p1 & AP - Intangibles

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P1/AP - INTANGIBLES Multiple Choice Identify the letter of the choice that best completes the statement or answers the question.

1. The following are items that that could be included in the Intangible Assets: 1. Investment in a subsidiary company 2. Timberland 3. Cost of engineering activity required to advance the design of a product to the manufacturing stage 4. Lease prepayments (6 months’ rent paid in advance)   5. Cost of equipment obtained under finance lease 6. Internally generated publishing title 7. Costs incurred in the formation of the corporation 8. Operating losses losses incurred in the start-up of the business 9. Training costs incurred in start-up operations 10. Purchase of a franchise 11. Goodwill internally generated 12. Cost of testing in search for product alternatives 13. Goodwill acquired in the purchase of a business 14. Cost of developing a patent 15. Cost of purchasing a patent from an inventor 16. Legal costs incurred in securing a patent 17. Costs of a successful legal suit to protect the patent 18. Cost of conceptual formulation of possible product alternatives 19. Cost of purchasing a copyright 20. Research and development costs 21. Long-term receivables 22. Cost of developing a trademark 23. Cost of purchasing a trademark 24. Computer software for a computer-controlled machine that cannot operate without that specific software 25. Operating system of a computer

P1,500,000 2,000,000 120,000 60,000 700,000 230,000 90,000 560,000 80,000 1,200,000 300,000 65,000 640,000 140,000 500,000 70,000 230,000 160,000 900,000 340,000 310,000 61,000 290,000 130,000 10,000

How much could be recognized as Intangible Assets? a. P3,600,000 c. P5,830,000 b. P3,740,000 d. P3,530,000 2. Jeff Company developed a new machine for manufacturing volleyballs. Because the machine is considered very valuable, the entity had it patented. The following expenditures were incurred in developing and patenting the machine: Purchase of special equipment to be used solely for development of 2, 250, 000 the new machine Research salaries and fringe benefits for engineers and scientists 350, 000 Cost of testing prototype 3 00, 000 Legal cost of filing the patent 150, 000 Fees paid to government patent office 60, 000 Drawing required by patent office to be filed with patent application 40, 000 1. What amount should be capitalized as the cost of the patent? a. 150, 000 b. 240, 000 c.210, 000 d.300, 000 2. What amount of research and development should be expensed in the current year? a.2, 700, 000 b.2, 550, 000 c. 5, 600, 000

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d. 2, 250, 000 3. On July 1, 2015, Jeff purchased a patent from the inventor, who asked P1,100,000 for it. Jeff 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, P500,000, noninterest-bearing. The current interest rate for this type of financing is 12 percent. Jeff estimates the useful life of the patent to be ten years. Carrying amount of patent as of December 31, 2015 a. P1,045,000 c. P860,310 b. P 955,900 d. P908,105

4. Ana Company acquired three patents in January 1, 2016

Patent X Patent Y Patent Z

Cost

Remaining Useful Life

Remaining Legal Life

2, 250, 000 3, 556, 000 2, 556, 000

15 6 5

9 10 16

In July 31, 2016 the entity s uccessfully defended its right to Patent Z and incurred legal fees of P 455, 000.

What total amount of amortization should be recognized for 2016? a.1, 353, 867 b.2, 500, 000 c.2, 556, 000 d.3, 556, 000 5. Ana Company was granted a patent on January 1, 2013 and appropriately capitalized P450,000 of related costs. The entity was amortizing the patent over the useful life of 15 years. During 2016, the entity paid P150,000 in legal costs in successfully defending an attempted infringement of the patent.  After the legal action was completed, the entity sold the patent to the plaintiff for P750,000. The policy is to take no amortization in the year of disposal What amount should be reported as gain from sale of patent in 2016? a.150,000 b.240,000 c.270,000 d.390,000 6. On January 1, 2014 Ana Company, purchased a patent for P 9, 140, 000. The patent is being amortized over the remaining legal life of 15 years expiring on January 1, 2030. During 2017 the entity determined that the economic benefits of the patent would not last longer than ten years from the date of acquisition. What is the carrying amount of the patent on December 31, 2017? a. 6, 267, 428.57 b. 1, 828,000 c. 7, 312, 000 d. 9, 140, 000 7. On January 2, year 1, Arlene, Inc. purchased a patent for a new consumer product for 90,000. At the time of purchase, the patent was valid for fifteen years; however, the patent’s useful life was estimated to be only ten years due to the competitive nature of the product. On December 31, year 4, the product was permanently withdrawn from sale under governmental order because of a potential health hazard in the product. What amount should Arlene charge against income during year 4, assuming amortization is recorded at the end of each year?

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a. 9,000 b. 54,000 c. 63,000 d. 72,000 8. Arlene Company acquired copyright to the original recordings of a famous singer. The agreement with the singer, allows the entity to record and rerecord the singer for a period of 5 years. During the initial six-month period of the agreement, the singer is very sick and consequently cannot record. The studio time that was blocked by the entity had to be paid during the period the singer could not sing. The following costs are incurred by the entity: Cost of acquiring the copyright Operating loss during the start up period (studio time lost) Massive advertising campaign to launch the artist

5,000,000 1,000,000 1,500,000

What amount should be capitalized as cost of the copyright? a. 5,000,000 b. 6,000,000 c. 7,500,000 d. 6,500,000 9. On January 1, 2016, Arlene signed an agreement to operate as franchisee of Clear 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 each, beginning January 1, 2017. 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. Arlene’s revenue from the franchise for 2016 was P8,000,000. Arlene estimates the useful life of the franchise to be ten years. Carrying amount of franchise as of December 31, 2016? a. P549,644 b. P494,680 c. P538,733 d. P612,000 10. Arlene Company markets product to real state agents and to new homeowners, purchased a customers list for P600,000 on January 2, 2015. Because of turnover among real-state agents and because new homeowners gradually become established gradually established homeowners, the list is expected to have economic value for only 4 years. The company uses the straight line method of amortization. In January 2016, the customer list was tested for impairment as a result of substantial turndown in the retail-estate market in the area. It is estimated that customer list will generate future cash flows of P100,000 per year for the next three years and that the fair value (less cost to sell) of the customer list is P240,000. The market rate of interest in this day is 8%. What amount of impairment loss on customer list should Arlene Company recognize? a. none c. 210,000 b. 192,300 d. 450,000 11. On January 1, 2014, Matet Company signed an eight-year lease for office space. The entity has the option to renew the lease for an additional four-year period on or before January 1, 2021. During January 2016, two years after occupying the leased premises, the entity made general improvement to the premises costing P3,600,000 and having an estimated useful life of ten years. On December 31, 2016, the entity’s intention as to exercise of the renewal option is uncertain because this will depend upon future office space requirement. A full year depreciation expense is taken for the current year.

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What amount should be recorded as depreciation of leasehold improvement for the current year? a. 300,000 b. 360,000 c. 450,000 d. 600,000 12. On January 1, 2014, Matet Company signed an eight-year lease for office space. The entity has an option to renew the lease for an additional 8-year period on or before January 1, 2017. During January 2016, the entity made substantial improvement to the warehouse. The cost of the improvement was P540,000 with an estimated useful life of 15 years. On December 31, 2016, the entity intended to exercise the renewal option. The entity has taken a full year depreciation on this leasehold improvement for 2016. On December 31, 2016, what is the carrying amount of the leasehold improvement? a. 486,000 b. 504,000 c. 510,000 d. 513,000 13. During year 4, Matet Corp. incurred costs to develop and produce a routine, low-risk computer software product, as follows: Completion of detailed program design 13,000 Costs incurred for coding and testing to establish technological feasibility 10,000 Other coding costs after establishment of technological feasibility 24,000 Other testing costs after establishment of technological feasibility 20,000 Costs of producing product masters for training materials 15,000 Duplication of computer software and training materials from product masters (1,000 units) 25,000 Packaging product (500 units) 9,000 77. Q1. In Matet’s December 31 , year 4 balance sheet, what amount should be reported in inventory? a. 25,000 b. 34,000 c. 40,000 d. 49,000 Q2. In Matet’s December 31, year 4 balance sheet, what amount should be capitalized as software cost, subject to amortization? a. 54,000 b. 57,000 c. 59,000 d. 69,000

