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Problems
3. Leah Company acquired a welding machine with an invoice price of P3,360,000 subject to a cash discount of
5% which was not taken. Leah incurred freight and insurance during shipment of P50,000 and testing and in-
stallation cost of P200,000. Leah also incurred cost of P20,000 in removing the old welding machine prior to the
installation of the new one. Welding supplies were acquired at a cost of P100,000. The VAT on the acquisition
is P360,000. What is the cost of the welding machine?
a. 3,100,000
b. 3,250,000
c. 3,220,000
d. 3,400,000
6. In December 2017, Nash Company exchanged an old machine, which cost P6,000,000 and 50% depreciated,
for a used machine and paid a cash difference of P1,500,000. The fair value of the old machine was deter-
mined to be P2,000,000. What amount should Nash record the machine?
a. 6,000,000
b. 2,000,000
c. 3,500,000
d. 3,000,000
7. Marian Company and Xenia Company are fuel oil distributors. To facilitate the delivery of oil to customers, Mar-
ian and Xenia exchanged ownership of 5,000 barrels of oil without physically moving the oil. Marian paid Xenia
P2,000,000 to compensate for a difference in the grade of oil. It was reliably determined that the exchange
lacks commercial substance because the configuration of the cash flows of the asset received does not dif-
fer from the configuration of the cash flows of the asset transferred. On the date of exchange, cost and fair
value of oil were:
Marian Company Xenia Company
Cost 45,000,000 40,000,000
Fair value 51,000,000 53,000,000
1. What amount should Marian Company record the oil inventory received in exchange?
a. 45,000,000
b. 47,000,000
c. 51,000,000
d. 53,000,000
2. What amount should Xenia Company record the oil inventory received in exchange?
a. 40,000,000
b. 38,000,000
c. 42,000,000
d. 51,000,000
ANSWERS: A, A, A, D, B, C, B, D
1. On January 1, 2017 Union Company received a grant of P10,000,000 from the British government in order to
defray safety and environmental costs within the area where the enterprise is located. The safety and envi-
ronmental costs are expected to be incurred over four years, respectively, P1,000,000, P2,000,000, P2,000,000
and P3,000,000. How much income from the government grant should be recognized in 2017?
a. 2,000,000
b. 1,000,000
c. 10,000,000
d. 1,250,000
VII. On January 1, 2017, Carroll Company received a grant of P1,000,000 from the Philippine Government for
the construction of a laboratory and research facility with a total cost of P6 million and a useful life 5
years and no residual value. The facility was completed in early of 2017. Carroll Company recorded
the grant as deferred revenue upon the receipt.
1. What should Carroll Company include in its 2017 income statement an income from the government grant?
a. 500,000
b. 100,000
c. 200,000
d. 240,000
2. If the grant becomes repayable in full in 2019 because Carroll is not able to comply with the conditions re-
quired for the grant, what is the amount of loss to be recognized in the income statement?
a. 1,000,000
b. 600,000
c. 400,000
d. 500,000
3. Assuming that Carroll Company recorded the grant as a deduction towards the capital cost of the asset,
what is the depreciation expense to be recorded in 2017?
a. 1,200,000
b. 1,000,000
c. 900,000
d. 800,000
ANSWERS: D, C, C, C
The depreciated value of the old building on the books of the company from which the land was purchased
was P300,000. The old building was never used by Paula. What is the cost of the land and building as inven-
tory?
a. 10,580,000
b. 9,880,000
c. 10,280,000
d. 10,430,000
P4. Razor Company, a newly formed corporation, incurred the following expenditures related to land and building:
Cost of land, which included an old apartment building appraised at P500,000 3,000,000
Fee for title search 100,000
Payment to tenants for vacating old building 500,000
Payment for delinquent property taxes assumed by the purchaser 200,000
Removal of apartment building 50,000
Salvaged materials retained by the demolition company 10,000
Cost of grading, leveling and other landscaping 150,000
Architect fees on new building 200,000
Payment to building contractors 10,000,000
Interest cost on specific borrowing incurred during construction 500,000
Payment of medical bills of employees accidentally injured while inspecting
building construction 180,000
Cost of paving driveway and parking lot 40,000
Fences surrounding the property 20,000
Cost of installing lights in the parking lot 50,000
Premium for insurance on the building during construction 250,000
Cost of open house party to celebrate opening of new building 60,000
1. What is the cost of the land?
a. 3,950,000 c. 4,000,000
b. 3,000,000 d. 2,950,000
2. What is the cost of the building?
a. 11,500,000 c. 10,950,000
b. 10,000,000 d. 10,990,000
P5. Jerald Company uses many kinds of machines in its operation. The company constructs some of these ma-
chines itself and acquires others from manufacturers. The following information relates to a machine that was
acquired on January 1, 2017.
