PROBLEM 1:

The following independent situations relate to the audit of intangible assets. Answer the
questions at the end of each situation.
a. YOLING INDUSTRIES reports the following patents on its December 31, 2012 statement of
financial position.
Initial cost Date of
Useful life
(at
date
of
acquisition
acquisition)
Patent A
P1,224,000 March 1, 2009
17 years
Patent B
450,000 July 1, 2010
10 years
Patent C
432,000 Sept. 1 2011
4 years
The following events occurred during the year ended December 31, 2013.
Research and development costs of P737,100 were incurred during the year. These
costs were incurred prior to projects achieving economic viability.
Patent D was purchased on July 1 for P855,000. It has a remaining life of 9 years.
A possible impairment of Patent Bs value may have occurred at December 31, 2013.
This is due to a significant reduction in the demands for certain products protected
by Patent B. the companys controller estimates the following future cash flows from
Patent B.
December 31, 2014
P60,000
December 31, 2015
60,000
December 31, 2016
60,000
The appropriate discount rate to be used for these cash flows is 8%.
1. What is the total carrying value of Yolings patents on December 31, 2012?
A. P2,383,500
C. P2,106,000
B. P1,390,620
D. P1,573,500
2. What amount of impairment loss should be reported by Yoling for the year ended
December 31, 2013?
A. P137,880
C. P337,500
B. P282,500
D. P154,620
3. What is the total value of Yolings patents on December 31, 2013?
A. P1,969,080
C. P2,158,500
B. P2,020,620
D. P2,203,500
b. In your audit of the books of MELANIE CORP. for the year ended December 31, 2013, you
found the following items in connection with the companys patents account.
Melanie had spent P360,000 during the year ended December 31, 2012, for research
and development costs. This amount was debited to its patents account. The
companys cost records discloses that it had spent a total of P424,500 for the research
and development of its patents, of which P64,500 spent in 2012 had been debited to
Research and Development Expenses.
The patents were issued on July 1, 2012. In connection with the issuance of the
patents, the company incurred legal expenses of P42,840, which are debited to Legal
and Professional Fees Expense.
On January 5, 2013, Melanie paid a retainer of P45,000 for legal services in connection
with a patent infringement suit brought against it. Deferred Costs was charged for the
amount.
In reply to your inquiry about the companys liabilities as of December 31, 2013, you
received a letter from the companys legal counsel dated January 20, 2014, which
indicated that a settlement of the patent infringement suit had been arranged. The
plaintiff will drop the suit and release the company from all future liabilities in
exchange for P60,000. Additional lawyers fees were incurred amounting to P3,780.
4. The correcting journal entries (excluding amortization) on December 31, 2013 would
include net debit (credit) to
Legal and
Patents
Professional Fees
Expense
A.
P(317,16
P108,780
0)
B.
(208,380
0
)

C.
D.

(272,160
)
(253,380
)

63,780
45,000

c. As the recently appointed auditor of SUBHUMAN COMPANY, you have been asked to
examine selected accounts. You audit client, organized in 2012, has setup a single account
for all intangible assets. The following summary shows the debit entries that have been
recorded during 2013.
January 2
April 5
June 30
July 1
August 3
September
1

Purchased patent (8-year life)

Goodwill
Payment of 12 months rent on property leased by
Subhuman
Purchased franchise with a 10-year life:
expiration date, July 1, 2023
Payment for copyright (5-year life)
Research and development costs related to patent
(incurred prior to achieving economic viability)

P870,000
720,000
182,000

900,000
312,000
320,000
P3,304,0
00

5. What is the total carrying value of Subhumans intangible assets as of December 31,
2013?
A. P2,928,917
C. P2,927,705
B. P2,622,250
D. P2,713,250
PROBLEM 2:
The following situations are found n the records of the KILI INC. in your audit of the companys
financial statements for the year ended December 31, 2012.
a. December 1, 2012:
Advertising expense
Cash
Payment of 2013 advertising contract

