SCHOOL OF ACCOUNTANCY, BUSINESS and HOSPITALITY

Accountancy Department

ACCT 1056- Intermediate Accounting 2

First Semester, SY 2023-2024

EXERCISES
Intangible Assets – IAS 38

Make sure you have solved the following problems before attending our meeting. Please write
your complete solution in your Journal of Learnings (JoL) or notebook. Volunteers for recitation
are encouraged during the discussion of the exercises.

PROBLEM 1

Apple Limited is a successful engineering business. Over the past number of years, the company has
achieved a market share for its products of 30%. At a recent board meeting, the directors suggested
recognizing an intangible asset for this market share.

A series of statements is provided below. Determine whether each statement is correct or not
relevant to recognition of Intangible Assets. Write the word “TRUE” if the statement is correct,
otherwise write “FALSE”.

1. The market share does not have physical substance, is a result of past event and future
economic benefits can be expected through sales made to customers.
2. There is little or no control over a market.
3. The market share is not separable from the business and does not arise from legal rights.
4. The market share qualifies for recognition as intangible asset.

PROBLEM 2
Extracts from the financial records of ABC Inc. for the year ended 2019 are as follows:
Goodwill generated by the company due to an exceptional employee workforce Undeterminable
Advertising expenditure to generate goodwill for the company upon its start-up
Goodwill acquired in a business combination
Patent acquired from another business
Customer lists
Miscellaneous research expenses
Development expenses demonstrating 5 out of 6 criteria in PAS 38 par. 57
Development expenses demonstrating 6 out of 6 criteria in PAS 38 par. 57
In-process R&D costs acquired in a business combination at fair value
Intangible asset acquired through a government grant, at fair value
Equipment acquired for use in various R&D projects
Depreciation on the above equipment
Cost of materials used in R&D projects
Compensation for R&D personnel
Outside consulting fees
Indirect costs allocated to the R&D
Legal costs to file a patent on a certain product; production of which would not have been
undertaken without the patent
Special equipment to be used solely for the development of the product mentioned above;
the equipment has no other use and has a useful life of 4 years
Labor and material costs incurred in producing prototypes 2,000,000
Cost of testing the prototype

Required
Compute for the total amount of intangible assets to be recognized and the amount to be immediately
expensed.

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 PROBLEM 3
During 2019, ABC Inc. incurred costs to develop and produce a routine, low-risk computer
software product as follows:
Completion of detailed program design or working model P1,300,000
Cost 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 master 2,500,000
Packaging product 900,000

Required
Compute for the amount to be capitalized as intangible assets.

PROBLEM 4

Beehive Limited is a company that owns a number of intangible assets. A list of the intangible assets
owned by Beehive Limited together with some detail is provided below:

• A brand called ‘Orange blossom’. This brand was acquired on April 1, 2016 for P2 000 000. The
life of the ‘Orange blossom’ brand is expected to be ten years. There is no active market for this
brand.

• A brand called ‘Infused ginger’. This brand has been developed by Beehive Limited during 2016
at a cost of P300 000 (incurred in May 2016). The life of the ‘Infused ginger’ brand is expected to
be ten years. There is no active market for this brand.

• A lollipop that can be used as a flashlight in the dark is currently being developed. The initial
research into the technical feasibility of this product and its potential market cost P800 000 during
2014. Development began on March 1, 2014 and has cost Beehive Limited a total of P34 000 000
to December 31, 2016. All criteria were met for capitalization of development costs in 2014.
Throughout 2015, cash flow problems resulted in Beehive Limited being unsure of their ability to
continue the development of this prototype. The cash flow problems were resolved in early
January 2016 with the securing of a loan liability from Dodge Bank. Development costs were
incurred evenly over the three years.

• The right to manufacture under a patent for a period of five years was purchased on September
1, 2016 for P5 000 000. The patent has an expected life of twenty years. This patent may be
renewed for a further period of three years for a sum of P30 000 which is considered insignificant
cost.

Required: Determine the following:

1. Capitalizable cost of:

a. Orange blossom.
b. Infused Ginger
2. On Lollipop:
a. Capitalizable cost as of December 31, 2014.
b. Capitalizable cost as of December 31, 2015.
c. Capitalizable cost as of December 31, 2016.
3. On Patent:
a. Amortization period.
b. Amortization for 2016.

PROBLEM 5

Yoyo has, for many years, manufactured a yoghurt drink called ‘Yog-Nog’. This brand name was originally
acquired 10 years ago from a competitor company. The cost of this acquisition came to P800 000, which
was duly capitalised. No amortisation had been processed against this brand name since the brand was

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already 80 years old at the time of acquisition and, at that time, there was no indication that demand for
this drink was diminishing.

