AUDIT OF
PREPAYMENT AND
INTANGIBLE
ASSET
Prepared By:
Angelica Catacutan (Problem 1-4)
Michelle Emmerson (Problem 5-9)
Madel L. Marbella (Problem 10-13)
Patrise Mae T. Sioson (Problem 14-18)
Mark Angelo D. Reyes (Problem 19-22)
Colegio de Sebastian
BS Accountancy 5G
PROBLEM 6-1
The INTANGIBLES COMPANY engaged in the following transactions at the beginning of
2018:
1. Purchased a patent for P700,000 that had originally been filed in January 2012. The
acquisition was made to protect another patent that the company had filed for in January 2014
and subsequently received.
2. Purchased the rights to a novel by a best-selling novelist in exchange for 100,000 ordinary
shares (P10 par) selling for P60 per share. The book sells 1 million copies in 2018 and is
expected to sell a total of 500,000 copies in future years.
3. purchased the franchise to operate a ferry service from the government for P100,000. A bridge
has been planned to replace the ferry, and it is expected that it will be completed in five years.
The company hopes that the ferry will continue as a tourist attraction, but profits are expected to
be only 20% of those earned before the bridge is opened.
4. paid P280,000 to attorneys for the services to successfully defend the patent acquired in
transaction 1.
5. Paid a taxi operator P500,000 to have the company name prominently displayed on his taxis
for two years.
Based on the preceding information, determine the carrying value of the following at the end of
2018:
1. Patent
A. P630,000
B. P656,250
C. P910,000
D. P650,000
2. Copyright
A. P2,000,000
B. P0
C. P3,000,000
D. P4,000,000
3. Franchise
A. P100,000
B. P84,000
C. P80,000
D. P76,000
SOLUTION 6-1
1. Cost of patent
Amortization for 2018 (p700,000/14 years)
Carrying value, December 31, 2018
Answer: D
P700,000
(50,000)
P650,000
The competing patent purchased to protect another patent with a life of 16 years has a remaining
legal life of 14 years and should be amortized over that period
2. cost of copyright
Amortization for 2018
(6,000,000 x 1 milllion/1.5 million)
Carrying value, December 31, 2018
Answer: A
P6,000,000
3. Cost of franchise
Amortization for 2018 (P100,000/5)
Carrying value, December 31, 2018
Answer: C
P100,000
(20,000)
P80,000
(4,000,000)
P2,000,000
PROBLEM 6-2
The following independent situations relate to the audit of intangible assets. Answer the
question/s at the end of each situation.
Situation 1
YOLING INDUSTRIES reports the following patents on its December 31, 2017, statement of
financial position.
Patent A
Patent B
Patent C
Initial cost
Date of acquisition
P1,224,000
450,000
432,000
March 1, 2014
July 1, 2015
Sept. 1, 2016
Useful life
(at the date of acquisition)
17 years
10 years
4 years
The following events occurred during the year ended December 31, 2018.
1. Research and development costs of P737,100 were incurred during the year. These costs were
incurred prior to projects achieving economic viability.
2. Patent D was purchased on july 1 for P855,000. It has a remaining life of 91/2 years.
3. A possible impairment of Patent B’s value may have occurred at December 31, 2018. This is due
to a significant reduction in the demands for certain products protected by Patent B. The
company’s controller estimates the following future cash flows from Patent B.
December 31, 2019
P60,000
December 31, 2020
P60,000
December 31, 2021
P60,000
The appropriate discount rate to be used for these cash flows is 8%.
1. What is the total carrying value of Yoling’s Patents on December 31, 2017?
A. P2,383,500
C. P2,106,000
B. P1,390,620
D. P1,573,500
2. What amount of impairment loss should be reported by Yolling for the year ended December 31,
2018?
A. P137,880
C. P337,500
B. P292,500
D. P154,620
3. What is the total carrying value of Yolling’s patents on December 31,2018?
A. P1,969,080
C. P2,158,500
B. P2,020,620
D. P2,203,500
SITUATION 2
In your audit of the books of DIEHARD CORP. for the year ended December 31, 2018, you
found the following items in connection with the company’s patents account.
a) Diehard had spent P360,000 during the year ended December 31, 2017, for research and
development costs. This amount was debited to its patents account. The company’s cost records
disclose that it had spent a total of P424,500 for the research and development of its patents, of
which P64,500 spent in 2017 had been debited to Research And Development Expense.
b) The patents were issued on July 1, 2017. In connection with the issuance of the patents, the
company incurred legal expenses of P42,840, which debited to Legal And Professional Fess
Expense.
c) On January 5, 2018, Diehard paid a retainer of P45,000 for legal services in connection with a
patent infringement suit brought against it. Deferred costs was charged for the amount.
d) In reply to your inquiry about the company’s liabilities as of December 31, 2018, you
received a letter from the company’s legal counsel dated January 20, 2019, which indicated that
a settlement of the patent infringement suit had been arranged. The plaintiff will drop the suit
and release the company from all future liabilities in exchange for P60,000. Additional lawyer’s
fees were incurred amounting to P3780.
4. The correcting journal entries (excluding amortization) on December 31, 2018, wpould
include net debit (credit) to
Patents
P(317,160)
(208,380)
(272,160)
(253,380)
A
B
C
D
Legal and professional fess expense
P108,780
0
63,780
45,000
SITUATION 3
As the recently appointed auditor for SUPERPOWER COMPANY, you have been asked to
examine selected accounts. Your audit client, organized in 2017, has setup a single account for
all intangible assets. The following summary shows the debit entries that have been recorded
during 2018.
