Intangibles & Other Assets

I- THEORIES
1. Intangible assets are said to be without physical substance. Which of the following items listed
below is not an intangible asset?
(a) patent (c) goodwill
(b) leasehold (d) marketable securities

2. One of these is not an intangible asset. Which one?

(a) patent (c) franchise
(b) secret process and formula (d) leasehold improvement

3. The process of assigning the cost of an intangible by charges against periodic revenue, in some
systematic and rational manner, is called:
(a) depletion. (c) depreciation.
(b) amortization. (d) allocation.

4. In accordance with generally accepted accounting principles, which of the following methods of
amortization is normally recommended for intangible assets?
(a) sum of years digits’ method (c) units of production
(b) straight line (d) double declining balance

5. What valuation methods are used for intangible assets:

(a) cost model and fair value model
(b cost model and FVOCI model.
(c) cost model and FVTPTL model
(d) cost model and revaluation model

6. Which of the following should not be amortized?

(a) copyright (c) perpetual franchise
(b) customer list (d) all of these

7. A large publicly held company has developed and registered a trademark during 2000. How
should the cost of developing and registering the trademark be accounted for?
(a) Charged to an asset account that should not be amortized.
(b) Expensed as incurred.
(c) Amortized over 20 years if in accordance with management’s evaluation.
(d) Amortized over its useful life or 17 years whichever is shorter.

8. The current trend in the accounting treatment for research and development costs is to:
(a) capitalize all costs as assets when incurred and amortized when revenue are earned.
(b) treat all costs as current expenses as incurred.
(c) capitalize selectively, and predetermine the conditions that would require capitalization as
well as those that would be written off as current expenses.
(d) accumulate all costs in a special intangible asset account until a determination can be made
as to the degree of future benefits.

DCCPAR

Intangibles & Other Assets R2

9. Research and development costs, under prevailing practice, may be accounted for as follows:
(a) R and D costs related to successful projects should be capitalized; others expensed.
(b) R and D costs related to unsuccessful projects should be capitalized; others expensed.
(c) R and D costs should be expensed as incurred.
(d) R and D costs should be allocated between successful and unsuccessful projects.

10. Which of the following principles best describes the current of accounting for research and
development costs?
(a) immediate recognition as an expense. (c) systematic and rational allocation. method
(b) associating cause and effect. (d) income tax minimization.

11. An activity that would be expensed currently as research and development costs is the:
(a) testing in search for or evaluation of product or process alternatives.
(b) adaptation of an existing capability to a particular requirement or customer’s need as a part
of continuing commercial activity.
(c) legal work in connection with patent applications or litigation, and the sale or licensing of
patents.
(d) engineering follow-through in an early phase of commercial production.

12. Goodwill may be recorded when:

(a) It is identified within an entity
(b) One entity acquires another in a business combination
(c) The fair value of an entity assets exceeds cost
(d) An entity has exceptional customer relations

13. Which of the following intangible assets should be tested for impairment?
(a) copyrights (c) perpetual franchises
(b) trademark (d) all of the above

14. Deferred charges:

(a) are cash received or other assets recognized for goods and services that will be supplied in
future periods.
(b) are payments made for services that will be utilized by the business.
(c) represent those portions of expenditures for services, made prior to the balance sheet date
but not consumed at the balance sheet and will be utilized or consumed in the future
normal operating cycles.
(d) are prepayments for services or benefits that will be received over a number of periods.

15. Deferred charges classification on the balance sheet sometimes contain heterogeneous items.
Which of the four accounts should not be included under the deferred charges classification?
(a) bond discount (c) research and development costs
(b) unexpired insurance premiums (d) deferred pension costs

16. Which is not a characteristic of an intangible asset?

(a) The asset lacks physical substance.
(b) The asset is used in production or supply of goods and services, for rental to others or for
administrative purposes.
(c) The asset provides future economic benefits.
(d) The asset has an indeterminate useful life.

17. Which is not unidentifiable intangible asset?

(a) patent (c) copyright
(b) franchise (d) goodwill
18. If the pattern in which the economic benefits from the asset are consumed cannot be predicted
reliably, the method of amortization for an intangible asset should be:
(a) straight line (c) declining balance
(b) output method (d) sum of years digit

19. Intangible assets should be carried (benchmark treatment):

(a) gross cost
(b) fair value on balance sheet date
(c) revalued amount minus accumulated amortization and accumulated impairment losses
(d) cost minus accumulated impairment losses and accumulated amortization

20. Which of the following is not considered in estimating the useful life of intangible assets?
(a) expected usage of the asset by the enterprise
(b) stability of the industry in which the intangible asset operates
(c) salvage value of the asset
(d) level of maintenance expenditure required to obtain the future economic benefit from the
asset

21. PAS 38 requires an enterprise to recognize an intangible asset if and only if:
(a) It is probable that the future economic benefits that are attributable to the asset will flow to
the enterprise.
(b) The cost of the asset can be measured reliably.
(c) It is possible that the future economic benefits that are attributable to the asset will flow to
the enterprise and the cost of the asset can be measured reliably.
(d) It is probable that the future economic benefits that are attributable to the asset will flow to
the enterprise and the cost of the asset can be measured reliably.

