Escolar Documentos
Profissional Documentos
Cultura Documentos
12
12-1.
SUBSTANTIVE TESTS OF
INTANGIBLE ASSETS
12-2.
12-3.
Menfro, Inc.
The rapid amortization of the leasehold for the first twelve (12) years resulted to
an understatement of income totaling to P60,000:
Correct amortization P450,000 x 12
20
Amortization per client (P27,500 x 12)
P270,000
Over-amortization
P 60,000
330,000
In view of the above, the amount of P60,000 should be added back to Retained
Earnings as correction of prior years profits. Furthermore, amortization of
P22,500 for the 13th year should be recorded.
These adjustments would result to a net increase in the Retained Earnings balance
which will enable the company to declare dividends without depleting the
Retained Earnings balance significantly.
12-2
12-4.
Requirement (a)
The annual depreciation for years 11 to 25 is P1,667. By the end of the 25th year,
the building would be fully depreciated. [(50,000 25,000) / 15 years)
Requirement (b)
If the original lease had contained a renewal clause for an additional 20 years, the
depreciation rate would still be 5%, which is based on the original term of the
lease. The renewal of the lease contract is not certain and therefore will not be
considered in the determination of the amortization period.
12-5.
P
Q
R
Less: Adjustment
as per BIR
requirement
As Adjusted
Cost as
Recorded
P 40,000
120,000
160,000
P320,000
80,000
P240,000
1997
P1,212.12
3,529.41
4,705.88
P9,447.41
(2,361.85)
P7,085.56
(a)
As Adjusted
P 15,454.54
45,000.00
60,000.00
(37,789.67)
P113,368.98
(b)
P120,454.54
210,000
17
x 0.5 = P 909.09
x 0.5 =
6,176.47
P7,085.56
210,000
17
x 0.5 =
98,823.53
P113,368.98
(40,151.52)
P120,454.54
12-3
(2)
12-6.
80,000.00
5,151.52
15,000.00
20,000.00
10,000.00
30,000.00
40,000.00
40,151.52
Cartwright Corporation
Note to Instructor: For ease of discussion, the adjusting entries in the solution are
dated to correspond with the original erroneous journal entries. In actual practice,
they would be dated as of the year-end.
Jan. 1
10
Apr. 1
May 15
Organization Expenses
Intangibles
To classify incorporation fees.
17,500
Organization Expenses
Intangibles
To classify legal fees for the
organization of the company.
7,500
Advertising Expense
Intangibles
To expense advertising costs.
15,000
Land
Building
Intangibles
To reclassify land and buildings for
R & D activities.
15,000
20,000
15,000*
17,500
7,500
15,000
35,000
15,000
12-4
July 1
Dec. 10
31
31
31
prepaid expenses.
Patent
Intangibles
To reclassify the patent.
10,000
10,000
12,000
12,000
30,000
12,000
12,000
30,000
750
Amortization Expense
Patent
To record year amortization (20year life) on June 30 patent.
250
750
250
Harper, Inc.
Calculation of Goodwill
Average year-end net assets:
(P2,400,000 5)
Average annual earnings
(P400,000 5)
Less: Normal return on average year-end assets
(10% x P480,000)
Excess annual earnings
Excess annual earnings capitalized at 20% or Goodwill
P32,000 12%
P 480,000
P 80,000
48,000
P 32,000
= P160,000
12-5
Bayer, Inc.
Bayer, Inc.
P328,500
40,000
Lead, Inc.
P298,500
P368,500
74,900
P298,500
12,900
P443,400
P311,400
Supporting Computations:
Schedule 1: Goodwill of Bayer, Inc.
Average pre-tax earnings 11.1.01 to 11.1.06
Less:
Additional annual depreciation equipment taken over
at P40,000 in excess of book value (P40,000 / 5)
Adjusted pre-tax earnings
Less:
Required earnings on net tangible assets
(15% x P368,500)
P82,000
P18,725
P74,900
8,000
P74,000
55,275
12-9.
P44,000
P 3,225
P12,900
4,000
P48,000
44,775
12-6
Asset
Patent A
Patent B
Equipment
Land
Appraisal
Value
Portion of
Total Value
P 30,000
40,000
19,700
62,000
30/151.7
40/151.7
19.7/151.7
62/151.7
Total
Cost
x
x
x
x
P137,500
137,500
137,500
137,500
P151,700
Allocated
Cost
=
=
=
=
P 27,192
36,256
17,856
56,196
P137,500
Journal entries for 2004, 2005 and 2006, relative to intangible assets, are as
follows:
2004
Apr. 27 Patent A
Patent B
Equipment
Land
Cash
To record the acquisition of assets.
