_L1-Variable overhead costs incurred to selt-constructa ass ‘mpanies should assign no portion of fixed overhead to self-constructed assets. "77S When capitalizing interest during construction of an asset, an imputed interest cost ‘on stor financing must be included. “EA Assets under construction for a company’s own use do not qualify for interest cost capitalization. “£5. Avoidable interest is the amount of interest cost that a company could theoretically avoid if it had not made expenditures for the asset. “L.6.When a company purchases land with the intention of developing it for a particular use, interest costs associated with those expenditures qualify for interest capitalization. -L7-Assets purchased on long-term credit contracts should be recorded at the present value of the consideration exchanged. ‘1 8-Companies account for the exchange of nonmonetary assets on the basis ofthe fair value of the asset given up or the fair value of the asset received. Ifa nonmonetary exchange lacks commercial substance, and cash is received, a partial gain or loss is recognized, .E((0) When a company exchanges nonmonetary assets and a loss results, the company recognizes the loss only if the exchange has commercial substance. "LLu-Gains or losses on disposals of assets co not distort periodic income when the group or composite method is used to compute depreciation. L.£22 Companies frequently use the composite approach when the assets are similar in nature and have approximately the same useful lives. Dey Changes in estimates are handled prospectively by dividing the asset's book value less any salvage value by the remaining estimated life. 12. An impairment loss is the amount by which the carrying amount of the asset exceeds the sum of the expected future net cash flows from the use of that asset. 1.18: The first step in determining whether an impairment has occurred is to estimate the future net c&sh flows expected from the use of that asset and its eventual disposition. Fi Impaired assets held for disposal should be reported at the lower of cost or net realizable value. Bey Normally, companies compute depletion on a straight-line basis. 3 Intangible development costs and restoration costs are part of the depletion base. Cay The asset turtover ratio ts computed by dividing netsales by ending toval assets p< Ty “EQ@M The profit margin on sales ratio is a measure for analyzing the use of property, plant, and ‘equipment. Problem Solving Problem 1. Urban Corporation bought a piece of Land and self-constructed a warehouse during 2019. ‘The following related costs were charged to property, plant and equipment account: Land purchase 12,000,000 Demolition of old building 300,000 legal fees for land acquisition 150,000 Building permit fees 80,000 Interest on loan for construction 270,000 Building construction costs 15,000,000 Landscaping costs 3,500,000 Equipment purchased for use in excavation 800,000 Fixed overhear allocated to building construction 100,000 Compensation for injury to construction worker (No insurance was carried) 140,000 Profit recognized on construction = 1,200,000 Modifications to new building per instruction by city building inspectors 240,000 ‘The following were credited to the account: Sale of salvage from the demolished old building 70,000 Sale of excavation equipment 640,000 ‘The modifications to the new building per instruction by the building inspectors resulted from poor planning by the company. Determine the separate costs of Land, Land Improvements, and Building, Apply the principles of Philippine interpretations Committee.Problem 2, On January 1, 2019, Metro C fe like company follows the poli ‘0 Company started the construction of its new building. The icy of capitalizing allowable interest costs. Construction costs were incurred as follows: January 1 1,400,000 September 20 1,000,000 March 31. 1,000,000 December 31 400,000 July 1 1,200,000 ‘The Building was completed on December 31, 2019. a _On January 1, 2019, the company obtained a loan for P 4,000,000 at an interest rate of 10%, specifically for the construction of the Building. Prior to their disbursement, the proceeds of the loan were temporarily invested and earned interest income amounting to P 125,000. How much is the capitalized interest? b. The company obtained a loan for P 5,000,000 at an interest rate of 10%, specifically for the construction of the Building. Availments from the loans were made at the beginning of each quarter in equal amounts. Prior to their disbursements, the proceeds of the loan were temporarily invested and earned interest income amounted to P 40,000. What is the total costs of the building constructed? c OnJanuary 1, 2019, Metro Co. borrowed P 1,800,000 at an interest rate of 10% specifically for the construction of its new building. Interest earned for the temporary investment of the proceeds of the loan prior to their disbursement amounted to P 10,000. Metro Co. also had the following other loans in 2019 which were borrowed for general purposes. The proceeds of these loans were used in part for the construction of the Building. 10%, 2-year note at P 1,600,000, and 12%, 5-year note at P 2,000,000. How much is the capitalized interest? i Problem 3. The Asiaplus Corporation received on January 1, 2015 a special type of equipment, built by the supplier to Asiaplus’ specifications. The equipment is comprised of the following components: Component Gost Est.ResidualValue Estimated Life 1 82,000 2,000 10 years 2 33,000 3,000 6 years 3 22,000 1,000 Tyears 4 18,000 2,000 S years Component 4 was replaced on December 31, 2018, the company incurring P 20,000 on the new part. The company realized net proceeds of P 5,000 on the sale of component 4. The new part is expected to last ‘ev for'S-years withno:estimated-scrap-value-”Give entries for: (a) depreciation of the equipment forthe year. ended December 31, 2015, (b) sale of component 4 at December 31, 2018, (c) replacement of component 4, (d) depreciation of equipment for the year 2018, and (e) depreciation of the equipment for the year ended 2019, Problem 4. On July 1, 2018, Family Mining Company purchased a coal mine for P 4,000,000. The estimated capacity of the mine was 1,400,000 tons, During 2018, the company mines 20,000 tons of coal per month and sells 18,000 tons of coal per month. The selling price is P60 per ton. And production costs {excluding depletion and depreciation) are P8 per ton. At the end of the mine's life, itis expected that it will cost P 400,000 to restore the land, after which it can be sold for P 200,000. The company also purchased temporary housing for the miners at.a cost of P 300,000. The housing has an expected useful life of 10 years but it {s expected to be sold for P 20,000 at the end of the mine's life. In 2019, after the financial statement for 2018 have been issued, a new estimate indicated that the capacity of the mine was only 800,000 at the beginning of the year. Determine the following: (a) cost of ending inventory for 2018, (b) cost of goods sold for 2018, and (c) revised depletion and depreciation rate per ton in 2019? Problem 5. Lakers, Inc. purchased a machinery on.January 1, 2015, at a cost of P 100,000. It is being depreciated using the straight-line method over its projected useful life of 10 years, At December 31, 2015, the asset's fair value was P 112,500. Accordingly, an entry was made on that date to recognize the revaluation surplus. It is the company policy to transfer a portion of revaluation surplus to retained earnings every period. An impairment was detected on December 31, 2017 and the recoverable amount of the asset was determined tobe P 67,375, At December 31, 2018, the fair value of the asset was determined to be P 73,000. What amount of revaluation surplus should be credited directly to equity n December 31, 2015? What is the amount of impairment loss to be reported by Lakers on December 31, 20177 How much is recognized as revaluation surplus on December 31, 2018? SS»fonbicea 1 Lond. improve mene Land Building ood ooo » 0 00.0 BO 000 4p 000 Gast 210 090 \s0_ 90 1s 000 30090 0 ond (49 nov) 2 -( 40 poo) i te : 2 san oho * (210 op : fone a i d Wi-+ 400 aoc Lepivins OS), (oe onosas d)_pepeeosicn expense i200 {c) nag pet musoied mepucvinnind 14 100 naa ra - bs 490.0. 