PAS 38: INTANGIBLE ASSETS
CRITERIA FOR RECOGNITION
Identifiability
In order to meet the definition of an intangible asset, expenditure on an item must be separately identifiable in order to distinguish
it from goodwill. An asset meets the identifiability criterion when it
• Is capable of being separated from the entity and sold, transferred, licensed, or rented either individually or in combination with
a related contract, asset, or liability
• Arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or
other rights or obligations
Control
An entity controls an asset if it has the power to obtain the future economic benefits flowing from the underlying resource and to
restrict the access of others to those benefits. Usually this control would flow from legally enforceable rights. However, legal
enforceability is not necessary if control can be enforced in some other way.
For example, one method of control is keeping something secret through employee confidentiality.
Control needs to be looked at carefully. An entity may be able to identify skills in its workforce and to measure the costs of
providing those skills to its staff (via training). However, the entity usually does not have control over the expected economic
benefits arising from the skilled staff, as they can leave their employment.
Even if the skills are protected in some way such that departing staff are not permitted to use them elsewhere, the entity has lost
the future benefit of the skills imbued in the departing staff member.
Similarly, the purchase of customer lists or expenditure on advertising, while identifiable, does not provide control to an entity
over the expected future benefits. Customers are not forced to buy from the entity and can go elsewhere.
Future Economic Benefit
Future economic benefit may include revenue from the sale of products, services, or processes, but also includes cost savings or
other benefits from use of an asset.
Use of intellectual property can reduce operating costs rather than produce revenue.
RECOGNITION AND MEASUREMENT
An item may be recognized as an intangible asset when it meets the definition of an intangible asset (see previous) and meets
these recognition criteria
• It is probable that the expected future economic benefits that are attributable to the asset will flow to the entity.
• The cost of the asset can be measured reliably.
Initially, intangible assets shall be measured at cost. The cost of separately acquired intangible assets comprises
• Purchase price, including any import duties and nonrefundable purchase taxes, less discounts and rebates.
• Directly attributable costs of preparing the asset for use.
Directly attributable costs can include employee benefits, professional fees, and costs of testing.
Costs that cannot be included are
• Costs of introducing new products or services, such as advertising
• Costs of conducting new business
• Administration costs
• Costs incurred while an asset that is ready for use is awaiting deployment
• Costs of redeployment of an asset
• Initial operating losses incurred from operation
If payment for an intangible asset is deferred beyond normal credit terms, then the cost is the cash price and the balance is treated
as a finance charge over the period of the finance.
If intangible assets are acquired as part of a business combination, as defined in PFRS 3, their cost is their fair value at the
acquisition date. The probability of future economic benefit is reflected in their fair value, and, therefore, the probability of future
economic benefit required for recognition is presumed. In a business combination, such intangible assets are to berecognized
separately from goodwill.
Assessing the fair value of an intangible asset in a business combination can be difficult; obvious techniques are the use of
comparable market transactions or quoted prices. Sometimes there may be a range of values to which probabilities can be
assigned. Such uncertainty enters into the measurement of the asset rather than demonstrating an inability to measure the value. If
an intangible asset has a finite life, then it is presumed to have a reliably measurable fair value.
In some circumstances, it may not be possible to reliably measure the fair value of an intangible asset in a business
combination because it is inseparable or there is no history or evidence of exchange transactions for the asset, and any fair value
estimates would be based on immeasurable variables.
If an intangible asset is acquired in exchange for another asset, then the acquired asset is measured at its fair value unless the
exchange lacks commercial substance or the fair value cannot be reliably measured, in which case the acquired asset should be
measured at the carrying amount of the asset given up, where carrying amount is equal to cost less accumulated depreciation and
impairment losses. For impairment losses, reference should be made to PAS 36. In this context, any compensation received for
impairment or loss of an asset shall be included in the income statement.
INTERNALLY GENERATED INTANGIBLE ASSETS
With internally generated intangible assets, problems arise in identifying whether there is an identifiable asset that will
generate future economic benefit and in reliably determining its cost.
