AUDIT OF PREPAYMENTS
1. The following situations are found on the records of the Kilimanjaro, Inc. in your audit of the
company’s financial statements for the year ended in December 31, 2007.
1. December 1, 2007:
Advertising Expense
24,000
Cash
Payment of 2008 advertising contract
2. Balance of Office Supplies Expense, Dec. 31, 2007
Balance of Unused office supplies
Inventory of office supplies, Dec. 31, 2007
24,000
P15,000
5,000
7,500
3. June 2, 2007:
Prepaid Insurance
18,000
Cash
18,000
Payment of one-year insurance premium of inventory
4. Balance of factory supplies expense account, Dec. 31, 2007
Physical inventory of factory supplies
P23,000
19,500
5. On May 1, 2007, a two-year subscription to the Industry Journal on the amount of P4,800
was paid. Subscriptions expense was charged for the entire amount.
Prepare the adjusting journal entries on December 31, 2007 based on the situations described.
COST OF PATENT
2. Kenya Enterprises developed a new machine that reduces the time required to mix the chemical
used in one of its leading products. Because the process is considered very valuable to the
company, Kenya patented the machine.
Kenya incurred the following expenses in developing and patenting the machine:
Research and development laboratory expenses
Materials used in the construction of the machine
Blueprints used to design the machine
Legal expenses to obtain patent
Wages paid for the employee’s work on the research, development, & building
of the machine (60% of the time was spent in actually building the machine)
Expense of drawing required by the Bureau of Patents to be submitted with the
Patent application
Fees paid to Bureau of Patents to process application
P750,000
240,000
96,000
360,000
900,000
51,000
75,000
One year later, Kenya Enterprises paid P525,000 in legal fees to successfully defend a patent against an
infringement suit by Gaya-gaya Company.
1. What is the total cost of the patent?
a. P993,000
b. P468,000
e.
c. P564,000
d. P126,000
2. What is the total cost of the new machine?
a. P1,362,000
b. P0
c. P780,000
d. P876,000
3. What is the entry to record the legal fees paid for the successful defense of the patent
against the infringement suit?
a. Patents
Cash
b. Legal Fees Expense
Cash
c. Machinery
Cash
525,000
525,000
525,000
525,000
525,000
525,000
d. Amortization Expense - Patents
Cash
525,000
525,000
IDENTIFYING INTANGIBLE ASSETS
3. The following amounts included in the general ledger of the Margherita Peak Corporation at
December 31, 2007:
Organization costs
Trademarks
Patents
Discount on bonds payable
Deposits with advertising agency for ads to promote goodwill of company
Cost of equipment acquired for various research and development projects
Costs of developing a secret formula for a product that is expected to be
Marketed for at least 20 years
P72,000
45,000
225,000
105,000
30,000
320,000
240,000
On the basis of the information above, what is the total amount of intangibles assets to be reported by
Margherita Peak on its balance sheet at December 31, 2007?
a. P342,000
c. P510,000
b. P270,000
d. P830,000
CORRECTING INTANGIBLE ASSET ACCOUNT
4. As a member of the audit team for the audit of the Ras Dashen Company’s financial statements
for the year ended December 31, 2007, you have been asked to examine selected accounts. The
controller for Ras Dashen mentions that there is only one account (shown below) kept for
intangible assets.
Feb 1
Mar 15
Apr 13
May 1
June 15
Dec 31
Dec 31
Stock issue costs
Research and Development costs
Legal costs to obtain patent
Payment of 12 mos.’ rent on property leased
by Ras Dashen
Promotional expenses related to start-up of
business
Unamortized bond discount on bonds
December 31, 2027
Operating losses for first year
Debit
P 72,000
1,880,000
150,000
Credit
Balance
72,000
1,952,000
2,102,000
240,000
2,342,000
414,000
2,756,000
168,000
482,000
2,924,000
3,406,000
1. The amount of organization expenses to be reported on Ras Dashen’s income statement
for the year ended December 31, 2007, is
a. P 2,348,000
c. P582,000
b. P486,000
d. P240,000
2. What is the carrying value of the patent at December 31, 2007, assuming that its useful
life is 10 years?
a. P150,000
c. P135,000
b. P138,750
d. P 0
3. The prepaid rent to be shown on Ran Dashen’s Balance sheet at December 31, 2007, is
a. P160,000
c. P80,000
b. P240,000
d. P 0
LEASE BONUS AND LEASEHOLD IMPROVEMENTS
5. Meru, Inc. leases an old building which intends to improve and use for administrative purposes.
The company pays a bonus of P100, 000 to obtain the lease. Annual rental for the 10-year lease
period is P160, 000. No option to renew the lease or right to purchase the property is given by the
lessor.
