Since 1977

FAR OCAMPO/CABARLES/SOLIMAN/OCAMPO
FAR.2909-Intangible Assets OCTOBER 2020

DISCUSSION PROBLEMS
1. Which statement is incorrect regarding intangible 7. The probability recognition criterion is always
assets? considered to be satisfied for intangible assets
a. Intangible assets are identifiable non-monetary a. Acquired separately
assets without physical substance. b. Acquired in a business combination
b. The recognition of an item of as an intangible asset c. Generated internally
requires an entity to demonstrate that the item d. Both a and b
meets the definition of an intangible asset and the
criteria for recognition. 8. An intangible asset arising from development shall be
c. An intangible asset shall be measured initially and recognized if, and only if, an entity can demonstrate:
subsequently at cost. I. The technical feasibility of completing the
d. Intangible assets are presented as a separate line intangible asset so that it will be available for use
item in the statement of financial position. or sale.
II. Its intention to complete the intangible asset and
2. The critical attributes of an intangible asset include use or sell it.
identifiability, control over the resource and existence III. Its ability to use or sell the intangible asset.
of future economic benefits. Which statement IV. How the intangible asset will generate probable
describes existence of future economic benefits? future economic benefits.
a. The asset is separable or arising from contractual V. The availability of adequate technical, financial
or other legal rights. and other resources to complete the development
b. The entity has the power to obtain benefits from and to use or sell the intangible asset.
the asset. VI. Its ability to measure reliably the expenditure
c. The use of the asset will generate revenues or attributable to the intangible asset during its
reduce future costs. development.
d. All of these.
a. I, II, III, IV, V and VI.
b. I, II, IV and VI only.
3. Which of the following will most likely qualify for
c. I, II, III, IV and V only.
recognition as intangible asset?
d. I, IV and VI only.
a. A team of skilled staff
b. Talented manager
9. Research is original and planned investigation
c. Customer loyalty
undertaken with the prospect of gaining new scientific
d. Knowledge protected by legal rights
or technical knowledge and understanding. Examples
of research activities do not include
4. An intangible asset shall be recognized if, and only if:
a. Activities aimed at obtaining new knowledge.
a. It is probable that the expected future economic
b. The search for, evaluation and final selection of,
benefits that are attributable to the asset will flow
applications of research findings or other
to the entity.
knowledge.
b. The cost of the asset can be measured reliably.
c. The search for alternatives for materials, devices,
c. Both a and b.
products, processes, systems or services.
d. Neither a nor b.
d. The design, construction and testing of a chosen
alternative for new or improved materials, devices,
5. Expenditures that do not satisfy the recognition criteria
products, processes, systems or services.
are recognized as
a. In general, expenses when they are incurred.
10. Development is the application of research findings or
b. In business combinations, part of the amount
other knowledge to a plan or design for the production
attributed to the goodwill recognized at the
of new or substantially improved materials, devices,
acquisition date.
products, processes, systems or services before the
c. Either a or b
start of commercial production or use. Examples of
d. Neither a nor b
development activities do not include
a. The design, construction and testing of pre-
6. Expenditure on items that cannot be distinguished
production or pre-use prototypes and models.
from the cost of developing the business as whole is
b. The design of tools, jigs, moulds and dies involving
not recognized as intangible asset. Those items
new technology.
include:
c. The design, construction and operation of a pilot
I. Brands
plant that is not of a scale economically feasible for
II. Mastheads
commercial production.
III. Publishing titles
d. The formulation, design, evaluation and final
IV. Customer lists
selection of possible alternatives for new or
a. I, II and IV only c. II, III and IV only improved materials, devices, products, processes,
b. II, and IV only d. I, II, III and IV systems or services.

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EXCEL PROFESSIONAL SERVICES, INC.
11. Which statement is correct regarding research and
development expenditures?
a. Expenditure on research may be capitalized.
b. All development expenditures should be
capitalized.
c. If an entity cannot distinguish the research phase
of an internal project to create an intangible asset
from the development phase, the entity treats the
expenditure for that project as if it were incurred in
the development phase only.
d. Expenditure on an intangible item that was initially
recognized as an expense shall not be recognized
as part of the cost of an intangible asset at a later
date.