Goodwill
The Standard proscribes the recognition of internally generated goodwill as an asset. The rationale behind this is that any
expenditure incurred does not result in an asset that is an identifiable resource—it is not separable, nor does it arise from
contractual or other legal rights—or that is controlled by the entity. In addition, any costs incurred are unlikely to be specifically
identifiable as generating the goodwill. The position that the difference between a valuation of a business and the carrying
amount of its individual assets and liabilities may be capitalized as goodwill falls down insofar as that difference cannot be
categorized as the cost and therefore cannot be recognized as an asset.
Other Internally Generated Intangible Assets
The Standard sets out rules for the recognition of other internally generated intangible assets and broadly defines such
expenditures as research and development. It proscribes the recognition of internally generated brands, mastheads, publishing
titles, customer lists, and similar items, because expenditure thereon, like expenditure on internally generated goodwill, cannot be
distinguished from the cost of developing the business as a whole and is therefore not separately identifiable.
In order to determine whether an internally generated intangible asset qualifies for recognition, its generation is divided into a
research phase and a development phase. If the two phases cannot be distinguished, then the entire expenditure is classified as
research.
Expenditure on research (or the research phase of an internal project) is to be written off as an expense as and when
incurred, as it is not possible to demonstrate that an asset exists that will generate future economic benefit. Examples
include
• Activities aimed at obtaining new knowledge
• The search for, evaluation, and selection of applications of research findings or knowledge
• The search for alternatives for materials, devices, products, systems, or processes
• The formulation, design, evaluation, and selection of possible alternatives for new or improved materials, devices,
products, systems, or processes
Development expenditure may be recognized as an intangible asset when, and only when, all of the following can be
demonstrated:
• The technical feasibility of completing the asset so that it will be available for use or sale
• The intention to complete the asset and use or sell it
• The ability to use or sell the asset
• How the asset will generate probable future economic benefit, including demonstrating a market for the asset’s
output, or for the asset itself, or the asset’s usefulness
• The availability of sufficient technical, financial, and other resources to complete the development and to use or sell
the asset
• The ability to reliably measure the expenditure attributable to the asset during its development
Examples of activities that may fail to be recognized as intangible assets include
• The design, construction, and testing of preuse prototypes or models
• The design of tools and jigs involving new technology
• The design, construction, and operation of a pilot plant that is not capable of commercial production
• The design, construction, and testing of a chosen alternative for new or improved materials, devices, products,
systems, or processes
RECOGNITION OF AN EXPENSE
The Standard requires that all expenditure on an intangible item be written off as an expense unless it meets the recognition
criteria or it is acquired as part of a business combination and cannot be separately identified, in which case it is subsumed as part
of goodwill and treated in accordance with PFRS 3. Examples include
• Expenditure on start-up activities (start-up costs) or on opening a new facility or business (preoperative expenses)
• Expenditure on training
• Expenditure on advertising and promotional activities (including mail order catalogues)
• Expenditure on relocating or reorganizing part or all of an entity
WEB SITE DEVELOPMENT COSTS
The advent of the Internet has created new ways of performing tasks that were unknown in the past. Most entities have their own
Web site that serves as an introduction of the entity and its products and services to the world at large. A Web site has many of
the characteristics of both tangible and intangible assets. With virtually every entity incurring costs on setting up its own Web
site, there was a real need to examine this issue from an accounting perspective. An interpretation was issued that addressed Web
site costs: SIC 32, Intangible Assets—Web site Costs.
SIC 32 lays down guidance on the treatment of Web site costs consistent with the criteria for capitalization of costs
established by PAS 38. According to SIC 32, a Web site that has been developed for the purposes of promoting and
advertising an entity’s products and services does not meet the criteria for capitalization of costs under PAS 38. Thus costs
incurred in setting up such a Web site should be expensed.
MEASUREMENT AFTER RECOGNITION
The Standard states that, after recognition, intangible assets may be measured using either a cost model or a revaluation model.
However, if the revaluation model is used, then all assets in the same class are to be treated alike unless there is no active market
for those assets.
“Classes of intangible assets” refers to groupings of similar items, such as patents and trademarks, concession rights, or brands.
Assets in each class must be treated alike in order to avoid mixes of costs and values.
If the cost model is selected, then after initial recognition, an intangible asset shall be carried at cost less accumulated
amortization and impairment losses.
If the revaluation model is selected, the intangible asset shall be carried at its fair value less subsequent accumulated
amortization and impairment losses. Fair values are to be determined from an active market and are to be reassessed with
regularity sufficient to ensure that, at the end of the reporting period, the carrying amount does not differ materially from its fair
value.
