CHAPTER 7

INTANGIBLE ASSETS
Exercise 7 -1: Fill in the blanks

1. Assets that have no physical substance and carry a high degree of uncertainty regarding
future benefits are called .
2. The wearing-down process for intangible assets is called .
3. Costs incurred in successfully defending a patent is recorded as _ .
4. provides protection for a creative work.
5. The right to sell a certain product in a certain area is called a .
6. Operating losses incurred in the start-up of a business should immediately be .

7. Goodwill is measured by the excess of the over and above the

.
8. Franchises with unlimited lives should not be .

9. Brands, mastheads, publishing titles, customer lists and items similar in substance that
are internally generated should not be recognized as .
10. Computer software development costs should be expensed until the point of
has been established.

Exercise 7 -2: True or False – Theory

1. The cost of a patent must be amortized over a 20-year period.

2. Generally, research and development costs should be charged to expense

when incurred.

3. When an entire business is purchased, goodwill is the excess of cost over the
book value of the net assets acquired.

4. If an acquired franchise or license has an indefinite life, the cost of the asset
is amortized.
5. Development costs are capitalized only before technical and commercial
feasibility of the asset for sale or use have been established.
6. Research and development costs can be classified as a property, plant, and
equipment item or as an intangible asset.

1
 7. The cost of a patent should be amortized over its legal life or useful life,
whichever is shorter.

8. Goodwill is not recognized in accounting unless it is acquired from another

business enterprise.
9. An intangible asset is identifiable when it cannot be separated from the entity
itself.

10. A masthead is the title of a newspaper or magazine at the head of the front or
editorial page.
11. Goodwill is amortized and tested at least annually for impairment.
12. The brand name Coca-Cola is an intangible asset.

13. Because patents are often subject to litigation, their useful life is frequently
longer than their legal life.
14. Although research costs must be expensed, development costs may be
capitalized if certain criteria are met.
15. Customer list has indefinite useful life.
16. Intangible assets derive their value from the right (claim) to receive cash.
17. Costs incurred during the research phase are capitalized as an intangible
asset once economic viability has been established.
18. Intangibles with limited life are amortized by systematic charges to expense
over their useful life.
19. Internally generated goodwill should be capitalized in the accounts.

20. PAS 38 requires start-up costs and initial operating losses during the early
years be capitalized.

Exercise 7 -3: Multiple Choice

1. Which of these assets differs from the other assets listed?
a. Franchise costs
b. Patents
c. Brand names
d. Goodwill

2
2. A purchased patent has a legal life of 15 years. It should be
a. expensed in the year of acquisition.
b. amortized over 15 years regardless of its useful life.
c. amortized over its useful life if less than 15 years.
d. amortized over 20 years.

3. The asset that cannot be sold individually in the market place is

a. a license.
b. goodwill.
c. a copyright.
d. none of the above because they all can be sold individually in the market place.

4. On July 1, 2020, The Educational Software Co. purchased the copyright to Parsons Computer
tutorials for ₱108,000. It is estimated that the copyright will have a useful life of 5 years with
an estimated residual value of ₱8,000. The amount of amortization expense recognized for the
calendar year 2020 is
a. ₱21,600.
b. ₱10,800.
c. ₱20,000.
d. ₱10,000.

5. Brand names can appear on the statement of financial position if

a. the asset definition criteria are satisfied.
b. the asset recognition criteria are satisfied.
c. the brand name has been purchased.
d. all of the above

Exercise 7 -4: Problem Solving

1. Patent. Dexter Company purchases a patent from Santali Corporation for a price of
₱300,000 and incurs legal fees and consulting fees related to the purchase in the amounts of
₱40,000 and ₱60,000, respectively. The patent’s remaining life is 15 years, but because of
the market competition, its useful life is estimated to be only 10 years.

a. What is the total acquisition cost of the patent?

b. How much is the annual amortization of the patent?
c. At what amount should the patent be reported on the statement of financial position after
three years?

3
2. Copyright. Hearth Company purchases a copyright for ₱120,000 and incurs legal fees of
₱15,000 related to the purchase. The estimated economic life is 40 years. What is the amount
of the annual amortization?

3. Franchise. Seattle Corporation pays a franchise fee of ₱20 million to enable it to sell Good’s
product for the next 20 years. In addition, it is required to pay an annual fee of ₱100,000.

a. What is the amount of the annual amortization?

b. What is carrying amount of the franchise after five years?
c. What is the decrease in income for the year?

4. Goodwill. Danton, Inc. has the following assets and liabilities:

Carrying value Fair market value

Accounts Receivable ₱ 500,000 ₱ 400,000
Building 5,200,000 5,800,000
Machinery 400,000 500,000
Bonds Payable (200,000) (200,000)

a. Before calculations for goodwill, what value should a purchaser assign to Danton, Inc.?
b. Assume that a purchaser pays ₱7 million. How much is goodwill, if any?

5. Research & Development. Edwards Corporation purchases a building for ₱2,000,000 which
is to be used to create prototype for a new type hydrogen bomb. Once the prototype is
completed, the building will have to be burned down because of high radiation levels. During
the period of bomb construction, the salaries of Edwards Corporation’s scientists are billable
to the Philippine government on a cost-plus-profit basis. The total billed this period was
₱100,000. How much is the R & D expense for the period?

6. Computer Software. Terry, Inc. spends ₱75,000 in determining the technological feasibility
of certain computer software. After the point of technological feasibility has been established,
it spends another ₱400,000 in completing the software’s production. How much is the
capitalized computer software cost?

7. Patent. In early January 2020, Lerner Corporation applied for a patent, incurring legal costs
of ₱50,000. In January 2021, Lerner incurred ₱19,000 of legal fees in a successful defense of
its patent. The company amortizes the patent over 10 years.

Compute a. 2020 and 2021 amortization

b. December 31, 2020 and December 31, 2021 carrying value