PrAAnP Ebr V - AUDIT OF INTANGIBLE ASSETS PROBLEM NO. 1 - items considered as intangible assets \ Presented below is a list of items that may or may not be reported as intangible assets in a company’s statement of financial position Investment in associate *PI,500,000 «Trees in a timber plantation’ . 2,000,000 Cost of engineering activity required | to advance the. . design of a product to the manufacturing'stage «>: -. 120,000 Lease prepayments (6 months’ rent paid in advance) 60,000 Right-of-use asset (equipment) 700,000 Internally generated publishing title 230,000 . Costs incurred in the formation of the corporation 90,000 Operating losses incurred in the start-up of the 560,000 _ business . 9... Training costs incurred in start-up operations 80,000 10. Purchase of a franchise 1,200,000 11. Internally generated goodwill 300,000 12. Cost of testing in search for product alternatives 65,000 13. Goodwill acquired in the purchase of a business 640,000 14. Cost of develaping a patent “140,000 15. Cost of purchasing a patent from an inventor 500,000 16; Legal costs incurred in securing a patent 70,000 ° 17. Costs of a successful legal suit to protect the patent 230,000 18. Cost of conceptual formulation of possible product alternatives ue 160,000 19. Cost of purchasing a copyright : 900,000 20. Research and development costs _ : 340,000 21, Long-term receivables . 310,000 22. Cost of developing a trademark’ 61,000 23. Cost of purchasing a trademark ~ 290,000 24. Computer software for a computer-controlled machine that cannot operate without that specific software 130,000 25. Operating system of a computer 10,000 QUESTION: How. much of these items would typically be reported as intangible assets in the statement of financial position? a. P3,530,000 c. P3,740,000 b. P3,600,000 a. P5,830,000°V- Audit of Intangible Assets . OCAMPO/ OCAMPO Answer: B Suggested Solution: PAS 38 par. 8 defines “intangible “asset” as an identifiable non-1 monetary asset without physical substance, Items 10, 13, 15, 16, 19 and 23 would be reported as intangible assets. The other items will be reported as follows: Item1 - Investment in associate (separate tne item) es ‘ Item 2 - Biological assets ‘eo Item3 - Research and development expense in profit or loss — Ttem 4 - Other current assets (prepaid rent) - Item5 - Separate line item or property, plant, and equipment’ Item 6 - Not recognized. PAS 38 par. 63 states that internally generated brands, mastheads, publishing titles; customer lists and other items similar in substance shall not be. recognized as intangible assets. Any costs related to . creating publishing titles incurred internally must be expensed. Item 7 - Expense in profit or loss Item 8 - Income and expenses in profit or loss | Item 9 - Expense in profit or loss Item 11. - Notrecognized. PAS 38 par. 48 states that internally _ generated goodwill shall not be recogriized as an asset. Any costs incurred related to internally generated ' ; goodwill must be expensed. Item 12 - Research and development expense in profit or loss Item 14 - Research and development expense in profit or loss Item 17 - Expense in profit or loss Item 18 - Research and development expense in profit or loss Item 20 - Research and development expense in profit or loss. Item 21 - Other non-current assets ~ Item 22 -- Expense in profit or loss Item 24 - Property, plant, and equipment (see PAS 38 par. 4) Item 25 - Property, plant, and equipment (see PAS 38 par. 4) 184ae of Intangible Assets : OCAMPO/OCAMPO PROBLEM NO. 2 - Audit of research and development expenditures Presented below are five unrelated :situations., For. each situation compute the amount that will be classified and recognized. as research and development expense. oy yyet 1, Mabitac Company incurred the following costs during 2021: Quality control during commercial production, including routine testing of products P460,000 Laboratory research aimed at discovery of new ns knowledge : 540,000 Engineering follow-through in an | early phase of y commercial production 120,000 Adaptation of existing capability to a particular ‘requirement or customer’s need as'part of continuing commercial activity 110,000 Trouble-shooting in connection with breakdowns ' during commercial production™ : 230,000 Searching for applications: of hew research findings ~ «150,000 P540,000 A c. P1,150,000 d. P1,610,000 2. Lumbari Company incurred the following costs during 2021 in connection with its research and development activities: Cost of equipment acquired that will have alternative uses in future research and development projects over the next’S years PI,A00, 00 Materials consumed in research and development a projects } 295,000 . Consulting fees paid to outsiders for,research and development projects uaa Personnel costs of persons involved in research and 640,000 development projects , Indirect costs reasonably allocable to research and 250,000 development projects Materials purchased for future-research and 2. 