400 mas orpcetiotinn Expense 2 wei umulaitd pepceti os 1p nog Probie m 4 (a) _2nco oo9 = 2.85 12006 th) 5-46 Ing o 00 i4y 0 00 usgaiom)) ae Ec 343 200: 5.1 (O__prpletinn + 4p ngo/ yo ggg + Biro 2gHy0 x bond a ; Jn1ooo AU s20 Depceciuien +22 te 31 2046 Demons 1% 14090. i (2200) fur) = 5 b25 13,200. 4Audit Prob: PPE 2 best answer foreach ofthe following, O@t2ta=lo a pment is iypiely je o Beene af he seston st sscepsibleto fod beease A, beamonnisrvontes on the bane set a st she Interea conto is inke galenenersbipot veal property? vie eal poy AD niche the hest antt poceretoabuaneidencet sap the nto appeuvals 0 ey. uisation af corporate mines nl or restos wi ss . a e he neuistion af apecie pee of prOpety Pours disbursement of praceeds fore closing ofthe property. ton we the ile compan sa baal he itor nsnally obtains and understanding of internal eontoland performs crty ana equipment transactions occurdarin th a, Fests ofcontrok i Analytical provesanes to verify ewrrent yearaaldtions to property and equipment ae «Aber jn a the balances athe begloningof eye, 5 AQhwichorske bowing combinations of pacers anaeitr most keto perform to aban evidence about res asekadeon? 2 Fe Recompatingcaleulagions and obaining written management representations CC sserving operating activities and comparing balances to prior pero balers ‘.contpniny ownership and conruborating transactions through ingires of elient personnel pected? Z. aditoe tours production fciiy, hich ofthe misstatements or questionable practices is most Hkely tobe detected by the aul procedures Arercciation expenss on falls depreciated machinery has heen recogsiz ‘5. vera has heen overapplia i Sctnsurance coverage on the Eality bas lapsed. i dQ eesting for unrecorded petivements of equipment, an aitoris most key as | EGohnpare ceprectatin journal entries with similar prior year entries inscarch of flly deprecated eaipment aarena trams of equiparent observed dusing he plant rove ad then trace tem othe equipment subsilary ede Seer ic Senerajoumal for nsusualnipment additions and excessive abs to repalrs an maintenance expense -QDorernsinin tha proper amounts of deprecation ae expensed proves assurance ‘Completeness Jpouemanayements asterions of valuation and — C Rights and obligations. ‘Existence or occurrence, ‘gAhanditor may conclude that depreciation charges are insufcient by noting Pinan values greatly in exeess of ook ales $y Lange numbers of flly €epreciated assets. scauettonnayzes pais and maintenance ssn primar aban evidence in aupporeol te aucasersion bara © Soe ots capers for repairs and mainterance have been ecordd in he proper Period. Fae esernnas for property and equipment have been recorded he proper period ies for repairs and maintenance have been property cat ged to expense, Ip captallaed the cost of palstngits warehouse An ator would most key detect this when 1p @n-viokstion of company policy, Coatsen Company erroncoust si siecussns cuptatznon policies with Coataens contol i Byamtnng maintenance expense accounts CObserving that the warehouse had been painted. Avcnionstoequipmentare sometimes undersatd: Which ofthe following aceouts olde reviewed by the auditor to gain reasonable assurance tha al rot undesael? fences yale e.bepeiton egese EGomonaliprtregumest S(RETSrSad mateo ceenpeszes anager he wl ox ely sok rom te plant manager information repocing is necessary insurance coverage. QD wvpenan auctor interviews the plant n panei “ Fae f gta inventory observation proceures. \ pelewalatprocurementof ceraia ames. " Srey atthe preston for ucaleteacounts following? aaamateg ofthe debits tothe accumulated depreciation account, ‘GL Revieyrat insurance policy riders. sents of equipment through which ofthe! tive for management ¥o manipute the ining and amo 1yAhich ofthe following is not ikely amo an sou cna ietees sn enigs yer shave overpass Yea A "big atl Lan abnormally unprofitable year ‘bs. Incorne smoothing.The amount of interest expense tobe recognized in 2017 is? os 7 Bhne crying value or te note payable ade aot rise GAM 1100, punter of machines desig to produce ke gents. 1Nesen 4 ean iste tive esta ve on sos o£ ‘Showed ato cost of 4,200,000 and acct 10 Company operates Fetory that contains keg ‘ated at 10 8 per avian on a straghtsline basis. In general, machines are St. At Fly 1, 2016, Espresso Coatpany’had a total of a 6 machines, and the balance sheet ‘ation of P 1,300,000, Dueing the 2016-2017 periods, the following transactions occurred: ee 1.08 Septesniy 1,206, anew nnichine was acquired fr P 150,000, This machine replaced two other machines. One of the two replaced mach sso on ly 2012 or Pz AUD, ws ra onthe new aching wl Espresso, In making cash payment of F000 on the new nuschine, Thesscond repiced chi od a cast of 790,000 on Apel, 2014 ad was sok forP 73,000. - 2-0 fay 1, 2017, mshi had a of 1000 oy 12014 ware am sea sod fr serapfor POO, 5.0m January 2017, a machine thi hal boon acquit on fansary 1, 2014 Tor P70,000 wa repaired becase its mator had been datnaged fon overt cca est of P30, Tes expect at isola inerease the Wife of the machine by an extra two years, ’ i : oc ments, The arm cost P 12,000. Mn Ap 1, 2017, Isiesso Coma filed anew form of ar toa machine used for pulling special designs onto parm a 12000, The machine had hoon said om pei, 2014 for P400,000. The arm ern be use on a number of other machines when required and has yearlite. Itwillnot he sokl when any pater machine isretired but retained foruseon olher machines. 26 The reporting dei ane 3, ihe vested cigprecttions September 1, 2016 ofthe machine that was acquired on july 1, 2013 amounted to? P28, 3710 ‘The gain (loss) on the sale of the second replaced machine in (1) on September 1,2016 amounted to? ? 