Problem 32-1 (IAA)

Razor Company was granted a patent for an invention on January 1, 2020. The costs of
licensing and registration, models and drawings amounted to P255,000.
On January 1, 2022, the entity paid P90,000 in successfully defending the patent in an
infringement suit brought against the entity.
On January 1, 2023, the entity paid P510,000 for the acquisition of a competing patent which
has a remaining life of 16 years/ the competing patent is intended to protect the original patent.
Required:
Prepare journal entries from 2020 to 2023 to record the expenditures in connection with the
patent, including the annual amortization of patent.

Problem 32-2
Blade Company spent a total of P510,000 in developing a patent which was applied for on July
1, 2020. The patent was issued on January 1, 2021.
The cost of licensing was nominal and the useful life of the patent is 15 years.
On January 1, 2023, the entity purchased a related patent for P720,000. The related patent has a
remaining useful life of 16 years. This related patent is believed to extend the useful life of the
old patent.
On January 1, 2024, the entity purchased a competing patent for P540,000 in order to protect
the original patent.
Required:
Prepare journal entries from 2020 to 2024.

Problem 32-3
Crystal Company summarized the following transactions pertaining to patent.
2020 Spent P250,000 for the research and development of the patent
2021
Jan. 1 Paid P60,000 To apply for and obtain right to the patent. The useful life of the
patent is 10 years.
2022
Jan. 1 Purchased for P600,000 a new patent that is expected to prolong the life of the
original patent by 6 years.
2023
Dec. 31 A competitor obtained rights to a patent which rendered the entity’s patent
obsolete.
Required:
Prepare the journal entries relating to the patent.

Problem 32-4 (AICPA Adapted)

On January 1, 2020, Toxic Company purchased a patent for P7,140,000. The patent is being
amortized over the remaining legal life of 15 years.
During 2023, the entity determined that the economic benefits of the patent would not last longer
than ten years from the date of acquisition.
Required:
1. Prepare journal entry to record the acquisition of the patent on January 1, 2020.
2. Prepare journal entry to record the amortization of the patent for 2020.
3. Prepare journal entry to record the amortization of the patent for 2023.
4. Compute the carrying amount of the patent on December 31, 2023.
Problem 32-5 (AICPA Adapted)
On January 1, 2020, Arabian Company purchased a patent for a new consumer product for
P900,000. At the time of purchase, the patent was valid for 15 years.
However, the patent’s useful life was estimated to be only 10 years due to the competitive nature
of the product.
On December 31, 2023, the product was permanently withdrawn from sale under governmental
order because of a potential health hazard in the product.
Required:
1. Prepare journal entry to record the patent acquisition.
2. Prepare journal entry to record the amortization of the patent for 2023.
3. Prepare journal entry to record the writeoff of the patent on December 31, 2023
Problem 32-6 (PHILCPA Adapted)
At the beginning of the current year, Erudite Company acquired three patents.
Cost Remaining useful Remaining legal life
life
Patent X 1,200,000 10 8
Patent Y 2,000,000 5 10
Patent Z 3,000,000 6 15

Patent Z is believed to be uniquely useful as long as the entity retains the right to use it.
The entity successfully defended the right to Patent Y at the middle of the year. Legal fees of
P450,000 were incurred in this action.
Required:
Prepare journal entries for the current year.

Problem 32-7 (IAA)

Apple company provided the following data in connection with the patent account on December
31, 2020:
1. The entity spent P500,000 during the fiscal year ended December 31, 2019 for research
and development cost and charged this amount to the patent account.

The records showed that for 2018 the research and development cost amounted to
P150,000 and was charged to expense.

2. The patent right was granted on January 1, 2019.

 Legal expenses and other direct costs in connection with the issuance of the patent totaled
P510,000 and were charged to legal and professional fees.

3. The entity paid a legal counsel P50,000 on January 1, 2020 for legal services in
connection with an infringement suit brought against the entity. This amount was charged
to legal and professional fees.

4. On January 15, 2021, it was learned from the legal counsel handling the infringement suit
that an amicable settlement was agreed and that the entity has to pay P100,000 damages.
The accrued legal counsel fee was P30,000.

5. The balance of the patent account on December 31, 2020 was P450,000.

The entity has not yet recorded amortization for 2020. The patent has a useful life equal
to the legal life.
Required:
Prepare adjusting journal entries on December 31, 2020.
Problem 32-8 (AICPA Adapted)
Ignoble Company reported the following account balances on January 1, 2020:
Patent 1,920,000
Accumulated depreciation 240,000
Transactions during the current year and other information relating to intangible assets were as
follows:
 The patent was purchased for P1,920,000 on January 1, 2018 at which date the
remaining legal life was 16 years.

On January 1, 2020, the entity determined that the useful life of the patent was only
eight years from the date of acquisition.
 On January 1, 2020, in connection with the purchase of a trademark from another entity,
the parties entered into a noncompetition agreement and a consulting contract.

The entity paid the other party P800,000, of which three-fourths was for the trademark
and one-fourth was for the counterparty’s agreement not to compete for a five-year
period in the line of business covered by the trademark.

