4. HW on Intangible Assets PDF

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Warning: TT: undefined function: 321HOMEWORK ON INTANGIBLE ASSETSPROBLEM 1 (Research and Development Costs)Daisy Company incurred the following research and development costs in the current year:Materials used in R & D projects 400, Equipment acquired that will have alternate future use in f...

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HOMEWORK ON INTANGIBLE ASSETS

PROBLEM 1 (Research and Development Costs) Daisy Company incurred the following research and development costs in the current year: Materials used in R & D projects Equipment acquired that will have alternate future use in future R & D projects Depreciation on above equipment Personnel costs of persons involved in R & D projects Consulting fees paid to outsiders for R & D projects Indirect costs reasonably allocable to R & D projects

400,000 2,000,000 500,000 1,000,000 100,000 200,000

1. How much is the R & D costs to be expensed in the current year? 2. Assuming that the equipment has not alternative future use, how much is the R & D costs to be expensed in the current year?

PROBLEM 2 (Patent, Capitalizable Cost) Orchid Company developed an equipment to be used in its manufacturing process. The following expenses were incurred in developing and patenting the equipment: Research and development Metal used in the construction of the equipment Blueprints used to design the equipment Wages for employees’ work on the research, development & construction of the equipment Legal expenses to obtain patent Expenses of drawings required by patent office to be submitted with the patent application Fees paid to Patent Office

1,000,000 400,000 150,000 1,500,000 600,000 50,000 100,000

How much is the total capitalizable cost of the patent?

PROBLEM 3 (Research and Development, Patent, Amortization, Impairment) Azucena Co. reports the following patents on its December 31, 2019, statement of financial position: Initial cost Patent A Patent B Patent C

P6,120,000 2,250,000 2,160,000

Date of acquisition March 1, 2016 July 1, 2017 September 1, 2018

Useful life (at date of acquisition) 17 years 10 years 4 years

The following events occurred during the year ended December 31, 2020: a. Research and development costs of P3,685,500 were incurred during the year. These costs were incurred prior to projects achieving economic viability. b. Patent D was purchased on July 1 for P4,275,000. It has a remaining life of 9.5 years. 1

c. A possible impairment of Patent B’s value may have occurred at December 31, 2020. This is due to a significant reduction in the demands for certain products protected by Patent B. the company’s controller estimates the following future cash flows from Patent B: December 31, 2021 December 31, 2022 December 31, 2023

P300,000 300,000 300,000

The appropriate discount rate to be used for these cash flows is 8%. 1. How much is the total carrying value of Azucena’s patents on December 31, 2019? 2. How much impairment loss should be reported by Azucena’s for the year ended December 31, 2020? 3. How much is the total carrying value of Azucena’s patents as of December 31, 2020?

PROBLEM 4 (Franchise, Installment Note, Initial Franchise Fee) On January 1, 2020, Ylang-ylang Company signed an agreement to operate as a franchisee of another entity for an initial franchise fee of P12,000,000. The same date, the entity paid P4,000,000 and agreed to pay the balance in four equal annual installments of P2,000,000 beginning January 1, 2021. The down payment is non-refundable and no future services are required of the franchisor. The entity can borrow at 14% for a loan of this type. The franchise contract will last for 10 years. 1. How much is the interest expense for 2020? 2. How much is the amortization expense for 2020? PROBLEM 5 (Goodwill Computation) The following pieces of information are available in relation to Lavender Corp.’s computation of Lilac Corp.’s goodwill: Net assets, excluding goodwill P120,000,000 Industry’s normal rate of return 12% Lilac’s net income for the past five years is as follows: 2016 2017 2018 2019 2020

P15,200,000 15,600,000 15,200,000 17,200,000 16,800,000

Compute for Lilac’s goodwill using the following methods: 1. Capitalization of average earnings, assuming that average earnings is capitalized at 10% 2. Capitalization of excess earnings for 5 years. 3. Capitalization of excess earning at 25%. 4. Capitalization of excess earnings for 5 years using a discount rate of 12%.

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PROBLEM 6 (Various Intangible Assets - Comprehensive) The following information pertains to CANNA Inc.’s intangible assets: a. On January 1, 2020, CANNA signed an agreement to operate as a franchisee of Max & Caroline Food Chain, for an initial franchise fee of P15,000,000. Of this amount, P3,000,000 was paid when the agreement was signed and the balance is payable in 4 annual payment of P3,000,000 each, beginning January 1, 2021. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. Discount rate used is 14%. The agreement also provides that 5% of the revenue from the franchise must be paid to the franchisor annually. CANNA’s revenue from the franchise for 2020 was P1,900,000. CANNA estimates the useful life of the franchise to be 10 years. b. CANNA incurred a total of P13,000,000 in 2019 for experimental and development costs in its laboratory to develop a patent which was granted on January 2, 2020. Legal fees and other costs associated with registration of the patent totaled P2,720,000. CANNA estimates that the useful life of the patent will be 8 years. c. A trademark was purchased from Baker Inc. for P6,400,000 on July 1, 2017. CANNA estimates that the useful life of the trademark will be 20 years from the date of acquisition. Expenditures for successful litigation in defense of the trademark totaling P1,632,000 were paid on July 1, 2020. 1. 2. 3. 4.

How much is the carrying value of the franchise at December 31, 2020? How much is the carrying value of the patent at December 31, 2020? How much is the carrying value of the trademark at December 31, 2020? How much are the total expenses resulting from the above transactions that would appear on CANNA’s profit or loss statement for the year ended December 31, 2020?

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