REVIEW QUESTIONS FOR INTANGIBLE ASSETS

1. The following accounts were found in the general ledger of Diamond Company as of
December 31, 2016:

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 Company, the total intangible assets
shown should be

a. P 1,300,000 b. P 1,000,000 c. P 900,000 d. P 0

2. On July 1, 2016, MN Company signed an agreement to operate as a franchise of Jollifoods,

Inc. for an initial franchise fee of P 600,000. Of this amount, P 200,000 was paid when the
agreement was signed and the balance is payable in four equal annual payments starting
July 1, 2017. The payable is not refundable and no future services are required for the
franchise. MN’s credit rating indicates that in can borrow money at 14% for a loan of this
type.

Information of present value factors is as follows: Present value of P1 at 14% for 4 periods –
P0.59; Present value of annuity of P1 at 14% for 4 periods – P2.91.

What is the cost of the franchise acquired on July 1, 2016?

a. P436,000 b. P491,000 c. P600,000 d. P676,000

3. On November 1, 2016, 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 2020, 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 two years effective November 1, 2016.

The amortization amount for the intangibles in 2016 is

a. P 57,500 b. P 65,500 c. P 70,500 d. P 120,500

4. Freetown Manufacturing Company acquired three patents in January 2016. The

patents have different lives as indicated in the following schedule:

Rem. useful Rem legal

Cost life (Years) life (Years)
Patent A P125,000 10 17
Patent B 272,000 5 7
Patent C 656,200 Indefinite 17

Patent C is believed to be uniquely useful as long as the company retains the right
to use it. In June 2016, 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, 2016?
a. P 39,750 b. P 78,350 c. P 84,880 d. P 105,600

5-7. KL Food Products, a manufacturer of chocolate drinks, acquired a patent on

June 28, 2014 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, 2015, the company spent P51,000 to successfully defend the patent
against a competitor.

During 2016, 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.

5. How much is the patent amortization expense for 2014?

a. P34,000 b. P20,000 c. P17,000 d. P10,000

6. Use the same information, What is the patent carrying value at January 1, 2016?
a. P310,000 b. P304,000 c. P289,000 d. P283,000

7. Use the same information, How much is the revised amortization expense for
2017?
a. P56,600 b. P57,800 c. P60,800 d. P62,000

8. Jade Company spent P200,000 on research and development cost for an

invention during 2011.
On January 1, 2012, the invention was patented at a nominal cost that was
expensed in 2012. The legal life of the patent was 15 years and the estimated
useful life was 9 years. In January 2016, Jade paid P250,000 for legal fees in a
successful defense of the patent.

What should be the amortization expense for 2016?

a. P0 b. P22,730 c. P27,780 d. P50,000

9. LV Company incurred the following costs during 2016:

Quality control during commercial production,
including routine testing of products P 58,000
Laboratory research aimed at discovery of
new knowledge P 68,000
Testing for evaluation of new products P 24,000
Modification of the formulation of a plastics product P 6,000
Engineering follow through in an early phase
of commercial production P 15,000
Adaptation of an existing capability to a particular
requirement of customers’ needs as part of the
continuing commercial activity P 13,000
Trouble shooting in connection with breakdowns
during commercial production P 29,000
Searching for application of new research findings P 19,000

What is the total amount to be reported as research and development expense for
2016?

a. P 92,000 b. P 98,000 c. P 117,000 d. P 232,000

10. Jan Company incurred costs in 2016 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 2016 statement of comprehensive income?

a. P 2,080,000 b. P 1,390,000 c. P 1,180,000 d.P 880,000

11. Ruby Inc. incurred P816,000 of research and development costs in its laboratory
to develop a patent which was granted on January 2, 2016. Additional costs of
P152,000 were incurred in the registration of the patent. The estimated economic
life of the patent is 8 years.

What amount should Ruby charge to patent amortization expense for the year
ended in December 31, 2016?
a. P 986,000 b. P 102,000 c. P 19,000 d. P 0

12. The Garnet Trading spent P1,440,000 in acquiring a patent on January 3, 2008.
Due to competitive nature of the product, the patent was estimated to have a useful
life of 10years.
 At the beginning of 2012, the company paid P180,000 for legal fees in a successful
defense of the patent. On July 1, 2016, a competitor obtained the 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. P39,000

13. 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 an 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. P 45,000 b. P 65,000 c. P 112,000 d. P 162,000

14. On January 2, 2013, 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 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 total amount should Dec charge against income during 2016 assuming
amortization is recorded at the end of each year?

