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Problem 1

Acquisition and Amortization of Intangible Assets


The INTANGIBLES COMPANY engaged in the following transactions at the beginning
of 2014:
1. Purchased a patent for P700,000 that had originally been filed in January
2008. The acquisition was made to protect another patent that the company
had filed in January 2010 and subsequently received.
2. Purchased the rights to a novel by a best-selling novelist in exchange for
100,000 ordinary shares (P10 par) selling P60 per share. The books sells 1
million copies in 2014 and is expected to sell a total of 500,000 copies in the
future years.
3. Purchased the franchise to operate a ferry service from the government for
P100,000. A bridge has been planned to replace the ferry, and it is expected
that it will be completed in five years. The company hopes that the ferry will
continue as a tourist attraction, but profits are expected to be only 20% of
those earned before the bridge is opened.
4. Paid P280,000 to attorneys for services to successfully defend the patent
acquired in transaction 1.
5. Paid a taxi operator P500,000 to have the company name prominently
displayed on his taxis for two years.
Based on the preceding information, determine the carrying value of the following
at the end of 2014:
1. Patent
a. P630,000
b. P656,250
c. P910,000
d. P650,000
2. Copyright
a. P2,000,000
b. P0
c. P3,000,000
d. P4,000,000
3. Franchise
a. P100,000
b. P84,000
c. P80,000
d. P76,000
Solution P1
1.
Cost of Patent
Amortization for 2014 (P700,000/14

P700,00
0
(50,000)

years)
Carrying value, December 31, 2014

P650,00
0

Answer: D
The competing patent purchased to protect another patent with a life of 16
years has a remaining legal life of 14 years and should be amortized over the
period.
2.
Cost of copyright
Amortization for 2014 (P6,000,000 x
1 million/ 1.5 million)
Carrying value, December 31, 2014

P6,000,00
0
(4,000,00
0)
P2,000,00
0

Answer: A
3.
Cost of franchise
Amortization for 2014 (P100,000/5)
Carrying value, December 31, 2014
Answer: C

P100,00
0
(20,000)
P80,000

Problem 2
Acquisition and Amortization of Intangible Assets
The following independent situations relate to the audit of intangible assets. Answer
the question/s at the end of each situation.
Situation 1
YOLING INDUSTRIES reports the following patents on its December 31, 2013
statement of financial position.
Initial
cost
Patent
A
Patent
B
Patent
C

Date of
acquisition

P1,224,00 March 1,
0 2010
250,000 July 1, 2011
432,000 Sept. 1,
2012

Useful life
(at date of
acquisition)
17 years
10 years
4 years

The following events occurred during the year ended December 31, 2014.

1. Research and development costs of P737,100 were incurred during the year.
These costs were incurred prior to projects achieving economic viability.
2. Patent D was purchased on July 1 for P855,000. It has a remaining life of 9
years.
3. A possible impairment of Patent Bs value may have occurred at Dec.
31,2014. This is due to a significant reduction in the demands for certain
products protected by Patent B. The companys controller estimates the
following future cash flows from Patent B.
December 31,
P60,00
2015
0
December 31,
60,000
2016
December 31,
60,000
2017
The appropriate discount rate to be used for these cash flows is 8%.
1. What is the total carrying value of Yolings patents on December 31, 2013?
a. P2,383,500
b. P1,390,620
c. P2,106,000
d. P1,573,500
2. What amount of impairment loss should be reported by Yoling for the year
ended December 31, 2014?
a. P137,880
b. P292,500
c. P337,500
d. P154,620
3. What is the total carrying value of Yolings patents on December 31, 2014?
a. P1,969,080
b. P2,020,620
c. P2,158,500
d. P2,203,500
Situation 2
In your audit of the books of DIEHARD CORP. for the year ended December 31,
2014, you found the following items in connection with the companys patent
accounts.
a. Diehard had spent P360,000 during the year ended December 31, 2013, for
research and development costs. This amount was debited on its patent
accounts. The companys cost records discloses that it spent a total of
P425,000 for the research and development of its patents, of which P64,500
spent in 2013 had been debited to Research and Development Expense.
b. The patent s were issued on July 1, 2013. In connection with the issuance of
the patents, the company incurred legal expenses of P42,840, which were
debited to Legal and Professional Fees Expense.

