THE SUPEKTIBOL INTANGIBLES

MULTIPLE CHOICE

1.A Topic: Acquisition costs and goodwill

LO 2, 3
P acquired S for $1,100,000 at a time when the underlying book value of S was
$1,000,000. The $1,100,000 purchase price includes accounting and legal fees of $50,000.
S's assets and liabilities were fairly stated except for the following:

Fair value Book value

Inventory $60,000 $40,000
Land 30,000 20,000

Goodwill reported for this acquisition is:

a. $20,000
b. $50,000
c. $70,000
d. $90,000

ANS: a
Rationale:
Cost $1,050,000
Book value 1,000,000
Excess paid $ 50,000
Inventory 20,000
Land 10,000
Goodwill $ 20,000
B. Topic: Bargain purchase
LO 4
P purchased all of the outstanding shares of S for $1,300,000 at a time when the
underlying book value of S was $1,200,000. S's assets and liabilities consist of the
following:

Fair value Book value

Cash, receivables $250,000 $250,000
Inventory 360,000 380,000
Equipment 900,000 600,000
Liabilities 30,000 30,000

The gain on acquisition is:

a. $140,000
b. $180,000
c. $220,000
d. $260,000

ANS: b
Rationale:
Cost $1,300,000
Book value 1,200,000
Excess of cost over book value $ 100,000
Excess
Inventory $(20,000)
Equipment 300,000 280,000
Gain $ 180,000
C.Tripiani Inc. incurred $450,000 of capitalizable costs to develop computer software during 2010. The
software will be used internally over its 5-year life. What amount of the computer software costs should
be expensed in 2010?
a. $45,000
b. $450,000
c. $100,000
d. $90,000

b $450000 X 1/5 = $90,000.

D. Cyber Inc. incurred $20,000 of capitalizable costs to develop computer software during 2011. The
software will be used internally over its 5-year life. What amount of the computer software costs should
be expensed in 2011?
a. $4,000
b. $8,000
c. $12,000
d. $5,000

b $20,000 X 1/5 = $20,000.

E. Topic: Goodwill
LO 2
P acquires all of S Company at an acquisition cost of $8,000,000. Assets
and liabilities of the acquired company are as follows:

Book value Fair value

Current assets $ 500,000 $ 700,000
Land, buildings and equipment (net) 6,000,000 7,500,000
Brand names -0- 1,000,000
Liabilities 2,000,000 1,750,000

Goodwill arising from this acquisition is reported at:

a. $0
b. $ 550,000
c. $1,200,000
d. $1,550,000

ANS: b
Rationale: $8,000,000 - ($700,000 + $7,500,000 + $1,000,000 - $1,750,000) = $550,000

2.A. Topic: Poolings

LO 1
X Company acquires all of Y Company in an acquisition properly accounted for as an asset
acquisition. X issues 80,000 shares of common stock with a fair value of $2,000,000 for
Y’s net assets. The fair values of Y’s assets and liabilities approximate their book values.
Here are the balance sheets of X and Y prior to the acquisition:

X Company Y Company
Assets $3,000,000 $1,000,000

Liabilities $1,600,000 $ 600,000

Common stock, $1 par 100,000 10,000
Additional paid-in capital 900,000 290,000
Retained earnings 400,000 100,000
$3,000,000 $1,000,000

Assume the acquisition occurred prior to 2001 and qualifies as a pooling. What is the
retained earnings balance of the combined company, immediately following the acquisition?

a. $400,000
b. $500,000
c. $250,000
d. $520,000
ANS: b
Rationale: X's entry is:

Investment 400,000
 Common stock 80,000
Retained earnings 100,000
APIC 220,000

Use the following information to answer questions b-d:

Kelly Corporation acquires Lawson Co. in a statutory merger. Below is the balance sheet of
Lawson at the date of acquisition.

Book value Market value

Current assets $ 1,000,000 $ 4,000,000
Plant & equipment 50,000,000 70,000,000
Identifiable intangibles 20,000,000 30,000,000
Goodwill 4,000,000 7,000,000
Current liabilities 2,000,000 2,000,000
Long-term liabilities 52,000,000 52,000,000
Capital stock 3,000,000
Retained earnings 18,000,000

B. Topic: Statutory merger, net asset valuation, prior goodwill

LO 2
Kelly issues stock with a market value of $58,000,000 for Lawson. How much goodwill
does Kelly record?

a. $ 1,000,000
b. $ 7,000,000
c. $ 8,000,000
d. $10,000,000

ANS: c
Rationale: $8,000,000 = $58,000,000 – ($4,000,000 + $70,000,000 + $30,000,000 -
$2,000,000 - $52,000,000)
C. Topic: Subsequent changes in acquired asset values
LO 3
Assume that three months after the acquisition, additional identifiable intangibles,
belonging to Lawson at the date of acquisition, are discovered. These intangibles have a
market value of $500,000. The entry to reflect this new information includes:

a. A credit to goodwill of $500,000

b. A credit to intangible assets of $500,000
c. A gain of $500,000
d. A loss of $500,000

ANS: a
Rationale: The correcting entry is:

Identifiable intangibles 500,000

Goodwill 500,000

D. Topic: Subsequent changes in acquired asset values

LO 3
Assume that a year after the acquisition, it is determined that because of a downturn in the
economy and resulting reduction in sales, the acquired plant and equipment is only worth
$60,000,000. The entry to reflect this new information includes:

a. A debit to goodwill of $10,000,000

b. A debit to plant and equipment of $10,000,000
c. A gain of $10,000,000
d. A loss of $10,000,000

ANS: d
Rationale: The correcting entry is:

Impairment loss 10,000,000

Plant & equipment, net 10,000,000
P Company acquired all of the net assets of S Company. The balance sheet of S Company
immediately prior to the acquisition, along with market values of its assets and liabilities, is as
follows:

S Company
book value market value
Current assets $ 800,000 $ 1,000,000
Plant & equipment (net) 28,000,000 35,000,000
Patents 100,000 2,000,000
Identifiable intangible: brand names 0 13,000,000
Skilled work force 0 4,000,000
Goodwill 200,000 700,000
Liabilities 21,000,000 20,000,000
Common stock, $10 par 2,000,000
Additional paid-in capital 3,000,000
Retained earnings 3,100,000

E. Topic: Statutory merger, asset valuation, goodwill

LO 2, 4
P Company pays $40,000,000 in cash for S Company, in an acquisition properly reported
as a statutory merger. P records goodwill of:

a. $18,000,000
b. $17,300,000
c. $ 9,000,000
d. $ 4,300,000

ANS: c
Rationale: $9,000,000 = $40,000,000 – ($1,000,000 + $35,000,000 + $2,000,000 +
$13,000,000 - $20,000,000).
3. Refer here for 1-5

Southern Company’s balance sheet is as follows:

Current assets $ 6,000,000

Plant & equipment 75,000,000
Total $81,000,000

Liabilities $65,000,000
Common stock, $1 par 200,000
Additional PIC 11,900,000
Retained earnings (5,000,000)
Treasury stock, 3,000 shares (200,000)
Accumulated OCI 9,100,000
Total $81,000,000

Pecan Corporation is in the process of acquiring Southern. Its research reveals that
Southern’s current assets are carried at $1,000,000 more than book value, its plant & equipment is
carried at $30,000,000 more than book value, and it has the following unreported intangibles:

Fair value
Non-competition agreement $ 4,000,000
Skilled employees 2,000,000
Business from prospective customers 8,000,000
Order backlog 15,000,000

Pecan includes an earnings contingency, with a current value of $500,000, as part of the
acquisition agreement.
A. Topic: Acquisition financing, stock price contingency
LO 1, 3
Pecan finances the acquisition with bonds. If Southern’s shareholders are to receive $36
per share in cash on acquisition, how much cash must Pecan generate from the sale of
bonds?

a. $3,600,000
b. $7,200,000
c. $7,092,000
d. $7,592,000

ANS: c
Rationale: Southern has 200,000 – 3,000 = 197,000 shares outstanding. 197,000 x $36 =
$7,092,000.

B. Topic: Unreported intangibles, earnings contingency, goodwill

LO 2, 3, 4
How much cash must Pecan generate from the sale of bonds, if it wants to report
$10,000,000 in goodwill?

a. $13,500,000
b. $15,500,000
c. $24,000,000
d. $23,500,000

ANS: a
Rationale: Fair value of identifiable net assets acquired = $5,000,000 + $45,000,000 +
$4,000,000 + $15,000,000 - $65,000,000 = $4,000,000.
To report $10,000,000 in goodwill, the total acquisition cost must be $14,000,000. The
earnings contingency is $500,000, so $13,500,000 in cash must be paid.
C. Topic: Goodwill
LO 4
Pecan pays $30,000,000 in cash to the former shareholders of Southern. How much
goodwill does it record?

a. $26,000,000
b. $26,500,000
c. $16,500,000
d. $ 8,500,000

ANS: b
Rationale: Fair value of identifiable net assets acquired = $5,000,000 + $45,000,000 +
$4,000,000 + $15,000,000 - $65,000,000 = $4,000,000.
Acquisition cost = $30,000,000 + $500,000 = $30,500,000.
Goodwill = $30,500,000 - $4,000,000 = $26,500,000

D. Topic: Subsequent value changes, acquired assets

LO 2, 3, 4
Pecan pays $5,000,000 in cash to the former shareholders of Southern. Subsequent
information reveals that Southern has customer lists, not reported on its balance sheet,
with a fair value of $600,000 at the date of acquisition. This information was received
during the measurement period. The entry to record the new information includes a credit
of $600,000 to:

a. Intangible assets
b. Goodwill
c. Gain on acquisition
d. Additional paid-in capital

ANS: b
Rationale: Initial fair value of identifiable net assets acquired = $5,000,000 + $45,000,000
+ $4,000,000 + $15,000,000 - $65,000,000 = $4,000,000
Acquisition cost = $5,000,000 + $500,000 = $5,500,000
Initial goodwill = $5,500,000 - $4,000,000 = $1,500,000
When the additional intangible is discovered, goodwill declines to $900,000 since the fair
value of identifiable net assets increases to $4,600,000.
E. Topic: Earnings contingency, subsequent value changes
LO 3
Pecan pays $5,000,000 in cash to the former shareholders of Southern. Assume the fair
values of Southern’s identifiable net assets are as originally stated. Within the measurement
period, additional information on Southern’s expected future performance at the date of
acquisition reveals that the earnout had a fair value of $200,000 at the date of acquisition.
The entry to record the new information includes a credit of $300,000 to:

a. Intangible assets
b. Goodwill
c. Gain on acquisition
d. Earnings contingency liability

ANS: b
Rationale: Initial fair value of identifiable net assets acquired = $5,000,000 + $45,000,000
+ $4,000,000 + $15,000,000 - $65,000,000 = $4,000,000.
Initial acquisition cost = $5,000,000 + $500,000 = $5,500,000.
Initial goodwill = $5,500,000 - $4,000,000 = $1,500,000
When the fair value of the earnout declines, the acquisition cost declines to $5,200,000,
and goodwill declines to $1,200,000 = $5,200,000 - $4,000,000.

4.
A. In January, 2011, Mustang Corporation purchased a patent for a new consumer product for
$1,000,000. At the time of purchase, the patent was valid for fifteen years. Due to the competitive nature
of the product, however, the patent was estimated to have a useful life of only ten years. During 2016 the
product was permanently removed from the market under governmental order because of a potential
health hazard present in the product. What amount should Mustang charge to expense during 2016,
assuming amortization is recorded at the end of each year?
a. $500,000.
b. $250,000.
c. $100,000.
d. $150,000.

($1,000,000 ÷ 10) × 5 = $500,000.

B. To induce the owners of Innovative Systems to sell to Agilysis Inc, an earnout was included in
the acquisition agreement. Agilysis agrees to pay the former owners of Innovative Systems
$2.00 for every dollar of total EBITDA earned over $50 million in the next three years.
The payment would be made at the end of three years. Expected total EBITDA in the next
three years is as follows:

Total EBITDA earned Probability

$35,000,000 0.10
45,000,000 0.40
55,000,000 0.20
65,000,000 0.30

Required
What is the value of the earnout at the date of acquisition, assuming a discount rate of
10%? Round your answer to the nearest dollar.

ANS:

5,000,000 x $2 x 0.20 $ 2,000,000

15,000,000 x $2 x 0.30 9,000,000
$11,000,000
11,000,000/(1.10)3 $ 8,264,463

C. Topic: Earnings contingency

LO 3
To induce the owners of Innovative Systems to sell to Agilysis Inc, an earnout was
included in the acquisition agreement. Agilysis agrees to pay the former owners of
Innovative Systems $2.00 for every dollar of total EBITDA earned over $50 million in the
next three years. The payment would be made at the end of three years. Expected total
EBITDA in the next three years is as follows:

Total EBITDA earned Probability

$35,000,000 0.10
45,000,000 0.40
55,000,000 0.20
65,000,000 0.30

Required
What is the value of the earnout at the date of acquisition, assuming a discount rate of
10%? Round your answer to the nearest dollar.

ANS:

5,000,000 x $2 x 0.20 $ 2,000,000

15,000,000 x $2 x 0.30 9,000,000
$11,000,000
11,000,000/(1.10)3 $ 8,264,463
D.
Lynne Corporation acquired a patent on May 1, 2012. Lynne paid cash of $40,000 to the seller. Legal fees
of $1,000 were paid related to the acquisition. What amount should be debited to the patent account?
a. $1,000
b. $39,000
c. $40,000
d. $41,000
Solution
d $40,000 + $1,000 = $41,000.

E.
Contreras Corporation acquired a patent on May 1, 2012. Contreras paid cash of $35,000 to the seller.
Legal fees of $900 were paid related to the acquisition. What amount should be debited to the patent
account?
a. $900
b. $34,100
c. $35,000
d. $35,900
Solution
d $35,000 + $900 = $35,900.

5.A.
Mini Corp. acquires a patent from Maxi Co. in exchange for 2,500 shares of Mini Corp.’s $5 par value
common stock and $90,000 cash. When the patent was initially issued to Maxi Co., Mini Corp.’s stock
was selling at $7.50 per share. When Mini Corp. acquired the patent, its stock was selling for $9 a share.
Mini Corp. should record the patent at what amount?
a. $102,500
b. $108,750
c. $112,500
d. $90,000

Solution

c(2,500X$9)+$90,000=$112,500
B. In January, 2010, Arianne Corporation purchased a patent for a new consumer product for $100,000.
At the time of purchase, the patent was valid for fifteen years. Due to the competitive nature of the
product, however, the patent was estimated to have a useful life of only ten years. During 2015 the
product was permanently removed from the market under governmental order because of a potential
health hazard present in the product. What amount should Arianne charge to expense during 2015,
assuming amortization is recorded at the end of each year?
a. $100,000.
b. $6,667.
c. $10,000.
d. $50,000.

($100,000 ÷ 10) × 5 = $50,000

C.
Jeff Corporation purchased a limited-life intangible asset for $150,000 on May 1, 2010. It has a useful life
of 10 years. What total amount of amortization expense should have been recorded on the intangible
asset by December 31, 2012?
a. $ -0-
b. $30,000
c. $40,000
 d. $45,000
Solution
c ($150,000 ÷ 10) × 2 2/3 = $40,000.

D.
Rich Corporation purchased a limited-life intangible asset for $270,000 on May 1, 2010. It has a useful
life of 10 years. What total amount of amortization expense should have been recorded on the intangible
asset by December 31, 2012?
a. $ -0-.
b. $54,000
c. $72,000
d. $81,000
Solution
c ($270,000 ÷ 10) × 2 2/3 = $72,000.

E.
Thompson Company incurred research and development costs of $100,000 and legal fees of $20,000 to
acquire a patent. The patent has a legal life of 20 years and a useful life of 10 years. What amount
should Thompson record as Patent Amortization Expense in the first year?
a. $ -0-.
b. $ 2,000.
c. $ 6,000.
d. $12,000.
Solution
b $20,000 ÷ 10 = $2,000.

6.A.
ELO Corporation purchased a patent for $180,000 on September 1, 2010. It had a useful life of 10 years.
On January 1, 2012, ELO spent $44,000 to successfully defend the patent in a lawsuit. ELO feels that as
of that date, the remaining useful life is 5 years. What amount should be reported for patent amortization
expense for 2012?
a. $41,200.
b. $40,000.
c. $37,600.
d. $31,200.

Solution
b $180,000 – [($180,000 ÷ 10) × 1 1/3] = $156,000. ($156,000 + $44,000) ÷ 5 = $40,000.

B.

Danks Corporation purchased a patent for $900,000 on September 1, 2010. It had a useful life of 10
years. On January 1, 2012, Danks spent $220,000 to successfully defend the patent in a lawsuit. Danks
feels that as of that date, the remaining useful life is 5 years. What amount should be reported for patent
amortization expense for 2012?
a. $206,000.
b. $200,000.
c. $188,000.
d. $156,000.

Solution
b $900,000 – [($900,000 ÷ 10) × 1 1/3] = $780,000. ($780,000 + $220,000) ÷ 5 = $200,000

C.
The general ledger of Vance Corporation as of December 31, 2012, includes the following accounts:
 Copyrights $ 30,000
Deposits with advertising agency (will be used to promote goodwill) 27,000
Discount on bonds payable 70,000
Excess of cost over fair value of identifiable net assets of
Acquired subsidiary 440,000
Trademarks 90,000
In the preparation of Vance's balance sheet as of December 31, 2012, what should be reported as total
intangible assets?
a. $530,000.
b. $557,000.
c. $560,000.
d. $587,000.
Solution
c $30,000 + $440,000 + $90,000 = $560,000.

D.
In January, 2008, Findley Corporation purchased a patent for a new consumer product for $960,000. At
the time of purchase, the patent was valid for fifteen years. Due to the competitive nature of the product,
however, the patent was estimated to have a useful life of only ten years. During 2013 the product was
permanently removed from the market under governmental order because of a potential health hazard
present in the product. What amount should Findley charge to expense during 2013, assuming
amortization is recorded at the end of each year?
e. $640,000.
f. $480,000.
g. $96,000.
h. $64,000.
Solution
b ($960,000 ÷ 10) × 5 = $480,000.

