WEEK 1: Intangible Assets

Illustrative Problems

1. Defined by PAS38 as an identifiable non-monetary asset without physical substance.

A. Intangible asset C. Monetary asset
B. Goodwill D. Non-financial asset
2. Defined by PAS38 as the application of research findings or other knowledge to a plan or design for the
production of new or substantially improved materials, devices, products, processes, systems or services
before the start of commercial production or use.
A. Research and development C. Development
B. Research D. Process improvement
3. Defined by PAS38 as the original and planned investigation undertaken with the prospect of gaining new
scientific or technical knowledge and understanding.
A. Research and development C. Development
B. Research D. Process improvement
4. Defined by PAS38 as the estimated amount that an entity would currently obtain from disposal of the
asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the
condition expected at the end of its useful life.
A. Carrying amount C. Entity-specific value
B. Fair value D. Residual value
5. Defined by PAS38 as the present value of the cash flows an entity expects to arise from the continuing use
of an asset and from its disposal at the end of its useful life or expects to incur when settling a liability.
A. Carrying amount C. Entity-specific value
B. Fair value D. Residual value
6. Defined by PAS38 as the amount of cash or cash equivalents paid or the fair value of other consideration
given to acquire an asset at the time of its acquisition or construction, or, when applicable, the amount
attributed to that asset when initially recognized in accordance with the specific requirements of other
PFRSs.
A. Cost C. Carrying amount
B. Fair value D. Entity-specific value
7. Which is correct concerning the criterion of identifiability of an intangible asset?
I. An intangible asset is identifiable when it is separable, meaning, the asset could be sold, transferred,
licensed, rented or exchanged.
II. An intangible asset is identifiable when it arises from contractual or legal rights.
A. I only C. Both A and B
B. II only D. Neither A nor B
8. Which is incorrect concerning separate acquisition of an intangible asset?
A. If an intangible asset is acquired separately, the cost of the intangible asset can usually be measured
reliably.
B. The cost of an intangible asset comprises its purchase price and any directly attributable expenditure
on preparing the asset for its intended use.
C. If payment for an intangible asset is deferred beyond normal credit terms, its cost is equal to the total
payments over the credit period.
D. If an intangible asset is acquired in exchange for a nonmonetary asset or a combination monetary and
nonmonetary asset, the cost is measured at fair value unless the exchange transaction lacks
commercial substance.
9. If the intangible asset is acquired by way of exchange of assets and the transaction lacks commercial
substance, the intangible asset shall be measured initially at
A. Fair value of the asset given C. Carrying amount of the asset given
B. Fair value of the asset received D. Carrying amount of the asset received
10. A trademark is acquired by issuance of the entity’s own ordinary shares, the trademark shall be measured
initially at
A. Carrying amount of the trademark C. Fair value of the ordinary shares
B. Par value of the ordinary shares D. Fair value of the trademark
11. Choose the incorrect statement.
A. Internally generated goodwill shall not be recognized as an intangible asset.
B. Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance
should be not be recognized as intangible assets.
C. The cost of internally generated intangible asset comprises all directly attributable cost necessary to
create, produce and prepare the asset for its intended use.
D. Costs incurred during research phase and development phase are capitalized to intangible asset.

