Financial Accounting and Reporting

Intangible Assets

Reviewer
Intangible Assets
1. Penk Company reported the following assets at year-end:
Financial asset held for trading 1,000,000
Goodwil 1,500,000
Prepaid Insurance 50,000
Patent 2,500,000
Customer List 500,000

What amount should be reported as total intangible assets at year-end?

a. 4,000,000
b. 5,500,000
c. 4,500,000
d. 3,000,000

2. Reyd Company has bought the entity from previous owners through a leveraged management
buy-in (MBI). The company incurred a total transaction cost related to the MBI in the amount of
P5,000,000 which was broken into the following specific costs: P1,000,000 related to the issue
of own equity instrument, P1,500,000 related to the issue of debt instrument and P2,500,000 for
the consultants and lawyers fees. The management proposes to capitalize the P5,000,000 as
intangible asset.

What amount should the company recognize as an intangible asset?

a. None
b. 2,500,000
c. 4,000,000
d. 5,000,000

3. Bloo Company exchanges the rights to distribute a product in Brisbane which have a carrying
amount of P2,000,000 for cash of P1,000,000 and the right to distribute the same product in
Canberra, with a fair value of P1,400,000. The exchange is considered having the necessary
commercial substance.

At the time of exchange, the intangible assets should be initially recorded by Bloo Company at
a. 1,000,000
b. 1,400,000
c. 2,000,000
d. 2,400,000

4. Bayolet Company incurred P1,600,000 of research and development costs to develop a product
for which a patent was granted at the beginning of the current year. Legal fees and other costs
associated with registration of the parent totalled P300,000. At year-end, the entity paid
P450,000 for legal fees in a successful defense of the patent.

What is the total amount that should be capitalized for the patent at year-end?
a. 750,000
b. 300,000
c. 2,050,000
d. 2,350,000
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Intangible Assets

5. Indeygo Company acquired a patent for a drug with a remaining legal and useful life of six years
on January 1, 2018 for P5,400,000. On January 1, 2020, a new patent is received for an
improved version of the same drug. The new patent has a legal and useful life of twenty years.

What is the amortization expense for 2020?

a. 900,000
b. 200,000
c. 180,000
d. 300,000

6. Yilow Company purchased Patent A for P600,000 and Patent B for P900,000. Yilow also paid
indirect costs of P75,000 for Patent A and P105,000 for Patent B. Both patents were challenged
in legal actions. Yilow paid P300,000 in legal fees in successful defense of Patent A and
P450,000 in legal fees in an unsuccessful defense of Patent B.

What amount should Yilow capitalize for patents?

a. 675,000
b. 975,000
c. 1,680,000
d. 2,430,000’

7. Stars Corporation incurred P198,900 of research and development costs to develop a product
for which a patent was granted on January 2, 2011. Legal fees and other costs associated with
registration of the patent totalled P44,200. On January 2, 2014, Stars paid P62,400 for legal
fees in a successful defense of the patent. The patent has a useful economic life of 20 years.

What amount should Stars record as amortization expense for 2014?

a. 2,210
b. 5,200
c. 7,800
d. 19,500

8. On January 1, 2016, Shiver Company bought a trademark from Hot Company for P3,000,000.
The entity retained an independent consultant who estimated the trademark’s life to be
indefinite. The carrying amount of the trademark was P1,500,000 on the books of Hot Company.

On December 31, 2016, what is the carrying amount of the trademark?

a. 3,000,000
b. 1,500,000
c. 2,850,000
d. 0

9. On January 2, 2014, Rainbow Company bought a trademark from Mars Company for P600,000.
Rainbow retained an independent consultant, who estimated the trademark’s remaining life to
be 20 years. Its amortized cost on Mars’ accounting record was P456,000.

At what amount should the trademark be initially recorded?

a. 456,000
b. 570,000
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Intangible Assets

c. 585,000
d. 600,000

10. On January 1, 2010, Better Company bought a trademark for P400,000, having an estimated
useful life of 16 years. After 16 years, revenues expected from this intangible will be zero. In
January 2014, Better paid P60,000 for legal fees in a successful defense of the trademark.

