INTANGIBLE ASSETS

On June 30, 2006, Finn Company exchanged 20,000 shares of Edlow

Corporation P30 par value common stock for a patent owned by Bisk
Company. The Edlow stock was acquired in 2003 at a cost of P500,000. At
the exchange date, Edlow common stock had a fair value of P40 per share,
and the patent had a net carrying amount of P1,000,000 on Bisk’s books.
1. Finn should record the patent at
a. 500,000
b. 600,000
c. 800,000
d. 1,800,000

Tobin Company incurred P 1, 600, 000 of research and development costs to

develop a product for which a patent was granted on January 1,2006.legal
fees and other costs associated with registration of the patent totaled
P300,000. On March 31,2006, Tobin paid P450,000 for legal fees in a
successful defense of the patent.
2. The total amount capitalized for this patent through March 31,2006 should
be
a. 750,000
b. 300,000
c. 2,050,000
d. 2,350,000

Hy Company bought Patent A for P400,000 Patent B for P600,000. Hy also

paid acquisition costs of P50,000 for Patent A and P70,000 for Patent B. Both
patents were challenged in legal actions. Hy paid P200,000 in legal fees for a
successful defense of Patent B.
3. What amount should Hy capitalize for patents?
a. 1,620,000
b. 1,120,000
c. 650,000
d. 450,000

On January 1, 2003, Taft Company purchased a patent for P7,140,000. The

patent is being amortized over its remaining legal life of 15 years expiring on
January 1, 2018. During 2006, Taft determined that the economic benefits of
the patent would not last longer than ten years from the date of acquisition.
4. 4. What amount should be reported in the balance sheet for the patent, net
of accumulated amortization, at December 31, 2006?
a. 4,284,000
b. 4,896,000
c. 5,050,000
d. 5,236,000

On January 1, 2003, Lava Company purchased a patent for a new consumer

product for P9000,000. At the time of purchase, the patent was valid for 15
years. However, the patent’s useful life was estimated to be only 10 years
due to the competitive nature of the product. On December 31, 2006, the
product was permanently withdrawn from sale under governmental order
because of a potential health hazard in the product.
5. What amount should Lava charge against income during 2006, assuming
amortization is recorded at the end of each year?
a. 90,000
b. 540,000
c. 630,000
d. 720,000

Zamboanga Company acquired three patents in January 2006. The patents

have different lives as indicated in the following schedule:
 Cost Remaining useful life Remaining 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 company retains the
right to use it. In June 2006, the company successfully defended its right to
patent Y. legal fees of P450,000 were incurred in this action. The company’s
policy is to amortize intangible assets by the straight-line method to the
nearest half year. The company reports on a calendar-year basis.
6. The amount of amortization that should be recognized for 2006 is
a. 1,050,000
b. 1,100,000
c. 1,095,000
d. 1,020,000

Gray Company was granted a patent on January 1, 2003, and appropriately

capitalized P450,000 of related costs. Gary was amortizing the patent over its
estimated life of 15 years. During 2006, Gray paid P150,000 in legal costs in
successfully defending an attempted infringement of the patent. After the
legal action was completed, Gray sold the patent to the plaintiff for P750,000.
Gray’s policy is to take no amortization in the year of disposal.
7. In its 2006 income statement, what amount should Gray report as gain
from sale of patent?
a. 150,000
b. 240,000
c. 270,000
d. 390,000

On June 30, 2006, Union Company purchased goodwill of P1,250,000 when it

acquired the net assets of Apex Company. During 2006, union incurred
additional cost of developing goodwill, by training Apex employees, P500,000
and hiring additional Apex employees, P250,000.
8. The December 31, 2006 balance sheet should report goodwill at
a. 2,000,000
b. 1,750,000
c. 1,500,000
d. 1,250,000

