UNIVERSITY OF SANTO TOMAS
UST-Alfredo M. Velayo – College of Accountancy
España, Manila
IAC 11 – INTEGRATED REVIEW IN FINANCIAL ACCOUNTING AND REPORTING
2ND TERM, ACADEMIC YEAR 2019-2020
INTANGIBLE ASSETS
1. On December 31, 2019, Aquafit Company exchanged 100,000
ordinary shares of P50 par value for the following assets:
• A trademark valued at P1,500,000
• A land valued at P6,500,000
• A franchise right. No estimate of the value is available at
time of exchange.
The ordinary share of Aquafit Company is selling at P90 on the
date of the exchange.
How much should be the value of the
franchise on the date of exchange?
a. P2,000,000
b. P1,500,000
c. P1,000,000
d. zero
Total fair value of shares issued 100,000 x 90 = P9,000,000
Fair value of trademark
(1,500,000
Fair value of land
(6,500,0000)
Value assigned to franchise
P1,000,000
2. Dowell Company purchased a patent on January 1, 2016 for
P4,500,000. The patent was being amortized over its remaining
legal life of 15 years expiring on December 31, 2030. During
2019, Dowell determined that the economic benefits of the
patent would not last longer than 12 years from the date of
acquisition.
What amount should be reported in the December
31, 2019 statement of financial position as patent, net of
accumulated amortization?
a. P3,000,000
b. P3,200,000
c. P3,300,000
d. P3,600,000
Cost of patent
Accumulated amortization, 12/31/2018
4,500,000/15 x 3
Carrying amount, January 1, 2019
2019 amortization 3,600,00/9
Carrying amount, December 31, 2019
P4,500,000
( 900,000)
P3,600,000
( 400,000)
P3,200,000
Dinar Company incurred P100,000 of research and development
costs to develop a product for which a patent was granted on
January 1, 2017. Legal fees and other costs associated with
registration of the patent totaled P300,000. The patent is
3. How much is the amortization expense for the year 2017?
a. P5,000
b. P15,000
c. P20,000
d. P30,000
P300,000/ 20
= P15,000
4. How much is the carrying value of the patent on December 31,
2019?
a. P255,000
b. P248,800
c. P262,500
d. P335,000
Cost
Accumulated amortization, December 31, 2019
P15,000 x 3
Carrying amount, December 31, 2019
P300,000
(45,000)
P255,000
5. How much is the total expenses for the year 2019?
a. P15,000
b. P95,000
c. P80,000
d. P87,500
Total expenses = P80,000 + P15,000 = P95,000
6. How much is the total expenses for the year 2019 assuming Dinar
Company did not win the lawsuit?
a. P80,000
b. P262,500
c. P87,500
d. P350,000
Total expenses = P80,000 + (300,000 – 30,000) = P350,000
OR:
Legal fees
P80,000
Amortization for ½ year
7,500
Carrying amount (for writeoff) at June 30
P300,000 – 37,500
262,500
Total expenses for 2019
P350,000
On January 1, 2019, Yen Company obtained a franchise from Euro
Corp. to sell for 20 years Euro’s products.
The initial
franchise fee as agreed upon shall be P6,000,000, and shall be
payable in cash, P1,000,000, when the contract is signed and
the balance in four equal installments, thereafter, as
evidenced by a non-interest bearing note.
The agreement
rate for this type of note is 12%. PV of P1 for 4 periods at
12% is .6355 and PV of ordinary annuity for 4 periods at 12% is
3.0373.
7. How much is the initial cost of the franchise?
a. P6,000,000
b. P4,796,625
c. P4,177,500
d. P3,796,625
Down payment
PV of future payments
P1,250,000 x 3.0373
Cost of the franchise
P1,000,000
3,796,625
P4,796,625
8. How much is the total amount charged against revenues for the
year 2019?
a. P458,875
b. P239,831
c. P945,426
d. P489,831
Annual amortization P4,796,625/20
P239,831
Continuing Franchise Fee (Royalty exp.)