12. Joy Corp. is engaged in a research and development
project to produce a new product. In the year ended
December 31, 2019, the company spent P1,200,000
on research and concluded that there were sufficient
grounds to carry the project on to its development
stage and a further P750,000 had been spent on
development. At that date management had decided
that they were not sufficiently confident in the ultimate
profitability of the project and wrote off all the
expenditure to date to the income statement. In 2020
further direct development costs have been incurred of
P800,000 and the development work is now almost
complete with only an estimated P100,000 of costs to
be incurred in the future. Production is expected to
commence within the next few months. Unfortunately
the total trading profit from sales of the new product is
not expected to be as good as market research data
originally forecasted and is estimated at only
P1,500,000. Assuming the other criteria given in PAS
38 are met, how much should be capitalized as of
December 31, 2020?
a. P1,650,000 c. P900,000
b. P1,550,000 d. P800,000
13. Nasugbu Company incurred the following costs during
the current year:
Quality control during commercial
production, including routine testing of
products P58,000
Laboratory research aimed at discovery of
new knowledge 68,000
Testing for evaluation of new products 24,000
Modification of the formulation of a plastic
product 26,000
Engineering follow-through in an early phase
of commercial production 15,000
Adaptation of an existing capability to a
particular requirement or customer's need
as a part of continuing commercial
activity 13,000
Trouble-shooting in connection with
breakdowns during commercial production 29,000
Searching for applications of new research
findings 19,000
What is the total amount Nasugbu should report as
research and development expense?
a. P137,000 c P198,000
b. P169,000 d. P213,000
14. Cavinti Company provided the following information
relevant to the research and development
expenditures for the current year:
Current period depreciation on the
building housing R and D activities P1,500,000
Cost of market research study 1,000,000
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Current period depreciation on a
machine used in R and D activities 500,000
Salary of R and D director 1,200,000
Salary of Vice-President who spends ¼
of his time overseeing R and D
activities 2,400,000
Pension costs for salary of R and D
director 50,000
Pension costs for salary of Vice-President 100,000
The R and D expense for the current period should be
a. P3,875,000 c. P4,875,000
b. P5,750,000 d. P3,800,000
15. Which statement is incorrect regarding the cost of an
intangible asset?
a. If an intangible asset is acquired separately, the
cost comprises its purchase price, including import
duties and taxes and any directly attributable
expenditure of preparing the asset for its intended
use.
b. If an intangible asset is acquired in a business
combination that is an acquisition, the cost is
based on its fair value at the date of acquisition.
c. If an intangible asset is acquired free of charge or
by way of government grant, the cost is equal to
its fair value.
d. If payment for an intangible asset is deferred
beyond normal credit terms, its cost is equal to the
total payments over the credit period.
16. Directly attributable costs of preparing the asset for its
intended use do not include
a. Costs of employee benefits (as defined in PAS 19)
arising directly from bringing the asset to its
working condition.
b. Professional fees arising directly from bringing the
asset to its working condition.
c. Costs of testing whether the asset is functioning
properly.
d. Administration and other general overhead costs.
17. The cost of internally generated intangible asset
includes the following, except
a. Cost of materials and services used or consumed in
generating the intangible asset
b. Cost to register a legal right
c. Salaries, wages and other employment related
costs of personnel directly engaged in generating
the asset
d. Expenditure on training staff to operate the asset
18. Which of the following describes a patent?
a. It gives the holder exclusive right to use,
manufacture, and sell a product or a process
without interference or infringement by others.
b. A word, phrase, or symbol that distinguishes or
identifies a particular entity or product.
c. The exclusive and assignable legal right, given to
the originator for a fixed number of years, to print,
publish, perform, film, or record literary, artistic, or
musical material.
d. A contractual arrangement under which the
franchisor grants the franchisee the right to sell
certain products or services, to use certain
trademarks or trade names, or to perform certain
functions, usually within a designated geographical
area.
