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Classification of intangible assets based on useful life

Intangible assets are classified as:

1. Indefinite life: no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the
2. Finite life: a limited period of benefit to the entity.

Intangible asset with finite and indefinite lives

Is it subject to
Intangible assets with: Amortization? Possible Impairment?
1. Finite lives Yes Yes
2. Indefinite lives No Yes

Is an exclusive right granted by the government giving the holder thereof to exclusively use, manufacture and sell a
product or process for a period of 20 years without interference or infringement by others. The term of a patent shall
be twenty years from the filing date of the application.

Cost of Patent
a. When purchased: Includes purchase price and any directly attributable expenditure in preparing the asset for its
intended use
b. If internally developed: Cost includes only the licensing and other related legal fees in securing the patent rights.

Cost that are expensed as incurred

a. Research and development cost
b. Legal fees and other costs of successfully prosecuting or defending a patent
c. Legal fees and other costs of unsuccessfully prosecuting or defending a patent

Amortization of Patent – The original cost should be amortized over the legal life or useful life whichever is SHORTER.

On January 1, 2014, Ria Company incurred P1,000,000 of research and development cost to develop a product. Legal
fees and other costs associated with the registration of the patent totaled P400,000 and this patent was granted on
January 1, 2015. On July 1, 2015, Ria paid P500,000 for legal fees in a successful defense of the patent. On December 31,
2016, the patent was written off due to the advent of a new product coming from the market.

Required: Prepare the necessary entries

Illustration: Change in Estimate

On January 1, 2011, Drenz Company purchased a patent for P600,000. The patent was being amortized over its
remaining legal life of 15 years expiring on January 1, 2026. During 2016, Drenz determined that the economic benefits
of the patent would not last longer than ten years from the date of acquisition.

Required: Compute for the carrying amount of the Patent on December 31, 2016.
Is an exclusive right granted by the government to the author, composer or artist enabling him to publish, sell or
otherwise benefit from his literary, musical or artistic work.

The rights of an author shall last during the lifetime of the author and for fifty (50) years after his death and shall not be
assignable or subject to license.

Cost of Copyright
1. Developed copyright – cost assigned to copyright consists of all expenses incurred in the production of the work
including those required to establish or obtain right.

2. Purchased – cost includes the cash paid and other expenses incidental to the acquisition.

Amortization of copyright
The amortization should be based on the copyright’s useful life. However, it is acceptable in practice to directly write
off the cost of the copyright against the revenue of the first printing.

Is an agreement in which one party called the franchisor grants certain rights to another party called the franchisee.

Franchise Cost
1. Initial franchise fee – includes the lump sum payment for the acquisition of the franchise and all legal fees and
expenses incurred in connection with the acquisition of the right.
2. Continuing franchise fee – this represents continues payment to the franchisor for providing specific future services,
such as advertising, and for continued use of intangible rights by the franchisee;

Amortization of Franchise
a. Granted for a definite period – Amortize over the useful life or definite period whichever is shorter
b. Granted indefinitely – Shall not be amortized but rather tested for impairment at least annually

Books of franchisor:
Methods of accounting
1. Accrual method – this is used when realization or collection of the note is reasonably assured.
2. Installment method – this is used when realization or collection of the note is not reasonably assured.
3. Cost recovery method – this is used when realization or collection of the note is uncertain or highly speculative

On January 1, 2016, Joshia Company signed an agreement to operate as a franchisee of Luke Company for an initial
franchise fee of P10,000,000. Of this amount, P2,000,000 was paid when the agreement was signed and the balance is
payable in equal annual payments of P1,600,000 beginning January 1, 2017. The agreement provides that the down
payment is not refundable and no future services are required of the franchisor. The agreement also provides that 5% of
the revenue from the franchise must be paid to the franchisor annually. Joshia’s credit rating indicates that it can borrow
money at 14% for a loan of this type.