On January 1, 2006 Paye Company purchased Che Company at a cost that

resulted in recognition of goodwill of P2,000,000. During the first quarter of
2006, Paye spent an additional P800,000 on expenditures designed to
maintain goodwill. Due to these expenditures, at December 31, 2006, Paye
estimated that the benefit period of goodwill was indefinite.
9. In its December 31, 2006 balance sheet, what amount should Paye report
as goodwill?
a. 1,800,000
b. 1,900,000
c. 2,000,000
d. 2,660,000

The owners of East Company are planning to sell the business to new
interests. The cumulative net earnings for the past five years amounted to
P5,500,000 including expropriation gain of P500,000. The fair value of net
assets of East Company was P7,500,000.
10. Assuming that goodwill is determined by capitalizing average net
earnings at 10%, the amount to be paid for goodwill is
a. 3,500,000
b. 7,500,000
c. 2,500,000
d. 5,000,000
Sarrah Company engaged your services to compute the goodwill to be
recognized in the purchase of ABC Corporation in January 2007. The following
information was taken from the records of ABC.
Net income Net assets
2002 360,000 1,600,000
2003 388,000 1,800,000
2004 288,000 1,900,000
2005 380,000 2,000,000
2006 394,000 2,100,000
1,810,000 9,400,000
It is agreed that goodwill is measured by capitalizing excess earnings at 40%,
with normal return on average net assets at 10%.
11. How much is the “purchase price” of ABC Corporation?
a. 2,535,000
b. 2,100,000
c. 2,315,000
d. 2,305,000

Easter Company has acquired the net assets of XYZ Corporation for
P5,000,000. In acquiring XYZ, the owners of Easter felt that XYZ had an
unrecorded goodwill. They decided to capitalize the estimated annual
superior earnings of XYZ at 20% to determine the amount of goodwill. The
computation resulted in an estimated goodwill of P500,000.

A rate of 10% on net assets before recognition of goodwill was used to

determine normal annual earnings of XYZ because it is the rate that is earned
on net assets in the industry in which XYZ operates. All other assets of XYZ
are properly recorded.
12. What is the amount of estimated annual earnings of XYZ?
a. 500,000
b. 450,000
c. 100,000
d. 550,000

Rem Company is considering acquisition of the net assets of Sunset Company

to expand its operations. The book value and current value of the assets of
Sunset Company are P3,300,000 and P4,000,000, respectively. The normal
rate of return is believed to be 9%, but Rem believes it can earn 12%
annually on its investment in Sunset due to the excellent reputation of
Sunset.

13. What is the amount of goodwill using the “years” multiple of excess
earnings” method assuming a 10-year period of excess earnings?
a. 1,000,000
b. 1,100,000
c. 1,200,000
d. 990,000

Pillar Company is considering acquisition of the net assets of Ruth Company

as part of a diversification program. The management of Pillar believes the
excellent reputation of Ruth provides an opportunity to achieve a level of
earnings in excess of the normal rate of 10%. In fact, it expects to earn a rate
of 14% on its investment. The following information is available on Ruth
Company:
Current value
Current assets 8,750,000
Noncurrent assets 14,000,000
Total assets 22,750,000
Liabilities 13,750,000
Net assets 9,000,000
Excess earnings are expected to continue over a five-year period. The present
value of an ordinary annuity of 1 at 14% for 5 years is 3.43.
14. What is the amount of goodwill under the present value method?
a. 1,800,000
b. 3,121,300
c. 1,234,800
d. 3,087,000

Washington Company is negotiating to acquire Jefferson Company.

Washington manufactures and sells wood-burning stoves, and Jefferson
Company produces parts that are required to manufacture the stoves.
Jefferson Company enjoys an exceptional reputation, and Washington
management believes it can continue Jefferson’s current level of income and
satisfy its own need for parts. Under the contemplated arrangement,
Washington Company will negotiate for the acquisition of the net assets of
Jefferson Company. The following information has been developed to
determine the appropriate price.

Recorded amounts and estimated values of Jefferson Company’s assets and

liabilities are as follows:
Recorded amount Current value
Assets to be received 16,000,000 19,500,000
Liabilities to be assumed 6,000,000 5,500,000
10,000,000 14,000,000
========== =========
Jefferson Company’s earnings for the past five years averaged P2,000,000.
This is believed to be a reasonable estimate of future income. The level of
income normally experienced by companies similar to Jefferson Company is
10%.

