August 8, 2014
Problem 1
The following costs are generally incurred by a newly established entity: 5,000,000
Pre-operating cost of a business facility 375,000.00 60,000
Purchased recipes and secret formula 225,000.00 100
Training, customer loyalty and market share 210,000.00 30
Licensing, royalty and stand-still agreement 450,000.00
Operating and broadcast rights 168,000.00
Goodwill purchased in a business combination 750,000.00
A license to manufacture a steriod by means of a govrnment grant 225,000.00
Cost of courses taken by management in quality engineering management 675,000.00
A television advertisement that will stimulate the sales in technology industry 150,000.00
Investment in associate 750,000.00
6 month lease payment in advance 450,000.00
Cost of equipment acquired through a finance leaase 150,750.00
Internally developed customer list 180,750.00
Cost incurred in the corporation's formation and organization 345,000.00
Operating lossess incureed in the start up of the business 195,000.00
Initial franchise fees paid 262,500.00
Continuing franchise fees 75,000.00
Internally generated goodwill 1,200,000.00
Cost of testing in search for a prodcut alternative 187,500.00
Cost of purchasing a patent from an inventor 205,500.00
Legal cost in securing a patent 105,000.00
Legal costs incured in successfully defending a patent 83,250.00
Cost of developing brands, mastheads and publishing title 300,000.00
Cost of purchasing a trademark 375,000.00
Computer software for a computer-controlled machine that cannot operate without
that specific software 488,250.00
An operating system of a computer 187,500.00
Amount paid to a lessor for the exclusive right to rent a facility under an operating lease agreement
for a period of ten years 150,000.00
Cost of improvements on a leased facility 375,000.00
How much from the above items can be recognized as intangible assets?
Problem 2
On January 2, 1011, David Inc acquired copy rights to the original recording of a famous singer. The agreement with the singer allows
to record and rerecord the songs of the singer for a period of 5 years. During the initial 6 month period of the agreement, the singer was very sick
and consequently cannot record. The studio time that was blocked by the company had to be paid even during the period the singer could not sing.
The following costs were incurred by the company.
Legal cost of acquiring the copay rights 15,000,000.00
Documentation expenses related to the copy acquisition 1,500,000.00
Operational loss (studio time lost) 3,000,000.00
Massive advertising campaign to launch the artist 1,500,000.00
Base on the above information, ascertain the following:
1) How much should the copy right be initially recognized?
2) What is the carrying value of the copy right as of December 31, 2011?
Problem 3
On December 26, 2011, ZANDRA CO. obtained a franchise from DONDIE Corp. to sell for 20 years DONDIE products. The initial franchise fee
as agreed upon shall be P15,000,000 and shall be payable in cash P1,500,000, when the contract is signed and the balance in five equal installments
every December 31 thereafter as evidenced by a non-interest bearing note. The agreement provides that the franchisor shall provide the necessary
initial services required under the franchise contract. By the end of the year, the company has performed all the initial services which
costed DONDIE P2,246,592.
Use 4 decimal places for PV factors 1,500,000
Assuming that the franchis could borrow money at 12% interest, determine the following: 2,700,000
1) How much should the franchise be initially recorded? 20
2) What is the carrying value of the franchise on December 31, 2012?
Problem 4
JOHN Corp. is developing a new production process. During the year, total expenditure amounted to P1,500,000 of which P1,350,000 was incurred
before December 1, 2011 and P150,000 was incurred between December 1 to December 31 of the same year. The entity was able to demonstrate
that at December 1, the productionb process met the criteria for recognition as an intangible asset. The recoverable amount of the know-how
embodied in the process (including cash outflows to compute the process before it is available for use) is estimated to be P750,000.
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August 8, 2014
During 2012, expenditure incurred is P3,000,000. At the end of 2012, the recoverable amount of the know-how embodied in the process
(including further cash outflows to complete the process before it is available for use) is estimated to be P2,850,000.
Based on the above information, ascertain the following: 2,850,000
1) How much should the related intangible asset be initially recognized in 2011? 3,000,000
2) How much should the intangible be recognized as of December 31, 2012?
Problem 5
LLUBEL, INC. holds a valuable patent on a precipitator that prevents certain types of air pollution LLUBEL does not manufacture or sell the
products it develops. Instead, it conducts research and develops products and processes which it patents and then signs patents to manufactures
on a royalty basis. Occasionally it sells patents. The following presents the summary of the activities in relation to the aforementioned patent:
2003 Research aimed at the discovery of the new technology 5,760,000.00
1/5/2004 Design and construction of a prototype 1,314,000.00
3/15/2004 Testing the prototype model 630,000.00
1/2/2005 Legal and other professional fees to process the patent application
(useful life = legal life) 930,000.00
12/10/2007 Legal fees padi to successfully defending the device patent 535,500.00
1/3/2009 Acquisition of the competitive patent aimed for protecting old patents for
that shall increase company sales 609,000.00
1/5/2010 Acquisition of the related patent which extended the life of the patents for
additional 2 years 981,562.50
12/31/2012 Legal fees paid to unsuccessful patents infringement suit against a competitor 375,000.00
Based on the above information, ascertain the following: 20
1) What is the correct cost of the patent upon initial recognition?
