SCHOOL OF ACCOUNTANCY, BUSINESS and HOSPITALITY
Accountancy Department
ACCT 1056 – Intermediate Accounting
First Semester, SY 2025-2026
EXERCISES
Intangible Assets (IAS 38)
Problem 1 - Items considered as intangible assets
Write YES or NO. Write YES if the item is considered an intangible asset. If not, write NO.
1. Investment in associate
2. Trees in a timber plantation
3. Cost of engineering activity required to advance the design of a product to the manufacturing stage
4. Lease prepayments (6 months’ rent paid in advance)
5. Right-of-use asset (equipment)
6. Internally generated publishing title
7. Costs incurred in the formation of the corporation
8. Operating losses incurred in the start-up of the business
9. Training costs incurred in start-up operations
10. Purchase of a franchise
11. Internally generated goodwill
12. Cost of testing in search for product alternatives
13. Goodwill acquired in the purchase of a business
14. Cost of purchasing a patent from an inventor
15. Legal costs incurred in securing a patent
16. Costs of a successful legal suit to protect the patent
17. Cost of conceptual formulation of possible product alternatives
18. Cost of purchasing a copyright
19. Research and development costs
20. Long-term receivables
21. Advertising expenditure
22. Cost of purchasing a trademark
23. Computer software for a computer-controlled machine that cannot operate without that specific
software
24. Operating system of a computer
25. Cryptocurrencies that are not held for sale in the ordinary course of business nor for investment
purposes
Problem 2 - Items included in the cost of intangible assets
Write YES or NO. Write YES if the item is included in the cost of an intangible asset. If not, write NO.
1. Purchase price
2. Input tax
3. Import duties
4. Costs of employee benefits arising directly from bringing the asset to its working condition
5. Costs of introducing a new product
6. Costs of advertising and promotional activities
7. Costs of conducting business in a new location
8. Costs of staff training
9. Costs of testing whether the asset is functioning properly
10. Professional fees arising directly from bringing the asset to its working condition
11. Administration and other general overhead costs
12. Initial operating losses
13. Costs incurred while an asset capable of operating in the manner intended by management has yet to
be brought to use
14. Costs of relocating or reorganizing part or all of an entity’s operations
15. Expenses related to incidental operations before or during the development activities
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Problem 3 - Research and development activities
Write R if the item is a research activity. Write D if the item is a development activity. Write N if the item is not R&D.
1. Design, construction and testing of pre-production or pre-use prototypes and models
2. Engineering follow-through in an early phase of commercial production
3. Activities aimed at obtaining new knowledge
4. Quality control during commercial production, including routine testing
5. Trouble-shooting in connection with breakdowns during commercial production
6. Search for, evaluation, and final selection of applications of research findings or other knowledge
7. Design of tools, jigs, molds, and dies involving new technology
8. Routine ongoing effort to refine, enrich, or improve quality of an existing product
9. Adaptation of an existing capability to a particular requirement or customer need
10. Periodic design changes to existing products
11. Design, construction, and operation of a pilot plant that is not of a scale economically feasible for
commercial production
12. Search for alternatives for materials, devices, products, processes, systems, or services
13. Routine design of tools, jigs, molds, and dies
14. Design, construction, and testing of a chosen alternative for new or improved materials, devices,
products, processes, systems, or services
15. Formulation, design, evaluation, and final selection of possible alternatives for new or improved
materials, devices, products, processes, systems, or services
Problem 4 – True or False
Write TRUE if the statement is correct, otherwise write FALSE if the statement is incorrect.
1. Amortization of limited-life intangible assets should not be impacted by expected residual values.
2. Internally generated goodwill associated with a business may be recorded as an asset when a firm
offer to purchase that business unit has been received.
3. All intangibles are subject to periodic consideration of impairment with corresponding potential write-
downs.
4. Research and development costs are recorded as an intangible asset if it is felt they will provide
economic benefits in future years.
5. Limited-life intangibles are amortized by systematic charges to expense over their useful life.
6. PAS 38 Intangible Assets applies to intangible assets held for sale in the ordinary course of business.
7. In the case of a machine incorporating software that cannot be operated without the software, the
entire item would be treated as property, plant, and equipment under PAS 16 Property, Plant and
Equipment.
8. In order to determine whether an internally generated intangible asset qualifies for recognition, its
generation is divided into a research phase and a development phase. If the two phases cannot be
distinguished, then the entire expenditure is classified as development.
