01 Activity 1

Jeremiah Corporation has provided the following information on intangible assets as follows:

a. A patent was purchased from Isaiah Company for P5,000,000 on January 1, 20x1. On the acquisition
date, the patent was estimated to have a useful life of 10 years. The patent had a net book value of
P5,000,000 when Isaiah sold it to Jeremiah.

b. On February 2, 20x2, a franchise was purchased from Daniel Company for P2,160,000. The contract
that runs for 20 years provides that 5%of revenue from the franchise must be paid to Daniel. Revenue
from the franchise for 20x2 was P8,000,000.

c. Jeremiah incurred the following research and development costs in 20x2:

Materials and equipment P462,000

Personnel 657,000
Indirect costs 329,000
Total P1,448,000

Because of the recent events, Jeremiah, on January 1, 20x2, estimates that the remaining useful life of
the patent purchased on January 1, 20x1, is only five (5) years from January 1, 20x2.

1. On December 31, 20x2, the carrying value of the patent should be ______________
Acquisition cost of the patent P5,000,000
Less: Amortization
20X1 (P5,000,000/10 years) P500,000
20X2(P5,000,000 – 500,000
=P4,500,000/ 5 years) P900,000 (1,400,000)
Carrying value of patent, 20X2 P3,600,000

2. The unamortized cost of the franchise at December 31, 20x2 should be ____________
Acquisition cost of franchise P2,160,000
Less: Amortization (P2,160,000/20 years x 11/12) (99,000)
Carrying value of franchise, 20X2 P2,061,000

3. How much should be charged against Jeremiah’s income for the year ended December 31,
20x2?
Amortization of patent P900,000
Amortization of franchise 99,000
Payment to franchise (P8,000,000 x 5%) 400,000
Research and development cost 1,448,000
Charges against 20X2 income P2,847,000