Washington Company and Jefferson Company agreed to capitalize average

excess earnings at 25% in estimating the value of goodwill.
15. How much should Washington Company pay in acquiring Jefferson
Company?
a. 16,400,000
b. 18,000,000
c. 14,200,000
d. 16,000,000

On January 1, 2006, Boracay Company bought a trademark from Lamitan

Company for P3,000,000. Boracay retained an independent consultant who
estimated the trademark’s life to be indefinite. Its carrying amount in
Lamitan’s accounting records was P1,500,000.
16. In Boracay’s December 31, 2006 balance sheet, what amount should be
reported as trademark?
a. 3,000,000
b. 1,500,000
c. 2,850,000
d. 0

Rava Company developed a trademark to distinguish its products from those

of its competitors. Through advertising and other means, the company is
seeking to establish significant product identification to increase future sales.
The similarity between the trademark costs and other intangible and
operating costs has caused some confusion over proper accounting. The
following items are being treated as part of the cost of the trademark:
Marketing research to study consumer tastes 400,000
Design costs of trademark 1,500,000
Legal fees of registering trademark 150,000
Advertising to establish recognition of trademark 200,000
Registration fee with Patent Office 50,000
Through renewals, the trademark is expected to have an unlimited life.
17. The cost to be capitalized as trademark should be
a. 1,700,000
b. 1,900,000
c. 2,300,000
d. 2,100,000

On July 1,2006, Hart signed an agreement to operate as a franchisee of Ace

Printers for an initial franchise fee of P12,000,000. The same date, Hart paid
P4,000,000 and agreed to pay the balance in four equal annual payments of
P2,000,000 beginning July 1, 2007. The down payment is not refundable and
no future services are required of the franchisor. Hart 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 amount of 1 at 14% for 4 periods 1.69
Present value of an ordinary annuity of 1 at 14% for 4 periods 2.91

18. Hart should record the acquisition cost of the franchise on July 1, 2006 at
a. 13,520,000
b. 12,000,000
c. 9,820,000
d. 8,720,000

Manila Company has four segments. Segment One has experienced

significant loss for the year ended December 31, 2006. Management is
evaluating this segment for purposes of recognizing an impairment. On
December 31, 2006, the net assets of Segment One including an allocated
goodwill are as follows:
Cash 4,000,000
Accounts receivable 7,000,000
Inventory 15,000,000
Property, plant and equipment, net 25,000,000
Intangible assets 6,000,000
Goodwill 5,000,000
Liabilities [20,000,000)
Net assets 42,000,000
It is determined that the fair value of the net assets of Segment One on
December 31, 2006 is P38,000,000.
19. Manila Company should recognize in 2006 an impairment loss at
a. 5,000,000
b. 4,000,000
c. 6,000,000
d. 0

On December 31, 2006, Visayas Company showed the following intangible

assets:
Trademark 6,000,000
Patent 3,000,000
The trademark has 8 years remaining in its legal life. However, it is
anticipated that the trademark will be routinely renewed in the future. Thus,
the trademark is considered to have an indefinite life.
Because of an inflationary economy, the trademark is expected to generate
cash flows of P200,000 per year. The appropriate discount rate is 10%.
Mathematically, the discounted value of a stream of indefinite annual cash
flow is simply computed by dividing the annual cash flow by the discount
rate.
The patent has an economic life of just 5 years because of market conditions.
It is expected that the patent will generate cash flows of P500,000 per year.
The appropriate discount rate is also 10%. The present value of an ordinary
annuity of 1 at 10% for 5 periods is 3.79
20. Visayas Company shall recognize in 2006 total impairment loss at
a. 1,105,000
b. 5,105,000
c. 4,000,000
d. 0