E.
Day Company purchased a patent on January 1, 2012 for $600,000. The patent had a remaining useful
life of 10 years at that date. In January of 2013, Day successfully defends the patent at a cost of
$270,000, extending the patent’s life to 12/31/24. What amount of amortization expense would Kerr
record in 2013?
a. $60,000
b. $67,500
c. $72,500
d. $90,000

Solution
b [($600,000 – $60,000) + $270,000] ÷ 12 = $67,500.

7.A.
On January 2, 2012, Klein Co. bought a trademark from Royce, Inc. for $1,200,000. An independent
research company estimated that the remaining useful life of the trademark was 10 years. Its
unamortized cost on Royce’s books was $900,000. In Klein’s 2012 income statement, what amount
should be reported as amortization expense?
a. $120,000.
b. $ 90,000.
c. $ 60,000.
d. $ 45,000.
Solution
a $1,200,000 ÷ 10 = $120,000.

B.
A company acquires a patent for a drug with a remaining legal and useful life of six years on January 1,
2011 for $2,100,000. The company uses straight-line amortization for patents. On January 2, 2013, a new
patent is received for a timed-release version of the same drug. The new patent has a legal and useful
life of twenty years. The least amount of amortization that could be recorded in 2013 is
a. $350,000.
b. $ 70,000.
c. $ 95,454.
d. $ 80,500.
Solution
b $2,100,000 – [($2,100,000 ÷ 6) × 2] = $1,400,000. $1,400,000 ÷ 20 = $70,000.

C.
Blue Sky Company’s 12/31/12 balance sheet reports assets of $7,500,000 and liabilities of $3,000,000.
All of Blue Sky’s assets’ book values approximate their fair value, except for land, which has a fair value
that is $450,000 greater than its book value. On 12/31/12, Horace Wimp Corporation paid $7,650,000 to
acquire Blue Sky. What amount of goodwill should Horace Wimp record as a result of this purchase?
a. $ -0-
b. $150,000
c. $2,700,000
d. $3,150,000
Solution
c ($7,500,000 + $450,000) – $3,000,000 = $4,950,000 $7,650,000 – $4,950,000 = $2,700,000.

D.
Dotel Company’s 12/31/12 balance sheet reports assets of $12,000,000 and liabilities of
$5,000,000. All of Dotel’s assets’ book values approximate their fair value, except for land, which has a
fair value that is $800,000 greater than its book value. On 12/31/12, Egbert Corporation paid $12,200,000
to acquire Dotel. What amount of goodwill should Egbert record as a result of this purchase?
a. $ -0-
b. $ 200,000
c. $4,400,000
d. $5,200,000
Solution
c ($12,000,000 + $800,000) – $5,000 = $7,800,000.
$12,200,000 – $7,800,000 = $4,400,000.

E.
Floyd Company purchases Haeger Company for $3,200,000 cash on January 1, 2013. The book value of
Haeger Company’s net assets, as reflected on its December 31, 2012 balance sheet is $2,480,000. An
analysis by Floyd on December 31, 2012 indicates that the fair value of Haeger’s tangible assets
exceeded the book value by $240,000, and the fair value of identifiable intangible assets exceeded book
value by $180,000. How much goodwill should be recognized by Floyd Company when recording the
purchase of Haeger Company?
a. $ -0-
b. $720,000
c. $480,000
d. $300,000
Solution
d $2,480,000 + $240,000 + $180,000 = $2,900,000. $3,200,000 – $2,900,000 = $300,000.

8.A.
General Products Company bought Special Products Division in 2012 and appropriately recorded
$500,000 of goodwill related to the purchase. On December 31, 2013, the fair value of Special Products
Division is $4,000,000 and it is carried on General Product’s books for a total of $3,400,000, including the
goodwill. An analysis of Special Products Division’s assets indicates that goodwill of $400,000 exists on
December 31, 2013. What goodwill impairment should be recognized by General Products in 2013?
a. $0.
b. $200,000.
c. $50,000.
d. $300,000.
Solution
a Since $4,000,000 > $3,400,000, $0 impairment.

B.
During 2012, Bond Company purchased the net assets of May Corporation for $2,000,000. On the date
of the transaction, May had $600,000 of liabilities. The fair value of May's assets when acquired were as
follows:
Current assets $ 1,080,000
Noncurrent assets 2,520,000
$3,600,000
How should the $1,000,000 difference between the fair value of the net assets acquired
($3,000,000) and the cost ($2,000,000) be accounted for by Bond?
a. The $1,000,000 difference should be credited to retained earnings.
b. The $1,000,000 difference should be recognized as a gain.
c. The current assets should be recorded at $1,080,000 and the noncurrent assets should be
recorded at $1,520,000.
d. A deferred credit of $1,000,000 should be set up and then amortized to income over a period
not to exceed forty years.
Solution
b $3,000,000 – $2,000,000 = $1,000,000 gain.

C.
The following information is available for Barkley Company’s patents:
Cost $2,580,000
Carrying amount 1,290,000
Expected future net cash flows 1,200,000
Fair value 975,000
Barkley would record a loss on impairment of a.
$ 90,000.
b. $ 315,000.
c. $1,290,000.
d. $1,380,000.
Solution
b $1,290,000 – $975,000 = $315,000.

D.
Harrel Company acquired a patent on an oil extraction technique on January 1, 2012 for $7,500,000. It
was expected to have a 10 year life and no residual value. Harrel uses straight-line amortization for
patents. On December 31, 2013, the expected future cash flows expected from the patent were expected
to be $900,000 per year for the next eight years. The present value of these cash flows, discounted at
Harrel’s market interest rate, is $4,200,000. At what amount should the patent be carried on the
December 31, 2013 balance sheet?
a. $7,500,000
b. $7,200,000
c. $6,000,000
d. $4,200,000
Solution
c $7,500,000 – [($7,500,000 ÷ 10) × 2] = $6,000,000.
E.
Malrom Manufacturing Company acquired a patent on a manufacturing process on January 1, 2012 for
$6,250,000. It was expected to have a 10 year life and no residual value. Malrom uses straight-line
amortization for patents. On December 31, 2013, the expected future cash flows expected from the
patent were expected to be $500,000 per year for the next eight years. The present value of these cash
flows, discounted at Malrom’s market interest rate, is $3,000,000. At what amount should the patent be
carried on the December 31, 2013 balance sheet?
a. $6,250,000
b. $5,000,000
c. $4,000,000
d. $3,000,000
Solution
d $6,250,000 – [($6,250,000 ÷ 10) × 2] = $5,000,000. Since $5,000,000 > ($500,000 × 8),
patent is reported at $3,000,000 (present value of cash flows.

9.A.
Twilight Corporation acquired End-of-the-World Products on January 1, 2012 for $8,000,000, and
recorded goodwill of $1,500,000 as a result of that purchase. At
December 31, 2012, the End-of-the-World Products Division had a fair value of $6,800,000. The net
identifiable assets of the Division (excluding goodwill) had a fair value of $5,800,000 at that time. What
amount of loss on impairment of goodwill should Twilight record in 2012?
a. $ -0-
b. $500,000
c. $700,000
d. $1,200,000
Solution
b $6,800,000 – $5,800,000 = $1,000,000 $1,500,000 – $1,000,000 = $500,000.

B.
Jenks Corporation acquired Linebrink Products on January 1, 2012 for $6,000,000, and recorded goodwill
of $1,125,000 as a result of that purchase. At December 31, 2012, Linebrink Products had a fair value of
$5,100,000. The net identifiable assets of the Linebrink (excluding goodwill) had a fair value of
$4,350,000 at that time. What amount of loss on impairment of goodwill should Jenks record in 2012?
a. $ -0-
b. $375,000
c. $525,000
d. $900,000
Solution
b $5,100,000 – $4,350,000 = $750,000 $1,125,000 – $ 750,000 = $375,000.

C.
In 2012, Edwards Corporation incurred research and development costs as follows:
Materials and equipment $ 90,000
Personnel 130,000
Indirect costs 150,000
$ 370,000
These costs relate to a product that will be marketed in 2011. It is estimated that these costs will be
recouped by December 31, 2015. The equipment has no alternative future use. What is the amount of
research and development costs that should be expensed in 2012?
a. $0.
b. $220,000.
c. $280,000.
d. $370,000.
Solution
d Expense total of $370,000.
D.
Hall Co. incurred research and development costs in 2013 as follows:
Materials used in research and development projects $ 450,000
Equipment acquired that will have alternate future uses in future research
and development projects 3,000,000
Depreciation for 2013 on above equipment 500,000
Personnel costs of persons involved in research and development projects 750,000
Consulting fees paid to outsiders for research and development projects 300,000
Indirect costs reasonably allocable to research and development projects 225,000
$ 5,225,000
The amount of research and development costs charged to Hall's 2013 income statement should be
a. $1,700,000.
b. $2,000,000.
c. $2,225,000.
d. $4,700,000.
Solution
c $5,225,000 – $3,000,000 = $2,225,000.

E.
Loazia Inc. incurred the following costs during the year ended December 31, 2013:
Laboratory research aimed at discovery of new knowledge $230,000
Costs of testing prototype and design modifications 45,000
Quality control during commercial production, including routine testing
of products 270,000
Construction of research facilities having an estimated useful life of
6 years but no alternative future use 360,000
The total amount to be classified and expensed as research and development in 2013 is
a. $605,000.
b. $905,000.
c. $635,000.
d. $335,000.
Solution
c $230,000 + $45,000 + $360,000 = $635,000.

10.A.
MaBelle Corporation incurred the following costs in 2012:
Acquisition of R&D equipment with a useful life of
4 years in R&D projects $600,000
Start-up costs incurred when opening a new plant 140,000
Advertising expense to introduce a new product 700,000
Engineering costs incurred to advance a product to full
production stage 500,000
What amount should MaBelle record as research & development expense in 2012?
a. $ 650,000
b. $ 740,000
c. $1,100,000
d. $1,240,000
Solution
a ($600,000 ÷ 4) + $500,000 = $650,000.

B.
Leeper Corporation incurred the following costs in 2012:
 Acquisition of R&D equipment with a useful life of
4 years in R&D projects $800,000
Cost of making minor modifications to an existing product 140,000
Advertising expense to introduce a new product 700,000
Engineering costs incurred to advance a product to full
production stage 750,000
What amount should Leeper record as research & development expense in 2012?
a. $ 950,000
b. $ 940,000
c. $1,450,000
d. $1,640,000
Solution
a ($800,000 ÷ 4) + $750,000 = $950,000.

C.
Platteville Corporation has the following account balances at 12/31/12:
Amortization expense $ 30,000
Goodwill 420,000
Patent, net of $90,000 amortization 210,000
What amount should Platteville report for intangible assets on the 12/31/12 balance sheet?
a. $210,000
b. $300,000
c. $630,000
d. $660,000
Solution
c $420,000 +$210,000 = $630,000.

D.
Shangra -La Company incurred $2,000,000 ($500,000 in 2011 and $1,500,000 in 2012) to develop a
computer software product. $ 600,000 of this amount was expended before technological
feasibility was established in early 2012. The product will earn future revenues of $4,000,000 over
its 5 -year life, as follows: 2012 – $1,000,000; 2013 – $1,000,000; 2014 – $800,000; 2015 –
$800,000; and 2016 – $400,000. What portion of the $2,000,000 computer software costs should
be expensed in 2012?
a. $350,000
b. $400,000
c. $450,000
d. $1,500,000
Solution

c ($2,000,000 – $600,000) × ($1,000,000 ÷ $4,000,000) = $350,000.

$350,000 + ($600,000 – $500,000) = $450,000.

E.
Logan Company incurred $4,000,000 ($1,100,000 in 2011 and $ 2,900,000 in 2012) to develop a
computer software product. $1,200,000 of this amount was expended before technological
feasibility was established in early 2012. The product will earn future revenues of $8,000,000 over
its 5-year life, as follows: 2012 – $2,000,000; 2013 – $2,000,000; 2014 – $1,600,000; 2015 –
$1,600,000; and 2016 – $800,000. What portion of the $4,000,000 computer software costs should
be expensed in 2012?
a. $700,000.
b. $750,000.
c. $800,000.
d. $2,900,000.
Solution
c ($4,000,000 – $1,200,000) × ($2,000,000 ÷ $8,000,000) = $700,000.
$700,000 + ($1,200,000 – $1,100,000) = $800,000.

11.A.
Geller Inc. incurred $700,000 of capitalizable costs to develop computer software during 2012. The
software will earn total revenues over its 4-year life as follows: 2012 - $400,000; 2013 - $500,000;
2014 - $600,000; and 2015 - $500,000. What amount of the computer software costs should be
expensed in 2012?
a. $700,000
b. $140,000
c. $175,000
d. $245,000
Solution

c $700,000 X ¼ = $175,000 (greater than $140,000).

B. Philips Inc. incurred $100,000 of capitalizable costs to develop computer software during 2016. The
software will be used internally over its 5-year life. What amount of the computer software costs should
be expensed in 2016?
a. $20,000
b. $10,000
c. $30,000
d. $40,000

b $100,000 X 1/5 = $20,000.

C.
Tripiani Inc. incurred $900,000 of capitalizable costs to develop computer software during 2012. The
software will be used internally over its 5-year life. What amount of the computer software costs
should be expensed in 2012?
a. $900,000
b. $180,000
c. $202,500
d. $300,000
Solution

b $900,000 X 1/5 = $180,000.

D.
Lopez Corp. incurred $1,260,000 of research and development costs to develop a product for which a
patent was granted on January 2, 2008. Legal fees and other costs associated with registration of the
patent totaled $240,000. On March 31, 2013, Lopez paid $450,000 for legal fees in a successful defense
of the patent. The total amount capitalized for the patent through March 31, 2013 should be
a. $690,000.
b. $1,500,000.
c. $1,710,000.
d. $1,950,000.
Solution
a $240,000 + $450,000 = $690,000.

E
On June 30, 2013, Cey, Inc. exchanged 4,000 shares of Seely Corp. $30 par value common stock for a
patent owned by Gore Co. The Seely stock was acquired in 2013 at a cost of $110,000. At the exchange
date, Seely common stock had a fair value of $46 per share, and the patent had a net carrying value of
$220,000 on Gore's books. Cey should record the patent at
a. $110,000.
b. $120,000.
c. $184,000.
d. $220,000.
Solution
c 4,000 × $46 = $184,000.

12.A.
On May 5, 2013, MacDougal Corp. exchanged 6,000 shares of its $25 par value treasury common stock
for a patent owned by Masset Co. The treasury shares were acquired in 2012 for $135,000. At May 5,
2013, MacDougal's common stock was quoted at $34 per share, and the patent had a carrying value of
$165,000 on Masset's books. MacDougal should record the patent at
a. $135,000.
b. $150,000.
c. $165,000.
d. $204,000.

Solution
d 6,000 × $34 = $204,000.

B.
Ely Co. bought a patent from Baden Corp. on January 1, 2013, for $450,000. An independent consultant
retained by Ely estimated that the remaining useful life at January 1, 2013 is 15 years. Its unamortized
cost on Baden’s accounting records was $225,000; the patent had been amortized for 5 years by Baden.
How much should be amortized for the year ended December 31, 2013 by Ely Co.?
a. $0.
b. $22,500.
c. $30,000.
d. $45,000.
Solution
c $450,000 ÷ 15 = $30,000.

C.
January 2, 2010, Koll, Inc. purchased a patent for a new consumer product for $450,000. At the time of
purchase, the patent was valid for 15 years; however, the patent’s useful life was estimated to be only 10
years due to the competitive nature of the product. On December 31, 2013, the product was permanently
withdrawn from the market under governmental order because of a potential health hazard in the product.
What amount should Koll charge against income during 2013, assuming amortization is recorded at the
end of each year?
a. $ 45,000
b. $270,000
c. $315,000
d. $360,000
Solution
c $450,000 – [($450,000 ÷ 10) × 3] = $315,000.

D.
On January 1, 2009, Russell Company purchased a copyright for $2,000,000, having an estimated useful
life of 16 years. In January 2013, Russell paid $300,000 for legal fees in
a successful defense of the copyright. Copyright amortization expense for the year ended
December 31, 2013, should be
a. $0.
b. $125,000.
 c. $143,750.
d. $150,000.
Solution
d ($2,000,000 – [($2,000,000 ÷ 16) × 4] = $1,500,000 ($1,500,000 + $300,000) ÷ 12 =
$150,000.

E.

During 2013, Leon Co. incurred the following costs:

Testing in search for process alternatives $ 350,000
Costs of marketing research for new product 250,000
Modification of the formulation of a process 560,000
Research and development services performed by Beck Corp. for Leon 425,000
In Leon's 2013 income statement, research and development expense should be
a. $560,000.
b. $985,000.
c. $1,335,000.
d. $1,585,000.
Solution
c $350,000 + $560,000 + $425,000 = $1,335,000.

13.A.
Riley Co. incurred the following costs during 2013:
Significant modification to the formulation of a chemical product $160,000
Trouble-shooting in connection with breakdowns during commercial
production 150,000
Cost of exploration of new formulas 200,000
Seasonal or other periodic design changes to existing products 185,000
Laboratory research aimed at discovery of new technology 275,000
In its income statement for the year ended December 31, 2013, Riley should report research and
development expense of
a. $635,000.
b. $785,000.
c. $820,000.
d. $970,000.
Solution
a $160,000 + $200,000 + $275,000 = $635,000.

B.
On December 31, year 3, Byte Co. had capitalized software costs of $600,000 with an economic life of
four years. Sales for year 4 were 10% of expected total sales of the software. At December 31, year
4, the software had a net realizable value of $480,000. In its December 31, year 4 balance sheet,
what amount should Byte report as net capitalized cost of computer software?
a. 432,000
b. 450,000
c. 480,000
d. 540,000
Solution
(b) The software should be valued at the lower of its unamortized cost or its net realizable value. The
software’s unamortized cost is $450,000, which is equal to $600,000 – $150,000 ($600,000/4)

C.
On January 2, year 4, Judd Co. bought a trademark from Krug Co. for $500,000. Judd retained an
independent consultant, who estimated the trademark’s remaining life to be fifty years. Its
unamortized cost on Krug’s accounting records was $380,000. In Judd’s December 31, year 4
balance sheet, what amount should be reported as accumulated amortization?
a. 7,600
b. 9,500
c. 10,000
d. 12,500
Solution
(c) Judd Company would record the trademark at its cost of $500,000. The unamortized cost on the
seller’s books ($380,000) is irrelevant to the buyer. The trademark has a remaining useful life of fifty
years. Therefore, the year 4 amortization expense and 12/31/Y4 accumulated amortization is $10,000
($500,000 ÷ 50 years).

