PROBLEM 1:

The following independent situations relate to the audit of intangible assets. Answer the questions at the end of
each situation.

a. YOLING INDUSTRIES reports the following patents on its December 31, 2012 statement of financial position.
Initial cost Date of acquisition Useful life
(at date of acquisition)
Patent A P1,224,000 March 1, 2009 17 years
Patent B 450,000 July 1, 2010 10 years
Patent C 432,000 Sept. 1 2011 4 years

The following events occurred during the year ended December 31, 2013.
 Research and development costs of P737,100 were incurred during the year. These costs were
incurred prior to projects achieving economic viability.
 Patent D was purchased on July 1 for P855,000. It has a remaining life of 9 ½ years.
 A possible impairment of Patent B’s value may have occurred at December 31, 2013. This is due to a
significant reduction in the demands for certain products protected by Patent B. the company’s
controller estimates the following future cash flows from Patent B.
December 31, 2014 P60,000
December 31, 2015 60,000
December 31, 2016 60,000

The appropriate discount rate to be used for these cash flows is 8%.

1. What is the total carrying value of Yoling’s patents on December 31, 2012?
A. P2,383,500 C. P2,106,000
B. P1,390,620 D. P1,573,500
2. What amount of impairment loss should be reported by Yoling for the year ended December 31, 2013?
A. P137,880 C. P337,500
B. P282,500 D. P154,620
3. What is the total value of Yoling’s patents on December 31, 2013?
A. P1,969,080 C. P2,158,500
B. P2,020,620 D. P2,203,500

b. In your audit of the books of MELANIE CORP. for the year ended December 31, 2013, you found the
following items in connection with the company’s patents account.
 Melanie had spent P360,000 during the year ended December 31, 2012, for research and development
costs. This amount was debited to its patents account. The company’s cost records discloses that it had
spent a total of P424,500 for the research and development of its patents, of which P64,500 spent in
2012 had been debited to Research and Development Expenses.
 The patents were issued on July 1, 2012. In connection with the issuance of the patents, the company
incurred legal expenses of P42,840, which are debited to Legal and Professional Fees Expense.
 On January 5, 2013, Melanie 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.
 In reply to your inquiry about the company’s liabilities as of December 31, 2013, you received a letter
from the company’s legal counsel dated January 20, 2014, which indicated that a settlement of the
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 lawyer’s fees were incurred amounting to
P3,780.
4. The correcting journal entries (excluding amortization) on December 31, 2013 would include net debit
(credit) to
Legal and Professional
Patents Fees Expense
A. P(317,160) P108,780
B. (208,380) 0
C. (272,160) 63,780
D. (253,380) 45,000

c. As the recently appointed auditor of SUBHUMAN COMPANY, you have been asked to examine selected
accounts. You audit client, organized in 2012, has setup a single account for all intangible assets. The
following summary shows the debit entries that have been recorded during 2013.

January 2 Purchased patent (8-year life) P870,000

April 5 Goodwill 720,000
June 30 Payment of 12 months rent on property leased by Subhuman 182,000
 July 1 Purchased franchise with a 10-year life:
expiration date, July 1, 2023 900,000
August 3 Payment for copyright (5-year life) 312,000
September 1 Research and development costs related to patent
(incurred prior to achieving economic viability) 320,000
P3,304,000

5. What is the total carrying value of Subhuman’s intangible assets as of December 31, 2013?
A. P2,928,917 C. P2,927,705
B. P2,622,250 D. P2,713,250

PROBLEM 2:
The following situations are found n the records of the KILI INC. in your audit of the company’s financial
statements for the year ended December 31, 2012.
a. December 1, 2012:

Advertising expense 72,000

Cash 72,000
Payment of 2013 advertising contract

b. Balance of Office Supplies expense, December 31, 2012 P45,000

Balance of Unused Office supplies, December 31, 2012 15,000
Inventory of Office Supplies, December 31, 2012 22,500

c. June 2 2012:

Prepaid insurance 54,000

Cash 54,000
Payment of one-year insurance premium for inventory

d. Balance of Factory Supplies Expense Account, Dec. 31, 2012 P69,000

Physical inventory of factory supplies, Dec. 31, 2012 58,500

e. On May 1, 2012, a two-year subscription to the Industry Journal in the amount of P14,400 was paid.
Subscription expense was charged for the entire amount.

