AE 121 Intangibles

1. On January 1, 2013, Cecilia Company purchased a patent from an original patentee for P2,400,000. The remaining
legal life of the patent is 15 years but the useful life is only 12 years. On January 1, 2014, the entity paid P550,000 in
successfully defending the patent in an infringement suit filed against the entity. On January 1, 2015, the entity
acquired a competing patent for P1,500,000. The competing patent has a remaining legal life of 15 years but it is not
to be used because it was intended to protect the original patent. What is the carrying amount of the patent on
December 31, 2015?
A. 3,150,000
B. 3,600,000
C. 3,200,000
D. 3,500,000

2. On January 1, 2012, Jericho Company purchased a patent for P7,140,000. The patent is being amortized over the
remaining legal life of 15 years expiring on January 1, 2027. During 2015, the entity 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 for the patent, net of accumulated amortization, on December 31, 2015?
A. 4,282,000
B. 4,896,000
C. 5,050,000
D. 5,236,000

3. The owners of Rainier Company are planning to sell the business to new interests. The cumulative net earnings for the
past five years amounted to P16,500,000 including expropriation loss of P1,500,000. Goodwill is measured by
capitalizing excess earnings at 25% with normal earnings at 20%. The fair value of the net assets of the entity at current
year-end was P10,000,000. What is the acquisition cost of the entity?
A. 16,400,000
B. 14,000,000
C. 14,400,000
D. 15,200,000

4. Iris Company purchased another entity for P8,000,000 cash. The assets and liabilities of the acquire are as follows:
Carrying Amount Fair Value
Cash 1,000,000 1,000,000
Inventory 400,000 500,000
In-process R&D 6,000,000 5,000,000
Assembled workforce 1,100,000 1,200,000
Liabilities 2,500,000 3,000,000
What is the goodwill arising from the acquisition?
A. 4,500,000
B. 3,300,000
C. 3,100,000
D. 2,000,000

5. On January 1, 2015, Christine Company acquired a trademark for P3,000,000. The trademark has eight years remaining
in the legal life. It is anticipated that the trademark will be renewed in the future indefinitely without problem. On
December 31, 2015, the trademark is assessed for impairment. Because of a decline in economy, the trademark is
expected to generate cash flows of just P120,000 annually. The useful life of the trademark still extends beyond the
foreseeable horizon. The appropriate discount rate is 6%. What amount should be recognized as impairment loss on
trademark for 2015?
A. 1,000,000
B. 2,000,000
C. 3,000,000
D. Zero

6. On January 1, 2012, Jerome Company signed a 12-year lease for a building. The entity has an option to renew the
lease for an additional six-year period on or before January 1, 2016. During January 2015, the entity made substantial
improvement to the building. The cost of the improvement was P4,500,000 with an estimated useful life of ten years.
On December 31, 2015, the entity intended to exercise the renewal option. The entity has taken a full year
depreciation on this improvement. On December 31, 2015, what is the carrying amount of the leasehold
improvement?
A. 4,500,000
B. 4,050,000
C. 4,200,000
D. 4,000,000
7. Shanette Company incurred research and development costs in the current year as follows:
Equipment acquired for use in various research and development projects 975,000
Depreciation on the above equipment 135,000
Materials used 200,000
Compensation costs of personnel 500,000
Outside consulting fees 150,000
Indirect costs appropriately allocated 250,000
What is the research and development expense for the current year?
A. 850,000
B. 1,085,000
C. 1,235,000
D. 1,825,000

8. Maribeth Company made the following expenditures relating to Product Zee:

Legal costs to file a patent on Product Zee. Production of the finished product would not have been
undertaken without the patent 100,000
Special equipment to be used solely for development of Product Zee. The special equipment has no
other use and has an estimated useful life of four years 600,000
Labor and materials costs incurred in producing a prototype model 2,000,000
Cost of testing the prototype 800,000
What total amount of costs should be expensed when incurred?
A. 2,800,000
B. 2,950,000
C. 3,400,000
D. 3,500,000

Notes:
1. Definitions of research and development costs.
a. Research—original and planned investigation undertaken with the prospect of gaining new scientific or technical
knowledge and understanding. For example, laboratory research.
b. Development—application of research findings or other knowledge to a plan or design for the production of new or
substantially improved materials, devices, products, processes, systems, or services before the start of commercial
production or use. Examples include formulation or design of possible products or processes, construction of prototypes, and
operation of pilot plants.
2. Accounting for research and development costs.
a. Research costs are expensed as incurred.
b. Development costs are expensed as incurred unless they meet all of the following criteria, in which case they are capitalized:
(1) The project achieves technical feasibility of completing the intangible asset so that it will be available for use or sale,
(2) The company intends, and has the ability, to complete the intangible asset and use or sell it,
(3) The intangible asset will generate probable future economic benefits (there is a market for the asset or the output of the asset),
(4) The company has adequate technical, financial, and other resources to complete the development of the intangible asset, and
(5) The company can measure reliably the development costs associated with the intangible asset to be developed.
3. Research performed under contract by the reporting company for others is accounted for differently. Thus, if firm A does research
under contract for firm B, the former may capitalize those costs (as a receivable) while the latter expenses them.
4. Computer Software: