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DLSU Accountancy Department

Practical Accounting One


INTANGIBLES
I. Research and Development Costs (PAS 38)
Problem 1. GE Inc. developed a time machine which will be commercialized in 2012. As a new audit staff of SGV & Co.,
you are assigned to audit the research and development costs of GE in 2011. The following expenditures in 2011 were
recorded by GE Inc. in the research and development account:
Periodic design changes to existing products
P1,000,000
Quality control during commercial production including routine testing
200,000
Design of tools, jigs, molds and dies involving the new time machine
100,000
Testing in search for time machine
300,000
Conceptual formulation and design of time machine
400,000
Routine design of tools, jigs, molds and dies of time machine
500,000
Engineering follow through in an early phase of commercial production
600,000
Trouble shooting breakdown during production
300,000
Laboratory research aimed at obtaining or discovering new product
200,000
Design, construction and testing of preproduction prototype and model
300,000
Searching for application of research finding and other knowledge
300,000
Design, construction and testing of the improved product
200,000
Routine on-going effort to refine or improve the quality of an existing product 100,000
Design, construction and operation of a pilot plant
200,000
Cost of Building constructed on 1/1/2011 for future research and development
4,000,000
Organization and pre-incorporation costs incurred
500,000
Costs incurred for promoting and marketing the hologram phone
300,000
Depreciation on the building above used for development of pilot plant
800,000
Required: Based on the result of your audit, determine the following for the year ended December 31,2011:
____________1. Total Research Costs
____________2. Total Development Costs
____________3. Total Research and Development Costs
____________4. Expenses which are not Research and Development Costs

II. Internally Developed Computer Software


Problem 1. On January 1,2011, Microsoft Inc. decided to develop a new Operating System known as Windows Infinite.
In 2011, the software developed incurred the following costs in the process of designing, developing and producing the
new Operating System:
Salaries and wages of programmers doing research
Designing and planning the Operating System
Code Development
Testing the Operating System

P500,000
200,000
300,000
400,000

On January 1,2012, the technological feasibility of the Operating System has been established. On the same
date, the company incurred P10,000,000 as the total cost of production of product master. The production of the software
started on February 1,2012 and the product was marketed on the same date. The total costs of produced and prepared
software for sale is P5,000,000. The total sales of Windows Infinite during 2012 is P8,000,000. The normal gross profit
rate of Microsoft Inc. is 40%. Microsoft estimated that the total sales revenues over the 4-year life of the product will be
P40,000,000.
Required: Based on the result of your audit, determine the following:
____________1. Total Research and Development Costs to be expensed in 2011
____________2. Amount to be capitalized as software development cost subject to amortization in 2012
____________3. Amortization of software development cost in 2012
____________4. Carrying value of software development cost on December 31, 2012
____________5. Amount of Ending Inventory on December 31,2012

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III. Assets Classified as Intagible Assets


Problem 1. The following items are included in the Intangible Asset Account of Goodwill Inc.:
Investment in an Associate Company
Agricultural Land
Research and development costs
Initial Operating Losses
Organization costs in forming corporation
Internally generated goodwill
Cost of purchasing a trademark
Operating software of a personal computer
Long-term receivables
Cost of developing a trademark
Computer software for a computer-controlled machine that cannot operate without the software
Legal costs incurred in securing a patent
Purchase of a franchise
Lease prepayments
Engineering follow through during production
Cost of equipment obtained under a finance lease
Internally generated mastheads
Cost of purchased customer lists
Internally generated brand
Cost of purchased publishing titles
Training costs incurred in start-up operation
Goodwill from business combination
Cost of testing in search for product alternatives
Cost of developing a software before technical feasibility
Cost of purchasing a patent from an investor
Legal costs in successful defense of a patent
Legal costs in unsuccessful defense of a patent
Cost of conceptual formulation of possible product alternatives
Cost of purchasing a copyright
Infrastructure asset when the concession operator has received a right, not a license, to charge users
for the public service and the revenue receivable is not agreed upon in advance
Infrastructure asset when the concession operator has a guaranteed contractual right to receive
a specific amount of cash over the life of the arrangement

P1,000,000
2,000,000
200,000
300,000
100,000
200,000
300,000
200,000
100,000
500,000
100,000
200,000
300,000
300,000
200,000
300,000
200,000
400,000
300,000
200,000
100,000
300,000
500,000
100,000
200,000
150,000
100,000
200,000
300,000
1,000,000
2,000,000

Required: What is the total amount to be recognized as intangible assets?