c. On January 5, 2014, Diehard paid a retainer of P45,000 for legal services in


connection with a patent infringement suit brought against it. Deferred Costs
was charged for the amount.
d. In reply to your inquiry anout the companys liabilities as of December 31,
2014, you received a letter from the companys legal counsel dated January
20, 2015, which indicated that a settlement of patent infringement suit had
been arranged. The plaintiff will drop the suit and release the company from
all future liabilities in exchange for P60,000. Additional lawyers fees were
incurred amounting to P3,780.
4. The correcting journal entries (excluding amortization) on December 31, 2014
would include debit (credit) to
Patents
Legal and Professional Fees
Expense
a.
P(317,16 P108,780
0)
b.
(208,380 0
)
c.
(272,160 63,780
)
d.
(253,380 45,000
)
Situation 3
As the recently appointed auditor for SUPERPOWER COMPANY, you have been asked
to examine selected accounts. Your audit client, organized in 2013, has setuo a
single account for all intangible assets. The following summary shows the debit
entries that have been recorded during 2014.
Jan 3
Apr 5
Jun
30
Jul 1
Aug 3
Sep 1

Purchased patent (8-year life)


Goodwill
Payment of 12 months rent on property
leased by Superpower
Purchased franchise with 10-year life;
expiration date, July 1, 2024
Payment for copyright (5-year life)
Research and development costs related
to patent (incurred prior to achieving
economic viability)

P870,000
720,000
182,000
900,000
312,000
320,000

P3,304,00
0
5. What is the total carrying value of Superpowers intangible assets as of
December 31, 2014?
a. P2,928,917
b. P2,622,250
c. P2,927,705
d. P2,713,250

Solution 2
Situation 1
1.
Patent A
Initial Cost
Amortization:
2010 (P1,224,000 x 10/12)
2011-2013 (P1,224,000 x 3/17)
Patent B
Initial Cost
Amortization:
2011 (P450,000/10 x 6/12)
2012-2013 (P450,000 x 2/10)
Patent C
Initial cost
Amortization:
2012 (P432,000/4 x 4/12)
2013 (P432,000 x )

P1,224,00
0
P60,00
0
216,00
0

(276,000)

P450,000
P22,50
0
90,000

(112,500)

337,500

P432,000
P36,00
0
108,00
0

(144,000)

Total carrying value of patents, Dec.


31, 2013

288,000
P137,88
0

Answer: D
2.
Patent B
Carrying value, Dec. 31, 2013
Less: 2014 amortization (P450,000 x 1/10)
Carrying value, Dec. 31, 2014
Present value of future cash flows (P60,000
x 2.5770)
Impairment loss

P337,50
0
45,000
292,500
154,620
P137,88
0

Answer: A
3.
Patent A
Carrying value, Dec. 31, 2013

P948,00
0

P948,0

Less: 2014 amortization (P1,224,000


x 1/17)
Patent B
Patent C
Carrying value, Dec. 31, 2013
Less: 2014 amortization (P432,000 x
)
Patent D
Initial cost
Less: 2014 amortization
(P855,000/9.5 x 6/12)
Total carrying value of patents, Dec.
31, 2014

00
72,000

P876,000
154,620

P288,0
00
108,00
0
P855,0
00
45,000

180,000

810,000
P2,020,62
0

Situation 2
4. Adjusting journal entries
December 31, 2014
a.

Retained earnings

360,00
0

Patents
b.

360,00
0

Patents
Retained earnings
c. Legal and professional fees
expense
Deferred costs
d. Legal and professional fees
expense
Liability for settlement of
patent infringement suit
Accrued attorneys fees
Answer: A

Situation 3
5.
Patent
Less: Amortization (P870,000/8)
Goodwill
Franchise
Less: Amortization (P900,000/10
x 6/12)

42,840
42,840
45,000
45,000
63,780

P870,00
0
108,750
P900,00
0
45,000

60,000
3,780

P761,250
720,000
855,000

Copyright
Less: Amortization
(P312,000/5x5/12)
Total carrying value, Dec. 31,
2014
Answer: B

P312,00
0
26,000

286,000
P2,622,25
0

Problem 3
Prepayments
The following situations are found in the records of the KILIMANJARO, INC. in your
audit of the companys financial statements for the year ended December 31, 2014.
1. December 1, 2014:
Advertising expense
Cash

