CHAPTER 56
Intangible Assets
Prepared by McDonald’s
Problem 56-1 (IAA)
Vanessa Company reported the following data at year-end:
Franchise
Computer Software
Deferred charges
Patent
Customer list purchased
Copyright
Deposit with advertising agency to promote goodwill
Bond sinking fund
Goodwill
Trademark
Research and development cost

1,000,000
1,500,000
100,000
2,500,000
500,000
700,000
400,000
1,300,000
4,000,000
900,000
2,000,000
What amount should be reported as intangible assets?
- 11,100,000
Solution:
Franchise
Computer software
Patent
Customer list
Copyright
Goodwill
Trademark
Total intangible assets
1,000,000
1,500,000
2,500,000
500,000
700,000
4,000,000
900,000
11,100,000
Problem 56-2 (IAA)
Webster Company commenced operations in the current year. A number of expenditures were made
during the current year that were debited to one account intangible assets
State incorporation fees and legal costs related to organizing the corporation
Fire insurance premium for three-year period
100,000
60,000
Purchase of a copyright
Legal fees for filling a patent on a new product resulting from an R&D project
Legal fees for successful defense of the patent developed from the project
Entered into a 10-year franchise agreement with a franchisor
Advertising cost
Purchase of all of the outstanding ordinary shares of an acquiree. On the date of purchase,
the acquiree had total assets of P6,000,000 at fair value and total liabilities of P2,200,000 at
fair value

200,000
50,000
10,000
500,000
150,000
5,000,000
What total amount should be reported as intangible assets?
- 1,950,000
Solution:
Copyright
Patent
Franchise
Goodwill
Total intangible assets
200,000
50,000
500,000
1,200,000
1,950,000
Acquisition cost
Net assets of acquiree (6,000,000 - 2,000,000)
Goodwill
5,000,000
-3,800,000
1,200,000
Problem 56-3 (IAA)
Alcaraz Company paid P5,000,000 to purchase intangible assets with the following fair value:
Internet domain name
Order backlog
In-process research and development
Operating permit
1,500,000
1,200,000
2,400,000
900,000
In addition, the entity spent P2,000,000 to run an advertising campaign to boost its image in the local
community.

What amount should be recognized as cost of the in-process research and development?
- 2,000,000
Solution:
Fair value
Internet domain
name
1,500,000
Fraction Cost
15/60
1,250,000
Order backlog
In-process R and D
Operating permit
1,200,000
2,400,000
900,000
6,000,000
12/60
24/60
9/60
1,000,000
2,000,000
750,000
5,000,000
Note: As in-process research and development project acquired separately is recognized as an asset at
cost, even if a component is research.
Subsequent expenditure on that project is accounted for as any other research and development
expenditure which may be expensed or capitalized depending on the criteria for the recognition of an
intangible asset.
The cost of the advertising should be expensed immediately.
Problem 56-4 (IAA)
Golden Company developed a new machine for manufacturing baseballs. Because the machine is
considered very valuable, the entity had it patented. The following expenditures were incurred in
developing and patenting the machine:
Special equipment used solely for development
Research salaries and fringe benefits for engineers
Cost of testing prototype
Legal cost for filling patent
Fees paid to government patent office
Drawings required with patent application

500,000
200,000
250,000
150,000
50,000
40,000
What amount should be capitalized as cost of patent?
- 240,000
Solution:
Legal cost for filling patent
Fees paid to government patent office
Drawings required with patent application
Total cost of patent
150,000
50,000
40,000
240,000
Problem 56-5 (AICPA Adapted)
Tobin Company incurred P1,600,000 of research and development cost to develop a product for which a
patent was granted at the beginning of current year. Legal fees and other costs associated with
registration of the patent totaled P300,000. At year-end, the entity paid P450,000 for legal fees in a
successful defense of the patent.

What total amount should be capitalized for the patent at year-end?
- 300,000
Solution:
Legal fees and other costs associated with registration
300,000
Note: The cost of litigation, whether successful or not, should be treated as outright expense because
such cost would only maintain and not enhance the originally assessed future benefit.
Problem 56-6 (IAA)
Harmonious Company acquired a patent for a drug with a remaining legal and useful life of six years on
January 1, 2019 for P5,4000,000.
On January 1, 2021, a new patent is received for an improved version of the same drug. The new patent
has a legal and useful life of twenty years.

