Intangible Assets

DLSU Accountancy Department Practical Accounting One INTANGIBLES I. Research and Development Costs (PAS 38) Problem 1. GE Inc. developed a time machine which will be commercialized in 2012. As a new audit staff of SGV & Co., you are assigned to audit the research and development costs of GE in 2011. The following expenditures in 2011 were recorded by GE Inc. in the research and development account: Periodic design changes to existing products P1,000,000 Quality control during commercial production including routine testing 200,000 Design of tools, jigs, molds and dies involving the new time machine 100,000 Testing in search for time machine 300,000 Conceptual formulation and design of time machine 400,000 Routine design of tools, jigs, molds and dies of time machine 500,000 Engineering follow through in an early phase of commercial production 600,000 Trouble shooting breakdown during production 300,000 Laboratory research aimed at obtaining or discovering new product 200,000 Design, construction and testing of preproduction prototype and model 300,000 Searching for application of research finding and other knowledge 300,000 Design, construction and testing of the improved product 200,000 Routine on-going effort to refine or improve the quality of an existing product 100,000 Design, construction and operation of a pilot plant 200,000 Cost of Building constructed on 1/1/2011 for future research and development 4,000,000 Organization and pre-incorporation costs incurred 500,000 Costs incurred for promoting and marketing the hologram phone 300,000 Depreciation on the building above used for development of pilot plant 800,000 Required: Based on the result of your audit, determine the following for the year ended December 31,2011: ____________1. Total Research Costs ____________2. Total Development Costs ____________3. Total Research and Development Costs ____________4. Expenses which are not Research and Development Costs

II. Internally Developed Computer Software Problem 1. On January 1,2011, Microsoft Inc. decided to develop a new Operating System known as “Windows Infinite”. In 2011, the software developed incurred the following costs in the process of designing, developing and producing the new Operating System: Salaries and wages of programmers doing research Designing and planning the Operating System Code Development Testing the Operating System

P500,000 200,000 300,000 400,000

On January 1,2012, the technological feasibility of the Operating System has been established. On the same date, the company incurred P10,000,000 as the total cost of production of product master. The production of the software started on February 1,2012 and the product was marketed on the same date. The total costs of produced and prepared software for sale is P5,000,000. The total sales of Windows Infinite during 2012 is P8,000,000. The normal gross profit rate of Microsoft Inc. is 40%. Microsoft estimated that the total sales revenues over the 4-year life of the product will be P40,000,000. Required: Based on the result of your audit, determine the following: ____________1. Total Research and Development Costs to be expensed in 2011 ____________2. Amount to be capitalized as software development cost subject to amortization in 2012 ____________3. Amortization of software development cost in 2012 ____________4. Carrying value of software development cost on December 31, 2012 ____________5. Amount of Ending Inventory on December 31,2012

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III. Assets Classified as Intagible Assets Problem 1. The following items are included in the Intangible Asset Account of Goodwill Inc.: Investment in an Associate Company Agricultural Land Research and development costs Initial Operating Losses Organization costs in forming corporation Internally generated goodwill Cost of purchasing a trademark Operating software of a personal computer Long-term receivables Cost of developing a trademark Computer software for a computer-controlled machine that cannot operate without the software Legal costs incurred in securing a patent Purchase of a franchise Lease prepayments Engineering follow through during production Cost of equipment obtained under a finance lease Internally generated mastheads Cost of purchased customer lists Internally generated brand Cost of purchased publishing titles Training costs incurred in start-up operation Goodwill from business combination Cost of testing in search for product alternatives Cost of developing a software before technical feasibility Cost of purchasing a patent from an investor Legal costs in successful defense of a patent Legal costs in unsuccessful defense of a patent Cost of conceptual formulation of possible product alternatives Cost of purchasing a copyright Infrastructure asset when the concession operator has received a right, not a license, to charge users for the public service and the revenue receivable is not agreed upon in advance Infrastructure asset when the concession operator has a guaranteed contractual right to receive a specific amount of cash over the life of the arrangement

P1,000,000 2,000,000 200,000 300,000 100,000 200,000 300,000 200,000 100,000 500,000 100,000 200,000 300,000 300,000 200,000 300,000 200,000 400,000 300,000 200,000 100,000 300,000 500,000 100,000 200,000 150,000 100,000 200,000 300,000 1,000,000 2,000,000

Required: What is the total amount to be recognized as intangible assets?

