FAR PUNP Undergraduate Review: INTANGIBLES

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PAS 38: INTANGIBLES

PROBLEMS
1.   The term “intangible assets” is used in accounting to denote
A.   Current or noncurrent property items without physical characteristics.
B.   Assets with lesser economic significance because of the nature of such assets.
C.   Property without physical characteristics that have against term effects on a business enterprise.
D.   Such items as patents, copyrights, and claims against customers that can be valued on
monetary basis.

2.   An intangible asset is (choose the incorrect one)

A.   An unidentifiable nonmonetary asset without physical substance.
B.   A resource controlled by entity as a result of past events.
C.   A resource from which future economic benefits are expected to flow to the entity.
D.   Held for use in the production or supply of goods or services, for rental to others or for
administrative purposes.
3.   Which is incorrect concerning the criterion of control by the entity of the intangible asset?
A.   An entity controls an asset if the entity has the power to obtain the future economic benefits
flowing from the underlying resources and also can restrict the access of others to those
benefits.
B.   The capacity of the entity to control the economic benefits from an intangible asset would
normally stem from legal rights that are enforceable in a court of law.
C.   Market and technical knowledge may give rise to future economic benefits which can be
controlled by the entity if the knowledge is protected by legal rights such as copyright.
D.   The skill of employees arising out of the benefits of the training costs can be recognized as
intangible asset.
4.   Which of the following research and development related costs should be capitalized and amortized over
current and future periods?
A.   Labor and material costs incurred in building a prototype model, after establishing technological
feasibility
B.   Cost of testing equipment that will also be used solely in the current year research and
development project
C.   Administrative salaries allocated to research and development
D.   Research findings purchased from another company to add a particular research project
currently in process.

5.   After initial recognition, a class of intangible assets whose fair value can be reliably measured, may be
carried in the financial statement
A.   At revalued amount, being the fair value at the date of the revaluation plus any subsequent
accumulated amortization and any subsequent accumulated impairment losses.
B.   At revalued amount, being the fair value at the date of the revaluation less any subsequent
accumulated amortization and any subsequent accumulated impairment losses.
C.   At revalued amount, without any subsequent amortization.
D.   At cost.
6.   Legal fees incurred by a company in defending its patent rights should be expensed when the outcome
of litigation is
Successful Unsuccessful
A. Yes No
B. Yes Yes
C. No Yes
D. No No

7.   Goodwill
A.   Generated internally, should not be capitalized unless it is measured by an individual
independent of the enterprised involved.
B.   Is easily computed by assigning a value to the individual attributes that comprise its existence.
C.   Represents a unique asset and is recognized only when resulting from the purchase of an
existing entity.
D.   Exists in any company that has earnings that differ from those of a competitor.

18.   The capitalized software cost shall be amortized

A.   On a straight-line basis over its useful life.
B.   Using the radio of current revenue over total expected revenue from the product

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C.   Using the greater of the straight-line rate or the ratio of current revenue over total expected
revenue from the product
D.   Uniformly over twenty years
19.   Which is incorrect concerning acquisition of an intangible asset as part of a business combination?
A.   The cost of intangible asset is based on its fair value at the date of acquisition.
B.   If there is an active market from the intangible asset, the fair value is equal to the quoted
market price which is usually the current bid price.
C.   If there is no active market for the intangible asset, the fair value is equal to the amount that
would be paid by the entity in an arm’s length transaction between knowledgeable and willing
parties.
D.   The fair value of an intangible asset acquired in a business combination cannot be measured
with sufficient reliability separately from goodwill.
20.   The cost of internally generated asset includes all of the following, except
A.   Expenditure in materials use in generating the intangible asset.
B.   Compensation costs of personal directly engaged in generating the asset.
C.   Overhead that is necessary to generate the asset and that can be allocated on a reasonable and
consistent basis to the asset.
D.   Expenditure on training staff to operate the asset.
Problem 1: Classification
Presented below is a list of items that could be included in the intangible assets section of the balance
sheet.

a)   Investment in a subsidiary company.

