(1 to 3) Problem 1
Ziva Inc.’s own research department has an on-going project to develop a new production process. At the end of 2019,
Ziva had already spent a total of P300,000 of which P270,000 was incurred before November 1,2019. On December
1,2019, the company’s newly developed production process met the criteria for recognition as an intangible asset.
During 2020, Ziva incurred additional expenditures of P600,000. At the end of 2020, 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.
Required: Based on the result of your audit, determine the following:
1. At December 31,2019, the production process should be recognized at a cost of
a. 300,000
b. Zero
c. 30,000
d. 270,000
2. Total cost of the production process at December 31,2020
a. 630,000
b. 600,000
c. 870,000
d. 900,000
3. Impairment loss to be recognized by Ziva in 2020, in connection with the new production process
a. 300,000
b. Zero
c. 30,000
d. 60,000
(4 to 8) Problem 2
Sony Inc. was organized in 2019. 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 2019 and 2020:
Intangible Assets
July 1,2019
8-year franchise; expires June 30, 2027 P126,000
October 1,2019
Advance payment on leasehold (tem of lease is 2 years) 84,000
December 31,2019 Net loss for 2019 including incorporation fee, P3,000, and related legal fees of organizing, P15,000
(all fees incurred in 2019) 48,000
January 2,2020
March 1,2020
April 1,2020
July 1,2020
October 1,2020
Acquired patent (10-year life) 222,000
Cost of developing a secret formula 225,000
Goodwill purchased 835,200
Legal fee for successful defense of patent purchased above 37,950
Research and development costs 480,000
Required: Based on the result of your audit, determine the following: (Ignore Income Tax Implications)
4. Unamortized patent cost at December 31,2020
a. 199,800
b. 235,440
c. 222,000
d. 197,490
5. Unamortized franchise cost at December 31,2020
a. 110,250
b. 94,500
c. 102,375
d. 118,125
6. Amount of prepaid rent at December 31,2020
a. 73,500
b. 31,500
c. 84,000
d. 63,000
7. Adjusting entries on December 31,2020 should include a net debit to retained earnings account of
a. 89,275
b. 42,000
c. 60,375
d. 66,375
8. As a result of the adjustments at December 31,2020, the total charges against Sony’s 2020 Income should be
a. 840,900
b. 822,900
c. 597,900
d. 841,275
(9 to 11) Problem 3
Gibbs Laboratories holds a valuable patent (No. 143) on a device that burns body fats. Gibbs 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. The history of Patent No. 143 is as follows:
2010-2011
Research conducted to develop device 7,680,000
Jan. 5, 2012
Design and construction of a prototype 1,752,000
Mar. 15, 2012 Testing of Models 840,000
Jan. 2, 2013
Legal and other fees to process patent application 1,241,000
Dec. 10, 2015 Legal fees paid to successfully defend device patent 714,000
April 3, 2016 Research aimed at modifying the design of the patented device 860,000
July 28, 2019 Legal fees paid in successful patent infringement suit against a competitor 680,000
A 17-year useful life was assumed by Gibbs when it received the initial device patent. On January 1,2018, it revised its
useful life estimate downward to 5 remaining years. The company’s reporting date is December 31,2020.
Required: Based on the result of your audit, determine the following:
9. Carrying value of Patent No. 143 at December 31,2013
a. 1,168,000
b. 3,607,529
c. 1,241,000
d. 1,178,950
10. Carrying value of Patent No. 143 at December 31,2017
a. 1,488,000
b. 876,000
c. 350,400
d. 817,600
11. Carrying value of Patent No. 143 at December 31,2020
a. 657,000
b. 876,000
c. 525,600
d. 350,400
(12 to 13) Problem 4
Abby Inc. is an established computer software company. In 2019, the firm incurred the following costs in the process of
designing, developing and producing a new software program using a certain technology to access the Internet:
Designing and planning
P1,800,000
Code development
2,700,000
Testing
900,000
Production of product master
4,500,000
In 2020, Abby incurred P1,800,000 in costs to produce the software program for sale in 2020. The costs of designing and
planning, code development and testing were all incurred before the technological feasibility of the product was
established. Abby began marketing the software program in 2020 and earned revenues of P4,320,000 in 2020. Abby
estimates that the total revenues over the 4-year life of the product will be P21,600,000. At the end of 2020, Abby was
offered P7,200,000 for the rights to distribute the software.
