AUDIT OF INTANGIBLE ASSETS

Problem 1

In connection with your audit of the ABC Corporation, you noted the following transactions during 2019:
Jan. 2 Paid legal fees of P450,000 and stock certificate costs of P249,000 to complete
organization of the corporation.
15 Hired a clown to stand in front of the corporate office for 2 weeks and hound out
pamphlets and candy to create goodwill for the new enterprise. Clown cost, P30,000;
pamphlets and candy, P15,000.
Apr. 1 Patented a newly developed process with costs as follows:
Legal fees to obtain patent P1,287,000
Patent application and licensing fees 190,500
Total P1,477,500
It is estimated that in 6 years other companies will have developed improved
processes, making the ABC Corporation process obsolete.
May 1 Acquired both a license to use a special type of container and a distinctive trademark
to be printed on the container in exchange for 18,000 shares of ABC’s no-par common
stock selling for P50 per share. The license is worth twice as much as the trademark,
both of which may be used for 6 years.
July 1 Constructed a shed for P3,930,000 to house prototypes of experimental models to be
developed in future research projects.
Dec. 31 Incurred salaries for an engineer and chemist involved in product development
totaling P750,000 in 2019.

Determine the following:

1. Cost of the patent
2. Cost of the licenses
3. Cost of the trademark
4. Carrying amount of the intangible assets as of December 31, 2019
5. Total amount resulting from the foregoing transactions that should be expensed when incurred

Problem 2

In connection with your audit of the ABC Corporation’s financial statements for the year 2019, you noted
the following items relative to the company’s Intangible assets.

 A patent was purchased from DEF Company for P4,000,000 on January 2, 2018. ABC estimated that
the remaining useful life of the patent to be 10 years. The patent was carried in DEF’s accounting
records at a carrying value of P4,000,000 when DEF sold it to ABC.
 During 2019, a franchise was purchased from XYZ Company for P960,000. In addition, 5% of the
revenue from the franchise must be paid to XYZ. Revenue from the franchise for 2019 was
P5,000,000. Carter estimates the useful life of the franchise to be 10 years and takes full year’s
amortization in the year of purchase.

 ABC incurred research and development costs of P866,000 in 2019. ABC estimates that these costs
will be recouped by December 31, 2009.

 On January 1, 2019, ABC, because of the recent events in the industry, estimates that the remaining
life of the patent purchased on January 2, 2018, is only 5 years from January 1, 2019.

1. How much is the amortization of the patent for 2019?

2. How much is the carrying amount of the patent as of December 31, 2019?
3. How much is the carrying amount of the intangible assets as of December 31, 2019?
4. How much is the total amount to be charged against income in 2019?