b)   Timberland.
c)   Cost of engineering activity required to advance the design of a product to the manufacturing stage.
d)   Lease prepayment (6 months’ rent paid in advance).
e)   Cost of equipment obtained.
f)   Cost of searching for applications of new research findings.
g)   Costs incurred in the formation of a corporation.
h)   Operating losses incurred in the start-up of a business.
i)   Training costs incurred in the start-up of new operation.
j)   Purchase cost of a franchise.
k)   Goodwill generated internally.
l)   Cost of testing in search for product alternatives.
m)   Goodwill acquired in the purchase of a business.
n)   Cost of developing a patent.
o)   Cost of purchasing a patent from an inventor.
p)   Legal costs incurred in securing a patent.
q)   Unrecovered costs of a successful legal suit to protect the patent.
r)   Cost of conceptual formulation of possible product alternatives.
s)   Cost of purchasing a copyright.
t)   Research and development costs.
u)   Long-term receivables.
v)   Cost of developing a trademark.
w)   Cost of purchasing a trademark.

Required:
a)   Indicate which items on the list above would generally be reported as intangible assets in the
statement of financial position.
b)   Indicate how, if at all, the items not reportable as intangible assets would be reported in the financial
statements.

Problem 2: Classification
Joni Hyde Inc. has the following amounts included in its general ledger at December 31, 2001:

Organization costs ₱24,000

Trademarks 15,000
Discount on bonds payable 35,000
Deposits with advertising agency for ads to promote goodwill of
company 10,000
Excess of cost over fair value of net identifiable assets of
acquired subsidiary 75,000
Cost of equipment acquired for research and development
projects; the equipment has an alternative future use 90,000
Costs of developing a secret formula for a product that is
expected to be marketed for at least 20 years 80,000

Required:
a)   On the basis of the information above, compute the total amount to be reported by Hyde for intangible
assets on its balance sheet at December 31, 2001. Equipment has alternative future use.
b)   If an item is not to be included in intangible assets, explain its proper treatment for reporting purposes.

Problem 3: Acquisition of Intangible Assets

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Ham Company reported intangible asset account balances on December 31, 2013, as follows;

Patents P192,00
Less accumulated amortization 36,000
Patents, Carrying Value P156,00

Transactions during 2014 and other information relating to Ham Company’s intangible assets included the
following:

a.   The patent was purchased from Gray Company on January 2, 2011 at which date the remaining legal
life was 16 years. On January 2, 2014, Ham Company determined that the remaining useful life of the
patent was only eight years.
b.   On January 3, 2014, the company acquired both a license to use a special type of container and a
distinctive trademark to be printed on the container in exchange for 600 shares of Ham Company no-
par ordinary shares, which are selling P80 per share. The license is worth twice as much as the
trademark, both of which may be used for four years.
c.   On January 3, 2014, Ham Company acquired all the non-cash assets and assumed all liabilities of
Brown Company at a cash price of P12 million. Ham Company determined that the fair value of the net
assets acquired in the transaction is P8, 000,000.

Required: Prepare a summary list of Ham Company’s intangible assets showing cost and accumulated
amortization as of December 31, 2014.

Problem 4: Patent
On January 2, 2011, Bacon Enterprises, Inc. developed a new machine for manufacturing baseballs. Because
the machine is considered very valuable, the company had it patented. The following expenditures were
incurred in developing and patenting the machine in 2011:

Purchase of special equipment (Cost was P600,000) Recoverable amount

after development of the new machine is P460,000

Research salaries and fringe benefits for engineers and scientists 51,300
Costs of testing prototype 70,800
Fees paid to Philippine Patent Office 7,500
Drawings required by the patent office to be filed with patent application 14,100
Legal costs of filing for patent 38,100

Bacon elected to amortize the patent over ten years. Full year amortization is taken up in the year of
acquisition. At January 2, 2013, Bacon paid P72,000 to successfully defend the patent in an infringement
suit. On the January 3, 2014, Bacon determined that the remaining estimated useful life of the patent was
five years.

