Reference no: EM132819382

Question - The owners of North Company are planning to sell the business to new interests. The cumulative net earnings for the past five years amounted to P6,500,000. The fair value of net assets of North Company was P50,000,000. Compute the goodwill given the following various scenarios:

Scenario 1: Purchase of "average excess earnings"

The goodwill is measured at average excess earnings for 3 years. The normal rate of return for the industry is 12%.

Scenario 2: Present value method

The goodwill is measured at average excess earnings for 3 years. The normal rate of return for the industry is 12%. The present value of an ordinary annuity of 1 for 3 years at 8% is 2.5771.

Scenario 3: Capitalization of "average excess earnings"

Goodwill is measured at the average excess earnings capitalized at 40%. The normal rate of return for the industry is 12%.

Scenario 4: Capitalization of "average earnings"

Goodwill is measured at the average earnings capitalized at 12.5%. The normal rate of return for the industry is 12%.