 Under the consulting contract, the entity agreed to pay the counterparty P50,000
annually on January 1 of each year for 5 years. The first payment was made on January
1, 2020.
Required:
Prepare journal entries for the current year.

Problem 32-9 (IAA)

Sanity Company acquired a copyright to a best seller novel for P285,000 on January 1, 2020.
The copyright has a remaining legal life of 20 years.
Sales of the novel are estimated as:
2020 50,000 copies
2021 30,000 copies
2022 10,000 copies
2023 5,000 copies
Required:
Prepare journal entries for 2020 and 2021.

Problem 32-10 (IAA)

Steady Company incorrectly charged the P300,000 cost of a copyright acquired in early 2019 to
the retained earnings account. The error was discovered as part of the 2020 audit.
The entity followed the policy of amortizing copyright cost over the expected period of benefit
by the straight line method.
The copyright is expected to be useful in producing revenue for 5 years.
Required:
1. Prepare journal entry necessary in 2020 to correct the prior period error.
2. Prepare journal entry to record the amortization of the copyright for 2020.
Problem 32-11 (IAA)
Center Company acquired three intangible assets before 2020. The entity is preparing financial
statements on December 31, 2020. Before that date, no formal financial statements had been
prepared and the cost of intangible assets had been charged to operations when acquired.
The following intangible assets were accounted for in this manner.
Acquisition date Useful life Cost
Copyright 1 January 1, 2016 20 400,000
Copyright 2 July 1, 2017 15 360,000
Patent January 1, 2018 10 500,000

Required:
1. Prepare correcting entry to record the intangible assets on January 1, 2020
2. Prepare journal entry to record amortization of intangible assets for 2020.

Problem 32-12 (ACP)

Staple Company entered into a franchise agreement to sell the products of a franchisor for 20
years. The agreement provides that Staple Company shall pay an initial fee of P6,000,000 in cash
upon the signing of the agreement at the beginning of current year.
The agreement further provides that the franchisee shall pay a periodic fee of 5% based on the
annual gross sales.
During the current year, the entity realized gross sales of P25,000,000.
Required:
Prepare journal entries for the current year on the books of the franchisee.

Problem 32-13 (ACP)

At the beginning of current year, Outlandish Company entered into a franchise agreement with
Jollibee Company to sell Jollibee products for an indefinite period. The agreement provides for
an initial fee of P20,000,000, P5,000,000 down upon signing of the contract and the balance in
four equal annual payments every year-end.
The entity signed 10% interest-bearing note for the balance. The collection of the note is
reasonably assured.
The agreement further provides that the franchisor will assist in the site location, make a survey
of potential market and provide training of management and employees. Jollibee Company has
already performed all initial services required under the agreement.
Required:
Prepare journal entries for the current year on the books of the franchisee.

Problem 32-14 (AICPA Adapted)

At the beginning of current year, Doomsday Company signed an agreement to operate as a
franchisee of Perfect Pizza for an initial franchise fee of P8,000,000 for a period of 10 years. Of
this amount, P3,000,000 was paid when the agreement was signed and the balance payable in
five annual payments of P1,000,000 at every year-end. The franchisee signed a noninterest-
bearing note for the balance.
The market rate of interest for this note is 10%. The PV of 1 at 10% for 5 periods is 0.62, and the
PV of an ordinary annuity of 1 at 10% for 5 periods is 3.70. In return for the initial franchise fee,
the franchisor will help in locating the site, negotiate the lease or purchase the site, supervise the
construction activity and provide training to employees. The initial services required of the
franchisor are substantially performed.
Required:
Prepare journal entries on the books of the franchisee for the current year.
Problem 32-15 (AICPA Adapted)
Brazen Company purchased a patent on January 1, 2015 for P6,000,000. The original life of the
patent was estimated to be 15 years.
However, in December 2020, the controller received information proving conclusively that the
product protected by the patent would be obsolete within four years.
The entity decided to write off the unamortized portion of the patent cost over five years
beginning in 2020.
What is the patent amortization for 2020?
a. 1,200,000
b. 1,000,000
c. 800,000
d. 400,000

Problem 32-16 (IAA)

Safehouse Company was granted a patent on a product on January 1, 2010 with a 20-year useful
life.
To protect the patent, the entity purchased on January 1, 2020 for P4,500,000 a patent on a
competing product which was originally issued on January 1, 2015.
Because of the unique plant, the entity does not feel the competing patent can be used in
producing a product.
What is the amortization of the competing patent for 2020?
a. 450,000
b. 225,000
c. 300,000
d. 0

Problem 32-17 (AICPA Adapted)

Gray Company was granted a patent on January 1, 2017 and appropriately capitalized P450,000
of related costs.
The entity was amortizing the patent over the useful life of 15 years.
During 2020, the entity paid P150,000 in legal costs in successfully defending an attempted
infringement of the patent.
After the legal action was completed, the entity sold the patent to the plaintiff for P750,000. The
policy is to take no amortization in the year of disposal.
What amount should be reported as gain from sale of patent in 2020?
a. 150,000
b. 240,000
c. 270,000
d. 390,000
Problem 32-18 (IAA)
Harmonious Company acquired a patent for a drug with a remaining legal and useful life of six
years on January 1, 2018 for 5,400,000. The entity used straight line amortization.
On January 1, 2020, a new patent is received for an improved version of the same drug. The new
patent has a legal and useful life of twenty years.
What is the amount of amortization expense for 2020?
a. 900,000
b. 200,000
c. 180,000
d. 300,000

