UNIVERSITY OF SANTO TOMAS

UST-Alfredo M. Velayo – College of Accountancy

España, Manila

IAC 11 – INTEGRATED REVIEW IN FINANCIAL ACCOUNTING AND REPORTING

2ND TERM, ACADEMIC YEAR 2019-2020

INTANGIBLE ASSETS

1. On December 31, 2019, Aquafit Company exchanged 100,000

ordinary shares of P50 par value for the following assets:
• A trademark valued at P1,500,000
• A land valued at P6,500,000
• A franchise right. No estimate of the value is available at
time of exchange.

The ordinary share of Aquafit Company is selling at P90 on the

date of the exchange. How much should be the value of the
franchise on the date of exchange?
a. P2,000,000
b. P1,500,000
c. P1,000,000
d. zero

Total fair value of shares issued 100,000 x 90 = P9,000,000

Fair value of trademark (1,500,000
Fair value of land (6,500,0000)
Value assigned to franchise P1,000,000

2. Dowell Company purchased a patent on January 1, 2016 for

P4,500,000. The patent was being amortized over its remaining
legal life of 15 years expiring on December 31, 2030. During
2019, Dowell determined that the economic benefits of the
patent would not last longer than 12 years from the date of
acquisition. What amount should be reported in the December
31, 2019 statement of financial position as patent, net of
accumulated amortization?
a. P3,000,000
b. P3,200,000
c. P3,300,000
d. P3,600,000

Cost of patent P4,500,000

Accumulated amortization, 12/31/2018
4,500,000/15 x 3 ( 900,000)
Carrying amount, January 1, 2019 P3,600,000
2019 amortization 3,600,00/9 ( 400,000)
Carrying amount, December 31, 2019 P3,200,000

Dinar Company incurred P100,000 of research and development

costs to develop a product for which a patent was granted on
January 1, 2017. Legal fees and other costs associated with
registration of the patent totaled P300,000. The patent is
3. How much is the amortization expense for the year 2017?
a. P5,000
b. P15,000
c. P20,000
d. P30,000

P300,000/ 20 = P15,000

4. How much is the carrying value of the patent on December 31,

2019?
a. P255,000
b. P248,800
c. P262,500
d. P335,000

Cost P300,000
Accumulated amortization, December 31, 2019
P15,000 x 3 (45,000)
Carrying amount, December 31, 2019 P255,000

5. How much is the total expenses for the year 2019?

a. P15,000
b. P95,000
c. P80,000
d. P87,500

Total expenses = P80,000 + P15,000 = P95,000

6. How much is the total expenses for the year 2019 assuming Dinar
Company did not win the lawsuit?
a. P80,000
b. P262,500
c. P87,500
d. P350,000

Total expenses = P80,000 + (300,000 – 30,000) = P350,000

OR:

Legal fees P80,000

Amortization for ½ year 7,500
Carrying amount (for writeoff) at June 30
P300,000 – 37,500 262,500
Total expenses for 2019 P350,000

On January 1, 2019, Yen Company obtained a franchise from Euro

Corp. to sell for 20 years Euro’s products. The initial
franchise fee as agreed upon shall be P6,000,000, and shall be
payable in cash, P1,000,000, when the contract is signed and
the balance in four equal installments, thereafter, as
evidenced by a non-interest bearing note. The agreement
 rate for this type of note is 12%. PV of P1 for 4 periods at
12% is .6355 and PV of ordinary annuity for 4 periods at 12% is
3.0373.

7. How much is the initial cost of the franchise?

a. P6,000,000
b. P4,796,625
c. P4,177,500
d. P3,796,625

Down payment P1,000,000

PV of future payments
P1,250,000 x 3.0373 3,796,625
Cost of the franchise P4,796,625

8. How much is the total amount charged against revenues for the
year 2019?
a. P458,875
b. P239,831
c. P945,426
d. P489,831

Annual amortization P4,796,625/20 P239,831

Continuing Franchise Fee (Royalty exp.)
5% x P5,000,000 250,000
Interest expense
12% x P3,796,625 455,595
Total expenses P945,426

