14-1. The decision whether a given expenditure on intangible asset to be treated as expense or asset requires judgment. Expenditure giving rise to future benefits will be classified as assets while those expenditure the future benefits from which are uncertain are charged of as expense in the year incurred. The expected benefit from the intangible assets can be assessed in terms of the following:
a) Patents: Actual production of the goods covered by the patent
b) Goodwill: Review of actual excess income as well as actual income of the investee
c) Trademark / Tradename: Continuous production of the product covered by the trademark/tradename.
14-2. Research and Development Costs vary widely among companies. Many expenditures do have future worth, while others are so highly uncertain as to future value that recording them as assets is clearly improper.
The auditor’s interest in auditing Research and Development costs stems from the objective of determining whether they should be deferred or charged against current operations. He shall be guided by GAAP in judging whether the client’s treatment of the Research and Development Costs is justified or not.
14-3. Menfro, Inc.
The rapid amortization of the leasehold for the first twelve (12) years resulted to an understatement of income totaling to P60,000:
Correct amortization P450,000 x 12 P270,000 20
Amortization per client (P27,500 x 12) 330,000
Over-amortization P 60,000
In view of the above, the amount of P60,000 should be added back to Retained Earnings as correction of prior years’ profits. Furthermore, amortization of P22,500 for the 13th year should be recorded.
These adjustments would result to a net increase in the Retained Earnings balance which will enable the company to declare dividends without depleting the Retained Earnings balance significantly.
CHAPTER
14
SUBSTANTIVE TESTS OF
14-2
14-4. Requirement (a)
The annual depreciation for years 11 to 25 is P1,667. By the end of the 25th year, the building would be fully depreciated. [(50,000 – 25,000) / 15 years)
Requirement (b)
If the original lease had contained a renewal clause for an additional 20 years, the depreciation rate would still be 5%, which is based on the original term of the lease. The renewal of the lease contract is not certain and therefore will not be considered in the determination of the amortization period.
14-5. Process Development Company
Process Development Company Patents Amortization Schedule
Cost as
Description Recorded Amortization Per Client
2 0 1 5 2006 to 2014 T o t a l Adjustment As Adjusted Patent P P 40,000 P1,212.12 P 19,393.94 P 20,606.06 P(5,151.52) P 15,454.54 Q 120,000 3,529.41 56,470.59 60,000.00 (15,000) 45,000.00 R 160,000 4,705.88 75,294.12 80,000.00 (20,000) 60,000.00 P320,000 P9,447.41 P151,158.65 P160,606.06 Less: Adjustment as per BIR requirement 80,000 (2,361.85) (37,789.67) (40,151.52) As Adjusted P240,000 P7,085.56 (a) P113,368.98 (b) P120,454.54 P120,454.54
* Based on 17 years legal life.
(a) 2006 Amortization: P = x 0.5 = P 909.09 Q & R = x 0.5 = 6,176.47 P7,085.56 (b) 2007 to 2014 Amortization: P = x 8 =P 14,545.45 Q & R = x 0.5 = 98,823.53 P113,368.98 30,000 16.5 210,000 17 30,000 16.5 210,000 17
Adjusting Journal Entries
(1) Capital in excess of par value 80,000.00
Patent P 10,000.00
Patent Q 30,000.00
Patent R 40,000.00
To adjust patent valuation to conform to BIR requirement.
(2) Accumulated amortization – Patent P 5,151.52 Accumulated amortization – Patent Q 15,000.00 Accumulated amortization – Patent R 20,000.00
Retained earnings – Correction of prior
years’ profit 40,151.52
To adjust amortization provision from 2006 to 2014.
14-6. Cartwright Corporation
Note to Instructor: For ease of discussion, the adjusting entries in the solution are dated to correspond with the original erroneous journal entries. In actual practice, they would be dated as of the year-end.
Jan. 1 Organization Expenses 17,500
Intangibles 17,500
To classify incorporation fees.
10 Organization Expenses 7,500
Intangibles 7,500
To classify legal fees for the organization of the company.
5 Advertising Expense 15,000
Intangibles 15,000
To expense advertising costs.