IV. Internally Generated Patent


Problem 1. As a newly hired assurance associate of PWC Philippines, you are assigned to audit the Patent Account of
Sony Inc. for year ended December 31,2011. On January 1, 2010, Sony Inc. developed a new machine that reduces the
time required to mix the chemicals in one of its leading products. Because the process is considered very valuable to the
company, Sony patented the machine. The following expenses were incurred by Sony Inc. in 2010 in developing and
patenting the machine:
Research and development laboratory expenses
Salary of Research Engineer who work on the research, development and building of
the machine (20% of the time was spent in actually building the machine
Materials used in the construction of the machine
Blueprints used to design the machine
Legal expenses to register and obtain the patent
Expense of drawing required by Bureau of Patents to be submitted in patent application
Fees paid to Bureau of Patents to process application
Useful life of the Patent

P2,000,000
200,000
300,000
100,000
400,000
50,000
60,000
25 years

On January 1,2011, Sony paid P500,000 in legal fees to successfully defend the patent against an infringement suit by
Toshiba Inc. In is the companys policy to take full year depreciation in the year of acquisition.
Required: Based on the result of your audit, determine the following:
____________1. Cost of Patent
____________2. Cost of Machine
____________3. Amount that should be charged as expense in 2010
____________4. Amount that should be charged as expense in 2011 aside from amortization
____________5. Amortization on 2010
____________6. Amortization on 2011
____________7. Carrying value of patent on December 31,2011

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V. Acquisition, Amortization and Impairment of Intangible Assets


Problem 1. Acer Inc. engaged KMPG Philippines as its external auditor for the year ended December 31,2011. As a
newly promoted Senior Associate of the said auditing firm, the engagement partner assigned you to the year-end audit of
Acer Inc. Based on the result of risk assessment procedure, your audit team determined that the internal control of the
client is weak. As such, you have to perform an extensive substantive test of the companys Intangible Asset transactions
during 2011. The following data are provided by the accounting department of Acer:
On January 1,2011, Acer paid legal fees of P500,000 and stock certificate costs of P250,000 to complete the
organization of the corporation.
On January 2,2011, Acer hired a clown to stand up in front of the corporate office for 2 weeks and hand to hand
out pamphlets and candy to create goodwill for the new enterprise. Clown cost P20,000; Pamphlets and candy
P30,000.
On April 1,2011, Acer patented a newly developed process with costs as follows:
o Legal expenses to obtain a patent
P200,000
o Expenses of drawing required by the Bureau of Patent
100,000
o Patent application and licensing fees
300,000
(The useful life of the patent is 30 years)
On July 1,2011, Acer acquired a customer list from Asus Inc. by issuing 10,000 Ordinary Shares with par value of
P5. The Ordinary Share of Acer is quoted at P10 at this date with a useful life of four years.
On October 1,2011, Acer signed an agreement to operate as franchisee of Apple Inc. for an initial franchise of
P1,000,000. Of this amount, P200,000 was paid when the agreement was signed and the balance was payable in
four annual payments of P200,000 each starting September 1,2012. The agreement provides that the down
payment is not refundable and no future services are required of the franchisor. The implicit rate for loan of this
type is 10%. The agreement also provides that 5% of the revenue from the franchise must be paid to the
franchisor annually. Acers revenue from the franchise for 2011 was P200,000. Acer estimated that the useful life
of the franchise to be 5 years.
On November 1,2011, Acer acquired trademark from Toshiba Inc. for P150,000. The legal life of the trademark in
the Philippines is 10 year which are renewable for periods of ten years each.
On December 1,2011, Acer constructed a shed for P4,000,000 to house prototypes of experimental models to be
developed in future research products.
On December 2,2011, Acer incurred salaries for an engineer and computer programmer involved in product
development totaling P300,000.
On December 10,2011, Acer incurred P50,000 legal fees to successfully defend its patent against a competitor.
On December 15,2011, Acer incurred P100,000 for internally generated brand and mastheads.
On December 20,2011, Acer purchased a subsidiary. As a result of business combination, P500,000 goodwill was
recorded by Acer.
On December 31,2011, the following data are also provided by Acer Inc.:
Intangible Asset
Fair Value less Cost to Sell
Value in Use
Patent
P 500,000
P 700,000
Customer List
120,000
50,000
Franchise
700,000
1,180,000
Trademark
130,000
50,000
Goodwill
400,000
Required: Based on the result of your audit, determine the following:
____________1. Initial Cost of Patent
____________2. Initial Cost of Customer List
____________3. Initial Cost Franchise
____________4. Trademark
____________5. Amount that shall be expensed as incurred (exclusive of amortization and contingent franchise fee)
____________6. Total Amortization in 2011
____________7. Total Impairment Loss in 2011
____________8. Carrying value of Intangible Assets in December 31,2011
Problem 2. For the year ended December 31, 2015, the following transactions occurred in the company of JET Inc:
1/1/2015 The company was incorporated and it incurred P200,000 for organizing and incorporating the company. It also
paid P100,000 for the company opening and blessing.
6/1/2015 The company successfully registered the patent of a newly developed technology with the following costs:
o Legal expenses to obtain a patent
P300,000
o Expenses of drawing required by the Bureau of Patent
500,000
o Patent application and licensing fees
200,000
o (The useful life of the patent is 40 years)
9/30/2015 The company successfully defended the patent at a legal cost of P500,000. Its useful life was increased to 50
years.
10/1/2015 The company incurred P400,000 for internally generated customer list and publishing titles.
11/30/2015 The company incurred salaries for an engineer and computer programmer involved in product development
totaling P300,000 before the technological feasibility.
12/31/2015 The company constructed a shed for P5,000,000 to house prototypes of experimental models to be
developed in future research products.