72,000
72,000

b. Balance of Office Supplies expense, December 31, 2012

Balance of Unused Office supplies, December 31, 2012
Inventory of Office Supplies, December 31, 2012

P45,000
15,000
22,500

c. June 2 2012:
Prepaid insurance
54,000
Cash
54,000
Payment of one-year insurance premium for inventory
d. Balance of Factory Supplies Expense Account, Dec. 31, 2012
Physical inventory of factory supplies, Dec. 31, 2012

P69,000
58,500

e. On May 1, 2012, a two-year subscription to the Industry Journal in the amount of P14,400
was paid. Subscription expense was charged for the entire amount.
PROBLEM 3:
KENYA ENTERPRISES developed a new machine that reduces the time required to mix the
chemicals used in one of its leading products. Because the process is considered very valuable
to the company, Kenya patented the machine.
Kenya incurred the following expenses in developing and patenting the machine:
Research and development laboratory expenses
P750,00
0
Materials used in the construction of the machine
240,000
Blueprints used to design the machine
96,000
Legal expenses to obtain patent
360,000

Wages paid for the employees work on the

research,
development, and building of the machine
(60% of the
time was spent in actually building the
machine)
Expense of drawing required by the patent Office
to be submitted with the patent application
Fees paid to Patent Office to process application

900,000

51,000
75,000

One year later, Kenya Enterprises paid P525,000 in legal fees to successfully defend a patent
against an infringement suit by Tutulad Company.
1. What is the total cost of the patent?
A. P993,000
C. P564,000
B. P486,000
D. P126,000
2. What is the total cost of the new machine?
A. P1,362,000
C. P780,000
B. P0
D. P876,000
3. What is the entry to record the legal fees paid for the successful defense of the patent
against the infringement suit?
A. Patents
525,000
Cash
525,000
B. Legal fees expense
525,000
Cash
525,000
C. Machinery
525,000
Cash
525,000
D. Amortization expense
525,000
525,000
Patents
Cash
PROBLEM 4:
The following amounts are included in the general ledger of MARCIE CORPORATION at
December 31, 2012:
Organization costs
P
72,000
Trademarks
45,000
Patents
225,000
Discount on bonds payable
105,000
Deposits with advertising agency for ads to promote goodwill of
30,000
company
Cost of equipment acquired for various research and
320,000
development projects
Costs of developing a secret formula for a product that is
240,000
expected to be
marketed for at least 20 years
On the basis of the information above, what is the total amount of intangible assets to be
reported by Marcie in its statement of financial position at December 31, 2012?
A. P342,000
C. P510,000
B. P270,000
D. P830,000
PROBLEM 5:
As a member of the audit team for the audit of DASHEN COMPANYs financial statements for
the year ended December 31, 2012, you have been asked to examine selected accounts. The
controller for Dashen mentions that there is only one account (shown below).

Feb.
Marc
h
April

1
1
5
3

INTANGIBLE ASSETS
Deb Credi
it
t
Stock issue costs
P72,000
Research and Development costs
1,880,00
0
Legal costs to obtain patent
150,000

Balance
P72,000
1,952,0
00
2,102,0

00
May

June

Dec.

Dec.