5% x P5,000,000
250,000
Interest expense
12% x P3,796,625
455,595
Total expenses
P945,426
9. Alcatel Company purchased an entity for P6,000,000 cash on
January 1. The book value and fair value of the assets of the
acquired entity as of the date of the acquisition follow:
Book Value Fair Value
Cash
P
50,000 P
50,000
Accounts receivable
500,000
500,000
Inventory
1,000,000 1,500,000
Patent
450,000
Property, plant and equipment
2,000,000 3,000,000
In addition, the acquired entity had liabilities totaling
P2,000,000 at the time of the acquisition.
The acquired
entity has no other separately identifiable intangible assets.
What is the goodwill arising from the acquisition?
a. P4,500,000
b. P2,550,000
c. P2,500,000
d. P500,000
Consideration given
Fair value of net assets acquired
P5,500,000 – P2,000,000
Goodwill
P6,000,000
3,500,000
P2,500,000
10. On December 31, 2018, Irvins Company acquired the following
intangible assets:
• A trademark for P2,000,000.
The trademark has 8 years
remaining in the legal life. It is anticipated that the
trademark will be renewed in the future, indefinitely,
without problem.
• A patent for P4,000,000.
Because of market conditions,
it is expected that the patent will have economic life
for just 5 years, although the remaining legal life is 10
years.
Because of a decline in the economy, the trademark is now
expected to generate cash flows of just P120,000 per year.
The useful life of the trademark still extends beyond the
foreseeable horizon. The cash flows expected to be generated
by the patent are P500,000 annually for each of the next
years.
The appropriate discount rate for all intangible
assets is 8%. The present value of 1 at 8% for four periods
is 0.74 and the present value of an ordinary annuity of 1 at
8% for four periods is 3.31. Irvins Company shall recognize a
total impairment loss in 2019 at
a. P2,845,000
b. P2,045,000
c. P1,980,000
d. P1,545,000
Carrying amount (Cost – Accum. Amort)
Recoverable amount
500,000 3.31
120,000/8%
Impairment loss
Patents
P3,200,000
1,655,000
P1,545,000
Trademark
P2,000,000
1,500,000
P 500,000
11. Carola Inc. has a trademark purchased 5 years ago for
P15,600,000. The said trademark was determined to have an
indefinite useful life. During the current year, Carola
noticed that some indicators of impairment are evident and
thus tested the trademark for impairment. The net cash flows
to be generated by the trademark have been determined to be
either P585,000 with a probability of 70%, or P1,170,000 with
a probability of 30%. The appropriate risk-adjusted interest
rate is 10%. Determine the impairment loss.
a. P14,764,287
b. P11,700,000
c. P7,995,000
d. P0
Carrying amount
Recoverable amount
(585,000 x 70%) + (1,170,000 x 30%)
10%
Impairment loss
P15,600,000
7,605,000
P7,995,000
12. On January 1, 2016, Starbucks Company signed a 12-year lease
for a building.
Starbucks has an option to renew the lease
for an additional 6-year period on or before January 1, 2021.
During January 2019, Starbucks made substantial improvements
to the building. The cost of the improvements was P4,500,000,
with an estimated useful life of 10 years.
At December 31,
2019, Starbucks intended to exercise the renewal option.
Starbucks has taken a full year’s depreciation on this
improvement. In the December 31, 2019 statement of financial
position, the carrying amount of this leasehold improvement
should be
a. P4,500,000
b. P4,200,000
c. P4,050,000
d. P4,000,000
Cost of the improvement
Accumulated depreciation
4,500,000/10
Carrying amount
P4,500,000
450,000
P4,050,000
The leasehold improvement shall be depreciated over the
remaining lease term or the useful life, whichever is shorter.
Remaining lease term
Useful life
12 + 6 – 3
15 years
10 years (shorter)
13. Lucent Company purchased another entity for P8,000,000 cash.
The acquiree had total liabilities of P3,000,000. Lucent
Company’s assessment of the fair value it obtained when it
purchased the other entity is as follows:
Cash
P1,000,000
Inventory
500,000
In-process research and development
5,000,000
Assembled workforce
1,200,000
What is the goodwill arising from the acquisition?
a. P4,500,000
b. P3,300,000
c. P1,500,000
a. P300,000
Consideration given
FV of net identifiable assets
(P1M + .5M + 5M) – 3M
Goodwill
P8,000,000
3,500,000
P4,500,000
In-process research is recognized as an asset in business
combination (subject to subsequent impairment testing),
whereas assembled workforce does not qualify under the
definition of asset.
