RMIT Classification: Trusted

TOPIC 3: INTANGIBLE ASSETS

TUTORIAL QUESTIONS

QUESTION 1: ForeverYoung Ltd is involved in the research and development of a new type
of anti-aging face cream.

For the research and development of it, has incurred the following expenditure at 30 June
2022:

 $10 000 obtaining a general understanding of market for anti-age creams;

 $50 000 to study new chemicals substances and organic ingredients;
 $90 000 on preparation of a cream sample and the testing with testers.

After these activities, the company expects to reach a very large market for the product,
which will generate thousands of dollars in revenue.

REQUIRED

1) Determine how the above expenditure would be treated for accounting purposes.

2) If any of the above expenses are development costs, provide the journal entries at the
end of financial year (30 June 2022).

QUESTION 2: Book Ltd acquired Kindle Ltd on 1 July 2022 for the sum of $1,000,000.

On the same date Kindle Ltd has the following assets and liabilities recorded in its statement
of financial position:

Carrying amount Fair value

Assets
Land 600,000 800,000
Machinery 200,000 150,000
Cash 70,000
Liabilities
Loan 360,000

REQUIRED

Is there any goodwill arising from the acquisition? If any, can you establish its amount?

1
 RMIT Classification: Trusted

QUESTION 3: (Text book worked example 8.3): Revaluation of intangible assets:

Ocean Grove Ltd wants your advice on which of the following intangible assets may be
revalued and, if a revaluation can be done, what the accounting entry would be.

(a) The company has developed its brand name to the point where it is a very valuable asset.
It would appear that if it were to sell the brand name it would receive at least $2 million
for it.

(b) The company acquired a patent two years previously for $1 million. The associated pro-
duction process is quite specialised; however, there is one other manufacturer who has the
necessary knowledge to utilise the patent. That other manufacturer would probably be
prepared to pay at least $1.5 million for the patent.

(c) The company acquired a franchise—McDingbat Hamburgers—for $500 000. There is

great demand for this franchise as evidenced by the ‘wanted’ advertisements placed in a
number of franchise journals. The current market price for such a franchise is $670 000.

QUESTION 4: (Textbook worked example 8.4): Amortisation of research and development

Portsea Ltd is developing a new product called a burble. The company spent $300 000 re-
searching the demand for the burble. It then spent $250 000 working out whether the com-
pounds out of which the burble is made will biodegrade in less than 50 years.

As a result of the knowledge gained in the preceding steps, the company designed machin-
ery to produce the burbles. This design phase cost $600 000. It is expected that millions of
burbles will be sold for at least $10 each. All the expenditure was incurred within the one re-
porting period.

REQUIRED

How much of the above expenditure would qualify to be shown as an intangible asset?

2
 RMIT Classification: Trusted

QUESTION 5: (Text book question 37): Innovator Ltd incurred expenditure researching and
developing a cure for a common disease found in turnips. At the end of 2016 management
determined that the research and development project was unlikely to succeed because tri-
als of the prototype had been unsuccessful. During 2017 a breakthrough in agricultural sci-
ence improved chances of the product succeeding and development resumed. The project
was completed in 2017. At the end of 2017 costs incurred on the project were expected to
be recoverable. Innovator expects that 10 per cent of the project revenue will be received
in 2018, 20 per cent in 2019, 30 per cent in 2020, 30 per cent in 2021 and 10 per cent in
2022. After five years the product will be at the end of its useful life because the disease
found in turnips will have been eradicated. Costs incurred were as follows:

Research ($000) Development($000)

2016 40 000 10 000
2017 12 000 60 000

REQUIRED

(a) How much research expenditure and development expenditure should be recognised
as an expense in 2016?

(b) How much research and development expenditure should be recognised as an expense
in 2017?

(c) State how much expenditure should be carried forward (deferred) and reported in the
statement of financial position at the end of 2016 and 2017.

(d) Prepare journal entries for the amortisation of deferred costs in 2018 and 2019, as-
suming that actual revenues are as expected. State the amount of deferred expenditure
carried forward in the statement of financial position in relation to the deferred costs.

(e) Assume that after charging amortisation based on sales revenue at the end of 2017 the
discounted net cash flows expected to be generated from the deferred expenditure
were estimated as $15 000. Prepare any journal entries required to account for this in-
formation.