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CPA Review: Intangible Assets and Goodwill

The document contains multiple choice questions related to accounting for intangible assets such as patents, goodwill, research and development costs, and organization costs. The questions cover topics like amortization of patents, calculation of goodwill, classification of costs as research and development expense, and capitalization of internal use software costs.

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Ira Benito
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56 views2 pages

CPA Review: Intangible Assets and Goodwill

The document contains multiple choice questions related to accounting for intangible assets such as patents, goodwill, research and development costs, and organization costs. The questions cover topics like amortization of patents, calculation of goodwill, classification of costs as research and development expense, and capitalization of internal use software costs.

Uploaded by

Ira Benito
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila
FINANCIAL ACCOUNTING AND REPORTING VALIX/VALIX/SANTOS
BATCH 93 – MAY 2023 CPALE
INTANGIBLE ASSETS
1. On January 1, 2020, an entity purchased a patent for a new consumer product for P4,500,000. At the time
of purchase, the patent had a remaining legal life of 15 years. However, the useful life of the patent was
only 10 years due to the competitive nature of the product. On December 31, 2023, the product was
permanently withdrawn from sale under governmental order because of potential health hazard in the
product. The amortization of the patent is recorded at the end of each year. What amount should be
charged against income in 2023?
a. 2,700,000
b. 3,150,000
c. 3,600,000
d. 450,000
2. On January 1, 2020, an entity purchased a patent for P7,140,000. The patent is being amortized over the
remaining legal life of 15 years expiring on January 1, 2025. During 2023, the entity determined that the
economic benefits of the patent would not last longer than ten years from the date of acquisition.
What is the carrying amount of patent on December 31, 2023?
a. 4,284,000
b. 4,896,000
c. 5,050,000
d. 5,236,000
3. An entity purchased another entity for P5,000,000 cash. The following carrying amount and fair value
were associated with the items acquired in this business combination:
Carrying amount Fair value
Accounts receivable 2,000,000 2,000,000
Inventory 1,000,000 500,000
Government contract 0 1,000,000
Equipment 400,000 500,000
Short-term loan payable (2,000,000) (2,000,000)
The fair value associated with the acquired government contract is not based on any legal or contractual
relationship. In addition, for obvious reason, there is no open market trading for this intangible.
What is the goodwill arising from the business combination?
a. 3,000,000
b. 3,600,000
c. 4,000,000
d. 0
4. An entity reported assets before goodwill and liabilities at fair value of P15,000,000 and P6,000,000,
respectively. Net earnings after elimination of unusual and infrequent items totaled P1,000,000 for 2020,
P1,150,000 for 2021, P1,500,000 for 2022, P1,250,000 for 2023 and P1,350,000 for 2024. The normal
rate of return is 10% on net assets at fair value.
1. What is the goodwill if excess earnings are capitalized at 8%?
a. 4,375,000
b. 2,150,000
c. 3,500,000
d. 5,300,000
2. What is the goodwill if average earnings are capitalized at 10%?
a. 6,500,000
b. 3,500,000
c. 6,625,000
d. 1,750,000

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Page 2
5. An entity incurred the following costs during the current year:
Modification to the formulation of a chemical product 135,000
Trouble-shooting in connection with breakdowns during commercial production 150,000
Design of tools, jigs, molds and dies involving new technology 170,000
Seasonal or other periodic design changes to existing product 185,000
Laboratory research aimed at discovery of new technology 215,000
What total amount should be reported as research and development expense for the current year?
a. 520,000
b. 470,000
c. 385,000
d. 335,000
6. During the current year, an entity incurred the following costs related to a new solar-powered car:
Salaries of laboratory employees researching how to build the new car 2,500,000
Legal fees for the patent application for the new car 200,000
Engineering follow-up during the early stages of commercial production 500,000
Marketing research to promote the new car 300,000
Design, testing and construction of prototype 4,000,000
Labor and materials incurred in producing a prototype 1,000,000
Equipment with useful life of 4 years used solely for development of the new car 1,500,000
What amount should be reported as research and development expense for the current year?
a. 9,500,000
b. 9,000,000
c. 7,875,000
d. 9,300,000
7. During the current year, an entity incurred the following costs to develop and produce a routine
low-risk computer software product:
Completion of detailed program design or working model 1,300,000
Cost incurred for coding and testing to establish technological feasibility 1,000,000
Other coding cost after establishment of technological feasibility 2,400,000
Other testing cost after establishment of technological feasibility 2,000,000
Cost of producing product masters for training materials 1,500,000
Duplication of computer software and training materials from product master 2,500,000
Packaging product 900,000
1. What amount should be capitalized initially as software cost?
a. 5,400,000
b. 3,700,000
c. 5,900,000
d. 6,900,000
2. What amount should be reported in inventory at year-end?
a. 2,500,000
b. 3,400,000
c. 4,000,000
d. 4,900,000
8. An entity began construction of a new facility in Mindanao. The costs incurred during the start-up
activities were production equipment P4,000,000, travel of salaried employees P500,000, license fees
P150,000, training of local employees for production and maintenance operations P1,500,000 and
advertising P800,000. What portion of the organization costs should be expensed?
a. 2,000,000
b. 2,150,000
c. 2,950,000
d. 6,000,000
End

