PROBLEM 1:

The following independent situations relate to the audit of intangible assets. Answer the
questions at the end of each situation.

a. YOLING INDUSTRIES reports the following patents on its December 31, 2012 statement of
financial position.
Initial cost Date of Useful life
acquisition (at date of
acquisition)
Patent A P1,224,000 March 1, 2009 17 years
Patent B 450,000 July 1, 2010 10 years
Patent C 432,000 Sept. 1 2011 4 years

The following events occurred during the year ended December 31, 2013.
 Research and development costs of P737,100 were incurred during the year. These
costs were incurred prior to projects achieving economic viability.
 Patent D was purchased on July 1 for P855,000. It has a remaining life of 9 ½ years.
 A possible impairment of Patent B’s value may have occurred at December 31, 2013.
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, 2014 P60,000
December 31, 2015 60,000
December 31, 2016 60,000

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

1. What is the total carrying value of Yoling’s patents on December 31, 2012?
A. P2,383,500 C. P2,106,000
B. P1,390,620 D. P1,573,500
2. What amount of impairment loss should be reported by Yoling for the year ended
December 31, 2013?
A. P137,880 C. P337,500
B. P282,500 D. P154,620
3. What is the total value of Yoling’s patents on December 31, 2013?
A. P1,969,080 C. P2,158,500
B. P2,020,620 D. P2,203,500

b. In your audit of the books of MELANIE CORP. for the year ended December 31, 2013, you
found the following items in connection with the company’s patents account.
 Melanie had spent P360,000 during the year ended December 31, 2012, for research
and development costs. This amount was debited to its patents account. The
company’s cost records discloses that it had spent a total of P424,500 for the research
and development of its patents, of which P64,500 spent in 2012 had been debited to
Research and Development Expenses.
 The patents were issued on July 1, 2012. In connection with the issuance of the
patents, the company incurred legal expenses of P42,840, which are debited to Legal
and Professional Fees Expense.
 On January 5, 2013, Melanie paid a retainer of P45,000 for legal services in connection
with a patent infringement suit brought against it. Deferred Costs was charged for the
amount.
 In reply to your inquiry about the company’s liabilities as of December 31, 2013, you
received a letter from the company’s legal counsel dated January 20, 2014, which
indicated that a settlement of the patent infringement suit had been arranged. The
plaintiff will drop the suit and release the company from all future liabilities in
exchange for P60,000. Additional lawyer’s fees were incurred amounting to P3,780.
4. The correcting journal entries (excluding amortization) on December 31, 2013 would
include net debit (credit) to
Legal and
Patents Professional Fees
Expense
A. P(317,16 P108,780
0)
B. (208,380 0
)
 C. (272,160 63,780
)
D. (253,380 45,000
)

c. As the recently appointed auditor of SUBHUMAN COMPANY, you have been asked to
examine selected accounts. You audit client, organized in 2012, has setup a single account
for all intangible assets. The following summary shows the debit entries that have been
recorded during 2013.

January 2 Purchased patent (8-year life) P870,000

April 5 Goodwill 720,000
June 30 Payment of 12 months rent on property leased by 182,000
Subhuman
July 1 Purchased franchise with a 10-year life:
expiration date, July 1, 2023 900,000
August 3 Payment for copyright (5-year life) 312,000
September Research and development costs related to patent
1 (incurred prior to achieving economic viability) 320,000
P3,304,0
00

5. What is the total carrying value of Subhuman’s intangible assets as of December 31,
2013?
A. P2,928,917 C. P2,927,705
B. P2,622,250 D. P2,713,250

PROBLEM 2:
The following situations are found n the records of the KILI INC. in your audit of the company’s
financial statements for the year ended December 31, 2012.
a. December 1, 2012:

Advertising expense 72,000

Cash 72,000
Payment of 2013 advertising contract

b. Balance of Office Supplies expense, December 31, 2012 P45,000

Balance of Unused Office supplies, December 31, 2012 15,000
Inventory of Office Supplies, December 31, 2012 22,500

c. June 2 2012:

Prepaid insurance 54,000

Cash 54,000
Payment of one-year insurance premium for inventory

d. Balance of Factory Supplies Expense Account, Dec. 31, 2012 P69,000

Physical inventory of factory supplies, Dec. 31, 2012 58,500

e. On May 1, 2012, a two-year subscription to the Industry Journal in the amount of P14,400
was paid. Subscription expense was charged for the entire amount.