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12. Examples of directly attributable costs that are capitalized as cost of intangible assets least likely include
A. Costs of employee benefits (as defined in PAS19) arising directly from bringing the asset to its working
condition
B. Professional fees arising directly from bringing the asset to its working condition
C. Costs of conducting business in a new location or with a new class of customers
D. Costs of testing whether the asset is functioning properly.
13. The acquirer shall recognize __________ as the excess of the aggregate of the consideration transferred,
any non-controlling interest in the acquiree and the fair value of the acquirer’s previously held equity
interest in the acquiree; and the net identifiable assets acquired.
A. Organization cost C. Business combination asset
B. Goodwill D. Non-monetary asset
14. Research activities do not include
A. Design, construction and testing of pre-production or pre-use prototypes and models
B. Activities aimed at obtaining new knowledge
C. Search for, evaluation and final selection of, applications of research findings or other knowledge
D. Formulation, design, evaluation and final selection of possible alternatives for new or improved
materials, devices, products, processes, systems or services.
15. Subsequent measurement of intangible asset includes
A. Cost model and fair value model C. Revaluation model and impairment model
B. Cost model and revaluation model D. Revaluation model and fair value model
16. Which of the following statements regarding impairment of intangible asset is false?
A. The amortization charge is recognized in profit or loss unless another PFRS requires that it be included
in the cost of another asset.
B. The amortization period should be reviewed at least annually.
C. Amortization of an intangible asset is over its legal life or useful life whichever is longer.
D. The residual value of an intangible asset is presumed to be zero unless a third party is committed to
buy the intangible asset at the end of its useful life or unless there is an active market.
17. Which of the following costs incurred for internally developed computer software is capitalized as cost of
the intangible asset?
A. Directly attributable cost incurred before a technical feasibility has been established.
B. Cost of coding, testing and cost to produce the product master after technological feasibility has been
established.
C. Cost incurred to actually produce and package the software from masters.
D. All of the foregoing.
18. An entity has two patents that have allegedly been infringed by competitors. After investigation, legal
counsel informed the entity that it had a weak case on patent P1 and a strong case regard to patent P2.
Patent P1 was unsuccessfully defended while patent P2 was successfully defended. Both patents have a
remaining legal life of 8 years. How should the entity account for these legal costs incurred relating to the
two patent?
A. Expensed for P1 and capitalized for P2 C. Capitalized for both P1 and P2
B. Expensed for both P1 and P2 D. Capitalized for P1 and Expensed for P2
19. Which of the following would most likely be capitalized as intangible asset?
A. Website development costs C. Internally generated brand, masthead, customer list
B. Organization costs D. Internally developed computer software
20. Which of the following should be expensed as incurred by the franchisee for a franchise with an estimated
useful life of ten years?
A. Amount paid to the franchisor for the franchise
B. Payment to a company, other than the franchisor, to obtain the franchise.
C. Legal fees paid to the franchisee’s lawyers to obtain the franchise.
D. Periodic payments to the franchisor based on the franchisee’s revenue.
21. A computer software purchased s an operating system for the hardware or as an integral part of a
computer controlled machine tool that cannot operate without the specific software should be treated as
A. Intangible asset C. Inventory
B. Property, plant and equipment D. Expense
22. The legal life of patent is
A. 20 years C. 10 years
B. 20 years, renewable for another 20 years D. 10 years, renewable for another 10 years
23. Dimatanaw Company exchanges the rights to distribute a product in Baliuag which have a carrying amount
of P2,000,000, for cash of P1,000,000 and the rights to distribute the same product in Bustos, with a fair
value of P1,400,000. The exchange is considered having the necessary commercial substance. At the time
of exchange, the intangible asset should be initially recorded by Dimatanaw at
A. 1,000,000 C. 2,000,000
B. 1,400,000 D. 2,400,000
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24. Dimakita Company purchases a trademark from an overseas company to manufacture items under the
trademark. Dimakita incurs the following costs in purchasing the trademark: Amount paid for the
trademark, P8,000,000; Import duties, P80,000; Legal fees (negotiating the deal and ensuring the term of
the trademark are fair), P100,000; Training costs (required by overseas company before the trademark can
be used), P20,000; Advertising new product, P30,000 and cost of registering the trademark (required in
terms of the agreement with supplier), P90,000. What amount should the trademark be initially recorded?
A. 8,180,000 C. 8,290,000
B. 8,270,000 D. 8,320,000
25. Dimahawakan Company purchased a patent on January 1, Year 1 for P428,400. The patent was being
amortized over its remaining legal life of 15 years. On January 1, Year 4, Dimahawakan determined that the
economic benefits of the patent would not last longer than 10 years from the date of acquisition. What
amount should be reported in the balance sheet as patent, net of accumulated amortization at December
31, Year 7?
A. 146,880 C. 244,800
B. 195,840 D. 302,400
26. On July 1, Year 1, Dimasalat Inc. signed an agreement to operate as a franchise of Tire Co. for an initial
franchise fee of P1,200,000. On the same date, Dimasalat paid P400,000 and agreed to pay the balance in
four equal payments of P200,000 beginning July 1, Year 2. The down payment is not refundable and no
future service are required of the franchisor. The company can borrow at 14% for a loan of this type. PV of
an ordinary annuity of 1 is 2.914 while PV of an annuity due of 1 is 3.322. What is the carrying value of the