72,000
72,00
0

Payment of 2015 advertising


contract
2.
Balance of Office supplies expense, Dec.
31, 2014
Balance of Unused office supplies, Dec.
31, 2014
Inventory of office supplies, Dec. 31,
2014

P45,00
0
15,000
22,500

3. June 2, 2014:
Prepaid Insurance
Cash

54,000
54,00
0

Payment of one-year
insurance premium for
inventory
4.
Balance of Factory supplies expense
account, Dec. 31, 2014
Physical inventory of factory supplies,
Dec. 31, 2014

P69,00
0
58,000

5. On May 1, 2014, a two-year subscription to the Industrial Journal in the


amount of P14,400 was paid. Subscriptions expense was charged for the
entire amount.

Prepare the adjusting entries on December 31, 2014, based on the situations
described.
Solution 3
Adjusting Journal Entries
December 31,2014
1
2

3
4
5

Prepaid advertising
Advertising expense
Unused office supplies
Office supplies
expense
(P22,500-P15,000)
Insurance expense
Prepaid insurance
(P54,000x7/12)
Factory supplies inventory
Factory supplies
expense
Prepaid subscriptions
Subscription
expense
(P14,400x16/24)

72,000
72,000
7,500
7,500
31,500
31,500
58,500
58,500
9,600
9,600

Problem 4
Cost of Patent
Kenya Enterprises developed a new machine that reduces the time required to mix
chemicals used in one of its leading products. Because the process is considered
very valuable to the company, Kenya patented the machine.
Kenya incurred the following expenses in developing and patenting the machine:
Research and development laboratory expenses
Materials used in the construction of the machine
Blueprints used to design the machine
Legal expenses to obtain patent
Wages paid for the employees work on the research
development, and building the machine (60% of the time
was spent in actually building the machine)
Expense of drawing required by the Patent Office to be
submitted with the patent application
Fees paid to Patent Office to process application

P750,00
0
240,000
96,000
360,000
900,000
51,000
75,000

One year later, Kenya Enterprises paid P525,000 in legal fees to successfully defend
a patent against an infringement suit by Gaya-gaya company.
1. What is the total cost of the patent?
a. P993,000
b. P486,000
c. P564,000
d. P126,000
2. What is the total cost of the new machine?
a. P1,362,000
b. P0
c. P780,000
d. P876,000
3. What is the entry to record the legal fees paid for the successful defense of
the patent against the infringement suit?
a. Patents
525,000
Cash
525,000
b. Legal fees expense
525,000
Cash
525,000
c. Machinery
525,000
Cash
525,000
d. Amortization expense
525,000
patents
Cash
525,000
Solution 4
1.
Legal expenses to obtain patent
Expense of drawing required by Patent
Office to be submitted with patent
application
Fees paid to process patent application
Total cost of patent

P360,00
0
51,000
75,000
P486,00
0

Answer: B
2.
Materials used in the construction of
the machine
Blueprints used to design the machine
Wages paid for the employees work
on the construction of the machine
(P900,000 x 60%)
Total cost of machine
Answer: D

P240,00
0
96,000
540,000
P876,00
0

3. The legal fees paid for the successful defense of the patent should be
expensed, not capitalized. This expenditure does not meet the definition of
and the recognition criteria for an intangible asset. The entry to record the
legal fees paid is:
Legal fees expense
Cash
Answer: B

525,000
525,000

Problem 5
Identifying Intangible Assets
The following amounts are included in the general ledger of Margherita Peak
Corporation on December 31, 2014:
Organization costs
Trademarks
Patents
Discount on bonds payable
Deposits with advertising agency for ads to promote
goodwill of company
Costs of equipment acquired for various research and
development projects
Costs of developing a secret formula for a product
that is expected to be marketed for at least 20 years

P72,00
0
45,000
225,00
0
105,00
0
30,000
320,00
0
240,00
0

On the basis of the information above, what is the total amount of intangible assets
to be reported by Margherita Peak in its statement of financial position on
December 31, 2014?
a.
b.
c.
d.