PROBLEM 3:
KENYA ENTERPRISES developed a new machine that reduces the time required to mix the
chemicals used in one of its leading products. Because the process is considered very valuable
to the company, Kenya patented the machine.

Kenya incurred the following expenses in developing and patenting the machine:
Research and development laboratory expenses P750,00
0
Materials used in the construction of the machine 240,000
Blueprints used to design the machine 96,000
Legal expenses to obtain patent 360,000
 Wages paid for the employee’s work on the
research,
development, and building of the machine 900,000
(60% of the
time was spent in actually building the
machine)
Expense of drawing required by the patent Office 51,000
to be submitted with the patent application
Fees paid to Patent Office to process application 75,000

One year later, Kenya Enterprises paid P525,000 in legal fees to successfully defend a patent
against an infringement suit by Tutulad Company.

1. What is the total cost of the patent?

A. P993,000 C. P564,000
B. P486,000 D. P126,000
2. What is the total cost of the new machine?
A. P1,362,000 C. P780,000
B. P0 D. P876,000
3. What is the entry to record the legal fees paid for the successful defense of the patent
against the infringement suit?
A. Patents 525,000
Cash 525,000
B. Legal fees expense 525,000
Cash 525,000
C. Machinery 525,000
Cash 525,000
D. Amortization expense – 525,000
Patents 525,000
Cash

PROBLEM 4:
The following amounts are included in the general ledger of MARCIE CORPORATION at
December 31, 2012:
Organization costs P
72,000
Trademarks 45,000
Patents 225,000
Discount on bonds payable 105,000
Deposits with advertising agency for ads to promote goodwill of 30,000
company
Cost of equipment acquired for various research and 320,000
development projects
Costs of developing a secret formula for a product that is
expected to be 240,000
marketed for at least 20 years

On the basis of the information above, what is the total amount of intangible assets to be
reported by Marcie in its statement of financial position at December 31, 2012?
A. P342,000 C. P510,000
B. P270,000 D. P830,000

PROBLEM 5:
As a member of the audit team for the audit of DASHEN COMPANY’s financial statements for
the year ended December 31, 2012, you have been asked to examine selected accounts. The
controller for Dashen mentions that there is only one account (shown below).

INTANGIBLE ASSETS
Deb Credi Balance
it t
Feb. 1 Stock issue costs P72,000 P72,000
Marc 1 Research and Development costs 1,880,00 1,952,0
h 5 0 00
April 3 Legal costs to obtain patent 150,000 2,102,0
 00
May 1 Payment of 12 moths’ rent on
property leased by Dashen 240,000 2,342,0
00
June 1 Promotional expenses related to
5 start – up of business 414,000 2,756,0
00
Dec. 3 Unamortized bond discount on
1 bonds 168,000 2,924,0
due Dec. 31, 2032 00
Dec. 3 Operating losses for first year 482,000 3,406,0
1 00

1. The amount of organization expenses to be reported in Dashen’s income statement for the
year ended December 31, 2012, is
A. P2,348,000 C. P582,000
B. P486,000 D. P240,000
2. What is the carrying value of the patent at December 31, 2012, assuming that its useful
life is 10 years?
A. P150,000 C. P135,000
B. P138,750 D. P0
3. The prepaid rent to be shown on Dashen’s statement of financial position at December 31,
2012, is
A. P160,000 C. P80,000
B. P240,000 D. P0

PROBLEM 6:
MERON INC. leases an old building which it intends to improve and use for administrative
purposes. The company pays a bonus of P100,000 to obtain the lease. Annual rental for the
10-year lease period is P160,000. No option to renew the lease or right to purchase the
property is given by the lessor.