22. The cost of an internally generated intangible asset includes (choose the incorrect one):
(a) expenditure on training staff to operate the asset.
(b) expenditure on materials and services used or consumed in generating the intangible asset.
(c) salaries, wages and other employment related costs of personnel directly engaged in
generating the asset.
(d) overheads that are necessary to generate the asset and that can be allocated on a
reasonable and consistent basis to the asset.

23. These are undertaken to discover new knowledge that will be useful in developing a new
product, service or process or that will result to an improvement of an existing product, service
or process.
(a) research activities (c) operating activities
(b) development activities (d) organization costs

24. Development activities involve the application of research findings to develop a product, service
or process. Which is not considered a development activity?
(a) design, construction and testing of preproduction prototype and model
(b) design of tools, jigs, molds and dies involving new technology
(c) design, construction and operation of a pilot plant
(d) laboratory research aimed at discovery of new knowledge

25. Which of the following is correct about research and development cost?
(a) All R and D costs, without exception, must be charged to expense when incurred.
(b) R and D costs must be capitalized and then amortized over 20 years or less.
(c) Development costs must be capitalized.
(d) Financial statements should disclose the aggregate amount of R and D expenditure
recognized as expense during the period.
26. What is the proper time or time period over which to match the cost of an intangible asset with
revenue if it is likely that the benefit of the asset will last for an indeterminate period of time?
(a) 50 years (c) 20 years
(b) 40 years (d) 5 years

27. A consideration in determining the useful life of an intangible asset is not the:
(a) legal, regulatory or contractual provision
(b) initial acquisition
(c) expected action of competitors
(d) effect of obsolescence, demand, competition and other economic factor

28. Should the following fees associated with the registration of an internally developed patent be
capitalized?
Legal fees Registration fees
(a) Yes Yes
(b) Yes No
(c) No Yes
(d) No No

29. Legal fees incurred in successfully defending a patent suit should be capitalized when the
patent has bee:
Internally developed Purchased from an inventor
(a) Yes Yes
(b) Yes No
(c) No Yes
(d) No No

30. Legal fees incurred by a company in defending its patent rights should be capitalized when the
outcome of the litigation is:
Successful Unsuccessful
(a) Yes Yes
(b) Yes No
(c) No Yes
(d) No No

31. Macky has two patents that have allegedly been infringed by competitors. After investigation,
legal counsel informed Macky that it had a weak case on patent A and a strong one in regard to
patent B. Macky incurred additional legal fees to stop infringement on patent B. Both patents
have a remaining legal life of 8 years. How should Macky account for these legal costs incurred
relating to the two patents?
(a) expense costs for patent A and capitalize cost for patent B.
(b) expense costs for both patents.
(c) capitalize costs for both patents.
(d) capitalize costs for patent A and expense costs for patent B.

32. The cost of purchasing patent rights for a product that might otherwise have seriously
competed with the purchaser’s patented product should be:
(a) charged off in the current period.
(b) amortized over the legal life of the purchased patent.
(c) added to factory overhead and allocated to production of the purchaser’s product.
(d) amortized over the remaining useful life of the patent for the product whose market would
have been impaired by competition from the newly patented product.
33. A purchased patent has a remaining legal life of 15 years. It should be:
(a) expensed in the year of acquisition.
(b) amortized over 15 years regardless of the useful life.
(c) amortized over its useful life if less than 15 years.
(d) amortized over 20 years.

34. Protective Company was granted a patent on a product on January 15, 1992. To protect its
patent, the corporation purchased on January 2, 2001 patent on a competing product which was
originally issued on January 10, 1998. Because of its unique plant, Protective Company does not
feel the competing patent can be used in producing a product. The cost of the competing patent
should be:
(a) amortized over a maximum period of 17 years.
(b) amortized over a maximum period of 13 years.
(c) amortized over a maximum period of 11 years.
(d) expensed in 2001

35. Which of the following statements concerning patents is correct?

(a) legal cost incurred to successfully defend a patent should not be capitalized and not
amortized over the patent’s remaining useful life.
(b) legal fees and other direct costs in registering a patent should be capitalized and amortized
over 5 years.
(c) research and development contract services purchased from others and used to develop a
patent should be capitalized and amortized over the patent’s useful life.
(d) research and development costs incurred to develop a patent should be capitalized and
amortized over 17 years.

36. Which of the following should be expensed as incurred by a franchisee for a franchise with a
useful life of 10 years?
(a) amount paid to the franchisor for the franchise.
(b) payment to a company, other than the franchisor, for the franchise.
(c) legal cost paid to franchisee’s lawyer to obtain the franchise.
(d) periodic payments to the franchisor based on the franchisee’s revenue.

37. A lessee incurred costs to construct walkways and landscaping costs to improve leased
property. The useful life of the walkways and landscaping costs is 15 years. The remaining
term of the lease is 20 years. The walkways and landscaping costs should be:
(a) capitalized as leasehold improvements and depreciated over 20 years.
(b) capitalized as leasehold improvements and depreciated over 15 years.
(c) capitalized as leasehold improvements and expensed upon lease expiration.
(d) expensed in the current period.