a. P 90,000 b. P 540,000 c. P630,000 d. P720,000

15. On January 2, 2016, 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 12 years. It’s carrying amount on Kit’s accounting
records was P1,200,000

In Gem’s December 31,2016 statement of financial position, what amount should be

reported as accumulated amortization?
a. P150,000 b. P125,000 c. P120,000 d. P100,000

16-18. On January 3, 2008, 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 10years. At the beginning of 2012, the company spent P90,000 in
successfully prosecuting an attempted infringement of the patent. At the beginning
of 2013, the company incurred additional costs of P200,000. It is expected that
future economic benefits will flow to the enterprise as a result of this expenditure
through cost savings and the asset’s use is estimated to be extended by additional
5 years. On July 1, 2016, a competitor obtained rights to a patent which made the
company’s patent obsolete.

16. How much is the patent amortization for the year 2012?
a. P75,600 b. P63,000 c. P57,000 d. P48,000

17. Use the same information, How much is the patent amortization for the year
2013?

a. P 44,000 b. P 51,500 c. P103,000 d. P130,000

18. Use the same information, How much is the loss on patent obsolescence
recognized in the year 2016?
a. P268,000 b. P286,000 c. P334,750 d. P343,750

19. SPACE LAB enjoys big profit from its Singhot Inhaler, a product that delivers
insulin to the brain of people with type 3 diabetes. The carrying value of the patent
for Singhot Inhaler is P9,000,000 as of December 31, 2016. They want to maintain
market leadership of Singhot for the next 10 years.

LUCENA Co. produces and sells Yo Bokayo, a type of candy that contains virgin
coconut oil which delivers ketones to the brain of type 3 diabetes patients. This
candy is 1/4000 of the price of Singhot and just as effective. On December 29,
2016, SPACE LAB bought the patent of Yo Bokayo for P1,000,000 with the intention
of removing the candy from the market. The contract prohibits LUCENA from
producing a similar product for the next 10 years.

As of December 31, 2016, SPACE LAB will report Patents at:

a. P10,000,000 c. P1,000,000
b. P9,000,000 d. No correct answer given

20. During 2016, SICATRIZ Laboratories incurred the following cost:

>R&D services performed by Empacho Company for SICATRIZ, P1,500,000.
>R&D costs incurred by SICATRIZ for research procedures done for Combantrin
Corp., reimbursable by Combantrin Corp., P4,000,000.
>Cost incurred in the conceptual formulation of possible process alternative,
P1,500,000.
>Depreciation expense for the building used exclusively for air-drying malunggay
leaves, an ingredient used for SICATRIZ’s best-selling capsules, P300,000.
>Testing alternative procedures to extract juice from Tawa-tawa plant, P500,000.
 In its 2016 profit and loss, what should SICATRIZ report as research and
development expense?
a. P 7,800,000 c. P3,500,000
b. P4,300,000 d. P300,000

21. On January 1, 2016, YUMMY Corporation was incorporated. They immediately

registered their trademark and tradename and spent P8,000 for the registration.
They sell specialty food items packaged as “pasalubong” from various regions in the
Philippines. They have Kornicks, different kinds of Chicharon, different kinds of
Longganiza, etc. Their stores are found in train, jeepney, and bus stations where
there is large foot traffic. In 2016, they spent P1,000,000 in billboards and signage
in strategic locations to optimize customer awareness of their location, products,
trademark and tradename.

During the same year, they patented a unique packaging technique that
preserves the crispiness and freshness of the products for 2 years without chemical
preservatives. For this they spent P800,000 for the research, P500,000 for
development after attaining technical feasibility, and P100,000 for the registration
of patent. The patent was granted on December 29, 2016. Its legal life is 20 years.

It is the corporation’s policy not to capitalize expenditures below P15,000.

How much intangible assets should YUMMY present in its December 31, 2016
statement of financial position?
a. P2,408,000 c. P600,000
b. P1,400,000 d. P100,000

22. In 2016, GABRIEL Laboratories developed a new product that provide the elderly with
good nutrition, positive disposition, good bones and no joint pains.

Based on the foregoing, how much should be capitalized as intangible assets?

a. P5,620,000 b. P4,900,000 c. P3,300,000 d. P720,000

23. On July 1, 2016, ALLOFME Corporation purchased Allofyou Company paying P50,000,000
cash. The purchase covered various tangible assets at P130,000,000, tradename and
trademark at P200,000, and brand names at P600,000, all at fair market value. ALLOFME
assumed P100,000,000 liabilities of ALLOFYOU, also at fair value. Will this transaction result
in a goodwill? If yes, how much?
a. Yes, there is P19,200,000 goodwill.
b. Yes, there is P800,000 goodwill.
c. No, there is no goodwill.
d. No correct answer given.