470,000 development a. P1,465,000 ge. -P1,965,000, b. P1,685,000 . d. P2,135,000 185 ~V- Audit of Intangible Assets OCAMPO/ OCAMPO 3. During 2021, Pangil Company incurred the following costs: Research and development services performed by ‘Talim Company for Pangil P700,000 ‘Testing for evaluation of new products 600,900 Laboratory research aimed at discovery of new knowledge 850,000 a, P_ 850,000 P1,550, b. 1,450,000 4, Rizal Company incurred the following costs during the year ended December 31, 2021: Design, construction, and testing of preproduction prototypes and models P435,000 Routine, on-going cfforts to refine, enrich, or otherwise improve upon the qualities of an existing product 375,000 Quality control during commercial production including routine testing of products 450,000 Laboratory research aimed at discovery of new knowledge 630,000 a. P 630,000 som nOH 00m b. P1,005,060 1,440,000 5. Victoria, Inc. incurred the following costs during .the year ended December 31, 2021: ‘Laboratory research aimed at discovery of new knowledge P300,000 Radical modification to the formulation of a chemical product 217,500 Research and development costs reimbursable under a contract to perform research and development for Court Corporation 525,000 Testing for evaluation of new products 337,500 a. P300,000 qenasSO b. 537,500 . P1,380,000 186y- Audit of Intangible Assets OCAMPO/OCAMPO Answers:1)B 2)C 3)D 4jc 5c Suggested Solution: To assess whether an internally generated intangible asset meets the criteria for recognition, an entity classifies the generation of the asset into research phase and development phase. Research is original and planned investigation undertaken with the prospect of gaining new scientific, or technical knowledge and understanding. Examples of research activities are: * Activities aimed at obtaining new knowledge * The search for, evaluation and final selection of, applications of research findings or other knowledge , .* The search for alternatives for materials,” devices, products, processes, systems or services The formulation, design, evaluation and final selection of possible alternatives for new or improved materials, devices, products, processes, systems or services. PAS. 38 par. 54 statés that no intangible asset arising from research (or from the research phase of an internal project) shall be recognized. Expenditure on research (or on the research phase of an internal project) shall be recognized as an expense when it is incurred. Development is the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the Start of commercial production or use. Examples of development activities are: the design, construction and. testing of pre-production or preaise prototypes and models the design of tools, jigs, moulds and dies involving new technology the design, construction and operation of a pilot plant that is not of a seale economically feasible for commercial production the design, construction and testing of a chosen alternative for new or improved materials, devices, products, processes, systems or services 187V- Audit of Intangible Assets ; , OCAMPO/OCAMPo PAS 38 par. 57 states that an intangible asset arising from development (or from development phase of an internal project) shall be recognized if, and only if, an entity can demonstrate all of the following: aS a) the technical feasibility of completing the intangible | asset so that it will be available for use or sale. 5) its intention to complete the intangible.asset and use or sell it. ¢) its ability to use or sell the intangible asset. d) how the intangible asset will generate prabable future economic benefits. “Among other things, the entity: can’ demonstraté ‘the existence of a market for the output of the intangible assét' or 'the intangible asset itself or, if it is to be used internally, the iuséfuliiess of the intangible asset. : e) the availability of adequate technical, financial and: ‘other resources to complete the development.and to use or sell the intangible’ asset. fits ability to measure reliably the expenditure attributable ‘to the intangible asset during its development. : \ If an entity cannot distinguish ‘the research . phase: ros development phase of an internal project to crecte an intangible’ asset, the entity treats the expenditure on that project as a were incurred in the research phase only. Because of the very strict. requirements of PAS 38,° all development. expenditures in the problem were expensed since fhefe: are no indications that all of the conditions were.met. Research and development activities normally occur prior to commercial production and distribution of a product or process. Therefore, ‘the ~ following activities that relate to. commercial production are not considered research and development activities: * Engineering follow through in. an early phase of commercial production © Quality control during commercial production including routine testing. * Trouble-shooting in connection with breakiowns: during ‘commercial production © Routine: on-going effort to refine, enrich or npiove quality of @ an existing product * Adaptation of an. existing capability to a particular- requirement or customer need. ee .