ACCOUNTING FOR INTANGIBLE ASSETS
To be discussed:
a. How to determine acquisition cost
b. Computation of amortization expense
c. Accounting for subsequent expenditures on intangible assets
d. Entries prepared to record transactions relating to intangible assets
An Intangible asset – is an identifiable non-monetary asset without physical appearance. It is reported as a
noncurrent asset.
Examples are:
Patents Trademarks
Copyrights Licenses
Franchise Computer software
Goodwill
Elements of an Intangible Asset:
1. Identifiable- separable; capable of being separated or divided from the entity; capable of being
sold, transferred, licensed, rented or exchanged.
2. Controlled by the enterprise
3. Expected future benefits
4. Has cost that can be measured reliably
Intangible asset may be acquired:
1. by Purchase
2. in a business combination
3. internally generated intangible asset
4. by way of government grant
5. by exchange
INITIAL RECOGNITION
An intangible asset shall be initially measured at cost.
Notes:
1. Intangible assets with finite useful life is amortized over its estimated useful life or legal life
whichever is shorter.
2. An intangible asset with indefinite useful life shall not be amortized. But it is tested for
impairment.
3. If there is a change in the estimated useful life of intangible asset, a revised amortization is to
be computed.
4. Subsequent expenditures are capitalized when such expenditures would extend the useful life
of the intangible asset; increase net cash inflow from the use of the asset; or improve the
quality of the output. If subsequent expenditures are capitalized, a revise amortization is
computed.
5. The costs of defending intangible asset, whether successful or NOT are charged to expense.
6. The intangible asset shall be derecognized when NO future economic benefits are expected
from it. Loss is to be recognized equals to the carrying value of the intangible asset.
7. Goodwill is recognized only when acquired by purchase. That is, when an entire business is
acquired by another entity for an amount that is greater than the fair market value of the net
identifiable assets acquired.
8. Goodwill is not subject to amortization. But is being tested for impairment.
9. Goodwill is reported as a separate line item in the statement of financial statement.
10. Research and Development costs are generally charged to expense.
ANSWERS TO:
4-1
a. Computation of research and development expense.
Expense relating to the special equip. purchased:
Cost of the equipment P600,000
Recoverable amount of the equip. 460,000
Cost of equipment charged to R&D expense P140,000
Research and fringe benefits for … 51,300
Costs of testing prototype 70,800
Research and Development Expense P262,100
b. Computation of Patent carrying value at December 31, 2020
Fees paid to Phil. Patent Office P7,500
Drawings required by patent office to be filed with… 14,100
Legal costs of filing the patent 38,100
Total cost of patent (year 2019) P59,700
Divide by estimated useful life 10 years
Annual amortization P5,970
Cost of patent P59,700
Less: amortization for year 2019 and 2020(5,970x2) (11,940)
Carrying value of patent, December 31, 2020 P47,760
c. What is the amortization expense for the year 2021? P5,970
Note: the amortization for the year 2021 is same with the previous amortization expense. The cost
incurred on Jan. 2, 2021 to defend the patent is not capitalized. It is charged to expense.
d. Computation of Carrying value of patent as at December 31, 2022
Cost of patent P59,700
Less: amortization for year 2019 -2021 (P5,970x3 yrs.) 17,910
Carrying value of patent, Dec. 31, 2021 P41,790
Divide by remaining useful life 5 years
Revised amortization starting year 2022 P8,358
Cost of patent P59,700
Less: amortization for year 2019 -2021 (P5,970x3 yrs.) 17,910
Amortization for year 2022 8,358
Carrying value of patent, Dec. 31, 2022 P33,432
4-6 Entries from year 2021 to 2024
In 2021 to record research and dev. cost
R and D expense 500,000
Cash 500,000
In 2022 to record the cost of patent
Patent 120,000
Cash 120,000
Entry on Dec. 31, 2022 to record amortization of Patent.
Amortization expense (120,000/10 yrs.) 12,000
Accumulated Amortization-Patents 12,000
Entry on January 1, 2023 to record the purchase of new Patent.