25°15 Hivenew net deprecisite cost of the machine whose motor was replaced on nnaty 1, 2017 8? P94, Jeo The now armfita to antachine on April 1, 2017 should be depreciated over?” IB Years Ee depreciation expense oll thensachines forthe yer eno Hane 30,2017 ward amount toi GTGPEE (On an audit engagement for 2017, you handled the andit of fixed assets of Mongol Copper Mines. This mining company bought the ‘xpioration rights of haven Mineral Exploration on June 30,2017 for P 14,580,000, OF this purchase price, P 9,720,000 was allocated to copper ore ‘which ad renrsining reserves estimated at 1,620,000 tons. Mengel Copper Mines expects to extract 15,000 tons afore a month with an estimated selling price of PS0 per ton, Production stated immediately alter some new machineries costing P 1,200,000 were bought on Jane 20,2017. These ‘ow machineries halan estimated use ifeof 15 years with a scrap value of 103% of cst after the ore estimate has been extracted from the property, at which time the machineries will already be useless, Amang the operating expenses of Mongol Copper Mines at December 31, 2017 were: Depreciation expense, P810,000, and Depreciation = Machineries P 80,000, Recorded depletion expense was under /overstated by? 470,000 ovu(iared, )Recorded depreciation expense was under/averstated by? | JO.00 owecteited The audited carrying value of the machinery as of Decenuber 31,2017 is? I (40/000 The audited carrying value of the copper ore a of December 31,20177 1s 1R0,000, The appropriate depreciation method that shoud be used forthe machineras is? Ovkpu Methel ere oto ats Green Company acquires a new manufacturing equipment on January 1, 2017, on installment basis. The deferred payment contract Provides fora down payment of P 300,000 and an 8-year note for P 3,104,160, The note sto be pad in 8 eq insta yments of P 388,020, ‘neuding TOPs interest. The paynrents are to be made on December 31 of each year bephinlng December 31,2017. The equipment has a cash price sguivalent of 2,370,000. Green's financial year-end id December 31- What isthe acquisition east ofthe equipment? 270,000. ath paiue |The amount to be recognized on Jantiary 1, 2017, as discount on note payable is? 14034 60 ) The amount of interest expense to be recognized in 2017 1s 201,000 re yi mx oto Ming Capen ts SOAPS id id ee Ey ead Nee eee ne rt cnet ae Ca oe eee reer pamer cestlociea akan nies t's oases pat mtrteased aoe an ea cpa a ee reaper ina ee Sree ee ee eeoeene Tons mined £200,000 tons : - Tonssold 640,000 tons ¢ Unit selling price per ton Peso Direct labor 640,000 Miscellaneous mining overhead 128,000 Operating expenses (excluding depreciation) $76,000 + Inventories are valued on a first-in, first-out basis. Depreciation on the building isto be allocated as follaws; 20% to operating expenses, 80% to production, Depreciation on machinery is chargeable to production, ‘ Based onthe above and the result of your aut anger the following; (Disregard tax plications) How mach isthe depletion for 20177 UO, )Total inventorlable depreciation for 2017? BA ,000 How nich sthe ventory asof December 31,2017? ARR,400 | 460) yoo iow mich s the costo sates or he year ended December 3,20177 WUE4s te How much is the maximnam aniount that may bedeclared as dividends a the end ofthe company’s frst year of operations? 11%, 400 AN C500) (40, 08), 470,480. 200 S rei ua? 2S19 oop = tne ) 1200 pa nooo 31200 pon ye, ——1u2oonn (nooo) (uonnod (un o0) . woso poo Jono —overedied 140 000. a qo 000 YL 540 Doo 5 Wwioonn ae " ~ 043 ; 210.000 (suo ono) G2 x qoopn = 40000 Japov0 overstated 5) putput method = 12400 anovo- 1457520 45 30000 “(ledond yoyo 10S = 2575 gain——___fephiem 3 = Pb) 9930 999 01.2 X_ fp ppg a) 2104 io. 7 2 _s.0.000 Luogono = (2020-100) 2110 apo 20vo90 tw. (320 090) p24 Ibo. 280 000 = = 4 = 3) fayment—inkeest mart _—___tV 229-000 2030 00 4009 " _36 6 b20 207 | Igloo I¢ggaen | soa sno 4) 207 000. ) _ennood 3H oog: ee ae {uyoooo? upon 5) 1g) 020. 28% 020 20 #9000 (13 1021 (307 ait), 9200) 440 000 2009 x pone 427-400 gyaoun (dono) “unnnoYopic: Substantive Tests of PPE Hou nated daringyo . eset, All expen ‘ampany that the company cared oa anit of the YOU C identi sverotecorled in the fallowing.single asset account, Propeety-andl Fquipment ‘Aequisition price af land andl building 960,000 Options taken out on several pieces of Property 16,000 [ist price of naichinery purchased 3110 Freight on machinery purchased 5,000 Repair to machinery resulting feom damage slaring shipment 1,100 Gost of removing old machinery 400 102,000 ard scowls Driveves modeling, 400,000 pai since acquisition of bailing 20,00 1,828,480 isossments, which are believe to fairly represent the relative ‘yas subject t9:12% c1sh discount, Based on propert the nd. The machi igrelated tothe bul Compute the balance: B Land Building Warchouse Machine Delivery Truck. and ~ On January 1 stood in the path of: Building ~ On March 12, | 1) Land, (2) Building, and (3) Machinery. 2018 disclosed the following property d Ace Dep. Proceeds : 3,720,000, "288,000 980,000 108,000 564,000 your sult of CAN Corporation for they Cost 4,800,000 1,800,000, 8,400,000 3 1,320,000, 960,000 364,000 1,200,000 570,000 ‘condemnation award was recei new highway. land an building were purchased at estate was acquired with theintention of demolis corporate books. There Jugs Cash proceed received in September represents the net proccess Warehouse - On huly 4, the warehouse was destroyed by fire. The warehouse aoarernce proceeds and other fands were used to purchase areplicement warehots Mochi - On December 15, the machine was exchange fora machine having a fair val ‘Delwony Track ~ On November 13, the delivery 0 c Jin connection withyour audit ofthe DO Mining Corporation| rP 10,400,000 mining property estimated to.contaln 6.0000 ‘mine operations costs F 800,000 and have estimated If ed residual value P 320,000 after its physical If 200,000 tons: {640,000 tons 440 640,000 128000 ‘Tonsmined Tonssold Unitsellingprice per ton. Direct labor "Miscellaneons mining overhead P ‘Operating expenses (excluding depreciation) — "inventories are valied on a FIFO basis. Depreciation on the "production, enema tguttiear soe pea rem ota the statement of financial position jatar al beded ee 3, ulin, P3,000,000; Accumulated en #40080, The cary recognition prior periods ofan asset s value ofthebulldingto be 1,600,000 andthe equipmentto ff December 31,2017. las Property and Equipment: hich was taken arvl cod ‘dnd land purehasedl and P 10,000 related to thase not pure ived as consideration forthe forced sal of a total cost of P 6,000,000, of which 30 ing the building, anal this front demolition ot building, wats purelased on Janey fat a cost of P 7,200,000. 576000 : bul sto be allocated a5 flows: Deprectation on ntchineryis chargeableto production, 5 Eatin for 2038, (3) Inventory sof Decenibe= 31,2018, as dividendsat the end ofthe firstyear. 4 niber of transactions invelvingthe acquisition of several values involved, the building is worth twice a8 much as Jited to Purchase discounts. OF the wa options, P 6,000 sold at book val sed The old machinery Was lispositions: 720,000, 880,000 64,000 564,000 {the company’s land and building, which 1 was allocated to the building on the ‘as accomplished duringthe month of 2, 2012. On December 12, the Tue of P 756,000 and eash of P 108,000 was received. puskting, (3) Warehouse, (4) Machine, and (5) fortheyesr ended December 100 tons ofore. The residial value of the pro} feoftiteen yea with no residual value, Mine! Feo peace Pollowrngis the stmmary ofthe company’s operations ‘machi 20% to operating expenses, 80% to RR ead St eae company showed the following ope and equip Deptacaton- Bulg P Se omen E20 00; canned Depreciation opted the revaluation model fo the valuation of property and equipment. Se pls forte butlding of P 150,000. dn cenber 31 2017 an Independent Eoebangan, Thebitaingandeqrpmenthod rena sel ‘Thishhas resulted in valuerA 4000005320 000 02 “4 vavopgo: 64000 4 noo * 2000 ‘yx pogo = 4000 422000 44000 G) 4g 400 144 n90 § cag of t 212 03 i 5009 pe sei 3110. | pro biem Ih 4 120 09) {2.2 ao (3) £29) O09 fu) g64 000. (veo 0 oun) - og ooo (514 090) (5) su noo z (030 Doo) Coi000) : Probie Wh 4) 19 son oye (2) gonoop topo 00 (2) 4p o99 | ($00 090) = gogoooo + (s2n00n) 3g nog , Quon 000 O10 ao ooo: be oop | | boo 000 pong 5d bybond ! 