PrE2 MODULE- INTANGIBLE ASSETS

Learning Objectives:
At the end of the day, students shall be able to:
1. Know the criteria in defining an intangible asset.
2. Know the initial and subsequent measurement of an intangible asset.
3. Understand the amortization and impairment of intangible asset.
4. Understand the nature of goodwill as an intangible asset.

Intangible Assets are identifiable nonmonetary assets without physical substance.

The intangible asset must be controlled by the entity as a result of past event and from which
future economic benefits are expected to flow to the entity.
Accordingly, there are three essential criteria in the definition of an intangible asset, namely:
a. Identifiability
b. Control
c. Future economic benefits
Recognition of an intangible asset
An intangible asset shall be recognized if the following conditions are present:
a. It is probable that future economic benefits attributable to the asset will flow to the
entity.
b. The cost of the intangible asset can be measured reliably.
Initial measurement of intangible asset
An intangible asset shall be measured initially at cost.
PAS 38 specifically pertains to identifiable intangible assets.
If the intangible asset is acquired through purchase, there is a transfer of legal right that would
make the asset identifiable.
Moreover, if the asset could be sold, transferred, licensed, rented or sold separately, the
intangible asset is identifiable.
Examples of identifiable intangible assets are:
1. Patent
2. Copyright
3. Franchise
4. Trademark or tradename
5. Customer list
6. Computer software
7. Broadcasting license, airline right and fishing right
Classification of intangible assets
1. Intangible assets with definite life (patent, copyright, franchise, etc.)
2. Intangible assets with indefinite life (goodwill, trademark and perpetual franchise)
Activity. Problems
Problem 1. Harmonious Company acquired a patent for a drug with a remaining legal and
useful life of six years on January 1, 2016 for 5,400,000.
On January 1, 2018 a new patent is received for an improved version of the same drug. The new
patent has a legal and useful life of twenty years.
What is the amortization expense for 2018?
a. 900,000
b. 200,000
c. 180,000
d. 300,000

Cost - 1/1/2016 5,400,000

Amortization for 2016 and 2017 (5,400,000/6x2) (1,800,000)
Carrying amount 3,600,000
Amortization for 2018 (3,600,000/20 180,000

Problem 2. Iceberg Company purchased a patent on January 1, 2013 for 6,000,000. The original
useful life was estimated to be 15 years.
However in December 2018 the management 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 cost of the patent over five years
beginning in 2018.
What is the patent amortization for 2018?
a. 1,200,000
b. 1,000,000
c. 800,000
d. 400,000

Cost - 1/1/2013 6,000,000

Acc amortization- 12/31/2017
(6,000,000/15x5) 2,000,000
Carrying amount - 1/1/2018 4,000,000

Amortization for 2018 (4,000,000/5) 800,000

Problem 3. 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:
Purchased of special equipment to be used solely for
Development of the new machine 1,800,000
Research salaries and fringe benefits for engineers
And scientist 200,000
Cost of testing prototype 250,000
Legal cost for filing of patent 150,000
Fees paid to government patent office 50,000
Drawing required by patent office to be filled with
Patent application 40,000
What amount should be capitalized as cost of patent?
a. 240,000
b. 540,000
c. 740,000
d. 200,000
Legal cost of filing 150,000
Fee paid 50,000
Drawing required 40,000
Total cost of patent 240,000

What amount of research and development cost should be expensed in the current year?
a. 2,250,000
b. 2,000,000
c. 2,490,000
d. 1,800,000

Purchased of special equipment 1,800,000

Research salaries and fringe benefits 200,000
Cost testing prototype 250,000
Research and development expenses 2,250,000

Problem 4. Alcaraz Company paid 5,000,000 to purchase intangible assets with the following
fair value:
Internet domain name 1,500,000
Order backlog 1,200,000
In-process research and development 2,400,000
Operating permit 900,000
In addition the entity spent 2,000,000 to run an advertising campaign to boost its image in the
local community.
What amount should be recognized as cost of the in-process research and development?
a. 2,400,000
b. 2,000,000
c. 2,800,000
d. 0
 Fair value Fraction Cost
Internet domain name 1,500,000 15/60 1,250,000
Order backing 1,200,000 12/60 1,000,000
In process R and D 2,400,000 24/60 2,000,000
Operating permit 900,000 9/60 750,000
6,000,000 5,000,000

Problem 5. On January 1, 2015, Taft company purchased a patent for P7,140,000. the patent is
being amortized over the remaining legal life of 15 years expiring on January 1, 2030.

