UNIT 4 Exercise Worksheet

Exercise 1 - Patent
In 2020, Dragonborn Co. incurred developed costs on a patent for P100,000 cash and paid P1,000,000
for its patent application & licensing in January 1, 2020.
On December 31, 2021, Dragonborn Co. successfully defended a lawsuit from Altmers Corp and paid
P50,000 in attorney’s fees.
On January 1, 2023, the company acquired a competing patent for P85,000.
On January 1, 2025 the company acquired a related patent for P150,000, it extended the life of the
original patent for 5 more years. Dragonborn uses the straight line method in amortization of patents.

Required:
Prepare the journal entries for the years 2020 – 2025 related to the patent.

Exercise 2 – Franchise
On January 1, 2020, Aela Company acquired a 20 year franchise to operate a Jollibee food outlet by
paying an initial franchise fee of P12,000,000, of which P2,000,000 is payable in cash and the remaining
sum to be paid in a 12% non-interest bearing note payable in 5 equal installments every December 31
starting in 2020.
The initial franchise fees is a payment for initial services of the franchisor to Aela, it includes assistance
in finding a suitable store location, advertising, training staff, machinery & equipment, supplies and
other preparations for initial operations. The franchise contract also provides for Aela to pay a 5%
periodic franchise fee based on gross sales, Aela is obliged to pay at the end of each year based on
agreement. The Jollibee food outlet operated by Aela Company reported 20,000,000 sales for the year
2020.

Required:
Prepare the necessary journal entries in the books of the franchisee, Aela Company to record the
transactions related to the franchise in 2020.

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Exercise 3 – Copyright
On January 1, 2020, Ulfric purchased a copyright that grants him the rights for the production of a
musical piece within a 5 year period, the purchase price was P1,500,000. He also paid the following
costs:
Acquisition related employee benefits & incentives P 100,000
Advertising cost 200,000
Business relocation costs 520,000
Selling and administrative costs 400,000
Professional fees. 800,000
Ulfric adopted the write-off on first sale approach in amortizing the copyright. The revenues from
initial sale of the copyrighted piece of art was recognized in 2021.

Required:
From the above expenditures, what amount of copyright can be capitalized?

Exercise 4 – Other intangible assets

Rikke Corp. had the following expenditures on January 1, 2020:
Legal costs of P100,000 for acquiring a broadcasting license for 10 years. Rikke will indefinitely renew
the license for 10 years each.
Costs of P250,000 to register airline rights for 15 years. Rikke has no intention of renewing after
expiration.
Purchased a customer list for P60,000 to be used in product marketing and direct selling. The list has a
useful life of 3 years.
Research costs before technological feasibility for a computer software, P150,000 and cost of coding,
testing and cost of product masters P300,000. The computer software has a useful life of 5 years and is
amortized on a straight line basis.
Required:
Prepare the necessary journal entries to record the transactions of Rikke Corp. in 2020. All intangible
assets that are subject to amortization (finite life) uses the straight line method of amortization.

Exercise 5 - Goodwill Residual approach

All Might Corp. acquired the net assets of Midoriya Company on January 1, 2020 for P3,000,000 cash.
The fair value for all of Midoriya’s assets were as follows:
Loans and receivables P 500,000
Inventories 1,800,000
Property, plant and equipment 5,600,000
Midoriya had the following liabilities at their fair value:
Short-term loans and payables P 300,000
Long-term liabilitites 5,000,000

Requirements:
1. Determine the amount of goodwill that resulted from the acquisition under the residual approach.
2. Prepare the journal entry in the books of All Might Corp. to record the acquisition.

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Exercise 6 - Goodwill Direct approach
Todoroki Inc. is considering the acquisition of the net assets of Yaoyoruza Co. Both parties agreed to
decide on the acquisition cost by measuring goodwill under the direct approach.
Yaoyoruza has the following data available for the computation of goodwill:
Total assets P 5,000,000
Total liabilities 2,000,000
Normal rate of return 10%
Yaoyoruza reported the following income figures for the past five years:
2016 P 300,000
2017 P 350,000
2018 P 310,000
2019 P 390,000
2020. P 370,000

Requirements:
Determine the amount of goodwill under the four different methods under the direct approach.
1. Purchase of average excess earnings
2. 20% capitalization of average excess earnings
3. 10% capitalization of average earnings
4. Present value method

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