PROBLEM 1:
The following costs are generally incurred by FRIEREN Company, a newly established entity:
1. Pre-opening cost of a business facility P250,000
2. Purchased recipes and secret formulas 150,000
3. Training, customer loyalty, and market share 140,000
4. Licensing, royalty, and standstill agreement 300,000
5. Operating and broadcast rights 112,000
6. Goodwill purchased in a business combination 500,000
7. A license to manufacture steroids by means of a government grant 150,000
8. Cost of courses taken by management in quality engineering management 450,000
9. A television advertisement that will stimulate the sales in the industry 100,000
10. Investment in associate 500,000
11. 6-month lease payment in advance 300,000
12. Cost of equipment acquired through a finance lease 100,500
13. Internally developed customer list 120,500
14. Cost incurred in the corporation’s formation and organization 230,000
15. Operating losses incurred in the start-up of the business 130,000
16. Initial franchise fees paid 175,000
17. Continuing franchise fees 50,000
18. Internally generated goodwill 800,000
19. Cost of testing in search for a product alternative 125,000
20. Cost of purchasing a patent from an inventor 137,000
21. Legal cost in securing a patent 70,000
22. Legal costs incurred in successfully defending a patent 55,500
23. Cost of developing brands, mastheads, and publishing a title 200,000
24. Cost of purchasing a trademark 250,000
25. Computer software for a computer-controlled machine that cannot operate without that specific 325,500
software
26. An operating system of a computer 125,000
27. Amount paid to lessor for the exclusive right to rent a facility under an operating lease agreement 100,000
for a period of 10 years
28. Cost of improvements on a leased facility 250,000
REQUIRED:
How much from the above items can be recognized as intangible assets, including goodwill?
PROBLEM 2:
In connection with your preparation of financial statements of HIMMEL Corporation, you noted the following
transactions during 2023:
January 02 Paid legal fees of P450,000 and other costs of P249,000 to complete organization of the
corporation.
15 Hired a clown to stand in front of the corporate office for 2 weeks and distributed pamphlets and
candy to create goodwill for the new entity. The clown’s fee was P30,000 while cost incurred
for the pamphlets and candy were P15,000.
April 01 Patented a newly developed process with costs as follows:
Legal fees to obtain patent P1,287,000
Patent application and licensing fees 190,500
Total P1,477,500
It is estimated that in 6 years other companies will have developed improved processes, making
the patented process obsolete.
May 01 Acquired both a license to use a special type of container and a distinctive trademark to be
printed on the container in exchange for 18,000 shares of HIMMEL’s no par ordinary shares
selling for P50 per share. The license is worth twice as much as the trademark, both of which
may be used for 6 years.
July 01 Constructed a shed for P3,930,000 to house prototypes of experimental models to be developed
in future research projects.
December 31 Incurred salaries for an engineer and chemist involved in product development totaling
P750,000 in 2023.
It is the company’s policy to take full year amortization in the year of acquisition.
REQUIRED:
1. Cost of patent
2. Cost of licenses
3. Cost of trademark
4. Carrying amount of intangible assets as of December 31, 2023
5. Total amount resulting from the foregoing transactions that should be expensed when incurred
PROBLEM 3:
You gathered the following information related to the Patents account of the STARK Company in connection with your
preparation of the company’s financial statements for the year 2024. In May 2023, STARK developed a new machine that
will allow shoelaces to be automatically tied when the shoes were worn. Because the process is considered revolutionary
and very valuable to the shoe industry, STARK patented the machine. The following expenses were incurred in developing
and patenting the machine:
Research and development laboratory expenses P2,500,000
Metal used in the construction of the machine 800,000
Blueprints used to design the machine 320,000
Legal expenses to obtain patent 1,200,000
Wages paid for the employees’ work on the research, development, and building of the machine (60% of the 3,000,000
time was spent building the machine)
Expense of drawing required by the patent office to be submitted with the patent application 170,000
Fees paid to the government patent office to process application 250,000
During 2024, STARK paid P375,000 in legal fees to successfully defend the patent against an infringement suit by a
company rival. It is the company’s policy to take full year amortization in the year of acquisition.
REQUIRED:
1. What is the cost of the patent?
2. What is the cost of the machine?
3. Total amount that should be charged to expense when incurred in connection with the development of the patented
machine.
4. What is the carrying amount of the patent as of December 31, 2024?
PROBLEM 4:
FERN Company acquired all of the outstanding ordinary shares of an acquiree paying P7,400,000 cash. The carrying
amount and fair value of the assets and liabilities of the acquiree were:
Accounts Carrying Amount Fair Value
Accounts receivable P1,080,000 P975,000
Inventory 1,620,000 2,400,000
Property, plant and equipment 5,400,000 6,975,000
Accounts payable 1,800,000 1,800,000
Bonds payable 2,700,000 2,475,000
REQUIRED:
1. What amount of goodwill should be reported at year-end?
2. Assuming the company paid P6,000,000 in cash in acquiring the net assets of the acquiree, what amount of goodwill
should be reported at year-end?
PROBLEM 5:
EISEN Company is planning to sell the business to new interests. The cumulative net earnings for the past five years
amounted to P16,500,000 including expropriation loss of P1,500,000. The normal rate of return is 20%. The fair value of
net assets of the entity at current year was P10,000,000.
REQUIRED:
What amount should be recognized as goodwill if:
1. Excess earnings are purchased for 5 years.
2. Excess earnings are capitalized at 25%.
3. Annual average earnings are purchased for 3 years.
4. Annual average earnings are capitalized at 25%.
5. Excess earnings are discounted at 12% for 5 years. (Round-off the PV factors to two-decimal places)
PROBLEM 6:
HEITER Company operates a production line which is treated as a cash generating unit for impairment review purposes. At
year-end the carrying amount of the noncurrent assets are as follows:
• Goodwill – P1,100,000
• Machinery – P2,200,000
The value in use of the production line is estimated at P2,700,000 at this time.
REQUIRED:
1. What is the revised carrying amount of goodwill after recognition of impairment?
2. What is the revised carrying amount of machinery after recognition of impairment?