Financial Accounting: Theory & Practice Intangible Assets

FINANCIAL ACCOUNTING
THEORY & PRACTICE

INTANGIBLE ASSETS
QUIZZER
Intangible Assets
INTANGIBLE ASSETS
Essay Questions
Basic concepts
1. Define an intangible asset.
PAS 38, paragraph 8, simply defines an intangible asset as follows: "An intangible asset is
an identifiable nonmonetary asset without physical substance". The requirement for the
asset to be held for use in the production or supply of goods or services, for rental to others,
or for administrative purposes has been removed from the definition of an intangible asset.
Paragraph 8 further states that "the intangible asset must be controlled by the entity as a
result of past event and from which future economic benefits are expected to flow to the
entity".
2. What are the two conditions for the recognition of an intangible asset?
1. It is probable that the future economic benefits that are attributable to the asset will flow
to the entity.
2. The cost of the intangible asset can be measured reliably.
3. What are the three essential criteria in the definition of an intangible asset?
The three essential criteria in the definition of an intangible asset are:
1. Identifiability
2. Control
c. Future economic benefits
4. Explain the meaning of "identifiability".
The definition of an intangible asset requires that an intangible asset must be identifiable in
order to distinguish it clearly from goodwill.
With nonphysical items, there may be a problem with identifiability.
An asset is identifiable when:

a. It is separable. This means that the asset is capable of being separated from the entity
and sold, transferred, licensed, rented or exchanged, either individually or together with
a related contract, asset or hability regardless of whether the entity intends to do so.
b. It arises from contractual or other legal rights. This is regardless of whether such rights
are transferable or separable from the entity or from other rights and obligations.
Essay Questions Page 1

5. Explain the element of "control" of an intangible asset?
Control is the power of the entity to obtain the future economic benefits flowing from the
intangible asset and restrict the access of others to those benefits. In other words, the entity
must be able to enjoy the future economic benefits from the asset and prevent others from
enjoying the same benefits. The capacity of an entity to control the future economic benefits
from an intangible asset normally would stem from legal rights that are enforceable in a court
of law, for example, trademark, copyright and patent. In the absence of legal rights, it is more
difficult to demonstrate control.
However, legal enforceability of a right is not always a necessary condition for control since
an entity may be able to control the future economic benefits in some other way. For
example, one method of control is keeping secret through employee confidentiality. The skill
of employees, arising out of the benefits of training costs, cannot be recognized as intangible
asset because the entity does not control the future actions of its staff. Similarly, market
share and customer loyalty cannot normally be recognized as intangible asset because an
entity cannot control the action of the customers.
6. Explain the meaning of "future economic benefits".
Future economic benefits 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. For example, the
use of intellectual property in a production process or the legal right to use a new technology
may reduce future production costs rather than increase future revenue.
7. What is the cost of an intangible asset that is "acquired separately"?
1. The cost of an intangible asset comprises the purchase price, import duties and
nonrefundable purchase taxes, and any directly attributable cost of preparing the. asset
for the intended use. Directly attributable costs include costs of employee benefits
arising directly from bringing the asset to the working condition, professional fees arising
directly from bringing the asset to the working condition, and costs of testing whether the
asset is functioning properly.
2. If the payment for an intangible asset is deferred beyond normal credit terms, the cost is
the cash price equivalent. The difference between the cash price and the total payments
is recognized as interest expense over the credit period.

Intangible Assets
8. What is the meaning of "identifiable intangible asset"?
PAS 38 specifically pertains to identifiable intangible assets. If the intangible asset is

acquired through purchase, there is a transfer of legal right that would make the asset
identifiable. Moreover, if the asset could be rented or sold separately, the intangible asset is
considered identifiable.
The common examples of identifiable intangible assets are:

a. Patent
b. Copyright
c. Franchise
d. Trademark or brandname
e. Leasehold or lease rights
f. Computer software
g. Broadcasting license, airline right and fishing right
9. What is the meaning of "unidentifiable intangible asset"?
An intangible asset is unidentifiable if it cannot be sold, transferred, licensed, rented or

exchanged separately.
In other words, the intangible asset is inherent in a continuing business and can only be
identified with the entity as a whole.
The best example of an unidentifiable intangible asset is goodwill.
Capitalizable costs
10. Give examples of costs that are not included in 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.
c. Administration and other general overhead costs.
d. Costs incurred while an asset capable of operating in a manner intended by
management has yet to be brought into use.
e. Initial operating losses.

11. What is the cost of an intangible asset that is acquired as part of a business combination?
a. If an intangible asset is acquired in a business combination, the cost of the intangible

asset is based on the fair value on the date of acquisition. The fair value of an intangible
asset acquired in a business combination can be measured with sufficient reliability to
be recognized separately from goodwill.
b. If there is an active market, the quoted price of an identical asset provides the most
reliable evidence of fair value. The quoted price of a similar asset may also provide
evidence of fair value.
c. If there is no active market, the fair value of the intangible asset is equal to any available
quoted price for identical or similar asset.
d. The fair value can also be based on unobservable inputdeveloped by the entity. For
example, the fair value is determined by a financial forecast of the future net cash flows
from the intangible asset.
12. What is the cost of an intangible asset that is acquired by "government grant"?
An intangible asset may be acquired by way of a government grant, free of charge or for
nominal consideration. This may occur when a government transfers or allocates to an entity
intangible assets such as airport right and license to operate radio or TV.
The intangible asset acquired by way of government grant may be initially recorded at either:
a. Fair value
b. Nominal amount or zero, plus any expenditure that is directly attributable to preparing
the asset for its intended use.
13. What is the cost of an "internally generated intangible asset"?
The cost of an internally generated intangible asset comprises all directly attributable costs
necessary to create, produce and prepare the asset to be capable of operating it in the
manner intended by management.
Examples of directly attributable costs are:
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. Amortization of patents and licenses that are used to generate the intangible asset.

Intangible Assets
However, the following expenditures are not components of the cost of an internally
generated intangible asset:
a. Selling, administrative and other general overhead, unless this expenditure can be
directly attributed to preparing the asset for use.
b. Clearly identified inefficiencies and initial operating losses incurred before an asset
achieves planned performance.
c. Expenditure on training staff to operate the asset.
PAS 38, paragraph 63, explicitly provides that "internally generated brands, mastheads,
publishing titles, customer lists and items similar in substance shall not be recognized as
intangible assets".
Revenue expenditures
14. Give examples of expenditures that are expensed when incurred.
1. Start up costs. Start up costs may consist of organization costs such as legal and
secretarial costs incurred in establishing a legal entity. Start up costs also include
preopening costs or expenditures to open a new facility or business, and preoperating
costs or expenditures for commencing new operations or launching new products or
processes.
2. Training costs
3. Advertising and promotional costs
4. Business relocation or reorganization costs
However, a prepayment can be recognized as an asset when payment for goods has been
made in advance of the entity obtaining a right to access those goods or when payment for
services has been made in advance of the entity receiving those services.
15. What is the treatment of a subsequent expenditure on an intangible asset?
As a rule, a subsequent expenditure on an intangible asset shall be recognized as expense.

The reason is that most subsequent expenditures are likely to maintain only the expected
future economic benefits embodied in the intangible asset.
However, the subsequent expenditure may be capitalized or added to the cost of the
intangible asset if the following recognition criteria for an intangible asset are met:

a. It is probable that future economic benefits that are attributable to the subsequent
expenditure will flow to the entity.
b. The subsequent expenditure can be measured reliably.
The nature of an intangible asset is such that, in many cases, it is not possible to determine
whether subsequent expenditure is likely to enhance or maintain the economic benefits that
will flow to the entity from the intangible asset.
In addition, it is often difficult to attribute such expenditure directly to the intangible asset or
to the business as a whole. Therefore, only rarely will a subsequent expenditure on an
intangible asset result to an addition to the cost of the intangible asset.
Measurement after initial recognition

16. Explain the measurement of an intangible asset after initial recognition.
Initially, an entity shall measure an intangible asset at cost. However, after initial recognition,
an entity shall choose either the cost model or revaluation model as its accounting policy.
Cost model. An intangible asset shall be carried at cost, less any accumulated amortization
and any accumulated impairment loss.
Revaluation model. An intangible asset shall be carried at a revalued amount, less any
subsequent amortization and any subsequent accumulated impairment loss. The revalued
amount is the fair value at the date of revaluation and is determined by reference to an active
market. Thus, an intangible asset can only be carried at revalued amount if there is an active
market for the asset.
Patent
17. What do you understand by patent?
A patent is an exclusive right granted by the government to an inventor enabling him to control
the manufacture, sale or other use of invention for a specified period of time.
The legal life of patent is 20 years from the date of filing the application. This is in accordance
with R.A. No. 8293, or the Intellectual Property Code of the Philippines, which took effect on
January 1, 1998.
A patent cannot be renewed but the life can be extended beyond the legal life by a new patent
for improvements and changes. Under US GAAP a patent is classified as technology-based
intangible asset.

Intangible Assets
18. What expenditures are capitalized as cost of patent?
If the patent is acquired by purchase, the cost includes the purchase price and any directly
attributable expenditure necessary in preparing the asset for the intended use. If the patent
is internally developed, the cost includes the licensing and other related legal fees in securing
the patent rights. As a rule, all related research and development costs shall be expensed as
incurred. Legal fees and other costs of successfully prosecuting or defending a patent shall
be expensed immediately.
19. Explain the amortization period of patent.
1. The original cost shall be amortized over the legal life or useful life, whichever is shorter.
2. A competitive patent acquired to protect an original patent shall be amortized over the
remaining life of the original patent.
3. If a related patent is acquired in order to extend the life of the old patent, the cost of the
related patent and any unamortized cost of the old patent shall be amortized over the
extended life.
Copyright
20. What is a copyright?
A copyright is an exclusive right granted by the government to the author, composer or artist,
enabling the grantee to publish, sell or otherwise benefit from the literary, musical or artistic
work. Under US GAAP, a copyright is considered an artistic-related intangible asset.
The cost assigned to copyright consists of all expenses incurred in the production of the work
including those required to estabhsh or obtain the right. Where the copyright is purchased,
the cost includes the cash paid, and directly attributable cost necessary for the intended use.
Theoretically, the cost of the copyright shall be amortized over the useful life. In practice, it is
often difficult to estimate the number of years in which benefits will be received. Thus, it is
usually advisable to write off the cost of the copyright against the revenue of the first printing.
Under the Intellectual Property Code of the Philippines, the term of protection for copyright is
during the lifetime of the author and for 50 years after death.

Franchise
21. What is a franchise?
Under a franchise agreement, one party called the franchisor grants certain rights to another
party called the franchisee.
Under US GAAP, a franchise is a contract-based intangible asset. The franchise agreement

may be:
a. Between the government and a private entity or individual
b. Between private entities or individuals
If the franchise is between the government and a private entity or individual, the latter is
permitted to use public property in performing its services. Examples are the use of public
waters for interisland shipping, the use of public land for telephone or electric lines, or the
use of streets and highways for a bus line.
If the franchise is between private entities or individuals, the franchisee acquires the right to
use the trademark, patent and process of the franchisor. Examples are the right to operate
a fried chicken drive-in under the tradename "Max" or "Aristocrat" and the right to operate a
"McDonald" or "Jollibee" restaurant.
22. What expenditures are capitalized as cost of franchise?
The cost of the franchise includes the lump sum payment for the franchise and all legal fees
and expenses incurred in connection with the franchise acquisition. The lump sum payment
is known as the initial franchise fee and therefore the initial cost of the franchise. If the
franchise agreement requires the franchisee to make periodic payment to the franchisor
based on the franchisee's revenue, such payment is treated as outright expense. This
payment is known as the periodic franchise fee.
23. Explain the amortization period of franchise.
If the franchise is granted for a definite period, the cost of the franchise shall be amortized
over the useful life or definite period, whichever is shorter.
If the franchise is granted indefinitely or perpetually, the cost of the franchise shall not be
amortized but tested for impairment at least annually.

Intangible Assets
Leasehold
24. What is a leasehold?
A leasehold is the right acquired by the lessee by virtue of a contract of lease to use the
specific property owned by the lessor for a definite period of time in consideration for a certain
sum of money. The cost of leasehold shall be amortized over the life of the lease. If the cost
is not very substantial, it may be charged to outright expense.
25. What are leasehold improvements?
Leasehold improvements are alterations or modifications on the leased property made by the
lessee. Leasehold improvements are classified as property, plant and equipment. Examples
are buildings, walks, pavements, landscaping, driveways and other structures made on a
leased land, and lighting installations, repairs, partitions, cabinets, shelves, and ventilating
system made on a leased building.
26. Explain the depreciation of leasehold improvements.
The cost of leasehold improvements shall be depreciated over the life of the lease or life of
the improvements, whichever is shorter. The residual value of the leasehold improvements
is ignored because legally the improvements become the property of the lessor upon
termination of the lease.
If the lease contract contains provision for renewal option and the likelihood of renewal is too
uncertain, the renewal option is ignored. However, where the renewal is highly probable or
certain it may be appropriate to consider the renewal option in determining the extended
lease term.
Trademark
27. What is a trademark?
A trademark is a symbol, sign, slogan or name used to mark a product to distinguish it from
other products. The terms "trademark," "tradename" and "brandname" are interchangeably
used. Under US GAAP, a trademark is a market-related intangible asset.
When a trademark is purchased, the cost includes the purchase price plus costs directly
attributable to the acquisition. When a trademark is internally developed, the cost includes
expenditures required to establish it, including filing fees, registry fees and other expenses
incurred in securing the trademark such as design cost of the trademark. If the trademark is
successfully prosecuted or defended, the litigation cost is an outright expense.

28. Explain the amortization period of trademark.

Under R.A. 8293 or the Intellectual Property Code of the Philippines, the legal hfe of
trademark is 10 years and may be renewed for periods of 10 years each. Considering the
almost automatic renewal of a trademark, an entity may properly classify a trademark as an
intangible asset with an indefinite life. Accordingly, the cost of trademark is not amortized
but subject to test for impairment at least annually.
Broadcasting license
29. Explain a "broadcasting license with indefinite life".
The entity has acquired a broadcasting license that expires in five years. The broadcasting
license is renewable every 10 years if the entity provides at least an average level of service
to the customers and complies with relevant legislative requirements. The license may be
renewed indefinitely at little cost. The entity intends to renew the license indefinitely and
evidence supports the ability to do so. The broadcasting license should be treated as having
an indefinite useful life because it is expected to contribute to the net cash inflows indefinitely.
Therefore, the broadcasting license should not be amortized but tested for impairment
annually and whenever there is an indication that it may be impaired.
30. Explain a "broadcasting license with a finite life".

