MODULE 13: Intangible Assets

RELATED STANDARDS: IAS38 – Intangible Assets; SIC 32 – Intangible Assets—

Web Site Costs; IFRS 3 – Business Combination; US GAAP; RA 8293, IFRIC 12

INTRODUCTION
This chapter addresses the accounting for intangible asset, an example would be
Coca-Cola’s drink formula which is a closely held trade secret that only a few
employees know; this is an example of an internally developed intangible asset.
Intangible assets are defined as identifiable non-monetary assets that cannot be
seen, touched or physically measured, and are created through time and effort.
Intangible assets are identified separately on a company’s financial statements, and
come in two primary forms: legal intangibles and competitive intangibles. Legal
intangibles are also known as intellectual property, and include trade secrets,
copyrights, patents, and trademarks.

Learning Objectives:
1. Define intangible asset.
2. State the initial measurement of intangible assets that are (a) externally
acquired and (b) internally acquired.
3. State the subsequent measurement of intangible assets that (a) have
infinite useful life and (b) indefinite useful life.
4. Account for subsequent expenditures on intangible assets.
5. Give examples of intangible assets within the scope of IAS 38 and explain
their accounting requirements.
6. Illustrate the difference between full IFRS and IFRS for SMEs

 Definition of Terms
 Amortization – The systematic allocation of the depreciable amount of an
intangible asset over its useful life.
 Development – The application of research findings or other knowledge to a
plan or design for the production of new or substantially improved materials,
devices, products, processes, systems or services before the start of
commercial production or use.
 Entity-specific value – The present value of the cash flows an entity expects to
arise from the continuing use of an asset and from its disposal at the end of its
useful life or expects to incur when settling a liability.
 Intangible asset – An identifiable non-monetary asset without physical
substance.
 Monetary assets – Money held and assets to be received in fixed or
determinable amounts of money.
 Research – Original and planned investigation undertaken with the prospect of
gaining new scientific or technical knowledge and understanding.

 Scope
 IAS 38 applies to all intangible assets other than:
 Financial assets (see IAS 32 Financial Instruments: Presentation)
 Exploration and evaluation assets (see IFRS 6 Exploration for and Eval-
uation of Mineral Resources)
 Expenditure on the development and extraction of minerals, oil, natural
gas, and similar resources
 Intangible assets arising from insurance contracts issued by insurance
companies
 Intangible assets covered by another IFRS.

 The three critical attributes of an intangible asset

 Identifiability (an intangible asset is identifiable when it)

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Is separable (capable of being separated and sold, transferred, licensed,

rented, or exchanged, either individually or together with a related
contract)
 Arises from contractual or other legal rights, regardless of whether those
rights are transferable or separable from the entity or from other rights
and obligations.
 Control (power to obtain benefits from the asset)
 An entity controls an asset if the entity has the power to obtain the future
economic benefits flowing from the underlying resource and to restrict
the access of others to those benefits.
 Future economic benefits (such as revenues or reduced future costs)
 The future economic benefits flowing from an intangible asset may include
revenue from the sale of products or services, cost savings, or other
benefits resulting from the use of the asset by the entity.

 Specific intangible assets

Intangible Definition Legal
Asset Life/Amortization/Impairment
Patent An exclusive right granted for a product, 20 years
process or an improvement of a product
or process which is new, inventive and
useful which gives the inventor the right
to exclude others from making, using, or
selling the product during the life of the
patent. (Intellectual Property Office of the
Philippines)
Copyright The legal protection extended to the Life of the author plus 50
owner of the rights in an original work years after his death
(every production in the literary, scientific
and artistic domain). (Intellectual
Property Office of the Philippines)
Trademark/ A tool used that differentiates goods and 10 years legal life but may
Tradename services from each other. A trademark be renewed. Normally not
/ Brand can be one word, a group of words, sign, amortized but subject for
name symbol, logo, or a combination of any of impairment.
these. (Intellectual Property Office of the
Philippines)
Franchise An exclusive right granted by the Amortize if with definite
franchisor (government or private period or tested for
companies) to a franchisee to use the impairment if with indefinite
property or the rights (trademark, patent period
and process of the franchisor)
Goodwill An asset representing the future Not amortized but tested for
economic benefits arising from other impairment at least annually
assets acquired in a business
combination that are not individually
identified and separately recognized.
(IFRS 3)
Leasehold The right acquired by the lessee by virtue Amortized over the life/term
right of a contract of lease to use the specific of the lease
property owned by the lessor for a
definite period of time in consideration for
a rent.
Right or A permit from an authority to own or use If the term is renewable
license something, do a particular thing, or carry indefinitely, the license is
on a trade. (i.e. broadcasting license, tested for impairment
airline right)
Customer Consists of information about customers Tested for impairment
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Intangible Definition Legal