Payment of 12 moths rent on

property leased by Dashen

240,000

2,342,0
00

1
5

Promotional expenses related to

start up of business

414,000

2,756,0
00

3
1

Unamortized bond discount on

bonds
due Dec. 31, 2032
Operating losses for first year

168,000

2,924,0
00
3,406,0
00

3
1

482,000

1. The amount of organization expenses to be reported in Dashens income statement for the
year ended December 31, 2012, is
A. P2,348,000
C. P582,000
B. P486,000
D. P240,000
2. What is the carrying value of the patent at December 31, 2012, assuming that its useful
life is 10 years?
A. P150,000
C. P135,000
B. P138,750
D. P0
3. The prepaid rent to be shown on Dashens statement of financial position at December 31,
2012, is
A. P160,000
C. P80,000
B. P240,000
D. P0
PROBLEM 6:
MERON 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 the 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.
1. What is the annual cost (excluding depreciation) of this lease to Meron?
A. P210,000
C. P160,000
B. P200,000
D. P170,000
2. What is the amount of annual depreciation (straight line), if any, should Meron, Inc.
record?
A. P40,000
C. P50,000
B. P30,000
D. P0
3. What is the entry to record the lease bonus paid at the inception of the lease?
A. Rent expense
100,000
Cash
100,000
B. Prepaid rent
100,000
Cash
100,000
C. Prepaid rent
90,000
Rent expense
10,000
Cash
100,000
D. Rent expense
90,000
Prepaid rent
10,000
Cash
100,000
PROBLEM 7:
ELGON COMPANY was organized in 2011 and began operations at the beginning of 2012. 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
Improvements to leased office space prior to occupancy
Fees paid to underwriters for handling stock issue
Costs of meetings of incorporators to discuss organizational

P135,000
225,000
36,000
63,000

activities
Filing fee to incorporate

9,0
00
P468,00
0

What is the total amount of organization costs that should be reported in Elgons income
statement?
A. P243,000
C. P180,000
B. P468,000
D. P207,000
PROBLEM 7:
CAMEROON CORP. has provided information on intangible assets as follows:
A patent was purchased from Patintero Company for P6,000,000 on January 1. 2011. On
the acquisition date, the patent was estimated to have a useful life of 10 years. The
patent had a net book value of P6,000 when Patentero sold it to Cameroon.
On February 1, 2012, a franchise was purchased from the Franchisor Company for
P1,440,000. The contract which runs for 20 years provides that 5% of revenue from the
franchise must be paid to Franchisor. Revenue from the franchise for 2012 was
P7,500,000.
The following research and development costs were incurred by Cameroon in 2012:
Materials and
P426,000
Equipment
Personnel
567,000
Indirect costs
306,0
00
Total
P1,299,0
00
Because of recent events, Cameroon, on January 1, 2012, estimated that the remaining useful
life of the patent purchased on January 1, 2011, is only 5 years from January 1, 2012.
1. On December 31, 2012, the carrying value of the patent should be
A. P4,320,000
C. P1,680,000
B. P6,000,000
D. P0
2. The unamortized cost of the franchise at December 31, 2012, should be
A. P999,000
C. P1,440,000
B. P1,356,250
D. P1,374,000
3. How much should be charged against Cameroons income for the year ended December
31, 2012?
A. P2,280,000
C. P2,820,000
B. P2,826,000
D. P1,725,000
4. An auditor will most likely obtain evidence regarding the continuing validity and existence
of the patent by obtaining a written representation from
A. The Securities and Exchange Commission (SEC)
C. the patent inventor
B. A Patent attorney
D. The patent owner
PROBLEM 9:
EMI KOUSSI CORP. has its own research department. However, the company purchases patents
from time to time. The following is a summary of transactions involving patents now owned by
the company.
During 2006 and 2007, Emi Koussi spent a total of P459,000 in developing a new
process that was patented (Patent A) on April 1, 2008; additional legal and other costs of
P50,000 were incurred.
A patent (Patent B) developed by Nonoy Inventor, an inventor, was purchased by for
P187,500 on December 1, 2009, on which date it had an estimated useful life of 12
years.
During 2008, 2009, and 2010, research and development activities cost P510,000. No
additional patents resulted from these activities.
A patent infringement suit brought by the company against a competitor because of the
manufacture of articles infringing on Patent B was successfully prosecuted at a cost of
P42,600. A decision in the case was rendered in June 2010.
On July 1, 2011, Patent C was purchased for P172,800. This patent had 16 years yet to
run.