The entity has acquired a broadcasting license that expires in 3 years. The licensing authority
has decided that it will no longer renew broadcasting license but rather will auction the
license.
The entity expects that the broadcasting license will continue to contribute to the net cash
inflows until the license expires after 3 years. In this case, the useful life of the broadcasting
license is no longer indefinite because the license cannot be renewed anymore. Thus, the
broadcasting license should be amortized over the remaining useful life of 3 years and tested
for impairment.
Airline right
31. Explain the amortization of an "airline right".
An entity has acquired a route authority or an airline right that may be renewed every 5 years.
The acquiring entity intends to comply with the applicable rules and regulations surrounding
renewal. Route authority renewals are routinely granted at a minimal cost and route authority
has been renewed when the airline has complied with the applicable rules and regulations.
In this case, the airline right should be regarded as having an indefinite useful life. Therefore,
the airline right should not be amortized but tested for impairment annually and whenever
there is an indication that it may be impaired.

Intangible Assets
Customer list
32. Explain the amortization a "customer list".
Literally, a customer list is a customer database containing the name, contract information,
order history and other vital and social statistics, such as birth, death and even sickness.
PAS 38, paragraph 63, provides that internally generated customer list shall not be
recognized as an intangible asset. However, an acquired customer list may be recognized
as an intangible asset and amortized over its useful life. For example, a direct-mail marketing
entity has acquired a customer list and expects that it will be able to derive benefit from the
information on the list for 3 years. In such a case, the customer list should be recognized as
an intangible asset and amortized over the useful life of 3 years.
Organization costs
33. What is the meaning of "organization costs"?
Organization costs represent costs incurred in forming or organizing a corporation.

Specifically, organization costs include legal fees in connection with incorporation such as
drafting of articles and by-laws, corporate registration, incorporation fees and share issuance
costs.
PAS 38, paragraph 69, provides that "start up costs which include legal and secretarial costs
in establishing a legal entity shall be recognized as expense when incurred." Accordingly, it
is now clearcut that organization costs shall be expensed when incurred. However, share
issuance costs shall be debited to share premium arising therefrom. If the share premium
is not sufficient to absorb such costs, the excess shall be debited to "share issuance costs"
account to be i presented as "contra equity" or as a deduction from share premium first and
retained earnings second.
Service concession
34. What is a "service concession"?
A service concession is an arrangement between a private sector entity and a public sector
entity whereby the private sector entity shall provide services in order that the public could
access to major infrastructure, for example, expressway, airport, bridge and
telecommunication network.
Under local parlance, this scheme is the equivalent of "build, operate and transfer" or BOT.
There are two parties in a service concession, namely:
1. Concession operator - a private sector entity.
2. Grantor - a public sector entity which is the party that grants the service concession.

The concession operator is paid for the services over the period of the arrangement and in
return has the obligation to provide public services At the end of the arrangement, the
residual interest in any infrastructure asset constructed as part of the arrangement is
controlled by the grantor, not by the concession operator.
35. What is the treatment of the "infrastructure asset" in a service concession?
Under IFRIC 12, the infrastructure asset is not an item of property, plant and equipment of
the concession operator. The concession operator shall recognize the fair value of the
consideration as either a financial asset or an intangible asset.
36. When is the infrastructure asset accounted for as financial asset?
A financial asset shall be recognized by the concession operator when the operator has a
guaranteed contractual right to receive a specified amount of cash over the life of the
arrangement. For example, a concession operator constructs or upgrades an airport and
operates it for a fixed period of time for an agreed amount. Under this arrangement, the
payments received by the concession operator are recognized as partial repayment of the
financial asset.
37. Explain the accounting of the infrastructure asset as financial asset by the concession
operator.
Under IFRIC 12, paragraph 24, the amount due from the grantor is accounted for as any of
the following:
a. Loan receivable
b. Financial asset at fair value through other comprehensive income
c. Financial asset at fair value through profit or loss
38. When is the infrastructure asset accounted for as intangible asset?
An intangible asset shall be recognized by the concession operator when the operator has
received a right, not a license, to charge users for the public service and the revenue
receivable is not agreed upon in advance but is dependent on the use of the asset by the
public.

Intangible Assets
Amortization
39. Explain the amortization of an intangible asset.
Amortization is the systematic allocation of the depreciable amount of an intangible asset

over the asset's useful life.
PAS 38 provides the following on the amortization of intangible assets:
1. Paragraph 97 states that intangible assets with limited or finite life are amortized over
their useful life.
2. Paragraphs 107 and 108 state that intangible assets with indefinite life are not amortized
but are tested for impairment at least annually and whenever there is an indication that
the intangible asset may be impaired.
40. What is the amortization period of an intangible asset?
The depreciable amount of an intangible asset shall be amortized on a systematic basis over
its useful life. Amortization shall begin when the asset is available for use.
41. Explain the "useful life" of an intangible asset.
The useful life of an intangible asset must be assessed as either indefinite or finite. If finite,
the useful life may be expressed in terms of years or the number of units to be produced.
The useful life of an intangible asset is indefinite when there is no foreseeable limit to the
period over which the asset is expected to generate net cash flows. In other words, the useful
life is indefinite when there are no legal, contractual, competitive and other factors that would
limit the useful life of the intangible asset.
The useful life of an intangible asset that arises from contractual or other legal rights shall not
exceed the period of the contractual or legal rights but may be shorter depending on the
period over which the entity expects to use the asset. If the contractual or other legal rights
are conveyed for a limited term that can be renewed, the useful life shall include the renewal
period only if there is evidence to support renewal by the entity without significant cost.
42 What is the method of amortizing the cost of an intangible asset?
The method of amortization shall reflect the pattern in which the economic benefits from the
asset are consumed. However, if such pattern cannot be determined reliably, the straight
line method of amortization shall be used.

43. Explain the residual value of an intangible asset.
The residual value of an intangible asset shall be presumed to be zero, except:

a. When a third party is committed to buy the intangible asset at the end of its useful life.
b. When there is an active market for the intangible asset so that its expected residual value
can be measured and it is probable that there will be a market for the asset at the end of
its useful life.
44. What are the factors that are considered in determining the useful life of an intangible asset?
a. Technical, technological and other type of obsolescence

b. Expected action by competitors or potential competitors
c. Expected usage of the asset by the entity
d. Typical product life cycle for the asset
e. Stability of the industry in which the asset operates
f. Level of maintenance expenditure required to obtain the expected future economic
benefits from the asset
g. The useful life of the asset may be dependent on the useful life of other assets of the
entity
h. Period of control over the asset and legal or similar limits on the use of the asset, such
as expiry dates of related leases.
Goodwill
45. What is goodwill?
Goodwill arises when earnings exceed normal earnings by reason of good name, capable
staff and personnel, high credit standing, reputation for fair dealings, reputation for superior
products, favorable location and a list of regular customers.
In other words, goodwill is created by a good relationship between an entity and its
customers:
a. By building up a reputation by word of mouth for high quality products or high standard
of service.
b. By responding promptly and helpfully to queries and complaints of customers.
c. Through the personality of the staff and their attitude to the customers.
Goodwill changes from day to day. Goodwill is continually changing. One act of bad customer
relations might damage goodwill and one act of good relations might improve goodwill.

Intangible Assets
46. What are the two kinds of goodwill?
1. Developed goodwill is that goodwill which is generated internally because of good name,
capable staff and personnel, superior quality of products, favorable location and high
credit standing. Such "homegrown" goodwill is not recorded. Cost of developing,
maintaining or restoring goodwill shall be expensed as incurred. PAS 38, paragraph 48,
explicitly provides that "internally generated goodwill shall not be recognized as an
asset".
2. Purchased goodwill is the one that is paid for. Purchased goodwill arises when a
business is acquired. Purchased goodwill is recognized as an asset.
47. Explain the "residual approach" of measuring goodwill.
Under the residual approach, goodwill is measured by comparing the purchase price for the
entity with the net tangible and identifiable assets, meaning total assets excluding goodwill
minus liabilities assumed. The excess of the purchase price over the net tangible and
identifiable assets is considered as goodwill. The net tangible and identifiable assets must
be measured at fair value. This is known as the "residual approach" because goodwill is
simply the residual after deducting the fair value of net tangible and identifiable assets from
the total acquisition cost agreed upon between the acquirer and the acquiree.
48. How is goodwill measured in a business combination?
Goodwill is measured as the excess of the total of the consideration transferred, the amount
of noncontrolling interest in the acquiree and the acquisition-date fair value of the acquirer's
previously held interest in the acquiree, over the net amount of the identifiable assets
acquired and liabilities assumed.
Formula
Consideration transferred xx
Amount of noncontrolling interest in the acquiree xx
Fair value of previously held interest in the acquiree xx
Total xx
Net amount of identifiable assets acquired and liabilities assumed at fair value (xx )
Goodwill xx

49. What is "negative goodwill"?
If the purchase price or consideration transferred is less than the net amount of the identifiable
assets acquired and liabilities assumed, the difference is negative goodwill. PFRS 3,
paragraph 34, provides that such negative goodwill is recognized in profit or loss as "gain on
bargain purchase". The standard has already dropped the term negative goodwill.
Derecognition
50. Explain "derecognition" of an intangible asset.
An intangible asset shall be derecognized or eliminated from the statement of financial

position:
a. On disposal of the asset.
b. When no future economic benefits are expected from its use and disposal.
Gains and losses arising from the derecognition of an intangible asset shall be determined
as the difference between the net disposal proceeds and the carrying amount of the asset,
and shall be recognized in the income statement.
Derecognition gains shall not be included in revenue but treated as other income.
Research & Development

51. Explain research activity and development activity.
PAS 38, paragraph 52, provides that to assess whether an internally generated intangible
asset meets the criteria for recognition, an entity classifies the generation of the asset into a
research phase and a development phase. Research is original and planned investigation
undertaken with the prospect of gaining scientific or technical knowledge and understanding.
Otherwise stated, a research activity is undertaken to discover new knowledge that will be
useful in developing new product or that will result in significant improvement of existing
product.
Development is the application of research findings 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. Simply stated, a
development activity involves the application of research findings to develop a new product.
Paragraph 53 provides that if an entity cannot distinguish the research phase from the
development phase, the entity shall treat the expenditure as if it were incurred in the research
phase only.

Intangible Assets
52. Give examples of research activities.
Research activities include:

a. Laboratory research aimed at discovering or obtaining new knowledge
b. Searching for application of research finding and other knowledge
c. Conceptual formulation and design of possible product or process alternatives
d. Testing in search or evaluation of product or process alternatives
53. Give examples of development activities.
Development activities include:

a. Design, construction and testing of preproduction prototypes and models
b. Design of tools, jigs, molds and dies involving new technology
c. Design, construction and operation of a pilot plant that is not of scale economically
feasible for commercial production
d. Design, construction and testing of a chosen alternative for new or improved product or
process
54. Give examples of activities not considered as research and development.
Research and development activities typically occur prior to the beginning of commercial
production and distribution of product or process.
Accordingly, activities that relate to commercial production do not result to research and
development activities.
Examples of such activities not considered research and development include:
a. Engineering follow through in an early phase of commercial production

b. Quality control during commercial production including routine testing
c. Trouble shooting in connection with breakdowns during production
d. Routine on-going efforts to refine, enrich or improve qualities of existing product
e. Adaptation of an existing capability to a particular requirement or customer need
f. Periodic design changes to existing products
g. Routine design of tools, jigs, molds and dies
h. Activity, including design and construction engineering, related to construction,
relocation, rearrangement or start up of facilities and equipment.

55. Explain the accounting for research cost.
PAS 38, paragraph 54, provides that no intangible asset arising from research or from the
research phase of an internal project shall be recognized. In other words, expenditure on
research or on the research phase of an internal project shall be recognized as expense
when it is incurred.
The reason is that at the research phase of a project, an entity cannot be certain that future
economic benefits would probably flow to the entity. At the research stage, there is too much
uncertainty about the likely success of the project. In the research phase, an entity cannot
demonstrate that an intangible asset exists that will generate probable future economic
benefits.
56. Explain accounting for development cost.
In contrast, development cost is incurred at a later stage in a project and the probability of
success may be more apparent. Accordingly, development cost may be expensed or
capitalized depending on whether certain criteria or conditions are met.
Thus, development cost may qualify as intangible asset if and only if the entity can
demonstrate all of the following:
a. The technical feasibility of completing the intangible asset so that it will be available for
use or sale. This is achieved when a prototype or model is produced. The entity has
completed the testing of the model and it is now convinced that it has a product to sell
or use that is significantly better than any other product available in the market. The entity
plans to file a patent application for the product.
b. The intention to complete the intangible asset and use or sell it.
c. The ability to use or sell the intangible asset.
d. How the intangible asset will generate probable future economic benefits. Among other
things, the entity shall demonstrate the existence of a market for the output of the
intangible asset or the intangible asset itself.
e. Availability of resources or funding to complete development and to use or sell the asset.
f. The ability to measure reliably the expenditure attributable to the intangible asset during
its development.

Intangible Assets
57. Explain an "acquired in-process R and D project".
An in-process research and development project acquired separately or in a business

combination is recognized as an asset at cost, even if a component is research. Subsequent
expenditure on that project is accounted for as any other research and development cost
which may be expensed or capitalized depending on the recognition criteria for an intangible
asset.
Accordingly, the subsequent expenditure is recognized as an expense if it is a research

expenditure. The subsequent expenditure is added to the carrying amount of the in-process
research and development project if it is a development expenditure that satisfies the
recognition criteria for an intangible asset. Otherwise, the subsequent development
expenditure is recognized as an expense.
58. Explain the accounting for "expenditures for research and development which have
alternative future use".
The AICPA Financial Accounting Standards Board stipulated that expenditures for research
and development which have alternative future use, either in additional research projects or
for productive purposes, can be capitalized. This means that costs incurred for materials,
equipment and intangible asset related to research and development activities which have
alternative future use can be capitalized. Subsequently, the cost of materials used,
depreciation and amortization would be charged to research and development expense.
59. Explain the capitalization of cost for an "internally developed computer software".
Costs incurred in creating a computer software product shall be charged to expense when
incurred until a technical feasibility has been established for the product.
Actually, this is the research stage where there is so much uncertainty about the future
economic benefits. Accordingly, all the research costs shall be expensed outright.
As a minimum, technological feasibility is established when an entity has produced either a
detailed program design of the software or a working model.
After technological feasibility has been established, capitalizable software costs include the
cost of coding and testing and the cost to produce the product masters.
The costs incurred to actually produce the software from masters and package the software
for sale shall be charged as inventory.