FAR.2909
EXCEL PROFESSIONAL SERVICES, INC.
19. Batangas Company purchased a patent from the
inventor, who asked P110,000 for it. Batangas paid
for the patent as follows: cash, P40,000; issuance of
1,000 shares of its own ordinary shares, par P10
(market value, P20 per share); and a note payable due
at the end of three years, face amount, P50,000,
noninterest-bearing. The current interest rate for this
type of financing is 12 percent. Batangas Company
should record the cost of the patent at
a. P110,000 c. P95,590
b. P 98,800 d. P85,590
20. Which statement is correct regarding the amortization
of an intangible asset?
I. The cost less residual value of an intangible asset
with a finite useful life should be amortized over
that life
II. An intangible asset with an indefinite useful life
should not be amortized.
III. The maximum amortization period cannot exceed
twenty years.
a. I only c. I and III only
b. I and II only d. Neither I, II nor III
21. A consideration not relevant in determining the useful
life of the intangible asset is the
a. The period of control over the asset and legal or
similar limits on the use of the asset
b. Technical, technological, commercial or other types
of obsolescence
c. Expected actions of competitors or potential
competitors
d. Initial cost
22. The residual value of an intangible asset with a finite
useful life shall be assumed to be zero unless:
a. There is a commitment by a third party to
purchase the asset at the end of its useful life.
b. 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 a market
will exist at the end of the asset’s useful life.
c. Either a or b.
d. Neither a nor b.
23. The method of amortization used for an intangible
asset with a finite life
a. Need not reflect the pattern of use of the asset
b. Should be based on revenue that is generated by
an activity that includes the use of the asset
c. Should always be the straight-line method
d. Should be the straight-line method if the pattern of
use cannot be determined reliably
24. Which statement is correct regarding subsequent
expenditures on intangible assets?
a. The nature of intangible assets is such that, in
many cases, there are additions to such an asset
or replacements of part of it.
b. Most subsequent expenditures are likely to
enhance the expected future economic benefits
embodied in an existing intangible asset that meet
the definition of an intangible asset and the
recognition criteria.
c. Expenditures incurred after the initial recognition
of an acquired intangible asset or after completion
of an internally generated intangible asset are
rarely recognized in the carrying amount of an
asset.
d. All of these.
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25. Gooden Enterprises Inc. developed a new machine for
manufacturing baseballs. Because the machine is
considered very valuable, the company 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 P1,820,000
Research salaries and fringe benefits
for engineers and scientists 171,000
Cost of testing prototype 236,000
Legal costs for filing of patent 127,000
Fees paid to government patent office 25,000
Drawings required by patent office to
be filed with patent application 47,000
Gooden elected to amortize the patent over its legal
life. At the beginning of the second year, Gooden
Enterprises paid P240,000 to successfully defend the
patent in an infringement suit. At the beginning of the
fourth year Gooden determined that the remaining
estimated useful life of the patent was five years.
The carrying amount of the patent at the end of fourth
year is
a. P135,320 c. P1,649,680
b. P131,100 d. P 39,800
26. An entity purchases a trademark and incurs the
following costs in connection with the trademark:
One-time trademark purchase price P100,000
Nonrefundable taxes 5,000
Training sales personnel on the use of
the new trademark 7,000
Research expenditures associated with
the purchase of the new trademark 24,000
Legal costs incurred to register the
trademark 10,500
Salaries of the administrative personnel 12,000
Assuming that the trademark meets all of the
applicable initial asset recognition criteria, the entity
should recognized an asset in the amount of
a. P100,000 c. P146,500
b. P115,500 d. P158,500
27. The legal life of trademark is
a. Ten years
b. Twenty years
c. Seventeen years
d. The life of the creator plus fifty years
28. On January 1, 2020, Sassou Corp. acquired a copyright
on a book of photographs from the estate of a world
renowned photographer who died in late December
2019, for a price of P500,000. Sassou’s CEO knows
that copyrights normally cover the lifetime of the artist
plus 50 years, but she has heard of a recent court case
that extended the legal life by an additional 20 years.