9. Alcatel Company purchased an entity for P6,000,000 cash on

January 1. The book value and fair value of the assets of the
acquired entity as of the date of the acquisition follow:
Book Value Fair Value
Cash P 50,000 P 50,000
Accounts receivable 500,000 500,000
Inventory 1,000,000 1,500,000
Patent - 450,000
Property, plant and equipment 2,000,000 3,000,000

In addition, the acquired entity had liabilities totaling

P2,000,000 at the time of the acquisition. The acquired
entity has no other separately identifiable intangible assets.
What is the goodwill arising from the acquisition?
a. P4,500,000
b. P2,550,000
c. P2,500,000
d. P500,000

Consideration given P6,000,000

Fair value of net assets acquired
P5,500,000 – P2,000,000 3,500,000
Goodwill P2,500,000
10. On December 31, 2018, Irvins Company acquired the following
intangible assets:
• A trademark for P2,000,000. The trademark has 8 years
remaining in the legal life. It is anticipated that the
trademark will be renewed in the future, indefinitely,
without problem.
• A patent for P4,000,000. Because of market conditions,
it is expected that the patent will have economic life
for just 5 years, although the remaining legal life is 10
years.

Because of a decline in the economy, the trademark is now

expected to generate cash flows of just P120,000 per year.
The useful life of the trademark still extends beyond the
foreseeable horizon. The cash flows expected to be generated
by the patent are P500,000 annually for each of the next
years. The appropriate discount rate for all intangible
assets is 8%. The present value of 1 at 8% for four periods
is 0.74 and the present value of an ordinary annuity of 1 at
8% for four periods is 3.31. Irvins Company shall recognize a
total impairment loss in 2019 at
a. P2,845,000
b. P2,045,000
c. P1,980,000
d. P1,545,000

Patents Trademark
Carrying amount (Cost – Accum. Amort) P3,200,000 P2,000,000
Recoverable amount
500,000 3.31 1,655,000
120,000/8% 1,500,000
Impairment loss P1,545,000 P 500,000

11. Carola Inc. has a trademark purchased 5 years ago for

P15,600,000. The said trademark was determined to have an
indefinite useful life. During the current year, Carola
noticed that some indicators of impairment are evident and
thus tested the trademark for impairment. The net cash flows
to be generated by the trademark have been determined to be
either P585,000 with a probability of 70%, or P1,170,000 with
a probability of 30%. The appropriate risk-adjusted interest
rate is 10%. Determine the impairment loss.
a. P14,764,287
b. P11,700,000
c. P7,995,000
d. P0

Carrying amount P15,600,000

Recoverable amount
(585,000 x 70%) + (1,170,000 x 30%)
10% 7,605,000
Impairment loss P7,995,000
12. On January 1, 2016, Starbucks Company signed a 12-year lease
for a building. Starbucks has an option to renew the lease
for an additional 6-year period on or before January 1, 2021.
During January 2019, Starbucks made substantial improvements
to the building. The cost of the improvements was P4,500,000,
with an estimated useful life of 10 years. At December 31,
2019, Starbucks intended to exercise the renewal option.
Starbucks has taken a full year’s depreciation on this
improvement. In the December 31, 2019 statement of financial
position, the carrying amount of this leasehold improvement
should be
a. P4,500,000
b. P4,200,000
c. P4,050,000
d. P4,000,000

Cost of the improvement P4,500,000

Accumulated depreciation
4,500,000/10 450,000
Carrying amount P4,050,000

The leasehold improvement shall be depreciated over the

remaining lease term or the useful life, whichever is shorter.

Remaining lease term 12 + 6 – 3 15 years

Useful life 10 years (shorter)

13. Lucent Company purchased another entity for P8,000,000 cash.

The acquiree had total liabilities of P3,000,000. Lucent
Company’s assessment of the fair value it obtained when it
purchased the other entity is as follows:
Cash P1,000,000
Inventory 500,000
In-process research and development 5,000,000
Assembled workforce 1,200,000

What is the goodwill arising from the acquisition?

a. P4,500,000
b. P3,300,000
c. P1,500,000
a. P300,000

Consideration given P8,000,000

FV of net identifiable assets
(P1M + .5M + 5M) – 3M 3,500,000
Goodwill P4,500,000

