PROBLEMS ON
IDENTIFIABLE
INTANGIBLE ASSETS 2
ACFAR 2132 INTERMEDIATE ACCOUNTING
LEOPOLDO D. MEDINA, CPA, MSA
COPYRIGHT
PROBLEM 1
Bookware Publishing Corp acquired a copyright to Bernardine Evaristo’s “Girl,
Woman, Other”, a best seller novel and a 2019 Booker Prize winner, for
P285,000 on January 1, 2020. The copyright has a remaining legal life of 20
years.
Sales of the novel are estimated as:
2020
50,000 copies
2021
30,000 copies
2022
10,000 copies
2023
5,000 copies
PREPARE JOURNAL ENTRIES FOR 2020 AND
2021.
2020 Copyright
285,000
Cash
Amortization exp
285,000
150,000
Copyright
150,000
285,000/95,000 = 3 ;
2021 Amortization exp
3 x 50,000 = 150,000
90,000
Copyright
3 x 30,000 = 90,000
90,000
PROBLEM 2
Attenborough Company incorrectly charged the P300,000 cost
of a copyright acquired in early 2019 to the retained earnings
account. The error was discovered as part of the 2020 audit.
The entity followed the policy of amortizing copyright cost over
the expected period of benefit by the straight line method. The
copy right is expected to be useful in producing revenue for 5
years.
A. PREPARE JOURNAL ENTRY NECESSARY IN 2020 TO
CORRECT THE PRIOR PERIOD ERROR.
Copyright
240,000
Retained earnings
Cost
240,000
300,000
-Amortization
300 T / 5
CA
60,000
240,000
B. PREPARE JOURNAL ENTRY TO RECORD THE AMORTIZATION OF THE
COPYRIGHT FOR 2020.
Amortization expense
Copyright
60,000
60,000
PROBLEM 3
Brooks Company acquired three intangible assets before 2020. The entity
is preparing financial statements on December 31, 2020. Before that date,
no formal financial statements had been prepared and the cost of
intangible assets had been charged to operations when acquired.
The following intangible assets were accounted for in this manner.
Acquisition date
Useful life
Cost
Copyright 1 January 1, 2016
10
Copyright 2 July 1, 2017
360,000
Patent
15
January 1, 2018
400,000
10
500,000
A. PREPARE CORRECTING ENTRY TO RECORD AMORTIZATION OF
INTANGIBLE ASSETS ON JANUARY 1, 2020.
COPYRIGHT 1
COST
Accumulat
ed
Amortizatio
n
Carrying
Amount
1/1/2020
COPYRIGHT 2
400,000
400 T / 20
x4
360,000
360 T / 15
80,000
320,000
PATENT
x 2.5
500,000
500 T / 10
60,000
300,000
x2
100,000
400,000
Copyright
620,000
Patent
400,000
Retained earnings
1,020,000
B. PREPARE JOURNAL ENTRY TO RECORD AMORTIZATION OF
INTANGIBLE ASSETS FOR 2020.
Amortization expense
T
94,000
Copyright
44,000
Patent
50,000
 20 T + 24
FRANCHISE
PROBLEM 1
Forman Company entered into a franchise agreement to sell the
products of a franchisor for 20 years. The agreement provides that
Forman Company shall pay an initial fee of P6,000,000 in cash upon
the signing of the agreement at the beginning of current year.
The agreement further provides that the franchise shall pay a
periodic fee of 5% based on the annual gross sales. During the
current year, the entity realized gross sales of P250,000.
PREPARE JOURNAL ENTRIES FOR THE CURRENT YEAR ON THE
BOOKS OF THE FRANCHISEE.
Franchine
6,000,000
Cash
Amortization exp
6,000,000
300,000
 6M / 20
Franchise
Cash
Sales
Franchise fee exp
Cash
300,000
25,000,000
25,000,000
1,250,000
 25 M x 5 %
1,250,000
PROBLEM 2
At the beginning of current year, Levinson Company entered
into a franchise agreement with Jollybee Company to sell
Jollybee products for an indefinite period. The agreement
provides for an initial fee of P20,000,000: P5,000,000 down
upon signing of the contract and the balance in four equal
annual payments every year-end.
The entity signed 10% interest -bearing note for the balance.
The collection of the note is reasonably assured.
The agreement further provides that the franchisor
will assist in the site location, make a survey of
potential market and provide training of
management and employees. Jollybee Company has
already performed all initial services required under
the agreement.
PREPARE JOURNAL ENTRIES FOR THE
CURRENT YEAR ON THE BOOKS OF THE
FRANCHISEE.