jan. 2
April 5
June 30
July 1
Aug. 3
Sept. 1
Purchased patent (8-year life)
Goodwill
Payment of 12 months’ rent on property leased by
superpower
Purchased franchise with 10-year life; expiration date,
july 1, 2028
Payment for copyright (5-yearlife0
Research and development costs related to patent
(incurred prior to achieving economic viability)
P 870,000
720,000
182,000
900,000
312,000
320,000
P 3,304,000
5. What is the total carrying value of superpower’s intangible assets as of December 31, 2018?
A. P2,928,917
C. P2,927,705
B. P2,622,250
D. P2,713,250
SOLUTION 6-2
1. patent A
Initial cost
Amortization:
2014 (P1,224,000/17 x 10/12) P60,000
2015-2017 (p1,224,000 x 3/17) 216,000
patent B
P1,224,000
(276,000)
P948,000
Initial cost
Amortization:
2014 (P1,224,000/17 x 10/12) P22,500
2015-2017 (p1,224,000 x 3/17) 90,000
P450,000
(112,500)
patent C
Initial cost
Amortization:
2014 (P1,224,000/17 x 10/12) P36,000
2015-2017 (p1,224,000 x 3/17) 108,000
Total carrying value of patents, Dec. 31, 2017
P337,500
P432,000
(144,000)
P288,000
P1,573,500
ANSWER: D
2. Patent B
Carrying value, December 31, 2017
P337,500
Less: 2018 amortization (P450,000 x 1/10)
45,000
Carrying value, December 31, 2018
292,500
Present value of future cash flows (P60,000 X 2,5770) 154,620
Impairment loss
P137,880
ANSWER: A
3. patent A
Carrying value, December 31, 2017
P948,000
Less: 2018 amortization (P1,224,000x1/17)
72,000 P876,000
Patent B
154,620
Patent C
Carrying value, \december 31, 2017
P288,000
Less: 2018 amortization (P432,000 x ¼)
108,000
180,000
Patent D
Initial cost
P855,000
Less: 2018 amortization (P855,000/9.5 x 6/12) 45,000
810,000
Total carrying value of patents, December 31, 2018
P2,020,620
ANSWER: B
SITUATION 2
4. Adjusting Journal Entries
December 31, 2018
a) Retained earnings
patents
360,000
b) Patents
retained earnings
42,840
360,000
42,840
c) Legal and professional fees expense
deferred costs
45,000
d) Legal and professional fees expense
liability for settlement of patent
infringement suit
accrued attorney’s fees
ANSWER: A
63,780
45,000
60,000
3,780
SITUATION 3
5. patent
P870,000
Less: Amortization (P870,00/8)
108,750
Goodwill
Franchise
P900,000
Less: Amortization(P900,000/10 X 6/12) 45,000
Copyright
P312,000
Less: Amortization(P312,000/5 x 5/12)
26,000
Total carrying value, December 31, 2018
ANSWER: B
P 761,250
720,000
855,000
286,000
P2,622,250
PROBLEM 6-3
The following situations are found in the records of the KILIMANJARO, INC. in your audit of
the company’s financial statements for the year ended December 31, 2018.
1. December 1, 2018:
Advertising expense
72,000
Cash
Payment of 2018 advertising contract.
2. Balance of Office supplies expense, Dec. 31, 2018
Balance of unused office supplies, Dec. 31, 2018
Inventory of office supplies, Dec. 31, 2018
3. June 2, 2018
72,000
P45,000
15,000
22,500
Prepaid insurance
54,000
Cash
54,000
Payment of one-year insurance premium for inventory.
4. Balance of factory supplies expense account, Dec. 31, 2018
Physical inventory of factory supplies, Dec. 31, 2018
P69,000
58,500
5. On May 1, 2018, a two-year subscription to the industry journal in the amount of P14,400 was
paid. Subscription expense was charged for the entire amount.
Prepare the adjusting journal entries on December 31, 2018, based on the situations described.
SOLUTION 6-3
ADJUSTING JOURNAL ENTRIES
December 31, 2018
1. Prepaid advertising
Advertising expense
2. Unused office supplies
Office supplies expense
(P22,500 – P15,000)
72,000
72,000
7,500
7,500
3. Insurance expense
Prepaid insurance
(P54,000 X 7/12)
31,500
4. Factory supplies inventory
Factory supplies expense
58,500
5. Prepaid subscriptions
Subscription expense
(P14,400 X 16/24)
31,500
58,500
9,600
9,600
PROBLEM 6-4
KENYA ENTERPRISE developed a new machine that reduces the time required to mix the
chemicals 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 in the construction of the machine
Legal expenses to obtain patent
Wages paid for the employees’ work on the research,
development, and building of the machine (60% of
the time was spent in actually building the machine)
Expense of drawing required by the patent office to be
submitted with the patent application
Fees paid to Patent Office 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
C. P564,000
B. P486,000
D. P126,000
2. What is the total cost of the new machine?
A. P1,362,000
C. P780,000
B. P0
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
525,000
Cash
525,000
B. Legal fees expense
525,000
Cash
525,000
C. Machinery
525,000
Cash
525,000
B. Amortization expense - patents
525,000
Cash
525,000
SOLUTION 6-4
1. Legal expenses to obtain patent
Expense of drawing required by patent office
to be submitted with patent application
Fees to be paid to process patent application
Total cost of patent
P360,000
51,000
75,000
P486,000
ANSWER: B
2. Materials used in the construction of the machine
Blueprints used to design the machine
Wages of the employees’ work on the
construction of the machine (P900,000 x 60%)
Total cost of machine
ANSWER: B
P240,000
96,000
540,000
P486,000
3. The legal fees paid for the successful defense of the patent should be expensed, not
capitalized. This expenditure does not meet the definition of and the recognition criteria for an
intangible asset. The entry to record the legal fees paid is:
Legal fees expense
Cash
ANSWER: B
525,000
525,000
PROBLEM 6-5
Identifying Intangible Assets
The following amounts are included in the general ledger of MARGHERITA PEAK
CORPORATION at December 31, 2018:
Organization costs
P 72,000
Trademarks
45,000
Patents
225,000
Discount on bonds payable
105,000
Deposits with advertising agency for ads to
promote goodwill of company
30,000
Cost of equipment acquired for various research
and development projects
320,000
Costs of developing a secret formula for a product
that is expected to be marketed for at least 20 years
240,000
On the basis of the information above, what is the total amount of intangible assets to be reported
by Margherita Peak in its statement of financial position at December 31, 2018?
A. P342,000
B. P270,000
C. P510,000
D. P830,000
SOLUTION 6-5
Trademarks
P 45,000
Patents
225,000
Total intangible assets
270,000
Answer: B




Organization cost should be recognized as expense in the period it is incurred.