After obtaining the lease, improvements on the leased building are made costing P400,000.
The building has an estimated remaining useful life of 19 years.

1. What is the annual cost (excluding depreciation) of this lease to Meron?

A. P210,000 C. P160,000
B. P200,000 D. P170,000
2. What is the amount of annual depreciation (straight – line), if any, should Meron, Inc.
record?
A. P40,000 C. P50,000
B. P30,000 D. P0
3. What is the entry to record the lease bonus paid at the inception of the lease?
A. Rent expense 100,000
Cash 100,000
B. Prepaid rent 100,000
Cash 100,000
C. Prepaid rent 90,000
Rent expense 10,000
Cash 100,000
D. Rent expense 90,000
Prepaid rent 10,000
Cash 100,000

PROBLEM 7:
ELGON COMPANY was organized in 2011 and began operations at the beginning of 2012. The
company provides landscaping services. The following costs were incurred prior to the start of
operations:

Legal fees in connection with organization of the company P135,000

Improvements to leased office space prior to occupancy 225,000
Fees paid to underwriters for handling stock issue 36,000
Costs of meetings of incorporators to discuss organizational 63,000
 activities
Filing fee to incorporate 9,0
00
P468,00
0

What is the total amount of organization costs that should be reported in Elgon’s income
statement?
A. P243,000 C. P180,000
B. P468,000 D. P207,000

PROBLEM 7:
CAMEROON CORP. has provided information on intangible assets as follows:
 A patent was purchased from Patintero Company for P6,000,000 on January 1. 2011. On
the acquisition date, the patent was estimated to have a useful life of 10 years. The
patent had a net book value of P6,000 when Patentero sold it to Cameroon.
 On February 1, 2012, a franchise was purchased from the Franchisor Company for
P1,440,000. The contract which runs for 20 years provides that 5% of revenue from the
franchise must be paid to Franchisor. Revenue from the franchise for 2012 was
P7,500,000.
 The following research and development costs were incurred by Cameroon in 2012:
Materials and P426,000
Equipment
Personnel 567,000
Indirect costs 306,0
00
Total P1,299,0
00

Because of recent events, Cameroon, on January 1, 2012, estimated that the remaining useful
life of the patent purchased on January 1, 2011, is only 5 years from January 1, 2012.
1. On December 31, 2012, the carrying value of the patent should be
A. P4,320,000 C. P1,680,000
B. P6,000,000 D. P0
2. The unamortized cost of the franchise at December 31, 2012, should be
A. P999,000 C. P1,440,000
B. P1,356,250 D. P1,374,000
3. How much should be charged against Cameroon’s income for the year ended December
31, 2012?
A. P2,280,000 C. P2,820,000
B. P2,826,000 D. P1,725,000
4. An auditor will most likely obtain evidence regarding the continuing validity and existence
of the patent by obtaining a written representation from
A. The Securities and Exchange Commission (SEC) C. the patent inventor
B. A Patent attorney D. The patent owner

PROBLEM 9:
EMI KOUSSI CORP. has its own research department. However, the company purchases patents
from time to time. The following is a summary of transactions involving patents now owned by
the company.
 During 2006 and 2007, Emi Koussi spent a total of P459,000 in developing a new
process that was patented (Patent A) on April 1, 2008; additional legal and other costs of
P50,000 were incurred.
 A patent (Patent B) developed by Nonoy Inventor, an inventor, was purchased by for
P187,500 on December 1, 2009, on which date it had an estimated useful life of 12 ½
years.
 During 2008, 2009, and 2010, research and development activities cost P510,000. No
additional patents resulted from these activities.
 A patent infringement suit brought by the company against a competitor because of the
manufacture of articles infringing on Patent B was successfully prosecuted at a cost of
P42,600. A decision in the case was rendered in June 2010.
 On July 1, 2011, Patent C was purchased for P172,800. This patent had 16 years yet to
run.
  During 2012, Emi Koussi expended P180,000 on patent development. However, the
company is still undecided as to how the patent, if approved by the Bureau of Patents,
will generate probable future economic benefits.

