Guillena, Isabelle Dynah E.

ACCO 20093
BSA 2-10
DISCUSSION QUESTIONS
1. What are the two main characteristics of intangible assets?
- They are not a financial instrument
- They lack physical substance
2. If intangibles are acquired for stock, how is the cost of the intangible determined?
- If intangibles are acquired for stock, the cost of the intangible is the fair value of
the consideration given or the fair value of the consideration received, whichever
is more clearly evident.
3. Intangibles have either a limited useful life or an indefinite useful life. How should
these two different types of intangibles be amortized?
- Indefinite: no foreseeable limit to the period therefore should not be amortized
- Finite: the cost less residual value of an intangible asset with a finite useful life
should be amortized on a systematic basis over that life. The amortization should
also follow the pattern of benefits. If it cannot be determined reliably, the straight-
line method is used.
4. Why does the accounting profession make a distinction between internally
created intangibles and purchased intangibles?
- When intangibles are created internally, it is often difficult to determine the
validity of any future service potential. To permit deferred of these types of costs
would lead to a great deal of subjectivity because management can argue that
almost any expense could be capitalized on the basis that it will increase future
benefits. The cost of purchased intangibles, however, is capitalized because its
cost can be objectively verified and reflects its fair value at the date of
acquisition.
5. In 2020, Ghostbusters Corp. spent P420,000 for “goodwill” visits by sales
personnel to key customers. The purpose of these visits was to build a solid,
friendly relationship for the future and to gain insight into the problems and needs
of the companies served. How should this expenditure be reported?
- Companies cannot capitalize self-developed, self-maintained, self-created
goodwill. These expenditures will be recorded as selling expense
6. What are factors to be considered in estimating the useful life of an intangible
asset?
a. The expected use of the asset by the entity.
b. The expected useful life of another asset or a group of assets to which the
useful life of the intangible asset may relate.
c. Any legal, regulatory, or contractual provisions that may limit useful life.
d. Any legal, regulatory or contractual provisions that enable renewal or
extension of the asset's legal or contractual life without substantial cost.
 e. The effects of obsolescence, demand, competition, and other economic
factors.
f. The level of maintenance expenditure required to obtain the expected future
cash flows from the asset
7. What should be the pattern of amortization for a limited life intangible?
- Future net cash flow should be less than Carrying value; If so, then there’s an
impairment. The amount of loss can be computed by subtracting the amount of
fair value to the carrying value
8. Columbia Sportswear Company acquired a trademark that is helpful in
distinguishing one of its new products. The trademark is renewable every 10
years at minimal cost. All evidence indicates that this trademarked product will
generate cash flows for an indefinite period of time. How should this trademark
be amortized?
- It is not amortized since the trademark will generate cash flow for an indefinite
period of time
9. Explain how losses on impaired intangible assets should be reported in income.
- Impairment losses are generally reported in the “Other expenses and losses”
section in the Income Statement. Because these losses, along with the recovery
of said losses, are similar to other costs that would flow through operations.
Therefore, gains (or recoveries of losses) on assets to be disposed of should be
reported as part of income from continuing operations.
10. What is the nature of research and development costs?
- Research and development costs are incurred to develop new products or
processes, to improve present products, or to discover new knowledge.
- R&D presents different problems, such as:
o identifying the costs associated with particular activities, projects, or
achievements, and
o determining the magnitude of the future benefits and the length of time
over which such benefits may be realized. R&D activities may incur costs
classified as follows:
 materials, equipment, and facilities,
 personnel,
 purchased intangibles,
 contract services, and
 indirect costs
Problems
Problem 1
Americano Co. developed a new machine for manufacturing baseballs. Because the
machine is considered very valuable, the company had patented it. The following
expenditures were incurred in developing and patenting the machine:
Research Salaries and fringe benefits for scientists P100,000
Cost of testing prototype 250,000
Legal cost for filing of patent 230,000
Fees paid to government patent office 140,000
Drawing acquired by patent office to be filed with patent application 75,000
What amount should be capitalized as cost of patent?
Legal cost for filing of patent 230,000
Fees paid to government patent office 140,000
Drawing acquired by patent office to be filed with patent
75,000
application
Cost of Patent 445,000

Problem 2
French Vanilla Company commenced operations in the current year. A number of
expenditures were made during the current year that were debited to one account
Intangible asset.

What amount should be reported as intangible asset?

Incorporation fees and legal costs P150,000
 Purchase of copyright 300,000
Legal fees for filing a patent 50,000
Legal fees for successful defense of the patent 50,000
Entered into a 10-year franchise agreement with a franchisor 600,000
Amount to be reported as intangible asset 1,150,000
Problem 3
During 2019, Latte Inc., spent P5,000,000 developing its new “Hyperion” software
package. Of this amount, P2,200,000 was spent before technological feasibility was
established for the product, which is to be marketed to third parties. The package was
completed at December 31, 2019. Latte expects a useful life of 8 years for this product
with total revenues of P16,000,000. During the first year (2020), Latte realizes revenues
of P3,200,000.
a. What journal entries should have been prepared by the accountant in 2019
for the foregoing facts?
Research & Development Expense P2,800,000
Patents 2,200,000
Cash 5,000,000
To record Research and Development expense and patent

Amortization expense (2,200,000 / 8) P275,000

To patents 275,000
To record amortization expense

b. Prepare the entry to record amortization at December 31, 2020.

Amortization expense 275,000
To patents 275,000
To record amortization expense

Problem 4
Arabica Coffee Company acquired patent right on July 1, 2018 for P2,000,000. The
asset has a legal life of 15 years but due to the rapidly changing technology
management estimates a useful life of only 5 years. On January 1, 2019, management
is uncertain that the process can actually be made economically feasible and decides to
write down the patent to an estimated market value of P600,000. Amortization will be
taken three years from this time. On January 1, 2021, after having perfected the related
production process, the asset is now appraised at a sound value of P2,400,000.
Furthermore, the estimated useful life is now believed to have extended by six more
years. The company uses the straight-line method of amortization.
Compute for the following:
 a. Amortization expense for 2018
Cost of Intangible P 2,000,000
Useful life 5
Amount of amortization 400,000
6/12
Amortization expense for 2018 200,000
b. Impairment loss to be recognized in 2019
Cost of Intangible P 2,000,000
Less: Amortization 200,000
Book value at January 1, 2019 1,800,000
Less: Recoverable amount 600,000
Impairment loss 1,200,000
c. Patent carrying value at December 31, 2020
Revalued amount 600,000
Less: Amortization (600,000 / 3) x 2 years 400,000
Carrying value of patent 200,000
d. Revaluation surplus recognized in 2021
Sound value 2,400,000
Carrying value of patent 200,000
Revaluation surplus 2,200,000

Problem 5
Huagcang Gagalau Company was granted a patent on January 1, 2016 and
capitalized P440,000. The entity was amortizing the patent over the useful life of
15 years. During 2019, the entity paid P145,000 in successfully defending an
attempted infringement of the patent. After the legal action was completed, the
entity sold the patent to the plaintiff for P800,000. The policy is to take no
amortization in the year of disposal.
What amount should be reported as gain from sale of patent in 2019?
Acquisition of patent – January 1, 2016 P 440,000
Amortization for 2016, 2017, 2018 (440,000/15 x 3 =
(87,999.99)
87,999.99)
Carrying value of patent at January 1, 2019 352,000

Sale price 800,000

Carrying amount (352,000)
Gain from sale of patent 448,000