Chapter 21

Intangible Assets

PROBLEM 21-1: TRUE OR FALSE

1. FALSE
2. FALSE
3. TRUE
4. TRUE
5. TRUE
6. TRUE
7. TRUE
8. FALSE
9. TRUE
10. TRUE

PROBLEM 21-2: THEORY & COMPUTATIONAL

1. D

2. B

3. Solution: $10,000 x 95% x ₱46 = 437,000 + 25,000 = 462,000

4. Solution:
Testing in search for, or evaluation of, product or process
alternative 230,000
Design, construction, and testing of pre-production prototypes
120,000
and models
Total R&D expense 350,000

5. Solution:
Searching for applications of new research findings. 120,000
Laboratory research aimed at discovery of a new knowledge. 180,000
Total R&D expense 300,000

6. Solution:
Conceptual formulation and design on possible product or
process alternatives 100,000
Radical modification of the design of a product or process 80,000
Total R&D expense 180,000

1
7. Solution:
 Activities directed to the development of
knowledge, including the design and construction
engineering of a prototype equipment 4,800,000
 Design of tools, jigs, and dies involving new
technology 7,800,000
 Design, construction, and operation of a pilot plant
not of a scale economically feasible for
commercial production 5,225,000
 Total R&D expense 13,025,000

8. Answer: 0

9. D

10. D

11. D

12. Solution:
Masthead, purchased from a competitor 50,000
Web site costs, for external use, customers can place orders on
the web site 60,000
Total intangible assets 110,000

13. D

14. Solution:
1/1/x3
Patent 30,000
Cash 30,000

12/31/x3
Amortization expense (30,000 ÷ 20) 1,500
Accumulated amortization 1,500

1/1/x4
Legal fees expense 9,000
Cash 9,000

12/31/x4
Amortization expense 1,500
Accumulated amortization 1,500

15. Answer: 100,000 – legal fees and registration costs

2
16. Solution:
Net proceeds 600,000
Carrying amount of intangible asset - 12/31/x2 (800,000 x 8/10) (640,000)
Loss on disposal (40,000)

17. Solution: 1,200,000 x 5/10 = 600,000 – carrying amount charged as

impairment loss

18. Solutions:
Case 1: 0 – the trademark is presumed to have an indefinite useful life.

Case 2: (300,000 ÷ 10) = 30,000

19. D

20. Solution: (600,000 ÷ 16) = 37,500. Under PAS 38, subsequent

expenditures on intangible assets are generally expensed.

3
PROBLEM 21-3: EXERCISES: COMPUTATIONAL

1. Solutions:
Requirement (a): No commercial substance
Big’s books:
Publishing title – Ms. Jane Ballpen 4,400,000
Publishing title – Mr. Juan Lapis 4,400,000

Bigger’s books:
Publishing title – Mr. Juan Lapis 4,200,000
Publishing title – Ms. Jane Ballpen 4,200,000

Requirement (b): With commercial substance

Big’s books:
Publishing title – Ms. Jane Ballpen 4,500,000
Publishing title – Mr. Juan Lapis 4,400,000
Gain on exchange 100,000

Bigger’s books:
Publishing title – Mr. Juan Lapis 4,500,000
Publishing title – Ms. Jane Ballpen 4,200,000
Gain on exchange 300,000

2. Solution:
Amortization expense (2.1M ÷ 3) 7,000,000
Accumulated amortization 7,000,000

3. Solution:
Design cost of trademark 1,500,000
Legal fees of registering trademark 150,000
Registration fee with Patent Office 50,000
Total 1,700,000

4. Solution:
Special equipment used solely on R&D activities for the newly
invented product. 720,000
Labor and material costs incurred in producing a prototype
model 2,400,000
Cost of testing the prototype
960,000
Total R&D expense 4,080,000

4
5. Solution:
Design of tools, jigs, molds and dies involving new technology 85,000
Modification to the initial design of a prototype 67,500
Laboratory research aimed at discovery of new technology 107,500
Amortization of other intangible assets used in R&D activities
for new inventions 30,000
Total R&D expense 290,000