Cash paid for machine, including VAT of P96,000 896,000
Cost of transporting machine 30,000
Labor cost of installment by expert fitter 50,000
Labor cost of testing machine 40,000
Insurance cost for 2017 15,000
Cost of training for personnel who will use the machine 25,000
Cost of safety rails and platform surrounding the machine 60,000
Cost of water device to keep the machine cool 80,000
Cost of adjustment to machine to make it operate more efficiently 75,000
How much should be capitalized as cost of the machine?
a. 1,135,000 c. 1,160,000
b. 1,231,000 d. 1,150,000
ANSWERS: D, D, D, B, A, D, A, A
PAGE 7
IV. BORROWING COST
a) Interest and other costs incurred by an enterprise in connection with the borrowing of funds. Interest
expense calculated using the effective interest method, finance charges in respect of finance leases,
exchange differences arising from foreign currency borrowings to the extent that they are regarded as an
adjustment to interest costs.
b) Borrowing cost is required to be capitalized for Qualifying Assets which are assets that takes a substantial
period of time to get ready for its intended use.
c) If the borrowing cost is from specific borrowings, the amount of the actual interest incurred less investment
income from temporary investments of excess borrowings shall be capitalized.
d) If the borrowing cost is from general borrowings, the amount capitalizable is the weighted average
expenditures times the average capitalization rate. However, the amount of borrowing cost to be capitalized
shall not exceed the actual interest incurred.
e) If it is a combination of both, the specific borrowing is deducted from the weighted average expenditures
before multiplying to the capitalization rate.
f) The second and succeeding periods shall include the cumulative amount capitalized including the borrowing
cost from last year as part of the weighted average expenditures to be weighted at the beginning of the
current year.
g) If the construction is completed before yearend, the denominator to compute for the weighted average
expenditures shall be the number of months of construction instead of 12 calendar months.
Problems
1. Lolita Company entered into a P10,000,000 fixed contract with Constructors Company on January 1, 2017 for
the construction of a new building. On January 1, 2017, Lolita obtained a loan of P10,000,000 at an interest
rate of 12% to finance specifically the construction. Availment from the loan may be made quarterly at unequal
amounts. Actual interest incurred for 2017 was P900,000. Prior to their disbursement, the proceeds from the
loan were temporarily invested and earned interest income of P50,000. The building was completed on De-
cember 31, 2017. Additional costs incurred during the construction were P200,000 for plans, specifications and
blueprint, and P350,000 for architectural design and supervision. What is the total cost of the building?
a. 11,400,000 c. 10,000,000
b. 11,450,000 d. 10,550,000
2. Nada Company had the following borrowings during 2017. The borrowings were made for general purposes but
the proceeds were used in part to finance the construction of a new building:
Principal Interest
12% bank loan 10,000,000 1,200,000
15% long-term loan 20,000,000 3,000,000
The construction began on January 1, 2017 and was completed on December 31, 2017. Expenditures on the
building were made as follows:
January 1 8,000,000
June 30 8,000,000
December 31 4,000,000
What is the amount of borrowing cost to be capitalized?
a. 1,680,000 c. 1,400,000
b. 4,200,000 d. 1,620,000
3. Nida Company had the following loans outstanding during the years 2016 and 2017:
Specific construction loan 2,000,000 10%
General loan 15,000,000 12%
The company began self-construction of a building on January 1, 2016 and was completed on December 31,
2017. The following expenditures were made during 2016 and 2017:
January 1, 2016 2,000,000
July 1, 2016 4,000,000
November 1, 2016 3,000,000
July 1, 2017 1,000,000
10,000,000
PAGE 8
1. What is the total cost of the building on December 31, 2017?
a. 10,000,000 c. 11,700,000
b. 11,660,000 d. 10,840,000
2. What is the 2017 interest expense?
a. 540,000 c. 840,000
b. 960,000 d. 360,000
4. Norma Company had the following outstanding loans during 2016 and 2017:
Specific construction loan – 10% 3,000,000
General loan – 12% 25,000,000
Norma Company began the self-construction of a new building on January 1, 2016 and building was completed
on September 30, 2017. The following expenditures were made in 2016 and 2017:
January 1, 2016 4,000,000
April 1, 2016 5,000,000
December 1, 2016 3,000,000
July 1, 2017 6,000,000
What is the cost of the new building on September 30, 2017?