« Periodic design changes to existing produtts =~ sr tig eggint * Routine design of tools, jigs, molds and dies ; 188OCAMPO/OCAMPO y: Audit of Intangible Assets «Activity, including design and construction of engineering related to construction, relocation, rearrangement or start-up of facilities-and equipment . | Question No. 1 # : Laboratory research aimed at discovery of new knowledge . P540,000° , Searching for applications of. new, research fi ndings 150,000 "Total . 2690.00 Question No. 2 Depreciation of equipment used in R & D. projects (P1,400,000/5) i a P- 280,000 Materials consumed in R & D:projects 295,000 Corisulting fees paid to outsiders forR & D projects. _',_ 500,000 Personnel costs of persons involved in R & Diprojects 640,000 _Inidirect costs reasonably allocable to R & D projects | 250,000 Total ; , BL,965,000 - Question No. 3 R&D services performed by Talim. Company for Pangil =P Ea aag ‘Testing for evaluation of new products Laboratory research aimed-at discovery of new. i knowledge Total 850,000 ; Question No. 4, Design, constuction, and testing of preproduction . prototypes and models P 435,000 Laboratory research aimed at discovery of new Total Question No.5 ~ re Laboratory research aimed at discovery of new. 300,000 knowledge , Radical modification to the formulation of a chemical 217,500 Product 337,500 Testing for evaluation of new products 5a55,.000 Total ’ 189 knowledge ! 630,000 —~ V- Audit of Intangible Assets OCAMPO/ OCAMPO PROBLEM NO. 3 ~ internally generated patent Alaminos Company has been involved in a project to develop an engine that runs on extracts from sugarcane. It commenced the project in February 2021. Between the commencement date and Pilae 30, 2021, Alaminos spent P3,810,000 on the project. At Pilae 30, 2021, there was no identification that the project would be commercially feasible, although the company had made significant progress and was sufficiently sure of future success that it was prepared to outlay more funds on the project. After spending a further P1,800,000 during July and August, the company had built a prototype that appeared to be successful. The prototype was demonstrated to a number of engineering companies during September, and a number of these companies expressed interest in the further development of the engine. Convinced that it now had a product that it would be able to sell, Alaminos spent a further P975,000 during October adjusting for the problems that the engineering firms had pointed out. On November 1, Alaminos applied for the patent ‘on the engine incurring administrative costs of P525,000. The patent had an expected useful life of five years. Between November and December 2021, Alaminos spent an additional amount of P1,230,000 on engineering and consulting costs to develop the project such that the engine was at manufacturing stage. These resulted in changes in the overall design of the engine, and costs of P75,000 weré incurred to add minor changes to the overall design of the patent authority. On January 1, 2022, Alaminos invited tenders for the manufacture of the engine for commercial sale. QUESTIONS: Based on the above and the result of your audit, determine the following: 1. Total arnount to be charge to expense when incurrec a Ropesaae c. P7,890,000 b. P7,185,000 d. P8,415,000v-Audit of Intangible Assets OCAMPO/OCAMPO 2. Total amount to be recognized as Patent ae, 0 c. -P1,230,000 © b. P525,000 Answers: 1)A 2)D ‘Suggested Solution: Question No. 1 _ Expenditures before meeting all the requirements of paragraph 57 of PAS 38 6,585,000 Refer to Problem No. 2 for notes on accounting for research and development expenditures. Due to the adjustments required by the engineering firms, the company is not yet able to measure the cost of the engine reliably -before the P975,000 expenditure. After adjusting for the problems pointed by ” engineering firms the entity can now meet all of the criteria of PAS 38 par, 57., Therefore, subsequent expenditures may now be capitalized. Question ‘No. 2 Expenditures after meeting all the requirements of paragraph 57 of PAS 38 P1830,000 PROBLEM NO. 4 ~ Internally generated patent You gathered the following information related to the Patents account of the Majayjay Cookie Corporation in connection with your audit of the company’s financial statements for the year 2021. In 2020, Majayjay 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, Majayjay patented the machine. The following expenses were incurred in developing and patenting the machine:V- Audit of Intangible Assets OCAMPO/ OCAMPO Research and development laboratory expenses P1,000,000 Metal used in the construction of the machine 320,000 Blueprints used to design the machine 128,000 Legal expenses to