38. Intangible assets are reported in the statement of financial position

(a) with an accumulated amortization account
(b) under PPE
(c) separate line item
(d) all of these are allowed in presenting intangible assets

39. Amortization of an intangible asset with finite useful life shall commence when
(a) It is first recognized as an asset
(b) It is probable that it will generate future economic benefits
(c) It is available for the intended use
(d) The cost can be measured with reasonable certainty

40. Intangible assets with indefinite life are tested for impairment
(a)Quarterly
(b) Annually
 (c) Biannually
(d) There are no guidelines defining when intangible assets are tested for impairment

41. The value derived from a firm’s ability to earn more than a normal rate of return on its specific
identifiable net asset is called:
(a) a franchise. (c) patent.
(b) goodwill. (d) organization cost.

42. Goodwill represents the excess of the cost of an acquired company over the:
(a) sum of the fair values assigned to plant assets less liabilities assumed.
(b) sum of the fair values assigned to identifiable assets acquired less liabilities assumed.
(c) sum of the fair values assigned to tangible assets acquired less liabilities assumed.
(d) sum of the fair values assigned to intangible assets acquired less liabilities assumed.

43. The major problem for accounting for intangible assets is determining
(a) Fair Value
(b) Separability
(c) Residual Value
(d) Useful life.

44. Which of the following principle best describes accounting for research and development?
(a) Associating cause and effect
(b) Systematic and rational allocation
(c) Income tax minimization
(d) Immediate recognition

45. A brand name acquired separately should initially recognized at

(a) Recoverable amount
(b) Either cost or fair value at the choice of acquirer
(c) Either cost or fair value at the choice of acquiree
(d) Cost

46. Which of the following research and development related costs should be capitalized and
amortized over current and future periods?
(a) research and development general laboratory building used in various projects
(b) inventory used for a specific research project
(c) administrative salaries allocated to research and development
(d) research findings purchased form another company to aid a particular research project
currently in process

47. If a company constructs a laboratory building to be used as a research and development

activity, 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.

48. A research and development activity for which the cost would be expensed as incurred is:
(a) modification of the design of a product or conceptual formulation and design of a possible
product alternative.
(b) trouble shooting in connection with breakdowns during commercial production.
(c) routine design of tools.
(d) engineering, follow-through in an early phase of commercial production.

49. A research and development activity for which the cost would be expensed as incurred is:
(a) design, construction and testing of preproduction prototypes and models
 (b) quality control during commercial production
(c) periodic design changes to existing products
(d) adaptation of an existing capability to a particular requirement or customer need

50. Which is not considered a research and development activity?

(a) routine on-going efforts to refine, enrich or improve quality of existing product.
(b) laboratory research aimed at discovery of new knowledge.
(c) conceptual formulation and design of possible product or process
(d) design, construction and operation of a pilot plant

51. On January 1, 2001, Jerry purchased equipment for use in developing a new product. Jerry uses
the straight line depreciation method. The equipment could provide benefits over a 10-year
period. However, the new product development is expected to take five years, and the
equipment can be used only for this project. Jerry’s 2001 expense equals:
(a) zero. (c) one-fifth of the cost of the equipment.
(b) the total cost of the equipment. (d) one-tenth of the cost of the equipment.

52. How should a research and development cost be accounted for?

(a) should be capitalized when incurred and then amortized over the estimated useful life.
(b) should be expensed in the period incurred
(c) may be either capitalized or expensed when incurred, depending upon the fact of the
situation.
(d) should be expensed in the period incurred unless it can be clearly demonstrated that the
expenditure will have significant future benefits.

53. Which of the following is not relevant in estimating the useful life of intangible asset
(a) The cost of asset
(b) Expected use of life of other assets related to intangible asset
(c) Level of maintenance expenditure required to obtain expected future economic benefit
(d) Technical obsolescence

54. Entities should evaluate indefinite life intangibles at least annually for
(a) Recoverability (c) Impairment
(b) Amortization (d) Estimated useful life

55. On December 31, 2001, Blitz Company had capitalized costs for a new computer software
product with an economic life of four years. Sales for 2002 were 10% of expected total sales of
the software. At December 31, 2002, the software had a net realizable value equal to 80% of the
capitalized cost. The unamortized cost reported on the December 31, 2002 balance sheet
should be:
(a) net realizable value. (c) 75% of capitalized cost.
(b) 90% of net realizable value. (d) 90% of capitalized cost.

56. Companies often are reluctant to record the costs of intangible assets as assets because:
(a) outlays for intangible assets typically provide nothing of value to the company.
(b) intangibles seldom have a useful life of more than one year.
(c) management and investors generally are more skeptical of the value of assets that cannot
be seen and touched.
(d) intangible assets are already incorporated in the market price of the stock and to record
them separately would involve double counting.

57. Goodwill is valued at:

(a) the difference between the price paid for an ongoing business and the fair value of the
identifiable assets acquired less liabilities assumed.
 (b) the difference between the fair value of the identifiable assets acquired and the liabilities
assumed.
(c) the total amount of cash paid out to acquire another company.
(d) the total amount of cash paid out to acquire another company, less the value of the
identifiable assets acquired.

58. Indicate which one of these statements is true.

(a) Since intangible assets lack physical substance, they need to be disclosed only in the notes
to the financial statements.
(b) Goodwill should be reported as a contra account in the stockholders’ equity section.
(c) Totals of major classes of assets can be shown in the balance sheet, with asset details
disclosed in the notes to the financial statements.
(d) Intangible assets are typically combined with plant assets and natural resources and then
shown in property, plant and equipment section.