a. 18,900,000 c. 18,700,000
b. 20,196,000 d. 20,260,000
ANSWERS: A, A, B, C, B
Problems
1. On January 1, 2016, Bianca Company purchased an equipment with a cost of P1,000,000. It is expected that
this equipment will be used for 5 years and have a residual value at that time of P100,000. It is also expected
that this equipment can produce 150,000 units of Bianca’s products. In 2016 and 2017, this equipment produced
20,000 and 25,000 units respectively.
PAGE 9
1. What is the accumulated depreciation on this equipment on December 31, 2017 under the straight-line
method of depreciation?
a. 270,000 c. 540,000
b. 640,000 d. 360,000
2. What is the accumulated depreciation on this equipment on December 31, 2017 under the SYD method of
depreciation?
a. 270,000 c. 540,000
b. 640,000 d. 360,000
3. What is the accumulated depreciation on this equipment on December 31, 2017 under the double-declining
balance method of depreciation?
a. 270,000 c. 540,000
b. 640,000 d. 360,000
4. What is the accumulated depreciation on this equipment on December 31, 2017 under the production meth-
od of depreciation?
a. 270,000 c. 540,000
b. 640,000 d. 360,000
5. During 2014 Macy Company purchased an equipment with a cost of P1,500,000. It is expected that this equip-
ment will be used for 5 years and have a residual value at the end of its useful life of P300,000. It is also ex-
pected that this equipment can produce 200,000 units of Macy’s products. Macy’s policy is to take a full year’s
depreciation in the year of acquisition and no depreciation in the year the asset is sold. In 2014, 2015 and 2016,
this equipment produced 50,000, 30,000 and 40,000 units respectively. Macy sold the equipment early in 2017
for P900,000. What is the gain on sale recognized in 2017?
a. 500,000
b. 320,000
c. 240,000
d. 120,000
7. Ollen Company uses the composite method of depreciation and has a composite rate of 25%. During 2017, it
sold assets with an original cost of P500,000 and a residual value of P100,000 for P300,000 and eventually ac-
quired P900,000 of new assets with a residual value of P150,000. Information regarding the original group of
assets as of January 1, 2017 is presented below:
Total cost 5,000,000
Total residual value 800,000
Accumulated depreciation 1,000,000
What was the depreciation expense recorded by Ollen Company in 2017?
a. 1,000,000
b. 1,312,500
c. 1,350,000
d. 1,100,000
PAGE 10
8. On April 1, 2016, Ofelia Company bought machinery under a contract that required a down payment of
P500,000 plus 24 monthly payments of P300,000 for total payments of P7,700,000. The cash price of the ma-
chinery was P6,500,000. The machinery has an estimated useful life of four years and estimated residual value
of P500,000. Ofelia uses SYD method of depreciation. In its 2017 income statement, what amount should Ofe-
lia report as depreciation for this machinery?
a. 2,400,000
b. 1,800,000
c. 1,950,000
d. 2,275,000
9. On January 1, 2015, Ozzie purchased a large quantity of laptop computers for their associates. The cost of
these computers was P10,000,000. On the date of purchase, the management estimated that the computers
would last approximately 6 years and would have a residual value at that time of P550,000. The company used
the sum-of-years’ digit method of depreciation. During 2017, the management realized that technological ad-
vancements and the volume of files being uploaded had made the computers virtually obsolete and that they
would have to be replaced sooner. Management decided to depreciate the computers using the double declin-
ing balance method of depreciation with no change in useful life and residual value. What is the depreciation
to be recognized for the year 2017?
a. 2,525,000
b. 2,250,000
c. 1,683,333
d. 1,125,000
10. Mona Company acquired property in 2017, which contains mineral deposit. The acquisition cost of the property
was P20,000,000. Geological estimates indicate that 5,000,000 tons of minerals may be extracted. It is further
estimated that the property can be sold for P5,000,000 following mineral extraction. At a discounted value of
P2,000,000, Mona is legally required to restore the land to a condition appropriate for resale. After acquisition,
the following costs were incurred:
Exploration cost 13,000,000
Development cost related to drilling of wells 10,000,000
Development cost related to production equipment 15,000,000
The company extracted 600,000 tons of the mineral in 2017 and sold 450,000 tons.