What amount should be recorded as amortization expense for 2021?
- 180,000
Solution:
Cost - January 1, 2019
Amortization for 2019 and 2020 (5,400,000 / 6 x 2)
Carrying amount - January 1, 2021
Amortization for 2021 (3,600,000 / 20)
5,400,000
-1,800,000
3,600,000
180,000
Problem 56-7 (IAA)
Iceberg Company purchased a patent on January 1, 2016 for P6,000,000. The original useful life was
estimated to be 15 years.
However, in December 2021, the management received information proving conclusively that the
product protected by the Iceberg patent would be obsolete within four years.
Accordingly, the entity decided to write off the unamortized cost of the patent over five years beginning
2021.

What amount should be recorded as patent amortization for 2021?
-
800,000
Solution:
Cost - January 1, 2016
Accumulated amortization - December 31, 2020
(6,000,000 / 15 x 5)
Carrying amount - January 1, 2021
6,000,000
-2,000,000
4,000,000
Amortization for 2021 (4,000,000 / 5)
800,000
Problem 56-8 (AICPA Adapted)
On January 1, 2018, Taft Company purchased a patent for P7,140,000. The patent is being amortized
over the remaining legal life of 15 years expiring on January 1, 2023.
During 2021, the entity determined that the economic benefits of the patent would not last longer than
ten years from the date of acquisition.

What is the carrying amount of patent on December 31, 2021?
- 4,896,000
Solution:
Cost - January 1, 2018
Amortization for 2019, 2019 and 2020
(7,140,000 / 15 x 3)
Carrying amount - January 1, 2021
Amortization for 2021 (5,712,000 / 7)
Carrying amount - December 31, 2021
Revised life
Years expired - 2018,2019, 2020
Remaining revised life
7,140,000
-1,428,000
5,712,000
-816,000
4,896,000
10 years
-3
7 years
Note: The change in the useful life of the patent is a change in accounting estimate.
The change in accounting estimate should be treated currently and prospectively.
Problem 56-9 (AICPA Adapted)
On January 1, 2018, Lava Company purchased a patent for a new consumer product for P900,000. At the
time of purchase, the patent was valid for 15 years.
However, the useful life of the patent was estimated to be only 10 years due to the competitive nature
of the product.
On December 31, 20121, the product was permanently withdrawn from sale under governmental order
because of a potential health hazard in the product.

What amount should be charged against income in 2021 if amortization is recorded at the end
of each year?
- 630,000
Solution:
Acquisition cost - January 1, 2018
Amortization for 2018, 2019 and 2020
(900,000 / 10 x 3)
Carrying amount - January 1, 2021
900,000
-270,000
630,000
Note: The remaining carrying amount on January 1, 2021 is entirely expensed in 2021.
Or
Amortization of patent for 2021 (900,000 / 10)
Writeoff of unamortized cost (900,000 / 10 x 4)
Total amount charged to expense in 2021
90,000
540,000
630,000
Problem 56-10 (AICPA Adapted)
Gray Company was granted a patent on January 1, 2018 and capitalized P450,000. The entity was
amortizing the patent over the useful life of 15 years.
During 2021, the entity paid P150,000 in successfully defending an attempted infringement of the
patent.
After the legal action was completed, the entity sold the patent to the plaintiff for P750,000. The policy
is to take no amortization in the year of disposal.

