Chapter 6 - Intangible Assets

CHAPTER 6
INTANGIBLE ASSETS

Discussion Question No. 21

a. Expense, cost of internally developed publishing title is not allowed to be capitalized.

b. Intangible
c. Expense
d. Intangible
e. Intangible
f. Prepaid expense
g. With alternative use, PPE; otherwise, unrecoverable cost, R and D expense
h. Charged to RE
i. Expense
j. Intangible
k. Intangible
l. Expense
m. Expense, copyright shall be written off in profit or loss
n. Expense
o. Expense
p. PPE
q. Expense
r. Expense
PROBLEMS

6-1. (Amsterdam Enterprises, Inc.)

(a) Special equipment (600,000 460,000) P140,000

Research salaries 51,300
Costs of testing prototype 70,800
R & D Expense P262,100

(b) Fees paid to Phil. Patent Office P 7,500

Drawings required by the patent office 14,100
Legal costs of filing patent 38,100
Patent cost, January 1, 2016 P 59,700
Less amortization of patent for years 2016 and 2017
(59,700/ 10) x 2 yrs. 11,940
Patent carrying value, December 31, 2017 P 47,760

(c) Patent carrying value at December 31, 2018 (59,700 x 7/10) P 41,790
Remaining estimated useful life at January 1, 2019 5
Amortization expense for year 2019 P 8,358

(d) Carrying value, January 1, 2019 P41,790

Less amortization expense for 2019 8,358
Carrying value, December 31, 2019 P33,432

6-2. (May Company)

Patents
Cost P192,000
Less accumulated amortization 36,000+(156,000/8) 55,500 P 136,500
License
Cost (100 x 600 x 2/3) P 40,000
Less accumulated amortization (40,000/4) 10,000 30,000
Trademark
Cost (100 x 600 x 1/3) P 20,000
Less accumulated amortization (20,000/4) 5,000 15,000
Goodwill (12M 9M) 3,000,000
Total intangible assets P3,181,500

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6-3. (July, Inc.)

2009
Jan. 3 Patents 196,000
Cash 196,000
2009-2010
Dec. 31 Amortization Expense Patents (196,000/10) 19,600
Accumulated Amortization-Patents 19,600
2011
Jan. 1 Legal Fees 28,000
Cash 28,000
2011-2013
Dec. 31 Amortization Expense 19,600
Accumulated Amortization-Patents 19,600
2014
Jan. 1 Patents 60,000
Cash 60,000
2014-2016
Dec. 31 Amortization Expense 15,800
Accumulated Amortization-Patents 15,800
196,000 (19,600 x 5) = 98,000
(98,000 + 60,000) / 10 = 15,800
2017
July 1 Amortization Expense 7,900
Accumulated Amortization-Patents 7,900
15,800 x 6/12 = 7,900

1 Loss from Write off of Patents 102,700

Accumulated Amortization-Patents 153,300
Patents 256,000
196,000 + 60,000 = 256,000
98,000 + (15,800 x 3.5 yrs) = 153,300

6-4. (ToGo Company)

Carrying value P4,000,000

Recoverable value
150,000/10% = 1,500,000 x 80% P1,200,000
300,000/10% = 3,000,000 x 20% 600,000 1,800,000
Impairment loss P2,200,000

6-5. (Boston Company)

(a) Amortization expense for 2014 (500,000/5) x P 50,000

(b) Carrying amount, December 31, 2015 (500,000 150,000) P350,000
Estimated recoverable amount 150,000
Impairment loss at December 31, 2015 P200,000
(c) Written down value of patent at December 31, 2015 P150,000
Less amortization for 2016
150,000 / 3 50,000
Carrying amount at December 31, 2016 P100,000
(d) Sound value at January 1, 2017 P600,000
Carrying amount at December 31, 2016 100,000
Increase in value P500,000
Impairment loss P200,000
Recovery of previous impairment loss through lower
amortization (100,000 50,000) 50,000 150,000
Revaluation surplus in 2017 P350,000

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6-6. (Summer Company)

