Intangibles

DOMALAON, LORIE JAE E. ACT 123

HW # 4 May 7, 2017 EASY

Problem 1 The INTANGIBLES COMPANY engaged in the following transactions at the beginning of 2014: 1.

Purchased a patent for P700,000 that had originally been filed in January 2008. The acquisition was made to protect another patent that the company had filed in January 2010 and subsequently received.

2.

Purchased the rights to a novel by a best-selling novelist in exchange for 100,000 ordinary shares (P10 par) selling P60 per share. The books sells 1 million copies in 2014 and is expected to sell a total of 500,000 copies in the future years.

3.

Purchased the franchise to operate a ferry service from the government for P100,000. A bridge has been planned to replace the ferry, and it is expected that it will be completed in five years. The company hopes that the ferry will continue as a tourist attraction, but profits are expected to be only 20% of those earned before the bridge is opened.

4.

Paid P280,000 to attorneys for services to successfully defend the patent acquired in transaction 1.

5.

Paid a taxi operator P500,000 to have the company name prominently displayed on his taxis for two years. Based on the preceding information, determine the carrying value of the copyright. SOLUTION: Cost of copyright

P6,000,000

Amortization for 2014(6M X1M / 1.5M

(4,000,000)

Carrying value, December 31, 2014

P2,000,00

Problem 2 The following situations are found in the records of the KILIMANJARO, INC. in your audit of the company’s financial statements for the year ended December 31, 2014. 1. December 1, 2014: Advertising expense Cash

72,000 72,000

Payment of 2015 advertising contract 2. Balance of Office supplies expense, Dec. 31, 2014 Balance of Unused office supplies, Dec. 31, 2014 Inventory of office supplies, Dec. 31, 2014

45,000 15,000 22,500

DOMALAON, LORIE JAE E. ACT 123

HW # 4 May 7, 2017

3. June 2, 2014: Prepaid Insurance

54,000

Cash

54,000

Payment of one-year insurance premium for inventory 4. Balance of Factory supplies expense account, Dec. 31, 2014

P69,00 0

Physical inventory of factory supplies, Dec. 31, 2014

58,000

5. On May 1, 2014, a two-year subscription to the Industrial Journal in the amount of P14,400 was paid. Subscriptions expense was charged for the entire amount. How much is the insurance expense to be recorded? SOLUTION: Insurance Expense

(P54,000x7/12) = P 31,500

PROBLEM 3 As a member of the audit team for the audit of RAS DASHEN COMPANY’s financial statements for the year ended December 31, 2014, you have been asked to examine selected accounts. The controller for Ras Dashen mentions that there is only one account (shown below) kept for intangible assets.

Debit Feb 1 Organization costs Mar 15

P72,000

Research and development

Apr 3 Legal costs to obtain patent

Credit P72,000

1,880,000 150,000

1,952,00 0 2,102,00 0

May 1 Payment of 12 months’ rent on property leased by Ras Dashen 240,000

Jun 15

2,342,00 0

Promotional expenses related to start-up of business

414,000

2,756,00 0

DOMALAON, LORIE JAE E. ACT 123

HW # 4 May 7, 2017

Dec 31 Unamortized bond discount on bonds due Dec. 31, 2034 Operating losses for firstyear

168,000 428,000

2,924,000 3,406,000

The amount of organization expenses to be reported in Ras Dashen’s income statement for the year ended Dec. 31, 2014, is?

SOLUTION: Organization costs

72,000

Promotional expenses related to start-up of business

414,000

Total organization expenses

486,000

MODERATE PROBLEM 4 MERU, INC. leases an old building which it intends to improve and use for administrative purposes. The company pays a bonus of P100,000 to obtain lease. Annual rental for the 10-year lease period is P160,000. No option to renew the lease or right to purchase the property is given by the lessor. After obtaining the lease, improvements on the leased building are made costing P400,000. The building has an estimated remaining useful life of 19 years. What is the annual cost (excluding depreciation) of this lease to Meru, Inc.? SOLUTION: Annual rental

P160,000

Amortization of lease bonus

10,000

Annual cost of lease

P170,000

DOMALAON, LORIE JAE E. ACT 123

HW # 4 May 7, 2017

HARD Problem 5 ELGON COMPANY was organized in 2013 and began operations at the beginning of 2014. The company provides landscaping services. The following costs were incurred prior to the start of operations: Legal fees in connection with organization of the company 171,000 Improvements to leased office space prior to occupancy225,000Costs of meetings of incorporators to discuss organizational activities 63,000 Filing fee to incorporate 9,000 What is the total amount of organizational costs that should be reported in Elgon’s income statement? SOLUTION: 171,000 + 63,000 + 9,000 = P 243,000