Other similar books sold by Sassou for deceased
photographers typically remain popular for only 10
years. The carrying amount of the copyright at
December 31, 2020 should be
a. P500,000 c. P492,857
b. P490,000 d. P450,000
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29. On January 1, 2020, Five signed an agreement to b. Computer software for a computer-controlled
operate as franchisee of Clear Copy Service, Inc. for an machine tool that cannot operate without that
initial franchise of P680,000. Of this amount, specific software is an integral part of the related
P200,000 was paid when the agreement was signed hardware and it is treated as property, plant and
and the balance was payable in four annual payments equipment.
of P120,000 each, beginning January 1, 2021. The c. When the software is not an integral part of the
agreement provides that the down payment is not related hardware, computer software is treated as
refundable and no future services are required of the an intangible asset.
franchisor. The implicit rate for loan of this type is d. The operating system of a computer is treated as
14%. The agreement also provides the 5% of the an intangible asset.
revenue from the franchise must be paid to the
franchisor annually. Five’s revenue from the franchise 32. On 1 January 2020 an entity purchased a new software
for 2020 was P8,000,000. Five estimates the useful package to operate its production equipment for
life of the franchise to be ten years. The carrying P600,000, including P50,000 refundable purchase
amount of franchise as of December 31, 2020 is taxes. The purchase price was funded by incurring a
a. P494,680 c. P549,644 loan of P605,000 (including P5,000 loan origination
b. P538,733 d. P612,000 fees). The loan is secured against the software
licenses.
30. UR Company purchased a customer database and a
formula for a new fuel substitute for diesel fuel for a In January 2020 the entity incurred the following costs
total of P100,000. UR Company uses the expected in customizing the software so that it is more suited to
cash flow approach for estimating the fair value of the systems used by the entity:
these two intangibles. The appropriate interest rate is • Labor – P120,000
5%. The potential future cash flows from the two • Depreciation of plant and equipment used to
intangibles, and their associated probabilities, are as perform the modifications – P15,000.
follows:
Customer Database: In January 2020 the entity’s production staff were
Outcome 1 - 20% probability of cash flows of P10,000 trained in how to operate the new software. Training
at the end of each year for 5 years. costs included:
Outcome 2 - 30% probability of cash flows of P2,000 • Cost of an expert external instructor – P7,000
at the end of each year for 4 years. • Labor – P3,000.
Outcome 3 - 50% probability of cash flows of P200 at
the end of each year for 3 years. In February 2020 the entity’s production team tested
the software and the information technology team
Formula: made further modifications necessary to get the new
Outcome 1 - 10% probability of cash flows of P50,000 software to function as intended by management. The
at the end of each year for 10 years. following costs were incurred in the testing phase:
Outcome 2 - 30% probability of cash flows of P30,000 • Material, net of P3,000 recovered from the sale of
at the end of each year for 4 years. the scrapped output – P21,000
Outcome 3 - 60% probability of cash flows of P10,000 • Labor – P11,000
at the end of each year for 3 years. • Depreciation of plant and equipment while it was
used to perform the modifications – P5,000.
How much should be recognized as customer
database?
The new software was ready for use on 1 March 2020.
a. P11,060 c. P11,295
However, because of low initial order levels, the entity
b. P13,137 d. P 0
incurred a loss of P23,000 on operating the software
during March.
SOLUTION GUIDE:
Probability What is the cost of the software?
Outcome Present value Prob. weighted PV a. P550,000 c. P722,000
Database b. P685,000 d. P732,000
1 43,295 .2 8,659
2 7,092 .3 2,128 33. Pagsanjan Company incurred costs to develop and
3 545 .5 273 produce a routine, low-risk computer software product
Total 11,060 as follows:
Formula Completion of detail program design P1,500,000
1 386,087 .1 38,609 Cost incurred for coding and testing to
2 106,379 .3 31,914 establish technological feasibility 500,000
3 27,233 .6 16,340 Other coding costs after establishment of
Total 86,863 technological feasibility 2,500,000
Other testing costs after establishment of
31. Which statement is incorrect regarding intangible technological feasibility 2,000,000
assets contained in or on a physical substance such as Costs of producing product masters for
a compact disc (in the case of computer software), training materials 3,000,000
legal documentation (in the case of a license or patent) Duplication of computer software and
or film? training materials from product master 4,000,000
a. In determining whether an asset that incorporates Packaging product 1,000,000
both intangible and tangible elements should be
treated property, plant and equipment or as an What amount should be capitalized as software cost
intangible asset, an entity uses judgment to assess subject to amortization?