IV. Internally Generated Patent Problem 1. As a newly hired assurance associate of PWC – Philippines, you are assigned to audit the Patent Account of Sony Inc. for year ended December 31,2011. On January 1, 2010, Sony Inc. developed a new machine that reduces the time required to mix the chemicals in one of its leading products. Because the process is considered very valuable to the company, Sony patented the machine. The following expenses were incurred by Sony Inc. in 2010 in developing and patenting the machine: Research and development laboratory expenses Salary of Research Engineer who work on the research, development and building of the machine (20% of the time was spent in actually building the machine Materials used in the construction of the machine Blueprints used to design the machine Legal expenses to register and obtain the patent Expense of drawing required by Bureau of Patents to be submitted in patent application Fees paid to Bureau of Patents to process application Useful life of the Patent

P2,000,000 200,000 300,000 100,000 400,000 50,000 60,000 25 years

On January 1,2011, Sony paid P500,000 in legal fees to successfully defend the patent against an infringement suit by Toshiba Inc. In is the company’s policy to take full year depreciation in the year of acquisition. Required: Based on the result of your audit, determine the following: ____________1. Cost of Patent ____________2. Cost of Machine ____________3. Amount that should be charged as expense in 2010 ____________4. Amount that should be charged as expense in 2011 aside from amortization ____________5. Amortization on 2010 ____________6. Amortization on 2011 ____________7. Carrying value of patent on December 31,2011

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V. Acquisition, Amortization and Impairment of Intangible Assets Problem 1. Acer Inc. engaged KMPG – Philippines as its external auditor for the year ended December 31,2011. As a newly promoted Senior Associate of the said auditing firm, the engagement partner assigned you to the year-end audit of Acer Inc. Based on the result of risk assessment procedure, your audit team determined that the internal control of the client is weak. As such, you have to perform an extensive substantive test of the company’s Intangible Asset transactions during 2011. The following data are provided by the accounting department of Acer:  On January 1,2011, Acer paid legal fees of P500,000 and stock certificate costs of P250,000 to complete the organization of the corporation.  On January 2,2011, Acer hired a clown to stand up in front of the corporate office for 2 weeks and hand to hand out pamphlets and candy to create goodwill for the new enterprise. Clown cost – P20,000; Pamphlets and candy – P30,000.  On April 1,2011, Acer patented a newly developed process with costs as follows: o Legal expenses to obtain a patent P200,000 o Expenses of drawing required by the Bureau of Patent 100,000 o Patent application and licensing fees 300,000 (The useful life of the patent is 30 years)  On July 1,2011, Acer acquired a customer list from Asus Inc. by issuing 10,000 Ordinary Shares with par value of P5. The Ordinary Share of Acer is quoted at P10 at this date with a useful life of four years.  On October 1,2011, Acer signed an agreement to operate as franchisee of Apple Inc. for an initial franchise of P1,000,000. Of this amount, P200,000 was paid when the agreement was signed and the balance was payable in four annual payments of P200,000 each starting September 1,2012. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. The implicit rate for loan of this type is 10%. The agreement also provides that 5% of the revenue from the franchise must be paid to the franchisor annually. Acer’s revenue from the franchise for 2011 was P200,000. Acer estimated that the useful life of the franchise to be 5 years.  On November 1,2011, Acer acquired trademark from Toshiba Inc. for P150,000. The legal life of the trademark in the Philippines is 10 year which are renewable for periods of ten years each.  On December 1,2011, Acer constructed a shed for P4,000,000 to house prototypes of experimental models to be developed in future research products.  On December 2,2011, Acer incurred salaries for an engineer and computer programmer involved in product development totaling P300,000.  On December 10,2011, Acer incurred P50,000 legal fees to successfully defend its patent against a competitor.  On December 15,2011, Acer incurred P100,000 for internally generated brand and mastheads.  On December 20,2011, Acer purchased a subsidiary. As a result of business combination, P500,000 goodwill was recorded by Acer.  On December 31,2011, the following data are also provided by Acer Inc.: Intangible Asset Fair Value less Cost to Sell Value in Use Patent P 500,000 P 700,000 Customer List 120,000 50,000 Franchise 700,000 1,180,000 Trademark 130,000 50,000 Goodwill 400,000 Required: Based on the result of your audit, determine the following: ____________1. Initial Cost of Patent ____________2. Initial Cost of Customer List ____________3. Initial Cost Franchise ____________4. Trademark ____________5. Amount that shall be expensed as incurred (exclusive of amortization and contingent franchise fee) ____________6. Total Amortization in 2011 ____________7. Total Impairment Loss in 2011 ____________8. Carrying value of Intangible Assets in December 31,2011 Problem 2. For the year ended December 31, 2015, the following transactions occurred in the company of JET Inc: 1/1/2015 – The company was incorporated and it incurred P200,000 for organizing and incorporating the company. It also paid P100,000 for the company opening and blessing. 6/1/2015 – The company successfully registered the patent of a newly developed technology with the following costs: o Legal expenses to obtain a patent P300,000 o Expenses of drawing required by the Bureau of Patent 500,000 o Patent application and licensing fees 200,000 o (The useful life of the patent is 40 years) 9/30/2015 – The company successfully defended the patent at a legal cost of P500,000. Its useful life was increased to 50 years. 10/1/2015 – The company incurred P400,000 for internally generated customer list and publishing titles. 11/30/2015 – The company incurred salaries for an engineer and computer programmer involved in product development totaling P300,000 before the technological feasibility. 12/31/2015 – The company constructed a shed for P5,000,000 to house prototypes of experimental models to be developed in future research products.