Asset Life/Amortization/Impairment
list such as their name and contact
information. A customer list also may be
in the form of a database that includes
other information about the customers
such as their order history and
demographic information.
Service An arrangement whereby a government Amortized over definite
concession or other public sector body contracts with period
a private operator to develop (or
upgrade), operate and maintain the
grantor's infrastructure assets. (IFRIC 12)
 Acquisition of intangible assets
a. Separate acquisition
b. Part of a business combination
c. Government grant
d. Exchange of assets
e. Self-creation (internal generation)

 Acquisition by deferred credit

 If the intangible asset is acquired by a deferred plan beyond normal credit
terms, the intangible asset is measured at the cash price equivalent. The
difference is accounted as interest expense over the credit period.

 Acquisition by issuance of securities

 If the intangible asset is acquired by issuance of equity securities, the
intangible asset is measured at (order of priority):
i. Fair value of the intangible asset received
ii. Fair value of the equity securities
iii. Par value of the equity securities
 If the intangible asset is acquired by issuance of debt securities, the intangible
asset is measured at (order of priority):
i. Fair value of debt securities
ii. Fair value of the asset received
iii. Face value of the debt securities

 Acquisition by exchanges of assets

 The cost of such an intangible asset is measured at fair value unless
a. The exchange transaction lacks commercial substance or
b. The fair value of neither the asset received nor the asset given up is
reliably measurable.
 If the intangible asset is acquired by exchange of another asset, the intangible
asset is measured at (order of priority):
i. Fair value of the asset given up
ii. Fair value of the intangible asset received
iii. Carrying amount of the asset given up
 If the exchange lacks commercial substance, the intangible asset is measured
at the carrying amount of the asset given up.

 The cost of a separately acquired intangible asset comprises:

 Purchase price, including import duties and non-refundable purchase taxes,
after deducting trade discounts and rebates; and
 Any directly attributable cost of preparing the asset for its intended use such
as:
a. Costs of employee benefits (as defined in IAS19) arising directly from
bringing the asset to its working condition;

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b. Professional fees arising directly from bringing the asset to its working
condition; and
c. Costs of testing whether the asset is functioning properly.

 Examples of expenditures that are not part of the cost of an intangible asset
a. Costs of introducing a new product or service (including costs of advertising
and promotional activities);
b. Costs of conducting business in a new location or with a new class of
customer (including costs of staff training); and
c. Administration and other general overhead costs.
d. Costs incurred while an asset capable of operating in the manner intended by
management has yet to be brought into use; and
e. Initial operating losses, such as those incurred while demand for the asset’s
output builds up.

 Internally generated intangible assets

 To assess whether an internally generated intangible asset meets the
criteria for recognition, an entity classifies the generation of the asset into:
1. Research phase; and
2. Development phase.
 If an entity cannot distinguish the research phase from the development
phase of an internal project to create an intangible asset, the entity treats
the expenditure on that project as if it were incurred in the research phase
only.
 Internally generated goodwill shall not be recognized as an asset.
 Internally generated brands, mastheads, publishing titles, customer lists and
items similar in substance shall not be recognized as intangible assets.