P342,000
P270,000
P510,000
P830,000

Solution 5
Trademarks
Patents
Total intangible
assets
Answer: B

P45,00
0
225,00
0
270,00
0

Organization costs should be recognized as expense in the period it is


incurred.
Discount on bonds payable should be reported as a contra account to bonds
payable.
Costs of equipment acquired for various research and development projects
should be included in the property, plant, and equipment section.
Deposits with advertising agency for ads to promote goodwill of the company
should be reported as prepaid advertising in the current assets section. PAS
38 does not preclude recognizing a prepayment as an asset when payment
for the delivery of goods or services has been made in advance for the
delivery of goods or rendering of the services.

Problem 6
Patent
As a member of the audit team for the audit of RAS DASHEN COMPANYs financial
statements for the year ended December 31, 2014, you have been asked to
examine selected accounts. The controller for Ras Dashen mentions that there is
only one account (shown below) kept for intangible assets.
Intangible Assets
Debit
Feb 1
Mar
15
Apr 3

Organization costs
Research and development
costs
Legal costs to obtain patent

P72,000
1,880,00
0
150,000

May 1

Payment of 12 months rent


on property leased by Ras
Dashen
Promotional expenses
related to start-up of
business
Unamortized bond discount
on bonds due Dec. 31, 2034
Operating losses for first
year

240,000

Jun
15
Dec
31
Dec
31

Credi
t

Balance
P72,000
1,952,00
0
2,102,00
0
2,342,00
0

414,000

2,756,00
0

168,000

2,924,00
0
3,406,00
0

482,000

1. The amount of organization expenses to be reported in Ras Dashens income


statement for the year ended Dec. 31, 2014, is
a. P2,348,000

b. P486,000
c. P582,000
d. P240,000
2. What is the carrying value of the patent at December 31, 2014, assuming
that its useful lifeis 10 years?
a. P150,000
b. P138,750
c. P135,000
d. P 0
3. The prepaid rent to be shown on Ras Dashens statement of financial position
at December 31, 2014, is
a. P140,000
b. P240,000
c. P80,000
d. P 0
Solution 6
1.
Organization costs
Promotional expenses related to start-up of
business
Total organization expenses

P72,00
0
414,00
0
P486,0
00

Answer: B
2.
Legal cost to obtain patent
Less: amortization, April 3
Dec 31
(P150,000/10x9/12)
Balance, December 31, 2014

P150,00
0
11,250
P138,75
0

Answer: B
3. Prepaid rent, Dec. 31, 2014 (P240,000 x 4* / 12)
*January 1, 2015 May 1, 2015
Answer: C

P80,000

Problem 7
Lease Bonus and Leasehold Improvements
MERU, INC. leases an old building which it intends to improve and use for
administrative purposes. The company pays a bonus of P100,000 to obtain lease.

Annual rental for the 10-year lease period is P160,000. No option to renew the lease
or right to purchase the property is given by the lessor.
After obtaining the lease, improvements on the leased building are made costing
P400,000. The building has an estimated remaining useful life of 19 years.
1. What is the annual cost (excluding depreciation) of this lease to Meru, Inc.?
a. P210,000
b. P200,000
c. P160,000
d. P170,000
2. What is the annual depreciation (straight-line), if any, should Meru, Inc.
record?
a. P40,000
b. P30,000
c. P50,000
d. P 0
3. What is the entry to record the lease bonus paid at the inception of the lease?
a. Rent
100,000
expense
Cash
100,000
b. Prepaid
100,000
rent
Cash
100,000
c. Prepaid
90,000
rent
Rent
10,000
expense
Cash
100,000
d. Rent
90,000
expense
Prepaid
10,000
rent
Cash
100,000

Solution P7
1.
Annual rental
Amortization of lease
bonus
Annual cost of lease
Answer: D

P160,00
0
10,000
P170,00
0

2. Annual depreciation on leasehold improvements


(P400,000/10 years)
Answer: A

P40,000

3.
Prepaid
rent
Cash

100,000
100,00
0

Answer: B
Problem 8
ELGON COMPANY was organized in 2013 and began operations at the beginning of
2014. The company provides landscaping services. The following costs were
incurred prior to the start of operations:
Legal fees in connection with organization of the company
171,000
Improvements to leased office space prior to occupancy
225,000
Costs of meetings of incorporators to discuss organizational activities
63,000
Filing fee to incorporate
9,000
What is the total amount of organizational costs that should be reported in Elgons
income statement?
a. 243,000
b. 468,000
c. 180,000
d. 207,000
Solution 8
171,000 + 63,000 + 9,000 = 243,000
Answer: A

