Chapter #12

Intangible Assets

TRUE OR FALSE

1. Amortization of limited-life intangible assets should not be impacted by expected residual values. False

2. Internally generated goodwill associated with a business may be recorded as an asset when a firm offer
to purchase that business unit has been received. False

3. All intangibles are subject to periodic consideration of impairment with corresponding potential
write-downs. True

4. Research and development costs are recorded as an intangible asset if it is felt they will provide
economic benefits in future years. False

5. Limited-life intangibles are amortized by systematic charges to expense over their useful life. True

6. PAS 38 Intangible Assets applies to intangible assets held for sale in the ordinary course of business.
False

7. In the case of a machine incorporating software that cannot be operated without the software, the entire
item would be treated as property, plant, and equipment under PAS 16 Property, Plant and Equipment.
True

8. In order to determine whether an internally generated intangible asset qualifies for recognition, its
generation is divided into a research phase and a development phase. If the two phases cannot be
distinguished, then the entire expenditure is classified as development. False

9. PAS 38 Intangible Assets prescribes the recognition of internally generated goodwill as an asset. True

10. Some intangible assets are not required to be amortized every year. True

11. If the revaluation model is used, at the date of the revaluation, accumulated amortization and
impairment losses are either eliminated against the cost and then the net amount is uplifted to the
revalued amount or are restated proportionately to the restatement of the gross carrying amount such
that the net amount is equal to the fair value. True

12. An intangible asset with a residual value at anything other than zero assumes that the entity will dispose
of the asset prior to the end of its economic life. True

13. Internally generated goodwill should not be capitalized in the accounts. True

14. The residual value is assumed to be zero unless there is a commitment by a third party to acquire the
asset at the end of its useful life or there is an active market for the asset and the residual value can be
determined by reference to that market, and it is virtually certain that an active market will continue to
exist at the end of the asset's useful life. False

15. If payment for an intangible asset is deferred beyond normal credit terms, then the cost is the cash price
and the balance is treated as a finance charge over the period of the finance. True

16. Market share and customer loyalty qualifies for recognition as intangible asset. False

17. Intangible assets acquired in a business combination shall be recognized separately from goodwill. True
 18. If intangible assets are acquired as part of a business combination, as defined in PFRS 3 Business
Combination, their cost is their fair value at the acquisition date. True

19. Add-in software on a computer, such as some forms of report writing software or antivirus software, are
not required for operating the tangible asset and therefore would be accounted for under PAS 38
Intangible Assets. True

20. Initially, intangible assets shall be measured at cost or revalued amount. False

21. In some cases, an intangible asset may be contained on or in a tangible item such as computer software,
films, and licensing agreements. True

22. The purchase of customer lists or expenditure on advertising are considered identifiable and therefore
recognized as intangible assets. False

23. A patent is amortized over the useful life or legal life of twenty years, whichever is longer. False

24. Internally generated brand, masthead, publishing title, and customer be recognized as an intangible
asset. False

25. An entity controls an asset if it has the power to obtain the future economic benefits flowing from the
underlying resource and to restrict the access of others to those benefits, True

26. The skill of employees arising out of the benefits of training costs can be recognized as intangible asset.
False

27. Entities are to apply the provisions of PAS 36 Impairment of Assets in assessing the recoverable amount
of an intangible asset and when and how to determine whether an asset is impaired. True

28. Organization cost is recognized as intangible asset and amortized over a period of five years. False

29. Intangible assets shall be derecognized on disposal or when no future benefits are expected to be derived
from their use or disposal. True

30. According to SIC 32, a Web site that has been developed for the purposes of promoting and advertising
an entity's products and services does not meet the criteria for capitalization of costs under PAS 38. True

MULTIPLE CHOICE – THEORIES

1. The term "intangible assets" is used in accounting to denote

a. current or non-current property items without physical characteristics.
b. assets with lesser economic significance because of the nature of such assets.
c. properties without physical characteristics that have long-term effects on a business enterprise.
d. such items as patents, copyrights, and claims against customers that can be valued on a monetary
basis.