24. At December 31, 2015, PINOY AGRICULTURAL MACHINERIES, INC. had three
existing patents as shown in the table below:

As of December 31, 2016, the company had the following transactions and
assessments pertaining to its patents:
>Due to competing products from China, the Upland/dryland tiller patent is
expected to be useful only in 2016 and 2017.
>The Amphibian carrier patent is believed to be uniquely useful as long as the
company retains the right to use it.
>On July 1, 2016, PINOY unsuccessfully defended its sheller/dryer patent. They
spent P15,000 in legal fees. The patent was immediately derecognized on July 1,
2016.

PINOY is a calendar year company. PINOY uses the straight line method for
amortizing intangible assets.

How much patent amortization expense should be recognized in for the

calendar year 2016?
a. P63,550 b. P54,175 c. P35,325 d. P28,125

25. How much charge will be taken against PINOY’s P&L regarding the unsuccessful
defense and derecognition of the dryer/sheller patent in 2016?
P15,000 b. P43,200 c. P58,200 d. P65,400

26. BUSINESS SYSTEMS ASSOCIATES develops business software that can be

integrated depending upon the need of the client. Its HR system includes human
resource data from hiring, payroll, payroll withholding tax, SSS, Philhealth,
separation pay, separation/firing data, etc. The client is given the option to get it as
a whole or to get component parts of the program. The company uses the cost
model for all its software.

The capitalized cost of the computer software as of December 31, 2015 is

P1,200,000 with an economic life of 5 years. The pattern of future revenue from the
software is reliably determined as follows: 30% in 2016, 20% in 2017, 20% in 2018,
20% in 2019 and 10% in 2020. At the end of 2016, the software’s recoverable
amount is P1,080,000.
How much is the amortization expense for the calendar year 2016 based on the
foregoing?
a. P360,000 b. P240,000 c. P120,000 d. none.

27. On July 1, 2017, Popular Company, a calendar-year company, signed an

agreement to operate as a franchisee of Pride Company for ten (10) years for a
franchise fee of P5,000,000. Of this amount, P1,000,000 was paid when the
agreement was signed and the balance is payable in four (4) annual payments of
P1,000,000 starting on June 30, 2018. The payment is not refundable and no future
services are required for the franchise. Popular Company’s credit rating indicates
that it can borrow money at 8% per annum for a loan of this type. Round off
present value factors to three decimal places. For example: 1.9259 is 1.926; 2.5771
is 2.577.

What is the cost of the franchise at July 1, 2017?

a. P4,993,000 c. P3,993,000
b. P4,312,000 d. P3,312,000

28. On December 31, 2017, Priceless Corporation exchanged 100,000 ordinary

shares of P75 par value for the following assets:
>Trademark valued at P800,000.
>Land and building with fair values of P2,500,000 and P4,000,000, respectively
>Franchise right. No estimate of value is available at the date of exchange.
An ordinary share of Priceless Corporation is selling at P87 on the date of
exchange.

How much is the franchise right recorded by Timeless Company on December 31,
2017?
A. P1,400,000 B. P1,200,000 C. P200,000 D. P0

29. At December 31, 2017, Brave Company has Trademarks account balance of
P220,000. This amount represents its purchase price of P150,000 paid on January
1, 2015 and P70,000 of legal costs incurred during the current year 2017 for the
cost of infringement suit filed by the company against its competitor. The
trademark was originally believed to have an indefinite useful life; hence, the
company did not record any amortization for this asset in 2015 and 2016. Because
of new products introduced in the market, the trademark is now believed to benefit
the company only up to the end of 2019.

What is the correct carrying amount, net of accumulated amortization, of the

Trademark that will be reported in Brave Company’s statement of financial position
at December 31, 2017?
A. P220,000 B. P146,667 C. P150,000 D. P100,000

30. On December 31, 2016, Honest Company acquired the following intangible
assets:

A trademark for P3,000,000. The trademark has 8 years remaining in its legal life. It
is anticipated that the trademark will be renewed in the future, indefinitely,
without problem.
A patent for P2,000,000. Because of market conditions, it is expected that the
patent will have economic life for just 5 years, although the remaining legal life
is 10 years.

