PROBLEM NO 1 Information concerning FRANCISCO CORPORATION's intangible assets is as follows 1 On January 1, 2019, Francisco signed an agreement to operate as a franchisee of Kopya Copy Service, Inc for an initial franchise fee of P8,500,000 Of this amount, P2,500,000 was paid when the agreement was signed and the balance is payable in four annual payments of P1,500,000 each beginning January 1, 2020 The agreement provides that the down payment is not refundable and no future services are required of the franchisor The implicit interest rate for a loan of this type is 14 The agreement also provides that 5 of the revenue from the franchise must be paid to the franchisor annually Francisco's revenue from the franchise for 2019 was P9,000,000 Francisco estimates the useful life of the franchise to be ten years 2 Francisco incurred P7,800,000 of experimental and development costs in its laboratory to develop a patent which was granted on January 2, 2019 Legal fees and other costs associated with registration of the patent totaled P1,640,000 Francisco estimates that the useful life of the patent will be 8 years 3 A trademark was purchased from Banawe Company for P4,000,000 on July 1, 2016 Expenditures for successful litigation in defense of the trademark totaling P1,000,000 were paid on July 1, 2019 Francisco estimates that the useful life of the trademark will be 20 years from the date of acquisition 4 During the current year, Francisco incurred the following costs to develop and produce a routine, low risk computer software product Completion of detailed program design P3,900,000 Costs incurred for coding and testing to establish technological feasibility 3,000,000 Other coding costs after establishment of technological feasibility 7,200,000 Other testing costs after establishment of technological feasibility Costs of producing product masters for training materials Duplication of computer software and training materials from 6,000,000 4,500,000 product masters (3,000 units) 7,500,000 2,700,000 Packaging product (1,500 units) Questions 1 What is the carrying value of the franchise at December 31, 2019 2 What is the carrying value of the patent at December 31, 2019 3 What is the carrying value of the trademark on December 31, 2019 4 What is the initial cost of the computer software 5 The total expenses resulting from the transactions that would appear on Francisco's income statement for the year ended December 31, 2019, should be 025 000000000 PROBLEM NO 2 Shown below is the Contributed Capital section of the December 31, 2018, Statement of Financial Position of CANDIRIT COMPANY, your audit client Preference share capital (6 , P50 par, 24,000 shares authorized, 10,200 shares issued and outstanding) 36,000 shares issued and outstanding) Ordinary share capital (P10 stated value, 90,000 shares authorized, Preference shares subscribed (2,400 shares subscribed at P54 per share) Share premium preference shares Share premium ordinary shares Total contributed capital The following equity related transactions occurred during 2019 P510,000 360,000 120,000 38,400 216,000 P1 244 400 Jan 3 Granted a compensatory share option plan for its key executives The options vest after a 3 year service period The estimated fair value of the options expected to be exercised is P243,000 Mar 6 Received the remaining P40 per share on the subscribed preference shares and issued the shares Apr 24 Sold 1,800 preference shares at P55 per share May 5 Received a subscription down payment of P6 per share on 3,000 ordinary shares The remaining P11 per share balance is due in 60 days June 6 Sold 2,000 ordinary shares at P17 per share July 3 Received the remaining balance on subscribed ordinary shares and issued the shares Sept 22 Purchased an equipment by paying P35,000 and issuing 3,000 ordinary shares and 1,700 preference shares Ordinary and preference shares are currently selling for P19 and P58 per share, respectively Oct 13 Reacquired 2,700 ordinary shares at P19 50 per share The company uses the cost method to account for treasury shares Nov 14 Issued for P96,000 a combination of 2,100 ordinary shares and 12 bonds with a face value of P60,000 The ordinary share is currently selling for P18 per share No market value exists for the bonds Dec 15 Reissued the 2,700 treasury shares at P20 50 per share Dec 28 Distributed a P3 per share dividend to all outstanding preference shares and a P1 50 per share dividend to all ordinary shares outstanding on this date (debit Retained earnings and credit cash for each dividend) Based on the preceding information, determine the following 6 Preference share capital 7 Ordinary share capital 8 Share premium preference 9 Share premium ordinary 10 Total contributed capital 000000000 000000000 PROBLEM NO 3 At the beginning of year 1, an entity grants to a senior executive 3,000 share options, conditional upon the executive's remaining in the entity's employ until the end of year 3 The exercise price is P40 However, the exercise price drops to P30 if the entity's earnings increase by at least an average of 10 per year over the three year period On grant date, the entity estimates that the fair value of the share options, with an exercise price of P30, is P15 per option If the exercise price is P40, the entity estimates that the share options have a fair value of P12 per option During year 1, the entity's earnings increased by 12 , and the entity expects that earnings will continue to increase at this rate over the next two years The entity therefore expects that the earnings target will be achieved, and hence the share options will have an exercise price of P30 During year 2, the entity's earnings increased by 13 , and the entity continues to expect that the earings target will be achieved During year 3, the entity's earnings increased by only 3 , and therefore the earnings target was not achieved The executive completes three years' service, and therefore satisfies the service condition Because the earnings target was not achieved, the 3,000 vested share options have an exercise price of P40 Based on the preceding information, answer the following 11 What is the compensation expense in year 1 12 What is the compensation expense in year 2 A 13 What is the compensation expense in year 32 14 At the end of year 2, the entity should report share options outstanding of