After obtaining the lease, improvements on the leased building are made costing P400,000. the building
has an estimated remaining useful life of 19 years.
1. What is the annual cost (excluding depreciation ) of this lease to Meru?
a. P210,000
c. P160,000
b. P200,000
d. P170,000
2. What is the amount of annual depreciation (straight-line), if any, should Meru, Inc.
record?
a. P40,000
c. P50,000
b. P30,000
d. P 0
3. What is the entry to record the lease bonus paid at the inception of the lease?
a. Rent expense
100,000
Cash
100,000
b. Prepaid rent1
100,000
Cash
100,000
c. Prepaid Rent
90,000
Rent expense
10,000
Cash
100,000
d. Rent expense
90,000
Prepaid rent
10,000
Cash
100,000
ORGANIZATION COSTS
6. Elgon Company organized in 2006 and began operations at the beginning of 2007. The company
provides landscaping services. The following costs were incurred prior to the start of the
operations:
What is the total amount of organization costs that should be reported on Elgon’s income statement?
Legal fees in connection with the organization of the company P45,000
Improvement to leased office spaced prior to occupancy
75,000
Fees paid to underwriters for handling stock issue
12,000
Cost of Meetings of incorporators to discuss organizational issue 21,000
Filling fee to incorporate
3,000
P156,000
1. What is the total amount of organizational costs that should be reported on Elgon’s
income statement?
a. P60,000
c. P156,000
b. P69,000
d. P81,000
PATENT, FRANCHISE, AND RESEARCH & DEVELOPMENT COSTS
7. Cameroon Corp. has provided intangible assets as follows:

A patent was purchased from Patintero company for P60,000,000 on January 1,2006. On
the acquisition date, the patent was estimated to have a useful life of 10 years. The patent
had a net book value of P6,000,000 when Patintero sold it to Cameroon.

On February 1, 2007, a franchise was purchased from the Franhisor Company for
P1,440,000. the contract which runs for 20 years provides that 5% of revenue from the
franchise must be paid to Franchisor. Revenue from the franchise for 2007 as P7,500,000.

The following research and development cost were incurred by Cameroon in 2007:
The materials and equipment
Personnel
Indirect cost
Total
P426,000
567,000
306,000
P1,299,000
Because of recent events, Cameroon, on January 1, 2007, estimates that the remaining useful life of the
patent purchased on January 1, 2006, is only 5 years from January 1, 2007.
1. On December 31, 2007, the carrying value of the patent should be
a. P4,320,000
b. P6,000,000
c.
P1,680,000
d. P 0
2. The unamortized cost of franchise at December 31,2007 should be
a. P999,000
c. P1,440,000
b. P1,356,250
d. P1,374,000
3. Ho much should be charged against Cameroon’s income for the year ended December
31,2007?
a. P2,280,000
c. P2,820,000
b. P2,826,000
d. P1,725,000
RESEARCH AND DEVELOPMENT COSTS
8. Emi Koussi Corp. has its own research department. However, the company purchases patents
from time to time. The following is a summary of transactions involving patents now owned by the
company.






During 2001 and 2002, Emi Koussi spent a total of P459,000 in developing a new process that
was patented (Patent A) on April 1, 2003; additional legal and other costs of P50,000 ere
incurred.
A patent (Patent B) developed by Nonoy Inventor, an inventor, was purchased for P187,500 on
December 1, 2004, on which date it had an estimated useful life of 12 ½ years.
During 2003, 2004, and 2005, research and development activities cost P510,000. No additional
patents resulted from these activities.
