PROBLEM 1

Cost of Intangible Assets

Franchise cost, 10-yr agreement P5,000,000

Computer Software 2,000,000
Prepaid expenses – rent and insurance 400,000
Patent on newly developed invention 2,000,000
Internally generated customer list, cost of creation 400,000
Bond sinking fund 1,600,000
Goodwill 1,900,000
Research and development cost 800,000

How much should be reported in the balance sheet as intangible assets?

PROBLEM 2
Cost of Intangible Assets

Selah Company had the following transactions and account balances during 2019:
• Legal costs in organizing the newly formed corporation, P250,000
• Insurance premium for 4 years, P70,000
• Copyright purchases, P300,000
• Legal fees for filing a patent on new project, P70,000
• Franchise, P1,000,000
• Advertising cost of newly franchises business unit, P200,000

How much should be reported in the balance sheet as intangible assets?

PROBLEM 3
Cost of Intangible Assets

Frances Company developed a new machine. Since the company regarded it as valuable, the entity had
it patented. The following costs were incurred:
• Purchase of special equipment for machine development, P2,000,000
• Salaries for scientist, workers, assistants, and engineers, P300,000
• Prototype testing, P100,000
• Patent filling – legal fees, P200,000
• Fees paid to government patent office, P20,000

1. How much should be recorded as intangible assets?

2. How much is the research and development expense?
PROBLEM 4
Cost of Patent

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 750,000
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 employees' work on the research,
development, and building of the machine
(60% of the time was spent in building the machine) 900,000
Expense of drawing required by the Patent Office to be 51,000
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 Gaya gaya Company.
1. What is the total cost of the patent?
2. What is the total cost of the new machine?
3. What is the entry to record the legal fees paid for the successful defense of the patent
against the infringement suit?

PROBLEM 5
Amortization of Intangible Assets
On Jan 1, 2016, Cream Company purchased a patent for P7,140,000. The patent is being amortized over
the remaining legal life of 15 years expiring Jan 1, 2031. During 2019, the entity determined that the
economic benefits of the patent would not last longer than ten years from the date of acquisition.

1. How much is the patent amortization in 2016?

2. How much is the paten amortization in 2019?
3. How much is the carrying value of the patent to be reported in Dec 31, 2019 SFP?

PROBLEM 6
Patent
Chim company was granted a patent on January 1, 2016 and capitalized P450,000. The entity was
amortizing the patent over the useful life of 15 years. During 2019, the entity paid P150,000 in a
successfully defending an attempted infringement of the patent.

After the legal action was completed, the entity sold the patent to the plaintiff for P750,000. How much
is the gain from sale of patent in 2019 assuming no amortization will be taken in the year of disposal?
PROBLEM 7
Patent

As a member of the audit team for the audit of RAS DASHEN COMPANY's financial statements for the
year ended December 31, 2018 you have been asked to examine selected accounts. The controller for
Ras Dashen mentions that there is only one account (shown below) kept for intangible assets.

INTANGIBLE ASSETS
Debit Credit Balance
Feb. 1 Organization costs 72,000 72,000
Mar. 15 Research and development
costs 1,880,000 1,952,000
April 3 Legal costs to obtain patent 150,000 2,102,000
May 1 Payment of 12 months' rent on
property leased by Ras Dashen 240,000 2,342,000
June 15 Promotional expenses related to
start-up of business 414,000 2,756,000
Dec. 31 Unamortized bond discount on
bonds due Dec. 31,2038 168,000 2,924,000
Dec. 31 Operating losses for first year 482,000 3,406,000

Questions:
1. The amount of organization expenses to be reported in Ras Dashen's income statement for the
year ended December 31,2018 is.
2. What is the carrying value of the patent at December 31, 2018 assuming that its useful life is 10
years?
3. The prepaid rent to be shown on Ras Dashen's statement d financial position at December 31,
2018, is

PROBLEM 8
Goodwill

On April 1, 2011, ZZ Corp paid cash of P620,000 for all of the net assets of AA Company appropriately
accounted for as a merger. The recorded assets and liabilities of AA Corporation on April 5, 2011 follow:

Cash P60,000
Inventory 180,000
PPE net of AD 220,000 320,000
Goodwill net of accumulated amortization 100,000
Liabilities (120,000)
Net Assets 540,000

On April 1, 2011 AA’s inventory had a fair value of P150,000 and the PPE net had a fair value of
P380,000. The amount of goodwill recorded in the books of ZZ as a result of the business combination
should be:
PROBLEM 9
Lease Bonus and Leasehold Improvements

Meru 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 fight to purchase the property is given by the lessor.

After obtaining the lease, improvements on the leased buildings 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 Meru Inc.
2. What is the amount of annual depreciation (straight line), if any should Meru Inc record?

PROBLEM 10
Accounting for Patent, Franchise, and R&D Costs

CAMEROON CORP. has provided information on intangible assets as follows:

• A patent was purchased from Patintero Company for P6,000,000 on January 1, 2017. On the
acquisition date, the patent was estimated to have a useful life of 10 years. The patent had a net
book value of P6,000,000 when Patintero sold it to Cameroon.
• On February 1, 2018, 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 2018 was P7,500,000.
• The following research and development costs were by Cameroon in 2018:
Materials and equipment P 426,000
Personnel 567,000
Indirect costs 306,000
Total P1,299,000

Because of recent events, Cameroon, on January 1, 2018, estimates that the remaining useful life of the
patent purchased on January 1, 2017, is only 5 years from January 1, 2018.

1. On December 31, 2018, carrying value of the patent should be

2. The unamortized cost of the franchise at December 31, 2018, should be
3. How much should be charged against Cameroon's income for the year ended December 31,
2018?