27,192
36,256
17,856
56,196
4,230
137,500
2,719
1,511
2005
Mar. 7 Legal Expenses
17,600
Cash
To record legal fees related to defense
of patents.
Mar. 7 Amortization of Patents
Patent A
To record amortization on Patent A
to date of write-off (Nov. 2004 to
Feb. 2005).
17,600
1,813
1,813
22,660
12-7
unsuccessful defense.
Oct. 31 Amortization of Patents
3,021
Patent B
To record amortization of Patent B for 2005.
3,021
2006
Oct. 31 Amortization of Patents
3,021
Patent B
To record amortization on Patent B for 2006.
3,021
Computations
Amortization for 2006:
Patent A: (P27,192 / 5 years) (6 / 12)
Patent B: (P36,256 / 12 years) (6 / 12)
Amortization on Patent A, 10/31/2004 3/7/2005:
(P27,192 / 5 years) (4/12)
Book value of Patent A to 3/7/2005:
Cost
Amortization recognized
P2,719
1,813
Amortization for 2005 and 2006:
Patent B: (P36,256/12 years)
P 2,719
1,511
P 4,230
P 1,813
P27,192
4,532
P22,660
P 3,021
The cost basis of patent B is P36,256 - P1,511 + P8,800 - P3,546). 2005, a full
years amortization is taken by dividing the unamortized cost by the remaining
useful life. In 2006 this is P39,999/10 years or P3,809.
Requirement (b)
The legal costs of a court defense should be charged to expense whether the suit is
won or lost because it does not meet the recognition criteria. Also, the
unsuccessful defense implies that Patent A is of no further value to the company
and leads to the write-off of the remaining unamortized cost of that patent.
12-8
12-10.
Balagtas Enterprises
Requirement (a)
Patents
1. Balance before adjustment, 12/31/06
P550,000
Correction: Deduct unamortized balance of P75,000
expenditures incorrectly debited to account on 1/1/03:
P75,000 x (7 years/10 years)
(52,500) [AJE (1)]
Corrected balance before 2006 amortization
P497,500
2.
2006 Amortization
Patent having two years remaining life
Unamortized cost: P210,000 x (7 years/14 years)
= P105,000
Amortization: P105,000/2
Remaining Patents
Unamortized cost: P497,500 - P105,000 = P392,500
Amortization: P392,500/7
Franchise Agreement
1. Balance before adjustment, 12/31/06
Correction: Deduct periodic payment charged to account
Corrected balance before 2006 amortization
2.
2006 Amortization:
P50,000 / 5 years
Organization Costs
1. Balance before adjustment, 12/31/06
Correction: Legal fees incorrectly charged to
Goodwill account in 1998
Amortization of above costs,
1998 - 2004 (P45,000 / 40) (7 years)
2.
P 52,500
56,071
P108,571 [AJE (2)]
P 95,000
(45,000) [AJE (3)]
P 50,000
P 10,000 [AJE (4)]
P102,000
P45,000
[AJE (5)]
7,875
139,125
139,125
Goodwill
1. Balance before adjustment, 12/31/06
Correction: Reclassification of legal fees
to Organization Costs
Reclassification of advertising fee to Advertising Expense
Amortization on Goodwill for 2004
(P200,000 / 40 years)
Balance 12.31.04
2.
12-9
P345,000
( 45,000)
(100,000)
( 5,000)
P195,000
52,500
108,571
52,500
108,571
Franchise Agreement
AJE (3) Selling and Administrative Franchise Expense
Franchise Agreement
45,000
10,000
45,000
10,000
Organization Cost
AJE (5) Organization Costs
Goodwill
AJE (6) Retained Earnings
Organization Costs
AJE (7) Retained Earnings
45,000
45,000
7,875
7,875
139,125
12-10
139,125
Goodwill
AJE (8) Selling and Administrative
Advertising Expense
Goodwill
100,000
100,000
5,000
5,000
Requirement (b)
(1) Retained Earnings
Selling and Administrative
Franchise Expense
Selling and Administrative
Advertising Expense
Organization Costs
Franchise Agreement
Goodwill
Patents
204,500
45,000
100,000
102,000
45,000
150,000
52,500
Summary:
Retained Earnings
AJE
(1)
(7)
(9)
(6)
(Dr.) Cr.