obtain patent 480,000 Wages paid for the employees’ work on the research, development, and building of the machine (60% of the time was spent in actually building the machine) 1,200,000 Expense of drawing required by the patent office ta be submitted with the patent application 68,000 Fees paid to the government patent office to process application 100,000 During 2021, Majayjay paid P150,000 in legal fees to successfully defend the patent against an infringement suit by Cookie Monster Corporation. It is the company’s policy to take full year amortization in the year of acquisition. QUESTIONS: Based on the given information and the result of your audit, determine the following: ae Cost of patent a. P580,000 6. P_ 798,000 b. P648,000 d. P1,128,000 . Cost of machine a. P1,040,000 F1,236,000 c. d. P1,648,000 3. Total amount that should be charged to exense when incurred in connection with the development of the paterted machine a P 0 b. P1,000,000 d. P1,618,000 4. Carrying amount of patent as of December 31,2021 a. P522,000 c. P 837,900 d. P1,01),200 192y-Audit of Intangible Assets Answers: 1) B 2)B 3)C 4B Suggested Solution: Question No. 1 Legal expenses to obtain patent Expense of drawing required by the patent office Fees paid to the government patent office Cost of patent Question No. 2 Metal used in the construction of the machine Blueprints used to design the machine Wages paid to the employees (P1,200,000 x 60%) Cost of machine Question No. 3 Research and development laboratory expenses Wages paid to the employees (P1,200,000 x 40%) R&D expense Question No. 4 Cost of patent (see no. 1) Less amortization (P648,000 x 2/20) Carrying amount of patent, 12/31/21 OCAMPO/ OCAMPO P480,000 68,000 P 320,000 128,000 720,000 P1.168,000 P1,000,000 480,000 P.1,480,000 P648,000 64,800 P583,200 Notes: 1) Cost of defending the patent should be expensed. 2) Since the useful life is not given, the patent was amortized using the legal life of 20 years 193,F V- Audit of intangible Assets OCAMPO/OCAMPO. PROBLEM NO. 5 ~ Acquired patent On January 2, 2013, Nagcarlan Company acquired a patent for P480,000. The patent had an estimated useful life of 10 years. At the beginning of 2017, the company spent P144,000 in successfully prosecuting an attempted patent infringement. At the beginning of 2018, the company purchased for P280,000 a patent that was expected to prolong the life of its original patent by 5 years. On July 1, 2021, a competitor obtained rights to a patent that made the company’s patents obsolete. QUESTIONS: Based on the above and the result of your audit, determine the following: 1. Carrying amount of patent as of December 31, 2017 c. P360,000 b. P355,200 d. , P369,600 2. Amortization of patent in 2018 ° a. P52,000 — ¢. P64,000 L b. P63,520 d. P64,960 3. Carrying amount of patents as of December 31, 2020 c. P448,000 4,640 d. P454,720 4. Loss on patent obsolescence in 2021 ¢, P416,000 . P364,000 d. P448,000 194answers: JA 2)A 3A 4A suggested Solution: Question No. 1 Cost of patent Less amortization up to 12/31/17 (P480,000 x 5/10) Carrying amount of patent, 12/31/17 Question No. 2 Amortization on original patent (P240,000/ 10) Amortization on related patent (P280,000/ 10) Total amortization in 2018 Question No. 3 Original patent (P240,000 x 7/10) Related patent (P280,000 x 7/10) Carrying amount of patents, 12/31/20 Question No. 4 Carrying amount of patents, 12/31/20 Less amortization, 1/1/21 to 7/1/21: Original patent (P240,000/ 10 x 6/12) P12,000 Related patent (P280,000/10 x 6/12) 14,000 Loss on patent obsolescence 195 y-Audit of Intangible Assets OCAMPO/ OCAMPO P168,000 196,000 £364,000 P364,000 26,000 £338,000V- Audit of Intangible Assets PROBLEM NO. 6 ~ Basket purchase of intangible assets Cavinti Company purchased a customer list and a form P2,000,000. Cavinti uses the expected cash fle estimating the fair value of these two intangibles * appropriate interest rate is 8%. The potential fut cash flows from the two intangibles, and their associated probabilities, are a5 follows: Customer List Outcome | - 20% probability of-cash flows of 250,000 at the end of eacl r for 5 years. Outcome 2 - 30% probability of cash flows of P150,000 at the end of each year for 4 year Outcome 3 - 50% probability of each year for 3 years. ash flows of P50,000 at the end of Formula Outcome 1 - 10% » probability of cash flows of P1,500,000 at the end of cach year for 10 years, Outcome 2 - 20% probability of cash flows of P500,000 at the end of each year for 4 year: Outcome 3 - 70% probability of cash flows of P300,000 at the end of cach year for 3 years. QUESTIONS: 1. The estimated fair value of the customer list is a, P 86,951 peaugTOR b. P106,697 d. P541,284 2. The estimated fair value of the formula is a. P309,687 . , b. P433,485 d. P4,164,771 3. The cost to be allocated to the customer list is a. P230,037 c. P395,042 b. P360,476 ad. PA38,440 4. The cost to be allocated to the formula is a. P1,561,560 b. P1,604,958 d. P1,769,963 196V- Audit of Intangible As: OCAMPO/OCAMPO Answers 1) 2)€ 3)/B 4jc sted Solution sug’ Question No. } Probability weighted 199,636 149,096 £ 428 3,110 Probability weighted esent value Probability Pp r 1 1,065,122 10% 1,006,512 2 656,063 20% 1213 3 773,129 70% 90 1,878,915 Question va. sak Pare value Fraction Allocation Customer bist 413, 110/2,202,025 360,476 Formula 1,878,015/2,292,025 1,639,524 2,000,000 PROBLEM NO. 7 Patent, lic trademark and R&D e In connection with your audit of the Cabuyao Corporation, you noted the following transactions during 2021: Jan, 2 Paid legal tees of P450,000 and other costs of P249,000 to complete organization of the corporation. 