D.
On January 2, year 4, Paye Co. purchased Shef Co. at a cost that resulted in recognition of goodwill of
$200,000. During the first quarter of year 4, Paye spent an additional $80,000 on expenditures
designed to maintain goodwill. In its December 31, year 4 balance sheet, what amount should Paye
report as goodwill?
a. 180,000
b. 200,000
c. 252,000
d. 280,000
Solution
(b) A company should record as an asset the cost of intangible assets such as goodwill acquired from
other entities. Costs of developing intangible assets such as goodwill “which are not specifically
identifiable, have indeterminate lives, or are inherent in a continuing business and related to an entity as
a whole” should be expensed when incurred. Therefore, only the $200,000 (and not the additional
$80,000) should be capitalized as goodwill. Goodwill should not be amortized.

E.
On January 2, year 1, Lava, Inc. purchased a patent for a new consumer product for $90,000. At the time
of purchase, the patent was valid for fifteen years; however, the patent’s useful life was estimated to
be only ten years due to the competitive nature of the product. On December 31, year 4, the product
was permanently withdrawn from sale under governmental order because of a potential health
hazard in the product. What amount should Lava charge against income during year 4, assuming
amortization is recorded at the end of each year?
a. 9,000
b. 54,000
c. 63,000
d. 72,000
Solution
(c) Before year 4, Lava would record total amortization of $27,000 [($90,000 × 1/10) × 3 years], resulting
in a 12/31/Y3 carrying amount of $63,000 ($90,000 – $27,000). Since the patent became worthless at
12/31/Y4 due to government prohibition of the product, the entire carrying amount ($63,000) should be
charged against income in year 4 as an impairment loss.
14.
A. Lynn Corporation acquired a patent on May 1, 2017. Lynn paid cash of P20,000 to the seller. Legal fees
of P800 were paid related to the acquisition. What amount should be debited to the patent account?
a. P800
b. P19,200
c. P20,000
d. P20,800

Answer: d
P20,000 + P800 = P20,800.
B. Mari Co. acquired a patent on May 1, 2017. Mari paid cash of P25,000 to the seller. Legal fees of P1,000
were paid related to the acquisition. What amount should be debited to the patent account?
a. P1,000
b. P24,000
c. P25,000
d. P26,000
Answer: d
P25,000 + P1,000 = P26,000.

C. Riff Corporation purchased a limited-life intangible asset for P120,000 on May 1, 2017. It has a useful
life of 10 years. What total amount of amortization expense should have been recorded on the
intangible asset by December 31, 2017?
a. P -0-
b. P24,000
c. P32,000
d. P36,000
Answer: c
(P120,000 / 10) x 8/3 = P32,000.

4. Reach Co. purchased a limited-life intangible asset for P180,000 on May 1, 2017. It has a useful life
of 10 years. What total amount of amortization expense should have been recorded on the intangible
asset by December 31, 2017?
a) P -0-
b) P 36,000
c) P 48,000
d) P 54,000
Answer: c
(P180,000 / 10) x 8/3 = P48,000.
5. ILO Corporation purchased a patent for P180,000 on September 1, 2015. It had a useful life of 10
years. On January 1, 2017, ILO spent P44,000 to successfully defend the patent in a lawsuit. ILO feels
that as of that date, the remaining useful life is 5 years. What amount should be reported for patent
amortization expense for 2017?
a) P 41,200
b) P 40,000
c) P 37,600
d) P 31,200
Answer: b
P180,000 – [(P180,000 / 10) x 4/3] = P156,000.
(P156,000 + P44,000) / 5 = P40,000.

15.
A. URF Corporation purchased a patent for P450,000 on Septermber 1, 2015. It had a useful life of 10
years. On January 1, 2017, URF spent P110,000 to successfully defend the patent in a lawsuit. URF feels
that as of that date, the remaining useful life is 5 years. What amount should be reported for patent
amortization expense for 2017?
a) P103,000
b) P100,000
c) P94,000
d) P78,000
Answer: b
P450,000 – [(P450,000 / 10) x 4/3] = P390,000.
(P390,000 + P110,000) / 5 = P100,000.

B. The general ledger of Vance Corporation as of December 31, 2016, includes the following accounts:

Copyrights P 20,000
Deposits with advertising agency (will be used to promote goodwill 27,000
Discount on bonds payable 67,500
Excess of cost over fair value of identifiable net assets of acquired
subsidiary 390,000
Trademarks 90,000

In the preparation of Vance’s balance sheet as of December 31, 2016, what should be reported as total
intangible assets?
a) P594,500
b) P527,000
c) P500,000
d) P460,000

Answer: c
P20,000 + P390,000 + P90,000 = P500,000.

C. In January, 2011, Findly Corporation purchased a patent for a new consumer product for P720,000.
At the time of purchase, the patent was valid for fifteen years. Due to the competitive nature of the
product, however, the patent was estimated to have a useful life of only ten years. During 2016 the
product was permanently removed from the market of only ten years. During 2016 the product was
permanently removed from the market under governmental order because of a potential heath hazard
present in the product. What amount should Findly charge to expense during 2016, assuming
amortization is recorded at the end of each year?
a) P480,000
b) P360,000
c) P72,000
d) P48,000

Answer: b
(P720,000 / 10) x 5 =P360,000.
D. Care Company purchased a patent on January 1, 2015 for P180,000. The patent had a remaining
useful life of 10 years at that date. In January of 2016, Care successfully defends the patent at a cost of
P81,000, extending the patent’s life to 12/31/27. What amount of amortization expense would Care
record in 2016?
a) P18,000
b) P20,250
c) P21,750
d) P27,000

Answer: b
[(P180,000 – P18,000) + P81,000] / 12 = P20,050.
E. On January 2, 2016, Klin Co. bought a trademark from Joyce, Inc. for P500,000. An independent
research company estimated that the remaining useful life of the trademark was 10 years. Its
unamortized cost on Joyce’s books was P400,000. In Klin’s 2016 income statement, what amount
should be reported as amortization expense?
a) P50,000
b) P40,000
c) P25.000
d) P20,000
Answer: a
P500,000 / 10 = P50,000
16.
A. Bobcat Baseball Company had a player contract with Carter that was recorded in its accounting
records of P5,800,000. Doggie Baseball Company had a player contract with Peter that was recorded in
its accounting records at P5,600,000. Bobcat traded Barter to Doggie for Peter by exchanging each
plater’s contract. The fair value of each contract was P6,000,000. What amount should be shown in the
accounting records after the exchange of player contracts?

Bobcat Doggie___
a) P5,600,000 P5,600,000
b) P5,600,000 P5,800,000
c) P5,800,000 P5,600,000
d) P6,000,000 P6,000,000
Answer: c
Bobcat: P6,000,000 – P200,000 (deferred gain) = P5,800,000.
Doggie: P6,000,000 – P400,000(deferred gain) = P5,600,000.

B. A company acquires a patent for a drug with a remaining legal and useful life of six years on January
1, 2014 for P1,200,000. The company uses straight-line amortization for patents. On January 2, 2016, a
new patent is received for a timed-release version of the same drug. The new patent has a legal and
useful life of twenty years. The least amount of amortization that could be recorded in 2016 is
a) P200,000
b) P40,000
c) P54,545
d) P60,000
Answer: b
P1,200,000 – [(P1,200,000 / 6) x 2] =P800,000.
P800,000 / 20 = P40,000.

C. Red Sky Company’s 12/31/17 balance sheet reports assets of P5,000,000 and liabilities of
P2,000,000. All of Red Sky’s assets’ book values approximate their fair value, except for land, which has
a fair value that is P300,000 greater than its book value. On 12/31/17, Horace Wimp Corporation paid
P5,100,000 to acquire Red Sky. What amount of goodwill should Horace Wimp record as a result of this
purchase?
a) P -0-
b) P100,000
c) P1,800,000
d) P2,100,000
Answer: c
(P5,000,000 + P300,000) – P2,000,000 = P3,300,000
P5,100,000 – P3,300,000 = P1,800,000.

D. Burner Company’s 12/31/17 balance sheet reports assets of P6,000,000 and liabilities of P2,500,000.
All of Turner’s assets’ book values approximate their fair value, except for land, which has a fair value
that is P400,000 greater than its book value. On 12/31/17, Benedict Corporation paid P6,100,000 to
acquire Burner. What amount of goodwill should Benedict record as a result of this purchase?
a) P -0-
b) P100,000
c) P2,200,000
d) P2,600,000
Answer: c
(P6,000,000 + P400,000) – P2,500,000 = P3,900,000.
P6,100,000 – P3,900,000 = P2,000,000.

E. Distributor Company purchases Supplier Company for P800,000 cash on January 1, 2016. The book
value of Supplier company’s net assets, as reflected on its December 31, 2015 balance sheet is
P620,000. An analysis by Distributor on December 31, 2015 indicates that the fair value of Supplier’s
tangible assets exceeded the book value by P60,000, and the fair value of identifiable intangible assets
exceeded book value by P45,000. How much goodwill should be recognized by Distributor Company
when recording the purchase of Supplier Company?
a) P -0-
b) P180,000
c) P120,000
d) P75,000
Answer: d
P620,000 + P60,000 + P45,000 = P725,000.
P800,000 – P725,000 = P75,000.

17.
A. General Products Company bought Special Products Division in 2015 and appropriately booked
P250,000 of goodwill related to the purchase. On December 31, 2016, the fair value of Special Products
Division is P2,000,000 and it is carried on General Product’s books for a total of P1,700,000, including
the goodwill of P200,000 exists on December 31, 2016. What goodwill impairment should be
recognized by General Products in 2016?
a) P0
b) P200,000
c) P50,000
d) P300,000
Answer: a
Since P2,000,000 > P1,700,000, P0 impairment.

B. During 2016, Ban Company purchased the net assets of Mae Corporation for P950,000. On the date
of the transaction, Mae had P300,000 of liabilities. The fair value of Mae’s assets when acquired were
as follows:
Current assets P 540,000
Noncurrent assets 1,260,000
P1,800,000
How should the P550,00 difference between the fair value of the net assets acquired (P1,500,000) and
the cost (P950,000) be accounted for by Bond?
a) The P550,000 difference should be credited to retained earnings.
b) The P550,000 difference should be recognized as an extraordinary gain.
c) The currents assets should be recorded at P375,000 and the noncurrent assets should be
recorded at P875,000.
d) A deferred credit of P550,000 should be set up and then amortized to income over a period not
to exceed forty years.
Answer: b
P1,500,000 – P950,000 = P550,000 extraordinary gain.

C. The following information is available for Parkley Company’s patents:

Cost P1,720,000
Carrying amount 860,000
Expected future net cash flows 800,000
Fair value 640,000

Parkley would record a loss on impairment of

a) P1,080,000
b) P220,000
c) P160,000
d) P60,000
Answer: b
P860,000 – P640,000 = P220,000.

D. Mining Company acquired a patent on an oil extraction technique on January 1, 2015 for P5,000,000.
It was expected to have a 10 year life and no residual value. Mining uses straight-line amortization for
patents. On December 31, 2016, the expected future cash flows expected from the patent were
expected to be P600,000 per year for the next eight years. The present value of these cash flows,
discounted at Mining’s market interest rate, is P2,800,000. At what amount should the patent be
carried on the December 31, 2016 balance sheet?
a) P5,000,000
b) P4,800,000
c) P4,000,000
d) P2,800,000
Answer: c
P5,000,000 – [(P5,000,000 / 10) x 2] = P4,000,000.

E. Malcom Manufacturing Company acquired a patent on a manufacturing process on January 1, 2017

for P10,000,000. It was expected to have a 10 year life and no residual value. Malcom uses straight-line
amortization for patents. On December 31, 2016, the expected future cash flows expected from the
patent were expected to be P800,000 per year for the next eight years. The present value of these cash
flows, discounted at Malcom’s market interest rate, is P4,800,000. At what amount should the patent be
carried on the December 31, 2016 balance sheet?
a) P10,000,000
b) P8,000,000
c) P6,000,000
d) P4,800,000
Answer: d
P10,000,000 – [(P10,000,000 /10) x 2] = P8,000,000.
Since P8,000,000 > (P800,000 × 8), patent is reported at P4,800,000 (present value of cash flows).

18.
A. Dawn Corporation acquired End-of-the-World Products on January 1, 2017 for P2,000,000, and
recorded goodwill of P375,000 as a result of that purchase. At December 31, 2017, the End-of-the-
World Products Division had a fair value of P1,700,000. The net identifiable assets of the Division
(excluding goodwill) had a fair value of P1,450,000 at that time. What amount of loss on impairment of
goodwill should Dawn recorded in 2017?
a) P0
b) P125,000
c) P175,000
d) P300,000
Answer: b
P1,700,000 – P1,450,000 = P250,000
P375,000 – P250,000 = P125,000.

B. Rutherford Corporation acquired Out-of-Way Products on January 1, 2017 for P4,000,000, and
recorded goodwill of P750,000 as a result of that purchase. At December 31, 2017, the Out-of-Way
Products Division had a fair value of P3,400,000. The net identifiable assets of the Division (excluding
goodwill) had a fair value of P2,900,000 at that time. What amount of loss on impairment of goodwill
shoud Rutherford record in 2017?
a) P0
b) P250,000
c) P350,000
d) P600,000
Answer: b
P3,400,000 – P2,900,000 = P500,000
P750,000 – P500,000 = P250,000.

C. In 2015, Erwinns Corporation incurred research and development cost as follows:

Materials and equipment P 80,000
Personnel 120,000
Indirect costs 150,000
P 350,000
These costs relate to a product that will be marketed in 2007. It is estimated that these costs will be
recouped by December 31, 2018. The equipment has no alternative future use. What is the amount of
research and development costs that should be expensed in 2015?
a) P0
b) P200,000
c) P270,000
d) P350,000
Answer: d
P80,000 + P120,000 + P150,000 = P350,000.

D. Hull Co. incurred research and development costs in 2016 as follows:

Materials used in research and development projects P450,000
Equipment acquired that will have alternate future uses in future research
and development projects 3,000,000
Depreciation for 2016 on above equipment 300,000
Personnel costs of persons involved in research and development projects 750,000
Consulting fees paid to outsiders for research and development projects 150,000
Indirect costs reasonably allocable to research and development projects 225,000
P 4,875,000
The amount of research and development costs charged to Hull’s 2016 income statement should be
a) P1,500,000
b) P1,650,000
c) P1,875,000
d) P4,050,000
Answer: c
P4,875,000 – P3,000,000 = P1,875,000.

E. Marty Inc. incurred the following costs during the year ended December 31, 2016:
Laboratory research aimed at discovery of new knowledge P180,000
Costs of testing prototype and design modifications 45,000
Quality control during commercial production, including routine testing
of products 270,000
Construction of research facilities having an estimated useful life of
6 years but no alternative future use 360,000
The total amount to be classified and expensed as research and development in 2016 is
a) P555,000
b) P855,000
c) P585,000
d) P285,000
Answer: c
P180,000 + P45,000 + P360,000 = P585,000.
19.
A. AnaBelle Corporation incurred the following costs in 2008:
Acquisition of R&D equipment with a useful life of
4 years in R&D projects P600,000
Start-up costs incurred when opening a new plant 140,000
Advertising expense to introduce a new product 700,000
Engineering costs incurred to advance a product to full
production stage 350,000
What amount should AnaBelle record as research & development expense in 2017?
a) P500,000
b) P640,000
c) P950,000
d) P1,340,000
Answer: a
(P600,000 / 4) + P350,000 = P500,000.

B. Reaper Corporation incurred the following costs in 2017

Acquisition of R&D equipment with a useful life of 4 years

in R&D projects P800,000
Start-up costs incurred when opening a new plant 140,000
Advertising expense to introduce a new product 700,000
Engineering costs incurred to advance a product to full
production stage 500,000
What amount should Reaper record as research & development expense in 2017?
a) P700,000
b) P840,000
c) P1,300,000
d) P1,540,000
Answer: a
(P800,000 / 4) + P500,000 = P700,000.

C. Shangri-La Company incurred P1,500,000 (P400,000 in 2016 and P1,100,000 in 2017) to

develop a computer software product. P500,000 of this amount was expended before technological
feasibility was established in early 2017. The product will earn future revenues of P4,000,000 over its 5-
year life, as follows: 2017 – P1,000,000; 2018 – P1,000,000; 2019 – P800,000; 2020 – P800,000; 2021 –
P400,000. What portion of the P1,500,000 computer software costs should be expensed in 2017?
a) P250,000
b) P300,000
c) P350,000
d) P1,100,000
Answer: c
(P1,500,000 – P500,000) x (P1,000,000 / P4,000,000) = P250,000.
P250,000 + (P500,000 – P400,000) = P350,000.

D. Pesocentavo Company incurred P3,000,000 (P800,000 in 2016 and P2,200,000 in 2017) to

develop a computer software product. P1,000,000 of this amount was expended, before technological
feasibility was established in early 2017. The product will earn future revenues of P8,000,000 over its 5-
year life, as follows: 2017 – P2,000,000; 2018 – P2,000,000; 2019 – P1,600,000; 2020 – P1,600,000; and
2021 – P800,000. What portion of the P3,000,000 computer software costs should be expensed in
2017?
a) P500,000
b) P600,000
c) P700,000
d) P2,700,000
Answer: c
(P3,000,000 – P1,000,000) x (P2,000,000 / P8,000,000) = P500,000.
P500,000 + (P1,000,000 – P800,000) = P700,000.