60. Explain the amortization of a computer software.
The amortization method for a computer software shall reflect the pattern in which the asset's
future economic benefits are expected to be consumed by the entity.
If such pattern cannot be determined reliably the straight line method is used.
61. What is the classification of a computer software in the statement of financial position?
1. As a rule, computer software is classified as an intangible asset. Under US GAAP, a

computer software is classified as technology-based intangible asset.
2. Computer software purchased for resale shall be treated as inventory.
3. A computer software purchased as an integral part of a computer controlled machine

tool that cannot operate without the specific software shall be treated as property, plant
and equipment. However, if the computer software is not an integral part of the related
hardware, it is classified as an intangible asset.
62. What is the treatment of "web site development cost"?
Under SIC 32, a web site that has been developed for the purpose of promoting and
advertising an entity's products and services does not meet the requirement to be recognized
as an intangible asset. Therefore, web site development cost shall be expensed when
incurred.
Disclosure requirements
63. What are the disclosures required in relation to intangible assets?
An entity shall disclose the following for each class of intangible assets, distinguishing
between internally generated intangible assets and other intangible assets.
1. Whether useful lives are indefinite or finite, and if finite, the useful lives or the
amortization rate.
2. The amortization method.
3. The gross carrying amount and any accumulated amortization (aggregated with
accumulated impairment losses) at the beginning and end of the period.

Intangible Assets
4. The line item in the income statement in which any amortization of intangible asset is
included.
5. Additions, separately showing those internally generated, those acquired separately and
those acquired through business combination.
6. Intangible assets classified as held for sale in accordance with PFRS 5.
7. Increases and decreases in intangible assets resulting from revaluations.
8. Impairment losses and reversal of impairment losses.
9. Net exchange differences on translation.
10. The carrying amount of intangible asset with indefinite life and the reason supporting the
assessment of indefinite life.
11. The carrying amount and remaining amortization period of intangible assets that are
material to the entity's financial statements.
12. The carrying amount of intangible assets whose title is restricted or pledged as collateral
security.
13. Contractual commitments for the acquisition of intangible assets.
14. Intangible assets acquired by way of government grant and initially recognized at fair
value.
15. The amount of research and development expenditure recognized as expense during
the period.

Multiple Choice - Theory

Basic concepts
1. An intangible asset is defined as
A. An identifiable asset without physical substance.
B. A nonmonetary asset without physical substance.
C. An identifiable nonmonetary asset without physical substance. FA © 2014
D. An identifiable monetary and nonmonetary asset without physical substance.
2. Which is a characteristic of an intangible asset?

A. Long-lived
B. Held for sale
C. Physical existence
D. Claim for a specific amount of cash in the future FA © 2014
3. Which of the following does not describe an intangible asset?

A. The asset is monetary.
B. The asset lacks physical existence.
C. The asset provides long-term benefit.
D. The asset is classified as noncurrent asset. FA © 2014
4. Intangible assets are classified as FA © 2014

A. Limited life and indefinite life C. Legally restricted and goodwill type
B. Amortizable and unamortizable D. Specifically identifiable and goodwill type
5. All of the following expenditures are expensed when incurred, except

A. Start up costs
B. Advertising and promotion costs
C. Business relocation or reorganization costs
D. Payment in advance of delivery of goods or the rendering of services FA © 2014
Categories
6. A copyright is an example of which general category of intangible asset?
A. Artistic-related C. Customer-related
B. Contract-based D. Market-related FA © 2014
7. Broadcast rights and franchises are an example of which general category of intangible
asset?
B. Contract-based D. Market-related TOA © 2013
MCQ - Theory Page 22

Intangible Assets
8. Franchise and broadcast right are an example of which general category of intangible asset?
9. Customer list and order backlog are an example of which general category of intangible
asset?
10. A trademark is an example of which general category of intangible asset?

B. Contract-based D. Market-related TOA © 2013
11. Patent and trade secret are an example of which general category of intangible asset?
A. Artistic-related C. Market-related
B. Customer-related D. Technology-based FA © 2014
Recognition criteria
12. An intangible asset shall be recognized if
A. The cost of the intangible asset can be measured reliably.
B. It is probable that future economic benefits attributable to the asset will flow to the entity.
C. It is possible that future economic benefits attributable to the asset will flow to the entity
and the cost of the intangible asset can be measured reliably.
D. It is probable that future economic benefits attributable to the asset will flow to the entity
and the cost of the intangible asset can be measured reliably. FA © 2014
13. The recognition criteria for an intangible asset include which of the following conditions?
A. The cost can be measured reliably.
B. The intangible asset must be measured at cost.
C. It is probable that future economic benefit will arise from use.
D. It is probable that future economic benefit will arise from use and the cost can be
measured reliably. FA © 2014
14. Which of the following is a criterion that must be met in order for an intangible asset to be
recognized other than goodwill?
A. The fair value can be measured reliably.
B. The asset is identifiable and lacks physical substance. FA © 2014
C. The asset is expected to be used in the production or supply of goods or services.
D. The asset is part of the activities aimed at gaining new scientific or technical knowledge.

15. The recognition criteria for an intangible asset include which of the following conditions?
I. The intangible asset must be measured at cost.
II. The cost can be measured reliably.
III. It is probable that future economic benefits will arise from the use of the intangible asset.
A. I and II only C. II and III only
B. I and III only D. I, II and III TOA © 2013
16. An intangible asset shall be recognized if

I. It is probable that future economic benefits attributable to the asset will flow to the entity.
II. The cost of the intangible asset can be measured reliably.
A. I only C. Both I and II
B. II only D. Neither I nor II TOA © 2013
17. An intangible asset is identifiable when

A. It is separable.
B. It arises from contractual and other legal right.
C. It is either separable or it arises from contractual and other legal right.
D. It is neither separable nor it arises from contractual and other legal right. FA © 2014
18. Which of the following statements is true 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 right.
19. Which of the following statements is true in relation to control by the entity of the intangible
asset?
A. The skill of employees arising out of the benefits of training costs cannot be recognized
as intangible asset.
B. Market share and customer loyalty cannot normally be recognized as intangible asset
because an entity cannot control the action of customers.
C. The capacity of the entity to control the economic benefits from an intangible asset would
normally stem from legal rights that are enforceable in a court of law.
D. All of these statements are true. FA © 2014

Intangible Assets
20. Which of the following statements is true concerning the criterion of control by the entity of
an intangible asset?
I. The capacity of the entity to control the economic benefits from an intangible asset would
normally stem from legal rights that are enforceable in a court of law.
II. The skill of employees arising out of the benefits of training costs can be recognized as
intangible asset.
Internally-generated intangible asset

21. Which of the following statements is true in relation to internally generated intangible asset?
A. Internally generated goodwill shall not be recognized as an intangible asset.
B. Internally generated brand, masthead, publishing title, and customer list shall not be
recognized as an intangible asset.
C. The cost of internally generated intangible asset comprises all directly attributable costs
necessary to create, produce and prepare the asset for the intended use.
22. The cost of an internally generated intangible asset includes all of the following, except
A. Fees to register a legal right.
B. Expenditure on training staff to operate the asset.
C. Expenditure on materials used in generating the intangible asset.
D. Compensation costs of personnel directly engaged in generating the asset. FA © 2014
23. Costs incurred internally to create intangible asset are

A. Capitalized C. Expensed if useful life is limited
B. Capitalized if useful life is indefinite D. Expensed when incurred FA © 2014
Separate acquisition
24. The cost of a separately acquired intangible asset comprises the purchase price, including
import duties and nonrefundable purchase taxes, and
A. Cost of introducing a new product or service
B. Administration and other general overhead cost
C. Cost of conducting a business in a new location
D. Directly attributable cost of preparing the asset for the intended use. FA © 2014

25. Which of the following statements is true concerning separate acquisition of an intangible
asset?
I. If an intangible asset is acquired separately, the cost of the intangible asset can usually
be measured reliably.
II. If payment for an intangible asset is deferred beyond normal credit terms, its cost is equal
to the cash price equivalent.
26. Which of the following statements is true 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. If payment for an intangible asset is deferred beyond normal credit terms, the cost is
equal to the cash price equivalent.
C. The cost of a separately acquired intangible asset comprises the purchase price and any
directly attributable cost of preparing the asset for the intended use.
Examples
27. Which of the following would qualify as an intangible asset?
A. Operating losses during the initial stages of the project.
B. Advertising and promotion on the launch of a huge product.
C. Legal costs paid to intellectual property lawyers to register a patent.
D. College tuition fees paid to employees who decide to enroll in an executive M.B.A
program at Harvard University while working with the entity. FA © 2014
Not an example
28. Which of the following does not qualify as an intangible asset?
A. Computer software C. Notebook computer
B. Copyright D. Registered patent FA © 2014
29. Which of the following is not an intangible asset?

A. Copyright C. Research and development cost
B. Franchise D. Trade name FA © 2014

Intangible Assets
Measurement
30. A brand name that was acquired separately shall initially be recognized at
A. Cost
B. Fair value
C. Recoverable amount
D. Either cost or fair value at the choice of the acquirer FA © 2014
31. Directly attributable costs of preparing the intangible asset for the intended use include all,
except
A. Initial operating losses
B. Cost of testing whether the asset is functioning properly FA © 2014
C. Professional fees .arising directly from bringing the asset to the working condition
D. Cost of employee benefits arising directly from bringing the asset to the working condition
Acquired as part of business combination

32. Which of the following statements is incorrect concerning acquisition of an intangible asset
as part of a business combination?
A. The cost of the intangible asset is based on the fair value at the date of acquisition.
B. If there is an active market for the intangible asset, the fair value is equal to the quoted
price of an identical asset.
C. If there is no active market for the intangible asset, the fair value may be equal to the
quoted price of a similar asset.
D. The fair value of an intangible asset acquired in a business combination cannot be
measured with sufficient reliability separately from goodwill. FA © 2014
Acquired by way of government grant

33. An intangible asset acquired by way of government grant may be initially recorded at
I. Fair value
II. Nominal amount or zero, plus any expenditure that is directly attributable to preparing
the asset for its intended use
A. I only C. Either I or II
34. An intangible asset acquired by way of government grant may be initially recorded at
A. Fair value
B. Nominal amount or zero plus any directly attributable expenditure
C. Either fair value or nominal amount or zero plus directly attributable expenditure
D. Neither fair value nor nominal amount FA © 2014

Measurement after initial recognition

35. After initial recognition, an intangible asset shall be carried using
A. Cost model only
B. Revaluation model only
C. Either cost model or revaluation model
D. Neither cost model nor revaluation model FA © 2014
36. Once recognized, intangible assets can be carried at

A. Cost less accumulated amortization
B. Revalued amount less accumulated amortization
C. Cost less accumulated amortization and impairment losses FA © 2014
D. Cost plus a notional increase in fair value since the intangible asset is acquired
37. An entity that acquires an intangible asset may use the revaluation model for subsequent
measurement only if
A. The intangible asset is a monetary asset.
B. An active market exists for the intangible asset.
C. The cost of the intangible asset can be measured reliably.
D. The useful life of the intangible asset can be reliably determined. FA © 2014
Copyright
38. Copyright should be amortized over
A. The legal life
B. Twenty years .
C. The life of the creator plus fifty years
D. The useful life or legal life, whichever is shorter FA © 2014
Patent
39. A patent should be amortized over
A. Twenty years
B. The useful life
C. The useful life or twenty years, whichever is longer
D. The useful life or twenty years, whichever is shorter FA © 2014
40. A purchased patent with a remaining legal life of 15 years should be

A. Amortized over 20 years.
B. Expensed in the year of acquisition.
C. Amortized over the useful life if less than 15 years.
D. Amortized over 15 years regardless of the useful life.

Intangible Assets
41. The cost of purchasing right for a product that might otherwise have seriously competed with
the purchaser's patented product should be
A. Charged off in the current period.
B. Amortized over the legal life of the purchased patent.
C. Added to factory overhead and allocated to production of the purchaser's product.
D. Amortized over the remaining useful life of the patent for the product whose market would
have been impaired by competition from the newly patented product. FA © 2014
42. When a patent is amortized, the credit is usually made to
A. The patent account
B. An expense account
C. An accumulated amortization account
D. An accumulated depreciation account FA © 2014
43. When an entity successfully defended a patent from infringement by a competitor, the cost
of successful litigation should be charged to
A. Expense of the period.
B. Legal fees and amortized over five years.
C. Patent and amortized over the legal life of the patent.
D. Patent and amortized over the remaining useful life of the patent. FA © 2014
Leasehold improvement
44. A lessee incurred cost to construct walkway and landscaping to improve leased property. The
useful life of the walkway and landscaping cost is fifteen years. The remaining term of the
nonrenewable lease is twenty years. The walkway and landscaping cost should be
A. Expensed as incurred.
B. Capitalized as leasehold improvement and depreciated over fifteen years.
C. Capitalized as leasehold improvement and depreciated over twenty years.
D. Capitalized as leasehold improvement and expensed in the year in which the lease
expires. FA © 2014
Trademark
45. A trademark is an example of which general category of intangible asset?
46. When an entity develops a trademark, the costs directly related to securing it should generally
be capitalized. Which of the following costs associated with a trademark should not be
capitalized?
A. Attorney fees C. Design costs FA © 2014
B. Consulting fees D. Research and development fees

47. Which of the following should not be capitalized as cost of trademark?

A. Legal fee
B. Design cost
C. Registration with Intellectual Property Office
D. Cost of successful litigation of the trademark FA © 2014
48. What is the legal life of trademark?

A. 10 years
B. 20 years
C. 10 years and renewable after every 10 years.
D. 20 years and renewable after every 20 years. FA © 2014
49. Which of the following statements is incorrect in relation to trademark?

A. A trademark is an identifiable intangible asset.
B. A trademark is not amortized but tested for impairment at least annually and whenever
there is an indication of impairment.
C. A trademark is amortized and tested for impairment whenever there is an indication of
impairment at the end of reporting period.
D. A trademark can be regarded as an intangible asset with an indefinite useful life
considering the almost automatic renewal of the legal life. FA © 2014
Franchise
50. Which of the following intangible assets should not be amortized?
A. Copyright
B. Customer list
C. Perpetual franchise
D. All of the intangible assets should be amortized. FA © 2014
51. Which of the following should be expensed as incurred by the franchisee for a franchise with
finite useful life?
A. Amount paid to the franchisor for the franchise.
B. Legal fees paid to the franchisee's lawyers to obtain the franchise.
C. Payment to an entity, other than the franchisor, for that entity's franchise.
D. Periodic payments to the franchisor based on the franchisee's revenue. FA © 2014
Airline gate rights

52. An airline entity purchased airline gate rights at an international airport with a legal life of five
years. However, the entity has the ability and right to extend the rights every ten years for an
indefinite period of time. Over what period of time should the entity amortize the gate rights?