14. Sheaffer Company engaged your services to compute the goodwill
in the purchase of another entity which provided the
following:
Net income
Net assets
2017
P
2,000,000 P
7,800,000
2018
2,500,000
8,700,000
2019
3,900,000
9,000,000
Goodwill is measured by capitalizing excess earnings at 25%
with normal return on average net assets at 20%. How much is
the purchase price for the other entity?
a. P13,400,000
b. P12,800,000
c. P11,800,000
d. P10,700,000
Fair value of assets acquired
P9,000,000
Goodwill
Average returns (average for 3 years) P2,800,000
Normal returns (20% x P8,500,000)
1,700,000
Excess earnings
P1,100,000
Divided by capitalization rate
25%
Goodwill
4,400,000
Total purchase price
P13,400,000
15. The owners of Acer Company are planning to sell the business
to new interests. The cumulative net earnings for the past 4
years were P6,000,000 including casualty loss of P200,000.
The current value of net assets of Acer Company was
P16,000,000. Goodwill is determined by capitalizing average
earnings at 8%. What is the amount of goodwill?
a. P1,450,000
b. P1,550,000
c. P2,215,000
d. P3,375,000
Average net annual earnings
(P6,000,000 + P200,000)/ 4 =
Normal earnings P16,000,000 x 8%
Capitalized at
Purchase price
Net assets at fair value
Goodwill
P1,550,000
8%
19,375,000
16,000,000
P3,375,000
16. HP Company acquired another entity on January 1. As part of
the acquisition, P5,000,000 in goodwill was recognized. This
goodwill was assigned to HP’s Internet cash generating unit.
During the year, the Internet cash generating unit reported
revenue
of
P8,000,000.
Publicly
traded
companies
with
operations similar to those of the Internet cash generating
unit had price-to-revenue ratio averaging 1.50.
The book
value of the assets and liabilities of HP’s Internet cash
HP Company should recognize goodwill impairment loss of
a. P6,000,000
b. P5,000,000
c. P4,800,000
d. P1,200,000
Fair value of the CGU based on PTR ratio
P8,000,000 x 1.5
P12,000,000
Carrying amount of the CGU 25M – 7M
18,000,000
Impairment loss
P 6,000,000
Impairment loss allocated to GW
5,000,000
Impairment loss allocated to identified assets P1,000,000
17. Coffee Bean Company incurred research and development costs in
the current year as follows:
Equipment acquired use in various researches
and development projects
Depreciation on the above equipment
Materials used
Compensation costs of personnel
Outside consulting fees
Indirect costs appropriately allocated
The total research and development costs in
income statement for the current year should be
a. P850,000
b. P1,085,000
c. P1,235,000
d. P1,825,000
Total research and development costs
P975,000
135,000
200,000
500,000
150,000
200,000
Coffee
Bean’s
P1,185,000
18. The research and development division of Dollar Company
undertakes both research and development activities of the
company. Its current development project on a prototype is
near completion. The cost identified in this project consists
of the following:
Cost of materials used
Training cost to operate the asset
Fees to register trade design
Initial operating losses
Salaries of consultant for the projects
Amortization of patent and license used in the
project
Selling and administrative expenses
P5,000,000
100,000
50,000
500,000
2,000,000
100,000
1,000,000
What is the amount of development costs that should be
capitalized?
a. P7,150,000
19. Pataca
Corporation
provided
the
following
information
regarding its Research COVID-19XXX included in the company’s
Intangible account as of December 31, 2019: Research MOP517 is
for a research project which consists of the following
charges:
Salaries of research staff
Patent acquired solely for the use in the
project
Special equipment acquired and useful for
various similar research activities
Patent acquired for use in several research
projects including COVID-19XXX
P18,000
12,000
10,000
16,000
The equipment and patents have been found to be useful for
approximately five years. You have further discovered both
patents and the equipment were acquired at the beginning of
2019. How much should be recognized as research and
development expense for the year 2019?