(52,500)
(139,125)
5,000
7,875
(204,500)
Organization Costs
AJE
(5)
(6)
(7)
Dr. (Cr.)
45,000
(7,875)
(139,125)
(102,000)
Goodwill
AJE
Dr. (Cr.)
45,000
100,000
5,000
150,000
(5)
(8)
(9)
108,571
12-11.
12-11
10,000
108,571
10,000
Requirement (a)
The deficiencies listed below are apparent from the balance sheet and the
explanations given. The assumption is made that costs incurred have been
properly classified by Mr. Balagtas. The correct treatment of each item is
presented in the column on the right.
Deficiency
Correct Treatment
1.
Capitalization of expenses:
Research and development
Marketing research
Personnel recruitment and training
Legal fees relative to organization
of the corporation
Operating expenses
2.
3.
4.
No statement of shareholders
equity and explanation of shares
issued is presented.
5.
12-12
12-12.
1.
2.
3.
Nikko Corporation
Requirement (a)
In a purchase transaction, assets are recorded at their acquisition price, which
becomes the cost basis to the acquiring corporation. The book values of the assets
for Rain Company are irrelevant.
Requirement (b)
When a price is paid for a group of assets, the total price must be allocated to the
individual assets. Because we know neither the total fair value of the tangible and
other intangible assets acquired from Rain Company nor the price to be paid by
the Nikko Corporation, we cannot determine whether Nikko Corporation has any
goodwill to record. The total price to be paid by the Nikko Corporation is
indefinite but it may be estimated by discounting the expected receipts (1% of net
sales) at the end of each of the next 5 years and adding the initial P450,000 cash
payment. If the estimated purchase price exceeds the sum of the estimated fair
values of the tangible and other assets purchased, then the excess may be recorded
as goodwill.
12-13.
12-13
building the center and bringing it to the point at which it would produce revenue.
The future income to be generated by the shopping center must have been
estimated to be more than sufficient to recover all of the expected costs of
building the center and preparing it for occupancy, including interest during the
construction period.
Instead of treating interest during construction as an element of the cost of the
physical assets, it can be argued that it represents an element of the general cost of
bringing the business to the point of revenue production and should therefore be
treated as an organization cost. This view regards interest during construction as
just another of the many expenditures that are necessary to acquire and organize
the physical assets of a new business but do not attach to any specific assets.
Treated as an organization cost, interest during construction would be expensed as
a start-up cost.
Another alternative to capitalizing an amount equal to the 2004 interest cost is to
treat it as interest expense. This treatment is inappropriate because it assumes that
the decision to use debt capital to finance construction is a decision deliberately to
incur an expense for the interest that accrues during the expected construction
period.
The extension of the construction period to October 2005 because of the typhoon
was externally imposed and so the interest capitalization period continues until
final construction is complete. That is, the additional interest cost is capitalized
and not expensed as a loss from the typhoon.
Cost of obtaining tenants: Both the 2004 and 2005 costs of obtaining tenants
should be capitalized and amortized over the life of the leases. The fact that all of
the tenants who were signed when the typhoon occurred accepted the October
occupancy date indicates that the total cost of obtaining tenants was not affected
by the delay.
The cost of obtaining tenants has a direct and easily identifiable relationship to the
rental income to be earned over the terms of the leases. Under these
circumstances, the problem of reliably measuring periodic net income is best
solved by matching costs with the revenues to which they are directly related.
Promotional advertising: The 2004 cost of promotional advertising should be
written off as a start-up cost. The 2005 cost of promotional advertising should
also be expensed.
The initial expense treatment of the 2004 advertising cost is appropriate because it
is a start-up cost.
The 2005 advertising cost may also be considered as a start-up cost or simply
expensed as advertising cost incurred.
12-14
12-16
12-14.
