Chapter 05

Intangible Assets
Inclusions and Exclusions From Intangible Asset
1) The following costs are generally incurred by Bound Eye Corporation:

Goodwill purchased in a business combination 500,000

Cost of developing website for the promotion and advertisement of the entity’s products 150,000
Cost incurred in the corporation’s formation and organization 230,000
Operating losses incurred in the start-up of the business 130,000
Initial franchise fee paid 175,000
Continuing franchise fee 50,000
Internally generated goodwill 800,000
Cost of purchasing a patent form an investor 137,000
Cost of leasehold improvement 70,000
Legal costs incurred in successfully defending a patent 55,500
Internally generated customer list 40,000
Cost of purchasing a trademark 250,000
Computer software for a computer controlled machine – cannot be operate without that specific software 325,500
How much from the above items can be recognized as intangible assets including goodwill?
A. 1,132,000
B. 1,387,500
C. 1,172,000
D. 1,062,000

Inclusions and Exclusions From Research & Development

2) Zazu provided you the following information pertaining to its Research and Development activities for the year 2022:

Searching for applications of new research findings 57,000

Trouble-shooting in connection with breakdowns during commercial production 87,000
Adaptation of an existing capability to a particular requirement of customer’s need as part of continuing
commercial activity 39,000
Engineering follow-through in an early phase of commercial production 45,000
Laboratory research aimed to 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
Routine and on-going efforts to refine, enrich, or otherwise, improve upon the qualities of an existing 750,000
product
What is the total amount to be classified and expensed as research and development for 2022?
A. 1,095,000
B. 1,017,000
C. 456,000
D. 561,000

Inclusions and Exclusions From Research & Development – Treatment to PPE Used in R & D
3) All of the following expenditures were included in the R & D expense account:

Salaries and wages for laboratory research 1,000,000

Design of preproduction prototype 200,000
Construction of production prototype 150,000
Quality control during commercial production 100,000
Materials and supplies consumed for laboratory research 400,000
Purchase of equipment used solely for the project – useful life 5 years 600,000
Patent filing and legal fees for completed project 50,000
Payments to other for research 300,000
What amount should be reported as research and development expense for the current year?
A. 2,650,000
B. 2,170,000
C. 2,050,000
D. 2,350,000

FAR by: John Bo S. Cayetano, CPA, MBA Page 1 of 5

Inclusions and Exclusions from Research & Development – Expenditure after Technical Feasibility
4) Floyd incurred the following costs during the current year:

February 1 P100,000 in legal and processing fees to file a patent

March 5 P250,000 in laboratory and material fees to identify new technology
April 15 Prototype development and testing, P340,000
May 1 Floyd achieved technical feasibility
July 1 Final development of the product and testing P550,000
What amount should be recognized as research and development expense?
A. 590,000
B. 250,000
C. 340,000
D. 1,140,000

Initial Measurement – Externally Generated, Without Direct Attributable Cost

5) Piptin Corporation acquires a patent from Siktin Company in exchange for 2,500 shares of Piptin Corporation’s P5
par value ordinary shares and P75,000 cash.

When the patent was initially issued to Siktin Company., Piptin Corporation’s shares were selling at P7.50 per share.

When Piptin acquired the patent, its shares were selling for P9 a share. Pipin Corporation should record the patent at
what amount?
A. 87,500
B. 93,750
C. 97,500
D. 75,000

Initial Measurement – Externally Generated, Issuance of Notes

6) On January 1, 2022, Black Mamba Company signed an agreement to operate as a franchise of Doug company for an
initial franchise fee of P30,000,000. Of this amount, P10,000,000 was paid when the agreement was signed and the
balance is payable in equal annual payment of P5,000,000 beginning December 31, 2022.

The agreement provides that the down payment is not refundable and no future services are required of the franchisor.
Black Mamba’s credit rating indicates that it can borrow money at 12% for loan of this type.

