Assignment – Intangible Assets

1. Mang Inasal has developed a secret chicken recipe which has spurred substantial growth for the
business. As a result of the growth, can Mang Inasal recognize an intangible asset?
a. Yes, because it pertains to goodwill.
b. Yes, because it is identifiable.
c. No, because it is not identifiable.
d. No, because the company has no control over the growth of the company.

2. ABC Co. is a manufacturer of several consumer products. It was able to develop internally a
detergent laundry soap (e.g. Arial) which has become popular among consumers. Can the brand
name or trademark relating to the detergent laundry soap be recorded as an intangible asset?
a. Yes, because it will provide future economic benefits and the development cost can be
used as basis to measure the initial cost.
b. Yes, because it is identifiable
c. Both A and B
d. No, because it is an internally generated intangible asset.

3. Statement 1: ABC Co., entered into a contract with a competitor XYZ Co., whereby XYZ Co.
cannot engage in same line of business ABC Co. is engaged in for a period of 5 years. A s
remuneration, ABC Co. paid XYZ Co. P1,000,000. ABC Co. should recognize an intangible asset.
Statement 2: The exceptional skills of employees as a result of training programs can be
capitalized as intangible asset became the employer are under the control of the business
entity.
a. Only statement 1 is true.
b. Only statement 2 is true.
c. Both statements are true.
d. Both statements are false.

4. Statement 1: Intangible assets with definite useful lines are amortized over their useful lives and
are tested for impairment at the end of reporting period if there is an indication of impairment.
Statement 2: Intangible assets with indefinite useful lives are not amortized but are tested for
impairment at least annually and whenever there is an indication that the intangible asset may
be impaired.
a. Only statement 1 is true.
b. Only statement 2 is true.
c. Both statements are true.
d. Both statements are false.

5. ABC Mining Co. was able to obtain a contract from the government which gives the company
the right to make oil exploration on a government owned property. ABC paid the government
 P5,000,000 for the right. ABC applies the full cost method in accounting for working assets. The
journal entry to record this transaction in the books of ABC is:
a. Working Asset 5,000,000
Cash 5,000,000
b. Oil exploration expense 5,000,000
Cash 5,000,000
c. Oil exploration right (Intangible Asset) 5,000,000
Cash 5,000,000
d. Exploration and evaluation asset 5,000,000
Cash 5,000,000

6. ABC Construction Co. entered into a contract with the government for the contruction of a
P50,000,000 bridge. As compensation for the construction, the government will allow ABC to
change toll fees on motorists for a period of 10 years. After 10 years, the bridge will be handed
back to the government. Upon completion of the bridge, ABC should recognize a non-current
asset under the line item:
a. Property, Plant and Equipment
b. Long-term Investment
c. Intangible Asset
d. Other Non-current asset

7. Statement 1: The basis for the initial measurement of intangible assets is cost. The basis for
subsequent measurement is cost less accumulated depreciation and any accumulated
impairment loss.
Statement 2: Subsequent expenditures on intangible assets are expensed. They can only be
capitalized if they can enhance future economic benefits.
a. Only statement 1 is true.
b. Only statement 2 is true.
c. Both statements are true.
d. Both statements are false.

8. Statement 1: Cost incurred in ongoing a corporation such as legal fees and incorporation fees
are charged to expense. These costs are a good example of start-up cost.
Statement 2: Under the residual approach, the formula to determine goodwill is purchase price
use fair value of net assets acquired excluding goodwill.
a. Only statement 1 is true.
b. Only statement 2 is true.
c. Both statements are true.
d. Both statements are false.

9. Statement 1: All expenditures related to research and development costs are expensed.
 Statement 2: Research and development expenditures which have alternative future use can be
capitalized.
a. Only statement 1 is true.
b. Only statement 2 is true.
c. Both statements are true.
d. Both statements are false.

10 to 15 are based on the following

You are provided with the following information regarding Monica Co. on December 31, 2020:

Carrying Amounts Fair Value

Total Assets P8,380,000 P8,380,000
Total Liabilities P2,350,000 P2,350,000
Shareholder's Equity
Share Capital P3,000,000 P4,700,000
Retained Earnings:
Net Income - 2016 to 2020 P4,230,000 P4,230,000
Dividends paid - 2016 to 2020 - 1,200,000 - 1,200,000
Balance 3,030,000 3,030,000
Total Shareholder's Equity 6,030,000 7,730,000
Total Liabilities and Shareholder's Equity P8,380,000 10,080,000

10. If you purchased Monica Co. for P8,000,000, how much goodwill should be recognized?
11. Assume that P500,000 goodwill is included in total assets. If you purchased Monica Co. for
P7,600,000, how much goodwill should be recognized?
12. If you purchased Monica Co. for P7,500,000, how much is the goodwill/gain on bargain
purchase? Note: Beside your answer, write whether it is goodwill or gain on bargain purchase.
13. Using direct approach, compute goodwill assuming it is measured at the average excess
earnings capitalized at 25%. Assume a normal rate of return in the industry of 10%.
14. Using direct approach, compute goodwill assuming it is measured at average earnings
capitalized at 9%.
15. Compute the purchase price of Monica CO. assuming goodwill is measured at average excess
earnings for 5 years. Assume a normal rate of return of 10% in the industry.

