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PRACTICAL ACCOUNTING 1 – REVIEW

INTANGIBLES

PROF. U.C. VALLADOLID

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.

1. 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 manufacturing stage 120,000
4. Lease prepayments (6 months’ rent paid in advance) 60,000
5. Cost of equipment obtained under finance lease 700,000
6. Internally generated publishing title 230,000
7. Costs incurred in the formation of the corporation 90,000
8. Operating losses incurred in the start-up of the 560,000
business
9. Training costs incurred in start-up operations 80,000
10. Purchase of a franchise 1,200,000
11. Goodwill internally generated 300,000
12. Cost of testing in search for product alternatives 65,000
13. Goodwill acquired in the purchase of a business 640,000
14. Cost of developing a patent 140,000
15. Cost of purchasing a patent from an inventor 500,000
16. Legal costs incurred in securing a patent 70,000
17. Costs of a successful legal suit to protect the patent 230,000
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 without that specific software 130,000
25. Operating system of a computer 10,000

1.How much could be recognized as Intangible Assets?

a. P3,600,000 c. P5,830,000
b. P3,740,000 d. P3,530,000

2. An entity purchases a trademark and incurs the following costs in connection with the
trademark:
One-time trademark purchase price 100,000 Nonrefundable VAT taxes 5,000 Training sales
personnel on the use of the new trademark 7,000 Research expenditures associated with the
purchase of the new trademark 24,000 Legal costs incurred to register the trademark 10,500
Salaries of the administrative personnel 12,000 Applying PFRS and assuming that the
trademark meets all of the applicable initial asset recognition criteria, the entity should recognize
an asset in the amount of
a. 100,000 b. 115,500 c. 146,500 d. 158,500

3. On January 1, 2016, Coffee Prince Café’ bought a trademark for P400,000, having an estimated
remaining useful life of 16 years. After 16 years, revenues expected from the intangibles will be
zero. In January 2020, Coffee Prince Café’ paid P 60,000 for legal fees in a successful defense
of the trademark. What amount of expense should Coffee Prince Café’ recognize and charge
against income during 2020?
a. P15,000 b. P25,000 c. P30,000 d. P85,000
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4. On January 2, 2018, Abeleda purchased a franchise with a useful life of ten years for P100,000.
An additional franchise fee of 3% of franchise operation revenues must be paid each year to the
franchisor. Revenues from franchise operations amounted to P800,000 during 2018. In its
December 31, 2020 balance sheet, what amount should Abeleda report as intangibles asset-
franchise?
a. P70,000 b. P87,600 c. P90,000 d. P100,000

5. On January 1, 2018, Dennis Corporation signed a 12-year lease for warehouse space. Dennis
has an option to renew the lease for an additional 8-year. During January 2020, Dennis made
substantial improvements to the warehouse. The cost of these improvements was P540,000,
with an estimated useful life of 15 years. At December 31, 2020, Dennis intended to exercise
the renewal option. Dennis has taken a full year’s depreciation on this leasehold improvement.

In the December 31, 2020 balance sheet, the carrying amount of this leasehold improvement
should be
a. 486,000 c. 504,000
b. 510,000 d. 513,000

6. On December 31, 2019 Byte Co. has capitalized software costs of P600,000 with an economic
life of four years. Sales for 2020 were 10% of expected total sales of the software. At December
31, 2020 the software had a net realizable value of P480,000.

On it’s December 31, 2020 balance sheet, what amount should Byte report as net capitalized
cost of computer software?
a. P432,000 b. P450,000 c. P480,000 d. P540,000

7. Northern Airline purchased airline gate rights at Newark international Airport for P2,000,000 with
a legal life of 5 years. However, Northern has the ability to extend the right every ten years for
an indefinite period of time. Over what period of time should Northern amortize the gate rights?
a. 5 years b. 15 years c. 40 years d. The rights should not be amortized

8. On January 2, 2018, Jerome Inc. purchased a patent for a new consumer product for P90,000.
At the time of purchase, the patent was valid for 15 years; however, the patent’s useful life was
estimated to be only ten years due to the competitive nature of the product. On December 31,
2021, the product was permanently withdrawn from sale under governmental order because of
a potential health hazard in the product. What amount should Jerome charge against income
during 2021, assuming amortization was recorded at the end of each year?
a. P9,000 b. P54,000 c. P63,000 d. P72,000

9. On January 2, 2020, Dave Company paid P500,000 to acquire a patent with a remaining
economic life of 15 years. Dave Company expects to use the patent for 5 years and intends to
sell it after 5 years. Jerome Company has committed to buy the patent for 40% of the cost to
Dave Company.