which element is more significant. a. P7,500,000 c. P4,500,000
b. P9,500,000 d. P8,000,000

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EXCEL PROFESSIONAL SERVICES, INC.

34. On January 1, 2020, Pila Company had capitalized cost LECTURE NOTES:
of P10,000,000 for a new computer software product
with an economic life of 4 years. Sales for 2020 for Determination of Goodwill
the software product amounted to P4,000,000. The
total sales of the software over its economic life are Specific attributes approach
expected to be P20,000,000. However, the pattern of
The attributes and components of goodwill are identified
the future sales from the computer software cannot be
and valued accordingly.
determined reliably. Pila should record amortization of
computer software in 2020 at Examples
a. P2,500,000 c. P5,000,000 • Highly advantageous strategic location
b. P2,000,000 d. P 0 • Superior management team
• Outstanding sales organization
35. Betterword Company is engaged in developing • Unusually good reputation in the industry
computer software. The following costs were incurred
during the current reporting period: Indirect valuation approach
Salaries of programmers doing research P235,000 Goodwill is the difference between the purchase price and
Expenses related to projects prior to the fair value of identifiable net assets acquired.
establishment of technological
feasibility 78,400 Excess earnings approach
Expenses related to projects after
technological feasibility has been Goodwill represents the expected value of future above-
established but before software is normal (superior) financial performance.
available for production 49,500
Amortization of capitalized software 1. Purchase of average earnings.
development costs 26,750 Average earnings Pxx
Costs to produce and prepare software Less normal earnings
for sale 56,300 (FV of NA x Normal rate of return) xx
Additional data: Excess earnings xx
Sales of products for the year P515,000 x number of years x
Goodwill Pxx
Beginning inventory 142,000
Portion of goods available for sale sold
2. Capitalization of average excess earnings
during the year 60%
Average earnings Pxx
Determine the company’s profit before tax. Less normal earnings
a. P 66,570 c. P55,870 (FV of NA x Normal rate of return) xx
b. P111,580 d. P76,810 Excess earnings xx
/ Capitalization rate %
SOLUTION: Goodwill Pxx
Sales P515,000
Less cost of sales: 3. Capitalization of average earnings
Inventory, beg. P142,000 Average earnings Pxx
Amort. of SDC 26,750 / Capitalization rate %
Production costs 56,300 Net assets, including goodwill xx
GAS 225,050 Less net assets, excluding goodwill xx
x COS ratio .6 135,030 Goodwill Pxx
Gross profit 379,970
Salaries of programmers (235,000) 4. Present value of average excess earnings
Expenses before TF ( 78,400) Average earnings Pxx
Profit before tax P 66,570 Less normal earnings
(FV of NA x Normal rate of return) xx
36. An asset representing the future economic benefits Excess earnings xx
arising from other assets acquired in a business x PVF using an appropriate rate xx
combination that are not individually identified and Goodwill Pxx
separately recognized is
a. Goodwill c. Trademark 39. RGW Industries purchased the net assets of SP
b. Patent d. Customer list Company for P1,300,000. A schedule of the net assets
of SP Company, as recorded on SP Company's books
37. Goodwill may be recorded when: at the time of the acquisition, is as follows:
a. It is identified within a company.
b. One company acquires another in a business Assets
combination. Cash P 31,000
c. The fair value of a company’s assets exceeds their Receivables 250,000
cost. Inventory 302,000
d. A company has exceptional customer relations. Land, buildings, and equipment (net) 350,000
Total assets P933,000
38. Internally generated goodwill is prohibited from Liabilities
recognition in the financial statements of an entity. Current liabilities P 90,000
The reason for this treatment is that: Long-term debt 185,000
a. Goodwill is not identifiable. Total liabilities P275,000
b. Goodwill is not measurable.
c. It is not comparable to any other intangible assets. Net assets (book value) P658,000
d. It is not prudent to recognize intangible assets.