Discount on bonds payable should be reported as a contra account to bonds payable.
Cost of equipment acquired for various research and development projects should be included in
the property, plant, and equipment section.
Deposits with advertising agency for ads to promote goodwill of the company should be reported
as prepaid advertising in the current assets section. PAS 38 does not preclude recognizing a
prepayment as an asset when payment for the delivery of goods or rendering of the services.
PROBLEM 6-6
Patent
As a member of the audit team for the audit of RAS DASHEN COMPANY’s financial
statements for the year ended December 31, 2018, 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.
INTANGIBLE ASSETS
Debit
Feb. 1
Organization costs
Mar. 15
Credit
Balance
P72,000
P72,000
Research and development
1,880,000
1,952,000
April 3
Legal costs to obtain patent
150,000
2,102,000
May 1
Payment on 12 months’ rent
on property leased by Ras
Dashen
June 15
414,000
2,756,000
168,000
2,924,000
482,000
3,406,000
Unamortized bond discount
on bonds due Dec. 31, 2038
Dec. 31
2,342,000
Promotional expenses related
to start-up of business
Dec. 31
240,000
Operating losses for first year
1. The amount of organization expenses to be reports in Ras Dashen’s income statement for the
year ended December 31, 2018 is
A. P2,348,000
C. P582,000
B. P486,000
D. P240,000
2. What is the carrying value of the patent at December 31, 2018 assuming that its useful life is 10
years?
A. P150,000
C. P135,000
B. P138,750
D. P0
3. The prepaid rent to be shown on Ras Dashen’s statement of financial position at December 31,
2018, is
A. P160,000
C. P80,000
B. P240,000
D. P0
SOLUTION 6-6
1. Organizational costs
Promotional expenses related to start-up of business
Total organization expenses
P 72,000
414,000
P486,000
Answer: B
2. Legal cost to obtain patent
Less: Amortization, April 3 – Dec. 31
(150,000/10 x 9/12)
Balance, Dec. 31, 2018
P150,000
11,250
P138,750
Answer: B
3. Prepaid rent, Dec. 31, 2018 (P240,000 x 4*/12)
*Jan. 1, 2019 – May 1, 2019
P 80,000
Answer: C
PROBLEM 6-7
Lease Bonus and Leasehold Improvements
MERU, INC. leases an old building which it intends to improve and use for administrative
purposes. The company pays a bonus of P100,000 to obtain the lease. Annual rental for the 10year 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 cot (excluding depreciation) of this lease to Meru, Inc.?
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. P0
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 rent
100,000
Cash
100,000
C. Prepaid rent
90,000
Rent expense
10,000
Cash
100,000
D. Rent expense
90,000
Prepaid expense
10,000
Cash
100,000
SOLUTION 6-7
1. Annual Rental
Amortization of lease bonus
Annual cost of lease
Answer: D
P160,000
10,000
P170,000
2. Annual depreciation on leasehold improvements
(400,000/10 years)
P40,000
Answer: A
3. Prepaid Rent
Cash
100,000
100,000
Answer: B
PROBLEM 6-8
Organizational Costs
ELGON COMPANY was organized in 2017 and began operations at the beginning of 2018. The
company provides landscaping services. The following costs were incurred prior to the start of
operations:
Legal fees in connection with organization of the company
P171,000
Improvements to leased office space prior to the occupancy
225,000
Costs of meetings of incorporators to discuss
organizational activities
63,000
Filing fee to incorporate
9,000
P468,000
What is the total amount of organization costs that should be reported in Elgon’s income
statement?
A. P243,000
B. P468,000
C. P180,000
D. P207,000
SOLUTION 6-8
Legal fees in connection with organization of the company
P171,000
Costs of meetings of incorporators to discuss
organizational activities
Filing fee to incorporate
63,000
9,000
P243,000
Answer: A
Improvements to leased office space prior to occupancy of P225,000 should be classified as
leasehold improvements.
PROBLEM 6-9
Accounting for Patent, Franchise, R&D Costs
CAMEROON CORP. has provided information on intangible assets as follows:



A patent was purchased from Patintero Company for P6,000,000 on January 1, 2017. 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 Patitero sold it to Cameroon.
On February 1, 2018, a franchise was purchased from the Franchisor 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 2018 was P7,500,000.
The following research and development costs were incurred by Cameroon in 2018:
Materials and equipment
P
426,000
Personnel
567,000
Indirect costs
306,000
Total
P1,299,000
Because of recent events, Cameroon, on January 1, 2018, estimates that the remaining useful life
of the patent purchased on January 1, 2017, is only 5 years from January 1, 2018.
1.
A.
B.
2.
A.
B.
3.
A.
B.
4.
A.
On December 31, 2018, the carrying value of the patent should be
P4,320,000
C. P1,680,000
P6,000,000
D. P0
The unamortized cost of the franchise at December 31, 2018, should be
P999,999
C. P1,440,000
P1,356,250
D. P1,725,000
How much should be charged against Cameroon’s income for the year ended December 31,
2018?
P2,280,000
C. P2,820,000
P2,826,000
D. P1,725,000
An auditor will most likely obtain evidence regarding the continuing validity and existence of the
patent by obtaining a written representation from
The Securities and Exchange Commission (SEC)
B. A patent attorney
C. The patent investigator
D. The patent owner
SOLUTION 6-9
1. Acquisition cost of patent purchased Jan. 1, 2017
Less: Amortization:
2017 (P6,000,000/10 years)
2018 (P6,000,000 – P600,000 = P
5,400,000/5 years)
1,080,000
P6,000,000
P 600,000
1,680,000
Carrying value of patent, December 31, 2018
P4,320,000
Answer: A
2. Acquisition cost of franchise purchased Feb. 1, 2018
Less: Amortization (P1,440,000/20 years x 11/12)
Carrying value of franchise, Dec. 31, 2018
P1,440,000
66,000
P1,374,000
Answer: D
PAS 38 provides that the depreciable amount of an intangible asset that has a finite life should
be allocated (amortized) on a systematic basis over its useful life. Amortization begins when the
asset is available for use, i.e., when it is in the location and condition necessary for it to be
capable of operating in the manner intended by management. On the other hand, an intangible
asset with an indefinite useful life should be amortized but should be tested for impairment by
comparing its recoverable amount with its carrying amount at least annually, and whenever there
is an indication that the intangible asset may be impaired.
