CHAPTER 56 INTANGIBLE ASSETS Problem 56-1 (IAA) Vanessa Company reported the following data at yearend: Franchise 1,000,000 Computer software 1,500,000 Deferred charges 00.000 Patent 2.500.000 ‘Customer list purchased 00,000 ‘Copyright 700,000 Deposit with advertising agency to promote goodwill 400,000 Bond sinking fund 1,300,000 Goodill «40,000 ‘Trademark 900,000 Research and development cost 2,000,000 What total amount should be reported as intangible assets? a, 11,100,000 . 11,500,000 10,600,000 ._ 13,100,000 Soluion 56-1 Answer a Franchise 1,000,000 Computer software 150,000 Patent 23500,000 Customer ist 00,000 Copyright 700,000 Goodwill 4,000,000 ‘Trademark 900,000 11100000 ‘Total intangible assets oy pie 56-2 (IAA) ester oN CO | Wee oe Mae atte ofegecount intangible ase, era ate inororatin Fa ep . te rganzing the corporation» ett ie nsurance premiun thee poems of a maine ar | fees fr filing patent on a RED project PM ig ae ees for sucessful defen of Ml scioped ome pjes on acesinos yea fcc gee iy a franchisor advertising cost umn archase ofall ofthe outstanding okay stars ‘0 cha acquiee. On the i of puch be epe ‘had total assets of P6,000,000 at fai vale and ical 4 abilities of P2 20,00 afavabe rl What total amount should be reported asinangesses? 1,980,000 1/960,000 . 2,050,000 @. 2,350,000 Solution 56-2 Answer @ : sna Copyright ae Patent 00 Franchise sae Goodwill Total: it = | intangible assets 5.0008 Acaustion cost 200) a Aeration mice (60000027 yes Goodwill eee eSProblem $6-3 (LAA) ‘Alcaraz Company paid P5,000,000 to purchase intangible assets with the following fair value: Internet domain name 1,300,000 Order backlog 1,200,000 In-process research and development 2,400,000 Operating permit ‘900,000 In addition, the entity spent P2,000,000 to run an advertising ‘campaign to boos its image inthe local community. ‘What amount should be recognized as cost of the in-process research, and development? a. 2,400,000 '. 2,000,000 ©. 2,800,000 a 0 Solution S6-3 Answer b Fairvalue Fraction Cost Internet domain name 1,500,000 15/60 1,250,000 Order backlog 1,200,000 12/60 1,000,000 In-process R and D 2,400,000 24/60 2,000,000 Operating permit 900,000 916075 5,000,000 ‘An in-process research and development project acquired separately is recognized as an asst at cost, even ifa component i research. Subsequent expenditure on that project is accounted for as any other research and development expenditure which may be ‘expensed or capitalized depending on the criteria forthe recognition of an intangible asset ‘The cost ofthe advertising should be expensed immediately. 770 ie 56-4 (LAA) re Company devel olde Because the meagae in Soa eed te te {ping and patenting eae oer yent used meetin 14 Solely for deve special f salaries and fringe hence’ {PDext Reset esting proto TS foreopen, Sian aay eo beso to BOvertIneR pata office a Figwings required With Ptentappictigg Sm 2 a manor silts a eeng i) + 340000 € 7404 di 200, solution 56-4 Answer a al cost for filing of patent 1etered to patent office Drawings required by patent office Total cost of patent Problem 56-5 (AICPA. Adapted) Tobin Company incurred PI 600,000 ofresearchnd development {ost fo, develop a product for which a ent wa gue ae beginning of current year. Legal fesand ober os ei vit stration of the patent totaled P300,00,A1yexent ey 450,000 for legal fes ina sucess deen eat ‘What total amount shouldbe capitis fre pn es? a 750,000 4 300,000 © 2,050,000 4 2;350,000 Solution 56-5 Answer b 0, Legal fees and other costs associated wi shoul bemeaed 104 So A The cost oftiigation whee se enn ‘he originally assessed fuure bee mmProblem 56-6 (IAA) Harmonious Company acquired patent fora drug with resning Jegal and useful feof sx Jearson January 1, 2019 for P5.400,000, ‘On January 1,2021, anew patents received for an improved versionof ‘the same drug. The new patent hasa