INTANGIBLE ASSETS

Theory of Accounts
1. Which of the following does not describe intangible assets?
a. They lack physical existence.
c. They provide long-term benefits.
b. They are financial instruments.
d. They are classified as long-term assets.
2. Which of the following costs incurred internally to create an intangible asset is generally expensed?
a. Research and development costs.
c. Legal costs.
b. Filing costs.
d. All of the above.
3. Under current accounting practice, intangible assets are classified as
a. amortizable or unamortizable.
b. limited-life or indefinite-life.
c. specifically identifiable or goodwill-type.
d. legally restricted or goodwill-type.
4. The cost of purchasing patent rights for a product that might otherwise have seriously competed with
one of the purchaser's patented products should be
a. charged off in the current period.
b. amortized over the legal life of the purchased patent.
c. added to factory overhead and allocated to production of the purchaser's product.
d. amortized over the remaining estimated life of the original patent covering the product whose
market would have been impaired by competition from the newly patented product.
5. The reason goodwill is sometimes referred to as a master valuation account is because
a. it represents the purchase price of a business that is about to be sold.
b. it is the difference between the fair value of the net tangible and identifiable intangible assets
as compared with the purchase price of the acquired business.
c. the value of a business is computed without consideration of goodwill and then goodwill is
added to arrive at a master valuation.
d. it is the only account in the financial statements that is based on value, all other accounts are
recorded at an amount other than their value.
6. Buerhle Company needs to determine if its indefinite-life intangibles other than goodwill have been
impaired and should be reduced or written off on its balance sheet. The impairment test(s) to be
used is (are)
Recoverability Test Fair Value Test
a.
Yes
Yes
b.
Yes
No
c.
No
Yes
d.
No
No
7. Which of the following research and development related costs should be capitalized and
depreciated over current and future periods?
a. Research and development general laboratory building which can be put to alternative uses in
the future
b. Inventory used for a specific research project
c. Administrative salaries allocated to research and development
d. Research findings purchased from another company to aid a particular research project
currently in process

8. Which of the following is considered research and development costs?

a. Planned search or critical investigation aimed at discovery of new knowledge.
b. Translation of research findings or other knowledge into a plan or design for a new product or
process.
c. Translation of research findings or other knowledge into a significant improvement of an
existing product.
d. all of the above.
9. Operating losses incurred during the start-up years of a new business should be
a. accounted for and reported like the operating losses of any other business.
b. written off directly against retained earnings.
c. capitalized as a deferred charge and amortized over five years.
d. capitalized as an intangible asset and amortized over a period not to exceed 20 years.
10. Capitalized costs incurred while developing computer software to be sold should be amortized using
the:
a. lower of the straight-line method or the percent-of-revenue method.
b. higher of the percent-of-revenue method or the percent-of-completion method.
c. lower of the percent-of-revenue method or the percent-of-completion method.
d. higher of the straight-line method or the percent-of-revenue method.
Practical Accounting
11. Alonzo Co. acquires 3 patents from Shaq Corp. for a total of P300,000. The patents were carried on
Shaqs books as follows: Patent AA: P5,000; Patent BB: P2,000; and Patent CC: P3,000. When Alonzo
acquired the patents their fair values were: Patent AA: P20,000; Patent BB: P240,000; and Patent
CC: P60,000. At what amount should Alonzo record Patent BB? ________________________
12. Pastel Co. purchased a patent on January 1, 1999, for P714, 000. The patent was being amortized
over its remaining legal life of 15 years expiring on January 1, 2008. During 2002, Pastel determined
that the economic benefits of the patent would not last longer than 10 years from the date of
acquisition. What amount should be charged to patent amortization expense for the year ended
December 31, 2002? _____________________________
13. On October 4, 2003, X exchanged 2,000 shares of its P50 par common stock held in treasury for a
patent of Y. The treasury shares were previously acquired at cost of P80,000. At the time of
exchange, Xs common stock was quoted in the market at P55 per share. The patent has carrying
value in the books of Y at P90,000.
At what value should X record the acquisition of the Patent?