59. If a company reports goodwill as an intangible asset on its books, what is the one thing you
know with certainty?
(a) The company is a valuable company worth investing in.
(b) The company has a well-established brand name.
(c) The company purchased another company.
(d) The goodwill will generate a lot of positive business for the company for many years to
come.

60. Which is not an intangible asset?

(a) manufacturing licenses (c) secret processes and formulas
(b) noncompetition agreement (d) organizational costs
II - PROBLEMS
1. On January 2, 2000, James Corporation acquired a patent for P192,000. The patent has a
remaining legal life of twelve years and an estimated useful life of eight years. In January 2004,
James paid P12,000 in legal fees in a successful defense of the patent. What should James
record as patent amortization for 2004?
(a) P16,000 (b) P24,000 (c) P25,500 (d) P27,000

2. During 2000, Bone Machine Company spent P176,000 on research and development costs for
an invention. This invention was patented on January 2, 2001, at a nominal cost that was
expensed in 2001. The patent had a legal life of 17 years and an estimated useful life of 8 years.
In January 2005, Bone paid P16,000 for legal fees in a successful defense of the patent.
Amortization for 2005 should be:
(a) P 0 (b) P1,231 (c) P4,000 (d) P26,000

3. On January 1, 2000, Kew Corporation incurred organizational costs of P12,000. For financial
accounting purposes, Kew is amortizing these costs on the same basis as the minimum
allowable for income tax purposes. What portion of the organizational costs will Kew defer to
years subsequent to 2000?
(a) P 0 (b) P2,400 (c) P9,600 (d) P12,000

4. During 2002, Delta Inc. incurred research and development costs as follows:
Experimental and development costs of a new
process patented in December 2002 P250,000
Testing for evaluation of prototypes 300,000
Modification of the formulation of a chemical
product 150,000
Research and development costs reimbursable
under a contract with Quality Chemicals
Corporation 500,000
What amount should Delta report as research and development expense in its income
statement for the year ended December 31, 2002?
(a) P 0 (b) P450,000 (c) P700,000 (d) P950,000

5. Pacific Company bought a patent for P300,000 on January 2, 2000 at which time the patent had
an estimated useful life of 10 years. On January 2, 2003, it was determined that this patent’s
useful life would expire at the end of 2006. How much should Pacific record as amortization
expense for this patent for the year ending December 31, 2004?
(a) P70,000 (b) P60,000 (c) P52,500 (d) P30,000

6. In January 1998, the Orient Company purchased a patent for an new consumer product for
P170,000. At the time of purchase, the patent was valid for seventeen years. Due to the
competitive nature of the product, the patent was estimated to have a useful life of ten years.
During 2002, the product was removed from the market under governmental order because of
a potential health hazar d present in the product.
What amount should Orient charge to expense during 2002, assuming amortization is
recorded at the end of each year?
(a) P10,000 (b) P17,000 (c) P102,000 (d) P130,000
7. Sunday Company was organized in late 2001 and began operations on January 1, 2002. The
company is engaged in conducting market research studies on behalf of manufacturers. Prior to
the start of operations, the following costs were incurred:

Attorney’s fees in connection with organization of company P 9,000

Improvements to leased offices prior to occupancy 6,000
Meeting of incorporators, SEC filing fees and other organization
expenses 5,000
P20,000
The company has decided to record amortization of organization costs over the maximum
period allowable under generally accepted accounting principles. What should be the amount
of organization costs amortized for 2002?
(a) P0 (b) P500 (c) P2,800 (d) P4,000

8. Royal Corp. incurred P175,000 of research and development costs in its laboratory to develop a
patent granted on January 2, 1998. Legal fees and other costs associated with registration of
the patent totaled P35,000. On April 25, 2002, Royal paid P50,000 for legal fees in a successful
defense of the patent. The total amount capitalized for this patent through April 25, 2002
should be:
(a) P260,000 (b) P210,000 (c) P85,000 (d) P35,000

9. Each of Pizza Pie Co.’s 21 new franchisees contracted to pay an initial franchise fee of P36,000.
By December 31, 2002, each franchisee had paid a non-refundable P12,000 fee and signed a
note to pay P12,000 principal plus the market rate of interest on December 31, 2003, and
December 31, 2004. Experience indicates that one franchisee will default on the additional
payments. Services for the initial fee will be performed in 2003. What amount of net unearned
franchise fees would Pizza Pie report at December 31, 2002?
(a) P480,000 (b) P720,000 (c) P732,000 (d) P756,000

10. On January 2, 2002, Delta Company purchased a franchise with a useful life of 10 years for
P100,000. An additional franchise fee of 3% of franchise operation revenues must be paid each
year to the franchisor. Revenues from franchise operations amounted to P800,000 during
2002. In its December 31, 2002 balance sheet, what amount should Delta report as an
intangible asset – franchise?
(a) P66,000 (b) P87,600 (c) P90,000 (d) P100,000

11. A business broker is attempting to value the Delicious fast food franchise. Average earnings
over the last 6 years have been P79,200 and are relatively stable. The original investment was
P288,000, and the current fair value of the net identifiable assets is P492,000. What is the
amount of implied goodwill if the average earnings rate in this industry is 10% investment?
(a) P79,200 (b) P300,000 (c) P288,000 (d) P792,000