E. De Paz Corp. incurred P420,000 of research and development costs to develop a product for which a
patent was granted on January 2, 2011. Legal fees and other costs associated with registration of the
patent totaled P80,000. On March 31, 2016, De Paz paid P120,000 for legal fees in a successful defense
of the patent. The total amount capitalized for the patent through March 31, 2016 should be
a) P200,000
b) P500,000
c) P540,000
d) P620,000
Answer: a
P80,000 + P120,000 = P200,000.

20.
A. On June 30, 2016, Fey Inc. exchanged 2,000 shares of Sheele Corp. P30 par value common
stock for a patent owned by Gore Co. The Sheele stock was acquired in 2016 at a cost of P55,000. At the
exchange date, Sheele common stock had a fair value of P45 per share, and the patent had a net
carrying value of P110,000 on Gore’s books. Fey should record the patent at
a) P55,000
b) P60,000
c) P90,000
d) P110,000
Answer: c
P2,000 x P45 = P90,000.

B. On May 5, 2016, Lynn Corp. exchanged 2,000 shares of its P25 par value treasury common
stock for a patent owned by Benson Co. The treasury shares were acquired in 2017 for P45,000. At May
 5, 2016, Lynn’s common stock was quoted at P32 per share, and the patent had a carrying value of
P55,000 on Benson's books. Lynn should record the patent at
a) P45,000
b) P50,000
c) P55,000
d) P64,000
Answer: d
P2,000 x P32 = P64,000.

C. Eli Co. bought a patent from Laden Corp. on January 1, 2016, for P300,000. An independent
consultant retained by Eli estimated that the remaining useful life is 30 years. Its unamortized cost on
Laden’s accounting records was P150,000; the patent had been amortized for 5 years by Laden. How
much should be amortized for the year ended December 31, 2016?
a) P0
b) P5,000
c) P10,000
d) P20,000
Answer: d
P300,000 / (20 – 5) = P20,000.

D. January 2, 2013, Troll, Inc. purchased a patent for a new consumer product for P180,000. At the
time of purchase, the patent was valid for 15 years; however, the patent’s useful life was estimated to
be only 10 years due to the competitive nature of the product. On December 31, 2016, the product was
permanently withdrawn from sale under governmental order because of a potential health hazard in
the product. What amount should Troll charge against income during 2016, assuming amortization is
recorded at the end of each year?
a) P18,000
b) P108,000
c) P126,000
d) P144,000
Answer: c
P180,000 – [(P180,000 / 10) x 3] = P126,000.

E. On January 1, 2012, Unlit Company purchased a copyright for P800,000 having an estimated
useful life of 16 years. In January 2016, Unlit paid P120,000 for legal fees in a successful defense of the
copyright. Copyright amortization expense for the year ended December 31, 2016, should be
a) P0
b) P50,000
c) P57,500
d) P60,000

Answer: d
P800,000 – [(P800,000 / 16) x 4] = P600,000
(P600,000 + P120,000) / 12 = P60,000.

21.
On May 31, 2016, Armstrong Company paid $3,500,000 to acquire all of the common stock of Hall
Corporation, which became a division of Armstrong. Hall reported the following balance sheet at the time
of the acquisition:

Current assets $ 900,000 Current liabilities $ 600,000

Noncurrent assets 2,700,000 Long-term liabilities 500,000
Stockholders’ equity 2,500,000
Total liabilities and
Total assets $3,600,000 stockholders’ equity $3,600,000

It was determined at the date of the purchase that the fair value of the identifiable net
assets of Hall was $2,800,000. At December 31, 2016, Hall reports the following balance
sheet information:
 Current assets $ 800,000
Noncurrent assets (including goodwill recognized in purchase)2,400,000
Current liabilities (700,000)
Long-term liabilities (500,000)
Net assets $2,000,000

It is determined that the fair market value of the Hall division is $2,100,000. The recorded
amount for Hall’s net assets (excluding goodwill) is the same as fair value, except for
property, plant, and equipment, which has a fair value of $200,000 above the carrying value.

A. What is the goodwill if any on May 31, 2016 ?

a.$500,000 c. $700000
b.$600,000 d. $800000

Goodwill = Fair value of the division less the fair value of the identifiable assets.
$3,500,000 – $2,800,000 = $700,000

B. Determine the impairment loss, if any, to be recorded on December 31, 2016.

a. 0 c. $200000
b. $100000 d. $300000

No impairment loss is recorded, because the fair value of Hall ($2,100,000) is greater than
the carrying value ($2,000,000) of the new assets.

C. Assume that the fair value of the Hall division is $1,900,000 instead of $2,100,000.
Determine the impairment loss, if any, on December 31, 2016.
a. $100000 c. $200000
b. 0 d. $300000

Fair value of Hall division $1,900,000

Carrying value of division $2,000,000
Increase in fair value of PP&E 200,000
Less goodwill (700,000)
(1,500,000)
Implied value of goodwill 400,000
Carrying amount of goodwill (500,000)
Loss on impairment $ (100,000)
D. During 2016, Lion Co. incurred the following costs:
Testing in search for process alternatives P350,000
Costs of marketing research for new product 250,000
Modification of the formulation of a process 510,000
Research and development services performed by
Beck Corp. for Lion 325,000
In Lion’s 2016 income statement, research and development expense should be
a) P510,000
b) P835,000
c) P1,185,000
d) P1,435,000

Answer: c
P350,000 + P510,000 + P325,000 = P1,185,000.

E. J. C. Riley Co. incurred the following costs during 2016:

Modification to the formulation of a chemical product P160,000
Trouble-shooting in connection with breakdowns during
commercial production 150,000
Costs of marketing research for new product 200,000
Seasonal or other periodic design changes to existing products 185,000
Laboratory research aimed at discovery of new technology 215,000
In its income statement for the year ended December 31, 2016, J. C. Riley should report research and
development expense of
 a) P575,000
b) P725,000
c) P415,000
d) P335,000

Answer: a
P160,000 + P200,000 + P215,000 = P575,000.

22.
Vasquez Manufacturing Company decided to expand further by purchasing Wasserman Company. The balance
sheet of Wasserman Company as of December 31, 2016 was as follows:

Wasserman Company
Balance Sheet
December 31, 2016

Assets Liabilities and Equities

Cash $ 210,000 Accounts payable $ 375,000
Receivables 550,000 Common stock 800,000
Inventory 275,000 Retained earnings 885,000
Plant assets (net) 1,025,000
Total assets $2,060,000 Total liabilities and equities $2,060,000

An appraisal, agreed to by the parties, indicated that the fair market value of the inventory was
$350,000 and that the fair market value of the plant assets was $1,225,000. The fair market
value of the receivables is equal to the amount reported on the balance sheet. The agreed
purchase price was $2,075,000, and this amount was paid in cash to the previous owners of
Wasserman Company.

A. What is the goodwill implied in the purchase price of $2,075,000?

a. $100000 c. $130000
b. $115000 d. $150000

Purchase price $2,075,000

Less tangible net assets acquired:
Book value ($2,060,000 – $375,000) $1,685,000
Appraisal increment—inventory 75,000
Appraisal increment—plant assets 200,000
Total fair market value of tangible net assets acquired 1,960,000
Goodwill $ 115,000

MacroSoft Inc. has capitalized $600,000 of software costs. Sales from this product were $360,000 in the first
year. MacroSoft estimates additional revenues of $840,000 over the product’s economic life of 5 years.

B.What is the amortization cost for the current year using straight line approach?
a. $200000 c. $600000
b. $300000 d. $120000
$600,000 x 1/5 = $120,000

C.What is the amortization cost for the current year using percent of revenue approach?

a. $180000 c. $600000
b. $300000 d. $120000

$600,000 x [$360,000/($360,000 + $840,000)] = $180,000

Presented below is information related to copyrights owned by Wamser Corporation at December 31,
2016.
Cost $2,700,000
Carrying amount 2,350,000
Expected future net cash flows 2,100,000
Fair value 1,400,000
Assume Wamser will continue to use this asset in the future. As of December 31, 2016, the
copyrights have a remaining useful life of 5 years.

D.What is the impairment loss on Dec. 31. 2016 ?

a. $2,350,000 c. 0

b. $1,400,000 d. $ 950,000

Carrying amount $2,350,000

Fair value 1,400,000
Loss on impairment $ 950,000

E.What is the amortization expense for 2017?

a. $70000 c. $280000
b. $140000 d. $200000

New carrying amount $1,400,000

Useful life ÷ 5 years
Amortization $ 280,000

23.
On December 31, 2004, Silver Corporation acquired the following three
intangible assets:
 A trademark for P300,000. The trademark has 7 years remaining legal life. It is anticipated that
the trademark will be renewed in the future, indefinitely, without problem.

 Goodwill for P1,500,000. The goodwill is associated with Silver’s Hayo Manufacturing reporting
unit.

 A customer list for P220,000. By contract, Silver has exclusive use of the list for 5 years. Because
of market conditions, it is expected that the list will have economic value for just 3 years.

On December 31, 2005, before any adjusting entries for the year were made, the following
information was assembled about each of the intangible assets:

a) Because of a decline in the economy, the trademark is now expected to generate cash flows of
just P10,000 per year. The useful life of trademark still extends beyond the foreseeable horizon.

b) The cash flows expected to be generated by the Hayo Manufacturing reporting unit is P250,000
per year for the next 22 years. Book values and fair values of the assets and liabilities of the
Hayo Manufacturing reporting unit are as follows:
Book values Fair values
Identifiable assets P2,700,000 P3,000,000
Goodwill 1,500,000 ?
Liabilities 1,800,000 1,800,000

c) The cash flows expected to be generated by the customer list are P120,000 in 2006 and P80,000
in 2007.
REQUIRED:
Based on the above and the result of your audit, determine the following:
(Assume that the appropriate discount rate for all items is 6%):
1. Total amortization for the year 2005
a. P73,333 b. P141,515 c. P116,190 d. P86,857

2. Impairment loss for the year 2005

a. P90,476 b. P133,333 c. P179,584 d. P0

3. Carrying value of Trademark as of December 31, 2005

a. P300,000 b. P257,143 c. P166,667 d. P120,416

4. Carrying value of Goodwill as of December 31, 2005

a. P1,500,000 b. P1,431,818 c. P1,425,000 d. P1,462,500

5. Carrying value of Customer list as of December 31, 2005

a. P220,000 b. P146,667 c. P176,000 d. P0
Solution
Question No. 1 - A
Trademark* -
Goodwill* -
Customer list (P220,000/3) 73,333
Total amortization 73,333

*The useful life is indefinite, so no amortization expense is recognized.

Question No. 2 - B
Trademark:
Carrying value 300,000
Recoverable amount (P10,000/0.06) 166,667 133,333
Goodwill*:
Carrying value of Hayo Manufacturing unit
(P2,700,000 + P1,500,000 - P1,800,000) 2,400,000
Recoverable amount (P250,000 x 12.0416) 3,010,400 -
Customer list
Carrying value (P220,000 - P73,333) 146,667
Recoverable amount:
2006: (P120,000 x 0.9434) 113,208
2007: (P80,000 x 0.8900) 71,200 184,408 -
Total impairment loss 133,333

*Since goodwill does not generate cash flows independently from other assets
or group of assets, the recoverable amount of goodwill as an individual asset
cannot be determined. Therefore, the recoverable amount is determined for
the cash
generating unit to which goodwill belongs.

Question No. 3 - C
Cost 300,000
Less impairment loss 133,333
 Carrying value, 12/31/05 166,667

Question No. 4 - A
Since goodwill is not amortized and is not impaired as of
12/31/05, the carrying value is P1,500,000.

Question No. 5 - B
Cost 220,000
Less amortization for 2005 73,333
Carrying value, 12/31/05 146,667

24.

Transactions during 2005 of the newly organized Pink Corporation included the following:

Jan. 2 Paid legal fees of P150,000 and stock certificate costs of P83,000 to complete
organization of the corporation.

15 Hired a clown to stand in front of the corporate office for 2 weeks and hound
out pamphlets and candy to create goodwill for the new enterprise. Clown
cost, P10,000; pamphlets and candy, P5,000.

Apr. 1 Patented a newly developed process with costs as follows: Legal

fees to obtain patent P 429,000
Patent application and licensing fees 63,500
Total P 492,500

It is estimated that in 6 years other companies will have developed improved

processes, making the Pink Corporation process obsolete.

May 1 Acquired both a license to use a special type of container and a distinctive
trademark to be printed on the container in exchange for 6,000 shares of
Pink’s no-par common stock selling for P50 per share. The license is worth
twice as much as the trademark, both of which may be used for 6 years.
 July 1 Constructed a shed for P1,310,000 to house prototypes of
experimental models to be developed in future research projects.

Dec. 31 Incurred salaries for an engineer and chemist involved in

product development totaling P1,750,000 in 2005.

QUESTIONS:
Based on the above and the result of your audit, determine the following:

A. Cost of
patent a. b. P429,000 c. P63,500 d. P0
P492,500
B. Cost of
licenses a. b. P200,000 c. P100,000 d. P0
P150,000
C. Cost of trademark
a. P150,000 b. P200,000 c. P100,000 d. P0
D. Carrying amount of Intangible Assets
a. P712,604 b. P2,477,604 c. P697,604 d. P0

E. Total amount resulting from the foregoing transactions that should be expensed when
incurred
a. P4,100,500 b. P1,983,000 c. P1,998,000 d. P0

Solution

Journal entries for 2005:

1/2 Organization expenses 233,000
Cash 233,000
1/15 Advertising expense 15,000
Cash 15,000

4/1 Patents 492,500

Cash 492,500

5/1 Licences (P300,000 x 2/3) 200,000

Trademark 100,000
Common stock (6,000 x P50) 300,000

7/1 Building 1,310,000

Cash 1,310,000

12/31 Research and Development expense 1,750,000

Cash 1,750,000

Question no. 1 -
A
See journal entry for April 1.

Note: Cost of internally developed patent includes only the

licensing and other related legal fees in securing the patent
rights.

Question no. 2 -
B
See journal entry for May 1.

Question no. 3 -
 C
See journal entry for May 1.

Question no. 4 -
C
Cost
Patent 492,500
Licences 200,000
Trademark 100,000 792,500
Less amortization
Patent (P492,500/6 x 9/12) 61,563
Licences (P200,000/6 x 8/12) 22,222
Trademark (P100,000/6 x 8/12) 11,111 94,896
Carrying value, 12/31/04 697,604

Question no. 5 - C

Organization expenses (Jan. 2 transaction) 233,000

Advertising expense (Jan. 15 transaction) 15,000
R and D expense (Dec. 31 transaction) 1,750,000
Total 1,998,000
25.
A.To induce the owners of Innovative Systems to sell to Agilysis Inc, an earnout was included in
the acquisition agreement. Agilysis agrees to pay the former owners of Innovative Systems $2.00
for every dollar of total EBITDA earned over $50 million in the next three years. The payment
would be made at the end of three years. Expected total EBITDA in the next three years is as
follows:

Total EBITDA earned Probability

$35,000,000 0.10
45,000,000 0.40
55,000,000 0.20
65,000,000 0.30

What is the value of the earnout at the date of acquisition, assuming a discount rate of 10%?
Round your answer to the nearest dollar.
a. 2,250,000
b. 8,246,463
c. 8,264,463
d. 9,264,123

ANS:

5,000,000 x $2 x 0.20 $ 2,000,000

15,000,000 x $2 x 0.30 9,000,000
$11,000,000
11,000,000/(1.10)3 $ 8,264,463

B.Sisco Co. purchased a patent from Thornton Co. for $180,000 on July 1, 2013. Expenditures of $68,000
for successful litigation in defense of the patent were paid on July 1, 2016. Sisco estimates that the useful
life of the patent will be 20 years from the date of acquisition.

What is the carrying value of the patent at December 31, 2016?

a. $200000 c. $229000
b. $214500 d. $250000

Cost of patent $180,000

Amortization 7/1/08 to 7/1/11 [($180,000 ÷ 20) × 3] (27,000)
Carrying value at 7/1/11 153,000
Cost of successful defense 68,000
Carrying value 221,000
Amortization 7/1/11 to 12/31/11 [$221,000 × 1/(20 – 3) × 1/2] (6,500)
Carrying value at 12/31/11 $214,500

C. Shure Company reportedthe following assets at year-end:

Financial asset held for trading 1,000,000
Goodwill 1,500,000
Prepaid Insurance 50,000
Patent 2,500,000
Customer List 500,000
What amount should be reported as total intangible assets at year-end?
a. 4,000,000 c. 4,500,000
b. 5,500,000 d. 3,000,000

Goodwil 1,500,000
Patent 2,500,000
Customer List 500,000
Total Intangible Assets 4,500,000

D. Harmonious Company acquired patent for a drug with a remaining legal and useful life of six years on
January 1, 2014 for $5,400,000. On January 1, 2016, a new patent is received for a timed-release
version of the same drug. The new patent has a legal and useful life of twenty years. What is the
amortization expense for 2016?
a. 900,000 c. 180,000
b. 200,000 d. 300,000

Cost- Beg. 5,400,000

Amortization for 2014 and 2015(5,400,000/6 x 2) (1,800,000)
 Carrying Amount- Janunary 1, 2016 3,600,000
Amortization for 2016(3,600,000/20) 180,000

E. Tobin Company incurred $1,600,000 of reseach and development costs to develop a product for which
a patent was granted at the beginning of current year. Legal Fees and other costs associated with the
registration of the patent totaled $300,000. At year-end, the entity paid $450,000 for legal fees in a
succesful defense of the patent. What is the total amount should be capitalized for the patent at year-
end?

a. 750,000 c. 2,050,000
b. 300,000 d. 2,350,000
Legal Fees and other cost 300,000

26.
A. Joshua Corporation acquired a patent on May 1, 2016. Joshua paid cash of $50,000 to the seller. Legal
fees of $2,000 were paid related to the acquisition. What amount should be debited to the patent account?
e. $2,000
f. $48,000
g. $50,000
h. $52,000
Solution
d $50,000 + $2,000 = $52,000.

