CPA REVIEW SCHOOL OF THE PHILIPPINES
Mani la
FINANCIAL ACCOUNTING AND REPORTING VALIX/VALIX/ESCALA/SANTOS/DELA CRUZ
INTANGIBLE ASSETS
1. An entity 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 at current year-end was P10,000,000. What is the amount
of goodwill if:
1. Excess earnings are capitalized at 25%?
a. 7,200,000
b. 6,400,000
c. 8,000,000
d. 3,600,000
2. Annual average earnings are capitalized at 25%?
a. 1,600,000
b. 3,600,000
c. 4,400,000
d. 2,000,000
2. A parent entity purchased for P45,000,000 all of the outstanding shares of a subsidiary with net assets
of P32,000,000. Subsidiary assets and liabilities on the date of acquisition are:
Carrying amount Fair value
Property, plant and equipment 50,000,000 57,500,000
Other assets 5,000,000 0
Assembled workforce 2,000,000 2,500,000
Liabilities 30,000,000 28,000,000
What amount should be reported as goodwill?
a. 8,500,000
b. 6,000,000
c. 6,500,000
d. 8,000,000
3. On January 1, 2018, an entity purchased a patent for P4,500,000. The patent is being amortized over
the remaining legal life of 15 years. During 2021, the entity determined that the economic benefits
of the patent would not last longer than 12 years from the date of acquisition. What is the carrying
amount of the patent on December 31, 2021?
a. 3,600,000
b. 3,200,000
c. 3,300,000
d. 3,000,000
4. On January 1, 2021, an entity reported patent cost of P1,920,000 and related accumulated
amortization of P240,000. The patent was purchased on January 1, 2019 at which date the remaining
legal life was 16 years. On January 1, 2021, the useful life of the patent was determined to be only 8
years from the date of acquisition. On January 1, 2021, the entity paid P800,000, of which
three-fourths was for a trademark and one-fourth was for the other entity’s agreement not to
compete for a 5-year period in the line of business covered by the trademark. The entity considered
the life of the trademark indefinite. Moreover, the entity agreed to pay P50,000 to the other entity as
consulting fee each year for 5 years payable every January 1. What is the total carrying amount of
intangible assets on December 31, 2021?
a. 2,160,000
b. 2,480,000
c. 2,000,000
d. 2,040,000
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5. Earth Company incurred the following costs during the current year:
Laboratory research aimed at discovery of new knowledge 750,000
Design of tools, jigs, molds and dies involving new technology 400,000
Quality control during commercial production including routine testing 350,000
Equipment acquired with an estimated useful life of five years, no residual value
and no alternative future use 1,500,000
Research and development services performed by Star Company for Earth Company 250,000
Research and development services performed by Earth Company for Moon Company 200,000
What amount of research and development expense should be reported in the current year?
a. 2,900,000
b. 1,700,000
c. 1,900,000
d. 2,100,000
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 and
the follow up occurred during the current year 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
Special equipment with useful life of 4 years to be used solely for the 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
3. What amount of the costs incurred should be expensed immediately?
a. 8,200,000
b. 2,300,000
c. 6,700,000
d. 4,400,000
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