PROBLEM 3:
KENYA ENTERPRISES developed a new machine that reduces the time required to mix the 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 P750,000
Materials used in the construction of the machine 240,000
Blueprints used to design the machine 96,000
Legal expenses to obtain patent 360,000
Wages paid for the employee’s work on the research,
development, and building of the machine (60% of the
time was spent in actually building the machine) 900,000
Expense of drawing required by the patent Office to be 51,000
submitted with the patent application
Fees paid to Patent Office to process application 75,000

One year later, Kenya Enterprises paid P525,000 in legal fees to successfully defend a patent against an
infringement suit by Tutulad Company.

1. What is the total cost of the patent?

A. P993,000 C. P564,000
B. P486,000 D. P126,000
2. What is the total cost of the new machine?
A. P1,362,000 C. P780,000
B. P0 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 – Patents 525,000
Cash 525,000

PROBLEM 4:
The following amounts are included in the general ledger of MARCIE CORPORATION at December 31, 2012:
Organization costs P 72,000
Trademarks 45,000
Patents 225,000
Discount on bonds payable 105,000
Deposits with advertising agency for ads to promote goodwill of company 30,000
Cost of equipment acquired for various research and development projects 320,000
Costs of developing a secret formula for a product that is expected to be
marketed for at least 20 years 240,000

On the basis of the information above, what is the total amount of intangible assets to be reported by Marcie in
its statement of financial position at December 31, 2012?
A. P342,000 C. P510,000
B. P270,000 D. P830,000

PROBLEM 5:
As a member of the audit team for the audit of DASHEN COMPANY’s financial statements for the year ended
December 31, 2012, you have been asked to examine selected accounts. The controller for Dashen mentions that
there is only one account (shown below).

INTANGIBLE ASSETS
Debit Credit Balance
Feb. 1 Stock issue costs P72,000 P72,000
March 15 Research and Development costs 1,880,000 1,952,000
April 3 Legal costs to obtain patent 150,000 2,102,000
May 1 Payment of 12 moths’ rent on property
leased by Dashen 240,000 2,342,000
June 15 Promotional expenses related to
start – up of business 414,000 2,756,000
Dec. 31 Unamortized bond discount on bonds
due Dec. 31, 2032 168,000 2,924,000
Dec. 31 Operating losses for first year 482,000 3,406,000

1. The amount of organization expenses to be reported in Dashen’s income statement for the year ended
December 31, 2012, is
A. P2,348,000 C. P582,000
B. P486,000 D. P240,000
2. What is the carrying value of the patent at December 31, 2012, assuming that its useful life is 10 years?
A. P150,000 C. P135,000
B. P138,750 D. P0
3. The prepaid rent to be shown on Dashen’s statement of financial position at December 31, 2012, is
A. P160,000 C. P80,000
B. P240,000 D. P0

PROBLEM 6:
MERON 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 the 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 Meron?

 A. P210,000 C. P160,000
B. P200,000 D. P170,000
2. What is the amount of annual depreciation (straight – line), if any, should Meron, Inc. record?
A. P40,000 C. P50,000
B. P30,000 D. P0
3. What is the entry to record the lease bonus paid at the inception of the lease?
A. Rent expense 100,000
Cash 100,000
B. Prepaid rent 100,000
Cash 100,000
C. Prepaid rent 90,000
Rent expense 10,000
Cash 100,000
D. Rent expense 90,000
Prepaid rent 10,000
Cash 100,000

PROBLEM 7:
ELGON COMPANY was organized in 2011 and began operations at the beginning of 2012. 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 P135,000

Improvements to leased office space prior to occupancy 225,000
Fees paid to underwriters for handling stock issue 36,000
Costs of meetings of incorporators to discuss organizational activities 63,000
Filing fee to incorporate 9,000
P468,000

What is the total amount of organization costs that should be reported in Elgon’s income statement?
A. P243,000 C. P180,000
B. P468,000 D. P207,000

