FINANCIAL ACCOUNTING AND REPORTING

Assessment Examination on Intangible Assets and Research & Development Costs

Name: ______________________ Section: ____ Score: ____ / 50

Instructions: Choose the letter that corresponds to your answer and write them on a ½ crosswise yellow
paper. Any form of tampering is considered wrong.
1. Which of the following items would qualify as an intangible asset?
a. Advertising and promotion on the launch of a huge product.
b. College tuition fees paid to employees who decide to enroll in an executive M.B.A
program at Harvard University while working with the entity.
c. Operating losses during the initial stages of the project.
d. Legal costs paid to intellectual property lawyers to register a patent.

2. Which of the following disclosures is not required with respect to intangible assets?
a. Useful lives of the intangible assets.
b. Reconciliation of carrying amount at the beginning and the end of the year.
c. Contractual commitments for the acquisition of intangible assets.
d. Fair value of similar intangible assets used by competitors.

3. The reason goodwill is referred to as a master valuation account is that

a. It represents the purchase price of a business that is about to be sold.
b. It is the difference between the fair value of the net identifiable assets as compared with
the purchase price of the acquired business.
c. The value of a business is computed without consideration of goodwill and then
goodwill is added to arrive at a master valuation.
d. It is the only account in the financial statements that is based estimated value.

4. Which of the following is not one of the criteria which must be met before development
costs can be capitalized?
a. The entity has sufficient financial resources to complete the project.
b. The entity intends to complete the project and either use or sell the intangible asset.
c. The entity can reliably identify the research costs incurred to bring the project to
economic feasibility.
d. The project has achieved technical feasibility.

5. Which of the following accurately describes the appropriate accounting for goodwill
acquired through a business combination?
a. It should be recorded at cost and amortized over 40-year period
b. It should be recorded at cost and amortized over a 10-year period
c. It should be recorded at cost and tested for impairment every three years
d. It should be recorded at cost and tested for impairment on an annual basis and more
often if certain events occur

6. Which of the following is a research and development cost?

a. Research and development performed under contract for others
b. Development or improvement of techniques and processes
c. Offshore oil exploration that is the primary activity of an entity
d. Market research related to a major product for the entity

7. Which of the following statements is incorrect regarding internal-use software?

a. The application and development costs should be amortized on a straight line basis
unless another systematic and rational basis is more appropriate.
b. Internal-use software is considered to be software that is marketed as a separate product
or as part of a product or process.
c. The costs of testing and installing computer hardware should be capitalized as incurred.
d. The costs of training and application maintenance should be expensed as incurred.

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8. Camille Corporation incurred the following costs in 2017:
Acquisition of R&D equipment with a useful life of 4 years in R&D projects P 600,000
Start-up costs incurred when opening a new plant 140,000
Advertising expense to introduce a new product 700,000
Engineering costs incurred to advance a product to full production stage 400,000
(economic viability not achieved)

What amount should Camille record as research & development expense in 2017?
a. 550,000 b. 740,000 c. 1,000,000 d. 1,140,000

9. Kuyab Company incurred P900,000 of research and development cost to develop a product
for which a patent was granted on January 2, 2017. Legal fees and other costs associated
with the registration of the patent totaled P200,000. On July 31, 2017, Kuyab paid P400,000
for legal fees in a successful defense of the patent. The total amount capitalized for this
patent through July 31, 2017 should be:
a. 1,500,000 b. 1,100,000 c. 600,000 d. 200,000

10. Laguna Company acquired three patents in January 2017. The patents have different lives
as indicated in the following schedule:
Cost Remaining useful life Remaining legal life
Patent A 2,000,000 10 8
Patent B 3,000,000 5 10
Patent C 6,000,000 Indefinite 15

Patent C is believed to be uniquely useful as long as the company retains the right to use it.
In June 2017, the company successfully defended its right to Patent B. Legal fees of
P800,000 were incurred in this action. The company’s 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 2017 is:
a. 1,330,000 b. 1,250,000 c. 2,050,000 d. 950,000

11. 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

12. On January 2, 2017, 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
patent’s useful life was estimated to be only 10 years due to the competitive nature of the
product. On December 31, 2020, 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 2020, 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