______________________________

14. Riley Co. incurred the following costs during 2013:

Significant modification to the formulation of a chemical product
Trouble-shooting in connection with breakdowns during commercial production
Cost of exploration of new formulas
Seasonal or other periodic design changes to existing products
Laboratory research aimed at discovery of new technology

P160,000
150,000
200,000
185,000
275,000

In its income statement for the year ended December 31, 2013, Riley should report research and
development expense of
____________________________

15. The following info pertain to X company which is to be acquired by Y company:

BOOK VALUE CURRENT VALUE
Tangible assets
1,500,000
2,000,000
Intangible, w/o goodwill
500,000
1,000,000
Liabilities
1,500,000
1,500,000
Normal rate of earning is 8%. Xs expected earnings is at 14% per year for 5 years. What is the
goodwill if agreed as equal to purchase of average excess earnings for 5 years? _________
16. IMGONNAPASS is considering acquisition of the net assets of IHAVETOPASS to expand its operations.
The book value and current value of the net assets of IHAVETOPASS company are P3,300,000
and P4,000,000, respectively. The normal rate of return is believed to be 9%, but IMGONNAPASS
believes it can earn 11.25% annually on its investment in IHAVETOPASS due to its excellent
reputation. What is the amount of goodwill using the year multiple of excess earning method
assuming a 10-year period of excess earnings?
____________________
17. Xs business cumulative earnings for the past 5 years amounted to P500,000. The appraised value of
the business net assets was P800,000. X is selling the business plus goodwill, determined by
capitalizing average net earnings at 10%. The value of goodwill is ____________________
18. General Products Company bought Special Products Division in 2012 and appropriately recorded
P500,000 of goodwill related to the purchase. On December 31, 2013, the fair value of Special
Products Division is P4,000,000 and it is carried on General Products books for a total of P3,400,000,
including the goodwill. An analysis of Special Products Divisions assets indicates that goodwill of
P400,000 exists on December 31, 2013. What goodwill impairment should be recognized by General
Products in 2013?
_________________________
19. The general ledger of Vance Corporation as of December 31, 2012, includes the following accounts:
Copyrights
P 30,000
Deposits with advertising agency (will be used to promote goodwill)
27,000
Discount on bonds payable
70,000
Excess of cost over fair value of identifiable net assets of
acquired subsidiary
440,000
Trademarks
90,000
In the preparation of Vance's balance sheet as of December 31, 2012, what should be reported as
total intangible assets?
______________________
20. Hall Co. incurred research and development costs in 2013 as follows:
Materials used in research and development projects
Equipment acquired that will have alternate future uses in future research
and development projects
Depreciation for 2013 on above equipment
Personnel costs of persons involved in research and development projects
Consulting fees paid to outsiders for research and development projects
Indirect costs reasonably allocable to research and development projects
Total

P 450,000
3,000,000
500,000
750,000
300,000
225,000
P5,225,000

The amount of research and development costs charged to Hall's 2013 income statement should be
______________________
21. Logan Company incurred P4,000,000 (P1,100,000 in 2011 and P2,900,000 in 2012) to develop a
computer software product. P1,200,000 of this amount was expended before technological feasibility
was established in early 2012. The product will earn future revenues of P8,000,000 over its 5-year
life, as follows: 2012 P2,000,000; 2013 P2,000,000; 2014 P1,600,000; 2015 P1,600,000; and
2016 P800,000. What portion of the P4,000,000 computer software costs should be expensed in
2012? _____________________________

Auditing Problems
On December 31, 2004, Silver Corporation acquired the following three intangible assets:
A trademark for P300,000. The trademark has 7 years remaining legal life. It is anticipated that the
trademark will be renewed in the future, indefinitely, without problem.
Goodwill for P1,500,000. The goodwill is associated with Silvers Hayo Manufacturing reporting unit.
A customer list for P220,000. By contract, Silver has exclusive use of the list for 5 years. Because of
market conditions, it is expected that the list will have economic value for just 3 years.
On December 31, 2005, before any adjusting entries for the year were made, the following information was
assembled about each of the intangible assets:
1. Because of a decline in the economy, the trademark is now expected to generate cash flows of just
P10,000 per year. The useful life of trademark still extends beyond the foreseeable horizon.
2. The cash flows expected to be generated by the Hayo Manufacturing reporting unit is P250,000 per
year for the next 22 years. Book values and fair values of the assets and liabilities of the Hayo
Manufacturing reporting unit are as follows:
Book values Fair values
Identifiable assets
P2,700,000 P3,000,000
Goodwill
1,500,000
?
Liabilities
1,800,000
1,800,000
3. The cash flows expected to be generated by the customer list are P120,000 in 2006 and P80,000 in
2007.

REQUIRED:
Based on the above and the result of your audit, determine the following: (Assume that the appropriate
discount rate for all items is 6%):
1. Total amortization for the year 2005
a. P73,333
b. P141,515

c. P116,190

d. P86,857

2. Impairment loss for the year 2005

a. P90,476
b. P133,333

c. P179,584

d. P0

3. Carrying value of Trademark as of December 31, 2005

a. P300,000
b. P257,143
c. P166,667

d. P120,416

4. Carrying value of Goodwill as of December 31, 2005

a. P1,500,000
b. P1,431,818
c. P1,425,000

d. P1,462,500

5. Carrying value of Customer list as of December 31, 2005

a. P220,000
b. P146,667
c. P176,000

d. P0