University of San Jose-Recoletos

College of Commerce
Department of Accountancy and Finance

Intangible Assets_Research and Development

I. THEORY

1. Which of the following does not describe intangible assets?

a. They lack physical existence.
b. They are financial instruments.
c. They provide long-term benefits.
d. They are classified as long-term assets.

2. Costs incurred internally to create intangibles are

a. Capitalized
b. Capitalized if they have an indefinite life.
c. Expensed as incurred.
d. Expensed only if they have a limited life.

3. Which of the following intangible assets should be shown as a separate item on the balance sheet?
a. Goodwill
b. Franchise
c. Patent
d. Trademark

4. The cost of purchasing patent rights for a product that might otherwise have seriously competed with
one of the purchaser’s patented products should be
a. Charged off in the current period.
b. Amortized over the legal life of the purchased patent.
c. Added to factory overhead and allocated to production of the purchaser’s product.
d. Amortized over the remaining estimated life of the original patent covering the product
whose market would have been impaired by competition from the newly patented
product.

5. Wrigle, Inc. went to court this year and successfully defended its patent from infringement by a
competitor. The cost of this defense should be charged to
a. Patents and amortized over the legal life of the patent.
b. Legal fees and amortized over 5 years or less.
c. Expenses of the period.
d. Patents and amortized over the remaining useful life of the patent.

6. Which of the following is not an intangible asset?

a. Trade name
b. Research and development costs
c. Franchise
d. Copyrights

7. Which of the following intangible assets should not be amortized?

a. Copyrights
b. Customer lists
c. Perpetual franchises
d. All of these intangible assets should be amortized

8. When a patent is amortized, the credit is usually made to

a. The patent account
b. An accumulated amortization account
c. A deferred credit account
d. An expense account

9. In a business combination, companies record identifiable intangible assets that they can reliably
measure. All other intangible assets, too difficult to identify or measure, are recorded as:
a. Other assets c. Goodwill
b. Indirect costs d. Direct costs

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10. Goodwill may be recorded when
a. It is identified within a company.
b. One company acquires another in a business combination.
c. The fair market value of a company’s assets exceeds their costs.
d. A company has exceptional customer relations.
11. Which of the following intangible assets could not be sold by a business to raise needed cash for a
capital project?
a. Patent c. Goodwill
b. Copyright d. Brand Name

12. The intangible asset goodwill may be

a. Capitalized only when purchased.
b. Capitalized either when purchased or created internally.
c. Capitalized only when created internally.
d. Written off directly to retained earnings.

13. A loss on impairment of an intangible asset is the difference between the asset’s
a. Carrying amount and the expected future net cash flows.
b. Carrying amount and its fair value.
c. Fair value and the expected future net cash flows.
d. Book value and its fair value.

14. Which of the following research and development related costs should be capitalized and depreciated
over current and future periods?
a. Research and development general laboratory building which can be put to alternative
uses in the future.
b. Inventory used for a specific research project.
c. Administrative salaries allocated to research and development.
d. Research findings purchased from another company to aid a particular research project
currently in process.

15. Which of the following principles best describes the current method of accounting for research and
development costs?
a. Associating cause and effect
b. Systematic and rational allocation
c. Income tax minimization
d. Immediate recognition as an expense

16. Which of the following would be considered research and development?

a. Routine efforts to refine an existing product.
b. Periodic alterations to existing production lines.
c. Marketing research to promote a new product.
d. Construction of prototypes.

17. Intangible assets are reported in the balance sheet

a. With an accumulated depreciation account.
b. In the property plant and equipment section
c. Separately from other assets.
d. None of the above

18. Research and development costs

a. Are intangible assets.
b. May result in the development of a patent.
c. Are easily identified with specific projects.
d. All of the above.

19. Which of the following costs should be excluded from research and development expense?
a. Modification of the design of a product.
b. Acquisition of R & D equipment for use on a current project only.
c. Cost of marketing research for a new product.
d. Engineering activity required to advance the design of a product to the manufacturing stage.

20. Operating losses incurred during the start-up years of a new business should be
a. Accounted for and reported like the operating losses of any other business.
b. Written off directly against retained earnings.
c. Capitalized as deferred charge and amortized over five years.
d. Capitalized as intangible asset and amortized over a period not to exceed 20 years.

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II. PROBLEMS.