Apr. 1 Land 15,000
Building 20,000
Intangibles 35,000
To reclassify land and buildings for R & D activities.
May 15 Research and Development Expenses 15,000*
Intangibles 15,000
To expense materials purchased. * Alternatively, unused materials and
supplies, if material, may be set up as prepaid expenses.
14-4
June 30 Patent 10,000
Intangibles 10,000
To reclassify the patent.
July 1 Income Summary / Retained Earnings 12,000
Intangibles 12,000
To record operating loss.
Dec. 10 Research and Development Expenses 12,000
Intangibles 12,000
To record acquisition of equipment.
31 Research and Development Expenses 30,000
Intangibles 30,000
To expense R & D costs.
31 Research and Development Expenses 750
Accumulated Depreciation: Building 750 To record ¾ year depreciation on R
& D building (20-year life) from April 1 entry.
31 Amortization Expense 250
Patent 250
To record ½ year amortization (20-year life) on June 30 patent.
PAS 38 prohibits capitalization of start-up expenses such as organization costs. No amortization should therefore be recorded.
14-7. Harper, Inc.
Calculation of Goodwill
Average year-end net assets:
(P2,400,000 5) P 480,000
Average annual earnings
(P400,000 5) P 80,000
Less: Normal return on average year-end assets
(10% x P480,000) 48,000
Excess annual earnings P 32,000
Excess annual earnings capitalized at 20% or Goodwill
14-8. Bayer, Inc.
Bayer, Inc. Lead, Inc.
Net tangible assets per records, Nov. 1, 2015 P328,500 P298,500 Add: Agreed increase in value of equipment 40,000
Net adjusted tangible assets P368,500 P298,500 Add: Value of Goodwill (Schedules 1 & 2) 74,900 12,900 Total amount to be paid for net tangible assets
and goodwill P443,400 P311,400
Supporting Computations:
Schedule 1: Goodwill of Bayer, Inc.
Average pre-tax earnings 11.1.10 to 11.1.15 P82,000 Less: Additional annual depreciation equipment taken over
at P40,000 in excess of book value (P40,000 / 5) 8,000
Adjusted pre-tax earnings P74,000
Less: Required earnings on net tangible assets
(15% x P368,500) 55,275
Excess annual pre-tax earnings P18,725
Goodwill (excess earnings capitalized at 25%) P74,900
Schedule 2: Goodwill of Lead, Inc.
Average pre-tax earnings 11.1.10 to 11.1.15 P44,000 Less: Adjustment for effect of organization cost written off
in 2014 (P20,000 / 5) 4,000
Adjusted pre-tax earnings P48,000
Less: Required earnings on net tangible assets
(15% x P298,500) 44,775
Excess annual pre-tax earnings P 3,225
Goodwill (excess earnings capitalized at 25%) P12,900 14-9. Phoenix Supply Company
Requirement (a)
Allocation of the P137,500 cost to the individual assets in the group of assets acquired is based on the relative fair value of the individual assets.
14-6
Asset Appraisal Value Portion of Total Value Total Cost Allocated Cost Patent A P 30,000 30/151.7 x P137,500 = P 27,192 Patent B 40,000 40/151.7 x 137,500 = 36,256 Equipment 19,700 19.7/151.7 x 137,500 = 17,856 Land 62,000 62/151.7 x 137,500 = 56,196 P151,700 P137,500Journal entries for 2013, 2014 and 2015, relative to intangible assets, are as follows: 2013 Apr. 27 Patent A 27,192 Patent B 36,256 Equipment 17,856 Land 56,196 Cash 137,500
To record the acquisition of assets.
Oct. 31 Amortization of Patents 4,230
Patent A (27,192 / 5 x 6/12) 2,719 Patent B (36,256 / 12 x 6/12) 1,511
To record amortization of patents for 2004.
2014
Mar. 7 Legal Expenses 17,600
Cash 17,600
To record legal fees related to defense of patents.
Mar. 7 Amortization of Patents 1,813
Patent A 1,813
To record amortization on Patent A to date of write-off (Nov. 2013 to Feb. 2014).
Mar. 7 Loss on Patent A 22,660
Patent A 22,660
To record write-off of Patent A after unsuccessful defense.