14. On December 31, year 3, Matet Co. had capitalized software costs of 600,000 with an economic life of four years. Sales for year 4 were 10% of expected total sales of the software. At December 31, year 4, the software had a net realizable value of 480,000. In its December 31, year 4 balance sheet, what amount should Matet report as net capitalized cost of computer software? a. 432,000 b. 450,000 c. 480,000 d. 540,000 15. An entity purchases a trademark and incurs the following costs in connection with the trademark: One-time trademark purchase price 100,000 Nonrefundable VAT taxes 5,000 Training sales personnel on the use of the new trademark 7,000 Research expenditures associated with the purchase of the new trademark 24,000 Legal costs incurred to register the trademark 10,500 Salaries of the administrative personnel 12,000 Applying IFRS and assuming that the trademark meets all of the applicable initial asset recognition criteria, the entity should recognize an asset in the amount of a. 100,000 b. 115,500

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c. 146,500 d. 158,500 16. Kelly Company is planning to sell the business to new interests. The cumulative earnings for the past seven years amounted to P7, 450, 000 including the expropriation gain of P 450, 000. The fair value of net assets of Kelly Company was P 9, 750, 000. The goodwill is determined by capitalizing average net earnings at 10%. What is the amount to be paid for goodwill? a.250, 000 b.7, 450, 000 c.1, 000, 000 d.350, 000 17. Kelly Company acquired Small Company on January 1. As part of the acquisition, P500,000 in goodwill was recognized; this goodwill was assigned to Kelly’s Internet Applications reporting unit. During the year, the Internet Applications reporting units reported revenues of P800,000. Publictly traded company with operations similar to those of the Internet Application unit had price-to-revenue ratios averaging 1.70. The fair values and book values of the asset and liabilities of the Internet Applications reporting unit are as follows: Book Values Fair Values Identufiable assets P1,950,000 P1,900,000 Goodwill 500,000 ? Liabilities 650,000 650,000 What is the amount of impairment loss on goodwill to be recognized? a. none c. 390,000 b. 110,000 d. 500,000 18. Kelly Corp. incurred the following costs during year 4: Design of tools, jigs, molds, and dies involving new technology 125,000 Modification of the formulation of a process 160,000 Troubleshooting in connection with breakdowns during commercial production 100,000 Adaptation of an existing capability to a partic ular customer’s need as part of a continuing commercial activity 110,000 In its year 4 income statement, Kelly should report research and development expense of a. 125,000 b. 160,000 c. 235,000 d. 285,000 19. Tris Co. purchased two machines of P250,000 each on January 2, 2016. The machines were put into use immediately. Machine A has useful life of five years and can only be used in one reasearch project. Machine B will be used for two years on a research and development project and then used by the production division for an additional eight years. Tris uses straight line method of depreciation. What should Tris include in 2016 research and development expense? a. P 75,000 c. P375,000 b. P275,000 d. P500,000 20. You gathered the following information related to the Patents account of the Tris Cookie Corporation in connection with your audit of the company’s financial statements for the year 2016. In 2015, Tris 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, Tris  patented the machine. The following expenses were incurred in developing and patenting the machine: Research and development laboratory expenses Metal used in the construction of the machine Blueprints used to design the machine Legal expenses to obtain patent Wages paid for the employees’ work on the research, development, and building of the machine (60% of

P1,000,000 320,000 128,000 480,000

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the time was spent in actually building the machine) Expense of drawing required by the patent office to be submitted with the patent application Fees paid to the government patent office to process application