2. Which of the following assets do not have the characteristic of exchangeability?

a. Patents
b. Copyrights
c. Goodwill
d. Franchise
3. Which of the following considerations are relevant in determining the useful life of an intangible asset?
I. Legal, regulatory or contractual provisions.
II. Provisions for renewal or extension. III. Expected actions of competitors.
IV. Initial cost.

a. I, II, III and IV

b. I, II and III
c. II, III and IV
d. I, III and IV

4. Which of the following research and development related costs should be capitalized and amortized over
current and future periods?
a. Labor and material costs incurred in building a prototype model
b. Cost of testing equipment that will also be used in another separate research and development
project scheduled to begin next year
c. Administrative salaries allocated to research and development
d. Research findings purchased from another company to add a particular research project current in
process

5. Which statement is correct concerning amortization of intangible assets?

I. Intangible assets with limited or finite life are amortized over their useful life.
II. Intangible assets with indefinite life are not amortized but are tested for impairment every two
years.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

6. Which statements are correct concerning goodwill?

I. Goodwill shall not be amortized because its useful life is indefinite.
II. Goodwill shall be tested for impairment at least annually or more frequently if events or changes
in circumstances indicate a possible impairment.
III. Further costs of developing, maintaining and restoring goodwill should be capitalized.
IV. Once impairment loss is recognized for goodwill, the loss taken up is not allowed to be reversed
in a subsequent period.

a. I,II and III

b. I,III and IV
c. I,II and IV
d. II,III and IV

7. Goodwill.
a. generated internally, should not be capitalized unless it is measured by an individual who is
independent of the enterprise concerned.
b. is easily computed by assigning a value to the individual attributes that comprise its existence.
c. represents a unique asset in that its value can be identified only with the business as a whole.
d. exists in any company that has earnings which differ from those of a competitor.

8. Legal fees incurred in successfully defending a patent should be capitalized when the patent has been
internally developed purchased from an inventor
a. Yes No
b. Yes Yes
c. No Yes
d. No No
9. Which statements are correct concerning recognition and derecognition of an intangible asset?
I. An intangible asset shall be measured initially at either cost or revalued amount.
II. After initial recognition, an intangible asset can be carried at cost less any accumulated
amortization and any accumulated impairment loss.
III. After initial recognition, an intangible asset can be carried at a revalued amount less any
subsequent accumulated amortization and accumulated impairment loss.
IV. An Intangible asset shall be derecognized on disposal or when no future economic benefits
are expected from its use or disposal.

a. I, II, III and IV

b. I, II and III
c. II, III and IV
d. I, III and IV

10. Which of the following methods of amortization is normally recommended for intangible assets?
a. Sum-of-the-years' digits method
b. Straight-line method
c. Composite rate method
d. Double-declining balance method

11. In relation to amortization of intangible assets, PAS 38 Intangible Assets requires that intangible assets
with indefinite useful lives
a. are amortized by the straight-line method across their useful lives.
b. must be amortized across a period of no more than 20 years.
c. are not subject to an amortization charge.
d. should not be amortized in a period in which maintenance of the asset occur.

12. In relation to the amortization of intangible assets, if an intangible asset has a finite useful life,
a. it must be amortized over a period not exceeding 40 years.
b. it must be amortized across a period not exceeding 5 years.
c. it is not subject to an annual amortization charge.
d. it must be amortized over that life.

13. In relation to the amortization of intangible assets, the general rule in PAS 38 Intangible Assets is that
unless demonstrated otherwise
a. the residual value does not enter into the determination of the amortization charge.
b. the residual value need not be reviewed at the end of each annual reporting period.
c. all intangible assets have a residual value at least equal to the amount maintenance costs incurred.
d. the residual value is presumed to be zero.

14. PAS 38 Intangible Assets requires that the following items in relation to intangibles, each be disclosed
separately.
a. The opening balance of each intangible.
b. The closing balance of each intangible
c. Any impairment losses reversed in profit or loss during the period
d. All mounts of intangibles acquired during the period.

15. Using the revaluation model, intangible assets should be reported in the statement of financial position
at
a. cost less accumulated amortization and impairment losses.
b. fair value at the date of revaluation less any subsequent accumulated amortization and any
subsequent impairment losses.
c. fair value at the date of acquisition accumulated amortization impairment losses.
d. amortized cost.
16. The proper accounting for the costs incurred in creating computer software products that are to be sold,
leased, or otherwise marketed to external parties is to
a. capitalize all costs until the software is sold to external parties.
b. charge research and development expense when incurred until technological feasibility has been
established for the product.
c. charge research and development expense only if the computer software has alternative future uses.
d. capitalize all costs as incurred until a detailed program design or working model is created.

17. Internally generated goodwill is prohibited from recognition in the financial statements of an entity. The
reason for this treatment is that
a. goodwill is not identifiable.
b. goodwill is not measurable.
c. it is not comparable to any other intangible assets.
d. it is not prudent to recognize intangible assets.