legal and useful life of twenty years, ‘What amount should be recorded as amortization expense for 2021? Solution 56-6 Answer Cost January 1, 2019 $400,000 ‘Amorization for 3019 and 2020 5,400.000/6%2) 800,000 Carrying amount ~ January 1, 2021 3,600,000 Amortization for 2021 (3,600,000 /20) 10,000 Problem 6-7 (IAA) iceberg Company purchased a patent on January 1, 2016 for 16,000,00. Theorgia useful life was estimated tobe 1 year. However inDecember 2021, he managementrecived infomation proving cconelusvely that the product protected by the Iceberg patent would be obsolete within four years. Accordingly, the entity decided to wit off the unamortized cost ofthe patentover five yearsbeginning 2021 ‘What amount shoild be recorded as patent amortization for 2021? 1,200,000 . 1,000,000 800,000 & 400,000 Solution 56-7 Answer ¢ Cost - January 1, 2016 ‘Accumilatedarorization - December 31, 2020 ©0000? (6,000,000/'15 x3) 2,000,000 (Carrying amount - January 1, 2021 ‘Amortization for 2021 (4,000,000 /5) ™m pie 56-8 (AICPA re qouary 1, 2018, Tag 8 9,000. The patentis teing ener p15 years expiring on Janay ote i] ie ; ep ing 2021 the entity dete purrent WOUIK NOt lst Tonge ta on eon i the carrying amount of wats Pee on Dees 4 4284,000 ber $4,896,000 * $50,000 §, 5,236,000 souion 56-8 Answer b ~ January 1, 2018 erortization for 2018, 2019 and 2020 oo (7,140,000/ 15 x3) hoe carying amoupt — January 1,20, ra Smmortzation for 2021 (5.712,000/7) ane arying amount ~ December 31, 2021 “690 Revised life ‘Oyen Years expired ~2018, 2019, 2020 Q Remaining revised life Ty The change in the useful life ofthe ptt isachangeinscrnig estimate, ‘The change in accounting estimate shouldbe teed ceely nt Prospectively.Problem 56-9 (AICPA Adapted) On January 1, 2018, Lava Company purchased a patent fora new ‘consumer product for P900,000. At the time of purchase, the patent was valid for 15 years, However, the useful life ofthe patent was estimated to be only 10 ‘years due to the competitive nature ofthe product On December 31, 2021, the produet was permanently withdraven from sale under governmental order because of a potential health hazard inthe product. What amount should be charged against income in 2021 if amortization is recorded at the end of each year? a 90,000 b. 540,000 ©. 630,000 4 720,000 Solution 56-9 Answer ¢ ‘Acquisition cost— January 1, 2018 900,000 ‘Amortization for 2018, 2019 and 2020 (800,000 10x 3) (270,000) Carryinig amount — January 1, 2021 £630,000 Therein caning mount on fry |, 202 ientrely expensed. in2021 ‘Amortization of patent for 2021 (900,000 10) 90,000 WiriteofT of amortized cost 40,000 Total amount charged to expense in 2021 630.000 4 56-10 (AICPA Ady pe cea eapaal 8,988 THe wa ney Otte 5 ra. 1590712021, the entity paid p wet ug 2 atngemen of SO egy abe BD Thepoliy ease e el y 47750 to takenoannagete pat amount should be "Pe in fom ec jion 56-10 Answer d Sol vision Cost ~ January 2018 fortization for 2018, 2015 and2029 00954, S® en eee oe Gain from sale of patent (75000-24099 = Problem 56-11 (AICPA Adapted ‘Atthe beginning of current year, Boraay( oy ffom Lamitan Company for P3000 00 Te ent sees independent consultant who estimated the ademas ie w be indefinite. The carrying amount ofthe trademark was Pl 500000 tebooks of Laritan Company Whats the carrying amount ofthe trademark at yen? 3,000,000 . 1,500,000 ©. 