Cotabato Company acquired Gensan Company on January 1. As part of the

acquisition, P5,000,000 in goodwill was recognized. This goodwill was
assigned to Cotabato’s Internet cash generating unit. During the year, the
Internet cash generating unit reported revenue of P8,000,000. Publicly traded
companies with operations similar to those of the Internet cash generating
unit had price-to-revenue ratio averaging 1.80. The carrying amounts of the
assets and liabilities of Cotabato’s Internet cash generating unit are as
follows:
Identifiable assets 20,000,000
Goodwill 5,000,000
Liabilities 6,500,000
21. Cotabato Company should recognize goodwill impairment loss at
a. 5,000,000
b. 4,100,000
c. 900,000
d. 0

On January 1, 2006, Ral Company leased land and building from an unrelated
lessor for a ten-year term. The lease has a renewal option for an additional
ten years, but Ral has not reached a decision with regard to the renewal
option. In early January of 2006, Ral completed the following improvements
to the property:
Description Estimated life Cost
Sales office 10 years 470,000
Warehouse 25 years 750,000
Parking lot 15 years 180,000
22. Depreciation of leasehold improvements for 2006 should be
a. 70,000
b. 89,000
c. 122,000
d. 140,000

On January 1, 2006, Ames Corporation signed an eight-year lease for office

space. Ames has the option to renew the lease for an additional four-year
period on or before January 1, 2013. During January 2006, Ames incurred the
following costs:
 P1,200,000 for general improvements to the leased premises with an
estimated useful life of ten years.
 P500,000 for office furniture and equipment with an estimated useful
life of ten years.
 P400,000 for moveable assembly line equipment with useful life of 5
years.
At December 31, 2006, Ames’ intentions as to exercise of the renewal option
are uncertain. A full year’s depreciation of leasehold improvements is taken
for calendar year 2006.
23. In Ames’ December 31, 2006 balance sheet, accumulated depreciation of
leasehold improvement should be
a. 292,500
b. 150,000
c. 170,000
d. 212,500
On January 1, 2004, Nobb Corporation signed a 12-year lease for warehouse
space. Nobb has an option to renew the lease for an additional 8-year period
on or before January 1, 2008. During January 2006, Nobb made substantial
improvements to the warehouse. The cost of these improvements was
P540,000, with an estimated useful life of 15 years. At December 31, 2006,
Nobb intended to exercise the renewal option. Nobb has taken a full year’s
depreciation on this leasehold improvement.
24. In the December 31, 2006 balance sheet, the carrying amount of this
leasehold improvement should be
a. 486,000
b. 504,000
c. 510,000
d. 513,000

On January 1, 2004, Wayne Company signed an eight-year lease for office

space. Wayne has the option to renew the lease for an additional four-year
period on or before January 1, 2011. During January 2006, two years after
occupying the leased premises, Wayne made general improvements to the
premises costing P3,600,000 and having an estimated useful life of ten years.
At December 31, 2006, Wayne’s intentions as to exercise of the renewal
option are uncertain because they depend upon future office space
requirements. A full year’s depreciation expense is taken for calendar year
2006.
25. Wayne should record depreciation of leasehold improvements for 2006 at
a. 300,000
b. 360,000
c. 450,000
d. 600,000

Star Company leases a building for its product showroom. The ten-year
nonrenewable lease will expire on December 31, 2011. In January 2006, Star
redecorated its showroom and made leasehold improvements of P480,000.
The estimated useful life of the improvements is 8 years. Star uses the
straight-line method of depreciation.
26. What amount of leasehold improvements, net of depreciation, should Star
report in its June 30, 2006 balance sheet?
a. 456,000
b. 450,000
c. 440,000
d. 432,000

)n January 1, 2005, Bay Company acquired a land lease for a 21-year period
with no option to renew. The lease required Bay to construct a building in lieu
of rent. The building, completed on January 1, 2006, at a cost of 8,400,000,
will be depreciated using the straight-line method. At the end of the lease,
the building’s estimated market value will be P4,200,000.
27. What is the building’s carrying amount in Bay’s December 31, 2006
balance sheet?
a. 7,980,000
b. 8,000,000
c. 8,190,000
d. 8,200,000

END