PROBLEM 7:
CAMEROON CORP. has provided information on intangible assets as follows:
 A patent was purchased from Patintero Company for P6,000,000 on January 1. 2011. On the acquisition
date, the patent was estimated to have a useful life of 10 years. The patent had a net book value of P6,000
when Patentero sold it to Cameroon.
 On February 1, 2012, a franchise was purchased from the Franchisor Company for P1,440,000. The
contract which runs for 20 years provides that 5% of revenue from the franchise must be paid to
Franchisor. Revenue from the franchise for 2012 was P7,500,000.
 The following research and development costs were incurred by Cameroon in 2012:
Materials and Equipment P426,000
Personnel 567,000
Indirect costs 306,000
Total P1,299,000

Because of recent events, Cameroon, on January 1, 2012, estimated that the remaining useful life of the patent
purchased on January 1, 2011, is only 5 years from January 1, 2012.
1. On December 31, 2012, the carrying value of the patent should be
A. P4,320,000 C. P1,680,000
B. P6,000,000 D. P0
2. The unamortized cost of the franchise at December 31, 2012, should be
A. P999,000 C. P1,440,000
B. P1,356,250 D. P1,374,000
3. How much should be charged against Cameroon’s income for the year ended December 31, 2012?
A. P2,280,000 C. P2,820,000
B. P2,826,000 D. P1,725,000
4. An auditor will most likely obtain evidence regarding the continuing validity and existence of the patent by
obtaining a written representation from
A. The Securities and Exchange Commission (SEC) C. the patent inventor
B. A Patent attorney D. The patent owner

PROBLEM 9:
EMI KOUSSI CORP. has its own research department. However, the company purchases patents from time to
time. The following is a summary of transactions involving patents now owned by the company.
 During 2006 and 2007, Emi Koussi spent a total of P459,000 in developing a new process that was
patented (Patent A) on April 1, 2008; additional legal and other costs of P50,000 were incurred.
 A patent (Patent B) developed by Nonoy Inventor, an inventor, was purchased by for P187,500 on
December 1, 2009, on which date it had an estimated useful life of 12 ½ years.
 During 2008, 2009, and 2010, research and development activities cost P510,000. No additional patents
resulted from these activities.
 A patent infringement suit brought by the company against a competitor because of the manufacture of
articles infringing on Patent B was successfully prosecuted at a cost of P42,600. A decision in the case
was rendered in June 2010.
 On July 1, 2011, Patent C was purchased for P172,800. This patent had 16 years yet to run.
 During 2012, Emi Koussi expended P180,000 on patent development. However, the company is still
undecided as to how the patent, if approved by the Bureau of Patents, will generate probable future
economic benefits.

Assume that the legal life of each patent is also its useful life.
1. What is Patent A’s carrying value on December 31, 2012?
A. P120,888 C. P38,125
B. P497,125 D. P388,113
2. What is Patent B’s carrying value on December 31, 2012?
A. P141,250 C. P32,092
B. P28,906 D. P173,342
3. What is Patent C’s carrying value on December 31, 2012?
A. P162,000 C. P159,840
B. P327,600 D. P156,600
4. What is the total patent amortization expense to be reported in Emi Koussi’s income statement for the year
ended December 31, 2012?
A. P37,300 C. P74,325
B. P28,741 D. P28,300

PROBLEM 10:
ANDES CORPORATION expended P510,000 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 P54,000. The patent
application was filed on October 1, 2008, and the patent was estimated to have a useful life of 10 years.

On June 1, 2010, Andes spent P28,440 to successfully prosecute a patent infringement. In addition, the patent’s
estimated useful life was extended to 12 years form June 1, 2010. At the beginning of 2012, Andes determined
that a competitor’s product would make the Oido Organ obsolete and the patent worthless by December 31,
2012.

Based on the preceding information, calculate the patent amortization expense for each of the following years:
1. 2008
A. P14,100 C. P5,400
B. P12,750 D. P1,350
2. 2009
A. P51,000 C. P2,700
B. P56,400 D. P5,400
3. 2010
A. P4,438 C. P3,750
B. P2,188 D. P5,820
4. 2011
A. P4,438 C. P3,750
B. P6,120 D. P2,188
5. 2012
A. P331,875 C. P39,062
B. P19,531 D. P3,750

