ST.

VINCENT COLLEGE
FINANCIAL ACCOUNTING & REPORTING INTANGIBLE ASSETS

EXERCISE

PATENT

1. On June 30, 2019, Lara Company exchanged 40,000 shares of Mae Company P30 par value
ordinary shares for a patent owned by Lorena Company. The Mae stock was acquired in
2017 at a cost of P1,000,000. At the exchange date, Mae’s ordinary shares had a fair value of
P40 per share, and the patent had a net carrying amount of P2,000,000 on Lorena’s books.
Lara should record the patent at

a. 1,000,000 c. 1,200,000
b. 1,600,000 d. 2,000,000

2. Tobin Company incurred P1,800,000 of research and development costs to develop a product
for which a patent was granted on January 2, 2019. Legal fees and other costs associated
with registration of the patent totaled P500,000. On March 31, 2019, Tobin paid P600,000 for
legal fees in a successful defense of the patent. The total amount capitalized for this patent
through March 31, 2019 should be

a. 2,300,000 c. 500,000
b. 2,900,000 d. 1,100,000

3. Hy Company bought Patent A for P800,000 and Patent B for P1,000,000. Hy also paid
acquisition costs of P60,000 for Patent A and P80,000 for Patent B. Both patents were
challenged in legal actions. Hy paid P250,000 in legal fees for a successful defense of Patent
A and P400,000 in legal fees for an unsuccessful defense of Patent B. What amount should
Hy capitalize for patents?

a. 1,110,000 c. 1,800,000
b. 860,000 d. 1,940,000

4. On January 1, 2016, Taft company purchased a patent for P5,450,000. The patent is being
amortized over its remaining legal life of 10 years expiring on January 1, 2026. During 2019,
Taft determined that the economic benefits of the patent would not last longer than 8 years
from the date of acquisition. What amount should be reported in the statement of financial
position for the patent, net of accumulated amortization, at December 31, 2019?

a. 3,052,000 c. 3,815,000
b. 2,725,000 d. 3,338,125

5. ABC Company developed a patent at cost of P400,000 and spent P150,000 for the licensing
of the patent including legal fees and cost of models and drawings that accompany the
registration on January 2, 2015. The patent will be useful for the entire legal life.

On January 2, 2017, the company paid P200,000 to attorneys for the services in connection
with a successful defense of the patent.

On January 2, 2019, the company purchased a competing patent for P170,000 in order to
protect the original patent. The competing patent has 18 years to run from the date of
acquisition.
The amortization of patent in 2019 is
a. 18,125 c. 10,625
b. 7,500 d. 16,000

TRADEMARK

6. On January 2, 2019, Judd Company bought a trademark from King Company for 2,000,000.
Judd retained an independent consultant, who estimated the trademark’s remaining life to be
20 years. Its unamortized costs on King’s accounting records was P1,520,000. Judd decided
to amortize the trademark over the maximum period allowed. In Judd’s December 31, 2019
statement of financial position, what amount should be reported as accumulated amortization?

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 a. 76,000 c. 176,000
b. 100,000 d. 24,000

7. On January 1, 2015 Vick company purchased a trademark for P5,000,000, having an

estimated useful life of 10 years. In January 2019, Vick paid P500,000 for legal fees in a
successful defense of the trademark. Trademark amortization expense for the year ended
December 31, 2019 should be

a. 560,000 c. 600,000
b. 400,000 d. 500,000

8. N Company acquired a registered trademark for P800,000. The trademark has a remaining
legal life of five years but can be renewed every 10 years for a nominal fee. The entity was
expected to renew the trademark indefinitely.

What amount of amortization expense should be recorded for the trademark in the current
year?

a. 0 c. 40,000
b. 20,000 d. 160,000

COPYRIGHT

9. Susan Company acquired a copyright to a best seller novel for P320,000 on January 1, 2018.
The copyright has a legal life of 30 years. Sales of the novel are estimated as follows:

2018 45,000 copies

2019 35,000 copies
2020 15,000 copies
2021 5,000 copies

How much is the amortization of copyright in 2019?

a. 144,000 c. 176,000
b. 112,000 d. 160,000

LEASEHOLD IMPROVEMENT

10. On January 2, 2019, Ral Company leased land and building from an unrelated lessor for a
ten-year term. The lease has a renewal option for an additional ten years, but Ral has not
reached a decision with regard to the renewal option. In early January of 2019, Ral completed
the following improvements to the property:

Description Estimated life Cost

Sales office 10 years 400,000
Warehouse 20 years 700,000
Parking lot 12 years 240,000

Depreciation of leasehold improvements for 2019 should be

a. 95,000 c. 134,000
b. 67,000 d. 124,000

11. On January 2, 2019, Eva Company signed an eight-year lease for office space. Eva has the
option to renew the lease for an additional four-year period on or before January 2, 2026.
During January 2019 Eva incurred the following costs:

* P1,500,000 for general improvements to the leased premises with an estimated useful
life of ten years.