2 0000 320 000 toon iouas sa + mow fee 40 O00. Lupo art : = Pee “429 poo. Wooo : | | GH Opp piagpe eee 2 2 374 000 |{u)_G4Y0 odo L )_gunoon y #4 L pong ¥ 201. 1u00d Lu 4 bond Ibouog 5 1b 000) (iwoon) 534 Won. [ve 000 (302400 Peo vlem W gy eno dvd 12)_\s9 non (a) Woononjrc +s GuUOde (ayy oon) Lupo poo) snnnoafg ogo loo yoa Camppop) 225000 (vu) —ivovons (5) ipo noo Sooo (snp) 2500 00n isn00 (o8400b uae 22000 Deaviem V (1) 400000 (1D. (3). 910-009. (4) 1450 00 (iyo yp 9) z £20000)» (2smoo) JWwovoo Jae ISD 000 Tuo 00D (900000) (4p ono) (yo don) yo on 29000 |INTANGIBLE ASSETS —— Theory of Accounts . 1 Am intangible aset iden as Thomas a 0. Aba nt sot tee Pecune ve ‘ronment at wot phys sence a os pain ‘estos ancy and nonmonetary ak witho phys substance h of the following sui! qualify es a intangible asset? ‘2 Advertsing and promotion on the launch of a huge product 1h Colles ition fees pas to employees who deide to enol in an exccutve MBA program while working wih the ent Operating loss during the inital stages of project al cos pai to intellectuslpropety lawyers to register a patent ich of the Following does not qualify a an intangible asst? ‘a Computer software © Copyright thats protected 1, Registered patent 4. Notebook computer fh ecoition eter for an intangible asset neude which ofthe following conlitons? De Lirmustbemensiaed arcost. weet the detinlhen oF Intanaibic ash 2 Th. tseost canbe measired reliably ti itisprobable hat fture exonome benefits wil rise rom ts use a .tand I Land only ‘nd ITonly Wand tttonly D. gRaraetc et at ar sit spt salinity be een t a” Recoverble amount Faicvae Paes d Con .. &Kite ital recognition, an intangible ast sal be ea using he 2 Cost model only &Eithercost or evaluation model evalston model only 4 Nether eos nor evaluation model 7 tne set gid by way of overeat maybe ily reste 1, Nominal anount or zero, plus any expenditure tat sdzctl altribtabe to preparing the asset fr its intended use. a Touly (Ether Tor tt ‘only Neither For 1 wll shall be tested for impairment ca. If there isan indication of impeirment ea - be rowers ent ye ‘May be roverow partyin subsequent year Every 5 years ‘Gaithe aoquistion of a subsidiarypoe ene ar RIE ROME IAS ee is a 40 years 5: . Loe & Syears ; 4. The rights should not be amortized C77 Mrwtattion ofan intangible asset with finite us ie shall eommense when Iti first recognized as an asset, [tis probable that it will generate future economic benoits © Itisavailable for the intended use +4, Ae cost can be measured with reasonable certainty ), Which of the Following represents the masimum amortization period mandated for intangible ests? a 10years b. 20 years © Dyears 4, Axo arbitrary cap on the useful life has been established, C, 22 Which of the folowing factors should nat be eomsidered in estimating the useful ite of intangible asset? +4. Legal, regulatory or contsctal provision 'b. Expected action by competitors or potential competitors © Residual value a Axpested usegsol the asset DH Teis the systematic allocation of the cost ofan intangible asset less any residual value as an expense over the asset's useful life? 8 Depreciation ‘c. Depletion 1b, Realization 4d. Amortization DP Whicn is not a component ofthe cost of internally generated intangible asset? 4. Cost of materials end services ued OF consumed in generating the intangible asset >. Costof employee benefits arising ftom the generation of the intangible assct Zo. Feesto register algal right ‘ tare on training staf to operate the asset 9 F Research ectivities includes al ofthe followin, ‘= & Search for application of research finding o ater knowledge 2b. Search for product or processes alternative = ¢. Formulation and design ofthe possible product or provess alternative 4. Design, construction and testing of preproduction protetype and model. - dewclopmont ack wi Wes 23, Which of the following statements in relation tothe term “development” itrue? C-- I. Me product being developed should have already been put into commercial production cr use. Development involves the application of research findings. a Teak. © BothT and it Ou Neither Por 1 D ne ae ee ‘a. Associating cost and effect ‘Income tax minimization b.__ Systematic and rational allocationThe following information pe ns Lo BAKER COMPANY'S intangible et {On Jantuiry 12019, taker signed an agreement to operate as a franchise {initial franchise fee of PL, 500, 000, OF this amount, P300, 000 was p balance bs payable in 4 amuual payments of P300, 000 each, beginning January 1, 2020. The agi that the down payment is not refimdable and no future services are required of the franchisor. ‘The present value al January 1, 2019, ofthe 4 annual payments discounted at 149% (the implicit rate for a loan of this type) is P874, 000. ‘The agreement also provides that 5%6 of the revenue from the franchise must be paid to the franc! annually. Baker's revenue from the franchise for 2019 was P19, 000, 000. Baker estimates the useful life of the of Max and ‘ss Food Chain, Ine. for an jd when the agreement wa franchise to be 10 years, 2. Baker incurred P1, 300 000 of experimental and developmental costs in its was granted 01 Ja nd other costs 000, Baker estimates that the useful life of the patent will be 8 years. tory to develop a patent which n of the patent totaled P272, 3, Atrademark was purchased from Banawe Company for P640, 000 on july 1, 2016. Expenditures for successful litigation in defense of the trademark totaling P163, 200 were paid on July 1, 2018. Bak life of the trademark will be 20 years from the date of acquisition, estimates that the useful Computes ACMh “Whats the carrying value ofthe franchise at December 2, What is the earvying value of the patent at December 30 What is the carrying value of the trade the total expenses resulting from the t y 1, 20192 , 2019? irk on December 31, 20197 actions that would appear on Baker's income statement for the ended December 31, 2019, should be U On Noven coast of a pop 2018, reflect any that operates a scenic railway along the al position at fair values of Rapids on July 1, us the terms of acquu Goodwill 200,000, Operating license 1,200,000 Property-train stations and land 300,000. Rail track and coaches 300,000: Steam engines (2) 4,000,000, Purchase consideration: 3,000,000 ‘The operating license is for ten years, It has recently been renewed by the transport authority and is stated at the cost of its renewal. ‘The carrying amounts of the property and rail track and coaches are based on their estimated _ replacement cost. The engines are valued at their net selling price. On December 1, 2018, the boiler of one of the steam engines exploded, completely destroying the whole engine. Fortunately, no one was injured, but the engine was beyond repair, Due to its age,areplacement could notbe obtained, Because of the reduced passenger capacity, the estimated value in use of the business after the accident was assessed at P2 million. Passenger numbers after the accident were