1,200,000 68,000 100,000

During 2016, Tris 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. Based on the above and the result of your audit, determine the following: 1. Cost of patent a. P580,000 b. P648,000

c. P1,128,000 d. P 798,000

2. Cost of machine a. P1,236,000 b. P1,648,000

c. P1,040,000 d. P1,168,000

3. Amount that should charged to expense when incurred in connection with the development of the patented machine a. P1,480,000 c. P1,608,000 b. P1,000,000 d. P 0 4. Carrying amount of patent as of December 31, 2016 a. P522,000 c. P1,015,200 b. P583,200 d. P 837,900 21. In connection with your audit of the Ramil Corporation’s financial statements for the year 2016 you noted the following items relative to the company’s Intangible assets.  A patent was purchased from Maica Company for P4,000,000 on January 2, 2013. Ramil estimated that the remaining useful life of the patent to be 10 years. The patent was carried in Maica’s accounting records at a carrying value of P4,000,000 when Maica sold it to Ramil.  During 2016, a franchise was purchased from Gloria Company for P960,000. In addition, 5% of the revenue from the franchise must be paid to Gloria. Revenue from the franchise for 2016 was P5,000,000. Ramil estimates the useful life of the franchise to be 10 years and takes full year’s amortization in the year of purchase.  Ramil incurred research and development costs of P866,000 in 2016. Ramil estimates that these costs will be recouped by December 31, 2019.  On January 1, 2016, Ramil, because of the recent events in the industry, estimates that the remaining life of the patent purchased on January 2, 2013, is only 5 years from January 1, 2016. Based on the above and the result of your audit, determine the following: 1. Amortization of patent for 2016 a. P900,000 b. P800,000

c. P720,000 d. P400,000

2. Carrying amount of patent as of December 31, 2016 a. P2,880,000 c. P2,700,000 b. P2,400,000 d. P3,200,000 3. Carrying amount of intangible assets as of December 31, 2016 a. P3,264,000 c. P3,564,000 b. P4,610,000 d. P3,744,000

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4. Total amount that should be charged against income in 2016 a. P2,112,000 c. P2,012,000 b. P1,066,000 d. P1,932,000 22. You noted the following items relative to the company’s Intangible assets in connection with your audit of the Maica Corporation’s financial statements for the year 2016.  On January 1, 2016, Maica signed an agreement to operate as franchisee of Clear 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 each, beginning January 1, 2017. 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. Maica’s revenue from the franchise for 2016 was P8,000,000. Maica estimates that the useful life of the franchise to be ten years.  Maica incurred P624,000 of experimental and development costs in its laboratory to develop a patent which was granted on January 2, 2016. Legal fees and another costs associated with the registration of the patent totaled P131,200. Maica estimates that the useful life of the patent will be eight years.  A trademark was purchased from Gloria Company for P320,000 on July 1, 2013. Expenditures for successful litigation in defense of the trademark totaling P80,000 were paid on July 1, 2016. Maica estimates that the trademark’s useful life will be indefinite. Based on the above and the result of your audit, determine the following: (Round off present value factors to 4 decimal places) 1. Total expenses related to franchise in 2016 a. P503,914 c. P448,950 b. P535,200 d. P454,964 2. Carrying amount of franchise as of December 31, 2016 a. P549,644 c. P538,733 b. P494,680 d. P612,000 3. Carrying amount of patent as of December 31, 2016 a. P131,200 c. P124,640 b. P114,800 d. P123,482 4. Carrying amount of trademark as of December 31, 2016 a. P320,000 c. P304,000 b. P288,000 d. P400,000 5. Carrying amount of intangible assets as of December 31, 2016 a. P1,046,800 c. P1,009,480 b. P 984,444 d. P 929,480 23. In connection with your audit of the Ramil Corporation, you noted the following transactions during 2016: Jan. 2

Paid legal fees of P450,000 and stock certificate costs of P249,000 to complete organization of the corporation.

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Hired a 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.

 Apr. 1

Patented a newly developed process with costs as follows: Legal fees to obtain patent

P1,287,000

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Patent application and licensing fees Total

190,500 P1,477,500

It is estimated that in 6 years other companies will have developed improved processes, making the Ramil Corporation process obsolete. May

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Acquired both a license to use a special type of container and a distinctive trademark to be printed on the container in exchange for 18,000 shares of Ramil’s no -par ordinary shares selling for P50 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 P3,930,000 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 2016.