Oct. 31 Amortization of Patents 3,021
Patent B 3,021
To record amortization of Patent B for 2014.
2015
Oct. 31 Amortization of Patents 3,021
Patent B 3,021
To record amortization on Patent B for 2015.
Computations Amortization for 2015: Patent A: (P27,192 / 5 years) (6 / 12) P 2,719 Patent B: (P36,256 / 12 years) (6 / 12) 1,511 P 4,230 Amortization on Patent A, 10/31/2013 – 3/7/2014: (P27,192 / 5 years) (4/12) P 1,813
Book value of Patent A to 3/7/2014:
Cost P27,192
Amortization recognized P2,719
1,813 4,532
P22,660 Amortization for 2014 and 2015:
Patent B: (P36,256/12 years) P 3,021
The cost basis of patent B is P36,256 - P1,511 + P8,800 - P3,546). 2014, a full year’s amortization is taken by dividing the unamortized cost by the remaining useful life. In 2015 this is P39,999/10 ½ years or P3,809.
Requirement (b)
The legal costs of a court defense should be charged to expense whether the suit is won or lost because it does not meet the recognition criteria. Also, the unsuccessful defense implies that Patent A is of no further value to the company and leads to the write-off of the remaining unamortized cost of that patent.
14-8
14-10. Balagtas Enterprises
Requirement (a)
Patents
1. Balance before adjustment, 12/31/15 P550,000 Correction: Deduct unamortized balance of P75,000
expenditures incorrectly debited to account on 1/1/03:
P75,000 x (7 years/10 years) (52,500) [AJE (1)] Corrected balance before 2015 amortization P497,500
2. 2015 Amortization
Patent having two years remaining life
Unamortized cost: P210,000 x (7 years/14 years)
= P105,000 Amortization: P105,000/2 P 52,500 Remaining Patents Unamortized cost: P497,500 - P105,000 = P392,500 Amortization: P392,500/7 56,071 P108,571 [AJE (2)] Franchise Agreement
1. Balance before adjustment, 12/31/15 P 95,000
Correction: Deduct periodic payment charged to account (45,000) [AJE (3)] Corrected balance before 2015 amortization P 50,000 2. 2015 Amortization:
P50,000 / 5 years P 10,000 [AJE (4)]
Organization Costs
1. Balance before adjustment, 12/31/15 P102,000 Correction: Legal fees incorrectly charged to
Goodwill account in 2007 P45,000 [AJE (5)] Amortization of above costs,
1998 - 2004 (P45,000 / 40) (7 years) 7,875 37,125 [AJE (6)]
P139,125 [AJE (7)]
2. No amortization need be taken up in 2015. With the effectivity of PAS 38 which does not allow deferment or capitalization of organization costs, the entire balance of this account, should have been charged off against income in 2013. Adjusting entry in 2015 will be:
Retained earnings – Prior period
adjustment 139,125
Goodwill
1. Balance before adjustment, 12/31/15 P345,000 Correction: Reclassification of legal fees
to Organization Costs ( 45,000)
Reclassification of advertising fee to Advertising Expense (100,000) Amortization on Goodwill for 2013
(P200,000 / 40 years) ( 5,000)
Balance 12.31.13 P195,000
2. Effective January 2005, Revised PAS 36 prohibits amortization of intangibles with indefinite life - Goodwill being one of them. Hence, no amortization would be taken up starting 2005. Assessment for possible impairment should be done annually or whenever there is an indication that the asset may be impaired.