PROBLEM 11:
The following costs were incurred by EVEREST COMPANY during 2012:
Searching for applications of new research findings P 57,000
Trouble – shooting in connection with breakdowns during
commercial production 87,000
Adaptation of an existing capability to a particular requirement or customer’s 39,000
 need as a part of continuing commercial activity
Engineering follow – through in an early phase of commercial production 45,000
Radical modification of the formulation of a glassware product 78,000
Laboratory research aimed at discovery of new knowledge 204,000
Testing for evaluation of new products 72,000
Quality control during commercial production, including routine
testing of products 174,000
Materials consumed in research and development projects 177,000
Consulting fees paid to outsiders for research and development projects 300,000
Personnel costs of persons involved in research and development projects 384,000
Indirect costs reasonably allocable to research and development projects 150,000
Materials purchased for future research and development projects 102,000
Research and development costs reimbursable under a contract to
perform research and development for Client Corporation 1,050,000
Design, construction, and testing of preproduction prototypes and models 870,000
Routine on – going efforts to refine, enrich, or otherwise improve upon
the qualities of an existing product 750,000
Total P4,539,000

What is the total amount to be classified and expensed as research and development for 2012?
A. P3,342,000 C. P2,394,000
B. P2,292,000 D. P2,220,000

PROBLEM 12:
MOSES COMPANY’s own research department has an on – going project to develop a new production process. At
the end of 2011, Moses had already spent a total of P300,000, of which P270,000 was incurred before November
1, 2011. On November 1, 2011, the company’s newly developed production process met the criteria for
recognition as an intangible asset.

During 2012, Moses incurred additional expenditure of P600,000. At the end of 2012, the recoverable amount of
the intangible asset was estimated to be P570,000. Including future cash outflows to complete the process
before it is available for its intended use.

1. At December 31, 2011, the production process should be recognized at a cost of

A. P300,000 C. P30,000
B. P 0 D. P270,000
2. What is the total cost of the production process at December 31, 2012?
A. P630,000 C. P870,000
B. P600,000 D. P900,000
3. How much impairment loss should be recognized be Moses in 2012, in connection with the new production
process?
A. P300,000 C. P30,000
B. P0 D. P60,000

PROBLEM 13:
KIYAT CORPORATION was organized in 2011. Its accounting records include only one account for all intangible
assets. The following is a summary of the debit entries that have been recorded and posted during 2011 and
2012:
INTANGIBLE ASSETS
July 1, 2011 8-year franchise, expires June 30, 2019 P126,000
Oct. 1, 2011 Advance payment on leasehold (term of lease is 2 years) 84,000
Dec. 31, 2011 Net loss for 2011 including incorporation fee, P3,000, and
related legal fees of organizing, P15,000
(all fees incurred in 2011) 48,000
Jan. 2, 2012 Acquired patent (10-year life) 222,000
March 1, 2012 Cost of developing a secret formula 225,000
April 1, 2012 Goodwill purchased 835,200
July 1, 2012 Legal fee for successful defense of patent purchased above 37,950
Oct. 1, 2012 Research and development costs 480,000
Ignore income tax effects.

1. The unamortized patent cost at December 31, 2012, should be

A. P199,800 C. P222,000
B. P235,440 D. P197,490
 2. The unamortized franchise cost at December 31, 2012, should be
A. P110,250 C. P102,375
B. P94,500 D. P118,125
3. The amount of prepaid rent to be reported in Kiyat’s December 31, 2012, statement of financial position is
A. P73,500 C. P84,000
B. P31,500 D. P63,000
4. The adjusting entries on December 31, 2012, should include a net debit to the retained earnings account of
A. P889,275 C. P60,375
B. P42,000 D. P66,375
5. As a result of the adjustments at December 31, 2012, the total charges against Kiyat’s 2012 income should
be
A. P840,900 C. P597,900
B. P822,900 D. P841,275

PROBLEM 14:
KIKI LABORATORIES holds a valuable patent (No. 362436) on a device that burns body fats. Kiki does not
manufacture or sell the products and processes it develops; it conducts research and develops products and
processes which it patents, and then assigns the patents to manufacture on a royalty basis. The history of Patent
No. 362436 is as follows:

Date Activity Cost

2002 – 2003 Research conducted to develop device P7,680,000
2004
Jan. 5 Design and construction of a prototype 1,752,000
March 5 Testing of models 840,000
2005
Jan. 2 Legal and other fees to process patent application 1,241,000
2006
Dec. 10 Legal fees paid to successfully defend device patent 714,000
2007
April 3 Research aimed at modifying the design of the patented device 860,000
2011
July 28 Legal fees paid in a successful patent infringement suit
against a competitor 680,000

A 17 – year useful life was assumed by Kiki when it received the initial device patent.