In December 31, 2020, what amount of patent amortization should Dave Company report its
profit or loss?
a. 40,000 c. 100,000
b. 60,000 d. 200,000

10. Jerold Company purchased a patent on January 1, 2018 for P428,400. The patent was being
amortized over its remaining legal life of 15 years. Early 2021, Jerold determined that the
economic benefits of the patent would not last longer than 10 years from the date of acquisition.

What amount should be reported in the statement of financial position as patent, net of
accumulated amortization at December 31, 2021?
a. 257,040 c. 302,400
b. 293,760 d. 314,160
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11. Sang Company has broadcasting license that will expire in 5 years. As of January 1, 2020 the
license has a carrying amount of P2,000,000. The license is renewable and has already been
renewed twice in the past. There are no factors to suggest that the license will not be renewed
again and the entity has the intention to do so. The license is expected to contribute to the
entity’s cash flow indefinitely.

In the December 31, 2020 statement of financial position, how much should be reported as the
carrying value of the broadcasting license?
a. none c. 1,900,000
c. 1,600,000 d. 2,000,000

12. On January 1, 2021, JP Corp. incurred organization costs of P24,000. What portion of the
organization costs will JP defer to years subsequent to 2021?
a. P23,400 b. P19,200 c. P4,800 d. P0

13. In connection with Ramil Corporation’s financial statements for the year 2021 you noted the
following items relative to the company’s Intangible assets.

 A patent was purchased from Maica Company for P4,000,000 on January 2, 2020. Ramil
estimated that the remaining useful life of the patent to be 10 years. The patent was carried
in Maica’s accounting records at a carrying value of P4,000,000 when Maica sold it to
Ramil.

 During 2021, a franchise was purchased from Gloria Company for P960,000. In addition,
5% of the revenue from the franchise must be paid to Gloria. Revenue from the franchise
for 2021 was P5,000,000. Ramil estimates the useful life of the franchise to be 10 years
and takes full year’s amortization in the year of purchase.

 Ramil incurred research and development costs of P866,000 in 2021. Ramil estimates that
these costs will be recouped by December 31, 2023.

 On January 1, 2021, Ramil, because of the recent events in the industry, estimates that the
remaining life of the patent purchased on January 2, 2020, is only 5 years from January 1,
2021.

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

1. Amortization of patent for 2021

a. P900,000 c. P720,000
b. P800,000 d. P400,000

2. Carrying amount of patent as of December 31, 2021

a. P2,880,000 c. P2,700,000
b. P2,400,000 d. P3,200,000

3. Carrying amount of intangible assets as of December 31, 2021

a. P3,264,000 c. P3,564,000
b. P4,610,000 d. P3,744,000

4. Total amount that should be charged against income in 2021

a. P2,112,000 c. P2,012,000
b. P1,066,000 d. P1,932,000

14. You gathered the following information related to the Patents account of the Gloria Cookie
Corporation in connection with your audit of the company’s financial statements for the year
2021.

In 2020, Gloria developed a new machine that reduces the time required to insert the fortunes
into its fortune cookies. Because the process is considered very valuable to the fortune cookie
industry, Gloria patented the machine. The following expenses were incurred in developing and
patenting the machine:
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Research and development laboratory expenses P1,000,000

Metal used in the construction of the machine 320,000
Blueprints used to design the machine 128,000
Legal expenses to obtain patent 480,000
Wages paid for the employees’ work on the research,
development, and building of the machine (60% of
the time was spent in actually building the
machine) 1,200,000
Expense of drawing required by the patent office to be
submitted with the patent application 68,000
Fees paid to the government patent office to process
application 100,000

During 2021, Gloria paid P150,000 in legal fees to successfully defend the patent against an
infringement suit by Cookie Monster Corporation.

It is the company’s policy to take full year amortization in the year of acquisition.

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

1. Cost of patent
a. P580,000 c. P1,128,000
b. P648,000 d. P 798,000

2. Cost of machine
a. P1,236,000 c. P1,040,000
b. P1,648,000 d. P1,168,000

3. Amount that should charged to expense when incurred in connection with the development
of the patented machine
a. P1,480,000 c. P1,608,000
b. P1,000,000 d. P 0

4. Carrying amount of patent as of December 31, 2021

a. P522,000 c. P1,015,200
b. P583,200 d. P 837,900

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

1. Mcmoud Company incurred the following costs during 2020:

Quality control during commercial production,

including routine testing of products P460,000
Laboratory research aimed at discovery of new
knowledge 540,000
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 findings 150,000

a. P690,000 c. P1,150,000
b. P540,000 d. P1,610,000

2. Valla Company incurred the following costs during 2020 in connection with its research and
development activities:

Cost of equipment acquired that will have alternative

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uses in future research and development

projects over the next 5 years P1,400,000
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