12. An entity purchased a patent for P900,000. At the time of purchase, the patent was valid for 15
years. However, the useful life of the patent was estimated to be only 10 years. On December
31, 2017, the patented product was permanently withdrawn from sale under government
order because of potential hazard. What total amount should be charged against income in
2017?
(a) 720,000 (b) 540,000 (c) 630,000 (d) 90,000
13. Moon Corporation paid P420,000 for the outstanding common stock of Star Co. At that time,
Star had the following condensed balance sheet:
Carrying Amounts
Current assets P 56,000
Plant and equipment, net 532,000
Liabilities 280,000
Stockholders’ equity 308,000
The fair value of the plant and equipment was P84,000 more than the recorded carrying
amount. The fair values and the carrying amounts were equal for all other assets and liabilities.
What amount of goodwill, related to Star’s acquisition, should Moon report in its consolidated
balance sheet?
(a) P28,000 (b) P56,000 (c) P84,000 (d) P112,000

14. Paramount Company purchased a patent on January 2, 1998. for P240,000. on that date the
patent had a remaining legal life of 16 years but a remaining estimated economic life of only 10
years. On July 1, 1999, Paramount spent P81,600 in a successful defense against a patent
infringement suit brought against the company. On January 2, 2001, Paramount revised its
estimate of the patent’s useful life; as of this date the patent is estimated to have a remaining
useful life of 5 years. On December 31, 2002, management concludes that the patent is now
worthless because of a new process developed by a competitor during the latter of December
2002.
What amount of loss should Paramount recognize in its income statement for the year
ended December 31, 2002?
(a) P141,120 (b) P100,800 (c) P188,160 (d) P142,416

For items 15 and 16:

Information concerning Tina Corporation’s intangibles is as follows:

(a) On January 1, 2002, Tina signed an agreement to operate a franchise of Rapid, Inc. for an
initial franchise fee of P85,000. Of this amount, P25,000 was paid when the agreement was
signed and the balance is payable in four annual payments of P15,000 each beginning
January 1, 2003. The present value at January 1, 2002, of the four annual payments
discounted at 14% (the implicit rate for a loan at this type) is P43,700. The agreement also
provides that 5% of the revenue from the franchise must be paid to the franchisor annually.
Tina’s revenue from the franchise for 2002 was P900,000. Tina estimates the useful life of
the franchise to be ten years.
(b) Tina incurred P78,000 of experimental and development costs in its laboratory to develop a
patent which was granted on January 2, 2002. Legal fees and other costs associated with
registration of the patent totaled P48,000. Tina estimates that the useful life of the patent
will be eight years.
(c) A trademark was purchased from Walton Company for P40,000 on July 1, 1999.
Expenditures totaling P68,000 were paid on July 1, 2002. Tina estimates that the useful life
of the trademark will be 20 years from the date of acquisition.

15. Amortization of intangibles for 2002 is:

(a) P10,870 (b) P14,870 (c) P16,870 (d) P18,870

16. The unamortized cost of intangibles on December 31, 2002 is:

(a) P42,000 (b) P136,830 (c) P158,130 (d) P202,830
For items 17 and 18:

Ward Company incurred research and development costs in 2000 as follows:

Equipment acquired for use in various research and
development projects P975,000
Depreciation on the above equipment 135,000
Materials used 200,000
Compensation costs of personnel 500,000
Outside consulting fees 150,000
Indirect costs appropriately allocated 250,000
Modification to the formulation of a chemical product 140,000
Trouble-shooting in connection with break-downs and
quality control during commercial production 150,000
Design of tools, jigs, molds and dies involving new
technology 170,000
Seasonal or routine or other periodic design changes to
existing products 185,000
Laboratory research aimed at discover of new technology 215,000

17. The total research and development costs charged to expenses in Ward’s 2000 income
statement should be:
(a) P850,000 (b) P1,235,000 (c) P1,1760,000 (d) P1,825,000

18. The total amount charged to other operating expenses in Ward’s 2000 income statement should
be:
(a) P335,000 (b) P675,000 (c) P755,000 (d) P850,000

For items 19 and 20:

K Corp. is considering to buy the Thrift Clothing Company and assembles the following
information relative to the company being acquired on December 31, 2002:
Assets Per Book Adjusted
Current Assets P154,000 P148,000
Investments 48,000 42,000
Plant and equipment (net) 408,800 380,000
Goodwill 96,000 96,000
P706,800 P666,000
Liabilities and Stockholders’ Equity
Current Liabilities P 32,500 P 32,500
Long-term Liabilities 230,000 230,000
Capital stock 230,000 230,000
Retained earnings 214,300 173,500
P706,800 P666,000
 The following information pertains to the Retained Earnings:
Per Book Adjusted
Ret. earnings – 1/1/2000 P183,340 P151,900
Add: Net income for 2000-2002
(after loss on sale of fixed
assets *) 74,160 64,800
Less: Dividends for 2000-2002 ( 43,200) ( 43,200)
Ret. earnings – 12/31/2002 P 214,300 P 173,500

* Loss on sale of fixed

assets in 2002 P 73,440 P 79,200
Assume that earnings of the future are expected to be the same as average normal earnings of
the past three years, 10% is accepted as a reasonable return on net assets excluding goodwill as
of December 31, 2002, and average earnings in excess of 10% are capitalized at 15% in
determining goodwill.