In-process research is recognized as an asset in business

combination (subject to subsequent impairment testing),
whereas assembled workforce does not qualify under the
definition of asset.
14. Sheaffer Company engaged your services to compute the goodwill
in the purchase of another entity which provided the
following:
Net income Net assets
2017 P 2,000,000 P 7,800,000
2018 2,500,000 8,700,000
2019 3,900,000 9,000,000

Goodwill is measured by capitalizing excess earnings at 25%

with normal return on average net assets at 20%. How much is
the purchase price for the other entity?
a. P13,400,000
b. P12,800,000
c. P11,800,000
d. P10,700,000

Fair value of assets acquired P9,000,000

Goodwill
Average returns (average for 3 years) P2,800,000
Normal returns (20% x P8,500,000) 1,700,000
Excess earnings P1,100,000
Divided by capitalization rate 25%
Goodwill 4,400,000
Total purchase price P13,400,000

15. The owners of Acer Company are planning to sell the business
to new interests. The cumulative net earnings for the past 4
years were P6,000,000 including casualty loss of P200,000.
The current value of net assets of Acer Company was
P16,000,000. Goodwill is determined by capitalizing average
earnings at 8%. What is the amount of goodwill?
a. P1,450,000
b. P1,550,000
c. P2,215,000
d. P3,375,000

Average net annual earnings

(P6,000,000 + P200,000)/ 4 = P1,550,000
Normal earnings P16,000,000 x 8%
Capitalized at 8%
Purchase price 19,375,000
Net assets at fair value 16,000,000
Goodwill P3,375,000

16. HP Company acquired another entity on January 1. As part of

the acquisition, P5,000,000 in goodwill was recognized. This
goodwill was assigned to HP’s Internet cash generating unit.
During the year, the Internet cash generating unit reported
revenue of P8,000,000. Publicly traded companies with
operations similar to those of the Internet cash generating
unit had price-to-revenue ratio averaging 1.50. The book
value of the assets and liabilities of HP’s Internet cash
 HP Company should recognize goodwill impairment loss of
a. P6,000,000
b. P5,000,000
c. P4,800,000
d. P1,200,000

Fair value of the CGU based on PTR ratio

P8,000,000 x 1.5 P12,000,000
Carrying amount of the CGU 25M – 7M 18,000,000
Impairment loss P 6,000,000
Impairment loss allocated to GW 5,000,000
Impairment loss allocated to identified assets P1,000,000

17. Coffee Bean Company incurred research and development costs in

the current year as follows:

Equipment acquired use in various researches P975,000

and development projects
Depreciation on the above equipment 135,000
Materials used 200,000
Compensation costs of personnel 500,000
Outside consulting fees 150,000
Indirect costs appropriately allocated 200,000

The total research and development costs in Coffee Bean’s

income statement for the current year should be
a. P850,000
b. P1,085,000
c. P1,235,000
d. P1,825,000

Total research and development costs P1,185,000

18. The research and development division of Dollar Company

undertakes both research and development activities of the
company. Its current development project on a prototype is
near completion. The cost identified in this project consists
of the following:

Cost of materials used P5,000,000

Training cost to operate the asset 100,000
Fees to register trade design 50,000
Initial operating losses 500,000
Salaries of consultant for the projects 2,000,000
Amortization of patent and license used in the 100,000
project
Selling and administrative expenses 1,000,000

What is the amount of development costs that should be

capitalized?
a. P7,150,000
19. Pataca Corporation provided the following information
regarding its Research COVID-19XXX included in the company’s
Intangible account as of December 31, 2019: Research MOP517 is
for a research project which consists of the following
charges:

Salaries of research staff P18,000

Patent acquired solely for the use in the
project 12,000
Special equipment acquired and useful for
various similar research activities 10,000
Patent acquired for use in several research
projects including COVID-19XXX 16,000

The equipment and patents have been found to be useful for

approximately five years. You have further discovered both
patents and the equipment were acquired at the beginning of
2019. How much should be recognized as research and
development expense for the year 2019?
a. P56,000
b. P18,000
c. P35,200
d. P0