3. Chargers against 2018 income:
Amortization of patent (see no. 1)
Amortization of franchise (see no. 2)
Payment to franchisor (P7,500,000 x 5%)
Research and development costs
Total
Answer: C
4. A patent attorney
Answer: B
P1,080,000
66,000
375,000
1,299,000
P2,820,000
PROBLEM 6-10
Research and Development Costs
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 2012 and 2013, Emi Koussi spent a total of P459,000 in developing a new process that
was patented (Patent A) on April 1, 2014; additional legal and other costs of P50,000 with
incurred.
A patent (Patent B) developed by Nonoy Inventor, an inventor, was purchased for P187,500 on
December 1, 2015, on which date it had an estimated useful life of 12 ½ years.
During 2014, 2015, and 2016, 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 article infringing on Patent B was successfully prosecuted at a cost of P42,000. A
decision in the case was rendered in June 2016.
On July 1, 2017, Patent C was purchased for P172,000. The patent had 16 years yet to run.
During 2018, Emi Koussi expended P180,000 on patent development. However, the company is
still undecided as to how the patent, if approved by the Bureau of Patents, will generate probable
future economic benefits.
Assume that the legal life of each patent is also its useful life.
1.
a.
b.
c.
d.
What is Patent A’s carrying value on December 31, 2018?
P120,888
P497,125
P38,125
P388,113
2.
a.
b.
c.
d.
What is Patent B’s carrying value on December 31, 2018?
P141,250
P28,906
P32,092
P173,342
3.
a.
b.
c.
d.
What is Patent C’s carrying value on December 31, 2018?
P162,000
P327,600
P159,840
P156,600
4. What is the total patent amortization expense to be reported in Emi Koussi’s income statement
for the year ended December 31, 2018?
a. P37,300
b. P28,741
c. P74,325
d. P28,300
SOLUTIONS 6-10
Date
Patent
Cost
Useful Life
April 1, 2014
Dec. 1, 2015
July 1, 2017
A
B
C
P 50,000
187,500
172,800
P 410,300
20* years
12.5 years
16 years
Annual
Amortization
P 2,500
15,000
10,800
P 28,300
*According to RA 8293, the Intellectual Property Code of the Philippines, the term (legal life) of
patent is 20 years from the date of filing the application.
1. Cost of Patent A
Less: Amortization, April 1, 2014- Dec. 31, 2018
(P2,500 x 4 9/12)
Carrying Value, Dec. 31, 2018
Answer: C
P 50,000
2. Cost of Patent B
Less: Amortization, Dec. 1, 2015- Dec. 31, 2018
(P15,000 x 3 1/12)
Carrying Value, Dec. 31, 2018
Answer: A
P 187,500
3. Cost of Patent C
Less: Amortization, July 1, 2017- Dec. 31, 2018
(P10,800 x 1 6/12)
Carrying Value, Dec. 31, 2018
Answer: D
P 172,800
11,875
P 38,125
46,250
P 141,250
16,200
P 156,600
4. Amortization of patents for the year ended Dec. 31, 2018
(see schedule)
Answer: D
P 28,300
Legal costs incurred in prosecuting or defending a patent are subsequent costs of maintaining,
rather than enhancing the original future economic benefits that are expected to flow from the
patent. These subsequent legal costs should be expensed, not capitalized.
PROBLEM 6-11
Patent Amortization
ANDES CORPORATION expended P510,000 in research and development costs. These
activities resulted to a new product called the Oido Organ. It was patented at additional legal and
other costs of P54,000. The patent application was filed on October 1, 2014, and the patent was
estimated to have a useful life of 10 years.
On June 1, 2016, 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, 2016. At the
beginning of 2018, Andes determined that a competitor’s product would make the Oido Organ
obsolete and the patent worthless by December 31, 2019.
Based on the preceding information, calculate the patent amortization expense for each of the
following years:
1.
a.
b.
c.
d.
2014
P14,100
P12,750
P5,400
P1,350
2.
a.
b.
c.
d.
2015
P51,000
P56,400
P2,700
P5,400
3.
a.
b.
c.
d.
2016
P4,438
P2,188
P3,750
P5,820
4.
a.
b.
c.
d.
2017
P4,438
P6,120
P3,750
P2,188
5.
a.
b.
c.
d.
2018
P31,875
P19,531
P39,062
P3,750
SOLUTION 6-11
1. PATENT AMORTIZATION FOR 2014:
Oct. 1- Dec. 31 (P54,000/10 x 3/12)
Answer: D
P 1,350
2. PATENT AMORTIZATION FOR 2015:
Jan. 1- Dec. 31 (P54,000/10)
Answer: D
P 5,400
3. PATENT AMORTIZATION FOR 2016:
Cost of Patent
Less: Amortization, Oct. 1, 2014- June 1, 2016:
(P54,000/10 x 1 8/12)
Unamortized Cost, June 1, 2016
Revised remaining life
Revised annual amortization
Amortization for 2016:
Jan. 1- June 1 (P54,000/10 x 5/12)
P 54,000
9,000
P 45,000
/12 years
P 3,750
P 2,250
June 1- Dec. 31 (P3,750 x 7/12)
Total
Answer: A
2,188
P 4,438
4. PATENT AMORTIZATION FOR 2017:
(P45,000/12 years)
Answer: C
5. PATENT AMORTIZATION FOR 2018:
Cost of Patent
Less: Amortization:
2014
2015
2016
2017
Unamortized Cost, Jan, 1, 2018
Revised remaining life
Revised annual amortization
Answer: B
P 3,750
P 54,000
P 1,350
5,400
4,438
3,750
14,938
P 39,062
/12 years
P 19,531
PROBLEM 6-12
Research and Development Costs
The following cost were incurred by EVEREST COMPANY during 2018:
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.
Radical modification of the formulation of a glassware product.