* P600,000 for office furniture and equipment with an estimated useful life of ten years.

* P500,000 for movable assembly line equipment with useful life of five years

At December 31, 2019, Eva’s intention as to exercise of the renewal option is uncertain. A full
year’s depreciation of leasehold improvements is taken for calendar year 2019. In Eva’s
December 31, 2019 statement of financial position, accumulated depreciation of leasehold
improvement should be

a. 187,500 c. 125,000
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 b. 150,000 d. 310,000

12. On January 1, 2017, Norm Company signed a 12-year lease for warehouse space. Norm has
an option to renew the lease for an additional 8-year period on or before January 1, 2020.
During January 2019, Norm made substantial improvements to the warehouse. The cost of
these improvements was P600,000, with an estimated useful life of 15 years. At December 3l,
2019, Norm intended to exercise the renewal option. Norm has taken a full year’s
depreciation on this leasehold improvement. In the December 31, 2019, statement of financial
position, the carrying amount of this leasehold improvement should be

a. 570,000 c. 550,000
b. 540,000 d. 560,000

GOODWILL

13. The income of XYZ Company before tax is P6,000,000 after charges and credits for the items
listed below:

Depreciation on property plant and equipment, at

cost 1,000,000
Year-end bonus to the president 500,000
Gain on sale of investment 300,000
Loss from typhoon 1,500,000
Additional tax assessment in prior years 200,000
Loss on sale of machinery 250,000

XYZ Company has a valuable patent which is not recorded on the books. If the company is
sold, the patent would be transferred to the buyer for P500,000. The patent has a remaining
useful life of 5 years.

The property, plant and equipment of XYZ, costing P10,000,000 are being depreciated at 10%
per annum and have a fair value of P12,000,000. The property, plant and equipment would be
transferred to the buyer at the fair value.

The income for goodwill calculation purposes is

a. 6,000,000 c. 7,150,000
b. 7,850,000 d. 8,150,000

14. Assume the following data:

Net assets, excluding goodwill. 6,500,000

Normal rate of return in the industry 10%

Past earnings for 5 years preceding the sale:

2016 550,000
2017 600,000
2018 700,000
2019 850,000
2020 950,000
3,650,000

Compute the goodwill if it is valued at average excess earnings for 5 years.

a. 200,000 c. 285,000
b. 400,000 d. 365,000

15. In No. 14, compute the goodwill if it is valued at average excess earnings capitalized at 25%.

a. 320,000 c. 228,000
b. 160,000 d. 292,000

16. In No. 14, compute the goodwill using the capitalization of average earnings at 10%.

a. 400,000 c. 730,000
b. 650,000 d. 800,000

17. In No. 14, compute the goodwill using the present value method. The average excess
earnings are expected to be earned for 5 years.
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 a. 400,000 c. 276,743
b. 303,280 d. 492,830

18. On January 1, 2019, Global Company purchased National Company for P25,000,000. The
amount of net assets of National Company on this date is P21,000,000. Thus, there is
“purchased goodwill” of P4,000,000.

National Company has three cash generating units, Segments A, B and C and the net assets
at fair value of the segments are P10,500,000, P6,300,000 and P4,200,000, respectively. The
goodwill must be allocated to the three cash generating units on the basis of the fair value of
the net assets.

Fair value Fraction Goodwill

Segment A 10,500,000 105/210 2,000,000
B 6,300,000 63/210 1,200,000
C 4,200,000 42/210 800,000
21,000,0000 4,000,000

On December 31, 2019, Segment A suffers significant losses and its recoverable amount is
P10,000,000. Assume the carrying amounts excluding goodwill on December 31, 2019 are as
follows:

Segment A 9,000,000
Segment B 8,000,000
Segment C 7,000,000
Goodwill 4,000,000
28,000,000

The impairment loss attributable to Segment A is

a. 1,500,000 c. 2,500,000
b. 500,000 d. 1,000,000

19. Universal Company has three segments, A, B and C, each of which is considered a cash
generating unit. Segment A has been experiencing significant losses in prior years. There is
an indication that Segment A has been impaired. On December 31, 2019, Segment A is tested
for impairment with the following net assets:

Cash 2,000,000
Accounts receivable 8,000,000
Inventory 10,000,000
Property, plant and equipment 40,000,000
Accumulated depreciation (20,000,000)
Goodwill 3,000,000
Liabilities (15,000,000)
Net assets 28,000,000

It is determined that the recoverable amount of the net assets of Segment A is P21,000,000.

On December 31, 2019, the Company shall recognize impairment loss at

a. 4,000,000 c. 3,000,000
b. 7,000,000 d. 5,000,000

20. Ester Company has just acquired the net assets of XYZ Corporation for P4,800,000. In
acquiring XYZ, the owners of Ester felt that XYZ had an unrecorded goodwill. They decided to
capitalize the estimated annual superior earnings of XYZ at 20% to determine the amount of
goodwill. The computation resulted in an estimated goodwill of P400,000.

