PROBLEM 1-PATENT

ARDEX INDUSTRIES reports the following patents on its December 31, 2015 statement of financial position.
Date of Useful life
Initial Cost Acquisition (at date of acquisition)
Patent A P1,224,000 March 1, 2012 17 years
Patent B 450,000 July 1, 2013 10 years
Patent C 432,000 Sept. 1, 2014 4 years
The following events occurred during the year ended December 31, 2016.
1. Research and development costs of P737,100 were incurred during the year. These costs were incurred prior to
projects achieving economic viability.
2. Patent D was purchased on July 1 for P855,000. It has a remaining life of 9 ½ years.
3. A possible impairment of Patent B’s value may have occurred at December 31, 2016. This is due to a significant
reduction in the demands for certain products protected by Patent B. the company’s controller estimates the
following future cash flows from Patent B.
December 31, 2015 P60,000
December 31, 2016 60,000
December 31, 2017 60,000
The appropriate discount rate to be used for these cash flows is 8%.
1. What is the total carrying value of ARDEX patents on December 31, 2015?
A. P2,383,500 C. P2,106,000

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B. P1,390,620 D. P1,573,500

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2. What amount of impairment loss should be reported by ARDEX for the year ended December 31, 2016?

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A. P137,880 C. P337,500

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B. P292,500 D. P154,620
3. What is the total carrying value of ARDEX’ patents on December 31, 2016?

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A. P1,969,080 rs e C. P2,158,500
B. P2,020,620 D. P2,203,500
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PROBLEM 2: On January 2, 2012, TAURUS 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 2016, the company spent
P144,000 in successfully prosecuting an attempted patent infringement. At the beginning of 2017, the company
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purchased for P280,000 a patent that was expected to prolong the life of its original patent by 5 years. On July 1, 2020, a
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competitor obtained rights to a patent that made the company’s patent obsolete.
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Based on the above and the result of your audit, determine the following:

1. Carrying amount of patent as of December 31, 2016

a. P360,000 c. P369,600
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b. P240,000 d. P355,200
2. Amortization of patent in 2017
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a. P64,000 c. P52,000
b. P64,960 d. P63,520
3. Carrying amount of patents as of December 31, 2019
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a. P448,000 c. P444,640
b. P454,720 d. P364,000
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4. Loss on patent obsolescence in 2020

a. P338,000 c. P448,000
b. P416,000 d. P364,000

PROBLEM 3:STI CORP. has its own research department. However, the company purchases patents from time to time. The
following is a summary of transactions involving patents now owned by the company.
 During 2010 and 2011, STI spent a total of P459,000 in developing a new process that was patented (Patent A) on
April 1, 2012; additional legal and other costs of P50,000 were incurred.
 A patent (Patent B) developed by CHARAN, an inventor, was purchased for P187,500 on December 1, 2013, on
which date it had an estimated useful life of 12 ½ years.
 During 2012, 2013, and 2014, research and development activities cost P510,000. No additional patents resulted
from these activities.
 A patent infringement suit brought by the company against a competitor because of the manufacture of articles
infringing on Patent B was successfully prosecuted at a cost of P42,600. A decision in the case was rendered in
June 2014.
 On July 1, 2015, Patent C was purchased for P172,800. This patent had 16 years yet to run.
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  During 2016, STI expended P180,000 on patent development. However, the company is still undecided as to how
the patent, if approved by the Bureau of Patents, will generate probable future economic benefits.
Assume that the legal life of each patent is also its useful life.
1. What is Patent A’s carrying value on December 31, 2016?
A. P120,888 C. P38,125
B. P497,125 D. P388,113
2. What is Patent B’s carrying value on December 31, 2016?
A. P141,250 C. P32,092
B. P28,906 D. P173,342
3. What is Patent C’s carrying value on December 31, 2016?
A. P162,000 C. P159,840
B. P327,600 D. P156,600
4. What is the total patent amortization expense to be reported in STI’s income statement for the year ended
December 31, 2016?
A. P37,000 C. P74,325
B. P28,741 D. P28,300

PROBLEM 4: RESEARCH AND DEVELOPMENT COST

The following costs were incurred by LEO COMPANY during 2016:

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Searching for applications of new research findings P 57,000

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Trouble-shooting in connection with breakdowns during

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commercial production 87,000

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Adaptation of an existing capability to a particular
requirement or customer’s need as a part of continuing

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commercial activity rs e 39,000
Engineering follow-through in an early phase of
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commercial production 45,000
Radical modification of the formulation of a glassware
product 78,000
Laboratory research aimed at discovery of new knowledge 204,000
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Testing for evaluation of new products 72,000

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Quality control during commercial production, including

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routine testing of products 174,000

Materials consumed in research and development projects 177,000
Consulting fees paid to outsiders for research and
development projects 300,000
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Personnel costs of persons involved in research and

development projects 384,000
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Indirect costs reasonably allocable to research and

development projects 150,000
Materials purchased for future research and development
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projects 102,000
Research and development costs reimbursable under a
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contract to perform research and development for

Client Corporation 1,050,000
Design, construction, and testing of preproduction
Prototypes and models 870,000
Routine on-going efforts to refine, enrich, or otherwise
Improve upon the qualities of an existing product 750,000
Total P4,539,000

What is the total amount to be classified and expensed as research and development for 2016?
A. P3,342,000 C. P2,394,000
B. P2,292,000 D. P2,220,000

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 VARIOUS INTANGIBLE ASSETS
5.The GREEN COMPANY engaged in the following transactions at the beginning of 2016:

1. Purchased a patent for P700, 000 that had originally been filed in January 2010. The acquisition was made to
protect another patent that the company had filed for in January 2012 and subsequently received.
2. Purchased the rights to a novel by a best-selling novelist in exchange for 100,000 ordinary shares (P10 par) selling
for P60 per share. The book sells 1 million copies in 2016 and is expected to sell a total of 500,000 copies in
future years.
3. Purchased the franchise to operate a ferry service from the government for P100,000. A bridge has been planned
to replace the ferry, and it is expected that it will be completed in five years. The company hopes that the ferry
will continue as a tourist attraction, but profits are expected to be only 20% of those earned before the bridge is
opened.
4. Paid P280,000 to attorneys for the services to successfully defend the patent acquired in transaction 1.
5. Paid a taxi operator P500,000 to have the company name prominently displayed on his taxis for two years.

Based on the preceding information, determine the carrying value of the following at the end of 2016:

1. Patent
A. P630,000 C. P910,000
B. P656,250 D. P650,000

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2. Copyright

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A. P2,000,000 C. P3,000,000
B. P 0 D. P4,000,000

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3. Franchise
A. P100,000 C. P80,000

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B. P84,000 rs e D. P76,000
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6. GEN. SANTOS CORPORATION was organized in 2015. Its accounting records include only one account for all intangible
assets. The following is a summary of the debit entries that have recorded and posted during 2015 and 2016:
INTANGIBLE ASSETS
July 1, 2015 8-year franchise; expires June 30,2023 P126,000
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Oct. 1, 2015 Advance payment on leasehold (term of

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lease is 2 years) 84,000

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Dec. 31, 2015 Net loss for 2015 including incorporation

fee, P3,000, and related legal fees of
organizing, P15,000 (all fees incurred
in 2015) 48,000
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Jan. 2, 2016 Acquired patent (10-year life) 222,000

Mar. 1, 2016 Cost of developing a secret formula 225,000
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April 1, 2016 Goodwill purchased 835,200

July 1, 2016 Legal fee for successful defense of patent
purchased above 37,950
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Oct. 1, 2016 Research and development costs 480,000

Ignore income tax effects.
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1. The unamortized patent cost at December 31, 2016, should be

A. P199,800 C. P222,000
B. P235,440 D. P197,490
2. The unamortized franchise cost at December 31, 2016, should be
A. P110,250 C. P102,375
B. P94,500 D. P118,125
3. The amount of prepaid rent to be reported in GEN. SANTOS’ December 31, 2016, statement of financial position
is
A. P73,500 C. P84,000
B. P31,500 D. P63,000
4. The adjusting entries on December 31, 2016, should include a net debit to the retained earnings account of
A. P889,275 C. P60,375
B. P42,000 D. P66,375