B. DNZ Corporation acquired a patent on May 1, 2016. DNZ paid cash of $70,000 to the seller. Legal
fees of $1,000 were paid related to the acquisition. What amount should be debited to the patent
account?
e. $1,000
f. $69,000
g. $70,000
h. $71,000
Solution
d $70,000 + $1,000 = $71,000.

C. Tiny Corp. acquires a patent from J. Co. in exchange for 5,000 shares of Tiny Corp.’s $5 par value
common stock and $100,000 cash. When the patent was initially issued to J. Co., Tiny Corp.’s stock
was selling at $7.50 per share. When Tiny Corp. acquired the patent, its stock was selling for $9 a
share. Mini Corp. should record the patent at what amount?
e. $100,000
f. $ 137,000
g. $145000
h. $37,500

Solution

c(5,000X$9)+$100,000=$145,000

D. Ryan Corporation purchased a limited-life intangible asset for $250,000 on May 1, 2014. It has a
useful life of 10 years. What total amount of amortization expense should have been recorded on the
intangible asset by December 31, 2016?
e. $ -0-.
f. $66,667
g. $25000
h. $50000
Solution

b ($250,000 ÷ 10) × 2 2/3 = $66,667

E. Day Company purchased a patent on January 1, 2012 for $600,000. The patent had a remaining
useful life of 10 years at that date. In January of 2013, Day successfully defends the patent at a cost
of $270,000, extending the patent’s life to 12/31/24. What amount of amortization expense would
Kerr record in 2013?
e. $60,000
f. $67,500
g. $72,500
h. $90,000

Solution
b [($600,000 – $60,000) + $270,000] ÷ 12 = $67,500

27.
A. Pacific Inc. incurred $600,000 of capitalizable costs to develop computer software during 2016. The
software will be used internally over its 2-year life. What amount of the computer software costs
should be expensed in 2016?
e. $200,000
f. $100,000
g. $300,000
h. $400,000
b $600,000 X 1/2 = $300,000.

B.
Tripiani Inc. incurred $800,000 of capitalizable costs to develop computer software during 2012. The
software will earn total revenues over its 5-year life as follows: 2012 - $500,000; 2013 - $ 600,000;
2014 - $ 600,000; 2015 - $200,000; and 2016 - $100,000. What amount of the computer software
costs should be expensed in 2012?
a. $200,000
b. $160,000
c. $180,000
d. $266,667
Solution

a $800,000 X $500,000 / $2,000,000 = $200,000 (greater than $160,000).

C. Topic: Bargain purchase

LO 4
X Company pays $4,000,000 in cash to acquire all of Y Company in a statutory merger.
Book and fair values of Y Company’s assets and liabilities appear below.

Book value Fair value

Current assets $ 300,000 $ 400,000
HTM investments 100,000 600,000
Buildings, net 1,200,000 4,000,000
Equipment, net 2,000,000 6,000,000
Liabilities 2,000,000 2,000,000

What is the gain on acquisition?

a. $6,000,000
b. $0
c. $3,000,000
d. $5,000,000

ANS: d
Rationale:
Cost $ 4,000,000
Fair value of net assets acquired
Current assets $ 400,000
HTM investments 600,000
Buildings 4,000,000
Equipment 6,000,000
Liabilities (2,000,000) 9,000,000
Gain on acquisition $(5,000,000)
D. Topic: Goodwill
LO 2
X Company acquires all of Y Company in an acquisition properly accounted for as an asset
acquisition. X issues 80,000 shares of common stock with a fair value of $8,000,000 for
Y’s net assets. The fair values of Y’s assets and liabilities approximate their book values,
except Y has customer lists valued at $3,000,000 that are not reported on its balance sheet,
and its plant assets are overvalued by $5,000,000. Here are the balance sheets of X and Y
prior to the acquisition:

X Company Y Company
Assets $30,000,000 $10,000,000

Liabilities $16,000,000 $ 6,000,000

Common stock, $1 par 1,000,000 100,000
Additional paid-in capital 9,000,000 2,900,000
Retained earnings 4,000,000 1,000,000
$30,000,000 $10,000,000

How much goodwill is recognized for this acquisition?

a. $ 2,000,000
b. $ 3,000,000
a c. $ 6,000,000
d. $11,000,000

ANS: c
Rationale:
Cost $8,000,000
Fair value of net assets acquired
Reported assets $ 5,000,000
Customer lists 3,000,000
Liabilities (6,000,000) 2,000,000
Goodwill $6,000,000

E.Brazil Inc. incurred $200,000 of capitalizable costs to develop computer software during 2013. The
software will be used internally over its 10-year life. What amount of the computer software costs should
be expensed in 2016?
a. $30,000
b. $40,000
c. $60,000
d. $20,000

b $200,000 X 1/10 = $20,000.

28.
A. Wang Co. bought a patent from Paul Corp. on January 1, 2016, for $1,000,000. An independent
consultant retained by Wang estimated that the remaining useful life at January 1, 2016 is 10 years. Its
unamortized cost on Paul’s accounting records was $225,000; the patent had been amortized for 5 years
by Paul. How much should be amortized for the year ended December 31, 2016 by Wang Co.?
e. $0.
f. $22,500.
g. $100,000.
h. $200,000.

$1,000,000 ÷ 10 = $100,000.

B.Protec Co. bought a patent from Braum Corp. on January 1, 2015, for $500,000. An independent
consultant retained by Ely estimated that the remaining useful life at January 1, 20135 is 5 years. How
much should be amortized for the year ended December 31, 2015 by Protec Co.?
a. $0.
b. $50,000.
c. $5,000.
d. $10,000.
Solution
c $500,000 ÷ 5 = $10,000

C. During 2016, Tiger Co. incurred the following costs:

Testing in search for process alternatives $ 100,000
Costs of marketing research for new product 150,000
Modification of the formulation of a process 300,000
 Research and development services performed by Beck Corp. for Leon 400,000
In Leon's 2016 income statement, research and development expense should be
e. $950,000.
f. $500,000.
g. $800,000.
h. $550,000.

$100,000 + $300,000 + $400,000 = $800,000.

D. Bradley Co. incurred the following costs during 2015:

Significant modification to the formulation of a chemical product $100,000
Trouble-shooting in connection with breakdowns during commercial
production 150,000
Cost of exploration of new formulas 200,000
Seasonal or other periodic design changes to existing products 450,000
Laboratory research aimed at discovery of new technology 500,000
In its income statement for the year ended December 31, 2015, Bradley should report research and
development expense of ?
e. $800,000.
f. $600,000.
g. $1,400,000.
h. $700,000.
Solution
$100000+ $200,000 + $500,000 = $800,000.

D. Jeree Corporation acquired Out-of-Way Products on January 1, 2016 for P4,000,000, and recorded
goodwill of P1,000,000 as a result of that purchase. At December 31, 2016, the Out-of-Way
Products Division had a fair value of P3,000,000. The net identifiable assets of the Division
(excluding goodwill) had a fair value of P2,500,000 at that time. What amount of loss on
impairment of goodwill shoud Rutherford record in 2017?
e) P0
f) P300,000
g) P400,000
h) P700,000

Answer: d
P3,000,000 – P2,700,000 = P300,000
P1,000,000 – P300,000 = P700,000.

29.
A. Topic: Stock price contingency
LO 3
P acquires all of the voting shares of S by issuing 500,000 shares of $1 par common stock
valued at $10,000,000. Included in the agreement is a contingency guaranteeing the former
shareholders of S that P's shares will be worth at least $18 per share after one year. If the
shares are worth less, P will pay the former shareholders of S enough cash to reimburse
them for the decline in value below $18 per share. P estimates that there is a 5% chance
that the stock value will be $16 at the end of one year, and a 95% chance that the stock
value will be $18 per share or higher. A discount rate of 10% is appropriate. What is the
value of the stock price contingency at the date of acquisition?

a. $1,000,000
b. $ 45,455
c. $ 50,000
d. $ 863,636

ANS: b
Rationale: [($18 - $16) x 500,000] x .05 = $50,000/1.10 = $45,455
B.
Alonzo Co. acquires 3 patents from Shaq Corp. for a total of $300,000. The patents were carried on Shaq’s
books as follows: Patent AA: $5,000; Patent BB: $2,000; and Patent CC: $3,000. When Alonzo acquired
the patents their fair values were: Patent AA: $20,000; Patent BB: $240,000; and Patent CC: $60,000. At
what amount should Alonzo record Patent BB?
a. $100,000
b. $200,000
c. $2,000
d. $225,000
Solution
d $300,000 X ($240,000 / $320,000) = $225,000.

C. On January 2, 2016, Klin Co. bought a trademark from Kenn, Inc. for $1,000,000. An independent
research company estimated that the remaining useful life of the trademark was 5 years. Its unamortized
cost on Kenn’s books was $900,000. In Klin’s 2016 income statement, what amount should be reported as
amortization expense?
e. $20,000.
f. $ 45,000.
g. $ 90,000.
h. $ 12,500.

$1,000,000 ÷ 5 = $20,000.

D. Style Company bought Special Products Division in 2015 and appropriately recorded $100,000 of
goodwill related to the purchase. On December 31, 2016, the fair value of Special Products Division is
$1,000,000 and it is carried on Stylet’s books for a total of $800,000, including the goodwill. An analysis of
Special Products Division’s assets indicates that goodwill of $400,000 exists on December 31, 2016. What
goodwill impairment should be recognized by Style in 2016?
e. $0.
f. $400,000.
g. $100,000.
h. $500,000.

Since $4,000,000 > $3,400,000, $0 impairment.

E. The following information is available for PowerPlus Company’s patents:

Cost $3,000,000
Carrying amount 1,500,000
Expected future net cash flows 1,400,000
Fair value 800,000
PowerPlus would record a loss on impairment
of?
a. $ 700,000.
e. $ 1,500,000.
f. $1,600,000.
g. $3.000,000.

$1,500,000 – $800,000 = $700,000.

30.
Transactions during 2005 of the newly organized Pink Corporation included the following:

Jan. 2 Paid legal fees of P150,000 and stock certificate costs of P83,000 to complete
organization of the corporation.

15 Hired a clown to stand in front of the corporate office for 2 weeks and
hound out pamphlets and candy to create goodwill for the new
enterprise. Clown cost, P10,000; pamphlets and candy, P5,000.

Apr. 1 Patented a newly developed process with costs as follows:

Legal fees to obtain patent P 429,000
Patent application and licensing fees
63,500
Total P 492,500

It is estimated that in 6 years other companies will have developed

improved processes, making the Pink Corporation process obsolete.

May 1 Acquired both a license to use a special type of container and a

distinctive trademark to be printed on the container in exchange for
6,000 shares of Pink’s no-par common stock selling for P50 per share.
The license is worth twice as much as the trademark, both of which may
be used for 6 years.

July 1 Constructed a shed for P1,310,000 to house prototypes of

experimental models to be developed in future research projects.

Dec. 31 Incurred salaries for an engineer and chemist involved in

product development totaling P1,750,000 in 2005.

QUESTIONS:
Based on the above and the result of your audit, determine the following:
 A. Cost of
patent a. b. P429,000 c. P63,500 d. P0
P492,500
B. Cost of
licenses a. b. P200,000 c. P100,000 d. P0
P150,000
C. Cost of trademark
a. P150,000 b. P200,000 c. P100,000 d. P0
D. Carrying amount of Intangible Assets
a. P712,604 b. P2,477,604 c. P697,604 d. P0

E. Total amount resulting from the foregoing transactions that should be expensed when
incurred
a. P4,100,500 b. P1,983,000 c. P1,998,000 d. P0

Solution
Question no. 2 - B

See journal entry for May 1.

Question no. 3 -
C

See journal entry for May 1.

Question no. 4 -
C

Cost
Patent 492,500
Licences 200,000
Trademark 100,000 792,500
Less amortization
Patent (P492,500/6 x 9/12) 61,563
Licences (P200,000/6 x 8/12) 22,222
Trademark (P100,000/6 x 8/12) 11,111 94,896
Carrying value, 12/31/04 697,604

Question no. 5 - C

Organization expenses (Jan. 2 transaction) 233,000

Advertising expense (Jan. 15 transaction) 15,000
R and D expense (Dec. 31 transaction) 1,750,000
Total 1,998,000

31.
On December 31, 2004, Silver Corporation acquired the following three
intangible assets:
 A trademark for P300,000. The trademark has 7 years remaining legal life. It is anticipated
that the trademark will be renewed in the future, indefinitely, without problem.

 Goodwill for P1,500,000. The goodwill is associated with Silver’s Hayo Manufacturing
reporting unit.

 A customer list for P220,000. By contract, Silver has exclusive use of the list for 5 years.
Because of market conditions, it is expected that the list will have economic value for just 3
years.

On December 31, 2005, before any adjusting entries for the year were made, the following
information was assembled about each of the intangible assets:

a) Because of a decline in the economy, the trademark is now expected to generate cash flows
of just P10,000 per year. The useful life of trademark still extends beyond the foreseeable
 horizon.

b) The cash flows expected to be generated by the Hayo Manufacturing reporting unit is
P250,000 per year for the next 22 years. Book values and fair values of the assets and
liabilities of the Hayo Manufacturing reporting unit are as follows:
Book values Fair values
Identifiable assets P2,700,000 P3,000,000
Goodwill 1,500,000 ?
Liabilities 1,800,000 1,800,000

c) The cash flows expected to be generated by the customer list are P120,000 in 2006 and
P80,000 in 2007.

REQUIRED:
Based on the above and the result of your audit, determine the following:
(Assume that the appropriate discount rate for all items is 6%):
A. Total amortization for the year 2005
a. P73,333 b. P141,515 c. P116,190 d. P86,857

B. Impairment loss for the year 2005

a. P90,476 b. P133,333 c. P179,584 d. P0

C. Carrying value of Trademark as of December 31, 2005

a. P300,000 b. P257,143 c. P166,667 d. P120,416

D. Carrying value of Goodwill as of December 31, 2005

a. P1,500,000 b. P1,431,818 c. P1,425,000 d. P1,462,500

E. Carrying value of Customer list as of December 31, 2005

a. P220,000
b. P146,667
c. P176,000
d. P0
Solution
Question No. 1 - A
Trademark* -
Goodwill* -
Customer list (P220,000/3) 73,333
Total amortization 73,333

*The useful life is indefinite, so no amortization expense is recognized.

Question No. 2 - B
Trademark:
Carrying value 300,000
Recoverable amount (P10,000/0.06) 166,667
133,333
Goodwill*:
Carrying value of Hayo Manufacturing unit
(P2,700,000 + P1,500,000 - P1,800,000) 2,400,000
Recoverable amount (P250,000 x 12.0416) 3,010,400 -
Customer list
Carrying value (P220,000 - P73,333) 146,667
Recoverable amount:
2006: (P120,000 x 0.9434) 113,208
2007: (P80,000 x 0.8900) 71,200 184,408 -
Total impairment loss 133,333
 *Since goodwill does not generate cash flows independently from other
assets or group of assets, the recoverable amount of goodwill as an
individual asset cannot be determined. Therefore, the recoverable amount
is determined for the cash
generating unit to which goodwill belongs.

Question No. 3 - C
Cost 300,000
Less impairment loss 133,333
Carrying value, 12/31/05 166,667

Question No. 4 - A
Since goodwill is not amortized and is not impaired as of
12/31/05, the carrying value is P1,500,000.

Question No. 5 - B
Cost 220,000
Less amortization for 2005 73,333
Carrying value, 12/31/05 146,667

32.
A.The Garnet Trading spent P1,440,000 in acquiring a patent on January 3, 2007. Due to the
competitive nature of product, the patent was estimated to have a useful life of 10 years. At
the beginning of 2011, the company paid P180,000 on legal fees in a successful defense of
the patent. On July 1, 2015, a competitor obtained rights to a patent which made Garnet’s
patent obsolete?
How much is the loss from the patent obsolescence?
a) P216,000
b) P243,000
c) P261,000
d) P396,000

1,440,000 x 1.5/10 = 216,000

B. March Corporation bought patent A for P40,000 and patent B for P60,000. March also paid
acquisition cost of P5,000 for patent A and P7,000 for patent B. both patents were challenged
in legal actions. March paid P20,000 in legal fees for a successful defense of Patent A and
P30,000 in legal fees for unsuccessful defense of Patent B.
What amount should March Corporation disclose as total cost of its patent on the year end
statement of financial position?
a) P65,000
b) P112,000
c) P162,000
d) P45,000

40,000 + 5,000 = 45,000

C. On January 2, 2012, Dec Company purchased a patent for a new consumer product for
P900,000. At the time of purchase, the patent was valid for 15 years. However, the patent’s
useful life was estimated only to be 10 years due to the competitive nature of the product.
On December 31, 2015, the product was permanently withdrawn from sale under
governmental order because of a potential health hazard in the product. What total amount
should Dec charge against income during 2015 assuming amortization is recorded at the end
of each year?
a) P90,000
b) P540,000
c) P630,000
d) P720,000

900,000 x 7/10 = 630,000

D. On January 2, 2015, Gem Company bought a trademark from Kit Company for P1,500,000/
Gem retained an independent consultant who estimated the trademark’s remaining life to be
30 years. Its carrying amount on Kit’s accounting records was P1,200,000
In Gem’s December 31, 2015 statement of financial position, what amount should be
reported as accumulated amortization?
a) P75,000
b) P60,000
c) P50,000
d) P37,500

1,500,000 ÷ 30 = 50,000
E. On January 2, 2015, Tweety Company purchased Sylvester Company at a cost that resulted
in recognition of goodwill of P1,000,000 having an expected benefit period of 10 years.
During the first quarter of 2015, Tweety spent an additional P400,000 on expenditures
deigned to maintain goodwill. Due to these expenditures, at December 31, 2015, Tweety
estimated that the benefit of goodwill was 20 years.
In its December 31, 2015 statement of financial position, what amount should Tweety report
as goodwill?
a) P1,400,000
b) P1,000,000
c) P950,000
d) P900,000
33. On January 3, 2007, the Estonia Company spent P480,000 to apply for and obtain a patent on a newly developed
product. The patent had an estimated useful life of 10 years. At the beginning of 2011, the company spent P90,000
in successfully prosecuting an attempted infringement of the patent. AT the beginning of 2012, the company
incurred additional cost of P200,000. It is expected that future economic benefits will flow to the enterprise as a
result of this expenditure through savings and the asset’s use is estimated to be extended by additional 5 years. On
July 1, 2015, a competitor obtained rights to a patent which made the company’s patent obsolete.