A patent infringement suit brought by the company against a competitor because of the
manufacture of articles infringing on Patent B was successfully prosecuted at a cost of P42,600.
A decision in the case was rendered in June 2005.
On July 1, 2006, Patent C was purchased for P172,800. This patent had 16 years yet to run.
During 2007, Emi Kousi expended P180,000 on patent development. However, the company is
still undecided as to how the patent, if approved by the Bureaus of Patents, will generate
probable future economic benefits.
Assume that legal life of each patent is also its useful life.
1. What is the total carrying value of Emi Koussi’s patents on December 31,2007?
a. P335,975
c. P515,975
b. P382,000
d. P344,975
2. What is the total patent amortization expense to be reported on Emi Koussi’s inxcome
statement for the year ended December 31, 2007?
a. P37,300
c. P74,325
b. P28,741
d. P28,300
PATENT AMORTIZATION
9. Andes Corporation expended P150, 000 in research and development costs. These activities
resulted to a new product called the Odio Organ. It was patented at additional legal and other
costs of P54, 000 The patent application was filed on October 1, 2004, and the patent was
estimated to have a useful life of 10 years.
On June 1, 2006, Andes spent P28,440 to successfully prosecute a patent infringement. In addition, the
patent’s estimated useful life was extended to 12 years from June 1, 2006. at the beginning of 2007,
Andes determined that a competitor’s product would make the Oido Organ obsolete and the patent
worthless by December 31, 2008.
Based on the preceding information, calculate the patent amortization expense for each of the following
years:
1. 2003
a. P14,100
b. P12,750
c. P5,400
d. P1,350
2. 2004
a. P51,000
b. P56,400
c. P2,700
d. P5,400
3. 2005
a. P4,438
b. P2,188
c. P3,750
d. P5,820
4. 2006
a. P4,438
b. P6,120
c. P3,750
d. P2,188
5. 2007
a. P31,875
b. P19,631
c. P39,062
d. P3,750
RESEARCH AND DEVELOPMENT COSTS
10. The following costs were included by the Everest Company during 2007:
Searching for applications of new research findings
P 57,000
Trouble-shooting in connection with breakdowns during commercial production
87,000
Adaptation of existing capability to a particular requirement or customer’s need
as a part of continuing commercial activity
39,000
Engineering follow-through in an early phase of commercial production
45,000
Radical modification of the formulation of a glassware product
78,000
Laboratory research aimed at discovery of new knowledge
204,000
Testing for evaluation of new products
72,000
Quality control during commercial production, including routine testing of products
174,000
Materials consumed in research and development projects
177,000
Consulting fees paid to outsiders for research and projects
300,000
Personnel costs of persons involved in research and development projects
384,000
Indirect costs reasonably allocable to research and development projects
150,000
Materials purchased for future research and development projects
102,000
Research and development costs reimbursable under a contract to perform
research and development for Client Corporation
1,050,000
Design, construction, and testing of preproduction prototypes and models
870,000
Routing on-going efforts to refine, enrich, or otherwise improve upon the qualities
of an existing product
750,000
Total
P4,539,000
What is the total amount to be classified and expensed as research and development for 2007?
a. P3,342,000
c. P2,394,000
b. P2,292,000
d. P2,220,000
COST OF AN INTERNALLY GENERATED INTANGIBLE ASSET
11. Moses Company’s own research department has an on-going project to develop a new
production process. At the end of 2006, Moses had already spent a total of P300,000, of which
P270,000 was incurred before November 1, 2006. On November 1, 2006, the company’s newly
developed production process met the criteria for recognition as an intangible asset.
During 2007, Moses incurred additional expenditure of P600,000. At the end of 2007, the recoverable
amount of the intangible asset was estimated to be P570,000, including future cash outflows to complete
the process before it is available for its intended use.
1. At December 31, 2006, the production process should be recognized at a cost of
a. P300,000
c. P30,000
b. P0
d. P270,000
e.
