Biological assets – Mango Trees P2,500,000
Biological assets – Harvested Mangoes 1,000,000
Inventories – Dried Mangoes 1,200,000

The following additional information were gathered by the auditor in the course of the
audit:
a. The biological assets – mango trees had fair value less costs to sell of P2,000,000 as
of December 31, 2019. The amount provided in the client-prepared schedule was
based on the accumulated capitalized costs as of December 31, 2018 plus
capitalized fertilizers and other costs amounting to P200,000 during 2019.The mango
trees were estimated to bear fruits for a period of 20 years. It was further ascertained
that at the beginning of the year, the mango trees were already capable of bearing
fruit.

b. The biological assets – harvested mangoes in the client-prepared schedule included

P300,000 mangoes which were already processed. The processed mangoes
underwent processing last December 15, 2019. The value of these mangoes
reflected the fair value less costs to sell of P250,000 as of December 1, 2019.
Processing costs amounted to P50,000. These mangoes had fair value less costs to
sell of P275,000 as of December 15, 2019 (just right before these had undergone
processing). As of December 31, 2019, these processed mangoes had net realizable
value of P320,000.

c. The unprocessed mangoes had fair value less costs to sell of P760,000 as of
December 31, 2019.

d. The inventories of P1,200,000 as of December 31, 2019 were properly valued at their
net realizable values.

Required:
1. Proposed adjusting journal entries.
2. Amount of inventory to be recognized from the December 15 processing on that date.
3. Adjusted balance of inventory as of December 31, 2019.
4. Amount to be reported as biological assets as of December 31, 2019.

Auditing Practice I Second Term, AY 2019-2020

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