7023

Common questions

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The goodwill, when average earnings are capitalized at 10%, is P3,500,000. Average earnings over the years 2020-2024 amount to P1,250,000. At a required return of 10%, net assets valued at P9,000,000 (P15,000,000 assets - P6,000,000 liabilities) yield normal earnings of P900,000. Thus, excess earnings are P350,000 (P1,250,000 - P900,000), and capitalizing at 10% gives goodwill of P350,000 / 0.10 = P3,500,000.

The carrying amount of the patent on December 31, 2023, is P4,284,000. The patent is amortized over 10 years at P714,000 per year (P7,140,000/10 years). By the end of 2023, 4 years of amortization will have been recorded, so the carrying amount is calculated as P7,140,000 - (P714,000 x 4 years) = P4,284,000.

The amount that should be capitalized as software cost is P5,400,000. This includes the cost of completion of detailed program design (P1,300,000), and coding and testing costs incurred to establish technological feasibility (P1,000,000). Post-feasibility costs like other coding costs after establishment of feasibility (P2,400,000) and other testing costs (P700,000 calculated as the portion attributable to testing before market release), as well as cost of producing product masters for training materials (P500,000 calculated only for initial set-up before mass reproduction), are also capitalized.

The goodwill arising from the business combination is P3,600,000. This is calculated by subtracting the fair value of the acquired net assets (accounts receivable P2,000,000, inventory P500,000, government contract P1,000,000, and equipment P500,000, less short-term loan payable P2,000,000) from the purchase price of P5,000,000. The fair value of net assets is P1,400,000, thus goodwill is P5,000,000 - P1,400,000 = P3,600,000.

The amount that should be charged against income in 2023 is P3,600,000. Initially, the patent was amortized over a useful life of 10 years, resulting in an annual amortization of P450,000 (P4,500,000/10 years). However, due to the product's withdrawal from the market in 2023, the entire remaining unamortized balance must be written off, resulting in a charge against income of the sum of the unamortized balance, which would total P3,600,000 calculated as (P450,000 annual amortization x 8 remaining years)

The amount to be reported in inventory is P2,500,000. This includes costs directly related to duplication of computer software and training materials from product masters (P2,500,000). Other costs related to packaging product or training materials do not generally fall under inventory costs unless specifically required as part of inventory.

The total amount reported as research and development expense is P9,300,000. This includes salaries of laboratory employees (P2,500,000), legal fees for patent application (P200,000), design, testing, and construction of prototype (P4,000,000), labor and materials for the prototype (P1,000,000), and the equipment depreciation solely for development use, which is P600,000 (P1,500,000/4 years). The total is P9,300,000.

The total amount to be expensed is P2,950,000. This includes the travel of salaried employees (P500,000), license fees (P150,000), training of local employees (P1,500,000), and advertising (P800,000). These costs are typically expensed as incurred during the start-up phase. Production equipment costs (P4,000,000) do not fall under organization costs and are capitalized.

The total amount to be reported as research and development expense is P520,000. This includes modification to the formulation of a chemical product (P135,000), design of tools, jigs, molds, and dies involving new technology (P170,000), and laboratory research aimed at discovery of new technology (P215,000). These costs meet the criteria for research and development expenses.

An initial capitalization of P5,400,000 should be made. This includes costs incurred after technological feasibility, specifically for coding and testing after establishment (P2,400,000) and completion of detailed program design or working model (P1,300,000), as well as necessary adjustments and cost of producing product masters (integral for training), up to P1,700,000.

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