19. How much is the average normal earnings:

(a) P21,600 (b) P24,720 (c) P48,000 (d) P49,200

20. How much is the goodwill?

(a) P320,000 (b) P144,000 (c) P115,000 (d) P123,000

21. On January 2, 2000, Ral Company leased land and building from an unrelated lessor for a ten-
year term. The lease has a renewal option for an additional ten years, but Ral has not reached a
decision with regard to the renewal option. In early January of 2000, Ral completed the
following improvements to the property:
Description Estimated life Cost
Sales office 10 years P47,000
Warehouse 25 years 75,000
Parking lot 15 years 18,000
Depreciation of leasehold improvements for 2000 should be:
(a) P7,000 (b) P8,900 (c) P12,200 (d) P14,000

22. On December 1, 2000, Terry Company signed a 10-year nonrenewable lease for a building to be
used in manufacturing operations. During the latter part of December 2000, Terry incurred the
following costs:
(a) P96,000 for general improvements to the premises
(b) P48,000 for movable assembly line equipment
(c) P120,000 for office furniture and equipment
In its December 31, 2000 balance sheet, Terry should report leasehold improvements of:
(a) P96,000 (b) P144,000 (c) P216,000 (d) P264,000

23. On January 2, 2000, Eve Company signed an 8-year lease for office space. Eve has the option to
renew the lease for an additional four-year period on or before January 2, 2007. During 2002,
Eve incurred the following costs:
(a) P120,000 for general improvements to the leased premises with an estimated useful life of
10 years.
(b) P50,000 for office furniture and equipment with an estimated useful life of 10 years.
(c) P48,000 for movable assembly line equipment.

At December 31, 2002, Eve’s intentions as to exercise of the renewal option are uncertain.
A full year’s depreciation of leasehold improvements is taken for calendar year 2002. In Eve’s
December 31, 2002 balance sheet, accumulated depreciation of leasehold improvements should
be:
(a) P10,000 (b) P15,000 (c) P20,000 (d) P21,250
24. On January 1, 1996, Neil Corporation signed a 12-year lease for warehouse space. Neil has an
option to renew the lease for an additional 8-year period on or before January 1, 2000. During
January 1998, Neil made substantial improvements to the warehouse. The cost of these
improvements was P540,000, with an estimated useful life of 15 years. At December 31, 1998,
Neil intended to exercise the renewal option. Neil has taken a full year’s depreciation on this
leasehold improvement. In the December 31, 1998 balance sheet, the carrying amount of this
leasehold improvement should be:
(a) P486,000 (b) P504,000 (c) P510,000 (d) P513,000

25. On January 1, 2014, an entity purchased a patent for P7,140,000. The patent is being amortized
over the remaining legal life of 15 years. During 2017, the entity determined that the economic
benefits of the patent would not last longer than ten years from date of acquisition. What is the
carrying amount of the patent on December 31, 2017
(a) P4,284,000 (b) P4,896,000 (c) P5,050,000 (d) P5,326,000

26. On January 1, 2017, an entity reported patent cost of P1,920,000 and related accumulated
amortization of P240,000. The patent was purchased on January 1, 2015 at which date the
remaining legal life was 16 years. On January 1, 2017, the useful life of the patent was
determined to be only 8 years from date of acquisition. On January 1, 2017, the entity paid
P800,000 of which ¾ was for trademark and ¼ was for the other entity’s agreement not to
compete for a 5 year period in the line of business covered by the trademark. The entity
considered the life of the trademark indefinite. Moreover, the entity agreed to pay P50,000 to
other entity as consulting fee each year for 5 years payable every January 1. What is the
carrying amount of the intangible assets on January 1, 2017?
(a) P2,280,000 (b) P2,480,000 (c) P1,880.000 (d) P1,680,000

27. On January 1, 2017, an entity reported patent cost of P1,920,000 and related accumulated
amortization of P240,000. The patent was purchased on January 1, 2015 at which date the
remaining legal life was 16 years. On January 1, 2017, the useful life of the patent was
determined to be only 8 years from date of acquisition. On January 1, 2017, the entity paid
P800,000 of which ¾ was for trademark and ¼ was for the other entity’s agreement not to
compete for a 5 year period in the line of business covered by the trademark. The entity
considered the life of the trademark indefinite. Moreover, the entity agreed to pay P50,000 to
other entity as consulting fee each year for 5 years payable every January 1. What is the total
amount of expenses for 2017 in relation to intangible asset?
(a) P370,000 (b) P320,000 (c) P470,000 (d) P280,000

28. White Company incurred research and development costs in 2000 as follows:
Equipment acquired for use in various research and
development projects P975,000
Depreciation on the above equipment 135,000
Materials used 200,000
Compensation costs of personnel 500,000
Outside consulting fees 150,000
Indirect costs appropriately allocated 250,000

