NATURAL RESOURCES AND INTANGIBLE ASSETS

Natural Resources – consist of standing timber and resources extracted from the ground, such as oil, gas and
minerals.

Intangible Assets – are rights, privileges and competitive advantages that result from the ownership of long-
lived assets that do not possess physical substance.

NATURAL RESOURCES
Depletion – the allocation of the cost of natural resources in a rational and systematic manner over the
resource’s useful life. Companies generally use the units-of-activity method to compute depletion.

Total cost−Residual Value

=Depletion Cost per Unit
Total Estimated Units Available

Depletion Cost per Unit x Units Extracted During the Year=Total Depletion During the Year

To record the depletion,

Inventory
Accumulated Depletion

To record the sale of natural resources,

Cost of Goods Sold
Inventory

Example: At the beginning of the current year, LUMALABAN AKO CO. purchased mineral mine for
P26,400,000 with removal ore estimated at 1,200,000 tons. After it has extracted all the ore, the entity
will be required by law to restore the land to its original condition at an estimated cost of P2,100,000.
The present value of the estimated restoration cost is P1,800,000.
The entity believed that it will be able to sell the property afterwards for P3,000,000. During the current
year, the entity incurred P3,600,000 of development cost preparing the mine for production, removed
80,000 tons of ore and sold 60,000 tons.
What total amount of depletion should be recorded for the current year?
Acquisition cost P26,400,000
Development cost 3,600,000
Estimated restoration cost at present value 1,800,000
Total cost P31,800,000
Residual value (3,000,000)
Depletable amount 28,800,000

31,800,000−3,000,000
=P 24 Depletion Cost per Unit
1,200,000

Depletion for the current year (80,000 x 24) = 1,920,000

Depletion included in cost of goods sold (60,000 x 24) = 1,440,000

INTANGIBLE ASSETS

Amortization – the process of allocating the cost of intangible assets with limited lives. (Intangible assets with
indefinite lives should not be amortized). Straight line method is use to amortize the intangible assets.

Intangible Assets Description Initial cost Legal Life

Patent An inclusive rights issued The cash or cash 20 years
by a patent office that equivalent price paid to
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 enables the recipient to acquire the patent.
manufacture, sell, or
otherwise control an
invention for a specified
number of years from the
date of grant.
Copyrights Give the owner the The cost of acquiring and Life of the creator plus a
exclusive right to defending it. specified number of
reproduce and sell an years. (commonly 70
artistic or published work. years) 50 years in the
Philippines
Trademarks and Trade Word, phrase, jingle, or Purchase price. 10 years and can be
Names symbol that identifies a renewed every 10 years
particular enterprise or
product.
Franchises and Licenses Franchise - A contractual Purchase cost Can be for definite or
arrangement between a indefinite life.
franchisor and franchisee.
The franchisor grants the
franchisee the right to sell
certain products, perform
specific services or use
certain trade names,
usually within a
designated geographic
area.
Licenses – operating
rights given by the
government that permits
the company to use
public property in
performing its services.
Goodwill Represents the value of Excess of cost over the Not amortized
all favorable attributes fair value of the net
that relate to a company assets acquired.
that is not tied to any
other specific asset.
Good customer Gain on bargain purchase
relationships, skilled - kapag mas mataas yung
employees, exceptional FV of net assets kaysa sa
management. cost
Only recorded when
entire business is
reported
No internally generated
goodwill

*Research and Development – expenditures that may lead to patents, copyrights, new processes and new
products.

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NATURAL RESOURCES AND INTANGIBLE ASSETS – Answer Key
Multiple-Choice

1. Which of the following statements is false?

a. If an intangible asset has a finite life, it should be amortized.
b. The amortization period of an intangible asset can exceed 20 years.
c. Goodwill is recorded only when business is purchased.
d. Development costs are always expensed when incurred.
2. Indicate which of the following statements is true.
a. Since intangible assets lack physical substance, they need be disclosed only in notes to financial
statements.
b. Goodwill should be reported as a contra account in equity section.
c. Totals of major classes of assets can be shown in the statement of financial position, with asset
details disclosed in the notes to financial statements.
d. Intangible assets are typically combined with plant assets and extractable natural resources and
shown in the property, plant and equipment section.
3. An intangible asset is defined as
a. An identifiable asset without physical substance.
b. A nonmonetary asset without physical substance.
c. An identifiable nonmonetary asset without physical substance.
d. An identifiable monetary and nonmonetary asset without physical substance.
4. The cost of an internally generated asset includes all of the following, except
a. Cost of materials and services used in generating the intangible asset.
b. Compensation costs of personnel directly engaged in generating the asset.
c. Fees to register a legal right.
d. Expenditure on training staff to operate the asset.
5. It is the systematic allocation of the amortizable amount of an intangible asset over the useful life
a. Amortization
b. Allocation
c. Realization
d. Expiration
6. The amortization method used shall reflect the pattern in which the asset’s economic benefits are
consumed by the entity. If such pattern cannot be determined reliably, what is the amortization method
used?
a. Straight line
b. Production method
c. Diminishing balance method
d. Ratio of current year’s sales to the total expected sales
7. Which of the following does not qualify as an intangible asset?
a. Computer software
b. Registered patent
c. Copyright
d. Notebook computer
8. Amortization of an intangible asset with a finite useful life shall commence when
a. It is first recognized as an asset.