Intangible Assets
A. 5 years C. 40 years FA © 2014

B. 15 years D. The rights should not be amortized.
Service concession
53. It is an arrangement whereby a public sector entity grants a private concession operator to
provide services that give the public access to major economic and social infrastructure, such
as expressway and telecommunication network.
A. Government assistance C. Loan
B. Government grant D. Service concession FA © 2014
54. The private concession operator shall recognize the infrastructure asset as
A. Financial asset
B. Intangible asset
C. Either intangible asset or financial asset
D. Neither intangible asset nor financial asset FA © 2014
55. The infrastructure asset shall be recognized by the concession operator as an intangible
asset when
I. The operator has received a right, not a license, to charge users for the public service.
II. The right to charge the users for the public service is not an unconditional right because
the revenue receivable is not agreed upon in advance but is dependent on the use of
the asset.
B. II only D. Neither I nor II FA © 2014
56. The infrastructure asset shall be recognized by the concession operator as a financial asset
when
I. The operator has an unconditional contractual right to receive cash over the life of the
arrangement.
II. The grantor has contractually guaranteed to pay the operator the specified or
determinable amount.
57. If the infrastructure asset is recognized by the concession operator as a financial asset, it is
accounted for as
A. Loan receivable
B. Financial asset at fair value through profit or loss
C. Financial asset at fair value through other comprehensive income
D. All of these

Amortization
58. It is the systematic allocation of the amortizable amount of an intangible asset over the useful
life.
A. Allocation C. Expiration
B. Amortization D. Realization FA © 2014
59. An intangible asset is regarded as having an indefinite useful life when

A. The useful life of the intangible asset arises from legal right.
B. The useful life of the intangible asset arises from contractual right.
C. There is no foreseeable limit to the period over which the asset is expected to generate
net cash inflows to the entity.
D. There is a foreseeable limit to the period over which the asset is expected to generate
net cash inflows to the entity. FA © 2014
60. Which type of intangible asset is amortized? FA © 2014

A. Limited life C. Both limited life and indefinite life
B. Indefinite life D. Neither limited life nor indefinite life
61. Which of the following statements is true concerning amortization of intangible assets?
I. Intangible assets with limited or finite life are amortized over their useful life.
II. Intangible assets with indefinite life are not amortized but are tested for impairment at
least annually.
62. The residual value of an intangible asset with a finite useful life shall be assumed zero, except
A. There are no exceptions.
B. When there is a commitment by a third party to purchase the asset at the end of the
useful life.
C. When there is an active market for the asset and it is probable that such market will exist
at the end of the useful life.
D. When there is a commitment by a third party to purchase the asset at the end of useful
life or there is an active market for the asset and it is probable that such market will exist
at the end of useful life. FA © 2014

Intangible Assets
63. The residual value of an intangible asset shall be presumed to 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 value can be determined by
reference to that market and it is probable that such market will exist at the end of the
asset's useful life.
64. The major problem of accounting for an intangible asset is determining
A. Fair value C. Separability
B. Residual value D. Useful life FA © 2014
65. The factors that are considered in determining the useful life of an intangible asset include all
of the following, except
A. Residual value
B. Technical obsolescence
C. Expected action of competitors
D. Expected usage of the asset by the entity FA © 2014
66. A consideration in determining the useful life of an intangible asset is not the
A. Initial cost
B. Obsolescence
C. Provision for renewal or extension
D. Legal, regulatory or contractual provision FA © 2014
67. The factors in determining the useful life of an intangible asset include all of the following,
except
A. The amortization method.
B. The expected use of the asset.
C. Any legal or contractual provision that may limit the useful life.
D. Any provision for renewal or extension of legal life of the asset. FA © 2014
68. Which of the following statements is true concerning useful life of an intangible asset?
I. An intangible asset is regarded as having an indefinite useful life when there is no
foreseeable limit to the period over which the asset is expected to generate net cash
inflows to the entity.
II. The useful life of an intangible asset arising from contractual or other legal rights shall
not exceed the period of those rights but may be shorter depending on the period over
which the asset is expected to be used by the entity

69. Which of the following represents the maximum amortization period mandated for intangible
assets with finite useful life?
A. 10 years
B. 20 years
C. 40 years
D. No arbitrary cap on the useful life has been established. FA © 2014
70. What is the appropriate method of amortizing intangible asset?

A. The straight line method in all circumstances.
B. The double declining balance in all circumstances.
C. A subjective amount of periodic amortization without regard to any particular method.
D. The straight-line method, unless the pattern in which the economic benefits are
consumed can be determined reliably. FA © 2014
71. The amortization method used shall reflect the pattern in which the asset's economic benefits
are consumed by the entity. If such pattern cannot be determined reliably, what is the
amortization method used?
A. Straight line
B. Production method
C. Diminishing balance method
D. Ratio of current year's sales to the total expected sales. FA © 2014
72. Which of the following methods of amortization is normally used for an intangible asset?
A. Double declining balance C. Sum of the years' digits
B. Straight line D. Units of production FA © 2014
73. Amortization of an intangible asset with a finite useful life shall commence when
A. It is available for use.
B. It is first recognized as an asset.
C. The cost can be identified with reasonable certainty.
D. It is probable that it will generate future economic benefits. FA © 2014
Goodwill
74. In a business combination, the excess of the cost of purchase over the fair value of the
identifiable net assets purchased is
A. A bargain purchase C. Indirect cost
B. Goodwill D. Other asset

Intangible Assets
75. Goodwill shall be recognized only when

A. It is purchased from another entity.
B. It is acquired through the purchase of another entity.
C. An entity reports above normal earnings for five years.
D. It can be established that a definite benefit has resulted from good name, capable staff
or reputation. FA © 2014
76. The intangible asset goodwill may be

A. Capitalized only when purchased.
B. Capitalized only when created internally.
C. Written off directly against retained earnings.
D. Capitalized either when purchased or created internally. FA © 2014
77. In a business combination, the excess of cost of purchase over the fair value of the identifiable
net assets acquired is
A. A bargain purchase C. Other asset
B. Goodwill D. Indirect cost FA © 2014
78. Purchased goodwill should

A. Not be amortized.
B. Be written off as soon as possible as other expense.
C. Be written off as soon as possible against retained earnings. FA © 2014
D. Be written off by systematic charge as operating expense over the period benefited.
79. What does the standard require with respect to accounting for goodwill?
A. Goodwill should be amortized over the useful life.
B. Goodwill should be recorded and never adjusted.
C. Goodwill should be amortized over a five-year period.
D. Goodwill should be recorded and periodically evaluated for impairment. FA © 2014
Impairment
80. Entities should evaluate indefinite life intangible assets at least annually for
A. Amortization C. Impairment
B. Estimated useful life D. Recoverability FA © 2014
81. Goodwill shall be tested for impairment

A. Annually C. On the acquisition of a subsidiary
B. Every 5 years D. If there is an indication of impairment

82. Intangible assets with indefinite useful life are tested for impairment
A. Biannually at the reporting date
B. Annually at the annual reporting date
C. Quarterly at the quarterly reporting date FA © 2014
D. There is no guideline defining when intangible assets are tested for impairment
83. Goodwill should be tested periodically for impairment

A. At the subsidiary level.
B. For the entity as a whole.
C. At the industry segment level.
D. At the operating segment level or one level below. FA © 2014
84. An entity is performing an annual test of the impairment of goodwill for a cash generating unit.
It has determined that the fair value of the unit exceeds the carrying amount. Which of the
following statements is true concerning the test of impairment?
A. Goodwill should be written down as impaired.
B. Goodwill should be retested at the entity level.
C. Impairment is not indicated and no additional analysis is necessary.
D. The assets and liabilities should be valued to determine if there has been an impairment
of goodwill. FA © 2014
85. An impairment loss recognized for goodwill

A. Shall be reversed in a subsequent year.
B. Shall not be reversed in a subsequent year.
C. May be reversed fully in a subsequent year.
D. May be reversed partly in a subsequent year. FA © 2014
Research & development

Research activities
86. Research activities include all of the following, except
A. Search for product or process alternative.
B. Search for application of research finding or other knowledge.
C. Formulation and design of the possible product or process alternative.
D. Design, construction and testing of preproduction prototype and model. FA © 2014

Intangible Assets
Development activities
87. Which of the following statements in relation to "development" is true?
I. The products being developed should have already been put into commercial production
or use.
II. Development involves the application of research findings.
88. Development activities include all of the following, except
A. Laboratory activities aimed at obtaining new knowledge.
B. Design of tools, jigs, molds and dies involving new technology.
C. Design, construction and testing of a chosen alternative for a new or improved product
or process.
D. Design, construction and operation of a pilot plant that is not of a scale economically
feasible for commercial production. FA © 2014
R&D activity
89. Which of the following would be considered research and development?
A. Construction of prototype
B. Routine effort to refine an existing product
C. Periodic alteration to existing production line
D. Marketing research to promote a new product FA © 2014
90. Which is not considered a research and development activity?

A. Design, construction and operation of a pilot plant
B. Laboratory research aimed at discovery of new knowledge
C. Conceptual formulation and design of possible product or process FA © 2014
D. Routine on-going effort to refine, enrich or improve quality of existing product
91. Which of the following would not be considered research and development activity?
A. Laboratory research aimed at discovery of new knowledge.
B. Conceptual formulation and design of possible product alternative. FA © 2014
C. Application of research finding or other knowledge to a plan for a new product.
D. Adaptation of an existing capability to a particular requirement or customer need.
R&D Cost – recognition criteria

92. Which principle best describes the current method of accounting for research and
development cost?
A. Associating cause and effect C. Income tax minimization FA © 2014
B. Immediate recognition as an expense D. Systematic and rational allocation

93. How should research and development cost be accounted for?

A. Must be expensed in the period incurred.
B. Must be capitalized when incurred and then amortized over useful life. FA © 2014
C. May be either capitalized or expensed when incurred depending upon the materiality.
D. Must be expensed in the period incurred unless it can be clearly demonstrated that the
expenditure will have alternative future use or unless contractually reimbursable.
Capitalized R&D Cost

94. Which of the following statements is true about accounting for development cost?
A. Development cost must be expensed
B. Development cost is always deferred and expensed against future revenue FA © 2014
C. Development cost is recorded as component of other comprehensive income.
D. Development cost may be capitalized as an intangible asset in very restrictive situations.
95. Which of the following is not a criterion which must be met before development cost can be
capitalized?
A. The project has achieved technical feasibility.
B. The entity has sufficient financial resources to complete the project.
C. The entity intends to complete the project and either use or sell the intangible asset.
D. The entity can reliably identify the research cost incurred to bring the project to economic
feasibility. FA © 2014
96. Which of the following costs should be capitalized?

A. Salaries of research staff
B. Cost of research to determine whether a market for the product exists
C. Acquisition cost of equipment to be used on current research project only FA © 2014
D. Engineering cost incurred to advance the product to the full production stage
97. Which of the following research and development costs should be capitalized and amortized
over current and future periods?
A. Administrative salaries allocated to research and development.
B. Labor and material costs incurred in building a prototype or model.
C. Research findings purchased from another entity to aid a particular research project
currently in process.
D. Cost of testing equipment that will also be used in another separate research and
development project scheduled to begin next year. FA © 2014

Intangible Assets
98. Which of the following research and development costs should be capitalized and amortized
over current and future periods?
A. Inventory used for a specific research project
B. Research and development general laboratory building
C. Administrative salaries allocated to research and development
D. Research findings purchased from another entity to aid a particular research project
currently in process FA © 2014
99. Which of the following costs should not be capitalized?

A. Cost incurred to file for patent. FA © 2014
B. Engineering cost incurred to advance the project to the full production stage.
C. Cost of testing prototype before economic feasibility has been demonstrated.
D. Acquisition cost of equipment to be used on current and future research projects.
Expensed R&D Cost

100. A research and development activity for which the cost would be expensed as incurred is
A. Quality control during commercial production
B. Periodic design changes to existing products
C. Design, construction and testing of preproduction prototype or model FA © 2014
D. Adaptation of an existing capability to a particular requirement or customer need
101. Which of the following costs should be excluded from research and development expense?
A. Modification of the design of a product.
B. Cost of marketing research for a new product. FA © 2014
C. Acquisition of research and development equipment for use on a current project only.
D. Engineering activity required to advance the design of a product to the manufacturing
stage.
102. If an entity 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. Depreciation or immediate writeoff depending on entity policy.
B. Research and development expense in the period of construction.
C. Depreciation deducted as part of research and development expense. FA © 2014
D. An expense at such time as productive research has been obtained from the facility.

103. At the beginning of the current year, an entity purchased equipment for use in developing a
new product. The entity uses the straight line depreciation method. The equipment could
provide benefits over a 10-year period. However, the new product development is expected
to take five years, and the equipment can be used only for this project. The entity's expense
for the current year in relation to the equipment equals
A. Zero
B. The total cost of the equipment
C. One-fifth of the cost of the equipment
D. One-tenth of 1;he cost of the equipment
Computer software costs

104. A computer software purchased as an operating system for the hardware or as an integral
part of a computer controlled machine tool that cannot operate without the specific software
shall be treated as
A. Expense C. Inventory FA © 2014
B. Intangible asset D. Property, plant and equipment
105. The proper accounting for costs incurred in creating computer software is
A. To capitalize all costs until the software is sold.
B. To capitalize all costs as incurred until a detailed program design or working model is
created.
C. To charge research and development expense only if the computer software has
alternative future use.
D. To charge research and development expense when incurred until technological
feasibility has been established for the product. FA © 2014
106. Which of the following statements is true 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.
B. II only D. Neither I nor II. FA © 2014
107. Which of the following statements is incorrect regarding internal-use software?
A. The costs of training and application maintenance should expensed as incurred.
B. The costs of testing and installing computer hardware should be capitalized as incurred.
C. Internal-use software is considered to be software that is marketed as a separate product
or as part of a product or process. FA © 2014
D. 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.