13. On January 1, 2017, Mambusao Company bought a trademark from Panitan Company for
P6,000,000. Mambusao retained an independent consultant who estimated the trademark’s
life to be indefinite. Its carrying amount in Panitan’s accounting records was P4,000,000. In
Mambusao’s December 31, 2017 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

14. On January 1, 2017, 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

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 paid when the agreement was signed and the balance is payable in equal annual payment of
P5,000,000 beginning December 31, 2017. The agreement provides that the down payment
is not refundable and no future services are required of the franchisor. Calamba’s 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 0.64
Present value of an ordinary annuity of 1 3.04

a. 30,000,000 b. 15,200,000 c. 25,200,000 d. 21,600,000

15. Liliw Company engaged your services to compute the goodwill in the purchase of Calauan
Company which provided the following:
Net income Net assets
2017 1,400,000 6,000,000
2018 1,600,000 8,000,000
2019 2,000,000 8,800,000
2020 2,200,000 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

16. 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 Sapian’s 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:
Assets Liabilities
Recorded amounts 20,000,000 8,000,000
Current values 25,000,000 5,000,000

Sapian’s 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

17. 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

18. On January 1, 2017, 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 2017, Carmona spent an additional P2,000,000 on expenditures designed
to maintain goodwill. Due to these expenditures, at December 31, 2017, Carmona estimated
that the benefit period of goodwill was indefinite. In its December 31, 2017 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

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19. Sta. Rosa Company has been experiencing significant losses in prior years. On December
31, 2017, the assets and liabilities are:
Cash 10,000,000
Accounts receivable 20,000,000
Inventory 30,000,000
Property, plant and equipment 50,000,000
Goodwill 5,000,000
Liabilities 40,000,000

On December 31, 2017, 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

20. 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.

On December 31, 2017, Segment One suffered significant losses and its recoverable amount
is P30,000,000. On December 31, 2017, the carrying amounts are as follows:
Segment One 28,000,000
Segment Two 50,000,000
Segment Three 67,000,000
Goodwill 20,000,000

In its 2017 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

21. On January 1, 2017, 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, 2021.
During January 2019, 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,
2019, Paete intended to exercise the renewal option. Paete has taken a full year’s
amortization on this improvement. In the December 31, 2019, 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

22. On January 1, 2018, 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, 2024. During January 2020, Puntavedra incurred the following costs:
General improvements to the leased premises with useful 5,400,000
life of 10 years
Office furniture and equipment with useful life of 8 years 2,400,000
Moveable assembly line equipment with useful life of 5 years 1,800,000

At December 31, 2020, Puntavedra’s intention as to the exercise of the renewal option is
uncertain. A full depreciation of leasehold improvement is taken for year 2020. In
Puntavedra’s December 31, 2020 balance sheet, accumulated depreciation of leasehold
improvement should be:
a. 1,200,000 b. 1,300,000 c. 540,000 d. 900,000

23. 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

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 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

24. Siniloan Company incurred research and development costs in 2017 as follows:
Equipment acquired for use in various R&D projects 6,000,000
Depreciation on the above equipment 1,200,000
Materials used 3,000,000
Compensation costs of personnel 4,000,000
Outside consulting fees 1,500,000
Indirect costs appropriately allocated 1,300,000

The 2017 total research and development expense should be:

a. 11,000,000 b. 15,800,000 c. 9,700,000 d. 9,800,000

25. Biñan Company incurred the following costs during 2017:

Design of tools, jigs, molds and dies involving new technology 2,500,000
Modification of the formulation of a process 3,200,000
Trouble shooting in connection of breakdowns during
commercial production 2,000,000
Adaptation of an existing capability to a particular customer’s
need as part of a continuing commercial activity 2,200,000

In its 2017 income statement, Biñan should report research and development expense of:
a. 2,500,000 b. 3,200,000 c. 4,700,000 d. 5,700,000