PROBLEM 9
CAMEROON CORP has provided information on intangible assets as follows:

A patent was purchased from Patintero Company for 6,000,000 on January 1,


2013. On the acquisition date, the patent was estimated to have a useful life

of 10years. The patent had a net book value of 6,000,000 when Patintero sold
it to Cameroon.
On February 1, 2014, a franchise was purchased from the Franchisor
Company for 1,440,000. The contract which runs for 20years provides that
5% of revenue from the franchise must be paid to the franchisor. Revenue
from the franchise for 2014 was 7,500,000.
The following research and development costs were incurred by Cameroon in
2014:
Materials and equipment
426,000
Personnel
567,000
Indirect costs
306,000
Because of recent events, Cameroon, on January 1, 2014, estimates that the
remaining useful life of patent purchased on January 1, 2013, is only 5 years from
January 1, 2014.
1. On December 31,2014, the carrying value of the patent should be
a. 4,320,000
b. 6,000,000
c. 1,680,000
d. 0
2. The unamortized cost of the franchise at December 31,2014 should be
a. 999,000
b. 1,356,250
c. 1,440,000
d. 1,374,000
3. How much should be charged against Cameroons income for the year ended
December 31, 2014?
a. 2,280,000
b. 2,826,000
c. 2,820,000
d. 1,725,000
4. An auditor will most likely obtain evidence regarding the continuing validity
and existence of the patent by obtaining a written representation from
a. SEC
b. A patent attorney
c. The patent inventor
d. The patent owner
SOLUTION P9
1. Acquisition cost of the patent
6,000,000
Less: Amortization:
2013 (6M/10years) 600,000
2014(6M 600,000 =
5,400,000/5years) 1,080,000 1,680,000
Carrying value of patent, December 31, 2014 4,320,000
Answer A

2. Acquisition cost of franchise


Less: Amortization
(1,440,000/20years x 11/12)
Carrying Value of franchise

1,440,000
66,000
1,374,000

Answer D
3. Charges against 2014 income:
Amortization of patent
Amortization of franchise
Payment to franchisor
R&D costs
Total

1,080,000
66,000
375,000
1,299,000
2,820,000

Answer C
4. A patent attorney
Answer B
PROBLEM 10
ANDES CORPORATION expended 510,000 in research and development costs. These
activities resulted to a new product called the Oido Organ. It was patented at
additional legal and other costs of 54,000. The patent application was filed on
October 1, 2010, and the patent was estimated to have a useful life of 10 years.
On June 1, 2012, Andes spent 28,440 to successfully prosecute a patent
infringement. In addition, the patents estimated useful life was extended to
12years from June 1, 2012. At the beginning of 2014, Andes determined that a
competitors product would make the Oido Organ obsolete and the patent worthless
by December 31, 2015.
Based on the preceding information, calculate the patent amortization expense for
each of the following years:
1. 2010
a.
b.
c.
d.
2. 2011
a.
b.
c.
d.
3. 2012
a.

14,100
12,750
5,400
1,350
51,000
56,400
2,700
5,400
4,438

b.
c.
d.
4. 2013
a.
b.
c.
d.
5. 2014
a.
b.
c.
d.

2,188
3,750
5,820
4,438
6,120
3,750
2,188
31,875
19,531
39,062
3,750

SOLUTION P10
1. 54,000 / 10 x 3/12 = 1,350 Answer D
2. 54,000 / 10
Answer D
3. Cost of patent
54,000
Amortization
(9000)
Unamortized cost
45,000
Revised Remaining Life
12
Revised annual amortization 3,750
Amortization for 2012
54,000 / 10 x 5/12
2,250
3,750 x 7/12
2,188
Total
4,438
Answer A
4. 45,000 / 12 = 3,750 Answer C
5. Cost of patent
Less: Amortization:
2010
1,350
2011
5,400
2012
4,438
2013
3,750
Unamortized cost, Jan 2014
Revised remaining life
Revised annual amortization
Answer B

54,000

14,938
39,062
2
19,531