9. PAS 38 Intangible Assets prescribes the recognition of internally generated goodwill as an asset.
10. Some intangible assets are not required to be amortized every year.
11. If the revaluation model is used, at the date of the revaluation, accumulated amortization and
impairment losses are either eliminated against the cost, and the net amount is uplifted to the
revalued amount, or are restated proportionately to the restatement of the gross carrying amount such
that the net amount is equal to the fair value.
12. An intangible asset with a residual value at anything other than zero assumes that the entity will
dispose of the asset prior to the end of its economic life.
13. Internally generated goodwill should not be capitalized in the accounts.
14. The residual value is assumed to be zero unless there is a commitment by a third party to acquire the
asset at the end of its useful life, or there is an active market for the asset and the residual value can
be determined by reference to that market, and it is virtually certain that an active market will continue
to exist at the end of the asset’s useful life.
15. If payment for an intangible asset is deferred beyond normal credit terms, then the cost is the cash
price, and the balance is treated as a finance charge over the period of the finance.
16. Market share and customer loyalty qualify for recognition as intangible assets.
17. Intangible assets acquired in a business combination shall be recognized separately from goodwill.
18. If intangible assets are acquired as part of a business combination, as defined in PFRS 3 Business
Combination, their cost is their fair value at the acquisition date.
19. Add-in software on a computer, such as some forms of report writing software or antivirus software,
are not required for operating the tangible asset and therefore would be accounted for under PAS 38
Intangible Assets.
20. Initially, intangible assets shall be measured at cost or revalued amount.
21. In some cases, an intangible asset may be contained on or in a tangible item such as computer
software, films, and licensing agreements.
22. The purchase of customer lists or expenditure on advertising are considered identifiable and therefore
recognized as intangible assets.
23. A patent is amortized over the useful life or legal life of twenty years, whichever is longer.
24. Internally generated brand, masthead, publishing title, and customer list shall be recognized as
intangible assets.
25. An entity controls an asset if it has the power to obtain the future economic benefits flowing from the
underlying resource and to restrict the access of others to those benefits.
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26. The skill of employees arising out of the benefits of training costs can be recognized as an intangible
asset.
27. Entities are to apply the provisions of PAS 36 Impairment of Assets in assessing the recoverable
amount of an intangible asset and when and how to determine whether an asset is impaired.
28. Organization cost is recognized as an intangible asset and amortized over a period of five years.
29. Intangible assets shall be derecognized on disposal or when no future economic benefits are
expected to be derived from their use or disposal.
30. According to SIC 32, a website that has been developed for the purposes of promoting and
advertising an entity’s products and services does not meet the criteria for capitalization of costs
under PAS 38.
Problem 5 – Capitalizable cost of Trademark
During the year 2023, DRAMA Company acquired a trademark for P1,700,000 plus purchase taxes of P400,000. Half of
these taxes is nonrefundable while the remaining half is refundable. Legal costs of transferring the title over the trademark
amounted to P300,000. Costs of announcing to the public that the trademark has been acquired by the entity amounted to
P120,000.
Required: From this information, determine the capitalizable cost of the trademark.
Problem 6 – Journal Entries
During the year 2023, EMERALD Company had the following transactions involving the acquisition of intangible assets:
1. On January 1, 2023, a trademark was acquired for P4,500,000 by paying P500,000 cash and issuing an 8%
interest-bearing promissory note that will mature after four years. Market rates averaged 8%.
2. On July 1, 2023, a patent was acquired for a total price of P5,000,000, where P2,000,000 down payment was made
and the balance was evidenced by a three-year noninterest-bearing promissory note. Market rates averaged 6%.
3. On October 1, 2023, another patent was acquired by paying P1,000,000 cash and issuing a two-year noninterest-
bearing note with face amount of P5,000,000. The face amount of the note is payable in equal annual installments
of P2,500,000 starting one year after the date of purchase. Market rates averaged 7%.
Required: Determine the journal entry to record each of these transactions.
Problem 7 – Journal Entries
RUBY Company acquired the following intangible assets during the year 2023:
1. On May 1, 2023, a franchise was acquired by issuing 50,000 common shares with P20 par value. As of the same
date, the franchise had a fair value of P1,500,000, while the ordinary shares had P32/share fair value.
Documentation costs for the transaction amounted to P150,000.
2. On September 1, 2023, a customer list was acquired by issuing 30,000 common shares with P20 par value. The
customer list’s fair value is not reliably determinable, but the shares had P34/share fair value.
3. On October 1, 2023, another franchise was acquired by issuing 60,000 common shares with P20 par value. This
franchise had fair value of P1,750,000, while the shares’ fair value is not reliably determinable.
Required: Determine the journal entry to record each of these transactions.