5. As a result of the adjustments at December 31, 2014, the total charges against GEN. SANTOS’ 2016 income
should be
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 A. P840,900 C. P597,900
B. P822,900 D. P841,275

7. In connection with your audit of the CUPCAKE Corporation, you noted the following transactions during 2016:

Jan. 2 Paid legal fees of P400,000 and stock certificate costs of P249,000 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 entity. Clown cost, P30,000;
pamphlets and candy, P15,000.
Apr. 1 Patented a newly developed process with costs as follows:
Legal fees to obtain patent P1,287,000
Patent application and licensing fees 190,500
Total P1,477,500
It is estimated that in 6 years other companies will have developed improved processes,
making the CUPCAKE Corporation process obsolete.
May 1 Acquired both a license to use a special type of container a distinctive trademark to be
printed on the container in exchange for 18,000 shares of CUPCAKE’s no-par ordinary
shares selling for P50 per share. The license is worth twice as much as the trademark,
both of which may be used for 6 years.

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July 1 Constructed a shed for P3,930,000 to house prototypes of experimental models to be

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developed in the future research projects.

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

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P750,000 in 2016.

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It is the company’s policy to take full year amortization in the year of acquisition.
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QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Cost of patent
a. P1,477,500 c. P1,287,000
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b. P 190,500 d. P 0
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2. Cost of licenses
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a. P450,000 c. P600,000
b. P300,000 d. P 0
3. Cost of trademark
a. P450,000 c. P600,000
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b. P300,000 d. P 0
4. Carrying amount of Intangible Assets as of December 31, 2014
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a. P2,031,250 c. P1,981,250
b. P2,026,260 d. P 0
5. Total amount resulting from the foregoing transactions that should be expensed when incurred
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a. P2,971,500 c. P5,424,000
b. P1,494,000 d. P 0
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GOODWILL
8. In line with MALIGAYA Corp.’s expansion program, it has become interested in acquiring in Mindanao to handle many of
its production functions in that area. One propective seller is Mariwasa Co. whose owners have decided to sell their
business if a proper settlement can be agreed upon. Mariwasa Co.’s statement of financial prosition appears as follows:
Current Assets P 9,000,000 Current Liabilities P 4,800,000
Investments 3,000,000 Noncurrent Liabilities 6,000,000
PPE, net 24,000,000 Ordinary shares 3,000,000
Share premium 10,200,000
Accum. Profits 12,000,000
Total P 36,000,000 Total P 36,000,000

MALIGAYA has hired an appraisal company to determine the proper valuation of its assets and has ascertained that the
investments ha fair value of P 9,000,000 while inventories were undersated by P 4,800,000. An examination of the
company’s income for the last 4 years indicates that the net income has a steady increase 20%. Net income in 2015 was at

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 P 6,000,000. The company believes that this trend will continue over the next 4 more years. Based on industry
performance, it is believed that the normal rate of return for a businesses similar to Mariwasa was at 18%. Determine the
proposed acquisition price assuming that the goodwill shall be computed as follows:

1. Capitalization of average excess earnings at 18%:

a. 89,680,000 b. 72,000,000 c. 36,572,`832 d. 53,680,000
2. Purchase of excess earnings for four years:
a. 48,312,600 b 39,182,400 c. 61,920,000 d. 45,662,400
3. Capitalization of average earnings at 20%
a. 48,312,000 b. 39,182,400 c. 61,920,000 d. 45,662,400
4. Present value of the average excess earnings for four years at 15%:
a. 63,585,958 b. 55,182,400 c. 45,085,682 d. 45,662,400

PROBLEM 9: Information concerning Ruth Corporation Intangible asset is as follows:

a. On January 1, 2016, Ruth signed an agreement to operate as a franchisee of Rapid Copy Service, Inc., for an initial
franchise fee of P85,000. Of this amount, P25,000 was paid when the agreement was signed and the balance is
payable if four annual payments of P15,000 each beginning January 1, 2017. The agreement provides that the
down payment is not refundable and no future services are required of the franchisor. The present value at
January 1, 2016, of the four annual payments discounted at 14% (the implicit rate for a loan of this type is

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P43,700.) the agreement also provides that 5% of the revenue from the franchise must be paid to the franchisor

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annually. Ruth’s revenue from the franchise for 2016 was P900,000. Ruth estimates the useful life of the

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franchise to be ten years.