Total salaries and patent for use in the project P30,000

Depreciation of equipment 2,000
Amortization of patent 16,000/5 3,200
Research and development expense P35,200

20. Won Company provided you the following information pertaining

to its Research and Development activities for the year 2019:

Searching for applications of new research

findings P 57,000
Trouble-shooting in connection with breakdowns
during commercial production 87,000
Adaptation of an existing capability to a
particular requirement or customer’s need
as a part of continuing commercial activity 39,000
Engineering follow-through in an early phase
of commercial production 45,000
Laboratory research aimed at discovery of new
knowledge 204,000
Design of tools, jigs, and molds involving new
technology 72,000
Quality control during commercial production,
including routine testing of products 174,000
Testing in search for product or process
alternative 300,000
Design and construction of preproduction
prototype and model 384,000
 What is the total amount to be classified and expensed as
research and development for 2019?
a. P1,095,000
b. P1,017,000
c. P456,000
d. P561,000

During 2019, Fajardo Company incurred the following costs to

develop and produce a computer software product:

Completion of detailed program design P1,495,000

Costs incurred for coding and testing to
Establish technological feasibility 1,150,000
Other coding costs after establishment of
technological feasibility 2,760,000
Other testing costs after establishment of
technological feasibility 2,300,000
Cost of producing product masters for training
materials 1,725,000
Duplication of computer software and training
materials from product masters 2,875,000
Packaging product 1,035,000

Fajardo correctly capitalized some of these expenditures as

cost of the computer software.

Fajardo determined the life of the software to be 5 years and

it has a policy to take full year amortization in the year an
internally generated asset was recognized.

Based on its forecast, the pattern of future revenue from the

software can be determined reliably and the software would
bring total revenue of P10,000,000 over its life. In 2019,
Fajardo reported a revenue of P1,500,000.

21. Determine the capitalized software cost.

a. P9,660,000
b. P6,785,000
c. P5,060,000
d. P6,210,000

Commercial
Research Development Production

Commercial and After establishment of

technological commercial and
feasibility not yet technological
established and feasibility (and other
recognition criteria not capitalization criteria
yet met for development costs
are met)
Period cost – Expense Intangible Asset Product Cost
 UNIVERSITY OF SANTO TOMAS
UST-Alfredo M. Velayo – College of Accountancy
España, Manila

22. Determine the amortization of computer software in 2019.

a. P759,000
b. P1,012,000
c. P1,017,750
d. P1,357,00

P6,785,000/5 = P1,357,000

Default amortization method for intangible is straight-line,

unless the enterprise can demonstrate another pattern of
expected economic benefit from the asset, in which case, the
justification for the use of this amortization method (other
than straight-line) must be disclosed in the notes to the
financial statements.
IAC 11 – INTEGRATED REVIEW IN FINANCIAL ACCOUNTING AND REPORTING
2ND TERM, ACADEMIC YEAR 2019-2020

INTANGIBLE ASSETS – THEORY

1. Which is not within the definition of an intangible asset?

a. Held for use in the production or supply of goods or
services, for rental to others, or for administrative
purposes
b. Identifiable nonmonetary asset without physical substance
c. A resource controlled by an enterprise as a result of past
events
d. A resource from which future economic benefits are expected
to flow to the enterprise

To qualify as intangible asset, an item must meet all of the

following definition criteria: identifiability, control, and
existence of future economic benefits (IAS 38).

2. Which is incorrect concerning the recognition and measurement

of an intangible asset?
a. If an intangible asset is acquired separately, the cost
comprises its purchase price, including import duties and
taxes and any directly attributable expenditure of
preparing the asset for its intended use.
b. If an intangible asset is acquired in a business
combination that is an acquisition, the cost is based on
its fair value at the date of acquisition.
c. If an intangible asset is acquired free of charge or by way
of government grant, the cost is equal to its fair value.
d. If payment for an intangible asset is deferred beyond
normal credit terms, its cost is equal to the total
payments over the credit period.

The purchase price in item d must be equal to the fair

value of the asset, if practicably determinable, or its
equivalent cash price, being the sum of the down payment
plus the PV of all future payments.