18. One of the essential characteristics of an intangible asset is

a. indefinite useful life.
b. controlled by the enterprise.
c. subject to amortization.
d. has physical substance.

19. If original estimates of useful life of an intangible asset are changed,

a. the asset's unamortized cost should be amortized over the revised remaining life.
b. the asset's unamortized cost should be amortized over the revised total life.
c. a retroactive adjustment is made in the accounts.
d. no further amortization is recognized.

20. Which of the following should not be recognized as an asset?

a. Development costs incurred after establishing commercial and technological feasibility
b. Excess of cost over fair value of net assets acquired in a business combination which is treated as an
acquisition
c. Patent right purchased from an investor
d. Costs incurred in organizing a corporation

21. Legal fees in the registration of patent rights were incurred by an entity at the beginning of the year.
Towards the end of the year, legal fees were incurred in successfully defending the entity's patent rights.
What is the proper treatment of these legal fees?
a. Legal fees in the registration are expensed while legal fees in the patent
b. Legal fees in the registration are capitalized while legal fees in the defense are expensed.
c. Both legal fees are capitalized.
d. Both legal fees are expensed in the period incurred.

22. The cost of an internally generated intangible asset comprises all expenditures that can be directly
attributed or allocated on a reasonable and consistent basis, to creating, producing and preparing the
asset for its intended use. Which of the following should not form part of the cost of internally generated
intangible asset?
a. Expenditure on training staff to operate the asset
b. Expenditure on materials and services used or consumed in generating the intangible asset
c. Any expenditure that is directly attributable to generating the asset, such as fees for registration of a
legal right
d. Salaries, wages and other employment related costs of personnel directly engaged in generating the
asset
23. According to PAS 38 Intangible Assets, amortization of an intangible asset with a finite useful life should
commence when
a. it is first recognized as an asset.
b. it is available for use.
c. it is probable that it will generate future economic benefits.
d. the costs can be identified with reasonable certainty.

24. A brand name that was acquired separately should initially be recognized according to PAS 38 Intangible
Assets at
a. recoverable amount.
b. either cost or fair value at the choice of the inquirer.
c. fair value.
d. cost.

25. Are the following statements true or false, according to PAS38 Intangible Assets?
(1) Expenditures during the research phase of a project may sometimes be capitalized as an
intangible asset.
(2) Expenditures during the development phase of a project may sometimes be capitalized as an
intangible asset.

Statement (1) Statement (2)

a. False False
b. False True
c. True False
d. True True

26. Cristina Joy, Inc. acquires copyrights to the original recordings of a famous singer. The agreement with
the singer allows the company to record and rerecord the singer for a period of five years. During the
initial six-month period of the agreement, the singer is very sick and consequently cannot record. The
studio time that was blocked by Cristina Joy had to be paid even during the period the singer could not
sing. These costs were incurred by the company:
I. Legal cost of acquiring the copyrights
II. Operational loss (studio time lost, etc.) during start-up period
III. Massive advertising campaign to launch the artist

Which of the above items is a cost that is eligible for capitalization as an intangible asset?
a. I only
b. I and II only
c. I, II and III
d. Neither I, II nor III

27. Which item listed below does not qualify as an intangible asset?
a. Computer software.
b. Registered patent
c. Copyrights that are protected
d. Notebook computer

28. Which of the following items qualify as an intangible asset under PAS 38?
a. Advertising and promotion on the launch of a huge product.
b. College tuition fees paid to employees who decide to enroll in an executive M.B.A. program Southern
Philippines School of Education and Accountancy (SPSEA) while working with the company.
c. Operating losses during the initial stages of the project.
d. Legal costs paid to intellectual property lawyers to register a patent.
29. Once recognized, intangible assets can be carried at
a. Cost less accumulated depreciation.
b. Cost less accumulated depreciation and less accumulated amortization.
c. Revalued amount less accumulated depreciation.
d. Cost plus a notional increase in fair value since the intangible asset is acquired.

30. Which of the following disclosures is not required by PAS 38?

a. Useful lives of the intangible assets.
b. Reconciliation of carrying amount at the beginning and the end of the year.
c. Contractual commitments for the acquisition of intangible assets.
d. Fair value of similar intangible assets used by its competitors

31. An entity that acquires an intangible asset may use the revaluation model for subsequent measurement
only if
a. The useful life of the intangible asset can be reliably determined.
b. An active market exists for the intangible asset.
c. The cost of the intangible asset can be measured reliably.
d. The intangible asset is a monetary asset.