Intangible Assets
108. Web site development costs incurred for the purpose of promoting and advertising an entity's
product or service should be
B. Recognized as an intangible asset with indefinite life.
C. Recognized as an intangible asset with a definite life.
D. Included as component of other comprehensive income. FA © 2014
109. A dot-com entity has recently completed a highly publicized research and development
project. Which of the following statements in relation to the research and development project
is true?
A. Costs incurred during the research phase can be capitalized.
B. Designing of jigs and tools would qualify as research activities.
C. Training costs of technicians used in research can be capitalized.
D. Costs incurred during the development phase can be capitalized if criteria such as
technical feasibility of the project being established are met. FA © 2014
110. At the beginning of the current year, an entity had capitalized cost for a new computer
software product with an economic life of four years. Sales for the current year were ten
percent of expected total sales of the software. The pattern of future sales cannot be
measured reliably. At year-end, the software had a net realizable value equal to eighty
percent of the capitalized cost. What is the unamortized cost of the computer software
reported in the year-end statement of financial position?
A. Net realizable value
B. Ninety percent of capitalized cost
C. Ninety percent of net realizable value
D. Seventy five percent of capitalized cost
111. At the beginning of the current year, an entity had capitalized cost for a new computer
software product with an economic life of four years. Sales for the current year were ten
percent of expected total sales of the software. The pattern of future sales cannot be
measured reliably. At year-end, the software had a net realizable value equal to eighty
percent of the capitalized cost. The unamortized cost reported in the year-end statement of
financial position should be
A. Net realizable value C. Ninety percent of net realizable value
B. Ninety percent of capitalized cost D. Seventy five percent of capitalized cost

Comprehensive
112. Which of the following statements is incorrect concerning research and development?
A. Expenditure on research shall be recognized as an expense when incurred.
B. Research is original and planned investigation undertaken with the purpose of gaining
new scientific and technical knowledge.
C. Development is application of research finding to a plan for the production of new product
prior to the commencement of commercial production or use.
D. If an entity cannot distinguish the research phase from the development phase of a
project, the entity shall treat the expenditure on that project as if it were incurred in the
development phase.
113. Which of the following statements in relation to research and development is true?
I. Expenditure during the research phase of a project may sometimes be capitalized as an
intangible asset.
II. Expenditure during the development phase of a project may sometimes be capitalized
as an intangible asset.
Start-up costs
114. Start-up costs including legal and state fees to organize a new entity should be
B. Capitalized and never amortized.
C. Capitalized and tested for impairment annually.
D. Capitalized and amortized over a reasonable period. FA © 2014
115. Operating losses incurred during the start-up years of a new entity should be
A. Written off directly against retained earnings.
B. Accounted for and reported like any other operating losses
C. Capitalized as a deferred charge and amortized over five years.
D. Capitalized as an intangible asset and amortized over twenty years. FA © 2014
Presentation & disclosure

116. Intangible assets are reported in the statement of financial position
A. As a separate line item
B. Under property, plant and equipment
C. With an accumulated amortization account
D. All of these are allowed in presenting intangible assets FA © 2014

Intangible Assets
117. Which of the following intangible assets should be reported as a separate line item in the
statement of financial position?
A. Franchise C. Patent
B. Goodwill D. Trademark FA © 2014
118. Which disclosure is not required with respect to intangible assets?

A. Useful life of the intangible asset
B. Fair value of similar intangible asset used by the competitor
C. Contractual commitment for the acquisition of intangible asset
D. Reconciliation of carrying amount at the beginning and the end of the year FA © 2014
Comprehensive
119. Which of the following statements in relation to intangible assets is true?
A. Intangible assets cannot be treated as having an indefinite useful life.
B. Intangible assets acquired in a business combination shall be recognized separately
from goodwill.
C. Intangible assets with a finite useful life shall be measured initially at cost and tested
annually for impairment.
D. Intangible assets acquired in a business combination shall only be recognized if the
assets have already been recognized by the acquiree. FA © 2014
120. Which of the following statements is true concerning amortization and impairment of
intangible assets?
A. Intangible assets with finite useful life are amortized over the useful life.
B. Intangible assets with indefinite useful life are not amortized but are tested for impairment
at least annually.
C. Intangible assets with finite useful life are tested for impairment at the end of reporting
period when there is an indication of impairment.

I. Internally generated brands, mastheads, publishing titles, customer lists and items
similar in substance shall not be recognized as intangible assets.
II. The cost of internally generated intangible asset comprises all directly attributable cost
necessary to create, produce and prepare the asset for its intended use.


I. Intangible assets cannot be treated as having an indefinite useful life.
II. Intangible assets with a finite useful life shall be measured at cost and tested annually
for impairment.
123. Which of the following statements in relation to intangible assets acquired in a business
combination is true?
I. Intangible assets acquired in a business combination shall only be recognized if they
have already been recognized by the entity being acquired.
II. Intangible assets acquired in a business combination shall not be recognized separately
from goodwill.
B. II only D. Neither I nor. II TOA © 2013

Intangible Assets
Multiple Choice – Problems: Intangible Assets Other than Goodwill

Total intangible assets
1. Shure Company builds and sells equipment used in manufacturing pharmaceuticals. On
December 31,2014, the entity has financial assets at fair value through profit or loss at
P1,000,000, goodwill valued at PI,500,000, prepaid insurance at P50,000, patent valued at
P2,500,000, and a customer list valued at P500,000. What amount should be reported as
total intangible assets on December 31, 2014?
A. 3,000,000 C. 4,500,000
B. 4,000,000 D. 5,500,000 P1 © 2014
2. Biennial Company acquired a trademark relating to the introduction of a new manufacturing

process. The entity incurred the following costs:
Cost of trademark 3,500,000
Expenditure on promoting the new product 50,000
Employee benefits relating to the testing of the
proper functioning of the new process 200,000
What total cost should be capitalized as an intangible asset?
A. 3,500,000 C. 3,700,000
B. 3,550,000 D. 3,750,000 FA © 2014
3. Vanity Company showed the following balances on December 31,2014:

Copyright 500,000
Deposit with advertising agency used to promote goodwill 400,000
Bond sinking fund 1,000,000
Excess of cost over fair value of identifiable net assets
of acquired subsidiary 4,000,000
Trademark 900,000
What total amount should be reported as intangible assets?
A. 1,400,000 C. 5,400,000
B. 4,500,000 D. 5,800,000 FA © 2014
4. Lovely Company provided the following transactions during the current year:
* Paid legal fees of P50,000 and stock certificate costs of P10,000 to complete
organization of the corporation.
* Hired a clown to stand in front of the corporate office for two weeks and hand out
pamphlets and candy, P15,000.
* Patented a newly developed process with costs as follows:
Legal fees to obtain patent 400,000
Patent application and licensing fees 50,000
MCQ – Problems: Intangible Assets Other than Goodwill Page 45

* Acquired both a license to use a special type of container and a distinctive trademark to
be printed on the container in exchange for 6,000 ordinary shares of Lovely Company
selling for P50 per share.
The license is worth twice as much as the trademark, both of which may be used for four
years.
What total amount should be recognized as intangible assets?
A. 750,000 C. 810,000
B. 800,000 D. 950,000 P1 © 2014
Copyright
5. Beach Company acquired copyright to the original recordings of a famous singer. The
agreement with the singer allows the entity to record and rerecord the singer for a period of
5 years. During the initial six-month period of the agreement, the singer is very sick and
consequently cannot record. The studio time that was blocked by the entity had to be paid
during the period the singer could not sing. The following costs are incurred by the entity:
Cost of acquiring the copyright 5,000,000
Operating loss during the start up period (studio time lost) 1,000,000
Massive advertising campaign to launch the artist 1,500,000
What amount should be capitalized as cost of the copyright?
A. 5,000,000 C. 6,500,000
B. 6,000,000 D. 7,500,000 FA © 2014
Franchise
6. On December 31,2014, Czar Company exchanged 100,000 ordinary shares of P50 par value
for the following assets:
* A trademark valued at P1,500.000.
* A building, including land, valued at P6,500,000 (20% of the value is for the land).
* A franchise right. No estimate of the value is available at the date of exchange.
The ordinary share of Czar Company is selling at P90 on the date of exchange.
What amount should be recognized as measurement of the franchise on the date of
exchange?
A. 0 C. 1,500,000
B. 1,000,000 D. 2,000,000 P1 © 2014
7. On January 1,2014, Hart Company signed an agreement to operate as a franchisee of Ace

Company for an initial franchise fee of PI2,000,000. The same date, Hart Company paid
P4,000,000 and agreed to pay the balance in four equal annual payments of P2,000,000
beginning January 1,2015. Hart Company can borrow at 14% for a loan of this type. The PV
of 1 at 14% for 4 periods is .59, and the PV of an ordinary annuity of 1 at 14% for 4 periods

Intangible Assets
is 2.91. What is the acquisition cost of the franchise?

A. 8,720,000 C. 12,000,000
B. 9,820,000 D. 13,520,000 P1 © 2014
8. On July 1, 2014, Seashore Company signed an agreement to operate as a franchisee for an

initial franchise fee of P6,000,000. On the same date, the entity paid P2,000,000 and agreed
to pay the balance in four equal annual payments of PI,000,000, beginning July 1, 2015. The
down payment is not refundable and no future services are required of the franchisor. The
entity can borrow at 14% for a loan of this type. Present and future value factors are as
follows:
Present value of 1 at 14% for 4 periods 0.59
Future amount of 1 at 14% for 4 periods 1.69
Present value of an ordinary annuity of 1 at 14% for 4 periods 2.91
What is the initial measurement of the franchise?
A. 4,360,000 C. 6,000,000
B. 4,910,000 D. 6,760,000 FA © 2014
Trademark
9. On January 1, 2014, Boracay Company bought a trademark from Lamitan Company for
P3,000,000. The entity retained an independent consultant who estimated the trademark's
life to be indefinite. The carrying amount of the trademark was PI,500,000 on the books of
Lamitan Company. On December 31,2014, what is the carrying amount of the trademark?
A. 0 C. 2,850,000
B. 1,500,000 D. 3,000,000 P1 © 2014
10. Mariz Company has acquired a trademark relating to the introduction of a new manufacturing
process. The costs incurred were as follows:
Expenditure on promoting the new product 50,000
Employee benefits relating to testing of new process 200,000
What total cost should be capitalized as intangible noncurrent asset in respect of the new
process?
A. 3,500,000 C. 3,700,000
B. 3,550,000 D. 3,750,000 P1 © 2014

11. Raven Company developed a trademark to distinguish its products from those of the
competitors.
Marketing research to study consumer tastes 400,000
Design cost of trademark 1,500,000
Legal fee of registering trademark 150,000
Advertising to establish recognition of trademark 200,000
Registration fee with Intellectual Property Office 50,000
What amount should be capitalized as cost of trademark?
A. 1,700,000 C. 2,100,000
B. 1,900,000 D. 2,300,000 FA © 2014
Patent
12. Tobin Company incurred PI,600,000 of research and development costs to develop a product
for which a patent was granted at the beginning of current year. Legal fees and other costs
associated with registration of the patent totaled P300,000. At year-end, the entity paid
P450,000 for legal fees in a successful defense of the patent. What is the total amount that
should be capitalized for the patent at year-end?
A. 300,000 C. 2,050,000
B. 750,000 D. 2,350,000 P1 © 2014
13. Harmonious Company acquired a patent for a drug with a remaining legal and useful life of
six years on January 1,2012 for P5,400,000. On January 1,2014, a new patent is received
for a timed-release version of the same drug. The new patent has a legal and useful life of
twenty years. What is the amortization expense for 2014?
A. 180,000 C. 300,000
B. 200,000 D. 900,000 FA © 2014
14. On January 1, 2013, Daredevil Company purchased a patent with a cost of P5,800,000 and
useful life of five years. The entity used straight line amortization. On December 31, 2014,
the entity determined that impairment indicators are present. The fair value less cost of
disposal of the patent is estimated to be P2,700,000. The value in use is estimated to be
P2,825,000. The remaining useful life of the patent is estimated to be two years. What amount
should be reported as impairment loss for 2014?
A. 0 C. 655,000
B. 275,000 D. 780,000 FA © 2014

Intangible Assets
15. Safehouse Company was granted a patent on a product on January 1, 2004 with a 20-year
useful life. To protect the patent, the entity purchased on January 1, 2014 for P4,500,000 a
patent on a competing product which was originally issued on January 1, 2009. Because of
the unique plant, the entity does not feel the competing patent can be used in producing a
product. What is the amortization of the competing patent for 2014?
A. 0 C. 300,000
B. 225,000 D. 450,000 FA © 2014
16. Iceberg Company purchased a patent on January 1, 2009 for P6,000,000. The original useful
life was estimated to be 15 years. However, in December 2014, the management received
information proving conclusively that the product protected by the Iceberg patent would be
obsolete within four years. Accordingly, the entity decided to write off the unamortized cost
of the patent over five years beginning in 2014. What is the patent amortization for 2014?
A. 400,000 C. 1,000,000
B. 800,000 D. 1,200,000 FA © 2014
17. On January 1,2011, Lava Company purchased a patent for a new consumer product for
P900,000. At the time of purchase, the patent was valid for 15 years. However, the patent's
useful life was estimated to be only 10 years due to the competitive nature of the product. On
December 31, 2014, the product was permanently withdrawn from sale under governmental
order because of a potential health hazard in the product. What amount should be charged
against income of 2014 if amortization is recorded at the end of each year?
A. 90,000 C. 630,000
B. 540,000 D. 720,000 P1 © 2014
18. On January 1, 2011, Taft Company purchased a patent for P7,140,000. The patent is being
amortized over the remaining legal life of 15 years expiring on January 1, 2026. During 2014,
the entity determined that the economic benefits of the patent would not last longer than ten
years from the date of acquisition. What is the carrying amount of patent on December 31,
2014?
A. 4,284,000 C. 5,050,000
B. 4,896,000 D. 5,236,000 P1 © 2014
19. Zamboanga Company acquired three patents in January 2014.
Cost Remaining useful life Remaining legal life

Patent X 1,200,000 10 8
Patent Y 2,000,000 5 10
Patent Z 3,000,000 6 15

In June 2014, the entity successfully defended its right to Patent Y and incurred legal fees of
P450,000. What total amount of amortization should be recognized for 2014?
A. 1,020,000 C. 1,095,000
B. 1,050,000 D. 1,100,000 P1 © 2014
20. Gray Company was granted a patent on January 1, 2011 and appropriately capitalized
P450,000 of related costs. The entity was amortizing the patent over its useful life of 15 years.
During 2014, the entity paid P150,000 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 P750,000. The policy is to take no amortization in the year of disposal. What
amount should be reported as gain from sale of patent in 2014?
A. 150,000 C. 270,000
B. 240,000 D. 390,000 FA © 2014
Comprehensive
Questions 21 & 22 are based on the following information. P1 © 2014
Golden Company developed a new machine for manufacturing baseballs. Because the machine is
considered very valuable, the entity had it patented. The following expenditures were incurred in
developing and patenting the machine:
Purchase of special equipment to be used solely for
development of the new machine 1,800,000
Research salaries and fringe benefits for engineers and scientists 200,000
Cost of testing prototype 250,000
Legal cost for filing of patent 150,000
Fees paid to government patent office 50,000
Drawings required by patent office to be filed with patent application 40,000
21. What amount should be capitalized as cost of patent?

A. 200,000 C. 540,000
B. 240,000 D. 740,000
22. What amount of research and development cost should be expensed in the current year?
A. 1,800,000 C. 2,250,000
B. 2,000,000 D. 2,490,000

On January 1, 2014, Aim Company showed patent of PI,920,000 with related accumulated
amortization of P240.000. The patent was purchased on January 1,2012 at which date the legal
life is 16 years. On January 1,2014, the useful life of the patent was determined to be only 8 years

Intangible Assets
from the date of acquisition. On January 1, 2014, in connection with the purchase of a trademark
from Cat Company, the parties entered into a noncompetition agreement and a consulting contract.
Aim Company paid Cat Company P800,000, of which three-fourths was for the trademark, and
one-fourth was for Cat Company's agreement not to compete for a five-year period in the line of
business covered by the trademark. Aim Company considered the life of the trademark to be
indefinite. Moreover, Aim Company agreed to pay Cat Company P50,000 annually on January 1
of each year for 5 years.
23. What is the carrying amount of intangible assets on January 1,2014?