3. The cost of intangible asset is composed of

a. Purchase price excluding import duties and nonrefundable
taxes
b. Purchase price including import duties and nonrefundable
taxes
c. Purchase price including both refundable and nonrefundable
taxes
d. Purchase price including trade discounts and rebates after
deducting import duties and nonrefundable taxes

4. Legal fees incurred by a company in defending its patent

rights should be expensed when the outcome of the litigation
is
Successful Unsuccessful
Expenditures incurred on an intangible asset subsequent to
acquisition shall be recognized as expenses, unless the
expenditure clearly provides economic benefits in excess of
originally assessed standard of performance.

In the above item, other than expensing the legal fees to defend
the asset, if the defense proved to be unsuccessful, the
remaining carrying value of the asset shall be written off.

5. Which one of the following is not a component of the cost of

internally generated intangible asset?
a. Cost of materials and services used or consumed in
generating the intangible asset
b. Cost of employee benefits arising from the generation of
the intangible asset
c. Fees to register a legal right
d. Expenditure on training staff to operate the asset (expense
because of uncertainty of economic benefit)

6. Which statement is incorrect concerning internally generated

intangible asset?
a. To assess whether an internally generated intangible asset
meets the criteria for recognition, an enterprise
classifies the generation of the asset into a research
phase and a development phase.
b. The cost of an internally generated asset comprises all
directly attributable costs necessary to create, produce
and prepare the asset for its intended use.
c. Internally generated brands, mastheads, publishing titles,
customer lists and items similar in substance should not be
recognized as intangible assets.
d. Internally generated goodwill may be recognized as an
intangible asset.

Goodwill shall only be recognized when it arises from a

business combination treated as an acquisition.

7. The following expenditures should be expensed when incurred,

except
a. Advance payment for delivery of goods or rendering of
services (advances to suppliers)
b. Relocation costs
c. Advertising and promotion costs
d. Organization and other start up costs

8. A lessee incurred costs to construct office space in a leased

warehouse. The estimated useful life of the office is 10
years. The remaining term of the nonrenewable lease is 15
years. The cost should be
a. Capitalized as leasehold improvement and depreciated over
 d. Expensed as incurred

An item of PPE shall be depreciated over the expected pattern

of economic benefits, which in the case of leasehold
improvements is the shorter between the useful life and the
remaining lease term. The shorter period is the estimated
useful life.

9. An entity shall choose either the cost model or revaluation

model as its accounting policy in measuring intangible asset.
Which statement is correct?
i. The cost model means that an intangible asset shall be
carried at cost less any accumulated amortization and any
accumulated impairment loss.
ii. The revaluation model means that an intangible asset
shall be carried at revalued amount less any subsequent
accumulated amortization and any subsequent accumulated
impairment loss.
a. Both I and II b. Neither I nor II c. I only d.
II only

10. It is the systematic allocation of the cost of an

intangible asset less any residual value as an expense over
the asset’s useful life?
a. Depreciation
b. Depletion
c. Amortization
d. Realization

However, IAS 38 still uses the term depreciation for this

definition.

11. In relation to amortization of intangible assets, if an

intangible asset has a finite useful life
a. It must be amortized over a period not exceeding 40 years
b. It must be amortized across a period not exceeding 5 years
c. It is not subject to an annual amortization charge
d. It must be amortized over that life

12. In relation to amortization of intangible assets, PAS 38

Intangibles, requires that intangible asset with indefinite
useful lives
a. Are amortized by the straight-line method across their
useful lives
b. Must be amortized across a period of no more than 20 years
c. Are not subject to an amortization charges
d. Should not be amortized in a period in which maintenance of
the asset occurs

The following intangible assets are not amortized: intangible

not yet available for use, assets with indefinite useful life,
ad goodwill.
13. What is the proper time or time period over which to match
the cost of an intangible asset with revenues if it is likely
that the benefit of the asset will last for an indefinite
period?
a. 40 years
b. 50 years
c. Immediately
d. At such time as a reduction in value can be quantitatively
determined

Item d is in effect impairment. Testing for impairment shall

be made at least annually and whenever there is indication of
impairment.