A revaluation increase is to be recognized in other comprehensive income and accumulated in equity unless it reverses a
previously recognized impairment loss, in which case it shall be recognized in profit or loss. If, in subsequent years, revaluation
decreases on the same asset occur, such decreases are recognized in other comprehensive income to the extent of any credit
balance in the revaluation surplus in respect of that asset. Otherwise the reduction is recognized in profit or loss.
Any revaluation reserve in respect of a particular intangible asset is transferred to retained earnings when it is realized. This could
be on disposal, although it is permitted to treat the additional amortization resulting from the revaluation as a realization of that
surplus and transfer this amount from revaluation reserve to retained earnings. Under no circumstances can the revaluation
reserve, or part thereof, be credited to profit or loss.
USEFUL LIFE
The useful life of an intangible asset must be assessed on recognition as either indefinite or finite. If the assessment
determines the life to be finite, then the length of life or number of units to be produced must be determined also. An
indefinite useful life may be determined when there is no foreseeable limit to the period over which the entity will continue to
receive economic benefit from the asset. All relevant factors must be considered in this assessment and may include
• Expected usage by the entity and whether it could be used by new management teams
• Product life cycles
• Rates of technical or commercial change
• Industry stability
• Likely actions by competitors
• Legal restrictions
• Whether the useful life is dependent on the useful lives of other assets “Indefinite” does not mean “infinite.”
Additionally, assessments should not be made based on levels of future expenditure over and above that which would normally
be required to maintain the asset at its initial standard of performance.
AMORTIZATION
The depreciable amount of an intangible asset with a finite useful life is to be allocated over its useful life. The depreciable
amount is the cost of the asset (or other amount substituted for cost, e.g., in a revaluation model) less its residual value.
Amortization shall commence when the asset is ready for use and shall cease when it is derecognized or is reclassified as held for
sale under PFRS 5.
The residual value is to be assumed to be zero unless there is a commitment by a third party to acquire the asset at the end of its
useful life or there is an active market for the asset and the residual value can be determined by reference to that market, and it is
probable that an active market will continue to exist at the end of the asset’s useful life.
Therefore, an asset with a residual value at anything other than zero assumes that the entity will dispose of the asset prior to the
end of the asset’s economic life.
The Standard requires that the residual value be reassessed at each balance sheet date. Any changes are to be treated as changes
in accounting estimates. In practice, this is unlikely to have any impact in view of the basic presumption of a zero residual value.
Similarly, the useful life is to be reassessed annually. Any changes are also to be treated as changes in accounting estimates.
Intangible assets with indefinite useful lives are not to be amortized. However, the asset must be tested for impairment annually
and whenever there is an indication that it may be impaired. PAS 36 provides guidance on impairment. Additionally, the
determination of an indefinite useful life must be reassessed at each balance sheet date. If the assessment changes, it is to be
treated as a change in accounting estimate.
Accounting for Specific Intangible Assets
Patent
A patent gives the holder exclusive right to use, manufacture, and sell a product or a process without interference or
infringement by others.
Acquired
Same with PPE - (Cost depends on manner of acquisition)
Internally generated
Expensed – R&D costs related to the development of the product, process, or idea that is subsequently patented
Capitalized – Costs to secure the patent right
Amortization
Over its legal life (20 years) or its useful life, whichever is shorter.
Trademark
A trademark or trade name is a word, phrase, or symbol that distinguishes or identifies a particular entity or product.
Measurement
Same with patents
Legal life
Legal protection for an indefinite number of renewals for a period of 10 years (Sec. 145 RA 8293) each.
Amortization
Limited life - Amortized over the life of the trademark
Indefinite life - not amortized
Franchise
A franchise is a contractual arrangement under which the franchisor grants the franchisee the right to sell certain products or
services, to use certain trademarks or trade names, or to perform certain functions, usually within a designated geographical area.
Fees related to franchise
Initial – capitalized; amount depends on the manner of payment
Periodic – expensed when incurred
Amortization
Limited life - Amortized over the life of the franchise
Indefinite life - not amortized
Goodwill
An asset representing the future economic benefits arising from other assets acquired in a business combination that are not
individually identified and separately recognized. (PFRS 3 Appendix)
Determination of Goodwill
Specific attributes approach
The attributes and components of goodwill are identified and valued accordingly.