1. What is the total depletion for 2017?
a. 4,800,000
b. 3,600,000
c. 5,400,000
d. 4,050,000
2. What is the depletion expense for 2017?
a. 4,800,000
b. 3,600,000
c. 5,400,000
d. 4,050,000
11. Owen Company acquired a mineral right for P30,000,000 in January 2016. The mine has removable ore esti-
mated at 4,000,000 tons. After it has extracted all the ore, Owen will be required by law to restore the land to its
original condition at an estimated cost of P2,000,000. Owen believes that the property can be sold afterwards
for P5,000,000. Early in 2016, roads were constructed and other development costs were incurred to aid in the
extraction and transportation of the mined ore at a cost of P6,000,000. In 2016, 200,000 tons were mined and
sold. On December 31, 2017, a new survey made by a new mining engineer indicated that 5,000,000 tons were
available for mining. In 2017, 225,000 tons were mined and only 150,000 tons were sold. How much depletion
was included in the 2017 cost of sales?
a. 1,350,000
b. 1,410,750
c. 940,500
d. 900,000
PAGE 11
12. On July 1, 2017 Olga Company purchased rights to a mine. The total purchase price was P50,000,000 of which
P5,000,000 was allocated to the land. Estimated reserves were 6,000,000. Olga expects to extract and sell
100,000 tons per month. Olga Company purchased new equipment on July 1, 2017 for P21,000,000 with esti-
mated life of 8 years. However, after all the resource is removed, the equipment will be of no use and will be
sold for P3,000,000. What is the depreciation of the equipment for 2017?
a. 1,800,000
b. 2,100,000
c. 1,125,000
d. 3,600,000
13. Odessa Company constructed a building costing P15,000,000 on a mine property. The building has an esti-
mated useful life of six years with no residual value. After all the resources are removed expectedly over five
years, the building will be of no use. The estimated recoverable output from the mine is 1,000,000 tons. During
the first year, Odessa produced 200,000 tons but there was a shutdown and no output in the second year. In
the third year, Odessa resumed operations and produced 300,000 tons. What is the depreciation in the third
year on the building for Odessa Company?
a. 3,000,000
b. 2,500,000
c. 3,600,000
d. 4,500,000
14. The following account balances are recorded in the books of Lavelle Company at the end of 2017:
Retained earnings 5,000,000
Capital liquidated 2,000,000
Accumulated depletion 8,000,000
Current year depletion on 200,000 units extracted at a rate of 20 per unit 4,000,000
Ending inventory of finished goods (30,000 units) 2,400,000
What is the maximum dividends that Lavelle Company can declare for 2017?
a. 5,000,000
b. 13,000,000
c. 12,400,000
d. 10,400,000
15. In 2014, Bourne Mining Company purchased property with natural resources for P62,000,000. The property
was relatively close to a large city and had an expected residual value of P9,000,000. The following infor-
mation relates to the use of the property:
(a) In 2014, Bourne spent P4,000,000 in development costs and in 2015, P3,000,000 in buildings on the
property. Bourne does not anticipate that the buildings will have any utility after the natural resources are
depleted.
(b) In 2015 and 2017, P3,000,000 and P7,900,000, respectively were spent for additional development on the
mine.
© The tonnage mined and estimated remaining tons for the years 2014 to 2018 are as follows:
Year Tons Extracted Estimated Tons Remaining
2014 0 5,000,000
2015 1,500,000 3,500,000
2016 1,800,000 2,200,000
2017 1,700,000 1,400,000
2018 1,400,000 0
1. How much is the depletion in 2017?
a. 18,000,000 c. 14,000,000
b. 17,000,000 d. 18,900,000
2. How much is the depreciation expense on the building in 2017
a. 633,400 c. 945,000
b. 900,000 d. 600,000
ANSWERS: D, C, B, A, D, D, C, C, A, A, B, A, A, C, D, B, A
PAGE 12
Problems
1. The following account balances relating to property, plant and equipment of Daryl Company appear on the
books on December 31, 2016:
Land 6,000,000
Building 60,000,000
Accumulated depreciation 24,000,000
Plant, property and equipment have been carried at cost since their acquisition. The land was acquired 15
years ago while the building’s construction was completed on January 1, 2007. The straight-line method for
depreciation is used and the building is depreciated over its 25-year useful life with no residual value. On Jan-
uary 1, 2017, the company revalued property, plant, and equipment. On the same date, contracted profession-
al appraisers submitted the following information regarding the replacement cost of the land and the building:
Land 9,000,000
Building 80,000,000
3. What is the depreciation on the building for the year ended December 31, 2017?
a. 3,000,000
b. 4,000,000
c. 5,000,000
d. 3,200,000
PAGE 13
2. Cotton Company acquired a building on January 1, 2013 at a cost of P20,000,000. The building has an esti-
mated life of 10 years and residual value of P4,000,000. The building was revalued on January 1, 2017 and the
revaluation revealed replacement cost of P30,000,000, residual value of P5,000,000 and revised life of 12
years. The entity’s tax rate is 30%
3. What is the depreciation on the building for the year ended December 31, 2017?
a. 1,600,000
b. 1,875,000
c. 2,500,000
d. 2,000,000
3. Adelle Company finished construction of its building on January 1, 2013 at a total cost of P25,000,000. The
building was depreciated over its estimated useful life of 20 years using the straight-line method with no resid-
ual value. The building was subsequently revalued on December 31, 2016 and the revaluation report showed
that the asset had a replacement cost of P32,000,000 and was determined to have no change in its useful life.
Adelle’s tax rate is 30%. On January 1, 2018, the building was tested for recoverability and the fair value was
determined to be P18,000,000 on this date, with no change on its remaining useful life.
4. What is the depreciation on the building for the year ended December 31, 2017?
a. 1,125,000
b. 1,200,000
c. 1,600,000
d. 2,000,000
PAGE 14
4. During December 2017, Quintessential Company determined that there had been a significant decrease in
market value of its equipment. At December 31, 2017, Quintessential compiled the following information con-
cerning the equipment:
What is the impairment loss that should be reported in the 2017 income statement?
a. 1,500,000
b. 3,000,000
c. 1,000,000
d. 2,200,000
5. Everlast Company had purchased equipment for P10,000,000 on January 1, 2016. The equipment had a 10-
year life and a residual value of 500,000. Everlast Company depreciated the equipment using the straight-line
method. On December 31, 2017, Everlast questioned the recoverability of the carrying amount of this equip-
ment. On December 31, 2017, the undiscounted expected net future cash flows related to the continued use
and eventual disposal of the equipment totaled P6,000,000. The equipment’s fair value less cost to sell on De-
cember 31, 2017 is P4,500,000, while the discounted cash flows related to the equipment is P5,000,000. After
the asset was tested for impairment it was determined that the useful life did not change with no residual value.
What is the carrying value of the equipment on December 31, 2018?
a. 4,375,000
b. 3,937,500
c. 7,150,000
d. 5,250,000
6. Caliber Company reported an impairment loss of P4,000,000 in its income statement for the year ended 2016.
This loss was related to an item of property, plant and equipment which was acquired on January 1, 2015 with
cost of P25,000,000, useful life of 10 years and no residual value. On the December 31, 2016 statement of fi-
nancial position, Caliber reported this asset at P16,000,000 which is the fair value on such date. On December
31, 2017, Caliber determined that the fair value of its impaired asset had increased to P19,000,000. The
straight-line method is used in recording depreciation of this asset. What amount of gain on impairment recov-
ery should Caliber report in its 2017 income statement?
a. 5,000,000
b. 3,500,000
c. 1,500,000
d. 0
7. On December 31, 2017, Ella Company’s only cash generating unit was tested for impairment. Information to
the assets of the cash generating unit is presented below:
Building 2,500,000
Equipment 1,500,000
Machinery 1,000,000
Goodwill 500,000
It was determined that the cash generating unit has a recoverable amount of P3,500,000 and the building’s fair
value is P2,000,000.
ANSWERS: A, C, D, D, A, B, B, A, A, B, D, A, B, C, D, A
Patents
• An exclusive right granted by the government to an inventor to control the manufacture, use or sale of an
invention
• Cost – Licensing and registration fees only for APPLIED AND REGISTERED patents and purchase price
and any directly attributable expenditure necessary in preparing the asset for its intended use for PUR-
CHASED PATENTS.
• Principles on amortization:
▪ Amortization is based on the useful life or legal life (20 years), whichever is shorter.