a. P56,000
b. P18,000
c. P35,200
d. P0
Total salaries and patent for use in the project
Depreciation of equipment
Amortization of patent 16,000/5
Research and development expense
P30,000
2,000
3,200
P35,200
20. Won Company provided you the following information pertaining
to its Research and Development activities for the year 2019:
Searching for applications of new research
findings
Trouble-shooting in connection with breakdowns
during commercial production
Adaptation of an existing capability to a
particular requirement or customer’s need
as a part of continuing commercial activity
Engineering follow-through in an early phase
of commercial production
Laboratory research aimed at discovery of new
knowledge
Design of tools, jigs, and molds involving new
technology
Quality control during commercial production,
including routine testing of products
Testing in search for product or process
alternative
Design and construction of preproduction
prototype and model
P 57,000
87,000
39,000
45,000
204,000
72,000
174,000
300,000
384,000
What is the total amount to be classified and expensed as
research and development for 2019?
a. P1,095,000
b. P1,017,000
c. P456,000
d. P561,000
During 2019, Fajardo Company incurred the following costs to
develop and produce a computer software product:
Completion of detailed program design
Costs incurred for coding and testing to
Establish technological feasibility
Other coding costs after establishment of
technological feasibility
Other testing costs after establishment of
technological feasibility
Cost of producing product masters for training
materials
Duplication of computer software and training
materials from product masters
Packaging product
P1,495,000
1,150,000
2,760,000
2,300,000
1,725,000
2,875,000
1,035,000
Fajardo correctly capitalized some of these expenditures as
cost of the computer software.
Fajardo determined the life of the software to be 5 years and
it has a policy to take full year amortization in the year an
internally generated asset was recognized.
Based on its forecast, the pattern of future revenue from the
software can be determined reliably and the software would
bring total revenue of P10,000,000 over its life. In 2019,
Fajardo reported a revenue of P1,500,000.
21. Determine the capitalized software cost.
a. P9,660,000
b. P6,785,000
c. P5,060,000
d. P6,210,000
Research
Commercial and
technological
feasibility not yet
established and
recognition criteria not
yet met
Period cost – Expense
Development
After establishment of
commercial and
technological
feasibility (and other
capitalization criteria
for development costs
are met)
Intangible Asset
Commercial
Production
Product Cost
UNIVERSITY OF SANTO TOMAS
UST-Alfredo M. Velayo – College of Accountancy
España, Manila
22. Determine the amortization of computer software in 2019.
a. P759,000
b. P1,012,000
c. P1,017,750
d. P1,357,00
P6,785,000/5 = P1,357,000
Default amortization method for intangible is straight-line,
unless the enterprise can demonstrate another pattern of
expected economic benefit from the asset, in which case, the
justification for the use of this amortization method (other
than straight-line) must be disclosed in the notes to the
financial statements.
IAC 11 – INTEGRATED REVIEW IN FINANCIAL ACCOUNTING AND REPORTING
2ND TERM, ACADEMIC YEAR 2019-2020
INTANGIBLE ASSETS – THEORY
1. Which is not within the definition of an intangible asset?
a. Held for use in the production or supply of goods or
services, for rental to others, or for administrative
purposes
b. Identifiable nonmonetary asset without physical substance
c. A resource controlled by an enterprise as a result of past
events
d. A resource from which future economic benefits are expected
to flow to the enterprise
To qualify as intangible asset, an item must meet all of the
following definition criteria:
identifiability, control, and
existence of future economic benefits (IAS 38).
2. Which is incorrect concerning the recognition and measurement
of an intangible asset?
a. If an intangible asset is acquired separately, the cost
comprises its purchase price, including import duties and
taxes
and
any
directly
attributable
expenditure
of
preparing the asset for its intended use.
b. If an intangible asset is acquired in a business
combination that is an acquisition, the cost is based on
its fair value at the date of acquisition.
c. If an intangible asset is acquired free of charge or by way
of government grant, the cost is equal to its fair value.
d. If payment for an intangible asset is deferred beyond
normal credit terms, its cost is equal to the total
payments over the credit period.
The purchase price in item d must be equal to the fair
value of the asset, if practicably determinable, or its
equivalent cash price, being the sum of the down payment
plus the PV of all future payments.
