The following information pertains to Best Food (BF) Company’s intangible assets: a. On January 1, 2020, BF signed an agreement to operate as a franchisee of Macky’s Food Chain 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, 2021. 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, 2020 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. BF’s revenue from the franchise for 2020 was P19 million. BF estimates the useful life of the franchise to be 10 years. b. BF incurred P1,300,000 of experimental and developmental 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 totalled P272,000. BF estimates that the useful life of the patent will be 8 years. c. A trademark was purchased from Big Star Company for P640,000 on July 1, 2017. Expenditures for successful litigation in defense of the trademark totalling P163,200 were paid on July 1, 2019. BF estimates that the useful life of the trademark will be 20 years from the date of acquisition. Required i. What is the carrying value of the franchise at December 31, 2020? ii. What is the carrying value of the patent at December 31, 2020? iii. What is the carrying value of the trademark at December 31, 2020? iv. Determine the total expenses resulting from the aforementioned transactions that should appear on BF’s statement of income for the year ended December 31, 2020.
. The following information pertains to Best Food (BF) Company’s intangible assets:
a. On January 1, 2020, BF signed an agreement to operate as a franchisee of Macky’s Food
Chain 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, 2021. 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, 2020 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. BF’s revenue from the franchise for 2020
was P19 million. BF estimates the useful life of the franchise to be 10 years.
b. BF incurred P1,300,000 of experimental and developmental 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 totalled P272,000. BF estimates that the useful life of the patent
will be 8 years.
c. A trademark was purchased from Big Star Company for P640,000 on July 1, 2017.
Expenditures for successful litigation in defense of the trademark totalling P163,200 were
paid on July 1, 2019. BF estimates that the useful life of the trademark will be 20 years from
the date of acquisition.
Required
i. What is the carrying value of the franchise at December 31, 2020?
ii. What is the carrying value of the patent at December 31, 2020?
iii. What is the carrying value of the trademark at December 31, 2020?
iv. Determine the total expenses resulting from the aforementioned transactions that
should appear on BF’s statement of income for the year ended December 31, 2020.
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