3. During 2020, Dayrit Company incurred the following costs:

Research and development services performed by

Cerds Company for Dayrit 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

4. Tina Company incurred the following costs during the year ended December 31, 2020:

Design, construction, and testing of preproduction

prototypes and models P435,000
Routine, on-going efforts to refine, enrich, or
otherwise improve upon the qualities of an
existing product 375,000
Quality control during commercial production
including routine testing of products 450,000
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

5. Gloria, Inc. incurred the following costs during the year ended December 31, 2020:

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

16. A license is acquired July 1, 2018, for P450,000; while it has a legal life of 15 years, due to
rapidly changing environment, management estimates a useful life of only 5 years. Straight-line
amortization will be used. At January 1, 2019, management estimated that the recoverable
amount of the license is only P135,000. Amortization will be taken over 3 years from that point.
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On January 1, 2021, due to the change in general economic situations, the license now has a
fair value of P540,000. The entity adopted the revaluation model to measure the license
starting January 1, 2021. The estimated remaining useful life is now believed to be 5 years.

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

1. How much is the loss on impairment on January 1, 2019?

a. P270,000 c. P225,000
b. P300,000 d. P 0

2. How much can be recognized as gain on impairment recovery in 2021?

a. P270,000 c. P495,000
b. P180,000 d. P315,000

3. How much will be recognized as revaluation surplus on January 1, 2021?

a. P270,000 c. P495,000
b. P180,000 d. P315,000

17. A company acquires a patent for a drug with a remaining legal and useful life of six years on
January 1, 2019 for 1,800,000. The company uses straight-line amortization for patents. On
January 2, 2021, a new patent is received for a timed-release version of the same drug. The
new patent has a legal and useful life of twenty years. The least amount of amortization that
could be recorded in 2021 is
a. 300,000. b. 60,000. c. 81,818. d. 69,000.

18. During 2021, Bond Company purchased the net assets of May Corporation for 1,000,000. On
the date of the transaction, May had 300,000 of liabilities. The fair value of May's assets when
acquired were as follows:
Current assets 540,000
Noncurrent assets 1,260,000
1,800,000
How should the 500,000 difference between the fair value of the net assets acquired
( 1,500,000) and the cost ( 1,000,000) be accounted for by Bond?
a. The 500,000 difference should be credited to retained earnings.
b. The 500,000 difference should be recognized as a gain.
c. The current assets should be recorded at 540,000 and the noncurrent assets should
be recorded at 760,000.
d. A deferred credit of 500,000 should be set up and then amortized to income over a
period not to exceed forty years.

19. On January 1, 2019, Bingham Inc. purchased a patent with a cost 1,160,000, a useful life of 5
years. The company uses straight-line depreciation. At December 31, 2020, the company
determines that impairment indicators are present. The fair value less cost to sell the patent is
estimated to be 540,000. The patent's value-in-use is estimated to be 565,000. The asset's
remaining useful life is estimated to be 2 years.

1. Bingham's 2020 income statement will report Loss on Impairment of

a. 0. b. 131,000. c. 156,000. d. 595,000.

2. The company's 2021 income statement will report amortization expense for the patent of
a. 188,333. b. 232,000. c. 282,500. d. 595,000

20. Nikko Co. purchased two machines of P250,000 each on January 2, 2021. The machines were
put into use immediately. Machine A has useful life of five years and can only be used in one
research project. Machine B will be used for two years on a research and development project
and then used by the production division for an additional eight years. Nikko uses straight line
method of depreciation.

What should Nikko include in 2021 research and development expense?

a. P 75,000 c. P375,000
b. P275,000 d. P500,000
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21. A patent right is acquired on January 2019, for P500,000 while it has a legal life of 15 years,
due to rapidly changing technology, management estimates a useful life of 5 years. At January
1, 2020, management is uncertain that the process can actually be made economically feasible,
and decides to write-down the patent to an estimated market value of P150,000 with no change
in its remaining useful life. On January 1, 2021, having perfected the related production process,
the asset is now appraised at a sound value of P600,000.

Q1. Under the revaluation model, what amount should be reported in the shareholders equity
as a result of revaluation?
a. none b. P187,500 c. P250,000 d. P300,000

Q2. Under the revaluation model, what amount should be reported in the current year income
statement as a result of revaluation on January 1, 2021?
a. none b. P187,500 c. P250,000 d. P300,000

22. An intangible asset costs P300,000 on January 1, 2020. On January 1, 2021, the asset was
evaluated to determine if it was impaired. As of January 1, 2021, the asset was expected to
generate future cash flows of P25,000 per year (at the end of each year). The appropriate
discount rate is 5%.