2. What is the total cost of the production process at December 31, 2007?
a. P630,000
c. P870,000
b. P600,000
d. P900,000
3. How much impairment loss should be recognized by Moses in 2007, in connection with
the new production process?
a. P300,000
c. P30,000
b. P0
d. P60,000
ACQUISITION AND AMORTIZATION OF INTANGIBLE ASSETS
12. Kikiktat Corporation was organized in 2006. its accounting records include only one account for
all intangible assets. The following is a summary of the debit entries that have been recorded and
posted during 2006 and 2007:
July 1, 2006
Oct 1, 2006
Dec 31, 2006
Jan 2, 2007
Mar 1, 2007
April 1, 2007
July 1, 2007
Oct 1, 2007
INTANGIBLE ASSETS
8-Year Franchise; expires June 30, 2014
Advance payment on leasehold (term of lease is 2 years)
Net loss for 2005 including incorporation fee, P3,000, and related
legal fees of organizing, P15,000 (all fees incurred in 2006)
Acquired patent (10-year life)
Cost of developing a secret formula
Goodwill purchased
Legal fee for successful defense of patent purchased above
Research and development costs
P126,000
84,000
48,000
222,000
225,000
835,200
37,950
480,000
Ignore income tax effects.
1. The unamortized patent cost at December 31, 2007, should be
a. P199,800
c. P222,000
b. P235,440
d. P197,490
2. The unamortized franchise cost at December 31, 2007, should be
a. P110,250
c. P102,375
b. P94,500
d. P118,125
3. The amount of prepaid rent to be reported on Kikiktat’s December 31, 2007, balance sheet is
a. P73,500
c. P84,000
b. P31,500
d. P63,000
4. The adjusting entries on December 31, 2007, should include a net debit to the retained earnings
account of
a. P889,275
c. P60,375
b. P42,000
d. P66,375
5. As a result of the adjustments at December 31, 2007, the total charges against Kikiktat’s 2007
income should be
a. P840,900
c. P597,900
b. P822,900
d. P841,275
PATENT ACQUISITION AND AMORTIZATION
13. Kjik Laboratiories holds a valuable patent (No. 362436) on a device that burns body fats. Kijik
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 manufacture
on a royalty basis. The history of Patent No. 362436 is as follows:
DATE
1997-1998
1999 Jan 5
Mar 15
2000 Jan 2
2002 Dec 10
2003 April 3
2006 July 28
INTANGIBLE ASSETS
Research conducted to develop device
Design and construction of a prototype
Testing of models
Legal and other fees to process patent application
Legal fees paid to successfully defend device patent
Research aimed at modifying the design of the patented device
Legal fees paid in unsuccessful patent infringement against a
competitor
COST
P7,680,000
1,752,000
840,000
1,241,000
714,000
860,000
680,000
A 17-year useful life was assumed by Kijik when it received the initial device patent.
On January 1, 2005, it revised its useful life estimate downward to 5 remaining years. The company’s
balance sheet date is December 31, 2007.
Based on the preceding information, compute the carrying value of Patent No. 362436 on each of the
following dates:
1. December 31, 2000
a. P1,168,000
b. P3,507,529
c. P1,241,000
d. P1,178,950
2. December 31, 2004
a. P1,488,000
b. P876,000
c. P350,400
d. P817,600
3. December 31, 2007
a. P657,000
b. P876,000
c. P525,600
d. P350,400
CORRECTING PATENT-RELATED ENTRIES
14. You are engaged to audit the financial statements of Afognat Co. for the year ended June 230,
2007. Your audit revealed the following items in connection with the company’s patents account.
1. Research and development costs of P360,000 were incurred during the company’s fiscal
year ended June 30, 2006, and were charged to its patents account.
2. The patent right was granted on January 2, 2006. The account Legal and Professional
Fees Expense was debited for P15,000 in connection with the issuance of the patent.
3. The company spent P75,000 on July 5, 2006, for legal expenses in connection with a
patent infringement suit filed against it. This amount was charged to Deferred Costs.
4. The company received a letter from its lawyers on July 12, 2007. It indicated that an
amicable settlement of the lawsuit had been agreed. Afognat Co. would be released from
all future liabilities in exchange for P100,000. Accrued attorney’s fees totaled P60,000.
Prepare the adjusting journal entries on June 30, 2007 based on the foregoing information.