1. Lopez Corp. incurred P420,000 of research and development costs to develop a product for which a
patent was granted on January 2, 2006. Legal fees and other costs associated with registration of
the patent totaled P80,000. On March 31, 2011, Lopez paid P150,000 for legal fees in a successful
defense of the patent. The total amount capitalized for the patent through March 31, 2011 should be
______________________.

Ans.: P230,000 (80,000 + 150,000)

2. On June 30, 2013, Cey, Inc. exchanged 20,000 shares of Seely Corp. P30 par value common stock
for a patent owned by Gore Co. The Seely stock was acquired in 2013 at a cost of P550,000. At the
exchange date, Seely common stock had a fair value of P46 per share, and the patent had a net
carrying value of P1,100,000 on Gore's books. Cey should record the patent at

Ans.: P920,000 (2,000 shares x P46)

3. On January 2, 2014, Proton Company paid P500,000 to acquire a patent with a remaining economic
useful life of 15 years. Proton Company expects to use the patent for 5 years and intends to sell it
after 5 years. Newton Company has committed to buy the patent for 40% of the cost to Proton
Company. In its December 31, 2014, what amount of patent amortization should Proton Company
report in its profit or loss?

Ans.: P60,000 <(500,00 x 60%) / 5 years > (note : third party has committed to buy the asset after five years)

4. On January 2, 2014, Earth Company bought a trademark from Mars Company for P600,000. Earth
retained an independent consultant, who estimated the trademark’s remaining life to be 20 years. Its
amortized cost on Mars’ accounting records was P456,000. At what amount should the trademark be
initially recorded?

Ans. : P600,000

5. On January 1, 2010, Better Company bought a trademark for P400,000, having an estimated
remaining 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?

Ans.: P85,000 < Amortization of 25,000 (P400,000 / 16 years) + Cost of litigation of P 60,000

6. Pasture Company has a broadcasting license that expires in 5 years. As of January 1, 2011, the
license has a carrying amount of P1,800,000. The license is renewable and has already been
renewed twice in the past. During the current year 2011, the broadcasting authority has decided that
in the future it will auction the licenses when they came up for renewal. As a result of this
development the company’s renewal option is no longer assured. The license has a remaining life of
three years as of January 1, 2011. In the December 31, 2013 statement of financial position, how
much should be reported as the carrying value of the broadcasting license?

Ans.: P1,200,000 <1,800,000 less amortization of 600,000 (1,800,000 / 3 years) >

7. On June 30, 2011, Sunlight Company purchased the asset of Bright Company. The acquisition
resulted in a purchased goodwill of P1,500,000. During 2011, Sunlight incurred additional costs of
developing goodwill: P500,000 for training employees, and P250,000 for hiring additional employees.
How much should Sunlight report as goodwill in its December 31, 2011 balance sheet?

Ans.: P1,500,000

8. Podium Company has incurred P200,000 of research expenditure on a project to develop a new type
of fuel and has expensed these costs. On January 2, 2014, Portal Company purchases the research
project, including certain patents that have been registered by Podium Company for P300,000 and
recognizes the costs as an intangible asset. Subsequently, Portal Company incurred P400,000 of
expenditure on completing the research phase and decides to develop the product commercially. It
incurs a further cost of P600,000 in bringing the product to a stage where the conditions for
recognizing development costs of an internally generated intangible asset are met. Further costs of

Intangible Assets_Research and Development

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 P2,000,000 are incurred in bringing the product into a condition where it is ready for use in the
manner the management intend. Initial marketing costs and losses are incurred of P400,000 before
the product was successfully launched. What total amount should Portal Company recognize as an
asset related to the above costs?

Ans.: P2,300,000 (P300,000 + P2,000,000)

9. On April 30, 2011, Shark Corporation purchased for P30 per share all 200,000 of Fins Corporation’s
outstanding ordinary share. On this date, Fins’ balance sheet showed net assets of P5,000,000.
Additionally, the fair value of Fins’ identifiable assets on the same date was P600,000 in excess of
their carrying amount. What amount should Shark report as goodwill in its April 30, 2011
consolidated balance sheet?

Ans.: P400,000 < P6,000,000 (200,000 x P30) – (P5,000,000 + 600,000)

10. Pluto Company incurred research and development costs in 2012 as follows:

Equipment acquired for various researches & development projects P 1,200,000

Depreciation on the above equipment 120,000
Materials used 156,000
Compensation cost for personnel 600,000
Outside consulting fees 170,000
Indirect costs appropriately allocated 300,000

What is the total research and development cost charged in Pluto’s income statement?

