Intangible Assets Problem

Problem A
On January 2, 2016, Jero Company developed a new machine for manufacturing
baseballs. Because the machine is considered very valuable, the company had it
patented. The following expenditure were incurred in developing and patenting the
machine in 2016:
Purchase of special equipment (cost was P600,000)
Recoverable amount after development
Of the new machine 460,000
Research salaries and fringe benefits for engineers
And scientists 51,300
Cost of testing prototype 70,800
Fees paid to Philippine Patent office 7,500
Drawings required by the patent office to be filed
With patent application 14,100
Legal costs of filing for patent 38,100

Jero elected to amortize the patent over ten years. Full year amortization is taken up in
the year of acquisition. At January 2, 2018, Jero paid P72,000 to successfully defend
the patent in infringement suit.

On January 3, 2019, Jero determined that the remaining estimated useful life of the
patent was five years

Required:

1. Compute the amount charged to research & development expense based on

foregoing data.
2. What is the patent carrying amount at December 31, 2017?
3. What is the amortization expense for the patent for the year ended December 31,
2019?
4. What is the carrying amount of the patent at December 31, 2019?

Problem B
On January 3, 2009, the Althea Company spent P196,000 to apply for and obtain a
patent on a newly developed product. The patent had an estimated useful life of 10
years. At the beginning of 2011, the company spent P28,000 in successfully
prosecuting an attempted infringement of the patent.
At the beginning of 2014, the company purchased for P60,000 a patent that was
expected to prolong the life of its original patent by 5 years. On July 1, 2017, a
competitor obtained rights to a patent which made the company’s patent obsolete.
Required:
5. What is the amortization of expense December 31, 2011?
6. What is the total expense recorded in the December 31, 2011?
7. What is the carrying value of patent December 31, 2016?
8. What is the amortization of expense on 2017?
9. What is the loss from write off of patent?

Problem C
Nathalie Company acquired a patent right on July 1, 2014 for P500,000. The asset has
a legal life of 15 years but due to the rapidly changing technology, management
estimates a useful life of only five years.
On December 31, 2015, management is uncertain that the process can actually be
made economically feasible, and decides to write down the patent to its recoverable
amount of P150,000. Amortization will be taken over three years from that time.
On January 1, 2017, after having perfected the related production process, the asset is
now appraised at a sound value of P600,000. Furthermore, the estimated useful life is
now believed to have extended by six more years. The company uses straight-line
method of amortization.
Required: Determine the following
10. Amortization expense for the year 2015.
11. Impairment loss recognized in 2015.
12. Patent carrying value at December 31, 2016.
13. Revaluation surplus recognized in 2017.
Problem D
On January 1, 2016 Sofia Company, signed an agreement to operate as a franchise
for 10 years for a franchise fee of P1,400,000. The franchise fee is payable as follows:
Down-payment (upon signing the agreement) P500,000
Balance of P900,000 payables in three equal annual
payments of P300,000 beginning January 1,
2017. The market rate of interest for similar
Obligation is 10%.

The agreement also provided for the payment of 5% royalties based on sales. In return
for these royalties. The franchisor agreed to provide marketing and promotional services
for Sofia Company for the duration of the franchise contract. Actual sales P1,000,000
on year 2016.

Required:

14. What is the cost of the franchise acquired on January 1, 2016?

15. What is the amount of the amortization expense for the franchise for the year
ended December 31, 2016?
16. What is the total expense recorded in the December 31, 2016?
17. What is the carrying value of franchise December 31, 2017?

Problem E

The following data appear in the books of Grace Company at January 1, 2016:

Current Assets
Trade receivables (net) 1,200,000
Inventory 1,800,000 3,000,000
Property, Plant and Equipment 4,600,000
Total assets 7,600,000
Current liabilities 760,000
Noncurrent liabilities 1,600,000 2,360,000
Equity 5,240,000

On this date, Alainah Company purchased all of the assets and assumed all of the
liabilities of Grace Company for P7,000,000. On January 1, 2016, the fair value of
Grace Company’s assets was as follows:
Trade receivable (net) 1,000,000
Inventory 1,700,000
Property, Plant and Equipment (net) 5,900,000

The fair values of the liabilities are deemed equal to their carrying amounts.

Required:

18. Compute the amount of goodwill or gain on acquisition included in the purchase
price by Alainah Company.
19. Prepare the journal entry to record the acquisition of Grace Company by Alainah
Company on January 1, 2016.

Problem F

Isabel Company reported intangible asset account balances on December 31, 2015,
as follows:

Patent P 192,000
Less: accumulated depreciation 36,000
Carrying amount P 156,000

Transaction during 2016 and other information relating to Isabel Company’s intangible
assets included the following:

a. The patent was purchased from Gray Company on January 2, 2013, at which
date the remaining legal life was 16 years. During 2016, Isabel Company
determined that the remaining useful life of the patent was only eight years
including the current year.

b. On January 3, 2016, the company acquired both license to use a special type of
container and a distinctive trademark to be printed on the container in exchange
for 600 shares of Isabel Company, which are selling at P100 per share. The
license is worth twice as much as the trademark, both of which may be used for
four years. The ordinary share has a par value of P80 per share.

c. On January 3, 2016, Isabel Company acquired all the non-cash asset and
assumed all liabilities of Brown Company at a cash price of P12 million. Isabel
Company determined that the fair value of the net assets acquired in the
transaction is P9,000,000.

Required:

20. What is the carrying value of patent December 31, 2016?

21. What is the carrying value of license December 31, 2016?
22. What is the carrying value of trademark December 31, 2016?
23. What total intangible assets net of accumulated amortization December 31,
2016?

Problem G
Andy Company is interested in computing the goodwill to be recognized in the
purchase of Anton Company in January 2024.

Anton Company reported the following information:

Net income Net assets

2019 360,000 1,600,000
2020 388,000 1,800,000
2021 288,000 1,900,000
2022 380,000 2,000,000
2023 394,000 2,100,000
Total 1,810,000 9,400,000

Goodwill is measured by capitalizing excess earnings at 40% with normal return on

average net assets at 10%.

Required:

24. What is the average net asset?

25. What is the average annual earnings?
26. What is the normal earnings?
27. What is the Goodwill?
28. What amount should be reported as acquisition cost of Anton Company?