Question

PROBLEM NO  1 Information concerning FRANCISCO CORPORATION's intangible assets is as follows  1  On January 1, 2019, Francisco signed an agreement to operate as a franchisee of Kopya Copy Service, Inc  for an initial franchise fee of P8,500,000  Of this amount, P2,500,000 was paid when the agreement was signed and the balance is payable in four annual payments of P1,500,000 each beginning January 1, 2020  The agreement provides that the down payment is not refundable and no future services are required of the franchisor  The implicit interest rate for a loan of this type is 14   The agreement also provides that 5  of the revenue from the franchise must be paid to the franchisor annually  Francisco's revenue from the franchise for 2019 was P9,000,000  Francisco estimates the useful life of the franchise to be ten years  2  Francisco incurred P7,800,000 of experimental and development costs in its laboratory to develop a patent which was granted on January 2, 2019  Legal fees and other costs associated with registration of the patent totaled P1,640,000  Francisco estimates that the useful life of the patent will be 8 years  3  A trademark was purchased from Banawe Company for P4,000,000 on July 1, 2016  Expenditures for successful litigation in defense of the trademark totaling P1,000,000 were paid on July 1, 2019  Francisco estimates that the useful life of the trademark will be 20 years from the date of acquisition  4  During the current year, Francisco incurred the following costs to develop and produce a routine, low risk computer software product  Completion of detailed program design P3,900,000 Costs incurred for coding and testing to establish technological feasibility 3,000,000 Other coding costs after establishment of technological feasibility 7,200,000 Other testing costs after establishment of technological feasibility Costs of producing product masters for training materials Duplication of computer software and training materials from 6,000,000 4,500,000 product masters (3,000 units) 7,500,000 2,700,000 Packaging product (1,500 units) Questions  1  What is the carrying value of the franchise at December 31, 2019  2  What is the carrying value of the patent at December 31, 2019  3  What is the carrying value of the trademark on December 31, 2019  4  What is the initial cost of the computer software  5  The total expenses resulting from the transactions that would appear on Francisco's income statement for the year ended December 31, 2019, should be 025  000000000  PROBLEM NO  2 Shown below is the Contributed Capital section of the December 31, 2018, Statement of Financial Position of CANDIRIT COMPANY, your audit client  Preference share capital (6 , P50 par, 24,000 shares authorized, 10,200 shares issued and outstanding) 36,000 shares issued and outstanding) Ordinary share capital (P10 stated value, 90,000 shares authorized, Preference shares subscribed (2,400 shares subscribed at P54 per share) Share premium preference shares Share premium ordinary shares Total contributed capital The following equity related transactions occurred during 2019  P510,000 360,000 120,000 38,400 216,000 P1 244 400 Jan  3 Granted a compensatory share option plan for its key executives  The options vest after a 3 year service period  The estimated fair value of the options expected to be exercised is P243,000  Mar  6 Received the remaining P40 per share on the subscribed preference shares and issued the shares  Apr  24 Sold 1,800 preference shares at P55 per share  May 5 Received a subscription down payment of P6 per share on 3,000 ordinary shares  The remaining P11 per share balance is due in 60 days  June 6 Sold 2,000 ordinary shares at P17 per share  July 3 Received the remaining balance on subscribed ordinary shares and issued the shares  Sept  22 Purchased an equipment by paying P35,000 and issuing 3,000 ordinary shares and 1,700 preference shares  Ordinary and preference shares are currently selling for P19 and P58 per share, respectively  Oct  13 Reacquired 2,700 ordinary shares at P19 50 per share  The company uses the cost method to account for treasury shares  Nov  14 Issued for P96,000 a combination of 2,100 ordinary shares and 12  bonds with a face value of P60,000  The ordinary share is currently selling for P18 per share  No market value exists for the bonds  Dec  15 Reissued the 2,700 treasury shares at P20 50 per share  Dec  28 Distributed a P3 per share dividend to all outstanding preference shares and a P1 50 per share dividend to all ordinary shares outstanding on this date (debit Retained earnings and credit cash for each dividend)  Based on the preceding information, determine the following  6  Preference share capital 7  Ordinary share capital 8  Share premium preference 9  Share premium ordinary 10  Total contributed capital  000000000     000000000  PROBLEM NO  3 At the beginning of year 1, an entity grants to a senior executive 3,000 share options, conditional upon the executive's remaining in the entity's employ until the end of year 3  The exercise price is P40  However, the exercise price drops to P30 if the entity's earnings increase by at least an average of 10  per year over the three year period  On grant date, the entity estimates that the fair value of the share options, with an exercise price of P30, is P15 per option  If the exercise price is P40, the entity estimates that the share options have a fair value of P12 per option  During year 1, the entity's earnings increased by 12 , and the entity expects that earnings will continue to increase at this rate over the next two years  The entity therefore expects that the earnings target will be achieved, and hence the share options will have an exercise price of P30  During year 2, the entity's earnings increased by 13 , and the entity continues to expect that the earings target will be achieved  During year 3, the entity's earnings increased by only 3 , and therefore the earnings target was not achieved  The executive completes three years' service, and therefore satisfies the service condition  Because the earnings target was not achieved, the 3,000 vested share options have an exercise price of P40  Based on the preceding information, answer the following  11  What is the compensation expense in year 1  12  What is the compensation expense in year 2  A  13  What is the compensation expense in year 32 14  At the end of year 2, the entity should report share options outstanding of

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Intermediate Accounting Volume 2

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