15 Hired @ clown to stand in front of the corporate office for 2 weeks and hound out pamphlets and candy to create goodwill for the new entity. Clown cost, P30,000; pamphlets and candy, P15,000. 197V- Audit of Intangible Assets OCAMPO/OCAMP Apr. 1 Patented a newly developed process with costs as follows: Legal fees to obtain patent , P 1,287,000 Patent application and licensing fees 500 Total _ lt is estimated that in 6 years other companies will have developed improved processes, making the Cabuyao Corporation process obsolete. May 1 Acquired both a license to ust a special tvpe of container and a distinctive trademark ta be printed on the container in exchange for 18,000 shares of Cabuyao’s no-par ordinary shares selling for PS) per share. The license is worth twice as much as the trademark, both of which may be used for 6 years. July 1 Constructed a shed for P3,990,000 to house prototypes of experimental models. to be developed in future research projects. Dec. 31 Incurred salaries for an engineer and chemist involved in product development totaling P750,000 in 2021, It is the company's policy to take full year amortization in the year of acquisition. ‘ QUESTIONS: Based on the given information and the result of your audit, determine the following: 1. Cost of patent a P 0 c. 1,287,000 b. P 190,500 . ad. Pl,477,500 _ 2. Cost of licenses . a. P 0 c. P480,000 b. P300,000 : 10gv- Audit of Intangible Assets 3. Cost of trademark c. P450,000 d. P690,000 OCAMPO/ OCAMPO 4. Carrying amount of Intangible Assets as of December 31, 2021 P2,026,250 fe, da. P2,031,250 5. Total amount resulting from the foregoing transactions that should be expensed when incurred a. P oO c. P2,971,500 P5,424,000 d. Answers:1)D 2)D 3)B 4)B 5S)B Suggested Solution: The following journal entries to record the foregoing transactions will be useful in computing for the requirements: Jan. 2 Organization expenses Cash Jan. 15 Advertising expense Cash Apr. 1 Patents Cash May 1 t Licenses (P900,000 x 2/3) Trademark (P900,000 x 1/3) Share capital (18,000 x P50) ~ 199 P 699,000 P 45,000 P1,477,500 P 600,000 300,000 P3,930,000 P 699,000 P 45,000 P1,477,500 P 900,000 P3,930,000| We Auda of intangible Assets OCAMPO/OCAMPo Research and develo Can pment expense P 750,000 - P 750,000 Question No, 1 See journal entry for April 1. Question Nos. 2 & 3 See journal entry for May 1, Question No, 4 Cost: Patent P1,477,500 Licenses 600,000 Trademark 300,000 P2,377,500 Less amortization for 2021: Patent (P1 1477,500/6) 246,250 Licenses (P600,000/6) * 100,000 Trademark (P300,000/6) ___50,000 396,250 Carrying amount, 12/31/21 P1,981,250 Question No, 5 Organization expenses (Jan. 2 transaction) P 699,000 + Advertising expense (Jan. 15 transaction) 45,000 R and D expense (Dec. 31 transaction) 7 —~750,000 Total 1,494,000 PROBLEM NO. 8 - Patent, franchise and R&D In connection with your audit of the Liliw Corporation’s financial Statements for the year 2021 you noted the following items relative ta the company’s Intangible assets. * A patent was purchased from Pansol Company for P4,000,000 on January 2, 2020. Liliw estimated that the remaining useful life & the patent to be 10 years. The patent was carried in Pansol’s accounting records at a carrying value of P4,000,000 when Pansd sold it to Liliw, 200v- Audit of Intangible Assets OCAMPO/OCAMPO « During 2021, a franchise was purchased from Makiling Company for P960,000. In addition, 5% of the revenue from the franchise must be paid to Makiling. Revenue from the franchise for 2021 was 5,000,000. Liliw estimates the useful life of the franchise to be 10 years and takes fuil year’s amortization in the year of purchase. « Liliw incurred research and development costs of P866,000 in 2021. Liliw estimates that these costs will be recouped by December 31, 2024. »* On January 1, 2021, Liliw, because of the recent events in the industry, estimates that the remaining life of the patent purchased on January 2, 2020, is only 5 years from January 1, 2021. QUESTIONS: Based on the given information and the result of your audit, determine the following: 1. Amortization of patent for 2021 a. P400,000 c. P800,000 ‘b. P720,000 _ a, P900,000 2. Carrying amount of patent as of December 31, 2021 a, P2,400,000 b. P2,700,000 d. P3,200,000 3. Carrying amount of intangible