Franchise
20,000,000
Cash
5,000,000
Note payable
discounted
15,000,000  interest bearing ; NOT
Note payable
3,750,000
 15 M / 4
Interest expense
1,500,000
 15 M x 10%
Cash
5,250,000
*there is no amortization ; franchise is for indefinite period
PROBLEM 3
At the beginning of current year, Bertolucci
Company signed an agreement to operate as a
franchise of Pizza Delizioso for an initial franchise
fee of P80,000,000 for a period of 10 years. Of this
amount P3,000,000 was paid when the agreement
was signed and the balance payable in five annual
payments of P1,000,000 at every year-end. The
franchise signed a noninterest -bearing note for the
balance.
The market rate of interest for this note is 10%. In
return for the initial franchise fee, the franchisor will
help in locating the site, negotiate the lease or
purchase the site, supervise the construction
activity and provide training to employees. The
initial services required of the franchisor are
substantially performed.
PREPARE JOURNAL ENTRIES ON THE BOOKS
OF THE FRANCHISEE FOR THE CURRENT
YEAR.
Initial payment
3,000,000
+ PV of note
1M x 3.791
3,791,000
Cost of franchise
6,791,000
Face of note (1M x 5)
5,000,000
-PV of note
3,791,000
Implied interest or DNP
1,209,000
Franchise
Discount on NP
Cash
6,791,000
1,209,000
3,000,000
Note payable
Amortization exp
10
5,000,000
679,100
Franchise
Note payable
Cash
 6.791M /
679,100
1,000,000
1,000,000
INTEREST EXPENSE
DISCOUNT ON NP
PAYMENT
1.1.20
12.31.20
12.31.21
12.31.22
12.31.23
12.31.24
1,000,000
1,000,000
1,000,000
1,000,000
1,000,000
379,100
379,100
INTEREST
379,100
317,100
248,720
173,592
90,951
90,488
PRINCIPAL
620,900
682,900
751,280
826,408
909,512
PV OF NOTE
3,791,000
3,170,100
2,487,200
1,735,920
909,512
0
PROBLEM 4
At the beginning of current year, Cameron Company signed an
agreement to operate as a franchisee for an initial franchise fee
of P6,000,000.
On the same date, the entity paid P2,000,000 and agreed to
pay the balance in four equal annual payments of P1,000,000
at every year-end.
The down payment is not refundable, and no future services
are required of the franchisor. The entity can borrow at 14% for
a loan of this type.
WHAT IS THE INITIAL MEASUREMENT OF THE FRANCHISE?
Downpayment
2,000,000
+ PV of note
1M x 2.914
Initial measurement
2,914,000
4,914,000
TRADEMARK
PROBLEM 1
Spielberg Company developed a trademark to distinguish its
products from those of the competitors.
Through advertising and other means, the entity is seeking to
establish significant product identification to increase future sales.
The similarity between the trademark costs and other intangible
and operating costs has caused some confusion over proper
accounting.
The following items are being treated as part of the cost of the
trademark:
Marketing research to study consumer tastes
Design costs of trademark
400,000
1,500,000
Legal fees of registering trademark
150,000
Advertising to establish recognition of trademark
200,000
Registration fee with Patent Office
50,000
WHAT IS THE INITIAL COST OF THE
TRADEMARK?
Design costs of trademark
1,500,000
Legal fees of registering trademark
150,000
Registration fee with Patent Office
50,000
1,700,000
PROBLEM 2
Zemeckis Company purchased a new trademark and incurred the following:
Purchase price
1,000,000
Nonrefundable value added tax
50,000
Training of personnel on the use of new trademark
70,000
Research expenditures associated with the purchase
of the new trademark
240,000
Legal cost incurred to register the new trademark
Administrative salaries
120,000
105,000
WHAT IS THE INITIAL COST OF THE
TRADEMARK?
Purchase price
Nonrefundable value added tax
1,000,000
50,000
Legal cost incurred to register the new trademark
105,000
1,155,000
PROBLEM 3
On January 1, 2020, Minghella Company acquired the following intangible
assets:
A trademark for P2,000,000. The trademark has a remaining legal life of 8
years. The trademark will be renewed in the future indefinitely without
problem. The trademark is now expected to generate cash flows of just
P120,000 per year.
A patent for P6,000,000. The patent has an economic life for just 5 years. On
December 31, 2020, the intangible assets are tested for impairment. The
cash flows expected to be generated by the patent amount to P1,000,000
annually for each of the next 4 years.