It is the company’s policy to take full year amortization in the year of acquisition. Based on the above and the result of your audit, determine the following: 1. Cost of patent a. P1,477,500 c. P1,287,000 b. P 190,500 d. P 0 2. Cost of licenses a. P450,000 b. P300,000

c. P600,000 d. P 0

3. Cost of trademark a. P450,000 b. P300,000

c. P600,000 d. P 0

4. Carrying amount of Intangible Assets as of December 31, 2016 a. P2,031,250 c. P1,981,250 b. P2,026,250 d. P 0 5. Total amount resulting from the foregoing transactions that should be expensed when incurred a. P2,971,500 c. P5,424,000 b. P1,494,000 d. P 0 24. On January 2, 2009, Herbert Company spent P480,000 to apply for and obtain a patent on a newly developed product. The patent had an estimated useful life of 10 years. At the beginning of 2013, the company spent P144,000 in successfully prosecuting an attempted patent infringement. At the beginning of 2014, 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, 2017, a competitor obtained rights to a patent that made the company’s patent obsolete. Based on the above and the result of your audit, determine the following: 1. Carrying amount of patent as of December 31, 2013 a. P360,000 c. P369,600 b. P240,000 d. P355,200 2. Amortization of patent in 2014 a. P64,000 b. P64,960

c. P52,000 d. P63,520

3. Carrying amount of patents as of December 31, 2016 a. P448,000 c. P444,640

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b. P454,720

d. P364,000

4. Loss on patent obsolescence in 2017 a. P338,000 c. P448,000 b. P416,000 d. P364,000 25. On December 31, 2015, Kaila Corporation acquired the following three intangible assets:  A trademark for P450,000. The trademark has 7 years remaining legal life. It is anticipated that the trademark will be renewed in the future, indefinitely, without problem.  Goodwill for P2,250,000. The goodwill is associated with Kaila’s Manufacturing reporting unit.  A customer list for P330,000. By contract, Kaila has exclusive use of the list for 5 years. Because of market conditions, it is expected that the list will have economic value for just 3 years. On December 31, 2016, before any adjusting entries for the year were made, the following information was assembled about each of the intangible assets: a) Because of a decline in the economy, the trademark is now expected to generate cash flows of just P15,000 per year. The useful life of trademark still extends beyond the foreseeable horizon. b) The cash flows expected to be generated by the Laguna Manufacturing reporting unit is P375,000 per year for the next 22 years. Carrying amounts and fair values of the assets and liabilities of the Laguna Manufacturing reporting unit are as follows:

Identifiable assets Goodwill Liabilities

Carrying amount P4,050,000 2,250,000 2,700,000

Fair values P4,500,000 ? 2,700,000

c) The cash flows expected to be generated by the customer list are P180,000 in 2017 and P120,000 in 2018. Based on the above and the result of your audit, determine the following: (Assume that the appropriate discount rate for all items is 6%. Round off present value factors to 4 decimal places): 1. Total amortization for the year 2016 a. P110,000 c. P212,273 b. P174,285 d. P130,285 2. Impairment loss for the year 2016 a. P135,714 b. P269,376

c. P200,000 d. P 0

3. Carrying amount of Trademark as of December 31, 2016 a. P450,000 c. P385,715 b. P250,000 d. P180,624 4. Carrying amount of Goodwill as of December 31, 2016 a. P2,250,000 c. P2,147,727 b. P2,137,500 d. P2,193,750 5. Carrying amount of Customer list as of December 31, 2016 a. P330,000 c. P220,000 b. P264,000 d. P 0 26. A license is acquired July 1, 2013, 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, 2014, management estimated that the recoverable amount of the license is only P135,000. Amortization will be taken over 3 years from that point.