Laboratory research aimed at discovery of new knowledge.
Testing for evaluation of new products.
Quality control during commercial production, including routine
testing of products.
Materials consumed in research and development projects.
Consulting fees paid to outsiders for research and development
projects.
P
57,000
87,000
39,000
45,000
78,000
204,000
72,000
174,000
177,000
300,000
Personnel costs of persons involved in research and development
projects
Indirect costs reasonably allocable to research and development
projects.
Materials purchased for future research and development projects.
Research and development costs reimbursable under a contract to
perform research and development for Client Corporation.
Design, construction, and testing of preproduction prototypes and
models.
Routine on-going efforts to refine, enrich, or otherwise improve upon
the qualities of an existing product.
Total
384,000
150,000
102,000
1050,000
870,000
750,000
P 4,539,000
What is the total amount to be classified and expensed as research and development for 2018?
a.
b.
c.
d.
P3,342,000
P2,292,000
P2,394,000
P2,220,000
Solution 6-12
Searching for applications of new research findings.
Radical modification of the formulation of a glassware product.
Laboratory research aimed at discovery of new knowledge.
Testing for evaluation of new products.
Materials consumed in research and development projects.
Consulting fees paid to outsiders for research and development
projects.
Personnel costs of persons involved in research and development
projects
Indirect costs reasonably allocable to research and development
projects.
Design, construction, and testing of preproduction prototypes and
models.
Total
Answer: B
PAS 38 classifies the generation of an intangible asset into:
a. A research phase; and
P
57,000
78,000
204,000
72,000
177,000
300,000
384,000
150,000
870,000
P 2,292,000
b. A development phase
An intangible asset that relates to research activities should not be recognized because the entity
cannot demonstrate that an intangible asset exist that will generate probable future economic
benefits. Therefore, such expenditure is expensed when it is incurred.
Examples of research activities are:
1. Activities aimed at obtaining new knowledge;
2. The search for, evaluating, and final selection of application of research findings or other
knowledge;
3. The search for alternatives for materials, devices, products, processes, system or services; and
4. The formulation, design, evaluation, and final selection of possible alternatives for new or
improved materials, devices, products, process, system or services.
An intangible asset that arises from the development phase shall be recognize if, and only if, an
entity can demonstrate all of the following:
a. The technical feasibility of completing the intangible asset so that it will be available for use or
sale;
b. Its intention to complete the intangible asset and use or sell it;
c. Its ability to use or sell the intangible asset;
d. How the intangible asset will generate probable future economic benefits (for example, the entity
must be able to demonstrate the existence of a market for the intangible asset or its output or, if it
is to be used internally, the usefulness of the intangible asset);
e. The availability of adequate technical, financial, and other resources to complete the
development and to use or sell the intangible asset; and
f. Its ability to measure reliably the expenditure attributable to the intangible asset during its
development.
Examples of development activities are:
1. The design, construction, and testing of pre-production or pre-use prototypes and models
2. The designs of tools, jigs, moulds, and dies involving new technology;
3. The design, construction, and operation of a pilot plant that is not of a scale economically
feasible for commercial production; and
4. The design, construction, and testing a chosen alternative for new or improved materials,
devices, products, processes, systems or services.
PROBLEM 6-13
Cost of Internally Generated Intangible Asset
MOSES COMPANY’s own research department has an on-going project to develop a new
production process. At the end of 2017, Moses had already spent a total of P300,000, of which
P270,000 was incurred before November 1, 2017. On November 1, 2017, the company’s newly
developed production process met the criteria for recognition as an intangible asset.
During 2018, Moses incurred additional expenditure of P600,000. At the end of 2018, 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.
a.
b.
c.
d.
At December 31, 2017, the production process should be recognized at a cost of
P300,000
P0
P30,000
P270,000
2.
a.
b.
c.
d.
What is the total cost of the production process at December 31, 2018?
P630,000
P600,000
P870,000
P900,000
3. How much impairment loss should be recognized by Moses in 2018, in connection with the new
production process?
a. P300,000
b. P0
c. P30,000
d. P60,000
SOLUTION 6-13
1. Cost of the production process at Dec. 31, 2017
(P300,000 – P270,000)
P 30,000
Answer: C
PAS 38 provides that the cost of an internally generated intangible asset is the sum of
expenditure incurred from the date when the intangible asset first meets the recognition criteria.
The standard prohibits recognition as a part of the cost of an intangible asset at a later date, the
expenditure that was initially recognized as an expense when it was incurred.
2. Expenditure incurred:
From November 1, 2015- December 31, 2017
(P300,000 – P270,000)
During 2018
Total as of December 31, 2018
Answer: A
3. Carrying amount as of December 31, 2018 (see no. 2)
Recoverable Value
Impairment Loss
Answer: D
P 30,000
600,000
P 630,000
P 630,000
570,000
P 60,000
Problem 6-14
KIKIKTAT CORPORATION was organized in 2017. 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 2017 and 2018.
INTANGIBLE ASSETS
July 1, 2017 8-year franchise; expires June 30, 2024
Oct. 1, 2017 Advance payment on leasehold (term of
Lease is 2 years)
Dec. 31,2017 Net loss for 2017 including incorporation fee,
P3,000, and related legal fees of organizing
P15,000 (all fees incurred in 2017)
Jan. 2,2018
Acquired patent (10-year life)
Mar.1,2018 Cost of developing a secret formula
April 1,2018 Goodwill purchased
July 1,2018 Legal fee for successful defence of patent
Patent purchased above
P 162,000
84,000
48,000
222,000
225,000
835,200
37,950
Oct. 1,2018
Research and development costs
480,000
Ignore Income tax effect.
1.
A.
B.
2.
A.
B.
3.
A.
B.
4.
A.
B.
5.
A.
B.
