AYAW KAPRESSURE Corporation acquired two patents, several items of equipment and

a parcel of land for a total of P1,500,000 . Appraisal values of the assets on the date of
acquisition are as follows: Patent A P400,000 Patent B 400,000 Land 400,000 Equipment
400,000 By acquiring the assets in a group, the company was able to get a favorable
price. The acquisition took place on April 27, 2021. Patent A has a five-year remaining life
and Patent B a 10-year remaining life. Amortization on intangible assets is determined on
a straight-line basis, computed in whole pesos to the nearest full month.

During 2022 the company became involved in two lawsuits resulting in the successful
defense of Patent A but the unsuccessful defense of Patent B. Total legal fees of $17,000
were incurred. Management estimates that approximately equal effort went into
defending each patent. The established date of these settlements was March 27, 2022.
No further transactions affecting the patents occurred in year 2023.

Prepare journal entries for the years 2021, 2022, and 2023, related to the intangible asset
accounts. The company’s reporting year ends on December 31.

Allocation of the P1,500,000 cost to the individual assets in the group of assets
acquired is based on the relative fair value of the individual assets.

Appraisal Portion of Total Allocated

Asset Value Total Value Cost Cost
Patent A P 400,000 400/1,600 x P1,500,000 = P 375K
Patent B 400,000 400/1,600 x 1,500,000 = 375K
Equipment 400,000 400/1,600 x 1,500,000 = 375K
Land 400,000 400/1,600 x 1,500,000 = 375K
P1,600,000 P1,600,000

Journal entries for 2021, 2022 and 2023, relative to intangible assets, are as follows:

2021
Apr. 27 Patent A 375K
Patent B 375K
Equipment 375K
Land 375K
Cash 1,500,000
To record the acquisition of assets.

Dec 31 Amortization of Patents 75K

Patent A (375K / 5 x 8/12) 50K
Patent B (375K / 10 x 8/12) 25,000
To record amortization of patents
for 2021.
2021
Mar. 7 Legal Expenses 17,000
Cash 17,000
To record legal fees related to defense
of patents.

Mar. 7 Amortization of Patents 9,375

Patent B 9,375
To record amortization on Patent A
to date of write-off (Jan 2021 to March 22 ).

Mar. 7 Loss on Patent A 340,625

Patent A 340,625
To record write-off of Patent A after
unsuccessful defense.

Dec 31 Amortization of Patents A 75K

Patent A 75K
To record amortization of Patent B for 2022

2023

Dec 31 Amortization of Patents 75K

Patent A 75K
To record amortization on Patent B for 2023.

You noted the following items relative to the company’s intangible assets in connection
with your audit of the NCIS’ financial statement for the year 2020:

On January 1,2020, NCIS signed an agreement to operate as franchisee of Vague Copy
Service Inc. for an initial franchise of P600,000. Of this amount, P200,000 was paid when
the agreement was signed and the balance was payable in four annual payments of
P100,000 each, beginning January 1,2021. 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 12%. The agreement also provides the 5% of the revenue
from the franchise must be paid to the franchisor annually. NCIS’ revenue from the
franchise for 2020 was P9,000,000. NCIS estimates that the useful life of the franchise to be
10 years.

NCIS incurred P620,000 of experimental and development costs in its laboratory to

develop a patent which was granted on January 2,2020. Legal fees and other costs
associated with the registration of the patent totaled P131,500. NCIS estimates that the
useful life of the patent will be 25 years.
A trademark was purchased from ALE Inc. for P300,000 on July 1,2017. Expenditures for
successful litigation in defense of the trademark totaling P50,000 were paid on July 1,2020.
NCIS estimates that the trademark’s useful life will be indefinite. Use 4 decimal places
for present value factor. Required: Based on the result of your audit, determine the
following:___
1. Total expenses related to franchise in 2020
2. Carrying amount of franchise as of December 31,2020
3. Carrying amount of patent as of December 31,2020
4. Carrying amount of trademark as of December 31,2020
5. Carrying amount of intangible assets as of December 31,2020

Down payment P200,000

Add PV of installment payments (P100,000 x 3.03735) 303,735
Cost of franchise 503,735
Divide by useful life 10
Amortization of franchise 50,374
Periodic franchise fee (P9,000,000 x 5%) 450,000
Imputed interest expense (P303,735 x 12%) 36,448.2.
Total expenses related to franchise in 2006 P536,822.2

