PROBLEM NO.

The following are items that could be included in the Intangible Assets:

1. Investment in a subsidiary company P1,500,000

2. Timberland 2,000,000
3. Cost of engineering activity required to
advance the design of a product to the 120,000
manufacturing stage
4. Lease prepayments (6 months’ rent paid in 60,000
advance)
5. Cost of equipment obtained under finance 700,000
lease
6. Internally generated publishing title 230,000
7. Costs incurred in the formation of the 90,000
corporation
8. Operating losses incurred in the start-up of 560,000
the business
9. Training costs incurred in start-up 80,000
operations
10. Purchase of a franchise 1,200,000
11. Goodwill internally generated 300,000
12. Cost of testing in search for product 65,000
alternatives
13. Goodwill acquired in the purchase of a 640,000
business
14. Cost of developing a patent 140,000
15. Cost of purchasing a patent from an 500,000
inventor
16. Legal costs incurred in securing a patent 70,000
17. Costs of a successful legal suit to 230,000
protect the patent
18. Cost of conceptual formulation of possible
product alternatives 160,000
19. Cost of purchasing a copyright 900,000
20. Research and development costs 340,000
21. Long-term receivables 310,000
22. Cost of developing a trademark 61,000
23. Cost of purchasing a trademark 290,000
24. Computer software for a computer-
controlled machine that cannot operate 130,000
without that specific software
25. Operating system of a computer 10,000

How much could be recognized as Intangible Assets?

PROBLEM 2
In connection with your audit of the Cabuyao Corporation, you noted the
following transactions during 2006:

Jan. 2 Paid legal fees of P450,000 and stock certificate

costs of P249,000 to complete organization of
the corporation.

Hired a clown to stand in front of the corporate

15 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. Patented a newly developed process with costs as

1 follows:

Legal fees to obtain patent P1,287,000

Patent application and 190,500
licensing fees
Total P1,477,500

It is estimated that in 6 years other companies

will have developed improved processes, making
the Cabuyao 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 Cabuyao’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 Constructed a shed for P3,930,000 to house

1 prototypes of experimental models to be
developed in future research projects.

Dec. Incurred salaries for an engineer and chemist

31 involved in product development totaling
P750,000 in 2006.

QUESTIONS:

Based on the above and the result of your audit, determine the following:

1. Cost of patent
2. Cost of licenses
3. Cost of trademark
4. Carrying amount of Intangible Assets as of December 31, 2006
5. Total amount resulting from the foregoing transactions that should be
expensed when incurred
PROBLEM 3
Doha Corporation was organized in 2013. Its accounting records include only one
account for all intangible assets. The following is a summary of the entries
that have been recorded and posted during the years 2013 and 2014:

Intangibles
7/1/13 Franchise expiring on June 30, 2021 P252,000
10/1 Advance payment on lease expiring on October 1, 2015 158,000
12/31 Net loss for 2013 including incorporation fee, P6,000, and
related legal fees of organizing the business, P30,000 (all
incurred in 2013) 95,000
1/2/14 Acquired patent with a useful life of 10 years 444,000
3/1 Cost of developing a secret formula 450,000
4/1 Goodwill purchased 1,670,400
7/1 Legal fees for successful defense of patent purch on 1/275,900
10/1 Research and development costs on a new project 950,000
Required:

1. The unamortized patent cost at December 31, 2014

2. The unamortized franchise cost at December 31, 2014
3. The amount of prepayments to be reported as of December 31, 2014
4. The adjusting entries on December 31, 2014, should include a net debit to
the retained earnings account at:
5. As a result of the adjustments at December 31, 2014, the total charges
against income of 2014 should be:

PROBLEM 4:
The accounting records of Alyssa Corp. which was organized in 2013 include only
one account for alt intangible assets. The following is a summary of the items
debited to the said account in 2013 and 2014;
Date Particulars Amount
Jul. 1, 2013Franchise (indefinite term)
P1,260,000
Oct. 1 Lease advance payments (2-year term, starting840,000
October 1, 2013)
Dec. 31 Net loss for 2013 including incorporation fees,
P30,000, and related legal fees of organizing the
business, P150,000. 480,000
Jan. 2, 2014Purchased patent (10 year life)
2,220,000
Mar. 1 Cost of developing a recipe 2,250,000
Apr. 1 Purchased goodwill 8,352,000
Jul. 1 Legal fee for successful defense of the patent
purchased in Jan 1, 2014 379,500
Audit notes:
A On December 31, 2013, the management estimates that the annual net future
cash flows from the franchise's continued use was at P180,000. On December
31, 2014, this estimate was revised due to decline in product demand to
P150,000 annually.
B On December 31, 2014, the estimated annual net future cash flows from the
patent's continued use was at P337,822 for its remaining life.
C The prevailing market rate of interest as of December 31, 2013 and 2014 was
consistent at 12%.
 Based on the above information and on your audit, answer the following
requirements:

