Illustrative 1: Pepper Company incurred P 1,600,000 of research and development costs to develop a product for
which patent was granted at the beginning of the year. Legal fees and other costs associated with registration of the
patent totaled P 300,000.
At year end, the entity paid P 450,000 for legal fees in a successful defense of the patent.
Required: What is the total amount that should be capitalized for the patent at year-end?
Illustrative 2: Pepper Co. was granted a patent on January 1, 2021. The patent was appropriately recognized at
P800,000 and estimated to have a useful life of 10 years. In 2023, Pepper Co. incurred P100,000 in successfully
defending the patent in an infringement suit. However, two months after the suit, Pepper Co. sold the intangible asset
to the plaintiff for P600,000.
Pepper Co.'s policy is to recognize a full year's amortization in the year of acquisition and none in the year of
derecognition.
Required: How much is the gain (loss) on disposal recognized in Pepper Co.'s statement of financial position?
Illustrative 3: On January 1, 2023, Pepper Company purchased a patent for a new consumer product for P 900,000.
At the time of purchase, the patent was valid for 15 years. However, the useful life of the patent was estimated to be
only 10 years due to the competitive nature of the product.
On December 31, 2026, Pepper incurred 70,000 for unsuccessfully defending the patent from an infringement suit.
Required: What amount should be charged against income in 2026?
Illustrative 4: On January 1, 2026, Boracay Company bought a trademark from Lamitan Company for P 3,000,000.
The entity retained an independent consultant who estimated the trademark's life to be indefinite. The carrying amount
of the trademark was P 1,500,000 on the books of Lamitan Company.
Required: On December 31, 2026, what is the carrying amount of the trademark?
Illustrative 5: On January 1, 2020, Pepper Company purchased a copyright for P600,000, having an estimated useful
life of 16 years. In January 2024, Pepper paid P90,000 for legal fees in a successful defense of the copyright.
Required: Amortization expense for the year ended December 31, 2024 should be
Illustrative 6: On January 1, 2026, Ivana Company signed an agreement to operate as a franchisee of Rain Company
for an initial franchise fee of P 12,000,000. On the same date, the company paid P 4,000,000 and agreed to pay the
balance in four equal annual payments of P 2,000,000 beginning January 1, 2027. Ivana Company can borrow at 14%
for a loan of this type and the present value of an ordinary annuity of 1 at 14% for four periods is 2.91. The agreement
provides that Ivana can operate for a period of 10 years.
Required:
1. What is the acquisition cost of the franchise?
2. How much is the interest expense for the year 2026?
3. How much is the amortization expense for the year 2026?
4. How much is the carrying amount of the franchise at the end of 2026?
Illustrative 7: Pepper Co. incurred P5,000,000 on a self-created computer software, P2,100,000 of which was
incurred after the technological feasibility was established.
The software is expected to have a 3-year economic life and generate future
Required: Provide the entry to record amortization expense for the year.
Illustrative 8: At year end, Sky Company reported assets of P 5,000,000 and liabilities of P 2,000,000. The carrying
amounts of the assets approximate fair value, except for land which has a fair value that is P 300,000 greater than
carrying amount.
On the same date, Ivana Company paid P 6,000,000 to acquire Sky Company.
Required: What amount of goodwill should be recorded by the acquirer as a result of this purchase?
Illustrative 9: Pepper Co. provided you the following information pertaining to its Research and Development
activities for the year 2022:
Searching for applications of new research findings P57,000
Troubleshooting in connection with breakdowns during commercial production 87,000
Adaptation of an existing capability to a particular requirement of customer's need as part of continuing commercial
activity 39,000
Engineering follow-through in an early phase of commercial production 45,000
Laboratory research aimed to discovery of new knowledge 204,000
Design of tools, jigs, and molds involving new technology 72,000
Quality control during commercial production, including routine testing of products 174,000
Testing in search for product or process alternative Design and construction of preproduction prototype and model
300,000
Routine and on-going efforts to refine, enrich, or otherwise, improve upon the qualities of an existing product 750,000
Required:
1. What is the total amount to be classified and expensed as research and development for 2022?
2. What is the total amount to be classified as operating expenses for 2022?
Illustrative 10: The following costs are generally incurred by Pepper Corporation:
Goodwill purchased in a business combination P500,00
Cost of developing website for the promotion and advertisement of the entity's products 150,000
Cost incurred in the corporation's formation and organization 230,000
Operating losses incurred in the start-up of the business 130,000
Initial franchise fee paid 175,000
Continuing franchise fee 50,000
Internally generated goodwill 800,000
Cost of purchasing a patent form an investor 137,000
Cost of leasehold improvement 70,000
Legal costs incurred in successfully defending a patent 55,500
Internally generated customer list 40,000
Cost of purchasing a trademark 250,000
Computer software for a computer controlled machine that cannot be operate without that specific software 325,500
Required: How much from the above items can be recognized as intangible assets including goodwill?
Illustrative 11: Golden Baboy Company developed a new machine for manufacturing baseballs. Because the machine
is considered very valuable, the entity had it patented. The following expenditures were incurred in developing and
patenting the machine:
Purchase of special equipment to be used solely for development of the new machine P1800,000
Research salaries and fringe benefits for engineers and scientists 200,000
Costs of testing prototype 250,000
Legal cost for filing of patent 150,000
Fees paid to Philippine Patent Authority 50,000
Drawings required by the patent office to be filed with patent application 40,000
Required:
1. What amount should be capitalized as cost of patent?
2. What amount of research and development cost should be expensed in the current year?