REVIEWER IN INTERMEDIATE ACCOUNTING

Problem 169 (IAA)

Vanity Company showed the following balance 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 c. 5,400,000
b. 4,500,000 d. 5,800,000

Problem 170 (IAA)

Alcaraz Company paid P5,000,000 to purchase intangible assets with the following fair value:

Internet domain name 1,500,000

Order backing 1,200,000
In-process research and development 2,400,000
Operating permit 900,000

In addition, the entity spent P2,000,000 to run an advertising campaign to boost its image in the
local community.

What amount should be recognized as cost of the in-process research and development?
89
a. 2,400,000 c. 2,800,000
b. 2,000,000 d. 0

Problem 171 (AICPA Adapted)

Tobin 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 fee and other costs associated with registration of the patent totalled P300,000. At the
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 c. 2,050,000
b. 300,000 d. 2,350,000

Problem 172 (IAA)

Harmonious Company acquired a patent for a drug with a remaining legal and useful life of six
years on January 1,2014 for P5,400,000.

On January 1, 2016, 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 2016?

a. 900,000 c. 180,000
b. 200,000 d. 300,000

Problem 173 (IAA)

Golden 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

1. What amount should be capitalized as cost of patent?

a. 240,000 c. 740,000
b. 540,000 d. 200,000

2. What amount of research and development cost should be expensed in the current
year?
a. 2,250,000 c. 2,490,000
b. 2,000,000 d. 1,800,000

90
Problem 174 (AICPA Adapted)

On January 1, 2016, Boracay Company bought a trademark from Lamitan Company for
P3,000,000. 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 Lamitan
Company.

On December 31, 2016, what is the carrying amount of the trademark?

a. 3,000,000 c. 2,850,000
b. 1,500,000 d. 0

Problem 175 (IAA)

On January 1, 2016, Aim Company showed patent of P1,920,000 with related accumulated
amortization of P240,000. The patent was purchased on January 1, 2014 at which date the legal
life is 16 years.

On January 1, 2016, the useful life of the patent was determined to be only 8 years from the
date of acquisition.

On January 1, 2016, in connection with the purchase of a trademark from Cat Company, the
parties entered into a noncompetition agreement and a consulting contract.

Aim Company paid Cat Company P800,000, of which three-fourths was for the trademark, and
one-fourth was for the Cat Company’s agreement not to compete for a five-year period in the
line of business covered by the trademark. Aim Company considered the life of the trademark
to be indefinite.

Moreover, Aim Company agreed to pay Cat Company P50,000 annually on January 1 of each
year for 5 years.

1. What is the carrying amount of intangible assets on January 1, 2016?

a. 2,280,000 c. 1,880,000
b. 2,480,000 d. 1,680,000

2. What is the total amortization of intangible assets for 2016?

a. 280,000 c. 320,000
b. 440,000 d. 160,000

Problem 176 (AICPA Adapted)

On January 1, 2016, Hart Company signed an agreement to operate as a franchisee of Ace

Company for an initial franchise fee of P12,000,000.

The same date, Hart Company paid P4,000,000 and agreed to pay the balance in four equal
annual payments of P2,000,000 beginning January 1, 2017.

Hart Company can barrow at 14% for a loan of this type. The present value factors at 14% are as
follows:

Present value of 1 at 14% for four periods 0.59

Present value of an ordinary annuity of 1 at 14% for four periods 2.91

91
What is the acquisition cost of the franchise?

a. 13,520,000 c. 9,820,000
b. 12,000,000 d. 8,720,000

Problem 177 (AICPA Adapted)

Carr Company recently acquired 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 c. 40
b. 30 d. 0

Problem 178 (IAA)

Java Company purchased an entity for P6,000,000 cash at the beginning of the current year.

The carrying amount and fair value of the assets of the acquire on the date of the acquisitions
are as follows:

Carrying amount Fair value

Cash 50,000 50,000

Accounts receivable 500,000 500,000
Patent 1,000,000 1,500,000
Property, plant and equipment 0 250,000
Property, plant and equipment 2,000,000 3,000,000

Total 3,550,000 5,300,000

In addition, the acquitee had liabilities totalling P2,000,000 at the time of acquisition. The
acquire had no other separately identifiable intangible assets.

What is the goodwill arising from the acquisition?

a. 2,700,000 c. 4,450,000
b. 2,450,000 d. 700,000

Problem 179 (IAA)

Casanova Company purchased another entity for P500,000 cash. The following carrying amount
and fair value were associated with the items acquired in this business combination:

Carrying amount Fair value

Accounts receivable 2,000,000 2,000,000

Inventory 1,000,000 500,000
Government contract 0 1,000,000
Equipment 400,000 500,000
Short-term payable (2,000,000) (2,000,000)

Net Assets 1,400,000 2,000,000

The fair value associated with the acquired entity’s government contract is not based on any
legal or contractual relationship. 92

In addition, for obvious reason, there is no open market trading for an intangible of this sort.

