UNIVERSITY OF NUEVA CACERES

City of Naga
COLLEGE OF BUSINESS AND ACCOUNTANCY
Comprehensive Accounting A/Y 2018-2019

FINANCIAL ACCOUNTING AND REPORTING JSD

INTANGIBLE ASSETS

INTANGIBLE ASSETS

Definitions

Intangible asset An identifiable nonmonetary asset without physical substance.

The systematic allocation of the depreciable amount of an intangible asset over
Amortization
its useful life.
The amount of cash or cash equivalents paid or the fair value of other
consideration given to acquire an asset at the time of its acquisition or
Cost
construction, or, when applicable, the amount attributed to that asset when
initially recognized in accordance with the specific requirements of other PFRSs.
The amount for which that asset could be exchanged between knowledgeable,
Fair value
willing parties in an arm’s length transaction.
Money held and assets to be received in fixed or determinable amounts of
Monetary assets
money.
Original and planned investigation undertaken with the prospect of gaining new
Research
scientific or technical knowledge and understanding.
The application of research findings or other knowledge to a plan or design for
Development the production of new or substantially improved materials, devices, products,
processes, systems or services before the start of commercial production or use.

Two important aspects of the definition of an Intangible Asset are:

I. Identifiability – Identifiable means

(a) Is separable, it is capable of being separated or divided from the entity and sold, transferred,
licensed, rented or exchanged, either individually or together with a related contract, asset or liability
OR

(b) Arises from contractual or other legal rights, regardless of whether those rights are transferable or
separable from the entity or from other rights and obligations.

II. Inherent characteristics of assets are:

(a) Control - An entity controls an asset if the entity has the power to obtain the future economic
benefits flowing from the underlying resource and to restrict the access of others to those benefits.

(b) Future Economic Benefits - The future economic benefits flowing from an intangible asset may
include revenue from the sale of products or services, cost savings, or other benefits resulting from
the use of the asset by the entity.

(c) Cost – An asset shall only be recognized if its cost or value can be measured reliably.

KEY OBSERVATIONS

 Identifiability is the major reason why internally generated goodwill is not recognized as an asset. Aside
from lacking control and unmeasurable cost of goodwill.
 Control is the reason why internally generated brands and the skills of employees arising from training or
experience is not an asset. However, cost also plays a major role in its non recognition.

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 UNIVERSITY OF NUEVA CACERES
City of Naga
COLLEGE OF BUSINESS AND ACCOUNTANCY
Comprehensive Accounting A/Y 2018-2019

FINANCIAL ACCOUNTING AND REPORTING JSD

Recognition and Initial Measurement

 An enterprise to recognize an intangible asset, whether purchased or self-created AT COST if, and only
if:

 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.

Initial Measurement and Subsequent Expenditures

 Intangible assets are initially measured at cost.

 Subsequent expenditure on an intangible asset after its purchase or completion should be
recognized as an expense when it is incurred
 However in very rare cases that it is probable that this expenditure will enable the asset to generate
future economic benefits in excess of its originally assessed standard of performance and the
expenditure can be measured and attributed to the asset reliably.

Internally Generated Intangible Assets

I. It is sometimes difficult to assess whether an internally generated intangible asset qualifies for recognition
because of problems in

(a) Identifying whether and when there is an identifiable asset that will generate expected future
economic benefits;
(b) Determining the cost of the asset reliably. In some cases, the cost of generating an intangible
asset internally cannot be distinguished from the cost of maintaining or enhancing the entity’s
internally generated goodwill or of running day-to-day operations.

II. To assess whether an internally generated intangible asset meets the criteria for recognition, an entity
classifies the generation of the asset into:

(a) A research phase (b) A development phase

III. If an entity cannot distinguish the research phase from the development phase of an internal project to
create an intangible asset, the entity treats the expenditure on that project as if it were incurred in the
research phase only.

Research Phase

I. No intangible asset arising from research (or from the research phase of an internal project) shall be
recognized. Expenditure on research (or on the research phase of an internal project) shall be recognized
as an expense when it is incurred.

II. In the research phase of an internal project, an entity cannot demonstrate that an intangible asset exists
that will generate probable future economic benefits. Therefore, this expenditure is recognized as an
expense when it is incurred.