franchise to be reported on December 31, Year 3 statement of financial position assuming the franchise
has a definite life of 20 years?
A. 859,950 C. 1,110,000
B. 982,800 D. 1,352,000
27. The R & D division of Dimaaninag Company undertakes both research and development activities of the
company. Its current development project on a prototype is near completion. The cost identified in this
project consists of the following:
Cost of materials used P5,000,000
Salaries of consultants for the projects 2,000,000
Fees to register trade designs 50,000
Amortization of the patent used in this project 100,000
Selling and administrative overheads allocated 1,000,000
Initial operating losses 500,000
Training costs to operate the asset __100,000
Total P8,750,000
The other costs that related to this project are the salaries of scientist and technicians (P1,200,000) and
depreciation of equipment used in the research and development activities (P900,000). Management
estimates that about one third of these costs relate to the development project. What amount of
development costs that should be capitalized as intangible asset?
A. 7,150,000 C. 8,250,000
B. 7,850,000 D. 8,750,000
28. Ditotoo Company incurred P1,500,000 to develop a computer software product. P400,000 of this amount
was expended before technological feasibility was established in early Year 1. The product will earn future
revenues of P4,000,000 over its 5-year life, as follows: Year 1 – P1,000,000; Year 2– P1,000,000; Year 3 –
P800,000; Year 4 – P800,000; and Year 5 – P400,000. The internally developed software is expressed as a
measure of revenue and it can be demonstrated that revenue and the consumption of economic benefits
of the intangible asset are highly correlated. What portion of the computer software costs should be
expensed in Year 1?
A. 220,000 C. 275,000
B. 620,000 D. 675,000
29. The owners of Invisible Co, are planning to sell the business to new interests. The cumulative net earnings
for the past five years amounted to P16,500,000 including expropriation loss of P1,500,000. Goodwill is
measured by capitalizing excess earnings at 25% with normal earnings at 20%. The fair value of net assets of
the entity at current year-end was P10,000,000. What is the goodwill from acquisition?
A. 6,400,000 C. 4,400,000
B. 4,000,000 D. 5,200,000
30. Abstract Co. was granted a patent on January 1, Year 1 and appropriately capitalized P4,500,000 of related
costs. The entity was amortizing the patent over the estimated useful life of 15 years. During Year 4, the
entity paid P1,500,000 in legal costs in successfully defending an attempted infringement of the patent. After
the legal action was completed, the entity sold the patent to the plaintiff for P7,500,000. The policy is to take
no amortization in the year of disposal. What amount should be reported as gain from sale of patent?
A. 1,500,000 C. 2,700,000
B. 2,400,000 D. 3,900,000
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31. On January 1, Year 1, Untouchable Co. purchased a patent from an original patentee for P2,400,000. The
remaining legal life of the patent is 15 years but the useful life is only 12 years. On January 1, Year 2 the entity
paid P550,000 in successfully defending the patent in an infringement suit filed against the entity. On January
1, Year 3, the entity acquired a competing patent for P1,500,000. The competing patent has a remaining legal
life of 15 years but it is not to be used because it was intended to protect the original patent. What is the
carrying amount of the patent on December 31, Year 3?
A. 3,150,000 C. 3,200,000
B. 3,600,000 D. 3,500,000
32. Obscure Co. incurred research and development costs in the current year as follows:
Equipment acquired for use in various research and development 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 is the research and development expense the current year?
A. 850,000 C. 1,235,000
B. 1,085,000 D. 1,285,000
33. Indeterminate Co. made the following expenditures relating to Product Zee:
Legal costs to file a patent on Product Zee. Production of the finished product would
have not been undertaken without the patent 100,000
Special equipment to be used solely for development of Product Zee. 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 total amount of costs should be expensed when incurred?
A. 2,800,000 C. 2,950,000
B. 3,400,000 D. 3,500,000
34. Unforeseeable Co. made the following expenditures during the current year:
Cost to develop computer software for internal use 1,000,000
Cost to market research activities 750,000
What amount should be reported as research and development expense?
A. 1,750,000 C. 750,00
B. 1,000,000 D. None
35. On January 1, Year 1, Incomprehensible Co. purchased a patent for a new customer product for P900,000.
At the time of purchase, the patent was valid for 15 years. However, the useful life was estimated to be only
10 years due to the competitive nature of the product. On December 31, Year 4, the product was
permanently withdrawn from sale under governmental order because of potential health hazard in the
product. What amount should be charged against income during Year 4, assuming amortization is recorded
at the end of each year?
A. 720,000 C. 540,000
B. 630,000 D. 90,000
36. On January 1, Year 3, Indeterminable Co. reported patent cost of P1,920,000 and related accumulated
amortization of P240,000. The patent was purchased on January 1, Year 1 at which date the remaining legal
life was 16 years. On January 1, Year 3, the useful life of the patent was determined to be only 8 years from
the date of acquisition. On January 1, Year 3, the entity paid P800,000, of which three-fourths was for
trademark, and one-fourth was for the other entity’s agreement not to compete for a five-year period in the
line of business covered by the trademark. The entity considered the life of the trademark indefinite.
Moreover, the entity agreed to pay P50,000 to the other entity as consulting fee each year for 5 years payable
every January 1. What is the amortization of intangible assets for Year 3?
A. 320,000 C. 250,000
B. 280,000 D. 370,000

- End of discussion

“Success is no accident. It is hard work, perseverance, learning, studying, sacrifice and most of all, love of what you
are doing or learning to do.” Pele

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