Assume that the legal life of each patent is also its useful life.
1. What is Patent A’s carrying value on December 31, 2012?
A. P120,888 C. P38,125
B. P497,125 D. P388,113
2. What is Patent B’s carrying value on December 31, 2012?
A. P141,250 C. P32,092
B. P28,906 D. P173,342
3. What is Patent C’s carrying value on December 31, 2012?
A. P162,000 C. P159,840
B. P327,600 D. P156,600
4. What is the total patent amortization expense to be reported in Emi Koussi’s income
statement for the year ended December 31, 2012?
A. P37,300 C. P74,325
B. P28,741 D. P28,300

PROBLEM 10:
ANDES CORPORATION 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, 2008, and the patent was
estimated to have a useful life of 10 years.

On June 1, 2010, Andes spent P28,440 to successfully prosecute a patent infringement. In

addition, the patent’s estimated useful life was extended to 12 years form June 1, 2010. At the
beginning of 2012, Andes determined that a competitor’s product would make the Oido Organ
obsolete and the patent worthless by December 31, 2012.

Based on the preceding information, calculate the patent amortization expense for each of the
following years:
1. 2008
A. P14,100 C. P5,400
B. P12,750 D. P1,350
2. 2009
A. P51,000 C. P2,700
B. P56,400 D. P5,400
3. 2010
A. P4,438 C. P3,750
B. P2,188 D. P5,820
4. 2011
A. P4,438 C. P3,750
B. P6,120 D. P2,188
5. 2012
A. P331,875 C. P39,062
B. P19,531 D. P3,750

PROBLEM 11:
The following costs were incurred by EVEREST COMPANY during 2012:
Searching for applications of new research findings P 57,000
Trouble – shooting in connection with breakdowns during
commercial production 87,000
Adaptation of an existing capability to a particular requirement 39,000
or customer’s need as a part of continuing commercial activity
Engineering follow – through in an early phase of commercial 45,000
production
Radical modification of the formulation of a glassware product 78,000
Laboratory research aimed at discovery of new knowledge 204,000
Testing for evaluation of new products 72,000
Quality control during commercial production, including routine
testing of products 174,000
Materials consumed in research and development projects 177,000
Consulting fees paid to outsiders for research and development 300,000
 projects
Personnel costs of persons involved in research and 384,000
development projects
Indirect costs reasonably allocable to research and development 150,000
projects
Materials purchased for future research and development 102,000
projects
Research and development costs reimbursable under a contract
to 1,050,000
perform research and development for Client Corporation
Design, construction, and testing of preproduction prototypes 870,000
and models
Routine on – going efforts to refine, enrich, or otherwise improve
upon 750,0
the qualities of an existing product 00
Total P4,539,0
00

What is the total amount to be classified and expensed as research and development for
2012?
A. P3,342,000 C. P2,394,000
B. P2,292,000 D. P2,220,000

PROBLEM 12:
MOSES COMPANY’s own research department has an on – going project to develop a new
production process. At the end of 2011, Moses had already spent a total of P300,000, of which
P270,000 was incurred before November 1, 2011. On November 1, 2011, the company’s newly
developed production process met the criteria for recognition as an intangible asset.

During 2012, Moses incurred additional expenditure of P600,000. At the end of 2012, the
recoverable amount of the intangible asset was estimated to be P570,000. Including future
cash outflows to complete the process before it is available for its intended use.