Trial Balance
Debit
Credit
P 61,000
92,500
P
500
38,500
75,000
29,000
10,000
85,000
26,000
10,500
29,000
24,000
50,000
49,000
27,000
454,000
173,000
Interest expense
Extraordinary losses
Accumulated amortization:
patents
Accumulated amortization:
leasehold improvements
Accumulated amortization:
licensing agreements
Prior period adjustment
licensing agreement no. 1
Prior period adjustment
amortization of leasehold
improvements
Net income for 2006
3,500
12,000
Totals
*
P1,239,000
147,500
12,500
300,000
768,500
P1,239,000
P 2,500
(1)
(8)
17,000
8,500
Income Statement
Debit
Credit
P
(1) P 17,000
(8)
11,000
(3)
(2)
(6)
(10)
(7)
(7)
(9)
1,000
(9)
(7)
(4)
(5)
29,000
24,000
1,250
29,250
(3)
1,000
3,400
5,500
1,500
8,000
16,000
29,000
(4)
(5)
1,250
29,250
(10)
1,500
P124,400
Balance Sheet
Debit
Credit
61,000
95,000
(500)
38,500
92,000
37,500
(10,000)
68,000
15,000
10,500
19,500
50,000
464,400
768,500
147,500
13,500
300,000
(27,000)
181,000
45,000
3,500
12,000
(2)
3,400
(3,400)
(10)
3,000
(3,000)
(6)
5,500
(5,500)
(30,500) *
(1,500) *
62,600
62,600
P124,400
768,500
768,500
470,600
470,600
Generally, adjustments in the current period that could have been determined by management in a prior period should enter into the determination of net income in the current
period. However, because the 2006 financial statements were not prepared in conformity with generally accepted accounting principles, these retroactive adjustments are
considered to be errors and treated as prior period adjustments and, therefore, should be applied against beginning retained earnings.
12-17
(2)
(3)
(4)
Machinery
Patents
To transfer cost of improving
machinery to the fixed asset account.
17,000
17,000
3,400
1,000
3,400
1,000
1,250
1,250
29,250
29,250
(7)
(8)
(9)
5,500
5,500
8,000
16,000
Start-up Expenses
Organization Costs
To expense other organization costs.
29,000
Equipment
Accounts Receivable Lessor
Leasehold Improvements
To charge the Equipment account with
movable equipment and to record a
receivable from the landlord for the real
estate taxes erroneously paid by Lee.
12-18
24,000
29,000
8,500
2,500
11,000
1,500
1,500
3,000
12-19
Broadway Corporation
Requirement (1)
Broadway Corporation
Intangibles Section of Balance Sheet
December 31, 2006
Franchise from IE Copy Service, Inc., net of
accumulated amortization of P6,870 (Schedule 1)
Patent, net of accumulated amortization of P2,050
(Schedule 2)
Trademark, net of accumulated amortization of
P7,294 (Schedule 3)
Total intangibles
P 61,830
14,350
42,706
P118,886
Schedule 1:
Computation of Franchise from
IE Copy Service, Inc.
Cost of franchise at January 1, 2006
Down payment
Present value of installments
Initial amount capitalized
Amortization of franchise for 2006 (P68,700 10
years)
Franchise balance, December 31, 2006
P25,000
43,700
P68,700
(6,870)
P61,830
Schedule 2:
Computation of Patent
Capitalized cost of patent at January 2, 2006 legal
fees and other costs associated with registration
Amortization of patent for 2006 (P16,400 8 years)
Patent balance, December 31, 2006
P16,400
(2,050)
P14,350
12-20
P40,000
P40,000
(7,000)
P33,000
Accumulate
d
Amortizatio
n
P7,000
P7,000
P 6,870
45,000
6,118
P57,988
2,050
10,000
2,000
P72,038
12-21
P15,000
7,000
1,000
P23,000
Jo Tan Company
Requirement (a)
Jo Tan Company
INTANGIBLES SECTION OF BALANCE SHEET
December 31, 2007
P1,440,000
432,000
P1,872,000
12-22
P2,000,000
(200,000)
1,800,000
(360,000)
P1,440,000
P 480,000
(48,000)
P 432,000
Requirement (b)
Jo Tan Company
Income Statement Effect
For the year ended December 31, 2007
Patent from Francis Argante Company:
Amortization of patent for 2007
(P1,800,000 5 years)
Franchise from JC Company:
Amortization of franchise for 2007
(P480,000 10)
Payment to Reagan Company
(P2,500,000 X 5%)
Research and development costs
Total charged against income
12-19.
P360,000
P 48,000
125,000
173,000
433,000
P966,000
Twinkle Industries
Requirement (a)
Patent X
Life in years
Life in months (12 X 17)
Amortization per month
Number of months amortized to date
Year
2004
2005
Month
10
12
17
204
P150
12-23
12
12
46
10
120
P125
Month
6
12
12
30
4
48
P300
Month
4
12
16
P23,700
11,250
9,600
P44,550
Requirement (b)
Analysis of 2008 transactions
1.