below. expectations. even: after allowing for the reduced capacity. A. market research. report concluded that tourists were not using the rallway because of the fear of similar accident occurring to the remaining engine. In the light of this, the value in use of the business was re-assessed on December 31, 2018 at Pi.8 million, On this date, Abar received an offer of P 900,000 in respect of the transferable operating license. Compute ely ‘amount of the following as of December 31, 2018 after recognizing the impairment loss, Goodwill, (PF Operating License, (31 Property - Train stations and land, engines. Rail track and coaches, and 5) SteameT you gathered the following information related to the Patents account of the Majayjay Cookie Corporation in {i yneetion with your audit of the company’s financial statements for the year 2018, In 2017, Majayjay developed a new machine that reduces the time required to insert the fortunes into its fortune cookies. Because the process is iasidered very valuable to the future cookie industry, Majayjay patented the machine. The following expenses were sicurred in developing and patenting the machine: Research and development laboratory expenses P 1,000,000 Metal used in the construction of the machine 320,000 Blueprints used to design the machine 128,000 Legal expenses to obtain patent 480,000 Wages paid for the employees’ work on the research, development, and building of the machine (60% of the time was spent in actually building the machine) 1,200,000 Expenses of drawing required by the patent office to be submitted ‘with the patent application 68,000 Fees paid to the government patent office to process application 100,000 During 2018, Majayjay paid P 150,000 in legal fees to successfully defend the nt bby Cookie Monster Corporatjaf. Itis the compgnJ's policy to take full year ‘amortization in the year of acquisition. ao eoovne the followings [24 Cost of patent, 2] Cost of machine, (3) Amounythat should he charged to expense when panerrad connection with the development of the patented machine) and (AJ Carrying amount of patent as of December 31,2018. (4m,606 Research and development services performed by nd Laboratory research patent against and infringement suit During 2018, Pangil Company incurred the following costs: “lim Company for Pangil, P 700,000; Testing for evaluation of new products, P 600,00 aimed at discovery of new knowledge, P 850,000. Compute the amount that will be classified and expensed as research and development. aiso,o0% suring the year ended December 31, 2018: Design, construction, and V. Rizal Company incurred the following costs di testing of preproduction prototypes and models, P 435,000; Routine, on-going efforts 9 refine, enrich or otherwise improve upon the qualities of an existing product, P 375,000; Quality control during ‘commercial production poor ting routine testing of products, P 450,000; and Laboratory research aimed at discovery of mew Knowledge, ? 630.000. Soppute che amount that will be classified and expensed as research and development.DATE “intangible : Foote 2 4 Q__2.700,000 @ Panrom 3 fof (som) > atsom/ 1 A wi) 2 aioe, ; (19 Wo)? teu om) 0 7 ERLE : 7 Sail Oot. fy = doo x %{n = topo > to {oto.si0 a sum ray (ire #0) om = tos _# 524 Yon = Te mn 3 400 3400 32000 Jano un x sf, = 450,60) 4 Yooblenn At ‘ ee 6) $6) 8 x 7) ER /I 50,690 1 @)_te = 12901000 : = 89) 944.99 ars) sega0 (p btH fu 09 ( 5001600) fuywir. Clore?) eee, ae “EAT SO,90 X 12 ,000/ | $90, 000 + 333% Ds. «77 eso ov0 . . we 12H: 0 ns = 9%77-77 Suu uu} FM ey 5 760.0 = ia CN EQ [eo ww S Cas gay 0, 000, OR OEE: ae = =—roviem_#% Bauman tne Gey. + _ O___Yovd Z (uS000 esa [0,000 70,00 anes eye, 4 og, 000 aaa @__l\ow,o 40 Q__ 648 0 ef 1501 «OD xy -lfw aye 2 Fy So, 00d_ 114,004 F_Se9 Gov. fooem # > BS 06 + 630,08 = F joos SW,‘Topic: Substantive Tests of Intangible Assets Problems: I. Ignore income tax effects. July 1, 2019 8-year franchise; expires June 30, 2027 P126, 000 October 1, 2019 Advance payment on leasehold (term of lease is 2 years) 84,000 December 31,2019 Not loss for 2019 including incorporation fee, P3, 000 and Related legal fees of organizing, P15, 000 (all fees incurred) 48, 000 January 2, 2020 Acquired patent (10-year life) 222,000 March 1, 2020 Cost of developing a secret formula 225,000 April 1, 2020 Goodwill purchased 835, 200 July 1, 2020 Legal fee for successful defense of patent purchased above 37,950 October 1, 2020 Rand D costs 480,000 1. The unamortized patent cost at December 31, 2020, should be 300 2, The unamortized franchise cost at December 31, 2020, should be 102 395 3. The amount of prepaid rent tobe reported on Kitkat’s December 31, 2020 statement of financial position is 4. The adjusting entries on December 31, 2020, should include a net debit to the retained earnings account of $.Asa result of the adjustments at December 31, 2020, the total charges against Kitkat’s 2020 Income should be IL. NOAH COMPANY’s own research department has an on-going project to develop a new production process. At the end of 2019, NOAH had already spent a total of P300, 000, of which 270, 000 was incurred before November 1, 2019. On November 1.2019, the company’s newly developed production process met the criteria for recognition as an intangibie asset. During 2019, Noah incurred additional expenditure of P600, 000. At the end of 2020, the recoverable amount of the intangible asset vas estimated to be P570, 000, including future cash flows to complete the process before itis available for its intended use. 1. At December 31, 2019, the production process should be recognized ata cost of 2. Whae is the total cost ofthe production process at December 31, 2019? 3. How much impairment loss should be recognized by Noah in 2020, in connection with the new production process? Il. ANDES COMPANY 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, 2016, and the patent was estimated to have a useful life of 10 years. On june 1, 2018, Andes spent P28, 440 to successfully Prosecute a patent infringement. In addition, the patent's estimated useful life was extended to 12 years from June-1,2018,-At ‘the beginning of 2020, Andes determined that a competitor's product would make the Oido Organ obsolete and the patent worthless by December 31, 2021, Based on the preceding information, calculate the patent amortization expense for each of the following years: 2016-2020 |. Information concerning Tippy Corporation's intangible assets is as follows: 2. On January 1, 2017 Tippy signed an agreement to operate as franchise of Roulette Copy Service, Inc, fee of P 85,000. Of this amount P 25,000 was paid when the agreement was signed, and the balance is payable in four annual payments of P 15,000 each beginning January 1, 2018. The agreement provides that the down payment is not refundable and no future services are required from the franchisor. The present value at January 2, 2017 of the four-agnual payments Aiscounted at (494 (the implicit rate for a loan of this type) is P 43.700. The agreement also provides sa) of the revenue from the franchise must be paid to the fata annually. Tippy’s revenue from the franchise for 2018 was P 900,000. Tippy estimates the useful life of the franchise to be 40)years. 