26. Dumalag Company provided the following information relevant to the research and
development expenditures for the year 2017:
Current period depreciation on the building housing R and D activities 1,500,000
Cost of market research study 1,000,000
Current period depreciation on a machine used in R and D activities 500,000
Salary of R and D director 1,200,000
Salary of Vice-President who spends ¼ of his time overseeing
R and D activities 2,400,000
Pension costs for salary of R and D director 50,000
Pension costs for salary of Vice-President 100,000

The R&D expense for the current period should be:

a. 3,875,000 b. 4,875,000 c. 5,750,000 d. 3,800,000

27. Biñan Company made the following expenditures relating to Product X:

* Legal costs to file a patent on Product X. Production of the finished 500,000
product would not have been undertaken without the patent.
* Special equipment to be used solely for development of Product X. The 4,000,000
equipment has no other use and has an estimated useful life of four years.
* Labor and material costs incurred in producing a prototype model 3,000,000
* Cost of testing the prototype 2,000,000

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

28. On January 1, 2017, Caliraya Company had capitalized cost of P10,000,000 for a new
computer software product with an economic life of 4 years. Sales for 2017 for the software
product amounted to P4,000,000. The total sales of the software over its economic life are

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 expected to be P20,000,000. However, the pattern of the future sales from the computer
software cannot be determined reliably. In its 2017 income statement, Caliraya should
record amortization of computer software at:
a. 2,500,000 b. 5,000,000 c. 2,000,000 d. 0

For items 29 and 30: During 2017, Jamindan Company incurred costs to develop and produce a
routine, low-risk computer software product as follows:
Completion of detail program design 1,500,000
Cost incurred for coding and testing to establish technological feasibility 500,000
Other coding costs after establishment of technological feasibility 2,500,000
Other testing costs after establishment of technological feasibility 2,000,000
Costs of producing product masters for training materials 3,000,000
Duplication of computer software and training materials from
product master 4,000,000
Packaging product 1,000,000

29. In the December 31, 2017 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

30. In the December 31, 2017 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

31. An entity shall choose either the cost model or revaluation model as its accounting policy in
measuring intangible asset. Which statement is correct?
a. The cost model means that an intangible asset shall be carried at cost less any
accumulated amortization and any accumulated impairment loss.
b. The revaluation model means that an intangible asset shall be carried at revalued
amount less any subsequent accumulated amortization and any subsequent
accumulated impairment loss.
a. I only b. II only c. Both I and II d. Neither I nor II

32. Which is incorrect concerning the recognition and measurement of an intangible asset?
a. If an intangible asset is acquired separately, the cost comprises its purchase price,
including import duties and taxes and any directly attributable expenditure of preparing
the asset for its intended use.
b. If an intangible asset is acquired in a business combination that is an acquisition, the cost
is based on its fair value at the date of acquisition.
c. If an intangible asset is acquired free of charge or by way of government grant, the cost is
equal to its fair value.
d. If payment for an intangible asset is deferred beyond normal credit terms, its cost is equal
to the total payments over the credit period.

33. The appropriate method of amortizing intangible asset is best described by which of the
following?
a. The straight line method, unless the pattern in which the asset’s economic benefits are
consumed by the enterprise can be determined reliably.
b. The double declining balance in all circumstances
c. Management can make a subjective amount of periodic amortization without regard to
any particular method
d. The straight line method in all circumstances

34. The best definition of useful life of an intangible asset is:

a. The legal life of the intangible.
b. The period over which management believes the intangible asset will contribute to the
revenue-producing process.

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 c. Twenty years.
d. The period over which the cost of the asset can be deducted for income tax purposes.

35. Which of the following factors should not be considered in estimating the useful life of
intangible asset?
a. Legal, regulatory or contractual provision
b. Expected action by competitors or potential competitors
c. Residual value
d. Typical product life cycle of the asset

36. The residual value of an intangible asset should be presumed zero, unless
I. There is a commitment by a third party to purchase the asset at the end of its useful
life.
II. There is an active market for the asset and residual value can be determined by
reference to that market and it is probable that such market will exist at the end of
the asset’s useful life.
a. Both I and II b. Neither I nor II c. II only d. I only

37. Which one of the following is not a component of the cost of internally generated intangible
asset?
a. Cost of materials and services used or consumed in generating the intangible asset.
b. Cost of employee benefits arising from the generation of the intangible asset.
c. Fees to register a legal right
d. Expenditure on training staff to operate the asset.

