INTANGIBLE ASSETS

Theory of Accounts

1. Which of the following does not describe intangible assets?

a. They lack physical existence. b. They are financial instruments.

c. They provide long-term benefits. d. They are classified as long-term assets.

2. Which of the following costs incurred internally to create an intangible asset is generally expensed?

a. Research and development costs. b. Filing costs.

c. Legal costs. d. All of the above.

3. Under current accounting practice, intangible assets are classified as

a. amortizable or unamortizable. b. limited-life or indefinite-life. c. specifically identifiable or goodwill-type. d. legally restricted or goodwill-type.

4. The cost of purchasing patent rights for a product that might otherwise have seriously competed with

one of the purchaser's patented products should be

a. charged off in the current period. b. amortized over the legal life of the purchased patent. c. added to factory overhead and allocated to production of the purchaser's product. d. amortized over the remaining estimated life of the original patent covering the product whose

market would have been impaired by competition from the newly patented product.

5. The reason goodwill is sometimes referred to as a master valuation account is because

a. it represents the purchase price of a business that is about to be sold. b. it is the difference between the fair value of the net tangible and identifiable intangible assets

as compared with the purchase price of the acquired business. c. the value of a business is computed without consideration of goodwill and then goodwill is

added to arrive at a master valuation. d. it is the only account in the financial statements that is based on value, all other accounts are

recorded at an amount other than their value.

6. Buerhle Company needs to determine if its indefinite-life intangibles other than goodwill have been

impaired and should be reduced or written off on its balance sheet. The impairment test(s) to be

used is (are)

Recoverability Test Fair Value Test

a. Yes Yes b. Yes No c. No Yes d. No No

7. Which of the following research and development related costs should be capitalized and

depreciated over current and future periods?

a. Research and development general laboratory building which can be put to alternative uses in the future

b. Inventory used for a specific research project c. Administrative salaries allocated to research and development d. Research findings purchased from another company to aid a particular research project

currently in process

8. Which of the following is considered research and development costs?

a. Planned search or critical investigation aimed at discovery of new knowledge. b. Translation of research findings or other knowledge into a plan or design for a new product or

process. c. Translation of research findings or other knowledge into a significant improvement of an

existing product. d. all of the above.

9. Operating losses incurred during the start-up years of a new business should be

a. accounted for and reported like the operating losses of any other business. b. written off directly against retained earnings. c. capitalized as a deferred charge and amortized over five years. d. capitalized as an intangible asset and amortized over a period not to exceed 20 years.

10. Capitalized costs incurred while developing computer software to be sold should be amortized using

the:

a. lower of the straight-line method or the percent-of-revenue method. b. higher of the percent-of-revenue method or the percent-of-completion method. c. lower of the percent-of-revenue method or the percent-of-completion method. d. higher of the straight-line method or the percent-of-revenue method.

Practical Accounting

11. Alonzo Co. acquires 3 patents from Shaq Corp. for a total of P300,000. The patents were carried on

Shaqs books as follows: Patent AA: P5,000; Patent BB: P2,000; and Patent CC: P3,000. When Alonzo

acquired the patents their fair values were: Patent AA: P20,000; Patent BB: P240,000; and Patent

CC: P60,000. At what amount should Alonzo record Patent BB? ________________________

12. Pastel Co. purchased a patent on January 1, 1999, for P714, 000. The patent was being amortized

over its remaining legal life of 15 years expiring on January 1, 2008. During 2002, Pastel determined

that the economic benefits of the patent would not last longer than 10 years from the date of

acquisition. What amount should be charged to patent amortization expense for the year ended

December 31, 2002? _____________________________

13. On October 4, 2003, X exchanged 2,000 shares of its P50 par common stock held in treasury for a patent of Y. The treasury shares were previously acquired at cost of P80,000. At the time of exchange, Xs common stock was quoted in the market at P55 per share. The patent has carrying value in the books of Y at P90,000. At what value should X record the acquisition of the Patent? ______________________________

14. Riley Co. incurred the following costs during 2013: Significant modification to the formulation of a chemical product P160,000 Trouble-shooting in connection with breakdowns during commercial production 150,000 Cost of exploration of new formulas 200,000 Seasonal or other periodic design changes to existing products 185,000 Laboratory research aimed at discovery of new technology 275,000

In its income statement for the year ended December 31, 2013, Riley should report research and

development expense of ____________________________

15. The following info pertain to X company which is to be acquired by Y company: BOOK VALUE CURRENT VALUE

Tangible assets 1,500,000 2,000,000 Intangible, w/o goodwill 500,000 1,000,000 Liabilities 1,500,000 1,500,000

Normal rate of earning is 8%. Xs expected earnings is at 14% per year for 5 years. What is the goodwill if agreed as equal to purchase of average excess earnings for 5 years? _________

16. IMGONNAPASS is considering acquisition of the net assets of IHAVETOPASS to expand its operations.

The book value and current value of the net assets of IHAVETOPASS company are P3,300,000 and P4,000,000, respectively. The normal rate of return is believed to be 9%, but IMGONNAPASS believes it can earn 11.25% annually on its investment in IHAVETOPASS due to its excellent reputation. What is the amount of goodwill using the year multiple of excess earning method assuming a 10-year period of excess earnings? ____________________

17. Xs business cumulative earnings for the past 5 years amounted to P500,000. The appraised value of

the business net assets was P800,000. X is selling the business plus goodwill, determined by capitalizing average net earnings at 10%. The value of goodwill is ____________________

18. General Products Company bought Special Products Division in 2012 and appropriately recorded

P500,000 of goodwill related to the purchase. On December 31, 2013, the fair value of Special Products Division is P4,000,000 and it is carried on General Products books for a total of P3,400,000, including the goodwill. An analysis of Special Products Divisions assets indicates that goodwill of P400,000 exists on December 31, 2013. What goodwill impairment should be recognized by General Products in 2013? _________________________

19. The general ledger of Vance Corporation as of December 31, 2012, includes the following accounts:

Copyrights P 30,000 Deposits with advertising agency (will be used to promote goodwill) 27,000 Discount on bonds payable 70,000 Excess of cost over fair value of identifiable net assets of acquired subsidiary 440,000 Trademarks 90,000

In the preparation of Vance's balance sheet as of December 31, 2012, what should be reported as total intangible assets? ______________________

20. Hall Co. incurred research and development costs in 2013 as follows:

Materials used in research and development projects P 450,000 Equipment acquired that will have alternate future uses in future research

and development projects 3,000,000 Depreciation for 2013 on above equipment 500,000 Personnel costs of persons involved in research and development projects 750,000 Consulting fees paid to outsiders for research and development projects 300,000 Indirect costs reasonably allocable to research and development projects 225,000

Total P5,225,000 The amount of research and development costs charged to Hall's 2013 income statement should be ______________________

21. Logan Company incurred P4,000,000 (P1,100,000 in 2011 and P2,900,000 in 2012) to develop a computer software product. P1,200,000 of this amount was expended before technological feasibility was established in early 2012. The product will earn future revenues of P8,000,000 over its 5-year life, as follows: 2012 P2,000,000; 2013 P2,000,000; 2014 P1,600,000; 2015 P1,600,000; and 2016 P800,000. What portion of the P4,000,000 computer software costs should be expensed in 2012? _____________________________

Auditing Problems 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 Silvers 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:

1. 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.

2. 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

3. 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