Adjusting Journal Entries:
Patents
AJE (1) Retained Earnings 52,500
Patents 52,500
AJE (2) Cost of Goods Sold 108,571
Patents 108,571
Franchise Agreement
AJE (3) Selling and Administrative -
Franchise Expense 45,000
Franchise Agreement 45,000
AJE (4) Selling and Administrative
Expense 10,000
Franchise Agreement 10,000
Organization Cost
AJE (5) Organization Costs 45,000
Goodwill 45,000
AJE (6) Retained Earnings 7,875
Organization Costs 7,875
AJE (7) Retained Earnings 139,125
14-10
Goodwill
AJE (8) Selling and Administrative –
Advertising Expense 100,000
Goodwill 100,000
AJE (9) Retained Earnings 5,000
Goodwill 5,000
Requirement (b)
(1) Retained Earnings 204,500
Selling and Administrative –
Franchise Expense 45,000
Selling and Administrative –
Advertising Expense 100,000 Organization Costs 102,000 Franchise Agreement 45,000 Goodwill 150,000 Patents 52,500 Summary: Retained Earnings (Dr.) Cr. AJE (1) (52,500) (7) (139,125) (9) 5,000 (6) 7,875 (204,500) Organization Costs Dr. (Cr.) AJE (5) 45,000 (6) (7,875) (7) (139,125) (102,000) Goodwill Dr. (Cr.) AJE (5) 45,000 (8) 100,000 (9) 5,000 150,000
(2) Cost of Goods Sold 108,571
Selling and Administrative Expense 10,000
Patents 108,571
14-11. Balagtas Company
Requirement (a)
The deficiencies listed below are apparent from the balance sheet and the explanations given. The assumption is made that costs incurred have been properly classified by Mr. Balagtas. The correct treatment of each item is presented in the column on the right.
Deficiency Correct Treatment
1. Capitalization of expenses: Research and development Marketing research
Personnel recruitment and training Legal fees relative to organization of the corporation
Operating expenses
Treat all the items as expenses in 2015 income statement.
2. No depreciation was taken on machinery.
Expense appropriate amounts in the 2015 income statement.
3. Ordinary shares account does not reflect the par value of the outstanding shares (11,000).
Increase ordinary shares by par value of 1,000 shares.
4. No statement of shareholders’ equity and explanation of shares issued is presented.
The statement should be provided, including dates and numbers of shares issued, peso amounts assigned, and the bases for assigning peso values in noncash transactions. Also, land given by Mario should be recorded at fair value; services by Pedro should be recognized as an expense at fair value. Additional paid-in capital may be recognized as the result of the above.
5. No accumulated deficit presented. “Deficit accumulated during development stage” should be included in the shareholders’ equity section. The amount results from corrections made in items 1 and 2 above.
14-12
Requirement (b)
Additional items which should be included are:
1. Income statement, including amounts of revenue and expenses recognized since the inception of the enterprise in 2015.
2. Statement of cash flows, including cumulative amounts of sources and uses of cash since the inception of the enterprise.
3. Additional disclosures: identification of the company as a development-stage enterprise, and description of significant development-stage activities. 14-12. Nikko Corporation
Requirement (a)
In a purchase transaction, assets are recorded at their acquisition price, which becomes the cost basis to the acquiring corporation. The book values of the assets for Rain Company are irrelevant.
Requirement (b)
When a price is paid for a group of assets, the total price must be allocated to the individual assets. Because we know neither the total fair value of the tangible and other intangible assets acquired from Rain Company nor the price to be paid by the Nikko Corporation, we cannot determine whether Nikko Corporation has any goodwill to record. The total price to be paid by the Nikko Corporation is indefinite but it may be estimated by discounting the expected receipts (1% of net sales) at the end of each of the next 5 years and adding the initial P450,000 cash payment. If the estimated purchase price exceeds the sum of the estimated fair values of the tangible and other assets purchased, then the excess may be recorded as goodwill.
14-13. Golden Springs Shopping Center, Inc.
Interest on mortgage bonds: An amount equal to the interest cost incurred in 2013 (P60,000) is clearly a cost that can be associated with the normal construction period and can be regarded as a normal element of the capitalized cost of the physical assets of the shopping center because the construction period would have ended at the end of the year if the typhoon had not occurred. The decision to use debt capital to finance the shopping center was made with full knowledge that interest would accrue during the construction period and add to the total cost of building the center and bringing it to the point at which it would produce revenue. The future income to be generated by the shopping center must have been estimated to be more than sufficient to recover all of the expected costs of
building the center and preparing it for occupancy, including interest during the construction period.
Instead of treating interest during construction as an element of the cost of the physical assets, it can be argued that it represents an element of the general cost of bringing the business to the point of revenue production and should therefore be treated as an organization cost. This view regards interest during construction as just another of the many expenditures that are necessary to acquire and organize the physical assets of a new business but do not attach to any specific assets. Treated as an organization cost, interest during construction would be expensed as a start-up cost.