The unamortized patent cost at December 31, 2018 should be
P199,800
C. P222,000
P235,440
D. P197,490
The unamortized franchise cost at December 31, 2018, should be
P110,250
C. P102,375
P94,500
D. P118,125
The amount of prepaid rent to be reported in KIKIKTAT’s December 31, 2018 statement of
Financial Position is
P73,500
C. P84,000
P31,500
D. P63,000
The adjusting entries on December 31, 2018 should include net debit to the retained earnings
accunt of:
P889,275
C. P60,375
P42,000
D. P66,375
As a result of the adjustments at December 31,2018, the total charges against Kikiktat’s 2018
income should be
P840,900
C. P597,900
P882,900
D. P841,275
SOLUTION 6-14
1. Cost of Patent, Jan. 2, 2018
Less: Amortization for 2018 (P222,000/10 years)
Unamortized patent cost, Dec. 31, 2018
P222,000
22,200
P199,800
2. Cost of franchise, July 1,2017
Less: Amortization, July 1,2017-Dec,31 2018
(P126,000/8x1 6/12)
Unamortized franchise cost, Dec. 31,2018
P126,000
3. Prepaid rent, Dec. 31, 2018 (P84,000 x 9/24)
P31,500
4. ADJUSTING ENTRIES
December 31,2018
a. Franchises
Prepaid rent
Retained earnings
Patents
126,000
84,000
48,000
222,000
23,625
P102,375
Research and development expense
(P225,000 + P480,000)
Goodwill
Legal fees expense
Intangible Assets
705,000
835,000
37,950
2,058,150
b. Franchise amortization expense (P126,000/8) 15,750
Retained earnings (P126,000/8 x 6/12)
7,875
Franchises
23,625
c. Rent expense (P84,000/2 years)
Retained earnings (P84,200 x 3/24)
Prepaid rent
42,000
10,500
52,500
d. Patent amortization expense
Patent (P222,000/10years)
22,200
22,200
Net debit to retained earnings
(P48,000 + P7,875 + P10,500)
5. Charges against 2018 income:
Research and development expense
Legal fees expense
Franchise Amortization expense
Rent expense
Patent amortization expense
Total
P66,375
P705,000
37,950
15,750
42,000
22,200
P822,900
Problem 6-15
KIJIK LABORATORIES holds a valuable patent (No.362436) as 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
manufacturers on a royalty basis. The history of patent No. 362436 is as follows:
DATE
2008-2009
2010
Jan.5
Mar.15
2011
Jan.2
2012
Dec.10
ACTIVITY
Research conducted to develop device
COST
P7,680,000
Design and construction of a prototype
Testing of models
1,752,000
840,000
Legal and other fees to process patent application
1,241,000
Legal fees paid to successfully defend
device patent
2013
April 3
2017
July 28
714,000
Research aimed at modifying the design of
the patented device
Legal fees paid in a successful patent infringement
Suit against a competitor
860,000
680,000
A 17-year useful life was assumed by Kijik when it received the initial device patent.
On January 1,2016, it revised its useful life estimated downward to 5 remaining years.
The company’s reporting date is December 31,2018
Based on the preceding information, compute the carrying value of Patent No. 362436 on each of
the following dates:
1. December 31,2011
A. P1,168,000
B. P3,607,529
C. P1,241,000
D. P1,178950
2. December 31,2015
A. P1,488,000
B. P876,000
C. P350,000
D. P817,600
3. December 31,2018
A. P657,000
B. P876,000
C. P525,600
D. P350,400
SOLUTION 6-15
1. Cost to obtain patent, Jan 2,2011
Less: 2009 amortization (P1241,000/17years)
Carrying value, Dec 31,2011
2. Carrying value, Dec. 31,2011
Less: Amortization, 2012-2015:
(P73,000 x 4years)
Carrying value, Dec. 31,2015
3. Carrying value, Dec 31,2015
Less:Amortization, 2016-2018 (P876,000 x 3/5)
Carrying value, Dec. 31,2018
P1,241,000
73,000
P1,168,000
P1,168,000
292,000
P876,000
P876,000
525,600
P350,400
PROBLEM 6-16
ACADIA CORP. was incorporated on January 2,2017. The corporation’s financial statements for
its first year’s operations were not examined by a CPA. You have been engaged to audit the
financial statements for the year ended December 31, 2018, and your audit is substantially
completed. The corporation’s trial balance appears below.
Acadia Corp.
TRIAL BALANCE
December 31, 2018
Debit
Credit
Cash
Accounts Receivable
Allowance for doubtful accounts
Inventories
Machinery and equipment
Accumulated depreciation
Patents
Leasehold improvements
Prepaid expenses
Goodwill
Licensing agreement No.1
Licensing agreement No.2
Accounts payable
Unearned revenue
Share capital
Retained earnings, January 1,2018
Sales
Cost of goods sold
Selling and administrative expenses
Interest expense
Loss on extinguishment of debt
Totals
P300,000
1.460,000
P29,200
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
9,500,000
3,722,000
190,000
400,000
P25,940,000
P25,940,000
The following information relates to accounts that may yet require adjustment.
1. Patents for Acadia’s manufacturing process were acquired January 2, 2018, at a cost of
P1,870,000. An additional P694,000 was spent on December 29,2018, to improve machinery
covered by the patents and charged to the Patents account. Depreciation on property, plant and
equipment has been properly recorded for 2018. Acadia uses the straight-line method for all
depreciation and amortization and the legal life on its patents.
2. On January 3, 2017, Acadia purchased Licensing Agreement No. 1, which was believed to have
an indefinite useful life. The balance in the Licensing Agreement no.1 account includes it’s
purchased price of P1,140,000 and expenses of P60,000 related to the acquisition. On January 1,
2018, Acadia purchases Licensing Agreement no.2, which has a life expectancy of 10 years. The
balance in the Licensing Agreement No.2 account included 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 2019 revenue from the agreement.
In late December 2017, an explosion caused a permanent reduction in the expected revenueproducing value of Licensing Agreement No.1 and in January 2019, 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 31,2017.
3. The balance in the Goodwill account represents amount paid on December 30,2017, for a four
year advertising program, estimated to assist in increasing Acadia’s sales.
4.
The Leasehold Improvements account includes (a) the P300,000 cost of improvements with a
total estimated useful life of 12 years, which Acadia as tenant made to leased premises in
January 2017, and movable assembly line equipment costing P300,000that was installed in the
leased premises in December 2018, Acadia paid its rent in full during 2018. A 10-year nonrenewable lease was signed January 3, 2017, for the leased building that Acadia used in
Manufacturing operations.
