PROBLEM NO.

11

On December 31, 2004, Silver Corporation acquired the following three intangible assets:

 A trademark for P300,000. The trademark has 7 years remaining legal life. It is
anticipated that the trademark will be renewed in the future, indefinitely, without problem.

 Goodwill for P1,500,000. The goodwill is associated with Silver s Hayo Manufacturing
reporting unit.

 A customer list for P220,000. By contract, Silver has exclusive use of the list for 5 years.
Because of market conditions, it is expected that the list will have economic value for just
3 years.

On December 31, 2005, before any adjusting entries for the year were made, the following
information was assembled about each of the intangible assets:

a) Because of a decline in the economy, the trademark is now expected to generate cash
flows of just P10,000 per year. The useful life of trademark still extends beyond the
foreseeable horizon.

b) The cash flows expected to be generated by the Hayo Manufacturing reporting unit is
P250,000 per year for the next 22 years. Book values and fair values of the assets and
liabilities of the Hayo Manufacturing reporting unit are as follows:
 Book values Fair values

Identifiable assets P2,700,000 P3,000,000

Goodwill 1,500,000 ?

Liabilities 1,800,000 1,800,000

c) The cash flows expected to be generated by the customer list are P120,000 in 2006 and
P80,000 in 2007.

REQUIRED:

Based on the above and the result of your audit, determine the following: (Assume that the
appropriate discount rate for all items is 6%):

1. Total amortization for the year 2005

a. P73,333 b. P141,515 c. P116,190 d. P86,857

2. Impairment loss for the year 2005

a. P90,476 b. P133,333 c. P179,584 d. P0

3. Carrying value of Trademark as of December 31, 2005

a. P300,000 b. P257,143 c. P166,667 d. P120,416

4. Carrying value of Goodwill as of December 31, 2005

a. P1,500,000 b. P1,431,818 c. P1,425,000 d. P1,462,500

5. Carrying value of Customer list as of December 31, 2005

a. P220,000 b. P146,667 c. P176,000 d. P0

Solution and Explanation:

1. Answer: A
Trademark*
Goodwill*
Customer list (P220,000/3) 73,333
Total Amortization 73,333

An intangible asset with an indefinite useful life shall not be amortized. (PAS 38, par 107)

Hence, the Trademark and Goodwill were not amortized.

2. Answer: B
Trademark:
Carrying value 300,000
Recoverable amount (P10,000/0.06) 166,667

133,333 Goodwill*:

-
Customer list*: -

Total Impairment Loss 133,333

An asset is impaired when its carrying amount exceeds its recoverable amount. (PAS 36, par
8)

If it is not possible to determine the fair value less costs to sell because there is
no basis for making a reliable estimate of the amount obtainable from the sale of
the asset in an arm’s length transaction between knowledgeable and willing
parties, the entity may use the asset’s value in use as its recoverable amount.
(PAS 36, par 20)

3. Answer: C
Cost 300,000
Less: Impairment Loss 133,333
Carrying value, 12/31/08 166,667

4. Answer: A
Since goodwill is not amortized and is not impaired as of 12/31/08, the carrying
value is still P1,500,000.

5. Answer: B
Cost 220,000
Less: Amortization for 2008 73,333
Carrying value, 12/31/08 146,667

An entity shall choose either the cost model in paragraph 74 or the revaluation
model in paragraph 75 as its accounting policy. (PAS 38, par 72)

In the cost model: After initial recognition, an intangible asset shall be carried at its cost
less any accumulated amortisation and any accumulated impairment losses. (PAS 38,
par 74)

In the revaluation model: After initial recognition, an intangible asset shall be carried
at a revalued amount, being its fair value at the date of the revaluation less any
subsequent accumulated amortisation and any subsequent accumulated impairment
losses. (PAS 38, par 75)