A. 1,680,000 C. 2,280,000
B. 1,880,000 D. 2,480.000
24. What is the total amortization of intangible assets for 2014?

A. 160,000 C. 320,000
B. 280,000 D. 440,000
Multiple Choice - Problems: Leasehold & Leasehold Improvement

Depreciation
25. On January 1,2012, Wayne Company signed an eight-year lease for office space. The entity
has the option to renew the lease for an additional four-year period on or before January
1,2019. During January 2014, two years after occupying the leased premises, the entity made
general improvements costing P3,600,000 and having a useful life often years. On December
31,2014, the entity's intentions as to exercise of the renewal option are uncertain. What is the
depreciation of leasehold improvements for 2014?
A. 300,000 C. 450,000
B. 360,000 D. 600,000 FA © 2014
26. On January 1, 2014, 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 the entity has
not reached a decision with regard to the renewal option. In early January of 2014, the entity
completed the following improvements to the property:
Sales office 10 years 470,000
Warehouse 25 years 750,000
Parking lot 15 years 180,000
What is the depreciation of leasehold improvements for 2014?
A. 70,000 C. 122,000
B. 89,000 D. 140,000 P1 © 2014
MCQ – Problems: Leasehold Improvement Page 51

Accumulated depreciation
27. On January 1,2014, Ames Company signed an eight-year lease for office space. The entity
has the option to renew the lease for an additional four-year period on or before January 1,
2021. During January 2014, the entity incurred the following costs:
• P1,200,000 for general improvements to the leased premises with an estimated useful
life often years.
• P500,000 for office furniture and equipment with an estimated useful life often years.
• P400,000 for moveable assembly line equipment with useful life of 5 years.
On December 31,2014, the entity's intentions as to exercise of the renewal option are
uncertain. What is the accumulated depreciation of leasehold improvements on December
31,2014?
A. 150,000 C. 212,500
B. 170,000 D. 292,500 P1 © 2014
Carrying amount
28. On January 1, 2012, Nobb Company signed a 12-year lease for warehouse space. The entity
has an option to renew the lease for an additional 8-year period on or before January 1, 2016.
During January 2014, the entity made substantial improvement to the warehouse. The cost
of the improvement was P540,000, with an estimated useful life of 15 years. On December
31, 2014, the entity intended to exercise the renewal option. On December 31,2014, what is
the carrying amount of the leasehold improvement?
A. 486,000 C. 510,000
B. 504,000 D. 513,000 FA © 2014
29. Star Company leased a building to be used as product showroom. The ten-year
nonrenewable lease will expire on December 31,2019. In January 2014, the entity
redecorated the showroom and made leasehold improvement of P480,000. The estimated
useful life of the improvement is 8 years. The straight-line method of depreciation is used.
What is the carrying amount of leasehold improvement on June 30,2014?
A. 432,000 C. 450,000
B. 440,000 D. 456,000 P1 © 2014
30. On January 1,2013, Bay Company acquired a land lease for 21 years with no option to renew.
The lease required the lessee to construct a building in lieu of rent. The building, completed
on January 1,2014, at a cost of P8,400,000, is depreciated using the straight line method. At
the end of the lease, the building's estimated fair value is P4,200,000. The useful life of the
building is 25 years. What is the carrying amount of the building on December 31, 2014?
A. 7,980,000 C. 8,190,000
B. 8,064,000 D. 8,232,000 P1 © 2014
MCQ – Problems: Leasehold Improvement Page 52

Intangible Assets
Comprehensive
At the beginning of current year, Aloha Company signed a contract whereby the entity was to pay
P3,000,000 cash plus P300,000pcr month rent for an office building. The contract is for 10 years
and renewable for another 10 years at a monthly rental of P400,000.
Prior to occupancy, the lessee spent P1,000,000 in improving the building. In addition, the parking
lot was improved, new pavement and lighting were made at a cost of P400,000. It is estimated that
such improvement will be usable for 5 years. .
31. What is the amortization of leasehold for the current year?
A. 0 C. 600,000
B. 300,000 D. 700,000
32. What is the depreciation of leasehold improvement for current year?

A. 140,000 C. 280,000
B. 180,000 D. 480,000
Questions 1 thru 3 are based on the following information. P1 © 2014

At the beginning of current year, Explicable Company acquired a 5-year lease on land and building
from another entity at an annual rental of P 1,200,000.
On same date, the entity paid P2,400,000 representing rental for the first year and an advance
rental for one year which will be applied for the last year of the lease contract. Moreover, the entity
paid P2,000,000 upon signing of the contract to obtain right to the lease. Improvements and
alterations were made on the building at a cost of P500,000.
33. What is the rent expense for the current year?

A. 1,200,000 C. 2,400,000
B. 1,800,000 D. 3,600,000
34. What is the amortization of leasehold for the current year?
A. 0 C. 400,000
B. 200,000 D. 500,000
35. What is the depreciation of leasehold improvement for the current year?
A. 0 C. 500.000
B. 100,000 D. 900,000
Multiple Choice – Problems: Goodwill

Acquisition cost
36. Sarrah Company is interested in computing the goodwill to be recognized in the purchase
of ABC Company in January 2015. The following information was taken from the records
of ABC.
MCQ – Problems: Goodwill Page 53

Net income Net assets

2010 360,000 1,600,000
2011 388,000 1,800,000
2012 288,000 1,900,000
2013 380,000 2,000,000
2014 394,000 2,100,000
1,810,000 9,400,000
Goodwill is measured by capitalizing excess earnings at 40% with normal return on average
net assets at 10%. What is the "purchase price" of ABC Company?
A. 2,100,000 C. 2,315,000
B. 2,305,000 D. 2,535,000 P1 © 2014
Bargain Purchase
37. At year-end, Bliss Company purchased the net assets of another entity for P6,000,000. On
the date of the transaction, the acquiree had P2,000,000 of liabilities. The assets of the
acquiree at fair value were P3,000,000 for current assets and P6,000,000 for noncurrent
assets. How should the purchase be accounted for?
A. Negative goodwill should be credited for P1,000,000.
B. Retained earnings should be credited for P1,000,000.
C. Gain on bargain purchase should be credited for P1,000,000.
D. The current assets should be reported at P3,000,000 and the noncurrent assets at
P5,000,000. FA © 2014
Goodwill
38. At year-end, Star Company purchased for P30 per share all 200,000 of Moon Company's
outstanding ordinary shares. On this date, the carrying amount of net assets was P5,000,000.
The fair value of identifiable assets on this date was P400,000 in excess of their carrying
amount. What amount should be reported as goodwill at year-end?
A. 350,000 C. 600,000
B. 400,000 D. 1,000,000 FA © 2014
39. East Company is planning to sell the business to new interests. The cumulative net earnings
for the past five years amounted to P5,500,000 including expropriation gain of P500,000.
The fair value of net assets of East Company was P7,500,000. The goodwill is determined
by capitalizing average net earnings at 10%. What is the amount to be paid for goodwill?
A. 2,500,000 C. 5,000,000
B. 3,500,000 D. 7,500,000 P1 © 2014

Intangible Assets
40. On December 31, 2014, Sky Company reported assets of P5,000,000 and liabilities of
P2,000,000. The carrying amounts of the assets approximate fair value, except for land which
has a fair value that is P300,000 greater than carrying amount. On December 31, 2014, Blue
Company paid P6,000,000 to acquire Sky Company. What amount of goodwill should be
recorded by the acquirer as a result of this purchase?
A. 1,000,000 C. 3,000,000
B. 2,700,000 D. 3,300,000 FA © 2014
41. On June 30,2014, High Company purchased for cash at P50 per share all 150,000 ordinary
shares outstanding of Skyline Company. The statement of financial position on June 30,2014
showed net assets with a carrying amount of P6,000,000. The fair value of property, plant,
and equipment on June 30,2014 was P800,000 in excess of carrying amount. What amount
should be recorded as goodwill on the date of purchase?
A. 0 C. 800,000
B. 700,000 D. 1,500,000 FA © 2014
42. Flair Company purchased another entity for P8,000,000 at year-end. The carrying amount of
the acquiree's net assets on the date of purchase is P6,200,000. An analysis indicated that
the fair value of the acquiree's tangible assets exceeded the carrying amount by P600,000,
and the fair value of identifiable intangible assets exceeded carrying amount by P450,000.
What amount of goodwill should be recognized by the acquirer?
A. 0 C. 1,200,000
B. 750,000 D. 1,800,000 FA © 2014
43. On January 1,2014, Paye Company purchased Che Company at a cost that resulted in
recognition of goodwill of P2,000,000. During the first quarter of 2014, Paye Company spent
an additional P800,000 on expenditures designed to develop and maintain goodwill by
training and hiring new employees. Due to these expenditures, on December 31,2014, Paye
Company estimated that the benefit period of goodwill was indefinite. In the December 31,
2014 statement of financial position, what amount should be reported as goodwill?
A. 1,800,000 C. 2,000,000
B. 1,900,000 D. 2,660,000 P1 © 2014
44. Mayer Company purchased Tara Company for P8,000,000 cash. Tara Company had total
liabilities of P3,000,000. Mayer Company's assessment of the fair value it obtained when
it purchased Tara Company is as follows:
Cash 1,000,000
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. 300,000 C. 3,300,000
B. 1,500,000 D. 4,500,000 P1 © 2014
45. Brisbane Company has recently diversified by taking over the operations of Darwin Company
at a cost of P10,000,000. Darwin manufactures and sells a cleaning cloth called the
"Superswipe" which was developed by Darwin's highly trained staff. The unique nature of the
coating used on die "Superswipe" has resulted in Darwin Company a significant share of the
South African market. As a result of the takeover, Brisbane Company acquired the following
assets at fair value.:
Land and building 3,200,000
Production machinery 2,000,000
Inventory 1,800,000
Accounts receivable 700,000
In addition, Darwin Company owned, but had not recognized, the following
• Trademark-"Superswipe" with fair value of PI,000,000.
• Patent - Formula for the special coating with fair value of P500,000.
What amount of goodwill should be recognized on the date of acquisition?
A. 800,000 C. 1,800,000
B. 1,300,000 D. 2,300,000 P1 © 2014
46. Java Company purchased an entity for P6,000,000 cash at the beginning of the current year.
The carrying amount and fair value of the assets of the acquired entity as of the date of the
acquisition are as follows:
Carrying amount Fair value
Cash 50,000 50,000
Accounts receivable 500,000 500,000
Inventory 1,000,000 1,500,000
Patent 0 250,000
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 acquisition.
The acquired entity has no other separately identifiable intangible assets. What is the goodwill
arising from the acquisition?
A. 700,000 C. 2,700,000
B. 2,450,000 D. 4,450,000 P1 © 2014

Intangible Assets
47. Casanova Company purchased another entity for P5,000,000 cash. The following carrying
amount and fair value were associated with the items acquired in this business combination:
Accounts receivable 2,000,000 2,000,000
Inventory 1,000,000 500,000
Government contract 0 1,000,000
Equipment 400,000 500,000
Short-term loan payable (2,000,000) (2,000,000)
Net assets 1,400,000 2,000,000
The fair value associated with the acquired entity's government contract is not based on any
legal or contractual relationship. In addition, for obvious reason, there is no open market
trading for an intangible of this sort. What is the goodwill arising from the business
combination?
A. 0 C. 3,600,000
B. 3,000,000 D. 4,000,000 FA © 2014
48. At year-end, Clever Company purchased for P4,000,000 cash all of the outstanding ordinary
shares of Sun Company when Sun's statement of financial position showed net assets of
P3,200,000. Sun's assets and liabilities had fair value different from the carrying amount as
follows:
Property, plant and equipment, net 5,000,000 5,750,000
Other assets 500,000 0
Long-term debt 3,000,000 2,800,000
What amount should be reported as goodwill in the year-end consolidated statement of
financial position of Clever Company and its wholly-owned subsidiary?
A. 250,000 C. 750,000
B. 350,000 D. 800,000 FA © 2014
Multiple Choice – Problems: Research & Development

Research & development expense
49. Brill Company made the following expenditures during the current year:
Costs to develop computer software for internal use in Brill's
general management information system 1,000,000
Cost of market research activities 750,000
What is the research and development expense?
A. 0 C. 1,000,000
B. 750,000 D. 1,750,000 FA © 2014
MCQ – Problems: Research & Development Page 57

50. Alcaraz Company paid P5,000,000 to purchase the following intangible assets with fair value
as indicated:
Internet domain name 1,500,000
Order backlog 1,200,000
In-process research and development 2,400,000
Operating permit 900,000
In addition, the entity spent P2,000,000 to run an advertising campaign to boost its image in
the local community. What amount should be recognized as cost of the in-process research
and development?
A. 0 C. 2,400,000
B. 2,000,000 D. 2,800,000 P1 © 2014
51. At the beginning of current year, West Company purchased two machines for P1,000,000
each. The machines were put into use immediately Machine A has a useful life of 5 years and
can be used only in one research project. Machine B will be used for 2 years on a research
and development project and then used by the production division for an additional 8 years.
The entity used the straight line method of depreciation. What amount should be recognized
as research and development expense for the current year?
A. 300,000 C. 1,500,000
B. 1,100,000 D. 2,000,000 FA © 2014
52. Cody Company incurred the following costs during the current year:
Design of tools, jigs, molds, and dies involving new technology 125,000
Modification of the formulation of a process 160,000
Trouble-shooting in connection with breakdowns
during commercial production 100,000
Adaptation of an existing capability to a particular customer's
need as part of a continuing commercial activity 110,000
In the income statement for the current year, what amount should be reported as research
and development expense?
A. 125,000 C. 235,000
B. 160,000 D. 285,000 FA © 2014
53. Dell Company incurred the following costs during the current year:
Routine on-going efforts to refine, enrich, or otherwise
improve an existing product 125,000
Design, construction and testing of preproduction models 110,000
Quality control during commercial production
including routine testing of products 150,000
Laboratory research for discovery of new knowledge 180,000

Intangible Assets
What is the total research and development expense?