Prepare the adjusting journal entries that should be made on December 31,2018. Use a separate
account for the accumulation of each type of amortization.
SOLUTION 6-16
Acadia Corp
ADJUSTING JOURNAL ENTRIES
December 31, 2018
1. Machinery
694,000
Patents
694,000
To reclassify the cost of improving machinery to the Machinery account
2. Cost of goods sold (Patent amortization)
93,500
Accumulated amortization –Patents
93,500
To record 2018 amortization of Patent. (P1,870,000/20years)
3. Licensing agreement No.2
80,000
Unearned revenue
80,000
To recognized unearned revenue for the advance collection 2019 revenue from the
government
4. Retained earnings
720,000
Licensing agreement No.1
720,000
To record the impairment in value of Licensing Agreement No.1
Cost of Licensing Agreement No. 1
Recoverable value
Impairment loss in 2017
P1,200,000
480,000
P720,000
5. Cost of goods sold
(Licensing agreement amortization)
120,000
Accumulated amortizationLicensing Agreement No.2
120,000
To record 2018 amortization of Licensing Agreement No.2
(P1,080,000+P120,000=P1,200,000/10=P120,000)
6. Prepaid expenses (P600,000 x ¾)
450,000
Selling and administrative expenses
(P600,000 x 1/4 )
150,000
Goodwill
600,000
To reclassify prepaid advertising expense improperly charged to goodwill.
7. Machinery and equipment
300,000
Leasehold improvements
300,000
To reclassify cost of equipment charged to leasehold improvements.
8.
Retained earnings (P300,000/10)
30,000
Cost of goods sold (P300,000/10)
30,000
Accumulated DepreciationLeasehold improvements
60,000
To record 2017 and 2018 depreciation on leasehold improvements.
Problem 6-17
During 2016, 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 2016.
The building was completed on December 31,2017, at a cost of P5,600,000 and was placed in
service on January 2, 2018. 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 in long-term benefits (i.e,, at least 10 years) to the corporation. However, Apex 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 2018 appears below.
Upon recommendation of 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, 2017, and
has as economic life of 10 years.
Number
of projects
employee Benefits
Depreciation charges)
Completed projects with
Long-term benefits
30
Abandoned projects or
projects that benefit the
current period
20
Projects in processresults indeterminate
10
Total
60
Salaries and
(excluding building
Other Expenses
P1,800,000
P1,000,000
P1,300,000
P300,000
P800,000
P3,900,000
P240,000
P1,540,000
1. The total research and development expensed for 2018 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 2018?
A. P80,000
C. P120,000
B. P160,000
D. P0
3. What is the book value of the building on December 31, 2018?
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 31,2018?
A. P1,280,000
C. P1,600,000
B. P1,320,000
D. P0
SOLUTION 6-17
1. Salaries and employees benefits
Depreciation-building (P5,600,000/20years)
Other expenses
P3,900,000
280,000
1,540,000
Total research and development expenses
P5,720,000
2. Patent amortization for 2018 (P1,600,000/10years)
3. Cost of building
Less: Accumulated depreciation, Dec.31,2018
(P5,600,000/20 years)
Book Value, Dec.31,2018
4. Cost of patent purchased April 1, 2017
Less Amortization
April 1- Dec.31,2017
(1,600,000/10x9/12)
Jan.1-Dec.31,2018
(1,600,000/10)
Carrying Value, Dec. 31,2018
P160,000
P5,600,000
280,000
P5,320,000
P1,600,000
P120,000
160,000
P1,320,000
Problem 6-18
The following information pertains to BAKER COMPANY’S Intangible assets:
1. On January 1, 2018, Baker signed an agreement to operate as a franchisee of Max & Jess Food
Chain, Inc. for an initial franchise fee of 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 January 1,2019. The agreement provides that the down payment is not refundable and
no future services are required of the franchisor. The present value at January 1,2018, of the 4
annual payments discounted at 14% (the implicit rate for a loan of this type) is P874,000. The
agreement also provides that 5% of the revenue from the franchise must be paid to the franchisor
annually. Baker’s revenue from the franchise for 2018 was P19,000,000.
Baker estimates the useful life of the franchise to be 10 years.
2. Baker incurred P1,300,000 of experimental and development costs in its laboratory to develop a
patent which was granted on January 2, 2018. Legal fees and other costs associated with
registration of the patent totalled 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, 2015. Expenditures
for successful litigation in defence of the trademark totalling P163,200 were paid on July 1,2017.
Baker estimates that the useful life of the trademark will be 20 years from the date of
acquisition.
1. What is the carrying value of the franchise at December 31, 2018?
A. P1,350,000
C. P1,056,600
B. P1.500.000
D. P1,174,000
2. What is the carrying value of the patent at December 31,2018?
A. P238,000
C. P1,375,500
B. P272,000
D. P258,400
3. What is the carrying value of the trademark on December 31, 2018?
A. P686,400
C. P544,000
B. P528,000
D, P707,200
4. The total expenses resulting from the transactions that would appear on Baker’s income
statement for the year ended December 31,2018, should be
A. P1,255,760
C. P1,133,400
B. P1,260,560
D. P183,400
SOLUTION 6-18
1. Down payment
Present value of 4 annual payments
Total cost of franchise
Less: Amortization for 2018 (P1,174,000/10)
Carrying value of franchise, Dec. 31,2018
2. Cost of securing patent on Jan.2, 2018
Less: Amortization for 2018 (P722,000/8)
Carrying value of patent, Dec. 31,2018
P300,000
874,000
1,174,000
117,400
P 1,056,600
P272,000
34,000
P238,000
3. Cost of trademark
Less: Amortization, July 1,2015-Dec31,2018
(P640,000/20 x 3 6/12)
Carrying value of trademark, Dec. 31,2018
P640,000
112,000
P528,000
4. Interest Expense (P874,000 x 14%)
Amortization of franchise (P1,174,000/10)
Amortization of patent (P272,000/8)
Amortization of trademark (P640,000/20)
Franchise fee (P19,000,000 x 5% )
Total expense
P122,360
117,400
34,000
32,000
950,000
P1,255,760
PROBLEM 6-19
Purchase of a Business
In line with CANDLER COMPANY’S expansion program, it has become interested in acquiring
a plant in Mindanao to handle many of production functions in that area. One prospective seller
is Sayo Na Co. whose owners have decided to sell their business if a proper settlement can be
obtained. Sayo Na Co.’s statement of financial position appears as follows:
Current assets
Investments
Property, Plant, and
equipment (net)
Total assets
P 4,500,000
1,500,000
12,000,000
__________
P 18,000,000
Current liabilities
Noncurrent liabilities
Ordinary shares
Share premium
Retained earnings
Total equities
P 2,400,000
3,000,000
1,500,000
5,100,000
16,000,000
P 18,000,000
Candler has hired Kilatis Appraisal Company to determine the proper price to pay for Sayo Na
Co. The appraisal company finds that the investments have a fair value of P4,500,000 and the
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 4 years indicates that the net income has
steadily increased. In 2018, 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 the Mindanao plant is
expected to stay the same for the next 4 years.