III. Examples of research activities are:

(a) Activities aimed at obtaining new knowledge

(b) The search for, evaluation and final selection of, applications of research findings or other knowledge
(c) The search for alternatives for materials, devices, products, processes, systems or services
(d) The formulation, design, evaluation and final selection of possible alternatives for new or improved
materials, devices, products, processes, systems or services.

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 UNIVERSITY OF NUEVA CACERES
City of Naga
COLLEGE OF BUSINESS AND ACCOUNTANCY
Comprehensive Accounting A/Y 2018-2019

FINANCIAL ACCOUNTING AND REPORTING JSD

Development Phase

I. An intangible asset arising from development (or from the development phase of an internal project) shall
be recognized if, and only if, an entity can demonstrate all of the following:

(a) The technical feasibility of completing the intangible asset so that it will be available for use or sale.
(b) Its intention to complete the intangible asset and use or sell it.
(c) Its ability to use or sell the intangible asset.
(d) How the intangible asset will generate probable future economic benefits. Among other things, the
entity can demonstrate the existence of a market for the output of the intangible asset or the intangible
asset itself or, if it is to be used internally, the usefulness of the intangible asset.
(e) The availability of adequate technical, financial and other resources to complete the development and
to use or sell the intangible asset.
(f) Its ability to measure reliably the expenditure attributable to the intangible asset during its
development.

II. In the development phase of an internal project, an entity can, in some instances, identify an intangible
asset and demonstrate that the asset will generate probable future economic benefits. This is because
the development phase of a project is further advanced than the research phase.

III. Examples of development activities are:

(a) The design, construction and testing of pre-production or pre-use prototypes and models;
(b) The design of tools, jigs, moulds and dies involving new technology;
(c) The design, construction and operation of a pilot plant that is not of a scale economically feasible for
commercial production; and
(d) The design, construction and testing of a chosen alternative for new or improved materials, devices,
products, processes, systems or services.

IV. Internally generated brands, mastheads, publishing titles, customer lists and items similar in
substance shall not be recognized as intangible assets.

V. Expenditure on internally generated brands, mastheads, publishing titles, customer lists and items similar
in substance cannot be distinguished from the cost of developing the business as a whole. Therefore,
such items are not recognized as intangible assets.

Measurement Subsequent to Acquisition

Cost model. After initial recognition the benchmark treatment is that intangible assets should
be carried at cost less any amortization and impairment losses.

Revaluation model. Intangible assets may be carried at a revalued amount (based on fair
value) less any subsequent amortization and impairment losses only if fair value can be
determined by reference to an active market. Such active markets are expected to be
uncommon for intangible assets.

Classification of Intangible Assets Based on Useful Life

Intangible assets are classified as:

 Indefinite life: No foreseeable limit to the period over which the asset is expected to generate
net cash inflows for the entity.
 Finite life: A limited period of benefit to the entity.

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 UNIVERSITY OF NUEVA CACERES
City of Naga
COLLEGE OF BUSINESS AND ACCOUNTANCY
Comprehensive Accounting A/Y 2018-2019

FINANCIAL ACCOUNTING AND REPORTING JSD

Measurement Subsequent to Acquisition of Intangible Assets with Finite Lives

The cost less residual value of an intangible asset with a finite useful life should be amortized over that
life:

 The amortization method should reflect the pattern of benefits.

 If the pattern cannot be determined reliably, amortize by the straight-line method.
 The amortization charge is recognized in profit or loss unless another PFRS requires that it be
included in the cost of another asset.
 The amortization period should be reviewed at least annually.
 The asset should also be assessed for impairment in accordance with PAS 36.

Measurement Subsequent to Acquisition of Intangible Assets with Indefinite Lives

 An intangible asset with an indefinite useful life should not be amortized.

 Its useful life should be reviewed each reporting period to determine whether events and
circumstances continue to support an indefinite useful life assessment for that asset. If
they do not, the change in the useful life assessment from indefinite to finite should be accounted
for as a change in an accounting estimate.
 The asset should also be assessed for impairment in accordance with PAS 36.