1. At December 31, 2011, the production process should be recognized at a cost of

A. P300,000 C. P30,000
B. P 0 D. P270,000
2. What is the total cost of the production process at December 31, 2012?
A. P630,000 C. P870,000
B. P600,000 D. P900,000
3. How much impairment loss should be recognized be Moses in 2012, in connection with the
new production process?
A. P300,000 C. P30,000
B. P0 D. P60,000

PROBLEM 13:
KIYAT CORPORATION was organized in 2011. Its accounting records include only one account
for all intangible assets. The following is a summary of the debit entries that have been
recorded and posted during 2011 and 2012:
INTANGIBLE ASSETS
July 1, 2011 8-year franchise, expires June 30, 2019 P126,000
Oct. 1, 2011 Advance payment on leasehold (term of lease is 2 84,000
years)
Dec. 31, Net loss for 2011 including incorporation fee,
2011 P3,000, and
related legal fees of organizing, P15,000 48,000
(all fees incurred in 2011)
Jan. 2, 2012 Acquired patent (10-year life) 222,000
March 1, Cost of developing a secret formula 225,000
2012
April 1, Goodwill purchased 835,200
2012
July 1, 2012 Legal fee for successful defense of patent 37,950
purchased above
 Oct. 1, 2012 Research and development costs 480,000
Ignore income tax effects.

1. The unamortized patent cost at December 31, 2012, should be

A. P199,800 C. P222,000
B. P235,440 D. P197,490
2. The unamortized franchise cost at December 31, 2012, should be
A. P110,250 C. P102,375
B. P94,500 D. P118,125
3. The amount of prepaid rent to be reported in Kiyat’s December 31, 2012, statement of
financial position is
A. P73,500 C. P84,000
B. P31,500 D. P63,000
4. The adjusting entries on December 31, 2012, should include a net debit to the retained
earnings account of
A. P889,275 C. P60,375
B. P42,000 D. P66,375
5. As a result of the adjustments at December 31, 2012, the total charges against Kiyat’s
2012 income should be
A. P840,900 C. P597,900
B. P822,900 D. P841,275

PROBLEM 14:
KIKI LABORATORIES holds a valuable patent (No. 362436) on a device that burns body fats. Kiki
does not manufacture or sell the products and processes it develops; it conducts research and
develops products and processes which it patents, and then assigns the patents to
manufacture on a royalty basis. The history of Patent No. 362436 is as follows:

Date Activity Cost

2002 – Research conducted to develop device P7,680,0
2003 00
2004
Jan. 5 Design and construction of a prototype 1,752,00
March 5 Testing of models 0
840,000
2005
Jan. 2 Legal and other fees to process patent application 1,241,00
0
2006
Dec. 10 Legal fees paid to successfully defend device patent 714,000
2007
April 3 Research aimed at modifying the design of the 860,000
patented device
2011
July 28 Legal fees paid in a successful patent infringement
suit 680,000
against a competitor

A 17 – year useful life was assumed by Kiki when it received the initial device patent.

On January 1, 2010, it revised its useful life estimate downward to 5 remaining years. The
company’s reporting date is December 31, 2012.

Based on the preceding information, compute the carrying value of Patent No. 362436 on each
of the following dates:
1. December 31, 2005
A. P1,168,000 C. P1,241,000
B. P3,607,529 D. P1,178,950
2. December 31, 2009
A. P1,488,000 C. P350,400
B. P876,000 D. P817,600
3. December 31, 2012
A. P657,000 C. P525,600
B. P876,000 D. P350,400
PROBLEM 15:
ACADIA CORP. was incorporated on January 2, 2011. The corporation’s financial statements for
its year’s operations were not examined by a CPA. You have been engaged to audit the
financial statements for the year ended December 31, 201, and your audit is substantially
completed. The corporation’s trial balance appears below.