What amount should be reported as gain from sale of patent in 2021?
- 390,000
Solution:
Acquisition cost - January 1, 2018
Amortization for 2018, 2019 and 2020 (450,000 / 15 x 3)
Carrying amount - January 1, 2021
450,000
-90,000
360,000
Gain from sale of patent (750,000 - 360,000)
390,000
Problem 56-11 (AICPA Adapted)
At the beginning of current year, Boracay Company bought a trademark from Lamitan Company for
P3,000,000. The entity retained an independent consultant who estimated the trademark’s life to be
indefinite. The carrying amount of the trademark was P1,500,000 on the books of Lamitan Company

What is the carrying amount of the trademark at year-end?
- 3,000,000
Solution:
Note: The legal life of trademark is 10 years and may be renewed every 10 years.
Considering the almost automatic renewal of a trademark, the trademark can be classified as an
intangible asset with identified life.
Accordingly, the cost of trademark is not amortized but tested for impairment at least annually.
Problem 56-12 (IAA)
Raven Company developed a trademark to distinguish its products from those of the competitors.
Marketing research to study consumer tastes
Design cost of trademark
Legal fee of registering trademark
Advertising to establish recognition of trademark
Registration fee with Intellectual Property Office

400,000
1,500,000
150,000
200,000
50,000
What amount should be capitalized as cost of trademark
- 1,700,000
Solution:
Design cost of trademark
Legal fee of registering trademark
Registration fee with Intellectual Property Office
Total cost of trademark
1,500,000
150,000
50,000
1,700,000
Problem 56-13 (IAA)
Royal Company purchased a trademark and incurred the following costs:
Purchase price
Nonrefundable value added tax
Training of personnel on the use of new trademark
Research expenditures associated with the purchase of the new trademark
Legal cost incurred to register the new trademark
Administrative salaries

1,000,000
50,000
70,000
240,000
105,000
120,000
What amount should be capitalized as cost of the trademark?
- 1,155,000
Solution:
Purchase price
Nonrefundable value added tax
Legal cost incurred to register the new trademark
Total cost of trademark
1,000,000
50,000
105,000
1,155,000
Problem 56-14 (IFRS)
Mariz Company acquired a trademark relating to the introduction of a new manufacturing process. The
entity incurred the following costs:
Cost of trademark
Expenditure on promoting the new product
Employee benefits relating to testing of new process

3,500,000
50,000
200,000
What total cost should be capitalized as intangible noncurrent asset in respect of the new
process?
- 3,700,000
Solution:
Cost of trademark
Employee benefits relating to testing of new process
Total cost
3,500,000
200,000
3,700,000
Problem 56-15 (AICPA Adapted)
At the beginning of current year, Hart Company signed an agreement to operate as a franchisee of Ace
Company for an initial franchise fee of P12,000,000.
Hart Company paid P4,000,000 down and agreed to pay the balance in four annual payments of
P2,000,000 at the end of each year. Hart Company can borrow at 14% for a loan of this type.
Present value of 1 at 14% for four periods
Present value of an ordinary annuity of 1 at 14% for four periods

0.59
2.91
What amount should be recognized as acquisition cost of the franchise?
- 9,820,000
Solution:
Downpayment
Present value of annual payments (2,000,000 x 2.91)
Cost of franchise
4,000,000
5,820,000
9,820,000
Problem 56-16 (IAA)
On January 1, 2021, Aim company showed patent of P1,920,000 with related accumulated amortization
of P240,000. The patent was purchased on January 1, 2019 at which date the legal life is 16 years.
On January 1, 2021, the useful life of the patent was determined to be only 8 years from the date of
acquisition.
On January 1, 2021, in connection with the purchase of a trademark from Cat Company, the parties
entered into a noncompetition agreement and a consulting contract.
Aim Company paid Cat Company P800,000, of which three-fourths was for the trademark, and onefourth was for Cat Company’s agreement not to compete for a five-year period in the line of business
covered by the trademark. Aim Company considered the life of the trademark to be indefinite.
Moreover, Aim Company agreed to pay Cat Company P50,000 annually on January 1 of each year for 5
years as consulting fee.


What is the carrying amount of intangible assets on January 1, 2021?
- 2,480,000
What amount should be recorded as total amortization for 2021?
- 320,000
Solution:
Patent (1,920,000 - 240,000)
Trademark (800,000 x 3/4)
Noncompetition agreement (800,000 x 1/4)
Total intangible assets - January 1, 2021
1,680,000
600,000
200,000
2,480,000
Amortization of patent (1,680,000 / 6)
Amortization of noncompetition agreement (200,000 / 5)
Total amortization for 2021
Note: The annual payment of P50,000 is expensed immediately.
280,000
40,000
320,000