Required: Based on the result of your audit, determine the following:
12. Research and development costs to be expensed in 2019
a. 9,900,000
b. 6,525,000
c. 6,300,000
d. 5,400,000
13. Research and development costs to be expensed in 2020
a. 2,700,000
b. 2,925,000
c. 1,575,000
d. 1,260,000
(14 to 16) Problem 5
A license is acquired July 1,2017, 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 1,2018,
management estimated that the recoverable amount of the license is only P135,000. Amortization will be taken over 3
years from that point.
On January 1,2020, 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 1,2020. The estimated remaining useful life is
now believed to be 5 years.
Required: Based on the result of your audit, determine the following:
14. Impairment loss on January 1,2019
a. 270,000
b. 300,000
c. 225,000
d. Zero
15. Gain on impairment recovery in 2020
a. 270,000
b. 180,000
c. 495,000
d. 315,000
16. Revaluation surplus on January 1,2020
a. 270,000
b. 180,000
c. 485,000
d. 315,000
(17 to 20) Problem 6
On January 2,2012, Mcgee Inc. spent P480,000 to apply for and obtain a patent on a newly developed product. The patent
had an estimated useful life of 10 years. At the beginning of 2016, the company spent P144,000 in successfully
prosecuting an attempted patent infringement. At the beginning of 2017, the company purchased for P280,000 a patent
that was expected to prolong the life of the original patent by 5 years. On July 1,2020, a competitor obtained rights to a
patent that made the company’s patent obsolete.
Required: Based on the result of your audit, determine the following:
17. Carrying amount of Patent as of December 31,2016
a. 360,000
b. 240,000
c. 369,500
d. 355,200
18. Amortization of patent in 2017
a. 64,000
b. 64,960
d. 53,000
c. 52,000
19. Carrying amount of Patent as of December 31,2019
a. 448,000
b. 454,720
c. 444,640
d. 364,000
20. Loss on patent obsolescence in 2020
a. 338,000
b. 416,000
d. 364,000
c. 448,000
(21 to 24) Problem 7. Horatio Inc. purchased a customer list and a formula for a total of P2,000,000. Horatio uses the fair
value of these two intangibles. The appropriate interest rate is 8%. The potential future cash flows from the two
intangibles, and their associated probabilities, are as follows:
Customer List
Outcome 1 – 20% probability of cash flows of P250,000 at the end of each year for 5 years.
Outcome 2 – 30% probability of cash flows of P150,000 at the end of each year for 4 years.
Outcome 3 – 50% probability of cash flows of P50,000 at the end of each year for 3 years.
Formula
Outcome 1 – 10% probability of cash flows of P1,500,000 at the end of each year for 10 years.
Outcome 2 – 20% probability of cash flows of P500,000 at the end of each year for 4 years.
Outcome 3 – 70% probability of cash flows of P300,000 at the end of each year for 3 years.
Required: Based on the result of your audit, determine the following:
21. Estimated fair value of customer list
a. 413,110
b. 86,915
c. 106,697
d. 541.284
22. Estimated fair value of the formula
a. 4,164,771
b. 1,878,915
c. 309,687
d. 433,485
23. Cost to be allocated to the customer list
a. 360,476
b. 438,440
c. 230,037
d. 395,042
24. Cost to be allocated to the formula
a. 1,769,963
b. 1,604,958
c. 1,561,560
d. 1,639,524
(25 to 28) Problem 8
In connection with your audit of the CSI Inc.’s financial statements for the year 2020, you noted the following items
relative to the company’s Intangible Assets:
a. A patent was purchased from MU Inc. for P4,000,000 on January 2,2019. CSI estimated that the remaining useful life
of the patent to be 10 years. The patent was carried in MU’s accounting records at a carrying value of P4,000,000 when
MU sold it to CSI.
b. During 2020, a franchise was purchased from RAN Inc. for P960,000. In addition, 5% of the revenue from the
franchise must be paid to RAN. Revenue from the franchise for 2020 was P5,000,000. CSI estimates the useful life of the
franchise to be 10 years and takes full year’s depreciation in the year of purchase.
c. CSI incurred research and development costs of P866,000 in 2010. CSI estimates that these costs will be recouped by
December 31,2023.
d. On January 1,2020, CSI, because of the recent events in the industry, estimates that the remaining life of the patent
purchased on January 2,2019, is only 5 years from January 1,2020.