Present value of 1 at 12% for four periods 0.636

Present value of ordinary annuity at 12% for four periods 3.037
Present value of annuity due at 12% for four periods 3.402

How much is the cost of franchise?

A. 30,000,000
B. 25,185,000
C. 21,541,500
D. 15,185,000

Initial Measurement – Externally Generated, With Direct Attributable Cost

7) An entity purchases a trademark and incurs the following costs in connection with the trademark:

One-time trademark purchase price P100,000

Nonrefundable taxes 5,000
Training sales personnel on the use of the new trademark 7,000
Research expenditures associated with the purchase of the new trademark 24,000
Legal costs incurred to register the trademark 10,500
Salaries of the administrative personnel 12,000

Assuming that the trademark meets all of the applicable initial asset recognition criteria, the entity should recognized
an asset in the amount of
A. 100,000
B. 115,500
C. 146,500
D. 158,500

FAR by: John Bo S. Cayetano, CPA, MBA Page 2 of 5

Initial Measurement – Internally Generated
8) Tamis Company developed a new machine which it had patented. The following costs were incurred in developing
and patenting the machine:

Purchased a special equipment to be used solely for development of new machine 1,800,000
Research salaries and fringe benefits for engineers and scientist 200,000
Cost of testing prototype 250,000
Legal cost of filing patent 300,000
Fees paid to government patent office 500,000
Drawings required by patent office to be filed with patent application 400,000
Legal fees incurred in a successful defense of patent 200,000
What amount should be capitalized as cost of patent?
A. 1,200,000
B. 1,400,000
C. 1,450,000
D. 3,450,000

Subsequent Measurement – Amortization

9) Alaminos Company acquired three patents in January 2016. The patents have different lives as indicated in the
following schedule:

Remaining Remaining
Patent Cost useful life legal life
A P2,000,000 10 8
B 3,000,000 5 10
C 6,000,000 Indefinite 15

The company’s policy is to amortize intangible assets by the straight-line method to the nearest half year. The
company reports on a calendar-year basis. The amount of amortization that should be recognized for 2016 is
A. 1,330,000
B. 1,250,000
C. 2,050,000
D. 950,000

Subsequent Measurement – Amortization, With Change in Estimate

10) On January 1, 2017, Josabelle Company purchased a patent for P7,140,000. The patents is being amortized over the
remaining legal life of 15 years. During January 2020, the entity determined that the economic benefits of patent
would not last longer than seven years from the date of acquisition.

What is the carrying amount of the patent on December 31, 2020?

A. 4,284,000
B. 4,896,000
C. 3,264,000
D. 5,236,000

Subsequent Measurement – Amortization of Software

11) In 2021, Rover spent P6,000,000 in its new software package. Of this amount, 60% was spent before technological
feasibility was established for the product, which is to be marketed to third parties. The package was completed at
December 31, 2021. Rover expects a useful life of 8 years with total revenues of P20,000,000.

During 2022, Rover realizes revenues of P4,000,000. Net realizable value of the software on December 31, 2022 is
85% of cost.

What amount of software expense should be included in the December 31, 2022 income statement?
A. 840,000
B. 360,000
C. 480,000
D. 600,000

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Subsequent Measurement – Impairment, Impairment of Definite Life Asset and New Amortization
On January 1, 2020, Blessed Company purchased a Patent for P280,000. The asset has a legal life of 10 years but due
to rapidly changing technology, Blessed estimates a useful life of only 7 years. On January 1, 2022, Blessed is uncertain
that the process can actually be made economically feasible, and decides to write down the patent.

The future cash inflows expected from the patent will be P40,000 per year for the remaining life of the patent. The present
value of these cash flows, discounted at 12% market interest rate, is P144,200. The fair value less cost to sell is P130,000.