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On January 1, 2016, 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, 2016. The estimated remaining useful life is now believed to be 5 years. Based on the above and the result of your audit, determine the following: 1. How much is the loss on impairment on January 1, 2014? a. P270,000 c. P225,000 b. P300,000 d. P 0 2. How much can be recognized as gain on impairment recovery in 2016? a. P270,000 c. P495,000 b. P180,000 d. P315,000 3. How much will be recognized as revaluation surplus on January 1, 2016? a. P270,000 c. P495,000 b. P180,000 d. P315,000 27. An intangible asset costs P300,000 on January 1,2015. On January 1,2016, the asset was evaluated to determine if it was impaired. As of January 1,2016, the asset was expected to generate future cash flows of P25,000 per year (at the end of each year). The appropriate discount rate is 5%. What total amount should be charged against income in 2016, assuming that the asset had a total useful life of 10 years from date of acquisition? a. P30,000 b. P92,304 c. P112,048 d. P122,304 What total amount should be charged against income in 2016 assuming that as of January 1,2015, the asset was assumed to have an indefinite useful life and that as of January 1,2016, the remaining life was still indefinite? a. 0 b. P30,000 c. P92,304 d. P122,304 28. As the recently appointed auditor for Herbert Company, you have been asked by your senior in charge to examine the entity’s intangible assets. The trial balance submitted to you by Herbert listed the following intangible assets account at December 31, 2016: Patents Trademarks Franchise Organization Costs Goodwill

P920,000 220,000 900,000 40,000 450,000

You obtained the following additional information: (1) The patents were purchased by the company on January 1, 2014 for P1,000,000. At the date of purchase, the patents were assessed to have an estimated useful life of 10 years, although the same will expire on December 31, 2027. Amortization was made by the company for years 2014 and 2015, based on 10 year life. In 2016, the company successfully defended the patents in an infringement suit, the decision rendered by the court on December 28, 2016. Legal fees of P120,000 were incurred and capitalized by the company in 2016. (2) At December 31, 2016, the company assessed the economic benefits expected to be derived from the patents. Because of new products and processes introduced in the market, it is believed that these patents would provide annual cash inflow of P140,000 for the next five years. The comp any’s appropriate discount rate is 10%. Since there is no homogeneous price is not reliably determinable.

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(3) The balance of the Trademarks account represents its purchase price of P150,000 paid on January 1, 2014 and P70,000 of legal costs useful incurred during the current year 2016 for the cost of infringement suit filed by the company against its competitor. The trademark was originally believed to have an indefinite useful life, hence no amortization was taken up by the company for years 2014 and 2015. Because of new products introduced in the market the Trademark is now believed to benefit the company up to the end of 2018. (4) The Franchise account represents the total of the cash paid to acquire it on January 1, 2015, P200,000 plus the P800,000 face value of the promissory note issued on the same date, reduced by 2015 amortization of P100,000. The P800,000 promissory note was non-interest bearing, payable in four annual installments of P200,000 due every December 31 starting December 31, 2015. All installment payments up to December 31, 2016 have been made on the due date. Implicit interest rate on the note is 10% based on the equivalent cash price of the Franchise when purchased. (5) The Organization Costs represents the unamortized portion of the costs of drafting, registering the corporate charter and the costs incurred in shareholders' meeting during the process of incorporation, reduced by amortization taken up in 2014 through 2015. The corporation opted to amortize the organization costs over five years for tax purposes and applied the same treatment for accounting purposes. (6) The Goodwill account represents the following items: P285,000 - Excess of the total consideration given over the fair value of the Net assets acquired in a business combination consummated on January 1, 2015, reduced by amortization recorded during the year 2015 (using straight-line). The company decided to amortize Goodwin over twenty years. There is no indication of impairment as of December 31, 2016. P165,000 - Cost of massive advertising campaign to launch a new product in January 2016. The Board of Directors concluded that this product contributed significantly to the profitability of the entity. No amortization has been recorded yet by the company on any of the above assets during the year 2016. 1. What is the carrying value of the patents at December 31, 2015? a. P800,000 c. P1,000,000 b. P900,000 d. P1,120,000 2. What is the Impairment loss on patents for the year 2016 a. P133,333 c. P133,900 b. P 135,000 d. P135,955 3. Determine the correct cost of the Franchise. a. P833,334 c.P845,670 b. P833,980 d.P860,980 4. Determine the Interest Expense for 2016 related to the Notes Payable. a. P63,398 c. P49,738 b. P40,000 d. P16,602 5.What is the amount initially recognized as Goodwill on January 1, 2015? a. P300,000 c. P165,000 b. P285,000 d P0 29. In line with Angel co.’s expansion program, it has become interested in acquiring a plant in Mindanao to handle many of its production functions in that area. One prospective seller is Akatsuki whose owners have decided to sell their business if a proper settlement can be obtained. Akatsuki’s balance sheet appear as follows: Current assets P4,500,000 Current liabilities P2,400,000 Investments 1,500,000 Non-current liabilities 3,000,000 PPE (net) 12,000,000 Common stock 1,500,000  APIC 5,100,000 Retained Earnings 6,000,000