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 b. It is probable that it will generate future economic benefits.
c. It is available for use.
d. The cost can be identified with reasonable certainty.
9. Which of the following is not an intangible asset?
a. Trade name
b. Research and development cost
c. Franchise
d. Copyright
10. SURE KA NA BA Company reported the following assets at year-end:
Financial asset held for trading 1,000,000
Goodwill 1,500,000
Prepaid Insurance 50,000
Patent 2,500,000
Customer list 500,000
What amount should be reported as total intangible assets at year-end?
a. 4,000,000
b. 5,500,000
c. 4,500,000
d. 3,000,000
11. MAGIGING CPA AKO Company showed the following balances at year-end:
Copyright 500,000
Deposit with advertising agency used to promote goodwill 400,000
Bond sinking fund 1,000,000
Excess of cost over fair value of identifiable net assets
of acquired subsidiary 4,000,000
Trademark 900,000
What total amount should be reported as intangible assets?
a. 1,400,000
b. 4,500,000
c. 5,400,000
d. 5,800,000
12. CJ Company incurred P1,600,000 of research and development costs to develop a product for which a
patent was granted at the beginning of current year.
Legal fees and other costs associated with registration of the patent totaled P300,000. At year end, the
entity paid P450,000 for legal fees in a successful defense of the patent.
What is the total amount that should be capitalized for the patent at year-end?
a. 750,000
b. 300,000
c. 2,050,000
d. 2,350,000
13. CLAIRE Company acquired a patent for a drug with remaining legal and useful life of six years on
January 1, 2020 for P5,400,000.
On January 1, 2022, a new patent is received for an improved version of the same drug. The new
patent has a legal and useful life of twenty years.
What is the amortization expense for 2022?
a. 900,000
b. 200,000
c. 180,000
d. 300,000
14. On January 1, 2021, ALLIAH Company bought a trademark from JOSHUA Company forP3,000,000.
The entity retained an independent consultant who estimated the trademark’s life to be indefinite. The
carrying amount of the trademark was P1,500,000 on the books of JOSHUA Company.
On December 31, 2021, what is the carrying amount of the trademark?
a. 3,000,000

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 b. 1,500,000
c. 2,850,000
d. 0
15. YVONNE Company acquired a registered trademark for P600,000. The trademark has a remaining
legal life of five years but can be renewed every 10 years for a nominal fee. The entity was expected to
renew the trademark indefinitely.
What amount of amortization expense should be recorded for the trademark in the current year?
a. 120,000
b. 15,000
c. 40,000
d. 0
16. At the beginning of the current year, JOAN Company bought a trademark for P500,000. The entity
retained an independent consultant who determined the remaining useful life of the trademark to be fifty
years. The unamortized cost of the trademark was P380,000.
What amount should be reported as amortization of trademark for the current year?
a. 10,000
b. 12,500
c. 9,500
d. 7,600
17. GRACE Company bought a franchise at the beginning of current year for P2,040,000. An independent
consultant estimated that the remaining useful life of the franchise was 50 years.
The unamortized cost of the franchise was P680,000. The entity decided to amortize the franchise over
the maximum period allowed.
What amount should be recorded as amortization of franchise for the current year?
a. 40,800
b. 40,000
c. 51,000
d. 17,000
18. FONSO Company recently acquired a copyright that now has remaining legal life of 40 years. The
copyright initially had a 30-year useful life. An analysis of market trend and consumer habit indicated
that the copyrighted material will generate positive cash flows for approximately 25 years.
What is the remaining useful life over which the entity can amortize the copyright?
a. 25
b. 30
c. 40
d. 0
19. At year-end, Myka Company reported assets of P5,000,000 and liabilities of P2,000,000. The carrying
amounts of the assets approximate fair value, except for land which has a fair value that is P300,000
greater than carrying amount. On same date, Kenneth Company paid P6,000,000 to acquire Myka
Company.
What amount of goodwill should be recorded by the acquirer as a result of this purchase?
a. 1,000,000
b. 3,300,000
c. 2,700,000
d. 3,000,000
20. At year-end, STAR Company purchased for P30 per share all 200,000 of MOON Company’s
outstanding ordinary shares. On this date, the carrying amount of net assets of the acquiree was
P5,000,000.
The fair value of identifiable assets on this date was P400,000 in excess of their carrying amount.
What amount should be reported as goodwill?
a. 1,000,000
b. 400,000
c. 600,000
d. 350,000

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Problem

1. VYNNA Company developed a new machine for manufacturing baseballs. 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 the new machine 1,800,000
Research salaries and fringe benefits for engineers and scientists 200,000
Cost of testing prototype 250,000
Legal cost for filing of patent 150,000
Fees paid to government patent office 50,000
Drawings required by patent office to be filed with patent application 40,000
a. What amount should be capitalized as cost of patent?
b. What amount of research and development cost should be expensed in the current year?
2. RISCHIADEL Company purchased a trademark and incurred the following costs:
Purchase price 1,000,000
Nonrefundable value added tax 50,000
Training of personnel on the use of new trademark 70,000
Research expenditures associated with the purchase
of the new trademark 240,000
Legal cost incurred to register the new trademark 105,000
Administrative salaries 120,000
What is the initial cost of the trademark?
3. On January 1, 2020, CHRISTIA Company showed patent of P1,920,000 with related accumulated
amortization of P240,000. The patent was purchased on January 1, 2018 at which date the legal life is
16 years.
On January 1, 2020, the useful life of the patent was determined to be only 8 years from the date of
acquisition.
On January 1, 2020, in connection with the purchase of trademark from EPHRAIM Company, the
parties entered into a noncompetition agreement and a consulting contract.
CHRISTIA Company paid EPHRAIM Company P800,000, of which three-fourths was for the trademark,
and one-fourth was for the EPHRAIM Company’s agreement not to compete for five-year period in the
line of business covered by the trademark. CHRISTIA Company considered the life of the trademark to
be indefinite.
Moreover, CHRISTIA Company agreed to pay EPHRAIM Company P50,000 annually on January 1 of
each year for 5 years.
a. What is the carrying amount of intangible assets on January 1, 2020?
b. What is the total amortization of intangible assets for 2020?

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