A. 235,000 C. 290,000
B. 275,000 D. 330,000 FA © 2014
54. Courage Company incurred the following costs in the current year:
R and D equipment with useful life of four years in various R & D projects 1,800,000
Start-up costs incurred when opening a new plant 4,200,000
Advertising expense to introduce a new product 2,100,000
Engineering costs incurred to advance a product to full
production stage but economic viability is not yet achieved 1,200,000
What amount should be recorded as research and development expense?
A. 1,650,000 C. 3,000,000
B. 2,220,000 D. 3,420,000 FA © 2014
55. During the current year, Orr Company incurred the following costs:
Research and development services performed by Key Company for Ort 150,000
Design, construction and testing of preproduction prototypes 200,000
Testing in search for new products or process alternatives 175,000
A. 150,000 C. 350,000
B. 200,000 D. 525,000 FA © 2014
56. In 2014, Citadel Company incurred the following research and development costs:
Materials and equipment 3,000,000
Personnel 2,000,000
Indirect costs 1,000,000
These costs relate to a product that will be marketed in 2015. It is estimated that these costs
will be recouped by December 31,2016.
What total research and development costs should be expensed in 2014?
A. 1,000,000 C. 5,000,000
B. 2,000,000 D. 6,000,000 P1 © 2014
57. Fear Company incurred the following costs during the current year:
Laboratory research aimed at discovery of new knowledge 200,000
Cost of testing prototype (economic viability not achieved) 50,000
Quality control during commercial production 300,000
Construction of research facility having an estimated
useful life of 5 years but no alternative future use 400,000
What is the total amount of research and development expense for the current year?
A. 330,000 C. 650,000
B. 630,000 D. 950,000 FA © 2014

58. 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 100,000
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. 600,000
Labor and material costs incurred in producing a prototype model 2,000,000
Cost of testing the prototype 800,000
What is the total amount of costs that should be expensed when incurred?
A. 2,800,000 C. 3,400,000
B. 2,950,000 D. 3,500,000 FA © 2014
59. Koral Company incurred the following costs during the current year:
Modification to the formulation of a chemical product 135,000
Trouble-shooting in connection with breakdowns
during commercial production 150,000
Design of tools, jigs, molds and dies involving new technology 170,000
Seasonal or other periodic design changes to existing products 185,000
Laboratory research aimed at discovery of new technology 215,000
In the income statement for the current year, what amount should be reported as research
and development expense?
A. 335,000 C. 470,000
B. 385,000 D. 520,000 FA © 2014
60. Ball Company incurred P400,000 direct cost of doing research and development work for the
government to be reimbursed by the government. Other research and development costs
incurred were:
Depreciation 300,000
Salaries 700,000
Indirect costs appropriately allocated 200,000
Materials 180,000
A. 1,080,000 C. 1,580,000
B. 1,380,000 D. 1,780,000 FA © 2014

Intangible Assets
61. Faith Company incurred the following research and development costs during the current
year:
Materials used 1,000,000
Equipment 2,000,000
Personnel 1,200,000
Indirect costs 1,500,000
These costs relate to a product that will be marketed next year. It is estimated that these
costs will be recouped after two years but the process has not achieved economic viability.
The equipment has no alternative future use. What is the amount of research and
development expense for the current year?
A. 0 C. 4,200,000
B. 3,700,000 D. 5,700,000 FA © 2014
62. Roca Company is a newly established entity. It was set up by . entrepreneur who is generally
interested in providing engineering and operational support services to aircraft
manufacturers. The en received a confirmed order from an aircraft manufacturer to develop
a new design for ducting the air conditioning of the aircraft. The entity incurred the following
expenditures in the current year in pursuance of a research and development project for the
air conditioner duct:
Salaries of engineers, consultants and technicians 400,000
Cost of developing the duct and producing the test model 500,000
Additional cost for revising the ducting process to ensure
that product could be introduced in the market 600,000
Cost of developing the first model or prototype and testing
it with air conditioners to ensure comparability 100,000
Cost of conference for the introduction of this new project 150,000
What total amount of the costs incurred should be treated as research and development
expense for the current year?
A. 1,200,000 C. 1,600,000
B. 1,500,000 D. 1,750,000 FA © 2014
63. Ward Company incurred the following research and development costs in the current year:
Equipment acquired for use in various R and D projects 975,000

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 250,000

What total research and development costs should be recognized as expense for the current
year?
A. 850,000 C. 1,235,000
B. 1,085,000 D. 1,825,000 FA © 2014
Computer software
64. On January 1, 2014, Bitter Company had capitalized cost of P5,000,000 for a new computer
software product with an economic life 5 years. Sales for 2014 amounted to P3,000,000. The
total sales of software over the economic life are expected to be P10,000,000. The pattern of
future sales cannot be measured reliably. On December 31,2014, the software had a fair
value less cost of disposal of P4,500,000. What is the carrying amount of the computer
software on December 31, 2014?
A. 3,500,000 C. 4,500,000
B. 4,000,000 D. 5,000,000 P1 © 2014
Questions 65 thru 67 are based on the following information. P1 © 2014

During the current year, Pitt Company incurred costs to develop and produce a computer software
product as follows:
Completion of detailed program design 1,300,000
Costs incurred for coding and testing to establish technological feasibility 1,000,000
Other coding costs after establishment of technological feasibility 2,400,000
Other testing costs after establishment of technological feasibility 2,000,000
Costs of producing product masters for training materials 1,500,000
Duplication of computer software and training materials from product masters 2,500,000
Packaging product 900,000
65. In the year-end statement of financial position, what amount should be reported in inventory?
A. 2,500,000 C. 4,000,000
B. 3,400,000 D. 4,900,000
66. What total amount of the costs incurred should be expensed immediately?
A. 2,300,000 C. 6,700,000
B. 4,400,000 D. 8,200,000
67. In the year-end statement of financial position, what amount should be capitalized as software
cost, subject to amortization?
A. 5,400,000 C. 5,900,000
B. 5,700,000 D. 6,900,000

Intangible Assets
Organization costs
68. Cutthroat Company, a major winery, started construction of a new facility in Mindanao. The
entity incurred the following costs in conjunction with the start-up activities of the new facility:
Production equipment 8,150,000
Travel costs of salaried employees 400,000
License fees 140,000
Training of local employees for production and maintenance operations 1,200,000
Advertising costs 850,000
What portion of the organization costs should be expensed?
A. 1,390,000 C. 2,450,000
B. 1,600,000 D. 2,590,000 FA © 2014
69. Paula Company was organized at the beginning of current year. The entity is engaged in
conducting market research studies on behalf of manufacturers. The following costs were
incurred during the current year:
Attorney fees in connection with organization of entity 900,000
Improvements to leased building prior to occupancy 600,000
Meetings of incorporators, state filing fees and other organization costs 500,000
What amount of organization costs should be expensed for the current year?
A. 0 C. 1,400,000
B. 35,000 D. 2,000,000 P1 © 2014
Comprehensive
Questions 70 thru 72 are based on the following information. FA © 2014
During the current year, Awesome Company incurred costs to develop and produce a routine, low-
risk computer software product.
Duplication of computer software and training materials from product
masters (1,000 units) 2,500,000
Packaging product (500 units) 900,000
70. In the year-end statement of financial position, what amount should be reported in inventory?
A. 2,500,000 C. 4,000,000
B. 3,400,000 D. 4,900,000

71. What total amount of the costs incurred should be expensed immediately?
A. 2,300,000 C. 6,700,000
B. 4,400,000 D. 8,200,000
72. In the year-end statement of financial position, what amount should be capitalized as software
cost?
A. 5,400,000 C. 5,900,000
B. 5,700,000 D. 6,900,000

Intangible Assets
ANSWER KEY THEORY

1.C 26.D 51.D 76.A 101.B
2.A 27.C 52.D 77.B 102.C
3.A 28.C 53.D 78.A 103.B
4.A 29.C 54.C 79.D 104.D
5.D 30.A 55.C 80.C 105.D
6.A 31.A 56.C 81.A 106.B
7.B 32.D 57.D 82.B 107.C
8.B 33.C 58.B 83.D 108.A
9.C 34.C 59.C 84.C 109.D
10.D 35.C 60.A 85.B 110.D
11.D 36.C 61.C 86.D 111.A
12.D 37.B 62.D 87.B 112.D
13.D 38.D 63.C 88.A 113.B
14.B 39.D 64.D 89.A 114.A
15.C 40.C 65.A 90.D 115.B
16.C 41.D 66.A 91.D 116.A
17.C 42.A 67.A 92.B 117.B
18.C 43.A 68.C 93.D 118.B
19.D 44.B 69.D 94.D 119.B
20.A 45.D 70.D 95.D 120.D
21.D 46.D 71.A 96.D 121.C
22.B 47.D 72.B 97.D 122.D
23.D 48.C 73.A 98.B 123.D
24.D 49.C 74.B 99.C
25.C 50.C 75.B 100.C
Answer Key Page 65

ANSWER KEY PROBLEMS

1.C 26.D 51.B
2.C 27.A 52.D
3.C 28.B 53.C
4.A 29.B 54.A
5.A 30.A 55.D
6.B 31.B 56.D
7.B 32.B 57.C
8.B 33.A 58.C
9.D 34.C 59.D
10.C 35.B 60.B
11.A 36.D 61.D
12.A 37.C 62.C
13.A 38.C 63.C
14.C 39.A 64.B
15.D 40.B 65.B
16.B 41.B 66.A
17.C 42.B 67.C
18.B 43.C 68.B
19.B 44.D 69.C
20.D 45.A 70.B
21.B 46.C 71.A
22.C 47.D 72.C
23.D 48.B
24.C 49.A
25.D 50.B
Answer Key Page 66

Intangible Assets
ANSWER EXPLANATION
1. Answer is (C).
Goodwill 1,500,000
Patent 2,500,000
Customer list 500,000
Total intangible assets 4,500,000
2. Answer is (C).
Employee benefits relating to the testing of the
proper functioning of the new process 200,000
Total 3,700,000
3. Answer is (C).
Total intangible assets (500,000 + 4,000,000 + 900,000) 5,400,000
4. Answer is (A).
Patent (400,000 + 50,000) 450,000
License (300,000 x 2/3) 200,000
Trademark (300,000 x 1/3) 100,000
Total cost of intangible assets 750,000
Fair value of ordinary shares (6,000 x 50) 300,000
5. Answer is (A). Cost of acquiring the copyright 5,000,000
6. Answer is (B).
Fair value of shares issued (100,000 x 90) 9,000,000
Fair value of trademark (1,500,000)
Fair value of land (20% x 6,500,000) (1,300,000)
Fair value of building (80% x 6,500,000) (5,200,000)
Measurement of franchise 1,000,000
7. Answer is (B).
Downpayment 4,000,000
Present value of annual payment (2,000,000 x 2.91) 5,820,000
Cost of franchise 9,820,000
Answer Explanation & Solutions Page 67

8. Answer is (B).
Downpayment 2,000,000
Present value of annual payment for 4 years(1,000,000 x 2.91) 2,910,000
Cost of franchise 4,910,000
9. Answer is (D). The legal life of trademark is 10 years and may be renewed for periods of 10
years each. Considering the almost automatic renewal of a trademark, the trademark can be
classified as an intangible asset with indefinite life. Accordingly, the cost of trademark is not
amortized but tested for impairment at least annually.
10. Answer is (C). Total cost (3.500,000 + 200,000) 3,700,000
11. Answer is (A). Total cost of trademark (1,500,000+ 150,000 + 50,000) 1,700,000
12. Answer is (A).

Legal fees and other costs associated with registration 300,000
The cost of litigation, whether successful or not, should be treated as outright expense
because such cost would only maintain and not enhance the originally assessed future
benefits.
13. Answer is (A).

Cost - January 1, 2012 5,400,000
Amortization for 2012 and 2013 (5,400,000 / 6 x 2) (1,800,000)
Carrying amount - January 1, 2014 3,600,000
Amortization for 2014 (3,600,000/20) 180,000
14. Answer is (C).

Cost – 1/1/2013 5,800,000
Amortization for 2013 & 2014 (5,800,000 / 5 x 2) (2,320,000)
Carrying amount – 12/31/2014 3,480,000
Value in use – higher 2,825,000
Impairment loss 655,000
15. Answer is (B).

Amortization for 2014 (4,500,000 / 10) 450,000
16. Answer is B).

Cost - January 1, 2009 6,000,000
Accumulated amortization - December 31, 2013 (6,000,000/15 x 5) 2,000,000

Intangible Assets
Carrying amount - January 1,2014 4,000.000

Amortization for 2014 (4,000,000 / 5) 800,000
17. Answer is (C).

Acquisition cost 900,000
Amortization for 2011,2012 and 2013
(900,000 / 10 x 3) (270,000)
Carrying amount - January 1,2014 630,000
The remaining carrying amount on January 1,2014 is entirely expensed in 2014 and this
includes the amortization of P90,000 for 2014 and the writeoff of the unamortized cost of
P540,000.
18. Answer is (B).

Cost - January 1, 2011 7,140,000
Amortization for 2011,2012 and 2013 (7,140,000/15x3) (1,428,000)
Carrying amount - January 1, 2014 5,712,000
Amortization for 2014 (5,712,000/7) ( 816,000)
Carrying amount - December 31, 2014 4,896,000
19. Answer is (B).

Patent X (1,200,000 / 8) 150,000
Patent Y (2,000,000/5) 400,000
Patent Z (3,000,000/6) 500,000
Total amortization 1,050,000
20. Answer is (D).

Acquisition cost - January 1,2011 450,000
Amortization for 2011, 2012 and 2013 (450,000/15x3) (90,000)
Carrying amount - January 1,2014 360,000
Gain from sale (750,000 - 360,000) 390,000
21. Answer is (B).

Legal cost for filing of patent 150,000
Fees paid to patent office 50,000
Drawings required by patent office 40,000
Total cost of patent 240,000

22. Answer is (C).

Purchase of special equipment 1,800,000
Research salaries and fringe benefits 200,000
Cost testing prototype 250,000
Research and development expense 2,250,000
23. Answer is (D).

Patent (1,920,000-240,000) 1,680,000
Trademark ( 800,000 x 3/4) 600,000
Noncompetition agreement ( 800,000x 1/4) 200,000
Total intangible assets - January 1, 2014 2,480.000
24. Answer is (C).

Amortization of patent (1,680,000 / 6) 280,000
Amortization of noncompetition agreement (200,000/5) 40,000
Total amortization for 2014 320,000
25. Answer is (D). (3,600,000/6) 600,000

The leasehold improvements are depreciated over the remaining lease term and the life of
the improvements, whichever is shorter.
26. Answer is (D).

Sales office (470,000 /10) 47,000
Warehouse (750,000/10) 75,000
Parking lot (180,000/10) 18,000
Total 140,000
Leasehold improvements should be depreciated over the life of the improvement or the lease
term, whichever is shorter.
27. Answer is (A). Accumulated depreciation - December 31,2014 (1200,000 / 8)

150,000
28. Answer is (B)

Original lease (years) 12
Extension 8
Total life 20
Less: Years expired (2012 and 2013) 2
Remaining lease term 18
Life of improvement (shorter) 15

Intangible Assets
Leasehold improvement 540,000

Depreciation for 2014 (540,000 /15) (36,000)
Carrying amount - December 31,2014 504,000
The renewal option is considered in determining the lease term because it is already certain
on December 31,2014.
29. Answer is (B).

