SAMPLE PROBLEMS: INTANGIBLE ASSETS

Problem 1
Transactions during the current year of the newly organized Lovely Company included the following:
·         Paid legal fees of P60, 000 and stock certificate costs of P20, 000 to complete organization of the
corporation.
·         Hired a clown to stand in front of the corporate office for two weeks and hand out pamphlets and
candy, P15, 450.
·         Patented a newly developed process with cost as follows:
Legal fees to obtain patent                          550,000
Patent application and licensing fees      65,000.
It is estimated that in five years other companies will have developed improved similar process, making
the patent process obsolete.
·         Acquired both a license to use a special type of container and a distinctive trademark to be printed
on the container in exchange for 6,000 ordinary shares of Lovely Company selling for P50 per share. The
license is worth twice as much as the trademark, both if which may be used for four years.
·         Constructed a shed for P355, 000 to house prototypes or experimental models to be developed in
future research projects.
·         Incurred salaries for an engineer and a chemist involved in product development totaling P200, 400
in the current year.
How much should be recognized as total initial cost of all intangible assets?
 
Legal fees to obtain patent 550,000
Patent application and licensing fees 65,000
Trademark (6,000 x P50 x 1/3) 100,000
License (300,000 x 2/3) 200,000
Total Cost of Intangible Assets 915,000  

Problem 2
Tobin Company incurred P1, 700,000 of research and development cost to develop a product for which a
patent was granted on January 1, 2018. Legal fees and other costs associated with registration of the
patent totaled P380, 000. On March 31, 2018, Tobin paid P440, 500 for legal fees in a successful defense
of the patent. What is the total amount that should be capitalized for the patent through March 31, 2018?

Legal fees and other costs 380,000

Problem 3
Queen Company developed a new machine that reduces the time required to insert the fortunes into its
fortune cookies. Because the process is considered very valuable to the fortune cookie industry, Queen
Company patented the machine. The following expenses were incurred in developing and patenting the
machine:
Research and development laboratory expense 560,000                                        
Metal used in the construction of the machine                  165,000
Blueprint used to design the machine                                              68,000
Legal expenses to obtain patent                                                       320,000                                     
Wages paid for the employees’ work on the research and
Development, and building of the machine (60% of the time
Was spent in actually building the machine)    800,000                          
Expense of drawing required by the patent office to be
     Submitted with the patent application              35,000                                  
Fee paid to government patent office to process application 57,000
 
At year-end, Queen Company paid P390, 000 in legal fees to successfully defend the patent  against an
infringement suit by another entity.
 
How much of the expenditures should be capitalized as cost of patent?
 

Legal expenses to obtain patent 320,000

Expense of drawing required by the patent office to be

submitted with the patent application 35,000

Fee paid to government patent office to process application 57,000

Total capitalizable cost of patent 412,000

Problem 4
Golden 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                          1,700,000
Research salaries and fringe benefits for engineers and scientists 300,000                                      
Cost of testing prototype                                              200,000
Legal cost for filing of patent                                                                         6,000
     Fees paid to government patent office                                                          40,000
     Drawings required by patent office to be filed with patent
                  Application                                                                                             50,000
 
a.       How much should be capitalized as cost of patent?

Legal cost for filing of patent 6,000

Fees paid to patent office 40,000

Drawings required by patent office 50,000

Total cost of patent 96,000

b.      How much research and development cost should be expensed in the current year?
 

Purchase of special equipment 1,700,000

Research salaries and fringe benefits 300,000

Cost of testing prototype 200,000

Research and development Expense 2,200,000
 
Problem 5
Iceberg Company purchased a patent on January 1, 2013 for P8, 000,000. The original useful life was
estimated to be 15 years. However, in December 2018, Iceberg’s controller received information proving
conclusively that the product protected by the Iceberg patent would be obsolete within four years.
Accordingly, the entity decided to write off the unamortized portion of the patent cost over five years
beginning in 2018.
 
What is the patent amortization for 2018?
 

Cost- January 1, 2013 8,000,000

Accumulated amortization (8,000,000/15 x 5) Dec. 31,2017 (2,666,667)

Carrying amount - January 1, 2018 5,333,333

Amortization for or 2010 (5,333,333/5) 1,066,667

Problem 6
On January 1, 2015, Taft Company purchased a patent for P9, 150,000. The patent is being amortized
over its remaining legal life of 15 years expiring on January 1, 2030. During 2018, Taft determined that
the economic benefits of the patent would not last longer than ten years from the date of acquisition.
What should be reported in the statement of financial position as carrying amount of patent on December
31, 2018?

Cost - January 1, 2015 9,150,000

Amortization for 3 periods (9,150,000/15 x 3) (1,830,000)

Carrying amount - December 31, 2017 7,320,000

Amortization for 2018 (7,320,000/7) (1,045,714)

Carrying amount - December 31, 2018 6,274,286

 
Problem 7
On January 1, 2015, Lava Company purchased a patent for a new consumer product for P980, 000. At the
time of purchase, the patent was valid for 15 years. However, the patent’s useful life was estimated to be
only 10 years due to the competitive nature of the product. On December 31, 2018, the product was
permanently withdrawn from sale under governmental order because of potential health hazard in the
product.
What amount should lava charge against income during 2018 if amortization is recorded at the end of
each year?
 

Acquisition cost 980,000

Amortization for 2015,2016,2017 (980,000/10 x 3) (294,000)

Carrying amount for 2018 686,000

Problem 8
Zamboanga Company acquired three patents in January 2018. The patents have different lives as
indicated in the following schedule:
 
                                Cost                       Remaining useful life                      remaining legal life
Patent X               1,500,000                             10                                                           8
Patent Y               2,450,000                             5                                                              10
Patent Z               3,780,000                             6                                                              15
 
Patent Z is believed to be uniquely useful as long as the entity retains the right to use it. In June 2018, the
entity successfully defended its right to Patent Y. Legal fees of P430,000 were incurred in this action. The
entity’s policy is to amortize intangible assets by the straight line method to the nearest half year. The
entity reports on a calendar-year basis. What amount of amortization should be recognized for 2018?

Patent X (1,500,000/8) 187,500

Patent Y (2,450,000/5) 490,000

Patent Z (3,780,000/6) 630,000

Total amortization 1,307,500
Problem 9
Gray Company was granted a patent on January 1, 2015, and appropriately capitalized P550, 000 of
related costs. Gray was amortizing the patent over its estimated life of 15 years. During 2018, Gray paid
P250, 000 in legal costs in successfully defending an attempted infringement of the patent. After the legal
action was completed, Gray sold the patent to the plaintiff for P850, 000. Gray’s policy is to take no
amortization in the year of disposal. In its 2018 income statement, what amount should Gray report as
gain from sale of patent?

 Acquisition cost, January 1, 2015 550,000

Amortization for 2015, 2016, 2017 (550,000/15x 3) (110,000)

Carrying amount - January 1, 2018 440,000

Sales price 850,000

Remaining cost of patent (440,000)

Gain from sale of patent 410,000

Problem 10
Romblon Company purchased another entity for P8, 700,000 each. A schedule of the fair value of entity’s
assets and liabilities as of the purchase date follows:
                Cash                                                               60,000
                Accounts receivable                                   850,000
                Inventory                                                     1,300,000
                 PPE                                                             4,100,000             6,310,000
 
Current liabilities                                                       850,000
Note payable – bank (long term)                           1,360,000            2,210,000
Net assets at fair value                                                                            4,100,000
 
What is the goodwill arising from the acquisition?

Acquisition cost 8,700,000

Net assets at Fair Value (4,100,000)
Goodwill 4,600,000