3. The cost of intangible asset is composed of
a. Purchase price excluding import duties
taxes
b. Purchase price including import duties
taxes
c. Purchase price including both refundable
taxes
d. Purchase price including trade discounts
deducting import duties and nonrefundable
and nonrefundable
and nonrefundable
and nonrefundable
and rebates after
taxes
4. Legal fees incurred by a company in defending its patent
rights should be expensed when the outcome of the litigation
is
Successful
Unsuccessful
Expenditures incurred on an intangible asset subsequent to
acquisition shall be recognized as expenses, unless the
expenditure clearly provides economic benefits in excess of
originally assessed standard of performance.
In the above item, other than expensing the legal fees to defend
the asset, if the defense proved to be unsuccessful, the
remaining carrying value of the asset shall be written off.
5. Which one of the following is not a component of the cost of
internally generated intangible asset?
a. Cost of materials and services used or consumed in
generating the intangible asset
b. Cost of employee benefits arising from the generation of
the intangible asset
c. Fees to register a legal right
d. Expenditure on training staff to operate the asset (expense
because of uncertainty of economic benefit)
6. Which statement is incorrect concerning internally generated
intangible asset?
a. To assess whether an internally generated intangible asset
meets
the
criteria
for
recognition,
an
enterprise
classifies the generation of the asset into a research
phase and a development phase.
b. The cost of an internally generated asset comprises all
directly attributable costs necessary to create, produce
and prepare the asset for its intended use.
c. Internally generated brands, mastheads, publishing titles,
customer lists and items similar in substance should not be
recognized as intangible assets.
d. Internally generated goodwill may be recognized as an
intangible asset.
Goodwill shall only be recognized when it arises
business combination treated as an acquisition.
from
a
7. The following expenditures should be expensed when incurred,
except
a. Advance payment for delivery of goods or rendering of
services (advances to suppliers)
b. Relocation costs
c. Advertising and promotion costs
d. Organization and other start up costs
8. A lessee incurred costs to construct office space in a leased
warehouse. The estimated useful life of the office is 10
years. The remaining term of the nonrenewable lease is 15
years. The cost should be
a. Capitalized as leasehold improvement and depreciated over
d. Expensed as incurred
An item of PPE shall be depreciated over the expected pattern
of economic benefits, which in the
case of leasehold
improvements is the shorter between the useful life and the
remaining lease term.
The shorter period is the estimated
useful life.
9. An entity shall choose either the cost model or revaluation
model as its accounting policy in measuring intangible asset.
Which statement is correct?
i.
The cost model means that an intangible asset shall be
carried at cost less any accumulated amortization and any
accumulated impairment loss.
ii.
The revaluation model means that an intangible asset
shall be carried at revalued amount less any subsequent
accumulated amortization and any subsequent accumulated
impairment loss.
a. Both I and II
b. Neither I nor II c. I only
d.
II only
10. It is the systematic allocation of the cost of an
intangible asset less any residual value as an expense over
the asset’s useful life?
a. Depreciation
b. Depletion
c. Amortization
d. Realization
However, IAS
definition.
38
still
uses
the
term
depreciation
for
this
11. In relation to amortization of intangible assets, if an
intangible asset has a finite useful life
a. It must be amortized over a period not exceeding 40 years
b. It must be amortized across a period not exceeding 5 years
c. It is not subject to an annual amortization charge
d. It must be amortized over that life
12. In relation to amortization of intangible assets, PAS 38
Intangibles, requires that intangible asset with indefinite
useful lives
a. Are amortized by the straight-line method across their
useful lives
b. Must be amortized across a period of no more than 20 years
c. Are not subject to an amortization charges
d. Should not be amortized in a period in which maintenance of
the asset occurs
The following intangible assets are not amortized: intangible
not yet available for use, assets with indefinite useful life,
ad goodwill.
13. What is the proper time or time period over which to match
the cost of an intangible asset with revenues if it is likely
that the benefit of the asset will last for an indefinite
period?
a. 40 years
b. 50 years
c. Immediately
d. At such time as a reduction in value can be quantitatively
determined
Item d is in effect impairment. Testing for impairment shall
be made at least annually and whenever there is indication of
impairment.