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Total Assets

P18,000,000

Total equities

P18,000,000

 Angel has hired Kankuro Appraisal co. to determine the proper price to pay for Akatsuki. The appraisal company finds that the investment have a fair value of P4,500,000 and the inventory is understated by P2,400,000. All other assets and equities are properly stated. An examinat ion of the company’s income for the last 4 years indicates that the net income had steadily increased. In 2016, the company had a net operating income of P3,000,000, which is expected to increase 20% each year over the next 4 years.  Angel believes that a normal return in this type of business is 18% on net assets. The asset investment in the Mindanao plant is expected to stay the same for the next 4 years.  According to Kankuro Appraisal Co., the fair value of Akatsuki can be estimated in many different ways. Calculate an estimate of the value of Akatsuki, assuming that any goodwill will be computed as: 1.The capitalization of the average excess earnings of Akatsuki at 18% a. P44,840,000 b. P36,000,000 c. P18,286,416 d. P26,840,000 2. The purchase of average excess earnings over the next 4 years a. P24,364,800 b. P19,591,200 c. P30,960,000 d. P22,831,200 3.The capitalization of average excess earnings of Akatsuki at 24% a. P31,500,000 b. P24,630,000 c. P18,381,888 d. P98,520,000 4. The present value of the average excess earnings over the next 4 years discounted at 15%. (The present value of an ordinary annuity of 1 at 15% for 4 periods is 2.85498) a. P31,792,979 b. P55,932,484 c. P22,542,844 d. P27750,135 5. If Angel were to pay P23,100,000 to purchase the assets and assume the liabilities of Akatsuki, how much would be charged to goodwill? a. P8,840,000 b. P6,364,800 c. P 0 d. P5,100,000 30. You are in the process of examining th intangible asset accounts of Angel Company and you obtained the following information:  A patent was purchased from Pizza Hot Company for P2,000,000 on January 1, 2015. Angel Company estimated the remaining useful life of the patent to be 10 years at the date of purchase. The patent was carried on Pizza Hot Company’s accounting records at a net carrying amount of P1,600,000 when Pizza Hot sold it to Angel Company During 2016, a franchise was purchased from Yellow Cob for P516,000. The terms of the payment are as follows: P180,000 down payment on the date of the purchase, April 1,2016 and P336,000 one year non-interest bearing note due on April 1, 2017. Implicit interest in this transaction is 12%. In addition, 5% of revenue from the franchise must be paid to Yellow Cob. Revenue from the franchise for 2016 wasP2,500,000. Angel estimated on the date of purchase that the useful life of the machine was 10 years.  Angel incurred the following expenditures relating to research and development activities in 2016: Materials P42,000 Equipment 100,000 Indirect Cost 102,000

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 Angel estimates that these costs will be recouped by December 31,2019. The materials and equipment purchased have no alternative future uses. During 2016, because of recent events in the field, Angel estimates that the remaining life of the patent purchased on January 1, 2015 is only 5 years from January 1,2016. The company takes a full year’s amortization or depreciation on assets acquired during the year. 1.

The amortization of the patent for the year 2016 is a. P200,000 b. P288,000 c. P333,000 d. P360,000

2. Total research and development expense to be shown in the 2016 statement of comprehensive income is a. P244,000 b. P164,000 c. P144,000 d. P48,800 3. The carrying Value of the Franchise at December 31, 2016 is a. P360,000 b. P370,000 c. P432,000 d. P444,000 4. The total amount that will be charged against revenue for 2016 related to the franchise is a. P192,000 b. P182,000 c. P161,000 d. P200,000 5. The amortized cost of the Notes Payable on December 31, 2016 is a. P300,000 b. P309,000 c. P327,000 d. P336,000