During 2012, Emi Koussi expended P180,000 on patent development. However, the
company is still undecided as to how the patent, if approved by the Bureau of Patents,
will generate probable future economic benefits.

Assume that the legal life of each patent is also its useful life.
1. What is Patent As carrying value on December 31, 2012?
A. P120,888
C. P38,125
B. P497,125
D. P388,113
2. What is Patent Bs carrying value on December 31, 2012?
A. P141,250
C. P32,092
B. P28,906
D. P173,342
3. What is Patent Cs carrying value on December 31, 2012?
A. P162,000
C. P159,840
B. P327,600
D. P156,600
4. What is the total patent amortization expense to be reported in Emi Koussis income
statement for the year ended December 31, 2012?
A. P37,300
C. P74,325
B. P28,741
D. P28,300
PROBLEM 10:
ANDES CORPORATION expended P510,000 in research and development costs. These activities
resulted to a new product called the Oido Organ. It was patented at additional legal and other
costs of P54,000. The patent application was filed on October 1, 2008, and the patent was
estimated to have a useful life of 10 years.
On June 1, 2010, Andes spent P28,440 to successfully prosecute a patent infringement. In
addition, the patents estimated useful life was extended to 12 years form June 1, 2010. At the
beginning of 2012, Andes determined that a competitors product would make the Oido Organ
obsolete and the patent worthless by December 31, 2012.
Based on the preceding information, calculate the patent amortization expense for each of the
following years:
1. 2008
A. P14,100
C. P5,400
B. P12,750
D. P1,350
2. 2009
A. P51,000
C. P2,700
B. P56,400
D. P5,400
3. 2010
A. P4,438
C. P3,750
B. P2,188
D. P5,820
4. 2011
A. P4,438
C. P3,750
B. P6,120
D. P2,188
5. 2012
A. P331,875
C. P39,062
B. P19,531
D. P3,750
PROBLEM 11:
The following costs were incurred by EVEREST COMPANY during 2012:
Searching for applications of new research findings
P 57,000
Trouble shooting in connection with breakdowns during
commercial production
87,000
Adaptation of an existing capability to a particular requirement
39,000
or customers need as a part of continuing commercial activity
Engineering follow through in an early phase of commercial
45,000
production
Radical modification of the formulation of a glassware product
78,000
Laboratory research aimed at discovery of new knowledge
204,000
Testing for evaluation of new products
72,000
Quality control during commercial production, including routine
testing of products
174,000
Materials consumed in research and development projects
177,000
Consulting fees paid to outsiders for research and development
300,000

projects
Personnel costs of persons involved in research and
development projects
Indirect costs reasonably allocable to research and development
projects
Materials purchased for future research and development
projects
Research and development costs reimbursable under a contract
to
perform research and development for Client Corporation
Design, construction, and testing of preproduction prototypes
and models
Routine on going efforts to refine, enrich, or otherwise improve
upon
the qualities of an existing product
Total