14. The appropriate method of amortizing intangible asset is
best described by which of the following?
a. The straight line method, unless the pattern in which the
asset’s economic benefits are consumed by the enterprise
can be determined reliably
b. The double declining balance in all circumstances
c. Management can make a subjective amount of periodic
amortization without regard to any particular method
d. The straight line method in all circumstances
Default amortization method for intangible is straight-line,
unless the enterprise can demonstrate another pattern of
expected economic benefit from the asset, in which case, the
justification for the use of this amortization method (other
than straight-line) must be disclosed in the notes to the
financial statements.
15. The best definition of useful life of an intangible asset
is
a. The legal life of the intangible.
b. The period over which management believes the intangible
asset will contribute to the revenue-producing process.
c. Twenty years.
d. The period over which the cost of the asset can be deducted
for income tax purposes.
16. Which of the following factors should not be considered in
estimating the useful life of intangible asset?
a. Legal, regulatory or contractual provision
b. Expected action by competitors or potential competitors
c. Residual value
d. Typical product life cycle of the asset
17. The residual value of an intangible asset should be
presumed zero, unless
i.
There is a commitment by a third party to purchase the
asset at the end of its useful life.
ii.
There is an active market for the asset and residual
c. I only
d. II only
See par. 100, IAS 38.
18. Research is
i.
Original and planned investigation undertaken with the
prospect of gaining new scientific or technical knowledge
and understanding. (Research)
ii.
Application of research finding or other knowledge to
a plan or design for the production of new or substantially
improved material, device, product, process, system or
service, prior to the commencement of commercial production
or use. (Development)
a. Both I and II
b. Neither I nor II
c. I only
d. II only
19. If a company constructs a laboratory building to be used as
a research and development facility, the cost of the
laboratory building is matched against earnings as
a. Research
and
development
expense
in
the
period
of
construction
b. Depreciation deducted as part of research and development
cost
c. Depreciation or immediate write-off depending on company
policy
d. An expense at such time as productive research has been
obtained from the facility
It is practicably assumed that the building has an alternative
use, so only the depreciation during research and development
period is expensed.
20. A research and development activity for which the cost
should be expensed as incurred is
a. Engineering follow-through in early phase of commercial
production (overhead)
b. Design,
construction,
and
testing
of
preproduction
prototypes and models (development)
c. Trouble shooting in connection with breakdowns during
commercial production (overhead)
d. Periodic design changes to existing products (overhead)
21. The proper accounting for the costs incurred in creating
computer software products is to
a. Capitalize all costs until the software is sold.
b. Charge research and development expense when incurred until
technological feasibility has been established for the
product.
c. Charge research and development expense only if the
computer software has alternative future use.
22. Which statement is correct regarding the proper accounting
treatment for internal-use software costs?
i.
Preliminary costs should be capitalized as incurred.
ii.
Application
and
development
costs
should
be
capitalized as incurred.
a. Both I and II
b. Neither I nor II
c. I only
d. II only
It is assumed in ii that the subsequent
incurred meet the capitalization criteria.
development
costs
23. Which of the following statements is incorrect regarding
internal – use software?
a. The application and development costs of internal-use
software should be amortized on the straight line basis
unless another systematic and rational basis is more
appropriate.
b. Internal-use software is considered to be software that is
marketed as a separate product or as part of a product or
process.
c. The costs of testing and installing computer hardware
should be capitalized as incurred.
d. The costs of training and application maintenance should be
expensed as incurred.
24. Which following statements is correct regarding the
treatment of start-up activities related to the opening of the
new facility?
i.
Cost of raising capital should be expensed as
incurred.
ii.
Costs of acquiring or constructing long-lived assets
and getting them ready for their intended use should be
expensed as incurred.
a. Both I and II
b. Neither I nor II
c. I only
d. II only
Some costs relating to issue of shares are netted against the
proceeds to arrive at contributed capital, while item ii is
directly attributable cost that is capitalized.
25. Operating losses incurred during the start-up years of a
new business should be
a. Accounted for and reported like the operating losses of any
other business
b. Written off directly against accumulated profits
c. Capitalized as a deferred charge and amortized over 5
years.
d. Capitalized as an intangible asset and amortized over 5
years.