During 2018, the entity determined that the economic benefits of the patent would not last
longer than ten (10) years from the date of acquisition.

What is the carrying amount of patent on December 31, 2018?

a. 4,284,000
b. 4,896,000
c. 5,050,000
d. 5,236,000

Cost - 1/1/2015 7,140,000

Amortization for 2015, 2014 and 2017
(7,140,000/15 x 3) (1,428,000)
Carrying amount- 1/1/2018 5,712,000
Amortization for 2018 (5,712,000/7) (816,000)
Carrying amount-December 31, 2018 4,896,000

Goodwill

Problem 6. Wella 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:

Carrying Amount Fair Value

Accounts receivable 1,080,000 975,000
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)
Net assets acquired 3,600,000 6,075,000

What amount of goodwill should be reported at year-end?

a. 3,800,000
b. 1,325,000
c. 2,300,000
d. 0

Acquisition cost 7,400,000

Net assets acquired at fair value (6,075,000)
Goodwill 1,325,000
Problem 7. High Company purchased cash at P50 per share all 150,000 ordinary shares outstanding of
Skyline Company.
The statement of financial position of the acquiree on the date of acquisition showed net assets with a
carrying amount of P6,000,000.
The fair value of property, plant and equipment on the date of acquisition was P800,000 in excess of the
carrying amount.

What amount should be recorded as goodwill on the date of purchased?

A. 1,500,000
B.800,000
C. 700,000
D. 0

Acquisition cost (150,000 x P50) 7,500,000

Fair value of net assets acquired 6,800,000
Goodwill 700,000

Problem 8. At year-end , SKy Company reported assets at P5,000,000 and liabilities of P2,000,000. The
carrying amount of the assets approximate fair value except land which has fair value that is P300,000
greater than carrying amount.
On the same date, Blue Company paid P6,000,000 to acquire Sky Company.

What amount of goodwill should be recorded by the acquirer as a result of this purchase?
A. 1,000,000
B. 3,300,000
C. 2,700,000
D. 3,000,000

Acquisition cost 6,000,000

Net assets at fair value (3,000,000 +300,000) 3,300,000
Goodwill 2,700,000

Problem 9. Easter 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 of the current year-end was
P10,000,000.

What is the amount of goodwill if

1. Excess earnings are purchased for 5 years?

A. 8,000,000
B. 4,000,000
C. 5,000,000
D. 4,500,000

Cumulative earnings 16,500,000

Add back expropriation loss 1,500,000
Adjusted cumulative earnings 18,000,000

Average annual earnings (18,000,000/5) 3,600,000

Normal earnings (20% x 10,000,000) 2,000,000
Excess earnings 1,600,000
Goodwill (1,600,000x 5) 8,000,000

2. Excess earnings are capitalized at 25%?

A. 7,200,000
B. 6,400,000
C. 8,000,000
D. 3,600,000

Excess earnings 1,600,000

Divide by capitalization rate 25%
Goodwill 6,400,000

3. Annual average earnings are purchased for 3 years?

A. 10,800,000
B. 18,000,000
C. 4,800,000
D. 5,400,000

Goodwill (3,600,000 x 3 years) 10,800,000

4. Annual average earnings are capitalized at 25%?

A. 1,6000,000
B. 3,600,000
C. 4,400,000
D. 2,000,000

Average annual earnings 3,600,000

Divde by capitalization rate 25%
Net assets including goodwill 14,400,000
Net assets before goodwill 10,000,000
Goodwill 4,400,000

5. Excess earnings are discounted at 12% for 5 years. (The present value of an ordinary annuity of 1 for 5
years at 12% is 3.60)
A. 12,960,000
B. 10,800,000
C. 5,760,000
D. 7,200,000