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EXCEL PROFESSIONAL SERVICES, INC.

The following schedule shows the differences between 42. The owners of Majayjay Company are planning to sell
the recorded costs and market values of the assets of the business to new interests. The cumulative net
SP Company at the date of the acquisition: earnings for the past 5 years was P9,500,000. The
Cost Market current value of net assets of Majayjay Company was
Inventory P302,000 P400,000 P20,000,000. Goodwill is determined by capitalizing
Land, buildings, & average earnings at 8%. What is the amount of
equipment 350,000 390,000 goodwill?
Patents -0- 40,000 a. P1,900,000 c. P1,700,000
Purchased in-process b. P3,750,000 d. P1,250,000
research &
development -0- 300,000
Existing work force -0- 90,000 43. An investor purchased Lemery Travel Corporation.
Totals P652,000 P1,220,000 Lemery has one asset whose value exceeds its book
Liabilities P275,000 P 275,000 value by P10,000. Lemery's Equity is P80,000. The
investor agreed with Lemery that its excess earnings
Determine the amount of goodwill to be recognized on would last for 10 years. Lemery's average income for
the acquisition. negotiation purposes is P40,000 and the industry
a. P642,000 c. P 74,000 average rate of return is 30% on market value of net
b. P464,000 d. P164,000 assets. Using the "present value of excess earnings"
approach to the calculation of goodwill and an
SOLUTION: appropriate discount rate of 10%, what is the purchase
price paid for Lemery?
Purchase price P1,300,000
a. P335,782 c. P169,880
Less FV of net assets:
b. P220,000 d. P 79,880
Cash P 31,000
Receivables 250,000
Inventory 400,000
44. Which of the following intangible assets should be
PPE 390,000
shown as a separate item on the statement of financial
Patents 40,000
position?
In-process R&D 300,000
a. Goodwill c. Patent
Total 1,411,000
b. Franchise d. Trademark
Liabilities ( 275,000) 1,136,000
Goodwill P 164,000
45. An entity shall disclose the following for each class of
40. Acquiree Corporation's pretax accounting income for
intangible assets, distinguishing between internally
the year 2020 was P850,000 and included the
generated intangible assets and other intangible
following items:
assets:
Impairment of goodwill P60,000 I. Whether the useful lives are indefinite or finite
Amortization of identifiable intangibles 57,000 and, if finite, the useful lives or the amortization
Depreciation on building 80,000 rates used
Extraordinary losses 44,000 II. The amortization methods used for intangible
Extraordinary gains 150,000 assets with finite useful lives
Profit-sharing payments to employees 65,000 III. The gross carrying amount and the accumulated
amortization (aggregated with accumulated
Acquirer Corporation is seeking to purchase Acquiree impairment losses) at the beginning and end of the
Corporation. In attempting to measure Acquiree’s period
normal earnings for 2020, Acquirer determines that IV. The line item(s) of the statement of comprehensive
the fair value of the building is triple the book value income in which any amortization of intangible
and that the remaining economic life is double that assets is included
used by Acquiree. Acquirer would continue the profit- V. A reconciliation of the carrying amount at the
sharing payments to employees. What is the normal beginning and end of the period
earnings (for purposes of computing goodwill) of
Acquiree Corporation for the year 2020? a. I, II, III IV and V c. I, II and III only
a. P764,000 c. P844,000 b. I, II, III and IV only d. II, III, IV and V only
b. P804,000 d. P954,000

41. Liliw Company engaged your services to compute the 46. An entity shall disclose
goodwill in the purchase of Calauan Company which a. A description of any fully amortized intangible
provided the following: asset that is still in use.
b. A brief description of significant intangible assets
Net income Net assets
controlled by the entity but not recognized as
2017 P1,400,000 P 6,000,000
assets because they did not meet the recognition
2018 1,600,000 8,000,000
criteria in PAS 38.