assets as of December 31, 2021 a. P3,264,000 b. P3,564,000 |. P4,610,000 4. Total expenses to be recognized in 2021 a. P1,066,000 ¢. P2,012,000 b. P1,932,000 : d. P2,112,000 201V- Audit of Intangible Assets Answers:1)B 2)€ 3)C 4)B Suggested Solution: Question No. 1 Cost of patent Less amortization in 2020 (P4,000,000/ 10) Carrying amount, 1/1/21 ; Divide by revised remaining useful life Patent amortization for 2021 Question No. 2 Carrying amount, 1/1/21 (see no. 1) Less amortization in 2021 (see no. 1) Carrying amaunt, 12/31/21 Question No, 3 Cost of franchise Less amortization in 2021 (P960,000/ 10) Carrying amount of franchise, 12/31/21 Carrying amount of patent, 12/31/21 (see no. 2) Carrying amount of intangibte assets, 12/31/21 Question No. 4 Patent amortization (see no. 1) Franchise amortization (see no. 3) Periodic franchise fee (P5,000,000 x 5%) R and D expense Total expenses in 2021 202 OCAMPO/OCAMPS 4,000,000 400,000 3,600,000 son £720,000 P3,600,000 —720,000 2,880,000 P 960,000 —— 26,000 864,000 2,880,000 3,744,000 P 720,000 96,000 250,000 866,000 P1,932,000wane v-Audit of Intangible Assets OCAMPO/OCAMPO PROBLEM NO. 9 - Franchise, patent and trademark You noted the following items relative to the company’s Intangible assets in connection with your audit of the Pila Corporation's financial statements for the year 2021. Franchise On January 1, 2021, Pila signed an agreement to operate as franchisee of Line Copy Service, Inc. for an initial franchise of P680,000. Of this amount, P200,000 was paid when the agreement was signed and the balance was payable in four annual payments of P120,000 cach, beginning January 1, 2022. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. The implicit rate for loan of this type is 14%. The agreement also provides the 5% of the revenue from the franchise must be paid to the franchisor annually. Pila’s revenue from the franchise for 2020 was P8,000,000. Pila estimates the useful life of the franchise to be ten years. : Patent On July 1, 2021, Pila purchased a patent from the inventor, who asked P1,100,000 for it. Pila paid for the patent as follows: cash, P400,000; issuance of 10,000 shares of its own ordinary shares, par P10 (market value, P20 per share); and a note payable due at the end of three years, face amount, PSO0,000, noninterest-bearing. The current interest rate for this type of financing is 12 percent. Pila estimates the useful life of the patent to be ten years. Trademark Pila purchased for P1,200,000 a trademark for a very successful Product. The trademark was determined to have an indefinite life. A competitor recently introduced a product that is in direct competition with the entity’s product, thus suggesting the need for an impairment test. Data gathered by the entity suggests that the useful life of the trademark is still indefinite, but the cash flows expected to be generated by the trademark have been reduced either to P40,000 per year (with a Probability of 70%) or to P80,000 per year (with 30% probability). The appropriate risk-free interest rate is 5%. The appropriate risk-adjusted interest rate is 10%. 203V- Audit of Intangible Assets . OCAMPO/OCAMPO. QUESTIONS: Based on the given information and the result of your audit, determine the following: (Round off present value factors to 4 decimal places) 2 1, Total expenses related to franchise in 2021 a. P448,950 b. P454,964 |. P53! 2. Carrying int of franchise as of December 31, 2021 c. P549,644 b. P538,733 d. P612,000 3. Carty ous amount of patent as of December 31, 2021 a. 860,310 : c. P 955,900 cbosPs0805® d. P1,045,000 4. Carrying amount of trademark as of December 31, 2021 a. P1,040,000 © c. P1,140,000 b. P1,080,000 d. P1,200,000 5. Total expenses related to the intan; 021 a, P662,759 b. P711,709 d. P802,212 a Answers:1)C 2)A 3)B 4)A 4c Suggested Solution: Question No. 1 wi Down ‘payment ~ ©" 200,000 Add PV of installment payments (P120,000 x 2.9137) 349,644 Cost of franchise 549,644 Divide by useful life 10 Amortization of franchise 54,964 Periodic franchise fee (P8,000,000 x 5%) 400,000 Imputed interest expense (P349,644 x 14%) 48,950 Total expenses related to franchise in 2021 503,014 204y-Audit of Intangible Assets OCAMPO/ OCAMPO Question No. 2 Cost of franchise (sce no. 1) P549,644 Less amortization in 2021 (sce no. 1) 54,964 Carrying amount of franchise, 12/31/21 494,680 Question No. 3 Cash paid : 400,000 Fair value of shares issued (10,000 x P20) 200,000 PV of note payable (P500,000 x 0.7118) 355,900 Cost of patent 955,900 Less amortization in 2021 [(P955,900/ 10) x 6/12] 47,795 Carrying amount of patent, 12/31/21 Question No. 4 Cost of trademark P1,200,000 Recoverable amount (see below) 1,040,000 Impairment loss P_.160,000 Outcome 1 (P40,000/.05 x .7) P 560,000 Outcome 2 (P80,000/.05 x .3) 480,000 Value in use 21,040,000 Notes: * Trademark is not amortized since the useful life is inclefinite. ‘The recoverable amount is the value in use since fair value less costs of disposal is not available. * Since the trademark is impaired, it is written down to its recoverable amount. i Question No. 5 Franchise (see no. 1) P503,914 Patent (see below) . 