Indirect valuation approach
Goodwill is the difference between the purchase price and the fair value of identifiable net assets acquired.
Excess earnings approach
1. Purchase of average earnings.
Average earnings
Less normal earnings (FV of NA x Normal rate of return)
Excess earnings
x number of years
Goodwill
Pxx
xx
xx
x
Pxx
2. Capitalization of average excess earnings
Average earnings
Less normal earnings (FV of NA x Normal rate of return)
Excess earnings
/ Capitalization rate
Goodwill
Pxx
xx
xx
%
Pxx
3. Capitalization of average earnings
Average earnings
/ Capitalization rate
Net assets, including goodwill
Less net assets, excluding goodwill
Goodwill
Pxx
%
xx
xx
Pxx
4. Present value of average excess earnings
Average earnings
Less normal earnings (FV of NA x Normal rate of return)
Excess earnings
x PVF using an appropriate rate
Goodwill
Pxx
xx
xx
xx
Pxx
Illustrative Theories and Problems
1. Intangible assets are
a. Identifiable non-monetary assets without physical substance.
b. Properties held to earn rentals or for capital appreciation or both.
c. Assets held for sale in the ordinary course of business.
d. Tangible items that are held for use in the production or supply of goods or services, for rental to others, or for administrative
purposes; and are expected to be used during more than one period.
2. The critical attributes of an intangible asset include
a. Identifiability (separable or arising from contractual or other legal rights)
b. Control (power to obtain benefits from the asset)
c. Future economic benefits (such as revenues or reduced future costs)
d. All of the above.
3. An intangible asset shall be recognized if, and only if it is probable that the expected future economic benefits
that are attributable to the asset will flow to the entity and the cost of the asset can be measured reliably. The
probability recognition criterion is always considered to be satisfied for intangible assets acquired
a. Separately.
b. In a business combination.
c. Either a or b
d. Neither a nor b
4. Expenditures that do not satisfy the recognition criteria are recognized as
a. In general, expense when they are incurred.
b. In business combinations, part of the amount attributed to the goodwill recognized at the acquisition date.
c. Either a or b
d. Neither a nor b
5. PAS 38 defines ‘Research’ as
a. The original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and
understanding.
b. The application of research findings or other knowledge to a plan or design for the production of new or substantially
improved materials, devices, products, processes, systems or services before the start of commercial production or use.
c. The search for mineral resources, including minerals, oil, natural gas and similar nonregenerative resources after the entity has
obtained legal rights to explore in a specific area.
d. The determination of the technical feasibility and commercial viability of extracting the mineral resource.
6. Which statement is correct regarding initial recognition of research and development costs?
a. Research costs may be capitalized.
b. All development costs should be capitalized.
c. If an entity cannot distinguish the research phase of an internal project to create an intangible asset from the development
phase, the entity treats the expenditure for that project as if it were incurred in the development phase only.
d. A research and development project acquired in a business combination is recognized as an asset.
7. Development costs are capitalized if, and only if, an entity can demonstrate:
I. The technical feasibility of completing the intangible asset so that it will be available for use or sale.
II. Its intention to complete the intangible asset and use or sell it.
III. Its ability to use or sell the intangible asset.
IV. How the intangible asset will generate probable future economic benefits.
V. The availability of adequate technical, financial and other resources to complete the development and to use or sell the
intangible asset.
VI. Its ability to measure reliably the expenditure attributable to the intangible asset during its development.
a. I, II, III, IV, V and VI.
b. I, II, IV and VI only.
c. I, II, III, IV and V only.
d. I, IV and VI only.