2019 2,000,000 8,800,000
c. The aggregate amount of research and
2020 2,200,000 9,200,000
development expenditure recognized as an
Total P7,200,000 P32,000,000
expense during the period.
It is agreed that goodwill is measured by capitalizing d. All of the above.
excess earnings at 25% with normal return on average
net assets at 15%. How much is the purchase price
for Calauan Company?
a. P11,600,000 c. P10,400,000
b. P11,200,000 d. P11,000,000 - now do the DIY drill -

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EXCEL PROFESSIONAL SERVICES, INC.
DO-IT-YOURSELF (DIY) DRILL
1. PAS 38 applies to
a. Intangible assets that are not within the scope of
another Standard.
b. Financial assets, as defined in PAS 32 Financial
Instruments: Presentation.
c. The recognition and measurement of exploration
and evaluation assets.
d. Expenditure on the development and extraction of
minerals, oil, natural gas and similar non-
regenerative resources.
2. PAS 38 applies to
a. Intangible assets held by an entity for sale in the
ordinary course of business.
b. Goodwill acquired in a business combination.
c. Non-current intangible assets classified as held for
sale.
d. Computer software used in extractive industries.
3. Which of the following items qualify as an intangible
asset under PAS 38?
a. Advertising and promotion on the launch of a huge
product
b. College tuition fees paid to employees who decide
to enroll in an executive M.B.A. program at
Harvard University while working with the
company
c. Operating losses during the initial stages of the
project
d. Legal costs paid to intellectual property lawyers to
register a patent
4. According to PAS 38 Intangible assets, which of the
following statements about research and development
expenditure is incorrect?
a. Research expenditure, other than capital
expenditure on research facilities, should be
recognized as an expense as incurred.
b. In deciding whether development expenditure
qualifies to be recognized as an asset, it is
necessary to consider whether there will be
adequate finance available to complete the project.
c. Development expenditure recognized as an asset
must be amortized over a period not exceeding 5
years.
d. Capitalized development expenditure must be
disclosed in the statement of financial position
under intangible non-current assets.
5. Which statement is incorrect concerning internally
generated intangible asset?
a. To assess whether an internally generated
intangible asset meets the criteria for recognition,
an enterprise classifies the generation of the asset
into a research phase and a development phase.
b. The cost of an internally generated asset
comprises all expenditure that can be directly
attributed or allocated on a reasonable and
consistent basis to creating, producing and
preparing the asset for its intended use.
c. Internally generated brands, mastheads,
publishing titles, customer lists and items similar in
substance should not be recognized as intangible
assets.
d. Internally generated goodwill may be recognized
as an intangible asset.
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6. Which of the following costs would be capitalized?
a. Acquisition cost of equipment to be used on
current research project only.
b. Engineering costs incurred to advance the product
to the full production stage.
c. Cost of research to determine whether a market
for the product exists.
d. Salaries of research staff.
7. Laguna Company incurred P900,000 of research and
development cost to develop a product for which a
patent was granted on January 2, 2020. Legal fees
and other costs associated with the registration of the
patent totaled P200,000. On July 31, 2020, Laguna
paid P400,000 for legal fees in a successful defense of
the patent. The total amount capitalized for this
patent through July 31, 2020 should be
a. P1,500,000 c. P1,100,000
b. P 600,000 d. P 200,000
8. Alaminos Company acquired three patents in January
2020. The patents have different lives as indicated in
the following schedule:
Remaining Remaining
Patent Cost useful life legal life
A P2,000,000 10 8
B 3,000,000 5 10
C 6,000,000 Indefinite 15
Patent C is believed to be uniquely useful as long as
the company retains the right to use it. In June 2020,
the company successfully defended its right to Patent
B. Legal fees of P800,000 were incurred in this action.
The company’s policy is to amortize intangible assets
by the straight-line method to the nearest half year.