A.How much is the patent amortization for the year 2011?

a) P75,600
b) P63,000
c) P57,000
d) P48,000

480,000 ÷ 10 = 48,000
B. Use the same information given. How much is the present amortization for the year 2012?
a) P44,000
b) P51,500
c) P103,000
d) P130,000
(480,000 x 5/10) + 200,000 = 440,000; 440,000 ÷ 10 = 44,000

C. How much is the loss on patent obsolescence recognized in the year 2013?
a) P268,000
b) P286,000
c) P334,750
d) P343,750
440,000 – (44,000 x 3.5 yrs) = 286,000

D.On January 1, 2011, Guam Corporation bought a patents for P270,000. Amortization is
being made over its remaining life of ten years expiring on January 1, 2021. During 2015,
Guam estimated that the useful life of the patent will be seven years from the date of
acquisition.
What amount should Guam report as a patent net of accumulated amortization in its
December 31, 2015 statement of financial position?
a) P1,600,000
b) P108,000
c) P54,000
d) P23,143

270,000 x 6/10 = 162,000; 162,000 ÷ 3 = 54,000; 162,000 – 54,000 = 108,000

E. On December 31, 2014, Cheese Company had capitalized costs for a new computer
software product with an economic life of five years. Sales for 2015 were 25% of the
expected total sales of the software. AT December 31, 2015 the software has a fair value less
cost to sell equal to 90% of the capitalized cost.
What percentage of the original capitalized cost should be reported as the net amount on
Cheese’s December 31, 2915 statement of financial position, assuming that the pattern of
future revenue from the software can be determined reliably?
a) 90%
b) 80%
c) 75%
d) 70%

1/5=20%; Depreciation is the higher rate, 20%; thus carrying amount is 80%

34.
A. On January 1, 2015, the Business Associates Company hadcapitalized cost of P6,000,000
for a new computer software product with an estimated useful life of 4 years. Sales for the
software product during 2015 were P2,400,000. The total sales of the software over economic
life are expected to be P12,000,000 but the pattern of the future sales cannot be determined
reliably
What amount of amortization of computer software should Business Associates Company
record for the year 2015?
a.P0
b. P1,200,000
c.P1,500,000
d. P3,000,000
25% X 6M = 1,500,000
B. On January 1, 2015, RMP Innovations, Inc had capitalized cost of P2,500,000 for a new
computer software product with an economic life of 5 years. Sales for 2015 amounted to
P1500,000. It is expected that sales of software during its five year economic life would total
P5,000,000. The expected sales for remaining four years are: 2016 -P1,200,000; 2017 –
P1,000,000; 2018 – P900,000; and 2019 –P400,000
On December 31, 2015, the software had fair value less cost to sell of P2,250,000.
How much is the computer software amortization expense for the year ended December 31,
2015?
a) P750,000
b) P500,000
c) P250,000
d) P225,000

1,500,000 ÷ 5,000,000 = 30%; 30% x 2,500,000 = 750,000

C. On July 16, 2015, Rudy Project Company purchased all assets and assumed all the
liabilities of Iris Company for P70,000,000 cash. Iris Company’s total identifiable asset values
were: Book values - P100,000,000; Fair market values –P115,000,000. Iris Company’s total
liabilities were P52,500,000.
What is the amount of goodwill that Rudy Project Company should record on July 16, 2015?
a) P22,500,00
b) P15,000,000
c) P7,500,000
d) P 0

115,000,000 – 52,500,000 = 62,500,000; 70,000,000 – 62,500,000 = 7,500,000

D. Curry Company incurred research and development costs of $100,000 and legal fees of
$10,000 to acquire a patent. The patent has a legal life of 20 years and a useful life of 10
years. What amount should Curry record as Patent Amortization Expense in the first year?
e. $ -0-.

f. $ 1,000.

g. $ 5,000.

h. $10,000.

Solution
b $10,000 ÷ 10 = $1,000.

E. Durant Corporation acquired a patent on Jude 1, 2011. Durant paid cash of $100,000 to the seller. Legal
fees of $50,000 were paid related to the acquisition. What amount should be debited to the patent
account?
i. $150,000
j. $50,000
k. $100,000
l. $0

$100,000 + $50,000 = $150,000.

35.
A.
Sailor Company’s has bought the entity from previous owners through a
leveraged management buy-in (MBI). The company incurred a total
transaction cost related to the MBI in the amount of P5,000,000 which was
broken into the following specific costs: P1,000,000 related to the issue of
debt instrument and P2,500,000 for the consultants and lawyers fees. The
management proposes to capitalize the P5,000,000 as intangible asset.
What amount should the company recognize as an intangible asset?
a) None c) P4,000,000
b) P2,500,000 d) P5,000,000

Answer: A
The cost of MBI should not be capitalized as an intangible asset, as they do
not in themselves provide access to future economic benefits. The transaction
costs on the equity instrument issued should be deducted from equity (PFRS
3 par. 31 or PFRS 3 par. 53 revised), the cost related to the debt issue should
be deducted from the liability and recognized over the term of the loan
through an adjustment to the interest cost (PAS 39 par.43). The consultants’
and lawyers’ fees should be added to the cost of the acquisition of the
business (PFRS par. 29 or PFRS 3 par. 53 revised).

B.
On June 30, 2014, Muller Company acquires one of its key competitors,
Cascade Company. One of the reason for the acquisition was the intention to
take Cascade Company’s brand out of the marketplayce and by so doing
increase the market share of Mullers Company’s own brand. At the time of
acquisition Muller’s brand has a carrying value of P400,000 which equal to its
current fair value. The fair value of Cascade Company’s brand was P500,000
with a carrying value of P600,000.
The management of Muller Company proposes to record the acquired brand
at a zero value as it will not be used in the future

In its June 30, 2014 fiscal year, what amount should Muller Company report
as a value of the brand in its consolidated statement of financial position?
a) P400,000 c)P900,000
b) P600,000 d)P1,000,000

Answer: C
The propose treatment is not appropriate. Fair value under PFRS 3, ‘Business
Combination’. Does not take into account the owner’s intention for the use of
the acquired assets. The brand should therefore be recorded at its fair value
on the date of acquisition and will be subsequently written off to the profit or
loss if it is not expected to be used.

C.
Michael Company exchanges the rights to distribute a product in Brisbane
which have a carrying amount of P2,000,000, for cash of P1,000,000 and the
rights to distribute the same product in Canberra, with a fair value of
P1,400,000. The exchange is considered having the necessary commercial
substance. At the time of exchange, the intangible asset should be initially
recorded by Michael Company at
a) P1,000,000 c)P2,000,000
b) P1,400,000 d)P,2400,000

Answer: B
The asset (intangible) received should be measure at its fair value of
P1,400,000.
Consequently, Michael Company should recognize a gain of P400,000 in its
profit or loss as being the difference of the total fair value of intangible given
up and carrying value (P2,000,000) of intangible asset given up.

D.
Podium Company has incurred P200,000 of research expenditureon a project
to develop a new type of fuel and has expensed these costs. On January 2,
2014, Portal Company purchases the research project, including
certainpatents that have been registered by Podium Company for P300,000
and recognizes the costs and intangible asset. Subsequently, Portal Company
incurred P400,000 of expenditure on completing the research phase and
decides to develop the product commercially. It incurs a further cost of
P600,000 in bringing the product to a stage where the conditions for
recognizing development costs of an internally generated intangible asset are
met. Further costs of P2,000,000 are incurred in bringing the product into a
condition where it is ready for use in the manner the management intend
Initial marketing costs and losses are incurred for P400,000 before the
product was successfully launched. What total amount should Portal Company
recognize as an asset related to the above costs?

a) P300,000 c)2,700,000
b) P2,300,000 d)3,300,000

Answer: B
Cost of purchased of research P 300,000
Development cost 2,000,000
Total cost to be capitalized P2,300,000

E.
On October 1, 2014, Jupiter, Inc. exchanged 2,000 shares of its P500 par
value ordinary shares held in treasury for a patent owned my Mars
Company. The
Treasury shares were acquired in 2013 at a cost of P800,000. At the time
of exchang, Jupiter’s ordinary share was quoted P550 per share and the
 patent had a net carrying value on Mars’ books of P900,000. At what
amount should Jupiter record the patent?
a) P800,000 c) P1,000,000
b) P900,000 d)P1,100,000

Answer: D
FMV of shares issued (treasury)
At the time of exchange (2,000 x P550) P1,100,000
PFRS 2, paragraph 10:For equity-settled share based payment transactions,
the entity, directly, at the fair value of the goods or services received, unless
that fair value cannot be estimated reliably. If the entity cannot estimate
reliably the fair value of the goods or services received, the entity shall
measure their value, and the corresponding increase in equity, indirectly, by
reference to the fair value of the equity instruments.

36.
A.
Company has developed a database of names and addresses of
professional people who teach their 25th birthdays between the years 2008
and 2014 and intends to exploit this by selling the information to suppliers of
life enhancement products and solutions for junior executives. The company
has incurred a total P500,000 to develop the data base. The company has
also incurred a total P800,000 of promoting the databases to vendors of such
solutions, such as adventure holiday companies. The administrative costs and
no income as yet. C company intends to capitalize all the costs incurred in the
relation to the database promotion and administrative costs. What amount of
intangible asset should C Company recognize?
a) P 500,000 c) P1,300,000
b)P 1,000,000 d) P1,800,000
Answer: A
The promotional costs are not eligible for capitalization as part of the cost of
the intangible asset. The database is already capable of operating in the
manner intended by management, that is , it can provide the information that
management wish to exploit. The start up losses is also not eligible for
capitalization as they are not directly attributable costs of the generation of
the database.

B.
Moon Company purchased Patent A for P600,000 and Patent B for P900,000.
Moon also paid indirect costs of P75,000 for Patent A and P105,000 for Patent
B. Both patents were challenged in legal actions. Moon paid P300,000 in legal
fees in successful defense of Patent B. What amount should Moon capitalize
for patents?
a) P675,000 c) P1,680,000
b) P975,000 d) P2,430,000

Answer: A
Capitalized Expensed
Original cost
Purchase price P600,000 P900,000
Indirect costs 75,000 105,000
Total 675,000 P1,005,000
Subsequent cost 750,000
Total costs 675,000 P1,755,000

C.
On January 2, 2014, Proton Company paid P500,000 to acquire a patent with
a remaining economic useful life of 15 years. Proton Company expects to use
the
Patent for 5 years and intends to sell it after 5 years. Newton Company has
committed to buy the patent for 40% of the cost to Proton Company. In its
December 31, 2014, what amount of patent amortization should Proton
Company report in its profit or loss?
a) P40,000 c) P100,000
b) P60,000 d) P200,000

Answer: B
Cost P500,000
Salvage value (P500,000 x 40%) (200,000)
Amortizable cost 300,000
- Useful life to Proton Co. 5 years
- Amortization-2014 P60,000

D.
Status Corporation incurred P198,900 of research and development costs to
develop a product for which a patent was granted on January 2, 2011. Legal
fees and other costs associated with registration of the patent totaled
P44,200. On January 2, 2014.Stars paid P62,400 for legal fees in a successful
defense on the patent. The patent has a useful economic life of 20 years.
What amount should Stars record as amortization expense for 2014?
a) P2,210 c) P7,800
b) P5,200 d) P19,500

Answer: A
Historical cost P 44,200
Divided by its legal life 20 years
P2210

E.
Meteor Company purchased a patent on January 1, 2011 for P428,400. The
patent
was being amortized over its remaining legal life of 15 years expiring on
January 1, 2023. Early 2014, Meteor determined that the economic benefits of
the patent would not last longer than 10 years from the date of acquisition.
What amount should be reported in the statement of financial position as
patent, net of accumulated amortization at December 31, 2014?
a) P257,040 c) P302,400
b) P293,760 d) P314,160

Answer B
Original cost
P428,400
Amortization from 01/01/11 to 01/01/14 (P428,400 x 3/15)
( 85,680)
Carrying value on January 1, 2014
P342,720
Amortization for 2014 (P342,720÷ 7 years)
( 48,960)
Carrying value, December 31, 2014
P293,760

37.
A. On January 2, 2014, Earth Company bought a trademark from Mars Company for
P600,000. Earth retained an independent consultant, who estimated the trademark’s
remaining life to be 20 years. Its amortized cost on Mars accounting records was P456,000.
At what amount should the trademark be initially recorded?
a. P456,000
b. P570,000
c. P585,000
d. P600,000

Answer: D
Trademark is initially recorded at its historical cost; the cost of an intangible asset is equal to the fair market
value of the asset at the time of acquisition. The fair market value of an asset acquired on a cash basis is
determined by its cash price or cash price equivalent.

B. On January 2, 2009, Wind Company bought a trademark for P500,000. The remaining legal life at the
time of acquisition is 20 years. The company made a reasonable and reliable estimate that this trademark
will provide additional ash flows to the enterprise for an indefinite period. During 2012, Wind Company’s
net cash flow related to the trademark have been on a decreasing trend. As a result of this, the company
decided to evaluate the trademark for possible impairment. On December 31, 2012, reliable estimate
showed that the present value of expected net cash inflows related to the trademark is P240,000. What
amount of impairment loss should the company recognize in 2012?

a. None
b. P240,000
c. P260,000
d. P500,000

Answer: C
Historical Cost of the asset P500,000
Fair Value on December 31, 2012 240,000
Impairment loss P260,000

C. On January 1, 2010, Better Company bought a trademark for P400,000, having an estimated remaining
useful life of 16 years. After 16 years, revenues expected from this intangible will be zero. In January 2014,
Better paid P60,000 for legal fees in a successful defense of the trademark. What amount of expense
should Better Company recognize and charge against income during 2014?

a. P15,000
b. P25,000
c. P30,000
d. P85,000

Answer: D
Amortization Expense – Original cost (P400,000/16) P25,000
Cost of litigation 60,000
Total Expense P85,000

D. Pasture Company has a broadcasting license that expires in 5 years. As of January 1, 2011, the license
has a carrying amount of P2,000,000. The license is renewable and has already been renewed twice in the
past. There are no factors to suggest that the license will not be renewed again and the entity has the
intention to do so. The license is expected to contribute to the entity’s cash flow indefinitely. In the
December 31, 2011 statement of financial position, how much should be reported as the carrying value of
the broadcasting license?

a. None
b. P1,600,000
c. P1,900,000
d. P2,000,000

Answer: D
The broadcasting license would be treated as indefinite and the license would not be amortized.

E. Pastor Company has a broadcasting license that expires in 5 years. As of January 1, 2011, the license has
a carrying amount of P1,800,000. The license is renewable and has already been renewed twice in the
past. During the current year 2011, the broadcasting authority has decided that in the future it will auction
the licenses when they came up for renewal. As a result of this development the company’s renewal option
is no longer assured. The license has a remaining life of three years as of January 1, 2011. In the December
31, 2011 statement of financial position, how much should be reported as the carrying value of the
broadcasting license?

a. None
b. P1,200,000
c. P1,600,000
d. P2,000,000

Answer: B
Carrying Value as of January 1, 2011 P1,800,000
Amortization – 2011 (P1,800,000 / 3 years) ( 600,000)
Carrying Value as of December 31, 2011 P1,200,000
38.
A
Colonel Co. purchased two machines for P250,000 each on /January 2, 2012. The machines
were put into use immediately. Machine A has a useful life of five years and can only be used
in one research project. Machine B will be used for two years on a development project and
then used by the production division for an additional eight years. Colonel uses straight-line
method of depreciation. What amount should colonel include in 2012 research and
development expense?
A. P 75,000
B. P275,000
C. P375,000
D. P500,000
Solution: Answer B
Machine A P250,000
Machine B (P250,000 / 10) 25,000
Total research and development cost P275,000

B
Pluto Company incurred research and development costs in 2012 as follows:
Equipment acquired for various researches & development projects
P1,200,000
Depreciation on the above equipment
120,000
Materials used
156,000
Compensatio cost for personnel
600,000
Outside consulting fees
170,000
Indirect costs appropriately allocated
300,000
What is the total research and development cost charged in Pluto’s income statement?
a. P1,070,000
b. P1,126,000
c. P1,346,000
d. P2,576,000
Solution: Answer C
Depreciation P 20,000
Materials used
156,000
Compensation cost for personnel 600,000
Outside Consulting fees 170,000
Indirect cost appropriately allocated 300,000
Total Research & Development (R & D) P1,346,000

C
Venus Company incurred the following costs during 2012:
Trouble shooting in connection with breakdowns during commercial production
Modification for the formulation of a chemical product
Design tools, jigs,, molds dies involving new technology
Seasonal or other periodic design changes to existing products
Laboratory research aimed at discovery of new technology
How much research and development costs Venus incurred in 2012?
Solution: Answer C
Modification for the formulation of a chemical product P 405,000
Design tools, jigs,, molds dies involving new technology 510,00
Laboratory research aimed at discovery of new technology 555,000
P1,470,000
D
Marlin Corporation incurred the following costs during the year ended December 31, 2012:
Routine, on-going efforts to refine, enrich, & improve upon the qualities of an existing
product 125,000
Design, construction, and testing of pre-production prototypes and models
110,000
Quality control during commercial production including routine testing of products
150,000
Laboratory research aimed at discovery of new knowledge
180,000

How much did Marlin Corporation in 2012 as research and development cost?
a. P235,000
b. P275,000
c. P290,000
d. P330,000
 Solution: Answer C
Design, construction, and testing of pre-production prototypes and models
110,000
Laboratory research aimed at discovery of new knowledge
180,000
Total amount to be classified as R & D for 2012
P290,000

E
Galaxy Company purchased a patent for P357,000 on January 2, 2011. This
patent was being amortized over its remaining legal life of fifteen years
expiring on January 2 , 2026. Early on January 2, 2014, Galaxy determined
that the economic benefits of the patent would not last longer than ten years
from the date of acquisition. What amount should be changed to patent
amortization expense for the year ended December 31,2014?
a) P21,000 c) P40,800
b) P35,700 d) P71,400