Acadia Corp.
TRIAL BALANCE
December 31, 2012
Debits Credits
Cash P 300,000
Accounts receivable 1,460,000
Allowance for doubtful accounts P29,200
Inventories 1,004,000
Machinery and Equipment 2,380,000
Accumulated Depreciation 524,000
Patents 2,564,000
Leasehold improvements 600,000
Prepaid expenses 900,000
Goodwill 600,000
Licensing agreement No. 1 1,200,000
Licensing agreement No. 2 1,120,000
Accounts payable 1,460,000
Unearned revenue 345,600
Share capital 6,000,000
Retained Earnings, January 1, 2012 3,181,200
Sales 14,400,000
Cost of Goods Sold 9,500,000
Selling and Administrative expenses 3,722,000
Interest expense 190,000 The following
Loss on extinguishments of debt 400,000 information
Totals P25,940,00 P25,940,0 relates to
0 00 accounts that
may yet require
adjustments.
1. Patents for Acadia’s manufacturing process were acquired January 2, 2012, at a cost of
P1,870,000. An additional P694,000 was spent on December 29, 2012, to improve
machinery covered by the patents and charged to the Patents account. Depreciation on
property, plant, and equipment has been properly recorded for 2012. Acadia uses the
straight-line method for all depreciation and amortization and the legal life on its patents.
2. On January 3, 2011, Acadia purchased Licensing Agreement No. 1, which was believed to
have an indefinite life. The balance in the Licensing Agreement No. 1 account includes its
purchase price of P1,140,000 and expenses of P60,000 related to the acquisition. On
January 1, 2012, Acadia purchases Licensing Agreement No. 2, which has a life expectancy
of 10 years. The balance in the Licensing Agreement No. 2 account includes its P1,080,000
purchase price and P120,000 in acquisition expenses, but it has been reduced by a credit
of P80,000 for the advance collection of 2013 revenue form the agreement.

In late December 2011, an explosion caused a permanent reduction in the expected

revenue – producing value of Licensing Agreement No. 1, and in January 2013, a flood
caused additional damage that rendered the agreement worthless. The recoverable
amount of Licensing Agreement No. 1 was determined to be P480,000 at December 31,
2011.

3. The balance in the Goodwill account represents amount paid on December 30, 2011, for a
four – year advertising program, estimated to assist in increasing Acadia’s sales.
4. The Leasehold Improvements account includes (a) the P300,000 cost of improvements
with a total estimated useful life of 12 years, which Acadia as tenant made to leased
premises in January 2011, and movable assembly line equipment costing P300,000 that
was installed in the leased premises in December 2012. Acadia paid its rent in full during
2012. A 10 – year non-renewable lease was signed January 3, 2011, for the leased building
that Acadia used in manufacturing operations.

Prepare the adjusting journal entries that should be made on December 31, 2012. Use a
separate account for the accumulation of each type of amortization.
PROBLEM 16:
During 2010, APEX COMPANY purchased a building site for its proposed research and
development laboratory at a cost of P1,200,000. Construction of the building was started in
2010. The building was completed on December 31, 2011, at a cost of P5,600,000 and was
placed in service on January 2, 2012. The estimated useful life of the building for depreciation
purposes was 20 years; the straight – line method of depreciation was to be employed and
there was no estimated salvage value.

Management estimates that about 50% of the projects of the research and development group
will result in long-term benefits (i.e., at least 10 years) to the corporation. However, Apex fails
to demonstrate how such projects will generate probable future economic benefits. The
remaining projects either benefit the current period or are abandoned before completion. A
summary of the number of projects and the direct costs incurred in conjunction with the
research and development activities for 2012 appears below.

Upon recommendation of the research and development group, Apex Company acquired a
patent for manufacturing rights at a cost of P1,600,000. The patent was acquired on April 1,
2011, and has an economic life of 10 years.