12) How much is the impairment loss for the year 2022?
A. 135,800
B. 79,800
C. 70,000
D. 55,800

13) How much is the amortization expense for the year 2022?
A. 28,840
B. 26,000
C. 18,025
D. 16,250

Subsequent Measurement – Impairment, Impairment of Indefinite Life Asset

14) On January 1, 2020, Rowena Company acquired a trademark for P3,000,000. The trademark has eight years
remaining in the legal life. It is anticipated that the trademark will be renewed in the future indefinitely without problem.

On December 31, 2020, the trademark is assessed for impairment. Because of a decline in economy, the trademark
is expected to generate cash flows of just P120,000 annually. The useful life of the trademark will extends beyond the
foreseeable horizon.

The appropriate discount rate is 6%. What amount should be recognized as impairment loss on trademark for 2020?
A. 1,000,000
B. 2,000,000
C. 3,000,000
D. 0

Total Related Expenses of Patent – Amortization, Cost of Defense, Impairment due to Unsuccessful Defense
Numbers 15, 16, 17 and 18
Behemoth Company incurred P100,000 of research and development costs to develop a product for which a patent was
granted on January 1, 2020. Legal fees and other costs associated with registration of the patent totaled P300,000. The
patent is being amortized over its legal life. On July 1, 2022, Behemoth Company won and paid legal fees of P80,000 for
the successful defense of the patent against an infringement lawsuit by Doug Company.

15) How much is the amortization expense for the year 2020?
A. 5,000
B. 20,000
C. 15,000
D. 30,000
16) How much is the carrying amount of the patent on December 31, 2022?
A. 255,000
B. 262,500
C. 248,800
D. 335,000
17) How much is the total expenses for the year 2022?
A. 15,000
B. 80,000
C. 95,000
D. 87,500
18) How much is the total expenses for the year 2022 assuming Behemoth Company did not win the lawsuit?
A. 80,000
B. 87,500
C. 262,500
D. 350,000

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Total Related Expenses of Franchise – Amortization, Interest, CFF & Impairment
19) On January 1, 2022, Blight Stones obtained a franchise from Doug Corporation to sell for 20 years Doug’s product.
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 provides that the franchisor shall provide the necessary initial services required under a franchise
contract. The agreement also provides that 5% of the revenue from the franchise must be paid to the franchisor.
Revenue from the franchise for 2022 was P5,000,000. PV of ordinary annuity at 12% for four periods 3.03735.

How much is the total expenses for the year 2022?

A. 458,875
B. 945,433
C. 239,831
D. 489,831
Goodwill – Direct Method
Numbers 20, 21, 22, 23 and 24
Life Company is 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. The normal rate of return is 20%. The fair value of
net assets of entity at current year-end was P10,000,000. Determine the goodwill thru the following indirect method:
20) Excess earnings are purchased for 5 years?
A. 8,000,000
B. 4,000,000
C. 5,000,000
D. 4,500,000

21) Excess earnings are capitalized at 25%?

A. 7,200,000
B. 6,400,000
C. 8,000,000
D. 3,600,000

22) Annual average earnings are purchased for 3 years?

A. 10,800,000
B. 18,000,000
C. 4,800,000
D. 5,400,000

23) Annual average earnings are capitalized at 25%?

A. 1,600,000
B. 3,600,000
C. 4,400,000
D. 2,000,000

24) Excess earnings are discounted at 12% for 5 years? (the PV of an ordinary annuity of 1 for 5 years at 12% is 3.60)
A. 12,960,000
B. 10,800,000
C. 5,760,000
D. 7,200,000

Goodwill – Indirect Method

25) Jennylyn purchased another entity for P8,000,000 cash. The assets and liabilities of the acquire are as follows:
Carrying Amount Fair Value
Cash 1,000,000 1,000,000
Inventory 400,000 500,000
In-process R and D 6,000,000 5,000,000
Assembled Workforce 1,100,000 1,200,000
Liabilities 2,500,000 3,000,000
What is the goodwill arising from acquisition?
A. 4,500,000
B. 3,300,000
C. 3,100,000
D. 2,200,000
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