Required:
a.  
Compute the amount charged to R&D Expense based on the foregoing data.
b.  
What is the patent carrying value at December 31, 2012?
c.  
What is the amortization expense for the patent for the year ended December 31, 2013?
d.  
What is the carrying value of the patent at December 31, 2014?

Problem 4: Accounting for Patents

Ankara Laboratories holds a valuable patent (No. 758-6002-1A) on a precipitator that prevents certain
types of air pollution. Ankara does not manufacture or sell the products and processes it develops; it
conducts research and develops products and processes which it patents, and then assigns the patents to
manufacturers on a royalty basis. Occasionally it sells a patent. The history of Ankara patent number 758-
6002-1A is as follows:

Date Activity Cost

2001–2002 Research conducted to develop precipitator ₱384,000
Jan. 2003 Design and construction of a prototype 87,600
Mar. 2003 Testing of models 42,000
Fees paid engineers and lawyers to prepare patent application; patent
Jan. 2004 62,050
granted July 1, 1994
Engineering activity necessary to advance the design of the precipitator to
Nov. 2005 81,500
the manufacturing stage
Dec. 2006 Legal fees paid to successfully defend precipitator patent 35,700
Apr. 2007 Research aimed at modifying the design of the patented precipitator 43,000
Jul. 2011 Legal fees paid in unsuccessful patent infringement suit against a competitor 34,000

Ankara assumed a useful life of 17 years when it received the initial precipitator patent. On January 1,
2009, it revised its useful life estimate downward to 5 remaining years. Amortization is computed for a full
year if the cost is incurred prior to July 1, and no amortization for the year if the cost is incurred after June
30. The company’s year ends December 31.

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Compute the carrying value of patent No. 758-6002-1A on each of the following dates
1.   December 31, 2004.
2.   December 31, 2008.
3.   December 31, 2011.

Problem 5: Accounting for Franchise, Patents, and Trade Name

Information concerning Haerhpin Corporation’s intangible assets is as follows:
a.   On January 1, 2012, Haerhpin signed an agreement to operate as a franchisee of Hsian Copy Service,
Inc. for an initial franchise fee of ₱75,000. Of this amount, ₱15,000 was paid when the agreement was
signed and the balance is payable in 4 annual payments of ₱15,000 each, beginning January 1, 2013.
The agreement provides that the down payment is not refundable and no future services are required of
the franchisor. The present value at January 1, 2012, of the 4 annual payments discounted at 14% (the
implicit rate for a loan of this type) is ₱43,700. The agreement also provides that 5% of the revenue
from the franchise must be paid to the franchisor annually. Haerhpin’s revenue from the franchise for
2012 was ₱950,000. Haerhpin estimates the useful life of the franchise to be 10 years.

b.   Haerhpin incurred ₱65,000 of experimental and development costs in its laboratory to develop a patent
which was granted on January 2, 2012. Legal fees and other costs associated with registration of the
patent totaled ₱13,600. Haerhpin estimates that the useful life of the patent will be 8 years.

c.   A trademark was purchased from Shanghai Company for ₱32,000 on July 1, 2009. Expenditures for
successful litigation in defense of the trademark totaling ₱8,160 were paid on July 1, 2012. Haerhpin
estimates that the useful life of the trademark will be 20 years from the date of acquisition.
Required:
1.   Prepare a schedule showing the intangible section of Haerhpin’s balance sheet at December 31, 2012.
2.   Prepare a schedule showing all expenses resulting from the transactions that would appear on
Haerhpin’s income statement for the year ended December 31, 2012.

Problem 6: Franchise
On January 1, 2013, The Ing Company signed an agreement to operate as a franchisee for 10 years for a
franchise fee of P1,000,000. The franchise fee is payable as follows:

Downpayment (upon signing the agreement) P400,000

Balance of P600,000 payable in three equal annual payments of P200,000 beginning January
1, 2014. The market rate of interest for similar obligation is 10%.
The agreement also provided for the payment of 5% royalties based on sales. In return for these royalties,
the franchisor agreed to provide marketing and promotional services for The Ing Company for the duration
of the franchise contract.