Problem 32-19 (IAA)

Centennial Company developed a trademark to distinguish its products from those of the
competitors.
Through advertising and other means, the entity is seeking to establish significant product
identification to increase future sales.
The similarity between the trademark costs and other intangible and operating costs has caused
some confusion over proper accounting.
The following items are being treated as part of the cost of the trademark:
Marketing research to study consumer tastes 400,000
Design costs of trademark 1,500,000
Legal fees of registering trademark 150,000
Advertising to establish recognition of trademark 200,000
Registration fee with Patent Office 50,000
What is the initial cost of the trademark?
a. 1,700,000
b. 1,900,000
c. 2,300,000
d. 2,100,000

Problem 32-20 (IAA)

Roy Company purchased a new trademark and incurred the following costs:
Purchase price 1,000,000
Nonrefundable value added tax 50,000
Training of personnel on the use of new trademark 70,000
Research expenditures associated with the purchase of the new
trademark 240,000
Legal cost incurred to register the new trademark 105,000
Administrative salaries 120,000

What is the initial cost of the trademark?

a. 1,000,000
b. 1,155,000
c. 1,465,000
d. 1,585,000
Problem 32-21 (IAA)
On January 1, 2o2o, Downtown Company acquired the following intangible assets:
A trademark for P2,000,000
The trademark has a remaining legal life of 8 years. The trademark will be renewed in the future
indefinitely without problem.
A patent for P6,000,000. The patent has an economic life for just 5 years.
On December 31, 2020, the intangible assets are tested for impairment.
The trademark is now expected to generate cash flows of just P120,000 per year.
The cash flows expected to be generated by the patent amount to P1,000,000 annually for each of
the next 4 years.
The appropriate discount rate for all intangible assets is 8%. The present value of an ordinary
annuity of 1 at 8% for 4 periods is 3.31.
1. What is the total impairment loss on trademark?
a. 2,000,000
b. 1,500,000
c. 500,000
d. 0
2. What is the impairment loss on patent?
a. 2,000,000
b. 4,800,000
c. 2,690,000
d. 1,490,000

Problem 32-22 (AICPA Adapted)

At the beginning of current year, Seashore Company signed an agreement to operate as a
franchisee for an initial franchise fee of P6,000,000.
On the same date, the entity paid P2,000,000 and agreed to pay the balance in four equal
payments of P1,000,000 at every year-end.
The down payment is not refundable and no future services are required of the franchisor. The
entity can borrow at 14% for a loan of this type.
Present value of 1 at 14% for 4 periods 0.59
Future amount of 1 at 14% for 4 periods 1.69
Present value of an ordinary annuity of 1 at 14% for 4 2.91
periods

What is the initial measurement of the franchise?

a. 6,760,000
b. 6,000,000
c. 4,910,000
d. 4,360,000
Problem 32-23 (AICPA Adapted)
On January 1, 2018, Averse Company signed a 12-year lease for warehouse space. The entity has
an option to renew the lease for an additional 8-year period on or before January 1, 2021.
During January 2020, the entity made substantial improvement to the warehouse. The cost of the
improvement was P540,000 with an estimated useful life of 15 years.
On December 31, 2020, the entity intended to exercise the renewal option. The entity has taken a
full year depreciation on this leasehold improvement for 2020.
On December 31, 2020, what is the carrying amount of the leasehold improvement?
a. 486,000
b. 504,000
c. 510,000
d. 513,000

Problem 32-24 (AICPA Adapted)

On January 1, 2020, Ames Company signed an eight-year lease for office space.
The entity had the option to renew the lease for an additional four-year period on or before
January 1, 2027.
The entity had the option to renew the lease for an additional four-year period on or before
January 1, 2027
In early January 2020, the entity incurred the following costs:
 P1,200,000 for general improvement to the leased premises with an estimated useful life
of ten years
 P500,000 for office furniture and equipment with an estimated useful life of ten years.
 P400,000 for moveable assembly line equipment with useful life of 5 years.
On December 31, 2020, the entity’s intention as to exercise of the renewal option is uncertain.
What is the accumulated depreciation of leasehold improvement on December 31, 2020?
a. 292,500
b. 150,000
c. 170,000
d. 212,500

Problem 32-25 (AICPA Adapted)

Cute Company, a major winery, started construction of a new facility in Mindanao. The entity
incurred the following costs in conjunction with the start-up activities of the new facility:
Production equipment 8,150,000
Travel costs of salaried employees 400,000
License fees 140,000
Training of local employees for production and maintenance
operations 1,200,000
Advertising costs 850,000

What portion of the organization costs should be expensed?

a. 2,590,000
b. 2,450,000
c. 1,390,000
d. 1,600,000