'b. Tippy incurred P 78,000 of experimental and development costs in its January 2,2017. Legal fees and other costs associated with re, useful life of the patent will be 8 years. c-A trademark was purchased from West Company for P 40,000 on July 1,201.4. Expenditures for successful litigation in defense of the trademark totaling P 10,000 were paid on July 1, 2017. Tippy estimates that the useful life of the trademark will be 20 years from the date of acquisition. * The audited balance as of December 31, 2017 Amortization) is The purchase of average excess earnings over the next four years is The audited balance as of December 31, 2017 of Trademark, net of Accumulated Amortization is The total Intangible Assets (net of Accumulated Amortization) as of December 31, 2017 is The expenses resulting from Intangibles transactions for 2017 amounted to for an initial franchise laboratory to develop a patent, which was granted on gistration of the patent totaled P 16,400. Tippy estimates that the Of the Franchise from Roulette Copy Service (net of Accumulatedth Probiun 2 Y ¥ Wyss ogo La sv) esp 201M, Loo wis es P30 630__p Heo too / 4 +£ .000. &g 70 1 esd ae = 4480 qrso Fly 450 47 00 2 Wg 250 gy GSO feo joa 18° aS ABAD RA 340 40 Bh 000 04— rr Eee Probl You obiain the following information pertaining to Red Co.'s property, plant, and equipment for 2015 in connection with your audit of the company's Financial staten Aucited balances at December 31, 2014 Debit Credit Land 3,750,000 Buildings 30,000,000 Accuntulated depreciatic lings P 6,877,500 {Machinery and equip 22,500,000 Accumulated depreviation ~ Machinery and Equipment 6,250,000, Delivery F 2,875,000 ) Accumulated Depreciation ~ Delivery Equipment 2,115,000 Depreciation Data Depreciation Method Useful Life Buildings 150% declining — balance 28 years Machinery and Equipment Straight-line 10 years Delivery Equipment Sum-of-the-years'-digit 4 years Leasehold Improvements Straight-line 5 ion are as follows: a On Janvary 2, 2015, Red purchased new truck)for P500, 000 cash and traded-in a 2-year-old truck with a cost of P450, 000 and a book value of P133, 000. Tite new truck has a cash price of P6OO, 000; the market value ofthe old truck is not known, On April 1, 2015, a/maching purchased for P75, 000 on April 1, 20109 was destroyed by fire, Red recovered P387, 500 from its insurance company. |. On May 1, 2015, cost of P4, 200, 000 were incurred toiniprove leased STSe BEM years, The elated lease terminates on December 31, 2021. 4. On July 1, 2015,cachinery and equipmen were purchased ata total invoice cost of P, 000, 000; additional cost of P 125,000 for freight and P62S, 000 for installation were incurred. «. Red determined that the delivery equipmei comprising the P 2,875,000 balance at January 1, 2015, would have been depreciated at total amount of P 450,000 for the year ended December 31, 2015, “The leasehold improvements have a useful life of 8 ‘The salvage values of the depreciable assets are immaterial. The policy of the Red Co. is to compute depreciation to the nearest month, QUESTIONS: Based nthe above and the result of your audit, answer the following 3 How much is the Accumulated depreciation ~ Buildings as of December 31, 2015? 4-6.How much is the Accumulated depreciation ~ Machinery and Equipment as of December 31, 2015? W437 500 7-9 How much isthe Aesantulnted depreciation — Delivery Equipma as of December 31, 20157. lated depresiation=Teasehold-Improveménts'as of Deceri yer 31, 2015?) Fav 5 How much isthe net gain (Ios) ftom disposal of assets fo the year ended December 31, 81s 9 A esc ca sup ens Davey Earned cds AraTARY MAG COMPARE neal’ dpe er etution and/or dspostion orthese ses. The cn ues th sight ine method of depreciation we 1 ‘transactions occurred during 2010: g ees [suzu Truck was purchased for P 1,200,000 in June, Indes moth, 42004 Fso Tk ms ell oP 75.00 he tk ras purchased in Api 2006 ata cost of P 630,00, , InJune a dil press vas purchased forP33,000. Freight in was P 3,000, “A Gill press which ta ben pursased by the clet in r ‘for P 30,000 was sold in June for P 24,000, z ng machine was purchased in July at a cost of P 225,000, Ino cx hs ai ye laneous Expenses amounted to P 10,500.‘The loss on sale of Fuso Truck in Jum 1 The gain on sale of drill press in June 201 4.The correct balance of Machinery and equipment at December 31 7 The eorret balance of Delivery Equipment at December 31, 2010's 30 Wit i the total deprecation expense for the year ended December 31, 2010? 31-33 What is the Book value of Machinery and Equipment at December 31, 2010? ff $4.30 Whats the comec Balance ofthe Accumulated Depreciation Delivery Equipment on December 31,201 oN Problem 3 Te flowing information pertains to BAKER COMPANY'S intangible assets: i 1. On January 1, 2010, Baker signed an agreement to operate as a ‘ranch isee of Max and Jess Food Chain, Inc. for an initial franchise fee of Pi, 500 00 OF ths amount, P300, 000 was paid when the gferment was signed andthe balances payable in 4 annual payments of P20, (000 each, beginning January |, 2011, The agreement provides that the down payment is not refundable and no future services afe required of the franclisor. The present valve a January 1, 2010, ofthe 4 annua payrents discounted at 14% (the implicit ate fora oan ofthis type) is 19874, 000. ‘The agieement also provides tat 3% of the revenue from te franchise st be paid tothe franchisor annually, Baker's revenue fiom the franchise for 2010 was P19, 000, 000, Baker estimates the useful ie ofthe franchise to be 10 year. 2. Baker incurred P1, 300, 000 of experimental and developmental costs in its laboratory to develop a patent which was granted on January 2, 2010. Leal ees ad other costs sociated with registration ofthe patent totaled P272, COO. Baker estimates thatthe tefl lie of the patent lemark was purchased ftom Banawe Company for P40, 000 on uly 1, 2007. Expenditures for success tigation in defense ofthe idea tlling PL, 200 wee pido uly 1200. Bakers ht the stl ib ofthe raenark wl be 20 years fom the at of 37-39 What isthe carrying value of the franchise at December 31, 2010? 40-42, What i the earrying value of the patent at December 31, 2610? 443-45. What is the carrying value ofthe trademark on December 31, 20107 528 000 46-48. The total expenses resulting from the transactions that would appear on should be that would appear on Baker some statement for the year ended December 31, 2010, Problem 4 KITKAT COMPANY was orgized in 208, acouting ezrin on seni cos inde only one account fol inaghle sets. The olin 2 summary of the debit entries that have been recorded and posted during 2009 and 2010: " 3 INTANGIBLE ASSETS» July 1, 2009 8-year Franchise; expires June 30, 2017 126, 000, October 1.20 ‘Advance payment on leasehold (ferm of lease is2 years)_84, 000... December 31, 2009_..._..Netoss for 2008 including incosporaion-feesP3, 000 and. it ab S ‘elated legal fees of organizing, ELS 000 al fees incurred) 48, 000 Nt Yat a January 2, 2010 ‘Acquired patent (10-year life) 222, 000 mies ait March 1, 2010 Cost of developing a Secret formula 228,000, April 1, 2010 Goodwill purchased 835, 200 July 1, 2010 “Legal fee for successful defense of patent purchased above 37, 950, ‘ctober 1, 2010 Rand D costs . 480,000, Ignore income tax effects. 