On January 1, 2010, it revised its useful life estimate downward to 5 remaining years. The company’s reporting
date is December 31, 2012.

Based on the preceding information, compute the carrying value of Patent No. 362436 on each of the following
dates:
1. December 31, 2005
A. P1,168,000 C. P1,241,000
B. P3,607,529 D. P1,178,950
2. December 31, 2009
A. P1,488,000 C. P350,400
B. P876,000 D. P817,600
3. December 31, 2012
A. P657,000 C. P525,600
B. P876,000 D. P350,400

PROBLEM 15:
ACADIA CORP. was incorporated on January 2, 2011. The corporation’s financial statements for its year’s
operations were not examined by a CPA. You have been engaged to audit the financial statements for the year
ended December 31, 201, and your audit is substantially completed. The corporation’s trial balance appears
below.

Acadia Corp.
TRIAL BALANCE
December 31, 2012
Debits Credits
Cash P 300,000
 Accounts receivable 1,460,000
Allowance for doubtful accounts P29,200
Inventories 1,004,000
Machinery and Equipment 2,380,000
Accumulated Depreciation 524,000
Patents 2,564,000
Leasehold improvements 600,000
Prepaid expenses 900,000
Goodwill 600,000
Licensing agreement No. 1 1,200,000
Licensing agreement No. 2 1,120,000
Accounts payable 1,460,000
Unearned revenue 345,600
Share capital 6,000,000
Retained Earnings, January 1, 2012 3,181,200
Sales 14,400,000
Cost of Goods Sold 9,500,000
Selling and Administrative expenses 3,722,000
Interest expense 190,000
Loss on extinguishments of debt 400,000
Totals P25,940,000 P25,940,000

The following information relates to accounts that may yet require adjustments.
1. Patents for Acadia’s manufacturing process were acquired January 2, 2012, at a cost of P1,870,000. An
additional P694,000 was spent on December 29, 2012, to improve machinery covered by the patents and
charged to the Patents account. Depreciation on property, plant, and equipment has been properly
recorded for 2012. Acadia uses the straight-line method for all depreciation and amortization and the legal
life on its patents.
2. On January 3, 2011, Acadia purchased Licensing Agreement No. 1, which was believed to have an indefinite
life. The balance in the Licensing Agreement No. 1 account includes its purchase price of P1,140,000 and
expenses of P60,000 related to the acquisition. On January 1, 2012, Acadia purchases Licensing Agreement
No. 2, which has a life expectancy of 10 years. The balance in the Licensing Agreement No. 2 account
includes its P1,080,000 purchase price and P120,000 in acquisition expenses, but it has been reduced by a
credit of P80,000 for the advance collection of 2013 revenue form the agreement.

In late December 2011, an explosion caused a permanent reduction in the expected revenue – producing
value of Licensing Agreement No. 1, and in January 2013, a flood caused additional damage that rendered
the agreement worthless. The recoverable amount of Licensing Agreement No. 1 was determined to be
P480,000 at December 31, 2011.

3. The balance in the Goodwill account represents amount paid on December 30, 2011, for a four – year
advertising program, estimated to assist in increasing Acadia’s sales.
4. The Leasehold Improvements account includes (a) the P300,000 cost of improvements with a total
estimated useful life of 12 years, which Acadia as tenant made to leased premises in January 2011, and
movable assembly line equipment costing P300,000 that was installed in the leased premises in December
2012. Acadia paid its rent in full during 2012. A 10 – year non-renewable lease was signed January 3, 2011,
for the leased building that Acadia used in manufacturing operations.

Prepare the adjusting journal entries that should be made on December 31, 2012. Use a separate account for the
accumulation of each type of amortization.

PROBLEM 16:
During 2010, APEX COMPANY purchased a building site for its proposed research and development laboratory
at a cost of P1,200,000. Construction of the building was started in 2010. The building was completed on
December 31, 2011, at a cost of P5,600,000 and was placed in service on January 2, 2012. The estimated useful
life of the building for depreciation purposes was 20 years; the straight – line method of depreciation was to be
employed and there was no estimated salvage value.