12-24
The book value of Patent Y is P11,250 and its estimated future cash flows
are P6,000: (3 X P2,000) therefore Patent Y is impaired. The impairment
loss is imputed as follows:
Book value
Less: Present value of future
cash flows 2,000 X 2.57710
Loss recognized
Patent Y carrying amount (12/31/08) P5,154
P11,250
5,154
P 6,096
P21,900
5,164
6,000
34,560
P67,624
Patent AA amortization
Life in years
Life in months
Amortization per month
P320 X 6 = P1,920
9 1/2
114
P320
x
x
x
0.9259 =
0.8573 =
0.7983 =
P1,852
1,715
1,597
P5,164
or
2,000
12-20.
2.582 =
P5,164
Depp Corporation
Requirement (a)
Cash.............................................................................................................
50,000
Receivables..................................................................................................
90,000
Inventory......................................................................................................
125,000
Land.............................................................................................................
60,000
Buildings......................................................................................................
75,000
Equipment....................................................................................................
70,000
Trademarks..................................................................................................
15,000
Goodwill......................................................................................................
65,000
12-25
P4,300,000
3,200,000
P1,100,000
Requirement (b)
Copyright Amortization Expense...................................................................
320,000*
Copyrights........................................................................................320,000
*New carrying amount
Useful life
Amortization per year
CV 12.31.06
Amortization, 2007
CV 12.31.07
Historical Cost
P4,300,000
430,000
P3,870,000
P3,200,000
10 years
P 320,000
Recovery
Requirement (c)
Fair Value
12.31.07
Fair Value
P3,200,000
320,000
P2,880,000
P3,400,000
520,000
12-26
12-22.
Espaol Co.
Franchises....................................................................................................................
42,000
Prepaid Rent.......................................................................................................................
28,000
Retained Earnings (Organization Costs of P6,000 in
2006)..............................................................................................................................
6,000
Retained Earnings (P16,000 P6,000)..............................................................................
10,000
Patents................................................................................................................................
74,000
Legal fees...........................................................................................................................
12,650
Research and Development Expense..................................................................................
(P75,000 + P160,000)......................................................................................................
235,000
Goodwill.............................................................................................................................
278,400
Intangible Assets..................................................................................................
686,050
5,250
Franchise Amortization Expense (P42,000 8).................................................................
2,625
Retained Earnings (P42,000 8 X 6/12)............................................................................
Franchises.............................................................................................................
7,875
14,000
Rent Expense (P28,000 2)...............................................................................................
3,500
Retained Earnings (P28,000 2 X 3/12)............................................................................
Prepaid Rent.........................................................................................................
17,500
Patent Amortization Expense.............................................................................................
7,400
Patents..................................................................................................................
7,400
(P74,000 10)
NoteNo amortization of goodwill; goodwill should be tested for impairment on
at least an annual basis in future periods.
12-23.
Sim Laboratories
Requirement (a)
Costs to obtain patent Jan. 1999
1996 amortization (P62,050 17)
Carrying value, 12/31/99
P62,050
(3,650)
P58,400
12-27
All costs incurred prior to January 1999 are related to research and development
activities and were expensed as incurred.
Requirement (b)
1/1/00 carrying value of patent
2000 amortization (P62,050 17)
2001 amortization
Legal fees to defend patent 12/01
Carrying value, 12/31/01
2002 amortization (P86,800 14)
2003 amortization
Carrying value, 12/31/03
P58,400
P3,650
3,650
6,200
6,200
(7,300)
51,100
35,700
86,800
(12,400)
P74,400
The costs incurred in 2000 and 2002 are related to research and development
activities and are expensed as incurred. Legal fees in successful defense of the
patent in 2001 could be capitalized and considered GAAP.
Requirement (c)
1/1/04 carrying value
2004 amortization (P74,400 5)
2005 amortization
2006 amortization
Carrying value, 12/31/06
P74,400
P14,880
14,880
14,880
(44,640)
P29,760
The legal costs in 2006 were expensed because the suit was unsuccessful. Even if
the lawsuit was successful, the legal fees would be likewise charged to expense.
This is in accordance with PAS 38, Intangibles which was made effective in 2004.