HOMEWORK ON INTANGIBLE ASSETS

PROBLEM 1 (Research and Development Costs)

Daisy Company incurred the following research and development costs in the current year:

Materials used in R & D projects 500,000

Equipment acquired that will have alternate future use in future R & D projects 2,000,000
Depreciation on above equipment 500,000
Personnel costs of persons involved in R & D projects 1,500,000
Consulting fees paid to outsiders for R & D projects 100,000
Indirect costs reasonably allocable to R & D projects 200,000

1. How much is the R & D costs to be expensed in the current year?

2. Assuming that the equipment has not alternative future use, how much is the R & D costs to be expensed in
the current year?

PROBLEM 2 (Patent, Capitalizable Cost)

Orchid Company developed an equipment to be used in its manufacturing process. The following expenses were
incurred in developing and patenting the equipment:

Research and development 1,000,000

Metal used in the construction of the equipment 400,000
Blueprints used to design the equipment 350,000
Wages for employees’ work on the research, development & construction of the equipment 1,500,000
Legal expenses to obtain patent 600,000
Expenses of drawings required by patent office to be submitted with the patent application 70,000
Fees paid to Patent Office 100,000

How much is the total capitalizable cost of the patent?

PROBLEM 3 (Research and Development, Patent, Amortization, Impairment)

Azucena Co. reports the following patents on its December 31, 2019, statement of financial position:

Useful life (at date of

Initial cost Date of acquisition
acquisition)
Patent A P6,120,000 March 1, 2016 17 years
Patent B 2,250,000 July 1, 2017 10 years
Patent C 2,160,000 September 1, 2018 4 years

The following events occurred during the year ended December 31, 2020:
a. Research and development costs of P3,685,500 were incurred during the year. These costs were incurred prior to
projects achieving economic viability.
b. Patent D was purchased on July 1 for P4,275,000. It has a remaining life of 9.5 years.

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c. A possible impairment of Patent B’s value may have occurred at December 31, 2020. 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, 2021 P300,000

December 31, 2022 300,000
December 31, 2023 300,000

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

1. How much is the total carrying value of Azucena’s patents on December 31, 2019?
2. How much impairment loss should be reported by Azucena’s for the year ended December 31, 2020?
3. How much is the total carrying value of Azucena’s patents as of December 31, 2020?

PROBLEM 4 (Franchise, Installment Note, Initial Franchise Fee)

On January 1, 2020, Ylang-ylang Company signed an agreement to operate as a franchisee of another entity for an
initial franchise fee of P12,000,000. The same date, the entity paid P4,000,000 and agreed to pay the balance in four
equal annual installments of P2,000,000 beginning January 1, 2021. The down payment is non-refundable and no
future services are required of the franchisor. The entity can borrow at 14% for a loan of this type. The franchise
contract will last for 10 years.

1. How much is the interest expense for 2020?

2. How much is the amortization expense for 2020?

PROBLEM 5 (Goodwill Computation)

The following pieces of information are available in relation to Lavender Corp.’s computation of Lilac Corp.’s
goodwill:
Net assets, excluding goodwill P120,000,000
Industry’s normal rate of return 12%

Lilac’s net income for the past five years is as follows:

2016 P15,200,000
2017 15,600,000
2018 15,200,000
2019 17,200,000
2020 16,800,000

Compute for Lilac’s goodwill using the following methods:

1. Capitalization of average earnings, assuming that average earnings is capitalized at 10%
2. Capitalization of excess earnings for 5 years.
3. Capitalization of excess earning at 25%.
4. Capitalization of excess earnings for 5 years using a discount rate of 12%.

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PROBLEM 6 (Various Intangible Assets - Comprehensive)

The following information pertains to CANNA Inc.’s intangible assets:

a. On January 1, 2020, CANNA signed an agreement to operate as a franchisee of Max & Caroline Food Chain, for
an initial franchise fee of P15,000,000. Of this amount, P3,000,000 was paid when the agreement was signed and
the balance is payable in 4 annual payment of P3,000,000 each, beginning January 1, 2021. The agreement
provides that the down payment is not refundable and no future services are required of the franchisor. Discount
rate used is 14%. The agreement also provides that 5% of the revenue from the franchise must be paid to the
franchisor annually. CANNA’s revenue from the franchise for 2020 was P1,900,000. CANNA estimates the
useful life of the franchise to be 10 years.

b. CANNA incurred a total of P13,000,000 in 2019 for experimental and development costs in its laboratory to
develop a patent which was granted on January 2, 2020. Legal fees and other costs associated with registration
of the patent totaled P2,720,000. CANNA estimates that the useful life of the patent will be 8 years.

c. A trademark was purchased from Baker Inc. for P6,400,000 on July 1, 2017. CANNA estimates that the useful
life of the trademark will be 20 years from the date of acquisition. Expenditures for successful litigation in defense
of the trademark totaling P1,632,000 were paid on July 1, 2020.

1. How much is the carrying value of the franchise at December 31, 2020?
2. How much is the carrying value of the patent at December 31, 2020?
3. How much is the carrying value of the trademark at December 31, 2020?
4. How much are the total expenses resulting from the above transactions that would appear on CANNA’s profit
or loss statement for the year ended December 31, 2020?

October 2020