The company reports on a calendar-year basis. The
amount of amortization that should be recognized for
2020 is
a. P1,330,000 c. P1,250,000
b. P2,050,000 d. P 950,000
9. On January 1, 2020, Calamba Company signed an
agreement to operate as a franchisee of Bay Company
for an initial franchise fee of P30,000,000. Of this
amount, P10,000,000 was paid when the agreement
was signed and the balance is payable in equal annual
payment of P5,000,000 beginning December 31, 2020.
The agreement provides that the down payment is not
refundable and no future services are required of the
franchisor. Calamba’s credit rating indicates that it can
borrow money at 12% for a loan of this type.
How much is the cost of franchise?
a. P30,000,000 c. P21,541,500
b. P25,186,500 d. P19,065,000
10. Kuh Lafuh Company purchased a customer list and an
ongoing research project for a total of P400,000. Kuh
uses the expected cash flow approach for estimating
the fair value of these two intangibles. The
appropriate interest rate is 7%. The potential future
cash flows from the two intangibles, and their
associated probabilities, are as follows:
Customer List
Outcome 1 - 20% probability of cash flows of P50,000
at the end of each year for 5 years.
Outcome 2 - 30% probability of cash flows of P30,000
at the end of each year for 4 years.
Outcome 3 - 50% probability of cash flows of P10,000
at the end of each year for 3 years.
FAR.2909
EXCEL PROFESSIONAL SERVICES, INC.

Ongoing Research Project 13. Balete Company is negotiating to acquire Drive

Outcome 1 - 10% probability of cash flows of P500,000 Company. Balete manufactures and sells wood
at the end of each year for 10 years. burning stoves and Drive Company produces parts that
Outcome 2 - 10% probability of cash flows of P10,000 are required to manufacture stoves. Drive enjoys an
at the end of each year for 4 years. exceptional reputation and Balete management
Outcome 3 - 80% probability of cash flows of P100 at believes it can continue Drive’s level of income and
the end of each year for 3 years. satisfy its own need for parts. The recorded amounts
and current values of the assets and liabilities of Drive
How much should be recognized as customer list?
are:
a. P400,000 c. P 77,025
b. P 84,609 d. P322,975 Assets Liabilities
Recorded amounts P20,000,000 P8,000,000
11. Biñan Company incurred the following costs during Current values 25,000,000 5,000,000
2020: Drive’s earnings for the past 5 years averaged
Design of tools, jigs, molds and dies P5,000,000. This is believed to be a reasonable
involving new technology P2,500,000 estimate of future income. The level of income
Modification of the formulation of a normally experienced by enterprises similar to Drive is
process 3,200,000 15%. Balete and Drive agreed to capitalize average
Trouble shooting in connection of excess earnings at 25% in estimating the value of
breakdowns during commercial goodwill. How much should Balete pay in acquiring
production 2,000,000 Drive?
Adaptation of an existing capability to a a. P20,000,000 c. P28,000,000
particular customer’s need as part of b. P32,000,000 d. P20,500,000
a continuing commercial activity 2,200,000
In its 2020 income statement, Biñan should report
14. Which of the following disclosures does PAS 38 not
research and development expense of
require?
a. P2,500,000 c. P3,200,000
a. A description, the carrying amount and remaining
b. P4,700,000 d. P5,700,000
amortization period of any individual intangible
asset that is material to the entity’s financial
12. Toni Company purchases Pauleen Company for
statements.
P13,985,000 cash on January 1, 2020. The book value
b. The existence and carrying amounts of intangible
of Pauleen Company’s net assets reported on its
assets whose title is restricted and the carrying
December 31, 2019 statement of financial position was
amounts of intangible assets pledged as security
P12,620,000. Toni's December 31, 2019 analysis
for liabilities.
indicated that the fair value of Pauleen's tangible
c. Contractual commitments for the acquisition of
assets exceeded the book value by P560,000, and the
intangible assets.
fair value of identifiable intangible assets exceeded
d. Fair value of similar intangible assets used by its
book value by P245,000.
competitors.
How much goodwill should be recognized by Toni
Company when recording the purchase of Pauleen?
a. P 0 c. P 805,000
b. P560,000 d. P1,365,000
J - end of FAR.2909 - J

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