Reference no: EM13950806

 

Estimating goodwill. Green Company is considering acquiring the assets of Gold Corporation by assuming Gold's liabilities and by making a cash payment. Gold Corporation has the following balance sheet on the date negotiations occur:

Gold Corporation Balance Sheet January 1, 20X6
Assets		Liabilities and Equity
Accounts receivable	$100,000	Total liabilities	$200,000
Inventory	100,000	Capital stock ($10 par)	100,000
Land	100,000	Paid-in capital in excess of par	200,000
Building (net)	220,000	Retained earnings	300,000
Equipment (net)	280,000
Total assets	$800,000	Total liabilities and equity	$800,000

Appraisals indicate that the inventory is undervalued by $25,000, the building is underva- lued by $80,000, and the equipment is overstated by $30,000. Past earnings have been consid- ered above average and were as follows:

Year                                  Net Income

20X1                                 $  90,000

20X2                                 110,000

20X3                                 120,000

20X4                                 140,000*

20X5                                 130,000

*Includes extraordinary gain of $40,000.

It is assumed that the average operating income of the past ?ve years will continue. In this industry, the average return on assets is 12% on the fair value of the total identi?able assets.

1. Prepare an estimate of goodwill based on each of the following assumptions:

a. The purchasing company paid for ?ve years of excess earnings.

b. Excess earnings will continue inde?nitely and are to be capitalized at the industry normal return.

c. Excess earnings will continue for only ?ve years and should be capitalized at a higher rate of 16%, which re?ects the risk applicable to goodwill.

2. Determine the actual goodwill recorded if Green pays $690,000 cash for the net assets of Gold Corporation and assumes all existing liabilities.