Number Salaries and Other Expenses

of Employee (excluding Building
Projects Benefits Depreciation Charges
Completed projects with 30 P1,800,000 P1,000,000
long – term benefits
Abandoned projects or 20 1,300,000 300,000
projects that benefit
the
current period
Projects in Process – 10 800,000 240,000
results in
indeterminate
Total 60 P3,900,000 P1,540,000

1. The total research and development expenses for 2012 should be

A. P2,920,000 C. P5,440,000
B. P5,880,000 D. P5,720,000
2. What is the amount of patent amortization for 2012?
A. P80,000 C. P120,000
B. P160,000 D. P0
3. What is the book value of the building on December 31, 2012?
A. P5,320,000 C. P5,040,000
B. P5,600,000 D. P6,460,000
4. What is the carrying value of the patent at December 31, 2012?
A. P1,280,000 C. P1,600,000
B. P1,320,000 D. P0

PROBLEM 17:
The following information pertains to BAKER COMPANY’s intangible assets:
a. On January 1, 2012, Baker signed an agreement to operate as a franchisee of Max & Jess
Food Chain, Inc. for an initial franchise fee of P1,500,000. Of this amount, P300,000 was
paid when the agreement was signed and the balance is payable in 4 annual payments of
P300.000 each, beginning January 1, 2013. The agreement provides that the down payment
is not refundable and no future services are required of the franchisor. The present value at
January 1, 2012, of the 4 annual payments discounted at 14% (the implicit rate for a loan of
this type) is P874,000. The agreement also provides that 5% of the revenue from the
franchise must be paid to the franchisor annually. Baker’s revenue from the franchise for
2012 was P19,000,000. Baker estimates the useful life of the franchise to be 10 years.
b. Baker incurred P1,300,000 of experimental and developments costs in its laboratory to
develop a patent which was granted on January 2, 2012. Legal fees and other costs
associated with registration of the patent totaled P272,000. Baker estimates that the useful
life of the patent will be 8 years.
c. A trademark was purchased from Banawe Company for P640,000 on July 1, 2009.
Expenditures for successful litigation in defense of the trademark totaling P163,200 were
 paid on July 1, 2011. Baker estimates that the useful life of the trademark will be 20 years
from the date of acquisition.

1. What is the carrying value of the franchise at December 331, 2012?

A. P1,350,000 C. P1,056,600
B. P1,500,000 D. P1,174,000
2. What is the carrying value of the patent at December 31, 2012?
A. P238,000 C. P1,375,500
B. P272,000 D. P258,400
3. What is the carrying value of the trademark on December 31, 2012?
A. P686,400 C. P544,000
B. P528,000 D. P707,200
4. The total expenses resulting form the transactions that would appear on Baker’s income
statement for the year ended December 31, 2012, should be
A. P1,255,760 C. P1,133,400
B. P1,260,560 D. P183,400

PROBLEM 18:
In line with CANDLER COMPANY’s expansion program, it has become interested in acquiring a
plant in Mindanao to handle many of its production functions in that area. One prospective
seller is Mahal Ko Sya Co. whose owners have decided to sell their business if a proper
settlement can be obtained. Mahal Ko Sya Co.’s statement of financial position appears as
follows:
Current assets P4,500,000 Current liabilities P2,400,000
Investments 1,500,000 Non Current 3,000,000
liabilities
Property, Plant, Ordinary shares 1,500,000
and
Equipment 12,000,000 Share premium 5,100,000
(net)
Retained Earnings 6,000,000
Total assets P18,000,00 Total Equities P18,000,0
0 00

Candler has hired Kilatis Appraisal Company to determine the proper price to pay for Mahal Ko
Sya Co. the appraisal company finds that the investments have a fair value of P4,500,000 and
the inventory is understated by P2,400,000. All other assets and equities are properly stated.

And examination of the company’s income for the last 4 years indicates that the net income
has steadily increased. In 2011, the company had a net operating income of P3,000,000, which
is expected to increase 20% each year over the next 4 years. Candler believes that a normal
return in this type of business is 18% on net assets. The asset investment in the Mindanao
plant is expected to stay the same for the next 4 years.