Leasehold improvement 480,000
Depreciation from January 1 to June 30, 2014 (480,000 / 6 x 6/12) ( 40,000)
Carrying amount - June 30, 2014 440,000
The remaining lease term from January 1,2014 to December 31,2019 is 6 years which is
shorter than the life of the improvement of 8 years.
30. Answer is (A).

Building 8,400,000
Depreciation for 2014 (8,400,000 / 20) (420,000)
Carrying amount - December 31,2014 7,980,000
The building was completed on January 1,2014, one year from the date of the lease on
January 1,2013. Thus, the remaining lease term is 20 years which is shorter than the life of
the building of 25 years. The estimated fair value of the building at the end of the lease is
ignored in computing depreciation because legally, the building becomes the property of the
lessor when the contract is terminated.
31. Answer is (B). Amortization of leasehold (3,000,000 / 10) 300,000
32. Answer is (B).

Improvement on building (1,000,000 /10) 100,000
Parking lot, new pavement and lighting (400,000 / 5) 80,000
Total depreciation 180,000
33. Answer is (B). Rent expense for current year 1,200,000

The balance of the rental payment of P1,200,000 should be recognized as prepaid rent.
34. Answer is (B). Amortization of leasehold (2,000,000 / 5)

400,00
0
The leasehold should be amortized over the lease term of 5 years.
35. Answer is (B). Depreciation of leasehold improvement (500,000 x 5) 100,000

The leasehold improvement is depreciated over the shorter between the life ofthe
improvement and the lease term. Since the life of the improvement is not given, the
depreciation is based on the lease term.
36. Answer is (D).

Average net assets (9,400,000 / 5) 1,880,000
Average earnings (1,810,000 / 5) 362.000
Less: Normal earnings (10% x 1,880,000) 188,000
Excess earnings 174,000
Divide by capitalization rate 40%
Goodwill 435,000
Net assets - 2014 2,100,000
Goodwill 435,000
Total purchase price 2,535,000
The purchase price or acquisition cost includes the payment for the 2014 net assets at
fair value and the goodwill.
37. Answer is (C).

Current assets 3,000,000
Noncurrent assets 6,000,000
Total assets 9,000,000
Liabilities (2,000,000)
Net assets at fair value 7,000,000
Acquisition cost 6,000,000
Excess net fair value 1,000,000
Since the net assets acquired at fair value exceeded acquisition cost, the difference is
accounted for as gain from bargain purchase.
Journal entry
Current assets 3,000,000
Noncurrent assets 6,000,000
Liabilities 2,000,000
Cash 6,000,000
Gain on bargain purchase 1,000,000
38. Answer is (C).

Acquisition cost (200,000 x P30) 6,000,000
Fair value of net assets (5,000,000 + 400,000) (5,400,000)
Goodwill 600,000

Intangible Assets
39. Answer is (A).

Cumulative earnings 5,500,000
Less: Expropriation gain 500,000
Adjusted cumulative earnings 5,000,000
Average earnings (5,000,000 / 5) 1,000,000
Divide by capitalization rate 10%
Net assets including goodwill 10,000,000
Less: Net assets before goodwill 7,500,000
Goodwill 2,500,000
The expropriation gain should be excluded in determining net earnings for goodwill
purposes because it is an unusual or irregular item.
40. Answer is (B).

Net assets at fair value (3,000,000 + 300,000) 3,300,000
Goodwill 2,700,000
41. Answer is (B).

Acquisition cost (150,000 x P50) 7,500,000
Fair value of net assets acquired 6,800,000
Goodwill 700,000
Carrying amount of net assets 6,000,000
Excess fair value of property, plant and equipment 800,000
Fair value of net assets 6,800,000
42. Answer is (B).

Net assets at fair value (6,200,000 + 600,000 + 450,000) 7,250,000
Goodwill 750,000
43. Answer is (C).

Cost of goodwill-January 1,2014 2,000,000
The cost of developing and maintaining goodwill of P800,000 is expensed outright.
PAS 38, paragraph 107, provides that goodwill or an intangible asset with an indefinite
useful life shall not be amortized but tested for impairment annually and whenever there is an
indication that the intangible asset may be impaired.

44. Answer is (D).

Cash 1,000,000
Inventory 500,000
In-process R and D 5,000,000
Total assets 6,500,000
Total liabilities 3,000,000
Net assets acquired at fair value 3,500,000
Net assets acquired at fair value (3,500,000)
Goodwill 4,500,000
The goodwill includes the fair value of the assembled workforce of P1,200,000. The
assembled workforce is not accounted for separately as an asset.
45. Answer is (A).

Assets acquired:
Land and building 3,200,000
Production machinery 2,000,000
Inventory 1,800,000
Accounts receivable 700,000
Trademark 1,000,000
Patent 500,000 9,200,000
Goodwill 800,000
46. Answer is (C).

Net assets acquired at fair value (3,300,000)
Goodwill 2,700,000
Total assets at fair value 5,300,000

Total liabilities 2,000,000
Net assets acquired at fair value 3,300,000
47. Answer is (D).

Accounts receivable 2,000,000
Inventory 500,000
Equipment 500,000
Short-term payable (2,000,000)
Net assets at fair value 1,000,000

Intangible Assets

Net assets at fair value (1,000,000)
Goodwill 4,000,000
The government contract is not recognized separately because it is not based on any legal
or contractual relationship nor is it separately tradable. The fair value of P1,000,000 is
imbedded in the amount of goodwill of P4,000,000.
48. Answer is (B).

Carrying amount of net assets 3,200,000
Undervaluation of property, plant and equipment 750,000
Overvaluation of other assets (500,000)
Overvaluation of long-term debt, 200,000
Fair value of net assets acquired 3,650,000

Fair value of net assets acquired (3,650,000)
Goodwill 350,000
49. Answer is (A). The P1,000,000 cost should be charged to computer software and the
P750,000 cost should be classified as distribution cost.
50. Answer is (B).

Fair value Fraction Cost
Internet domain name 1,500,000 15/60 1,250,000
Order backlog 1,200,000 12/60 1,000,000
In-process R and D 2,400,000 24/60 2,000,000
Operating permit 900,000 9/60 750,000
6,000,000 5,000,000
An in-process research and development project acquired separately is recognized as an
asset at cost, even if a component is research. Subsequent expenditure on that project is
accounted for as any other research and development expenditure which may be expensed
or capitalized depending on the criteria for the recognition of an intangible asset. The cost of
the advertising should be expensed immediately.
51. Answer is (B).

Machine A - charged entirely to expense 1,000,000
Machine B - (1,000,000 /10) 100,000
Total R and D expense 1,100,000

52. Answer is (D).

Design of tools, jigs and dies 125,000
Modification of the formulation of a process 160,000
Total R and D expense 285,000
The other two costs incurred are not R and D activities because they relate to commercial
production.
53. Answer is (C).

Design, construction and testing of models 110,000
Laboratory research 180,000
Total research and development expense 290,000
54. Answer is (A).

R and D equipment (1,800,000 / 4) 450,000
Engineering costs 1,200,000
Total R and D expense 1,650,000
55. Answer is (D). All costs incurred are charged to research and development expense
immediately.
56. Answer is (D). All costs incurred are expensed immediately. In the absence of any statement
to the contrary, all research and development costs are recognized as expense.
57. Answer is (C).

Laboratory research aimed at discovery of new knowledge 200,000
Cost of testing prototype (economic viability not achieved) 50,000
Construction of research facility 400,000
R & D expense 650,000
58. Answer is (C).

Special equipment used solely for Product Y 600,000
Labor and material costs 2,000,000
Cost of testing prototype 800,000
Total research and development expense 3,400,000
The legal costs incurred to file a patent should be charged to the patent account.
59. Answer is (D).

Modification to the formulation of a chemical product 135,000
Design of tools, jigs, molds and dies 170,000

Intangible Assets
Laboratory research 215,000

Total research and development expense 520,000
Research and development activities typically occur prior to the commercial production and
distribution of a product or process. Thus, the trouble shooting in connection with breakdown
and seasonal or other periodic changes to existing products are not R and D activities
because they relate to the commercial production.
60. Answer is (B).

Depreciation 300,000
Salaries . 700,000
Indirect costs allocated 200,000
Materials 180,000
Total research and development expense 1,380,000
Research and development performed under contract for others should not be treated as
expense if the direct costs are specifically reimbursable under the contract.
61. Answer is (D). All costs incurred are expensed immediately.
62. Answer is (C). All costs incurred are charged to research and development expense with the
exception of the cost of conference. The cost of conference is expensed immediately but not
as part of research and development expense.
63. Answer is (C).

Depreciation of equipment 135,000
Materials used 200,000
Compensation cost of personnel 500,000
Outside consulting fees 150,000
Indirect costs allocated 250,000
1,235,000
Expenditures for research and development which have alternative future use, either in
additional research project or for productive purposes, can be capitalized. This means that
costs incurred for equipment and intangible asset related to research and development
activities which have an alternative future use can be capitalized. Subsequently, the
depreciation of the equipment and the amortization of the intangible asset should be charged
to research and development expense.
64. Answer is (B).

Software cost 5,000,000
Amortization for 2014 (5,000,000/5 years) 1,000,000

Carrying amount - December 31, 2014 4,000,000

PAS 38, paragraph 97, provides that if the pattern of future benefit from an intangible asset
cannot be determined reliably, the straight line method of amortization shall be used. The
carrying amount of the computer software shall not be more than fair value less cost of
disposal. Otherwise, an impairment loss is recognized.
65. Answer is (B).

Product costs which are associated with inventory items are:
Duplication of computer software and training materials 2,500,000
Total inventory 3,400,000
66. Answer is (A).

PAS 38, paragraph 57, provides that costs incurred in creating a software product shall be
charged to research and development expense in period when incurred until a technological
feasibility has been established for the product. Technological feasibility is established when
a detailed program design or a working model is completed. Accordingly, the following costs
incurred are expensed outright.
Total costs charged as expense 2,300,000
67. Answer is ().

The costs incurred from the time of technological feasibility to the time when product costs
are incurred should be capitalized as computer software cost. Accordingly, the following costs
incurred are capitalized:
Total costs to be capitalized 5,900,000
68. Answer is (B).

Travel costs of salaried employees 400,000
Training of local employees for production and maintenance operations 1,200,000
Total start-up costs to be expensed 1,600,000
The production equipment definitely should be capitalized. The license fees and advertising
costs are also charged to expense but not embraced in the definition of start-up costs. The
license fees and advertising costs are operating costs and not pre-opening or pre-operating
costs. The organization costs contemplated in this problem squarely pertain to start-up costs.

Intangible Assets
Under PAS 38, start-up costs are outright expenses. Start-up costs may consist of
establishment costs such as legal and secretarial costs incurred in establishing a legal entity
or preopening costs – expenditures to open a new facility or pre-operating costs –
expenditures for commencing or launching a new project.
69. Answer is (C).

Attorney fees 900,000
Meetings of incorporators   500,000
Total organization expense 1,400,000
Under current financial reporting standard, organization costs should be expensed
immediately in the period when incurred. The improvements to leased building should be
capitalized as "leasehold improvements" and depreciated over the lease term or life of the
improvements, whichever is shorter.
70. Answer is (B).

Product costs which are associated with inventory items are:
Duplication of computer software and training materials 2,500,000
Total inventory 3,400,000
71. Answer is (A).

PAS 38, paragraph 57, provides that costs incurred in creating a software product shall be
charged to research and development expense in period when incurred until a technological
feasibility has been established for the product. Technological feasibility is established when
a detailed program design or a working model is completed. Accordingly, the following costs
incurred are expensed outright.
Total costs charged as expense 2,300,000
72. Answer is (C).

The costs incurred from the time of technological feasibility to the time when product costs
are incurred should be capitalized as computer software cost. Accordingly, the following costs
incurred are capitalized:
Total costs to be capitalized 5,900,000

Financial Accounting: Theory & Practice Intangible Assets

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Financial Accounting: Theory & Practice Intangible Assets

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FINANCIAL ACCOUNTING

THEORY & PRACTICE

The three essential criteria in the definition of an intangible asset are:

4. Explain the meaning of "identifiability".

An asset is identifiable when:

Essay Questions Page 1

5. Explain the element of "control" of an intangible asset?

6. Explain the meaning of "future economic benefits".

7. What is the cost of an intangible asset that is "acquired separately"?

Essay Questions Page 2

8. What is the meaning of "identifiable intangible asset"?

PAS 38 specifically pertains to identifiable intangible assets. If the intangible asset is

The common examples of identifiable intangible assets are:

9. What is the meaning of "unidentifiable intangible asset"?

An intangible asset is unidentifiable if it cannot be sold, transferred, licensed, rented or

The best example of an unidentifiable intangible asset is goodwill.

a. Costs of introducing a new product or service, including costs of advertising and

Essay Questions Page 3

a. If an intangible asset is acquired in a business combination, the cost of the intangible

13. What is the cost of an "internally generated intangible asset"?

Examples of directly attributable costs are:

Essay Questions Page 4

15. What is the treatment of a subsequent expenditure on an intangible asset?

As a rule, a subsequent expenditure on an intangible asset shall be recognized as expense.

Essay Questions Page 5

Measurement after initial recognition

Essay Questions Page 6

18. What expenditures are capitalized as cost of patent?

19. Explain the amortization period of patent.

Essay Questions Page 7

Under US GAAP, a franchise is a contract-based intangible asset. The franchise agreement

22. What expenditures are capitalized as cost of franchise?

23. Explain the amortization period of franchise.

Essay Questions Page 8

25. What are leasehold improvements?

26. Explain the depreciation of leasehold improvements.

Essay Questions Page 9

28. Explain the amortization period of trademark.

30. Explain a "broadcasting license with a finite life".

Essay Questions Page 10

Organization costs represent costs incurred in forming or organizing a corporation.

Essay Questions Page 11

35. What is the treatment of the "infrastructure asset" in a service concession?

36. When is the infrastructure asset accounted for as financial asset?

38. When is the infrastructure asset accounted for as intangible asset?

Essay Questions Page 12

Amortization is the systematic allocation of the depreciable amount of an intangible asset

40. What is the amortization period of an intangible asset?

41. Explain the "useful life" of an intangible asset.

42 What is the method of amortizing the cost of an intangible asset?

Essay Questions Page 13

43. Explain the residual value of an intangible asset.

The residual value of an intangible asset shall be presumed to be zero, except:

a. Technical, technological and other type of obsolescence

Essay Questions Page 14

46. What are the two kinds of goodwill?

47. Explain the "residual approach" of measuring goodwill.

48. How is goodwill measured in a business combination?

Essay Questions Page 15

49. What is "negative goodwill"?

An intangible asset shall be derecognized or eliminated from the statement of financial

Research & Development

Development is the application of research findings or other knowledge to a plan or design