What is the goodwill arising from the business combination?

a. 3,000,000 c. 4,000,000
b. 3,600,000 d. 0

Problem 180 (IAA)

Clever Company purchased for P4,000,000 cash all of the outstanding ordinary shares of Sun
Company when Sun’s statement of financial position showed net assets of P3,200,000.

On the date of acquisition, Sun’s assets and liabilities had fair value different from the carrying
amount as follows:

Carrying amount Fair value

Property, plant and equipment, net 5,000,000 5,750,000

Other assets 500,000 0
Long-term debt 3,000,000 2,800,000

What amount should be reported as goodwill in the consolidated statement of financial

position of Clever Company and its wholly-owned subsidiary?

a. 350,000 c. 750,000
b. 250,000 d. 800,000
Problem 181 (IFRS)

Brisbane Company has recently diversified by taking over the operations of Darwin Company at
a cost of P10,000,000.

Darwin manufactures and sells a cleaning cloth called the “Superswipe” which was developed
by Darwin’s highly trained staff.

The unique nature of the coating used on the “Superswipe” has resulted in Darwin Company a
significant share of the South African market.

As a result of the takeover, Brisbane Company acquired the following assets at fair value:

Land and building 3,200,000

Production machinery 2,000,000
Inventory 1,800,000
Accounts receivable 700,000

In addition, Darwin Company owned, but had not recognized, the following:

 Trademark – “Superswipe” with fair value of P1,000,000.

 Patent – Formula for the special coating with fair valuew3 of P5000,000.

What amount of goodwill should be recognized on the date of acquisition?

a. 2,300,000 c. 1,800,000
b. 1,300,000 d. 800,000
93
Problem 182 (IAA)

At year-end, Bliss Company purchased the net assets of another entity for P6,000,000. On the
date of the transaction, the acquire had P2,000,000 of liabilities.

The assets of the acquire at fair value were P3,000,000 for current assets and P6,000,000 for
noncurrent assets.

How should the purchase be accounted for?

a. Retained earnings should be credited for P1,000,000.

b. Gain on bargain purchase should be credited for P1,000,000.
c. The current assets should be reported at P3,000,000 and the noncurrent assets at
P5,000,000.
d. Negative goodwill should be credited for P1,000,000.

Problem 183 (IAA)

East Company is planning to sell the business to new interest. The cumulative net earnings for
the past five years amounted to P5,500,00 including expropriation gain of P500,000.

The fair value of net assets of East Company was P7,500,000. The goodwill is determined by
capitalizing average net earnings at 10%.

1. What is the purchase price of the business?

a. 10,000,000 c. 15,000,000
 b. 12,500,000 d. 7,500,000

2. What is the amount to be paid for goodwill?

a. 3,500,000 c. 2,500,000
b. 7,500,000 d. 5,000,000

Problem 184 (AICPA Adapted)

On January 1, 2014, Wayne Company signed an eight-year lease for office space. The entity has
the option to renew the lease for an additional four-year period on or before January 1, 2021.

During January 2016, two years after occupying the leased premises, the entity made general
improvement costing P3,600,000 and having a useful life of ten years.

On December 31, 2016, the entity’s intention as to exercise of the renewal option is uncertain.

What is the depreciation of leasehold improvement for 2016?

a. 300,000 c. 450,000
b. 360,000 d. 600,000

Problem 185 (AICPA Adapted)

On January 1, 2016, Ames Company signed an eight-year lease for office space. The entity has
the option to renew the leave for an additional four-year period on or before January 1, 2023.

During January 2016, the entity incurred the following costs:

 P1,200,000 for general improvement to the leased premises with an estimated useful
life of ten years. 94

 P500,000 for office furniture and equipment with an estimated useful life of ten years.

 P400,000 for moveable assembly line equipment with useful life of 5 years.

On December 31, 2016, the entity’s intention as to exercise of the renewal option is uncertain.

What is the accumulated depreciation of leasehold improvement on December 31, 2016?

a. 292,500 c. 170,000
b. 150,000 d. 212,500

Problem 186 (AICPA Adapted)

On January 1, 2014, Nobb Company signed a 12-year lease for warehouse space. The entity has
an option to renew the lease for an additional 8-year period on or before January 1, 2018.

During January 2016, the entity made substantial improvement to the warehouse. The cost of
the improvement was P540,000 with an estimated useful life of 15 years.

On December 31, 2016, the entity intended to exercise the renewal option.

On December 31, 2016, what is the carrying amount of the leasehold improvement?

a. 486,000 c. 510,000
b. 504,000 d. 513,000
Problem 187 (AICPA Adapted)
On January 1, 2015, Bay Company acquired a land lease for 21 years with no option to renew.
The lease required the lessec to construct a building in lieu of rent.