384,000
150,000
102,000

1,050,000
870,000

750,0
00
P4,539,0
00

What is the total amount to be classified and expensed as research and development for
2012?
A. P3,342,000
C. P2,394,000
B. P2,292,000
D. P2,220,000
PROBLEM 12:
MOSES COMPANYs own research department has an on going project to develop a new
production process. At the end of 2011, Moses had already spent a total of P300,000, of which
P270,000 was incurred before November 1, 2011. On November 1, 2011, the companys newly
developed production process met the criteria for recognition as an intangible asset.
During 2012, Moses incurred additional expenditure of P600,000. At the end of 2012, the
recoverable amount of the intangible asset was estimated to be P570,000. Including future
cash outflows to complete the process before it is available for its intended use.
1. At December 31, 2011, the production process should be recognized at a cost of
A. P300,000
C. P30,000
B. P 0
D. P270,000
2. What is the total cost of the production process at December 31, 2012?
A. P630,000
C. P870,000
B. P600,000
D. P900,000
3. How much impairment loss should be recognized be Moses in 2012, in connection with the
new production process?
A. P300,000
C. P30,000
B. P0
D. P60,000
PROBLEM 13:
KIYAT CORPORATION was organized in 2011. Its accounting records include only one account
for all intangible assets. The following is a summary of the debit entries that have been
recorded and posted during 2011 and 2012:
INTANGIBLE ASSETS
July 1, 2011 8-year franchise, expires June 30, 2019
P126,000
Oct. 1, 2011 Advance payment on leasehold (term of lease is 2
84,000
years)
Dec. 31,
Net loss for 2011 including incorporation fee,
2011
P3,000, and
48,000
related legal fees of organizing, P15,000
(all fees incurred in 2011)
Jan. 2, 2012 Acquired patent (10-year life)
222,000
March 1,
Cost of developing a secret formula
225,000
2012
April 1,
Goodwill purchased
835,200
2012
July 1, 2012 Legal fee for successful defense of patent
37,950
purchased above

Oct. 1, 2012 Research and development costs

Ignore income tax effects.

480,000

1. The unamortized patent cost at December 31, 2012, should be

A. P199,800
C. P222,000
B. P235,440
D. P197,490
2. The unamortized franchise cost at December 31, 2012, should be
A. P110,250
C. P102,375
B. P94,500
D. P118,125
3. The amount of prepaid rent to be reported in Kiyats December 31, 2012, statement of
financial position is
A. P73,500
C. P84,000
B. P31,500
D. P63,000
4. The adjusting entries on December 31, 2012, should include a net debit to the retained
earnings account of
A. P889,275
C. P60,375
B. P42,000
D. P66,375
5. As a result of the adjustments at December 31, 2012, the total charges against Kiyats
2012 income should be
A. P840,900
C. P597,900
B. P822,900
D. P841,275
PROBLEM 14:
KIKI LABORATORIES holds a valuable patent (No. 362436) on a device that burns body fats. Kiki
does not manufacture or sell the products and processes it develops; it conducts research and
develops products and processes which it patents, and then assigns the patents to
manufacture on a royalty basis. The history of Patent No. 362436 is as follows:
Date
2002
2003
2004
Jan. 5
March 5
2005
Jan. 2
2006
Dec. 10
2007
April 3
2011
July 28

Activity
Research conducted to develop device

Cost
P7,680,0
00

Design and construction of a prototype

Testing of models

1,752,00
0
840,000

Legal and other fees to process patent application

1,241,00
0

Legal fees paid to successfully defend device patent

714,000

Research aimed at modifying the design of the

patented device

860,000

Legal fees paid in a successful patent infringement

suit
against a competitor

680,000

A 17 year useful life was assumed by Kiki when it received the initial device patent.
On January 1, 2010, it revised its useful life estimate downward to 5 remaining years. The
companys reporting date is December 31, 2012.
Based on the preceding information, compute the carrying value of Patent No. 362436 on each
of the following dates:
1. December 31, 2005
A. P1,168,000
C. P1,241,000
B. P3,607,529
D. P1,178,950
2. December 31, 2009
A. P1,488,000
C. P350,400
B. P876,000
D. P817,600
3. December 31, 2012
A. P657,000
C. P525,600
B. P876,000
D. P350,400

PROBLEM 15:
ACADIA CORP. was incorporated on January 2, 2011. The corporations financial statements for
its years operations were not examined by a CPA. You have been engaged to audit the
financial statements for the year ended December 31, 201, and your audit is substantially
completed. The corporations trial balance appears below.
Acadia Corp.
TRIAL BALANCE
December 31, 2012
Cash
Accounts receivable
Allowance for doubtful accounts
Inventories
Machinery and Equipment
Accumulated Depreciation
Patents
Leasehold improvements
Prepaid expenses
Goodwill
Licensing agreement No. 1
Licensing agreement No. 2
Accounts payable
Unearned revenue
Share capital
Retained Earnings, January 1, 2012
Sales
Cost of Goods Sold
Selling and Administrative expenses
Interest expense
Loss on extinguishments of debt
Totals