49-51 The unamortized patent cost at December 31, 2010, should be 144 800 52-54 The unamortized franchise cost at December 31, 2010, should be '35.57-The amount of prepaid rent to be reported on Kitkat's December 31, 2010 statement of financial position is 31500 '58-60-The adjusting entries on December 31, 2010, should include a net debit tothe retained earnings account of 1.6. ees ofthe adjustment at Deerber 31,2010, the ttl charges aginst Kitts 2010 income howd be Problem 5 NOAH COMPANY’s own reseacch department has an on-going project to develop & new production process. At the end of 2009, NOAH had already spent a total of P300, 000, of which P270, 000 was incurred before November 1, 2009. On November 1, 2009, the company's newly developed production process met the criteria for recognition as an intangible asset. During 2010, Noah incurred additional expenditure of 17600, 000.” At the end of 2010, the recoverable amount of the intangible asset was estimated to be P570, 000, including future cashflows to complete the process before itis available for its intended use. 64-66 At December 31, 2009, the production provess should be recognized ata cost of (67-69 What is the total cost of the production process at December 31, 2010? F 0-72 iow much impairment loss should be recognized by Noah in 2010, in connection with the new production process?” Problem 4 ANDES COMPANY expended PS10, 000 in research and development costs, These activities resulted toa new product called the Oido Organ, A Nes peated a sddiional legal and other ests of PS, 000. "The patent application wa led on October I, 2005, andthe patent was mad aad life of 10 yeu. On June 1, 2008, Andes spent P28, 440 to suocesfully prosecute patent infingement. In adton He tes ctmated sel ie was extended to 12 years fom June 1, 2008, Atte beginning of 2010, Andes determined that» competio’s Product would make the Oido Organ obsolete and the patent worthless by December 31,2011 ‘Based on the preceding information, calculate the patent amortization expense for each ofthe following years 73-15, 2006 16-18, 2007 "79-81. 2008 82-84, 2009 85-87, 2010Yoblemt z AS) AGS oy aisasnet 33.3500. S40 955 815 (H9IG EIS 1 ade? aa) o 2420 ooo. de: 2400 09g — (0-2) 420009 — a a 1B) 4s 00 pt 30on0 = 65.099 Ww-le?_AD_282090 > Ua000- rsrome = 37g 00 - 75) + (20RD) we) b ——— Be + aw) 63-4. s0.0 ee i as). 3420000 _ we | £9.695-41500~(sp0- 50.07 lr I9s+ 40.800) = 1952S —_______— Je -30) (aoooosatoot as. 347337 Irshtem 1. cn a spacon i) stad) 10 bo ae ay 44-46) 20000 ajz000/g x 4+ 2320 yt -44) 0300.00. ao et soe sie S2¢ 009 ( o4oo90>U2000) 3o-72)__ 0 Dvd 4 I Voxsed . Pralaém_b she |_ tate b gas) laa eoo Be aye3s)_Lisy ba-mu) 102 376 4234) Do. fe so5a)_ 21500 qa-e1) 4437 0 ———Sico) Gu ss =4) 3150. _(-43) 822.900. Ss 203) 1454.2 ; ay 480.49 ——122360 __tnterest_ exe 950.00. ran cn ise — W400 __Amorh2.abea - 34000 Patent pet: F000. trade mart L255 340 —True ov False (1/F) Pe ett a ey | -£Jefotgngible assets derive their value from the right (claim) to receive cash in the future, i £(2)xerally created intangibles are recorded at cost, 1 Min enerated intan} CpAmontization of limited-life ble assets are initially recorded at fair value. intangible assets should not be impacted by expected residual values. 1 5cSathe intangible assets are not required to be amortized every year. 1 $A iinited-life intangibles are amortized by systematic charges to expense over their useful life, 172% cost of acquiring a customer list from another company is recorded as an intangible asset. £206 cost of purchased patents should be amortized over the remaining legal life of the patent. YAI anew patent is acquired through modification of an existing patent, the remaining book value of the ‘original patent may be amortized aver the life of the new patent. 1} In a business combination, a company assigns the cost, where possible, to the identifiable tangible and infonpiblg.assets, with the remainder recorded as goodwill LY beCornaily generated goodwill should not be capitalized in the accounts F{2-Antornally generated goodwill associated witha business may be recorded as am asset whena firm offer to pufrchgse that business unit has been received. 18-1 J& all intangibles are subject to periodic cons dchons,/ leration of impa irment with corresponding potential write- -LYAtthe fair value ofan unlimited life intangible other than goodwill is less tha Tos qnust be recognized 1.5) lf market value of an impai ¥y test that is used for impairments of property, plant, and equipment is used for t ior ite-life intangibles. + Poriodie alterations to esisting products are an example of Ipc the%a its book value, an impairment id asset recovers after yeversed ina subsequent perio. 2 same recoverabil 1 impai ent has been recognized, the impairment ch and development costs. esearch and development costs that result in patents may be capitalized to the extent of the fair value of ent 119, Research and development costs are recorded as an benefits in future years. -L2y/Contra accounts must be reported for intangible assets, Sndroperty, plant, and equipment. npible asset if itis felt they will provide economic a manner similar to accumulated depreciation, MultipleChoice Theories ay _b.L,Which of the following does not describe intangible assets? a. they lack physical existence. ¢. They provide long-term benefits. b. They are financial instruments. d. They are classified as long-term assets. 2, Which of the following characteristics do intangible assets possess? a Physical existence. c. Long-lived. b. Claim toa specific amount of cash in the future, d. Held for resale. x _).3. Which characteristic is not possessed by intangible assets? a, Physical existence. c. Result in future benefits. b. Short-lived. d. Expensed over current and/or future years. £4 ests incurred internally to create intangibles are afapitalized. c. expensed as incurred. b. capitalized if they have an indefinite life. expensed only if they have a limited life. as yrn of the following costs incurred internally to create an intangible asset is generally expensed? ‘a. Kesearch and development costs. c. Legal costs. b. Filing costs . All of the above. ag prtGorne following is not an intangible asset? a. fade name ¢. Franchise b. Research and development costs d. Copyrights 139M of ling tan jle assets should not be amortized? a. Copyrights ¢. Perpetual franchises . Customer lists a All ofthese intangible assets should be amortized.4.8. When patent is amortized, the credit is usually made to a. a.the Dat ‘count. c.a Deferred Credit account. b.aeecumulated Amortization account dan expense account. £9. When a company develops a trademark the costs directly related to securing it should generally be pialized. Which of the following costs associated with a trademark would not be allowed to be capitalized? Auorney fees. © Research and development fees. d. Design costs. 