32. Which of the following is a criterion that must be met in order for an item to be recognized as an
intangible asset other than goodwill?
a. The item's fair value can be measured reliably.
b. The item is part of the entity's activities aimed at gaining new scientific or technical knowledge.
c. The item is expected to be used in the production or supply of goods or services.
d. The item is identifiable and lacks physical substance.

33. Laurice Mae Company uses PFRS for financial reporting purposes. Which of the following is true about
accounting for the development costs of the company?
a. Development costs must be expensed.
b. Development costs are always deferred and expensed against future revenues.
c. Development costs may be capitalized as an intangible asset in very restrictive situations.
d. Development costs are recorded in other comprehensive income.

34. Intangible assets with indefinite lives are tested for impairment
a. quarterly at the quarterly reporting date.
b. annually at the annual reporting date.
c. biannually at the reporting date.
d. There are no guidelines defining when intangible assets are tested for impairment.

35. An intangible asset is considered to be impaired if its carrying value is greater than its recoverable
amount. The recoverable amount is
a. its historical cost.
b. its net selling price.
c. the greater of its net selling price or its value in use.
d. its replacement cost.
MULTIPLE CHOICE – PROBLEMS

A. The notes to financial statements of Shaanxi Company shows the following as compositions of Intangible
Assets as of December 31, 2021:

Patents P350,000
Organization Costs 150,000
Equipment (for use in various research & development projects) 500,000
Discount on Notes Payable 100,000
Prepaid Rent 175,000
Goodwill 800,000
Trademark 325,000
Plant Expansion Fund 400,000
Customer List (internally generated) 125,000
Research and Development 450,000
Deferred Charges 135,000
Computer Software 285,000
Copyright 255,000
Prepaid Insurance 350,000
Legal fees for successful defense of a patent 150,000
Advertising Cost 175,000

1. What is the correct amount to be presented as Intangible Assets in the statement of financial position
as of December 31, 2021?
a. P1,215,000
b. P2,015,000
c. P2,515,000
d. P2,665,000

B. The following costs were incurred by Liaoning Company:

Preopening costs of a business facility P100,000

Recipes, secret formulas, models and designs, prototype 150,000
Training, customer loyalty, and market share 50,000
Licensing, royalty, and stand-still agreements 250,000
Operating and broadcast rights 350,000
Goodwill purchased in a business combination 500,000
A company-developed patented drug approved for medical use 130,000
A license to manufacture a steroid by means of a government grant 260,000
A television advertisement that will stimulate the sales in the technology 130,000
industry

2. How much of the above costs are eligible for capitalization according 38 Intangible Assets?
a. P1,490,000
b. P1,640,000
c. P1,690,000
d. P1,920,000

C. Transactions during 2021 of the newly organized Fujian Corporation included the following:
● Patented a newly developed process. Legal fees to obtain the patent amounted to P60,000
while patent application and licensing fees were P25,000.
 ● Acquired both a license to sell a special type of product and a distinctive trademark to be
printed on the product for a total of P150,000. The license is worth twice as much as the
trademark.

● Constructed a shed for P200,000 to house prototypes and experimental models to be

developed in future research projects.

● Incurred salaries for an engineer and chemist involved in product development totaling
P220,000 in 2021.

3. What is the total cost to be capitalized as intangible assets?

a. P235,000
b. P315,000
c. P435,000
d. P455,000

D. Hubei Company has two operating segments and plans to come up with a distinction between the
two. Part of this project is to assign a trademark per segment. The following costs were incurred in
relation to the two trademarks:

Internally developed trademark

Trademark attorney cost P25,000
Advertising to introduce the trademark 75,000
Design cost 350,000
Market research 150,000
Registration fee 50,000

Acquired trademark
Acquisition cost, including VAT P560,000
Staff training cost 25,000
Market research 50,000
Registration fee 50,000

4. How much is the capitalized cost of trademark?

a. P975,000
b. P1,035,000
c. P1,060,000
d. P1,335,000

E. You noted the following items relative to the intangible assets of Gansu Corporation at December 31,
2021.
● On January 1, 2020, Gansu Corporation signed an agreement to operate as franchisee of Clear
Copy Services, Inc. for an initial franchise of P680,000 of this amount, P200,000 was paid when
the agreement was signed and the balance was payable in four annual payments of P120,000
beginning on January 1, 2021. The agreement provides that the down payment is not refundable
and no future services are required in the franchise. The implicit rate for a loan of this type is
14%. The agreement also provides that 5% of the revenue from the franchise must be paid to the
franchisor annually. Gansu's revenue from the franchise for 2021 was P8,000,000. Gansu
estimates the useful life of the franchise to be ten years.