6. Solution:
Design, construction and testing of preproduction prototypes
and models 240,000
Research and development services performed by Billit
Corporation for Eagle 180,000
Testing in search for new products or process alternatives 210,000
Total R&D expense 630,000

7. Solutions:
Requirement (a):
Costs to complete a detailed design of the software 1,560,000
Coding and testing costs to establish technological feasibility 1,200,000
R&D expense 2,760,000

Requirement (b):
Coding and testing costs to after technological feasibility has
been established 5,280,000
Costs of producing the product master 1,800,000
Intangible asset 7,080,000

Requirement (c):
Reproduction costs of software from the product master 3,000,000
Packaging costs for the products 1,080,000
Inventory 4,080,000

8. Solution:
Purchase price 1,200,000
Less: Down payment (20% x 1.2M) (240,000)
Note payable 960,000
Divide by: 5
Annual installment 192,000

5
Down payment 240,000
PV of note payable (192,000 x PV ordinary annuity @12%, n=5) 692,117
Total cost of patent 932,117
Multiply by: 2/13*
Accumulated amortization - 12/31/x2 143,403

* (20 legal life – 7 years) = 13

9. Solution: 700,000 ÷ 20 years = 35,000

10. Answer: ₱140,000 – the fair value of the asset received

11. Solution:
Patent (at fair value) 116,000
Ordinary shares (14,000 x ₱5) 70,000
Share premium (squeeze) 46,000

12. Solution: (20,000 ÷ 10) = 2,000 – The useful life is shorter than the legal
life. Therefore, the change is disregarded.

13. Solution: 0 – No amount was capitalized on the patent.

14. Solution:
R&D expense:
Development costs prior to reaching technological feasibility 400

Amortization expense:
Development cost after reaching technological feasibility (600 ÷ 3) 200

Cost of goods sold:

Cost of duplicating salable product (900 x 15/30) 450

Total expense 1,050

15. Solution: (95,000 + 25,000 + 30,000) = 150,000

6
PROBLEM 21-4: CLASSROOM ACTIVITY

Case 1:

Requirement (a):

7
Requirement (b):
20x1 20x2
Patent 1 120,000 120,000
Accumulated amortization (7,500) (22,500)
Amortization expense 7,500 15,000
Other expenses 35,000

8
Case 2:

Requirement (a):

9
Requirement (b):

20x1 20x2
Patent 2 - 60,000
Accumulated amortization - (1,000)
Amortization expense - 1,000
R&D expense 200,000 -

10
Case 3:

Requirement (a):

11
Requirement (b):

20x1 20x2
Organization costs - -
Accumulated amortization - -
Amortization expense - -
Other expense 80,000 -

12
Case 4:

Requirement (a):

13
Requirement (b):

20x1 20x2
Software costs - -
Accumulated amortization - -
Amortization expense - -
R&D expense 100,000 90,000

Case 5:

20x1 20x2
Patent 1 120,000 120,000
Accumulated amortization (7,500) (22,500)
Patent 2 - 60,000
Accumulated amortization - (1,000)
Organization costs - -
Accumulated amortization - -
Software costs - -
Accumulated amortization - -
Amortization expense 7,500 16,000
R&D expense 300,000 90,000
Other expenses 80,000 35,000

14
PROBLEM 21-5: THEORY
1. C 6. D
2. C 7. D
3. D 8. C
4. A 9. B
5. D 10. A

PROBLEM 21-6: THEORY

1. D 6. C 11. A
2. A 7. A 12. A
3. D 8. B 13. C
4. A 9. D 14. C
5. C 10. D 15. D

PROBLEM 21-7: THEORY

1. D 6. B
2. D 7. D
3. D 8. D
4. A 9. D
5. C 10. E

15
PROBLEM 21-8: MULTIPLE CHOICE: COMPUTATIONAL
1. B (600,000 x 3/4) = 450,000. The default amortization method is
straight-line. An amortization method based on revenue is
prohibited.