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Problem 8 – Intangibles acquired in a Business Combination
SAPPHIRE Company acquired the following assets in a single transaction price of P22,000,000:
Carrying Amounts Fair Values
Land P4,000,000 P5,000,000
Building 8,000,000 9,000,000
Equipment 2,000,000 1,500,000
Patent 900,000 1,600,000
Trademark - 2,000,000
Franchise 750,000 900,000
Required: Determine the initial measurement of each acquired asset under each of the following independent
scenarios:
1. The transaction is not a business 2. The transaction is a business combination.
combination.
Problem 9 – Research and Development Expenditures
Required: From the given information below, determine the amount of research and development expenditures
for the year 2023.
OPAL Company, a pesticide manufacturer, incurred the following costs during the year 2023:
Repair and troubleshooting costs incurred during the commercial a P 400,000
production process
Costs of evaluating and testing the alternative new product 1,200,000
formulations that can be developed and marketed in the future
Modifications made to the current production process to 560,000
accommodate a large specialized order by a customer
Costs of modifying the production process to accommodate the 800,000
new product that will be manufactured
Purchase cost of a machinery acquired on January 1 that can be 2,800,000
used in multiple R&D projects for 4 years and can be used in
commercial production for 3 years thereafter
Purchase cost of a machinery acquired on July 1 that can be used 600,000
for only a single project
Cost of testing the new product formulation regarding its effect in 750,000
the environment
Costs of modifying the existing product formulations to check the 900,000
reduction of their adverse impact to the environment
Total costs of manufacturing the Company’s existing products 4,000,000
Problem 10 – Research and Development Expenditures
During the year 2023, PIONEER’ Company, a smartphone processor chips manufacturer, self-constructed an equipment
to be specifically used in its production process. In connection with this, the Company incurred the following
costs:
1. Costs of researching possible production design, P450,000
2. Costs of constructing prototype version of the equipment to be putin test runs, 1,500,000
3. Costs of testing the prototype 200,000
4. Adjustments made to the prototype to account for the incompatibilities identified during testing 600,000
5. Final testing costs of the prototype 300,000
6. Costs of materials, labor and overhead for constructing the final and production version of the equipment
2,800,000
7. Costs of patent application, including the drawings required by the intellectual property office (IPO) 250,000
8. Fees paid to IPO to register the patent for the specialized equipment 350,000
The final version of the equipment was put into use starting July 1, 2023. It has an estimated useful life of 5 years. After
which, the equipment’s manufacturing procedures will be considered obsolete and new procedures shall be researched
and developed. The patent, on its own, has an estimated useful life of 10 years from July 1, 2023.
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Required: From this information, determine the amounts of the following:
a. Research and development expense
b. Carrying amount of the equipment as of December 31, 2023 and 2024
c. Carrying amount of the patent as of December 31, 2023 and 2024
Problem 11 – Patent
On January 1, 2023, ZIRCON Company had the following patents:
Carrying Remaining Useful Remaining
Amount Life Legal Life
Patent A P 2, 400,000 10 years 12 years
Patent B 3,000,000 12 years 8 years
Patent C 3,500,000 15 years 14 years
During the year 2023, the following events related to the patents have occurred:
• July 1, 2023 - Patent D was acquired for P1,800,000, with remaining useful life of 9 years and remaining legal life
of 11 years.
• Also, the following legal costs were incurred:
➢ P150,000 for successfully defending Patent A against an infringement case.
➢ P120,000 for unsuccessfully defending Patent B against an infringement case.
➢ P160,000 for successfully prosecuting. a patent infringing Patent C.
➢ P125,000 for unsuccessfully prosecuting a patent infringing Patent D.
Required: From the given information, determine the following:
a. Total amount to be recognized in the Company’ s 2023 profit or loss.
b. Journal entries for the year 2023.
c. Total net carrying amount of the patents as of December 31, 2023.
Problem 12 – Patent
At the beginning of 2023, TOPAZ Company had the following patents:
Cost of Date of Remaining Remaining
Purchase Purchase Useful Life Legal Life
Patent 1 P 2,880,000 01/01/19 16 years 19 years
Patent 2 3,520,000 07/01/20 14years 11 years
Patent 3 3,010,000 01/01/21 7 years 10 years
(Note: Remaining useful life and legal life were as of the date of, purchase and not as of January 1, 2023)
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In addition, the following transactions involving patents have occurred during 2023:
➢ April 1, 2023 - Patent 4 was acquired for P2,200,000 with remaining legal life and useful life of 10 years and 8
years, respectively.
➢ July 1, 2023 - Patent 5, a competing against Patent 3: was acquired for P1,800,000, Patent 5 has a remaining
useful life and legal life of 12 years and 10 years, respectively.