Another alternative to capitalizing an amount equal to the 2013 interest cost is to treat it as interest expense. This treatment is inappropriate because it assumes that the decision to use debt capital to finance construction is a decision deliberately to incur an expense for the interest that accrues during the expected construction period.
The extension of the construction period to October 2014 because of the typhoon was externally imposed and so the interest capitalization period continues until final construction is complete. That is, the additional interest cost is capitalized and not expensed as a loss from the typhoon.
Cost of obtaining tenants: Both the 2013 and 2014 costs of obtaining tenants should be capitalized and amortized over the life of the leases. The fact that all of the tenants who were signed when the typhoon occurred accepted the October occupancy date indicates that the total cost of obtaining tenants was not affected by the delay.
The cost of obtaining tenants has a direct and easily identifiable relationship to the rental income to be earned over the terms of the leases. Under these circumstances, the problem of reliably measuring periodic net income is best solved by matching costs with the revenues to which they are directly related. Promotional advertising: The 2013 cost of promotional advertising should be written off as a start-up cost. The 2014 cost of promotional advertising should also be expensed.
The initial expense treatment of the 2013 advertising cost is appropriate because it is a start-up cost.
The 2014 advertising cost may also be considered as a start-up cost or simply expensed as advertising cost incurred.
14-14. Lee Manufacturing Corporation
Lee Manufacturing Corporation Financial Statement Worksheet For the Year Ended December 31, 2015
Trial Balance Adjustments Income Statement Balance Sheet General Ledger Accounts Debit Credit Debit Credit Debit Credit Debit Credit
Cash P 61,000 P 61,000
Accounts receivable 92,500 (8) P 2,500 95,000
Allowance for doubtful accounts P 500 (500)
Inventories 38,500 38,500 Machinery 75,000 (1) 17,000 92,000 Equipment 29,000 (8) 8,500 37,500 Accumulated depreciation 10,000 (10,000) Patents 85,000 (1) P 17,000 68,000 Leasehold improvements 26,000 (8) 11,000 15,000 Prepaid expenses 10,500 10,500 Organization costs 29,000 (9) 29,000 Goodwill 24,000 (7) 24,000
Licensing agreement no. 1 50,000 (4) 1,250 19,500
(5) 29,250
Licensing agreement no. 2 49,000 (3) 1,000 50,000
Accounts payable 147,500 P 147,500
Unearned revenue 12,500 (3) 1,000 13,500
Capital stock 300,000 300,000
Retained earnings, Jan. 1, 2015 27,000 (27,000)
Sales 768,500 P 768,500
Cost of goods sold 454,000 (2) 3,400 P 464,400
(6) 5,500
(10) 1,500
Selling and general expenses 173,000 (7) 8,000 181,000
Start-up expenses (7) 16,000 45,000 (9) 29,000 Interest expense 3,500 3,500 Extraordinary losses 12,000 12,000 Accumulated amortization: patents (2) 3,400 (3,400) Accumulated amortization: leasehold improvements (10) 3,000 (3,000) Accumulated amortization: licensing agreements (6) 5,500 (5,500)
Prior period adjustment – licensing agreement no. 1
(4) 1,250
(5) 29,250
(30,500) *
Prior period adjustment – amortization of leasehold
improvements (10) 1,500 (1,500) *
Net income for 2015 62,600 62,600
Totals P1,239,000 P1,239,000 P124,400 P124,400 P 768,500 P 768,500 P 470,600 P 470,600
* Generally, adjustments in the current period that could have been determined by management in a prior period should enter into the determination of net income in the current period. However, because the 2015 financial statements were not prepared in conformity with generally accepted accounting principles, these retroactive adjustments are considered to be errors and treated as prior period adjustments and, therefore, should be applied against beginning retained earnings.
14-14. Lee Manufacturing Corporation (continued . . . )
Adjusting entries (shown on worksheet):
(1) Machinery 17,000
Patents 17,000
To transfer cost of improving machinery to the fixed asset account.