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Required: Based on the result of your audit, determine the following for the year ended December 31,2015:
__________1. Total costs that shall be capitalized as intangible asset
__________2. Total costs that shall be expensed as incurred
__________3. Amortization expense for the year ended December 31, 2015
__________4. Carrying value of patent on December 31, 2016
Problem 3. On January 1, 2015, RYT Inc. acquired the following intangible assets:
Customer List It was acquired in exchange for an equipment with a cost of P2,000,000 and accumulated depreciation
of P500,000. The fair value of the equipment is P3,000,000. RYT received P1,000,000 in the exchange. The customer list
has a useful life of 4 years.
Trademark It was acquired through the issuance of bonds payable with face value of P2,000,000 and nominal rate of
10%. The principal is payable at the end of its 3-year term while the interest is payable every December 31. The company
paid P100,000 for the issuance of the bonds. The fair value of the trademark as of this date is P2,500,000 while its book
value is P2,200,000. The effective interest rate of the bonds payable is 12%. The legal life of the trademark in the
Philippines is 10 year which are renewable for periods of ten years each.
Franchise - RYT Inc. signed an agreement to operate as franchisee of LEF Inc. for an initial franchise of P2,000,000. Of
this amount, P500,000 was paid when the agreement was signed and the balance was payable on December 31, 2016.
The agreement provides that the down payment is not refundable and no future services are required of the franchisor.
The implicit rate for loan of this type is 15%. The agreement also provides that 10% of the revenue from the franchise
must be paid to the franchisor annually. RYTs revenue from the franchise for 2015 was P500,000. RYT Inc. estimated
that the useful life of the franchise to be 20 years.
Copyright It was acquired by RYT Inc. through the issuance of 10,000 ordinary shares with par value of P20 and fair
value of P25. The copyright has indefinite legal life.
Goodwill The goodwill is a result of the business combination of RYT Inc. to WIZ Inc. on December 31, 2015. The
amount assigned to the goodwill is P300,000
As of December 31, 2015, the following data are provided:
Items
Fair value less cost to sell
Value in use
Customer list
1,200,000
1,300,000
Trademark
3,000,000
2,700,000
Franchise
1,800,000
2,300,000
Copyright
200,000
230,000
Goodwill
250,000
320,000
Required: Determine the following:
__________1. Cost of customer list
__________2. Cost of trademark
__________3. Cost of franchise
__________4. Cost of copyright
__________5. Total amortization for year 2015
__________6. Total impairment loss for year 2015
__________7. Carrying value of intangible assets as of 12/31/2015

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