Excess earnings 1,600,000

Divide by PV factor 3.60
Goodwill 5,760,000

LEASEHOLD IMPROVEMENTS

Problem 10. Star company leased a building to be used as product showroom . The ten year
nonrenewable lease will expire on December 31, 2023.
In January 2018, the entity redecorated the showroom and made leasehold improvement of P480,000.
The estimated useful life of the improvement is 8 years using straIght line method of depreciation.
What is the carrying amount of leasehodl improvement on June 30, 2018?
A. 456,000
B. 450,000
C. 440,000
D. 432,000

Leasehold improvement 480,000

Depreciation from Jan. 1 to June 30, 2018
(480,000/6 x 6/12) (40,000)
Carrying amount 440,000

Problem 11. On January 1, 2018, Bay Company acquired a land lease for 21 years with the no option to
renew. The lease required the lessee to construct a building in lieu of rent.
The building was completed on Dec. 31, 2018 at a cost of P8,400,000 and depreciated using the straigh
line method.
At the end of the lease, the estimated fair value of the building is P2,400,000. The useful life of the
building id 25 years.

What is the carrying amount of the building on Dec. 31, 2019?

A. 7,980,000
B. 8,064,000
C. 8,160,000
D. 8,100,000

Building - dec. 31, 2018 8,400,000

Depreciation for 2019 (8,400,000/20) (420,000)
Carrying amount- 12/31/2019 7,980,000

RESEARCH AND DEVELOPMENT COST

Problem 12. Ward Company incurred the following research and development costs in the current year.

Equipment acquired for use in various R and D projects 975,000

Depreciation on the above equipment 135,000
Materials used 200,000
Compensation costs of personnel 500,000
Outside consulting fees 150,000
Indirect costs appropriately allocated 250,000

What amount of research and development costs should be recognized as expense for the current year?
A. 850,000
B. 1,085,000
C. 1,235,000
D. 1,825,000
Depreciation of equipment 135,000
Materials used 200,000
Compensation costs of personnel 500,000
Outside consulting fees 150,000
Indirect costs appropriately allocated 250,000
Total expense 1,235,000

Problem 13. Ball incurred the following research and development costs during the current year?
Direct cost of doing contract research and development work for the
Government to be reimbursed by the government unit 400,000
Depreciation 300,000
Salaries 700,000
Indirect costs appropriately allocated 200,000
Materials used 180,000

What total amount of research and development costs should be reporting as expense in the current
period.
A. 1,080,000
B. 1,380,000
C. 1,580,000
D. 1,780,000

Depreciation 300,000
Salaries 700,000
Indirect costs appropriately allocated 200,000
Materials used 180,000
Total expense 1,380,000

Computer Software

Problem 14. During the current year, Pitt Company incurred the following costs to develop and produce
a computer software product:
Completion of detailed program design 1,300,000
Cost incurred for coding and testing to establish technology
Feasibility 1,000,000
Other coding costs after establishment of technology
Feasibility 2,400,000
Other testing costs after establishment of technology
Feasibility 2,000,000
Costs of producing product masters for training materials 1,500,000
Duplication of computer software and training materials
From product masters 2,500,000
Packaging product 900,000

1. What amount should be reported as inventory?

A. 2,500,000
B. 3,400,000
C. 4,000,000
D. 4,900,000
Duplication of computer software and training materials
From product masters 2,500,000
Packaging product 900,000
Total 3,400,000

2. What total amount of costs incurred should be expensed immediately?

A. 8,200,000
B. 2,300,000
C. 6,700,000
D. 4,400,000

Completion of detailed program design 1,300,000

Cost incurred for coding and testing to establish technology
Feasibility 1,000,000
Total expense 2,300,000

3. What amount should be capitalized as software cost?

A. 5,400,000
B. 5,700,000
C. 5,900,000
D. 6,900,000

Other coding costs after establishment of technology

Feasibility 2,400,000
Other testing costs after establishment of technology
Feasibility 2,000,000
Costs of producing product masters for training materials 1,500,000
Total software costs to be capitalized 5,900,000

Reference:

Valix, Conrado T. Intermediate Accounting I. Manila: GIC Enterprises Co., Inc. 2019.