● Gansu incurred P624,000 of experimental development costs in its laboratory to develop a patent
which was granted on January 1, 2020. Legal fees and other costs associated with the registration
of the patent totaled P131,200. Gansu estimates that the useful life of the patent will be eight
years.
 ● A trademark was purchased from Jane Company for P320,000 on July 1, 2019. Expenditures for
successful litigation in defense of the trademark totaling P80,000 were paid on July 1, 2021.
Gansu estimates that the trademark's useful life will be indefinite.

5. What are the carrying amounts of the intangible assets (franchise, patents and trademarks,
respectively) on December 31, 2021? (Round off present value factors to four decimal places)
a. P439,715; P98,400; P320,000
b. P439,715; P566,400; P240,000
c. P544,000; P566,400; P320,000
d. P544,000; P98,400; P240,000

F. During 2021, Jiangsu Company incurred the following costs:

R & D services performed by Elijah Company for Jiangsu P1,500,000

R & D costs incurred by Jiangsu Company for Elisha
Company and reimbursable by Elisha Company 2,400,000
Cost incurred in the conceptual formulation of possible process
alternative 2,000,000
Building cost that will be used as R & D facility, acquired on
January 1, 2018 with estimated useful life of 10 years 3,000,000
Design of tools, jigs and moulds 1,300,000
Cost of testing prototype and design modifications 900,000

6. In its 2021 profit and loss, what should Jiangsu Company report as research and development
expense?
a. P4,700,000
b. P6,000,000
c. P8,700,000
d. P11,100,000

G. Hainan Company incurred the following costs during 2021:

Design of tools, jigs, moulds and dies involving new technology, P125,000
Modification of the formulation of a process, 160,000
Trouble shooting in connection with breakdowns during
commercial production, 100,000
Adaptation of an existing capability to a particular customer's need
as part of a continuing commercial activity, 110,000

7. How much should Hainan Company report as research and development expense in its 2021
profit or loss?
a. P125,000
b. P160,000
c. P235,000
d. P285,000

H. Yunnan Company developed a new product to be sold to its customers. The following costs were
incurred in developing, patenting and manufacturing the product.

Fees paid to engineers and experts for initial research and feasibility P200,000
Professional fees to consultants to conduct market study 300,000
Cost of laboratory equipment and facilities for research 800,000
Development costs after establishing technological feasibility 500,000
Legal expenses to obtain patent 50,000
Expenses of drawings required by patent office to be
submitted with the patent application 20,000
 Licensing fees paid to the patent office 150,000
Legal costs paid to defend patent against competitors 300,000
Materials used during production 2,000,000
Direct labor 1,000,000
Overhead 300,000

8. What total cost should be capitalized as intangible assets?

a. P500,000
b. P650,000
c. P720,000
d. P800,000

I. On July 1, 2021, Jilin Company signed an agreement to operate as a franchisee for a franchise fee of
P5,000,000. Of this amount, P2,000,000 was paid when the agreement was signed and the balance is
payable in six (6) semi-annual payments of P500,000 every December 31 and June 30. The first
payment is due on December 31, 2021. The payment is not refundable and no future services are
required for the franchise. Jilin Company's credit rating indicates that it can borrow money at 8%
per annum for a loan of this type. Information on present value factors (PV) are:

PV of an ordinary annuity of 1 at 8% for 3 periods 2.5771

PV of an ordinary annuity of 1 at 4% for 6 periods 5.2421

9. What is the cost of the franchise acquired on July 1, 2021?

a. P2,577,100
b. P4,577,100
c. P4,621,050
d. P5,000,000

J. On April 1, 2021, Mongolia Company purchased from Sunbucks Company (franchisor), a franchise to
operate a 24-hours café at Eastwood for P3,125,000. In addition, the franchise contract stipulates that
Mongolia shall pay Sunbucks Company 5% of its sales exceeding P5,000,000, payable at the end of the
month following the end of every quarter. For the nine months ended December 31, 2021, Mongolia
Company's sales amounted to P8,500,000. Mongolia estimates that the useful life of the franchise is 10
years. It is the company's policy to amortize to the nearest month.

10. How much is Mongolia Company's amortization expense and franchise fee expense for the year
2021?
a. P312,500 and P425,000
b. P234,375 and P425,000
c. P312,500 and P175,000
d. P234,375 and P175,000

K. Tibet Company acquired a patent right on July 1, 2019 for P1,250,000. The asset has a remaining legal
life of 10 years but due to the rapidly changing technology, management estimates a useful life of only
five years. On January 1, 2021, management is uncertain that the process can actually be made
economically feasible, and decides to write down the patent to an estimated market value of
P750,000. Amortization will be taken over three years from that time.