2014 R & D Expense 500,000

Cash 500,000
2015
Jan. 1 Patents 120,000
Cash 120,000
Dec. 31 Amortization Expense 12,000
Accumulated Amortization-Patents 12,000
2016
Jan. 1 Patents 1,200,000
Cash 1,200,000
2016-2017
Dec. 31 Amortization Expense 87,200
Accumulated Amortization-Patents 87,200
(120,000-12,000) + 1,200,000 = 1,308,000
1,308,000/15 = 87,200
2017
Dec. 31 Loss from Write down of Patents 1,133,600
Accumulated Amortization 186,400
Patents 1,320,000

6-7. (April Company)

Laboratory research P 68,000

Modification of formulation 26,000
Testing 24,000
Searching for application 19,000
Depreciation of equipment (280,000/5) 56,000
R & D costs for 2016 P193,000

6-8. (Autumn Company)

a.
2016 Franchise 6,250,000
Cash 6,250,000

Dec. 31 Franchise Fee Expense (5% x 10,000,000) 500,000

Cash /Accrued Expenses 500,000

31 Amortization Expense 312,500

Accumulated Amortization-Franchise 312,500
6,250,000/10 = 625,000; 625,000 x 1/2
b.
Dec. 31 Amortization Expense 142,500
Accumulated Amortization-Patents 142,500
750,000 x 9.5/10 = 712,500; 712,500/5
c.
R & D Expense 2,300,000
Equipment 1,000,000
Accumulated Depreciation-Equipment 100,000
Cash 3,200,000
200,000+1.4M+600,000+100,000=2.3M; (1M.5) x =100,000

6-9. (Global Computer Corporation)

(a) R & D Expense 800,000

Software Costs 500,000
Cash 1,300,000

(b) Amortization Expense 125,000

Accumulated Amortization-Software Costs 125,000
0.5M/4 = 125,000 (higher); 0.5M x 1/5 = 100,000

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6-10. (Sun Company)

(a) Downpayment P 500,000

Present value of future payments
300,000 x 2.4869 746,070
Total cost P1,246,070

(b) Amortization Expense for 2016

1,246,070 / 10 yrs P 124,607
(c)
2016
Jan. 1 Franchise 1,246,070
Discount on Notes Payable 153,930
Cash 500,000
Notes Payable 900,000
Dec. 31 Interest Expense 74,607
Discount on Notes Payable (10% x 746,070) 74,067
31 Amortization Expense 124,607
Accumulated Amortization-Franchise 124,607
2017
Jan. 1 Notes Payable 300,000
Cash 300,000

6-11. (Winter Company)

(a) Cash purchase price P7,000,000

Fair value of net assets
(1,000,000 + 1,700,000 + 5,900,000 2.360,000) 6,240,000
Goodwill P 760,000

(b) Trade Receivables 1,000,000

Inventory 1,700,000
Property, Plant and Equipment 5,900,000
Goodwill 760,000
Current Liabilities 760,000
Noncurrent Liabilities 1,600,000
Cash 7,000,000

6-12. (Bagong Silangan Company)

(a) Recoverable amount of the CGU P13,100,000

Carrying amount of the CGU, including goodwill 13,400,000
Impairment loss P 300,000

Impairment Loss 300,000

Goodwill 300,000

(b) Recoverable amount of the CGU P12,400,000

Carrying amount of the CGU, including goodwill 13,400,000
Impairment loss P 1,000,000
Credited to goodwill 400,000
Decrease in value of identifiable noncurrent assets P 600,000

Impairment loss 1,000,000

Goodwill 400,000
Land (5/13 x 600,000) 230,769
Accumulated depreciation Building (6.2/13 x 600,000) 286,154
Accumulated amortization Patents (1/13 x 600,000) 46,154
Accumulated amortization Trademarks (.8/13 x 600,000) 36,923