14. The appropriate method of amortizing intangible asset is

best described by which of the following?
a. The straight line method, unless the pattern in which the
asset’s economic benefits are consumed by the enterprise
can be determined reliably
b. The double declining balance in all circumstances
c. Management can make a subjective amount of periodic
amortization without regard to any particular method
d. The straight line method in all circumstances

Default amortization method for intangible is straight-line,

unless the enterprise can demonstrate another pattern of
expected economic benefit from the asset, in which case, the
justification for the use of this amortization method (other
than straight-line) must be disclosed in the notes to the
financial statements.

15. The best definition of useful life of an intangible asset

is
a. The legal life of the intangible.
b. The period over which management believes the intangible
asset will contribute to the revenue-producing process.
c. Twenty years.
d. The period over which the cost of the asset can be deducted
for income tax purposes.

16. Which of the following factors should not be considered in

estimating the useful life of intangible asset?
a. Legal, regulatory or contractual provision
b. Expected action by competitors or potential competitors
c. Residual value
d. Typical product life cycle of the asset

17. The residual value of an intangible asset should be

presumed zero, unless
i. There is a commitment by a third party to purchase the
asset at the end of its useful life.
ii. There is an active market for the asset and residual
 c. I only
d. II only

See par. 100, IAS 38.

18. Research is
i. Original and planned investigation undertaken with the
prospect of gaining new scientific or technical knowledge
and understanding. (Research)
ii. Application of research finding or other knowledge to
a plan or design for the production of new or substantially
improved material, device, product, process, system or
service, prior to the commencement of commercial production
or use. (Development)
a. Both I and II
b. Neither I nor II
c. I only
d. II only

19. If a company constructs a laboratory building to be used as

a research and development facility, the cost of the
laboratory building is matched against earnings as
a. Research and development expense in the period of
construction
b. Depreciation deducted as part of research and development
cost
c. Depreciation or immediate write-off depending on company
policy
d. An expense at such time as productive research has been
obtained from the facility

It is practicably assumed that the building has an alternative

use, so only the depreciation during research and development
period is expensed.

20. A research and development activity for which the cost

should be expensed as incurred is
a. Engineering follow-through in early phase of commercial
production (overhead)
b. Design, construction, and testing of preproduction
prototypes and models (development)
c. Trouble shooting in connection with breakdowns during
commercial production (overhead)
d. Periodic design changes to existing products (overhead)

21. The proper accounting for the costs incurred in creating

computer software products is to
a. Capitalize all costs until the software is sold.
b. Charge research and development expense when incurred until
technological feasibility has been established for the
product.
c. Charge research and development expense only if the
computer software has alternative future use.
22. Which statement is correct regarding the proper accounting
treatment for internal-use software costs?
i. Preliminary costs should be capitalized as incurred.
ii. Application and development costs should be
capitalized as incurred.
a. Both I and II
b. Neither I nor II
c. I only
d. II only

It is assumed in ii that the subsequent development costs

incurred meet the capitalization criteria.

23. Which of the following statements is incorrect regarding

internal – use software?
a. The application and development costs of internal-use
software should be amortized on the straight line basis
unless another systematic and rational basis is more
appropriate.
b. Internal-use software is considered to be software that is
marketed as a separate product or as part of a product or
process.
c. The costs of testing and installing computer hardware
should be capitalized as incurred.
d. The costs of training and application maintenance should be
expensed as incurred.

24. Which following statements is correct regarding the

treatment of start-up activities related to the opening of the
new facility?
i. Cost of raising capital should be expensed as
incurred.
ii. Costs of acquiring or constructing long-lived assets
and getting them ready for their intended use should be
expensed as incurred.
a. Both I and II
b. Neither I nor II
c. I only
d. II only

Some costs relating to issue of shares are netted against the

proceeds to arrive at contributed capital, while item ii is
directly attributable cost that is capitalized.

25. Operating losses incurred during the start-up years of a

new business should be
a. Accounted for and reported like the operating losses of any
other business
b. Written off directly against accumulated profits
c. Capitalized as a deferred charge and amortized over 5
years.
d. Capitalized as an intangible asset and amortized over 5
years.