Quiz 2 Intangible Assets Part 2

Problem Solving (50 points)

1. On June 30, 2022, Finn Company exchanged 20,000 shares of Edlow Corporation P30 par value
common stock for a patent owned by Bisk Company. The Edlow stock was acquired in 2019 at a
cost of P500,000. At the exchange date, Edlow common stock had a fair value of P40 per share,
and the patent had a net carrying amount of P1,000,000 on Bisk’s books.
Finn should record the patent at
a. 500,000
b. 600,000
c. 800,000
d. 1,800,000

2. Tobin Company incurred P 1, 600, 000 of research and development costs to develop a product for
which a patent was granted on January 1,2022.legal fees and other costs associated with
registration of the patent totaled P300,000. On March 31,2022, Tobin paid P450,000 for legal fees
in a successful defense of the patent.
The total amount capitalized for this patent through March 31,2022 should be
a. 750,000
b. 300,000
c. 2,050,000
d. 2,350,000

3. Hy Company bought Patent A for P400,000 Patent B for P600,000. Hy also paid acquisition costs of
P50,000 for Patent A and P70,000 for Patent B. Both patents were challenged in legal actions. Hy
paid P200,000 in legal fees for a successful defense of Patent B.
What amount should Hy capitalize for patents?
a. 1,620,000
b. 1,120,000
c. 650,000
d. 450,000

4. On January 1, 2019, Taft Company purchased a patent for P7,140,000. The patent is being
amortized over its remaining legal life of 15 years expiring on January 1, 2022. During 2022, Taft
determined that the economic benefits of the patent would not last longer than ten years from the
date of acquisition.

What amount should be reported in the balance sheet for the patent, net of accumulated
amortization, at December 31, 2022?
a. 4,284,000
b. 4,896,000
c. 5,050,000
d. 5,236,000

5. On January 1, 2019, Lava Company purchased a patent for a new consumer product for
P9000,000. At the time of purchase, the patent was valid for 15 years. However, the patent’s useful
life was estimated to be only 10 years due to the competitive nature of the product. On December
31, 2022, the product was permanently withdrawn from sale under governmental order because of
a potential health hazard in the product.

What amount should Lava charge against income during 2022, assuming amortization is recorded
at the end of each year?
a. 90,000
b. 540,000
c. 630,000
d. 720,000

6. Zamboanga Company acquired three patents in January 2022. The patents have different lives as
1

indicated in the following schedule:

Page

Cost Remaining useful life Remaining legal life

 Patent X 1,200,000 10 8
Patent Y 2,000,000 5 10
Patent Z 3,000,000 6 15
Patent Z is believed to be uniquely useful as long as the company retains the right to use it. In June
2022, the company successfully defended its right to patent Y. legal fees of P450,000 were incurred
in this action. The company’s policy is to amortize intangible assets by the straight-line method to
the nearest half year. The company reports on a calendar-year basis.

The amount of amortization that should be recognized for 2022 is

a. 1,050,000
b. 1,100,000
c. 1,095,000
d. 1,020,000

7. Gray Company was granted a patent on January 1, 2019, and appropriately capitalized P450,000 of
related costs. Gary was amortizing the patent over its estimated life of 15 years. During 2022, Gray
paid P150,000 in legal costs in successfully defending an attempted infringement of the patent.
After the legal action was completed, Gray sold the patent to the plaintiff for P750,000. Gray’s policy
is to take no amortization in the year of disposal.

In its 2022 income statement, what amount should Gray report as gain from sale of patent?
a. 150,000
b. 240,000
c. 270,000
d. 390,000

8. The owners of East Company are planning to sell the business to new interests. The cumulative net
earnings for the past five years amounted to P5,500,000 including expropriation gain of P500,000.
The fair value of net assets of East Company was P7,500,000.

Assuming that goodwill is determined by capitalizing average net earnings at 10%, the amount to
be paid for goodwill is
a. 3,500,000
b. 7,500,000
c. 2,500,000
d. 5,000,000

9. Sarrah Company engaged your services to compute the goodwill to be recognized in the purchase
of ABC Corporation in January 2011. The following information was taken from the records of ABC.