The appropriate discount rate for all intangible assets is 8%.
A. WHAT IS THE TOTAL IMPAIRMENT LOSS ON TRADEMARK?
CA
2,000,000
IL
>
VIU
1,500,000 **
500,000
** the trademark has INDEFINITE life ;
to get the VIU, simply 120,000 / 80 %
8 yrs / 10 yrs legal
life
B. WHAT IS THE IMPAIRMENT LOSS ON
PATENT?
Cost
6,000,000
-Amort
6M / 5
CA
1 M x 3.312
1,200,000
4,800,000
>
VIU
IL 1,488,000
3,312,000
PROBLEM 4
Redford Company reported the following account balances on January 1,
2020:
Patent 1,920,000
Accumulated amortization
240,000
Transactions during the current year and other information relating to
intangible assets were as follows:
The patent was purchased for P1,920,000 on January 1, 2018 at which
date the remaining legal life was 16 years. On January 1, 2020, the
entity determined that the useful life of the patent was only eight
years form the date of acquisition.
 On January 1, 2020, in connection with the purchase of a trademark from
another entity, the parties entered into a noncompetition agreement and a
consulting contract.
The entity paid the other party P800,000, of which three- fourths was for the
trademark, and one-fourth was for the counterparty’s agreement not to compete
for a five-year period in the line of business covered by the trademark. The
entity considered the useful life of the trademark to be indefinite.
Under the consulting contract, the entity agreed to pay the counterparty
P50,000 annually on January 1 of each year for 5 years. The first payment was
made on January 1, 2020.
PREPARE JOURNAL ENTRIES FOR THE CURRENT YEAR.
Amortization exp
280,000
Accumulated amortization
1.92 M – 240 T
Trademark (3/4)
/
280,000
6 yrs = 280 T
600,000
Noncompetition agreement (1/4) 200,000
Cash
800,000
Amortization exp
agreement
40,000  for noncompetition
Accumulated amortization
200 T / 5
indefinite life
Royalty expense
Cash
40,000
; trademark is not amortized because of its
50,000
50,000
* PPE ; NOT AN INTANGIBLE ASSET
LEASEHOLD
IMPROVEMENT*
PROBLEM 1
On January 1, 2018, Polanski Company signed a 12-year lease for
warehouse space. The entity has an option to renew the lease for an
additional 8-year period on or before January 1, 2021.
During January 2020, the entity made substantial improvement to
the warehouse. The cost of the improvement was P540,000 with an
estimated useful life of 15 years.
On December 31, 2020, the entity intended to exercise the renewal
option. The entity has taken a full year depreciation on this
leasehold improvement for 2020.
ON DECEMBER 31, 2020, WHAT IS THE CARRYING AMOUNT OF THE
LEASEHOLD IMPROVEMENT?
original life
540,000
12
+ extension
36,000
8
total
504,000
20
- expired
2
Revised remaining 18
Cost
-AD 540T / 15
CA
> 15
PROBLEM 2
On January 1,2020, Mendes Company signed an eight-year lease for office space.
The entity had the option to renew the lease for an additional four-year period on or
before January 1, 2027.
In early January 2020, the entity incurred the following costs:
P1,200,000 for general improvement to the leased premises with an estimated
useful life of ten years.
P500,000 for office furniture and equipment with useful life of ten years.
P400,000 for moveable assembly line equipment with useful life of 5 years.
On December 31, 2020, the entity’s intention as to exercise of the renewal option is
uncertain.
WHAT IS THE ACCUMULATED DEPRECIATION OF LEASEHOLD
IMPROVEMENT OF DECEMBER 31, 2020?
Accumulated depreciation
1.2 M / 8 = 150,000
EXPENSE ; NOT AN INTANGIBLE ASSET
ORGANIZATION
COSTS*
Soderbergh Company, a major winery, started construction of a new facility
in Bacolod City.
The entity incurred the following costs in conjunction with the start-up
activities of the new facility:
Production equipment
8,150,000 *
Travel costs of salaried employees
License fee
400,000
140,000 **
Training of local employees for production and maintenance operations
1,200,000
Advertising costs
850,000
WHAT PORTION OF THE ORGANIZATION COSTS SHOULD BE
EXPENSED?
*Capitalized as Equipment
8,150,000
**If License fees are in connection with licensing in securing the
patent rights, then this item is capitalized as Patent 140,000
Therefore, the answer is : 2,450,000  start-up costs ; not
simply
organization costs
Start-up costs : organization costs, pre-operating costs, preopening costs