(2) Cost of Goods Sold 3,400
Accumulated Amortization: Patents 3,400
To record 2015 patent amortization (1/20 x P68,000).
(3) Licensing Agreement No. 2 1,000
Unearned Revenue 1,000
To classify revenue received in advance on licensing agreement as unearned revenue.
(4) Prior Period Adjustment – Licensing Agreement
No. 1 1,250
Licensing Agreement No. 1 1,250
To take up 2014 amortization (40 year life). (Note 1)
Note 1: Under the revised PAS 38 made effective January 1, 2005, intangible assets with indefinite useful lives need not be amortized but periodically assessed for possible impairment. This problem may also be solved by disregarding the 40-year amortization period for Licensing Agreement #1. The flood that rendered Licensing Agreement #1 worthless in January 2016 should be fully disclosed in the December 31, 2015 statements.
(5) Prior Period Adjustment – Licensing Agreement
No. 1 29,250
Licensing Agreement No. 1 29,250
To write off the permanent 60% reduction in the expected revenue-producing value of licensing agreement no. 1 caused by the December 2014 explosion (60% x P48,750).
14-16
(6) Cost of Goods Sold 5,500
Accumulated Amortization: Licensing
Agreements 5,500
To record 2015 amortization of licensing agreement no. 1 [(P50,000 – P1,250 – P29,250) 39] and no. 2 (P50,000 10).
(7) Selling and General Expenses 8,000
Start-up Expenses 16,000
Goodwill 24,000
To transfer items improperly charged to Goodwill.
(8) Start-up Expenses 29,000
Organization Costs 29,000
To expense other organization costs.
(9) Equipment 8,500
Accounts Receivable – Lessor 2,500
Leasehold Improvements 11,000
To charge the Equipment account with movable equipment and to record a receivable from the landlord for the real estate taxes erroneously paid by Lee.
(10) Cost of Goods Sold 1,500
Prior Period Adjustment – Amortization of
Leasehold Improvements 1,500
Accumulated Amortization: Leasehold
Improvements 3,000
To record 2014 and 2015 amortization of leasehold improvements based on 10-year life of lease (2 x 10% x P15,000).
14-15. Broadway Corporation
Requirement (1)
Broadway Corporation Intangibles Section of Balance Sheet
December 31, 2015 Franchise from IE Copy Service, Inc., net of
accumulated amortization of P6,870 (Schedule 1) P 61,830 Patent, net of accumulated amortization of P2,050
(Schedule 2) 14,350
Trademark, net of accumulated amortization of
P7,294 (Schedule 3) 42,706
Total intangibles P118,886
Schedule 1:
Computation of Franchise from IE Copy Service, Inc. Cost of franchise at January 1, 2015
Down payment P25,000
Present value of installments 43,700
Initial amount capitalized P68,700
Amortization of franchise for 2015 (P68,700 10
years) (6,870)
Franchise balance, December 31, 2015 P61,830
Schedule 2:
Computation of Patent Capitalized cost of patent at January 2, 2015 – legal
fees and other costs associated with registration P16,400 Amortization of patent for 2015 (P16,400 8 years) (2,050)
14-18
Schedule 3: Computation of Trademark Cost Accumulated AmortizationCost of trademark at July 1, 2012 P40,000 Amortization through December 31, 2015
(P40,000 20 years = P2,000 x 3 ½ years) P7,000
Balance, December 31, 2015 P40,000 P7,000
Deduct accumulated amortization (7,000) Trademark balance, December 31, 2015 P33,000
Cost of successful litigation in defense of trademark should be charged to expense.
Requirement (2)
Broadway Corporation
Expenses Resulting from Intangibles Transactions For the Year Ended December 31, 2015 Franchise from IE Copy Service, Inc.
Amortization of franchise (Schedule 1) P 6,870 Franchise fee on revenues from operations
(P900,000 x 5%) 45,000
Imputed interest expense on unpaid balance of
initial franchise fee (P43,700 x 14%) 6,118 P57,988
Amortization of patent (Schedule 2) 2,050
Litigation expense – Trademark 10,000
Amortization of trademark 2,000
Total expenses P72,038
14-16. Precious Opal Corporation
(a) 2015 amortization: P16,000 10 = P1,600. 12/31/06 book value: P16,000 – P1,600 = P14,400. 2016 amortization: (P16,000 10) = P1,600. 12/31/07 book value: (P16,000 – P3,200) = P12,800. (b) 2016 amortization: (P12,800) 4 = P3,200. 12/31/16 book value: P12,800 – P3,200 = P9,600.