 Research and development costs

 Charge all research cost to expense.
 Development costs are capitalized if, and only if, an entity can demonstrate
all of the following:
1. The technical feasibility of completing the intangible asset so it will be
available for use or sale.
2. Its intention to complete the intangible asset and use or sell it.
3. Its ability to use or sell the intangible asset.
4. The Intangible asset will generate probable future economic benefits.
Among other things, the entity can demonstrate the existence of a
market for the output of the intangible asset or the intangible asset itself
or, if it is to be used internally, the usefulness of the intangible asset.
5. The availability of adequate technical, financial and other resources to
complete the development and to use or sell the intangible asset.
6. Its ability to measure reliably the expenditure attributable to the intangible
asset during its development.
 If an entity cannot distinguish the research phase of an internal project to
create an intangible asset from the development phase, the entity treats the
expenditure for that project as if it were incurred in the research phase only.

 Recognition of an expense
 Expenditure on an intangible item shall be recognized as an expense when it
is incurred unless:
a. It forms part of the cost of an intangible asset that meets the recognition
criteria; or
b. The item is acquired in a business combination and cannot be recognized
as an intangible asset. If this is the case, it forms part of the amount
recognized as goodwill at the acquisition date
 Other examples of expenditure that is recognized as an expense when it is
incurred include:

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 Expenditure on start-up activities (ie start-up costs), unless this expenditure

is included in the cost of an item of property, plant and equipment in
accordance with IAS 16. Start-up costs may consist of establishment costs
such as legal and secretarial costs incurred in establishing a legal entity,
expenditure to open a new facility or business (i.e. pre-opening costs) or
expenditures for starting new operations or launching new products or
processes (i.e. pre-operating costs).
 Expenditure on training activities.
 Expenditure on advertising and promotional activities (including mail order
catalogues).
 Expenditure on relocating or reorganizing part or all of an entity.

 Measurement subsequent to acquisition: intangible assets with finite lives

 The cost less residual value of an intangible asset with a finite useful life
should be amortized on a systematic basis over that life:
 The amortization method should reflect the pattern of benefits.
 If the pattern cannot be determined reliably, amortize by the straight line
method.
 The amortization charge is recognized in profit or loss unless another IFRS
requires that it be included in the cost of another asset.
 The amortization period should be reviewed at least annually.
 Amortization of an intangible asset is over its legal life or useful life whichever
is shorter.
 The residual value of an intangible asset is presumed to be zero unless a third
party is committed to buy the intangible asset at the end of its useful life or
unless there is an active market.

 Measurement subsequent to acquisition: intangible assets with indefinite

useful lives
 An intangible asset with an indefinite useful life should not be amortized.
 Its useful life should be reviewed each reporting period to determine whether
events and circumstances continue to support an indefinite useful life assess-
ment for that asset.
 The change in the useful life assessment from indefinite to finite should be
accounted for as a change in an accounting estimate.
 The asset should also be assessed for impairment in accordance with IAS36.

 Other accounting issues

 Legal fees for prosecuting or defending an intangible asset (patent, copyright,
trademark), whether successfully or unsuccessfully, shall be expensed.
 Cost of franchise includes the initial franchise fee plus directly attributable
costs.
 Periodic payments made by the franchisee to the franchisor is considered as
an outright expense.
 Leasehold improvement is classified as property, plant and equipment
 Service concession is accounted as an intangible asset if the operator
receives a right to charge for use of a public sector asset that it constructs or
upgrades and then must operate and maintain for a specified period of time.
Service concession is accounted as a financial asset if the operator receives
an unconditional contractual right to receive a specified or determinable
amount of cash or another financial asset from the government in return for
constructing or upgrading a public sector asset, and then operating and main-
taining the asset for a specified period of time.
 Organization cost incurred in forming or organizing a business
entity/corporation is expensed immediately.
 Internally developed computer software
 Costs incurred in creating the computer software shall be charged to
expense until a technical feasibility has been established.
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After technical feasibility, cost of coding and testing, and the cost to
produce the product master shall be charged to intangible asset.
 Cost incurred to actually produce the software from masters and package
the software for sale shall be charged to inventory.
 Purchased software is accounted as:
 Intangible asset is it is for licensing or rental to others
 Inventory if it is for sale
 Property, plant and equipment if for use and integral part to the hardware
 Website development costs
 When an entity is not able to demonstrate how a web site developed for
promoting and advertising its own products and services will generate
probable future economic benefits, and consequently all expenditure on
developing such a web site shall be recognized as an expense when
incurred. (SIC 32)