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MULTIPLE CHOICE QUESTIONS

Theory

MC1 D MC6 A MC11 B MC16 B

MC2 D MC7 C MC12 D MC17 A
MC3 C MC8 D MC13 B MC18 B
MC4 B MC9 A MC14 D MC19 D
MC5 B MC10 D MC15 C MC20 C

Problems

MC21 D Patents P244,000

Franchise 100,000
Total cost of intangible assets P344,000

MC22 C Initial franchise fee P1,000,000

MC23 C Trademarks P750,000

Patents 150,000
Total intangible assets P900,000

MC24 B Initial payment P200,000

Present value of four annual payments (100,000 x 2.91) 291,000
Cost of franchise P491,000

MC25 B Patent (1,200,000 x 2/50) P48,000

Copyright (750,000/10 = 75,000; 75,000 x 2/12) 12,500
Franchise (60,000 x 2/12) 10,000
Total amortization amount for 2015 P70,500

MC26 B Patent A (125,000 10 = 12,500; P12,500

Patent B (272,500 5 = 54,500 x ) 27,250
Patent C (656,200 17) 38,600
Total patent amortization expense P78,350

MC27 C Amortization expense for 2013 (340,000 10 = 34,000 x ) P17,000

MC28 C Cost P340,000

Accumulated amortization (34,000 x 1.5 years) 51,000
Carrying value, January 1, 2015 P289,000

MC29 B Revised amortization expense for 2016 (289,000 5) P57,800

MC30 A There is no capitalized cost of the asset that will be subject to

amortization. P0

MC31 C Laboratory research P68,000

Testing for evaluation of new products 24,000
Modification of formulation of plastic products 6,000
Searching for application of new research findings 19,000
Total research and development expense P117,000

MC32 B Depreciation of equipment P210,000

Materials used in R & D 300,000
Compensation cost of personnel in R & D 400,000
Outside consulting fees for R & D work 220,000
Indirect costs appropriately allocated to R & D 260,000
Total research and development expense P1,390,000

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MC33 C Patent amortization expense (152,000 8) P19,000

MC34 A Loss from patent obsolescence (1,440,000 x 1.5/10) P216,000

MC35 A Cost of Patent A only (40,000 + 5,000) P45,000

MC36 C Patent amortization expense for 2015 (900,000 / 10 years) P 90,000

Loss on obsolescence 900,000 - (90,000 x 4 years) 540,000
Charge against income during 2015 P630,000

MC37 C Accumulated amortization (1,500,000 30) P50,000

MC38 D Patent amortization for 2011 (480,000 10) P48,000

MC39 A Carrying amount, beginning of 2012 (480,000 x 5/10) P240,000

Additional capitalized cost 200,000
New depletable cost P440,000
Revised remaining life 10 years
Patent amortization expense for 2012 P44,000

MC40 B New depletable cost (see No. 39) P440,000

Depletion for 3.5 years (44,000 x 3.5 years) 154,000
Carrying amount at time of obsolescence /Loss P286,000

MC41 B Cost of patent P270,000

Accumulated amortization (270,000/10 = 27,000; 27,000 x 4) 108,000
Carrying amount, beginning of 2015 P162,000
Revised depreciation expense for 2015 (162,000/3) 54,000
Patent, net of accumulated amortization, December 31, 2015 P108,000
OR 270,000 x 6/10 x 2/3 = 108,000

MC42 C SL =1/5 = 20%

Revenue = 25%
Depreciation is the higher rate, 25%; thus carrying amount is 75%

MC43 C SL rate = = 25%

Revenue = 2.4M/12M = 20%
Amortization in 2016: Higher rate is 25%; 25% x 6M P1,500,000

MC44 C Cumulative amortization under straight line

2/4 = 50%
Cumulative amortization under revenue method
2.4M + 4.2M = 6.6M; 6.6M/12M = 55%
Amortization in 2017:
55% x 6M = 3.3M; 3.3M 1.5M P1,800,000

MC45 A SL rate = 1/5 = 20%

Revenue = 1,500,000 5,000,000 = 30%
Higher is 30%; 30% x 2,500,000 P750,000

MC46 C Purchase price P70,000,000

Fair value of net assets (115.0M 52.5M) 62,500,000
Goodwill P7,500,000

MC47 B Goodwill P1,000,000

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