What amount of expense should Better Company recognize and charge against income during
2014?
a. 15,000
b. 25,000
c. 30,000
d. 85,000

11. At the beginning of the current year, Judd Company bought a trademark for P500,000. The
entity retained an independent consultant who determined the remaining useful life to be 50
years. The unamortized costs of the trademark was P380,000.

What amount should be reported as amortization of trademark for the current year?
a. 10,000
b. 12,500
c. 9,500
d. 7,600

12. On January 1, 2016, Hart Company signed an agreement to operate as a franchisee of Ace
Company for an initial franchise fee of P12,000,000. On the same date, Hart Company paid
P4,000,000 and agreed to pay the balance in four equal annual payments of P2,000,000
beginning January 1, 2017.

What is the acquisition cost of the franchise?

a. 13,520,000
b. 12,000,000
c. 9,820,000
d. 8,720,000

13. On January 2, 2011, Sardines Company purchased a franchise with a useful life of ten years for
P100,000. An additional franchise fee of 3% of franchise operation revenues must be paid each
year to the franchisor. Revenues from franchise operations amount to P800,000 during 2011.

In its December 31, 2011 statement of financial position, what amount should Sardines report
as intangible asset-franchise?
a. 70,000
b. 87,600
c. 90,000
d. 100,000

14. Garnet Company bought a franchise at the beginning of the current year for P2,040,000. An
independent consultant estimated that the remaining useful life of the franchise was 50 years.
The unamortized cost of the franchise was P680,000. The entity decided to amortize the
franchise over the maximum period allowed.
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Intangible Assets

What amount should be recorded as amortization of franchise for the current year?
a. 40,800
b. 40,000
c. 51,000
d. 17,000

15. Char Company acquired a copyright that now has a remaining legal life of 40 years. The
copyright initially had a 30-year useful life. An analysis of market trend and consumer habit
indicated that the copyrighted material will generate positive cash flows for approximately 25
years.

What is the remaining useful life over which the entity can amortize the copyright?
a. 25
b. 30
c. 40
d. 0

16. Struck Company incurred P1,500,000 (400,000 in 2014 and 1,100,000 in 2015) to develop a
computer software product. P500,000 of this aount was expended before technological
feasibility was established in early 215. The product will earn future revenues of P4,000,000
over its 5-year life as follows: 2015 – P1,000,000; 2016 – P1,000,000; 2017 – P800,000; 2018 –
P800,000 and 2019 – P400,000.

What portion of the P1,500,000 computer software costs should be expensed in 2015?
a. 250,000
b. 300,000
c. 350,000
d. 1,100,000

17. Ward Company incurred the following research and development costs in the current year:
Equipment acquired for use in various R&D projects 975,000
Depreciation on the above equipment 135,000
Materials used 200,000
Compensation costs of personnel 500,000
Outside consulting fees 150,000
Indirect costs appropriately allocated 250,000

What total amount of research and development costs should be recognized as expense for the
current year?
a. 850,000
b. 1,085,000
c. 1,235,000
d. 1,825,000

18. Colonel Co. Purchased two machines for P250,000 each on January 2, 2014. The machines
were put into use immediately. Machine A has a useful life of five years and can only be used in
one research project. Machine B will be used for two years on a research and development
project and then used by the production division for an additional eight years. Colonel uses
straight-line method of depreciation.

What amount should Colonel include in 2014 research and development expense?
Financial Accounting and Reporting
Intangible Assets

a. 75,000
b. 275,000
c. 375,000
d. 500,000

19. Ball Company incurred the following research and development costs during the current year:
Direct cost of doing contract research and development work
for the government to be reimbursed by the government
400,000
Depreciation 300,000
Salaries 700,000
Indirect costs appropriately allocated 200,000
Materials used 180,000

What total amount of R&D costs should be reported as expense in the current year?
a. 1,080,000
b. 1,380,000
c. 1,580,000
d. 1,780,000