69,149 Trademark (see no. 4) 160.000 Total expenses in 2021 733,063 Amortization (see no. 3) 47,795 - Interest (P355,900 x .12 x 6/12) 21354 Patent-related expenses 69,159 205V- Audit of Intangible Assets OCAMPO/OC ¢) be P135,714 « de P269,376 f 3. Canying amount of Trademark as of December 31, 2021 | a. P180,624 4 y .@ P385,715 : a | ‘Bb. P250,000 — iy d. P450,000 { f 4. Carrying amount of Goodwili as of December 31,,2021 a a. P2,137,500 “¢. P2,193,750 ; b. P2,147,727 &._P2,250/000"" no 27 i i ' 5. Carrying amount of Customer list as of December 31, 2021 - : a P 0 c. P264,000 ‘'b. P220,000, d. P330,000 Answers: 1)A. .2)© °3)B. 4)D 5)B Suggested Solution: “Question No. 1 Amortization of customer list (P330, 000/ 3) P110,000 PAS! 38 par. 107 states that an intangible asset with an indefinite useful life shall not be amortized. Therefore, the trademark and goodwill are ~ not.amortized. ; .V- Audit of Intangible Assets OCAMPO/OCAMPO Question No, 2 Trademark: Carrying amount P450,000 Recoverable amount (P15,000/0.06) 250,000 P200,000 Goodwill: Carrying amount of Laguna Manufacturing unit (P4,050,000+P2,250,000-P2,700,000} 3,600,000 Recoverable amount (P375,000x 12.0416) 4.515.600 - Customer list: Carrying amount (P330,000 - P110,000) 220,000 Recoverable amount [(P180,000 x 0.9434} + (P120,000 x 0.8900} 276,612 Total impairment loss : 200,000 Since goodwill does not generate cash flows independently from other assets or group of assets, the recoverable amount of goodwill as an individual assei cannot be determined. Therefore, the recoverable amount is determined for the cash generating unit 10 which goodwill belongs. , Question No. 3 Cost of trademark P450,000 Less impairment loss 200,900 Carrying amount of trademark, 12/31/21 250,000 Question No. 4 Since goodwill is not amortized and is not impaired as of 12/31/21, the carrying amount is P2,250,000. Question No. 5 Cost of customer list 330,000 Less amortization in 2021 “11,000 Carrying amount of customer list, 12/31/21 P22),000v- Audit of Intangible Assets OCAMPO/OCAMPO PROBLEM NO. 13 - Impairment and revaluation of license A license is acquired July 1, 2018, for P450,000; while it has a legal life of 15 years, due to rapidly changing environment, management estimates a useful life of only 5 years. Straight-line amortization will be used. At January 1, 2019, management estimated that the recoverable amount of the license is only P135,000. Amortization will be taken over 3 years from that point On January 1, 2021, due to the change in general economic situations, the license now has a fair value of P540,000. The entity adopted the revaluation model to measure the license starting January 1, 2021. The estimated remaining useful life is now believed to be 5 years. QUESTIONS: Based on the above and the result of your audit, determine the following: 1. How much is the loss on impairment on January 1, 2019? a. P 0 c. P270,000 b. P225,000 d. 300,000 2, How much can be recognized as reversal of impairment loss in 2021 profit or loss? a. P180,000 c. P315,000 b. P270,000 d. P495,000 3. How much will be recognized as revaluation surplus on January 1, 2021? a. P180,000 c. P315,000 b. P270,000 d. P495,000 Answers:1)C 2)A 3)C wu aV- Audit of Intangible Assets OCAMPO/OCAMPO Suggested Solution: Question No. 1 Carrying amount, 1/1/19 (P450,000 x 4.5/5} P405,000 Recoverable amount _135,000 Impairment loss P270,000 Question No. 2 Carrying amount without impairment, 1/1/21 (P450,000 x 2.5/5) P225,000 Carrying amount, ‘1/1/21 (P135,000 x 1/3) 45,000) Reversal of impairment loss P180,000 An impairment loss recognized in prior periods for an asset other than goodwill shall be reversed if, and only if, there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. if this is the case, the carrying amount of the asset shall be increased to its recoverable amount. That increase is a reversal of an impairment loss. (PAS 36 par. 114) The increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment loss shail not exceed the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognized for the asset in prior years. (PAS 36 par. 117) Question No. 3 Fair value, 1/1/21 P540,000 Carrying amount, 1/1/21 (P135,000 x 1/3) 45,000 Revaluation increase 495,000 Reversal of impairment loss (see no. 2) 180,000) Revaluation surplus P315,000 If an intangible asset’s carrying amount is increased as a result of a revaluation, the increase shall be recognized in other comprehensive income and accumulated in equity under the heading of revaluation surplus. However, the increase shall be recognized in profit or loss to the extent that it reverses a revaluation decrease af the same asset previously recognized in profit or loss. 216V- Audit of Intangible Assets OCAMPO/OCAMPO PROBLEM NO. 14 - Software development expenditures Lumban Software