 Difference between Full IFRS and IFRS for SMEs

Full IFRS
Internally generated intangible assets
may be capitalized.
Initial measurement of intangible
assets acquired by way of a
government grant shall be measured
at fair value of the grant or at nominal
amount.
Revaluation model may be applied
Intangible assets may have indefinite
useful life. No ten years presumed
limit.
The entity will review at each
reporting date whether there has
been a change in useful life, residual
amount or amortization method. If
there is an indicator, this will be
adjusted as a change in estimate.
IFRS for SMEs
It does not allow for any internally
generated intangible assets to be
capitalized.
Initial measurement of intangible assets
acquired by way of a government grant
must be measured at fair value.
It does not permit the application of the
revaluation model to intangible assets.
It does not permit intangible assets to be
classified as an asset with an indefinite life.
A useful life is required to be established
for all intangible assets, or it is assumed to
be 10 years.
There is no requirement to review
amortization method, useful life and
residual values at each reporting date.

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Illustrative Problems

1. Defined by IAS38 as an identifiable non-monetary asset without physical

substance.
A. Intangible asset C. Monetary asset
B. Goodwill D. Non-financial asset

2. Defined by IAS38 as the application of research findings or other knowledge to

a plan or design for the production of new or substantially improved materials,
devices, products, processes, systems or services before the start of
commercial production or use.
A. Research and development C. Development
B. Research D. Process improvement

3. Defined by IAS38 as the original and planned investigation undertaken with

the prospect of gaining new scientific or technical knowledge and
understanding.
A. Research and development C. Development
B. Research D. Process improvement

4. Defined by IAS38 as the estimated amount that an entity would currently

obtain from disposal of the asset, after deducting the estimated costs of
disposal, if the asset were already of the age and in the condition expected at
the end of its useful life.
A. Carrying amount C. Entity-specific value
B. Fair value D. Residual value

5. Defined by IAS38 as the present value of the cash flows an entity expects to
arise from the continuing use of an asset and from its disposal at the end of its
useful life or expects to incur when settling a liability.
A. Carrying amount C. Entity-specific value
B. Fair value D. Residual value

6. Defined by IAS38 as the amount of cash or cash equivalents paid or the fair
value of other consideration given to acquire an asset at the time of its
acquisition or construction, or, when applicable, the amount attributed to that
asset when initially recognized in accordance with the specific requirements of
other IFRSs.
A. Cost C. Carrying amount
B. Fair value D. Entity-specific value

7. Which is correct concerning the criterion of identifiability of an intangible

asset?
I. An intangible asset is identifiable when it is separable, meaning, the asset
could be sold, transferred, licensed, rented or exchanged.
II. An intangible asset is identifiable when it arises from contractual or legal
rights.
A. I only C. Both A and B
B. II only D. Neither A nor B

8. Which is incorrect concerning separate acquisition of an intangible asset?

A. If an intangible asset is acquired separately, the cost of the intangible asset
can usually be measured reliably.
B. The cost of an intangible asset comprises its purchase price and any
directly attributable expenditure on preparing the asset for its intended use.
C. If payment for an intangible asset is deferred beyond normal credit terms,
its cost is equal to the total payments over the credit period.

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D. If an intangible asset is acquired in exchange for a nonmonetary asset or a
combination monetary and nonmonetary asset, the cost is measured at fair
value unless the exchange transaction lacks commercial substance.