Key Principles on Certain Intangible Assets

Patents

 An exclusive right granted by the government to an inventor to control the manufacture, use or sale
of an invention
 Cost – Licensing and registration fees only for APPLIED AND REGISTERED patents and purchase
price and any directly attributable expenditure necessary in preparing the asset for its intended use
for PURCHASED PATENTS.
 Principles on amortization:
 Amortization is based on the useful life or legal life (20 years), which ever is shorter.
 If a competing patent is acquired to protect an original patent. The cost of the new patent
and the carrying amount of the original patent is amortized over the remaining life of the
original patent.
 If a related patent is acquired to extend the life of an existing patent. The cost of the new
patent and the carrying amount of the original patent is amortized over the extended
period, unless if the remaining life of the new patent is shorter than the extended period.

Goodwill

 An unidentifiable intangible asset that allows an enterprise to earn above normal income how
 It is only purchased goodwill that is recognized as an asset which is the cost in excess of the fair value
of the net assets acquired in a business combination. This the premium paid in acquiring another
business or ordinary shares when control is achieved. Countless of times goodwill is referred to as
BADWILL because seemingly the purchaser had gotten fleeced in the sale of the net assets of the seller.
 Internally generated goodwill shall not be recognized as an asset.
 Impairment of goodwill is discussed in Hand Out #22

 Methods of estimating goodwill

 Capitalization of “average excess earnings”

 Capitalization of “average earnings”
 Purchase or multiples of “average excess earnings”
 Present value of “average excess earnings”

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 UNIVERSITY OF NUEVA CACERES
City of Naga
COLLEGE OF BUSINESS AND ACCOUNTANCY
Comprehensive Accounting A/Y 2018-2019

FINANCIAL ACCOUNTING AND REPORTING JSD

EXAMPLE : Lets assume that a buyer is planning to buy the business of a competitor. The cumulative net earnings for the
past 5 years was P18,000,000. The current value of net assets of the seller was 10,000,000 only. Meaning if the buyer is
able to acquire the assets and assume the liabilities at fair value, the purchase price would only be 10,000,000. But let us
say that buyer will account for the past performance of the seller and determine it as a contributor to additional income in
the future from the purchase of the seller’s business. Goodwill is determined by the following assuming a 20 percent rate of
return and a 25% capitalization rate?

Average earnings (18M / 5) 3,600,000

Less: Normal earnings (10M x 20%) 2,000,000
Excess earnings or earnings from goodwill 1,600,000
Capitalized at 25% or divided by 25%
Goodwill 6,400,000

 The purchase price will then be 16,400,000 which is the price at fair
value plus the goodwill added to the fair value.
 A multiplier of let’s say 3 years if the “multiples of excess earnings”
is used or a PV factor of 3.17 if the discount rate is 10% and 4 periods
shall be used to compute for goodwill if for example the “PV of excess
earnings” will be used.

Average earnings (18M / 5) 3,600,000

Capitalized at 25% or divided by 25%
Purchase price 14,400,000

 Remember from above that 2M came from the net assets and 1.6M
came from goodwill. That’s why if you add the two together the 3.6M
comes from the net assets with the goodwill or simply the purchase
price.

Trademark

 An exclusive right granted by the government that permits the use of distinctive symbols, labels, and
designs associated with the product or the organization.

 Cost – Licensing and registration fees only for developed trademarks Cost of research, survey, design
and development cost is expensed.

 The legal life of a trademark is 10 years however it may be renewed for an additional 10 year period
for an unlimited number of times. Therefore the legal life of a trademark is indefinite and is not subject
to amortization but instead tested for impairment.

Computer Software

 IF the software is an integral part of the hardware for example the operating system of the PC, the
cost of the software shall be included in hardware cost

 Internally developed (whether for use or sale) charge to expense until technological feasibility is
achieved

 Cost to develop the software shall be capitalized once technological feasibility is reached either from
the creation of a “working model or a detailed program design”. Probable future benefits, intent and
ability to use or sell the software, resources to complete the software, and ability to measure cost are
also requirements for capitalization.

 Development activities have concluded and commercial production shall commence once the final or
“beta” version of the software has been produced. In accounting specially in US GAAP, the final
version is known as the “product master”
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 UNIVERSITY OF NUEVA CACERES
City of Naga
COLLEGE OF BUSINESS AND ACCOUNTANCY
Comprehensive Accounting A/Y 2018-2019

FINANCIAL ACCOUNTING AND REPORTING JSD

 The amortization method for computer software should reflect the pattern in which the asset’s future
economic benefits are expected to be consumed by the entity. If such pattern cannot be determined
reliably, the straight-line method is used.