According to Kilatis Appraisal Company, the fair value of Mahal Ko Sya Co. can be estimated in
many different ways. Calculate an estimate of the value of Mahal Ko Sya Co., assuming that
any goodwill will be computed as:

1. The capitalization of the average excess earnings of Mahal Ko Sya Co. at 18%
A. P44,840,000 C. P18,286,416
B. P36,000,000 D. P26,840,000
2. The purchase of average excess earnings over the next four years
A. P24,364,800 C. P30,960,000
B. P19,591,200 D. P22,831,200
3. The capitalization of average excess earnings of Mahal ko Sya at 24%
A. P31,500,000 C. P18,381,888
B. P24,630,000 D. P98,520,000
4. The present value of the average excess earnings over the next four years discounted at
15%. (The present value of an ordinary annuity of 1 at 15% for 4 periods is 2.85498.)
A. P31,792,979 C. P22,542,844
B. P55,932,484 D. P27,250,135
5. If Candler were to pay P23,100,000 to purchase the assets and assume the liabilities of
Mahal Ko Sya Co., how much would be charged to goodwill?
A. P8,840,000 C. P0
B. P6,364,800 D. P5,100,000
PROBLEM 19:
You have instructed by CANNON COMPANY, a high-flying conglomerate, to conduct a purchase
audit of XYA co.’s books to determine a possible purchase price for XYZ Co.’s assets. You find
the following information:

Total identifiable assets of XYZ Co. at fair market value P5,000,0

00
Liabilities 1,200,00
0
Average rate of return on net assets for XYZ Co.’s industry 15%
Forecasted earnings per year based on past earnings figures 700,000

Determine the purchase price on the basis of the following assumptions:

1. Goodwill is equal to 3 years’ excess earnings
A. P5,510,000 C. P3,930,000
B. P5,900,000 D. P4,190,000
2. Goodwill is equal to the present value of excess earnings discounted at 15% for 3 years.
(The present value factor of an ordinary annuity of 1 at 15% for 3 periods is 2.28323.)
A. P5,398,261 C. P4,690,460
B. P4,096,820 D. P5,101,441
3. Goodwill is equal to the capitalization of excess earnings at 15%
A. P7,600,000 C. P4,666,667
B. P8,466,667 D. P6,400,000

PROBLEM 20:
SKIN INC. is considering purchasing A & B Enterprises, which has the following assets and
liabilities.

Cost Fair market

Value
Accounts receivable P4,800,000 P4,400,000
Inventory 4,800,000 5,000,000
Prepaid Insurance 200,000 200,000
Buildings and Equipment (net) 1,400,000 4,000,000
Accounts payable (3,200,000) (3,200,000)
Net assets P P 10,400,000
8,000,000

If the purchase price is P12,600,000, the amount of goodwill to be charged in recording the
acquisition is
A. P4,600,000 C. P2,200,000
B. P2,400,000 D. P0

PROBLEM 21:
DURIAN COMPANY develops software for small business and home computer markets. Most of
the company’s computer programmers are involved in developmental work designed to
produce software that will perform fairly specific tasks in a user – friendly manner. Extensive
testing of the working model is performed before it is released to production for preparation of
masters and further testing. This carful preparation has resulted to the production of several
computer software packages that have been very successful in the marketplace.

Durian incurred the following costs during 2012:

Salaries and wages of programmers doing research P 705,000
Expenses related to projects prior to establishment of technological 235,200
feasibility
Expenses related to projects after technological feasibility has been
established 148,500
but before software is available for commercial production
Amortization of capitalized software development costs from
current and 80,250
prior years
Costs to produce and prepare software for sale 168,900
 Additional data for 2012:
Sales of products for the year P1,545,00
0
Beginning inventory 426,000
Portion of goods available for sale sold during year 60%
Income tax rate is 30%

What is Durian’s net income for 2012?

A. P139,797 C. P215,072
B. P195,681 D. P243,746