20. Marlin Corporation incurred the following costs during the year ended December 31, 2014
Routine, on-going efforts to refine, enrich and improve
upon the qualities of an existing product
125,000
Design, construction, and testing of pre-production
prototypes and models
110,000
Quality control during commercial production
including routine testing of products
150,000
Laboratory research aimed at discovery of new knowledge 180,000

How much did Marlin Corporation incur in 2014 as research and development costs?
a. 235,000
b. 275,000
c. 290,000
d. 330,000

21. Octopus Corporation incurred the following costs during the year ended December 31, 2014:
Laboratory research aimed at discovery of new knowledge 150,000
Radical modification to the formulation of a chemical product 125,000
R&D costs reimbursable under a contract to perform R&D for Wings Inc., 350,000
Testing for evaluation of new products 250,000

What is the total amount the company has incurred that can be identified in the research and
development stage?
a. 150,000
b. 275,000
c. 525,000
d. 625,000
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Intangible Assets

22. Research and development costs for Headway Corporation for the year ended December 31,
2014:

Project A: Expected total revenues P7,000,000, starting in early 2013. Expected total costs will
be P5,000,000. Costs incurred to date, all in 2014 are P2,200,000.

Project B: Expected total revenues P6,000,000. Costs incurred to date are P3,500,000.
Expected total costs are P4,500,000. The commencement of commercial sales is uncertain due
to problems in raising funds to cover the final development costs.

Project C: Expected total revenues, P3,500,000 with P1,000,000 of revenue already earned in
2014. Total development costs incurred, all in 2014, were P3,800,000.

Research projects: Total costs spent in 2014 were P1,500,000.

22.1 What amount of development costs should Headway Company capitalize in 2014?
a. 2,200,000
b. 5,700,000
c. 6,000,000
d. 7,500,000

22.2 Of the total actual cost incurred in 2014, how much should be recognized outright as an
expense?
a. 1,500,000
b. 2,200,000
c. 3,500,000
d. 5,000,000

22.3 What total amount should be charged against income in 2014 related to the research and
development costs?
a. 1,500,000
b. 5,000,000
c. 5,300,000
d. 6,300,000

23. On January 2, 2014, Firearm Corp. Signed an eight-year lease of office space. Firearm has the
option to renew the lease for an additional four-year period on or before January 2, 2021. During
January 2013, Firearms has incurred the following costs:
 P1,200,000 for general improvements to the leased premises with estimated useful life
of ten years.
 P500,000 for office furniture and equipment with estimated useful life of ten years.
At December 31, 2014, Firearms intention as to exercise of the renewal option are uncertain. A
full year’s amortization of leasehold improvements is taken for calendar year 2014.

In Firearm’s December 31, 2014 balance sheet, how much should be the accumulated
amortization?
a. 100,000
b. 150,000
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Intangible Assets

c. 170,000
d. 202,000

24. At the beginning of the current year, Ex Company acquired a 5-year lease on land and building
from another entity at an annual rental of P1,200,000. On the same date, the entity paid
P2,400,000 reprensenting rental for the first year and an advance rental for one year whil will be
applied for the last year of the lease contract. Moreover, the entity paid P2,000,000 upon
signing of the contract to obtain right to the lease. Improvement and alteration were made on
the building at a cost of P500,000.

24.1 What is the rent expense for the current year?

a. 1,200,000
b. 2,400,000
c. 3,600,000
d. 1,800,000

24.2 What is the amortization of leasehold for the current year?

a. 500,000
b. 400,000
c. 200,000
d. 0

24.3 What is the depreciation of leasehold improvement for the current year?
a. 500,000
b. 900,000
c. 100,000
d. 0

25. On January 1, 2015, Bay Company acquired a land lease for 21 years with no option to renew.
The lease required the lessee to construct a building in lieu of rent. The building completed on
January 1, 2016, at a cost of P8,400,000, is depreciated using the straight line method. At the
end of the lease, the building’s estimated fair value is P4,200,000. The useful life of the building
is 25 years.

What is the carrying amount of the building on December 31, 2016?

a. 7,980,000
b. 8,064,000
c. 8,190,000
d. 8,232,000