38. Which statement is incorrect concerning internally generated intangible asset?

a. To assess whether an internally generated intangible asset meets the criteria for
recognition, an enterprise classifies the generation of the asset into a research phase and
a development phase.
b. The cost of an internally generated asset comprises all directly attributable costs
necessary to create, produce and prepare the asset for its intended use.
c. Internally generated brands, mastheads, publishing titles, customer lists and items
similar in substance should not be recognized as intangible assets.
d. Internally generated goodwill may be recognized as an intangible asset.

39. The following expenditures should be expensed when incurred, except

a. Advance payment for delivery of goods or rendering of services
b. Relocation costs
c. Advertising and promotion costs
d. Organization and other start up costs

40. A lessee incurred costs to construct office space in a leased warehouse. The estimated useful
life of the office is 10 years. The remaining term of the nonrenewable lease is 15 years. The
cost should be
a. Capitalized as leasehold improvement and depreciated over 15 years.
b. Capitalized as leasehold improvement and depreciated over 10 years.
c. Capitalized as leasehold improvement and expensed in the year in which the lease expires
d. Expensed as incurred

41. Research is:

I. Original and planned investigation undertaken with the prospect of gaining new
scientific or technical knowledge and understanding.
II. Application of research finding or other knowledge to a plan or design for the
production of new or substantially improved material, device, product, process,
system or service, prior to the commencement of commercial production or use.
a. I only b. II only c. Both I and II d. Neither I nor II

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42. If a company constructs a laboratory building to be used as a research and development
facility, the cost of the laboratory building is matched against earnings as:
a. Research and development expense in the period of construction
b. Depreciation deducted as part of research and development cost
c. Depreciation or immediate writeoff depending on company policy
d. An expense at such time as productive research has been obtained from the facility

43. A research and development activity for which the cost should be expensed as incurred is
a. Engineering follow-through in early phase of commercial production
b. Design, construction, and testing of preproduction prototypes and models
c. Trouble shooting in connection with breakdowns during commercial production
d. Periodic design changes to existing products

44. On January 1, 2005, Haze Company had capitalized costs for a new computer software
product with an economic life of five years. Sales for 2005 were 30 percent of expected total
sales of the software and the pattern of future sales can be measured reliably. At December
31, 2005, the software had a net realizable value equal to 90 percent of the capitalized cost.
What percentage of the original capitalized cost should be reported as the net amount on the
December 31, 2005 balance sheet?
a. 70% b. 72% c. 80% d. 90%

45. The proper accounting for the costs incurred in creating computer software products is to
a. Capitalize all costs until the software is sold.
b. Charge research and development expense when incurred until technological feasibility
has been established for the product.
c. Charge research and development expense only if the computer software has alternative
future use.
d. Capitalize all costs as incurred until a detailed program design or working model is
created.

46. Which statement is correct regarding the proper accounting treatment for internal-use
software costs?
I. Preliminary costs should be capitalized as incurred.
II. Application and development costs should be capitalized as incurred.
a. I only b. II only c. Both I and II d. Neither I and II

47. Which following statements is correct regarding the treatment of start-up activities related to
the opening of the new facility?
I. Cost of raising capital should be expensed as incurred.
II. Costs of acquiring or constructing long-lived assets and getting them ready for their
intended use should be expensed as incurred.
a. I only b. II only c. Both I and II d. Neither I nor II

48. Operating losses incurred during the start up years of a new business should be
a. Accounted for and reported like the operating losses of any other business
b. Written off directly against retained earnings
c. Capitalized as a deferred charge and amortized over 5 years.
d. Capitalized as an intangible asset and amortized over 5 years.

49. In accordance with the new international accounting standard, which statement is correct?
I. Intangible assets with finite life are amortized over their useful life.
II. Intangible assets with indefinite life are not amortized but tested for impairment at
least annually.
a. I only b. II only c. Both I and II d. Neither I nor II

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