Legal fees in successfully defending the trade name should be charged to expense.
(c) Carrying amount (P19,733) > Fair Value (P15,000); thus the tradename fails the recoverability test. The new carrying value is P15,000.
The fair value is considered the recoverable amount. The estimated total future flows from the trade name of P16,000 need to be discounted and the resulting present value would in most probability be a lower amount than P15,000.
2017 amortization (after recording impairment loss): P15,000 ÷ 8 = P1,875.
12/31/17 book value: P15,000 – P1,875 = P13,125 14-17. Miguel Alfonso Corporation
Requirement (a)
Attorney’s fees in connection with organization
of the corporation P15,000
Costs of meetings of incorporators to discuss
organizational activities 7,000
State filing fees to incorporate 1,000
Total organization costs P23,000
Drafting and design equipment, P10,000, should be classified as part of fixed assets, rather than as organization costs.
Requirement (b) Organization Expense ... 23,000 Cash (Payables) ... 23,000 14-18. Jo Tan Company Requirement (a) Jo Tan Company
INTANGIBLES SECTION OF BALANCE SHEET December 31, 2016
Patent from Francis Argante Company, net of accumulated
amortization of P560,000 (Schedule 1) P1,440,000
Franchise from JC Company, net of accumulated amortization of P48,000 (Schedule 2)
432,000
14-20
Schedule 1 Computation of Patent from Francis Argante Company
Cost of patent at date of purchase P2,000,000
Amortization of patent for 2015 (P2,000,000 10 years) (200,000) 1,800,000 Amortization of patent for 2016 (P1,800,000 5 years) (360,000)
Patent balance P1,440,000
Schedule 2 Computation of Franchise from JC Company
Cost of franchise at date of purchase P 480,000
Amortization of franchise for 2013 (P480,000 10) (48,000)
Franchise balance P 432,000
Requirement (b)
Jo Tan Company Income Statement Effect For the year ended December 31, 2016 Patent from Francis Argante Company:
Amortization of patent for 2016
(P1,800,000 5 years) P360,000
Franchise from JC Company:
Amortization of franchise for 2016
(P480,000 10) P 48,000
Payment to Reagan Company
(P2,500,000 X 5%) 125,000 173,000
Research and development costs 433,000
Total charged against income P966,000
14-19. Twinkle Industries
Requirement (a)
Patent X
Life in years 17
Life in months (12 X 17) 204
Amortization per month P150
Number of months amortized to date
Year Month 2013 10 2014 12 2015 12 2016 12 46 Book value 12/31/16 P23,700: (P30,600 – [46 X P150])
Patent Y
Life in years 10
Life in months (12 X 10) 120
Amortization per month P125
Number of months amortized to date
Year Month 2014 6 2015 12 2016 12 30 Book value 12/31/16 P11,250: (P15,000 – [P125 X 30]) Patent Z Life in years 4 Life in months (12 X 4) 48
Amortization per month P300
Number of months amortized to date
Year Month 2015 4 2016 12 16 Book value 12/31/16 P9,600: (P14,400 – [P300 X 16]) At December 31, 2016 Patent X P23,700 Patent Y 11,250 Patent Z 9,600 Total P44,550 Requirement (b) Analysis of 2017 transactions
1. The P245,700 incurred for research and development should be expensed. 2. The book value of Patent Y is P11,250 and its estimated future cash flows are
P6,000: (3 X P2,000) therefore Patent Y is impaired. The impairment loss is imputed as follows:
Book value P11,250
Less: Present value of future
cash flows 2,000 X 2.57710 5,154
14-22
Patent Y carrying amount (12/31/17) P5,154 At December 31, 2017
Patent X P21,900 (P23,700 – [12 X P150])
Patent Y 5,164 (Present value of future cash flows) Patent Z 6,000 (P9,600 – [12 X P300]) Patent AA 34,560 (P36,480 – P1,920*) Total P67,624 Patent AA amortization Life in years 9 1/2 Life in months 114
Amortization per month P320
P320 X 6 = P1,920 Patent Y: Value in Use
2,000 x 0.9259 = P1,852 2,000 x 0.8573 = 1,715 2,000 x 0.7983 = 1,597 P5,164 or 2,000 x 2.582 = P5,164 14-20. Depp Corporation Requirement (a) Cash ...50,000 Receivables ...90,000 Inventory ...125,000 Land ...60,000 Buildings ...75,000 Equipment ...70,000 Trademarks ...15,000 Goodwill ...65,000 Accounts Payable ... 200,000 Notes Payable ... 100,000 Cash ... 250,000 Note that the building and equipment would be recorded at the 7/1/15 cost to Brigham; accumulated depreciation accounts would not be recorded.