16 to 28 are based on the following

On March 1, 2015, ABC Co. conducted research activities by purchasing a special equipment for
P1,000,000 to be used solely for the development of a new product, and another equipment for
P3,000,000 to be used also for the development of the same product but with an alternative future use.
The estimated useful lives of the equipment were 5 and 4 years respectively. On December 5, 2015, a
cost summary of the research activity was as follows:

Salaries of engineers and scientists P1,500,000

Research materials purchased and used 700,000
Depreciation of building where research was conducted 100,000

On January 1, 2016, the product’s technical feasibility and commercial viability was established.
Additional P400,000 development cost was incurred from January 1 to March 31, 2016. The patent was
applied for and granted on April 1, 2016. Legal and registration fees totaled P90,000. The estimated
useful life of the patent was 10 years. On February 1, 2017, legal fee of P200,000 was incurred in
connection with the successful defense of the patent. On January 1, 2018, a related patent was
purchased for P108,250 which extended the life of the old patent by 2 years. On September 30, 2020,
the product covered by the patent was withdrawn from the market on government order due to
potential hazard in the product.

Required:
Give the journal entry on:
16. March 1, 2015 to record purchases of equipments.
17. December 31, 2015 to record the summary of the research activities.
18. December 31, 2015 to record depreciation of equipment.
19. March 31, 2016 to record the additional development cost.
20. April 1, 2016 to record legal and registration fees.
21. December 31, 2016 to record amortization of patent for 2016.
22. February 1, 2017 to record P200,000 legal fee.
23. December 3, 2017 to record amortization of patent for 2017.
24. January 1, 2018 to record purchase of related patent.
25. December 31, 2018 to record amortization of patent for 2018.
26. December 31, 2019 to record amortization of patent for 2019.
27. September 30, 2020 to update amortization of patent.
28. September 30, 2020 to write-off the patent.

Chart of Accounts
A. Cash
B. Equipment
C. Accumulated Depreciation – Equipment
D. Accumulated Depreciation – Building
E. Patent
F. Amortization Expense – Patent
G. Legal Expense
H. Research and Development Expense
I. Impairment Loss

29 to 45 are based on the following

On August 1, 2017, ABC Co. signed a contract with XYZ Co. whereby ABC shall operate as a
franchisee of XYZ for 15 years at an initial franchise fee of P3,000,000. P1,000,000 is to be paid on
August 1, 2017 and a P2,000,000, non-interest bearing note was issued which is payable on August 1,
2018 and August 1, 2019. The market rate of interest for a note of this type is 12%. In addition, XYZ Co.
shall have a share of 5% of the net income of ABC Co. every year, payable every February 15 of the
following year. On December 31, 2019, it was determined that the remaining useful life of the franchise
was only 4 years because recent development in the market indicated that the products covered by the
franchise will be obsolete in 4 years. On this date, the fair value less cost to sell of the franchise was
P1,000,000. In view of the declining projected net income, ABC Co. decided to apply double declining
method in the amortization of the franchise starting 2020.

Additional Information:
A. Net income of ABC Co.:
2017 – P300,000 ; 2018 – P800,000 ; 2019 – P1,200,000
B. Projected Net Income of ABC Co.
2020 – P1,000,000 ; 2021 – P600,000 ; 2022 – P300,000 ; 2023 – P100,000

Required:
Give the journal entry on:
29. August 1, 2017 to record the franchise.
30. December 31, 2017 to record amortization of franchise.
31. December 31, 2017 to take up periodic franchise fee.
32. December 31, 2017 to take up amortization of discount on Notes Payable.
33. February 15, 2018 to record payment of periodic franchise fee.
34. August 1, 2018 to record 1s t payment of note payable.
35. December 31, 2018 to record amortization of franchise.
36. December 31, 2018 to take up periodic franchise fee.
37. December 31, 2018 to take up amortization of discount of Notes Payable
38. February 15, 2019 to record payment of periodic franchise fee.
39. August 1, 2019 to record 2nd payment of note payable.
40. December 31, 2019 to record amortization of franchise.
41. December 31, 2019 to take up periodic franchise fee.
42. December 31, 2019 to take up amortization of discount of Notes Payable
43. December 31, 2019 to record impairment loss.
44. February 15, 2020 to record payment of periodic franchise fee.
45. December 31, 2020 to record amortization of franchise.
Note: Round-off all computation to the nearest peso. Use the whole PV factor.

Chart of Accounts
A. Cash
B. Franchise
C. Notes Payable
D. Discount on Notes Payable
E. Franchise Fee Payable
F. Amortization Expense – Franchise
G. Franchise Fee Expense
H. Interest Expense
I. Impairment Loss