9. If the intangible asset is acquired by way of exchange of assets and the

transaction lacks commercial substance, the intangible asset shall be
measured initially at
A. Fair value of the asset given
B. Fair value of the asset received
C. Carrying amount of the asset given
D. Carrying amount of the asset received

10. A trademark is acquired by issuance of the entity’s own ordinary shares, the
trademark shall be measured initially at
A. Carrying amount of the trademark
B. Fair value of the ordinary shares
C. Par value of the ordinary shares
D. Fair value of the trademark

11. Choose the incorrect statement.

A. Internally generated goodwill shall not be recognized as an intangible
asset.
B. Internally generated brands, mastheads, publishing titles, customer lists
and items similar in substance should be not be recognized as intangible
assets.
C. The cost of internally generated intangible asset comprises all directly
attributable cost necessary to create, produce and prepare the asset for its
intended use.
D. Costs incurred during research phase and development phase are
capitalized to intangible asset.
12. Examples of directly attributable costs that are capitalized as cost of intangible
assets least likely include
A. Costs of employee benefits (as defined in IAS19) arising directly from
bringing the asset to its working condition
B. Professional fees arising directly from bringing the asset to its working
condition
C. Costs of conducting business in a new location or with a new class of
customers
D. Costs of testing whether the asset is functioning properly.

13. The acquirer shall recognize __________ as the excess of the aggregate of
the consideration transferred, any non-controlling interest in the acquiree and
the fair value of the acquirer’s previously held equity interest in the acquiree;
and the net identifiable assets acquired.
A. Organization cost C. Business combination asset
B. Goodwill D. Non-monetary asset

14. Research activities do not include

A. Design, construction and testing of pre-production or pre-use prototypes
and models
B. Activities aimed at obtaining new knowledge
C. Search for, evaluation and final selection of, applications of research
findings or other knowledge
D. Formulation, design, evaluation and final selection of possible alternatives
for new or improved materials, devices, products, processes, systems or
services.

15. Subsequent measurement of intangible asset includes

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A. Cost model and fair value model
B. Revaluation model and impairment model
C. Cost model and revaluation model
D. Revaluation model and fair value model

16. Which of the following statements regarding impairment of intangible asset is

false?
A. The amortization charge is recognized in profit or loss unless another IFRS
requires that it be included in the cost of another asset.
B. The amortization period should be reviewed at least annually.
C. Amortization of an intangible asset is over its legal life or useful life
whichever is longer.
D. The residual value of an intangible asset is presumed to be zero unless a
third party is committed to buy the intangible asset at the end of its useful
life or unless there is an active market.

17. Which of the following costs incurred for internally developed computer
software is capitalized as cost of the intangible asset?
A. Directly attributable cost incurred before a technical feasibility has been
established.
B. Cost of coding, testing and cost to produce the product master after
technological feasibility has been established.
C. Cost incurred to actually produce and package the software from masters.
D. All of the foregoing.

18. An entity has two patents that have allegedly been infringed by competitors.
After investigation, legal counsel informed the entity that it had a weak case on
patent P1 and a strong case regard to patent P2. Patent P1 was
unsuccessfully defended while patent P2 was successfully defended. Both
patents have a remaining legal life of 8 years. How should the entity account
for these legal costs incurred relating to the two patent?
A. Expensed for P1 and capitalized for P2
B. Capitalized for both P1 and P2
C. Expensed for both P1 and P2
D. Capitalized for P1 and Expensed for P2

19. Which of the following would most likely be capitalized as intangible asset?
A. Website development costs
B. Internally generated brand, masthead, customer list
C. Organization costs
D. Internally developed computer software

20. Which of the following should be expensed as incurred by the franchisee for a
franchise with an estimated useful life of ten years?
A. Amount paid to the franchisor for the franchise
B. Payment to a company, other than the franchisor, to obtain the franchise.
C. Legal fees paid to the franchisee’s lawyers to obtain the franchise.
D. Periodic payments to the franchisor based on the franchisee’s revenue.