Debits
P 300,000
1,460,000

Credits
P29,200

1,004,000
2,380,000
524,000
2,564,000
600,000
900,000
600,000
1,200,000
1,120,000
1,460,000
345,600
6,000,000
3,181,200
14,400,000
9,500,000
3,722,000
190,000
400,000
P25,940,00
0

P25,940,0
00

The following
information
relates to
accounts that
may yet require

adjustments.
1. Patents for Acadias manufacturing process were acquired January 2, 2012, at a cost of
P1,870,000. An additional P694,000 was spent on December 29, 2012, to improve
machinery covered by the patents and charged to the Patents account. Depreciation on
property, plant, and equipment has been properly recorded for 2012. Acadia uses the
straight-line method for all depreciation and amortization and the legal life on its patents.
2. On January 3, 2011, Acadia purchased Licensing Agreement No. 1, which was believed to
have an indefinite life. The balance in the Licensing Agreement No. 1 account includes its
purchase price of P1,140,000 and expenses of P60,000 related to the acquisition. On
January 1, 2012, Acadia purchases Licensing Agreement No. 2, which has a life expectancy
of 10 years. The balance in the Licensing Agreement No. 2 account includes its P1,080,000
purchase price and P120,000 in acquisition expenses, but it has been reduced by a credit
of P80,000 for the advance collection of 2013 revenue form the agreement.
In late December 2011, an explosion caused a permanent reduction in the expected
revenue producing value of Licensing Agreement No. 1, and in January 2013, a flood
caused additional damage that rendered the agreement worthless. The recoverable
amount of Licensing Agreement No. 1 was determined to be P480,000 at December 31,
2011.
3. The balance in the Goodwill account represents amount paid on December 30, 2011, for a
four year advertising program, estimated to assist in increasing Acadias sales.
4. The Leasehold Improvements account includes (a) the P300,000 cost of improvements
with a total estimated useful life of 12 years, which Acadia as tenant made to leased
premises in January 2011, and movable assembly line equipment costing P300,000 that
was installed in the leased premises in December 2012. Acadia paid its rent in full during
2012. A 10 year non-renewable lease was signed January 3, 2011, for the leased building
that Acadia used in manufacturing operations.
Prepare the adjusting journal entries that should be made on December 31, 2012. Use a
separate account for the accumulation of each type of amortization.

PROBLEM 16:
During 2010, APEX COMPANY purchased a building site for its proposed research and
development laboratory at a cost of P1,200,000. Construction of the building was started in
2010. The building was completed on December 31, 2011, at a cost of P5,600,000 and was
placed in service on January 2, 2012. The estimated useful life of the building for depreciation
purposes was 20 years; the straight line method of depreciation was to be employed and
there was no estimated salvage value.
Management estimates that about 50% of the projects of the research and development group
will result in long-term benefits (i.e., at least 10 years) to the corporation. However, Apex fails
to demonstrate how such projects will generate probable future economic benefits. The
remaining projects either benefit the current period or are abandoned before completion. A
summary of the number of projects and the direct costs incurred in conjunction with the
research and development activities for 2012 appears below.
Upon recommendation of the research and development group, Apex Company acquired a
patent for manufacturing rights at a cost of P1,600,000. The patent was acquired on April 1,
2011, and has an economic life of 10 years.

