Page 1 of 6

REVIEW OF FINANCIAL ACCOUNTING THEORY AND PRACTICE

INTANGIBLE ASSETS
1. Kuyab Company incurred P900,000 of research and development cost to develop a
product for which a patent was granted on January 2, 2005. Legal fees and other costs
associated with the registration of the patent totaled P200,000. On July 31, 2005,
Kuyab paid P400,000 for legal fees in a successful defense of the patent. The total
amount capitalized for this patent through July 31, 2005 should be
a. 1,500,000
b. 1,100,000
c.
600,000
d. 200,000
2. Laguna Company acquired three patents in January 2005. The patents have different
lives as indicated in the following schedule:
Patent A
Patent B
Patent C

Cost
2,000,000
3,000,000
6,000,000

Remaining useful life

10
5
Indefinite

Remaining legal life

8
10
15

Patent C is believed to be uniquely useful as long as the company retains the right to
use it. In June 2005, the company successfully defended its right to Patent B. Legal
fees of P800,000 were incurred in this action. The companys policy is to amortize
intangible assets by the straight-line method to the nearest half year. The company
reports on a calendar-year basis. The amount of amortization that should be
recognized for 2005 is
a. 1,330,000
b. 1,250,000
c. 2,050,000
d. 950,000
3. Nagcarlan Company purchased a patent on January 1, 2002, for P3,570,000. The
patent was being amortized over its remaining legal life of 15 years expiring on January
1, 2017. During 2005 Nagcarlan determined that the economic benefits of the patent
would not last longer than ten years from the date of acquisition. What amount should
be reported in the balance sheet as patent, net of accumulated amortization, at
December 31, 2005?
a. 2,618,000
b. 2,520,000
c. 2,448,000
d. 2,142,000
4. On January 2, 2002, San Pedro Company purchased a patent for a new consumer
product for P3,000,000. At the time of purchase, the patent was valid for 15 years.
However, the patents useful life was estimated to be only 10 years due to the
competitive nature of the product. On December 31, 2005, the product was
permanently withdrawn from sale under governmental order because of a potential
health hazard in the product. What amount should San Pedro charge against income
during 2005, assuming amortization is recorded at the end of such year?
a. 1,800,000
b. 2,400,000
c. 2,100,000
d. 300,000

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5. On January 1, 2005, Mambusao Company bought a trademark from Panitan Company

for P6,000,000. Mambusao retained an independent consultant who estimated the
trademarks life to be indefinite. Its carrying amount in Panitans accounting records
was P4,000,000. In Mambusaos December 31, 2005 balance sheet, what amount
should be reported as trademark?
a. 6,000,000
b. 5,700,000
c. 3,800,000
d. 3,600,000
6. On January 1, 2005, Calamba Company signed an agreement to operate as a
franchise of Bay Company for an initial franchise fee of P30,000,000. Of this amount,
P10,000,000 was paid when the agreement was signed and the balance is payable in
equal annual payment of P5,000,000 beginning December 31, 2005. The agreement
provides that the down payment is not refundable and no future services are required
of the franchisor. Calambas credit rating indicates that it can borrow money at 12% for
a loan of this type. Information on present value factors at 12% for 4 period is:
Present value of 1
Present value of an ordinary annuity of 1
a.
b.
c.
d.

0.64
3.04

30,000,000
15,200,000
25,200,000
21,600,000

7. Liliw Company engaged your services to compute the goodwill in the purchase of
Calauan Company which provided the following:
2002
2003
2004
2005

Net income
1,400,000
1,600,000
2,000,000
2,200,000

Net assets
6,000,000
8,000,000
8,800,000
9,200,000

It is agreed that goodwill is measured by capitalizing excess earnings at 25% with

normal return on average net assets at 15%. How much is the purchase price for
Calauan Company?
a. 11,600,000
b. 10,400,000
c. 11,200,000
d. 11,000,000
8. Panay Company is negotiating to acquire Sapian Company. Panay manufactures and
sells wood burning stoves and Sapian Company produces parts that are required to
manufacture stoves. Sapian enjoys an exceptional reputation and Panay management
believes it can continue Sapians level of income and satisfy its own need for parts.
Under the contemplated arrangement, Panay will negotiate for the acquisition of the net
assets of Sapian Company. The recorded amounts and current values of the assets
and liabilities of Sapian are:
Recorded amounts
Current values