11. How much is the amortization expense for the year 2019?
a. P250,000
b. P200,000
c. P125,000
d. P62,500

12. What is the amount of impairment loss recognized in the accounts in the year 2021?
 a. P312,500
b. P250,000
c. P125,000
d. P100,000
13. What is the patent carrying value at December 31, 2021?
a. P500,000
b. P625,000
c. P937,500
d. P1,250,000

L. Hunan Company acquired a trademark for P10 million from Bangkok Trading on January 2, 2021.
The trademark is carried in the accounting records of Bangkok at an amortized cost of P7.6 million.
Hunan Company's independent consultant has estimated that the useful life of the trademark to be
indefinite.

14. What amount should Hunan Company report as accumulated amortization in its December 31,
2021 statement of financial position?
a. P0
b. P500,000
c. P760,000
d. P1,000,000

M. Taiwan Manufacturing Company is a manufacturer of various household cleaning agents. On June

28, 2018, the company acquired a patent for the manufacture of a new product called "Clean All."
The cost of acquisition is P350,000. Management expects that the patent will be useful to the
company for 5 years. On January 1, 2019, the company spent P100,000 in successfully defending the
patent against a competitor. During 2021, management determines that the estimated remaining life
of the patent should be extended to four years, including the current year. The company's policy is to
amortize the cost of intangible assets using straight-line method to the nearest full month.

15. What is the amortization expense for the year 2021?

a. P70,000
b. P43,750
c. P41,250
d. P41,520

N. At December 31, 2020, Hong Kong Manufacturing Company had three existing patents as shown in
the table below.

Date Acquired Cost Useful Life

Patent A March 8, 2016 P150,000 8 years
Patent B January 1, 2019 210,250 10 years
Patent C July 1, 2019 72,000 5 years

During 2021, the company had the following transactions and assessments pertaining to its patents.

● Due to the emerging competition relating to the product being manufactured in Patent A, it is
expected that the right will be useful only in 2021 and 2022.

● Patent B is believed to be uniquely useful as long as the company retains the right to use it.

● On June 20, 2021, the company unsuccessfully attempted to defend its rights to Patent C.
Legal fees of P15,000 was incurred in this action. The asset was immediately derecognized in
the accounts.
 The company's policy is to take full year amortization in the year of acquisition and no amortization
in the year of derecognition using straight-line method. The company reports on a calendar-year
basis.

16. How much is the amortization of the patent for the year 2021?
a. P63,550
b. P54,175
c. P49,150
d. P28,125

17. How much is the loss taken to profit or loss during 2021 relating to the derecognition of Patent
C?
a. P15,000
b. P43,200
c. P58,200
d. P65,400

O. On December 31, 2015, Qinghai Company's patent has a carrying amount of P570,000. This patent
was acquired on October 10, 2013 and has an estimated total useful life of ten years. Subsequent
transactions and relevant information relating to the patent follows:

● On January 5, 2016, the company spent P90,000 in successfully prosecuting an attempted

infringement on the patent.

● At the beginning of 2018, Qinghai Company incurred additional costs of P142,000. It is

expected that future economic benefits will flow to the enterprise as a result of this
expenditure through a substantial cost saving and the asset is expected to be useful until
December 31, 2024.

● The company's policy is to take half-year depreciation in the acquisition and half year in the
year of derecognition using straight line method. The company reports on a calendar year
basis.

18. How much is the patent amortization for the year 2016?
a. P88,000
b. P80,000
c. P76,000
d. P57,000

19. How much is the patent amortization for the year 2018?
a. P88,000
b. P80,000
c. P76,000
d. P57,000

20. How much is the patent's carrying value at December 31, 2021?
a. P642,000
b. P570,000
c. P418,000
d. P240,000

P. At the beginning of 2018, Macau Corporation bought a patent for P540,000. Amortization is being
made over its remaining life of eight years expiring on December 31, 2025. During 2021, after an
 assessment of the patent's estimated future benefits, Macau determined that the economic life of
the patent will be six years from the date of acquisition.