8. Snape Corp. is engaged in a research and development project to produce a new product. In the year ended December 31,
2019, the company spent P1,200,000 on research and concluded that there were sufficient grounds to carry the project on to its
development stage and a further P750,000 had been spent on development. At that date management had decided that they were
not sufficiently confident in the ultimate profitability of the project and wrote off all the expenditure to date to the income
statement. In 2020 further direct development costs have been incurred of P800,000 and the development work is now almost
complete with only an estimated P100,000 of costs to be incurred in the future. Production is expected to commence within the
next few months. Unfortunately, the total trading profit from sales of the new product is not expected to be as good as market
research data originally forecasted and is estimated at only P1,500,000. Assuming the other criteria given in PAS 38 are met, how
much should be capitalized as of December 31, 2020?
a. P1,650,000
c. P900,000
b. P1,550,000
d. P800,000
9. When an internally generated asset meets the recognition criteria, the appropriate treatment for costs previously expensed is:
a. Reinstatement.
b. No adjustment as these amounts may not be reinstated.
c. Include in the cost of the development of the asset.
d. Capitalize into the cost of the asset and adjust the opening balance of retained earnings
10. Coron Company incurred the following costs during the current year:
Quality control during commercial production, including routine testing of products
Laboratory research aimed at discovery of new knowledge
Testing for evaluation of new products
P58,000
68,000
24,000
Modification of the formulation of a plastic product
Engineering follow-through in an early phase of commercial production
Adaptation of an existing capability to a particular requirement or customer's need
as a part of continuing commercial activity
Trouble-shooting in connection with breakdowns during commercial production
Searching for applications of new research findings
26,000
15,000
13,000
9,000
19,000
What is the total amount Coron should report as research and development expense?
a. P137,000
c P198,000
b. P169,000
d. P213,000
11. Siargao Company provided the following information relevant to the research and development expenditures for the current
year:
Current period depreciation on the building housing R and D activities
P1,500,000
Cost of market research study
1,000,000
Current period depreciation on a machine used in R and D activities
500,000
Salary of R and D director
1,200,000
Salary of Vice-President who spends ¼ of his time overseeing R and D activities
2,400,000
Pension costs for salary of R and D director
50,000
Pension costs for salary of Vice-President
100,000
The R and D expense for the current period should be
a. P3,875,000
c. P4,875,000
b. P5,750,000
d. P3,800,000
12. Which of the following describes a patent?
a. It gives the holder exclusive right to use, manufacture, and sell a product or a process without interference or
infringement by others.
b. A word, phrase, or symbol that distinguishes or identifies a particular entity or product.
c. The exclusive and assignable legal right, given to the originator for a fixed number of years, to print, publish, perform, film, or
record literary, artistic, or musical material.
d. A contractual arrangement under which the franchisor grants the franchisee the right to sell certain products or
services, to use certain trademarks or trade names, or to perform certain functions, usually within a designated geographical area.
13. Taal Company purchased a patent from the inventor, who asked P110,000 for it. Taal paid for the patent as follows: cash,
P40,000; issuance of 1,000 shares of its own ordinary shares, par P10 (market value, P20 per share); and a note payable due at the
end of three years, face amount, P50,000, noninterest-bearing. The current interest rate for this type of financing is 12 percent.
Taal Company should record the cost of the patent at
a. P110,000
c. P95,590
b. P 98,800
d. P85,590
14. A patent should be amortized over
a. Twenty years.
b. Its useful life.
c. Its useful life or twenty years, whichever is longer.
d. Its useful life or twenty years, whichever is shorter.
15. Legal fees incurred by a company in defending its patent rights should be expensed when the outcome of the litigation is
Successful
Unsuccessful
a.
Yes
Yes
b.
Yes
No
c.
No
No
d.
No
Yes
16. Haikyu 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.
Purchases of special equipment to be used solely for development of the new machine
Research salaries and fringe benefits for engineers and scientists
Cost of testing prototype
Legal costs for filing for patent
Fees paid to government patent office
P1,820,000
171,000
236,000
127,000
25,000
Drawings required by patent office to be filed with patent application
47,000
Haikyu elected to amortize the patent over its legal life. At the beginning of the second year, Haikyu Enterprises paid
P240,000 to successfully defend the patent in an infringement suit. At the beginning of the fourth year Haikyu
determined that the remaining estimated useful life of the patent was five years.