1. What is the correct carrying value of the Franchise as of December 31, 2014?
a. 1,200,000 c. 1,260,000
b. 1,250,000 d. 1,310,000

2. What is the correct carrying value of the Patent as of December 31, 2014?
a. 1,998,000 c. 1,900,000
b. 1,800,000 d. 1,880,000

3. What is the total retroactive adjustment to retained earnings beginning in 2014

as a result of your audit?
a. 585,000 c. 900,000
b. 480,000 d. 420,000

4. What is the total amount chargeable to expense for the current year (2014) as
a result of your audit?
a. 3,479,500 c. 3,049,500
b. 2,861,500 d. 3,059,500

PROBLEM 5:
Presented below are five unrelated situations. For each situation compute the
amount that will be classified and expensed as research and development.

A. Mabitac Company incurred the following costs during 2006:

Quality control during commercial

production, including routine testing of P460,000
products
Laboratory research aimed at discovery of 540,000
new knowledge
Engineering follow-through in an early phase
of commercial production 120,000
Adaptation of existing capability to a
particular requirement or customer’s need
as part of continuing commercial activity 110,000

Trouble-shooting in connection with

breakdowns during commercial production 230,000
Searching for applications of new research 150,000
findings

a. P690,000 c. P1,150,000
b. P540,000 d. P1,610,000
B. Lumban Company incurred the following costs during 2006 in connection with
its research and development activities:

Cost of equipment acquired that will have

alternative uses in future research
and development projects over the next P1,400,000
5 years
Materials consumed in research and
development projects 295,000
Consulting fees paid to outsiders for
research and development projects 500,000
Personnel costs of persons involved in
research and development projects 640,000
Indirect costs reasonably allocable to
research and development projects 250,000
Materials purchased for future research
and development 170,000

a. P1,685,000 c. P1,465,000
b. P2,135,000 d. P1,965,000

C. During 2006, Pangil Company incurred the following costs:

Research and development services performed

by Talim Company for Pangil P700,000
Testing for evaluation of new products 600,000
Laboratory research aimed at discovery of
new knowledge 850,000

a. P1,450,000 c. P2,150,000
b. P 850,000 d. P1,550,000

D. Rizal Company incurred the following costs during the year ended December
31, 2006:

Design, construction, and testing of

preproduction prototypes and models P435,000
Routine, on-going efforts to refine,
enrich, or otherwise improve upon the 375,000
qualities of an existing product
Quality control during commercial
production including routine testing of 450,000
products
Laboratory research aimed at discovery of
new knowledge 630,000

a. P 630,000 c. P1,440,000
b. P1,065,000 d. P1,005,000
 E. Victoria, Inc. incurred the following costs during the year ended December
31, 2006:

Laboratory research aimed at discovery of

new knowledge P300,000
Radical modification to the formulation of
a chemical product 217,500
Research and development costs reimbursable
under a contract to perform research and
development for Court Corporation 525,000
Testing for evaluation of new products 337,500

a. P 855,000 c. P300,000
b. P1,380,000 d. P637,500

PROBLEM 6:
ABC Corporation has several cash generating units (CGU). As of December 31,
2014, the demand for the products produced by one of its cash generating units
substantially declined thus, the cash generating unit was considered for
possible impairment. The following were made available for the said testing:
Asset CV, 12/2014
Factory Equipment P1,750,000
Office Equipment 1,475,000
Building 2,725,000
Goodwill 500,000
As a result of the impairment event, the expected annual net cash flows from
the CGU are expected to be at P1,252,282 for its remaining 5-year useful life.
The fair value less cost to sell of the CGU is at P5,250,000. (Assume a
prevailing rate of interest at 8%)

Required:

49. What is the recoverable value of the cash generating unit?

a. 5,000,000 c. 5,500,000
b. 5,250,000 d. 5,750,000

50. What is the impairment loss on the cash generating unit?

a. 1,200,000 c. 950,000
b. 1,000,000 d. 1,450,000

51. What is the carrying value of the Building after the impairment loss
recognition?
a. 2,725,000 c. 2,404,412
b. 2,527,000 d. 2,125,000

52. If the factory equipment has a recoverable amount of P1,600,000 and the office
equipment had a recoverable value of P1,400,000, what is the carrying value of
the Building after the impairment toss?