21. What amount should Macau report as accumulated amortization of the patents in its December
31, 2021 statement of financial position?
a. P540,000
b. P315,000
c. P225,000
d. P112,500

Q. Bengbu Company determined that the amortization rate on its patents is unacceptably low due to
current advances in technology. The company decided at the beginning of 2021 to decrease the
estimated total useful life on all existing patents from 10 years to 8 years. Patents were purchased
on January 1, 2016 for P3,000,000. The estimated residual value is zero.

Bengbu Company decided on January 1, 2021 to change its depreciation method for
manufacturing equipment from an accelerated method to the straight-line method. The
straight-line method is to be used for new acquisitions as well as for previously acquired
equipment. As of January 1, 2021, the total historical cost of depreciable assets is P8,000,000 and
the accumulated depreciation on those assets is P3,400,000. The expected remaining useful life of
Bengbu's depreciable assets as of January 1, 2021 is 10 years and the expected residual value is
P200,000.

22. What is the total charge against 2021 income as a result of the accounting change?
a. P960,000
b. P940,000
c. P647,500
d. P627,500

R. On December 31, 2020, Hefei Company acquired the following intangible assets:

● A trademark for P3,000,000. The trademark has 8 years remaining in its legal life. It is
anticipated that the trademark will be renewed in the future, indefinitely, without problem.

● A patent for P2,000,000. Because of market conditions, it is expected that the patent will have
economic life for just 5 years, although the remaining legal life is 10 years.

Because of a decline in the economy, the trademark is now expected to generate cash flows of just
P120,000 per year. The useful life of the trademark still extends beyond the foreseeable horizon.
The cash flows expected to be generated by the patent are P500,000 in 2022, P600,000 in 2023,
P400,000 in 2024 and P500,000 in 2025. The appropriate discount rate for all intangible assets is
6%. The present value of 1 at 6% for one period is 0.94, for two periods is 0.89, for three periods is
0.84 and for four periods is 0.79.

23. Hefei Company shall recognize a total impairment loss in 2021 at

a. P1,265,000
b. P1,000,000
c. P625,000
d. P0

S. During 2021, Fuyang Corp. incurred costs in its effort to develop and produce al routine, low-risk
computer software product, as follows:

● Completion of detailed program design P195,000

● Costs incurred for coding and testing to establish
 technological feasibility 15,000
● Other coding costs after establishment of technological feasibility 36,000
● Other testing costs after establishment of technological feasibility 30,000
● Costs of producing product masters for training materials 22,500
● Duplication of computer software and training materials from
product masters (500 units) 37,500
● Packaging product (250 units) 13,500

24. In the December 31, 2021 statement of financial position of Fuyang Corp., how much should be
capitalized as computer software?
a. P81,000
b. P85,500
c. P88,500
d. P93,500

25. In the December 31, 2021 statement of financial position of Fuyang Corp., how much should be
reported as inventory?
a. P37,500
b. P51,000
c. P60,000
d. P73,500

T. Suzhou Company develops computer software for licensing or rental to others. The capitalized cost
of the computer software amounted to P1,200,000 with an economic life of five years. The pattern of
future revenue from the software is not reliably determinable. At the end of Year 1, the software has
a recoverable amount equal to 90% of the capitalized cost.

26. How much is the amortization of the computer software for Year 1?
a. P360,000
b. P240,000
c. P120,000
d. P0

U. Beijing Company directed its IT team to develop its own website wherein customers can place
orders and will facilitate swift response to customer's inquiries as well. The development took four
months to complete up to May 30, 2021. Beijing incurred the following costs from day 1 up to May
30, 2021:

Market research P15,000

Computer equipment 35,000
Cost of domain name 15,000
Applications used on the web server 50,000
Stress testing 5,000
Website layout design 40,000
Security applications installed 25,000
Seminars and training for website maintenance of IT staff 20,000
Uploading of website contents 30,000

27. How much website cost should be presented as part of intangible assets in the statement of
financial position of Beijing as of December 31, 2021?
a. P165,000
b. P180,000
c. P200,000
d. P220,000
 28. If the website is developed solely for promoting and advertising Beijing's products, how much
should be capitalized in the statement of financial position of Beijing?
a. P0
b. P35,000
c. P165,000
d. P235,000

V. Shanghai Company has been experiencing significant losses in prior years. December 31, 2021, the
carrying amounts of assets and liabilities are:

Cash P5,000,000
Accounts Receivable 10,000,000
Inventory 15,000,000
Property, Plant and Equipment 25,000,000
Goodwill 4,000,000
Liabilities 20,000,000

On December 31, 2021, the fair value of the net assets of Shanghai, excluding goodwill, is
P38,000,000.