Assets
20,000,000
25,000,000

Liabilities
8,000,000
5,000,000

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Sapians earnings for the past 5 years averaged P5,000,000. This is believed to be the
a reasonable estimate of future income. The level of income normally experienced by
enterprises similar to Sapian is 15%. Panay and Sapian agreed to capitalize average
excess earnings at 25% in estimating the value of goodwill. How much should Panay
pay in acquiring Sapian?
a. 20,000,000
b. 28,000,000
c. 32,000,000
d. 20,500,000
9. The owners of Majayjay Company are planning to sell the business to new interests.
The cumulative net earnings for the past 5 years was P9,000,000 including casualty
loss of P500,000. The current value of net assets of Majayjay Company was
P20,000,000. Goodwill is determined by capitalizing average earnings at 8%. What is
the amount of goodwill?
a. 1,900,000
b. 1,700,000
c. 3,750,000
d. 1,250,000
10. On January 1, 2005, Carmona purchased Topaz Company at a cost that resulted in
recognition of goodwill of P5,000,000 having an expected benefit period of 10 years.
During January of 2005, Carmona spent an additional P2,000,000 on expenditures
designed to maintain goodwill. Due to these expenditures, at December 31, 2005,
Carmona estimated that the benefit period of goodwill was indefinite. In its December
31, 2005 balance sheet, what amount should Carmona report as goodwill?
a. 5,000,000
b. 7,000,000
c. 4,750,000
d. 4,500,000
11. Sta. Rosa Company has been experiencing significant losses in prior years. On
December 31, 2005, the assets and liabilities are:
Cash
Accounts receivable
Inventory
Property, plant and equipment
Goodwill
Liabilities

10,000,000
20,000,000
30,000,000
50,000,000
5,000,000
40,000,000

On December 31, 2005, the fair value of the net assets of Sta. Rosa is P62,000,000.
How much is the impairment loss applicable to goodwill?
a. 13,000,000
b. 8,000,000
c. 5,000,000
d.
0
12. Luzon Company purchased Jolo Company for P100,000,000. The net assets of Jolo
Company on the date of acquisition amounted to P80,000,000. Thus, there is a
goodwill of P20,000,000. Jolo Company has three segments, each of which is
considered a cash generating unit. The goodwill is allocated respectively to segments
One, Two and Three, P5,000,000, P6,000,000 and P9,000,000.

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On December 31, 2005, Segment One suffered significant losses and its recoverable
amount is P30,000,000. On December 31, 2005, the carrying amounts are as follows:
Segment One
Segment Two
Segment Three
Goodwill

28,000,000
50,000,000
67,000,000
20,000,000

In its 2005 income statement, Luzon Company should report impairment loss at
a. 3,000,000
b. 5,000,000
c. 2,000,000
d. 1,000,000
13. On January 1, 2003, Paete Company signed a 12-year lease for a building. Paete has
an option to renew the lease for an additional 8-year period on or before January 1,
2007. During January 2005, Paete made substantial improvements to the building. The
cost of the improvements was P3,600,000, with an estimated useful life of 15 years. At
December 31, 2005, Paete intended to exercise the renewal option. Paete has taken a
full years amortization on this improvement. In the December 31, 2005, balance sheet,
the carrying amount of this leasehold improvement should be
a. 3,240,000
b. 3,360,000
c. 3,400,000
d. 3,300,000
14. On January 1, 2003, Puntavedra Company signed an eigth-year lease for office space.
Puntavedra has the option to renew the lease for an additional six-year period on or
before January 1, 2009. During January 2005, Puntavedra incurred the following costs.
General improvements to the leased premises with useful
life of 10 years
Office furniture and equipment with useful life of 8 years
Moveable assembly line equipment with useful life of 5 years