▪ If a competing patent is acquired to protect an original patent. The cost of the new patent and the
carrying amount of the original patent is amortized over the remaining life of the original patent.
▪ If a related patent is acquired to extend the life of an existing patent. The cost of the new patent and
the carrying amount of the original patent is amortized over the extended period, unless if the remain-
ing life of the new patent is shorter than the extended period.
1. Susan Company acquired three patents in January of 2017. The patents have different lives as indicated in the
following schedule:
Cost Remaining useful life Remaining legal life
Patent A 2,000,000 8 5
Patent B 3,000,000 10 15
Patent C 5,000,000 Indefinite 8
Patent C is believed to be uniquely useful as long as the company retains the right to use it. In June 2017, the
company successfully defended its right to Patent C. Legal fees of P1,000,000 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. What is the total amount of amortization that should be recognized
for 2017?
a. 1,325,000
b. 1,550,000
c. 1,625,000
d. 1,000,000
2. Heir Company purchased a patent on January 1, 2014, for P6,000,000. The patent’s remaining legal life was 15
years expiring on December 31, 2028, however it was determined that due to the competitive nature of the
product that the patent will only be valid for 10 years. During 2017 Heir determined that the economic benefits
of the patent would not last longer than eight years from the date of acquisition. What amount should be re-
ported in the statement of financial position as patent, net of accumulated amortization, at December 31, 2017?
a. 4,400,000
b. 3,360,000
c. 3,675,000
d. 3,600,000
PAGE 16
3. On January 2, 2014, Carmine Company purchased a patent for a new consumer product for P5,000,000. 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, 2017, the product was permanently
withdrawn from sale under governmental order because of a potential health hazard in the product. What is the
total amount that Carmine should charge against income during 2017, assuming amortization is recorded at the
end of such year?
a. 3,000,000
b. 2,000,000
c. 3,500,000
d. 500,000
4. On January 1, 2014, Trina Company after incurring P5,000,000 worth of extensive research and development
for their new product line, registered Patent A at a cost of P800,000. Due to the competitive nature of Trina’s
industry, it was assessed that the useful life of the patent was only eight years. Since that time, Trina’s competi-
tors had taken strides in developing product lines that would equal Trina’s breakthrough. It was only on De-
cember 31, 2016 that Trina took action to protect itself and purchased Patent B, the most immediate threat to
Patent A’s survival at a cost of P2,000,000. The value of Patent B was evident because Trina’s product engi-
neers estimated that the remaining useful life of Patent B was ten years from the date of acquisition. What is
the total amortization expense recorded by Trina in 2017?
a. 500,000
b. 300,000
c. 250,000
d. 1,125,000
Goodwill
• An unidentifiable intangible asset that allows an enterprise to earn above normal income.
• It is only purchased goodwill that is recognized as an asset which is the cost in excess of the fair value of
the net assets acquired in a business combination. This the premium paid in acquiring another business or
ordinary shares when control is achieved.
• Internally generated goodwill shall not be recognized as an asset.
• Methods of estimating goodwill
a. Capitalization of “average excess earnings”
b. Capitalization of “average earnings”
c. Purchase or multiples of “average excess earnings”
d. Present value of “average excess earnings”
EXAMPLE: Let’s assume that a buyer is planning to buy the business of a competitor. The cumulative net
earnings for the past 5 years were P18,000,000. The current value of net assets of the seller was 10,000,000
only. Meaning if the buyer is able to acquire the assets and assume the liabilities at fair value, the purchase
price would only be 10,000,000. But let us say that buyer will account for the past performance of the seller and
determine it as a contributor to additional income in the future from the purchase of the seller’s business.
Goodwill is determined by the following assuming a 20 percent rate of return and a 25% capitalization rate?
Average earnings (18M / 5) 3,600,000
Less: Normal earnings (10M x 20%) 2,000,000
Excess earnings or earnings from goodwill 1,600,000
Capitalized at 25% or divided by 25%
Goodwill 6,400,000
➢ The purchase price will then be 16,400,000 which is the price at fair value plus the
goodwill added to the fair value.
➢ A multiplier of let’s say 3 years if the “multiples of excess earnings” is used or a PV
factor of 3.17 if the discount rate is 10% and 4 periods shall be used to compute for
goodwill if for example the “PV of excess earnings” will be used.