Management estimates that about 50% of the projects of the research and development group will result in
long-term benefits (i.e., at least 10 years) to the corporation. However, Apex fails to demonstrate how such
projects will generate probable future economic benefits. The remaining projects either benefit the current
period or are abandoned before completion. A summary of the number of projects and the direct costs incurred
in conjunction with the research and development activities for 2012 appears below.
Upon recommendation of the research and development group, Apex Company acquired a patent for
manufacturing rights at a cost of P1,600,000. The patent was acquired on April 1, 2011, and has an economic life
of 10 years.

Number of Salaries and Other Expenses (excluding

Projects Employee Benefits Building Depreciation Charges
Completed projects with 30 P1,800,000 P1,000,000
long – term benefits
Abandoned projects or 20 1,300,000 300,000
projects that benefit the
current period
Projects in Process – results in 10 800,000 240,000
indeterminate
Total 60 P3,900,000 P1,540,000

1. The total research and development expenses for 2012 should be

A. P2,920,000 C. P5,440,000
B. P5,880,000 D. P5,720,000
2. What is the amount of patent amortization for 2012?
A. P80,000 C. P120,000
B. P160,000 D. P0
3. What is the book value of the building on December 31, 2012?
A. P5,320,000 C. P5,040,000
B. P5,600,000 D. P6,460,000
4. What is the carrying value of the patent at December 31, 2012?
A. P1,280,000 C. P1,600,000
B. P1,320,000 D. P0

PROBLEM 17:
The following information pertains to BAKER COMPANY’s intangible assets:
a. On January 1, 2012, Baker signed an agreement to operate as a franchisee of Max & Jess Food Chain, Inc. for
an initial franchise fee of P1,500,000. Of this amount, P300,000 was paid when the agreement was signed
and the balance is payable in 4 annual payments of P300.000 each, beginning January 1, 2013. The
agreement provides that the down payment is not refundable and no future services are required of the
franchisor. The present value at January 1, 2012, of the 4 annual payments discounted at 14% (the implicit
rate for a loan of this type) is P874,000. The agreement also provides that 5% of the revenue from the
franchise must be paid to the franchisor annually. Baker’s revenue from the franchise for 2012 was
P19,000,000. Baker estimates the useful life of the franchise to be 10 years.
b. Baker incurred P1,300,000 of experimental and developments costs in its laboratory to develop a patent
which was granted on January 2, 2012. Legal fees and other costs associated with registration of the patent
totaled P272,000. Baker estimates that the useful life of the patent will be 8 years.
c. A trademark was purchased from Banawe Company for P640,000 on July 1, 2009. Expenditures for
successful litigation in defense of the trademark totaling P163,200 were paid on July 1, 2011. Baker
estimates that the useful life of the trademark will be 20 years from the date of acquisition.

1. What is the carrying value of the franchise at December 331, 2012?

A. P1,350,000 C. P1,056,600
B. P1,500,000 D. P1,174,000
2. What is the carrying value of the patent at December 31, 2012?
A. P238,000 C. P1,375,500
B. P272,000 D. P258,400
3. What is the carrying value of the trademark on December 31, 2012?
A. P686,400 C. P544,000
B. P528,000 D. P707,200
4. The total expenses resulting form the transactions that would appear on Baker’s income statement for the
year ended December 31, 2012, should be
A. P1,255,760 C. P1,133,400
B. P1,260,560 D. P183,400

PROBLEM 18:
In line with CANDLER COMPANY’s expansion program, it has become interested in acquiring a plant in
Mindanao to handle many of its production functions in that area. One prospective seller is Mahal Ko Sya Co.
whose owners have decided to sell their business if a proper settlement can be obtained. Mahal Ko Sya Co.’s
statement of financial position appears as follows:
 Current assets P4,500,000 Current liabilities P2,400,000
Investments 1,500,000 Non Current liabilities 3,000,000
Property, Plant, and Ordinary shares 1,500,000
Equipment (net) 12,000,000 Share premium 5,100,000
Retained Earnings 6,000,000
Total assets P18,000,000 Total Equities P18,000,000

Candler has hired Kilatis Appraisal Company to determine the proper price to pay for Mahal Ko Sya Co. the
appraisal company finds that the investments have a fair value of P4,500,000 and the inventory is understated
by P2,400,000. All other assets and equities are properly stated.