➢ October 1,2023 - Patent 2 was sold for P2,590,000.
➢ October 31, 2023 - Legal costs of P200,000 were incurred in successfully defending Patent 1 against infringement
case.
Required: From the given information, determine the following:
a. Total net carrying amount of the patents as of January 1, 2023.
b. Total amount to be recognized in the Company’s 2023 profit or loss.
c. Journal entries for the year 2023.
d. Total net carrying amount of the patents as of December 31, 2023.
Problem 13 – Franchise
On January 1, 2023, AQUAMARINE Company signed a ten-year franchise agreement with a franchisor, Initial franchise
fee amounted to P6,000,000, with the Company paying P 1,000,000 down payment and issuing noninterest-bearing
promissory note for the balance. As of the same date, market rates averaged 9%.
In addition to the initial fee, additional franchise fees of 2% of revenues from the franchise are required to be paid to the
franchisor every January 15 of the succeeding year. Revenues generated from the franchise amounted to P4,000,000
and P4,500,000 during 2023 and 2024, respectively.
Required: From the given information, determine the following:
a. Journal entries to be made for the years 2023 and 2024.
b. Net amounts to be reported in the Company’s 2023 and 2024 profit or loss.
c. Carrying amount of the franchise asset as of December 31, 2023 and 2024.
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Problem 14 - Trademark
At the beginning of 2023, ALEXANDRITE Company acquired a trademark for P8,000,000. This asset had a remaining
legal life of 8 years but is expected to be renewed indefinitely. There were no indicators of impairment during the years
2023 and 2024.
As of December 31, 2023 and 2024, the following information may be relevant:
FVLCD* Annual Net Cash Inflow Relevant Discount Rate
December 31, 2023 P 7,500,000 P 690,000 8%
December 31, 2024 7,100,000 740,000 10%
*FVLCD is fair value less costs of Disposal
Required: From the given information, determine the carrying amount of the trademark as of December 31, 2023
and 2024.
Problem 15 – Website Cost
Required: From the given information, determine the initial cost of the Company’s website.
During the year 2023, SPINEL Company started developing its website that contain information on the Company and its
operations. Its customers can also place their orders with Company through this website, In connection with the
development, the Company incurred the following costs:
Costs of conducting viability studies P 50,000
Costs of describing hardware and software
200,000
requirements
Costs of selection of alternative products and
180,000
suppliers
Acquisition of hardware components 1,500,000
Designing and layout costs for the website 250,000
Purchase price of the domain name 500,000
Costs of developing the website’s software 750,000
Costs of stress testing the website 160,000
Costs of reviewing security access after the
300,000
website became live
Costs of training the employee that will monitor
80,000
the website
Costs of developing the graphical contents in the
220,000
website
Total
Problem 16 – Comprehensive Problem
0n January 1, 2023, AMBER Company was established and started its operations right away. During the year, the
following transactions have occurred:
January 1, 2023 - The following costs were incurred related to the Company’s startup activities:
• Costs of transporting the key employees from their hometown to the Company’s location amounted to P800,000. ’
• Costs of acquiring initial quantities of inventories amounted to P2,800,000. Eighty percent of these inventories
were sold during the year.
• Costs of publicity materials announcing the start of the Company’s operations amounted to P300,000.
January 2, 2023 - A five-year franchise was entered into for an initial franchise fee of P4,000,000, payable in P1,000,000
cash and two-year noninterest-bearing promissory note for the balance. Market rates as of that date averaged 6%.
In addition to the initial franchise fee, additional franchise fee of 3% of the revenues from the franchise shall be paid on
January 31 of the succeeding year. Related revenues for the year amounted P6,000,000.
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April 1, 2023 - A patent was acquired for P5,000,000 and had estimated remaining legal life and useful life of 10 years
and 8 years, respectively.
July 1, 2023 - A trademark with remaining 5-year legal life was acquired for P3,000,000. The Company expects to renew
the trademark’s legal life in indefinite number of renewals.
Fast forward to December 31, 2023, the trademark’s fair value less costs to sell amounted to P2,750,000 while annual net
cash inflows from this asset is estimated to be P230,000. Relevant discount rate is 7%.
October 1, 2023 - To further promote the Company's goodwill, the Company spent P250,000 for the feeding program and
P400,000 in a year-end party to the community.
Required: From the given information, determine the following:
a. Journal entries during the year 2023.
b. Total amount to be recognized in the Company's 2023 profit or loss.
c. Net carrying amount of all the Company’s intangible asset as of December 31, 2023.
Prepared by Jerome D. Marquez, IA 2 Instructor
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