Average earnings (18M / 5) 3,600,000
Capitalized at 25% or divided by 25%
Purchase price 14,400,000
➢ Remember from above that 2M came from the net assets and 1.6M came from
goodwill. That’s why if you add the two together the 3.6M comes from the net assets
with the goodwill or simply the purchase price.
PAGE 17
5. Sherrie Company purchased Houston Company for P7,500,000 cash. A schedule of the market value of Hou-
ston’s assets and liabilities as of the purchase date follows.
Cash 50,000
Accounts receivable 800,000
Inventory 1,350,000
Property, plant and equipment 4,300,000 6,500,000
9. During 2017, Sarah Company incurred costs to develop and produce a routine low-risk computer software
product as follows:
Completion of detailed program design or working model 1,500,000
Cost incurred for coding and testing to establish technological feasibility 500,000
Other coding costs after establishment of technological feasibility 2,500,000
Other testing costs after establishment of technological feasibility 2,000,000
Costs of producing product master for training materials 3,000,000
Duplication of computer software and training materials from product master 4,000,000
Packaging of product 1,000,000
1. In the December 31, 2017 statement of financial position, what amount should be capitalized as software
cost subject to amortization?
a. 7,500,000 c. 9,500,000
b. 4,500,000 d. 8,000,000
2. In the December 31, 2017 statement of financial position, what amount should be reported as inventory?
a. 5,000,000 c. 4,000,000
b. 7,000,000 d. 6,500,000
Leasehold Improvements
• Permanent upgrading on leased property under an operating lease.
• This is a tangible asset by nature, however classified as an intangible asset because it’s an asset where
the ownership is not with the lessee who constructed or added the cost to the leased property but owner-
ship is with the lessor since the improvements cannot be detached or taken by the lessee at the expiration
of the leaseterm. This will be subject to amortization.
• If the lease contract is nonrenewable, the LHI is simply amortized using the shorter period between the re-
maining leaseterm and the useful life of the LHI.
• If the lease is renewable, the additional period shall be added to the remaining leaseterm if the extention
option has already been exercise or the intention to renew is certain. This total period will be the one
compared to the life of the LHI.
10. On January 1, 2013, Sugar Corporation signed a ten-year lease for an office space. Sugar has the option to
renew the lease for an additional five-year period on or before December 31, 2017. Sugar finished the con-
struction of general improvements to the leased premises at costing of P2,100,000 on January 1, 2016 with a
useful life of 10 years and opted to depreciate these leasehold improvements using the straight-line method.
At December 31, 2016, Sugar’s intention as to exercise the renewal option is uncertain. Sugar took a full
year’s depreciation in 2016. In 2017, it was decided by management to exercise the renewal option stated in
the contract. What is the depreciation expense on the leasehold improvement in 2017?
a. 300,000 c. 150,000
b. 200,000 d. 210,000
PAGE 19
Research and Development Expense
• Cost incurred during product development and charged as expensed as incurred.
• Product development only relates to new products and services being created by the entity. This does not
include the routine improvements and modification to existing products.
• Due to the uncertainty of such experimental activities all cost shall be charged to expense unless PPE or IA
are acquired with an alternative future use. In such case the cost shall be capitalized and only the
depreciation or amortization is charged to R and D expense.
• Once technological feasibility is achieved, cost is now capitalized as intangible asset such as “formula”,
“model” or “prototypes”.
• Also, contractually reimbursable research and development cost is treated as a receivable.
11. Summer Company incurred research and development costs in 2017 as follows:
Equipment acquired for use for various research and development projects 6,000,000
Depreciation on the above equipment 1,200,000
Materials used 3,000,000
Compensation costs of personnel 4,000,000
Outside consulting fees 1,500,000
Indirect costs appropriately allocated 1,300,000
What was Humble Company’s research and development expense for 2017?
a. 2,150,000 c. 1,450,000
b. 700,000 d. 1,150,000
13. In 2017, James Company incurred the following costs that are related with its research and development activi-
ties:
Direct costs of doing contract research and development work for the
government to be reimbursed by the local government unit 5,000,000
Research and development costs not included in the above were:
Depreciation 4,000,000
Salaries 2,000,000
Materials 1,500,000
Utilities 900,000
Indirect cost appropriately allocated 300,000
1. What is the total amortization to be recorded by Ronald on its intangible assets in 2017?
a. 1,600,000
b. 600,000
c. 1,450,000
d. 200,000
ANSWERS: A, D, C, A, B, A, C, A, A, A, B, A, C, A, A, B
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