The total research and development costs charged in White’s 2000 income statement should be:
(a) P850,000 (b) P1,085,000 (c) P1,235,000 (d) P1,825,000
29. In 2000, Ball Company incurred the following costs:
Direct costs of doing contract research and development
for the government to be reimbursed by the
governmental unit P400,000
Research and development costs not included above were:
Depreciation 300,000
Salaries 700,000
Indirect costs appropriately allocated 200,000
Materials 180,000
What was Ball’s total research and development expense in 2000?
(a) P1,080,000 (b) P1,380,000 (c) P1,580,000 (d) P1,780,000

30. West Company made the following expenditures relating to Product Y:

Legal costs to the patent on Product Y. Production of the
finished product would not have been undertaken
without the patent P10,000
Special equipment to be used solely for development of
Product Y. The equipment has no other use and
has an estimated useful life of four years. 60,000
Labor and material costs incurred in producing a prototype model 200,000
Cost of testing the prototype 80,000
What is the total amount of costs that will be expensed when incurred?
(a) P280,000 (b) P295,000 (c) P340,000 (d) P350,000

31. Koral Company incurred the following costs during 2000:

Modification to the formulation of a chemical product P135,000
Trouble shooting in connection with breakdowns during
commercial production 150,000
Design of tools, jigs, molds and dies involving new technology 170,000
Seasonal or other periodic design changes to existing products 185,000
Laboratory research aimed at discovery of new technology 215,000
In its income statement for the year ended December 31, 2000, Koral should report research
and development expense of:
(a) P520,000 (b) P470,000 (c) P385,000 (d) P335,000

32. Cody Corporation incurred the following costs during 2000:

Design of tools, jigs, molds and dies involving new technology P125,000
Modification to the formulation of a process 160,000
Trouble shooting in connection with breakdowns during
commercial production 100,000
Adaptation of an existing capability to a particular customer’s
need as part of a continuing commercial activity 110,000
In its 2000 income statement, Cody should report research and development expense of:
(a) P125,000 (b) P160,000 (c) P235,000 (d) P285,000

33. Dell Corporation incurred the following costs during the year ended December 31, 2000:
Routine, on-going efforts to refine, enrich or otherwise
improve upon the qualities of an existing product P125,000
Design, construction, and testing of preproduction prototypes
and models 110,000
Quality control during commercial production including
routine testing of products 150,000
Laboratory research aimed at discovery of new knowledge 180,000
The total amount to be classified and expensed as research and development for 2000 is:
 (a) P235,000 (b) P275,000 (c) P290,000 (d) P330,000

34. Heller Company incurred the following costs in 2000:

Research and development services performed by Kay
Corporation for Heller P150,000
Testing for evaluation of new products 125,000
Laboratory research aimed at discovery of new knowledge 185,000
What amount should Heller report as research and development costs in its income statement
for the year ended December 31, 2000?
(a) P125,000 (b) P150,000 (c) P335,000 (d) P460,000

35. During 2000, Orr Company incurred the following costs:

Research and development services performed by Key
Corporation for Orr P150,000
Design, construction, and testing of preproduction prototypes
and models 200,000
Testing in search for new products or process alternatives 175,000
In its 2000 income statement, what amount should Orr report as research and development
expense?
(a) P150,000 (b) P200,000 (c) P350,000 (d) P525,000

36. Brill Company made the following expenditures during 2000:

Costs to develop computer software for internal use
in Brill’s general management information system P100,000
Cost of market research activities 75,000
What amount of these expenditures should Brill report in its 2000 income statement as
research and development expense?
(a) P175,000 (b) P100,000 (c) P75,000 (d) P 0

For items 37 and 38:

During 2000, Pitt Corporation incurred costs to develop and produce a routine, low-risk
computer software product, as follows:
Completion of detail program design P13,000
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

37. In Pitt’s December 31, 2000 balance sheet, what amount should be reported as inventory?
(a) P25,000 (b) P34,000 (c) P40,000 (d) P49,000

38. In Pitt’s December 31, 2000 balance sheet, what amount should be capitalized as software cost,
subject to amortization?
(a) P54,000 (b) P57,000 (c) P59,000 (d) P69,000

39. Tanker Oil Company, a development stage enterprise, incurred the following costs during its
first year of operations:
Legal fees for incorporation and other related matters P55,000
Underwriters’ fees for initial stock offering 40,000
Exploration costs and purchases of mineral rights 60,000
 Tanker had no revenue during its first year of operation. What amount may Tanker capitalize
as organizational costs?
(a) P155,000 (b) P115,000 (c) P95,000 (d) Zero

40. Brown Corporation, a calendar-year taxpayer, was organized and actively began operations on
July 1, 2000 and incurred the following costs:
Legal fees to obtain corporate charter P40,000
Commission paid to underwriter 25,000
Other stock issue costs 10,000
Brown wishes to amortize its organizational costs over the shortest period allowed for tax
purposes. In 2000, what amount should Brown deduct for the amortization of organizational
expenses?
(a) P8,000 (b) P7,500 (c) P5,000 (d) Zero

41. On January 1, 2000, Kew Corporation incurred organizational costs of P240,000. For financial
accounting purposes, Kew is amortizing these costs on the same basis as the maximum
allowable for income tax purposes. What portion of the organizational costs will Kew defer to
years subsequent to 2000?
(a) P234,000 (b) P192,000 (c) P48,000 (d) P 0