Answer: C
Original cost 357,000
Less: Amortization from Jan 2, 2011 to Jan. 2, 2014
(357,000 x 3/15) 71,400
Carrying value as of January 2, 2014 P285,600
+Remaining new life:
New life 10 years
Expired life-date of change from
Jan. 2011 to Jan. 2014 3 years
7 years
Amortization expense per year starting from
the year of change
P 40,800

39.
A
Comet Company is considering acquisition of the net assets of Shooting Star Corporation to
expand its operations. The book value and current value of the net assets of Shooting Star
are P6,600,000 and P8,000,000, respectively. The normal rate of return is believed to be 9%,
but Comet believes it can earn 12% annually on its investment in Shooting Star due to the
excellent reputation of Shooting Star. What is the amount of goodwill using the “years
multiple of excess earnings” method assuming a 10-year period of excess earnings.
a) P1,980,000
b) P2,000,000
c) P2,200,000
d) 2,400,000
Answer: D
Expected earnings (P8,000,000 x 12%) P 960,000
Less: Normal earnings (P8,000,000 x 9%) 720,000
Excess Earnings 240,000
x No. of years 10
Goodwill P 2,400,000

B
On April 30, 2011, Shark Corporation purchased for P30 per share all 200,000 of Fins
Corporation’s outstanding ordinary share. On this date, Fins’ balance sheet showed net
assets of P5,000,000. Additionally, the fair value of Fins’ identifiable assets on the same date
was P600,000 in excess of their carrying amount. What amount should Shark report as
goodwill in its April 30,2011 consolidated balance sheet?
a) None
b) P400,000
c) P600,000
d) P1,000,000
Answer: B
Acquisition cost (200,000 shares x 30)
P6,000,000
Less: Market value of net assets acquired
Book Value P5,000,000
Fair Value of identifiable assets 600,000
5,600,000
Goodwill to be reported in a consolidated balance sheet P
400,000
C
The management of Shell Corporation is planning to sell the business. Records show that
cumulative net earnings for the past 5 years amounted to P600,000, including non-recurring
gain of P50,000. The appraised value of Shell’s net assets was P800,000. Assuming that
goodwill is determined by capitalizing average annual net earnings at 10%, how much would
be the implied goodwill?
a) P200,000
b) P250,000
c) P300,000
d) P350,000
Answer: C
Cumulative earnings, net of non-recurring gain
P550,000
Divide by total number of years earnings were earned 5
Average earnings P110,000
Divide by capitalization rate 10%
Implied net assets P1,100,000
Less: Appraised value of net assets 800,000
Implied goodwill P 300,000

D
Big Company acquired Small Company on January 1. As part of the acquisition, P500,000 in
goodwill was recognized; this goodwill was assigned to Big’s Internet Applications reporting
unit. During the year, the Internet Applications reporting unit report revenue of P800,000.
Publicly traded companies with operations similar to those of the Internet Applications unit
had price-to-revenue rations averaging 1.70. The fair values and book values of the assets
and liabilities of the Internet Applications reporting unit are as follows:
Book Values Fair Values
Identifiable assets P1,950,000 P1,900,000
Goodwill 500,000 ?
Liabilities 650,000 650,000
What is the amount of impairment loss on goodwill to be recognized?
a) None
b) P110,000
c) P390,000
d) P500,000
Answer: C
Estimated fair value of the Internet Applications reporting unit:
Revenues P800,000 x 1.70 = P1,360,000 estimated fair value
Net book value of net assets of the Internet Applications reporting unit
Identifiable assets P1,950,000
Goodwill 500,000
Liabilities (650,000)
Net Assets P1,800,000
Because the estimated fair value of the reporting unit (P1,360,000) is less than the net book
value of the reporting unit (P1,800,000), further computations are needed to determine the
amount of a goodwill impairment loss, if any.
Estimated fair value of Internet Applications reporting unit
P1,360,000
Fair Value of identifiable assets – fair value of liabilities
(P1,900,000 – P650,000) 1,250,000
Implied fair value of goodwill P
110,000
Carrying value of goodwill P 500,000
Implied fair value of goodwill
110,000
Impairment loss on goodwill P 390,000

E
General Products Company bought Special Products Division in 2010 and appropriately
recorded P500,000 of goodwill related to the purchase. On December 31, 2011, the fair value
of Special Products Division is P4,000,000 and it is carried on General Product’s books for a
total of P3,400,000, including the goodwill. AN analysis of Special Products Division’s assets
indicated that goodwill f P400,000 exists on December 31, 2011. What goodwill impairments
should be recognized by General Products in 2011?
a) None
b) P50,000
c) P200,000
 d) P300,000
Answer: A
Carrying value P3,400,000
Fair Value P4,000,000
Impairment loss none

40.

An intangible asset costs P300,000 on January 1,2011. On January 1, 2012, the asset was
evaluated to determine if it was impaired. As of January 1, 2012, the asset was expected to
generate future cash flows of P25,000 per year at the end of each year. The appropriated
discount rate is 5%.
A: What total amount should be charged against income in 2012, assuming that the asset
had a total useful life of 10 years from date of acquisition?
a) P30,000
b) P92,304
c) P112,048
d) P122,304
Answer : C
Amortization expense-2012 (P177,696/9) P19,744
Impairment loss 92,304
Total amount to be charges against income in 2012 P112,048
For intangible assets, the presumption is that in the absence of strong evidence to the contrary, the
residual value is zero and the straight-line method should be uses.

Book Value P270,000

Estimated fair value: Value in use 177,696
Impairment loss P 92,304

B: What total amount should be charged against income in 2012 assuming that as of January 1,
2011, the asset was assumed to have an indefinite useful life and that as of January 1, 2012, the
remaining life was still indefinite?
a) None
b) P30,000
c) P92,304
d) P112,304
Answer: A
The useful life is indefinite, so no amortization expense is recognized.

C
Service Company markets products to real estate agents and to new homeowners, purchased
a customers list for P600,000 on January 2, 2011. Because of turnover among real-estate
agents and because new homeowners gradually become established homeowners, the list is
expected to have economic life value for only for years. The company uses the straight-line
method of amortization. In January 2012, the customer list was tested for impairment as a
result of substantial turndown in the real estate market in the area. It is estimated that the
customer list will generate future cash flows of P100,000 per year for the next three years
and that the fair value of the customer list is P240,000. The market rate of interest on this
date is 8%. What amount of impairment loss on customer lists should Service Company
recognized?
a) None
b) P192,000
c) P210,000
d) P450,000
Answer: B
Recoverable amount P257,700
Less: Carrying Value 450,000
Impairment Loss P192,300
Jan.2011 Historical Cost P600,000 4 years
Jan.2012 Amortization (150,000) (1) year
Jan.2012 Carrying Value P450,000 3 years
Fair value P240,000
Value in use (P100,000 x 2.577) P257,700
Recoverable amount is the higher betweet the fair value less cost to sell and the value in
use.

D
Marvel Company acquired a patent on an oil extraction technique on January 1,2010 for
5,000,000. It was expected to have a 10 year life and no residual value. Marvel uses straight-
line amoritization for patents. On December 31, 2011, the expected future cash flows
expected from the patent were expected to be P600,000 per year for the next eight years.
The present value of these cash flows, discounted at Marvel’s market interest rate, is
P2,800,000. At what amount should the patent be carried on the December 31, 2011
financial position?
a) P5,000,000
b) P4,800,000
c) P4,000,000
d) P2,800,000
Answer: D
01/01/10 Cost 5,000,000 10 years
Amortization (2 years) 1,000,000 2 years
12/31/11 Carrying value 4,000,000 8 years
Fair value 2,800,000
Amount to be shown in the December 31, 2011 financial position is the lower between its
carrying value and the fair value (value in use).

E
Patron Manufacturing Company acquired a patent on a manufacturing process on January 1,
2010 for P5,000,000. It was expected to have a 10 year life and no residual value. Patron
uses straight-line amortixation for patents. On December 31, 2011, the expected future cash
flows expected from the patent were expected to be P400,000 per year for the next eight
years. The present value of these cash flows, discounted at Patron’s market interest rate, is
P2,400,000. What amount should the patent be carried on December 31,2011 statement of
financial position?
a) P5,000,000
b) P4,000,000
c) P3,200,000
d) P2,400,000
Answer: D
Acquisition cost P5,000,000
Amortization (2 years (5,000,000 x 2/10) 1,000,000
Carrying Value – 12/31/11 P4,000,000
Fair Value – amount to be shown P2,400,000

41.
A patent right is acquired on January 2008, for P500,000 while it has a legal life of 15 years,
due to rapidly changing technology, management estimates a useful life of only 5 years. At
January 1, 2009, management is uncertain that the process can actually be made
economically feasible, and decides to write down the patent to an estimated market value of
P150,000 with no change in its remaining useful life. On January 1, 2010, having perfected
the related production process, the assets is now appraised at a sound value of P600,000.
A: Under the revaluation model. What amount should be reported in the shareholders’ equity
as a result of revaluation?
a) None
b) P187,500
c) P250,000
d) P300,000
Answer D
Jan.2008 Historical Cost P500,000 5 years
Jan.2009 Amortization (100,000) (1) year
Jan.2009 Carrying Value P400,000 4 years
Amortization – 2009 (100,000) (1) year
Jan.2010 Carrying value P300,000 3 years
B: Under the revaluation model, what amount should be reported in the current year income
statement as a result of revaluation?
a) None
b) P187,500
c) P250,000
d) P300,000
Answer: B
Jan.2010 Amortized historical cost P300,000
Jan.2010 Amoritized fair value 112,500
Reversal of impairment loss – to income statement P187,500

C
Struck Company incurred P1,500,000 (400,000 in 2009 and 1,000,000 in 2010) to develop a
computer software product. P500,000 of this amount was expanded before technological
feasibility was established in early 2010. The product will earn future revenues of P4,000,000
over its 5 year life, as follows: 2010 – P1,000,000; 2011 – P1,000,000; 2012 – P800,000; 2013
– P800,000; and 2014 – P400,000. What portion of the P1,500,000 computer software costs
should be expensed in 2010?
a) P250,000
b) P300,000
c) P350,000
 d) P1,100,000
Answer: C
Total cost incurred P1,500,000
Research cost – 2009 ( 500,000)
Capitalized development cost P1,000,000
Amortization based on pattern of economic benefits:
ratio = P1,000,000 (P1,000,000/P4,000,000) = P250,000
Amortization P250,000
Research cost – 2010:
Total P500,000
Research cost – 2009 400,000 100,000
Total Expense – 2010 P 350,000

D
Logan Company incurred P3,000,000 (800,000 in 2009 and 2,200,000 in 2010) to develop a
computer software product. P1,000,000 of this amount wwas expanded before technological
feasibility was established in early 2010. The product will earn future revenues of P8,000,000
over its 5-year life, as follows: 2010 – P2,000,000; 2011 – P2,000,000; 2012 – P1,600,000;
2013 – P1,600,000; and 2014 – P800,000. What prtion of the 3,000,000 computer software
should be expensed in 2010?
a) P500,000
b) P600,000
c) P700,000
d) P2,200,000
Answer C
Total cost incurred P3,000,000
Research cost – 2009 (1,000,000)
Capitalized development cost P2,000,000
Amortization based on pattern of economic benefits:
ratio = P2,000,000 (P2,000,000/P8,000,000) = P500,000
Amortization P500,000
Research cost – 2010:
Total P1,000,000
Research cost – 2009 800,000 200,000
Total Expense – 2010 P 700,000

E
Dweller Inc. incurred P500,000 of capitalizable costs to develop computer software during
2011. The software will earn total revenues over its 4-year life as follows: 2011 – P400,000;
2012 – P500,000; 2013 – P600,000, and 2014 – P500,000. What amount of the computer
software costs should be expensed in 2011?
a) P100,000
b) P125,000
c) P175,000
d) P500,000
Answer a
Amortization based on the pattern of economic benefit
Ratio = P500,000 (400,000/2,000,000) = P100,000

41.
A
Trial Inc. incurred P600,000 of capitalizable costs to develop computer software during 2011.
The software will earn total revenues over its 5-year life as follows: 2011 – P500,000; 2012 –
P600,000; 2013 – P600,000; 2014 – P200,000 and 2015 – P100,000. What is the amount of
the computer software costs should be expensed in 2011?
a) P120,000
b) P135,000
c) P160,000
d) P600,000

Answer a
Amortization based on the pattern of economic benefit
Ratio = P600,000 (500,000/2,000,000) = P150,000

B
Trojan Inc. incurred P600,000 of capitalizable costs to develop computer software during
2011. The software will be used internally over its 5 year life. What amount of the computer
software costs should be expensed in 2011?
a) P120,000
b) P135,000
c) P200,000
d) P600,000
Answer a
Amortization based on straight line = 600,000/5 = P120,000

C
Tornado Co. made the following expenditures during 2012:
Costs to develop computer software for internal uses in Tornado’s
general management information system P100,000
Costs of market research activities 75,000
How much of these expenditures should tornado report in its 2012 income statement as
research and development expenses?
a) None
b) P75,000
c) P100,000
d) P175,000
Answer A
Neither of the two activities identifies is an example of activity that typically would be
considered research and development costs.

D
During 2012, Broiler Corp. incurred costs to develop and produce a routine low-risk computer
software product as follows:
Completion of detailed program design P130,000
Costs incurred for coding and testing to establish technological feasibility 100,000
Other coding costs after establishment of technological feasibility 240,000
Other testing costs 200,000
Costs of producing product masters for training materials 150,000
Duplication of computer software (1,000 units) 250,000
Packaging product (500 units) 90,000
D. In Broiler’s December 31, 2012 balance sheet, what amount should be reported in
inventory?
a) P250,000
b) P340,000
c) P400,000
d) P490,000
Answer b
Duplication of product masters P250,000
Packaging product 90,000
Cost of inventory P340,000

E In Broiler’s December 31, 2012 balance sheet, what amount should be capitalized as
software cost subject to amortization?
a) P540,000
b) P570,000
c) 590,000
d) 90,000
Answer C
Other Costs after establishment of technological feasibility
P240,000
Other testing costs 200,000
Cost of producing product masters 150,000
Capitalized Cost of Software P590,000

42.

Booster Company has been researching into new ways of manufacturing their products. The
costs and result of a recent project are as follows:
Period Costs Description
2010 P6,000,000 General Research
2011 January to June 9,000,000 Development Stage 1
2011 July to December 14,000,000 Development Stage 2
2012 nil New process adopted in the factory
Development began in January 2011, but it was only in July 2011 that it became apparent
that the process would be successful and that it would save the company a lot of money. The
new process will probably be used for ten years from January 2012, saving about P4,000,000
per annum. The process is protected bby patent for seven years, after which time most of
Booster’s rivals will adopt the process.
A: What is the carrying value of the development expenditure on December 31, 2011?
a) P9,000,000
b) P14,000,000
c) P23,000,000
d) P29,000,000
B: What is the carrying value of the development expenditure on December 31, 2012?
a) P9,000,000
 b) P12,000,000
c) P23,000,000
d) P29,000,000
Answer:
Question 1: B
Question 2: B (P14,000,000 – (14,000,000/7 years))
The entity can capitalize the P14,000,000 incurred after the criteria for recognition were
fulfilled. The P9,000,000 that had been previously written off or charges as an expense
cannot be capitalized later on. The process will enable the company to save P4,000,000 per
year for seven years, which totals P28,000,000 and this will be in excess of the cost because
after that the company will have no competitive advantage from using this process and
therefore no economic benefits.