Completed projects with

long term benefits
Abandoned projects or
projects that benefit
the
current period
Projects in Process
results in
indeterminate
Total

Number
of
Projects

Salaries and
Employee
Benefits

Other Expenses
(excluding Building
Depreciation Charges

20

1,300,000

300,000

10

800,000

240,000

60

P3,900,000

P1,540,000

30

P1,800,000

P1,000,000

1. The total research and development expenses for 2012 should be

A. P2,920,000
C. P5,440,000
B. P5,880,000
D. P5,720,000
2. What is the amount of patent amortization for 2012?
A. P80,000
C. P120,000
B. P160,000
D. P0
3. What is the book value of the building on December 31, 2012?
A. P5,320,000
C. P5,040,000
B. P5,600,000
D. P6,460,000
4. What is the carrying value of the patent at December 31, 2012?
A. P1,280,000
C. P1,600,000
B. P1,320,000
D. P0
PROBLEM 17:
The following information pertains to BAKER COMPANYs intangible assets:
a. On January 1, 2012, Baker signed an agreement to operate as a franchisee of Max & Jess
Food Chain, Inc. for an initial franchise fee of P1,500,000. Of this amount, P300,000 was
paid when the agreement was signed and the balance is payable in 4 annual payments of
P300.000 each, beginning January 1, 2013. The agreement provides that the down payment
is not refundable and no future services are required of the franchisor. The present value at
January 1, 2012, of the 4 annual payments discounted at 14% (the implicit rate for a loan of
this type) is P874,000. The agreement also provides that 5% of the revenue from the
franchise must be paid to the franchisor annually. Bakers revenue from the franchise for
2012 was P19,000,000. Baker estimates the useful life of the franchise to be 10 years.
b. Baker incurred P1,300,000 of experimental and developments costs in its laboratory to
develop a patent which was granted on January 2, 2012. Legal fees and other costs
associated with registration of the patent totaled P272,000. Baker estimates that the useful
life of the patent will be 8 years.
c. A trademark was purchased from Banawe Company for P640,000 on July 1, 2009.
Expenditures for successful litigation in defense of the trademark totaling P163,200 were

paid on July 1, 2011. Baker estimates that the useful life of the trademark will be 20 years
from the date of acquisition.
1. What is the carrying value of the franchise at December 331, 2012?
A. P1,350,000
C. P1,056,600
B. P1,500,000
D. P1,174,000
2. What is the carrying value of the patent at December 31, 2012?
A. P238,000
C. P1,375,500
B. P272,000
D. P258,400
3. What is the carrying value of the trademark on December 31, 2012?
A. P686,400
C. P544,000
B. P528,000
D. P707,200
4. The total expenses resulting form the transactions that would appear on Bakers income
statement for the year ended December 31, 2012, should be
A. P1,255,760
C. P1,133,400
B. P1,260,560
D. P183,400
PROBLEM 18:
In line with CANDLER COMPANYs expansion program, it has become interested in acquiring a
plant in Mindanao to handle many of its production functions in that area. One prospective
seller is Mahal Ko Sya Co. whose owners have decided to sell their business if a proper
settlement can be obtained. Mahal Ko Sya Co.s statement of financial position appears as
follows:
Current assets
P4,500,000 Current liabilities
P2,400,000
Investments
1,500,000 Non Current
3,000,000
liabilities
Property, Plant,
Ordinary shares
1,500,000
and
Equipment
12,000,000 Share premium
5,100,000
(net)
Retained Earnings
6,000,000
Total assets
P18,000,00 Total Equities
P18,000,0
0
00
Candler has hired Kilatis Appraisal Company to determine the proper price to pay for Mahal Ko
Sya Co. the appraisal company finds that the investments have a fair value of P4,500,000 and
the inventory is understated by P2,400,000. All other assets and equities are properly stated.
And examination of the companys income for the last 4 years indicates that the net income
has steadily increased. In 2011, the company had a net operating income of P3,000,000, which
is expected to increase 20% each year over the next 4 years. Candler believes that a normal
return in this type of business is 18% on net assets. The asset investment in the Mindanao
plant is expected to stay the same for the next 4 years.
According to Kilatis Appraisal Company, the fair value of Mahal Ko Sya Co. can be estimated in
many different ways. Calculate an estimate of the value of Mahal Ko Sya Co., assuming that
any goodwill will be computed as:
1. The capitalization of the average excess earnings of Mahal Ko Sya Co. at 18%
A. P44,840,000
C. P18,286,416
B. P36,000,000
D. P26,840,000
2. The purchase of average excess earnings over the next four years
A. P24,364,800
C. P30,960,000
B. P19,591,200
D. P22,831,200
3. The capitalization of average excess earnings of Mahal ko Sya at 24%
A. P31,500,000
C. P18,381,888
B. P24,630,000
D. P98,520,000
4. The present value of the average excess earnings over the next four years discounted at
15%. (The present value of an ordinary annuity of 1 at 15% for 4 periods is 2.85498.)
A. P31,792,979
C. P22,542,844
B. P55,932,484
D. P27,250,135
5. If Candler were to pay P23,100,000 to purchase the assets and assume the liabilities of
Mahal Ko Sya Co., how much would be charged to goodwill?
A. P8,840,000
C. P0
B. P6,364,800
D. P5,100,000