ACCOUNTING FOR PATENTS, LICENSES, GOODWILL, AND ORGANIZATION COSTS
15. Acadia Corporation was incorporated in January 2, 2006. A CPA did not examine the
Corporation’s financial statements for its first year’s operations. You have been engaged to audit
the financial statements for the year ended December 31, 2007, and your audit is substantially
completed. The corporation’s trial balance appears below:
Acadia Corp
TRIAL BALANCE
December 31, 2007
Cash
Accounts Receicable
Allowance for Doubtful Accounts
Inventories
Machinery and equipment
Accumulated Depreciation
Patents
Leasehold improvements
Prepaid expenses
Goodwill
Licensing Agreement 1
Licensing Agreement 2
Accounts Payable
Unearned revenue
Capital stock
Retained Earnings, January 1, 2007
Sales
Cost of Goods Sold
Selling and Administrative Expenses
Interest Expense
Loss on extinguishments of debt
Totals
P
Debit
300,000
1,460,000
Credit
P
29,200
1,004,000
2,380,000
524,000
2,564,000
600,000
900,000
600,000
1,200,000
1,120,000
1,460,000
345,600
6,000,000
3,181,200
14,400,000
P
9,500,000
3,722,000
190,000
400,000
25,940,000
The following information relates to accounts that may yet require adjustment.
P
25,940,000
1. Patents for Arcadia’s manufacturing process were acquired January 2, 2007, at a cost of
P1,870,000. An additional P684,000 was spent on December 29, 2007, to improve
machinery covered by the patents and charged to the Patents account. Depreciation on
property, plant, and equipment has been properly recorded for 2007. Acadia uses the
straight-line method for all depreciation and amortization and the legal life on its patents.
2. On January 3, 2006, Acadia purchased Licensing Agreement No. 1, which was believed
to have an indefinite useful life. The balance in the Licensing Agreement No. 1 amount
includes its purchase price of P1,140,000 and expenses of P60,000 related to the
acquisition . on January 1, 2007, Acadia purchases Licensing Agreement No. 2, which
has a life expectancy of 10 years. The balance in the Licensing Agreement No. 2 account
includes its P1,080,000 purchase price and P120,000 in acquisition expenses, but it has
been reduced by a credit of P80,000 for the advance collection of 2008 revenue from the
agreement.
In late December 2006, an explosion caused a permanent reduction in the expected
revenue-producing value of Licensing Agreement No. 1, and in January 2008, a flood
caused additional damage that rendered the agreement worthless. The recoverable
amount of Licensing Agreement No. 1 was determined to be P480,000 at December 31,
2006.
3. The balance in the Goodwill account represents amount paid on December 30, 2006, for
a four-year advertising program, estimated to assist in increasing Acadia’s sales.
4. The Leasehold Improvements account includes (a) the 300,000 cost of improvements
with a total estimated useful life of 12 years, which Acadia as tenant made to leased
premises in January 2006, and movable assembly line equipment costing P300,000 that
was installed in the leased premises in December 2007. Acadia paid its rent in full during
2007. A 10-year non-renewable lease was signed January 3, 2006, for the leased
building that Acadia used in manufacturing operations.
Prepare the adjusting journal entries that should be made on December 31, 2007. use a separate
account for the accumulation of each type of amortization.
ACCOUNTING FOR PATENTS AND RESEARCH AND DEVELOPMENT COST
16. During 2005, Apex Company purchased a building site for its proposed research and
development laboratory at a cost of P1,200,000. Construction of the building was started in 2005.
the building was completed on December 31, 2006, at a cost of P5,600,000 and was placed in
service on January 2, 2007. The estimated useful life of the building for depreciation purposes
was 20 years; the straight-line method of depreciation was to be employed and there was no
estimated salvage value.
Management estimates that about 50% of the projects of the research and development group will result
into long term benefits (i.e. at least 10 years) to the corporation. However, Apex fails to demonstrate how
such projects will generate probable future economics benefits. The remaining projects either benefit the
current period or are abandoned before completion. A summary on the number of projects and the direct
cost incurred in conjunction with the research and development activities for 2007 appears below.