Leasehold Improvements

 Permanent upgrading on leased property under an operating lease.

 This is a tangible asset by nature, however classified as an intangible asset because its an asset where
the ownership is not with the lessee who constructed or added the cost to the leased property but
ownership is with the lessor since the improvements cannot be detached or taken by the lessee at the
expiration of the leaseterm. This will be subject to amortization.
 If the lease contract is nonrenewable, the LHI is simply amortized using the shorter period between the
remaining leaseterm and the useful life of the LHI.
 If the lease is renewable, the additional period shall be added to the remaining leaseterm if the extention
option has already been exercise or the intention to renew is certain. This total period will be the one
compared to the life of the LHI.

- - END - -

PROBLEM SOLVING EXERCISES

Presented below is a list of items that could be included in the intangible assets section of the balance sheet.
1. Cost of purchasing a patent from an inventor.
2. Unrecovered costs of a successful legal suit to protect the patent.
3. Cost of purchasing a copyright.
4. Long-term receivables.
5. Cost of purchasing a trademark.
6. Cost of developing a trademark.
7. Research and development costs.
8. Cost of conceptual formulation of possible product alternatives.
9. Legal costs incurred in securing a patent.
10. Cost of developing a patent.
11. Timberland.
12. Lease prepayment (6 months’ rent paid in advance).
13. Cost of searching for applications of new research findings.
14. Operating losses incurred in the start-up of a business.
15. Purchase cost of a franchise.
16. Goodwill generated internally.
17. Goodwill acquired in the purchase of a business.
18. Cost of testing in search for product alternatives.
19. Training costs incurred in start-up of new operation.
20. Costs incurred in the formation of a corporation.
21. Cost of equipment obtained.
22. Cost of engineering activity required to advance the design of a product to the manufacturing stage.
23. Investment in a subsidiary company.
Instructions
(a) Indicate which items on the list above would generally be reported as intangible assets in the balance sheet.
(b) Indicate how, if at all, the items not reportable as intangible assets would be reported in the financial statements.

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 UNIVERSITY OF NUEVA CACERES
City of Naga
COLLEGE OF BUSINESS AND ACCOUNTANCY
Comprehensive Accounting A/Y 2018-2019

FINANCIAL ACCOUNTING AND REPORTING JSD

Williams Inc. has the following amounts included in its general ledger at the end of the current year.

Organization costs P120,000

Trademarks 150,000
Discount on bonds payable 45,000
Deposits with advertising agency for ads to promote goodwill of company 25,000
Excess of cost over fair value of net identifiable assets of acquired subsidiary 750,000
Cost of equipment acquired for research and development projects; the equipment has an alternative
future use 300,000
Costs of developing a secret formula for a product that is expected to be marketed for at least 20 years
800,000

Instructions
(a) On the basis of the information above, compute the total amount to be reported by Williams for intangible assets on
its balance sheet at year-end. Equipment has alternative future use.
(b) If an item is not to be included in intangible assets, explain its proper treatment for reporting purposes.

1. Tartabull purchased a patent from Vania Co. for P2,000,000 on January 1, 2012. The patent is being amortized over its
remaining legal life of 10 years, expiring on January 1, 2022. During 2014, Tartabull determined that the economic
benefits of the patent would not last longer than 7 years from the date of acquisition. What amount should be reported
in the balance sheet for the patent, net of accumulated amortization, at December 31, 2014?

2. Tartabull bought a franchise from Alexander Co. on January 1, 2013, for P800,000. The carrying amount of the
franchise on Alexander’s books on January 1, 2013, was P600,000. The franchise agreement had an estimated useful life
of 20 years. Because Tartabull must enter a competitive bidding at the end of 2022, it is unlikely that the franchise will
be retained beyond 2022. What amount should be amortized for the year ended December 31, 2014?

3. On January 1, 2013, Tartabull incurred organization costs of P500,000. What amount of organization expense should
be reported in 2014?