21. A computer software purchased s an operating system for the hardware or as

an integral part of a computer controlled machine tool that cannot operate
without the specific software should be treated as
A. Intangible asset C. Inventory
B. Property, plant and equipment D. Expense

22. The legal life of patent is

A. 20 years
B. 10 years

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C. 20 years, renewable for another 20 years
D. 10 years, renewable for another 10 years

23. Dimatanaw Company exchanges the rights to distribute a product in Baliuag

which have a carrying amount of P2,000,000, for cash of P1,000,000 and the
rights to distribute the same product in Bustos, with a fair value of P1,400,000.
The exchange is considered having the necessary commercial substance. At
the time of exchange, the intangible asset should be initially recorded by
Dimatanaw at
A. 1,000,000 C. 2,000,000
B. 1,400,000 D. 2,400,000

24. Dimakita Company purchases a trademark from an overseas company to

manufacture items under the trademark. Dimakita incurs the following costs in
purchasing the trademark: Amount paid for the trademark, P8,000,000; Import
duties, P80,000; Legal fees (negotiating the deal and ensuring the term of the
trademark are fair), P100,000; Training costs (required by overseas company
before the trademark can be used), P20,000; Advertising new product,
P30,000 and cost of registering the trademark (required in terms of the
agreement with supplier), P90,000. What amount should the trademark be
initially recorded?
A. 8,180,000 C. 8,290,000
B. 8,270,000 D. 8,320,000

25. Dimahawakan Company purchased a patent on January 1, Year 1 for

P428,400. The patent was being amortized over its remaining legal life of 15
years. On January 1, Year 4, Dimahawakan determined that the economic
benefits of the patent would not last longer than 10 years from the date of
acquisition. What amount should be reported in the balance sheet as patent,
net of accumulated amortization at December 31, Year 7?
A. 146,880 C. 244,800
B. 195,840 D. 302,400

26. On July 1, Year 1, Dimasalat Inc. signed an agreement to operate as a

franchise of Tire Co. for an initial franchise fee of P1,200,000. On the same
date, Dimasalat paid P400,000 and agreed to pay the balance in four equal
payments of P200,000 beginning July 1, Year 2. The down payment is not
refundable and no future service are required of the franchisor. The company
can borrow at 14% for a loan of this type. PV of an ordinary annuity of 1 is
2.914 while PV of an annuity due of 1 is 3.322. What is the carrying value of
the franchise to be reported on December 31, Year 3 statement of financial
position assuming the franchise has a definite life of 20 years?
A. 859,950 C. 1,110,000
B. 982,800 D. 1,352,000

27. The R & D division of Dimaaninag 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
Salaries of consultants for the projects 2,000,000
Fees to register trade designs 50,000
Amortization of the patent used in this project 100,000
Selling and administrative overheads allocated 1,000,000
Initial operating losses 500,000
Training costs to operate the asset __100,000
Total P8,750,000

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The other costs that related to this project are the salaries of scientist and
technicians (P1,200,000) and depreciation of equipment used in the research
and development activities (P900,000). Management estimates that about one
third of these costs relate to the development project. What amount of
development costs that should be capitalized as intangible asset?
A. 7,150,000 C. 8,250,000
B. 7,850,000 D. 8,750,000

28. Ditotoo Company incurred P1,500,000 to develop a computer software

product. P400,000 of this amount was expended before technological
feasibility was established in early Year 1. The product will earn future
revenues of P4,000,000 over its 5-year life, as follows: Year 1 – P1,000,000;
Year 2– P1,000,000; Year 3 – P800,000; Year 4 – P800,000; and Year 5 –
P400,000. The internally developed software is expressed as a measure of
revenue and it can be demonstrated that revenue and the consumption of
economic benefits of the intangible asset are highly correlated. What portion of
the computer software costs should be expensed in Year 1?
A. 220,000 C. 275,000
B. 620,000 D. 675,000

29. The owners of Invisible Co, are planning to sell the business to new interests.
The cumulative net earnings for the past five years amounted to P16,500,000
including expropriation loss of P1,500,000. Goodwill is measured by
capitalizing excess earnings at 25% with normal earnings at 20%. The fair
value of net assets of the entity at current year-end was P10,000,000. What is
the goodwill from acquisition?
A. 6,400,000 C. 4,400,000
B. 4,000,000 D. 5,200,000