Cost of franchise (see no. 1) P503,735

Less amortization in 2020 (see no. 1) 50,374
Carrying amount of franchise, 12/31/20 453,361
Question No. 3
Cost of patent P131,500
Less amortization in 2020 (P131,500/20) 6,575
Carrying amount of patent, 12/31/20 124,925
Question No. 4
Carrying amount of trademark, 12/31/20 P300,000
Notes: 1) Cost of defending the trademark should be expensed. 2) PAS 38 par. 107 stat
es that an intangible asset with indefinite useful life shall not be amortized.

Franchise (see no. 2) 453,361

Patent (see no. 3) 124,925
Trademark (see no. 4) P300,000
Carrying amount of intangible assets, 12/31/06 P878,286
On December 31, 2005, Siniloan Corporation acquired the following three intangible
assets:
• A trademark for P300,000. 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 P2,200,000. The goodwill is associated with Siniloan’s Laguna

Manufacturing reporting unit.

• A customer list for P300,000. By contract, Siniloan 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 2 years.

On December 31, 2006, 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 P10,000 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 P370,000 per year for the next 22 years. Book values and fair values of the assets
and liabilities of the Laguna Manufacturing reporting unit are as follows:
Book values Fair values
Identifiable assets P4,050,000 P4,500,000
Goodwill 2,200,000 ?
Liabilities 2,700,000 2,700,000
c) The cash flows expected to be generated by the customer list are P50,000 in 2007
and P100,000 in 2008.

QUESTIONS:
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 2006
2 Impairment loss for the year 2006
3 Carrying amount of Trademark as of December 31, 2006
4 Carrying amount of Goodwill as of December 31, 2006
5 Carrying amount of Customer list as of December 31, 2006

Hint:
Impairment Loss = Carrying Amount – RA (Value in use ↑ FVCTS)
VIU = PV of FCF
For IA with indefinite UL , PV of FCF is equal to :

PV = FCF / r

where PV is the present value of FCF, FCF is the estimated future cash flow for the year,
and r is the discount rate.

Impairment loss = Asset’s RA < Carrying value

1. 150,000
Amortization of customer list (P300,000/2) P150,000
PAS 38 par. 107 states that an intangible asset with an indefinite useful life shall not be
amortized. Therefore, the trademark and goodwill were not amortized.
2. 147,163.33.
Trademark:
Carrying amount P300,000
Recoverable amount (P10,000/0.06) 166,666.67 133,333.33
Goodwill:
Carrying amount of Laguna
Manufacturing unit
3,550,000
(P4,050,000+P2,200,000-P2,700,000)
Recoverable amount (P370,000x12.0416) 4,455,472 -
Customer list:
Carrying amount (P300,000 -P150,000) 150,000
Recoverable amount [(P50,000 x 0.9434) + (P100,0
P136,170 P13,830.
00 x 0.8900)]
Total impairment loss 147,163.33.

3. 166,667
Cost of trademark P300,000
Less impairment loss 133,333.33
Carrying amount of trademark, 12/31/06 166,666.67
4. Since goodwill is not amortized and is not impaired as of 12/31/06, the carrying
amount is P2,200,000.
5. P136,170
Cost of customer list P300,000
Less amortization in 2006 150,000
Carrying amount of customer list, 12/31/06 P150,000
Less: Impairment Loss P13,830
P136,170

Lumban Company incurred the following costs during 2006 in connection with its rese
arch and development activities:
Cost of equipment acquired that will have alternative uses in future research and dev
elopment projects over the next 5 years P1,500,00

Materials consumed in research and development projects 300,000

Consulting fees paid to outsiders for research and development projects 500,000

Personnel costs of persons involved in research and development projects 400,000

Indirect costs reasonably allocable to research and development projects 200,000

Materials purchased for future research and development 170,000

Compute the amount that will be classified and expensed as research and
development.(2pts.)

Depreciation of equipment used in R & D projects

(P1,500,000/5) P 300,000
Materials consumed in R & D projects 300,000
Consulting fees paid to outsiders for R & D projects 500,000
Personnel costs of persons involved in R & D projects 400,000
Indirect costs reasonably allocable to R & D projects 200,000
Total P1,700,000