The carrying amount of the patent at the end of fourth year is
a. P135,320
c. P1,649,680
b. P131,100
d. P 39,800
17. An entity purchases a trademark and incurs the following costs in connection with the trademark:
One-time trademark purchase price
P100,000
Nonrefundable taxes
5,000
Training sales personnel on the use of the new trademark
7,000
Research expenditures associated with the purchase of the new trademark
24,000
Legal costs incurred to register the trademark
10,500
Salaries of the administrative personnel
12,000
Assuming that the trademark meets all of the applicable initial asset recognition criteria, the entity should recognized
an asset in the amount of
a. P100,000
c. P146,500
b. P115,500
d. P158,500
18. Hinata Corp. acquired a fast food franchise for a P50,000 cash down payment and in addition gave a P150,00, oneyear,
noninterest-bearing note payable. The implicit interest rate is 12 percent. Hinata also agreed to pay the franchiser P100,000 per
year for the next 10 years for promotional campaigns, accounting, and related services by the franchiser.
Hinata should record the cost of the franchise as:
a. P183,935
c. P 933,935
b. P950,000
d. P1,183,935
19. Copyrights should be amortized over
a. Their legal life.
b. The life of the creator plus fifty years.
c. Twenty years.
d. Their useful life or legal life, whichever is shorter.
20. On January 1, 2020, Karasuno Corp. acquired a copyright on a book of photographs from the estate of a world renowned
photographer who died in late December 2019, for a price of P500,000. Karasuno’s CEO knows that copyrights normally cover
the lifetime of the artist plus 50 years, but she has heard of a recent court case that extended the legal life by an additional 20
years. Other similar books sold by Karasuno for deceased photographers typically remain popular for only 10 years. The carrying
amount of the copyright at December 31, 2020 should be
a. P500,000
c. P492,857
b. P490,000
d. P450,000
21. RGW Industries purchased the net assets of SP Company for P1,300,000. A schedule of the net assets of SP Company, as
recorded on SP Company's books at the time of the acquisition, is as follows:
Assets
Cash
P 31,000
Receivables
250,000
Inventory
302,000
Land, buildings, and equipment (net)
350,000
Total assets
P933,000
Liabilities
Current liabilities
Long-term debt
Total liabilities
P 90,000
185,000
P275,000
Net assets (book value)
P658,000
The following schedule shows the differences between the recorded costs and market values of the assets of SP Company at the
date of the acquisition:
Cost
Market
Inventory
Land, buildings, & equipment
Patents
Purchased in-process research & development
Existing work force
Totals
Liabilities
P302,000
350,000
-0-0-0P652,000
P275,000
P400,000
390,000
40,000
300,000
90,000
P1,220,000
P 275,000
Determine the amount of goodwill to be recognized on the acquisition.
a. P642,000
c. P 74,000
b. P464,000
d. P164,000
SOLUTION:
Purchase price
Less FV of net assets:
Cash
Receivables
Inventory
PPE
Patents
In-process R&D
Total
Liabilities
Goodwill
P1,300,000
P 31,000
250,000
400,000
390,000
40,000
300,000
1,411,000
( 275,000)
1,136,000
P 164,000
22. 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 identifiable 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.
23. Tadashi Company engaged your services to compute the goodwill in the purchase of Tsukishima Company which
provided the following:
Net income
Net assets
2017
P1,400,000
P 6,000,000
2018
1,600,000
8,000,000
2019
2,000,000
8,800,000
2020
2,200,000
9,200,000
Total
P 7,200,000
P32,000,000
It is agreed that goodwill is measured by capitalizing excess earnings at 25% with normal return on average net assets at 15%.
How much is the purchase price for Tsukishima Company?
a. P11,600,000
c. P10,400,000
b. P11,200,000
d. P11,000,000
24. The owners of Bokuto Company are planning to sell the business to new interests. The cumulative net earnings for the past 5
years was P9,500,000. The current value of net assets of Bokuto Company was P20,000,000. Goodwill is determined by
capitalizing average earnings at 8%. What is the amount of goodwill?
a. P1,900,000
c. P1,700,000
b. P3,750,000
d. P1,250,000
25. We purchased all the outstanding ordinary shares of Fukuradani Travel Corporation. Fukuradani has one asset whose value
exceeds its book value by P10,000. Fukuradani's Equity is P80,000. We agreed with Fukuradani that its excess earnings would
last for 10 years and we were granted a 10% return on our investment. Fukuradani's average income for negotiation purposes is
P40,000 and the industry average rate of return is 30% on market value of net assets. Using the "present value of excess earnings"
approach to the calculation of goodwill, what is the purchase price paid for Fukuradani?
a. P335,782
c. P169,880
b. P220,000
d. P 79,880