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Required: Based on the result of your audit, determine the following for the year ended December 31,2015: __________1. Total costs that shall be capitalized as intangible asset __________2. Total costs that shall be expensed as incurred __________3. Amortization expense for the year ended December 31, 2015 __________4. Carrying value of patent on December 31, 2016 Problem 3. On January 1, 2015, RYT Inc. acquired the following intangible assets: Customer List – It was acquired in exchange for an equipment with a cost of P2,000,000 and accumulated depreciation of P500,000. The fair value of the equipment is P3,000,000. RYT received P1,000,000 in the exchange. The customer list has a useful life of 4 years. Trademark – It was acquired through the issuance of bonds payable with face value of P2,000,000 and nominal rate of 10%. The principal is payable at the end of its 3-year term while the interest is payable every December 31. The company paid P100,000 for the issuance of the bonds. The fair value of the trademark as of this date is P2,500,000 while its book value is P2,200,000. The effective interest rate of the bonds payable is 12%. The legal life of the trademark in the Philippines is 10 year which are renewable for periods of ten years each. Franchise - RYT Inc. signed an agreement to operate as franchisee of LEF Inc. for an initial franchise of P2,000,000. Of this amount, P500,000 was paid when the agreement was signed and the balance was payable on December 31, 2016. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. The implicit rate for loan of this type is 15%. The agreement also provides that 10% of the revenue from the franchise must be paid to the franchisor annually. RYT’s revenue from the franchise for 2015 was P500,000. RYT Inc. estimated that the useful life of the franchise to be 20 years. Copyright – It was acquired by RYT Inc. through the issuance of 10,000 ordinary shares with par value of P20 and fair value of P25. The copyright has indefinite legal life. Goodwill – The goodwill is a result of the business combination of RYT Inc. to WIZ Inc. on December 31, 2015. The amount assigned to the goodwill is P300,000 As of December 31, 2015, the following data are provided: Items Fair value less cost to sell Value in use Customer list 1,200,000 1,300,000 Trademark 3,000,000 2,700,000 Franchise 1,800,000 2,300,000 Copyright 200,000 230,000 Goodwill 250,000 320,000 Required: Determine the following: __________1. Cost of customer list __________2. Cost of trademark __________3. Cost of franchise __________4. Cost of copyright __________5. Total amortization for year 2015 __________6. Total impairment loss for year 2015 __________7. Carrying value of intangible assets as of 12/31/2015

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