At December 31, 2017, because of a decline in the economy, the trademark is now
expected to generate cash flows of P120,000 only per year. The useful life of the
trademark still extends beyond the foreseeable horizon.

The cash flows expected to be generated by the patent are P400,000 in each of the
remaining four years.

The appropriate discount rate for all intangible assets is 5%. The present value of
an ordinary annuity of 1 at 5% for four periods is 3.55.

How much is the impairment loss of the intangible assets at December 31, 2017?
A. P1,180,000 B. P780,000 C. P600,000 D. P0

31. Beautiful Company developed a new product to be sold to its customers. The
following costs were incurred in developing, patenting and manufacturing the
product.

Fees paid to engineers and experts for initial

research and feasibility P200,000
Professional fees to consultants to
conduct market study 300,000
Cost of laboratory equipment and facilities
for research 800,000
Development cost after technological feasibility 500,000
Legal expenses to obtain patent 50,000
Expenses of drawings required by the patent
office submitted with the patent application 20,000
Licensing fees paid to the patent office 150,000
Legal costs paid to defend patent against
competitors 300,000
Materials used during production 2,000,000
Direct labor 1,000,000
Overhead 300,000
 How much is the total cost capitalized as intangible assets?
A. P500,000 B. P650,000 C. P720,000 D. P800,000

32. Sweet Company provided the following transactions during the current year.
>Paid legal fees of P50,000 and stock certificate issue costs of P10,000 to complete
organizing Sweet Company.
>Hired a clown to stand in front of the corporate office for two weeks to hand out
leaflets and product brochures, P15,000.
>Patented a newly developed process incurring the following:
>Legal fees to obtain patent, P400,000.
>Patent application and licensing fees, P50,000
>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 ordinary shares of
Sweet Company which sell for for P50 per share. The license is worth twice as much
as the trademark, both of which may be used for four years.

What total amount should be recognized as total intangible assets?

A. P750,000 B. P800,000 C. P810,000 D. P950,000

33. Beautiful Company developed a new product to be sold to its customers. The
following costs were incurred in developing, patenting and manufacturing the
product.

Fees paid to engineers and experts for initial

research and feasibility P200,000
Professional fees to consultants to conduct
market study 300,000
Cost of laboratory equipment and facilities
for research 800,000
Development cost after technological feasibility 500,000
Legal expenses to obtain patent 50,000
Expenses of drawings required by the patent
office submitted with the patent application 20,000

Licensing fees paid to the patent office 150,000

Legal costs paid to defend patent against
competitors 300,000
Materials used during production 2,000,000
Direct labor 1,000,000
Overhead 300,000

How much is the amount charged to R & D Expense based on the given data?
A. P1,300,000 B. P1,800,000 C. P2,100,000 d.P0

34. Jade Company spent P200,000 on research and development for an invention
during 2011. On January 1,2012 the invention was patented with the company
incurring total cost of 150,000. The legal life of the patent was 15 years and
estimated useful life was 10 years. In January 2016 Jade paid P100,000 for legal
fees in a successful defense of the patent. What should be the amortization
expense for year 2016?

35. TicTac Trading spent P1,440,000 in acquiring a patent on July 1, 2007. Due to
the competitive nature of the product, the patent was estimated to have a useful
life of 10 years. At the beginning of 2011, the company paid P180,000 for legal
fees in a successful defense of the patent. On December 31, 2015, a competitor
obtained rights to a patent which made TicTac’s patent obsolete.

How much loss from patent obsolescence was reported by TicTac on December
31, 2015?

36. Palmwood Manufacturing Company is a manufacturer of various household

cleaning agents. On June 28, 2013, the company acquired a patent for the
manufacture of a new product called “Clean All.” The cost of acquisition is
P350,000. Management expects that the patent will be useful to the company for 5
years. On January 1, 2015, the company spent P100,000 in successfully defending
the patent against a competitor. During 2016, management determines that the
estimated remaining life of the patent should be extended to four years, including
the current year. The company’s policy is to amortize the cost of intangible assets
using straight-line method to the nearest full month.

What is the amortization expense for the year 2016?

a. P70,000 b. P43,750 c. P41,250 d. P41,520

37. On December 31, 2015, Royal Palm Company acquired the following
intangible assets:

A trademark for P3,000,000. The trademark has 8 years remaining in its legal life.
It is anticipated that the trademark will be renewed in the future, indefinitely,
without problem.
A patent for P2,000,000. Because of market conditions, it is expected that the
patent will have economic life for just 5 years, although the remaining legal life is
10 years.