Required: Based on the result of your audit, determine the following:
25. Amortization of patent for 2020
a. 900,000
b. 800,000
c. 720,000
d. 400,000
26. Carrying amount of patent as of December 31,2020
a. 2,880,000
b. 2,400,000
c. 2,700,000
d. 3,200,000
27. Carrying amount of intangible assets as of December 31,2020
a. 3,264,000
b. 4,610,000
c. 3,564,000
d. 3,744,000
28. Total amount that should be charged against income in 2020
a. 2,112,000
b. 1,066,000
c. 2,012,000
d. 1,932,000
(29 to 33) Problem 9
You noted the following items relative to the company’s intangible assets in connection with your audit of the NCIS’
financial statement for the year 2020:
a. On January 1,2020, NCIS signed an agreement to operate as franchisee of Vague 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. NCIS’ revenue
from the franchise for 2020 was P8,000,000. NCIS estimates that the useful life of the franchise to be 10 years.
b. NCIS 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. NCIS
estimates that the useful life of the patent will be 8 years.
c. A trademark was purchased from ALE Inc. 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. NCIS estimates that the trademark’s useful life will
be indefinite.
d. Use 4 decimal places for present value factor.
Required: Based on the result of your audit, determine the following:
29. Total expenses related to franchise in 2020
a. 503,914
b. 535,200
c. 448,950
d. 454,964
30. Carrying amount of franchise as of December 31,2020
a. 549,644
b. 494,680
c. 538,733
d. 612,000
31. Carrying amount of patent as of December 31,2020
a. 131,200
b. 114,800
c. 124.640
d. 123.482
32. Carrying amount of trademark as of December 31,2020
a. 320,000
b. 288,000
c. 304,000
d. 400,000
33. Carrying amount of intangible assets as of December 31,2020
a. 1,046,800
b. 984,444
c. 1,009,480
d. 929,480
(34 to 37) Problem 10
During 2018, Eyecatcher Company purchased a building for its proposed research and development laboratory at a cost of
1,200,000. Construction of the building was started in 2018. The building was completed on December 31,2019, at a cost
of 5,600,000 and was placed in service on January 2,2020. The estimated useful life of the building for depreciation
purposes was 20 years; the straight life 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 in long-term
benefits (at least for 10 years) to the corporation. However, Eyecatcher fails to demonstrate how such projects will
generate probable future economic benefits. The remaining projects either benefit the current period or are abandoned
before completion. A summary of the number of projects and the direct costs incurred in conjunction with the research
and development activities for 2020 appears below.
Upon recommendation of the research and development group, Eyecatcher Company acquired a patent for manufacturing
rights at a cost of 1,600,000. The patent was acquired on April 1,2019, and has an economic life of 10 years.
Number of Projects:
Completed projects with long-term benefits
30
Abandoned projects or projects that benefit the current period
20
Projects in process – results indeterminate
10
Salaries and Employee Benefits:
Completed projects with long-term benefits
Abandoned projects or projects that benefit the current period
Projects in process – results indeterminate
1,800,000
1,300,000
800,000
Other expenses (excluding building depreciation charge):
Completed projects with long-term benefits
Abandoned projects or projects that benefit the current period
Projects in process – results indeterminate
1,000,000
300,000
240,000
Required: Based on the result of your audit, determine the following:
34. Total research and development expenses for 2020
a. 2,920,000
b. 5,880,000
c. 5,440,000
d. 5,720,000
35. Patent amortization for 2020
a. 80,000
b. 160,000
c. 120,000
d. Zero
36. Book value of building on 12/31/2020
a. 5,320,000
b. 5,600,000
c. 5,040,000
d. 6,460,000
37. Book value of patent on 12/31/2020
a. 1,280,000
b. 1,320,000
c. 1,600,000
d. Zero
(38 to 40) Problem 11
You have been instructed by Laser Inc., a high-flying conglomerate, to conduct a purchase audit of AIR Inc.’s books to
determine a possible purchase price of AIR Inc.’s net assets. You find the following information:
Total identifiable assets at AIR Inc. at fair market value
P5,000,000
Liabilities
1,200,000
Average return on net assets for AIR Inc.’s industry
15%
Forecasted earnings per year based on past earnings figures
700,000
Required: Determine the purchase price on the basis of the following assumptions:
38. Goodwill is equal to 3 year’s excess earnings
a. 5,510,000
b. 5,900,000
c. 3,930,000
d. 4,190,000
39. Goodwill is equal to the present value of excess earnings discounted at 15% for 3 years (Use five decimal places for
present value factor)
a. 5,398,261
b. 4,096,820
c. 4,690,460
d. 5,101,441
40. Goodwill is equal to the capitalization of excess earnings at 15%
a. 7,600,000
b. 8,466,667
c. 4,666,667
d. 6,400,000