Ans.: P 1,346,000 (120,000 + 156,000 + 600,000 + 170,000 + 300,000)

11. Meteor Company purchased a patent on January 1, 2011 for P428,400. The patent was being
amortized over its remaining legal life of 15 years expiring on January 1, 2023. Early 2014, Meteor
determined that the economic benefits of the patent would not last longer than 10 years from the date
of acquisition. What amount should be reported in the statement of financial position as patent, net of
accumulated amortization at December 31, 2014?

Ans.: P293,760 <428,400 - (428,400 x 3/15) = 342,720

342,720 – (342,720 / 7 years) = 293,760

12. On July 1, 2011, Tuna signed an agreement to operate as a franchisee of Can Company for an initial
franchise fee of P1,200,000. On the same date, Tuna paid P400,000 and agreed to pay the balance
in four equal annual payments of P200,000 beginning July 1, 2012. The down payment is not
refundable and no future services are required of the franchisor. Tuna can borrow at 14% for a loan
of this type. Present value and future value factors are as follows:

Present value of 1 at 14% for 4 periods 0.59

Future amount of 1 at 14% for 4 periods 1.69
Present value of an ordinary annuity of 1 at 14% for 4 periods 2.91

How much should Tuna record as acquisition cost of the franchise on July 1, 2011?

Ans.: P982,000 < P400,000 + (P200,000 x 2.91)

13. Octopus Corporation incurred the following costs during the year ended December 31, 2012:

Laboratory research aimed at discovery of new knowledge P 150,000

Radical modification to the formulation of a chemical product 125,000
Research and development costs reimbursable under a contract to perform
research and development for Wings, Inc. 350,000
Testing for evaluation of new products 250,000

What is the total amount the company incurred identified in the research and development stage?

Ans.: P525,000 (150,000 + 125,000 + 250,000)

14. Jenks Corporation acquired Linebrink Products on January 1, 2010 for P4,000,000 and recorded
goodwill of P750,000 as a result of that purchase. At December 31, 2010, Linebrink Products had a
fair value of P3,400,000. The net identifiable assets of the Linebrink (excluding goodwill) had a fair
value of P2,900,000 at that time. What amount of loss on impairment of goodwill should Jenks record
in 2010?

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 Ans.: P250,000 < 750,000 – (3,400,000 – 2,900,000)

15. Rich Corporation purchased a limited-life intangible asset for P210,000 on May 1, 2008. It has a
useful life of 10 years. What total amount of amortization expense should have been recorded on the
intangible asset by December 31, 2010?

Ans.: P 56,000 (210,000 / 10 x 2 2/3)

16. Thomson Company incurred research and development costs of P500,000 and legal fees of
P400,000 to acquire a patent. The patent has a legal life of 20 years and a useful life of 10 years.
What amount should Thompson record as Patent Amortization Expense in the first year?

Ans.: P40,000 <P400,000 / 10 years >

17. On January 2, 2013, Klein Company bought a trademark from Royce, Inc. for P1,000,000. An
independent research company estimated the remaining useful life of the trademark was 10 years.
Its unamortized cost of Royce’s books was P800,000. In Klein’s 2013 income statement, what
amount should be reported as amortization expense?

Ans.: P100,000 <P1,000,000 / 10>

18. In 2012, Edwards Corporation incurred research and development costs as follows:

Materials and equipment P 90,000

Personnel 120,000
Indirect costs 150,000

These costs relate to a product that will be marketed in 2013. The equipment has no alternative
future use. What is the amount of research and development costs that should be expensed in
2012?

Ans. P360,000

19. Dweller Inc. incurred P500,000 of capitalizable costs to develop computer software during 2011. The
software will earn total revenues over its 4-year life as follows: 2011 – P 400,000; 2012 – P500,000;
2013 – P600,000; and 2014 – P500,000. What amount of the computer software costs should be
expensed in 2011?

Ans.: P100,000 <P500,000 (P400,000 / P2,000,000)

20. Trojan Inc. incurred P600,000 of capitalizable costs to develop computer software during 2011. The
software will be used internally over its 5-year life. What amount of the computer software costs
should be expensed in 2011?

Ans. P120,000 <P600,000 / 5 >

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