What total amount should be charged against income in 2021, assuming that the asset had a
total useful life of 10 years from date of acquisition?
a. P30,000 b. P92,304 c. P112,048 d. P122,304

What total amount should be charged against income in 2021 assuming that as of January 1,
2020, the asset was assumed to have an indefinite useful life and that as of January 1, 2021,
the remaining life was still indefinite?
a. 0 b. P30,000 c. P92,304 d. P122,304

23. On December 31, 2021, Mark Company showed the following intangible assets:
Trademark 6,000,000
Patent 3,000,000
The trademark has 8 years remaining in its legal life. However, it is anticipated that the
trademark will be routinely renewed in the future. Thus, the trademark is considered to have an
indefinite life.
Because of an inflationary economy, the trademark is expected to generate cash flows of
P200,000 per year. The appropriate discount rate is 10%. Mathematically, the discounted value
of a stream of indefinite annual cash flow is simply computed by dividing the annual cash flow
by the discount rate.
The patent has an economic life of just 5 years because of market conditions. It is expected that
the patent will generate cash flows of P500,000 per year. The appropriate discount rate is also
10%. The present value of an ordinary annuity of 1 at 10% for 5 periods is 3.79

Mark Company shall recognize in 2021 total impairment loss at

a. 1,105,000 c. 5,105,000
b. 4,000,000 d. 0

24. Kelly Company is negotiating to acquire Emerson Company. Kelly manufactures and sells
wood-burning stoves, and Emerson Company produces parts that are required to manufacture
the stoves. Emerson Company enjoys an exceptional reputation, and Kelly management
believes it can continue Emerson’s current level of income and satisfy its own need for parts.
Under the contemplated arrangement, Kelly Company will negotiate for the acquisition of the net
assets of Emerson Company. The following information has been developed to determine the
appropriate price.

Recorded amounts and estimated values of Emerson Company’s assets and liabilities are as
follows:
Recorded amount Current value
Assets to be received 16,000,000 19,500,000
Liabilities to be assumed 6,000,000 5,500,000
10,000,000 14,000,000
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Emerson Company’s earnings for the past five years averaged P2,000,000. This is believed to
be a reasonable estimate of future income. The level of income normally experienced by
companies similar to Emerson Company is 10%.

Kelly Company and Emerson Company agreed to capitalize average excess earnings at 25% in
estimating the value of goodwill.

How much should Kelly Company pay in acquiring Emerson Company?

a. 16,400,000 c. 14,200,000
b. 18,000,000 d. 16,000,000

25. You noted the following items relative to the company’s Intangible assets in connection with
Maica Corporation’s financial statements for the year 2020.

 On January 1, 2020, Maica signed an agreement to operate as franchisee of Clear Copy

Service, Inc. for an initial franchise of P680,000. Of this amount, P200,000 was paid when
the agreement was signed and the balance was payable in four annual payments of
P120,000 each, beginning January 1, 2021. The agreement provides that the down
payment is not refundable and no future services are required of the franchisor. The implicit
rate for loan of this type is 14%. The agreement also provides the 5% of the revenue from
the franchise must be paid to the franchisor annually. Maica’s revenue from the franchise
for 2020 was P8,000,000. Maica estimates that the useful life of the franchise to be ten
years.

 Maica incurred P624,000 of experimental and development costs in its laboratory to develop
a patent which was granted on January 2, 2020. Legal fees and another costs associated
with the registration of the patent totaled P131,200. Maica estimates that the useful life of
the patent will be eight years.

 A trademark was purchased from Gloria Company for P320,000 on July 1, 2017.
Expenditures for successful litigation in defense of the trademark totaling P80,000 were paid
on July 1, 2020. Maica estimates that the trademark’s useful life will be indefinite.

Based on the above information, determine the following: (Round off present value factors to 4
decimal places)

1. Total expenses related to franchise in 2020

a. P503,914 c. P448,950
b. P535,200 d. P454,964

2. Carrying amount of franchise as of December 31, 2020

a. P549,644 c. P538,733
b. P494,680 d. P612,000

3. Carrying amount of patent as of December 31, 2020

a. P131,200 c. P124,640
b. P114,800 d. P123,482

4. Carrying amount of trademark as of December 31, 2020

a. P320,000 c. P304,000
b. P288,000 d. P400,000

5. Carrying amount of intangible assets as of December 31, 2020

a. P1,046,800 c. P1,009,480
b. P 984,444 d. P 929,480