30. Abstract Co. was granted a patent on January 1, Year 1 and appropriately
capitalized P4,500,000 of related costs. The entity was amortizing the patent
over the estimated useful life of 15 years. During Year 4, the entity paid
P1,500,000 in legal costs in successfully defending an attempted infringement
of the patent. After the legal action was completed, the entity sold the patent to
the plaintiff for P7,500,000. The policy is to take no amortization in the year of
disposal. What amount should be reported as gain from sale of patent?
A. 1,500,000 C. 2,700,000
B. 2,400,000 D. 3,900,000

31. On January 1, Year 1, Untouchable Co. purchased a patent from an original

patentee for P2,400,000. The remaining legal life of the patent is 15 years but
the useful life is only 12 years. On January 1, Year 2 the entity paid P550,000
in successfully defending the patent in an infringement suit filed against the
entity. On January 1, Year 3, the entity acquired a competing patent for
P1,500,000. The competing patent has a remaining legal life of 15 years but it
is not to be used because it was intended to protect the original patent. What
is the carrying amount of the patent on December 31, Year 3?
A. 3,150,000 C. 3,200,000
B. 3,600,000 D. 3,500,000

32. Obscure Co. incurred research and development costs in the current year as
follows:
Equipment acquired for use in various research and 975,000
development projects
Depreciation on the above equipment 135,000
Materials used 200,000
Compensation costs of personnel 500,000
Outside consulting fees 150,000

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Intangible Assets

Indirect costs appropriately allocated 250,000

What is the research and development expense the current year?

A. 850,000 C. 1,235,000
B. 1,085,000 D. 1,285,000

33. Indeterminate Co. made the following expenditures relating to Product Zee:
Legal costs to file a patent on Product Zee. Production of the
finished product would have not been undertaken without 100,000
the patent
Special equipment to be used solely for development of Product
Zee. The equipment has no other use and has an 600,000
estimated useful life of four years
Labor and material costs incurred in producing a prototype 2,000,000
model
Cost of testing the prototype 800,000
What total amount of costs should be expensed when incurred?
A. 2,800,000 C. 2,950,000
B. 3,400,000 D. 3,500,000

34. Unforeseeable Co. made the following expenditures during the current year:
Cost to develop computer software for internal use 1,000,000
Cost to market research activities 750,000
What amount should be reported as research and development expense?
A. 1,750,000 C. 750,00
B. 1,000,000 D. None

35. On January 1, Year 1, Incomprehensible Co. purchased a patent for a new

customer product for P900,000. At the time of purchase, the patent was valid
for 15 years. However, the useful life was estimated to be only 10 years due to
the competitive nature of the product. On December 31, Year 4, the product
was permanently withdrawn from sale under governmental order because of
potential health hazard in the product. What amount should be charged
against income during Year 4, assuming amortization is recorded at the end of
each year?
A. 720,000 C. 540,000
B. 630,000 D. 90,000

36. On January 1, Year 3, Indeterminable Co. reported patent cost of P1,920,000

and related accumulated amortization of P240,000. The patent was purchased
on January 1, Year 1 at which date the remaining legal life was 16 years. On
January 1, Year 3, the useful life of the patent was determined to be only 8
years from the date of acquisition. On January 1, Year 3, the entity paid
P800,000, of which three-fourths was for trademark, and one-fourth was for
the other entity’s agreement not to compete for a five-year period in the line of
business covered by the trademark. The entity considered the life of the
trademark indefinite. Moreover, the entity agreed to pay P50,000 to the other
entity as consulting fee each year for 5 years payable every January 1. What
is the amortization of intangible assets for Year 3?
A. 320,000 C. 250,000
B. 280,000 D. 370,000

- End of discussion

“Success is no accident. It is hard work, perseverance, learning, studying, sacrifice

and most of all, love of what you are doing or learning to do.” Pele

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Intangible Assets

ANSWER KEY:

1. A 13. B 25. A
2. C 14. A 26. A
3. B 15. C 27. B
4. D 16. C 28. D
5. C 17. B 29. A
6. A 18. C 30. D
7. C 19. D 31. A
8. C 20. D 32. C
9. C 21. B 33. B
10. D 22. A 34. D
11. D 23. B 35. B
12. C 24. B 36. A

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