A rate of 10% on net assets before recognition of goodwill was used to determine normal
annual earnings of XYZ because it is the rate that is earned on net assets in the industry in
which XYZ operates. All other assets of XYZ are properly recorded. What is the amount of
estimated annual earnings of XYZ?

a. 520,000 c. 400,000
b. 440,000 d. 80,000

COMPUTER SOFTWARE

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21. On January 1, 2019, XYZ Company had capitalized cost of P6,000,000 for a new computer
software product with an economic life of 5 years. Sales for 2019 for the software product
amounted to P2,000,000. The total sales of the software over its economic life are expected
to be P12,000,000. On December 31, 2019, the software had a net realizable value of
P5,000,000. The pattern of future benefits from the computer software cannot be determined
reliably. The amortization of computer software in 2019 is

a. 1,000,000 c. 1,500,000
b. 1,200,000 d. 2,250,000

22. During 2019, Pitt Company incurred costs to develop and produce a routine, low-risk
computer software product, as follows:

Completion of detail program design 1,000,000

Costs incurred for coding and testing to establish
technological feasibility 1,000,000
Other coding costs after establishment of
technological feasibility 1,000,000
Other testing costs after establishment of
technological feasibility 2,000,000
Costs of producing product masters for training
materials 1,000,000
Duplication of computer software and training
Materials from product masters (1,000 units) 2,000,000
Packaging product (500 units) 1,000,000

In Pitt’s December 31, 2019 statement of financial position, what amount should be reported in
inventory?

a. 3,000,000 c. 5,000,000
b. 3,000,000 d. 6,000,000

23. In No. 22, in Pitt’s December 31, 2019 statement of financial position, what amount should be
capitalized as software cost, subject to amortization?

a. 4,000,000 c. 3,000,000
b. 5,000,000 d. 6,000,000

24. During 2018, Digital Software Company developed a new personal computer database
management software package. Total expenditures on the project were P5,000,000, of which
40% occurred after the technological feasibility of the product had been established. The
product was completed and offered for sale on January 1, 2019. During 2019, revenues from
sales of the product totaled P7,000,000. The package is expected to be successfully
marketable for 5 years, and the total revenues over the life of the product will be P28,000,000.

The capitalized computer software in 2019 is

a. 5,000,000 c. 3,000,000
b. 2,400,000 d. 2,000,000

25. In No. 24, the amortization of the capitalized software in 2019 using straight line method is

a. 1,000,000 c. 600,000
b. 480,000 d. 400,000

26. In No. 24, the amortization of the capitalized software in 2019 using revenue method is

a. 500,000 c. 600,000
b. 750,000 d. 1,250,000

27. On January 1, 2019, A Company signed an annual maintenance agreement with a software
provider for P1,200,000 and the maintenance period begins on March 1, 2019.

The entity also incurred P400,000 on January 1, 2019 related to software modification that will
increase the functionality of the software asset over five years using the straight line method.

What total expense should be recognized as a result of the maintenance agreement and the
software modification for 2019?

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 a. 1,000,000 c. 1,080,000
b. 1,280,000 d. 400,000

RESEARCH AND DEVELOPMENT COST

28. Ward Company incurred research and development costs in 2019 as follows:

Equipment acquired for use in various research and

development projects 1,000,000
Depreciation on the above equipment 100,000
Materials used 250,000
Compensation costs of personnel 600,000
Outside consulting fees 200,000
Indirect costs appropriately allocated 300,000

The total research and development costs charged in Ward’s 2019 income statement should
be

a. 1,150,000 c. 1,350,000
b. 1,250,000 d. 1,450,000

29. West Company made the following expenditures relating to Product Y:

Legal costs to file a patent on Product Y. Production of the finished product

would not have been undertaken without the patent. 200,000
Special equipment to be used solely for development of Product Y. The
equipment has no other use and has an estimated useful life of four
years. 700,000
Labor and material cost incurred in producing a prototype model 2,500,000
Cost of testing the prototype 600,000
4,000,000

What is the total amount of costs that will be expensed when incurred?

a. 3,800,000 c. 3,400,000
b. 4,000,000 d. 3,300,000

30. Koral Company incurred the following costs during 2019.

Modification to the formulation of a chemical product 140,000

Trouble-shooting in connection with breakdowns during commercial
production 160,000
Design of tools, jigs, molds and dies involving new technology 180,000
Seasonal or other periodic design changes to existing products 200,000
Laboratory research aimed at discovery of new technology 220,000

In its income statement for the year ended December 31, 2019, Koral should report research
and development expense of

a. 320,000 c. 400,000
b. 540,000 d. 700,000

- End -

Answer Key

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 Intangible Assets

1. B 6. B 11. A
2. C 7. D 12. D
3. B 8. A 13. B
4. A 9. B 14. B
5. A 10. C 15. A

16. D 21. B 26. A

17. B 22. A 27. C
18. D 23 A 28. D
19. B 24. D 29. A
20. A 25. D 30. B