2. C (500,000 ÷ 50) =10,000

3. C (90,000 x 7/10) = 63,000 carrying amount as of Jan. 1, 20x3

written-off in profit or loss in 20x3.

4. D
Solution:
Design of tools, jigs, molds, and dies involving new
technology 125,000
Modification of the formulation of a process 160,000
R&D Expense 285,000

5. B
Solution:
Depreciation 300,000
Salaries 700,000
Indirect costs appropriately allocated 200,000
Materials 180,000
R&D Expense 1,380,000

6. C
Solution:
Special equipment - no other use 60,000
Costs in producing prototype 200,000
Cost of testing the prototype 80,000
R&D Expense 340,000

7. D The costs of market research activities are expensed as selling costs

and not as R&D expense.

8. B
Solution:
Duplication of computer software and training materials
from product masters (1,000 units) 25,000
Packaging product (500 units) 9,000
Total inventory 34,000

9. C
Other coding costs after establishment of technological
feasibility 24,000
Other testing costs after establishment of technological 20,000
16
 feasibility
Costs of producing product masters for training materials 15,000
Cost of software 59,000

10. A – the cost of trademarks

17
PROBLEM 21-9: MULTIPLE CHOICE: COMPUTATIONAL
1. C
Solution:
Depreciation on the above equipment 135,000
Materials used 200,000
Compensation costs of personnel 500,000
Outside consulting fees 150,000
Indirect costs appropriately allocated 250,000
Total R&D expense 1,235,000

2. C
Solution:
Macintosh laptops 600,000
EPSON printers 10,000
FUJI XEROX photocopying machines 250,000
Windows Operating Software 25,000
Total PPE – gross 885,000
Multiply by: 4/5
Total PPE – net 708,000

3. D
Solution:
The cash flows on the installment payments are computed as follows:
Date Principal Interest Total
1/1/x2 2,000,000 (10M x 4%) 400,000 2,400,000
1/1/x3 2,000,000 (8M x 4%) 320,000 2,320,000
1/1/x4 2,000,000 (6M x 4%) 240,000 2,240,000
1/1/x5 2,000,000 (4M x 4%) 160,000 2,160,000
1/1/x6 2,000,000 (2M x 4%) 80,000 2,080,000
Totals 10,000,000 1,200,000 11,200,000

The present value of the cash flows is computed as follows:

PV of 1 PV
Present value
Date Cash flows @12% factors
1/1x1 5,000,000 n=0 1 5,000,000
1/1/x2 2,400,000 n=1 0.8928571 2,142,857
1/1/x3 2,320,000 n=2 0.7971939 1,849,490
1/1/x4 2,240,000 n=3 0.7117802 1,594,388
1/1/x5 2,160,000 n=4 0.6355181 1,372,719
1/1/x6 2,080,000 n=5 0.5674269 1,180,248
Totals 13,139,702

4. D [($590,000 ÷ $.0204) x 95% x 120% x 112%] + 40,000 = 36,967,059

18
The 12% VAT is capitalized because the entity is a NON-VAT registered
entity.

5. B [(120,000 x 9/10) + 54,000] ÷ 12 = 13,500

6. D
Solution:
Testing in search for process alternatives 720,000
Costs of testing prototype and design modifications 500,000
Modification of the formulation of a process 1,220,000
Research and development services performed by Beck
Corp. for Ming 650,000
Total R&D expense 3,090,000

7. D (150,000 + 180,000 + 225,000) = 555,000

8. A
Solution:
Modification to the formulation of a chemical product 360,000
Costs of testing prototype and design modifications 600,000
Laboratory research aimed at discovery of new technology 675,000
Total R&D expense 1,635,000

9. C (6,000 x 45) = 270,000

10. D (180,000 ÷ 15 years) = 12,000

19