What is the carrying value of the franchise on December 31, 2016? (use 4 decimal places)
a. Building walks
b. Pavements
c. Landscaping
d. Driveways and other structures on the leased land
e. Lighting installations
f. Extraordinary repairs
g. Partitions
h. Cabinets
i. Shelves
j. Ventilating system made on leased building

Depreciation of leasehold improvements

Leasehold improvements should be depreciated over the lease term or life of the improvements whichever is shorter. If
the lease is terminated prior to the agreed term, the unamortized cost of the leasehold improvements is considered
as a loss.

Renewal Option Depreciate the leasehold improvement:

a. Too uncertain Over the lease term or life of the leasehold improvements whichever is shorter
b. Highly Probable Over the extended lease period or the life of the leasehold improvements
whichever is shorter

On January 2, 2013, Brayden Company Signed an eight-year lease for office space. Brayden has the option to renew the
lease for an additional five-year period on or before January 2, 2017. During January 2015, two years after occupying the
leased premises, Brayden made general improvements to the premises costing P1,080,000 and having an estimated
useful life of ten years.

Required. Compute for the carrying value of the leasehold improvements at December 31, 2016 if Brayden’s intention as
to exercise of the renewal option on 2016 is:
1. Uncertain
2. Too certain

“Mark” means any visible sign capable of distinguishing the goods (trademark) or services (service mark) of an enterprise
and shall include a stamped or marked container of goods (RA 8293)

“Trade name” means the name or designation identifying or distinguishing an enterprise (RA 8293)

Cost of trademark
a. When purchased – The cost includes the purchase price plus cost directly attributable to the acquisition.
b. If internally developed – The cost includes expenditures required to establish it, including filing fees, registry fees and
other expenses incurred in securing the trademark.
Legal fees and other costs of successfully prosecuting or defending a trademark is an outright expense.

Amortization of Trademark
The legal life of trademark is 10 years and may be renewed for periods of 10 years each (RA 8293). Because of easy
renewals of the life of the trademark, an entity may appropriately classify this as an intangible asset with indefinite life.
Therefore, the cost of a trademark is not amortized but subject to test for impairment at least annually.

On January 1, 2016, Ashliy Company bought a trademark from Elisha Company for P4,500,000. Ashily retained an
independent consultant who estimated the trademark’s life to be indefinite. Its carrying amount in Elisha’s accounting
records was P4,000,000.

Required: In Ashily’s December 31, 2016 statement of financial position, what amount should be reported as trademark?

Customer List
It is a database that includes names, contact information, order history, and demographic information for a list of

Cost of customer list

a. When purchased – The cost includes the purchase price plus cost directly attributable to the acquisition.
b. If internally developed – The cost shall be expensed and not capitalized as intangible assets

On January 1 of the current year, Gabrielle Company acquired the customer list of a large advertising agency for
P2,000,000. Gabrielle expects to benefit from the information acquired from the customer list for a period of 5 years.
Prepare the pertinent entries.
Problem No. 1

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

CABOOM LABORATORIES holds a valuable patent (No. 112170) on a device that prevents certain types of air
pollution. Caboom does not manufacture or sell the products and processes it develops; it conducts research
and develops products which it patents, and then assigns the patents to manufacturers on a royalty basis.
The history of Patent No. 112170 is as follows:

Date Activity Cost

2005-2006 Research conducted to develop device P1,259,100
Jan. 2007 Design and construction of a prototype 262,800
Mar. 2007 Testing of models 126,000
Jan. 2008 Legal and other fees to process patent application; patent granted
June 2008 186,150
Nov. 2009 Engineering activity necessary to advance the design of the device
to the manufacturing stage 244,500
April 2011 Research aimed at modifying the design of the patented device 129,000
May 2015 Legal fees paid in a successful patent infringement suit against a
competitor 102,000

Caboom assumed a useful life of 17 years when it received the initial device patent. On January 1, 2013, it
revised its useful life estimate downward to 5 remaining years. Amortization is computed for a full year if the
cost is incurred prior to July 1 and no amortization for the year if the cost is incurred after June 30. Caboom’s
reporting date is December 31, 2015.