4. Tartabull purchased the license for distribution of a popular consumer product on January 1, 2014, for P400,000. It is
expected that this product will generate cash flows for an indefinite period of time. The license has an initial term of 5
years but by paying a nominal fee, Tartabull can renew the license indefinitely for successive 5-year terms. What amount
should be amortized for the year ended December 31, 2014?

During 2008, Burks Corporation spent P510,000 in research and development costs. As a result, a new product called the
New Age Piano was patented. The patent was obtained on October 1, 2010, and had a legal life of 20 years and a useful
life of 10 years. Legal costs of P54,000 related to the patent were incurred as of October 1, 2010. During 2008, Burks
Corporation spent P510,000 in research and development costs. As a result, a new product called the New Age Piano
was patented. The patent was obtained on October 1, 2010, and had a legal life of 20 years and a useful life of 10 years.
Legal costs of P54,000 related to the patent were incurred as of October 1, 2010.

Instructions
(a) Prepare all journal entries required in 2010 and 2011 as a result of the transactions above.
(b) On June 1, 2012, Burks spent P28,440 to successfully prosecute a patent infringement. As a result, the estimate of
useful life was extended to 12 years from June 1, 2010. Prepare all journal entries required in 2012 and 2013.
(c) In 2014, Burks determined that a competitor’s product would make the New Age Piano obsolete and the patent
worthless by December 31, 2015. Prepare all journal entries required in 2014 and 2015.

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 UNIVERSITY OF NUEVA CACERES
City of Naga
COLLEGE OF BUSINESS AND ACCOUNTANCY
Comprehensive Accounting A/Y 2018-2019

FINANCIAL ACCOUNTING AND REPORTING JSD

Thomas Industries has the following patents on its December 31, 2014, balance sheet.

Patent Item Initial Cost Date Acquired Useful Life at Date Acquired
Patent A P48,000 3/1/11 20 years
Patent B P19,200 7/1/12 10 years
Patent C P16,800 9/1/13 8 years

The following events occurred during the year ended December 31, 2015.
1. Research and development costs of P347,000 were incurred during the year.
2. Patent D was purchased on July 1 for P10,800. This patent has a useful life of 12 years.
3. As a result of reduced demands for certain products protected by Patent B, a possible impairment of Patent B’s value
may have occurred at December 31, 2015. The controller for Thomas estimates the future cash flows from Patent B will
be as follows.

Year Future Cash Flows

2016 P2,500
2017 P2,500
2018 P2,500

The proper discount rate to be used for these flows is 8%. (Assume that the cash flows occur at the end of the year.)

Instructions (a) Compute the total carrying amount of Thomas’s patents on its December 31, 2014, balance sheet.
(b) Compute the total carrying amount of Thomas’s patents on its December 31, 2015, balance sheet.

Presented below is information related to copyrights owned by Fielder Company at December 31, 2014.
Cost P10,450,000
Carrying amount 6,320,000
Expected future net cash flows 5,000,000
Fair value 3,850,000

Assume that Fielder Company will continue to use this copyright in the future. As of December 31, 2014, the copyright is
estimated to have a remaining useful life of 10 years.

Instructions
(a) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2014. The company does
not use accumulated amortization accounts.
(b) Prepare the journal entry to record amortization expense for 2015 related to the copyrights.
(c) The fair value of the copyright at December 31, 2015, is P4,800,000. Prepare the journal entry (if any) necessary to
record the increase in fair value.

Tettleton Company incurred the following costs during the current year in connection with its research and
development activities.

Cost of equipment acquired that will have alternative uses in future research and development projects over the next 5
years (uses straight-line depreciation) P300,000
Materials consumed in research and development projects 75,000
Consulting fees paid to outsiders for research and development projects 123,000
Personnel costs of persons involved in research and development projects 215,000
Indirect costs reasonably allocable to research and development projects 48,000
Materials purchased for future research and development projects 72,000

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 UNIVERSITY OF NUEVA CACERES
City of Naga
COLLEGE OF BUSINESS AND ACCOUNTANCY
Comprehensive Accounting A/Y 2018-2019

FINANCIAL ACCOUNTING AND REPORTING JSD

Instructions Compute the amount to be reported as research and development expense by Tettleton on its income
statement for the current year. Assume equipment is purchased at the beginning of the year.