And examination of the company’s income for the last 4 years indicates that the net income has steadily
increased. In 2011, the company had a net operating income of P3,000,000, which is expected to increase 20%
each year over the next 4 years. Candler believes that a normal return in this type of business is 18% on net
assets. The asset investment in the Mindanao plant is expected to stay the same for the next 4 years.

According to Kilatis Appraisal Company, the fair value of Mahal Ko Sya Co. can be estimated in many different
ways. Calculate an estimate of the value of Mahal Ko Sya Co., assuming that any goodwill will be computed as:

1. The capitalization of the average excess earnings of Mahal Ko Sya Co. at 18%
A. P44,840,000 C. P18,286,416
B. P36,000,000 D. P26,840,000
2. The purchase of average excess earnings over the next four years
A. P24,364,800 C. P30,960,000
B. P19,591,200 D. P22,831,200
3. The capitalization of average excess earnings of Mahal ko Sya at 24%
A. P31,500,000 C. P18,381,888
B. P24,630,000 D. P98,520,000
4. The present value of the average excess earnings over the next four years discounted at 15%. (The present
value of an ordinary annuity of 1 at 15% for 4 periods is 2.85498.)
A. P31,792,979 C. P22,542,844
B. P55,932,484 D. P27,250,135
5. If Candler were to pay P23,100,000 to purchase the assets and assume the liabilities of Mahal Ko Sya Co.,
how much would be charged to goodwill?
A. P8,840,000 C. P0
B. P6,364,800 D. P5,100,000

PROBLEM 19:
You have instructed by CANNON COMPANY, a high-flying conglomerate, to conduct a purchase audit of XYA co.’s
books to determine a possible purchase price for XYZ Co.’s assets. You find the following information:

Total identifiable assets of XYZ Co. at fair market value P5,000,000

Liabilities 1,200,000
Average rate of return on net assets for XYZ Co.’s industry 15%
Forecasted earnings per year based on past earnings figures 700,000

Determine the purchase price on the basis of the following assumptions:

1. Goodwill is equal to 3 years’ excess earnings
A. P5,510,000 C. P3,930,000
B. P5,900,000 D. P4,190,000
2. Goodwill is equal to the present value of excess earnings discounted at 15% for 3 years. (The present value
factor of an ordinary annuity of 1 at 15% for 3 periods is 2.28323.)
A. P5,398,261 C. P4,690,460
B. P4,096,820 D. P5,101,441
3. Goodwill is equal to the capitalization of excess earnings at 15%
A. P7,600,000 C. P4,666,667
B. P8,466,667 D. P6,400,000

PROBLEM 20:
SKIN INC. is considering purchasing A & B Enterprises, which has the following assets and liabilities.

Cost Fair market Value

Accounts receivable P4,800,000 P4,400,000
Inventory 4,800,000 5,000,000
 Prepaid Insurance 200,000 200,000
Buildings and Equipment (net) 1,400,000 4,000,000
Accounts payable (3,200,000) (3,200,000)
Net assets P 8,000,000 P 10,400,000

If the purchase price is P12,600,000, the amount of goodwill to be charged in recording the acquisition is
A. P4,600,000 C. P2,200,000
B. P2,400,000 D. P0

PROBLEM 21:
DURIAN COMPANY develops software for small business and home computer markets. Most of the company’s
computer programmers are involved in developmental work designed to produce software that will perform
fairly specific tasks in a user – friendly manner. Extensive testing of the working model is performed before it is
released to production for preparation of masters and further testing. This carful preparation has resulted to the
production of several computer software packages that have been very successful in the marketplace.

Durian incurred the following costs during 2012:

Salaries and wages of programmers doing research P 705,000
Expenses related to projects prior to establishment of technological feasibility 235,200
Expenses related to projects after technological feasibility has been established
but before software is available for commercial production 148,500
Amortization of capitalized software development costs from current and
prior years 80,250
Costs to produce and prepare software for sale 168,900

Additional data for 2012:

Sales of products for the year P1,545,000
Beginning inventory 426,000
Portion of goods available for sale sold during year 60%
Income tax rate is 30%

What is Durian’s net income for 2012?

A. P139,797 C. P215,072
B. P195,681 D. P243,746