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b. Ruth incurred prior to 2016, P78,000 of experimental and development costs in its laboratory to develop a
patent which was granted on January 2, 2016. Legal fees and other costs associated with the registration of the

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patent totaled P16,400. Management estimates that the useful life of the patent will be eight years.
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c. A trademark was purchased from Sampson Company for P40,000 on July 1,2013. Expenditures for successful
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litigation in defense of the trademark totalling P10,000 were pain on July 1,2016. Management estimates that
the useful life of the trademark will be 20 years from the date of acquisition.

Required: Determine the correct balances as of Decemeber 31,2016 of the following.

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A B C D
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1. Franchise 85,000 68,700 61,830 43,700

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2. Patent 94,400 82,600 16,400 14,350

3. Trademark 50,000 41,250 40,000 33,000
4. Total Intangibles 109,180 118,230 125,100 150,000
5. Total expense in 2016 72,038 62,038 55,920 53,970
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PROBLEM 10
Before 2016, MALIKHAIN Enterprises prepared financial statements internally. The company has not been audited
because the ownership is held completely by one family and is not actively sold. As of 2016, however, in anticipation of
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bank loans and a possible public offering of ordinary shares, the company needs audited financial statements prepared in
conformity with GAAP.
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As a member of the team of independent auditors responsible for MALIKHAIN Enterprises, you have been assigned the
intangible assets. You have observed that four intangible asset accounts appear on the unadjusted trial balance.
Patents P550,000
Franchise 555,000
Organization cost 102,000
Goodwill 342,000

Additional investigation reveals the following:

1. All patents were purchased from another company when MALIKHAIN Enterprises began operations on January 2,
2009. These patents are being amortized over an expected useful life of 14 years. Improvements made to
equipment covered by the patents coseting P75,000 were debited to the account in January 2013. Amortization
in 2013 – 2015 included amortization on the P75,000 for the remaining life of the relevant patent. It is
determined that the P75,000 should have been expenses in 2013. It is further determined that as of January 1,
2016, one of the patents has a remaining life of only 2 years. This patent was originally assigned a cost of
P210,000.
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 2. A franchise agreement was signed on January 1, 2016. A P550,000 fee was paid covering an indefinite period.
The agreement calls for an additional annual payment of 5% of revenue. An entry debiting the account for
P5,000 was made at the time of the cash payment for 2016 for the continuing franchise fee. At the end of 2016,
estimates placed annual net future cash flows anticipated from the franchise was expected to be at P67,500. The
prevailing market rate of interest on this date was at 15%.
3. Organization cost include the unamortized portion of amounts paid to promoters for services rendered at the
inception of the corporation. These fees have been amortized, since inception, over an estimated 40-year life.
4. The goodwill account includes the following three items:
P45,000 Legal fees relative to the incorporation. These were assigned to the account on
January 2013.
200,000 Excess of cost ovre assigned net assets fair values of an enterprise acquired at the
beginning of 2014, expected to be of value for an indefinite period.
100,000 paid to an advertising consulting firm in early 2014 for a major advertising effort
expected to be beneficial for an indefinite period.

Required: Determine the correct balances as of December 31, 2016 of the following:
A B C D
1. Patent 385,000 368,700 361,830 388,929
2. Franchise 500,000 450,000 505,000 5,000
3. Organizational cost 147,000 102,000 47,000 0

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4. Goodwill 185,000 195,000 200,000 345,000

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* Assuming that the MALIKHAIN is a Small/Medium Enterprise, determine the adjusted balance of the following as of

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December 31, 2016:
A B C D

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5. Patent rs e 385,000 368,700 361,830 388,929
6. Franchise 550,000 450,000 505,000 322,081
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7. Organizational cost 147,000 102,000 47,000 0
8. Goodwill 185,000 180,000 160,000 140,000
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