2,850,000 a 0 Solution 56-11 Answer a The legat life of trademark is 10 yearsandmayberenewedv) years, ‘rademark, the Considering the almost automatic reser nee k can be classifieds tte Accordingly. the cost of trademark is 0" * impairment at least annually.Problem $6-12 (IAA) Raven Company developed a trademark to di from those of the competitors. istinguish its products Marketing research to study consumer tastes £03.99 Design cost of trademark $0,000 Legal fee of registering trademark gan ‘Advertising to establish recognition of trademark n00 Registration fee with Intellectual Property Office \ ‘What amount shouldbe capitalized as cost of trademark? a 1,700,000 b. 1900/00 2,300,000 2100.00 Solution 56-12 Answer a 1,700,000 Total cost of trademark (1,500,000 + 150,000 + 50,000) Problem S6-13 (IAA) Royal Company purchased a trademark and incurred the following costs: Purchase price 1,000,000 Nonrefundabie value added tx 0,000, Training of personnel onthe vse of new trademark 70,000 Research expenditures associated with the purchase sf the new trademark 240,000 Legal cos incurred to register the new tradenfark 105,000, 120,000 Administrative salaries ‘What amount should be capitalized as cost ofthe trademark? a. 1,000,000 b. 1,155,000 ©. 1,465,000 1,585,000 Solution 56-13 Answer b 1,000,000 50,000 105,000 Total cost of trademark Company acquired atademar, yest E Me mamufeeOing POSS heey eke, of trademark olen cons cost °f ture on promoting the ney Eeityee benehis relating tong te fenat otal cost SHOU be capital lia) me Wrespect of the New process? MEN nacre ant 31700, & 3,500,000 3,550,000 solution 56-14 Answer b otal cost (3,500,000 + 200,000) xan problem 56-15 (AICPA. Adapted) —— _Atthe beginning of current year, Hart Ai erras a anchiseofAceCompan ioe sea ees 12,000,000. Hart Company paid P4,000,000 down and agreed to pay he balance in four equal annual payments of P2, atthe end ofeach ye. Hart Company can borrow at 14% fora loan of tis type. Present value of 1 at 14% for four periods 059 Present value of an ordinary anouiy of at 1% for four periods 2h ‘What amount should be recognized as cision cus ofthe Ems” & 13,520,000 6. 12,000,000 ® 94820,000 & 8,720,000 Solution 56-15. Answer ¢ 00 pomspayment oxi) SE Present value of annual payments (0 ‘gn Cost of franchise mProblem 6-16 (IAA) On January 1, 2021, Aim Company showed patent of P1,920,000 with elated azcumulated amortation of 240,000, The patent was Purchased on January 1 2019 at which date the legal ies 16 years. On January 1,202, the wseful lif ofthe patent was determined to be conly 8 year from the dato acquisition ‘On January 1,202, in connection with the purchase ofa trademark from Cat Conipany, parties entered info a roncompeion agreement and aconsuling contract Aim Company paid Cat Company P800,000, of which three-fourths ‘vas for the tademark, and one-fourth was for Cat Company's ‘agreement hot to compete fora five-year period inthe line of business ‘covered by the trademark. Aim Company considered th life ofthe trademark to bende Moreover, Aim Company agreed 1 pay Cat Company PS0,000 Mrcalvendanuay Techy for yeasas consulting fe 1. Whatisthe caryingamount fitangible aes on Jaa 12021? a. 2,280,000 i. 2/480,000 1,880,000 4. 1/680,000 2. What amount should be recorded a total amorti ‘a. 280,000 6. 440,000 320,000 160,000 Solution 56-16 Question ! Answer b Question 2 Answer Patent (1,920,000 240,000) 1,680,000 ‘Trademark C7 800,000 x 3/4) 000 Noncompetiton agreement ( 800,000 x 1/4) 200,000 Total intangible assets - January 1, 2021 2,480,000 ‘Amortization of patent (1,680,000 /6) 280,000 ‘Amortization of noncompetition agreement 200,000) 40,000 ‘Total amortization for 2021 320,000 The annual payment of P50.000 is expensed immediately. 778, CHAPTER 57 GooDWILL problem 57-1 (AICPA Adapiey inning of. the beginning of cure jeu Pay -sulte pay $3{000,000. ga "onto pa ing the the year, Paye Com, Drexpenditures designed to dey ol Pn igp fining and hiring new employee, *™! Matin ott ueto these expendi Ped of goodwill wasindefnig: mel eet, Solution 57-1 Answer e Cost of goodwill 2a ‘The cost of developing and maintaining goodwill of P800000 is ‘pensed outright. PAS 38, paragraph 107, provides that goodwill or anistnte ‘sset with an indefinite useful | lifesbalaobeametad forimpairment annually and whenever ter isanincon ‘mtangible asset may be impaired. n