MULTIPLE CHOICE EXERCISES

1. Long lived properties items having no physical existence and whose value lies in the rights, privileges and advantages
they accord to the owner; identifiable non-monetary assets without physical substance.
a. Fixed asset c. Intangible Assets
b. Deferred Charges d. Tangible Assets

2. The original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge
and understanding.
a. Research c. Research and Development
b. Development d. Some other Answer

3. The application of research finding or other knowledge to a plan or design for the production of new or substantially
improved materials, devices, products, processes, systems or services before the start of commercial production or use.
a. Research c. Research and Development
b. Development d. Some other Answer

4. Those costs of materials, personnel, purchased intangibles, contract services and a reasonable allocation of indirect
cost specifically related to research and development activities and which have no alternative future uses.
a. Research expenses c. Research and Development expenses
b. Development expenses d. Some other Answer

5. An exclusive right granted by the government to an inventor enabling him to control the manufacture, sale or other
use of invention for a specified period of time.
a. Franchise c. Public Franchise
b. Patent d. Private Franchise

6. The right to manufacture sell or make use of a patent assigned by the patent owner.
a. License c. Licensee
b. Royalty d. Grant

7. The periodic payment made by the licensee to the patent holder as compensation for the assignment to the former of
the latter's patent rights
a. License c. License Fee
b. Royalty d. Grant

8. An exclusive right given to an applicant to publish or sell any literary, musical or artistic work
a. Franchise c. Copyright
b. License d. Answer not given

9. Any distinguishing device, symbol, label or name used to differentiate a product, article, business or services from
others
a. Registered name c. Brand name
b. Tradename or Trademark d. Label

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 UNIVERSITY OF NUEVA CACERES
City of Naga
COLLEGE OF BUSINESS AND ACCOUNTANCY
Comprehensive Accounting A/Y 2018-2019

FINANCIAL ACCOUNTING AND REPORTING JSD

10. A privilege granted by the government permitting a monopoly, or the use of public property subject to government
regulations
a. Franchise c. Public Franchise
b. Patent d. Private Franchise

11. A privilege often exclusive given to distributor or dealer by a manufacturer, to sell the manufacturer's product within
a specified territory; also called a distributor or dealership.
a. Franchise c. Public Franchise
b. Patent d. Private Franchise

12. Alterations or improvements made by the lessee on leased property

a. Leasehold improvements c. Operating lease
b. Leased premises d. Finance lease

13. The present value of the amount by which earnings of the business exceed a normal or basic return on its net assets
exclusive of goodwill
a. Goodwill c. Negative Goodwill
b. Franchise d. Some other Answer

14. Expenditures incurred in connection with the original incorporation and promotion of an enterprise.
a. Deferred Charges c. Pre-operating costs
b. Organization Expenses d. Promoters and underwriters fee

15. Advance payments made for services or supplies which have not been utilized by the business, and which are
expected to be consumed in the next accounting period or operation cycle whichever is longer
a. Prepaid Expenses c. Pre operating costs
b. Deferred Charges d. Advances

16. Expenditures which are applicable to operations of future accounting periods

a. Prepaid Expenses c. Pre operating costs
b. Deferred Charges d. Advances

17. Which of the following is not a characteristic of an intangible asset?

a. Physically exists c. Relatively long lived
b. Confers certain rights d. Value highly uncertain

18. Which of the following is an example of an intangible asset with unlimited life
a. Copyrights c. Trademarks and Trade names
b. Patents d. Some other Answer

19. Which of the following is an identifiable intangible asset?

a. Patents c. Goodwill
b. Copyrights d. Licenses

20. At the time of acquisition, an intangible asset may be valued at

a. cash paid c. the present value of amount to be paid
b. fair value of non-cash asset given up d. Any of the above

21. Which of the following is generally used in amortizing intangible assets subject to amortization?
a. straight line method c. scientific method
b. unit of production method d. Kairus triple declining method

22. Deferred charges

a. are payments for services which have not yet been utilized by the business

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 UNIVERSITY OF NUEVA CACERES
City of Naga
COLLEGE OF BUSINESS AND ACCOUNTANCY
Comprehensive Accounting A/Y 2018-2019

FINANCIAL ACCOUNTING AND REPORTING JSD

b. are cash received or other assets recognized for goods and services that are to be supplied in the future
periods
c. represents that portion of an expenditure for a service made prior to the balance sheet date and which will be
consumed in the normal operating cycle
d. are prepayments for services or benefits that are to be received over a number of years.