Upon recommendation the research and development group, Apex Company acquired a patent for
manufacturing rights at a cost of P1,600,000. The patent was acquired on April 1, 2006 and has an
economic life of 10 years.
Completed projects with long-term benefits
Abandoned projects or projects that benefit the
current period
Projects in process – results indeterminate
Total
Number
of
Projects
30
20
10
50
Salaries and
Employee
Benefits
P1,800,000
1,300,000
Other Expenses
(excluding Building
Depreciation Expense)
P1,000,000
300,000
800,000
P3,900,000
240,000
P1,540,000
1. The total research and development expenses for 2007 should be
a. P2,920,000
c. P5,440,000
b. P5,880,000
d. P5,720,000
2. What is the amount of patent amortization for 2007?
a. P80,000
b. P160,000
c. P120,000
d. P0
3. What is the book value of the building on December 31, 2007?
a. P5,320,000
c. P5,040,000
b. P5,600,000
d. P6,460,000
4. What is the carrying value of the patent at December 31, 2007?
a. P1,280,000
c. P1,600,000
b. P1,320,000
d. P0
ACQUISITION AND AMORTIZATION OF FRANCHISE, PATENT, AND TRADEMARK
17. The following information pertains to Baker company’s intangible assets:
1. On January 1, 2007, Baker signed an agreement to operate as a franchise of Max and Jess
food Chain, Inc. for an initial franchise fee if P1,500,000. Of this amount P300,000 was paid
when the agreement was signed and the balance is payable in 4 annual payments of
P300,000 each beginning in January 1, 2008. 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, 2007 of the 4 annual payments discounted at 14% (the implicit rate for a
loan of this type) is P874,000. the agreement is also providing the 5% of the revenue from the
franchise that must be paid to the franchisor annually. Baker’s revenue from the franchise for
2007 was P19,000,000. Baker estimates the useful life of the franchise to be 10 years.
2. Baker incurred P1,300,000 of the experimental and development costs in its laboratory to
develop a patent which was granted on January 2, 2007. Legal fees and other costs
associated with registration of the patent totaled P272,000. Baker estimates that the useful
life of the patent will be 8 years.
3. A trademark was purchased from Banawe Company for P640,000 on July 1, 2004.
Expenditures for successful litigation in defense of the trademark totaling P163,200 ware paid
on July 1, 2007. Baker estimates that the useful life of the trademark will be 20 years from the
date of acquisition.
1. What is the carrying amount of the franchise at December 31, 2007?
a. P1,350,000
c. P1,056,500
b. P1,500,000
d. P1,174,000
2. What is the carrying amount of the patent at December 31, 2007?
a. P238,000
c. P1,375,500
b. P272,000
d. P258,400
3. What is the carrying amount of the trademark at December 31, 2007?
a. P686,400
c. P544,000
b. P528,000
d. P707,200
4. The total expenses resulting from transactions would appear on Baker’s income statement for the
year-ended December 31, 2007, should be
a. P1,255,760
c. P1,133,400
b. P1,260,560
d. P183,400
PURCHASE OF A BUSINESS
18. In line with Candler Company’s expansion program, it has become interested in acquiring a plant
in Mindanao to handle many of its production functions in that area. One prospective seller is
Sayo Na Co. whose owners have decided to sell their business if a proper settlement an be
obtained. Sayo Na Co.’s balance sheet appears as follows:
Current Assets
Investments
Property, plant and equipment
4,500,000
1,500,000
12,000,000
Total Assets
18,000,000
Current Liabilities
Non Current Liabilities
Common Stock
APIC
Retained Earnings
Total Equities
2,400,000
3,000,000
1,500,000
5,100,000
6,000,000
P18,000,000
Candler has hired Kilatis Appraisal Company to determine the proper price to pay for Sayo Na Co.. The
Appraisal Company finds that investments have a fair value of P4, 500,000 and inventory is understated
by P2, 400,000. All other assets and equities are properly stated. An examination of the company’s
income for the last 40 years indicates that that the net income has steadily increased. In 2006 the
company had a net operating income of P3, 000,000 which is expected to increase 20% each year over
the next 4 years. Candler believes that a normal return in this type of business is 18% on net assets. The
asset investment in Mindanao plant is expected to stay the same for the next 4 year.
