Problem 1

E Company acquired three patents in January 2022.

Remaining Remaining
Cost useful life 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 entity retains the right to use it. In
June 2022, the entity successfully defended its right to Patent Y. Legal fees of P450,000 were
incurred in this action.

How much is the amortization expense for each patent for the year 2022?

150,000; 400,000; 500,000

Problem 2

On June 30, 2022, D Company signed an agreement to operate as a franchisee of J Printers for
an initial franchise fee of P6,000,000. On the same date, D Company paid P2,000,000 and
agreed to pay the balance in four equal annual payments of P1,000,000 beginning July 1, 2023.
The down payment is not refundable and no future services are required of the franchisor. D
Company can borrow at 14% for a loan of this type. Present and future value factors are as
follows:

Present value of 1 at 14% for 4 periods 0.59

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

What amount should D Company record the acquisition cost of the franchise on June 30, 2022?

4,910,000

Problem 3

On January 1, 2022, R Company bought a trademark from M Company for P500,000. R

Company retained an independent consultant who estimate the trademark’s life to be indefinite.
Its carrying amount in Montero’s accounting records was P800,000. Compute for the:

a. Amortization expense in 2022 0

b. Carrying amount of the trademark on December 31, 2022 500,000
 Since the trademark is considered to have an indefinite useful life, it is only subject to
impairment and not amortized. Since there is no information about the trademark’s
recoverable amount, we can assume that it is not impaired. Hence, there is no amortization
expense in 2022 and the carrying amount is still at P500,000

Problem 4

During 2022, Z Company incurred costs to develop and produce a computer software product
as follows:

Completion of detailed program design or working model P 500,000

Cost incurred for coding and testing to establish technological
feasibility 100,000
Other coding costs after establishment of technological
feasibility 1,000,000
Other testing costs after establishment of technological
feasibility 750,000
Costs of producing product masters 1,250,000
Duplication of computer software and training materials from
product master 1,500,000
Packaging product 250,000

1. What amount should be capitalized as software cost subject to amortization?

3,000,000
2. What amount should be reported as inventory? 1,750,000
3. Assuming the revenue method is used in the amortization and revenue for the year
amounted to P10,000,000 and total expected revenue is P40,000,000, how much is the
amortization for 2022? 750,000

Solution:
Problem 5

Minmin Company engaged your services to compute the goodwill and purchase price of the
acquisition of R Company. The following data are available for the R Company:

Current assets P 5,000,000 Current liabilities P 3,000,000

Investments 2,000,000 Noncurrent liabilities 5,500,000
PPE 15,000,000 Ordinary shares 7,000,000
Share premium 500,000
Retained earnings 6,000,000
Total assets P 22,000,000 Total liabilities and SHE P 22,000,000

You found out that the investments have a fair value of P1,500,000 and the current assets and
property, plant and equipment are understated by P1,000,000 and P2,000,000, respectively. All
other assets and equities are properly stated. An examination of the company’s income for the
last 5 years revealed that the total earnings amounted to P8,900,000. The said earnings include
loss on sale of equipment during the last year of P300,000 and P200,000 annual bonus of the
president. The normal rate of return is 10%.

Compute for the goodwill and the corresponding purchase price assuming:

1. Purchase of average excess earnings 2,200,000; 18,200,000

2. Capitalization of average excess earnings using a 10% rate 4,400,000; 20,400,000
3. Capitalization of average earnings using a 12% rate 1,000,000; 17,000,000
4. Discounted average excess earnings using a 14% rate 1,510,564; 17,510,564