PROBLEM 19:
You have instructed by CANNON COMPANY, a high-flying conglomerate, to conduct a purchase
audit of XYA co.s books to determine a possible purchase price for XYZ Co.s assets. You find
the following information:
Total identifiable assets of XYZ Co. at fair market value

P5,000,0
00
1,200,00
0
15%
700,000

Liabilities
Average rate of return on net assets for XYZ Co.s industry
Forecasted earnings per year based on past earnings figures

Determine the purchase price on the basis of the following assumptions:

1. Goodwill is equal to 3 years excess earnings
A. P5,510,000
C. P3,930,000
B. P5,900,000
D. P4,190,000
2. Goodwill is equal to the present value of excess earnings discounted at 15% for 3 years.
(The present value factor of an ordinary annuity of 1 at 15% for 3 periods is 2.28323.)
A. P5,398,261
C. P4,690,460
B. P4,096,820
D. P5,101,441
3. Goodwill is equal to the capitalization of excess earnings at 15%
A. P7,600,000
C. P4,666,667
B. P8,466,667
D. P6,400,000
PROBLEM 20:
SKIN INC. is considering purchasing A & B Enterprises, which has the following assets and
liabilities.
Cost
Accounts receivable
Inventory
Prepaid Insurance
Buildings and Equipment (net)
Accounts payable
Net assets

P4,800,000
4,800,000
200,000
1,400,000
(3,200,000)
P
8,000,000

Fair market
Value
P4,400,000
5,000,000
200,000
4,000,000
(3,200,000)
P 10,400,000

If the purchase price is P12,600,000, the amount of goodwill to be charged in recording the
acquisition is
A. P4,600,000
C. P2,200,000
B. P2,400,000
D. P0
PROBLEM 21:
DURIAN COMPANY develops software for small business and home computer markets. Most of
the companys computer programmers are involved in developmental work designed to
produce software that will perform fairly specific tasks in a user friendly manner. Extensive
testing of the working model is performed before it is released to production for preparation of
masters and further testing. This carful preparation has resulted to the production of several
computer software packages that have been very successful in the marketplace.
Durian incurred the following costs during 2012:
Salaries and wages of programmers doing research
Expenses related to projects prior to establishment of technological
feasibility
Expenses related to projects after technological feasibility has been
established
but before software is available for commercial production
Amortization of capitalized software development costs from
current and
prior years
Costs to produce and prepare software for sale

P 705,000
235,200

148,500

80,250
168,900

Additional data for 2012:

Sales of products for the year
Beginning inventory
Portion of goods available for sale sold during year
Income tax rate is 30%
What is Durians net income for 2012?
A. P139,797
B. P195,681

C. P215,072
D. P243,746

P1,545,00
0
426,000
60%