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
goodwill will be computed as:
1. The capitalization of the average excess earnings of Sayo Na Co. at 18%.
A. P44,840,000
C. P18,286,416
B. P36,000,000
D. P26,840,000
2. The purchase of average excess earnings years over the next four years.
A. P24,364,800
C. P30,960,000
B. P19,591,200
D. P22,831,200
3. The capitalization of average excess earnings 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 the liabilities of Sayo Na
Co., how much would be charged to goodwill?
A. P8,840,000
C. P 0
B. P6,364,800
D. P5,100,000
SOLUTION 6-19
Current assets (P4,500,00 + P2,400,00)
Investments
Property, plant, and equipment (net)
Current liabilities
Noncurrent liabilities
Net assets at fair value
P 6,900,000
4,500,000
12,000,000
(2,400,000)
(3,000,000)
P18,000,000
Normal earnings (P18,000,000 x 18%)
P3,240,000
Projected net income:
2019
3,600,000
2020
2021
2022
P
4,320,000
5,184,000
6,220,800
P
19,324,800
Average earnings over the next 4 years
(P19,324,800/4)
4,831,200
Average excess earnings (P4,831,200 – P3,240,000)
1,591,200
P
P
1. Goodwill (P1,591,200/18%)
Fair value of net assets
Total
Answer: D
P 8,840,000
18,000,000
P 26,840,000
2. Goodwill (P1,591,200 x 4)
Fair value of net assets
Total
Answer: A
P 6,364,800
18,000,000
P 24,364,800
3. Goodwill (P1,591,200/24%)
Fair value of net assets
Total
Answer: B
P 6,630,000
18,000,000
P 24,630,000
4. Goodwill (P1,591,200 x 2.85498)
Fair value of net assets
Total
Answer: C
5. Purchase price
Fair value of net assets
Goodwill
Answer: D
P 4,542,844
18,000,000
P 22,542,844
P 23,100,000
18,000,000
P 5,100,000
PROBLEM 6-20
Goodwill
You have been instructed by CANNON COMPANY, a high-flying conglomerate, 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
5,000,000
Liabilities
Average rate of return on net assets for XYZ Co.'s industry
Forecasted earnings per year based on past earnings figures
P
1,200,000
15%
700,000
Determine the purchase price on the basis of the assumptions:
1. Goodwill is equal to 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
present value factor of an ordinary annuity of 1 at 15% for 3 periods is 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 of 15%.
A. P7,600,000
C. P4,666,667
B. P8,466,667
D. P6,400,000
SOLUTION 6-20
Total identifiable assets
5,000,000
Less: Liabilities
Net assets
3,800,000
P
1,200,000
P
Average rate of return on net assets
15%
Average earnings
570,000
x
P
Forecasted earnings
700,000
Average earnings
Excess earnings
130,000
P
570,000
P
1. Goodwill – 3 years' excess earnings (P130,000 x 3)
Net assets
Purchase Price
Answer: D
P 390,000
3,800,000
P 4,190,000
2. Goodwill (P130,000 x 2.28323)
Net assets
Purchase Price
Answer: B
P 296,820
3,800,000
P 4,096,820
3. Goodwill (P130,000 ÷ 15%)
Net assets
Purchase Price
Answer: C
P 866,667
3,800,000
P 4,666,667
PROBLEM 6-21
Goodwill
DANSKIN, INC. is considering purchasing A & B Enterprises, which has the following assets
and liabilities.
Accounts receivable
Inventory
Prepaid Insurance
Buildings and equipment
(net)
Accounts payable
Net assets
Cost
Fair Market Value
P 4,800,000
4,800,000
200,000
1,400,000
P 4,400,000
5,000,000
200,000
4,000,000
(3,200,000)
P 8,000,000
(3,200,000)
P 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
B. P2,400,000
C. P2,200,000
D. P 0
SOLUTION 6-21
Purchase Price
12,600,000
Fair market value of net assets
Goodwill
2,200,000
Answer: C
PROBLEM 6-22
P
10,400,000
P
Accounting for Computer Software
Cost
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 have been very successful in the marketplace.
Daurian incurred the following costs during 2016:
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
Costs to produce and prepare software for sale
P705,000
235,200
148,500
80,250
168,900
Additional data for 2018:
Sales of products for the year
Beginning inventory
Portion of goods available for sale sold during year
Income tax rate is 30%
P 1,545,000
426,000
60%
What is Daurian's net income for 2018?
A. P139,797
C. P215,072
B. P195,681
D. P243,746
SOLUTION 6-22
Sales
Cost of goods sold:
Beginning inventory
Software production costs (including amortization of
capitalized software costs) (P168,900 + P 80,250)
Goods available for sale
Ending inventory (P675,150 x 40%)
Gross Income
Expenses:
Salaries and wages of programmers
Research-related expenses
Income before income tax
Income tax (30%)
Net Income
Answer: A
P 1,545,000
P 426,000
249,150
675,150
270,060
405,090
1,139,910
P 705,000
235,200
940,200
199,710
59,913
P 139,797