Because of a decline in the economy, the trademark is now expected to generate

cash flows of just P120,000 per year. The useful life of the trademark still extends
beyond the foreseeable horizon. The cash flows expected to be generated by the
patent are P500,000 in 2017, P400,000 in 2018, P300,000 in 2019 and P300,000 in
2020. The appropriate discount rate for all intangible assets is 5%. The present
value of 1 at 5% for one period is 0.952, for two periods is 0.907, for three periods is
0.864 and for four periods is 0.823.

Royal Palm Company shall recognize a total impairment loss in 2016 at

a. P1,000,000 b. P855,300 c. P 600,000 d. P0

38. On July 1, 2017, Rome Company signed an agreement to operate as a

franchisee for an initial franchise fee of P6,000,000. On the same date, Rome paid
P2,000,000 and agreed to pay the balance in four equal annual payments of
P1,000,000, beginning July 1, 2018. The down payment is not refundable and no
future services required of the franchisor. Rome Company can borrow at 14% for a
loan of this type. Present value of future value factors are as follows:

PV of 1 at 14% for 4 periods 0.59

Future amt of 1 at 14% for 4 periods 1.69
PV of an ordinary annuity of 1 at 14% for 4 periods 2,91

What is the initial measurement of the franchise?

a. P6,760,00 b. P6,000,000 c. P4,910,000 d. P4,360,000

39. Royalty Company prepares its financial statements according to IFRS. During
2015, the company incurred P1,245,000 in research expenditures to develop a new
product. An additional P756,000 in development expenditures were incurred after
technological and commercial feasibility was established and after the future
economic benefits were deemed probable. The project was successfully completed
and the new product was patented before the end of 2015. Sale of the product
began in 2016.

What amount of the above expenditures would be taken to profit or loss in

the year 2015?
a. P2,001,000 b. P1,245,000 c. P756,000 d. P0

40. On July 1, 2015, Courteous Company, a calendar-year company, signed an

agreement to operate as a franchisee of Pride Company for ten (10) years for a
franchise fee of P5,000,000. Of this amount, P2,000,000 was paid when the
agreement was signed and the balance is payable in three (3) annual payments of
P1,000,000 every June 30. The first payment is due on June 30, 2016. The
payment is not refundable and no future services are required for the franchise.
Courteous Company’s credit rating indicates that it can borrow money at 8% per
annum for a loan of this type. The present value of an ordinary annuity of 1 at 8%
for 3 periods is 2.577.
What is the carrying amount of the franchise at December 31, 2015?
a. P2,577,000 b. P4,577,000 c. P2,448,150 d. P4,348,150

41. At December 31, 2015, Accrual Company has Trademarks account balance of
P220,000. This amount represents its purchase price of P150,000 paid on January
1, 2013 and P70,000 of legal costs incurred during the current year 2015 for the
cost of infringement suit filed by the company against its competitor. The
trademark was originally believed to have an indefinite useful life; hence, no
amortization was taken up by the company for 2013 and 2014. Because of new
products introduced in the market, the trademark is now believed to benefit the
company only up to the end of 2017.

What is the correct carrying amount, net of accumulated amortization, of the

Trademark that will be reported in Accrual Company’s statement of financial
position at December 31, 2015?
a. P220,000 b. P146,667 c. P150,000 d. P100,000

42. At the beginning of 2012, Relevant Corporation bought a patent for P540,000.
Amortization is being made over its remaining life of eight years expiring on
December 31, 2019. During 2015, after an assessment of the patent’s estimated
future benefits, Relevant determined that the economic life of the patent will be six
years from the date of acquisition.

What amount should Relevant Corporation report as patents, net of

accumulated amortization, in its December 31, 2015 statement of financial
position?
a. P540,000 b. P315,000 c. P225,000 d. P112,500

43. On July 1, 2015, Comparable Company (a calendar-year corporation) had

capitalized cost of P3,600,000 for a new computer software product with an
economic life of 3 years. Sales from July 1 to December 31, 2015 amounted to
P3,500,000. It is expected that sales of software during its three-year economic life
would total P10,000,000. The pattern of sales is established as P6,000,000 in the
first year, P2,500,000 in the second year and P1,500,000 in the third year. On
December 31, 2015, the software had a fair value less cost to sell of P2,500,000.
 How much is the amortization expense of the computer software for the six
months ended December 31, 2015?
a. P1,260,000 b. P1,200,000 c. P1,100,000 d. P600,000