Sales of Yog-Nog have, in recent times, been falling. The marketing department, after much research into
the related consumer behaviour, suggested that the fall in sales was related to the outdated brand name
of the drink. The suggestion was accepted and the drink was re-launched as ‘Yogi-Yippi’ during late
December 2016. The cost of re-launching the drink came to P450 000 and was capitalised as a Yogi-
Yippi Brand name since it was expected that sales would now improve.

The previous brand name, ‘Yog-Nog’, with a carrying amount of P800 000, was expensed in full in the
current year ended December 31, 2016.

Required:

1. Is the capitalization of Yogi-Yippi properly made under IAS 38?

2. Assuming the write-off of Yog-Nog was properly made, what is the total amount that
should be expensed for the year ended December 31, 2016?

PROBLEM 6

Carrot Limited manages and operates toll roads on major national routes throughout the country. The
company purchased a license to operate a toll road in the Eastern Cape seventeen years ago for an
amount of P10,000,000. It was expected that the toll road would be in use for twenty years and the
economic benefits will flow to the entity evenly over the twenty-year period. The estimated toll road usage
is 1,000,000 cars per year. At the time, there were no plans to construct alternative routes in the area.
There is no active market for toll road licenses.

During the current year, the government announced plans, and construction began on a bridge in the
area that would significantly reduce usage of the toll road. The directors estimated that the economic
benefits flowing to the entity would decrease each year over the remaining three years. The estimated toll
road usage is expected to drop to 800 000 cars, 600 000 cars and 400 000 cars, respectively, over the
remaining three years of the license.

The right to operate the toll road was correctly recognized as an intangible asset upon purchase
seventeen years ago.

Required: Determine the following:

1. Amortization during the 1st year.

2. Amortization during the 18th year.
3. Carrying value at the end of the 19th year.

PROBLEM 7

Mince Limited is a company manufacturing and retailing food product. The current financial year ends on
December 31, 2016. The company owns one brand name, ‘pie’, shown in the balance sheet at its carrying
amount of P300 000. The right to manufacture under this brand name for a period of 30 years was
purchased on January 1, 2013 for P300 000. These rights may be renewed at a cost of PIO 000 (an
immaterial cost to the company). The brand name is considered to have an indefinite useful life. Mince
Limited intends not to calculate the recoverable amount of this brand at December 31, 2016 since a
detailed calculation of the recoverable amount was done at the end of 2015 on which date there was an
immaterial difference between the recoverable amount and carrying amount and there appears to be no
indication of an impairment after having performed the indicator review.

Required:

1. Mince has made the correct decision of non-calculation of recoverable amount on

December 31, 2016. (True or False?)
2. Carrying value of the intangible asset as of December 31, 2016.

PROBLEM 8
ABC Inc. has the following details for two of its intangible assets:
• On January 1, 2019, ABC Inc. 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, 2020,
the entity paid P550,000 in successfully defending the patent in an infringement suit filed against the
entity. On January 1, 2021, the entity acquired a competing patent for P1,500,000. The competing

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 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.

• On January 1, 2019, ABC Inc. purchased a trademark for P7,140,000. The trademark is being
amortized over its remaining legal life of 15 years. During 2022, the entity determined that the
economic benefits of the trademark would not last longer than ten years from the date of acquisition.

Required
Compute for the carrying amount (i.e. cost net of accumulated amortization) of the intangibles on
December 31, 2022.

PROBLEM 9
On January 1, 2019, ABC Inc. acquired the following intangible assets:
• A trademark for P3,000,000. The trademark has 8 years remaining in its legal life. It is anticipated that
the trademark will be renewed in the future, indefinitely, without problem.
• A patent for P6,000,000. Because of market conditions, it is expected that the patent will have
economic life for just 5 years, although the remaining legal life is 10 years.

On December 31, 2019, the intangible assets are assessed for impairment. Because of a decline in the
economy, the trademark is expected to generate cash flows of just P120,000 per year. The useful life of
the trademark still extends beyond the foreseeable horizon. The cash flows expected to be generated by
the patent are P1,000,000 annually for each of the next 4 years. The appropriate discount rate for all
intangible assets is 6%. The present value of an ordinary annuity of 1 at 6% for four periods is 3.46. The
fair value less cost to sell of the patent is P3,200,000.

Required
Compute for the total amount of impairment loss for the year then ended.

Prepared by Jerome D. Marquez, IA 2 Instructor

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