Patent 1,200,000
Cash 1,200,000
Entry on Dec. 31, 2023 to record amortization of Patent.
Amortization expense 87,200
Accumulated Amortization 87,200
Computation of revised amortization:
Cost of old patent , Jan. 1, 2022-------------------120,000
Less: amortization for year 2022--------------------12,000
CV, Dec. 31, 2022 -------------------------------------108,000
Add: Cost of new patent---------------------------1,200,000
Total amount for amortization starting year- 2023-------1,308,000
Divide by remaining useful life (10 yrs + 6 – yr.)---------------15 yrs
Revised annual amortization of patent-------------------------87,200
Computation of loss from the write-off of patent:
Cost of Patent ( 120,000 + 1,200,000)- ---1,320,000
Less: Accumulated amortization
2022 amortization – 12,000
2023 amortization - 87,200
2024 amortization – 87,200
Accumulated amortization----------------------186,400
Carrying value of patent (date of write off)-1,133,600 to be charged to
loss.
1. Entry on Dec. 31, 2024 to record the write-off of Patent.
Loss on write-off of patent----------1,133,600
Accumulated amortization-------------186,400
Patent------------------------------------------------1,320,000
4-7 Computation of research and development costs
Laboratory research aimed at… P68,000
Testing for evaluation of new… 24,000
Modification of the formulation… 26,000
Searching for application of new… 19,000
Depreciation of equipment (P280,000/5yrs.) 56,000
Total research and development costs P193,000
4-10
a. Computation of Franchise Cost:
Down payment 500,000
Add: Present value of the unpaid balance
300,000 x 2.4869------------------------------------------ 746,070
Total cost of Franchise---------------------------------- 1,246,070
b. Amortization of franchise for year 2024
cost of Franchise 1,246,070
Divide by estimated useful life 10 years
Annual amortization of franchise 124,607
Entries:
1. to record the cost of Franchise, Jan. 1, 2024
Franchise ---------------------------1,246,0870
Discount on Notes Payable---------153,930
Cash 500,000
Notes payable (300,000 x 3) 900,000
Face value of notes payable ------900,000
Present value of notes payable---746,070
Discount on Notes Payable --------153,930
2. to record amortization for year 2024
3. to record interest expense
Interest expense (746,070 x 10%)--- 74,607
Discount on Notes Payable 500,000
4. to record 1st installment payment
Notes payable ----------------300,000
Cash 300,000
4-11
a. Computation of Goodwill
Purchase price of KC company by Winter Co. 7,000,000
Fair Value of net assets of KC Co:
Trade receivables, net------1,000,000
Inventory-----------------------1,700,000
PPE, net-------------------------5,900,000
Total Fair value of assets---------------------8,600,000
Less: total liabilities of KC (760 +1,600)—2,360,000
Fair Value of net assets of KC Co------------------------- 6,240,000
Goodwill ------------------------------------------------------ 760,000
Entry by Winter Company to record the purchase of KC Company
Receivables 1,000,000
Inventory 1,700,000
PPE net 5,900,000
Goodwill 760,000
Current Liabilities 760,000
Noncurrent Liabilities 1,600,000
Cash 7,000,000
Goodwill is the excess of the purchase price over the net assets of the acquired company.
4-12
a. Computation of Purchase price of Goodwill company acquired by Matilda.
Excess average earnings shall be capitalized at 20%.
Reported profit/earnings of goodwill for 3 yrs:
2021---8,000,000
2022--10,000,000
2023--15,000,000
Total-33,000,000/3 = 11,000,000
Average earnings--------------------------11,000,000
Normal return on assets 9%:
100,000,000M x 9%-------------------------9,000,000
Excess of average earnings over normal return— 2,000,000
Divide by capitalization rate of 20%----------------- 20%
Goodwill 10,000,000
Fair Value of net assets of Goodwill Co.------------- 100,000,000
Add: Goodwill --------------------------------------------- 10,000,000
Purchase price of Goodwill Co. by Matilda 110,000,000
Assignment. Please answer the following (with computations)
MC 24 to MC 28
MC 29 to MC 37
MC 50 to MC 52