According to Kilatis Appraisal Company the fair value of Sayo Na Co. can be estimated in many different
ways. Calculate an estimate of the value of Sayo Na Co., assuming that any will be computed as:
1. The capitalization of the average excess earnings of Sayo Na Co. at 18%
a. P44,840,000
c. P18,286,415
b. P36,000,000
d. P26,840,000
2. The purchase of average excess earnings over the next four years.
a. P24,364,800
c. P18,381,888
b. P19,591,200
d. P98,520,000
3. The capitalization of average excess of Sayo Na Co. at 24%
a. P31,500,000
c. P18,381,888
b. P24,630,000
d. P98,520,000
4. The present value of the average excess earnings over the next four years discounted at 15%.
(The present value of an ordinary annuity of 1 at 15% for 4 periods is 2.85498)
a. P31,792,979
c. P22,542,844
b. P55,932,484
d. P27,250,135
5. If Candler were to pay P23,100,000 to purchase the assets and assume liabilities of Sayo Na
Co., how much would be charged to goodwill?
a. P8,840,000
c. P0
b. P6,364,800
d. P5,100,000
GOODWILL COMPUTATION
19. Cannon Company, a high-flying conglomerate, has instructed you to conduct a purchase audit of
XYZ Co.’s books to determine a possible purchase price for XYZ Co.’s net assets. You find the
following information:
Total identifiable assets of XYZ Co. at fair market value
Liabilities
Average rate of return on net assets for XYZ Co.’s industry
Forecasted earnings per share based on past earnings figures
5,000,000
1,200,000
15%
700,000
Determine the purchase price on the basis of the following assumptions:
1. Goodwill is to equal 3 years’ excess earnings
a. P5,510,000
c. P3,930,000
b. P5,900,000
d. P4,190,000
2. Goodwill is equal to the present value of excess earnings discounted at 15% for 3 years. (The
PV factor of an ordinary annuity of 1 at 15% for 3 periods, 2.28323)
a. P5,398,261
c. P4,690,460
b. P4,096,820
d. P5,101,441
3. Goodwill is equal to the capitalization of excess earnings at 15%
a. P7,600,000
c. P4,666,667
b. P8,466,667
d. P6,400,000
ACCOUNTING FOR COMPUTER SOFTWARE COST
20. Danskin, Inc. is considering purchasing A & B Enterprises, which has the following assets and
liabilities
.
Accounts Receivable
Inventory
Prepaid Insurance
Cost
4,800,000
4,800,000
200,000
Fair Market Value
4,400,000
5,000,000
200,000
Buildings and Equipment (Net)
Accounts payable
Net Assets
1,400,000
(3,200,000)
8,000,000
4,000,000
(3,200,000)
10,400,000
If the purchase price is P12,600,000, the amount of goodwill to be charged in recording the acquisition is
a. P4,600,000
c. P2,200,000
b. P2,400,000
d. P0
ACCOUNTING FOR COMPUTER SOFTWARE COST
21. Daurian Company develops software for small businesses and home computer markets. Most of
the company’s computer programmers are involved in developmental work designed to produce
software that will perform fairly specific-tasks in a user-friendly manner. Extensive testing of the
working model is performed before it is released to production for preparation of masters and
further testing. This careful preparation has resulted to the production of several computer
software packages that has been very successful in the marketplace.
Daurian incurred the following costs during 2007:
Salaries and wages of programmers doing research
Expenses related to projects prior to establishment of technological feasibility
Expenses related to projects after technological feasibility has been established
But before software is available for commercial production
Amortization of Capitalized software development costs from current and prior years
Cost to produce and prepare software for sale
P705 ,000
235,200
148,500
80,250
168,900
Additional Data for 2007:
Sales of products for the year
Beginning Inventory
Portion of goods available for sale sold during the year
Income tax rate is 35%
What is Durian’s Net income for 2007?
a. P129,812
b. P181,704
P1,545,000
426,000
50%
c. P199,710
d. P226,336