2) What is the carrying value of the patent on December 31, 2005?
3) What is the carrying value of the patent on December 31, 2009?
4) What is the carrying value of the patent as of December 31, 2011?
5) What is the total cost from patent write off should be recognized in 2012?
Problem 6
NADEL Corp's patents had carrying value amounting to P840,000 as of December 31, 2012, before amortization. All patents were purchased
on January 2, 2004, 6 years after their registration. Thus, these patents are being amortized over their remaining legal life from date of purchase.
Legal expenses in successfully defending the patent totaling to P112,500 were debited to the amount of January 2009. Amortization in 2009-2011
included amortization on the P112,500 for the remaining life of the relevant patent. It is determined that the P112,500 should have been expensed
in 2009. It is further determined that one of the patents has a remaining life of only 3 years as at the beginning of 2012. This patent was orginally
assigned a cost of P315,000. 840,000
Based on the above information, ascertain the following: 315,000
1) What is the correct amortization for 2012?
2) What is the adjusted carrying value of the patents as of December 31, 2012?
3) What is the retroactive adjustment to the beginning retained earnings, if there are any, as a result of your audit?
Problem 7
VERGILE CORP maintains the following items in its intangibles account as of fiscal year ended June 30, 2012:
Research (RED MICAH) 98,475.00
Copyrights 94,500.00
Goodwill 48,000.00
Audit findings:
a) Research RED MICAH is for a research project which consist of the following charges:
Salaries of research staff 27,750.00
Patent acquired solely for the use of the project 18,000.00
Special equipment acquired and useful for various similar research activities 15,000.00
Patent acquired for use in several research projects
including project (RED MICAH) 24,300.00
Cost of pilot models 13,425.00
Total 98,475.00
The patent has generally been foud to be useful for approximately ten years while the special equipment useful for 5 years. You have further
discovered both patents and the specialized equipment were acquired at the beginning of the fiscal year and that cost of models and salaries
were incurred evenly throughout the fiscal year. Amortization is yet to be made on the related intangible.
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August 8, 2014
b) The company's copyright were accounted as follows:
Copyright R23 1/2/2008 25 YEARS 45,000.00 1
Copyright B42 7/15/2009 15 YEARS 49,500.00 4/5
You have discovered that the company made no amortization on the above intangibles from the year of acquisition.
c) The company's goodwill was acquired as part of business combination when it acquired the net assets of JM Corp at an acquisition cost
amounting to P2,373,000 on Feb 24, 2010. JM's net assets were carried in its book at P2,325,000 while their fair value aggregated to P2,340,000.
d) Management has now decided to correct its past accounting treatment deciding to use the straight line method of amortizing intangibles
computed to the nearest half year. 2,373,000
1) What is the carrying value of the following intangibles: 2,340,000
a) Project RED MICAH
b) Patent
c) Copyrights
d) Goodwill
2) How much should be recognized as research expense for the fiscal year 2012?
3) How much is the amortization expense for the copyrights in fiscal year 2012?
4) How much is the amortization expense for the goodwill in fiscal year 2012?
Problem 8
EDWARD Corp. is engaged in developing computer software for small business at home computer market. Most of the computer programmers
are involved in development work designed to produce software that will perform fairly specific tasks in user - friendly manner. Extensive testing
of the working model is performed before it is released to production for preparation of masters and further testing. As a result of careful
preparation, EDWARD Corp. has produced several products that have been very successful in the market place. The following costs were incurred
during 2012:
Salaries and wages of programmers doing research 660,000.00
Expenses related to projects prior to establishments of technological feasibility 470,400.00
Cost of completing the detailed program design 750,000.00
Cost of coding the product master after technizal feasibility has been established 141,000.00
Cost of testing the product master after technical feasibility has been established 156,000.00
Amortization of capitalized softwaare development cost from current and prior years 160,500.00
Cost to produce and prepare software for sale 337,800.00
Additional data for 2012:
Sales of products for the year 3,090,000.00
Beginning inventory 852,000.00
Portion of goods available for sale sold during the year 60%
Based on the above and the result of your audit, determine the following:
1) Amount to be capitalized as software development cost subject to amortization
2) Cost of ending inventory
3) Total amount related to the development of computer software that should be expensed when incurred
Problem 9
HOWARD Corp acquired a patent right on July 1, 2007 for P250,000. The remaining a legal life on the date of purchase is 15 years. However, due to
rapidly changing technology, management estimates that the remaining useful life on July 1, 2007 is only 5 yrs.
At Jan 1, 2008, management is uncertain that the process can actually be made economically feasible and decides to write down the patent to an
estimated recoverable amount of P75,000. Amortization will be taken over 3 years from that point.
On Jan 1, 2010, having perfected the related production process, the entity adopts the revaluation model to measure the patent. The patent now
has a fair value of P 300,000. Furthermore, the estimated remaining useful life is now believed to be 5 yrs. 250,000
Based on the above information, determine the following: 75,000
1) How much is the loss on impairment on Jan 1, 2008 300,000
2) How much can be recognized as gain on impairment recovery in Jan 2010
3) How much is the revaluation surplus as of Jan 1,2010
4) Carrying value 12.31.2010
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