Requirement (b)
1. Amortization Expense (Trademarks) ... 1,500
Trademarks ([P15,000 – P3,000] 1/4 X 6/12) ... 1,500 2. Goodwill will not be amortized.
14-21. Bill Santos Company
Requirement (a) December 31, 2015 Loss on Impairment ...1,100,000* Copyrights ... 1,100,000 *Carrying amount P4,300,000 Fair value 3,200,000 Loss on impairment P1,100,000 Requirement (b)
Copyright Amortization Expense ... 320,000*
Copyrights ... 320,000
*New carrying amount P3,200,000
Useful life 10 years
Amortization per year P 320,000
Historical Cost Fair Value
Fair Value 12.31.07 CV 12.31.15 P4,300,000 P3,200,000 Amortization, 2016 430,000 320,000 CV 12.31.16 P3,870,000 P2,880,000 P3,400,000 Requirement (c) Copyrights ...520,000 Copyright Amortization Expense
or Gain on Recovery of Previously
Recognized Impairment ... 520,000 Recovery 520,000
14-24
14-22. Español Co.
Franchises ...42,000 Prepaid Rent ...28,000 Retained Earnings (Organization Costs of P6,000 in
2015) ...6,000 Retained Earnings (P16,000 – P6,000) ... 10,000 Patents ...74,000 Legal fees ...12,650 Research and Development Expense ... (P75,000 + P160,000) ...235,000 Goodwill...278,400
Intangible Assets ... 686,050 Franchise Amortization Expense (P42,000 8) ...5,250
Retained Earnings (P42,000 8 X 6/12)... 2,625
Franchises ... 7,875 Rent Expense (P28,000 2) ...14,000
Retained Earnings (P28,000 2 X 3/12)... 3,500
Prepaid Rent ... 17,500 Patent Amortization Expense ...7,400
Patents ...7,400 (P74,000 10)
Note—No amortization of goodwill; goodwill should be tested for impairment on at least an annual basis in future periods.
14-23. Sim Laboratories
Requirement (a)
Costs to obtain patent Jan. 2008 P62,050
1996 amortization (P62,050 17) (3,650)
Carrying value, 12/31/08 P58,400
All costs incurred prior to January 2008 are related to research and development activities and were expensed as incurred.
Requirement (b)
1/1/09 carrying value of patent P58,400
2009 amortization (P62,050 17) P3,650
2010 amortization 3,650 (7,300)
51,100
Legal fees to defend patent 12/10 35,700
Carrying value, 12/31/10 86,800
2011 amortization (P86,800 14) 6,200
2012 amortization 6,200 (12,400)
Carrying value, 12/31/12 P74,400
The costs incurred in 2009 and 2011 are related to research and development activities and are expensed as incurred. Legal fees in successful defense of the patent in 2001 could be capitalized and considered GAAP.
Requirement (c) 1/1/13 carrying value P74,400 2013 amortization (P74,400 5) P14,880 2014 amortization 14,880 2015 amortization 14,880 (44,640) Carrying value, 12/31/15 P29,760
The legal costs in 2015 were expensed because the suit was unsuccessful. Even if the lawsuit was successful, the legal fees would be likewise charged to expense. This is in accordance with PAS 38, Intangibles which was made effective in 2004.