Net income Net assets

2018 360,000 1,600,000
2019 388,000 1,800,000
2020 288,000 1,900,000
2021 380,000 2,000,000
2022 394,000 2,100,000
1,810,000 9,400,000
It is agreed that goodwill is measured by capitalizing excess earnings at 40%, with normal return on
average net assets at 10%.

How much is the “purchase price” of ABC Corporation?

a. 2,535,000
b. 2,100,000
c. 2,315,000
d. 2,305,000

10. Rem Company is considering acquisition of the net assets of Sunset Company to expand its
operations. The book value and current value of the assets of Sunset Company are P3,300,000 and
P4,000,000, respectively. The normal rate of return is believed to be 9%, but Rem believes it can
earn 12% annually on its investment in Sunset due to the excellent reputation of Sunset.
2
Page
 What is the amount of goodwill using the “years” multiple of excess earnings” method assuming a
10-year period of excess earnings?
a. 1,000,000
b. 1,100,000
c. 1,200,000
d. 990,000

11. On January 1, 2022, Boracay Company bought a trademark from Lamitan Company for
P3,000,000. Boracay retained an independent consultant who estimated the trademark’s life to be
indefinite. Its carrying amount in Lamitan’s accounting records was P1,500,000.

In Boracay’s December 31, 2022 balance sheet, what amount should be reported as trademark?
a. 3,000,000
b. 1,500,000
c. 2,850,000
d. 0

12. Cotabato Company acquired Gensan Company on January 1. As part of the acquisition,
P5,000,000 in goodwill was recognized. This goodwill was assigned to Cotabato’s Internet cash
generating unit. During the year, the Internet cash generating unit reported revenue of P8,000,000.
Publicly traded companies with operations similar to those of the Internet cash generating unit had
price-to-revenue ratio averaging 1.80. The carrying amounts of the assets and liabilities of
Cotabato’s Internet cash generating unit are as follows:

Identifiable assets 20,000,000

Goodwill 5,000,000
Liabilities 6,500,000

Cotabato Company should recognize goodwill impairment loss at

a. 5,000,000
b. 4,100,000
c. 900,000
d. 0

13. On January 1, 2022, Ral Company leased land and building from an unrelated lessor for a ten-year
term. The lease has a renewal option for an additional ten years, but Ral has not reached a
decision with regard to the renewal option. In early January of 2022, Ral completed the following
improvements to the property:
Description Estimated life
Cost
Sales office 10 years 470,000
Warehouse 25 years 750,000
Parking lot 15 years 180,000

Depreciation of leasehold improvements for 2022 should be

a. 70,000
b. 89,000
c. 122,000
d. 140,000

14. On January 1, 2020, Wayne Company signed an eight-year lease for office space. Wayne has the
option to renew the lease for an additional four-year period on or before January 1, 2011. During
January 2022, two years after occupying the leased premises, Wayne made general improvements
to the premises costing P3,600,000 and having an estimated useful life of ten years. At December
31, 2022, Wayne’s intentions as to exercise of the renewal option are uncertain because they
depend upon future office space requirements. A full year’s depreciation expense is taken for
calendar year 2022.
Wayne should record depreciation of leasehold improvements for 2022 at
a. 300,000
b. 360,000
3

c. 450,000
Page

d. 600,000
15. Star Company leases a building for its product showroom. The ten-year nonrenewable lease will
expire on December 31, 2015. In January 2022, Star redecorated its showroom and made
leasehold improvements of P480,000. The estimated useful life of the improvements is 8 years.
Star uses the straight-line method of depreciation.
What amount of leasehold improvements, net of depreciation, should Star report in its June 30,
2022 balance sheet?
a. 456,000
b. 450,000
c. 440,000
d. 432,000

16. On January 1, 2021, Bay Company acquired a land lease for a 21-year period with no option to
renew. The lease required Bay to construct a building in lieu of rent. The building, completed on
January 1, 2022, at a cost of 8,400,000, will be depreciated using the straight-line method. At the
end of the lease, the building’s estimated market value will be P4,200,000.

What is the building’s carrying amount in Bay’s December 31, 2022 balance sheet?
a. 7,980,000
b. 8,000,000
c. 8,190,000
d. 8,200,000

Questions 17 to 20 are to be found in the MS Form Answer sheet.

4
Page