Compute the carrying value of Patent No. 112170 on each of the following dates:

1. December 31, 2008

A. P180,675 B. P186,150 C. P293,788 D. P175,200

2. December 31, 2012

A. P223,200 B. P52,560 C. P131,400 D. P122,640

3. December 31, 2015

A. P120,560 B. P78,840 C. P52,560 D. P98,550
BARTOLO COMPANY has provided information on intangible assets as follows:

 A patent was purchased from Valenzuela Company for P4,000,000 on January 1, 2014. Bartolo estimates
the remaining useful life of the patent to be 10 years. The patent was carried in Valenzuela’s accounting
records at a net book value of P4,000,000 when Valenzuela sold it to Bartolo.

 During 2015, a franchise was purchased from Delco Company for P960,000. The contract which runs for
10 years provides that 5% of revenue from the franchise must be paid to Delco. Revenue from the
franchise for 2015 was P5,000,000. Bartolo takes a full year amortization in the year of purchase.

 The following research and development costs were incurred by Bartolo in 2015:
Materials and equipment P284,000
Personnel 378,000
Indirect costs 204,000

Bartolo estimates that these costs will be recouped by December 31, 2018. The materials and equipment
purchased have no alternative uses.

 On January 1, 2015, because of recent events in the field, Bartolo estimates that the remaining life of the
patent purchased on January 1, 2014 is only 5 years from January 1, 2015.

4. What is the total carrying value of Bartolo’s intangible assets on December 31, 2015?
A. P3,744,000 B. P4,864,000 C. P2,880,000 D. P3,681,500

5. As a result of the facts above, compute the total amount of charges against income for the year ended
December 31, 2015?
A. P2,428,000 B. P1,932,000 C. P1,648,000 D. P1,116,000

Problem 3 (Intangible assets)

On January 1, 2013, an entity purchased patent at a cost of P1,920,000 at which date the remaining legal life
was 16 years. On January 1, 2015, the useful life of the patent was determined to be only 8 years from the date
of acquisition. On January 1, 2015, the entity paid P800,000, of which three-fourths was for a trademark, and
one-fourth was for the other entity’s agreement not to compete for a 5-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 2015?
a. 320,000
b. 280,000
c. 250,000
d. 370,000

Transactions during 2016 of the newly organized ZERG CORPORATION included the following:

Jan 2. Paid legal fees of P233,000 to complete organization of the corporation.

15. Hired a clown to stand in front of the corporate office for 2 weeks and hand out pamphlets and candy
to create goodwill for the new enterprise. Clown cost P10,000; pamphlets and candy, P5,000.
April 1. Patented a newly developed process with costs as follows:
Legal fees to obtain patent P429,000
Patent application and licensing fees 63,500
Total P492,500

It is estimated that in 6 years other companies will have developed improved processes, making the
Zerg Corporation process obsolete.

May 1. Acquired both a license to use a special type of container and a distinctive trademark to be printed on
the container in exchange for 6,000 shares of Zerg’s no-par ordinary shares selling for P50 per share.
The license is worth twice as much as the trademark, both of which may be used for 6 years.

July 1. Constructed a shed for P1,310,000 to house prototypes of experimental models to be developed in
future research projects.

Dec 31 Incurred salaries for an engineer and chemist involved in product development totaling P1,750,000 in

Based on the above and the result of your audit, determine the following:

1. Cost of Patent
A. P492,500 B. P429,000 C. P63,500 D. P 0

2. Cost of licenses
A. P150,000 B. P200,000 C. P100,000 D. P 0

3. Cost of Trademark
A. P150,000 B. P200,000 c. P100,000 D. P 0

4. Carrying amount of Intangible assets

A. P712,604 B. P2,477,604 C. P697,604 D. P 0

5. Total amount resulting from the foregoing transactions that should be expensed when incurred
A. P4,100,500 B. P1,983,000 C. P1,998,000 D. P 0