ACC527 AUDITING THEORY AND PRACTICE BSA

INTANGIBLES
PROBLEM 1
Transactions during 2020 of the newly organized A Company included the following:

January 2 Paid legal fees of P150,000 and share certificate cost of P83,000 to complete
organization of the corporation.

1 Hired a clown to stand in front of the corporate office for 2 weeks and hand out
5 pamphlets and candy to create goodwill for new enterprise. Clown cost,
P10,000; pamphlets and candy P5,000.

April 1 Patented a newly develop process with costs as follows:

Legal fees to obtain patent 429,00

0
Patent application and licensing 63,500
fees
Total 492,50
0

It is estimated that in 6 years other companies will have developed improved

processes, making A process obsolete.

May 1 Acquired both a license to use a special type of container and a distinctive
trademark to be printed on the container in exchange for 6,000 shares of A no
par ordinary shares selling for P50 per share. The license is worth twice as much
as trademark, both of which may be used for 6 years.

July 1 Constructed a shed for P1,310,000 to house prototypes of experimental models

to be developed in future research projects.

Decemb 3 Incurred salaries for an engineer and chemist involved in product development
er 1 totaling P1,750,000 in 2018.

REQUIRED:
1. Cost of patent: 492,500
2. Cost of licenses: 200,000
3. Cost of trademark: 100,000
4. Carrying amount of intangible assets: P – 430,938; L – 177,778; T – 88,889
5. Total amount of the foregoing transaction that should be expensed when incurred:
1,998,000

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 ACC527 AUDITING THEORY AND PRACTICE BSA

PROBLEM 2
B Company decided to go online to further boost its sales of its world’s bestselling Panda Stuffed
Toy. The Company incurred the following expenditures for the year on each of the stages to
develop and operate its own website, as follows:

a. Stage 1: Planning Stage, which includes undertaking feasibility studies, defining objectives
and specifications, evaluating alternatives and selecting preferences – P1,500,000.

b. Stage 2: Application and Infrastructure Development Stage, which includes obtaining a

domain name, purchasing and developing hardware and operating software, installing
developed applications and stress testing – P2,500,000.

c. Stage 3: Graphical Design Development Stage, which includes designing the appearance
of web pages – P1,500,000.

d. Stage 4: Content Development Stage, which includes creating, purchasing, preparing and
uploading information, either textual or graphical in nature, on the website before the
completion of the website’ development. This information may either be stored in separate
databases that are integrated into (or accessed from) the website or coded directly into
the web pages – P3,500,000.

e. Stage 5: Operating stage which includes maintenance and enhancement the applications,
infrastructure, graphical design and content of the website – P1,500,000.

A close look at each of the stages reveals the following costs which were included:

 Under Stage 2, fee for a license to reproduce a copyright content – P400,000;

 Under Stage 2, fee paid to marketing company for creating content that advertises and
promotes the Company’s own products and services – P500,000;

 Under Stage 4, professional services for taking digital photographs of an entity’s own
products and for enhancing their display – P500,000.

REQUIRED:
1. How much is to be capitalized as Intangible Asset? 6,500,000
2. How much is expensed in the Profit or Loss? 4,000,000

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 ACC527 AUDITING THEORY AND PRACTICE BSA

PROBLEM 3
C Company which is considering acquiring D Company use the following data for an analysis:
Average annual earnings for the past 5 years 6,280,000
Expected annual increase in wages not be recovered by increased revenues 400,000
Increase in annual depreciation on the current fair value of assets 120,000
Average annual cost of goods sold for the past 5 years 2,660,000
Annual amortization of tangible assets with finite lives not previously recorded 100,000
Average annual operating expenses for the past 5 years 1,800,000

Assume that the appropriate rate of return is 10%. The book value of D’s net identifiable assets is
P5,700,000, which the revaluation were summarized as follows:

Revaluation of weighted average inventory to fair value 900,000

Increase in allowance for bad debts 100,000
Revaluation of PPE to fair value 1,200,000
Fair value of patent 1,500,000
Revaluation of bonds payable due to decline in interest 600,000
Unfunded projected obligation of the pension plan 1,400,000

Any excess annual earnings are expected to last for the next five years.

REQUIRED:
1. How much should C recognize as goodwill upon acquisition? 1,364,683
2. How much is the total value of the company acquired? 8,400,000

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