C
Monroe Company is engaged in a number of research and development projects. Its
accounting policy with regards to research and development is to capitalize expenditure as
far as allowed by PAS 38 Intangible Assets. At june 30,2011, the following balances existed in
the company’s accounting records:
Project A: Development completed June 30,2009. Total expenditure 200,000. Being amortized
over five years on the straight line basis. Balance and june 30, 2011: 120,000.
Project B: Development completed July 1, 2009. Total expenditures in the years ended June
30,2010 and June 30,2011 totaled P175,000. During the year ended June 30, 2012, it became
clear that a competitor had launched a superior product and the project was abandoned.
Further development expenditure in the year ended June 30,2012 amounted to 55,000.
Project C: Development commenced October 1, 2010. Expenditures per year: Yeard ended
June 30,2011, P85,000, Year ended June 30,2015, 170,000.
Project D: IN addition, research for project D commenced on July 1,2011. Expenditures to
date: year ended June 30, 2014, P80,000.
What amount should appear in the company’s income statement for research and
evelopment for the year ended June 30,2012?
a) 270,000
b) 120,000
c) 230,000
d) 350,000
D
What amount should appear in the company’s balance sheet for research and evelopment
for the year ended June 30,2012?
a) 255,000
b) 355,000
c) 80,000
d) 355,000

Answer D
Income Statement Balance Sheet
Project A
P200,000 / 5 years P 40,000
P120,000 – P40,000 P80,000
Project B (175,000 + 55,000) 230,000
Project C (P85,000 + P170,000) P255,000
Project D 80,000 none
Total P350,000 P 335,000

E
On June 30, 2011, Sunlight Company purchased the net assets of Bight Company The
acquisition resulted in a purchased goodwill of P1,500.000 During 2011, Sunlight incurred
additional costs of developing goad,. P500,000 for training Beam employees, and
P250,000 for hiring additional Beam employees. How much should Sunlight report as
goodwill in its December 31, 2011 balance sheet?
a) P1,425,000
b) P1,462,500
c) P1,500,000
d) P2,000,000
Solution
Goodwill P1,500,000

43

A
On January 2, 2015, Amsterdam Enterprises, Inc. developed a new machine for
manufacturing baseballs. Because the machine is considered very valuable, the company
had it patented. The following expenditures were incurred in developing and patenting the
machine in 2015:
Purchase of special equipment (Cost was P600,000)
recoverable amount after development of the
new machine P460,000
Research salaries and fringe benefits for engineers and scientists 51,300
Costs of testing prototype 70,800
Fees paid to Philippine Patent Office 7,500
Drawings required by the patent office to be filed with patent application 14,100
Legal costs of filing for patent 38,100

Amsterdam elected to amortize the patent over ten years. Full year amortization is taken up
in the year of acquisition. At January 2, 2017, Amsterdam paid P72,000 to successfully
defend the patent in an infringement suit. On January 3, 2018, Amsterdam determined that
the remaining estimated useful life of the patent was five years.
Compute for:
1. Research & Development Expense based on the foregoing data.
a. P191,300
b. P280,400
c. P262,100
d. P294,100
2. Patent carrying value at December 31,2016.
a. P47,760
b. P48,600
c. P50,000
d. P58,700
3. Amortization expense for the patent for the year ended December 31, 2017.
a. P7,980
b. P8,010
c. P8,340
d. P8,358
4. Carrying value of the patent at December 31, 2018.
a. P33,432
b. P49,770
c. P49,800
d. P50,130
(Amsterdam Enterprises, Inc.)
a. Special equipment (600,000 – 460,000) P140,000
Research salaries 51,300
Costs of testing prototype 70,800
R & D Expense P262,100

b. Fees paid to Phil. Patent Office P 7,500

Drawings required by the patent office 14,100
Legal costs of filing patent 38,100
Patent cost, January 1, 2010 P 59,700
Less amortization of patent for years 2010 and 2011
(59,700/ 10) x 2 yrs. 11,940
Patent carrying value, December 31, 2011 P 47,760

c. Patent carrying value at December 31, 2012

59,700 x 7/10 P 41,790
Remaining estimated useful life at January 1, 2013 ÷ 5
Amortization expense for year 2013 P 8,358

d. Carrying value, January 1, 2013 P41,790

Less amortization expense for 2013 8,358
Carrying value, December 31, 2013 P33,432

B
ToGo Company previously purchased for P4,000,000 a trademark for a very successful coffee
drink it markets under the name of Cofiti-ormi. The trademark was determined to have an
indefinite life. A competitor recently introduced a product that is in direct competition with
the Cofiti-ormi product, thus, suggesting the need for an impairment assessment. Data
gathered by ToGo suggests that the useful life of the trademark is still indefinite, but the net
cash flows generated by the trademark have been reduced either to P150,000 annually, with
a probability of 80%, or to P300,000, with a probability of 20%. The appropriate risk-free
interest rate is 6%. The appropriate risk-adjusted interest rate is 10%. What is the amount of
the impairment loss, if any, on the trademark?
a. P2,000,000
b. P2,200,000
c. P2,500,000
d. P2,100,000

(ToGo Company)
Carrying value P4,000,000
Recoverable value
150,000/10% = 1,500,000 x 80% P1,200,000
300,000/10% = 3,000,000 x 20% 600,000 1,800,000
Impairment loss P2,200,000
C
Boston Company acquired a patent right on July 1, 2014 for P500,000. The asset has a legal life of 15
years but due to the rapidly changing technology, management estimates a useful life of only five
years. On December 31, 2015, management is uncertain that the process can actually be made
economically feasible, and decides to write down the patent to its recoverable amount of P150,000.
Amortization will be taken over three years from that time. On January 1, 2017, after having perfected
the related production process, the asset is now appraised at a sound value of P600,000. Furthermore,
the estimated useful life is now believed to have extended by six more years. The company uses
straight-line method of amortization.
Compute for:
1. Amortization expense for the year 2014.
a. P70,000
b. P65,000
c. P100,000
d. P50,000
2. Impairment loss recognized in 2015.
a. P310,000
b. P270,000
c. P300,000
d. P200,000
3. Patent carrying value at December 31, 2016.
a. P250,000
b. P200,000
c. P150,000
d. P100,000
4. Revaluation surplus recognized in 2017.
a. P290,000
b. P525,000
c. P470,000
d. P350,000

(Boston Company)
a. Patent cost P500,000
Estimated useful life ÷ 5 yrs.
Amortization per year P100,000
Amortization expense for 2010 (100,000 x 6/12) P 50,000
b. Carrying amount, December 31, 2011 (500,000 – 150,000) P350,000
Estimated recoverable amount 150,000
Impairment loss at December 31, 2011 P200,000

c. Written down value of patent at December 31, 2011 P150,000

Less amortization for 2012
150,000 / 3 50,000
Carrying amount at December 31, 2012 P100,000

d. Sound value at January 1, 2013 P600,000

Carrying amount at December 31, 2012 100,000
Increase in value P500,000
Impairment loss P200,000
Recovery of previous impairment loss through lower
amortization (100,000 – 50,000) 50,000 150,000
Revaluation surplus in 2013 P350,000
D
April Company incurred the following costs during 2015:

Quality control during commercial production,

Including routine testing of products P 58,000
Laboratory research aimed at discovery of new knowledge 68,000
Testing for evaluation of new products 24,000
Modification of the formulation of a plastics product 26,000
Engineering follow-through in an early phase of commercial production 15,000
Trouble-shooting in connection with breakdown during commercial
production 29,000
Searching for application of new research findings 19,000
Costs of equipment acquired that will have alternative uses in future
research and development projects over the next 5 years
(uses straight-line depreciation) 280,000

What is the total amount that April Company should classify as research and development cost for
2015.
a. P147,000
b. P102,000
c. P193,000
d. P176,000

(April Company)
Laboratory research P 68,000
Modification of formulation 26,000
Testing 24,000
Searching for application 19,000
Depreciation of equipment (280,000/5) 56,000
R & D costs for 2013 P193,000
E
On January 1, 2015, Sun Company signed an agreement to operate as a franchise for 10 year for a
franchise fee of P1,000,000. The franchise fee is payable as follows:
Down payment (upon signing the agreement) P 500,000
Balance of P900,000 payable in three equal annual payments
of P300,000 beginning January 1, 2016. The market
rate of interest for similar obligation is 10%\
The agreement also provided for the payment of 5% royalties based on sales. In return for these
royalties, the franchisor agreed to provide marketing and promotional services for Sun Company for the
duration of the franchise contract.
1. What is the cost of the franchise acquired on January 1,2015?
a. P1,344,000
b. P1,246,000
c. P1,200,000
d. P1,234,500
2. What is the amount of the amortization expense for the franchise for the year ended December
31, 2015?
a. P124,607
b. P131,700
c. P127,500
d. P124,500

44

A
The following data appear in the books of KC Company at January 1, 2015:
Current Assets:
Trade Receivables (net) P1,200,000
Inventory 1,800,000 P3,000,000
Property, Plant and Equipment (net) 4,600,000
Total Assets P7,600,000
Current Liabilities P 760,000
Noncurrent Liabilities 1,600,000 2,360,000
Equity P5,240,000

On this date, Winter Company purchased all of the assets and assumed all of the liabilities of KC
Company for P7,000,000. On January 1, 2015, the fair values of KC Company’s assets were as follows:
Trade Receivables (net), P1,000,000; Inventory P1,700,000; Property, Plant and Equipment (net),
P5,900,000. The fair values of the liabilities are deemed equal to their carrying amounts. What is the
amount of goodwill included in the purchase price paid by Winter Company?
a. P800,000
b. P760,000
c. P700,000
d. P725,000

Cash purchase price P7,000,000

Fair value of net assets
(1,000,000 + 1,700,000 + 5,900,000 – 2.360,000) 6,240,000

Goodwill P 760,000

B
Bagong Silangan Company currently performs an annual test of the impairment of goodwill relating to
its textile division, considered a cash-generating unit. Goodwill at December 31, 2015 has a ledger
balance of P400,000. The ledger balances of the productive assets in this cash-generating unit are as
follows at December 31, 2015:
Land P 5,000,000
Building, net of accumulated depreciation of P3,400,000 6,200,000
Patents 1,000,000
Trademarks 800,000

1. What is the amount impairment, if any, assuming that the recoverable amount of the cash
generating unit is P13,100,000?
a. P100,000
b. P200,000
c. P300,000
d. P400,000
2. What is the amount impairment, if any, assuming that the recoverable amount of the cash
generating unit is P12,400,000?
a. P1,000,000
b. P2,000,000
c. P3,000,000
d. P4,000,000

(Bagong Silangan Company)

a. Recoverable amount of the CGU P13,100,000
Carrying amount of the CGU 13,400,000
Impairment of CGU P 300,000

b. Recoverable amount of the CGU P12,400,000

Carrying amount of the CGU 13,400,000
Impairment loss P 1,000,000
Reported goodwill per ledger 400,000
Decrease in value of identifiable noncurrent assets P 600,000

C
Data for the computation of total intangible assets follow:

Deposits with advertising agency which will be used to promote goodwill P

45,000
Organization costs 50,000
Unamortized bond discount 155,000
Patents 244,000
Franchise to operate in Cebu 100,000
Marketing costs of introducing new products 150,000
Research and development costs expected to benefit future periods 420,000
What is the correct total cost of the intangible assets?
a. P744,000
b. P439,000
c. P394,000
d. P344,000
Solution

D 244,000 + 100,000 = 344,000

D
Torspeed Co. was formed towards the end of 2015. At the time of formation, the company spent
P50,000 for accounting fees; P150,000 for legal fees; stock certification costs of P500,000; initial
franchise fee of P1.0 million; initial lease payment of P300,00; and promotional fees of P300,000. How
much of the foregoing shall be initially recorded as intangible assets?
a. P0
b. P700,000
c. P1,000,000
d. P2,300,000
Solution

C Initial franchise fee of P1,000,000

E
The following accounts were found in the general ledger of Diamond Company as of December 31,
2015:
Unamortized discount on bonds payable P 120,000
Organization costs 100,000
Losses in early years of company 450,000
Trademarks 750,000
Patents 150,000
Amount set up by Board of Directors as goodwill 300,000

In the statement of financial position of Diamond, the total intangible assets shown should be
a. P1,300,000
b. P1,000,000
c. P900,000
Solution

C 750,000 + 150,000 = 900,000

44
A
On July 1, 2015, MN Company signed an agreement to operate as a franchise of Jollifoods, Inc. for an
initial franchise fee of P600,000. Of this amount, P200,000 was paid when the agreement was signed
and the balance is payable in four equal annual payments starting July 1, 2016. The payment is not
refundable and no future services are required for the franchise. MN’s credit rating indicates that it can
borrow money at 14% for a loan for this type.
Information on present value factors is as follows: Present value of P1 of 14% for 4 periods – P0.59;
Present value of an ordinary annuity of P1 at 14% for 4 periods – P2.91.
What is the cost of the franchise acquired on July 1, 2015?
a. P436,000
b. P491,000
c. P600,000
d. P676,000
Solution

B 200,000 + (100,000 x 2.91) = 491,000

B
On November 1, 2015, a newly established manufacturing outfit paid cash to acquire a patent for
P1,200,000, a copyright for P750,000, and a franchise for P60,000. The patent expires at the end of
2019, has a total legal life of 20 years in the Philippines and is expected to produce benefits only for 5
years. The copyright has a service life of 10 years. The franchise allows the company to be exclusive
sales agent for one whole year. The amortization amount for the intangibles in 2015 is?
a. P62,500
b. P70,500
c. P120,500
d. P375,000
Solution

B 1,200,000 x 2/50 = 48,000; (750,000 ÷ 10) x 2/12 = 12,500

60,000 x 2/12 = 10,000; 48,000 + 12,500 + 10,000 = 70,500
C
Freetown Manufacturing Company acquired three patents in January 2015. The patents have different
lives as indicated in the following schedule:
Remaining useful Remaining
Costs Life (Years) legal life (Years)
Patent A P125,000 10 17
Patent B 272,500 5 7
Patent C 656,000 Indefinite 17

Patent C is believed to be uniquely useful as long as the company retains the right to use it. In June
2015, the company unsuccessfully attempted to defend its right to Patent B. Legal fees of P127,000
were incurred in this action. The company’s policy is to amortize intangible assets by the straight-line
method to the nearest half-year. The company reports on a calendar-year basis.
How much is the patent amortization expense for the year ended December 31, 2015?
a. P39,750
b. P78,350
c. P84,880
d. P105,600
Solution

B 125,000 ÷ 10 = 12,500; 272,500 ÷ 5 = 54,500 x ½ = 27,250

656,200 ÷ 17 = 38,600; 12,500 + 27,250 + 38,600 = 78,350

D
KL, a manufacturer of chocolate drinks acquired a patent on June 28, 2013 for P340,000. Management
expects the patents to be useful to the company for its remaining life of 10 years. Legal life of the
patent is 20 years. On January 3, 2014, the company spent P51,000 to successfully defend the patent
against a competitor.
During 2015, management determines that the estimated remaining life of the patent should be
reduced to only five years, including the current year. This was made after a very careful consideration
of the situation the is in, more so with respect to its competitors. The company policy is to amortize the
cost of intangible assets using the straight-line method to the nearest full month.
D. How much is the patent amortization expense for 2013?
a. P34,000
b. P20,000
c. P17,000
d. P10,000
E. What is the patent carrying value at January 1, 2015?
a. P310,000
b. P304,000
c. P289,000
d. P283,000
How much is the revised amortization expense for 2016?
a. P56,000
b. P57,800
c. P60,800
d. P62,000
Solutions

C 340,000 ÷ 10 = 34,000 x ½ = 17,000

C 340,000 – 17,000 – 34,000 = 289,000
B 289,000 ÷ 5 = 57,800

45
A
LV Company incurred the following costs during 2015:
Quality control during commercial production,
Including routine testing of products P 58,000
Laboratory research aimed at discovery of
new knowledge 68,000
Testing for evaluation of new products 24,000
Modification of the formulation of a plastics product 6,000
Engineering follow through in an early phase of
commercial production 15,000
Adaptation of an existing capability to a particular
Requirement of customers’ needs as part of the
Continuing commercial activity 13,000
Trouble shooting in connection with breakdowns
During commercial production 29,000
Searching for application of new research findings 19,000
What is the total amount to be reported as research and development expense for 2015?
a. P92,000
b. P98,000
c. P117,000
d. P232,000

B
Jan Company incurred cost in 2015 as follows:
Equipment acquired for use in various research
And development projects P 900,000
Depreciation on the equipment above 210,000
Materials used in R&D 300,000
Compensation costs of personnel in R&D 400,000
Outside consulting fees for R&D work 220,000
Indirect costs appropriately allocated to R&D 260,000
What is the total amount of research and development that should be reported in Jan Company’s 2015
statement of comprehensice income?
a. P2,080,000
b. P1,390,000
c. P1,180,000
d. P880,000

C
Ruby, Inc. incurred P816,000 of research and development costs in its laboratory to develop a patent
which was granted on January 2, 2015. Additional costs of P152,000 were incurred in the registration of
the patent. The estimated life of the patent is 8 years.
What amount should Ruby charge to patent amortization expense for the year ended December 31,
2015?
a. P968,000
b. P102,000
c. P19,000
d. P0

D
At year-end, Fly Co. has the amount of P7,600,000 and P3,000,000 to assets and liabilities respectively.
The carrying amounts of the assets approximate fair value that is P400,000 greater than carrying
amount. On same date, Row Co. paid P8,000,000 to acquire Fly Co.
What amount of goodwill should be recorded by the acquirer as a result of this purchase?
a. P1,000,000
b. 3,300,000
c. P2,700,000
d. P3,000,000

Acquisition cost P 8,000,000

Net assets at fair value 5,000,000
Goodwill P 3,000,000

BestBuy Co. is planning to sell the business to new interests. The cumulative net earnings for the past
three years amounted to P4,500,000 including expropriation gain of P1,500,000. The fair value of net
assets of BestBuy Co. was P6,000,000. The goodwill is determined by capitalizing average net earnings
at 10%. What is the amount to be paid for goodwill?
a. P3,500,000
b. P7,500,000
c. P4,000,000
d. P4,500,000

Cumulative Earnings P 4,500,000

Less: Expropriation gain 1,500,000
Adjusted cumulative earnings P 3,000,000

Average earnings (P3,000,000 / 3) P 1,000,000

Capitalization rate 10%
Purchase price or net assets including goodwill P10,000,000
Less: Net assets before goodwill 6.000,000
Goodwill P 4,000,000

46
A
GG, a manufacturer of orange drinks acquired a patent on June 30,2013 for P250,000. Management
expects the patents to be useful to the company for its remaining life of 10 years. Legal life of the
patent is 20 years. On January 3, 2014, the company spent P55,000 to successfully defend the patent
against a competitor.
During 2015, management determines that the estimated remaining life of the patent should be
reduced to only five years, including the current year. This was made after a very careful consideration
of the situation the company is in, more so with respect to its competitors. The company policy is to
amortize the cost of intangible assets using the straight-line method to the nearest full month.
A. How much is the patent amortization expense for 2013?
a. P12,500
b. P12,000
c. P13,400
d. P11,700
B. What is the patent carrying value at January 1, 2015?
a. P202,500
b. P212,500
c. P214,000
d. P210,000
C. How much is the revised amortization expense for 2016?
a. P40,000
b. P41,600
c. P42,500
d. P44,000

Computation:
 1. P250,000 / 10 = P25,000 x ½ = P12,500.
2. P250,000 – 12,500 – 25,000 = P212,500.
3. P212,500 / 5 = P42,500.

D
Taylor Co. bought a patent from Ed Co. at the beginning of current year for P4,900,000. An independent
consultant estimated that the remaining useful life of the patent was 7 years. The remaining legal life
was 10 years. The unamortized cost of the patent on January 1, 2017 was P1,200,000. What is the
amortization of patent for current year?
a. P1,275,000
b. P700,000
c. P400,000
d. P285,000

Computation:
P4,900,000 / 7 years = P700,000.

E
Jade Company spent P200,000 on research and development cost for an invention during 2010. On
January 1, 2011, the invention was patented at a nominal cost that was expensed in 2011. The legal life
of the patent was 15 years and the estimated useful life was 9 years. In January 2015, Jade paid
P250,000 for legal fees in a successful defense of the patent.
What should be the amortization expense for 2015?
a. P0
b. P22,730
c. P27,780
d. P50,000
Solution

A P0
*You can buy complete chapters by: Www.TestbankU.com Contact Us:
[email protected]
Test Bank, Chapter 2 1