The building, completed on January 1, 2016, at a cost of P8,400,000, is depreciated using the
straight line method.

At the end of the lease, the building’s estimated fair value is P4,200,000. The useful life of the
building is 25 years.

What is the carrying amount of the building on December 31, 2016? ANSWER: A

a. 7,980,000 c. 8,190,000
b. 8,064,000 d. 8,232,000

Problem 188 (IAA)

At the beginning of current year, Explicable Company acquired a 5-year lease on land and
building from another entity at an annual rental of P1,200,000.

On same date, the entity paid P2,400,000 representing rental for the first year and an advance
rental for one year which will be applied for the last year of the lease contract.

Moreover, the entity paid P2,000,000 upon signing of the contract to obtain right to the lease.

Improvement and alteration were made on the building at a cost of P500,000.

1. What is the rent expense for the current year?

a. 1,200,000 c. 3,600,000
b. 2,400,000 d. 1,800,000 95

2. What is the amortization of leasehold for the current year?

a. 500,000 c. 200,000
b. 400,000 d. 0

3. What is the depreciation of leasehold improvement for the current year?

a. 500,000 c. 100,000
b. 900,000 d. 0

Problem 189 (IAA)

At the beginning of the current year, Alpha Company signed a contract whereby the entity was
to pay P3,000,000 cash plus P300,000 per month rent for an office building.

The contract is for 10 year and renewable for another 10 years at a monthly rental od
P400,000.

Prior to occupancy, the lease spent P1,000,000 in improving the building.

In addition, the parking lot was improved, new pavement and lighting were made at a cost of
P400,000. It is estimated that such improvement will be usable for 5 years.

1. What is the amortization of leasehold for the current year?

a. 600,000 c. 700,000
b. 300,000 d. 0
 2. What is the depreciation of leasehold improvement for current year?

a. 480,000 c. 180,000
b. 280,000 d. 140,000

Problem 190 (AICPA Adapted)

Ward Company incurred the following research and development costs in the current year:

Equipment acquired for use in various R and D projects 975,000

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

What total amount of research and development costs should be recognized as expense for the
current year?

a. 850,000 c. 1,235,000
b. 1,085,000 d. 1,825,000

Problem 191 (IAA)

Courage Company incurred the following costs in the current year:

R and D with useful life of four years in

Various R and D projects 1,800,000
Start-up costs incurred when opening a new plant 4,200,000
Advertising expense to introduce a new product 2,100,000
Engineering costs incurred to advance a product to full 96
Production stage but economic viability is not yet achieved 1,200,000

What amount should be recorded as research and development expense?

a. 1,650,000 c. 3,000,000
b. 2,220,000 d. 3,420,000

Problem 192 (IAA)

Metal Company incurred the following costs during the current year:

Laboratory research aimed at discovery of

New knowledge 750,000
Design of tools, jigs, molds and dies involving
New technology 220,000
Quality control during commercial production,
Including routine testing 350,000
Equipment acquired two years ago, having an estimated
useful life of five years with no residual value, used
in various R and D projects 1,500,000
Research and development services performed by
Stone Company for Metal Company 230,000
Research and development services performed by
Metal Company for Kaye Company 20,000

What amount of research and development expense should be reported in the current year?
a. 1,200,000 c. 1,870,000
 b. 1,500,000 d. 2,170,000

Problem 193 (AICPA Adapted)

Brunson Company, a major winery, begun construction of a new facility in Mindanao. The
following costs are incurred in conjunction with the with the start-up activities of the new
facility.

Production equipment 8,150,000

Travel costs of salaried employees 400,000
License fees 140,000
Training of local employees for production and
Maintenance operations 1,200,000
Advertising costs 850,000

What portion of the organization costs should be expensed?

a. 9,750,000 c. 1,390,000
b. 1,600,000 d. 0

Problem 194 (AICPA Adapted)

During the current year , Pitt Company incurred the following costs to develop and produce a
computer software product:

Completion of detailed program design 1,300,000

Costs incurred for coding and testing to
Establish technological feasibility 1,000,000
Other coding costs after establishment
Of technological feasibility 2,400,000
Other testing costs after establishment 97
Of technological feasibility 2,000,000
Costs of producing product masters for training materials 1,500,000
Duplication of computer software and
Training materials from product masters 2,500,000
Packaging product 900,000

1. What amount should be reported as inventory?

a. 2,500,000 c. 4,000,000
b. 3,400,000 d. 4,900,000

2. What total amount of the costs incurred should be expensed immediately?

a. 8,200,000 c. 6,700,000
b. 2,300,000 d. 4,400,000

3. What amount should be capitalized as software cost?

a. 5,400,000 c. 5,900,000
b. 5,700,000 d. 6,900,000

Problem 195 (AICPA Adapted)