40. Consulting fey business combination, companies record identifiable intangible assets that they can reliably measure. intangible assets, woo difficult to identify or measure, are recorded as i. other assets, . indirect costs, goodwill d. direct costs. [The carrying amount ofan intangible is | Te fair value of the asset ata balance sheet date. asset's acquisition cost less the total related amortization recorded to date. qual to the balance of the related accumulated amortization account, d. the assessed value of the asset for intangible tax purposes, 2, Which of the following research and development related costs should be capitalized and depreciated over tand ft s? a."Research and development general laboratory building which can be put to alternative uses in the future b. Inventory used fora specific research project 2 Administrative salaries allocated to research and development d. Research findings purchased from another company to aid a particular research project currently in process ment costs? Ling cause and effect c. Income tax minimization b. Systematic and rational allocation d. Immediate recognition asan expense jee N {0-4 Financial- Accounting ~ sme of the following principles best describes the current method of accounting for research anid PI soc should-research-and-development costs be'accounted for; accordin, ‘ds Board Statement? Mist be capitalized when incurred and then amortized over their estimated useful lives. b. Must be expensed in the period incurred. ¢. May be either capitalized or expensed when incurred, depending upon the materiality of theamounts involved, d. Must be expensed in the period incurred unless it can be ciearly demonstrated that the expenditure will have alternative future uses or unless contractually reimbursable. 1 ‘h of the following would be considered research and development? a. Routine efforts to refine an existing product. ¢ Marketing research to promote a new product. b. Periodic alterations to existing production lines. d. Construction of prototypes. i¢ notes to the financial statements should include information about acquired intangible assets, and aggrégate amortization expense for how many succeeding years? a6 bs c4 a3 -£.17. Which of the following should be reported under the “Other Expenses and Losses” section of the income. statement? a. Goodwill impairment losses. b, Trade name amortization expen: c. Patent impairment losses d. None ofthe above. 0.18, The total amount of patent cost amortized to date is usually a, shown in a separate Accumulated Patent Amortization account which , shown in the current income statement. _careflected as credits in the Patents account. d. reflected as a contra property, plant and equipment item. shown contra to the Patents account. -£.19 Intangible assets are reported on the balance sheet Ath an accumulated depreciation account. €. separately from other assets. b. in the property, plant, and equipment section. d.none of the above. -£.20. Which ofthe following is often reported as an extraordinary item?a Amortization expense. b. impairment losses for intangible assets other than goodwill, ¢, Impairment losses on goodwill d, None of the above. Problem Solving name in January 2011, incurring legal costs of $30,000. The company amortizes the trade name over 8 years. Barkley successfully defended its trade name in January 2012, incurring $9,800 in loyal foes. AL the beginning of 2013, based on new marketing research, Barkley determines that the fair value of the trade name is $24,000. Estimated total future cash flows from the trade name are $26,000 on January 4, 2013. Prepare the necessary journal entries for the years ending December 31, 2011, 2012, and 2013. Show all computations. I. Barkley Corp. obtained a trad Ui. An entity is planning to sell the business to new interests. ‘The cumulative earnings for the past five years amounted to P 16,500,000 including expropriation loss of P 1,500,000. ‘The normal rate of return is 20%. The fair value of net assets of the entity at current year-end was P 10,000,000. What is the amount of goodwill if: (a) Excess earnings are purchased for years, (b) Excess earnings are capitalized at 25%, (c)Annual average earnings are purchased for 3 years, (4) Annual average earnings are capitalized at 25%, and (e) Excess earnings are discounted at 12% for 5 years. UL, On January 1, 2015, an entity purchased a patent for P 7,140,000. The patent is being amortized over the remaining legal life of 15 years. During 2018, the entity determined that the economic benefits of the patent would not last longer than ten years from the date of acquisition. What is the earrying amount of the patent on December 31, 2018? IV. On January 1, 2018, an entity reported patent cost of P 1,920,000 and related accumulated amortization of P 240,000. ‘The patent was purchased on January 1, 2016 at which date the remaining legal life was 16 years. On january 1,2018, the useful life of the patent was determined to be only,8 years from the date of acquisition..On January 1, 2018, the entity paid P 800,000, of which three-fourths was for a trademark, and on-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 P 50,000 to the other entity as consulting fee each year for 5 years payable every January 1 © Whatis the total carrying amount of intangible assets on January 1, 2018? ‘© What is the amount of total expenses for 2018 in relation to intangible assets? V. Earth Company incurred the following costs during the current year: Laboratory research aimed at discovery of new knowledge 750,000 Design of tools, jigs, molds and dies involving new technology 400,000 Quality control during commercial production including routine testing 350,000 Equipment acquired two years ago, having an estimated useful life of 5 years with no residual value used in various R and D projects 1, 500,000 Research and development service performed by Star Company for Earth Company 250,000 Research and development services performed by Earth Company for Moon Company 200,000 ‘What amount of research and development expense should be reported in the current year? a major winery, begins construction of a new facility in Mindanao. ‘The following costs are incurred in conjunction with the start-up activities of the new facility: Production equipment 8,150,000 ‘Travel costs of salaried employees 400,000 License fees 140,000 ‘Training of local employees for production and maintenance operations 1,200,000 '850,000 Advertising costs What portion of the organization costs should be expensed?ast | Sconsem_t Det i) 401 fcndcnrabion ¢ vp 450 os Trademark 150 fo ooopes 3250] Der 4 oo Lega tees 4800. _ Las 4go0 Dec it agar PMOCt2 Oto, Eyorn 51io FE Wogemark. 5150 aan 4o-9¢0-= 3150 + 14250 — (0u150 + goods 1 = gy Teademark ang. aye 34 050=Sisp + 30404 odai= Gand tobe th 1 fo) Me 500 Dog {o) 15 000 009 (a tb 500.000 (a) (4 sopOdo : * (i509 ody? {1909.0 000) {15.00 000) CL 500 0002 S009 000 f¥00D.0Db. Sood ugg {5000000 15000 009 (10.009 909) xsi 4 Xe ar Bi ’ pes 500 09 1250-000 aon 3000 000 . 3000 099 x _ayt — = 3 re 1000 ove logo pig 440.000 150 n99_| Ss 5 (et) 5000 n99 1wspp-00d BELA | 200-940 ited ¢ bos 800 *enlivo .if _ 1 Bate Puobie ol a a quagt 1140 000 * 1428 O00) 4.544, 006. Ale ooo __ 511 2.009, Feta = 1 tio _Peabiem ta 120 cop foo non ue ooo orc (140 0999 Leno noa) > (200 09 ¥3 + 2)- ROOD (4) warrsvo =u = 246280 Gv0 Dv0=U* wove 9 D770 300 000 +4 * SP000 Mu aso x Yin = 164 OBE wooook ary ¢ bb GOT spon x Hr = 93333 Problem WV 2P4GEE asnsv0 c2g4css) 2042 B12 te) 549 645-45 (54904.54) 494 650.94 (4) 320000 (y) 494680-94 SS ee 320000 128 490.44 2670000 (225 000) 120 vod 2565 000 5 513.000 GAL 000) > 3409 000 ¥Iyy. 111 000 + 201 | 85 000Problem vi U) 148 000 @) 25000 508 000 '07 000 fv 200 x _407 360 080 a Peblem Vil (1) 330 000 /3 = 1D 900 330 000 C0 090) 220 000 (#20000 y evo 000 2ivou 000 G) 440 000 313 G00 [25 3400 = qoo 000 1800000 2-Iwo vvg