42. Gray Company was organized late in 2000 and began operations on January 1, 2001. Prior to
the start of operations, the following costs were incurred:
Attorney’s fees for incorporating P60,000
State incorporation filing fees 40,000
Gray amortized organization costs over the maximum period allowable under GAAP. How
much amortization should Gray record for the year ended December 31, 2001?
(a) P5,000 (b) P2,500 (c) P12,000 (d) Zero

For items 43 and 44:

Towne Systems Corporation was a development stage enterprise from October 10, 2000
(inception) to December 31, 2001. The year ended December 31, 2002 is the first year in which
Towne is an established operating enterprise. The following are among the costs incurred by
Towne:
For the period For the year
10/1/2000 to 12/31/2001 12/31/2002
Leasehold improvements, equipment,
and furniture P1,000,000 P150,000
Security deposits 60,000 15,000
Research and development 750,000 450,000
Laboratory operations 175,000 275,000
General and administrative 250,000 400,000

43. For the period ended December 31, 2001, what total amount of the costs incurred should
Towne have capitalized?
(a) P1,060,000 (b) P1,810,000 (c) P1,985,000 (d) P2,235,000

44. For the period ended December 31, 2002, what total amount of the costs incurred should
Towne have capitalized?
(a) P875,000 (b) P615,000 (c) P165,000 (d) P150,000

45. Lex Corporation was a development enterprise from October 10, 2000 (inception) to December
31, 2001. The year ended December 31, 2002 is the first year in which Lex is an established
operating enterprise. The following are among the costs incurred by Lex:
 For the period For the year
10/10/2000 to 12/31/2001 12/31/2002
Leasehold improvements, equipment,
and furniture P1,000,000 P 300,000
Security deposits 60,000 30,000
Research and development 750,000 900,000
Laboratory operations 175,000 550,000
General and administrative 225,000 685,000
Depreciation 25,000 115,000
P2,235,000 P2,580,000
From its inception through the period ended December 31, 2002, what is the total amount of
costs incurred by Lex that should be charged to operations?
(a) P3,425,000 (b) P2,250,000 (c) P1,775,000 (d) P1,350,000

46. Freetown Manufacturing Company acquired three patents in January 2002. The patents have
different lives as indicated in the following schedule:
Cost Remaining useful life Remaining legal life
Patent A P125,000 10 17
Patent B 272,500 5 7
Patent C 656,200 Indefinite 17
Patent C is believed to be uniquely useful as long as the company retains the right to use it. In
June 2003, the company unsuccessfully attempted to defend its right to Patent B. Legal fees of
P127,000 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 2003 is:
(a) P105,600 (b) P78,350 (c) P84,880 (d) P51,100

47. Wash Company is negotiating to acquire Jar Company. Wash manufactures and sells wood-
burning stoves, and Jar Company produces parts that are required to manufacture the stoves.
Jar Company enjoys an exceptional reputation, and Wash management believes it can continue
Jar’s current level of income and satisfy its own need for parts. Under the contemplated
arrangement, Wash Company will negotiate for the acquisition of the net assets of Jar Company.
The following information has been developed to determine the appropriate price:
Recorded amounts and estimated values of Jar Company’s assets and liabilities are as
follows:
Recorded amount Current value
Assets to be received P16,000,000 P19,500,000
Liabilities to be assumed 6,000,000 5,500,000
P10,000,000 P14,000,000
Jar Company’s earnings for the past five years averaged P2,000,000. This is believed to be a
reasonable estimate of future income. The level of income normally experienced by companies
similar to Jar Company is 10%.
Wash Company and Jar Company agreed to capitalize average excess earnings at 25% in
estimating the value of goodwill. How much should Wash Company pay in acquiring Jar
Company?
(a) P16,400,000 (b) P18,000,000 (c) P14,200,000 (d) P16,000,000

48. Rave Company developed a trademark to distinguish its product from those of its competitors.
Through advertising and other means, the company is seeking to establish significant product
identification to increase future sales. The similarity between the trademark costs and other
intangible and operating costs has caused some confusion over property accounting. The
following items are being treated as part of the cost of the trademark:
Marketing research to study consumer tastes P400,000
Design costs of trademark 1,500,000
Legal fees of registering trademark 150,000
Advertising to establish recognition of trademark 200,000
 Registration fee with Patent Office 50,000
Through renewals, the trademark is expected to have an unlimited life. The cost to be
capitalized as trademark should be:
(a) P1,700,000 (b) P1,900,000 (c) P2,300,000 (d) P2,100,000

49. West Company purchased two machines for P1,000,000 each on January 2, 2002. The machines
were put into use immediately. Machine A has a useful life of 5 years and can be used only in
one research project. Machine B will be used for 2 years on a research and development project
and then used by the production division for an additional 8 years. West used the straight line
method of depreciation. What amount should West include in 2002 research and development
expense?
(a) P2,000,000 (b) P1,500,000 (c) P1,100,000 (d) P300,000

50. Tobin Company incurred P 1, 600, 000 of research and development costs to develop a product
for which a patent was granted on January 1,2006.legal fees and other costs associated with
registration of the patent totaled P300,000. On March 31,2006, Tobin paid P450,000 for legal fees
in a successful defense of the patent. The total amount capitalized for this patent through March
31,2006 should be
a. 750,000
b. 300,000
c. 2,050,000
d. 2,350,000