AUDIT OF INTANGIBLES

GROUP 3
DEC 12, 2019

PROBLEM #1

The Intangibles Company engaged in the following transactions at the beginning of 2018:

1. Purchased a patent for 700,000 that had originally been filed in January 2012. The acquisition
was made to protect another patent that the company had filed for In January 2014 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 for P60 per share. The book sells 1 million copies in 2018 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 2018.

1. PATENT
a. 630,000
b. 656,250
c. 910,000
d. 650,000

2. COPYRIGHT
a. 2,000,000
b. 0
c. 3,000,000
d. 4,000,000

3. FRANCHISE
a. 100,000
b. 84,000
c. 80,000
d. 76,000
PROBLEM #2

Transactions during 2005 of the newly organized Pink Corporation included the following:

Jan. 2 Paid legal fees of P150,000 and stock certificate costs of P83,000 to complete
organization of the corporation.

15 Hired a clown to stand in front of the corporate office for 2 weeks and hound out
pamphlets and candy to create goodwill for the new enterprise. Clown cost, P10,000;
pamphlets and candy, P5,000.

Apr. 1 Patented a newly developed process with costs as follows:

Legal fees to obtain patent P 429,000

Patent application and licensing fees 63,500
Total P 492,500

It is estimated that in 6 years other companies will have developed improved processes,
making the Pink 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 Pink’s no-par common stock
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 2005.

QUESTIONS: 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. P0

2. Cost of licenses

a. P150,000 b. P200,000 c. P100,000 d. P0

3. Cost of trademark

a. P150,000 b. P200,000 c. P100,000 d. P0

4. Carrying amount of Intangible Assets

a. P712,604 b. P2,477,604 c. P697,604 d. P0

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. P0

PROBLEM #3

INTANGIBLES 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 2012 and 2013, INTANGIBLES CORP. spent a total of 459,000 in developing a new
process that was patented (PATENT A) on April 1, 2014; additional legal and other costs of
50,000 were incurred.
 A patent (PATENT B) developed by Jezhryl Inventor, an inventor, was purchased for 187,500
on December 1, 2015, on which date it had an estimated useful life of 12 ½ years.
 During 2014, 2015, and 2016, research and development activities cost 510,000. No
additional patents resulted from these activites.
 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
42,600. A decision in the case was rendered in June 2016.
 On July 1, 2017, PATENT C was purchased for 172,800. This patent had 16 years yet to run.
 During 2018, INTANGIBLES CORP. expended 180,000 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, 2018

a. 120,000
b. 497,125
c. 38,125
d. 388,113
2. What is PATENT B’s carrying value on December 31, 2018
a. 141,250
b. 28,906
c. 32,092
d. 173,342
3. What is PATENT C’s carrying value on December 31, 2018
a. 162,000
b. 327,600
c. 159,840
d. 156,600