Company is an established computer software company. In 2020, the firm incurred the following costs in the process of designing, developing and producing a new software program: Designing and planning a P1,800,000 Code development 2,700,000 Testing 900,000 Production of product master 4,500,000 In 2021, Lumban incurred P1,800,000 in costs to produce the software program for sale in 2021. The costs of designing and planning, code development and testing were all incurred before the technological feasibility of the product was established.. Lumban began marketing the software program in 2021 and earned revenues of P4,320,000 in 2021. Lumban estimates that total revenues over the 4-year life of the product will be P21,600,000. At the end of 2021, Lumban was offered P7,200,000 for the rights to distribute the software. QUESTIONS: Based on the above and the result of your audit, answer the following: 1. How much of the R and D and production cost will be expensed in 2020? a. P9,900,000 c. P6,300,000 b. P6,525,000 d. P5,400,000 2. How much of the R and D and production costs will be expensed in 2021? a. P1,260,000 c. P2,700,000 b. P1,575,000 d. P2,925,000 Answers: 1)D 2)¥- Audit of intangible Assets OCAMPO/OChMPO Suggested Solution: Question No. i Designing and planning P 1,400,000 Code development 2,700,000 Testing 900,000 Tota] amount to be expensed in 2020 P5,400,000 Refer to Problem No. 2 for notes on accounting for research and development expenditures Question No. 2 re production cost P1,800,000 r. of software development cost 00,000/4} _1,125,000 to be expensed of cost of sales) in 2021 P2,925,000 The amortization method used shall reflect the pattern in which the asset's future economic benefits are expected to be consumed by the entity. If that pattem cannot be determined reliably the straight-line method shall be used. The amortization charge for each period shall be recognized in profit or loss urdess permitted or required to be included in the carrying amount of another asset. (PA There is a rebuttable presumption that an amoruzation method that ts based on the revenue generated by an activity that includes the use of an intangible asset is inappropriate. This presumpuon can be overcome only in the limited circumstances. {aj in which the intangible asset is expressed us a measure of revenue, or (b) when it can be demonstrated that revenue and the consumption of the economic benefits of the intangible asset ure hugily correlated (PAS 38 par. 964)V- Audit of Intangible Assets OCAMPO/OCAMPO PROBLEM NO. 15 ~ Software development expenditures sanjan Solthytes Corporation is engaged in developing computer software for the small business at home computer market. Most of the computer prograrnmers are involved in developmental work designed to produce software that will perform fairly specific tasks in a user- friendly manner. Extensive testing of the working model is performed before it is released to production for preparation of masters and further testin| ult of careful preparation, Pagsanjan has produced several products that have been very successful in the market place. The following costs were incurred during 202 Salaries and ‘wages of progra Expenses related to proje umners doing research P940,000 ts prior to establishment of technological feasibility 312,600 Expenses related to projects after technological Icasibility has heen established but before software is available for production 198,000 Amortization of capitalized software development cost from current and prior years 107,000 Costs of produce and prepare software for sale 225,200 Additional data for 2021: Sales of products for the year 2,060,000 Beginning inventory 368,000 Portion of goods available for sale sold during the year 60% QUESTIONS. Based on the above and the result of your audit, determine the following: 1, Amount to be capitalized as software development cost subject to amortization a Pp 0 ce. P 736,800 b. P198,000 d. P1,451,600 2. Cost of ending inventory a P270,000 e. P360,080 b. P317,280 ad. P439,280 219V- Audit of Intangible Assets OCAMPO/OCAMPO 3. Total amount related to the development of computer software that should be expensed when incurred a. P 0 c. P1,253,600 b. P940,000 d. P1,451,600 Answers: 1)B 2)C 3)C Suggested Solution: Question No. 1 Amount to be capitalized as software development cost P.98,000 Expenses incurred after technological feasibility has been established but before software is available for production would be capitalized and its amortization included in the cost of inventories. Question No. 2 F Costs of produce nning inventory P568,000 and prepare software for sale 225,200 Amort ion of software development cost _107,000 Total cost of goods available for sale 900,200 Percentage of ending inventory (100%-60%} 40% Ending inventory P360,08 Question No. J Salari Expt -s of programmers doing related to projects prior to establis| P 940,000 of technological feasibility ___313,600 Total P1,253,600 220