5,400,000
2,400,000
1,800,000

At December 31, 2005, Puntavedras intention as to the exercise of the renewal option
is uncertain. A full depreciation of leasehold improvement is taken for year 2005. In
Puntavedras December 31, 2005 balance sheet, accumulated depreciation of
leasehold improvement should be
a. 1,200,000
b. 1,300,000
c.
540,000
d. 900,000
15. Maayon Company begins construction of a new facility. Following are some of the
costs incurred in conjunction with the start up activities of the new facility:
Production equipment
1,500,000
Travel costs of salaried employees
400,000
License fees
50,000
Training of local employees for production and maintenance operations 1,300,000
Advertising costs
100,000
What portion of the organizational costs will be expensed?
a. 1,700,000
b. 1,850,000
c. 3,350,000
d. 1,300,000

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16. Siniloan Company incurred research and development costs in 2005 as follows:
Equipment acquired for use in various R&D projects
Depreciation on the above equipment
Materials used
Compensation costs of personnel
Outside consulting fees
Indirect costs appropriately allocated

6,000,000
1,200,000
3,000,000
4,000,000
1,500,000
1,300,000

The 2005 total research and development expense should be

a. 11,000,000
b. 15,800,000
c. 9,700,000
d. 9,800,000
17. Bian Company incurred the following costs during 2005:
Design of tools, jigs, molds and dies involving new technology
Modification of the formulation of a process
Trouble shooting in connection of breakdowns during commercial
production
Adaptation of an existing capability to a particular customers need
as part of a continuing commercial activity
In
of
a.
b.
c.
d.

2,500,000
3,200,000
2,000,000
2,200,000

its 2005 income statement, Bian should report research and development expense
2,500,000
3,200,000
4,700,000
5,700,000

18. Dumalag Company provided the following information relevant to the research and
development expenditures for the year 2005:
Current period depreciation on the building housing R and D activities
Cost of market research study
Current period depreciation on a machine used in R and D activities
Salary of R and D director
Salary of Vice-President who spends of his time overseeing
R and D activities
Pension costs for salary of R and D director
Pension costs for salary of Vice-President

1,500,000
1,000,000
500,000
1,200,000
2,400,000
50,000
100,000

The R and D expense for the current period should be

a. 3,875,000
b. 4,875,000
c. 5,750,000
d. 3,800,000
19. Bian Company made the following expenditures relating to Product X:
* Legal costs to file a patent on Product X. Production of the finished
product would not have been undertaken without the patent.
* Special equipment to be used solely for development of Product X.
The equipment has no other use and has an estimated useful life of
four years.
* Labor and material costs incurred in producing a prototype model
* Cost of testing the prototype

500,000
4,000,000
3,000,000
2,000,000

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What is the total amount of costs that will be expensed when incurred?
a. 9,000,000
b. 9,500,000
c. 6,000,000
d. 5,000,000
20. On January 1, 2005, Caliraya Company had capitalized cost of P10,000,000 for a new
computer software product with an economic life of 4 years. Sales for 2005 for the
software product amounted to P4,000,000. The total sales of the software over its
economic life are expected to be P20,000,000. However, the pattern of the future sales
from the computer software cannot be determined reliably.
In its 2005 income statement, Caliraya should record amortization of computer software
at
a. 2,500,000
b. 5,000,000
c. 2,000,000
d.
0
21. During 2005, Jamindan Company incurred costs to develop and produce a routine, lowrisk computer software product as follows:
Completion of detail program design
Cost incurred for coding and testing to establish technological feasibility
Other coding costs after establishment of technological feasibility
Other testing costs after establishment of technological feasibility
Costs of producing product masters for training materials
Duplication of computer software and training materials from
product master
Packaging product

1,500,000
500,000
2,500,000
2,000,000
3,000,000
4,000,000
1,000,000

1. In the December 31, 2005 balance sheet, what amount should be capitalized as
software cost subject to amortization?
a. 7,500,000
b. 4,500,000
c. 9,500,000
d. 8,000,000
2. In the December 31, 2005 balance sheet, what amount should be reported as
inventory?
a. 5,000,000
b. 7,000,000
c. 4,000,000
d. 6,500,000
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