29. How much is the impairment loss applicable to goodwill?

a. P4,000,000
b. P3,000,000
c. P1,000,000
d. P0

W. On January 1, 2020, Chengdu Company purchased Wealth Company for P25,000,000 when Wealth
Company's net assets had a fair value of P21,000,000, The excess payment was appropriately
recognized as goodwill and is expected to have a benefit period of 10 years. During 2021, Chengdu
spent an additional P1,150,000 on expenditures designed to maintain goodwill. Due to these
expenditures, at December 31, 2021, Chengdu estimated that the benefit period of goodwill had
increased an additional 10 years.

30. In its December 31, 2021 statement of financial position, what amount should Chengdu
Company report as goodwill?
a. P5,150,000
b. P4,500,000
c. P4,000,000
d. P3,200,000

X. Harbin Company is negotiating to acquire the net assets of LeMans Company. Under the plan,
Harbin is willing to pay for goodwill computed by capitalizing at 25% LeMans' average earnings in
excess of the 10% normal return based on appraised value of net assets. This is the same level of
income experienced by companies similar to LeMans line of business. Lemans' income for the past
three years averaged P3,000,000. LeMans' assets and liabilities are

Book Value Appraised Value

Assets, excluding goodwill P30,000,000 P39,000,000
Liabilities 10,500,000 10,500,000

31. What is the amount of goodwill?

a. P600,000
b. P420,000
c. P150,000
 d. P105,000

Y. Shenyang Company acquired another entity on January 1. acquisition, P5,000,000 in goodwill was
recognized. This goodwill was assigned As part of the to one of acquiree's cash generating units.
During the year, the cash generating unit reported revenue of P8,000,000. Publicly traded
companies with operations similar to those of the cash generating unit had price to revenue ratio
averaging 1.6. The book value of the assets and liabilities of the cash generating units are as
follows:

Identifiable assets P15,000,000

Goodwill 5,000,000
Liabilities 4,000,000

32. Shenyang Company shall recognize goodwill impairment loss at

a. P5,000,000
b. P3,200,000
c. P1,800,000
d. P0

Z. On January 1, 2021, Qingdao Company purchased Dalian Company at a cost that resulted in
recognition of goodwill at P10 million having an expected benefit period of 10 years. During the
first half of 2021, Qingdao Company spent an additional P2 million on expenditures designed to
maintain goodwill. Due to these expenditures, at December 31, 2021, Qingdao Company estimated
that the benefit period of goodwill was indefinite.

33. In its December 31, 2021 statement of financial position, what amount should Qingdao
Company report as goodwill?
a. P12,000,000
b. P10,000,000
c. P9,500,000
d. P9,000,000

AA. Nanchang Company is acquiring Jinan Corporation on January 1, 2021. The cumulative earnings of
Jinan from 2016 to 2020 amounted to P7.2 million. On January 1, 2021, the assets and liabilities of
Jinan at appraised values are P10.35 million and P6.65 million, respectively. The normal return in
Jinan's industry is 20%. Goodwill is computed by capitalizing at 25% average earnings in excess of
normal return based on appraised value of net assets.

34. What is the amount paid by Nanchang in the acquisition of Jinan Corporation?
a. P6.8 million
b. P6.5 million
c. P5.8 million
d. P2.8 million

BB. Wuhan Company is contemplating to acquire Shenzhen, Inc. on January 1, 2021. The information
on Shenzhen's profit and net assets for the last five years is as follows:

Profit Net Assets

2020 P 4,000,000 P 20,200,000
2019 3,200,000 20,000,000
2018 3,000,000 18,500,000
2017 3,800,000 17,900,000
2016 2,500,000 15,600,000
Total P 16,500,000 P 92,200,000
 It is agreed that Wuhan is willing to pay for goodwill measured by capitalizing at 40% excess of
the average profits over normal return on net assets. The normal return on average net assets
for the industry to which Shenzhen belongs is 10%.

35. How much should Wuhan Company pay to Shenzhen, Inc. in the acquisition of the latter's net
assets?
a. P20,200,000
b. P22,080,000
c. P23,400,000
d. P23,840,000

CC. On December 31, 2021, Dongguan Company purchased the net assets of another entity with the
following information:

Acquisition cos P3,000,000

Fair Value of Assets P4,500,000 (Current P1,500,000; P3,000,000)
Liabilities of acquiree P1,000,000

36. How should the P500,000 excess be treated by Dongguan?

a. As Negative goodwill
b. Credited Retained earnings
c. Credited to Gain from Bargain Purchase
d. Deducted from Intangible Assets total