23. Deferred charges classification in the balance sheet sometimes contains heterogeneous items. Which of the
following should not be included under the deferred charges classification
a. Unamortized bond discount
b. Pre operating expenses
c. Research and development costs
d. Deferred pension cost

24. Which of the following items is a research activity?

a. The design, construction and testing of a chosen alternative for new or improved materials, devices, products
processes, systems or services
b. The formulation, design, evaluation and final selection of possible alternatives for new or improved materials,
devices, products, processes, systems or services
c. The design of tools, jigs, moulds and dies involving new technology
d. The design, construction and operation of a pilot plant that is not of a scale economically feasible for
commercial production

25. Which of the following items is a development activity?

a. Activities aimed at obtaining new knowledge
b. The search for, evaluation and final selection of, applications of research findings or other knowledge
c. The design, construction and testing of pre-production or pre use prototypes and models
d. The search for alternatives for materials, devices, products, processes, systems or services

26. Which is incorrect concerning acquisition of an intangible asset as part of a business combination?
a. The cost of the intangible asset is based on its fair value at the date of acquisition
b. If there is an active market from the intangible asset, the fair value is equal to the quoted market price which
is usually the current bid price
c. If there is no active market for the intangible asset, the fair value is equal to the amount that would be paid by
the entity in an arm's length transaction between knowledgeable and willing parties.
d. The fair value of an intangible asset acquired in a business combination cannot be measure with sufficient
reliability separately from goodwill.

27. The cost of internally generated assets includes all of the following except
a. Cost of materials and services used in generating the intangible asset.
b. Compensation cost of personnel directly engaged in generating the asset.
c. Fees to register a legal right
d. Expenditure on training staff to operate the asset.

28. The following expenditures shall be expensed when incurred, except

a. Start up costs
b. advertising and promotion costs
c. Business relocation or reorganization costs
d. Payment in advance of delivery of goods or the rendering of services

29. Which statement is correct concerning amortization of intangible assets?

I. Intangible assets with limited or finite life are amortized over their useful life
II. Intangible assets with indefinite life are not amortized but are tested for impairment at least weekly.

a. I only
b. II only
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 UNIVERSITY OF NUEVA CACERES
City of Naga
COLLEGE OF BUSINESS AND ACCOUNTANCY
Comprehensive Accounting A/Y 2018-2019

FINANCIAL ACCOUNTING AND REPORTING JSD

c. Both I and II
d. Neither I nor II

30. Directly attributable costs of preparing the intangible asset for its intended use include all of the following except

a. Cost of employee benefits arising directly from bringing the asset to its working condition
b. Professional fees arising directly from bringing the asset to its working condition
c. Costs of testing whether the asset is functioning properly
d. Initial operating losses

31.Which of the following statements concerning financial statement presentation is not a true statement?
a. Intangibles are reported separately under Intangible Assets.
b. The balances of major classes of assets may be disclosed in the footnotes.
c. The balances of the accumulated depreciation of major classes of assets may be disclosed in the footnotes.
d. The balances of all individual assets, as they appear in the subsidiary plant ledger, should be disclosed in the
footnotes.

32.Intangible assets
a. should be reported under the heading Property, Plant, and Equipment.
b. are not reported on the balance sheet because they lack physical substance.
c. should be reported as Current Assets on the balance sheet.
d. should be reported as a separate classification on the balance sheet.

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.

33. Amortization of intangibles for 2002 is:

a. P10,870 b. P12,870 c. P16,870 d. P18,870

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

a P42,000 b P141,000 c P158,130 d. P202,830

35.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.

36. 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:
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 UNIVERSITY OF NUEVA CACERES
City of Naga
COLLEGE OF BUSINESS AND ACCOUNTANCY
Comprehensive Accounting A/Y 2018-2019

FINANCIAL ACCOUNTING AND REPORTING JSD

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

37. 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

38.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

THANK YOU!

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