Required:
A.   What is the cost of the franchise acquired on January 1, 2013?
B.   What is the amount of the amortization expense for the franchise for the year ended December 31,
2013?

Problem 7: Intangible Amortization: Presented below is selected information for Alatorre Company.
Answer each of the factual situations.
1.   Alatorre purchased a patent from Vania Co. for ₱1,000,000 on January 1, 2010. The patent is being
amortized over its remaining legal life of 10 years, expiring on January 1, 2020. During 2012, Ala-torre
determined that the economic benefits of the patent would not last longer than 6 years from the date of
acquisition. What amount should be reported in the balance sheet for the patent, net of accumulated
amortization, at December 31, 2012?
2.   Alatorre bought a franchise from Alexander Co. on January 1, 2011, for ₱400,000. The carrying amount
of the franchise on Alexander’s books on January 1, 2011, was ₱500,000. The franchise agreement had
an estimated useful life of 30 years. Because Alatorre must enter a competitive bidding at the end of
2020, it is unlikely that the franchise will be retained beyond 2020. What amount should be amortized
for the year ended December 31, 2012?
3.   On January 1, 2008, Alatorre incurred organization costs of ₱275,000. Alatorre is amortizing these costs
over 5 years. What amount, if any, should be reported as unamortized organization costs as of
December 31, 2012?
4.   Alatorre purchased the license for distribution of a popular consumer product on January 1, 2012, for
₱150,000. It is expected that this product will generate cash flows for an indefinite period of time. The
license has an initial term of 5 years but by paying a nominal fee, Alatorre can renew the license
indefinitely for successive 5-year terms. What amount should be amortized for the year ended December
31, 2012?

Problem 8: ImpairmentTones Industries has the following patents on its

December 31, 2013, balance sheet:

Useful Life at Date

Patent Item Initial Cost Date Acquired
Acquired
Patent A ₱30,600 3/1/10 17 years

Patent B ₱15,000 7/1/11 10 years

Patent C ₱14,400 9/1/12 4 years

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FAR PUNP Undergraduate Review: INTANGIBLES

The following events occurred during the year ended December 31, 2014:

a.   Research and development costs of ₱245,700 were incurred during the year.
b.   Patent D was purchased on July 1 for ₱36,480. This patent has a useful life of 9 ½ years.
c.   As a result of reduced demands for certain products protected by Patent B, a possible impairment of
Patent B’s value may have occurred at December 31, 2014. The controller for Tones estimates the future
cash flows from Patent B will be as follows:

For the Year

Future Cash Flows
Ended
31-Dec-15 ₱2,000
31-Dec-16 2,000
31-Dec-17 2,000

The proper discount rate to be used for these flows is 8%. (Assume that the cash flows occur at the end of
the year.)
Required:
1.   Compute the total carrying amount of Tones’ patents on its December 31, 2013, balance sheet.
2.   Compute the total carrying amount of Tones’ patents on its December 31, 2014, balance sheet.

Problem 9: Accounting for R & D Costs

Thomas More Company incurred the following costs during 2011 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 5 years (uses straight-line depreciation) ₱280,000
Materials consumed in research and development projects 59,000
Consulting fees paid to outsiders for research and
development projects 100,000
Personnel costs of persons involved in research and
development projects 128,000
Indirect costs reasonably allocable to research and
development projects 50,000
Materials purchased for future research and development
projects 34,000

Required: Compute the amount to be reported as research and development expense by More on its
income statement for 2011. Assume equipment is purchased at beginning of year.

Problem 11: Research and Development Cost

Tapa Company incurred the following costs during 2014:

Quality control during commercial production, including routine testing of products P58,000
Laboratory research aimed at discovery of new knowledge 68,000
Testing for evaluation of new products 24,000
Modification of the formulation of a plastics product 26,000
Engineering follow through in an early phase of commercial production 15,000
Trouble-shooting in connection with breakdown during commercial production 29,000
Searching for application of new research findings 19,000
Cost of equipment acquired that will have alternative uses in future research and
280,000
development projects over the next 5 years (uses straight –line depreciation)

Required: Compute the total amount that Tapa Company should classify as research and development costs
for 2014.

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